KEPCO ILIJAN CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES coon ol Tax Appeals QUEZON CITY SECOND DIVISION KEPCO lUJAN CORPORATION, C.T.A. CASE NO. 6966 Petitioner, Members: -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. THE COMMISSIONER OF Promulgated: INTERNAL REVENUE, APR 1 ~ 2009 / Respondent. ,7______ K:m t: .m . X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION CASTANEDA, JR., J_.: Before this Court is a Petition for Review praying for refund or issuance of tax credit certificate in the amount of P?4,658,481 .68, representing input value-added tax (VAT) incurred by petitioner for taxable year 2002 from importations and domestic purchases of capital goods/equipment and services preparatory to its production and eventual sale of electricity to the National Power Corporation (NPC) . Kepco llijan Corporation (Petitioner) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) , with 1t- principal office at 2501 Tektite Tower I, Exchange Road , Ortigas Center, San ~QJ

DEC IS ION C.T.A. CASE NO. 6966 Antonio, Pasig City. Petitioner is likewise registe1rd as a VAT taxpayer with the Bureau of Internal Revenue (BIR), through Re lenue District Office (ROO) No. 43 of Pasig City.1 It is engaged in the produr ion and sale of electricity as an independent power producer (IPP) , whose r educed electricity is sold solely to NPC .2 It has a duly approved Appliclation for VAT Zero-Rate , covering sales of electricity from June 5, 2002 to 0 cember 31 , 2002.3 Respondent, on the other hand , is the duly �ppointed Commissioner of Internal Revenue , with authority, among others, to decide, approve and grant claims for refund or tax credit of internal revenue tr es . He holds office at the BIR National Office Building , Agham Road , Diliman Quezon City. For the four quarters of taxable year 2002, etitioner filed its Quarterly I VAT Returns showing that it incurred expenses re resenting importation and domestic purchases of goods and services, for w ich petitioner also incurred input VAT.4 On April 13, 2004, petitioner filed an admin strative claim for refund of the amount of P74,658,481 .68 with the BIR Revenue District Office No. 43, representing input VAT allegedly incurred by petitibner for taxable year 2002 from importations and domestic purchases of ca ital goods/equipment and services preparatory to its production and eventual sale of electricity to NPC.5 Due to respondent's inaction and in order to suspend the running of the two-year prescriptive period under the Nationa Internal Revenue Code 9-t-- (NIRC) , petitioner filed the present Petition for Revi won April 22 , 2004. 1 Annex "A", Petition for Re view, Docket, p. I I. t, pp. 52-53 . 2 Par. 2, Facts Admitted, Joint Stipu lation of Facts and Iss ues, Doc 3 Annex " F', Petition for Review, Docket, p. 16. 4 Annexes "8", "C", " D", and "E", Docket, pp. 12- 15. 5 Annex " G, Petition for Review, Docket, p. 17.

DEC IS ION C.T.A. CASE NO. 6966 In his Answer filed on July 9, 2004, respondent prayed for the dismissal of the present Petition, and alleged the following Special and Affirmative Defenses :6 "6. Claims for refund are strictly construed against the taxpayer as the same partakes the nature of a tax exemption ; 7. The taxpayer has the burden to show that the taxes were erroneously or illegally paid . Failure on the part of the Petitioner to prove the same is fatal to its cause of action ; 8. The Petitioner should prove that its legal basis for claiming for the amount being refunded ." During trial , petitioner presented testimonial and documentary evidence ; wh ile respondent was declared to have waived his right to present evidence after repeated failure to appear and present evidence despite due notice .7 After petitioner filed its Memorandum on May 21 , 2008, and considering that respondent did not file his Memorandum , the case was deemed submitted for decision on June 10, 2008.8 The parties submitted the following issues9 for this Court's resolution : "1. Whether or not the sale of electricity by a VAT-registered entity, as the Petitioner, to the National Power Corporation (NPC) , qualifies as a sale of services subject to a VAT rate of zero percent (0%) or otherwise called a zero-rated VAT transaction . 2. Whether Petitioner, as a VAT-registered entity and during the calendar (taxable) year 2002, actually incurred expenses representing importation and domestic purchases of goods and services and which expenses represent costs attributable to Petitioner's production and sale of electricity to the NPC.Ji- 6 Docket, p. 30. 7 Docket, p. 309. 8 Reso lution dated June 10, 2008, Docket, p. 350. 9 Docket, p. 54. ! . ( ' r�� 4J UJ

DECISION C.T.A. CASE NO . 6966 3. Whether or not Petitioner is entitled to the refund of the total amount of P74,658,481 .68, representing the input VAT incurred for the four (4) taxable quarters of the calendar (taxable) year 2002 from its sale of electricity to the NPC. 4. Whether or not Petitioner's claim for refund is substantiated by documentary evidence." Petitioner anchors its claim on Sections 112(A) and (B) of the NIRC of 1997, which provide as follows : "SEC. 112. Refunds or Tax Credits of Input Tax.- (A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person , whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made , apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax : Provided, however, That in the case of zero- rated sales under Section 106(A)(2)(a)(1 ), (2) and (B) and Section 108 B(1) and (2) , the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilippinas (BSP) : Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributable to any one of the transactions , it shall be allocated proportionately on the basis of the volume of sales . (B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased , to the extent that such input taxes have not been applied against output taxes . The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made ." The afore-quoted provisions allow the refund/tax credit of excess input VAT in two instances , namely: (1) when the excess input VAT is attributable to zero-rated or effectively zero-rated sales ; and (2) when the excess input ?z- VAT is attributable to capital goods purchased by a VAT-registered person .

DEC ISION C.T.A. CASE NO . 6966 In its VAT Returns for the four quarters of taxable year 2002, petitioner reflected no amount of taxable or exempt sales/receipts but only zero-rated sales/receipts in the amount of P3,784,339,472.72, and an unutilized excess input VAT in the amount of P74 ,658,481 .68, broken down as follows : Exhibit Taxable Zero-rated Sales Excess Input VAT Year2002 B 1st Quarter p - p 1,740 ,640.93 2nd Quarter c 3rd Quarter 366 ,163,018.53 27,110,271 .53 4th Quarter D 1,614 ,690 ,075.46 17,468 ,655 .94 Total E 1,803,486 ,378. 73 28,338 ,913.28 p 74,658,481.68 p 3,784,339,472.72 The present claim covers the entire P74,658,481 .68 excess input VAT reported for the four quarters of taxable year 2002. Before deciding on the merits of petitioner's claimed input VAT of P74,658,481 .68, the Court must determine first the timeliness of the filing of the same , both in the administrative and judicial levels. Pursuant to Sections 112(A) and (B) of the NIRC of 1997, the reckoning of the two-year prescriptive period for the filing of a claim for input VAT refund starts from the close of the taxable quarter when the sale, importation or purchase was made . Counting from March 31 , 2002, June 30, 2002, September 30 , 2002 and December 31 , 2002, the close of all the quarters of taxable year 2002 ; petitioner had until March 31 , 2004, June 30, 2004, September 30 , 2004 and December 31 , 2004, respectively , within which to file its claim both in the administrative and judicial levels. Petitioner filed its administrative claim on April 13, 2004 ,10 and the Petition for Review on April 22, 2004. Clearly, both the administrative claim and the instant Petition for Review were filed out of time insofar as the claim )k 10 Exhibit " G". !iG7

DEC IS ION C.T.A. CASE NO. 6966 for the first quarter of taxable year 2002 is concerned . Thus , petitioner is barred from claiming refund of the input taxes for the first quarter of taxable year 2002 in the amount of P1 ,740 ,640.93 due to prescription . As regards the remaining input VAT claim covering the second , third , and fourth quarters of taxable year 2002 in the amount of P72 ,917 ,840.75 (P74,658,481 .68 less P1 ,740,640.93) , which was filed within the two-year prescriptive period , petitioner's VAT Returns for the second , third , and fourth quarters of taxable year 2002 showed that it had zero-rated sales/receipts in the amount of P3,784,339,472 .72. The above-quoted Section 112(A) of the NIRC of 1997 allows the refund/tax cred it of input VAT attributable to zero- rated or effectively zero-rated sales subject to the taxpayer's compliance with the following requisites :11 1. there must be zero-rated or effectively zero-rated sales; 2. that input taxes were incurred or paid ; 3. that such input taxes are attributable to zero-rated or effectively zero-rated sales ; 4. that the input taxes were not applied against any output VAT liability; and 5. that the claim for refund was filed within the two-year prescriptive period . Petitioner is a VAT-registered taxpayer engaged in the production and sale of electricity as an independent power producer to the National Power Corporation. Petitioner submits that its sale of electricity to NPC is effectively zero-rated pursuant to Section 108(8)(3) of the NIRC of 1997, in relation toJlt-- 11 AT&T Communications Sen,ices Phils. Inc. vs. Commissione r of Internal Revenue, CTA Case No. 722 1, December 12, 2007; and A ichi Forging Co. of Asia, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 73 14, November 2 1, 2007.

DECISION C.T.A. CASE NO. 6966 Section 13 of Republic Act No. (R.A.) 639512, as amended , which read as follows : "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . XXX XXX XXX (B) Transactions Subject to Zero Percent (0%) Rate. -The following services performed in the Philippines by VAT- registered persons shall be subject to zero percent (0%) rate: XXX XXX XXX (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate ;" (Emphasis supplied) "Section. 13. Non-profit Character of the Corporation, Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities. - The Corporation shall be non-profit and shall devote all its returns from its capital investments, as well as excess revenues from its operations , for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance of effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes , duties , fees , imposts as well as costs and service fees including filing fees , appeal bonds, supersedeas bonds, in any court or administrative proceedings ." (Emphasis supplied) This Court agrees with petitioner as it consistently held that NPC is an entity with a special charter, which categorically makes it exempt from payment of all taxes , whether direct or indirect, including VAT . Accordingly, J7v by virtue of the said charter, services rendered by a VAT-registered entity to 12 otherwise known as the Revised Charter of th e NPC .

DECISION C.T.A . CASE NO . 6966 NPC are effectively subject to zero percent (0%) VAT , in accordance with Section 108(B)(3) of the NIRC of 1997Y The Supreme Court affirmed NPC's tax exemption in the case of Maceda vs. Ma caraig, Jr., et a/.14 , declaring : "A chronolog ical review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax-exempt from all forms of taxes - direct or indirect. XXX XXX XXX One common theme in all these laws is that the NPC must be enabled to pay its indebtedness which , as of P.O. No. 938 was P12 Billion in total domestic indebtedness , at any one time , and US$4 Billion in total foreign loans at any one time . The NPC must be and has to be exempt from all forms of taxes if th is goal is to be achieved ." Further, R.A. No. 9136, otherwise known as the "Electric Power Industry Reform Act of 2001 ", specifically Section 6 thereof, as well as its Implementing Rules and Regulations , confirmed the zero-rated nature of the sale of generated power by generation companies to NPC.15 Likewise, respondent himself approved petitioner's Application for VAT Zero-Rate covering its sales of electricity to NPC from June 5, 2002 to December31 , 2002.16 Moreover, petitione r was able to establish through the various official 9"t- receipts it issued to NPC that it actually generated gross receipts from sale of 13 Kepco Phil. Corp. vs. Commissioner of Internal Revenue, CTA Case No. 7236, October 4, 2007; Kepco Phil. Corp. vs. Commissioner of Internal Revenue, CTA EB No. I07 , Jun e 29, 2007 (affirming the Deci sion in CTA Case No. 64 13, March I0, 2005); Kepco Phil. Corp. vs. Commissioner of Internal Revenue, CTA Case No . 6287, August 3 1, 2005; Kepco Phil. Corp. vs. Commissioner of Internal Revenue, CTA Case Nos . 5675 and 5704, March 18, 2003; Commissioner of Internal Revenue vs. Mirant Pagbilao Corp. , CTA EB No. 25 1, May 30, 2007. 14 Reso lution, G.R. No. 88291, June 8, 1993 (223 SCRA 217) . 15 Mindanao 1 Geothermal Partnership vs. Commissioner of internal Revenue, CTA Case No. 6788, October 13, 2005 16 Exhibit "F".

DECISION C.T.A. CASE NO. 6966 power generation services to NPC for the second , third , and fourth quarters of taxable year 2002 in the total amount of P2 ,270,146,221 .01 , broken down as follows :17 Exhibit OR Date In US$ Amount In Peso K Number 8/8/2002 879,284 .82 Exchange Rate 45,563 ,660.09 K- 1 8/8/2002 18,094 ,786.33 K-2 0002 9/2/2002 51 .819 20,442 ,908 .76 K-3 0003 9/3/2 002 61 ,254,724.26 K-4 0004 9/12/2002 1' 183,872 .06 51 .741 259,913 ,748.29 K-5 000 5 9/30/2002 4,99 1' 142 .55 52 .075 274,081 ,826 .59 K-6 0006 9/30/2002 5,229,571 .20 52.4 10 0007 10/23/2002 9,390 ,919.81 K-7 0008 10/28/2002 9,643 ,190.27 53 .238 5 13, 38 4 , 163 .59 K-8 0009 11/29/2 002 K-9 00 10 11/29/2002 9,549,226. 75 53 .575 10,569 ,926 .84 K-10 0011 12/ 27/2002 511 ,599,823.13 K-11 0012 12/ 27 / 2002 9,709,882 .83 53 .254 K-12 0013 14,748,027. 08 00 14 TOTAL 517 ,090 ,100.23 14,01 1,606 .01 2,270,146,221 .01 While the zero-rated sales/receipts declared in petitioner's VAT Returns for the second , third, and fourth quarters of taxable year 2002 in the amount of P3,784,339,472 .72 is higher than the amount of P2,270 ,146,221 .01 reflected in the official receipts , such discrepancy was brought about by petitioner's adoption of the "accrual method" instead of the "cash method" of accounting in recognizing its income for VAT purposes.18 Since no other sales were reported in its VAT Returns for the second , third , and fourth quarters of taxable year 2002 , all of petitioner's purchases for the same period are attributable to its effectively zero-rated sales and the input taxes of P72 ,917 ,840.75 arising from sa id purchases are eligible for refund under Section 112(A) of the NIRC of 1997. Inasmuch as the said law allows the refund/tax credit of excess input tax attributable to zero-rated or~ 17 Exhib its " K" to" K- 12". 18 Exhibits "HH- 1", "J", and " KK", pp . 4-6.

DEC ISION C.T.A. CAS E NO . 6966 effectively zero-rated sales without distinction as to whether or not the said input tax consists of VAT paid on the purchase of capital goods, the Court finds it unnecessary to determine whether the cla imed amount of P72, 917,840.75 cons ists of input VAT pertaining to cap ital goods. Going now to the issue of whether petitioner actually incurred the input VAT cla im for the second , third , and fourth quarters of ta xable year 2002 in the amount of P72,917, 840.75, Mr. Ador C. Mej ia, the Court-comm ission ed Independent Certified Publ ic Accountant (CPA), noted the following exceptions on petitioner's claimed input VAT for the four quarters of taxable year 2002 in the total amount of P74,658,481 .68:19 Findings 1st Quarter 2"d to 4th Quarters Total Erroneous amounts indicated in the schedule of input VAT as compared to sales invoices or official receipts resu lting in net overstatement -p of the input VAT claim (Annex 8) p 18,694 .28 18 ,694 .28 Input VAT recogn ized and recorded in the - 27 ,842 .35 27,842. 35 books related to non-VAT suppliers (Annex C) Input VAT recognized but not supported by official receipts and/or sales invoices (Annex 13,754 .50 731 ,747.82 745 ,502 .32 D) Input VAT recognized and supported by sales invoices/official receipts but not within the - 26 ,573 .27 26 ,573.27 period claimed (Annex E) Input VAT recognized and supported by official receipts but TI N was rubber stamped 919. 74 - 919 .74 onl y (Annex F) Input VAT on purchases which are not subjected to VAT (Ann ex G) 26,765 .92 17,492 .84 44 ,258 .76 Transactions not supported by sales invoices and/or official receipts on fi le (Annex H) 7,403 .55 274,904 .63* 282 ,308.18 VAT on importatio ns without import-export internal revenue declaration form (Annex I) 328,356 .00 - 328 ,356.00 VAT on importations with erroneous recording of VAT on GL as against the import-export internal revenue declaration form (Annex J) 1,914 .88 (71 ,181.75) (69 ,266 .87) .TOTAL p 397,808 .87 p 1,007,379.16 p 1,405 ,188.03 Includes p urchase of goods supported by an mvo1ce not duly reg1stered wlfh the BIR m the amount of P1 52, 614.45 (Exh1b1t Z-59) . Upon exam ination of petitioner's supporting documents such as Jt-- suppliers' invoices , official receipts, Bureau of Customs (BOC) Import Entry 19 Exhi bit "0".

DECISION C.T.A. CASE NO. 6966 Internal Revenue Declarations , monthly summary lists of purchases and other relevant documents ,20 this Court agrees with the findings of the Independent CPA except for the amount of P69,266 .87 detailed under Annex "J" of Exh ibit "0 ". In arriving at the amount of P69,266.87, the Independent CPA compared petitioner's input VAT claims as reflected in its general ledger vis-a- vis those amounts shown in its import internal revenue declarations such that the understatements of input VAT in the general ledger were offset against the overstatements. Considering that the bases of the Petition are the VAT Returns as filed ,; tt;le understatements should not be offset against the overstatements. Thus, the disallowed overstate ments for the first quarter and second to fourth quarters should be P57,017 .37 and P28,140.76, respectively, or a total of P85 ,158.13 and not P69,266.87. Accord ingly, the exceptions found by the Independent CPA should be adjusted from P1 ,405 ,188.03 to P1 ,559,61 3.03, as computed below: Findings 1 st Quarter 2"d to 41h Quarters Total Erroneous amounts indicated in the schedu le p 18 ,69 4 .28 -p 18 ,694 .2 8 of input VAT as compared to sales invoices or 27 ,842.35 27 ,842.35 official receipts resu lting in net overstatement - 745 ,502 .32 of the input VAT claim (Annex 8) 731 ,747.82 26 ,573 .2 7 Input VAT recognized and recorded in the 13,754 .50 books related to non-VAT suppliers {Annex C) 26 ,573.27 919.74 Input VAT recognized but not supported by - 44 ,258.76 official receipts and/or sales invoices (Annex - 282 ,308.18 9 19.74 17,492.84 328 ,3 56 .00 D) 26 ,7 6 5.92 274 ,904 .63* Input VAT recognized and supported by sales 7,40 3 .55 - invoices/official receipts bu t not within the 328 ,356.00 period claimed (Annex E) Input VAT recognized and supported by official rece ipts but T IN was rubber stamped only (Annex F) Input VAT on purchases which are not subj ected to VAT (Ann ex G) Transactions not supported by sales invoices and/or officia l receipts on fi le (Annex H) VAT on importatio ns without import-export 20 Exhi bits " P" to" Z", " AA" to "BB", inclusive of sub-mark ings. ; 1 ~ .~ ) .J J

D ECI SION C.T .A . CAS E N O . 6966 intern al revenue declaration form (Annex I) 57 ,017 .37 28 , 140 .76 85,158 .13 452,911 .36 1,106,701.67 1,559 ,613 .03 VAT on im portations with erroneous recording of VAT on GL as agai nst the import-export intern al revenue declaration form (Annex J) TOTAL However, as stated earlier, petitioner's claim for the first quarter of taxable year 2002 shall be denied due to prescription . Therefore, only the input taxes of P1 ,106,710.67 shall be disallowed from the total claim of P72 ,917 ,840.75 covering the second , third , and fourth quarters of taxable year 2002. Moreover, evidence on record shows that petitioner's input VAT claim of P72 ,917 ,840.75 should be further reduced by P48,422,089 .03 ,21 broken down as follows : Reason for Disallowance Input VAT 1) Purchase of goods supported by invoices with TIN -V instead of TIN-VAT p 463 ,296.13 2) Purchase of services supported by ORs with TIN-V instead of TIN-VAT 3) Purchase of goods and services supported by ORs or invoices issued 392 ,926.01 not in the name of Petitioner 12 ,9 94 ,374 .02 4) Purchase of services supported by undated ORs 547 ,823.07 5) Purchase of goods and services supported by invoi ces or ORs outside 11 ,782 .96 the period of claim 6) Purchase of goods supported by invoices th at are not duly registered 4 ,385.45 190 ,745.60 with the BI R 7) Purchase of goods not su pported by in voices 19 ,34 0 ,287 .79 8) Purchase of goods and services included in th e summary of 14,476 ,468 .00 p 48,422,089.03 purchases but with no supporting documents 9) Input VAT on importations outs ide the period of claim TOTAL In other words , out of the P74,658,481 .68 input VAT claim for the four quarters of taxable year 2002 , the amount of P1 ,740,640.93 shall be denied on the ground of prescription while the amounts of P1 ,106,701 .67 and P48,422,089.03 shall be denied for not being supported with the required documentary evidence under Sections 110(A) and 113(A) of the NIRC of~ 2 1 Detai ls per A nn ex "A" o f thi s D ecision. ~' . 1 � ~I .l

DECISION C.T.A . CASE NO. 6966 1997 and as implemented by Sections 4.104-1 , 4.104-5, and 4.108-1 of Revenue Regulations 'No. 7-9522 , which read as follows : "SEC. 110. Tax Credits. - (A) Creditable Input Tax.- (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable aga inst the output tax : (a) Purchase or importation of goods 1. For sale; or 2. For conversion into or intended to form part of a finished product for sale, including packaging materials; or 3. For use as supplies in the course of business; or 4. For use as materials supplied in the sale of services; or 5. For use in trade or business for which deduction for depreciation or amortization is allowed under the Code , except automobiles, aircraft and yachts . (b) Purchase of services on which a value-added tax has been actually paid ; (2) The input tax on domestic purchase of goods or properties shall be creditable : (a) To the purchaser upon consummation of sale and on importation of goods or properties ; and (b) To the importer upon payment of the value- added tax prior to the release of the goods from the custody of the Bureau of Customs. However, in the case of purchase of services, lease or use of properties , the input tax shall be creditable to the <Jz- purchaser, lessee or licensee upon payment of the compensation , rental, royalty or fee . 22 Consoli dated Va lue-Added Tax Regu lations.

DEC ISION C.T.A. CASE NO. 6966 (3) A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed input tax credit as follows: (a) Total input tax which can be directly attributed to transactions subject to value-added tax; and (b) A ratable portion of any input tax which cannot be directly attributed to either activity. The term 'input tax' means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT- registered person . It shall also include the transitional input tax determined in accordance with Section 111 of this Code. The term 'output tax' means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered under Section 236 of this Code." "SEC. 113. Invoicing and Accounting Requirements for VAT-registered Persons.- (A) Invoicing Requirements. - A VAT-registered person shall , for every sale, issue an invoice or receipt. In addition to the information required under Section 237 , the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT- registered person, followed by his taxpayer's identification number (TIN) ; and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value- added tax ." "SECTION. 4.104-1. Credits for input tax. - 'Input tax ' means the value-added tax due from or paid by a VAT-registered person on importation of goods or local purchases of goods or services, including lease or use of property, from another VAT-registered person in the course of his trade or business. It shall also include the transitional or presumptive input tax determined in accordance with Section 105 of the Code. )k- ~lG

DECISION C.T.A. CASE NO. 6966 It includes the input taxes which ca n be directly attributed to transactions subject to the value-added tax plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. Any input tax evidenced by a VAT invoice or official receipt issued by a VAT-registered person in accordance with Section 108 of the Code , on the following transactions , shall be creditable against the output tax: (a) Purchase or importation of goods 1. For sale; or 2. For conversion into or intended to form part of a finished product for sale, including packaging materials; or 3. For use as supplies in the course of business; or 4. For use as raw materials supplied in the sale of services; or 5. For use in trade or business for which deduction for depreciation or amortization is allowed under the Code, except automobiles , aircraft and yachts . XXX XXX XXX (b) Purchase of real properties for which a VAT has actually been paid ; (c) Purchase of services in which a VAT has actually been paid ; (d) Transactions 'deemed sale ' under Section 100 (b) of the Code; (e) Presumptive input tax allowed to be carried over as provided for in Section 4.1 05-1 of these Regulations ; (f) A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed input tax credit as follows ; XXX XXX xxx" "SECTION . 4.104-5. Substantiation of claims for input tax credit. -. (a) Input taxes shall be allowed only if the domestic~ ~17

DEC ISION C.T.A . CASE NO. 6966 purchase of goods , properties or services is made in the course of trade or business . The input tax should be supported by an invoice or receipt showing the information as required under Section 108 (a) and 238 of the Code. Input tax on purchases of real property should be supported by a copy of the public instrument i.e. deed of absolute sale, deed of conditional sale , contract/agreement to sell , etc. together with the VAT receipt issued by the seller. A cash-register machine tape issued to a VAT-registered buyer by a VAT-registered seller from a machine duly registered with the BIR in lieu of the regular sales invoice, shall constitute valid proof of substantiation of tax credit only if the name and TIN of the purchaser is indicated in the receipt and authenticated by a duly authorized representative of the seller. (b) Input tax on importations shall be supported with the import entry or other equivalent document showing actual payment of VAT on the imported goods. (c) Presumptive input tax shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR . (d) Input tax on 'deemed sale' transactions shall be substantiated with the required invoices . (e) Input tax from payments made to non-residents shall be supported by a copy of the VAT declaration/return filed by the resident licensee/lessee in behalf of the non-resident licensor/lessor evidencing remittance of the VAT due ." "SECTION. 4.108-1. Invoicing Requirements. - All VAT- registered persons shall , for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN and address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN , business style , if any, and address of the VAT-registered purchaser, customer or client; 5. the word 'zero rated ' imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration . XXX XXX XXX ~ ~1 3

DECISION C.T.A . CASE NO . 6966 Page I7 of I9 Only VAT-registered persons are required to print their TIN followed by the word 'VAT in their invoice or receipts and this shall be considered as a 'VAT Invoice'. All purchases covered by invoices other than 'VAT Invoice' shall not give rise to any input tax. If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A 'VAT Invoice' shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code. The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records ." Hence, petitioner's claimed amount of P74 ,658,481.68 should be reduced by P51 ,269,431 .63 computed as follows : Barred by prescription - 1st Quarter p 1,740 ,640.93 Disallowances per CPA Report- 2 nd to 4 1 Quarters 1,106,701 .67 h Disallowances per Court's verification- 2nu to 4" Quarters 48,422 ,089 .03 Total disallowances p 51 ,269,431.63 It was established that petitioner's claimed input taxes were not applied against any output VAT liability during the period of claim and in the succeeding quarters since all of petitioner's sales were zero-rated and there was no output VAT due thereon . Although the claimed input tax was carried over to the succeeding quarters until the second quarter of taxable year 2004, the same was deducted as any "Any VAT Refund/TCC Claimed" from the Total Available Input Tax as of the second quarter of taxable year 2004.23 Ergo , petitioner could not have possibly utilized the subject claim in the succeeding quarters. ~ 23 Exhi bit " I- I" .

DEC IS ION C.T.A . CASE NO. 6966 In sum , petitioner has sufficiently proven that it is entitled to a refund or issuance of tax credit certificate corresponding to its unutilized input VAT for the second , third , and fourth quarters of taxable year 2002 in the amount of P23,389,050.05, computed as follows : Amount of Claim p 1,740,640.93 p 74,658,481 .68 Less : Barred by prescription- 1st Quarter 1, 106,701.67 51 ,269 ,431 .63 Disallowances per CPA Report - 2nd to 4th Quarters 48 ,422 ,089.03 p 23 ,389,050.05 Disallowa nces per Cou rt's ve rifi cation- 2nd to 4th Quarte rs Refundable Input VAT WHEREFORE , with the foregoing disquisitions , the Petition for Review is hereby PARTIALLY GRANTED. Accordingly , respondent is hereby ORDERED to REFUND or to ISSUE TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of P23 ,389,050.05, representing unutilized excess input VAT attributable to its zero-rated sales of electricity to NPC for the second , third , and fourth quarters of taxable year 2002. SO ORDERED. ~~-~ c . G:;I-~~1<;1 . qR. :JUANITO C. CASTANEDA, Associate Justice WE CONCUR: f&.--r ~~ ~LANCA-EN~RI~ QUEZ E~.UY OLGA Associate Justice Associate Justice

DEC IS ION C.T.A. CASE NO. 6966 CERTIFICATION Pursuant to Article VIII , Section 13 of the Constitution , 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. ~~~c. . ~~~/Q ' JUANITO C. CASTANEDA, qR. Acting Presidin~ Justice Chairperson , 2n Division

CTA Case No. 6966 Kepco Ilijan Corporation vs. CIR ANNEXA SUMMARY OF ADDITIONAL DISALLOWANCES PER COURT'S VERIFICATION Ex h . OR linvQice S uoolier l n Rut VAT Date 1) Purchase ofgoods supported by invoices with TIN- V instead of TIN- VAT U-75 6/5/2002 Quiet Stream Waters &Trade p 1,515.00 7/11/2002 Sta. Rita Machine Shop V-75 545.45 W- 23 7/10/2002 General Electric Phils Inc. 145,595.63 X-103 9/2/2002 Standphil Corporation 44,118 .18 X-147 9/30/2002 Ono Hardware & Lumber 375 .91 X-148 9/30/2002 Ono Hardware & Lumber 179 .64 Y-24 10/8/2002 Citimart Shop-On Z-50 12/19/2002 Citimart Shop-On 1,466 .78 Z-85 11/14/2002 Quiet Stream Waters &Trade 450 .23 3,250.00 8/31/02 & Y-54 & Y-55 9/15/02 General Electric Phils Inc. 265,799 .31 S ubtotal p 4631296.13 2) Purchase ofservices supported by ORs with TIN- V instead of TIN- VAT S- 55 4/18/2022 Red Eight Trading & Gen . Services p 6,500.00 T-13 5/8/2002 Red Eight Trading & Gen. Services 2,500.00 U-4 6/4/2002 Typo Grafika, Inc. 222.73 U- 52 6/18/2002 Typo Grafika, Inc. 231.82 U-95 6/27/2002 Typo Grafika, Inc. 3,122 .73 V-85 7/29/2002 Balisong Intelligence & Security Agency 56,073.13 W-7 8/15/2002 Premier Chemical Enterprise 545 .45 W-7 8/15/2002 Premier Chemical Enterprise 545.45 W-38 8/12/2002 MCC Printers & Enterprises 1,22 7 .27 W-40 8/12/2002 MCC Printers & Enterprises 477.27 W-99 8/23/2002 Typo Grafika, Inc. 95.45 W- 103 8/23/2002 Typo Grafika, Inc. 159.09 W-103 8/23/2002 Typo Grafika, Inc. 159.09 X-70 9/11/2002 Typo Grafika, Inc. 527.27 X-118 9/20/2002 Bullion Construction & Dev't Corp. 43,553.00 Y- 18 10/13/2002 Balisong Intelligence & Security Agency 63,842 .48 Y-43 10/3/2002 Typo Grafika, Inc. 1,500.00 Y-133 10/17/2002 Typo Grafika, Inc. 587 .27 Z-19 10/30/2002 Typo Grafika, Inc. 181.82 Z-38 11/11/2002 Grandoise Food Services, Inc. 2,072.73 Z-144 11/22/2002 Balisong Intelligence & Security Agency 66,791.32 Z-145 11/22/2002 MOF Company (Subic) Inc. 21,436.80 Z-161 11/22/2002 Red Eight Trading & Gen . Services 3,090.91 Z-220 12/3/2002 Bullion Construction & Dev't Corp. 38,083.36 Z-237 11/29/2002 L.Armani Trading & General Services 9,217.05 AA-26 12/5/2002 Balisong Intelligence & Secu rity Agency 70 182.52 Subtotal p 392�926. 01 3) Purchase of goods and services supported by ORs or invoices issued not in the name of Petitioner S-15 4/16/2002 Via Mare Catering Services P f l 1,155.37 T-1 5/7/2002 Marsh Phils . 4,307,658.27 An nex A Page 1 of 3 : . r � r) Jt.. L.

CTA Case No. 6966 Kepco Ilijan Corporation vs. CIR T-31 5/7/2002 F.A.T. Kee Computer Systems 627.27 V-79 7/24/2002 �Ma rsh Phils. 10,841,961.12 V-79 7/24/2002 Marsh Phils. (2,158,670.07) W-133 8/28/2002 Via Mare Catering Services W-136 8/28/2002 Via Mare Catering Services 919.51 722.55 Subtotal p 12, 994, 374.02 4) Purchase ofservices supported by undated ORs S- 26 Sa rca Construction p 177,014.40 T-58 Sarca Construction 214,056.44 V-93 Banbros Commercial 1,427.28 Z-15 ADP Electrical & I ndustrial Enterprises 58,909 .09 Z- 58 Marietta Purisima P. Santos 96,000.00 AA-96 Jumbo Cycle Enterprise, Inc. 415 .86 Subtotal p 547,823.07 S) Purchase ofgoods and services supported by invoices or ORs outside the period of claim S-31 4/26/2001 Intertek Testing Services Phi ls. P 731.59 S-31 4/ 26/2001 Intertek Testing Services Phils. 8,869.55 AA-24 1/2/2003 Premier Chemical Enterprise 2 181.82 Subtotal p 11, 782.96 7) Purchase ofgoods supported by invoices that are not duly registered with the BIR T-74 5/30/2002 Yokogawa Philippines, Inc. __.:_P_ _ _ _4:.L3:.:8:.:5.:...4:.:5_ Subtotal -=P-_ _ _ _4::.�r3.=:.8=:..'=5:.:...4::..5:=-- 8) Purchase of goods not supported by invoices p 1,505.00 Quiet Stream Waters & Trade Quiet Stream Waters & Trade 1,045 .00 Quiet Stream Waters & Trade 101 Computer Center 2,585.00 Atlas Super Flags Office 1 Superstore 2,545.45 Triton Communications Corp. Society Glass & Aluminum 580 .00 Justic International Trading Corp. RBC Petron Gasoline Station 1,231.82 Triton Communications Corp. Mercury Drug-Batangas 5,069.09 Caltex (Philippines) Inc. Big-Top Builders & Enterprise 2,454.55 Mila's Special Lechon Raytheon Ebasco Overseas, Ltd. 31,272.73 Raytheon Ebasco Overseas, Ltd. Citimart Shop-on 5,002.43 Subtotal 10,245 .82 4,059 .84 14,411.61 275 .00 1,772.73 80,168.23 19,203 .12 7 318.18 p 190, 745.60 9) Purchase ofgoods and services included in the summary ofpurchases but with no supporting documents Marsh Phils. p 12,156,847 .69 Raytheon Ebasco Overseas, Ltd. 7,078,574 .09 8,690.48 32,968 .18 33,756.44 Annex A Page 2 of 3

CTA Case No. 6966 , Kepco Ilijan Corporation vs. CIR Subtotal 29 450.91 p 19, 340, 287.79 Exh. IEIRD Date Supplier Input VAT 10) Input VAT on importations outside the period of claim BB-88 & BB-89 1/2/2003 Mitsubishi Corporation p 8,146,683 .00 BB-90 & BB-91 1/2/2003 Mitsubishi Corporation 1,246,331.00 BB-93 & BB-94 1/2/2003 Mitsubishi Corporation 735,353 .00 BB-96 & BB-97 1/2/2003 Mitsubishi Corporation 3,999,202 .00 BB-98 to BB- 100 1/2/2003 Mitsubishi Corporation 348 899.00 p 14,476,468.00 Subtotal TOTAL ADDITIONAL DISALLOWANCES I V p 48,422,089.03 Annex A Page 3 of 3 ' (' ; ~ r ' V : . I - f

CT1 Case No. 6966 ANNEXA . Kep. o Ilijan Corporation vs. CIR \ SUMMARY OF ADDITIONAL DISALLOWANCES PER COURT'S VERIFICATION Exh. OR Linvoice Su oo lier I n ~ut VAT Date 1) Purchase ofgoods supported by invoices with TIN- V instead of TIN- VAT U-75 6/5/2002 Quiet Stream Waters & Trade p 1,515.00 V-75 7/11/2002 Sta . Rita Machine Shop W- 23 7/10/2002 General Electric Phils Inc. 545.45 X-103 9/2/2002 Standphil Corporation X-147 9/30/2002 Ono Hardware & Lumber 145,595.63 X-148 9/30/2002 Ono Hardware & Lumber Y- 24 10/8/2002 Citimart Shop-On 44)18 .18 Z-50 12/19/2002 Citimart Shop-On Z-85 11/14/2002 Quiet Stream Waters & Trade 375 .91 179.64 1,466.78 450.23 3,250 .00 Y-54 & Y-55 8/31/02 & General Electric Phils Inc. 265!799 .31 9/15/02 Subtotal p 463,296.13 2) Purchase of services supported by ORs with TIN- V instead of TIN- VAT S-55 4/18/2022 Red Eight Trading & Gen . Services p 6,500 .00 T-13 5/8/2002 Red Eight Trading & Gen. Services 2,500 .00 U-4 6/4/2002 Typo Grafika, Inc. 222 .73 U-52 6/ 18/2002 Typo Grafika, Inc. 231.82 U-95 6/27/2002 Typo Grafika, Inc. 3,122 .73 V-85 7/29/2002 Balisong Intelligence & Security Agency 56,073.13 W-7 8/15/2002 Premier Chemical Enterprise 545.45 W-7 8/ 15/2002 Premier Chemical Enterprise 545.45 W-38 8/12/2002 MCC Printers & Enterprises 1,227 .27 W-40 8/12/2002 MCC Printers & Enterprises 477 .27 W-99 8/ 23/2002 Typo Grafika, Inc. 95.45 W- 103 8/ 23/2002 Typo Grafika, Inc. 159 .09 W-103 8/23/2002 Typo Grafika, Inc. 159.09 X-70 9/11 / 2002 Typo Grafika, Inc. 527.27 X-118 9/ 20/2002 Bullion Construction & Dev't Corp. 43,553 .00 Y- 18 10/13/2002 Balisong Intelligence & Security Agency 63,842.48 Y-43 10/3/ 2002 Typo Grafika, Inc. 1,500.00 Y- 133 10/17/2002 Typo Grafika, Inc. 587 .27 Z-19 10/30/ 2002 Typo Grafika, Inc. 181.82 Z-38 11/ 11/2002 Grandoise Food Services, Inc. 2,072 .73 Z- 144 11/22/2002 Balisong Intelligence & Security Agency 66,791.32 Z- 145 11/22/2002 MOF Company (Subic) Inc. 21,436 .80 Z- 161 11/22/2002 Red Eight Trading & Gen . Services 3,090.91 Z-220 12/3/ 2002 Bullion Construction & Dev't Corp. 38,083.36 Z- 237 11/29/2002 L.Armani Trading & General Services 9, 217.05 AA - 26 12/ 5/2002 Balisong Intelligence & Security Agency 70 182.52 Subtotal p 392�926. 0 1 3) Purchase of goods and services supported by ORs or invoices issued not in the name of Petitioner S- 15 4/16/2002 Via Mare Catering Services P f t 1,155.37 T-1 5/7/2002 Marsh Phils. 4,307,658.27 Annex A Page 1 of 3

ITA Case No. 6966 Kepco Ilijan Corporation vs. CIR T-31 5/7/2002 F.A.T. Kee Computer Systems 627 .27 V-79 7/24/2002 Marsh Phils. 10,841,961.12 V-79 7/24/2002 Marsh Phils . (2,158,670.07) W-133 8/28/2002 Via Mare Catering Services W-136 8/28/2002 Via Mare Catering Services 919.51 Subtotal 722.55 4) Purchase ofservices supported by undated ORs S- 26 Sarca Construction p 177,014.40 T - 58 Sarca Construction 214,056.44 V-93 Banbros Commercial 1,427.28 Z- 15 ADP Electrical & Industrial Enterprises 58,909 .09 Z- 58 Marietta Purisima P. Santos 96,000.00 AA-96 Jumb0 Cycle Enterprise, Inc. 415 .86 Subtotal p 547,823. 07 5) Purchase of goods and services supported by invoices or ORs outside the period of claim S-31 4/26/2001 Intertek Testing Services Phils. P 731.59 S-31 4/26/2001 Intertek Testing Services Phils. 8,869.55 AA-24 1/2/2003 Premier Chemical Enterprise 2,181.82 Subtotal p 1 1,782.96 7) Purchase ofgoods supported by invoices that are not duly registered with the BIR T-74 5/30/2002 Yokogawa Philippines, Inc. _ P_ __ _ 4_,_,3_8_5_.4_5_ Subtotal ---=P-_ _ _ _4:L1 =385::::.:�_4_:c='5- 8) Purchase ofgoods not supported by invoices p 1,505.00 Quiet Stream Waters & Trade Quiet Stream Waters & Trade 1,045.00 Quiet Stream Waters & Trade 101 Computer Center 2,585.00 Atlas Super Flags Office 1 Superstore 2,545.45 Triton Communications Corp. Society Glass & Aluminum 580 .00 Justic International Trading Corp. RBC Petron Gasoline Station 1,231.82 Triton Communications Corp. Mercury Drug-Batangas 5,069 .09 Caltex (Philippines) Inc. Big-Top Builders & Enterprise 2,454.55 Mila's Special Lechon Raytheon Ebasco Overseas, Ltd . 31,272.73 Raytheon Ebasco Overseas, Ltd. Citimart Shop-on 5,002.43 Subtotal 10,245.82 4,059 .84 14,411.61 275 .00 1,772.73 80,168 .23 19,203.12 7 318.18 p 190J45 .60 9) Purchase ofgoods and services included in the summary of purchases but with no supporting documents Marsh Phils. p 12,156,847.69 Raytheon Ebasco Overseas, Ltd. 7,078,574.09 8,690.48 32,968.18 33,756.44 ~ - Annex A Page 2 of 3

CTA Case No. 6966 Kepco I lijan Corporation vs. CIR Subtotal 29 450.91 p 1913401287.79 Exh . IEIRD Date Supplier Input VAT 10) Input VAT on importations outside the period of claim BB-88 & BB-89 1/2/2003 Mitsubishi Corporation p 8,146,683 .00 BB-90 & BB-91 1/2/2003 Mitsubishi Corporation 1,246,331.00 BB-93 & BB-94 1/2/2003 Mitsubishi Corporation 735,353.00 BB-96 & BB-97 1/2/2003 Mitsubishi Corporation 3,999,202.00 BB-98 to BB- 1/2/2003 Mitsubishi Corporation 3481899 .00 100 p 1414761468.00 Subtotal TOTAL ADDITIONAL DISALLOWANCES ~ p 48,422,089 .03 Annex A Page 3 of 3