CTA Case No. 5558 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY TOKUMI ELECTRONICS PHILIPPINES, INC., Petitioner, - versus- C.T.A. CASE NO. 5558 COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. 200� MAR 03 x- - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION Before Us for consideration is a Petition for Review filed by the Petitioner on October 20, 1997, seeking for a refund of the amount of TWO MILLION FOUR HUNDRED THIRTY SEVEN THOUSAND EIGHT HUNDRED SIX AND 161100 PESOS (PhP2,437,806.16) representing alleged unutilized input taxes paid by the Petitioner on its local purchases of goods and services directly attributable to its zero- rated sales for the period July 1, 1995 to December 31, 1995. The antecedent facts of the case giving rise to the controvery at bar are as follows: Petitioner is a domestic corporation organized and existing under and by virtue of the laws of the Republic of the Philippines. It is a VAT-registered entity (Exhs. A & C) engaged primarily in the business of manufacturing, exporting_ buying and selling at wholesale of speakers, assemblies, microphones, headphones and other electronic goods of similar nature. Petitioner is also registered with the Export Prc,cessing Zone Authority ("EPZA") having been issued EPZA Certificate of Registration No. 92-024.

DECISION- CTA CASENO. 5558 PAGE2 Records reveal that on October 20, 1995 and January 22, 1996, Petitioner filed with the Bureau of Internal Revenue its VAT returns for the third and fourth quarters of 1995, respectively, reporting a total amount of zero-rated export sales of P379,350,941.94 and total input tax payments of P2,437,806.16 on local purchases dirctly attributable to said sales broken down as follows: 1995 Exh. Zero-rated Carried over Inp u t VAT Carrieq over Sales From previous to subsequent On purchases quarter this quarter Quarter 3rd qtr D p 200,268,423.02 p I ,812,194.28 p 1,120,518.09 p 2,932,712.37 4th qtr E 179,082,518.92 2,932,712.37 I ,317,288.07 4,250,000.44 Total p 379,350,941.94 p 2,437,806.16 As a VAT-registered entity and with export sales that were paid for in acceptable foreign currency inwardly remitted to the Philippines and acc01 mted for in accordance with existing regulations of the Bangko Sentral ng Pilipinas (BSP), Petitioner contends that the said export sales are not subject to 10% value added ta'{ but are subject to 0% pursuant to Section 1OO(a)(2)(A) of the 1995 National Internal Revenue Code. For having erroneously paid the aforesaid VAT input taxt:S, and having no VAT output tax liability during the period July 1, 1995 to December 31, 1995 and in any succeeding quarter, Petitioner claims that it is entitled to refUl1d pursuant to Section 4.102-2 of Revenue Regulations No. 1-95 and Section 106(b) of the NIRC which reads, thus: "Section 4.100-2. Zero-rated safes. A zero-rated sale by a VAT registered person, which is a taxable transaction for VAT purposes, shall not rJ):., 0..- .1 ' t 1

DECISION- CTA CASE NO. 5558 PAGE3 result in any output tax. However, the input tax on his pu;�chases of goods, properties or services related to such zero-rated sale shall be available as a tax credit or refund in accordance with these regulations." (Rev. Reg. 7-95) "Section 106. Refunds or tax credits of creditable input tax. - (a) Any VAT-registered person, whose sales are zero-rated or e-:-rectively 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 n0t been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 1OO(a)(2)(A)(i),(ii) and (b) and Section 102(b)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accow1ted for in accordance with the regulations of the Ban gko 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 attributed to any one of the transactions, it shall be allocated proportionately on the basi; of the volume of sales." Consequently, on October 17, 1997, Petitioner filed with the Bureau of Internal Revenue an administrative claim for refund of its unutilized input VAT payments attributable to its zero-rated sales for the period July 1 to Decemt er 31, 1995 amounting to P2,437,806.16 (Exhibit "J"). There being no affirmative response from the Respondnt, and the two-year prescriptive period about to lapse, Petitioner elevated its grie\ ance to this Court on October 20, 1997. In his Answer to the Petition for Review, Respondent interposed the following Special and Affirmative Defenses, to wit: 3. Petitioner's right to claim refund has partiall), if not totally, prescribed; '',-) '�-j u. �

DECISION- CTA CASE NO. 5558 PAGE4 4. Petitioner's claim for refund 1s still pendi21g administrative investigation and evaluation; 5. Taxes paid and collected are presumed to have been in accordance with law and regulations and hence, not refundable; 6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to refund and failure to sustain the bU'.�den is fatal to the corresponding action; 7. Claims for refund are strictly construed against clJ.imants since they partake of the nature of an exemption from taxation. The issue in this case is whether or not Petitioner was able :o substantially prove its entitlement to a refund. The Court, after a thorough evaluation and painstaking scrutiny of the records of this case, conformably with existing laws and jurisprudence en the matter, is of the position, that the claim for refund must be granted. A perusal of all the evidence presented reveals that petiti01er has complied with all the requirements for zero rating of its sales set forth under Section 1 OO(a)(2) of the Tax Code which provides, thus: Section 100. Value-added tax on sale ofgoods or properties. - (a) Rate and base of tax. - There shall be levied, assessed ::.nd collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 1 0% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. (2) The following sales by VAT-registered persons sJ� all be subject to 0%: (A) Export sales. - The term 'export sales' means: (i) The sale and actual shipment of gc,ods from the Philippines to a foreign country, irre:pective of any

DECISION- CTA CASE NO. 5558 PAGES shipping arrangement that may be agreed upon which may influence or determine the transfer (Jf ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ngPili pinas (BSP). In the course of the proceeding, Petitioner was able to prove that it is a VAT- registered entity having been issued Value-Added Tax Registration Ce1iificate No. 001- 504-637-V (Exh. C). As shown by its Summary Export Sales, xport invoices, airway bills, bills of lading and RCBC credit memos (Exhs. P, Q, S to S-1775, inclusive) covering the period July 1 to December 31, 1995, the period covered by this petition, there is no squabble that the Petitioner actually made export sales in the amount of P378,802,543.04 which were paid for in acceptable foreign curJ ency inwardly remitted and accounted for in accordance with Bangko Sentral ngPilipinas regulations. Although Petitioner's total reported zero-rated export sales ofP379,350,941. 94 in its 1995 third and fourth quarterly VAT returns was over byP548,398.90 as again:,t its actual export sales ofP378,802,543.04, it does not alter the fact that its sales are zero-rated. However,Petitioner was only able to overcome the burden of proof of excess input VAT in the amount ofP1,676,017.24 as this is the amount ascert2ined and verified by the Court to be the correct refundable amount to the petitioner, prcperly substantiated and supported by documents in accordance with the existing VAT law. After verification and examination of the accuracy ofPetiti :mer's claim for refund, Punongbayan and Araullo certified in its report that the total amount ofP682,198.26 was not supported by Petitioner's supplier's invoices/official receipts, thus must be disallowed:

DECISION- CTA CASE NO. 5558 PAGE6 Reason for the Disallowance Exh. Amount a.) Purchases not in the account of 0-1 p 3,095.86 Tokumi Electronics Philippines, Inc. 0-17 403,741.64 b.) Purchases prior to the period covered in the application c.) Invoices/Official Receipts were not on file 0-18 14,390.10 and could no longer be located d.) Invoices/Official Receipts do not indicate the VAT registration number of the supplier or the VAT registration 0-23 225,414.46 number was only stamped e.) Invoices/Official Receipts do not show the BIR permit 0-24 3,427.53 number of the printer f.) Payment of services for which Tokumi Electronics Phils. Inc 0-25 .22,234.30 received provisional receipts or acknowledgement receipts only g.) No machine validation on billing statements for services availed by Tokumi Electronics Phils.lnc. The machine validation is require:! for the billing statements to serve as official receipts. 0-28 9,894.37 682,198.26 Total: p Likewise, in addition to the aforementioned disallowance, this Court finds the amount ofP79,590.66 as not properly substantiated for not comr;lying with the invoicing requirements and the prescriptive period, broken down as follows: Reason for the Disallowance Amount 1.) Reported twice p 629.00 2.) Not in the name Tokumi Electronics Philippines, Inc. 439.35 3.) Not within the period of claim 5,259.69 4.) Overstatement of reported invoice amount 103.72 5.) Without Invoice/Official Receipt but only 17,052.33 supported by a statement of account 6.) Without supporting documents 3,475.44 7.) Invoice/Official Receipt without TIN 43.18 8.) Discrepancy between amount of input taxes per vat Return & amount of input taxes per summary 52,587.95 Total: p 79,590.66 As earlier adverted to, We are persuaded to extend the relief sought byPetitioner but only up to the amount ofP1,676,017.24 after considering th above findings and the fact that the said excess input tax was never applied against any output tax liability of the 3 ..l

'II DECISION- CTA CASE NO. 5558 PAGE 7 Petitioner for the third and fourth quarters of 1995 and even in the succeeding quarters as evidenced by its quarterly VAT returns (Exhs. D, E & T to W, inclusive), computed as follows: Amount of Claim (Exhs. D, E & J) p 2,437,806.16 Less: Disallowances p 3,095.86 403,741.64 a.) Per Punongbayan & Araullo's Findings (Exh. L) 14,390.IO 1.) Purchases not in the account of 225,414.46 Tokumi Electronics Philippines, Inc. (Exh. 0-1) 3,427.53 2.) Purchases prior to the period covered 22,234.30 in the application (Exh. 0-17) 9,894.37 :'682,198.26 3.) Invoices/Official Receipts were not on file and could no longer be located (Exh. 0-18) 4.) Invoices/Official Receipts do not indicate the VAT Registration number of the supplier or the VAT registration number was only stamped (Exh. 0-23) 5.) Invoices/Official Receipts do not show the BIR Permit number of the printer (Exh. 0-24) 6.) Payment of services for which Tokumi Electronics Phils. Inc. received provisional receipts or or acknowledgement receipts only (Exh. 0-25) 7.) No machine validation on billing statements for services availed by Tokumi Electronics Phils. Inc. The machine validation is required for the Billing statements to serve as official receipts (Exh.0-28) b.) Per Court's Further Verification (Annex A) 1.) Reported twice p 629.00 2.) Not in the name Tokumi Electronics Philippines, Inc. 439.35 3.) Not within the period of claim 5,259.69 4.) Overstatement of eported invoice amount I 03.72 5.) Without Invoice/Official Receipt but only supported by a statement of account 17,052.33 6.) Without supporting documents 3,475.44 7.) Invoice/Official Receipt without TIN 43.18 8.) Discrepancy between amount of input taxes per vat 52,587.95 79,590.66 761,788.92 Return & amount of input taxes per summary Amount Refundable p 1,676,017.24 WHEREFORE, in the light of all the foregoing, the petition is PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE a TAX CREDIT

DECISION- CTA CASE NO. 5558 PAGES CERTIFICATE to herein Petitioner in the amount of ONE MILLJON SIX HUNDRED SEVENTY SIX THOUSAND SEVENTEEN PESOS and 2"'1100 (P1,676,017.24), representing the latter's input VAT for the period July 1 to Decem.:.>.er 31, 1995. SO ORDERED. -(), ERNESTO D. ACOSTA P�esiding Judge CERTIFICATION I hereby ce1iify that the above decision was reached after duv consultation with the members of the Court of Tax Appeals in accordance with Section 13, A1iicle VIII of the Constitution. oG ERNESTO D. ACOSTA Presiding Judge

ANNEXA TOKUMI ELECTRONICS PHILIPPINES, INC. vs. COMMISSIONER OF INTERNAL REVENUE CTA CASE NO. 5558 SCHEDULE OF COURrS DISALLOWANCES ON CLAIMED INPUT TAXES � 3rd& 4th QUARTERS 1995 Invoice O.R. invoice Disallowedln11ut Taxes Claimed- 1995 Number Number Amount Su11lier Month Ex h. 3rdQuarter 4th Quarter Total 1.) Not in the name of Tokumi Electronics Phlis. Inc. Cargohaus Sep-95 R-982 239691 142964 p 188.H p 17.18 p p 17.18 Cargohaus Nov-95 R-1475 239625 142967 376.2J Cargohaus Nov-95 R-1618 254780 Cargohaus Nov-95 R-1620 253541 153802 1,010.53 Cargohaus Nov-95 R-1624 254778 Cargohaus Nov-95 R-1626 254781 152748 341.e4 Cargohaus Nov-95 R-1628 256115 153803 266.51 153801 618.63 qa 154916 2 030.:<3 422.17 422.17 p p 4 643.90 422.17 439.35 subtotal p 17.18 p 2.) Not within the periodof claim Jui-95 R-296 216297 127013 p 362.C5 Jul-95 R-297 210720 Cargohaus Jui-95 R-298 210721 123221 1,018.49 Cargohaus Jul-95 R-299 215005 Cargohaus Jul-95 R-300 208067 123222 663.(5 Cargohaus Jul-95 R-301 208066 Cargohaus Jul-95 R-302 210718 125962 228.23 Cargohaus Jui-95 R-303 208068 Cargohaus Jul-95 R-304 215007 121847 597.S9 Cargohaus Jul-95 R-305 215006 Cargohaus Jui-95 R-306 217049 121846 166.E6 Cargohaus Jul-95 R-307 217050 Cargohaus Jui-95 R-308 217048 123219 594.3 Cargohaus Jui-95 R-309 Cargohaus Jul-95 R-310 10821 121848 540.SO K line Air Service Phils.� Inc. Jui-95 R-311 10993 K line Air Service Phiis.� Inc. Jul-95 R-312 10545 125964 1,184.81 K line Air Service Phils., Inc. Jui-95 R-149, R-150 10457 K line Air Service Phils., Inc. Jul-95 R-313 0015428 125963 817.�5 PAC-Atlantic lines Jul-95 R-314 429579 Pair Cargo & Warehousing Jul-95 R-315 429403 127526 1,505.S5 Pair Cargo & Warehousing Jul-95 R-316 432944 Pair Cargo & Warehousing Jul-95 428992 127527 282.20 Pair Cargo & Warehousing Jul-95 R-317 436343 Pair Cargo & Warehousing Jul-95 R-318 436342 127525 3,691.78 Pair Cargo & Warehousing Jul-95 R-319 437749 Pair Cargo & Warehousing Jul-95 R-320 436341 10821 500.(0 Pair Cargo & Warehousing Jul-95 R-321 068513 Phil. Skylanders, Inc. Jul-95 R-322 075489 10993 500.CO Phil. Skylanders, Inc. Jul-95 R-323 075001 Phil. Skylanders, Inc. Jul-95 R-324 071701 10545 500.CO Phil. Skylanders, Inc. Jul-95 R-325 075496 Phil. Skylanders, Inc. R-186 to R-188 16641 10457 500.CJ Philcopy Corporation 29744 1,183.f0 429579 246.S5 429403 1,331.<2 432944 144.43 428992 1,053.[;0 436343 228.<7 436342 614.25 437749 145.:0 436341 302.:9 068513 353.87 075489 640.<;2 075001 662.E4 071701 1,365.:4 075496 1,429.�9 97617 34 500.( 0 p 57 856.l1 p 5 259.69 p p 5 259.69 5 259.69 p subtotal p p 5 259.69 3.) Overstatement of reportedinvoice amount OOCL Phils. Inc. Dec-95 R-1992, R-1993 8060595 7969 p Rep6rted Amount 10,610.�5 p 9 645.:0 Actual Amount 964.f5 Overstatement Overseas Agency Services Dec-95 R-2146 57209 p Reported Amount 1 ,936.( 0 Actual Amount Overstatement 1 760.(0 p 176.GO p 1 140.f�5 p p 103.72 p 103.72 103.72 subtotal p p 103.72 p

ANNEXA TOKUMI ELECTRONICS PHILIPPINES, INC. vs. COMMISSIONER OF INTERNAL REVENUE CTA CASE NO. 5558 SCHEDULE OF COURT'S DISALLOWANCES ON CLAIMED INPUT TAXES 3rd & 4th QUARTERS 1995 Invoice O.R. Invoice Disallowed ln11ut Taxes Claimed- 1995 Number Number Amount SUI!I!iier Month Ex h. 3rd Quarter 4th Quarter Total 4.) Without Invoice/official receipt but supported only by a statement of account KC Business Management Dec-95 R-2279 0519 0379 p 187 575.6;� p p 17 052.33 p 17 052.33 17 052.33 17 052.33 subtotal p 5.) Without supporting documents Aug-95 223551 131621 p 460.7& Aug-95 0792 0792 8,641.60 Cargohaus Sep-95 AHKAwards 13858 430.50 National Bookstore 9 532.80 351751 353621 866.63 866.63 A.N. Villaluz Construction Oct-95 237396 3099 870.00 AN. Villaluz Construction Oct-95 1093715 Archetype Computer Service Oct-95 1092900 3095 643.00 Columbia Computer Center Oct-95 1080438 Dee Hwa Liong Electronics Oct-95 1085468 3207 400.00 Espana Photo Express Oct-95 ICTSI Oct-95 005125 150. 0L ICTSI Oct-95 Lucy Salazar Hardware Oct-95 29995 8,120.0(! Minda's Commercial Center, Inc. Oct-95 Motor Express Oct-95 0090 126. 00 MR-2 Music & Gen. Merchandise Oct-95 MR-2 Music & Gen. Merchandise Oct-95 351751 165.9(< National Bookstore Oct-95 National Bookstore Oct-95 R-1167 353621 24.2!i Photo City Manila Oct-95 S. Serafico Hardware & Elect. Supp Oct-95 R-1144 0842 75.00 Tatoland Hardware & Cons!. Supp Oct-95 R-1145 Toyota Bel-Air Oct-95 R-1163 1586 3,280.00 ICTSI Oct-95 R-1 1 69 ICTSI Oct-95 468 3,500.0cl ICTSI Oct-95 ICTSI Oct-95 0996 778.00 0995 5,957.50 351905 110.50 733196 167.50 5388 454.60 63465 200.00 8127 792.0 193907 2,882.6ll 1093715 p 2,998.60 1092900 1,306.80 1080438 1,306.80 1085468 1 306.8) p 35 615.9\ 3 237.81 3 237.81 3 237.81 p 4 104.44 subtotal p 866.63 p 6.) Invoice/Official Receipt without TIN Airlift Asia Jul-95 R-457 8716 8716 p 475.0.) p 43.18 p p 43.18 43.18 p subtotal p p 43. 1 8 7.) Discrepancy between amount of input taxes reported per vat return and amount of Input taxes per summary July Per Vat Return Per Summary Overstatement p 49,948.60 p p 49,948.60 Aug (Exhs. M,D,El (Exhs. M N} 49,948.60 117.77 117.77 Nov. 358,085.29 308,136.69 117.77 2 521.58 495,184.87 495,067.10 2,521.58 p 50,066.37 p 2,521.58 p 2 521.58 441,540.69 439,019.11 52,587.95 subtotal Total p 56,253.05 p 23,337.62 p 79,590.66