AICHI FORGING COMPANY OF ASIA INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court OfTax Appeals QUEZON CITY SECOND DIVISION AICHI FORGING COMPANY C.T.A. CASE NO. 7271 OF ASIA, INC. , Members: Petitioner, -versus- CASTANEDA, JR. , Chairperson UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, JUN 1 0 2008 Respondent. / ./ X ------------------------------------------------------------:t__::_~-~~-~~:~----- X DECISION PALANCA-ENRIQUEZ, J.: Pursuant to Section 112 {A) of the National Internal Revenue Code of 1997 (hereafter "NIRC of 1997"), as amended, petitioner filed a claim for refund of its creditable input VAT attributable to its zero-rated sales. To do so, however, petitioner must be able to show that its input VAT paid and output VAT transactions are properly substantiated. Failure to show proof of proper documentation is fatal to one's claim for refund or credit.

C.T.A. CASE NO. 7271 2 DECISION THE CASE This is a Petition for Review filed by Aichi Forging Company of Asia, Inc. (hereafter "petitioner") praying for a refund in the aggregate amount of P5,307,313.37, representing the VAT input taxes paid or incurred on its importation of goods and domestic purchases of goods and services attributable to its zero rated sales for the period April 1, 2003 to June 30, 2003. THE PARTIES Petitioner is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office at Barrio Pulong, Sta. Cruz, Sta. Rosa, Laguna. Respondent, on the other hand, 1s the duly appointed Commissioner of Internal Revenue vested with authority to exercise the functions of said office, including inter alia, the power to refund any internal revenue tax erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected or of VAT input taxes attributed to zero-rated revenue, with office address at the BIR National Office Building, Diliman, Quezon City. ~I

C.T.A. CASE NO. 7271 3 DECISION THE FACTS The facts as culled from the records, are as follows: Petitioner is duly registered with the Bureau of Internal Revenue as a value-added tax entity, pursuant to Section 107 (now Section 236) of the Tax Code on May 19, 1995. Consequently, it was issued Certificates of Registration, with RDO Control No. 95-570-000481 (BIR Form No. 1556) and OCN IRC 000148499 (BIR Form No. 2303). Petitioner has also registered its products, "close impression due steel forgings" and "tool and dies", with the Board of Investments (BOI) as a pioneer status, enjoying the privileges granted by the BOI. As such, it was issued Certificates of Registration Nos. 74-336, DP-92-057 & EP 95-132 by the Board of Investments. For the period covering April 1, 2003 to June 30, 2003, petitioner allegedly generated and recorded zero-rated sales in the amount of P171 ,942,121.15. Said amount was paid to petitioner in acceptable foreign currency and was inwardly remitted, in accordance with existing regulations of the Central Bank of the Philippines, pursuant to Section 106 (A) (2) (a) (1), (2) and (3) ofthe Tax Code. Petitioner purportedly incurred and paid VAT input taxes amounting to P5 ,307,313.37 from domestic purchases of goods, services, tU-r'

C.T.A. CASE NO. 7271 4 DECISION capital goods and from importation of goods and capital goods, which were all attributable to its zero rated sales. On June 14, 2005, petitioner filed a claim for refund in the total amount of P5,307,313.37 with respondent, through Revenue District Office 57, San Pedro, Laguna. For failure of the respondent to act on the request and in order to toll the running of the two-year prescriptive period, on June 21, 2005, petitioner filed the instant Petition for Review. In her Answer, respondent alleged by way of special and affirmative defenses that: "6. He reiterates and repleads the preceding paragraphs of this answer as part of his Special and Affirmative Defenses; 7. Petitioner's alleged claim for refund is subject to administrative investigation/examination by the Bureau of Internal Revenue; 8. Be that as it may, it is imperative for petitioner to prove that it has complied with the following requirements mentioned below, to wit: (a) The registration requirements of a Value Added Taxpayer pursuant to Section 6 (a) & (b) of Revenue Regulations No. 6-97 in relation to Section 4.107-1 (a) of Revenue Regulations No. 7-95 . (b) That the VAT input taxes of Php: 5,307,313.37 allegedly paid by petitioner from its importation and purchases of capital goods and other taxable goods a~

C.T.A. CASE NO. 7271 5 DECISION services were attributable to its zero-rated sales and such tax has not been applied against any output tax. (c) That petitioner's claim for tax credit or refund of excess Input Value Added Tax (VAT) was filed within two (2) years after the close of the taxable quarter when the sales were made in accordance with Section 4.106-1 (Re: Refunds or Tax Credits of Input Tax) and Section 4.1 06-2 (Re:: Procedures for Claiming Refunds or Tax Credits of Input Tax) of Revenue Regulations No. 7-95. (d) That petitioner's domestic purchases of services were made in the course of its trade or business, properly supported by invoices or receipts and import entry or other equivalent documents showing that it actually paid VAT in pursuance to Section4.104-5 (a) & (b) of Revenue Reg. No. 7-95. (Re: Substantiation of Claims for Input tax Credit). (e) The requirements as enumerated under Section 4.104- 2 of the Rev. Reg. 7-95 (Re: Persons who can avail of the Input Tax Credits) (f) That Petitioner has complied with the governing rules and regulations with reference to recovery of tax erroneously or illegally collected as explicitly found in Sections 112 (A) and 229 of the Tax Code as amended. XXX XXX. 9. Furthermore, it is incumbent for petitioner to prove by sufficient evidence that it is entitled to the refund consistent with the well settled principle in taxation, that claims for refund are construed strictly against the claimant as they partake the nature of an exemption from tax and it is incumbent upon petitioner to prove that it is entitled thereto under the law. Failure to prove the same is fatal to its claim for tax refund. Exemptions from taxation are highly disfavored in law and he who claims exemption must be able to justify his claim by the clearest grant of organic or tu--e_ (;? /

C.T.A. CASE NO. 7271 6 DECISION statutory law. An exemption from common burden cannot be permitted to exist upon vague implications (Asia Petroleum Co., vs. Llamas 49 Phil.466)" Petitioner presented Jesus B. Oliveros, Jr. and Ma. Wencita C. Salvador, as witnesses, and documentary evidence, marked as Exhibits "A " to "MM", inclusive of submarkings, which were admitted by the Court, except for Exhibits "B" and "P" for failure of petitioner to identify the same during trial and compare the same with their originals. On the other hand, respondent waived her right to present evidence and submitted the case for decision. Thereafter, both parties were ordered to file their simultaneous memoranda, within thirty (30) days from notice. Both parties having complied thereto, the case was deemed submitted for decision on January 18, 2008. Hence, this decision. ISSUES As stipulated upon by the parties, the following are the issues for the consideration of this Court: I WHETHER OR NOT PETITIONER HAS GENERATED AND RECORDED ZERO-RATED SALES AS CONTEMPLATED BY LAW IN THE AMOUNT OF ~ Ml

C.T.A. CASE NO. 7271 7 DECISION PHP171,942,121.15 DURING THE PERIOD APRIL 1, 2003 TO JUNE 30, 2003. II WHETHER OR NOT THE AMOUNT OF PHP171,942,121.15 WAS PAID FOR TO PETITIONER IN ACCEPTABLE FOREIGN CURRENCY AND WAS INWARDLY REMITTED IN ACCORDANCE WITH EXISTING REGULATIONS OF BSP. III WHETHER OR NOT THE PETITIONER INCURRED AND PAID VAT AMOUNTING TO P5,307,313.37 DURING THE PERIOD APRIL 1, 2003 TO JUNE 30,2003 FROM DOMESTIC PURCHASES OF GOODS, SERVICES AND CAPITAL GOODS, AND FROM IMPORTATION OF GOODS AND CAPITAL GOODS. IV WHETHER THE VAT PAYMENTS IN THE AMOUNT OF PHP5,307,313.37 WERE ATTRIBUTABLE TO THE PETITIONER'S ALLEGED ZERO-RATED SALES OF PHP171,942, 121.15. v WHETHER OR NOT THE ALLEGED VAT INPUT TAXES WERE PAID IN CONNECTION WITH THE TAXPAYER'S TRADE OR BUSINESS AND WERE DULY SUBSTANTIATED BY VALID RECEIPTS AND/OR INVOICES IN ACCORDANCE WITH SECTIONS 113 AND 237 OF THE TAX CODE, AS AMENDED. VI WHETHER OR NOT THE SAID AMOUNT HAS BEEN APPLIED AGAINST ANY VAT OUTPUT T~

C.T.A. CASE NO. 7271 8 DECISION LIABILITY OF THE PETITIONER COVERING THE SAME PERIOD, OR ANY SUCCEEDING PERIOD OR PERIODS. VII WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND IN THE TOTAL AMOUNT OF PHP5,307,313.37 ALLEGEDLY REPRESENTING VAT INPUT TAXES PAID DURING THE PERIOD APRIL 1, 2003 TO JUNE 30, 2003. VIII WHETHER OR NOT THE ADMINISTRATIVE AND JUDICIAL CLAIMS FOR TAX REFUND OR ISSUANCE OF TAX CREDIT CERTIFICATE OF THE PETITIONER WERE FILED WITHIN THE TWO (2)-YEAR STATUTORY PERIOD. Principal Issue The foregoing Issues raised by both parties boil down to the principal issue of whether or not petitioner is entitled to a refund or the issuance of a tax credit certificate in the amount of P5,307,313.37, representing VAT input taxes for the period covering April 1, 2003 to June 30, 2003. Petitioner's Arguments Petitioner argues that it is a VAT registered entity subject to VAT at 0% on its direct and indirect export sales, pursuant to Sections 106 (A) (2) (a) {i), (ii) and (iii) and 108 (B) (I) of the NIRC of 1997, as amended, ~ (;;; ;

C.T.A. CASE NO. 7271 9 DECISION and as such, its zero-rated sales will not result to any VAT output tax, Petitioner maintains that as an export-oriented enterprise, its finished products are sold to PEZA registered enterprises and others are exported abroad. For the period covering April 1, 2003 to June 30, 2003 , petitioner allegedly generated zero-rated sales and paid VAT input taxes in the course of its trade or business. Thus, for the said sales, it has no output liability, as those sales are considered zero-rated transactions. As such, it now claims the refund of unutilized input taxes incurred on its importation of goods and domestic purchases of goods and services for said period. The indirect export sales of petitioner are not subject to 10% value-added tax, but are zero-rated, as these are sales to PEZA registered enterprise and direct export. The input taxes were paid by petitioner on its domestic purchases of goods and services and capital goods and importation of goods, which are necessary in the ordinary course of its trade and business, as manufacturer of all kinds of steel and steel by products, particularly but not limited to closed impression die steel forging and automotive steel parts. The finished products manufactured were either directly exported or sold to PEZA registered enterprises, which is tantamount to indirect export sales as expressly provided by the Tax Code. Further, petitioner claims that having been (ftd/ r-;;: I

C.T.A. CASE NO. 7271 10 DECISION registered in accordance with the provisions of the Omnibus Investments Code of 1981 , it is entitled to the incentives provided thereon. Finally, petitioner contends that its claim for refund is supported by the testimonial and documentary evidence presented to the Court. Respondent's Counter-Arguments Respondent, for her part, submits that petitioner is not entitled to the refund of the alleged input VAT for failure of petitioner to prove that the administrative and judicial claims for refund were filed within the two-year statutory period. The administrative claim for refund was mere pro forma, hence it failed to prove substantial compliance with the administrative requirements of the law. Further, respondent maintains that petitioner merely "stamped" the word zero-rated on its sales invoices, which is contrary to the established practice that the same should be imprinted in the invoice and no prior approval from the BIR was made. Petitioner, according to respondent, also failed to prove that the amount ofP171,942,121.15 was paid in acceptable foreign currency and was remitted in accordance with existing BSP regulations. Hence, petitioner has failed to discharge its burden of proving entitlement to a (fttv{ refund in all material aspects. (J ;

C.T.A. CASE NO. 7271 11 DECISION THE RULING OF THE COURT The petition is partly meritorious. It is a settled rule that for a VAT registered entity whose sales are zero-rated, to validly claim a refund, it must comply with Section 112 (A) of the NIRC of 1997, as amended, which provides: "SEC. 112. Refunds or Tax Credits of Input Tax.- (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: xxx" Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer is VAT-registered; (2) the taxpayer is engaged in sales which are zero-rated or effectively zero-rated; (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; and (4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax. This Court finds that the first three requirements were complied with by petitioner.

C.T.A. CASE NO. 7271 12 DECISION As regards the first requisite, petitioner offered in evidence its Certificate of Registration with RDO Control No. 95-570-000481 and OCN 1RC00000148499 (Exhibit "B''), to prove compliance with the requirement that petitioner must be VAT registered. Although the said exhibit was denied admission by the Court for failure of petitioner to identify the same during trial and for failure to present the original for comparison, it bears stressing that respondent herself admitted in her answer the existence of the same document (Answer, Original Docket, page 81). Hence, by virtue of judicial admission (Section 4, Rule 129, Revised Rules of Court), petitioner has substantially complied with the first requisite. The second requisite has likewise been complied with. The evidence presented by petitioner, such as the Sales Invoices (Exhibits "T" to "T-400", "U" to "U-382", and "V" to "V-396'') and various VAT returns (Exhibits "E" to "G", "!"to "0", "R" and "S'') shows that it is engaged in sales which are zero-rated. In compliance with the third requisite, records show that petitioner filed its administrative claim for refund on June 14, 2005 (Exhibit "H'') and the present Petition For Review on June 21, 2005. Section 112 (A) of the NIRC of 1997, as amended, provides that the prescription of

C.T.A. CASE NO. 7271 13 DECISION claims for excess input VAT is counted from the close of the taxable quarter when the sales were made, which in this particular case is from June 30, 2003. It is therefore clear that both claims were filed within the two (2) year prescriptive period. However, with regard to the fourth requirement, the Court finds that there are some documents and claims of petitioner that are baseless and have not been satisfactorily substantiated. It bears stressing that as there is no output VAT imposed on zero- rated export sales, what the government reimburses or refunds to the claimant is the input VAT paid by such claimant in its purchases in the conduct of its business. Thus, more importantly, there is a need for petitioner to substantiate its paid input VAT by purchase invoices or official receipts. It is not only the export sales that should be proven, but also compliance with the requirements prescribed in Section 110, in relation to Section 113 of the NIRC of 1997, as amended, and as further implemented by Revenue Regulations No. 7-95. In this regard, Section 110 of the NIRC of 1997, as amended, provides: " SEC.ll 0. Tax Credits.- (A) Creditable Input Tax.-

C.T.A. CASE NO. 7271 14 DECISION (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: XXX XXX. (B) Excess Output or Input Tax.- If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT- registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, however, That any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112. xxx xxx." While, Section 113 of the same Code provides: "SEC. 113.- Invoicing and Accounting Requirements for VAT-registered Persons.- (A) Invoicing Requirements.- A VAT- registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT- registered person, followed by his taxpayer's identification number (TIN); and (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.

C.T.A. CASE NO. 7271 15 DECISION XXX xxx." Corollary thereto, Section 4-108-1 of Revenue Regulations No. 7- 95 (The Consolidated Value-Added Tax Regulations) prescribes the following information which must appear on the face of receipts or invoices issued for the sale of goods by all VAT-registered entities: "SEC. 4-108-1. Invoicing Requirements - All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN and address of the seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. In the case of sale of real property subject to VAT and where the zonal or market value is higher than the actual consideration, the VAT shall be separately indicated in the invoice or receipt. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoices or receipts and this shall be considered as "VAT Invoice". All purchases covered by invoices other than "VAT Invoice" shall not give rise to any input tax.

C.T.A. CASE NO. 7271 16 DECISION If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code. The invoice or 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." The law is very clear. Section 113 provides that "a VAT registered person shall, for every sale, issue a duly registered VAT invoice receipt for every sale transaction". Such VAT invoice or receipt must show the taxpayer's identification number, followed by the word "VAT" and the word "zero-rated" imprinted on the invoice receipt for sales covering a zero-rated sale. Applying the applicable provisions of the law, We now proceed to the determination of the substantiation of petitioner' s claim for refund. Substantiation o(Zero Rated Sales We must first determine petitioner' s substantiation of its alleged zero-rated sales. Petitioner declared in its Quarterly VAT Return for the second quarter of 2003 (Exhibit "G ") that it generated and recorded zero rated export sales in the amount ofP171 ,509,980.39. w (;ii ;

C.T.A. CASE NO. 7271 17 DECISION To prove its alleged zero-rated export sales, petitioner presented in evidence the following documents: 1) Sales Invoices \/'Exhibits "T " to "T-400"' "U" to "U-382"' and "V" to "V-396 '') ; 2) Independent CPA Report (Exhibit "JJ''); 3) Amended Commissioned Independent CPA Report (Exhibit "LL " ). A perusal of the above-mentioned documents, particularly the Amended Report of the Commissioned Independent CPA, reveals that the sales entered into by petitioner from April 1, 2003 to June 30, 2003 were mostly export sales to PEZA registered entities which are considered indirect export sales and some were direct export sales sent abroad. However, the Court finds certain unacceptable invoices which did not comply with the above requirements of the law for VAT zero-rating, particularly the imprinting of the words "zero-rated". For this reason, the following should be disallowed and thus, excluded from the total zero rated sales/receipts, to wit: EXHIBIT INVOICE NAME OF BUYER TOTAL AMOUNT T NUMBER Aichi Forging Corp. OF INVOICE 248,728.05 T-365 16847 Toyota 16666

C.T.A. CASE NO. 7271 18 DECISION T-397 17042 Toyota 2,713,828.07 T-398 17043 Toyota U-315 17127 lsuzu 605,431 .90 U-326 17323 lsuzu 184,582.76 U-346 17128 Toyota 299,742.58 U-347 17129 Toyota 207,132.24 U-368 17324 Toyota 1,405,837.11 U-369 17325 Toyota 150,126.36 U-381 17477 Toyota 1,103,155.7 1 U-382 17478 Toyota 298,996.56 V-384 17746 Toyota 724,577.17 TOTAL 7,942,138.51 Applying Section 106 (A)(2)(a)(5) of the NJRC of 1997, as amended, on value- added tax on the sale of goods or properties, particularly with respect to export sales, which provides: "SEC. 106. Value-added Tax on Sale of Goods or Properties.- (A) Rate and Base of Tax.- xxx XXX (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales.- The term "export sales" means: XXX XXX (5) Those considered export sales under Executive Order No. 226, otherwise known as the tfl�

C.T.A. CASE NO. 7271 19 DECISION Omnibus Investments Code of 1987, and other special laws; XXX XXX. " Corollary thereto, Article 23 in conjunction with Article 77 (2) of Executive Order No. 226 (hereafter "E. 0. 226 "), otherwise known as the Omnibus Investments Code of 1987, provides that sales to registered zone enterprise shall be considered as export sales and the exporter shall be entitled to the benefits allowed by law for such transaction. It must be emphasized that the bulk of petitioner' s sales were exportations made to PEZA registered entities, which are considered constructive exportations under E. 0. 226. Therefore, applying the foregoing provisions to the case at bar, petitioner as a VAT-registered entity under Section 106 (A)(2)(a)(5) of the Tax Code, its sales or transactions are subject to VAT at 0% rate. Subject to the requirements prescribed in Section 112 (A) , petitioner is, therefore, entitled to claim refund or issuance of a tax credit certificate for input VAT taxes attributable to the substantiated export sales. We now proceed to the determination of whether or not petitioner' s input VAT credits on its domestic purchases of goods and services for the second quarter of 2003 were fully substantiated. (; )

C.T.A. CASE NO. 7271 20 DECISION Substantiation of Input VAT other than Capital Goods After a thorough scrutiny of the evidence on record, the Court finds certain disallowable claims, in addition to the exceptions found by the independent CPA, as they were issued beyond the period covered by petitioner' s claim, which will result to a discrepancy in the input VAT available for refund, to wit: Outside of the eeriod covered EXH IBITS COMPANY Invoice No. O.R. No. Date of Date of OR Total Invoice Input VAT Invoice 3/3/2003 Am ou nt 100 Y, Y-1 KLine Air Service Phils., 416 42956 3/3/2003 1100 100 Inc. 100 Y-3, Y-4 KLine Air Service Phils., 448 43302 3/1212003 3/1212003 1100 Inc. 4727.27 Y-5, Y-6 KLine Air Service Phils., 491 43470 3/26/2003 3/26/2003 1100 Inc. 8181 .81 Y-96, Y-97 Ammex Machine Tools 5739 3557 3/31/2003 52000 Phils. 1463.73 Y-1 58 Aries Technologies, Inc. 312 121 6/25/2003 7/25/2003 88 ,363 .64 13000 Y-159 122 8/1/2003 90000 Y-160 Aries Technologies, Inc. 303 6/19/2003 16400.36 Y-161 309 123 6/23/2003 8/1/2003 156208.25 8327.45 Y-162 Aries Technologies, Inc. 1444 8/1/2003 16101 Y-163 315 23016 6/27/2003 0710/2003 143000 492 .36 Y-164 Asia Machine Shop 18592 6/30/2003 1570.25 Y-167 Asian Transmission Corp. 16972 6/20/2003 177123.93 Y-233 11330 820 11/29/2001 no date 180404 1434.55 Y-234 Assistco Energy & Ind. Corp 497 12100/2002 7/9/2003 91602 Y-235 10178062 9345 .61 Y-236 Autrans Phil. Corp 18273 135 3/31/2003 7/25/2003 22688.73 23 .85 Y-237 5416 1215 Y-246 BPI/MS Insurance Corp 423 3/30/2003 318.18 Y-247 Cairhill Metrology Inc. 6/24/2003 17272.73 20.86 Y-345 CAJ International F01warders 242 6/10/2003 15780 20 .85 Y-352, Y- Cargohaus, Inc. 15780 353 Cargohaus , Inc. 385107 404 3/13/2003 2/25/2003 Y-354 885575 3/13/2003 93456.05 Y-357, Y- 102801 .66 358 390119 890335 3/27/2003 3/27/2003 Y-359, Y- 262.39 360 13365 3500 229 .46 229 .35 (YJ;

C.T.A. CASE NO. 7271 21 DECISION Y-364, Y- Cargohaus, Inc. 385122 885566 3/11/2003 3/13/2003 413.93 37 .63 365 250 5/19/2003 7/9/2003 Castillo, Zamora & 9799 6/9/2003 7/4/2003 149699 13609 Y-382, Y- Poblador Law Offices LGN121870 427744 3f7/2003 383 DHL Worldwide Express 8839 3/5/2003 7/13/2003 292210 .64 26564.6 8888 6/20/2003 3/6/2003 997 90 .63 Z-33, Z-34 Exel Philippines, Inc 43824 6/25/2003 8/1/2003 997 90.63 Z-117 1929 3/28/2003 9/5/2003 715 65 Z-118 Exel Philippines, Inc 31 212712003 5/16/2003 10 2/28/2003 13750 1250 Z-119, Z-120 Famous Paciic Forwarding IMP#016986 54144 612212003 2/28/2003 12870 1170 Phils. S1000306 3/18/2003 2/28/2003 Z-126, Z-127 Fanuc Phils. Corp. 101786 3/19/2003 2/28/2003 33000 3000 Z-137, Z-138 101946 3/20/2003 71212003 Filsonics Equipment & 118 1953418 3/21/2003 880 80 Z-166 Services Inc 18 14366 312212003 7/25/2003 501 .11 45 .56 German Tech Asia Pacific, 25933 3/24/2003 355.03 32 .27 Z-204,z-205 Inc. 15227 3/25/2003 8/1/2003 Z-243 GRM International Inc 3/26/2003 2/24/2003 2541 231 Z-244 1927 3/27/2003 2/19/2003 2707 .89 246 .17 Z-245 lntnl Container Terminal Services, Inc. 326397 3/28/2003 7/11/2003 31 .82 3/29/2003 3/13/2003 350 13.64 Z-293, Z-294 lntnl Container Terminal Services, Inc. 4176 3/31/2003 150 18.18 Z-303 4326 4/1/2003 7/4/2003 200 27 .27 Z-304 lntnl Container Terminal Services, Inc. 4181 1/23/2003 71212003 300 18.18 Z-305 200 22 .73 Z-306 Laguna Internet, Inc. 3233 351 1/212003 250 22 .73 Z-307 2037 1/2/2003 250 18.18 Z-309 Liquid Honey, Inc. 11573 1/24/2003 200 22 .73 Z-310 6/20/2003 250 22.73 Z-311 Liquid Honey, Inc. 11597 2121/2003 250 13.64 Z-312 5/20/2003 150 18.18 Z-314 Liquid Honey, Inc. 11621 200 890 .01 Z-315 5/20/2003 9800 Z-316 Liquid Honey, Inc. 11647 212.36 5/20/2003 2336 857 .27 AA-14, AA- Liquid Honey, Inc. 11662 9430 1714.55 15 7/10/2003 18860 150.73 Liquid Honey, Inc. 11676 3/31/2003 1658 4809 .09 AA-38 52900 AA-61 Liquid Honey, Inc. 11690 7/1/2003 613.8 AA-62 6751 .8 AA-63 Liquid Honey, Inc. 11709 4918 AA-87, AA- 54098 Liquid Honey, Inc. 11732 88 AA-89, AA- Liquid Honey, Inc. 11757 90 Liquid Honey, Inc. 11770 AA-160 Liquid Honey, Inc. 11786 AA-161 Matsushita Electric Phils. 1212139 AA-164 Corp 111290 Mesco, Inc. AA-206 Mesco, Inc. 110904 AA-376 BB-23 Mesco, Inc. 110905 BB-39, BB- Mesco, Inc. 111357 MJD &sons, Inc. 4682 MOF Company, Inc. 151910 PID 4695 Controllers&Contractors Corp PID 4696 6688 608 Controllers&Contractors Corp PID 4696 3344 304 Controllers& Contractors Corp Ra-Tris General 57 3000 272 .73 Merchandise 17290 1571.82 6466.59 587.87 Slick Energy Distributors 216 107.27 1180 Spareman , Inc Speedway Electronics & 544

C.T.A. CASE NO. 7271 22 DECISION 40 Office Supplies 2402 596 3/10/2003 7/4/2002 3405 .6 309.6 Steelworks Industrial Sales 2048 3438 6/9/2003 7/25/2003 23100 2100 BB-73 Sun Logistics Tech, Inc. 2424 97003 5/26/2003 7/18/2003 83276 3/12/2003 11250 1022.72 BB-115, BB- Toyota 129534 3/12/2003 116 2997 3/31/2003 274341 24940.09 Toyota 5110 .25 464.56 BB-165, BB- Transorient Container 166 Terminal SeiVices 22080 2007 .27 Tri-Link Marketing Co. BB-167 2336361 .03 162,066-37 BB-181 , BB- 182 BB-188 SUBTOTAL On the other hand, the Court finds that the following receipts are not legible, such that the Court cannot verify the amounts being claimed: Unacceg_table Receig_ts (not readable-not oroven CTC) EXHIBITS COMPANY Invoice No. O.R.No. Date of Date of OR Total Invoice Input VAT Invoice Amount 3760 .61 Z-218 to Z- Integrated Logistics Phils. 6610 4/30/2003 4/30/2003 41366.71 241 Inc. 6433 2/21/2003 6434 3/21/2003 2/21/2003 18362.65 1669.33 6466 3/29/2000 18362.65 1669.33 6478 3/31/2003 18362.65 1669.33 6566 4/22/2003 4781 .82 6551 4/14/2003 52600 4781 .82 6641 5/5/2003 52600 1661 .27 6667 5/9/2003 18271 .89 994.46 6749 6/4/2003 10939.06 994.46 6753 5/30/2003 10939.06 893 .37 9827.04 1674.76 18422.36 24,550.56 SUBTOTAL While the following sales of service are supported by invoices, in violation of Section 113 ofthe NJRC of1997, as amended: No Official Receig_ts (Sale of Services) EXHIBITS COMPANY Invoice No. O.R. No. Date of Date of OR Total Invoice Input VAT 607 Invoice Amount 100 Y-2 KLine Air Service Phils. 4/24/2003 1100 Inc. 401682 20.68 Y-363 Cargo Haus 10-Apr 227.56 120.68 SUBTOTAL

C.T.A. CASE NO. 7271 23 DECISION With regard to the m1ssmg documents, as found by the Independent CPA, We adopt her findings during her examination {Annex H 1 of the Independent CPA 's Report, Exhibit "LL ') based on the evidence presented and the schedule of petitioner submitted to her. However, upon verification, the Court finds that the computation of the total amount is not correct, hence, it is hereby recomputed as follows: Name of Vendor Invoice Oatoof O.RNo. Date of Purchase Purcha. . Purchase of Amount Input VAT Total Invoice No. Invoice O.R. of of Services Amount 1857292 00829 Cap t al Suppllao 5 ,090 .70 5 ,599 .78 00829 Good� 29 ,406 .00 32 ,346.65 22,949 .50 25 ,244 .48 Asian Terminals, 0430 18-Jun- 10723 27-Jun- 22 ,949.50 2,294 .95 Inc. 0431 03 03 18.19 61 ,261 .23 2,940.60 6,601 .82 57525 750.00 2 ,294 .95 7,826.33 Autrans Phils., Corp. 19-Jun- 27-Jun- 181 .82 7,260.00 03 03 6 600.00 1.82 Autrans Phils., Corp. 7,751 .33 75.00 342 .00 95521 16-May- 6,600 660.00 Kino's Devt Inc. 03 3,420 163.64 342 .00 Primewo~ld Digital 8 609.32 Systems Inc. Roston MarKetin g Coro. Sandvik Philippines, Inc. TOTAL Substantiation of Input VAT on Capital Goods Moreover, with respect to the claimed input VAT on capital goods amounting to P329,031.42, a careful examination of the records reveals that petitioner failed to present proofs of its purchases of capital goods and the paid input tax on such transactions. Capital goods or properties, as defined in Revenue Regulations No. 7-95, are "goods and properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(/), used directly or indirectly in the {JI/

C.T.A. CASE NO. 7271 24 DECISION production or sale of taxable goods or services." Thus, goods and properties used by the taxpayer in its VAT-taxable business, subject to depreciation or amortization in accordance with the Tax Code, are considered capital goods. Input VAT on the purchase of such capital goods is creditable against the taxpayer's output VAT. The taxpayer is further given the option to claim refund of the input VAT on its capital goods, but only to the extent that the said input VAT has not been applied to its output VAT. Conversely, the Court will not allow unsupported claims. Hence, for failure to show proof of substantiation of its claim, We disallow petitioner's claim on its alleged input VAT paid on capital goods. Refundable Input VAT The above disallowed claims resulted to a discrepancy m the available input VAT available for refund, computed as follows: Input Tax on capital goods p 329 ,031.42 4978281 .95 Add: Input tax other than capital goods 5,307 ,313.37 Total Input Tax, per application p Less: Total exceptions as found by the Court A. Purchases Other than Capital Goods: 162,066 .37 1 9 9 , 1 1 6 .9 3 Outside of the period covered 24,550.56 Unacceptable receipts (fax copy only) No official receipts 120 .68 Missing ORsllnvoices 8 ,609 .32 Unlocated Difference per VAT Return & Schedule of importation 3,770 .00 B. Purchases of Capital Goods 329 031.42 Unsubstantiated Capital Goods Substantiated Input Tax p 4.779.165.02

C.T.A. CASE NO. 7271 25 DECISION Inasmuch as petitioner's input tax cannot be directly or entirely attributed to its zero-rated, taxable and exempt sales; the refundable amount of input tax shall be allocated proportionately to its zero-rated sales on the basis of its volume of sales, to wit: Period Zero-Rated Exempt VAT Sales Total Sales Substantiated Covered Sales Input Tax A B c D E 2003 432,140.76 171,619,692.80 4,779,165.02 2"d quarter 163,567,841.88 7,619,710.16 Period Substantiated Input Tax Attributable to Total Substantiated Covered Zero-Rated Sales Exempt Sales VAT Sales Output VAT 2003 Input Tax Second Quarter [(AID) X (E)) [(BID) X (E)) ((CID) x (E)) 4,554,941 .77 12,034.00 212, 189.25 4, 779 , 165 .02 761 ,971.00 In addition, relative to the report of the independent CPA, We agree that in computing the input VAT available for refund, petitioner did not deduct the output VAT for sales subject to VAT in the amount of P761,971.00 (Independent CPA's Report, Exhibit "LL ") . Based on the foregoing, the output tax payable must be applied against its substantiated claimed input tax allocated to zero-rated sales, resulting to a refundable input tax of P3,792,970.77 only, computed as follows: Total Input tax allocable to zero-rated sales p 4,554,941 .77 Less: Output Tax that should have been paid 761 971 .00 Total Input Tax Available for Refund p 3,792.970.77 Likewise, it is also worthy to note that although petitioner carried- over the claimed input VAT ofP5,307,313.37 to the succeeding quarters ~

C.T.A. CASE NO. 7271 26 DECISION of 2003, all quarters of 2004 and until the second quarter of 2005, as evidenced by Quarterly VAT Returns for the said taxable periods (Exhibits"! ", "1-1 ", "J ", "J-1 ", "K ", "L ", "M ", "N ", " 0 ", and "R ''), the same was not applied against any output VAT for the said periods. Moreover, the same was deducted as "Any VAT Refund/TCC" claimed from the total available input tax of P18,911 ,940.14, as of the second quarter of 2005. In other words, the subject claim no longer formed part of the excess input VAT of Pl3 ,122,121.34, as of the month of July 2005, which was to be carried over/applied to the succeeding third quarter of 2005. In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit certificate representing unutilized excess input VAT payments for the period April 1, 2003 to June 30, 2003, which are attributable to its zero-rated sales for the same period, but in the reduced amount ofP3 ,792,970.77. WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED. Respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the reduced amount of THREE MILLION SEVEN HUNDRED NINETY TWO THOUSAND NINE {ijv

C.T.A. CASE NO. 7271 27 DECISION HUNDRED SEVENTY PESOS AND 77/100 (P3,792,970.77), representing the unutilized input VAT attributable to zero-rated sales incurred for the months of April to June 2003. SO ORDERED. ~~f::c&~UEZ Associate Justice WE CONCUR: E~.UY ~a . a(-~ ~� Associate Justice itJANITO C. CASTANi'Dl\., JR. Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court's Division. .m. ~ (? .C:;;jf-~. Q_ JUANITO c. CASTANEDi-; Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman' s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court' s Division. �.,__.:~ . ~ ERNESTO D. ACOSTA Presiding Justice