CTA Case No. 5389 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY HOPEWELL POWER C.T.A. CASE NO. 5389 (PHILIPPINES) CORP., Petitioner�, - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - DECISION This petition for review is seeking for the refund or issuance of a tax credit certificate in the amount of P202,536,046.26, representing input value-added tax (VAT, for brevity) on capital goods for the period April 1, 1994 to September 30, 1995. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines. It is engaged in t h e business of power generation and subsequent sale thereof (Exh. A). It is registered with the Bureau of Internal Revenue as a VAT registered person with VAT Registration Certificate No. 330-001-726-870-V, dated July 16, 1992. (Exh. B). For the period April 1, 1994 to September 30, 1995, petitioner alleges that it paid input VAT on capital P202,536,046.26, the details o+ goods in the total amount

DECISION - C.T.A. CASE NO. 5389. - 2- of which are covered by the following amended quarterly VAT returns: Period Covered Amount Exh. 04-01-94 to 06-30-94 P-103,580,276.96 E 07-01-94 to 09-30-94 1,089,286.81 10-01-94 to 12-31-94 G 01-01-95 to 03-31-95 41,881,463.28 04-01-95 to 06-30-95 46,575,122.82 I 07-01-95 to 09-30-95 9,291,832.01 K T0 t a 1 118,064.38 M .P202,536,046.26 N On January 12, 1996, pursuant to Sectio n 106(b) of the Tax Code, as amended by Republic Act No. 7716, petitioner filed an application for tax credit/refund of value-added tax paid on capital goods with Revenue District Office No. 51 of the Bureau of Internal Revenue (Ex h s. V and V-1). On June 26, 1996, petitioner lodged the instant petition for review in order to toll the running of the two-y ear prescriptive period for claiming a refund under the law. In her An swer, respondent raises the following special and affirmative defenses: 5 � Petitioner ' s claim for the issuance of a VAT Tax Credit Certificate is premature as the same is still un dergoing admi n istrative routinary examination by respondent's Bureau; 6. The alleged creditable i n put taxes were collected and paid pursuant to law and pertinent BIR implementing rules and regulations, hence the same are neither refundable nor may they be claimed as

DECISION - C.T.A. CASE NO. 5389. - 3- credit. Petitioner must prove that the said input taxes were actually paid. remitted and received by respondent's Bureau and that the same were paid on capital goods purchased and have not been applied against output taxes; 7. Petitioner failed to substantiate by proper documents that it is entitled to refund or the issuance of a tax credit certificate for the amount of P202.536.046.26; 8. Claims for tax refund or tax credit are construed strictly against the claimant as they partake of the nature of a tax exemption. It is therefore incumbent upon the petitioner to prove that it is entitled to such exemption under the law. and failure to do the same is fatal to its claim for tax refund or tax credit; 9. Petitioner likewise failed to show that it had strictly complied with the provisions of Section 204 of the Tax Code in relation to Section 230 thereof with respect to the herein amount being claimed as tax credit. The issues to be resolved by this Court are as follows: 1. Whether or not petitioner's claim for refund has prescribed pursuant to the provisions of Section 204 of the Tax Code in relation with Section 230 of the same code; and 2. Whether or not petitioner was able to support with substantial evidence its entitlement to the claim for refund pursuant to Section 106(b) of the Tax Code. 1'\nent the first issue. We are convinced that petitioner was able to comply with the provisions of Section 204 of the Tax Code in relation with Section 230 of the same code in filing its claim for refund.

DECISION - C.T.A. CASE NO. 5389. - 4- The two-year� judicial prescriptive period in claiming a refund of i n put VAT is now reckoned from the filing of the quarterly VAT return as held in Our recent Resolutio n . dated July 20. 1998. in t h e case of Atlas Consolidated Mining and Development Corpo r ation v s . Commissioner of I nternal Revenue. C.T.A. Ca s e No. 5 2 96 wherein We ruled: "xxx (t)his Court. after a careful study of the arg um ents adduced by petitioner. reconsiders the decision with regard to the issue of prescription and consequently agrees with the interpretation of petitioner that the two-year period should be counted from the date of filing of the corresponding VAT quarterly return whic h is wit h in twenty (20) days after the close of each taxable quarter. This will harmonize Section 106 with Section 230 of the Tax Code whic h was interpreted by the Supreme Court in the cases of Commissioner of Interna l Revenue v s. TMX Sal es Inc. and th e Co u rt of Appeals. G.R. No. 83736. dated J a nuary 15. 199 2 ; and ACCRA Investment s Co r poration vs . Commis si oner o f Int e rnal Revenue. 204 SCRA 957 . that the two (2) year period should be counted from t h e filing of the final income tax return. because it is only during that date that the exact tax liability or refundability of tax can be determined. In the same manner. it is only after the filing of the quarterly VAT return that we can determine the VAT liability or refundability of VAT. It should be noted that the basic requirement is that VAT refund can only be granted to the extent that the input taxes have not been applied against output tax. All these things can only be determined if a return is filed. It is logical therefore. to conclude that the two-year period should not immediately be counced from the close of the quarter but from the date o f f i l i ng of the VAT return . ( Underlining Ours)."

DECISION - C.T.A. CA S E NO. 5389. - 5- Therefore, the judicial claim for refund of petitioner for the period April 1, 1994 to September 30, 1995 was timely filed within two years from the filing of petitioner's respective quarterly VAT returns, considering that the petition for review was filed on June 26, 1996, t h us: Original Date of Filing of Quarterly Period Covered Ex h . VAT Return ------------------------------------------------- 04-01-94 to 06-30-94 0 07-20-94 07-01-94 to 09-30-94 F 10-20-94 10-01-94 to 12-31-94 H 01-20-95 01-01-95 to 0 3-31-95 J 04-20-95 04-01-95 to 06-30-95 L 07-20-95 07-01-95 to 09-30-95 N 10-20-95 We now delve on t h e legal a n d factual aspect of the case whic h is t h e second iss u e at bar. Petitio n e r a n cho r ed its e n title ment to t h e clai m for refund of input VAT on Section 106(b) of the 1995 Tax Code, as a mended b y R.A. 7716. For easy reference, Section 106(b) of the Tax Code is h ereby quoted as fo l lows: Sec. 106. Refunds or tax credits of input tax. - (a) Export sales. - xxx. (b) Capital goods. A VAT-registered person may ap p ly f or the iss u ance of a tax credit certificate or ref u nd of i n put taxes paid on capital goods i mported or locally purchased, to t h e extent that suc h input taxes h ave not been applied against output taxes. The application for refund may be made only

�. DECISION - C . T.A. CASE NO. 5389. 6- within two (2) years after the close of the taxable quarter when the importation or purchase was made. Based on the above proviso, petitioner should prove that: (1) it is a VAT registered person; (2) the input taxes claimed by petitioner were paid on capital goods; (3) the input taxes have not been applied against output tax liability; and ( 4) the administrative claim for refund was seasonably filed. After a circumspect study of the evidence presented by petitioner, it was established that petitioner is a VAT-registered person with VAT Registration Certificate No � 330-001-726-870-V issued by the Bureau of Internal Revenue (Exh. B). The input taxes allegedly paid on capital goods remain unapplied as shown by the second quarter VAT return for the year 1996 (Exhs. 0 and 0-1) . Furthermore, the administrative claim for refund was seasonably filed within t h e time required under Section 106(b) of the Tax Code (Exhs. V and V- 1). However, it appears that most of the purchases made by petitioner, as evidenced by the sales invoices and official receipts are �f or engineering and structural services which according to respondent ' s revenue examiner do not constitute capital goods (Exhs. 2 and 2-a). Hence, We should resolve such corollary issue. Section 2(o) of Revenue Regulations No. 5-87 of the Value - Added Tax Regulations defines capital goods as -

DECISION - C.T.A. CASE NO. 5389. - 7- (o) "f..''apit:al goods" refer to goods with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services. Generally, a capital expenditure involves a payment which creates or enhances what is essentially a separate and distinct asset. Statutorily, capital expenditures are specified as amounts paid out tor new buildings or for permanent improvements or betterments made to increase the value of any property or estate or amounts expended in restoring property or in making good exhaustion thereof for which an allowance is or has been made ( 6 MERTENS Law of Federal Income Taxation, S25.37, pp. 114 to 115). In determining what constitutes capital goods, courts will look to the origin and character of the expenditure to determine whether it is a capital asset (6 MERTENS Law ot Federal Income Taxation, S25.37, p. 115, supra). For example, i t wa s held that "the cost of a topographical survey made tor the purpose of establishing boundary lines of the property, of ascertaining the topography of the land, and of recording the l .ocation on the property of valuable shrubs and shade trees is a capital expenditure" (Johnson vs. Comm., TC Memo 1955 - 247, cited in 6 MERTENS Law of Federal Income Taxation

DECISION - C.T.A. CASE NO. 5389. - 8- S25.63, p. 179). The same treatment is accorded to amounts expended for maps, abstracts, legal title opinions, recording fees and survevs (6 MERTENS Law of Federal Income Taxation, S 25.63, p. 179, supra) . The records show that petitioner expended for engineering and structural services for the purpose of constructing power plant facilities needed in the production of electricity, which is petitioner's main product. ~..Je are therefore convinced that said expenses are necessary and should form part of the cost of the power plant facilities. Such fact was also admitted by respondent's Revenue Exa miner, ~1 s. Delia Rios, in the cross examination conducted by petitioner's counsel on t h e August 26, 1997 sessio n , to wit: Q. What is the claim for refund of petitioner all about, Ms. Witness? A. The claim for refund of the petitioner is for refund of input tax for� their capital expenditures, Sir. Q. So, it has nothing to do with zero-rated sales or exempt sales is that right, Ms. ~.Jitness? A. Yes, Sir. ><X X XXX XXX. Q. Could you please tell us your understanding of what a capital expenditure is, Ms. Witness? A� Capital expenditures are those expenditures of purchases of capital goods which can be depreciated for a period of more than one ( 1) year, Sir.

DECISION - C.T.A. CASE NO. 5389. 9- Q. I would assume, Ms. l-Ji tness, that you have encountered cases involving capital expenditures? A. Yes, Sir. Q. In your opinion, Ms. Witness, in the co nstruction of a plant, are services rendered, are cost of services in a construction of a plant considered a capital expenditure? A. If the construction or the services render can be attributed to the building constructed, it can be classified as capital expenditure, Sir. Q. So, it is your opinion that services rendered for t he constr uction of building is considered capital expenditure, Ms. Witness? A. Yes, Sir. Q� How about services like, engineering and structural services also connected to the construction of that building, Ms. Witness? A � If it is really attributed to that construction, that can be classified as capital expenditure, Sir. Q. And so you have the opinion that those costs must form part of the amount of purchases of capital goods, Ms. Witness? A� Yes, Sir�. (pp. 21 to 29, TSN, August 26, 1997 Hearing) The issue that is left for our determination is petitioner's substantiation of input taxes claimed on capital goods. This Court, after a careful scrutiny of petitioner's invoices and official receipts, together with the Certification issued by independent CPA, SGV & Co. (Exh. W), is inclined to disallow some input taxes paid on the purchase of things which are not material

DECISION - C.T.A. CASE NO. 5389. - 10 - constructio n of power plant facilities, detailed as follows: Name of Supplier Exh. Input Tax Remarks AUTS International, Inc. X-1 p 32.27 Supplies Datacom Systems Corp. X-10 904.55 Toner NS Oscana X-21 29.09 Xerox Printwheel Enterprises X-23 263.64 Letterhead AUTS International, Inc. Y-17 32.27 Supplies OHL Yorldwide Express Y-37 339.15 Postage OHL Yorldwide Express Y-38 229.95 Postage Georkimart Biscuits Kameraworld Photo Lab, Inc. Y-44 27. 29 Film Developing Tong's Enterprises Y-51 Film Developing Vibal Social Prints 16.00 Call card Abenson, Inc. Y-115 172.73 Coleman Accurate Printing Inc. Y-127 198.18 Document envelopes American Packing Industries Z-1 2,966.91 No supporting document Andrew Commercial Z-5 190.91 No supporting document Asian Alliance Enterprises 4,192.09 No supporting document Avesco Marketing Corporation Z-36 No supporting document Bearing Center &Machinery 2.73 No supporting document Oataman Systems Corporation HO 45.00 Supplies DHL Worldwide Express H3 968.91 Postage Floro Blue Printing 88.00 Xerox National Book Store, Inc. Z-97 63.82 Supplies O'neals by Edna 292.60 No supporting document Perco Enterprises AA-1 488.17 No supporting document Printwheel Enterprise AA-15 5.39 No supporting document Ressein Commercial AA-17 768.18 No supporting document Rey Lapiz AA-19 250.00 No supporting document Vineza Industrial Sales AA-20 181.82 No supporting document Zenith Wire &Conduit AA-21 271.18 No supporting document Abenson, Inc. AA-22 1,054.54 Colored TV &VHS Consolidated Paper Products AA-28 283.91 Payslip w/ envelope Oataman Systems Corporation AA-32 29.09 Plastic dividers legal DHL Worldwide Express AA-61 1,513.64 Postage OHL Worldwide Express AA-86 704.55 Postage E-Plus Stationery, Inc. AA-129 388.64 Copy paper E-Plus Stationery, Inc. AA-130 20.82 Disk cleaner Executive Computer Systems AA-132 125.40 Floppy disk drive Floro Blue Printing 93.27 Xerox Kameraworld Photo Lab, Inc. Film developing Mega Photo 25. 45 Film PhotoLine Enterprises Corp. Xerox Print Wheel Enterprises 127.27 Calling card P.P. Gocheco &Co., Inc. 1,496.73 Table tennis w/ racket 55.57 (j/ 18.82 137.27 118.18 390.91

DECISION - C.T.A. CASE NO. 5389. 11 - The Landmark AA-164 107.98 Groceries Asian Alliance Enterprises AB-1 3.18 Scissors Contrade Enterprises, Inc. AB-16 40.18 Puncher, stapler &cutter Delta Diesel Parts No supporting document Executive Computer Systems AB-22 136.36 Computer supply Kamerauorld Photo Lab, Inc . AB-38 106.82 Film developing Kamerauorld Photo Lab, Inc. AB-39 13.51 Film developing Print Wheel Enterprises AB-67 27.57 Check voucher Severo Sy Ling, Inc. AB-70 363.64 Supplies Sunlife Bookstore 45.00 No supporting document Up-Toun Industrial Sales, Inc. AC-1 66.18 No supporting document Up-Toun Industrial Sales, Inc. AC-21 11. 45 No supporting document Abenson, Inc. AC-23 29.32 Rice cooker Easycall Communication Phils. AC-30 104.18 Pager subscription Executive Computer Systems AC-32 50.91 Computer supply Gem Stationery Inc. AC-34 454.55 Puncher, stapler, etc. Harson Electronic Parts AC-86 71.36 Adaptor HJ Franklin, Inc. AC-35 25. 45 Supplies Perce Printing Press 70.91 Supplies HJ Franklin, Inc. 61. 36 Supplies 70.91 T 0 TAL P21,465 .68 Thus, the aforestated a moun t ot P 21, 465.68 s hould be deducted from the amount recommended by the independent auditors in their examination. Below is the recomputation of the amount of petitioner's entitlement to the refund of input taxes on capital goods: Amount fo und by independent P202,452,859.57 auditors as valid input taxes (Exh. W) 21,465.68 P202,431,393.89 Less: input taxes which are not attributable to the construction of power plant facilities Amount refundable WHEREFORE, finding the petition for review partially meritorious, respondent is hereby ORDERED to REFUND or, in the alternative, to ISSUE a tax credit certificate in favor of petitioner the amount of P202,431,3~3. 9,

DECISION - C.T.A. CASE NO. 5389. - 12 - representing input tax payments on capital goods purchased for the period April 1, 1994 to September 30' 1995. SO ORDERED. ~(Q_,Q_~ ERNESTO D. ACOSTA Presiding Judge WE CONCUR: / fl.J /l~pA.MI.O.N/'0.DE{/ VE A Associate Ju e l /I JuI i/5/7 CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. G-Q~~ ERNESTO D. ACOSTA Presiding Judge