SAN ROQUE POWER CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES Coon ol Tax Appeals QUEZON CITY SECOND DIVISION SAN ROQUE POWER C.T.A. CASE NO. 6647 CORPORATION, Members: Petitioner, CASTANEDA, JR., Chairperson -versus- UY, and PALANCA-ENRIQUEZ, JJ. THE COMMISSIONER OF Promulgated: INTERNAL REVENUE, NOV 2 9 2007 Respondent. / ~ ( .P:oo f�tYl . : - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~- - - - - - - - - X AMENDED DECISION UY,~.: On March 8, 2006, this Court rendered a Decision denying petitioner's claim for refund or issuance of a tax credit certificate in the amount of P560,200,283.14 allegedly representing unutilized input VAT paid on purchases of capital goods and other taxable goods and services for the period January 1, 2001 to December 31 , 2001 . Petitioner received its copy of 20AJJ the said Decision on March 23,

AMENDED DECISION C.T.A. CASE NO. 6647 Subsequently, on April 7, 2006, petitioner filed a "Motion for New Trial and/or Reconsideration 1" of the assailed Decision on the ground of honest mistake or oversight; and that the Court's findings and conclusions do not agree with the evidence presented and with applicable law and jurisprudence, specifically: "(1) Petitioner's 2001 audited financial statements are attached to all of Petitioner's letters to Respondent, representing its administrative claims for refund of excess input taxes which were presented by Petitioner as Exhibits "EE" to "LL" but Petitioner inadvertently failed to include the attachments to the said Exhibits. As indicated in the attached affidavit of merit and in the aforementioned Exhibits , the attachments provide further proof that Petitioner's construction costs and other capital goods are duly recorded as Property, Plant and Equipment in Petitioner's books of accounts; (2) The Honorable Court should consider several other evidence submitted by Petitioner in support of its purchases showing that such purchases consist of capital goods; (3) The Honorable Court should find that in the absence of any other line of business engaged in by Petitioner, it logically follows that all its expenses which are made in the ordinary course of business are attributable to its effectively zero-rated business. The law does not require that zero-rated sales be made within the same period as the time when the expenses were incurred in order to consider such purchases as attributable to its zero-rated sales." Respondent was directed to file his Comment to the instant Motion in the Resolution dated May 3, 20062, within ten (1 0) days from receipt thereof. On May 18, 2006, respondent filed an "Opposition (Re: Motion for New Trial and/or Reconsideration 3 ", arguing , among others, that it is incorrect for petitioner to file a Motion for New Trial and/or Reconsideration ; rather it 11 should choose between the two remedies ; that petitioner's reliance on th~d 1 Docket, pp. 385-401. /V' V 2 Docket, p. 561. :. Docket, pp. 568-571 .

AMEN DED DEC ISION C.T.A. CASE NO . 6647 age 3 of 11 ground of honest mistake is misplaced ; and that Annexes "A" to "A-24" attached to the Motion are inadmissible as these are not original documents and were neither presented during trial nor formally offered . Pursuant to Section 1, Rule 1 of the 1997 Rules of Civil Procedure, this Court resolved in the Resolution dated July 28, 20064 to construe the Rules of <;:;ourt liberally to promote the objective of securing a just, speedy, and inexpensive disposition of every action , and allowed petitioner to present additional evidence in support of its subject motion. Thereafter, upon petitioner's motion5, the Court commissioned Ma . Victoria C. Espana as an Independent CPA on November 9, 2006, 6 to examine the voluminous documents evidencing petitioner's capital goods purchases, and ~"'Orresponding VAT input tax thereon , and was directed to submit her CPA Report within thirty (30) days from said date, and to testify on her findings on January 10, 2007 . On said date, Independent CPA, Ma . Victoria C. Espana, completed her testimony and petitioner was directed to file Supplemental Offer of Evidence within thirty (30) days therefrom , while respondent was given fifteen (15 ) days to file Comment thereto. On February 9, 2007, petitioner filed its Supplemental Offer of Evidence 7 consisting of Exhibits "SS" to "WW", with submarkings , for the purpose of proving the following : purchases of its capital goods; the nature and/or details of petitioner's purchases for the calendar year 2001 which gave rise to its excess VAT input taxes for the said year; the amount of its claim fo~ 4 Docket, pp. 573-574. 5 Motion to Commission An Independent CPA filed on November 8, 2006, Docket, pp. 60 1-607. " Minutes of hearing held on November 9, 2006, Records, p. 608. 7 Petitioner' s Supplemental Formal Offer of Evidence, Docket, pp. 713-7 17.

;~MEN DED DECISION t.T.A. CASE NO. 6647 Page 4 of II refund of excess input VAT that are attributable to purchases of capital goods which are duly substantiated in accordance with law; due recording of capital goods purchases in petitioner's books of accounts under property plant and equipment; and petitioner's entitlement to the refund or credit of the excess '/AT input taxes thereon . < In respondent's "Comment (Re: Petitioner's Formal Offer of Evidence)" filed on February 15, 2007, it was stated that respondent has no objection to the admission of Exhibits "SS" to "WW-1 " inclusive of sub-markings, without necessarily admitting their relevancy, materiality or probative value and the validity of the purposes for which the said exhibits are offered in evidence.8 In the Resolution dated March 14, 2007, all the exhibits mentioned in petitioner's Supplemental Formal Offer of Evidence were admitted and the parties were directed to simultaneously file their memoranda within thirty (30) days from receipt thereof.9 Petitioner filed its Supplemental Memorandum on April 27 , 200710 while respondent filed her Memorandum on May 28 , 2007.11 On June 6, 2007 , petitioner's "Motion for New Trial and/or Reconsideration" dated April 7, 2006 was submitted for resolution .12 Hence, this resolution . After a thorough review and examination of the pieces of evidence submitted by petitioner and the applicable laws and jurisprudence, the Court finds legal basis to partially grant petitioner's claim .~ 8 Docket, pp. 7 18-72 1. \. Docket, pp. 723-724. 10 Docket, pp. 725 -732 . 11 Docket, pp. 738-743. 12 Docket, p. 745 .

AMENDED DECISION C.T.A. CASE NO . 6647 Page 5 of II The Report 13 of the commissioned Independent CPA reflects the following summarized findings regarding petitioner's claim for refund or issuance of tax credit certificate pertaining to unutilized input VAT arising from purchases of capital goods: 1.) Input VAT on local purchases of p 359,440 ,010.47 Exh . W -A & W -A.2 goods & services ascertained to be in the nature of capital goods and 182,522 ,086 .77 Exh . W-F & VV- 0 recorded under PPE account 4 ,723,448 .56 Exh . W -G- 1 to VV-G- 2.) Input VAT on importation of goods 2 ascertained to be in the nature of capital goods & can reasonably be 39 ,300 .27 Exh. W-B & W-B-2 concluded to be part of the 143,265 .82 Exh. W -A.3 progress bi ll ings of the contractor that had been recorded under PPE 134,898 .36 Exh. W -A.4 account 1,673 .00 Exh . W -F- 1 3.) Input VAT on payment to services of nonresident foreign contractors 508,534 .88 Exh. W-G-3 ascerta ined to be in the nature of capital goods and recorded under 467 ,235 .56 Exh . W -G-4 PPE account p 547,980,453.69 4.) Footing error 5.) Input VAT relating to purchases of non-capital goods 6.) Input VAT from local purchases of services wh ich cannot be traced in the books under PPE account 7.) Input VAT on importation of goods that cannot be ascertained to be in the nature of capital goods used in the construction of the Power Plant 8.) Input VAT on importation of servi ces that cannot be ascerta ined to be in the nature of cap ital goods; supporting invoices were not ava ilable 9.) Input VAT from importation of services where the onshore fees in the invoices cannot be reconciled w ith the Company's schedules TOTAL Based on the foregoing findings, only the input VAT mentioned in item nos. 1, 2, and 3, in the aggregate amount of P546,685,545.80 represents petitioner's val id claim since the related purchases were ascertained to be in )~ 13 Exhibit "VV-A.5" . rr -

AMENDED DEC ISION C.T.A. CASE NO. 6647 Page 6 of II the nature of capital goods and recorded under petitioner's Property, Plant and Equipment (PPE) account. On the other hand , input VAT in the combined amount of P1 ,294,907.89 under nos. 4, 5, 6, 7, 8, and 9, cannot be allowed for any of the following reasons : for being erroneously computed ; their related purchases cannot be ascertained to be in the nature of capital goods; or they pertain to non-capital goods. The input VAT of P359,440,010.47 under item no. 1 of the commissioned Independent CPA's summarized findings should further be reduced by P9,862,986.26. The amount of reduction represents the difference between petitioner's claim and that appearing on its books; the details are provided below:14 SUPPLI ER CLAIM ED RECORDED PER DIFFERENC E January BOOKS UND ER CIP p 477 ,722.91 REOL p 18,596,495.64 p 18,118,772 .73 1,044 ,743 .83 5,550 .00 March 31 ,628,456 .25 30 ,583,712.42 483 ,670 .00 478 ,120.00 1' 180,633.40 REOL 1,370 .00 36,053,626 .63 34 ,872,993.23 Sithe 498 ,800 .00 497,430 .00 4,886 ,561 .78 59 ,090.91 April 30,231 ,248 .56 25 ,344,686 .78 563 ,960.91 504 ,870 .00 1,604 ,072 .00 REOL 35 ,915 ,314 .62 34 ,311 ,242 .62 388 ,425.83 Sithe 27 ,261 ,188.82 26 ,872 ,762.99 028; 8,080.11 Mav 590 ,512 .28 590 ,512 .00 REOL 19,738 ,153.10 19,730 ,072 .99 Sithe July REOL August REOL September AB Garcia REOL 14 Exhibit "VV-A.S".

AMENDED DECISION C.T.A. CASE NO. 6647 Page 7 of II October 8,516 .55 7,750 .00 766 .55 URS Phils. 38 ,559 , 147 .56 38 ,439 ,390 .82 119,756 .74 20,861 ,261 .50 20 ,775 ,049 .58 November p 260,990,352.42 p 251,127,366.16 86 ,211 .92 REOL p 9,862,986.26 December REOL TOTAL Moreover, the official receipts 15 covering the claimed input VAT of P36,897.96 on purchase of local services included in item no. 1 are not within the period of claim . Thus, the same must likewise be disallowed from the total input VAT of P359,440,010.47. The amounts of P52,454,331.00 and P533,730.93 should likewise be disallowed and be deducted from the total claim of P182,522,086.77 under item no. 2 in the Independent CPA's summarized findings , inasmuch as the amount of VAT cannot be determined from the submitted official receipts and invoices. The particulars are as follows : Amount of VAT cannot be ascertained from the ORs and invoices presented SUPPLIER PER EXHIBIT NO. PETITIONER'S August Toshiba lnt'l Corp . SCHEDULE ("ANNEX C.2) Toshiba lnt'l Corp . September p 32 ,826 ,222.00 MM-2-V283/MM-2-V288 lshikawajima-Harima Heavy Industries 14 ,177 ,949 .00 MM-2 -V284 / MM -2- V285 / MM - UEII 2-V289 November Toshiba lnt'l Corp . 4,827 .00 MM - 2-W232/MM-2-W233 TOTAL 2,104.00 MM-2 -W236 / MM - 2-W237 5,443 ,229.00 MM -2- Y208 / MM-2 - Y209 p 52,454,331.00 15 Exhibits "MM-2-P 16" and "MM-2-P 17".

AMENDED DECISION C.T.A. CASE NO. 6647 Page 8 of II Variance of input VAT claimed vs. amount appearing in supporting documents SUPPLI ER PER PER EVALUATI ON DIFFERENCE EXHIBIT NO. PETI TIO NER'S OF IEIRDs & OT HER SCHE DU LE DOCUME NTS ("ANNEX C.2) ,February UEII p 622 ,382 .00 p 109,727 .00 p 512 ,655 .00 MM-2- P 180/ M M-2- P181 April MM-2-R169/MM-2- UEII 412 ,956 .00 391 ,880 .93 21 ,075 .07 R168 June lshikawajima- 30 ,776.43 30,776 .0 0 0.43 MM-2-T232/M M-2- Harima Heavy T233/M M-2-T234 Industries August Chevalier 825 ,509 .00 825 ,508 .89 0.11 MM-2-V236/MM-2- V237/MM-2-V238 September ' 75 ,175.00 75 ,174.68 0 .32 M M - 2-W229/MM-2 - 533,730.93 W230/MM-2-W231 TATE Access TOTAL p 1,966 ,798 .43 p 1,433,067.50 p Therefore, the proper subject of refund or issuance of tax credit certificate is P483,797,599.65, computed as follows: 1.) p 359,440 ,010.47 Input VAT on local purchases of goods & services ascertained to be in the nature of capital goods (9 ,862 ,986 .26) and recorded under PPE account (36 ,897.96) p 349 ,540 ,126.25 Less: Disallowances: a) Variance between the claimed p 182,522 ,086 .77 input VAT and input VAT recorded per books under CIP (52 ,454 ,331.00) b) Official receipt for purchase of local services not within the period (533 ,730.93) 129,534 ,024 .84 of claim 4,723,448 .56 2.) Input VAT on importation of goods ascerta ined to p 483,797 ,599 .65 be in the nature of capital goods & can reasonably be co ncluded to be part of the progress billings of the contractor that had been recorded under PPE account Less: Disallowances: a) Amount of VAT cannot be ascerta ined from the Ors and invoices presented b) Variance of input VAT claimed vs . amount appea ring in the supporting documents 3.) Input VAT on payment to services of nonresident fore ign contractors ascertained to be in the nature of capital goods and recorded under PPE account TOTAL

AMEN DED DECISION C.T.A. CASE NO. 6647 Anent petitioner's refund claim attributable to its effectively zero-rated ~ales , petitioner argues that in the absence of any other line of business, it logically follows that all its expenses made in the ordinary course of business are attributable to its effectively zero-rated business. Petitioner further maintains that the law does not require that zero-rated sales be made within the same period as the time when the expenses were incurred in order to consider such purchases as attributable to its zero-rated sales. We disagree. The refund/tax credit of input VAT under Section 112(A) of the National Internal Revenue Code of 1997 is premised on the existence of zero-rated or effectively zero-rated sales. Since it has no record of zero-rated or effectively zero-rated sales for the four quarters of 2001 , petitioner's said claim cannot be granted . Well-settled is the general rule that claimants of tax refunds bear the burden of proving the factual basis of their claims. This is because tax refunds are in the nature of tax exemptions, the statutes of which are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Taxes are the lifeblood of the nation , therefore statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. 16 Since tax refunds are considered to be in derogation of sovereign authority, it is imperative that the granting thereof should not be r based on mere assumptions or dictates of logic. Concrete proof should be presented by petitioner showing its actual effectively zero-rated sales. And 16 Philippine Phosphate Fertilizer Corp. vs. CIR, G.R. No. 141973, June 28, 2005.

AMENDED DECISION C.T.A. CASE NO. 6647 Page IOof 11 failure of petitioner to prove its entitlement to the refund claim by concrete evidence, will merit its denial. In the light of the foregoing considerations , the Court finds legal basis to partially grant petitioner's subject "Motion for New Trial and/or Reconsideration" and thus hereby renders this Amended Decision pursuant to Section 3, Rule 14 of the Revised Rules of the Court of Tax Appeals , thereby effectively amending the assailed Decision dated March 8, 2006 rendered in the instant case. WHEREFORE , petitioner's "Motion for New Trial and/or Reconsideration" is hereby PARTIALLY GRANTED and this Court's Decision promulgated on March 8, 2006 in the instant case is hereby MODIFIED. Accordingly, respondent is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of Four Hundred Eighty Three Million Seven Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos (P483,797,599.65) representing unutilized input VAT on purchases of capital goods and services for the taxable year 2001 . SO ORDERED. ' WE CONCUR: rfle__e_ c ~ OLGA PALANCA-ENRIQUEZ Q~ ,.,~_J ~ G ~~~ . \J.. t3UA'NITO C. CASTANEDA/ Jiif. � Associate Justice Associate Justice

.. AMENDED DECISION C.T.A. CASE NO. 6647 ? age 11 of 11 ATTESTATION I attest that the conclusions in the above Amended Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division . Q a.......:;4 (? .ar~~ , Q . CfUANITO C. CASTANEDA,G3R. Associate Justice Chairperson 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 Amended Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ERNESTO D. ACOSTA Presiding Justice