PHILIPPINE PHOSPHATE FERTILIZER CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TA-X APPEALS QUEZON CITY PHILIPPINE PHOSPHATE FERTILIZER CORPORI\TION, Petitioner, -versus- C. T.A. CASE NO. 5523 THE HONORABLE CO:Mi\.fiSSIONER OF THE BUREAU OF INTERNAL REVENUE, Promulgated: ~ ' x-------------------------R-e-sp-o-n-de-n-t.--------Q--C-T--2-5--19-9----~ DECISION Before Us for consideration is a Petition for Review filed by the Petitioner on April 21 1997, seeking for a refund of the amount of ONE HUNDRED FIFTY THOUSAND THREE HUNDRED PESOS (P150,300.00) representing specific taxes allegedly paid during the period January to June 1995. The antecedent facts of the case giving rise to the controversy at bar are a.':! follows: Petitioner is a domestic corporation registered with the Expoti Processing Zone Authority (EPZA). It is engaged in the business of manufacturing fertilizer for domestic and intemational distribution. As manufacturer, it procures its fuel oil and other petroleum products locally. As manufacturer of exportable fet1ilizer, Petitioner secured from Petron, an importer of petroleum and fuel supplies, the fuel oil and other oil products, such as diesel

DECISION C.T.A. CASE NO. 5523 Page 2 and lubricants, which are indispensable for its operations. The specific and ad.valorem taxes, including the customs duties on the subject petroleum products, were allegedly paid by Petron to the Bureau of Internal Revenue and the Bureau of Customs, respectively. When these petroleum products were later sold and brought to the Expott Processing Zone for use therein in the Petitioner' s production of exportable fertilizer, the latter was billed the cotTesponding taxes and customs duties. In other wordr.;, the taxes and customs duties originally paid by Petron upon importation of the petroleum products are in tum passed on and charged to Petitioner by Petron upon delivery and sale of the petroleum products. As a result, Petron was reimbursed by the Petitioner on the said taxes and duties it previously paid to the Respondent and the Bureau of Customs. Relying on its tax-exempt status provided under Section 17 (1) of PD No. 66, Petitioner filed on April 2, 1997 with the Bureau of Internal Revenue an administrative claim for refund in the amount of P150,300.00 (Exh. 1) representing specific taxes paid on petroleum products purchased fi-om Petron during the period January to June 1995. Obtaining no affmnative response from the Respondent, Petitioner elevated its grievance with this Court on April21, 1997.. As intimated earlier, Petitioner's assertion hinges mainly on the provisions of Section 17 (1) of PD No. 66, as amended, which provides: Section 17-Tax Treatment of l\.1erchandise in the Zone- 1) Except as otherwise provided in this Decree, foreign and domestic merchandize, raw materials, supplies, mticles, equipment, machineries, spare parts and wares of every description except those prohibited by law, brought into the zone, to be sold, stored, broken up, repacked, assembled, installed, sorted, cleared, graded, or othenvise processed, manipulated, manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such

DECISION C.T.A CASE NO . 5523 Page 3 activity shall not be subject to customs and internal revenue laws and regulations nor to the local tax ordinances, the provisions of the law to the contrarv notwithstanding. (underlining supplied) On the other hand, in the Answer filed by the Respondent, the following Special and Affitmative Defenses were inteq)osed: 4. Petitioner's claim for tax refund is yet under administrative investigation; 5. The total amount ofP150,300.00 being claimed by the petitioner for the refund of the alleged specific taxes paid was not properly documented; 6. Taxes paid and received by the government are presumed to have been collected in accordance with law and regulations, hence, not refundable; 7. In an action for tax refund/credit the burden of proof is on the taxpayer to establish its right thereto and failure to sustain the same is fatal to the action; 8. It is incumbent upon the Petitioner to show that it has complied with the provisions of Section 204 in relation to Section 230 both of the Tax Code, as amended; 9. Well-settled is the rule that claims for refund are construed strictly again'it claimant'J, since they patiake of the nature of exemption from taxation. (Resins, Inc. vs. Auditor General, 25 SCRA 754, 1968) This case was deemed submitted for decision per resolution on April 13, 1999. Respondent did not submit Memorandum in suppot1 of his case. Forming the crux of the matter in the case at bar is whether or not on the basis of the evidence presented, documentary and testimonial, Petitioner wa'J able to establish its entitlement for refund in the amount ofP150,300.00 representing excise taxes paid during the petiod January 1995 to June 1995.

DE C ISION C.T.A. CASE NO . 5523 Page 4 The petition essentially raises a factual issue. We have time and again ruled that customs and internal revenue laws and regulations as well as local tax ordinances are not applicable to merchandise brought inside the Export Processing Zone provided that the said merchandise are used directly or indirectly in zone-related activities. Tins is the gist of Our ruling in the cases of Philippine Phosphate Fertilizer Corporation vs. Hon. Commissioner of Customs, CTA Case No. 4661, May 31, 1993; and Plulippine Phosphate Fertilizer Corporation vs. Hon. Commissioner of Customs, CTA Case 4957, October 5, 1995, thus, Section 17 (1) covers domestic merchandise, raw materials, supplies, at1icles and wares of every description, except those prohibited by law, brought into the zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleared, graded, or othenvise processed, manipulated, manufactured, mixed or used directly or indirectly in such activity shall not be subject to customs and internal revenue laws and regulations. Oil products produced by local oil companies maybe classified as domestic merchandise, raw materials or supplies as legally defmed in the Supreme Cout1 case of Commissioner of Customs vs. Caltex (Philippines), Inc., GR No. L-13067, December 29, 1959. 106 Phil. 829 which states that supplies or materials shall include gasoline from custom duties under At1icle 103 of RA No. 387. For what putvose, among others, these products may be brought into the zone for processing, manipulation, manufacture, mixed with foreign and domestic merchandise or used directly or indirectly in such activity. In our pat1icular case, the petroleum products delivered to petitioner is used in the processing of fertilizer for export. While respondent may be correct that these products did not form part of the fertilizer exported, nevet1heless, the law does not provide for such requirement but only requires the use of such materials directly or indirectly in such activity. The use of petroleum products, like bunker oil as fuel will easily fall under the plu�ase 'used directly or indirectly in such activity' . Clearly, these petroleum products can easily qualify for tax and duty free privilege under Section 17 (1) of PD No. 66.

DECISION C.T.A. CASE NO. 5523 Page 5 XXX X.XX X.XX This interpretation is strengthened by the enactment of EO 226 (The Omnibus Investments Code). The tax treatment of merchandise inside the zone was re-enacted under Atticle 77 of Book 1V of the Code but not Section 18 (i). Said Section 18 (I) was deleted fi:om Book 1V governing incentives of BOI registered enterprise under Book I which an EPZA registered enterprise may also enjoy as an additional incentive under At�ticle 78. XXX XXX X.XX Finally, under paragraph 2 of EO 226 aforequoted, the purchase of merchandise by a registered zone enteq:nise was likewise considered as export sale and the exporter shall be entitled to the benefits allowed by law for such transaction. Tllis will entitle the expot1er to duty drawback under Section 106 of the Tariff and Customs Code and tax credit under Section 127 (d) of the National Internal Revenue Code. Considering that pursuant to the aforequoted provision of the LOI and EO 226, the mere act of selling and delivering products to the export processing zone enterprise can be considered already as export sale without awaiting for actual exportation, the allegation of the respondent that the atticles sold to an EPZA registered entetvrise should fmm patt of the fmished product actually exported will hold no water at all. All the above incentives spring from the concept that an expott processing zone is carved out of the Pllilippine territory for purposes of enforcement of customs and tax laws. So that the area or areas fixed or delimited by presidential proclamation or by board resolution of the Export Processing Zone Authority as expot1 processing zone shall be referred to as the zone and the national territory outside of the zone shall be called customs territory (Section 2(e) and (f) of the Amended mles and Regulations to implement PD 66). The basic policy in establishing a zone is to attract enterprises especially foreign investors who will be manufacturing products primarily for export and be able to do so without their supplies and raw materials enteting, and the export products leaving the Pllilippine tetTitory within the context of customs and revenue regulations. Export is the backbone of our economy and is being encouraged by

DECISION C.T.A. CASE NO. 5523 Page6 providing enterprises with all the incentives including those which we have discussed above. For which reason the law fut1her states that "all doubts conceming the benefits and incentives granted to enterprises and investors by the Code shall be resolved in favor of investors and registered enterprises." XXX XXX X,XX Pursuant to the above-quoted ruling, and as reiterated in subsequent decisions of this Cout1 in cases involving similar factual milieu, Petitioner, being an EPZA registered enterprise, shall be exempt from the payment of excise taxes on the petroleum products secured by it from Petron Cotvoration, thus, all taxes paid by the Petitioner on the said products indispensable to its operations shall be refunded in its favor or credited and be applied againo;;t its future tax liabilities, ifthere be any. Having settled the legal issue in the affirmative, We shall now proceed to the factual basis ofPetitioner's claim. It is clear from the records of this case that the specific taxes on the petroleum products sold and delivered by Petron to Petitioner were paid in advance by Petron to the Bureau of Intemal Revenue which taxes were subsequently passed on and charged to Petitioner by Petron as evidenced by the following documents and as testified to by Petitioner's witness: 1.) Authority to Accept Payment for Excise Taxes (Exhibits B to J, inclusive) 2.) Invoices issued by Petron to petitioner (K-1 to K-74, inclusive) 3.) Testimony of Ms. F1orita Guinto Evangelista, Supervisor, Controller Department, Petron Corp. (TSN, March 23, 1998, pp. 7-13) However, upon scrutiny of the evidence, this Cout1 found out that the sum of P27,900.00 representing specific taxes paid by Petitioner shall be disallowed since the

DECISION C.T.A. CASE NO. 5523 Page 7 same represent taxes on the petroleum products sold and delivered beyond June 3, 1995, the expiry date of Petitioner's EPZA registration. Thus, the refundable amount to Petitioner is computed as follows: Amount per claim P150,300.00 Less: Specific taxes paid on deliveries beyond June 3, 1995 Exh. Invoice Invoice Volume Date (in liters) Number K-7 541571 06/14/95 12,000 K-3 14,000 K-9 738524 06127/95 12,000 K-8 12,000 K-6 914213 06106195 12,000 62,000 Amount Refundable 914214 06/06/95 X .45 967705 06/21195 Total Multiply by Tax Rate 27,900.00 P122,400.00 WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to REFlJND in favor of Petitioner the amount of P122,400.00 representing ad valorem and specific taxes for the period January to June 1995. SO ORDERED. /-' ;:J~ RAMON 0. DE VE " Associate Judge WE CONCUR: ~ Q- ~ L ERNESTO D. ACOSTA Presiding Judge ~~ ~''.l.r1J. Q. s Associate Judg

DECISION C.T.A. CASE NO. 5523 Page 8 CERTIFICATION I hereby certifY that this decision was reached after due consultation with the members of the Cout1 of Tax Appeals in accordance with Section 13, At1icle \ liii of the Constitution. ~\0-~ ERNESTO D. ACOSTA Presiding Judge