TAGANITO MINING CORPORATION v. COMMISSIONER OR INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals QUEZON CITY SECOND DIVISION TAGANITO MINING C.T.A. CASE NO. 7157 CORPORATION, Petitioner, Members: -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. Promulgated: COMMISSIONER OF INTERNAL REVENUE, OCT 2 2 2007 Respondent. / X----------------------------------------------------------------~------------ X DECISION PALANCA-ENRIQUEZ, J.: When a VAT-registered person export sales qualify as zero-rated sales pursuant to the requisites provided by law, the VAT-registered person is not liable to pay output tax thereon. Accordingly, the VAT- registered person may claim tax refund or credit of its duly substantiated unutilized input VAT paid on its domestic purchases of taxable goods and services and importation of capital goods that are directly attributable to such zero-rated sales. However, absence of clear and convincing proof (J)U

C.T.A. CASE NO. 7157 2 DECISION that the VAT on such purchases was shifted to the VAT-registered person, the VAT-registered person cannot claim refund or tax credit on such purchases. THE CASE This is a Petition For Review filed on February 24, 2005 by Taganito Mining Corporation (hereafter "petitioner"), which seeks the refund or issuance of a tax credit certificate in the amount of P11,564,034.65, representing the alleged unutilized input VAT for the period covering January 1, 2003 to December 31, 2003. THE FACTS The facts, as stipulated by the parties, are as follows: "1) Petitioner is a corporation duly organized and existin~ under the laws of the Philippines with address at 4 Floor, Solid Mills Building, De La Rosa St., Legaspi Village, Makati City; 2) Petitioner is duly registered with the Securities and Exchange Commission with SEC Registration No. 138682 dated March 4, 1987 with the following pnmary purpose. 'To carry on the business, for itself and for others, of mining lode and/or placer mining, developing, exploiting, extracting, milling, concentrating, converting, smelting, treating, refining, preparing for market, manufacturing, buying, selling, exchangin~

C.T.A. CASE NO. 7157 3 DECISION shipping, transporting, and otherwise producing and dealing in nickel, chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and all kings of ores, metals and the products and which by- products thereof of every kind and description and by whatsoever process the same can be or may hereafter be produced, and generally and without limit as to amount, to buy, sell, locate, exchange, lease, acquire and deal in lands, mines, and mineral rights and claims, and to conduct all business appertaining thereto; to purchase, locate, lease or otherwise acquire, mining claims and rights, timber rights, water rights, concessions and mines, buildings, dwellings, plants machinery, spare parts, tools and other properties whatsoever which this corporation may from time to time find to be to its advantage, to mine lands, and to explore, work, exercise, develop or tum to account the same; and to acquire, develop and utilize water rights in such manner as may be authorized or permitted by law; to purchase, hire, make, construct or otherwise, acquire, provide, maintain, equip, alter, erect, improve, repair, manage, work and operate private roads, barges, vessels, aircraft and vehicles, private telegraph and telephone lines, and other communication media, as may be needed by the corporation for its own purpose, and to purchase, import, construct, machine, fabricate, or otherwise acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes, watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, coke ovens, crushing works, gasworks, electric lights and power plants and compressed air plants, chemical works of all kinds, concentrators, smelters, smelting plants, and refineries, matting plants, warehouses, workshops, factories, dwelling houses, stores, hotels or other buildings, engines, machinery, spare parts, tools, implements and other works, conveniences and,, Q / ~w-

C.T.A. CASE NO. 7157 4 DECISION properties of any description in connection with or which may be directly or indirectly conducive to any of the objects of the corporation, and to contribute to, subsidize or otherwise aid or take part in any operations;' 3) That petitioner is a duly registered VAT entity with Certificate of Registration No. 94-470-000373 issued by the Respondent dated June 15, 1994; 4) That Petitioner is registered with the Board of Investments (BOI) as an exporter of beneficiated nickel silicate ores and chromite ores with BOI Certificate of Registration No. EP-88-306; 5) That the nature of the instant petition is a petition for review of the petitioner's claim for refund; 6) That the Respondent has granted no refund of the amount claimed by Petitioner from the time Petitioner filed its claim for refund up to the present." In his Answer, respondent alleged by way of special and affirmative defenses that: "4) Petitioner's claim for refund is subject to administrative investigation/examination by the respondent; 5) To support its claim, it is imperative for petitioner to prove the following, viz: a) The registration requirements of a value-added taxpayer in compliance with Section 6(a) and (b) of Revenue Regulations 6-97, in relation to Section 4.107-1 (a) of Revenue Regulations ~~:t95 , and Section 236 of the Tax Code, as amended; ~

C.T.A. CASE NO. 7157 5 DECISION b) The invoicing and accounting requirements for VAT- registered persons, as well as the filing and payment of VAT in compliance with the provisions of Sections 113 and 114 of the Tax Code, as amended; c) Proof of compliance with the prescribed checklist of requirements to be submitted involving claims for VAT refund in pursuance to Revenue Memorandum Order No. 53-98, otherwise there would be no sufficient compliance with the filing of administrative claim for refund which is a condition sine qua non prior to the filing of judicial claim in accordance with the provision of Section 229 of the Tax Code, as amended. It is worthy of emphasis that Section 112(D) of the Tax Code, as amended, requires the submission of complete documents in support of the application filed with the Bureau of Internal Revenue before the 120-day audit period shall apply, and before the taxpayer could avail of judicial remedies as provided for in the law. Hence, petitioner's failure to submit proof of compliance with the above-stated requirements warrants immediate dismissal of the petition for review; d) That the input taxes of P11 ,564,034.65 allegedly paid by the petitioner on its purchases of goods and services for the period covering January 1 to December 31 , 2003 were attributable to its zero-rated sales, and such have not been applied against any output tax and were not carried over in the succeeding taxable quarter or quarters; e) That petitioner's administrative and judicial claims for tax credit or refund of the unutilized input tax (VAT) was filed within two (2) years after the close of the taxable quarter when the sales were made in accordance with Sections 112 (A) and (D) and 229 of the Tax Code, as amended; t) That petitioner's domestic purchases of goods and services were made in the course of its trade or business, properly supported by VAT invoices and/or official receipts and other documents, such as subsidiary purchase journal, showing that it actually paid VAT in accordance with Sections 110 (A) (2) and 113 of the Tax Code, as amended, and in pursuance to Section 4.!04-5 (a) & (b) ~

C.T.A. CASE NO. 7157 6 DECISION Revenue Regulations 7-95 (Re: Substantiation of Claims for Input Tax Credit); g) The requirements as enumerated under Section 4.104-2 of Revenue Regulations 7-95 (Re: Persons who can avail of the Input Tax Credit)." Petitioner presented Reynaldo R. Virgilia, its Vice President of Finance, and Emmanuel M. Silva, its Chief Accountant, as witnesses, and documentary evidence, marked as Exhibits "A " to "BB ", inclusive of their submarkings, which were all admitted by the Court in a Resolution dated April 24, 2006. On the other hand, respondent did not present any evidence and submitted the case for decision. Thereafter, both parties were granted thirty (30) days from August 31 , 2005 within which to file their simultaneous memoranda. Only petitioner filed its memorandum on October 9, 2006, and the case was deemed submitted for decision. THE ISSUES As stipulated upon by the parties, the Issues for this Court' s consideration are:

C.T.A. CASE NO. 7157 7 DECISION I WHETHER OR NOT PETITIONER'S SALES ARE EXPORT SALES. II WHETHER OR NOT PETITIONER'S EXPORT SALES WERE PAID FOR IN ACCEPTABLE FOREIGN CURRENCY AND ACCOUNTED FOR IN ACCORDANCE ~TH THE RULES AND REGULATIONS OF THE BANGKO SENTRAL NG PILIPINAS (BSP). III WHETHER OR NOT PETITIONER'S INPUT TAXES ARE ATTRIBUTABLE TO ITS ZERO-RATED TRANSACTIONS. IV WHETHER OR NOT PETITIONER'S INPUT TAXES ARE SUFFICIENTLY SUBSTANTIATED WITH VAT INVOICES OR OFFICIAL RECEIPTS. v WHETHER OR NOT THE VAT INPUT TAXES BEING CLAIMED FOR REFUND/TAX CREDIT BY PETITIONER HAS BEEN CREDITED AGAINST ANY OUTPUT TAXES OR HAS BEEN CARRIED FORWARD TO THE SUCCEEDING QUARTER OR QUARTERS~

C.T.A. CASE NO. 7157 8 DECISION VI WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND OF VAT INPUT TAXES IT PAID FROM JANUARY 1, 2003 TO DECEMBER 31, 2003 AMOUNTING TO ELEVEN MILLION FIVE HUNDRED SIXTY FOUR THOUSAND THIRTY FOUR AND 65/100 (P11,564,034.65). THE COURT'S RULING The petition is partly meritorious. First and Second Issues Being interrelated, the first and second issues shall be discussed jointly. Petitioner claims that it is primarily engaged in the business of exploring, producing and exporting beneficiated nickel silicate ores and chromite ores which are 100% exported and/or shipped to foreign countries, specifically to Japan and Australia, as certified to by the BOI in accordance with Revenue Memorandum Order No. 9-00. Petitioner further contends that since these export sales were paid for in acceptable foreign currency, specifically, in US Dollars, which were inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of the BSP, the same are subject to zero percent (0~

C.T.A. CASE NO. 7157 9 DECISION VAT, pursuant to Section 106(A){2)(a)(J) of the National Internal Revenue Code (hereafter NIRC of1997), as amended, which states: "SEC. 106. Value-Added Tax on Sale of Goods or Properties.- (A) Rate and Base ofTax. - x x x (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales.- The term 'export sales' means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; XXX XXX." Under the aforecited provision, m order for an export sale to qualify as zero-rated, the following requisites must be present: 1) there was a sale and actual shipment of goods from the Philippines to a foreign country; 2) the sale was made by a VAT registered person; 3) the sale was paid for in acceptable foreign currency or its equivalent in goods or services; and or the payment was accounted for in accordance with the rules 4) and regulations of the Bangko Sentral ng Pilipinas.

C.T.A. CASE NO. 7157 10 DECISION After a careful examination of the evidence on record, the Court finds that petitioner has complied with all the above requirements. The fact that petitioner is a VAT registered entity is not disputed (Joint Stipulation of Facts and Issues, par. 3). For the period January 1, 2003 to December 31 , 2003 , petitioner actually shipped its products abroad to foreign buyers and generated export sales in the amount of US$10,542,771.66, with the peso equivalent of P567,193,182.63, as shown in petitioner's Schedule of Export Sales (Annex T-Il of Exhibit "T") and various export documents, such as export sales invoices, export declarations/permits, bills of lading, ore transport permits and outward foreign manifest (Exhibits "T-6-A-1 " to "T-6-L-22 "). Likewise, the foreign currency proceeds of US$10,542,771.66 derived from said export sales were inwardly remitted and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, as evidenced by the Security Bank Client Advices {Exhibits "T-6-A-1 " to "T-6-L-22 ") . Considering, therefore, that petitioner's export sales qualify as zero-rated sales, it is not liable to pay output VAT thereon. Accordingly, petitioner can claim tax credit/refund of the unutilized input VAT paid on its domestic purchases of taxable goods/services and importation~

C.T.A. CASE NO. 7157 11 DECISION capital goods, which are directly attributable to such zero-rated sales, pursuant to Section 112{A) ofthe NIRC of1997, as amended. Third and Fourth Issues We now proceed to the determination of whether or not petitioner incurred input taxes in connection with its zero-rated export sales for the four quarters of 2003. In its report dated August 30, 2005, the commissioned auditing firm, Punongbayan & Araullo, noted the following findings with respect to petitioner's claimed input VAT: 1) The amount of input taxes which the Company applied for refund for the period January 1 to December 31 , 2003 is lower by P20,710.38 than the total input taxes paid/incurred for the same period, as indicated in Exhibit T-1. The amount is computed as follows: Amount applied for refund Pl1 ,564,034.65 Amount of input taxes paid/incurred 11,584,745.03 p 20.710.38 2) Of the total input taxes paid/incurred, we noted exceptions totalling P88,190.93. These are summarized in Exhibit "T-Ill". Such amount has been considered in the Amended VAT returns filed on August 23 , 2005. 3) Of the total input taxes paid/incurred of Pl1 ,584,745.03 per Exhibit T-1 , we noted that~

C.T.A. CASE NO. 7157 12 DECISION input VAT paid/incurred totalling P11,496,554.10 are properly recorded in the books of accounts of the Company and supported by original suppliers ' invoices and/or official receipts. (Exhibit "T ", p . 4) A careful examination and scrutiny of petitioner's 2003 monthly Schedules of Purchases and Corresponding Input VAT [both for Head Office and Minesite] (Exhibits "T-1-A " and "T-1-B " of Exhibit "T ") and the related supporting documents reveals that the input taxes/incurred of P11,496,554.10, as found by the independent CPA, consisted of input taxes on domestic purchases of goods/services in the amount of P1 ,326,115.22 and input taxes on importation of capital goods in the amount ofP10,170,438.88, broken down as follows: 2003 Annexed to Exhibit T as On Domestic INPUT VA T Total Exh T-1-A Exh T-1-8 Exh T-Ill-A Pu rchases of On Importati on Goods/Servi ces of Capital Goods Jan . pp. 1-2 p. 1 p. 3 p 27 ,313.09 p 203,510.43 p 27,313.09 Feb . pp. 3-4 pp. 2-3 p. 1 117,765 .33 7,533,486.24 117 ,765 .33 Mar. pp. 5-6 pp. 4-5 p. 1 206,915 .06 2,433,442 .21 410 ,425.49 April pp. 7-8 pp. 6-7 p. 1 213 ,995.49 213 ,995.49 May pp. 9-11 p. 1 236,071 .72 P1o 170 438 88 236,071 .72 June p. 12 pp. 1, 3 100,119.94 July pp. 13-14 78 ,539 .57 7,633,606 .18 Aug . pp. 15-16 pp. 2,4 28 ,008 .85 78 ,539 .57 Sept. p. 17 pp. 2,3 23 ,580 .04 28,008.85 Oct. pp. 18-19 101 ,950.89 Nov. pp. 20-21 p. 3 69 ,241 .54 2 ,457 ,022 .25 Dec. p. 22 pp. 3,4 122,613.70 101 ,950.89 69,241 .54 p. 3 P1326 11 522 122,613.70 Tota l: P114ll65~

C.T.A. CASE NO. 7157 13 DECISION While petitioner was able to substantiate its domestic purchases of goods and services with VAT invoices/official receipts, however, We find that the amount of P1,326,115.22 is not entirely allowable as input tax credit. Pursuant to Revenue Memorandum Order No. 9-00, sales of goods, properties or services made by a VAT-registered supplier to a BOI registered entity whose products are 100% exported shall be accorded automatic VAT zero-rating, subject to the following reportorial and documentary requirements, prescribed under Section 3 of Revenue Memorandum Order No. 9-00: "SEC. 3. Sales ofgoods, properties or services made by a VAT-registered supplier to a BOI-registered exporter shall be accorded automatic zero-rating, i.e., without necessity of applying for and securing approval of the application for zero-rating as provided in Revenue Regulations No. 7-95, subject to the following conditions: (1) The supplier must be VAT-registered; (2) The BOI-registered buyer must likewise be VAT- registered; (3) The buyer must be a BOI-registered manufacturer/producer whose products are 100% exported. For this purpose, a Certification to this effect must be issued by the Board of Investments (BOI) and which certification shall be good for one year unless subsequently re-issued by the BOI; ~

C.T.A. CASE NO. 7157 14 DECISION (4) The BOI-registered buyer shall furnish each of its suppliers with a copy of the aforementioned BOI Certification which shall serve as authority for the supplier to avail of the benefits of zero-rating for its sales to said BOI-registered buyers; and (5) The VAT-registered supplier shall issue for each sale to BOI-registered manufacturer/exporters a duly registered VAT invoice with the words "zero-rated" stamped thereon in compliance with Sec. 4.108-1(5) of Revenue Regulations No. 7-95. The supplier must likewise indicate in the VAT-invoice the name and BOI-registry number of the buyer." In the case at bench, record shows that petitioner was issued a Certification by the BOI attesting to the fact that petitioner is a BOI registered entity with 100% exports. The Certification was valid for the period May 21, 2003 to December 31, 2003. Under Section 3.4 of said RMO 9-00, said Certification shall serve as authority for the local suppliers of petitioner to avail of the benefits of zero-rating on their sales to petitioner covering the period May 21, 2003 to December 31, 2003. On the basis of said Certification, no output tax should, therefore, be shifted by the local suppliers to petitioner. Hence, in the absence of clear and convmcmg proof that petitioner's local suppliers passed on or shifted the VAT on such domestic purchases to petitioner, it cannot claim the amount~

C.T.A. CASE NO. 7157 15 DECISION P597,272.04, as input tax credits on its domestic purchases for the period May 21 , 2003 to December 31 , 2003 , broken down as follows: Annexed to Exhibit T as lneut V AT Claim Exhibit T-1-A Exhibit T-111-A Year 2003 Exhibit Amount Total May 21-31 T-4 -E-4 0 p 162 .27 T-4-E-42 June T-4-E-43 4 9 6 .58 July T-4-E-45 August T-4-E-49 1,359 .01 September T-4-E-51 T-4-E-53 410 .07 T-4-E-57 T-4-E-68 9 11 .82 T-4-E-69 T-4-E-67 3 ,107 .64 T-4-E-71 T-4-E-73 309.09 T-4-E-72 T-4-E-92 1,09 0 .91 T-4-E-93 T-4-E-94 263 .64 T-4-E-95 T-4-E-96 181 .64 T-4-E-97 T-4-E-98 319 .09 T-4-E-99 T-4-E-100 229 .09 T-4-E- 101 T-4-E-102 1,351 .06 T-4-E- 103 T-4-E- 104 1,478 . 18 T-4-E- 105 T-4-E- 106 6 74 . 12 T-4-E- 107 T-4-E- 108 1,925.41 T-4-E- 109 T-4-E- 110 3,851 .51 T-4-E-111 T-4-E- 112 4 ,9 33 .24 2,341 .99 8,163.80 1,88 9 . 16 2 ,0 25 .98 2 ,442 .75 1,447 .26 986 .21 793 .65 2,420 .92 1,328 .80 4 ,513 .28 1,206 .98 12,331 .00 2 ,420 .27 1,858 .49 1,738 .65 p 73,217.51 2,253 .96 Page 12 Pages 1, 3 100,119.94 Pages 13-14 Pages 15-16 Pages 2,4 78,539.57 Pages 2,3 Page 17 28 ,008.85 23 , 58~

C.T.A. CASE NO. 7157 16 DECISION Octob er Pages 18-19 Page 3 101 ,950.89 November Pages 20-21 Pages 3,4 69,241 .54 December Page 22 Page 3 122,613.70 P 597 272 04 Total : Petitioner, therefore, may claim the amount of P728,843.18 only as input tax credits on its domestic purchases of goods/services for the period January 1, 2003 to May 20, 2003, to wit: Yea r 2 003 Annexed to Exhibit T as Inp ut VAT Claim Ex hibit T-1-A Exhibit T-1-B Exhibit T-Ill-A January Pages 1-2 Page 1 Page 3 p 27,313 .09 February Pages 3-4 Pages 2-3 Page 1 117,765.33 March Pages 5-6 Pages 4-5 Page 1 206,915 .06 April Pages 7-8 Pages 6-7 Page 1 213 ,995.49 May 1-20 Pages 9-11 Page 1 162,854.21 Total : P Z28 843,j 8 As regards the input VAT payment of Pl0,170,438.88 on petitioner's importations, We find the same a valid claim considering that it was directly paid to the Bureau of Customs and is duly covered by machine validated BOC import entry declarations and official receipts, in accordance with the substantiation requirements prescribed under Section 4.104-5(b) ofRevenue Regulations No. 7-95. In sum, petitioner's valid input tax credits amounts to P10,899,282.06, which represents the sum of the input VAT of P728,843.18 on its domestic purchases of goods/services for the p e v

C.T.A. CASE NO. 7157 17 DECISION May 1-20, 2003 and input VAT payment of Pl0,170,438.88 on importations made for the year 2003. Fi(th Issue As regards the fifth issue of whether or not the input VAT of P10,899,282.06 has been credited against any output tax or has been carried forward to the succeeding quarter or quarters, records show that the same was already net of output tax and was not carried over to the succeeding quarters. The input VAT claim of Pl1,564,034.65 (which includes the amount of P10,899,282.06 found by this Court as a valid claim) is already net of the output VAT liability of petitioner for taxable year 2003 in the amount of P136.36. Furthermore, in its VAT return for the fourth quarter of 2004, petitioner deducted the total claim of P11 ,564,034.65 as "Any VAT Refund/TCC Claimed" from the "Total Available Input Tax" as of the fourth quarter of 2003 (Exhibit "Y"). It is clear, therefore, that the input VAT claim of Pl1 ,564,034.65 was not carried over to the succeeding quarter/s. For all the foregoing, this Court finds that petitioner has sufficiently proven its entitlement to a refund or issuance of a tax credit certificate, but in the reduced amount of PI0,899,282.06, represent~

C.T.A. CASE NO. 7157 18 DECISION unutilized input taxes attributable to its zero-rated sales for the four quarters of2003. WHEREFORE, premises considered, the instant Petition For Review 1s hereby PARTIALLY GRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED to REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor ofpetitioner in the reduced amount of TEN MILLION EIGHT HUNDRED NINETY NINE THOUSAND TWO HUNDRED EIGHTY TWO AND 06/100 PESOS (P10,899,282.06), representing unutilized input taxes attributable to zero-rated export sales for the four quarters of2003 . SO ORDERED. &GA~=E~d Associate Justice WE CONCUR: E~.UY Ch~C! .~~ck 9,' Associate Justice .nfANITO-C. CASTANEDA,<1R. Associate Justice

.. C.T.A. CASE NO. 7157 19 DECISION ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~&f.c~~t.;"i~.. Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~~ ~ ERNESTO D. ACOSTA Presiding Justice