DYNO NOBEL PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY DYNO NOBEL PHILIPPINES, INC., Petitioner, -versus - C.T.A. CASE NO. 6098 COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. MAY 142002 ~ X-------------------------------- - ---- ----- -------------------~~ DECISION This Petition for Review involves a claim for the refund or for the issuance of tax credit certificate in the amount of P2,198,334.33 allegedly representing the unutilized input VAT paid on domestic purchases of goods and services and importation of capital goods, alleged to be attributable to its zero-rated export sales, covering the taxable year 1998 . The facts of the case as culled from the records are as follows: Petitioner is a domestic corporation duly organized and existing under and by virtue of Philippine law and is principally engaged in the business of manufacturing ammonium nitrate for export and sale abroad (Joint Stir.dation of Facts, Item No. I & 3, CTA records, pp.83-84). It is duly registered with the BIR as a VAT taxpayer and with the Board oflnvestments as an exporter of chemical products (ibid. , Item No. 4 & 5, CTA records, p .84). For the taxable quarters covenng January L 1998 to December 31 , 1998, petitioner filed its 15 211d, 3rd and 4th Quarterly VAT returns. On May 27, 1999, \

DECISION CTA Case No. 6098 Page 2 petitioner filed an amended quarterly VAT returns pertaining to the same quarters of the same taxable year. Subsequently thereafter, on April 18, 2000, petitioner again filed an Amended Quarterly VAT returns for the 15\ 2"d, 3rd and 4th quarters of the period January 1, 1998 to December 31 , 1998. Records would show that for the first quarter of 1998, petitioner had total input VAT payments ofP 1,543 ,714.41 pertaining to the previous quarters (4th quarter of 1997) unutilized input VAT payments of P 369,395.68 and �:urrent input VAT payments of P1 ,174,318.73. Said total input VAT payments of P1 ,543 ,714.41 were applied against the current output VAT ofP 424,567.15 thus leaving an unutilized input VAT payments of P1 ,119,147.26 for the 1st quarter of 1998 (Exhibit N). For the 2"d quarter of 1998, petitioner had current input VAT payments ofP1 ,118,895.01. Said input VAT payments were applied against the current output VAT of P508,324.24 thus leaving a balance of P610,570.77. Petitioner opted to carry over said unutilized input VAT payments to the succeeding quarter to be applied against petitioner' s output VAT liability (Exhibit 0). For the 3rd quarter of 1998, petitioner had total input VAT payments of P1 ,594,778 .83 pertaining to previous quarter' s unutilized input VAT of P61 0,570.77 and current input VAT payments of P984,208.06. Said total input VAT of P1,594,778.83 were applied against the current output VAT of P1,225,032.25 leaving a balance of P369,746.58 representing the unutilized input VAT payments for the 3rd quarter of 1998 (Exhibit P). For the 4th quarter of 1998, petitioner had current input VAT payments ofP941 ,106.69. Said input VAT payments were applied against the current output VAT of P231 ,666.20 thus leaving a balance ofP709,440.49 (Exhibit Q).

DECISION CTA Case No. 6098 Page 3 From the foregoing, petitioner is claiming the 11ggregate unutilized input VAT payments amounting toP 2,198,334.13 which pertains to the 15\ 3rd and 4th quarter of 1998 as these have not been carried over to the succeeding quarter, thus: Quarter Input VAT Output VAT Total Unutilized In utVAT 15tQ 1998 p 1,543 ,714.41 p 424,567.15 3rd Q 1998 1,594, 778.83 1,225 ,032.25 p 1,119,147.26 4th Q 1998 941,106 .69 231,666.20 369,746.58 709 440.49 TOTAL p 2,198,334.33 Believing that it has unutilized input VAT credits, petitioner filed separate applications for refund/tax credit for the 15\ 3rd and 4th quarters of 1998 with the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the DOF on March 27 , 2000 together with the required BIR Form No. 2552. To date, respondent has neither approved nor granted petitioner's claim for refund or application for tax credit of its unapplied VAT input taxes for the 15\ 3rd and 4th quarters oftaxable year 1998 in the aggregate amount ofP2,198,334.33. Hence, on April 19, 2000, petitioner filed a Petition for Review with this Court reiterating its stance. Respondent, for his part raised the following Special and Affirmative Defenses, to wit: 1. Petitioner's alleged claim for refund is subject to administrative routinary investigation/ examination by Respondent's Bureau; 2. The amount of P2,198,334.33 being claimed by petitioner representing alleged excess and/or unutilized input VAT for the 15\ 3rd and 4th quarters of 1998 was not properly documented;

DECISION CTA Case No. 6098 Page4 3. In an action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund and failure to adduce sufficient proof is fatal to the claim for tax refund/credit; 4. Petitioner must show that it has complied with the provisions of Sections 204 (C) and 229 ofthe Tax Code, as amended; 5. Petitioner miserably failed to prove compliance with the following: a. Section 4.1 00-2 in relation to Section 4.1 02-1 and Section 4.102-2 of Revenue Regulations No.?-95. b. Section 4.104-5 of Revenue Regulations 7-95 . 6. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation (Commissioner of Internal Revenue, 31 'SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs Commissioner ofInternal Revenue, 124 SCRA 121) The issues to be resolved by this court which, has been jointly stipulated by the parties are: 1. Whether or not petitioner has unutilized input VAT for the taxable quarters covering the period January 1, 1998 to December 31 , 1998 in the aggregate amount of P2,198,334.33 pertaining to domestic purchases of goods and services, and importation of capital goods which is a proper object of a claim for refund pursuant to Section 112 of the National Internal Revenue Code, as amended . 2. Whether or not the said unutilized in,put VAT of the petitioner was duly substantiated by documentary evidence in the form of invoices and official receipts. 3. Whether or not the said unutilized input VAT of the petitioner for the taxable year 1998 was carried forward to the succeeding taxable quarter and applied against any of the output VAT of the petitioner for the said period. 4. Whether or not petitioner generated export zero-rated sales for the period covering January 1, 1998 to December 31 , 1998.

-J DECISION CTA Case No. 6098 Page 5 5. Whether or not the petitioner has proven by sufficient evidence that it is entitled to the refund/tax credit being claimed in the instant case. As the foregoing issues are interrelated, we deem it best to streamline them into one main issue of "Whether or not petitioner is entitled to the tax refund/credit in the aggregate amount of P2,198,334.60 allegedly representing the unutilized creditable input VAT pertaining to domestic purchases of goods and services and importation of capital goods for the taxable year 1998." Petitioner anchored its claim for refund based on Section 106(a) of the Tax Code (now Section 112(A) of the Tax Reform Act of 1997), as amended. To quote: "SEC. 106. Refunds or tax credits of creditable input tax. - (a) 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: Provided, however, That in the case of zero- rated sales under Section 100 (a) (2) (A) (i), (ii) and (b) and Section 102 (b) (1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance wfLh the regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." Corollary, Section 11 ofthe same code defined Export Sales in this guise: "Sec. 100. Value-added tax on sale ofgoods or properties.-(a) x XX (2) The following sales by a VAT-registered person shall be subject to 0%: (A) Export sales.- The term ' export sales' means :

DECISION CTA Case No. 6098 Page 6 (i) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods and services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" As per the amended quarterly VAT returns submitted by petitioner, it appears that petitioner has creditable input VAT due in the aggregate amount ofP2,198,334.33, to the extent that said input VAT has not been applied agamst any output tax pursuant to Section 106 (A) (now Section 112 (A)) of the Tax Code. It was established that for the period January 1, 1998 to December 31, 1998, petitioner had input VAT in the amount of P 2,198,334.33 arising from domestic purchases of goods and services as well as importation of goods, broken down as follows: PURCHASES OF GOODS & SERVICES INPUT TAXABLE CLAIM FOR VAT SALES REFUND QTR. EXHIBIT DOMESTIC IMPORTATION (E=C+D X 10%) .(�} (G=E-Fl !A} !ID 19 .I.Q1 CARRIED OVER FROM PREVIOUS QUARTER 369 ,395.68 749,751 .85 1ST 98 Np 5,837 ,747.25 p 5,905,440.00 p 1' 174, ''�19.00 p 424 ,567.15 610 ,570. 77 1' 118,895.01 508 ,324 .24 (240 ,824 . 19) 2ND 98 0 6 ,335,294.92 4,853,651 .74 1,225 ,032.25 709,440.49 984 ,208 .06 231 ,666.20 2,198,334.60 3RD 98 p 6 ,539 ,648 .08 3,302,432 .50 941 ' 106.69 2,389,589 .84 4,218,528.76 p 4TH 98 Q 5,281 ,566.86 4 ,129 ,510 .00 TOTAL p 23,994,257.11 p 18,191 ,034.24 p A run down of the records of the case would reveal that petitioner's unutilized/creditable input taxes pertaining to the domestic purchase of goods and importation of goods and services are supported by various invoices and official receipts (Exhibits AA-1-1 to Exhibits AA-8-244 to AA-8-524) which have been duly submitted

DECISION CTA Case No. 6098 Page 7 with this court. Moreover, in the amended quarterly VAT returns, petitioner deducted the amount of input taxes claimed for each of the respective quarters (1 5 3rd and 4th) under \ the line: "Less: ANY REFUND/TCC CLAIMED". (Exhibits N, P, Q). Evidently, the total claimed unutilized creditable VAT input taxes was no longer carried over to the succeeding quarter, the 1st quarter of taxable year 1999 (ExhibitS) . True enough, the input VAT remained unutilized/unapplied because the goods of petitioner were allegedly 100% exported and therefore, subject to VAT at zero percent (0%) pursuant to Section 100(2)(A) of the Tax Code, as earlier quoted. Petitioner, in its second amended Quarterly Value-Added Tax Returns for the 1st quarter to 4th quarter of 1998 declared zero-rated sales in the amount ofP460,100,167.19, computed as follows : QUARTER EXHIBIT EXPORT . INVOLVED SALES 1st QTR N p 147 ,209 ,093 .68 153 ,850 ,374.44 2"d QTR 0 125 ,826 ,309 .56 33 ,214 ,389 .51 3ro QTR p 460,100,167.19 4 th QTR Q TOTAL p Section 100(a)(2) of the National Internal Revenue Code (then in effect at the time of the alleged exportation) defines "Export Sales" as the sale and shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported. In that case, it is imperative for any claimant of a tax refund or credit in relation to the input VAT paid to prove not only the existence of the sale but also the

DECISION CTA Case No. 6098 Page 8 actual shipment of the goods from the Philippines to a foreign country (Commissioner of Internal Revenue vs. Philippine Bobbin Corporation, CA G.R. SP No 59452, dated March 8, 2001). Thus, as can be gleaned from the records of tht' case as well as the verification made by the independent CPA, the export sales of petitioner were properly supported by bills of lading and shipping invoices. By and large, these documents affirm the authenticity of the export sales and if laid down together would establish the fact of exportation as they contain the information regarding the quantity of the goods, their destination as well as the amount involved. With regards to petitioner's input VAT this court made reference to the findings of the independent accounting firm commissioned by the Court. Thus, pursuant to CTA Circular No. 1-95, as amended, petitioner engaged the services of SGV & Co. to conduct a special audit on the matter. Below is a summary of the independent CPA' s findings (Exhibit Z) : Findings Amount of Disallowable Input Taxes 1 Domestic purchases of goods supported by documents other than p 29 ,746.82 VAT invoices (e.g. airway bill, ORs , delivery receipts , purchase order, statement of billing , cash slip, cash register, etc.) 2 Domestic purchases of services supported by documents other than 50 ,140.52 VAT official receipts (ORs) (e.g. airway bill, invoices, delivery ' Receipts, purchase order, statement of billing , cash slip, cash Register, etc.) 3 Domestic purchases of goods supported by invoices with pre-printed 26 ,255.65 TAN-VATN printed after July 31 , 1991 with stamped TIN-VNAT

DECISION 58,761 .82 CTA Case No . 6098 1,400.35 Page 9 587 .54 31 .82 4 Domestic purchases of services supported by ORs with stamped/ 53.53 handwritten 'VATN' only 103,755 .00 5 Domestic purchases of goods supported by photocopied documents 6 Domestic purchases of services supported by photocopied documents 7 Domestic purchases of goods supported by VAT invoices not in the name of the company 8 Erroneous computation of input tax credits 9 Importation of goods without supporting documents Total p 270 ,733.05 After further verification of the documents submitted, we found the independent's report to be in order save from some minor but notable exceptions. Thus, the court found that the following input VAT, which the independent auditing firm failed to consider, should likewise be disallowed, to wit: SUPPLIER EXHIBIT REF. NO. AMOUNT INPUT VAT (a) Invoice with stamped "TIN-VNAT after July 31 , 1991 4,000.00 p 363.64 CENTER TRADE PRINTHAUS AA 2-202 6414 (b) Invoice or official receipt not in the name of the company COPYER COPY CENTER AA 4-393 648938 46.4 1 p 4.22 CHUYTE ORDONEZ STORE AA 6-275 393551 64 .00 POST GROCERY AA 6-367 185500 360 .00 5.82 NEW ABIAN STORE AA 8-479 30768 933 .50 32 .73 84 .86 Subtotal p 127.63 (c) Overstated input VAT DON ATILANO AA 4-402 12713 1,799.49 p 181 .60 p 179.95 1.65

DECISION CTA Case No. 6098 Page 10 LEE SUPER PLAZA AA 6-336 254003 39 ,834.55 p 3 ,654 .55 33.23 DON ATILANO AA 6-77 13981 9,076.43 p 3,621 .32 7.57 DON ATILANO AA 8-284 15308 1,445.34 p 1.20 DON ATILANO AA 8-284 14193 5,199.134 p 832 .70 4.34 825.13 Su btotal 132.60 47.99 Total 131.40 539.26 477 .05 472 .71 p p In sum, the court recommend to partially grant petitioner's claim for refund in the amount ofP 1,927,062.02, computed as follows: Amount claimed P2, 198,334.33 Less: Disallowances 271,272 .31 p 1.927.062.02 (a) Per independent CPA' s verification P270,733 .05 (b) Per Court' s further verification -----..,, 539 .26 Amount Refundable WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby GRANTED but in the reduced amount of P1 ,927,062.02. Respondent Commissioner of Internal Revenue is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of herein petitioner in the amount of ONE MILLION NINE HUNDRED TWENTY SEVEN THOUSAND SIXTY TWO PESOS AND 02/100 (P1 ,927,062.02) representing unutilized input VAT paid attributable to petitioner' s zero- rated export sales covering the taxable year 1998. SO ORDERED. L (Q _0~ ERNESTO D. ACOSTA Presiding Judge

DECISION CTA Case No. 6098 Page 11 I CONCUR: ~e-~~Q. q{JANITO c. CASTANEDA,~.. Associate Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ERNESTO D. ACOSTA Presiding Judge