ACCENTURE, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* ACCENTURE, INC., C.T.A. CASE NO. 7046 Petitioner, Members: -versus- ACOSTA, Chairperson BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION BAUTISTA, J.: The Petition for Review seeks refund or issuance of tax credit certificate in the amount of P35,178,884.21, representing unutilized input value-added tax (VAT) on domestic purchases of goods and services for the period covering July 1, 2002 to November 30, 2002. Accenture Incorporated (Petitioner) is a domestic corporation duly registered with the Securities and Exchange Commission, and existing under and by virtue of the laws of the Republic of the Philippines. Its principal office address is at MSE Building, Ayala Avenue, Makati City. 1 It is primarily engaged in the business of providing management consulting and management information consulting services, including but not limited to, business strategies development, change management services, systems integration, systems management, development, sale and/or licensing of software, and sale of hardware and 1 Par. 1, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 98

DECISIO N C.T.A. CASE NO . 7046 related products, either as a principal or an agent, and other related business activities .2 Likewise, petitioner is a VAT taxpayer duly registered with the Bureau of Internal Revenue, with Taxpayer Identification Number (TIN) 000-845-543-000 VAT. 3 Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue, with authority, among others, to decide, approve and grant claims for refund or tax credit of internal revenue taxes. He holds office at the Bureau of Internal Revenue (BIR) National Office Building, Agham Road, Diliman, Quezon City.4 In petitioner's Quarterly VAT Return for the fourth quarter of 2002 (covering the period from June 1, 2002 to August 31, 2002), the following are reflected :5 Purchases than Amount Input VAT Domestic Purchases- Capital Goods 12 312,722.00 p 1,231,272.20 Domestic Purchases- Goods other Capital Goods 64,789,507.90 6,478,950.79 Domestic Purchases- Services Total Input Tax 16,455,868. 10 1, 645,586 .81 p 9,355,809.80 Zero-rated Sales P316,113,513 .34 Total Sales P335,640,544.74 While petitioner's Quarterly VAT Return for the first quarter of 2003 (covering the period from September 1, 2002 to November 30, 2002), reflected the following :6 Purchases Amount Input VAT Domestic Purchases- CaQital Goods 80,765,294.10 p 8,076,529.41 Domestic Purchases- Goods other than Capital Goods 132 820 541.70 Domestic Purchases- Services 63,238,758 .00 13 282 054.17 Total Input Tax 6,323,875.80 P27,682,459.38 Zero-rated Sales p 545,686,639.18 Total Sales p 572,880,982.68 On July 31, 2004, petitioner filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center an administrative cla im for refund or issuance of tax credit certificate of its alleged unutilized input VAT credits for the period covering July 1, 2002 to 2 Par. 4, JSFI, Docket, p. 99 3 Exhi bit "B" 4 Par. 2, JSFI, Docket, pp. 98-99 5 Exhibit "E" 6 Exhibit "K"

DECISION C.T.A. CASE NO . 7046 August 31, 2002, and September 1, 2002 to November 30, 2002 in the amounts of P8,811,301.66 and P26,367,542.55, respectively, or in the aggregate amount of P35,178,844.21. 7 Due to respondent's inaction, petitioner filed before this Court a Petition for Review on August 31, 2004. Respondent filed a Motion to Admit Answer on November 23, 2004 with attached Answer.8 In his Answer, respondent asserted the following Special and Affirmative Defenses: "4. He reiterates and repleads the preceding paragraphs of this answer as part of his Special and Affirmative Defenses; 5. Petitioner's alleged claim for issuance of tax credit certificate is still subject to administrative routinary investigation/examination by the respondent Bureau; 6. Taxes paid and collected are presumed to have been made in accordance with law, hence, not refundable. 7. Petitioner's claim for refund or issuance of tax credit certificate in the amount of P35,178,844.21 as alleged unutilized input VAT paid on its domestic purchases of goods and services for the period covering July 1, 2002 to November 30, 2002 were not fully substantiated/documented . 8. In an action for refund/credit, the burden of proof is on the petitioner to establish its right to refund and failure to adduce sufficient proof is fatal to the claim for tax refund/credit. 9. Petitioner's sales of goods and services to various alleged clients do not qualify as zero-rate VAT. 10. It is incumbent upon the latter to show that it has complied with the provisions under Section 204(c) in relation to Section 229 of the Tax Code. Otherwise, its failure to prove the same is fatal to its claim for refund . 11. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs. Commissioner ofInternal Revenue, 124 SCRA 1211)." 7 Exhibits "L" and "M " 8 Docket, pp. 47-50 9 Docket, pp. 49-50

DECISION C.T.A. CASE NO. 7046 Petitioner filed a Motion to Declare Respondent in Defaulf0 on December 6, 2004 and Opposition to Respondent's Motion to Admit Answer on January 19, 2005 11; which the Court admitted in a Resolution dated April 4, 2005. 12 Petitioner filed its Pre-Trial Brief3 on April 27, 2005; while respondent filed its Respondent's Pre- Trial Brief4 on June 29, 2005 . The parties filed their Joint Stipulation of Facts and Jssues5 on August 1, 2005, which was approved in a Resolutionl6 dated August 12, 2005. During the hearing on January 17, 2006, petitioner's counsel manifested that the Department of Finance has recommended for the approval of its claim for refund or issuance of tax credit certificate for the period from September to November 2002; hence, petitioner will file the corresponding motion to amend the Petition for Review when the claim has actually been approved .17 After the presentation of documentary and testimonial evidence, petitioner filed its Formal Offer of EvidenaP on November 27, 2006, which was admitted in Resolutions dated January 18, 2007 19 March 23, 200720, and May 29, 200721 � , During the July 3, 2007 hearing, respondent's counsel manifested that the One-Stop Shop of the Department of Finance has denied petitioner's claim. 22 On December 4, 2007, respondent filed its Manifestation with Motion to Admit Formal Offer of Evidence with attached Formal Offer of Evidence. The Court granted 10 Docket, pp. 52-55 y 11 Docket, pp. 58-62 12 Docket, pp. 65-66 r 13 Docket, pp. 71-81 14 Docket, pp. 87-89 15 Docket, pp. 98-101 16 Docket, p. 103 17 Docket, p. 111 18 Docket, pp. 139-151 19 Docket, pp. 217-219 20 Docket, pp. 242-243 21 Docket, pp. 248-249 22 Docket, p. 250

DECISION C.T.A. CASE NO. 7046 respondent's motion23 and admitted its Formal Offer of Evidence in a Resolution dated February 13, 2008. 24 In a Resolution dated March 25, 2008, the Court granted petitioner's Motion (for Partial ReconsiderationP filed on March 5, 2008. Thereafter, petitioner filed its Supplemental Formal Offer of Evidence on April 21, 2008, which was admitted in a Resolutiorr6 dated June 2, 2008. On July 14, 2008, the case was submitted for decision, taking into consideration the Memorandunfl filed by petitioner on July 7, 2008, sans respondent's Memorandum. 28 Hence, this Court's decision. The issues29 as stipulated by the parties are as follows: "1. Whether or not Petitioner's sales of goods and services are zero-rated for VAT purposes under Section 108(B)(2)(3) of the 1997 Tax Code. 2. Whether or not petitioner's claim for refund/tax credit in the amount of P35,178,884.21 represents unutilized input VAT paid on its domestic purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002. 3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged unutilized input VAT paid on its domestic purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002, and applied the same fully to its output VAT liability for the said period. 4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the unutilized input VAT on domestic purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002, from its sales of services to various foreign clients. 5. Whether or not Petitioner's claim for refund/tax credit in the amount of P35,178,884.21, as alleged unutilized input VAT on domestic purchases of goods and services for the period covering 1 July 2002 until 30 November 2002 are duly substantiated by proper documents." 23 Docket, p. 276 21 Docket, p. 284 25 Docket, p. 292 26 Docket, p. 317 27 Docket, pp. 318-337 28 Docket, p. 339 29 Docket, pp. 99-100

DECISIO N C.T.A. CASE NO. 7046 The issues can be simplified as follows: "Whether or not petitioner is entitled to a refund or issuance of tax credit certificate in the amount of P35,178,844.21, representing unutilized input VAT on domestic purchases of goods and services attributable to its sales of services to various foreign clients for the period covering July 1, 2002 to November 30, 2002". Petitioner anchors its claim on Section 112(A) of the National Internal Revenue Code (NIRC) of 1997, as amended, which allows the refund/tax credit of unutilized input VAT attributable to zero-rated or effectively zero-rated sales, to wit: "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: Provide4 however_ That in the case of zero- rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provide4 further_ That where the taxpayer is engaged in zero-rated or effectively zero-rated sales 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 basis of the volume of sales." Based on the afore-quoted provision, the following are the requisites for the granting of a claim for refund or tax credit: 1. 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 the refund was filed within the two-year prescriptive period. I

DECI SION C.T.A. CASE NO. 7046 Anent the first requisite, petitioner asserts that the bulk of its sales for the subject period of claim is subject to zero percent (0%) VAT pursuant to Section 108(8)(2) of the 1997 NIRC, as amended; since the said sales pertain to petitioner's services to various foreign clients in providing management consulting and management information consulting services, including but not limited to, business strategic services, change management services, systems integration, systems management, the development, sale/or licensing of software, and the sale of hardware and related products, either as principal or agent, and other related business activities, and the consideration for which is paid for in accordance with the rules and regulations of th e Bangko Sentral ng Pilipinas. Value-added tax at zero percent (0%) is imposed on revenues derived from sale of services aside from processing, manufacturing or repacking of goods for other person doing business outside the Philippines which goods are subsequently exported, provided that the transaction is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas under Section 108(8)(2) of the 1997 NIRC, as amended, which states: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - XXX XXX XXX (B) Transactions Subject to Zero Percent (0�/o) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0% ) rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the 8angko Sentral ng Pilipinas (8SP). (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)." (Emphasis supplied) I

DECISION C.T. A. CASE NO. 7046 Thus, for services to qualify for zero-rating under Section 108(B)(2), the taxpayer must comply with the following requirements: (1) the recipient of its business is doing business outside the Philippines, (2) the payment of its service fees was in acceptable foreign currency, and (3) accounting of such remittance was in accordance with BSP rules. In order to prove its alleged zero-rated or effectively zero-rated sales, petitioner presented in its formal offer of exhibits, the Official Receipts30, Billing Statements31, Memo Invoices-Receivable32, Memo Invoices-Paya ble33 and Bank Statements34 � In addition, petitioner submitted the Report35 of the Court-commissioned Independent CPA, Mr. Emmanuel Mendoza, dated August 1, 2006, where he noted that petitioner's gross billings as reflected in the Intercompany Payment Requests (IPR) for the fourth quarter of taxable year 2002 (July 2002 to August 2002) and first quarter of taxable year 2003 (September 2002 to November 2002) were all supported by zero-rated official receipts, billing statements, and memo invoices issued by the Company. However, based on the said Report, the Court finds that the alleged zero-rated sales per IPR amounting to P994,325,474.18 are higher than the al leged zero-rated sales per petitioner's Quarterly VAT Returns by P132,525,321.66. However, considering that petitioner did not file an Amended VAT Return to reflect the higher zero-rated sales amount of P994,325,474.18, the Court will consider only the amount of P861,800,152.52 reflected in its VAT Returns for the subject period of claim, broken down as follows: Exhibit No. 4th qtr 2002 Period Covered Zero Rated Sales "E" 1st qtr 2003 July 1 2002 to August 31 2002 Per VAT Returns "K" September 1, 2002 t o November 30, 2002 p 316,113,513.34 Total 545,686,639.18 P861 800 152.52 30 Exhibits "GG -1" to "GG-5" 31 Exhibits " HH-1" to " HH-5" 32 Exhibits "Il-l" to "II-31" 33 Exhibits "JJ -1" to "JJ-33" 34 Exhibits "KK-1" to "KK-5" 35 Exhibit "T"

DECISION C.T.A. CASE NO. 7046 Nevertheless, after a thoroug h review and eval uation of the documentary evidence presented, the Court notes that no evidence was presented to prove the fact that the foreign clients to whom petitioner renders service are clients doing business outside the Philippines. In the case of Commissioner of Interna l Revenue vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.36, the Supreme Court held that another essential condition for qualification to zero-rating under Section 108(B)(2) [then Section 102(b)(2)] is that the recipient of such services is doing business outside the Philippines. The Court quotes hereunder the pertinent portion of the said Decision: "The Tax Code not on ly requires that the services be other than 'processing, manufacturing, or repacking of goods' and that payment for such services be in accepta ble foreign currency accounted for in accordance with BSP ru les. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be 'for other persons doing business outside the Philippines. ' The phrase 'for other persons doing business outside the Philippines' not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term 'services' appearing in t he second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines. This can only be th e logical interpretation of Section 102(b)(2). If the provider and recipient of the 'other services' are both doing business in the Philippines, the pa yment of fo reign currency is irrelevant. Otherwise, those subject to the regu lar VAT under Section 102(a) can avoid paying the VAT by simply sti pulating payment in foreign currency inwardly remitted by the recipi ent of services . To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction . A ta x is a mandatory exaction, not a voluntary contribution. " (Emphasis supplied) 36 G. R. No. 153205, January 22, 2007

DECISION C.T.A. CASE NO. 7046 In this case, the documents subm itted by petitioner merely establish the existence of sale, that the payments of its service fees were in acceptable foreign currency, that the proceeds of such sales transactions were inwa rdly remitted to the Philippines and accounted for in accordance with BSP ru les. Even in the testimonial evidence37 presented by petitioner, there is nothing that will show that the "foreign clients" are doing business outside the Philippines and the Court quotes hereunder the pertinent portion s of the testimony given by Ms. Loida S. Samson, petitioner's Country Controller: "Q: Ms. Witness, what is the general business of Accenture? A: Accenture is engaged in a management consultant services. Q: And who are the clients of Accenture? A: Most of our clients are foreig n clien ts. " (Emphasis supplied) Likewise, even in the Report prepa red by Mr. Emmanuel Mendoza, there is no indication or mention to the effect that petitioner's foreign clients are doing business outside the Philippines. Petitioner's allegation that its clients were " foreign clients" is not sufficient to meet the requirement of the law t hat th e recipient of its service is doing business outside the Philippines. The phrase "foreign clients" is couched in general terms that the Court cannot just simply assume that they are doing busi ness outside the Philippines. A "foreign client" may also be engaged in doing business in the Philippines and in that case, when the petitioner and the recipient of its services are both doing busi ness in the Philippines, their transaction falls squarely under Section 108(A) of NIRC of 1997, as amended; governing domestic sale or exchange of services subj ect to 12% VAT. Even if there is an allegation that these foreign clients are doing business outside the Philippines, still the Court cannot give weight 37 TSN, June 6, 2006, pages 4 to 5

DECISION C.T .A. CASE NO. 7046 to such allegation. Mere allegations are not sufficient but must be accompanied by supporting evidence. 38 Thus, petitioner fails to prove that its sale of services to "foreign clients" qualifies for zero percent VAT. Well settled is the rule that a claim for refund is construed strictissimi juris against the taxpayer as it partakes in the nature of exemption from taxation.39 Furthermore, this Court believes that in cla ims for refund, t he law mandates the court to observe a higher standard of caution in appreciating and evaluating evidence. If indeed a claim for refund is wanting in pertinent and supporting evidence, then the granting thereof could prove to be improper, if not difficult. ~0 Petitioner has th e burden of proof to establish the factual basis of its claim for tax refu nd, which petitioner failed to do. Accordingly, the Cou rt wil l no longer discuss the other requisites, and hereby finds that the claim for refund or issuance of ta x credit certificate_must be denied. WHEREFORE, with the foregoing disquisitions, the Petition for Review is hereby DENIED for insufficiency of evidence. SO ORDERED. WE CONCUR: Q_~ ts>- DQ__J,..- ERNEsTo D. ACOSTA Presiding Justice CAESAR A. CASANOVA Associate Justice 38 Accenture Inc. vs . Commissioner of Internal Revenue, CTA Ca se Nos. 7158, 7285 & 73 13, August 7, 2008 39 Citibank N.A. vs . Court of Appeals, et. al. , G.R. No.107434, October 10, 1997 40 EON Joint Venture Inc. vs . Commissioner of Internal Revenue, CTA Case No. 6398, May 26, 2003

DECISION C.T.A. CASE NO. 7046 CE TIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~ (9-~ ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division