MIRANT SUAL CORPORATION (Formerly South Energy Pangasinan, Inc.) v. COMMISSIONER OF INTERNAL REVENUE (Consolidated with Case No. 7299)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION MIRANT SUAL CORPORATION, CTA CASE No. 7230 [Formerly Southern Energy Pangasinan, Inc.], CTA CASE No. 7299 Members: Petitione.r, Acosta, PJ, Bautista, and - versus - Casanova, JJ Promulgated: COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - -X MIRANT SUAL CORPORATION, [Formerly Southern Energy Pangasinan, Inc.], Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X - - - - - - - - - - - - - - - - - - .- - - - - - - - - - - - - - - - - - DECISION ACOSTA, PJ: The Case Before Us is a consolidated Petition for Review seeking the refund or issuance of a tax credit certificate in the aggregate amount of P 166,158,823.50 allegedly representing unutilized input value-added tax (VAT) paid on domestic purchases of goods and services, and importation of goods attributable to zero-rated sales for the four quarters of taxable year 2003.

DECISION C.T.A. Case Nos. 7230 & 7299 Page 2 of9 The Facts Petitioner is a domestic corporation organized and existing under and by virtue of Philippine laws, with principal office at Barangay Pangascasan, Sual, Pangasinan. It is principally engaged in the business of power generation and the subsequent sale thereof to the National Power Corporation (NPC) under a Build Operate Transfer (BOT) Scheme. It is registered as a VAT taxpayer in accordance with Section 107 of the Tax Code [now Section 236 of the National Internal Revenue Code], with BIR Cet1ificate of Registration bearing RDO Co.ntrol No. 05-0181 and Taxpayer Identification No. 003-841-103. It was originally registered with the Securities and Exchange Commission ("SEC") under the name "Pangasinan Electric Corporation" which was subsequently changed to "Southern Energy Pangasinan, Inc." on August 17, 1999. On June 28, 2001, its name was again changed from "Southem Energy Pangasinan Inc." to "Mirant Sual Corporation.' Respondent is the duly appointed Commissioner of Internal Revenue empowered to perform the duties of his office, including, among others, the duty to act on and approve claims for refund or issuance of tax credit certificate of overpaid internal revenue taxes as provided by law, with office address at the BIR National Office Building, Agham Road, Quezon City, where he may be served with summons and other court processes.2 On November 13, 2002, petitioner filed with the BIR Revenue District Office No. 5 at Alaminos, Pangasinan, an Application for Effective Zero-Rate of its supply of electricity to NPC, which was subsequently approved.3 Petitioner filed its quarterly VAT returns for first, second, third and fourth quarters of taxable year 2003 on April 24, 2003 , July 25, 2003, October 27, 2003 and January 26, 2004, respectively, declaring among others the following: 4 1 Par. I, 3, 4 and 5, Stipulation of Facts, Joint Stipul ation of Facts and Issues. 2 Par. 2, Stipulation of Facts, Joint Stipulation of Facts and Issues. 3 Par. 6, Stipulation of Facts, Joint Stipulation of Facts and Issues; and Exhibit A. 4 Ex hibits "C". "E", "G", and "H" .

DECISION C.T.A. Case Nos. 7230 & 7299 Page 3 of'9 Taxable sales 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Zero Rated Sales 6,488 .86 31 ,55 1,939.57 324 ,678 . 18 19,332.30 Total Sales 3 465 050 084.39 3 596 438 393 .77 W-6 602 023 96 3 60 1 959 563.07 3 614 577 820.66 Output Tax 3 596 444 882 63 3 602 284 24 1 25 3 6 14 597 152 96 Less: Input Tax 648 .89 _11_55. 193.96 32 467.82 I 933.23 In put Tax Carried Over Input Tax on : 296,371 ,388.03 379,051 ,038.85 237,399,953 .93 258 ,658 ,5 15 .95 Domestic Purchases-Cap ital Goods Goods other than Capital Goods I 230,88 1.17 155 ,740 .92 186,660.22 Domestic Purchases-Services 6, I06,804.23 5,743 ,795.37 5,426 ,308 . 15 Services rendered by Non-Resident 99 1,877.66 6,826,88 1.II 6, 192 ,825 .27 27 ,508,664 . 15 Importations-Capital Goods 5.575,693 .02 2, 155 ,495 .32 2,749 , 133 .28 Importations-other than Capital Goods 47,424 ,330.03 I, 148,164.00 735,256.5 1 Tota l Avai lable Input Tax 2,240,609.43 174 , 170 .00 5 30 1 371.00 Deduction : VAT Refund 12 730 245 .00 258,690,983.77 8,628 585.00 Net Creditab le Input Tax 94,818 00 407 ,2 75 ,5 15 68 301 , 143,989.98 Tax Overpayment II 199 697.6 1 176 602 366.25 258,690 983 .77 363,898,413 .78 230 673 149.43 30 I 143 989.98 22Z 51Z 255 4Z 258 658 s1s25 363 898 413 .78 3Q 1 1~2 Q56 zs 363 82Z ZM 82 (Underlines supplied) Petitioner filed its amended quarterly VAT returns for the first, second and fourth quarters ofthe year 2003 on July 25,2003, August 19, 2003 and July 26,2004, respectively, declaring among others the following: 5 Taxable sales 1' 1 Q uarter 2nd Quarter 4th Quarter Zero Rated Sales 6,488 .86 3 1,551,939 .57 19,332.30 Total Sa les 3,465,050,084.39 3,596,438 393 .77 3 496 602 023 96 3,6 14,577,820.66 Output Tax 3 596 444 882 63 3 6 14 597 152 96 Less: Input Tax 648 8~ 3,155, 193 .96 I 933.23 Input Tax Carried Over Input Tax on: 31 1,524,661.99 379,051 ,038.85 258 ,658 ,515.95 Domes ti c Purchases-Capital Goods Goods other than Capital Goods 99 1,877.66 230,88 1.17 18 6 ,6 6 0 .22 Domestic Purchases-Services 5,575 ,693 .02 6, 106,804 .23 9,994 ,299 .22 Services rendered by Non-Resident 47 ,424 ,330.03 6,826,88 1. 11 29,049,761.1 3 Importations-Capital Goods 2,240,609.43 2, 155 ,495.32 Importatio ns-other than Capital Goods 735,256 .5 I Total Ava il able Input Tax 94,818 .00 I 74, 170.00 Deduction : VAT Refund II 199 697.6 1 I 2,730,245.00 9 150314.00 Net Creditable Input Tax 379,05 1,687 .74 407,275 ,515 .68 3 0 7, 774 , 8 0 7 .03 Tax Overpayment 16 6 , 7 2 0 , 3 6 7 . 7 9 379 05 1 687.74 240 555,147.89 307,774,807.03 23Z 322,.253 23 372 Q5! Q38 85 3Q:Z :z:zz 8:Z3 8Q (Underlines supplied) 5 Exhibits "D", "F", and " I".

DECISION C.T.A . Case Nos. 7230 & 7299 Page 4 o f9 Pursuant to the procedure prescribed in Revenue Regulations No. 7-95, as amended, petitioner filed an administrative claim for refund of its tmutilized input VAT with the Bureau of Internal Revenue on December 20, 2004 in the total amount ofP166,158,823.50 for the four quarters ofCY 2003. 6 Petitioner filed a Petition for Review (docketed as CTA Case No. 7230) with this Court on April 22, 2005 claiming for refund or issuance of tax credit certificate in the amount of P67,527,025.75 representing its alleged unutilized input VAT paid on domestic purchases of goods and services and impmiation of goods attributable to zero-rated sales for the first quarter of 2003. In response thereto, respondent filed an Answer on June 21,2005 praying for the dismissal of the petition for lack of merit. On July 22, 2005, petitioner filed another Petition for Review (docketed as CTA Case No. 7299) before this Court, praying for a refund or issuance of tax credit certificate in the total amount of P98,631 ,797 .75, representing the alleged unutilized input VAT paid on domestic purchases of goods and services and importation of goods attributable to zero-rated sales for the second, third, and fourth quarters of 2003. I On September 6, 2005, respondent filed her Answer to the said Petition praying that the same be dismissed for lack of merit. On August 24, 2005, relying on Rule 31 , Section 1 of the Revised Rules of Court, petitioner filed a Mo~ion for Consolidation of CTA Case Nos. 7230 and 7299, due to the fact that both cases involve the same parties and issues. This Court granted petitioner's Motion and ordered the consolidation of the said cases in a Resolution dated October 12, 2005 . After trial, this consolidated case was submitted for decision on November 13, 2008 taking into consideration petitioner's Memorandum filed on November 10, 2008 and respondent's Memorandum filed on November 5, 2008. 6 Par. 9, Stipul ati on of Facts. Joint Stipul ati on of Facts and Iss ues; and Ex hibit " 8 " .

DECISION C.T.A. Case Nos. 7230 & 7299 Page 5 of9 The Issues The parties jointly stipulated the following issues7 to be resolved by this Court, to wit: I. Whether or not the power generation services rendered by Petitioner to NPC are subject to zero percent (0%) VAT pursuant to Section l 08(8)(3) of the National Internal Revenue Code of 1997 ("Tax Code"); 2. Whether or not Petitioner had unutilized creditable input VAT for the four quarters of CY 2003 arising from its domestic purchases of goods and services and importation of goods amounting to Pl66,158,823.50 that can be a proper object of a claim for refund pursuant to Seotion I08(8)(3) and Section 112(A) of the Tax Code; 3. Whether or not the unutilized creditable input taxes for the first, second, third, and fourth quarters of CY 2003 are substantiated by proper invoices and official receipts; 4. Whether or not the unutilized creditable input VAT for the four quarters of CY 2003 was carried over to the succeeding taxable quarter(s) and applied against any of the output VAT liability of the Petitioner; and , 5. Whether or not Petitioner is entitled to a refund and/or issuance of tax credit certificate for the unutilized input VAT payments for the four quarters of CY 2003 in the amount ofP166,158,823 .50. 6. Whether or not the unutilized input taxes are all attributable to zero- rated sales . The above issues boil down into a single point of whether or not petitioner is entitled to a refund or tax credit certificate in the amount ofP 166,158,823.50 allegedly representing excess input taxes attributable to zero-rated sales for the four quarters of taxable year 2003. The Court's Ruling Refunds or tax credits of input tax attributable to zero-rated sales is governed by Section 112 (A) of the National Internal Revenue Code (NIRC) which provides: " Section I 12. Refunds or tax credits of input tax . - I (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 7 Stipulation of Issues, Joint Stipulation of Facts and Issues.

DECISION C.T.A. Case Nos. 7230 & 7299 Page 6 of9 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 transi tion al input tax, to the extent that such input tax has not been applied against output tax; Provided, however, that in the case of zero rated sales under Section 106(A)(2)(1), (2) and (B) and Section 108(B)(l) and (2), the acceptable foreign currenc~ exchange proceeds thereof had been duly accounted for in accordance with the 1rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, that where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributable to any one of the transactions, it shall be allocated proportionately on the basis ofthe volume of sales." Pursuant to the abov.e provision, in order to be entitled to the issuance of tax credit certificate/refund of unutilized input VAT, petitioner must prove compliance with the following requisites: 8 I. There must be zero-rated or effectively zero-rated sales; 2. That input taxes were incurred or paid; 3. That such input taxes are directly attributable to zero-rated sales or effectively zero-rated sales; 4. That the input taxes were not applied against any output VAT liability during and in the succeeding quarters ; and 5. That the claim for refund was filed within the two-year prescriptive period. We will now determine petitioner's compliance with the above requirements. It is petitioner's stand that its sale of power generation services to NPC, Mirant Philippines Energy Corporation, Mirant Philippines Industrial Power Corporation, and Mirant Philippines Industrial Power II Corporation are subject to zero percent (0%) VAT. The said stance of the petitioner is meritorious. Section 6 of Republic Act No. 6136, otherwise known as the "Electric Power Industry Reform Act of 2001" (EPIRA) provides that sale of generated power by generation companies shall be subject to value added tax at zero percent rate . Rule 5, Section 6 of the Rules and Regulations to Implement EPIRA, which was promulgated 8 Nippon Express (Philippines) Corporation vs. Commissioner of Intern al Revenue, CTA Case No. 6464, June 15, 2007.

DECISION C.T.A. Case Nos. 7230 & 7299 Page 7 of9 by the Depatiment of Energy, provides that sale of generated power by generation company shall be zero-rated for the purpose of imposition of value-added tax, and that the imposition of zero percent (0%) VAT shall apply to the sale of generated power by a generation company through all stages of sale until it reaches the end-user. In an earlier case,9 this Court stressed that "the provisions of EPIRA, the regulations implementing the same, the interpretative rulings issued by the BIR and the CTA Decision on the case of Mindanao I Geothermal Partnership are unanimous in declaring that the sales of generated power by generation companies are VAT zero- rated." From the foregoing quoted provisions of law and its implementing rules and regulations, and decision of this Court, the benefits of zero-rating are clearly granted. In fact, even the BIR itself had earlier approved petitioner's application for VAT zero rate covering the taxable year 2003. 10 However, to qualify for VAT zero-rating under RA 6136, petitioner must prove l that: 1) it is a generation company, and 2) it derived sales from power generation. 11 It is undisputed that petitioner is principally engaged in the business of power generation. 12 However, petitioner has failed to prove compliance with the second requirement in order to qual!fy for VAT zero-rating under RA 6136. While petitioner declared the total amount of P14,278,025,861.89 13 as zero-rated sales in its 2001 quarterly VAT returns, the same could not be taken plainly as it is because there is still a need to produce the suppmiing documents proving the existence of such zero- rated sales. Noteworthy, that the photocopies of supporting documents of such zero- rated sales offered by petitioner14 were not admitted as evidence for failure of 9 Toledo Power Co., vs. Commi ssioner oflnternal Revenue, CTA Case Nos. 6805 & 6851, Ma y 17,2007. 10 Par. 6, Stipul ation of Facts, Joint Stipulation of Facts and Issues; and Exhibit "A". 11 Note 9 citing Mindanao l Geothermal Partnership vs. Commissioner of Internal Revenue, CTA Case No. 6788, October 13, 2005. (. 12 Par. 3. Stipul ati on of Facts Joi nt Stipulati on of Facts and Issues. /~ 13 Exhibits "C", " D", "E", " F", "G", " f-1 ", and "F'. 14 Marked as Exhibits Z to Z-302.

DECISION C.T.A. Case Nos. 7230 & 7299 Page 8 of9 petitioner's counsel/witness to identify the same during trial. 15 Moreover, the report of the Commissioned Independent CPA that the zero-rated sales are supported by zero rated VAT invoices and official receipts, has no probative value and is therefore, not binding to this Court in the absence of the supporting documents which became the basis of such a report. Considering that there are no zero-rated sales to speak of during the four quarters of taxable year 2003, petitioner is, therefore, not entitled to a refund of input taxes allegedly attributable thereto since it is a basic requirement under Section 112(A) of the NIRC that there should exists a zero-rated sales in order to be entitled to refund of unutilized input taxes. It is settled that tax refunds, like tax exemptions, are construed strictly against the taxpayer and that the claimant has the burden of proof to establish the factual basis of its claim for tax credit or refund. 16 Failure in this regard, petitioner's claim must fail. WHEREFORE, the instant Petition for Review IS hereby DENIED for insufficiency of evidence. SO ORDERED. L~- Ci-r-L- ERNESTO D. ACOSTA Presiding Justice CAES~VA Associate Justice 15 Resolut ions dated April 3, 2008 and June 3, 2008. 16 Sili con Philippines, Inc. vs. Comtnissioner of Interna l Revenue, CTA EB Case No. 298, January 18, 2008 citing Ci tibank, N.A . vs. Court ofAppeals and the Commissioner of lntemnl Revenue, 280 SCRA 459.

DE C ISION C.T.A. Case Nos. 7230 & 7299 Page 9 of9 CERTIFICATION I h~eby cetiify that the above decision was reached after due consultation with the members of the Court of Tax Appeals, First Division in accordance with Section 13, Article VIII ofthe Constitution. ~~-~ ERNESTO D. ACOSTA Presiding Justice