CTA Case No. 5751 (Decision)

( REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SEKISUI JUSHI PHILS., INC., Petitioner, - versus - C.T.A. CASE NO. 5751 COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. APR 26 2001 t:/Jo~Ak~H;: X-------------------------------------------------------- --X DEC ISIO N This is a Petition for Review seeking for the refund or for the issuance of a Tax Credit Certificate in the amount of FOUR MILLION SIX HUNDRED THIRTY ONE THOUSAND THIRTY TWO & 74/ 100 PESOS (P4, 631 ,032.74) allegedly representing the unutilized input taxes paid on Petitioner's domestic purchase of capital goods and services for the period January 1 to June 30,1997. Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office at Lot 11 Carmelray Industrial Park, Canlubang, Laguna. (Item No . 4, Joint Stipulation ofFacts, CTA Docket p. 34) Petitioner is principally engaged in the business of manufacturing, importing, exporting, buying, selling, or otherwise dealing in, at wholesale such goods as strapping band s and other packaging materials and goods of similar nature, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products. (Item no. 5, Joint Stipulation ofFacts, CTA Docket p . 33) It is a duly 55 o

DEC IS ION CTA C A SE NO . 5751 PAG E 2 registered value added taxpayer in accordance with Section 107 of the Tax Code (Item No. 1, Joint Stipulation ofFacts, CTA Docket p. 33) For the period January 1 to June 30, 1997, Petitioner filed its quarterly VAT returns with the Bureau of Internal Revenue (BIR) which reflected input taxes in the amount of Four Million Six Hundred Thirty One Thousand Thirty Two and 741100 Pesos (P4,631, 132.70), broken down as follows: Period Amount of Input Taxes Paid First Quarter P 2,100,302.60 (Exh A) Second Quarter 2,530,730.14 (Exh B) TOTAL 4,631,032.74 The aforesaid amount represents input taxes incurred in connection with Petitioner's domestic purchase of capital goods and services. (Item No . 2, Joint Stipulation of Facts. CTA Docket, p. 33) The said input taxes have remained unutilized since Petitioner has not engaged in any business activity or transaction for which it may be liable for output taxes . Consequently, there is no out'put tax against which the subject input taxes may be credited . (Item No.6, par.2, Petition for Review, CTA docket p .2) Pursuant to BIR Revenue Audit Memorandum Order No . 2-93, Petitioner on November 11 , 1998 filed with the One Stop Shop Inter Agency Tax Credit and Duty Drawback Center of the Department of Finance (CENTER-DOF), two separate applications for tax credit/refund of input taxes incurred for the period January 1 to March 31,1997 and April 1 to June 30,1997, respectively. (Item No. 3, Joint Stipulation ofFacts, CTA Docket p . 33) 559

DECISION CTA CASE NO. 575 1 PAGE 3 Petitioner has duly filed the instant Petition for Review within the two-year prescriptive period prescribed by then Section 230 of the Tax Code, as amended. (Item No. 6, Joint Stipulation o.f Facts. CTA Docket p.34) In answer to the instant Petition for Review, Respondent raised the following Special and Affirmative Defenses: " 5. Petitioner's alleged claim for refund/tax credit is subject to administrative routinary investigation/examination by Respondent's Bureau; 6. Petitioner failed miserably to show that the total amount of P4,631 ,032. 74, claimed as VAT input taxes, were erroneously or illegally collected, or that the same are properly documented ; 7. Taxes paid and collected are presumed to have been made in accordance with law; hence, not refundable; 8. In an action for tax refund, the burden is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund; 9. It is incumbent upon the Petitioner to show that it has complied with the provi sions of Section 204 in relation to Section 229 of the Tax Code; 10. Well-established is the rule that claims f0r refund/ tax credit are construed in strictissimi juris against the taxpayer as it partakes the nature of exemption from tax." In order to substantiate its claim for refund , Petitioner submitted the following documentary evidence, thus: 560

DECISION \ CTA CASE NO. 5751 PAGE4 ~_,i -' Exhibits --- jJescription A, B,Z,AA 1st, 211d,3rd, and 4th Quarter Vat returns for 1997 c Summary of VAT on local purchases of Goods and Services for the period February to July 1997 D, E, E- 1, F, F-1, G, Various Official Rece ipts, Billing Invoices, and G-1, H, H-1, I, I- 1, .1, Sales Invoices issued to Petitioner to prove payment of VAT for purcha~ e of goods and services .I- I , K, K. - I , L, L- 1, M, M-1, N, N-1,0, 0-1, PEZA Certificate of Registration No. 96-105 P, Q, R, S, S-1, T, U, U-1, V, V-1, X, X-I y BB, CC, DD, EE 1st, 2nd, 3'd and 4th Quarter VAT Returns of Petitioner for taxable year 1998 FF, GO I st and 2nd Quarter VAT Returns of Petitioner for taxable year 1999 After both parties submitted their respective memorandum , the Court is now tasked to reso lve the following iss ues jointl y stipulated by the Parties, thus : I. Whether or not Petitioner incurred input taxes in the amount of P4,63 1,032. 74 for the period January I to June 30, 1997 for purchase of cap ital goods and services in accordance with Section 112 (B) of the Tax Code; 2. Whether or not as of the date of filing of the instant Petition for Review, Petitioner has unutilized input taxes in the amount of P4,631,032 .74 which have not been offset against any output tax liability; 3. Granting that Petitioner has unutili zed input taxes 111 the amount of P4,63 1.032 .74, whether or not Petitioner ha~ carried over such input taxes to the succeeding quarters . 561

DEC IS ION CTA CASE NO . 575 1 PAGE 5 As all th e afo resaid issues are interrelated, We deemed it best to streamline them into one ma in issue of " Whether or� not Petitioner� is entitled to a refund or to the issuance of a Tax Credit Certificate in the amount of P4,631,032.74 allegedly representing the unutilized input taxes paid on its domestic purchase of capital goods and services." A fter a careful scrutin y of all th e record s, pl eadin gs and evidence on hand, we rul e in favo r of the Petitioner. In its Pe titi on for Rev iew. Pe titi oner ave rred that fo r the peri od January I to June 30, 199 7, it inc urred input taxes in th e amount o f P4 ,63 1,032. 74 for its purchase of capital good s and serv ices. Petitioner then anchored its claim for refund on Section 11 2(B) of th e 199 7 Tax Code, and we quote: " (B) Capital Goods. A VAT-registered person may appl y for the iss uance of a tax credit certi ficate or refund of input taxes paid on ca pital goods imported or locall y purchased, to the extent that such input taxes have not bee n appli ed aga inst output taxes. The appli cati on ma y be made onl y w ithin two (2) years after the close of the taxa bl e quarter when th e importati on or purchase was made." Based on th e afo requ oted provision of law, it is imperative for the Petitioner to prove th e fo ll owin g: ( l ) th a t it is a VAT registered person; (2) that the input tax es claimed were paid on capital goods; (3) th at the input taxes have not been appli ed against its output tax liability; a nd (4 ) th at th e admini strati ve claim for re fund was seaso nabl y fil ed . (Seaga te Technology (Ph ilipp ines) vs. Co mm issioner of In ternal Revenue, C TA Case No. 592 1, September 2, 2000) 562

DECIS ION CTA CASE NO. 575 I PAGE6 A circumspect stu dy of the reco rd s of thi s case reveals th at Petitioner sati sfactoril y co mpli ed with the above requirements. It was established by the Petiti oner that it is a VAT-registered person as shown by the Certifi cate of Registrati on iss ued by the BIR, dated November 15 ,1996 with RDO Co ntro l No. 96-56-002536. (A nnex "A" of Petiti on for Rev iew). Furthermore, the fact th at Petiti oner is a VAT- registered entity is already admitted by the Parties in its Joint Stipul ation of Facts (See Item No . I . Join t Stipulation ofFacts, CTA Docket p.33) As to whether or not Petitioner paid input taxes on capital goods, this Court answers in the affi rm ative. Upon examinati on of the pertinent documents submitted by the Petitioner, it is clear that from January I , 1997 to June 30, 1997, Petitioner purchased ca pital goods and services and paid input taxes thereon. Thi s is supported by the various invo ices and offic ial rece ipts (Ex hs. D, D- 1, E, E- 1, F, F-1 , G, G-1 , H, H-1 , I, I-1 , J, J-1 , K, K-1 , L, L- 1, M, M- 1, N, N- 1, 0, 0- 1, P, Q, R, R- 1, S, S-1 , T, U, U-1 , V , V - 1) submi tted in evidence by Petitioner. Reco rd s li kew ise revea l that as of the date of .fi ling of the Petition for Review, Petitio ner has unut ilized in put taxes in the amount of P4,63 1,032. 74 whi ch have not been offse t against any output tax liability because Petitioner's sales are 100% exported. This was tes tifie d to by Petitioner's w itness, Ms. A nd rea V. Suelto, Treasurer and General Affa irs Ma nage r, dur in g the hearing held on Jul y 19, 1999, and we qu ote, thus: ATTY. BI SD A: Q. Ms. wi tness, co uld yo u please te ll the Court bri efl y the nature of the business of the co mpany? MS. SUELTO:

DECISION CTA CASE NO. 575 1 PAGE 7 A. Our company is 100% export enterprise. We are registered with the PEZA Ecozone, Ma' am. ATTY. BISDA: Q. Now yo u mentioned that you are regi stered as an Ecozone Export Enterprise, what document, if any, will show that you are regi stered, M s. Witness? MS . SUELTO: A. We were issued the PEZA Certificate of Registration No. 96-105, Ma'am. (At this point, the counsel for the petitioner shows a document to the witness .) Inferring from the above testimoni es of Petitioner' s witness, it is evident that the input taxes remained unutili zed/unapplied because as a 100% export enterprise, Petitioner 's sales are subject to VAT at 0% pursuant , ) Section 100 (a)(l) of the Tax Code, as amended. Conseq uentl y, there is no output tax liability to which the input taxes can be applied. And lastl y, it is also clear that the administrative claim for refund was seasonably filed within two (2) years from the close of each VAT taxable quarter. It could be reca lled that Petitioner on November II , 1998 filed with the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance(CENTER-DOF), two separate applications for tax credit/refund of input taxes for the period January 1 to March 31, 1997 and April l to June 30,1997 and this was duly admitted by the Parties in their Joint Stipulation of Facts. (See Joint Stipulation of Facts, CTA Docketp.34). Respondent, however, in hi s Memorandum , dated April 14, 2000, alleged that Petitioner's clai m for refund must be denied on the gro und that Petitioner failed to

DECIS ION CTA CASE NO. 575 1 PAGE 8 comply with the substantiation req uirements provided under Secti on 4.106-1 (b) in relati on w ith Secti on 4. 104-5 of Revenue Regul ations No . 7-95 and in correlation with Secti on 16(c)(4) of Revenue Regulations No. 5-8 7. Section 4 .106-1 (b) pertains to req uirements for ava ilment of refund or issuance of a tax credit certificate of input taxes o n capital goods w hil e Section 4. 104-5 pertains to the substanti ation of claims for input tax cred it. Section 16(c)(4) of Revenue Regul ati ons No. 5-8 7 provides that: "S ection 16(c)(4). Purchase of Capital goods . - (i) Ori ginal co py of invo ice or receipt showing the elate of purchase, pu rchase price, amoun�. of VAT paid and desc rip tion of the capita l equipment loca ll y purchased ; (ii ) W ith respect to capital equipment imported, the photocopy of im po rt entry document fo r intern al revenue tax purposes and the confirmation receipt issued by the Bureau of Customs for the payment of VAT. " Corollaril y, Secti on 4 . 106- 1 (b) 111 relati on to Section 4. 104-5 of Revenue Reg ul ati on No .7-95 provides : "S ection 4.106-/(b) Capital Goods. - Only a VAT registered person may a ppl y fo r th e iss uance of a tax credit certifi cate or re fund of input taxes pa id on capital goods imported or locall y purchased . T he refun d .shall be allowed to the ex tent that such input taxes have not been appli ed aga inst o ut put taxes . T he appli cati on should be made within two (2) years afte r the close of the taxable quarter when the im portati on or purchase was made. "Capital goods or properties" refer to goods or properties with estimated useful life greater than one year and which are treated as deprec iable asse ts under Secti on 29 (f), used d irectl y or indirectly in the producti on or sale of taxabl e goods and services. "Section 4.104-5.- Substantiation of claims for input tax credit.- (a) Jnp ut taxes shall be all owed onl y if the do mestic purchase of goods, properti es or services is made in the co urse

DEC ISION CTA CASE NO. 575 1 PAGE9 of business. The input tax sho uld be supported by an invo ice or rece ipt showing the info rm atio n as requ ired under Section 108(a) and 238 of the Code. x x x Contrary to Respo nd ent 's observatio ns, Petitioner sati sfactoril y complied w ith the above requi sites. As earli er di scussed, Petitioner presented in ev idence and submitted with thi s Co urt vari o us in vo ices and o ffi cia l rece ipts supportin g the claim for refund of inp ut VAT. Respondent li kewise co ntends in its Supplemental Memorandum dated December 7, 2000 that Peti tio ner is not a VAT taxab le entity being an ecozone enterpri se registered with the Phili pp ine Eco nomic Zo ne A uth o ri ty (P EZA) thus it is exempted from nati onal and local taxes includin g VAT, pursuant to Section 24 of Republic Act 7916 in relation to Secti on 103 o f the Tax Code, as amended by R.A. 771 6. T he above issue has already been settl ed by this Co urt in the case of READ- RITE PHILIPPI NES, INC. (Fo rm erl y Sun wa rd Techno logies Phils., Inc .) vs. COMMI SS IONER OF INTERNA L R EVENUE, CTA Case N o 5659, promulgated on September 29 , 2000 , to q uote: "T his Co urt wo ul d li ke to stress that under Section 23 of Republic Act No . 7916 , two diffe rent fisca l incentives are granted to an ecozone enterpri se to wit: Sec. 23. Fiscal Incentives. Business establishments operatin g w ithin the ECOZON E shall be entitled to the fiscal incentives as provided fo r under Presidential Decree N o. 66, the law creating the Export Processing Zone authority, or those provided fo r under Book VI of Exec utive O rder No. 226, otherw ise known as the Omnibus Inves tments Code of 198 7." Based on the afo requo ted Secti on 23 of RA 79 I6, a PEZA reg istered ente rpri se has the opti on to choose betwee n two sets of fi scal

DEC ISION CTA CASE NO. 575 1 PAGE 10 incenti ves . One is that which is prov ided fo r under Presidenti al Decree No. 66, as amended and Section 24 of RA 79 16 whi ch includes the 5% preferentia l tax on gross income earned whi ch is in lieu of national and local taxes; and second as those provided for under Book VI of Executive Order No. 226, including but not limited to an income tax holiday (ITH) of 4 to 6 years dependin g on whether or not an enti ty is registered as a pioneer or non-pioneer enterprise. If an ecozone enterpri se chooses the 5% preferentia l tax, it is exempt from payment of nati onal and local taxes. However, if an ecozo ne enterprise chooses the income tax holiday, it is onl y exempt from payment of the income t[1X but still subj ect to other nati onal internal revenue taxes including the value-added tax. The di ffe rence between these 2 sets of fisca l incenti ves were explained by the Bureau of In ternal Revenue in VAT Rulin g Nos. 037-9 8; 043-98; 027-99 and 063-99." (See a lso Resolutions in the cases of SEAGATE T E CHNOLOGY (PHILIPPINE S) vs. COMMISSSIONER OF INTERNAL REVE NUE, CTA Case No. 5921, dated September 20, 2000 and TOSHIBA INFORMATION EQUIPMENT (PHILS) INC. vs. COMMISSIONER OF INTERNAL REVENUE, CTA Case No. 5762, dated Januat�y 17, 2001 .) In the case at bar, it is ev ident that Petit ioner opted to avail of the Fiscal Incenti ve (I ncome tax Holiday) prov ided und er Executive Order No .226 considering the fac t that they have been iss ued a VAT Reg istrati on Certificate by the BIR. Thus, although Petitioner is an ecozone enterprise registered with PEZA and exempt from income tax, Petiti oner is still subject to other in ternal revenue taxes such as Value Added Tax pursuant to the fiscal ince nti ves p rov ided by law. Havi ng answered all the above issues and after carefull y examining the invoices and official rece ipts, thi s Co urt fi nds that the fo ll owing input taxes should be di sallowed : SUPPLIER EXHIBIT REFER ENCE INPUT REMARK NO VAT John Clements D. D-1 15340 15,665.00 Not supported by an officia l receipt Consultant S, S-1 15626 John Clements 38581 222 .39 Not capita l goods as defi ned in Section Consultant R 235 (2)(t.) of R R. No. 10-94 FCR Business Machine Corp. v 863 .64 No TIN Riofil Corporation 235,025.40 Not supported by an officia l receipt

DEC ISION CTA CAS E NO. 5751 PAGE II Federal Phoenix w Policy#149234 2,537 .00 Not within the period of claim 254,313 .43 Ass . Co . Total And only the following validl y supported input va lue-added taxes should be refunded to Petitioner: SUPPLIER EXHIBIT REFERENCE INVOICE INPUT NO . AMOUNT TAX Riofil Corporation E , E-1 883 p 16,840,500.00 p 1,545,000 .00 Riofil Corporation F, F-1 882 539,637 .60 Riofil Corporation G. G-1 893 5,882 ,049 .84 481,854 .60 Riofil Corporation H, H-1 1051 968 ,745 .90 Tricorn Dynamics I, 1-1 50084 5 ,252,215 . 14 1,590.91 Design Crest J, J-1 18949 8,309 .09 Kreza Computer Center K, K-1 1858 10 ,559 ,330.31 7,131 .82 Riofil Corporation L, L-1 1060 818,664 .60 Columbia Enterprises M, M-1 69521 17,500.00 1,772.73 Ureka Steel Industries Co . N, N-1 27968 1,272 .73 Scientific Industries, Inc. 0 , 0-1 39297 91 ,400.00 160 .00 Avesco Marketing Corp. 423597 454 .55 Kreza Computer Center Q 2341 78,450 .00 2,507.73 U, U-1 8,923,444 .14 4,377' 102.26 20 ,300.00 14,000.00 1,760.00 5,000 .00 27,585.00 TOTAL p Thus, out of the total amount claimed for refund of P P4,631 ,032.74, the Court concludes that only the amount ofP4,377 ,102.26 should be granted to Petitioner. WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. Respondent is hereby ordered to refund or to issue a Tax Credit Certificate in favor of the Petitioner in the amount of P4,3 77,1 02.26 representing excess input taxes paid for the period covering January 1 to June 30, 1997. SO ORDERED.

DEC ISION CTA CASE N O. 575 1 PA GE 12 I CONCUR: Lt2~~ ERNESTO D. ACOSTA Pres idin g Judge CERTIFICATION I hereby certi fy th at the above decision was reached after due consultation with the members of the Court of Tax Appeal s in acco rdance with Section 13, Article VIII of the Constituti on. ~~-~ ERNESTO D. ACOSTA Presiding Judge