SMI-ED PHILIPPINES LAND HOLDINGS, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC SMI-ED PHILIPPINES C.T.A. E. B. No. 208 LANDHOLDINGS, INC., (C.T.A. CASE No.6740} Petitioner, -versus- COMMISSIONER Of INTERNAL Present: REVENUE, Acosta, P.J. Castaneda, Jr., Resputtdent. Bautista, Uy, Casanova/ dtKI Palanca-Enriquez, JJ. Pr_pmulgatecl: �~ t- �8 f. 7 2008 //F.Jd,)!!.J'~,\ fi--{t-U_./1 x----------------------------�------------------------------------------------:__________x ~";('j-/-~ nECISION CASTANEDA, Jr., J.;. Statement of the Case This petition en bane filed on September 11, 2006 by petitioner- appellant SMI-ED PHlUPPlNES LA.NDHOLDINGS, INC. (''S!Vll-E:D", for brevity) appeals the decision dated April 20, 2006 rendered IJy the First Division of the Court of Tax Appeals ( Court in Division) in the case entitled "SMI-ED PIIJLIPPINES LANDf/OLDI/I!G~ INC vs. ;t_...~

DECISION C.TA EB No. 20S (C.TA. CASE Nu. 67-10) COMMISSIONER OF INTERNAL REVENUE'/ docketed as C.T.A CASE No. 6740. The dispositive portion of the assailed Decision provides, as follows: IN VIEW Of All THE FOREGOING, petitioner's c.iairn tor re!UIKI/tax credit of unuliliLed 111pul VAl dS ot Nove111Uer 30, 2002 in l11e i:JIIIULIIIL of P11,299,302.8lis l1ereuy DENU:J). SO ORDERED. SMI-ED prays Uldl judyrnent be rendered setting aside the April 20, 2006 Decision a11d August 4, 2006 Resolution and that the claim for refund in the adjusted amount of Ten Million Nine Hundred Sixty Six Thousand Se\ten llunJreu Sixty and 32/100 Pesos (P10,966,760.32) representing its unulilizecl input VAT as of the date of the cessation of its operations be gra11Led dtid correspondingly issue in its tavor a TCC for the above amount. Statement of the Facts As found by the Court in Division, the following are lhe facts of this case: SMI-ED Plulippines Ldli(Jiioldinys, Inc. ("petitioner"), a COl purdtlon duly organized and existing u11der Llie ldWS ut U1e RepuiJhc uf the Philippine::;, is eli~aged in the real estate business. fl b registered with l11e Bureau 0f Inte1nal Reve11ue ("BIR") as a registered value added tax ("VAT') entity under Cellltlci:lle of Registration No. 1RUJOOOU.l0~2b dlld ldxpayer lcJentiticalion Number UO~ b~)O �H)l 000. The Conm11Sstu11er ut Internal Revenue ("respondent") is aulllUIIL:ecl to decide, approve a11d 91 dill 1dU11d!J ur lax credits ot overpaid inten tal reve11Ue taxes, among others, i11 accordaiice w1L11 Secllu11 4 of Lire 1997 National Inte111al t{evenue Code ("NIRC"). In a Lease Ayree1uent di:Jled July 9, 1998, First Philippine 111dusllial Park, Inc. agreed to lei:Jse to pdtlloner three (3) parcels of land witll a toti:ll a1 ea of

DECISION C.T.A EB No 208 (CTA CASE No. b/~0) approximately 106,000 square rneters, all located at Sto. Tomas, Batanqas, with a monl11ly rel&lal ul lJYI� 1'1, HY>iH 1111 d pe1 ioll ot til ty ( 'Jll) years com1tll~l '' 111� 1"'' It ily 9, 1998 a11J e11L1111~1 dl lllldlliq!,t. on July i:l, 20'1b. ll1e Lease Agree!IH!IIL lt1rll1er Stipulated tiJal ll&e I t.:dl IJI upt:l IIL::, ~,/Iilii be SI&IJic.:dsecJ IJy jJt!liliuncr tu ~,f'i I ED Philippines Teclinoluyy !ll(:uqJul dled ("SMl-ELl TeLimoloyy") trom July 9, 199ti Utltil July 8, 1999. SMH:U t>t&iilppilles 1 eLi u�olouy, Inc. [Jaid a rnonllily rental of US$18,421.00 beginnir'CJ July 9, � <JS. On July 9, 1999, bull 1 parties agreed to increase the mollthly rental to US$50,211.00 but etteLtive u1 ily lor a period ot 011e ( 1) year comrnet1Ci11y u11 July 9, 1999 and to end 011 July u, 2Udll. On Seple111ue1 JO, 1999, the Deed of Absolute Sale was executed between First Philippine lilllLbllldi 1-'dlk, i11C. and petitioner tor tile sale of l11e ll11ee (3) parcels of land cornprisu1y <.Ji' lOG,.ll)ti square meters for US$9,323,219.92 or for P378,709,866.00. However, petilio11er paid the total purclldse price of US$10,255,552.91 as evidt:i&u.::d lJy Sales lllVOice No. 0040 and IJdlll on tile following dates: !',u l!ull9r~ &munt Exhibit May 2~, .t 'J'JU se< 11nty deposit US$ 951,350.00 LL Auy. 31, 1'-J'J'J KK Sepl. 1.'-J, l<J'J'J illlliul paylllt.!llt '1,5�17,452.91 JJ lilldl fldYIIil!llt ::!./!!td2!l..QQ �r utdl ~!~~2~5.552.91 The amount of US$10,255,552.91 inLiuJeJ tile 10% VAT in t11e amount of US$932,322.00. On July 8, :woo, pdillot iet temli11aled its amended lease contract willl SIV1I- ED Technology, Inc. a11d wa-:, nu longer renewed because the latter cot put dlton decided not to C.Oitllllenu~ lb i.JLl:.>llless operations due to poor econoltllc Culllllliuns in the Philippines. On Augu-:,t 1, 20UO pelilio11er suld one of tile parcels of land w1Lh a total area of 66,681 square lllelt.c:rs to llJidetl Philippines Landl1oldings, Inc. ("liJiden") in the amount of JY440,00U,OOO.UO, illclusive of 10% VAT. On July 18, 2002, pelilililler again sold llle remaining parcels olland willl a total area of 39J07 squa1 e 111eters, to lbiden Philippines Landholdings, ltlc. Ill l11e amount JY187,000,000.0U, HILhJslve of VAT. Considenng Llidl petrlioth.::r I&Cid no more properties left to lease or sell, majority of its BoCird ot Directors, wllll tile concurrence of t11e stocl<holders, resolved to dissolve pdiliOI iei's coqJOI ale existence ef'fective Novemuer JU, 2002. On JC:lnuat y 16, 2UOJ, pdilioller requested for tile issu<mce ul a tax clearance with the l:llR in W&lllec.I.IOtl with its fonllal closure wll1c.ll took effect on November 30, 2002. On February 26, 20UJ, petrtioner filed a11 administrative claim tor retund or issuance of a tax credit certificate with the BIR, in t11e amount of P11,299,302.81 representing excess illiJUt VAl dS ol' llle time of its dissolution. The BIR's ine&cliotl on petitioner's claim for refund prompted pelil.iullet to appeal before tills LoLul u11 July .w, 2UUJ. In his Answer Lu l11e Petition, respotlde!lt raised the fullowillY SpeL.idl dnd Affirmative Defenses: ~L--

DECISION C.TA EB No. 208 (C T.A CASE No. 674ll) "4. Petitioner failed to demonstrate that the tax subject of the case at bar was erroneow;ly or illega/Jy <.'ollv..:wd; 5. Taxes pail/ dmJ collected are presumed to have been made in accordance with the liJW and reguliltion, hence, not refundable; 6. In a11 aclicHI fur tilX refund/credit_ the burden ofproof is 011 the livlpayer to establish its tight to tefimd dud fdilure to illlduce sufflrsie11t proof is tatal to the action for retuudjaetlit; 7. It is incumbent upon the petitioner to show that it has complied with the provisions ot Section L04 i11 relatioll to Section 229 ot the Tax Code, as amtmde�l dS well the requirement-'>� pr.wllietf f(;r 111 Hevenue Heguldtio11s No. S-87 a:i dmemle�i by Revenue Reguldtiuu:i Nu. .3..J:Ili ami Revenue Reyulaiii.JII!ii No. 7�95_ d!ii amtmt.led; Jlld 8. Cldilllfi for refumi ate construed strictly ilgainst the claimant tor the same partake the mttwe ot exemption lrom taxation {Lommissioner uf lnteuldl kevenue vs. Ledesma, G. H. No. L� L:J:;U9, Jdlluary 30, 1970- 31 SCRA 95) and as !itu:ll, they au! looked upon with di:>lilvor (Western Minolco Co1p. vs. Commissioner of l11ternal Revenue, 124 5CRA 121)." The Court in Division denied SMI-ED's claim for refund/tax credit. Consequently, SMl-t:D filed a Motion for Reconsideration and a Supplemental Motion fur l<ecollsideraUon on May 18, 2006 and on June 13, 2006, resp~clively. In a Resolution dated August 4, 2006, the Court in Division denied the motion. Sf\1li.:D received a copy of the said resolution on August 10, 2006. On August 29, 200C: tlh; Cou1 t En Bane granted S~lll-ED's "Motion for Extension of Time to File Petition for Review" filed on August 24, 2006. SMI-ElJ filed its Petition for Review En Bane on September 11, 2006. Respondent Cornrnissioner of Internal Revenue (CIR, for brevity) did not file his comrnenl:. In a resolution dated March 12, 2007, the parties are required to file their respective 1VIe1nordnda. Only SMI-ED complied and subrnilted its Memorandum on April 13, 2007. Hence, this case for decision. The following are the errors assigned by SMl-ED: A. The Honorable First Division erred in holding that the Petitioner-Appellant tailed to substantiate through documentary evidence its~ .. 1, .. .:. b

DECISION C.T.A. EB No. 208 (CT. A. CASE No. 6740) entitlement to claim for refund of unutilized invut VAl. B. The Honorable first Division erred in denying the Petitioner-Appellant's claim for rehmd for its failure to submit a tax�, clearance and audited financial statements to prove that it has been cleared of' pending tax liabilities. C. The HonoralJie First Division erred in finding that the Petitioner-Appellant's claim of tax refund could not proceed without the submission of a tax clearance and audited financial statements because of the possibility it has pending internal tax liabiHUes anti ~".a.:t not been issued a tax clearance. In any case, the right to assess has prescniJed. D. The 1-lonorable first Division erred in holding that ~uumission of all VAT returns is reqmred to prove the excess input VAT. Based on the foregoillQ, the issue is "Whether or not SMI-ED is entitled to a refund/tax credit certificate in the adjusted amount of Ten Million Nine Hundred Sixty Six Thousand Seven Hundred Sixty and 32/100 Pesos {P10,966,760.32)." This Court's Ruling We deny the peliliull. We find that: the issue and arguments raised by SMI-ED have already been considered by Lhe Court in Division in its assailed decision and resolution. c;Jv---�

( DECISION C.T.A EB N<l. 208 (C.TA CASE No. 6740) There b nu dbJHJll~ 11 kit p~r curnpulalion Lhe unulliiLt;tl 111pul VAT subject for refund/tax credit is Pl0,9f;F; 7 60.32 as held in li 1e assailed decision, as follows: However, a souliny ol auove schedule reveals that petitioner hess ultlllllized input VAT in the dllluunl ot fJ 1U,9bb,7t.i0.32, mslead of the claimed P11,299,302.81, computed as follows: OUTPUT VAT p 7,357,048.39 Year 2002 16,392,396.09 3'<1 Quar ler 572,747.74 763,623.76 Year 2000 3'0 Qudller 553,859.27 2"0 Qucs1ler ___ 541,388.7_2 P26,181,U6"1.02 1st Qua1 ler, as dll h::nded Year 1999 4t11 Quarter 3'J Qua1 ler, c.b dllieltded Less: INPUT VAT Year 2002 p 52,�'+10.00 3'0 QUdl ler 8,909.09 Year 2001 2nd Qua1ler 36,993,643.92 92,861.33 P37._14L.821,:H Year 1999 3'J Qua1 ler Carry-over fr. Previous Qtr. Unutilized Input VAT Out of the cornpuleJ P10,966,760.32 unutilized input VAT, only the amount of P10,812,579.90 was substantiated, as found by the Court in division, as follows: XXX A review ot U1e Jocu1 i 1ents ~:~::.ented betore us shows that petitioner was only able to substantiate by proper VAT invoice and official receipts ( Exhibits J, JJ, KK & LL) and Deed of Absolute Sale(Exhibit C), the input VAT payment of P36,993,643.92 011 its purchase of land trom the first Philippine Industrial Park. With respect to the input VAl payments of P52,410.00 and P8,909.09 for the 3'0 quarter of 2002 and 2"J quarter of 2001, respectively, as well as the input tax carry-over of P92,U6l.J3, It did not submit the VAT invoices and oft1cial receipts to substantidte tile si:lme. Hence, petitioner's substantiated unutilized input VAT amounts only to P10,812,579.90 (output VAT of P26,181,064.02 less substantiated input VAT of P36,993,643.92). (L-tnp!JcJSIS Supplied). ~ Clv 2'18

DECISION C.TA. EB No. 208 (CT.A. CASE No. 6740) Based on the foregoing, SMI-ED, therefore, is mistaken in alleging that the Cowl 111 LJivbioll ruled that petilioner (sr~n-LD) failed to substantiate through documentary evidence its entitlement to claim for refund of unulilized input VAT. What the Court in Division ruled in the negative was SMI--ED's entitlement to claim the unutilized input VAT for the subject period and We agree, as correctly discussed by the Court in Division, as follows: xxx Petitioner did not submit its VAT returns for taxable year 1998, 1st and 2nd quarle1 s ul I 'J'J'J, ~1' 1 ' quarter of' 2000, 3'd and 4u' qua1lers of 2001 and 1~t quarter ol 2U02. Without these documents, this Comt cannot ascertain petitioner's actual unutilized input VAT as of November 30, 2002. In addition, since tile sui.Jject claim represents unutilized inpul VAT due to retirement horn or cessation of business, it is vital that petitioner submit its audited financial statements in order for this Court to verify with ct!rt:ainly that it properly decla1�ed all of its sales/receipts for VAT pmpos>::::j fnHii the time of commencen:ent of business until cessation of its operations. In this connection, it is also incumbent upon petitioner to prove that it has satisfied i::lll ut its tax liabilities. Petitioner should lli::lve presented a Certificate of Tax Clecu anee showing that it l1as seltled all its tax obliyations with the BIR. Xxx XXX XXX Petitioner Llluuyll olfered in evidence its Letter Request for Tax Clearance1 to prove lhdt upon its closure, it formally requested for a tax clearance from the LHR. As the document indicates, it was a mere request for a tax clearance. There is no showing that t>elitioner was indeed issued a Tax Clearance Certificate as required by law and regulations, to prove that it had been cleared of any or all internal revenue tax liabilities. Thus, even assurnin9, for the sake of argument, that petitioner was able to substantiate I!:> dai111ed unulllized input VAT for the subject iJeriod, it is still not entitled to a 'etunJ/lax credit thereof considering that ll tailed to prove that it has no pe11diny internal revenue tax liabilities. (tfnphasis Supplied)~ 1 Exhibit H

DECISION C.T.A. EB No. 208 (C T.A. CASE No. 6740) Pertinent to this case are Section 112 and 236 of the National Internal Revenue Code of 1997 (NIRC) which reads, as follows: SEC. 112. RclunJs at tax aedtls otin;.mt tax. - XXX "(C)Cance/lation of VAT Registration. - A person whose reyistrallon has been cancelled due to 1elu t::111e11t tmlll or cessalion of business, or due lo Li 1anyes in or cessation ot slalus U11de1 Sedio11 106(C) of this Code may, within two {2) years from the c..late ot cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes. XXX "SECTION 236. XXX ''(F)Cancelli:Jtion of ReyistJi:itton. - The registration of any person wl1o ceases to be liable tu a lax Lype shall be car1celled upon filing with tile Reve1111e District Office wl1e1 e lie is 1ey1stered an application for� registmtion information update 111 a 1u1111 prbUil.Jed l11eretur. Xxx.~ Likewise, pertinent are Sections 4.106-2 and 4.107-6 of Revenue Regulations 7-95, as follows: SECTION 4. 106-2. PJUcedures for claiming refunds or tax credib ot 11 1put tax- Xxx XXX XXX (b) CancellatiOJl ur VJ\ I rey1stration - A per son whose reyislrallon has l.Jeen cancelled due to relln:!lllellt twill or cessi:lllon of busrness, or due to cl1all9es in or cessation of status under Section lOU(c) of the Code rnay, within two (2) years from the date of cancellation, apply for lhe issuance of a tax credit cerlilicate for any unused input tax wllicll lae 111ay use in payment of his other intefladl revenue taxes. However, he slaall L>e e�Jlilleu to a retu11d if he has no pendii�!J uate.llal revenue tax liabilities. Xxx XXX XXX SECTION 4.10/�b. Cd11celldlioll of Reyasl1 alion -- Any subsequent lfld]Or change in the ong1nal reybll alion shall be effected by filing a duly accomplished Application for Cancellation of Registration (BIR Form 1557) with the Revenue urstnct OttJCer concerned. Some inslaiJces wilete a VAl-reyistere<..l person may apply for cancell<ltion of registration are: XXX XXX XXX 5. Dissolution of d par lllersllip or corporation; XXX XXX XXX U / -~/C-/

DECISION C.TA. Ell No. 208 (CTA CASE No. 6740) Page 9 of I2 Based on the foregoing provisions, it is necessary that the "registration" of a person be cancelled first before a taxpayer could apply for the issuance of a tdx credit certificate. It is clear that the date of the cancellation is the reckoning point of the two-year period in which the taxpayer may apply for the issuance of the tax credit certificate. SMI-ED sl1ould have offered to the Court in Division its application for registration information update. Unfortunately, no proof of the cancellation of VAT registration was presented to the court. It is also noteworthy to mention that since SMI-�ED is a corporation organized dnd existing under the laws of the Republic of the Philippines, it must follow the process of dissolution as provided in the Corporation Code. As mentioned at the outset, the majority of SMI-ED's Board of Directors, wil11 the concurrence of the stockholders, resolved to dissolve SMI-ED's corporate existence effective November 30, 2002. However, no other proof was given by SMI-ED to duly establish its cessation of business operations as required by law. SMI-ED avers that nowhere in the law or the implementing rules and regulations that it is required that the taxpayer rnust show that it has no pending tax liabilities as a pre-condition to a claim for refund or grant of a tax credit certificate whether it be through the presentation of a tax clearance or audited financial statements. jlt-- The contention is bereft of merit.

DECISION C.TA. EB No. 208 (CT.A CASI: No. 67.JO) Sections 52 (C) and 235 of the 1997 NIRC read, as follows: SEC. 52. Cur pur dllull 1\elUI 11:::.. -- ... XXX XXX XXX (C) Return of l11e Cor poralion Contemplating Dissolution or Reor~aiiiLation. Every corpor aliu1 1 :::.lldll, w1tl111 1 t11irty (30) Jays after tile adopt 101 1 l.Jy tile corporation ot a re:::.olullu1 1ur plcto tor its Jbsolulion; or for tile liqurlldl1on ot the whole or any pa1 t of rts cdprtal ::.lock, 111Liudir1g a corporation wlmJ 1 lids IJeen notified of possil.Jie rnvoiUIJLctl y dissolution l.Jy tile Securities and Exchange Commission; or tor ils 1eo1 yaiJILallon, render a cu1 reel return to the Culliiiii:::.Sioner, verified under octll 1, selliii~J rurtll U1e terms of sucl1 resolution or pla11 dlld such other information as t11e ~eueta1y of Hnance, upon recon unenJdliun uf tile Commissioner, shall, by rules and regulations, prescribe. The dissolving 01� reorganizing corporation shall, prior lo l11e Issuance by the Securities ell Ill bclldiiYt! Conunis:::.ro11 of tile Certificate of Drs:::.oh Jtron or Reorganization, xxx xxx xxx , secure a certificate of tax cleanuu.;e t1 om the Bureau of Intelllal l<.evenue wllrCII certificate s!lctll be submitted to tile ~euH rlies and Exchange Co1 111111:::.sro11. SEC. 235. Preservalio11 of Books of Accounts and Other Accounting Records.- .. . (a) .. . (b) .. . (c) .. ": (d) ... (e). . . All corpora lions, partnerships or persons that retire f10111 1Jusi11ess ur shall within ten (10) ddys flur11 U1e ddle of rel11e111ent or within sucl1 pc11od lime as may be allowed l.Jy Llie l.ulillllb:::.loner rn special cases, su!JIIlit t11e1r book of accounts . . . to t11e LOilllliiS~iliiler 01 any u; ,,1:::: deputies for exarninallor\ 2il'ter which they shall IJe relumed. Corporations and partnerships contemplating dissolution must notify the <.:onunissioner and shall not be dissolved until cleared of any tax liai.Jilily. (I:.IIJplld!>li> suppllc:d) The rationale behind these Sections is to insure that no corporation may escape payment of taxes and other liabilities to the government simply by opting to dissolve the corporation and retire from business or reorganize ils 1Jusir1ess. 2 In addition, SMI-ED fdiled to file all quarterly returns as found by the Court in Division and the audited financial statements. It should be r noted that this Court could IIOL verify lhe excess unutilized input VAT Lotus Sojiware (f'lulir�f'illt:s). Inc. vs. Commissioner oflnternal Revenue, C.T.A CASE No. 6673, May 18, 2005.

DECISION C.T.A. EU No. 208 (C.T.A. CASE No. 6/40) Page II of 12 without tracing it to the quarterly VAT returns. This is necessary considering that the excess tnput VAT may be carried over lo l11e next quarter. On the other hand, the audited financial statements are necessary to ensure that the items declared in the VAT returns such as the output VAT and the input. VAT match with the declared sales and purchases, respectively, in L11e income statement and vice-versa. Hence, non-submission of these documents are fatal to its claim for refund/ tax credit certificate. We reiterate that d l.ldiln for refund is in the nature ut d claim for exemption. As such, they are regarded as a derogation of sovereign authority and is therefore to IJe considered strictissimi jwis against the taxpayer. 3 WHEREFORE, pre1nises considered, We deny the petition for lack of merit. Accordingly, We AFFIRM the April 20, 2006 Decision and the August 4, 2006 Resolution promulgated by the First Division of this Court. SO ORDERED. jYu�A~N~~I-T~OQC._CC4A:SfT~A0N'l<:f/dAQ~,_ . JR. Associate Ju:::.tice Supra, Note 2.

DECISION C.TA EB No. 203 (CT.A CASE No. 6-/~0) We concur: {\ C' \...-~�~---~\r. L.._....._ ERNESTO D. ACOSTA Presiding Justice , ~-( ER~LI~ ~~UY . BAUTISTA AssoCiafe Justice CAESAR A. CASANOVA ~- 7~ '-"?....-~ ----, Associate Justice OLGA PALANCA-ENiUQUEZ Associate Justice CEilTIFICATION Pursuant to Section 13, Arlicle VIII of the Constitution, it is hereby certified that the alJove UcLision has lJeen reached in COIIsulldliull with the members of tl1e LuUil En BdllC lJetore the case was assi~JIIed to the writer of the opinion ot tile Court. G~ Cl.....-v- ERNEsTo D. ACOSTA Presiding Justice