ACTUATE BUILDERS, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION ACTUATE BUILDERS, INC. CTA CASE NO. 9129 Petitioner, Members: -versus- Castaneda, Jr., Chairperson Mindaro-Grulla, and, Bacorro-Villena, JJ. COMMISSIONER OF Promulgated: CCT 0 3 2019 INTERNAL REVENUE, Respondent. x---------------------------------------------------------------------- -----------x DECISION CASTANEDA, JR., J.: STATEMENT OF THE CASE This is a Petition for Review filed by petitioner Actuate Builders, Inc. on August 27, 2015, which involves a claim for refund/tax credit of excess and unutilized input Value-Added Tax (VAT) in the amount of P2,857,766.93 for the first quarter of the calendar year (CY) 2013. STATEMENT OF THE FACTS The Parties Petitioner is a domestic corporation duly registered with and authorized by the Securities and Exchange Commission. 1 It is registered with the Bureau of Internal Revenue as a VAT-registered 9z.- 1 Certificate of Incorporation CS201015526 and Amended Articles of Incorporation, Exhibit "P-1", docket, pp. 342-368; Par. l.b, I. Stipulation of Fact, Joint Stipulation of Facts and Issues (JSFI), docket, p. 216.

DECISION CfA Case No. 9129 Page 2 of 2S entity.2 It is engaged in general construction business, including the construction, renovation, repair, fit-out, improvement of buildings, houses, condominium project/units, office facilities, and establishments, resorts or structures, whether for business, commercial, industrial or residential purposes, using any building materials and construction techniques.3 On the other hand, respondent is vested with the power to decide tax cases, including applications for refunds and/or tax credits. Respondent is being represented in this case by the legal officers of the Legal Division, Revenue Region 8, Makati City, with office address at 2/F Legal Division, BIR Bldg., No. 313 Sen. Gil Puyat Ave., Makati City, where summons, pleadings, notices and other processes of the Court may be served.4 The Relevant Facts Petitioner is a construction company, it provides construction works to its various Philippine Economic Zone Authority (PEZA) registered clients.5 Accordingly, petitioner alleges that it generated VAT zero-rated sales for such services, paid for in US dollars inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.6 As a result, for the first quarter of CY 2013, petitioner generated P50,789.826.58 in VAT zero-rated sales.7 In the course of its operations for the same period, petitioner avers that it incurred and paid input VAT arising from its domestic purchases of goods and services, which is directly attributable to its zero-rated sales. Petitioner claims that it paid input VAT in the total amount of P2,857,766.93, in excess of the output tax due.8 On March 31, 2015, petitioner filed with the BIR Revenue District Office (RDO) No. 50 an administrative claim for refund or issuance of ~ 2 BIR Certificate of Registration No. OCN 3RC0000836103, with Tax Identification No. (TIN) 007- 883-702-000, Exhibit "P-2", docket, p. 489. 3 Certificate of Incorporation CS201015526 and Amended Articles of Incorporation, Exhibit "P-1", docket, pp. 342-368. 4 Par. l.c, I. Stipulation of Fact, JSFI, docket, p. 216. 5 Exhibits "P-185" to "P-187", "P-188", !CPA Report, pp. 4, 6; Par. 8, IV. Facts, Petition for review, docket, p. 12. 6 Par. 9, IV. Facts, Petition for Review, docket, p. 12. 7 Exhibit "P-3", docket, p. 372. 8 Exhibit "P-3", docket, p. 372.

DECISION CTA Case No. 9129 tax credit certificate of its excess input VAT amounting to P2,857,766.93 for the first quarter of Cf 2013.9 On August 27, 2015, After the lapse of the 120-day period from the filing of the application for refund with no action from the respondent and to preserve its claim for refund, petitioner filed the instant petition. 10 In his Answer, 11 which was filed thru registered mail on November 26, 2015 and received by the Court on December 10, 2015, respondent raised the following special and affirmative defenses: "SPECIAL AND AFFIRMATIVE DEFENSES 4. Respondent reiterates and repleads the preceding paragraphs of the answer as part of her Special and Affirmative Defenses which are discussed hereunder; 5. Petitioner's alleged claim for refund or issuance of tax credit certificate is still subject to administrative investigation/examination by the SIR. 6. Taxes paid and collected are presumed to have been made in accordance with law, hence, not refundable. 7. Petitioner's claim for refund or issuance of tax credit certificate in the amount of P2,857,766.93 representing alleged excess and unutilized input VAT paid for the first quarter of 2013 were not fully substantiated by proper documents, such as sales invoices and official receipts, pursuant to Revenue Regulations No. 7-95 in relation to Section 113 and 237 of the 1997 Tax Code. 8. In an action for refund/credit, the burden of proof is on the petitioner to establish its right to claimed refund and failure to adduce sufficient proof is fatal to the claim for tax refund/credit. 9. It is incumbent upon the latter to show that it has complied with the provisions under Section 204 (c) in relation to Section 229 of the Tax Code. Otherwise, its failure to prove the same is fatal to its claim for refund. 10. Claims for refund are construed strictly against herein petitioner since the same partakes the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western)- 9 Exhibit "P-7", docket, pp. 399-410. 10 Docket, pp. 10-19. 11 Docket, pp. 80-81.

DECISION CTA Case No. 9129 Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 1211)." A Notice of Pre-Trial Conference12 was issued by the Court, setting the case for pre-trial conference on March 31, 2016. Accordingly, respondent's Pre-Trial Brief13 was filed thru registered mail on March 11, 2016 and received by the Court on March 23, 2016 while the petitioner's Pre-Trial Brief14 was filed on March 23, 2016. The Pre-trial conference ensued. 15 Thereafter, the parties submitted their Joint Stipulation of Facts and Issue16 on April 20, 2016. Consequently, the Court issued a Pre-Trial Order17 on June 2, 2016 and the pre-trial was deemed terminated. Upon petitioner's motion,18 on June 2, 2016, the Court commissioned Ms. Myra Celeste 0. Dabalos as the Independent Certified Public Accountant (ICPA) to render a report on the case. 19 On July 11, 2016, the ICPA issued a report. 20 During the trial, petitioner presented the testimonies of the following witnesses, by way of Judicial Affidavits in lieu of direct examination: Ms. Ma. Corazon C. Ramos21 and ICPA Myra Celeste 0. Dabalos. 22 In the hearing23 on September 1, 2016, respondent's counsel manifested that he is waiving the presentation of respondent's evidence. ?!- 12 Docket, pp. 84-8S. 13 Docket, pp. 86-88. 14 Docket, pp. 91-98. 15 Minutes of the Hearing, March 31, 2016, docket, p. 198. 16 Docket, pp. 216-223. 17 Docket, pp. 242-247. 18 Docket, pp. 203-205. 19 Minutes of the Hearing, June 2, 2016, docket, pp. 233-235. 20 Exhibit "P-11", !CPA Report. 21 Exhibit "P-10", Judicial Affidavit of Ms. Ma. Corazon C. Ramos dated March 22, 2016, docket, pp. 415-425; Minutes of the Hearing, July 26, 2016, presentation of petitioner's witness, Ms. Ma. Corazon C. Ramos, docket, pp. 280-282. 22 Exhibit "P-18", Judicial Affidavit of !CPA Myra Celeste 0. Dabalos dated August 26, 2016, docket, pp. 289-295; Minutes of the Hearing, September 1, 2016, presentation of petitioner's witness, !CPA Myra Celeste 0. Dabalos, docket, pp. 298-300. 23 Minutes of the Hearing, September 1, 2016, docket, pp. 298-300.

DECISION erA case No. 9129 On September 26, 2016, petitioner filed its Formal Offer of Exhibits with Motion for Commissioner's Hearing.24 On February 17, 2017, the Court granted petitioner's Motion for Commissioner's Hearing and set the hearing on March 14, 2017.25 In its Resolution dated September 15, 2017, the Court resolved petitioner's FOE/6 admitting Exhibits "P-1", "P-3", "P-7", "P-7-a", "P- 8", "P-10", "P-182", "P-11", "P-12","P-13","P-14 (inclusive of submarkings)", "P-15 (inclusive of submarkings)", "P-16 (inclusive of submarkings)", "P-17 (inclusive of submarkings)", "P-18 (inclusive of submarkings)", "P-19 (inclusive of submarkings)", "P-20", "P-21", "P- 22", "P-23 (inclusive of submarkings)", "P-24", "P-25", "P-26 (inclusive of submarkings)", "P-27", "P-28", "P-29 (inclusive of submarkings)", "P-30"I "P-31"I "P-32"I "P-33" to "P-156"I "P-157"f "P-158"I "P-159"I "P-161", "P-162", "P-163", "P-164", "P-165", "P-166", "P-167", "P- 168"I "P-169"I "P-170"I "P-171"I "P-172"I "P-173"I "P-174"I "P-175"I "P-176", "P-177"I "P-178"I "P-179"I "P-180"f "P-181"I "P-182"I "P- 183", "P-184", "P-185", "P-186", "P-186", "P-188", "P-189", "P-201" to "P-209", "P-211", "P-213" to "P-289", "P-298" to "P-502", "P-522" to "P-805", "P-808", "P-810" to "P-1099", "P-1101" to "P-1201", "P-1203" to "P-1228", "P-1230" to "P-1256", "P-1258" to "P-1297", "P-1299" to "P-1306", "P-1308" to "P-1341", "P-1343" to "P-1370", "P-1372" to "P- 1430", "P-1432" to "P-1443", "P-1445" to "P-1528", "P-1531" to "P- 1541", "P-1543" to "P-1569", "P-1571" to "P-1644", "P-1646" to "P- 1681"and "P-1683" to "P-1695". On the other hand, in the same resolution, the Court denied the admission of Exhibits "P-2" "P-2-a" "P-4" "P-5" "P-6" "P-160" "P-'II I f I 210", "P-212", "P-290" to "P-297", "P-503" to "P-521", "P-806" to "P- 807"' "P-809"f "P-1100"I "P-1202" "P-1229"I "P-1257"I "P-1298"I "P- f 1307"I "P-1342"I "P-1371"I "P-1431"I "P-1444"I "P-1529" to "P-1530"I "P-1542", "P-1570", "P-1645" and "P-1682". On October 18, 2017, petitioner filed a Motion (Re: for Partial Reconsideration)/7 praying that the Court reconsider the denied exhibits and allow the partial reopening of proceedings in the respect of the disallowed Exhibits "P-2", "P-2-a", and "P-6" to compare documents to their originals at a commissioner's hearing for the purpose. In its Resolution dated January 18, 2018, the Court granted petitioner's motion to reopen proceedings and set a Commissioner's ~ 24 Docket, pp. 322-340. 25 Resolution dated February 17, 2017, docket, pp. 436-437. 26 Docket, pp. 444-447. 27 Docket, pp. 448-451.

DECISION CTA Case No. 9129 Hearing on February 27, 2018, while the motion for partial reconsideration was held in abeyance.28 On April 12, 2018, petitioner filed a Motion for Leave (Re: To Substitute Marked Exhibits)/9 and prayed that it be allowed to substitute the documents attached to the motion and marked as Exhibits "P-2", "P-2-a" and "P-6" in place of the provisionally marked documents bearing the same markings attached to the its FOE. On August 8, 2018, the Court issued a Resolution30 granting petitioner's motion for leave to substitute the marked exhibits while the motion for partial reconsideration was partially granted, admitting Exhibits "P-2", "P-2-a", "P-6" and "P-160". However, the Court still denied the admission of Exhibits "P-4" and "P-5". Consequently, this case was deemed submitted for decision on October 15, 2018,31 considering the Memorandum32 for petitioner was filed on September 17, 2018 while respondent filed his Memorandum33 on September 21, 2018 through registered mail and received by the Court on October 2, 2018. THE ISSUE Based on the parties' stipulation, the sole issue for the Court's determination is: Whether the petitioner is entitled to a refund or tax credit for its input VAT payments for the 1st Quarter of CY 2013 in the amount of P2,857,766.93.34 ~ 28 Docket, pp. 475-477. 29 Docket, pp. 484-486. 30 Docket, pp. 494-499. 31 Resolution dated October 15, 2018, docket, p. 517. 32 Docket, pp. 500-511. 33 Docket, pp. 513-516. 34 II. Stipulation of Issue, JSFI, docket, p. 217.

DECISION CfA Case No. 9129 Petitioner's Arguments35 Petitioner argues it has complied with the complete documentation in support of its claim for refund. Citing Luzon Hydro Corporation vs. Commissioner of Internal Revenue,36 petitioner enumerated the requirements for entitlement to a refund or tax credit of unutilized input VAT under Section 112(A) of the NIRC of 1997: (a) the taxpayer is VAT-registered; (b) the taxpayer is engaged in zero-rated or effectively zero-rated sales; (c) the input taxes are due or paid; (d) the input taxes are not transitional input taxes; (e) the input taxes have not been applied against output taxes during and in the succeeding quarters; (f) the input taxes claimed are attributable to zero-rated or effectively zero-rated sales; (g) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(l) and (2), the acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; (h) where there are both zero-rated or effectively zero- rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of sales volume; and (i) the claim is filed within two years after the close of the taxable quarter when such sales were made. Petitioner contends that considering the evidence it presented, it complied with the above requirements and filed the claim within the 7--- 35 Memorandum, docket, pp. 500-511. 36 G.R. No. 188260, November 13, 2013.

DECISION CTA Case No. 9129 periods provided under Section 112(A) and (C) of the NIRC of 1997. Hence, petitioner prays that the Court grant its claim for refund or direct the issuance of tax credit certificate for its excess and unutilized input VAT for the first quarter of CY 2013. Respondent's Counter-Arguments37 On the other hand, respondent maintains that the claim for refund or issuance of tax credit certificate should be denied. He contends that since the claim for refund/tax credit of petitioner is by nature a tax exemption, and is construed strictissimi juris against petitioner, who is claiming the exemption without the clearest grant of the law, the fact that petitioner failed to fully substantiate by proper documents its claim, the same must necessarily fail. Respondent further argues that the exhibits of the petitioner should not be given probative value for being hearsay evidence. He submits that any probative weight given to petitioner's witness, Ms. Ma. Corazon C. Ramos, should have been limited only to those facts which she has personal knowledge. He claims that in the Returns, Summary of Sales and PEZA Registration, the signatories thereto were not presented to testify on such relevant and material matters. Hence, any attempt on the part of the petitioner to pass as absolute truth the contents of such documents should be considered as hearsay evidence. THE COURT'S RULING Jurisdiction over the Petition for Review on the claim for refund/tax credit The Court shall first determine whether it has jurisdiction over the Petition for Review in relation to the claim for refund filed by the petitioner with the respondent. jk- 37 Docket, pp. 513-516.

DECISION CfA Case No. 9129 Jurisdiction over the subject matter or nature of an action is fundamental for a court to act on a given controversy. It is conferred only by law and not by the consent or waiver upon a court which, otherwise, would have no jurisdiction over the subject matter of an action. Lack of jurisdiction of the court over an action or the subject matter of an action cannot be cured by the silence, acquiescence, or even by express consent of the parties. If the court has no jurisdiction over the nature of an action, its only jurisdiction is to dismiss the case. The court could not decide the case on the merits.38 Section 7(a)(1) and (2) of Republic Act (RA) No. 1125, as amended by RA No. 9282 and 9503, provides that the Court of Tax Appeals (CTA) has exclusive appellate jurisdiction to review by appeal the decisions or inaction by the CIR on claims for refund, viz.: "Sec. 7. Jurisdiction. -The erA shall exercise: a. Exclusive appellate jurisdiction to review by appeal, as herein provided: 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue; 2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;" (Emphasis supplied) In relation thereto, Section 112(A) and (C) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides for the period when to file an administrative claim for refund with the BIR and judicial claim for refund with the CTA, to wit: "SEC. 112. Refunds or Tax Credits ofInput Tax. - )k- 38 Nippon Express (Philippines) Corp. vs. Commissioner of Internal Revenue, G.R. No. 185666, February 4, 2015.

DECISION CTA case No. 9129 (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: ...x XXX XXX XXX (C) Period within which Refund or Tax Credit ofInput Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals." (Emphasis suppliecl) Pursuant to the aforequoted provision, a VAT registered taxpayer whose sale is 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 a refund or the issuance of tax credit certificate of its creditable input tax due or paid attributable to such sales. In the instant case, the claim for refund/tax credit covers the first quarter of CY 2013, which ended on March 31, 2013. Counting two years therefrom, petitioner had until March 31, 2015 within which to file its administrative claim for refund/tax credit. Clearly, the administrative claim for refund was timely filed by petitioner on March 31, 2015.39 Section 112(C) further states that upon filing of the administrative claim for refund, the BIR has one hundred twenty (120) days from the date of submission of the complete supporting).- 39 Exhibits "P-7" and "P-7-a", docket, pp. 399-409.

DECISION CTA case No. 9129 documents in support of the application to either grant or deny the claim. However, should the BIR deny fully or partially the claim, the taxpayer has thirty (30) days from the receipt of the decision denying the claim or in case of inaction by the BIR, from the expiration of the 120 days, to file an appeal with the Court. In the case of Commissioner ofInternal Revenue vs. Mindanao II Geothermal Partnership,40 the Supreme Court summarized the rules on the 120+30 day period for claiming refund or credit of input VAT: "SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF INPUT VAT The lessons of this case may be summed up as follows: XXX XXX XXX B. 120+30 Day Period a. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. b. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR. c. As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. (Aichi and San Roque) d. As an exception to the general rule, premature filing is allowed only if filed between 10 December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San Roque) Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was in force. (San Roque)" Based on the aforequoted provisions and above Supreme Court rulings, it is undisputable that in order for the Court to acquire jurisdiction over an appeal on claims for refund, compliance with the 120-day plus 30-day period is mandatory. )t-- 40 G.R. No. 191498, January 15, 2014.

DECISION CTA Case No. 9129 As to the timeliness of petitioner's judicial appeal, from the filing of petitioner's administrative claim on March 31, 2015, respondent had one hundred twenty (120) days or until July 29, 2015 to act on the said claim. Since respondent failed to act on the said claim on or before July 29, 2015, petitioner had thirty (30) days or until August 28, 2015 within which to file its judicial claim before this Court. Evidently, petitioner's judicial appeal by way of a Petition for Review filed on August 27, 2015 is well within the period provided by law. Hence, the instant petition is timely filed. Requisites of a claim for refund/tax Credit The Court now determines whether petitioner is entitled to its claim for refund or issuance of tax credit certificates. Pursuant to the afore-quoted Section 112(A) of the NIRC, in order to be entitled to a refund or issuance of a tax credit certificate for unutilized input VAT attributable to zero-rated or effectively zero- rated sales, the following requisites must be satisfied: 1. that the taxpayer is VAT-registered; 2. that the claim for refund was filed within the prescriptive period; 3. that there must be zero-rated or effectively zero-rated sales; 4. that input taxes were incurred or paid; 5. that such input taxes are attributable to zero-rated or effectively zero-rated sales; and 6. that the input taxes were not applied against any output VAT liability. For the second requisite, it has already been established that petitioner has filed its administrative and judicial appeal within the period prescribed by law. ?z-

DECISION CTA Case No. 9129 Petitioner is a VAT- registered entity. Petitioner is duly registered with the Bureau of Internal Revenue (SIR) as a VAT taxpayer as evidenced by its SIR Certificate of Registration No. OCN 3RC0000836103, with Tax Identification No. (TIN) 007-883-702-000.41 Hence, it is a VAT-registered entity. Petitioner is engaged in zero-rated or effectively zero-rated sales. Petitioner is registered with the Securities and Exchange Commission (SEC) with the primary purpose of engaging in general construction business, including the construction, renovation, repair, fit-out, improvement of buildings, houses, condominium projects/units, office facilities, and establishments, resorts or structures, whether for business, commercial, industrial or residential purposes, using any building materials and construction techniques now employed or to be developed.42 Petitioner maintains that it provided construction works to its various PEZA-registered clients, which are subject to zero percent (0%) VAT pursuant to Section 106(A)(2) of the NIRC of 1997, as amended.43 The Court notes, however, that the construction works provided by petitioner are sale of services, and not of goods, hence, the pertinent provision of the same Code applicable to the instant case is Section 108(8)(3), instead of Section 106(A)(2). Section 108(8)(3) of the NIRC of 1997, as amended provides: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease ofProperties. - )()()( )()()( XXX ~ 41 Exhibit "P-2", docket, p. 489. 42 Certificate of Incorporation CS201015526 and Amended Articles of Incorporation, Exhibit "P-1", docket, pp. 342 and 344. 43 Memorandum, docket, pp. 506-507.

DECISION CTA Case No. 9129 (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 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." Relative thereto, pertinent provision of Revenue Regulations (RR) No. 16-2005,44 as amended, states: "SEC. 4.108-5. Zero-Rated Sale ofServices.- XXX XXX XXX (b) Transactions Subject to Zero Percent (0%) VAT Rate.-The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate: 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." The special law specific to this case is Republic Act (RA) No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995". Section 8 of RA No. 7916, as amended, mandates that the PEZA shall manage and operate the ecozones as a separate customs territory, thus: "REPUBLIC ACT NO. 7916 (as amended by Republic Act No. 8748) AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND MECHANISMS FOR THE CREATION, OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN THE PHILIPPINES, CREATING FOR THIS PURPOSE, THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AND FOR OTHER PURPOSES. XXX XXX XXX SECTION 8. ECOZONE to be Operated and Managed as Separate Customs Territory. -The ECOZONE shall be managed and '7"' operated by the PEZA as separate customs territory. 44 "Consolidated Value Tax Added Tax Regulations of 2005".

DECISION CTA Case No. 9129 The PEZA is hereby vested with the authority to issue certificates of origin for products manufactured or processed in each ECOZONE in accordance with the prevailing rules of origin, and the pertinent regulations of the Department of Trade and Industry and/or the Department of Finance." (Underscoring supplied) Since the ecozone is viewed as a foreign territory by legal fiction, sales of goods and services made by a VAT-registered person in the Philippine customs territory to an entity registered and operating within the ecozone are considered exports to a foreign country subject to zero percent (0%) VAT. The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT.45 Finally, Section 8 of Republic Act No. 7916 "mandates that PEZA shall manage and operate the ECOZONE as a separate customs territory. The provision thereby establishes the fiction that an ECOZONE is a foreign territory separate and distinct from the customs territory. Accordingly, the sales made by suppliers from a customs territory to a purchaser located within an ECOZONE will be considered as exportations. Following the Philippine VAT system's adherence to the Cross Border Doctrine and Destination Principle, the VAT implications are that no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority."46 From the foregoing, it is evident that the sales of services by a VAT-registered taxpayer, such as herein petitioner, to entities located in the ecozones are considered "export sales" subject to VAT at zero percent (0%) rate. cr In its Quarterly VAT Return for the first quarter of 2013,47 petitioner reported total sales of P51,045,936.18, which included zero- rated sales in the amount of P50,789,826.58, as detailed below: ;c.. 45 Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc., G.R. No. 150154, August 9, 2005. 46 Coral Bay Nickel Corporation v. Commissioner ofInternal Revenue, G.R. No. 190506, June 13, 2016. 47 Exhibit "P-3", docket, p. 372.

DECISION CTA Case No. 9129 VAT Sales p 256,109.60 Zero-Rated Sales Total 50,789,826.58 p 51,045,936.18 As can be gleaned from petitioner's Summary List of Sales for the first quarter of 2013,48 its reported zero-rated sales of P50,789,826.58 were made to Diversified Technology Solutions International Inc. (DTSII), RMH Teleservices Asia Pacific Inc. and Anthem Solutions Inc. (ASI). However, petitioner was able to prove the PEZA registration of and VAT zero-rating of the transactions with DTSII and ASI only, by presenting the following documents: 1. PEZA Certificate No. 2013-0571 with PEZA Certification No. 2013-044749 for DTSII; and 2. PEZA Certificate No. 2013-0457 with PEZA Certification No. 2013-039050 for ASI. Accordingly, only the sales made to DTSII and ASI during the first quarter of CY 2013 shall qualify for VAT zero-rating pursuant to Section 108(8)(3) of the NIRC of 1997, as amended. In line with this, Sections 113(A)(2), (8)(1), (2)(c) and (3) of the NIRC of 1997, as amended, as implemented by Sections 4.113-1(A)(2), 8(1) and (2)(c) of RR No. 16-05, in relation to Sections 237 and 238 of the same Code, provide that a VAT taxpayer, like herein petitioner, shall for every lease of goods or properties, sale, barter or exchange of services, issue a VAT official receipt (OR), to wit: "Sec. 113. Invoicing and Accounting Requirements for VAT- registered Persons.- (A) Invoicing Requirements. - A VAT-registered person sha II issue: )()()( )()()( )()()( '}-l-- 4a Exhibit "P-188", !CPA Report. 49 Exhibit "P-185", !CPA Report. so Exhibits "P-186" to "P-187", !CPA Report.

DECISION CTA Case No. 9129 (2) A VAT official receipt for every lease of goods or properties, and for everv sale, barter, or exchange of services. (B) Information Contained in the VAT Invoice or VAT Official Receipt -The following information shall be indicated in the VAT invoice or VAT official receipt: (1) A statement that the seller is a VAT-registered person, followed by his Taxpayer's Identification Number (TIN); (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: Provided, That: XXX XXX XXX (c) If the sale is subject to zero percent (0%) value-added tax, the term 'zero-rated sale' shall be written or printed prominently on the invoice or receipt; XXX XXX XXX (3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and xxx" (Emphasis and underscoring supplied) "Sec. 4.113-1. Invoicing Requirements. - (A) A Vat-registered person shall issue: - XXX XXX XXX (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter, or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word 'VAT' in their invoice or official receipts. Said documents shall be considered as a 'VAT Invoice' or VAT official receipt. All purchases covered by invoice/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. VAT invoice/official 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. (B) Information contained in VAT invoice or VAT official receipt -The following information shall be indicated in VAT invoice or VAT official receipt: (1) A statement that the seller is a VAT-registered person, 9--- followed by his TIN;

DECISION CfA Case No. 9129 (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT; Provided, That: xxx (c) If the sale is subject to zero percent (0%) VAT, the term 'zero-rated sale' shall be written or printed prominently on the invoice or receipt; xxx" (Emphasis supplied) "SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. -All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service....." "SEC. 238. Printing of Receipts or Sales or Commercial Invoices. - All persons who are engaged in business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices before a printer can print the same "No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show, among other things, the name, business style, Taxpayer Identification Number (TIN) and business address of the person or entity to use the same, and such other information that may be required by rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner." (Emphasis supplied) In support of its zero-rated sales and to prove compliance with the VAT invoicing requirements provided by the above-quoted laws and regulations, petitioner submitted the corresponding ORs and invoices,51 which were examined by the Court-commissioned ICPA, Ms. Myra Celeste 0. Dabalos. Upon examination of the said documents, the ICPA accounted for a total of P50,725,691.53 zero-rated sales as summarized in its Summary of Official Receipts with Corresponding Invoices. 52 A comparison of the zero-rated sales per VAT Return53 as against the !CPA's verification reveals a difference of P64,135.05 (P50,789,826.58 less P50,725,691.53), which may be broken down as follows: ?z-- 51 Exhibits "P-33" to "P-156", !CPA Report. 52 Exhibit "P-157", ICPA Report, pp. 17-21. 53 Exhibit "P-3", Line 17, docket, p. 372.

DECISION CTA Case No. 9129 Client Exhibit No. OR Zero Rated Zero Rated Difference a DTSII P-37 toP-40 No. Sales per Sales per ICPA b DTSII P-43 to P-44 0210 SLS/Return p (6.00) c DTSII P-118 to P-122 0212 p 1,178,460.57 (OR/Inv) d DTSII P-132 to P-133 0229 p 1,178,466.57 (114,374.00) 0233 - Total 114,374.00 160 964.05 635 446.00 474 481.95 173,699.00 17,551.00 191 250.00 1'1,941,021.52 1'64,135.05 1'2,004,156.57 Out of the P64,135.05 difference, the amounts of P6.00 and P114,374.00 pertaining to items a and b, respectively, shall be disregarded as the same were not actually reported in petitioner's VAT return for the subject period. On the other hand, the amounts of P160,964.05 and P17,551.00 pertaining to items cand d, respectively, or a total of P178,515.05 shall be denied VAT zero-rating as the same were not covered by VAT zero-rated ORs. Moreover, the reported zero-rated sales of P134,440.00, as detailed below, shall also be denied VAT-zero rating as these were made to entities without proof of PEZA registration: Exhibit Client OR No. Amount No. RMH Teleservices Asia Pacific Inc 0214 p 68,664.00 P-47 RMH Teleservices Asia Pacific Inc 0215 P-49 Transcom Worldwide Philippines Inc 0225 45,776.00 P-105 20,000.00 Total -------- 1'134,440.00 In fine, out of the reported zero-rated sales of P50,789,826.58, only the amount of P50,476,871.53 represents petitioner's valid zero- rated sales, computed as follows: Total Reported Zero-Rated Sales p 178 515.05 p 50 789,826.58 Less: Adjustments/Disallowances 134,440.00 312,955.05 Sales not covered by VAT zero-rated ORs Sales to clients without proof of PEZA 1'50,476,871.53 !~ registration Total Valid Zero-Rated Sales

DECISION CfA Case No. 9129 The input taxes incurred or paid were attributable to its zero-rated sales. Having resolved that petitioner had VAT zero-rated sales for the first quarter of CY 2013 in the total amount of P50,476,871.53, the Court shall proceed to determine the amount of input VAT attributable thereto. In its Quarterly VAT Return for the first quarter of CY 2013,54 petitioner reported input taxes on its domestic purchases of goods other than capital goods and services in the total amount of P2,857,766.93, as broken down below, which is the subject of the instant claim for refund: Input Tax on Domestic Purchases of Goods Other ' than Capital Goods (Line 21F) Input Tax on Domestic Purchase of Services (Line p 2,615,319.64 � 211) 242,447.29 Total P2,857,766.93 To support its input VAT claim of P2,857,766.93, petitioner submitted various invoices, ORs and other documents,55 which were examined by the !CPA. Based on the report of the ICPA,56 the Court finds that the input VAT in the total amount of P1,622,138.80 should be disallowed for petitioner's failure to meet the substantiation requirements under Sections 110(A), 113(A) and (B), and 237 of the NIRC of 1997, as amended, in relation to Sections 4.110-1, 4.110-2, 4.110-8 and 4.113-1 of RR No. 16-05, as amended: Exhibit Description Input VAT Reference Amount Input tax claimed on domestic purchase of goods supported by a P-162 VAT Invoice not dated within the VAT-taxable quarter but within the I' 15 700.21 VAT-taxable year (Note A) P-163 Input tax claimed on domestic purchases of services supported by a 21,919.97 ~ VAT OR not dated within the VAT-taxable quarter but within the VAT-taxable year (Note A) 54 Exhibit "P-3", docket, p. 372. 55 Exhibits "P-201" to "P-1695" except for the denied exhibits (P-210, P-212, P-290 to P-297, P-503 to P-521, P-806 to P-807, P-809, P-1100, P-1202, P-1229, P-1257, P-1298, P-1307, P-1342, P- 1371, P-1431, P-1444, P-1529 to P-1530, P-1542, P-1570, P-1645 and P-1682). 56 Exhibit "P-11", !CPA Report, pp. 7-9.

DECISION CTA Case No. 9129 Exhibit Description Input VAT Reference Amount Input tax claimed on purchases of goods and services that are P-165 supported by VAT invoices (for goods) or VAT ORs (for services) that 311 370.44 are issued in the name of the Petitioner in the quarter when the 148 852.58 P-166 input taxes are claimed but the VAT was not separately indicated in P-167 the invoice/OR 6 846.43 P-168 Input tax claimed on domestic purchase of goods supported by VAT 24 066.71 P-169 documents other than a VAT Invoice (i.e., VAT OR etc.) 102 018.84 P-170 Input tax claimed on domestic purchase of goods supported by other P-171 Non-VAT document 143 243.55 P-172 Input tax claimed on domestic purchase of goods supported by a 638 376.84 VAT Invoice but not an original copy P-174 Input tax claimed on domestic purchases of goods supported by 1,285.71 P-175 Non-VAT Registered TIN Sales invoices only P-176 Input tax claimed on domestic purchase of goods supported by a 4,393.20 P-177 VAT Invoice issued in the Petitioner's name without the Petitioner's 33,038.48 P-178 TIN and/or address 49,827.28 P-179 Input tax claimed on domestic purchase of goods supported by a P-180 VAT invoice but not dated within the taxable vear 8,576.78 P-181 Input tax claimed on domestic purchase of goods supported by VAT Invoice with incorrect TIN of Petitioner but supported by VAT OR 1 869.19 with correct TIN and Address 901.08 Input tax claimed on domestic purchase of services supported by VAT documents other than a VAT OR (i.e., VAT invoice, Statement of 19,537.78 Account, Billing Invoice, etc.) 90,313.73 Input tax claimed on domestic purchase of services supported by P1,622,138.80 other Non-VAT document Input tax claimed on domestic purchases of services supported by a VAT OR but not an original copy Input tax claimed on domestic purchases of services supported by Non-VAT Registered TIN OR only Input tax claimed on domestic purchases of services supported by VAT OR issued in the Petitioner's name but without the Petitioner's TIN and/or Address Input tax claimed on domestic purchases of services supported by a VAT OR but without BIR's Authority to Print/Permit to Print Input tax claimed on domestic purchase of services supported by VAT OR. However, the sentence ''This is not a source of input tax." is printed in the VAT OR Input tax claimed on domestic purchase of goods and services without supporting documents Total In addition to the above disallowances, the input VAT in the amount of P139,078.61 shall, likewise, be disallowed for the reasons stated hereunder: Exhibit Vendor Name Input VAT Reason for Disallowance No. Amount Purchase of good supported by VAT invoice wherein the amount of input VAT P-203 Pacific Glass Corporation p 520.50 was not separately shown !c-

DECISION CTA Case No. 9129 Exhibit Vendor Name Input VAT Reason for Disallowance No. Amount Purchase of good supported by VAT 311.38 invoice but dated outside the period (first P-641 MC Home Depot, Inc. 1,026.40 quarter) of claim 1,607.14 Purchase of good supported by VAT P-646 MC Home Depot, Inc. 173.83 invoice but without the TIN of petitioner P-754 Ultra Petronne Interior Supply 342.86 Over-claimed input VAT (P2,410.71- P-994 Corp. 6,287.15 P4 017.85) 578.57 Purchase of good supported by VAT CFAL Oasis Development Corp. invoice but without the TIN and address 3,120.11 of petitioner P-1054 Space Creation, Inc. 1,997.15 Purchase of good supported by VAT P-1057 Space Creation, Inc. 10,665.00 invoice wherein the amount of input VAT was not separately shown P-1160 Space Creation, Inc. 428.57 Purchase of good supported by VAT 514.29 invoice wherein the amount of input VAT P-1360 Newton Hardware & Lumber 8,919.46 was not separately shown 98,571.28 Purchase of good supported by VAT P-1423 Perfectbuild Trade Corp. 157.78 invoice wherein the amount of input VAT 3,857.14 was not separately shown P-1422 Perfectbuild Trade Corp. Purchase of good supported by VAT p 139,078.61 invoice wherein the input VAT amount P-1436 Free-Aire Industries was not separately shown and the date is altered without countersiqnature P-1492 Multi Rich Home Decors Inc. Purchase of good supported by VAT invoice wherein the amount of input VAT P-1286 ewe-Prime Industries, Corp. was not separately shown Purchase of good supported by VAT P-1399 Ivm Phils. Services & invoice wherein the amount of input VAT Contractor, Inc. was not separately shown Purchase of good supported by VAT P-1298 Officefab E-Services invoice wherein the amount of input VAT Philippines, Inc was not separately shown Purchase of good supported by VAT P-1307 Rae Arise Enterprise invoice wherein the amount of input VAT Total was not separately shown Purchase of service supported by VAT OR wherein the input VAT amount was not separately shown Purchase of service supported by VAT OR wherein the input VAT amount was not separately shown Purchase of good supported by document which is denied admission by the Court Purchase of good supported by document which is denied admission by the Court In sum, out of the reported input VAT of P2,857,766.93, only the amount of P1,096,549.52 represents petitioner's valid input VAT for the first quarter of CY 2013, computed as follows: Input VAT per Returns p 2 857,766.93 Less: Disallowances :;-.-

DECISION p 1,622,138.80 1,761,217.41 CTA Case No. 9129 139,078.61 p 1,096,549.52 Per ICPA report Per Court's further verification Total Valid Input VAT Proceeding therefrom, a portion of petitioner's valid input VAT shall be applied against the output VAT liability for first quarter of CY 2013 in the amount of P30,733.15Y Consequently, only the remaining input VAT of P1,065,816.37 can be attributed to the declared zero- rated sales of P50,789,826.58 and only the input VAT of P1,059,249.06 is attributable to the valid zero-rated sales of P50,476,871.53, computed as follows: Valid Input VAT p 1 096 549.52 Less: Output VAT per return 30,733.15 Excess Input VAT Divide by Declared Zero-Rated Sales p 1,065,816.37 Multiply by Valid Zero-Rated Sales 50,789,826.58 Excess Input VAT attributable to Valid 50,476,871.53 Zero-Rated Sales p 1,059,249.06 The input taxes claimed were not applied against any output VAT liability. Although petitioner's claimed input VAT of P2,857,766.93 was carried-over in its succeeding Quarterly VAT Returns for the second quarter of CY 2013 up to the second quarter of CY 2015, 58 the same remained unutilized until it was deducted as "VAT Refund/TCC claimed" in its Amended Quarterly VAT Return for the second quarter of CY 2015. 59 Accordingly, the subject claim no longer formed part of the excess input VAT of P29,569,439.3360 as of the end of the second quarter of CY 2015 that was to be carried over to the succeeding 57 Line 196 of Exhibit "P-3", docket, p. 372. 58 Exhibits "P-14 (inclusive of submarkings)" to "P-18 (inclusive of submarkings)", "P-20 (inclusive of submarkings)" to "P-26 (inclusive of submarkings)". 59 Composition of VAT Refund/TCC claimed: 1st Qtr. of CY 2013 (Exh. P-3) P2,857,766.93 2nd Otr. of CY 2013 (Exh. P-14) 5,022 379.58 3rd Qtr. of CY 2013 (Exh. P-17) 3,479 157.17 4th Qtr. of CY 2013 (Exh. P-18) 3 749 492.22 Total Amount of "VAT Refund/TCC claimed" per return (Exh. P-26a) p 15 108 795.90 1M- 60 Line 29 of Exhibit "P-26", !CPA Report.

DECISION CTA Case No. 9129 quarters. As such, it eliminates the possibility that the present claim would be applied to future output VAT liability. In view of the foregoing, petitioner is entitled to a refund/tax credit of its excess and unutilized input VAT attributable to zero-rated sales for the first quarter of CY 2013 in the amount of P1,059,249.06. WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is ORDERED TO REFUND OR TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the amount of P1,059,249.06, representing its excess and unutilized input VAT attributable to its zero- rated sales for the first quarter of CY 2013. SO ORDERED. ~~Y; c. (]..$.~/~' JUANITO C. CASTANEDA, JR. Associate Justice WE CONCUR: ~N.Mh~.C~ CIELITO N. MINDARO-GRULLA Associate Justice ~

DECISION erA case No. 9129 ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. c. ~'4:: a...T~~Q.. 1UANITO C. CASTANEo:A, JR. Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. Presiding Justice