CTA Case No. 5651 (Decision)

REPUBLIC OF THE PH LBPPBN ES COURT OF TAX APPEAILS QUEZON CUTY HITACHI COlVlPLITEH. PH.ODLICTS (ASIA) CORPORAl'ION, Petitioner. -versus- C.T..\. C.-\SE NO. 5651 COl\1MISSIONER OF INTERNAL P romulgated: RU:VENLII~, Respondent. F�EB .Q2 200~0~';q.'rlj� 1/f.1l-/ x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - .. - -_�- - - - - ~-~- ~ - _��-:�� - -=--:-;: (! DECISION This T\::tition for Review is seeking for thc.: refund or 1ssua nc -.: or a ta .\ credit certiJicate in the amount of P2.589.328.32. r..:prcscnting unutili zed input valu..:--addcd tax (VAL for brevi ty) for the period April L 1996 to June 30. 1996. Petitioner is a domestic corporation duly orgauizeJ and e.\isting under ami by viTlue of the lavvs of the Philippines \Vith principal onice located at Spc.:ciat Export Processing Zom:, Laguna Technopark, Diiian, Laguna. It is liccnscd by thr..: ~ecuritics and Exchange Commission to "opera te. conduct and maintain the busin ess of man ufJc turin g exporting, buying, selling or otherwise dealing in at wholesale. ckc tric. r..:lcctronic and soltware product s and industrial properties. i.nducli.ng but not limik~d lo h::rd disk clrivc and component parts'" (E:-;.h. K). ll is an c.\pott c.:ntcq ri :,c.; rc.:gistcred with lll �.: Export Processing Zone Authority pursuant to the provisions of Presicleniial Decree No. GG. as amc ncku, with Certificate of Registration No. 9-1--28 (Exit B), da ted J\1ay 1 I. 199-L Like\vise, it is registered \Vith the Bureau of internal Revenul~ as a \'AT taxpayer with 199 j (

DECiSION- CTA CASE NO. 5651 PAGE2 Certificate of Registration IU)O Control No. 9-~-570-000298, elated June 28, 1()9.+ (Exhs . A and i\-1). On October 7, 199-t.. th~ Export Processing Zone .-\uthority through the Sp...:cial Board issued Resolution No. 94-212 approving Petitioner"s application for pionc...:r stat�us of its small-sized, high density hard disk drive and thin film magn~tic head manufacturin g filcility. The board further r...:solved that Petitioner's facilit-_ylproject is entitled to six (6) years income tax holiday (Exh. L-1 ). On July 29. 1Y96. Petitioner filed its quarterly VAT return for the quarter ended June 30, 1996, reflecting a total input V/\T in the amount of P 8,039, 567.86 arising from domestic purchases of goods and services (E.\.h. C). �Out of the aforesaid sum. Petitioner or is claiming the refund of P2, 589,328.32 by \Vay the instant petition. On June 25, 1998. Petitioner filed with the Depa11ment o[ Finance an application for tax crcdiLircfund of value-adJcd tax paid for the period April L 1996 to June 30, 1996. in the amount of P2. 589,.328.32. On June 26, 1998, Petitioner lodged its appeal \Vith this Court in order to toli the rumting of the I\Vo-ycar prescriptive period provided under Si,;clion 2.30 of the Tax Cock. as amended. In his AJlS\Vcr, Respondent raised the follo\ving Sp~cial and .-\1lirm~1 !i� � ~kknses : 4. Petitioner miserably failed to demonstrate that the ' "'� ~cc t of the <..:ase at bar was erroneously or illegally co lice kL,: 5. Taxes paid and collected an: pr...; ~ lilllCd to have been made m accordance \vith lavv and regulations. hi,;ncc. not refundable: or 6. In an action for lax rcfumllcredit, tl1e bunkn proof is on the..: taxpayer to establish its right to refund and failure to adduce sutli.cicnt proof is tltal to the action for tax rcfuncUcreclit : 200 J

r I)J(C I~ION - CTA CASE NO. 5651 I'AGU:J 7. II is incumbent upon the petttwncr to sho\v that it has compl ied with the provi sions of Section 20-t in relation to Section 229 of tile Tax Code, as amended: 8. Claims for refund arc construed strictly aga inst th e claimant for the same partakes the nature of exemption from taxation (ComJnissioner of Internal Revenue vs. Ledesma, G.R. No. L-13 509, .T;muary 30, 1970. 31 SCRA 95) and as such. they arc looked upon \Vith disfavor (Western tvlinolco Corp. vs. Conm1issioncr of Internal Revenue. 12-1- SCRA 1. 2 1): 9. Petition for review should he dismissed on the fo llowing grounds; (a) Lack of cause of action on the part of the petitioner i()r no11- exhaustion of administrative remedies. Considering tlwt the petition for review was fidel on the very same da~� (June 25. 1998) when the applic ation for tax rcfund!crcdit was also filed. the petitioner has not given the Commissioner oppottunity to decide 011 the claim. The taxpayer is given a period of two y~,;ars before appealing to the Court of Tax Appeals; and to notif-y the govcmment that such taxes have been questioned, and the notice should then be borne in mind in es timating the revenue avail.:lblc lo r expenditure. (Bermejo vs. Colkctor, L-3028, July 29, 195 0). The petition is pro-f01ma and was done merdy to comply with the letter of the la\v and yet it disregarded the spirit or the very substance of the l;nv. The ta xpayer should ha ve like! llis claim lo r refund at the earliest possible instance and should not have waited for the last day because by tbcn it would be too late f()r the Conunission er to act on !tis claim thereby destroying tl1e essence of the doctrine of exhaustion of administrative remedies. Consequently. the application tor rcfuncl/crcdit is not impressed \\-ith merit. (b) Lack of jurisdiction lor there;.; \vas no decision by� the Commissioner that the Court of T ax 1\ppe~tls could review simp!:� because he was not even given an opportunity to reach that dccisio 11. In support of its claim for refund, Petitioner prcsentcd varion." ~uc umentarv exhibits which consist of: l. The DlR, EPZ:\ and SEC Certificates oi' Registration (E.\.hs. :-\, .\-j . B, and K): 20 .1

D~Cl:-)IO N- CTA CASE NO. 5651 PAGI� 4 2. The original and amended Value-added Ta.\ Returns for ille second, third amt fourth quarters of 1996 and first quart er or 1997 (Exhs. C. 0. P. and Q): or 3. The Application for Tax CrcdiVRcfund \ .Jiuc-added Tax Paid (Lxhs. D and 1vl): ..J.. The original report of the commi ssioned independent C P:\ \Vith an addendum (Exhs. E. E-1 and X): 5. Sunmuries of input ta xes, e.\port sales, and imvard rcmillancc s for the second quarter of 1996 (Exhs. F-1to F-4. G-1 to G-4. H-1 to H-i 1.): 6. Photocopies of VAT invoices and/or oflicial receipts supporting the input VAT claimed by Petitioner (Exhs. l-1 to l-48 ): 7. Photocopies of Petition;,;r�s saks invoices and other exp1>rt saks docurn...:nls (Exhs . J-1 to J-122 and W-1 to W-377): 8. Eegislration Agree ment between LP Z.\ .l tH.I Petitioner to gether \Villi Certificate ofBoard Resolution (Exhs. Land L-1): 9. Cctiilication iss ued b_y 1\:: titioner" s Treasurer attes ting that Jll o f its sale s for th e second quarter of 1996 were lOO~o exported (Exh . N ): and 10. Certificati ons of Remittance from Pilipinas Bank and RCI.3C \Vith rcspcd to foreign currency proceeds of the sales (Exhs. R. S. and Y- J to Y-3): On the other hand, counsel Cor the Respondent failed to pn:scnt any controver ting evidence. subsequcntl:y the case wa s submitted for decision on November 1-L 2000, after both patties pn:sented their respective memoranda. The issues to be resolved by the Court arc as follows: 20 2

DECISION- CTA CASE NO. 5651 PAGE 5 l. \VItether or not Petitioner \Vas able to comply \Vitlt the provi sions of Section 20-1- in relation with Section 229 of the Tax Code. as amended. in filin g the instant claim for refund; and 2. Whether or not Petitioner \Vas able to support \vith substantial evidence its entitlement to the claim for refund pursuant to Section lO()(a) of the Ta:'\ Code, as amended. Respondent is of the opuuon that the present appeal should be denied on the ground of non-exhaustion of administrative remedies because the claim for refund :mel the petition for review were simultaneously filed on the sam e day (th e petiti on \V:l s actually filed the follovving clay). Respondent further posits that he \Vas not given a chance to decide the claim hence there \Vas no tkci sion that can be revie\ved by this Court. We disagree. or In the case of Cummissionl'r of lntl'rnal Rl'H'IlUl' Ys. Bank the Philippine Islands as Liquidator of Paramount Acceptance C orporation and The Court or Ta x Appeals, CA-G.R. SP No. 3-1-102, Sept<.>mber 19, 199-t the Court of :\ppeal s alTinnccl Our decision in the case of Bank or the _Philippin e Islands, as L iquidator or Paramount AcC(�ptancc Corporation vs. Commissioner or Tntl'rnal Ren�nue, CT.:-\ Case No. ..J257, Dec(.'mbcr 20, 1993, where it held: It is clear that a claim _for refund should be filed with the Commissioner of lntemal Revenue as a pre-requisite before court action on tax refund cases can be commenced and that the suit for refund must be fil ed within t"\\iO years from the elate of payment of the tax. It is also clear from Section 20.:J- that the claim for refund must be filed with the Cmnmission (sic) within two years from payment of the ta:'\. \\-hen the t"\vo-year period is about to prescribe and the claim for refund \Vith the Commi ss ioner of 20 3

DU:CI:)ION- CTA CASE NO. 5(i51 PAC I� (i lnternal R~venue has not been ac ted upon by him, for the prokction of th ~ interest of the taxpayer, he should file a petition for review with the Co urt of Tax App~als within th~ said two-y~ar p~ri o d ; oth~rw i s~, if th ~ d~cision of the Commissioner is aclvers~ to the taxpay~r and it was made after the two- y~ar period he ca n no longer appeal th~ s am~ to th~ Co urt of Tax :\pp~als (Gonzales and Gonzales. N ational lnternal Revenue Code. 1988 eeL p. JS-L citing Gibbs vs. Collector of lnt~rnal Revenu;.: and Co urt of L1:-.:: Apjh.:a ls, Accordingly. We do not agree \Vith appdlant that it is n~cessary for the Conuni ssion~r of lntcmal R~v~nue to act unfavorab ly on the claim for refund b~fore the Co urt of Tax Appeals may acquire jurisdiction. litis is so because of the positive requirement of Sectio n 230 and the doc trine that delay of the Conuniss ioner in rendering cl~cis ion clo~s not ~:-.::knd th~ peremptory p eriod fixed by the s tatute. N either arc \ Ve co nvinced that the; la\v r~quires that th~ claim f(n� refund should have been filed at the earli es t instance in ord~r to g ive th~ Conunissi oner an opportunity to rule on it aml the co urt to r~vi...;w the rulin g of the Conunissioner of lntemal R evenue on appeal. Til~ law 1-i:-.::cd the same period - t\vo years - lor filing a claim lor refund \Vitll tl1e Commissioner (Sec. 20-L par. 3), and fo r filing of sui t in co urt (Sec . 230). unlike in protes ts of assessment under Sec. 229 wluc h fi:-.::ed the period (thit1y days from receipt of decision ) for appealing to the court, thus ckarly implying that the prior decision or the Commissioner is necessary tor the court to take cognizance of the case. Wlul e it ma y be true that the Co urt of Tax Appeals is essentially an appellate court, ;md should act onl~� upon claims lor refund that arc unfavorabl y decided b_y the C01ru11issioner. th ...~ remedy is aclclressed to the lcgis lat�urc. The taxpJ y~r cannot be faulted for ta.king advantage of th e full t\vo- year p~::riocl prescribed by Jaw in filin g his claim fo r refund. T he Court of Tax Appeals itself acknovvlcclges that the claim for refund \Vith lhc Co nunissioner ca n be pcnclit1g simultaneo usly \Vith a suit for refund fikd with sa id coUit: .\.X.\. Accordingly, the Co urt is convinced that the filing of an application Jor rcfundlcreclit \Vith the R..::spondcnt on June 25 . 19Sll) and the petition tor r~vic\v with this Court on June 26, 1998, fall w ithin the two-year p...:riod. The countin g of the t\vo-year 20 4

DI�C ISION- CTA CASE NO. 5651 P A G I C7 period in claiming for refund of input VAT with th e Respond~.:nt is r~.:ckoncd li-Otn the close of the taxable quarter when the sales were made pursuant to Scction1OG(a) of the Tax Code, as amended, \vhil e the prescriptive period in claiming (or the rdund of input V t\T in this Co urt is counted from the dat e of filing of the quarterly VAT return (Nichimen Corporation Philippine Branch vs. Commissioner of I nternal RcYcntH', CTA cas�' No. 5384, August 18, 1998; Hop�'wdl Pom.�r (Phi lippines) Corp. vs. Commissioner or Internal Revenue, CTA C ase No. 5389, January 4, 1999). Anent the second iss ue. Petitioner believes that it is ~.:ntitled to the refund or tax credit of unutili zed input VAT arising hom purchases of donH.:s ti c goods and services becau se it s sales of goods arc 100<!-o exported. Petitioner eik s as legal bases the provisions or Section 1OG(a) in n.:lation with Section 1OO(a)(l) of the Tax Code_ as amended, to wit: SEC. l OG. Rejimtl.~ or tax creJits o( creditable input tax. -- (a) Any V1\T-rcgiskn.:d person. \Vho s~.: sales arc zcro-ra kd or d1~c t ivel y zero-rated, may, within two (2) y...:ars aJkr the clos..: of the taxable quarter when the sales were made, apply for the i ssuanc~ of a tax credit ceL1i.fi.ca tc or refund or creditable input tax due or paid a tt rib utab le to such sales, except transitional input tax. to the extent that such i11put tax has n ot been appli~d against output tax: Provided lwm.:-:wl'. Tha t in the case of zero-rated sales under Section 100(a)(2)(A)(i), (ii) and (b) and Section 102(b)(l) and (2). the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the regulations of the Bangko Sentral ng Pilipi.nas (B SP) : Provided. j/u�t/wr. Tbat wh...:re the taxpayer is engaged in zero-rated or effectively zero-rated sak and also in taxable or exempt sale of goods or propcL1ies or s-.: rviccs. and the amount of creditable input tax clue or paid cannot be cliJec tly and entirely attributed to any one of the transactions, it shall be allocated proportionatel y on the basis of the volume of saks. XXX .\.\.X �"'"\ .\. 20 5

DECISION- CTA CASE NO. 5651 PAGIC8 SEC. 100. J'a/ue-added hlX on s,de ql goo,/.y or properties. - (,:t) Rate ,1ml base CJ.( tax. - Then.:: shall be levied, assessed and collec ted on every sale, batier or exchange of good s, a va lue-added tax equi valent to 10~-o of the gross selling price or gross value in money of the goods or properties solei. bartered or cxchangecL such tax lobe paid by the seller or transferor: (2) The fotlovving sales by VAT-registered persons shall be subject to OO,o: A. Export sales. - T he term 'export sales ' means: (i) The sale and actual shipment or goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may iJ111uence or detcnnine the transfer of ownership or the goods so expo rt ed and paid for in acceptable foreign currency or its equi valent i.n goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipina s (BSP). Based on th e above provis ion s of th e Tax Code. Petitio ner mus t prove that (l) it is a VAT n.;gistcred person ; (2) its sales arc zero-rated ; (3) the administrative c laim for refund is seasonably filed: (4) the input ta xes claimed \Vere attributab k to /.ero-ratccl sales and were not applied against the output tax liability; and ( 5) foreign c uncnc ~' ~.:xchange proceeds had been duly acco unt ed lo r in accordance \Vitb th~ reg ulations or Bangko Sentral ng Pilipinas. A c ircumspect s tudy or th~ records of the case together \Vilh the plcadiJJ gs and evidence at hand, reveals that Petitioner qualifiedly compli ed with the above requi sites. It \Vas established that Petitioner is a VAT reg is tered person as e\;iclenced by the C ertificate of Reg istration ROO Control No . 9-J.-570-000298 issued by RDO }.;o. 57 of the Bureau of Internal Revenue (Exh. A). Petitioner ' s sales of goo ds arc 100\~o export ed (Ex.hs. J-1 to .T-122, N, and W-1 to \V-377) and therefore sub-jected to VAT at zero . 20t1

OECISION- CTA CASE NO. 5651 I'AG!i: 9 percent pursuant to Section 100(a)(2)(A)(i) of theTa:\ C:ode, as ;mlcnJed. lt is also clear that the administrative claim for refund \Vhich was filed on June 25. 1998. was or seasonably filed within two years fi�om the close of the second calendar quarter 199() (Ex.h. ivl) . The input la:\es claimed \Vere attributable to the goods exported and were no t applied against any output ta:\ liability (E:J1s.l-l to I--t~) . However, Js attested to by 1vlr. Ruben R. Rubio. the conunissioned independent CPA. and as verified by the Court. input taxe s in the sum of P1G5,785.-tl \Vere not supp orted by evid.:.nc...: (Ex.hs. E ancl E-1). Furthermore. the input taxes for the year 1996 \Vere no longer carried o\�er to the yea r 1997 as evidenced by the 1997 amended first quarterly VAT return or Petitioner (Ex..h. Q). Lastly. Petitioner \Vas able to prove that foreign currency \.:.\cha nge proceeds in US dollars, representing expott inward remittances, \Vere credited to it s US Dollar .\ccounts as certified by Pilipinas Dank and Rizal Conuncrcial Banking Cotvoration (Ex.hs. H-1 to H-1 1, R. R, Y-1, Y-2, and Y-3 ). Respondent maintains that Petitioner is not legally entitled to the claim for refund because of the fact that it is registered with the Philippim: Economic Zone Authority (PEZA) as an Ecozonc Export Enterprise hence its business is not subject to VAT pursuant to Section 2-t of Republic Act No. 791 G in relation to Section 1OJ of the Tax Code. as amenckd RA 7716 \Vhich provide: SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. - t'my provision of existing l;l\vs. rules and regulations to the contrary notwith standin g, no ta:\es, loca l and nation~ll, shall be imposed on business cstablislm1et"lts operating within the ECOZONE. ln lieu of paying taxes, �five percent (5~�o) of the gross income earned by all businesses and enterprises \Vithin th e ECOZONE shall be remitted to th e national govcmment XX:\... 20 7

DECISION- CTA CASE NO. 5651 PAGE 10 SEC. 103. The follmving shall be exempt from the value-added lax : .\.X.\ .\.\X (q) Transactions which are exempt under special law~, txcept those granted under Presidential Decree Nos. 66. 529, 972, 1.:1-91 and 1590, and non-electric cooperatives under Republic Act No. 6938, or intcmali.onal agreements to \Vhich the Philippines is a signatory (Underlining supplied) Respondent contends that since Petitioner is exempt from VAT. it is not allO\vcd any tax credit on VAT input taxes paid on its purchases of goods and services alleged to be attributable to its zero-rated sales pursuan l to :)eelion -Ll 03-1 of Revenue Rcguiations No. 7-95. On thi s point, \Ve agree with the Respondent that if an entity is rcgist..:rcd with PEZA as an ccozone cntcq)rise and is remitting S(!u of its gross income to tl11..: national government, it is exempt from the payrncnt of VAT. I-lo\vever, We do not agre e that the aforcquotcd provisos arc applicable in the case at bar. FirsL Petitioner is unckr income tax holiuay and is not remitting su�o of its gross income to the national government) Second. Section 103(q) of the Tax Code. as amended. specifically excepted. among others, transaction s under Presidential Decree No. (l6, hom trans;:Jctions \Vhich ~1re \ exempt from VAT under special laws, hence Petitioner. being registered \Vith the EPZA under the provi sions of Presidential Decree No. 66 is not cxc.tnpt hom Lhc p;1yment of the value-added tax. It bears s tressing thal under Section 23 of Republic Act No . 7916, two different fiscal incentives arc granted to an ccozonc enterprise, to \Vit: SEC. 23. Fiscal Incentives. -- Dusincss cslab lislunent s operating \-Vitl1in the ECOZONE shall be entitled to the fiscal incentives as provided ... 2 08 l (

DECISION - CTA CASE NO. 5651 PAGE 11 for under the Presidential Decree No. 66, the lavv crea ting the Export Processing Zone Authority. o r those provided for under Book VI of Executive Order No. 226, oth erwise known as the Onm ib us Investments Code of 19H 7. Based o n the afo requoted Sec tion 23 of RA 791.6, a PEZA regis t.;rcd enterprise has the option to choose between two se ts of fiscal incent ives. O ne, is tha t provided for un ckr P residential Decree No. 6(). as amended. and Scc tiou 2-J. of RA 7916 \VI uch includes th e 5��(>preferential ta x on gross incom e earn ed wh ich is in lieu of na tional and local ta xes; and second. as tl1ose provided for under Book VI of Execu t i~vc Order N o. 226, including but n ot limited to an income tax ho liday (ITI-l) of .J. to 6 years depending on whether or an entity is registered as a pioneer or no u-pioneer cnlcqJrisc. rr an ecozouc enterpri se chooses th e Sl?'o prdcrential tax, it is exempt from pa:vmcn t of all nati onal and local taxes. l-IO\vever. if an ccozon e enterprise chooses the income tax holiday. it is only exempt h om paym ent of th e incom e ta x but still subj ect to other nation:1l internal revenue ta xes including the v alue-added ta x. It must be pointed out tha t an ecozone en terprise cannot avail of these two sds of fiscal incenti ves at th e sa m e time. This vvas expla ined by the B ureau of .lnt.;ma l Revenue in VAT Ruling Nos. 037-n; O..J.3-9H; 027-99; and 063 -99 (Read-H.itc Ph ilipp ines I nc. (Fornwrly Sunward Tt~chnologics P hils., l.nc. vs. Co m miss iom� r of l nh:�rnal R (�venu c, CTA Case N o. 5659, September 29, 2000). Sin e~ Petiti oner ava il ed of the fiscal incentives under Executive O rder No. 226. that is. an income tax holichy for six years starting from October 7, 199.J. as eviden ced by CcrtiJicatc of Bo;:ml Resolut ion No. 9..J.- 2 l2 (Exh. L-1 ) it became subj ect to va luc-addecl ta x. ... 20rt l

DI~ C JSlO N- CTA CASE NO. 5651 PAGE 12 In sum, Petitioner is entitled to the n:::hmd of unutilizcd input VAT in a reduced amount ofP2,423,542.9L computed as follovvs : Total input VAT' claimed per Petition lor Rcvie\v P2. 539.328.32 Less: Unsupported input VAT Amo unt of input VAT supported and veriJicd 1G5. 785.41 _E2., +1-15+2,9J vVHERl!:FORE. in v iew of the foregoin g, the Petition for Revic\v is hereby PARTL-J.LLr GR~INTED . Respondent is ORDER.l�.0 to REFUND or lSS Ul� a TA..\: CH.gDlT CERTlFJCATE in the amount ofP2,423,5+2.91 in1 ~n:or of Petitioner. WE CONCUR: ~k_-~ ERNESTO 0. AC OSTA residing Judge CERTIFICATION I hereby certify that the above decision \Vas reached after clue consultation with the members of the Co urt of Tax Appeals in accordance with Section 13, A.rtick v rrr of the Constitution. ~- ~� Q'-'< 0--. ERNESTO D. ACOSTA Presiding Judge