HITACHI COMPUTER PRODUCTS (ASIA) CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY HITAC HI COMPUTER PRODUCTS (ASIA) C.T.A. CASE NO. 5707 CORPORAT ION, Prom ulgatecl: Petitioner, - versus - COMM ISSIONER OF INTERNAL REVENUE, Respondent. X-----------------------------------------------------------X DECISION This Petition for Review invo lves a claim for refund or iss uance of a tax credit certificate in the amount of THREE MILLION ONE HUNDRED TH IRTY SEVEN THOUSAND FIVE HUNDRED THIRTY FIVE PESOS AND FORTY-FIVE CENTAVOS (P3, 137,535.45) representing unapplied or unutili zed creditable value- added tax (VAT) paid for the period October 1, 1996 to December 31, 1996 . Petition er is a domestic corporation organized and existing under the laws of th e Rep ublic of the Philippines, with its principal office located at the Special Cxport Processing Zone, Laguna Technopark, Bifian, Laguna. It is reg istered with the Bureau of Interna l Revenu e (BIR) as a VAT taxpaye r on its sale of goods effecti ve .June 28 , 1994 as evidenced by Certificate of Registratio n No . 94-570-000298. (Joint Stipul at ion of racts, p. 37, CTA records) 73

DEC ISION- CTA CASE NO . 5707 PAGE2 It is likewi se, registered w ith th e Ex port Processin g Zo ne A uthority p ursuant to th e p rovisions of the Omnibus In vestment Code of 198 7 und er Certificate of Registratio n N o. 94-28 dated May 11 , 1994 . (J oint Stipul ati on of Facts, p. 38, CTA records) As a spec ial ex port zo ne enterpri se w ith pi oneer sta tus, it is prim arily engaged in the business of manufacturin g hard di sk dri ves, pl ain fie ld head and o th er comp uter paraphe rnals fo r ex port. It has a lso ava iled a s ix (6) year income tax ho liday under the PEZA law as shown in its EPZA Certifi ca te o f Board Resoluti on No . 94-2 12. (Exh ibit L) On May 8, 1997, Petiti o ne r fil ed its qua rterl y VAT return wi th the BIR fo r th e peri od Octobe r 1, 1996 to December 3 1, 1996 (Ex hibitC) . Thereafter, on Novem ber 8, 1999, Petiti o ner fil ed its A mended Quarte rl y VAT Return for the same period w hich refl ected, a mong oth ers, un applied V AT input tax in th e amount of P3, 137,535.45 on its purchases of goods and serv ices all egedl y attributabl e to its zero-rated sales. (Exhibi t 0 ) Furtherm ore, o n D ecember 22, 1998, a n appli cati on for tax credit o r refu nd of VAT input taxes for th e period October I, 1996 to December 3 1, 1996 in the amou nt of P3, 137,535.45 was fil ed by Petiti oner w ith the O ne-Stop-S hop Inter-Agency Tax Cred it and Duty Drawbac k Center of th e Departm e nt o f Fin ance. As the VAT app lication for re fund was not ac teJ upo n, the instant Petition was fil ed w ith thi s Court on D ecember 29, 1998. Res pondent in his A nswer, adva nced th e fo ll owing Special a nd Affirmative D efe nses: "4. Ass uming w ithout admitting that Petitioner ti led a claim for refund , the same is subj ect to investi gati on by the B urea u of Inte rna l Revenue.

DEC ISION- CTA CA SE NO. 5707 PAGE 3 5. Petiti oner mi serabl y failed to demonstrate that the tax subject of the case at bar was erroneo usly or ill egall y co ll ected. 6. Taxes paid and collected arc presumed to ha ve bee n mad e 111 accordallCe with la w <llld regulatiorl s, herlcc, nul rc l'urldahlc. 7. In an action !'o r tax rcl'und/crediL the burden or proo f is Oil the tax paye r to establi sh its ri ght to rc!'und and J~1ilure to adduce suffi cient proo f is fatal to the acti on for tax rcJ'und/credit. 8. It is incumbent upon the Petiti oner to show that it has compli ed with the prov isions of Secti on 204 in relati on to Secti on 229 of the Tax Code, as amended. 9. Claim s for refund arc co nstrued stri ctl y agai nst the claim ant fo r the same partakes the nature of exempti on fro m taxa ti on (Co mmissioner of Intem al Revenue vs. Ledesma, G. R. Nv. L- I 3509, January 30, I 970, J ~ SCRA 95) and as such, they arc looked upon with di sfa vo r (Wes tem Minv lco Co rp. vs. Co mmissioner vf Intem al Revenue, I 2./ SCRA I 2 1)." ln support of its claim , Petiti oner submitted the fo ll owing documents: I. Ex port Process ing Zone Authority (EPZA) Certifi cate o f Registrati on and EPZA Certifi cate of Board Resoluti on (Ex hibits A and L) 2. BIR Certifi cate of Reg istrati on as VAT t2'\ payc r (Ex h. B) 3. VAT Return fo r 4111 Qtr. of 1996 (Ex h. C inclusive of sub- ma rkin gs) 4. VAT Return for 151 Qtr. or 1997 ( Ex h. D inclu sive or sub- ma rkin gs) 5. Repo rt of Inde pendent C PA and Adde ndum to Repo rt (Ex h. E and P inclusive of sub-markings) 6. Summ ary of Co llecti on Report and IJ ank Pass book (Ex h. F- 1 to F- 9) 7. input tax sup po rting docum ents (Exh. G- 1 to G-1 23) 8. Export Sales supporting doc uments (Ex h. H-I to 1-1 -43 1, Q- 1 to Q- 63 1) ,., , ,_ . I , L)

DEC ISION - CTA CASE NO. 5707 PA GE4 9. Summary of Input Taxes for 4th Qtr. (Exh . 1-1 to I-4) 10 . S ummary of Ex port Sales fo r 4th Qtr. (Exh . .J- 1 to J-9 ) 11 . Registrati on Agreement w ith EPZA (Ex h. K) 12. Amended Q ua rterl y VAT Return for th e 151 Qtr. o f 1997 (Ex h. M) 13. Application for Tax Re fund (Exh. N) 14. A mended Quarterl y VAT Return for the 41h Qtr of 1996 (Ex h. 0) 15 . Bank Certifi cations of Inward Remittances (Exh . R-1 to R-4) On the o ther hand , Res pond ent through hi s co unsel, submitted the case for decision based o n the pl eadin gs. The so le issue brought before thi s Co urt for co nsiderati on is WH ETHE R OR N OT PETITION ER IS ENTITLE D TO TI-lE TAX REFUN D OR C REDIT OF T HE EXCESS OR UNU TrLIZED VAT IN PUT TAXES FOR TH E PERIOD OCTOB ER 1, 1996 TO DECEMBER 3 l , 1996 in the amount o f P3, 137,535.45. We rule in favor of Petiti oner. Petitioner basicall y anchored its claim fo r refund on Secti ons 100 and l 06(a) of the Tax Code, quoted hereunder as foll ows: "Section 100 . Value-added tax on sale ofgoods or p roperties. - (o) Rate and base of tax. - There shall be levied, assessed and co llected o n every sale, barter or ex change of goods or properti es, a value-added tax equi valent to 10% of the gross se lling price or gross value in money of t he goods or properti es so ld , bartered or exchanged, such tax to be pa id by the se ll er o r transfero r. XXX XXX XXX (2) the fo ll owin g sales by a V AT-registered person shall be subj ect to 0%: (A) Ex port sales. - The term 'export sales' means:

Ill � ~ 'ISH lN ( " 1/\~ ' t\SI �: N~l \ / 0 / I It\( i I .~ (i) The sale and actual shipme11t or goods rrom the Philippines to a roreign COUillry, irrespective or any shipping arrangement that may be agreed upon which may influence or determine the trans!Cr of ownership of the goods so exported and paid lor in acceptable foreign currency or its equivalent in goods and services, and accounted lor in accordance with the rules and regulation s of the Bangko Scntral ng Pilipinas (BSP);" "Section 106 . Rejimds or tax credits(~( creditable input tox. - (a) Any VAT-registered person, whose sa les arc zero-rated or effectively zero rated, may, within two (2) years alter the close of the taxable quarter when the sa les we re made, apply lor the issuance of a tax credit ce rtifi cate 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 : Provided, holl!ever, that in the case of zero-rated sales under Section I 00 (a)(2)(A)(i), (ii) and (b) and Section I 02 (b)( I�) and (2), the aq:eptable foreign currency exchange proceeds thereof had been duly accounted lor in accordance with the regulations of the Bangko Sentral ng Pi Iipi nas (BSP): Provided, further, that where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sa le of, goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transacti ons, it shall be all ocated proportionatel y on the basis of the vol ume of sales." The foregoing provi sion s of the Tax Code dictate that the fo ll owi ng basic requirements must be complied with in order that refunds or tax credits of input tax may granted: I. That there be a sale of goods; 2. That the sale was made by a VAT-regi stered perso n; 3. That the sale qualifies as export sale as deJined by law; 4. That the application lor a tax credit or refund be made within two (2) years from the filing of the VAT quarterly return ; 5. That the foreign exchange proceeds of sa id export sa les are properly accounted for in accordance with the regulations of the BSP ; ~(,., t !'

DEC ISION- CTA CASE NO. 5707 PAGE 6 6. That the input taxes have not been applied against o utpu t taxes. (Benguet Corporation vs. CIR, CTA Case No. 5532, Oct. 12, 1999) Petiti oner fil ed its admini strati ve cl aim fo r refund on December 22, 1998 w ith the O ne-S top-S hop Inter- Age ncy Tax C n~dit a nd Duty Drawback Cente r of th e Departm ent of Finance (Ex hibit "N") and its judicial claim on December 29, 1998 w ith the Court of Tax A ppeals. It can be recall ed th at the quarterl y VAT return for the period October 1, 1996 to December 3 1, 1996 whi ch is the subj ect of Petitioner's claim for refund was fi led on May 8, 1997 and the Amend ed Quarte rl y VAT return for the same period, on N ovember 8, 1999. Both claim s, there fore, we re fil ed w ithin the two-year reg lementary peri od presc ribed under the n Sectio n 23 0 in relati on to Secti ons I 06 (a) and (b) and 11 0 all of the Tax Code. Before proceeding to the merits of the case, it is necessary to address the iss ue raised by Respondent, that since Petiti oner is registered with the Philippi ne Eco nomic Zone Authority (PEZA) as an Ecozone Enterpri se, its business is not subject to VAT pursuant to Secti o n 24 of Rep ubli c Act No. 79 16. Acco rd ingly, Peti tioner is not allowed any input tax credit prev iously paid pursuan t to Secti on 4.1 03- 1 of Revenue Regulatio ns No. 7-95. T he Co urt has, however, rul ed o n th e a fo rementioned issue in the case of READ- RITE PHlLIPPINES, INC. (formerly Sunward Technologies Phils., Inc.) vs. COMMISSIONER OF INTERNAL REVENUE, CTA Case No. 5659, dated September 29, 2000, pertinent porti ons of whi ch are hereun der quo ted as fo ll ows: 778

DEC ISION- CTA CASE NO. 5707 PAG E 7 "Thi s Co urt wo uld li ke to stress that under Secti on 23 of Republi c Act No. 79 16, two dif!Crcnt fi scal incentives arc granted to an ccozo nc enterprise to wit: Sec. 23. Fisca l Incenti ves. B us in ess establi shments operating with in the ECOZONE shall be entitl ed to the fi scal incen ti ves as prov ided fo r under the Preside nti al Decree No. 66, the law creating the Ex port Process ing Zo ne authority, or thqse provided fo r under Book VI of Executi ve Order No. 226, otherwise known as the Omnibus In vestments Code of 1987." Based on th e aforequoted Secti on 23 of RJ\ 79 16, a PEZA registered enterprise has the opti on to choose between two sets of fi scal incentives . One is that wh ich is prov ided for under Pres id enti al Decree No. 66, as amended and Sectio n 24 of RA 79 16 whi ch includes the 5% preferenti al ta x on gross inco me earned whi ch is in li eu of national-a11d local taxes; and second as those prov ided for under Boo k VJ of Executi ve Order No . 226, including but not limited to an income tax holiday (rfl-f) of 4 to 6 years dependin g on whether or not an enti ty is registered as a pioneer or non-pi oneer enterpri se. If an ecozone enterpri se chooses the 5% preferenti al tax, it is exempt from payment of nati onal and loca l taxes. However, if an ecozo ne enterprise chooses the inco me tax holid ay, it is onl y exempt from pay ment lf the income tax but still subj ect to other nati onal internal revenue taxes including the va lu e- added tax . The diffe rence between these 2 sets of fisca l incenti ves was ex pl ained by the Bureau of Internal Revenue in VAT Rul ing Nos . 03 7-98; 043-98; 027-99 and 063-99. " (See also Reso luti ons in the cases of SEAGATE TEC HNOLOGY (PHILIPPINES) vs. CO MMI SSS IONE R OF INTERNAL REVENUE, CTA Case No. 592 1, da ted September 20, 2000 and TOS HI BA INFORMAT ION EQU IPMENT (PHI LS) INC. vs. COMM ISS IONER OF INTERNAL REVENUE, CTA Case No. 5762, dated .J anuary 17, 200 I. ) (Underlining ours) Gleaned from the reco rds of the case, Petiti oner is subject to VAT since it is enj oy in g an in come tax holiday as evidenced by the ce rtifica te of Board Reso luti on fro m the Philippine Export Zone Authority (Ex h. L). During the hearing held on January 10, 2000, Pe titio ner' s wi tness, Mr. Jonathan D. Capunitan, Accountin g Supervisor, attes ted thereto as follows:

DEC ISION- CTA CASE NO. 5707 PAGE 8 Mr. Q : Can yo u tell thi s Ho norable Court, Witness, w here Hitachi is located? A: Hitachi Computer products (As ia) Corproration is located at Techn ology Avenue, Phase II, Laguna Techno Park, B inan, Lagun a. Q : Is there any parti cul ar reason to yo ur knowledge that I-I itach i is located in PEZA Lag una Techno Park? A: Yes. O ur mother co mpany decided to locate Hitachi Com puter Products in Lag un a Techno park in ord er to ava il of the incenti ves such as income tax holiday, as provided in the law under Republi c Act 7962. Q: What is yo ur bas i ~ in sayi ng that Hitachi is e nti tled to income tax ho liday under R.A. 7962? A: Hitachi Computer Products (Asia) Corpo ration was granted income tax holiday under the Certificate of Board Reso luti o n, attached to the Registration Agreement betwee n Hitachi Computer Produ cts (Asia) Corporation and PEZA. Thus, s ince Petiti oner is still enJ oymg an mco me tax ho liday, it shall on ly be exempt from paym ent of inco me tax but shall be subj ect to other nat ional internal revenue taxes incl uding the value-added tax. A perusal of the records of the case di sc lose that Peti tioner's Ame nded Quarterl y VAT Return fo r th e ~ Q uarter of .1996 reported . sales in the amount of 4 zero-rated P 1,878,649,262.24 (Ex h. 0). However, based on the addendum repo rt of the independent CPA, th e zero-rated sales fo r th e 4111 Quarter of 1996 in th e amount of P50 ,537.044.44 were not substanti ated by the necessary export doc uments. On the other hand, the zero- rated sa les amo un ting to P I ,828, 11 2,2 17.80 were supported by export doc uments such as ;ao

DEC ISION- CTA CASE NO. 5707 PAGE 9 Ex port Sales Invo ices and Ai rway Bill s (Exhs. H- 1 to I-I-43 1, Q-1 to Q-63 1 and P) (Addendum Report o f SGV - Ex h. P) Moreover, Petiti oner' s inward remitta nces representing payments of export sales were supported by certifi cations from Ri za l Comm ercial Banking Corpo rati on (RCBC) and Pilipinas Bank (Ex hi bits R-2 to R-A) and partl y corrobo rated by Petiti oner's pass book from RCBC (Exhibits K-8 & K-9). The independent CPA furth er reported th at there was an insignili cant discrepancy of P4,6 13,769 .36 or 0.245% out of the total export sales proceeds of PI ,878 ,649,262 .24 whi ch cannot be traced fro m the bank certifications. (Exh. P) The claimed unutili zed credi tab le VAT input taxes fo r the period October I, 1996 to December 3 1, 1996 were not carri ed over to the succeed ing period as adduced in Petiti oner's VAT Return lor the Ist quarter o r 1997 show ing a nil VAT input lax carri ed ove r. To prove its cl aim , Petitio ner submitted various VAT invo ices and official receipts. In the spec ial audit conducted by the indepe nde nt CPA, the amoun t of P64 1,872. 18 was disall owed as it was not properly substanti ated fo r VAT purposes. (Ex h. E) The verificatio n conducted by the Court further added the fo llowing di sallowances: SUPPLIER EXHIBIT DA TE AMOUNT IN PUT VAT (a) Not within the period of clai m DOLPHIN ENVI RONM ENTAL G-5 to G-8 Prior to Oct. '96 p 60,919.98 p 5,538.16 CO NTROL G-12 to G-17 Prior to Oct. '96 96 ,720 .03 8,792 .73 DOLPHIN ENVIRONM ENTAL G-9 to G-10 35,360 .05 3,214 .55 CONTROL 9/21/96 62 ,722 .33 5,706 .03 DOLPHIN ENVIRONMENTAL G-26 4/ 11/ 96 15,949 .34 1,449 .94 CO NTROL G-27 5/3/96 THE ONLINE ADVAN CED SYSTEMS THE ONLINE ADVAN CED SYSTEM S L

DEC ISION- G-41 9 / 17/9 6 234,704.58 21,336 .78 CT A CASE NO. 5707 G- 104 1/ 1 0/97 136 ,118 .29 12,374 .39 P/\ GE 10 Subtotal p 642,494.60 p 58,412.58 ROYAL INSURANCE Total PHIL . FUJI XEROX CORP . p 2,658,448.65 p 241 ,677 .15 p 3,300,943.25 p 300,089.73 (b) No supporting document PHPC CO. LTO. In sum, Petiti oner has suffi cientl y complied with all the requirements fo r the grant of the refund . However, due to the forego ing di sa ll owances by the independent CPA and the Court, Petiti oner's claim is granted but in the reduced amount of P2, 195 ,573 .54, co mputed as fol lows: Amount Cl aimed P3, 137,535.45 Less: Di sallowances 94 1 961.91 P2 195 573.54 (a) Per SOY's Verifi cati o n (Ex h. E) P641 ,872. 18 (b) Per Court 's Verifi cati on 3 00,089 .73 A mount Refundabl e W HEREFORE, in view of all the forego ing, Respondent is hereby OR DERED to REFUND or ISSUE A TAX C REDIT CERT IFICATE in favor of Petiti oner in the amount of P2, 195,5 73.5 4 representing excess c reditabJ~ VAT input taxes paid fo r the period October 1, 1996 to December 3 1, 1996. SO O RDERED . ~~AJV~$~:~~A ~e]~,G d;gje AA_ I CO NCU R: Lb. c~ ERNESTO D. ACOSTA Pres idin g Judge

DEC ISION - CT/\ CASE NO. 5707 J> /\GE I I CERTIFICATION I hereby certify that the above dec ision was rcac h ~d afte r du e consultati on with the members o f the Co urt o r Tax Appea ls in acco rdance with Secti on 13, Article VIII o r the Con stitution . lL'-'~ () . l -L--'-.-/'-- I�: I{NI(sTo D. ACOSTA l'rcsi di11g .ludgc 783