CTA Case No. 5658 (Decision)

�, ... -- ' -� _ ... . ... ..... . SOUTHERN ENERGY QUEZON, INC. (Fonncdy: IIOPE\;y'JI.LL 1'0\;y'ER (PlliLll'PlNES) COHPORATfON, Petitioner, - versus - COMI\'ll:)SIONER OF INTEl NAL "'' .,.. 1U!.:Y1ii'IU� Respondent. (- JUL 1 1 2000 .---: --------�--�_:i �- \\ I X - - - - - - - ; ; - -- --- ------------ ------- ---- - - - - - - - .. - - - - - - .� - - - - - .� - - .. . �o J'r!;.'t C"lu,.. . �.�._-, ; -1,r Petitioner, by way of this petition for review, is :)ecking l(>r tllc i;;;u:�;cc L-1. ;: L::\ credit certi fi cate in the amount of P39,330,500.15, rcprcscn!iil_ L:l:i!ilil..:d i< ,!: v; ::�- added t::x (VAT, Cor brevity) on capital goods for the periud 1\pril I, l')% : ,; ii.::-.;;:,_;� 31, 1996. The facts as borne out by the records and plcaJings of the c::-;c arc <ls :�,ji: .J \\ :; : '' Petitioner is a domestic corporation duly organized and cxi:-;Ling u;._;,-r ;1:;�.! :,i virtue of the laws of the Philippines with principal onicc ::ddnss in Jl,:;_;biLu Cr.t��:_:..: lland, Pagbilao, Quezon. It is li censed by the Securities ;1nd Exch;mc Cnur:,;: ;,,:1 lu principally engage in the business of power generation and sub3CC]l1Cilt s:<k (hcr-.:�.11' (l::dt. A). lt is registered with the Bureau of Internal Revenue as <l V 1\T registered ct1!ily wilh

JlECISION- CTA CASE NO.SGSS 1'/\GE 2 Ccrtilicatc of Rcgi � trati on beari ng RDO C ont rol No. 9G-G00-CJ(l.1.�rn;, d:Lcr.: J:Jj1lui�y 2Ci, 1996. For the period April I, 1996 to December 31, 1996, Petitioner scasouabl' like! its Quarterly V1\T Returns reflecting an accumulated input taxes in th:: nnwt:ill or� P39,330,500.85 (Exhs. B, C, and D). These input taxc:_; -.vcre allcc,cdly paid by h.:[itioncr to the suppliers oC capital goods and services for the construction ::nd (.kVL�iq"nh'll! or�t:x power generating plant and other related facilities in Pagbibo, Gttu.on (TS1, i'-lu\�c:nLK:r I (l, 19%, p. 11) . Pur::;uant to the procedures prescribed under Revenue lq_:uhtion:.; r<ol. 7-1), ;:; amended, Petitioner filed on June 30, 1998, an application Cur t;Ix crcd :t or n.:!',::,: v:� [he af'orcmcutioncd unutilizec.l VAT paid on capital good:; (Ex!iibi: "J ...) . Without waiting for an answer from the RespOildCilt, Pl'lit:on:.:r !llc'- ::�: in:.;t;::il peti tion for revi ew on July 10, 1998, in order to toll the nu;nin:; of il1�.:- : ...�.-o yr prescriptive period for claiming a refund under the law. defenses that "lP]etitioncr's claim for refund is t::; consideration before the office of Respondent, accordingly, tllc Cili11.:3 o!' ;l;c p:�.. ::.:-;,t petition is premature ; well-settled is the doctrine that provision; i11 t<x rl'l"u!<d ,�11d c��:(':t arc construed strictly against the taxpayer as they arc in the nalLirc of a t:1x c:c:,.p:::J; iil an action for refund or tax credit, the taxpayer has the burdct; to ::d10w tk:t J..: ::::-;:�:; r�:.id were erroneously or illegally paid and failure to sustain the said burden i:; Ctial Lo tlH.: action for refund; it is _incumbent upon Petitioner to show that the cb[m !'ur L1:� cr::t.:: !.:;:; been filed within the prescriptive peri od under the Tax('. ' � � �:nd ;he;[.:.\<':::::;,�.:!:. r.. i.J

DI�:CISION- CT1\ C;\SL: N0.565:l Pt\GI 3 by Pcli tioncr arc prcumcu to have been collected aud receive�: in ;cc.o;�d.:;; :'-� -.�. ::: :,! .v and revenue regulations. On July 14, 1998, while this case was pending trial, Revcm:c Olliccr, Z.o:)c: ..... :..: M. Villo, was assigned by Revenue District Officer, !vii. NimLt h:n<.du:;a-As:;,,i, ol� Revenue District No. GO to investigate Petitioner's application l'ur t:tx credit or rc:'t:thl u:� input taxes (Exhs. I and 1-a). As a result, a memorandum report, d.t!.cd J\uG�.tsl -:!.'!, I y,:;;, �.vas submitted recommending a favorable action but in a tcdl.ccd a:nOL;r.t ol' :J�!'>,(:c.-:J representing unapplied input taxes on capital goods (Exits. 2, 2-a, 3, ;tml 3-;t). the services oLm independent Certified Publlc i\ccoun1<.li�: ;)Jr::t;' Li :�:�:. C: . : � 1-<)5, as amended. As a consequence, Mr. Ruben R.lZubi�, P:.r�lil:r or:�.:-:.:>.',::.- : � .� �<.. was commiss;vneu to verify the accuracy of Petitioner's summ:ry oi i;1pllt :; ; .: . . :. ('i�:-1�1, October 15, 1998, pp. 3 to 5). A report, elated March S, 1<)9r), \\�:-:; prc:-:cn:c.i :! �;:�: audit procedures performed and the finding tbat out of the tot;d c!<.tiaH:d i:;,'ll:. t�:-:c: ci' P39,330,500.85, only the sum of P28,745,502.40 was properly Slrl'Pc�:�:,:-.: l1y \ ":;: invoices and/or o[Jicial receipts (Exh. G; sec also TSN, rarch 3, l99'J, p. !2). The sole legal issue involved in this case is whether or nol PdiliulLT i:.; c:1titkd to the refund of the alleged unutilizcd input value-added taxes it paid [or tllc ;�.::�i:.;.: ,�eo�:c;�;::,�. J\pril l , 199GtoDcccmbcr 3 1, 199Gin thc amount ofP39,J30,500.35. After taking into consideration the aforementioned reports tor,cU:c;� wi:: t!J�..: plcadings and records of the case, the Court finds Pctitioncr en ti t!ccl to rd;; td/crcd it so ught pursuant to the provision of Section 1 06(b) of the 1996 Tax Code, to wit:

DECISION- CTt\ CASE N0.5658 P /\GE � SEC. 106. Refunds or tax credits of cn�di:'oUc ir:;w: t.:..\�. -- (a) xxx; (b) Capital goods.- A VAT-rcgi;tcrcd pcr:.;oil m:1y <lpp\y Jl.H� the issuance of a tax credit certificate or refund or input l<lxcs fl'lid vn capital goods im ported or locally purchased, tu the 8Xtcnt th:1l u-::ll i; put taxes have not been applied against output taxes. The ''Jlp!ic;:!ion m;1y be made only within two (2) years after the close of the td:;ablc qu;1rlcr \Yl!. 11 the importation or purchase was made (Emphasis supplied) The legal basis or Petitioner's claim for refund which is also the !eg<d i:;::;t: in hi:.; case is founded on the provisions of the afurcrncntionccl S'.cl iun 1 OC(:') inn\\ (; ,_�:.: :: ; ; apply for tax credit o r a claim for refund of input taxes p;1id o n pl!i"<..:h;1:-;c:; of' <.':t;�,::::: :_,H)::; imported or locally purchased, to the extent that such input t;::-;c:: bayc r:ot J.. c:1 :�;�: : : � : . In fact, the kgal issue i n this case has already been s::lllcd i;1 Lwu rrc-.: .. .:; �.-:� ..:s decided by this Court to wit : 1. Hopewell Power (Philippine.\) Corp. \'s. Con:ntissioucr u./ l,:.c�rnul Revenue, CTA Case No 5310, dated Nuvciii!Jcr 18, J .i()(::/; 2. Hopewell Po111er (Phi!JjJpines) ColjJ. l'S. Cununissi(!IJ,. r'' � :�,.,.,,"cr/ Revenue, CTA. Case No. 5389, dated January -1, / 9)92. This Court"s own study shows that the input taxc sough[ to he t"l.:i'_ii, :cd/c:�.-,'ik.; were nol applied against any output tax liability of the Pclitioncr (E:-;hs. F ;:J:d F.. !). ,, As regards the argument raised by Respondent in hi:s mcmora;!(L:ilt (i;;tt ::1..: t;,;,c:.; which Petitioner seeks to refund were not creditable input taxes under ;:; ...;.__ ;iun J (: ;;;) i) and (2) of the Tax Code, as amended by Republic Act No. 77lG, lltL' s:11nc Jw; no ilt:ril. The VAT invoices and official receipts presented by Pclilioncr 0\'erwL:ln:::JLiy p;�o'.-c I Wilh Courl or ApjJcals, Entry of Judgment, dated March25, j 999. .1 ,,.;;: .J, 2With Court uf Appeals' decision, elated Marcil 17,2000, arfir�;.:�.: ()m (Lxi:.!,�;l, ,' � 2000.

DECISION- CTA CASE N0.5658 PAGES that the purchases of goods and serv1ces were necessary Ill the conslruclil)!l o [" ];\)-.vcr p lant facilities which were used by Petitioner in its business ol powe-r !_',cncr;:Ji iun :md ;,;d �. At this point, it is worth mentioning that the same argument was rai:::Cl l by Rc:)pOn\\::::1 i:1 an appealed case entitled Commissioner of Intunal RcYcnuc vs. Horcwdi ;',�:.�t:;� (l,hils) Corporation, CA-C.R. SP. No. 51617, dated Man:!; t7, ZGGO, i;i_,�oi\'il[', t:�c same issue and parties wherein the Court of Appeals answered the :.;;:id ar�.u::1r.�u( in thi:-; wtse: "From the evidence on record, the goods purch1scd on \,hich ir::�:l VAT v,ras paid were necessary for Hopewell's busi1w:;s ol' po'.\.L'i" est ablishment and generation. They arc within the scoj'C :md nlc:n:i!l- ot" Revenue Regulations No. 7-95 - the Consolid:lled V .d .;c Al:kd T.tx Regulations -under the term "goods or propcrtie:, \'lith c:;timatd U:}.:' c:l life greater than one year and which arc treated as dcprceiabi�: ::.:;c: '.li:-.:�,i� section 29(l), used directly or indirect! y in the produdio: or s: L.: c r� L:::�: : . : :.: goods and scrvices".xxx. The above pronouncement is in all fours with the case at b<lr hence, We need not depart from such a conclusion. Likewise, We find that Petitioner ncL�d Iol prcsc:1! pmuf that its sales were effectively zero-rated as required under Section 3 of 1\.cv.nuc Regulations No. 3-88 because Petitioner is not claiming a refund/credit vf" i:1put l;1;-;cs attributable to eficctivcly zero-rated sales but on purchases of capital good;:, u.cl SCi"'.' ices. ,, Having settled the legal issue in favor of Pet iti oner, what is now left lor the Court to determine is the correct amount of input taxes that may be grmlccl on the b:t;i oi \1c evidence presented. The records show that both the revenue examiner and the independent auditor liitd Petitioner to be entitled to a refund. However, in th:; recommendation nwdc by the revenue examiner oniy those input taxes that pertai n to purchases or con�pukrs \'icrc considered as capital assets. She did not consider the p<1ymcnts for pr'"':ycs:.:. '.vor:�:, tu4o

DECISION- CTA CASE N0.5G58 PAGEG engineering services and purchases of construction supplies in bcr lir-.ai rcc,!JlmK:�:I: :!(::. As discussed earlier, the Court finds that these should have been con::idcrc! ;t; ncccs;:�;�:' in the construction of power plant facilities. In determining vvll;.,tt con sti l u lcs cap i l\\1 goods, courts should look to the origin and character of the expenditure so as to ascertain whether or not these goods shall be considered as capital asset. A scrutiny of the invoices and/or official receipts supporting Petitioner' s c !at ttl fer refund, together with the findings of the commissioned independent auditor, rcvcd::; t:ltl the amount of P875.45 should be disallowed for being expended on xcro;.; :u1d oDi�.:c: supplies which cannot be capitalized and not necessary in the construction or power pL:nt facilities (Exhs. G-3-B-11 and G-3-B-20). Below is the rccornpulition of l\.:Lit:r:1cr's entitlement to the refund of input taxes on capital goods: Total amount of the claim for refund P39,J30,500.S5 Less: Disallowances p 10,584,998.45 a. Per independent auditor 875 .45 b. Per CTA's examination __ ___; Amount refundable WHEREFORE, in view of the foregoing, Petitioner's claim fur refund is hereby partially GRANTED. Respondent is ORDERED to ISSUE A TAX CllFDIT CERTifiCATE in the amount of P28,744,626.95 representing input taxes 1x1id on c1pital goods for the period April 1, 1996 to December 31, 1996. SO ORDERED. 1U4t:l

DECISION- CTA CASE N0.5658 PAGE 7 WE CONCUR: IQ,o ERNESTO D. ACOSTA Presiding Judge v{ M- o u c RA CERTIFICATION I hereby certify that the above decision was reached aCLcr clue con:'ult:1tion will; t1c members of the Court of Tax Appeals in accordance with Section 13, Article V ll[ of the Constitution. ___;:-lQ --Q ERNESTO D. ACOSTA Presiding .J udgc ' , 1u4'i'