KEPCO PHILIPPINES CORPORATION v. THE COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY KEPCO PHILIPPINES CORPORATION, Petitioner, -versus- C.T.A. CASE NO. 5761 THE COMMISSIONER OF INTERNAL Promulgated: REVENUE, JUl 14 2003 Respondent. 14?4/IY'czh,.~t~ X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~- : - - X DECISION This is a Petition for Review claiming for the refund or issuance of a tax credit certificate in the amount of P31 ,590,928.85 allegedly representing unutilized input value- added tax for the taxable year 1997 arising from domestic purchases of goods or services attributable to the sale of electricity to the National Power Corporation (NPC, for brevity) and capital goods. The antecedents, as adduced from the records of the case, are summarized as follows : Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with its principal place of business located at Suite 2501- A, 25th Floor, Tektite Tower I, Exchange Road, Ortigas Center, City of Pasig (Joint Stipulation of Facts, Paragraph I, CTA records, p.51). It is a Value-Added Tax (VAT) registered taxpayer engaged in the production and sale of electricity (as an independent

DECISION- eTA CASE No. 5761 Page2 power producer), and sells electricity to the National Power Corporation (NPC) (Joint Stipulation of Facts, Paragraph 2, CTA records, p.51). For the four taxable quarters of calendar year 1997, petitioner duly filed its quarterly VAT returns with respondent BIR through the BIR' s authorized agent bank (Joint Stipulation of Facts, Paragraph 3, CTA records, p.51). According to petitioner, during the four taxable quarters of 1997, it has incurred expenses representing domestic purchases of goods and services, for which it paid input VAT representing 10% of the total amount of the said purchases allegedly attributable to the production and sale of electricity to the NPC. The input VAT paid in the total amount of P31 ,590,928 .85 were accordingly reported by petitioner in its quarterly VAT returns for the 15 2"d, 3rd and 4th quarters of 1997, detailed as follows : \ Quarter Input VAT Exhibit l si p 5,763,858.42 LL 2nd 3rd 6,634,853 .17 MM 4th 5,533 ,783 .25 NN TOTAL 13 ,658,434 .01 00 P31 25902928.85 Petitioner alleged that the said input VAT it paid on its domestic purchases of goods and services had remained unutilized considering that petitioner does not have any output VAT against which the same could be applied . According to petitioner, the absence of any output VAT is explained by the fact that NPC is its sole customer such that all its sales are zero-rated and, therefore, do not result to any output VAT .

DECISION- eTA CASE No. 5761 Page3 Petitioner filed the appropriate Application for Effective Zero Rating of its sales of electricity to NPC with respondent Commissioner of Internal Revenue (Joint Stipulation~~Facts, Paragraph 4, CTA records, p. 52). On March 30, 1999, petitioner, through its external auditors, filed with RDO No . 42 of the Bureau of Internal Revenue, a claim for refund of the unutilized input VAT incurred for the four taxable quarters of calendar year 1997 (Joint Stipulation of Facts, Paragraph 5, CTA records, p.52). To date, respondent has not acted on the subject claim for refund or tax credit. Thus, on March 31, 1999, petitioner filed with this court a Petition for Review claiming for the refund of the amount of P31 ,590,928 .85 as its unutilized input VAT for taxable year 1997. On June 4, 1999, respondent filed an answer to the instant petition for review, and raised therein the following Special and Affirmative Defenses, to wit: 1. "That the herein petitioner is not entitled to the refund of the amounts prayed for in the instant petition for review; 2. That the instant petition for review was prematurely filed as petitioner has not exhausted the administrative remedies required by law and jurisprudence on the action of this nature as no decision has as yet been rendered by the respondent; 3. Such being the case the Honorable court has no jurisdiction over the petition for review" . Subsequently, in a Resolution promulgated on March 19, 2002, this court granted petitioner' s "Motion for Leave of Court to Admit Attached Amended Petition for Review" filed by petitioner on December 21 , 2001 in order to include an additional cause of action in pursuing its claim for refund, particularly Section 106(b) of the 1995 Tax

DECISION- CTA CASE No. 5761 Page4 Code. Said law allows the refund of unutilized input VAT directly attributable to capital goods. Thereafter, petitioner presented additional oral and documentary evidence, among others, is the "Classified Summary of Domestic Purchases" to prove that its unutilized input VAT being claimed for refund or tax credit includes input VAT from domestic purchases of capital goods during the taxable year 1997. The claim for refund was recomputed as follows (Exhibits V, Z, DD and HH): Capital Goods Non-Capital Goods Total VAT Claim AU owed Disallowed Total AUowed Disallowed Total AU owed Disallowed Jan p 586,201.16 p 23,263.53 p 609,464.69 p 4,668.63 p 38, 122.09 p 42,790.72 p 590,869.79 p 61 ,385.62 p 652,255.41 Feb 1,573,647.42 74,691.08 I,648,338.50 59,747.55 2,510.34 62,257.89 1,633,394.97 77,201.42 1,710,596.39 Mar 2,789,087.12 528,610.64 3,317,697.76 66,516.82 16,792.04 83,308.86 2,855,603.94 545,402.68 3,40 I,006.62 Apr 2,309,607.82 554,581.54 2,864,189.36 129, 164.45 90.91 129,255.36 2,438,772.27 554,672.45 2,993,444.72 May 1,640,274.51 909,560.05 2,549,834.56 73, 116.37 2, 176.19 75,292.56 1,713,390.88 911 ,736.24 2.625, 127.12 June 739,064.62 182,398.75 921 ,463.37 83,458.04 11 ,359.92 94,817.96 822,522.66 193,758.67 I,016,281.33 July 1,838,573.88 360,623.93 2, 199, 197.81 117,626.41 79,059.99 196,686.40 I,956,200.29 439,683.92 2,395,884.21 Aug 1,788,933.72 195,416.74 1,984,350.46 70,462.19 72,049.55 142,511.74 1,859,395.91 267,466.29 2, 126,862.20 Sep 570,929.77 255,030.01 825,959.78 152,222.89 32,854.17 185,077.06 723, 152.66 287,884.18 1,011 ,036.84 Oct 1.521 ,286.90 69,886.55 1,591 , 173.45 112,577.79 56,291.47 168,869.26 1,633,864.69 126, 178.02 1,760,042.71 Nov 1,483,042.37 1,210, 173.32 2,693,215.69 115,140.13 10,216.68 125,356.81 1,598,182.50 1,220,390.00 2,818,572.50 Dec 7,502,089.67 I,274,350.40 8,776,440.07 176,988.98 126,389.75 303,378.73 7,679,078.65 1,400,740.15 9,079,818.80 Total P24,342,738.96 P5,638,586.54 P29,981 ,325.50 Pl , l61 ,690.25 P447,913.10 PI ,609,603.35 P25,504,429.21 P6,086,499.64 P31 ,590.928.85 The issues to be resolved in the case at bar are streamlined as follows: 1. Whether or not the sale of electricity by a VAT-registered entity to the National Power Corporation (NPC) qualifies as a sale of services subject to a VAT rate of zero percent (0%) or otherwise called as zero-rated VAT transaction (Joint Stipulation of Issues, Paragraph I, CTA records, p.52); 2. Whether herein Petitioner, as a VAT-registered entity, did, for the calendar year 1997, actually incur expenses representing domestic purchases of goods and services, for which it incurred an input VAT in the amount of P31 ,590,928 .85, which expenses represent the costs attributable to Petitioner's production and sale of

DECISION- eTA CASE No. 5761 Page5 electricity to the NPC (Joint Stipulation of Issues, Paragraph 2, CTA records, pp.52 & 53). 3. Whether or not petitioner is entitled to the claimed input VAT payments on capital goods purchased for taxable year 1997. The issue of whether or not the sale of electricity by a VAT-registered entity to NPC is effectively zero-rated for VAT purposes is not one of first impression as the same had already been resolved by this court in the affirmative in a number of similar cases. Thus, the law applicable thereto is Section 102(b)(3) [now Section 108(B)(3)] ofthe Tax Code in relation to Section 13 ofRepublic Act No. 6395 (NPC Charter), as amended, to wit: "Sec. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - xxx (b) Transactions subject to zero-rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1) XXX (2) XXX (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate." (Underlining supplied). XXX XXX XXX "Section 13. Non-profit Character of the Corporation : Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities. - The Corporation shall be non-profit and shall

DECISION- eTA CASE No. 5761 Page 6 devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance of effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings." (Underscoring supplied). Clearly from the foregoing, NPC is an entity with a special charter, which categorically makes it exempt from payment of all taxes, whether direct or indirect, including VAT. Hence, by virtue of the said charter, services rendered by a VAT registered entity to NPC are effectively subject to zero percent (0%) VAT (Mirant Navotas Corporation vs. Commissioner of Internal Revenue, CTA Case No. 6044, October 16, 2002) . Moreover, no less than the Supreme Court affirmed NPC' s tax exemption in the case of Maceda vs. Macaraig, Jr., G.R No. 88291, May 31, 1991, 197 SCRA 771 , where the High Tribunal held that : x x x Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from 'all forms of taxes x x '. The use of the phrase ' all forms ' of taxes demonstrate the intention of the Jaw to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the corporation to pay the indebtedness and obligations in furtherance and effective implementation of the policy enunciated in Section one of this Act,xxx". XXX XXX XXX

DECISION- eTA CASE No. 5761 Page 7 "It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes x x x if it is to attain its goals (emphasis ours) ." Thus, in order to qualify for effective zero-rating under Section 102(b)(3 ), petitioner must be able to prove the following : (a) that it is a VAT-registered entity and (b) that it actually derived sales from services rendered to NPC, an entity exempt from VAT by virtue ofRepublic Act No. 6395, as amended. The fact that petitioner is a VAT-registered entity is undisputed (par. 2, Joint Stipulation ofFacts). It should be noted, however, that petitioner' s quarterly VAT returns for taxable year 1997 (Exhibits LL, MM, NN and 00) did not reflect any amount of the alleged zero-rated sales and failed to substantiate the same. Also, petitioner did not submit the corresponding invoices and/or official receipts showing its sales of electricity to NPC for the subject period. Since petitioner failed to submit documents evidencing that it has reported effectively zero-rated sales for 1997, it follows that the input VAT payments allegedly attributable thereto cannot be refunded . It is clear from the provisions of Section 106(a) [now Section 112(A)] of the Tax Code that there must be zero-rated or effectively zero-rated sales in order that a refund of input VAT could prosper, to wit : "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)(l) and (2), the acceptable foreign currency exchange

DECISION- CTA CASE No. 5761 PageS proceeds thereof had been duly accounted for in accordance with 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. (Underlining supplied). The only issue left for determination is whether or not petitioner is entitled to the claimed input VAT payments on capital goods purchased for taxable year 1997. Section 106(b) [now Section 112(B)] ofthe Tax Code, provides : "Sec. 106. Refunds or tax credits of creditable input tax. - (a) xxx (b) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years, after the close of the taxable quarter when the importation or purchase was made. Relative thereto, Sections 4.104-5 and 4.106-1 ofRevenue Regulations No. 7-95 state, thus: "SEC. 4.106-1. Refunds or tax credits of input tax.- (a) xxx (b) XXX "Capital goods or properties" refer to goods or properties with estimated useful life greater that one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services." Plainly, from the above provisions, in order to be entitled to a refund/tax credit of input VAT paid on capital goods purchased, petitioner must prove that:

DECISION- eTA CASE No. 5761 Page9 1) it is a VAT registered entity; 2) it paid input VAT on capital goods purchased; 3) its input VAT payments on capital goods are duly supported by VAT invoices or official receipts; 4) it did not offset or apply the claimed input VAT payments on capital goods against any output VAT liability; and 5) the administrative and judicial claims for refund were filed within the two-year prescriptive period (KEPCO Philippines Corporation vs. The Commissioner of Internal Revenue, CTA Case Nos. 5675 and 5704, March 18, 2003). Records reveal that petitioner substantially complied with all the aforementioned requirements. It is undisputed that petitioner is a VAT-registered entity. Records likewise show that petitioner paid input VAT on capital goods purchased. But out of the total input taxes of P29,981 ,325 .50 reflected in the classified summary of petitioner' s input taxes on its purchases of capital goods, this court found that only P 15,109,293 .32 can be properly classified as capital goods, thus: EX HIB IT SUPPLIER'S NAME AMOUNT INPUT VAT E-7 to E-9 Triumpt Marketing E-23 to E-24 Lee Dynasty Furn iture p 31 ,850.00 p 2,895.45 E-31 to E-33 RIMMS Machinery, Inc. E-53 to E-60 IE SA 22 ,000 .00 2,000.00 E-61 to E-78 IESA E-187 to E-189 Triton Communications 320 ,324 .00 29 ,120 .36 E-196 to E-198 Network Metal Inc. E-246 to E-248 Network Metal Inc. 2,260,605.05 186,791.47 E-249 to E-251 Network Metal ine. E-258 to E-261 IESA 3,560 ,717 .82 323,701.62 E-268 to E-273 Vimaal Construction Co. E-294 to E-296 BNJ Sash Corporation 78 ,000 .00 7,090.91 E-300 to E-302 Network Metal Inc. E-303 to E-305 Executive Computer Tech 8,233 ,814 .16 748 ,528.56 E-335 to E-349 IESA E-357 to E-361 IESA 11 0,200.00 10,018 .18 649 ,398 .76 59 ,036 .25 2,104,995.77 191 ,363.25 66 ,397 .24 6 ,036 .11 605 ,363 .73 55 ,033 .06 8,962 ,359 .12 814 ,759 .92 45 ,000 .00 4,090.91 2 ,640 ,957 . 12 240,087.02 1,529,065.30 139,005.94 0

DECISION- CTA CASE No. 5761 Page 10 E-505 to E-510 FED Construction 248,400.00 22,581 .82 E-511 to E-513 TCU Air Sales 95 ,000 .00 8,636.36 E-525 to E-528 Tuadles Construction E-639 to E-641 Network Metal Inc. 1,144,591 .80 104,053.80 E-642 to E-644 BNJ Sash Corporation 348 ,800 . 00 31 ,709.09 F-54 to F-57 Jakofs Corporation 715 , 138.00 65,012 .55 F-176 to F-178 Network Metal Industries F-236 to F-238 FED Construction 3,172,646.95 288 ,422.45 F-317 to F-319 Krismajay Construction 9 ,744 ,288 .84 885 ,844.44 F-320 to F-322 Precesion Development F-333 to F-335 Scan Aire 624,433.81 56 ,766 .71 F-364 to F-366 Explorer Drilling Service 3,467 ,097 .91 315 ,190 .72 F-371 to F-373 ELl SEC F-431 to F-433 FED Construction 215 ,607 .06 19,600.64 F-437 to F-439 BNJ Sash Corporation 2,780 ,024 .50 252 ,729 .50 F-538 to F-540 Explorer Drilling Service F-541 to F-543 Firticor Inc. 185,466.50 16,860.59 F-636 to F-638 First Associated Tech 26 ,100.00 2 ,372 .73 F-642 to F-644 BNJ Sash Corporation F-698 to F-700 Explorer Drilling Service 888,551 .52 80 ,777.41 F-796 to F-798 Tuadles Construction 810 , 000 .00 73 ,636 .36 F-799 to F-801 Network Metal Industries 435 ,000 .00 39 ,545 .45 F-802 to F-805 Fyrelyn Industries F-806 to F-808 Network Metal Industries 21 ,500.00 1,954.55 F-863 to F-865 Liana Trading Corporation 118,575.00 10,779.55 F-925 to F-927 Network Metal Industries 1,589 ,800.57 144 ,527 .32 F-935 to F-936 MG Abulencia Enterprises 185,466.50 16,860.59 F-943 to F-945 Asia Corrosion Svcs 933,350.00 84 ,850.00 F-957 to F-959 Advance Surface Protector 3,049,211 .88 277,201 .08 F-974 to F-976 FED Construction F-1140to F-1142 Tuadles Construction 87 ,500.00 7 ,954 .55 G-1 to G-9 FED Construction 293,700.00 26 ,700 .00 G-78 to G-80 BNJ Sash Corporation G-97 to G-99 Tri-Ohms Engineering 12,850.00 1,168.18 G-140 to G-142 Scan Aire 2,400,000.00 218,181.82 G-152 to G-154 BNJ Sash Corporation G-169 to G-173 DNL Construction 67 ,374.34 6,124.94 G-174 to G-175 CD Sales Center 18,651 .00 1,695.55 G-176 to G-178 Allen International 1,711 ,022.40 155,547.49 180 ,000 .00 16 ,363 .64 277,050.30 25,186.39 1,268 ,257 .00 115,296.08 1,890 ,000 .00 171 ,818.18 1,250 ,000 .00 113 ,636 .36 262,500.00 23,863.64 3,179,551 .61 289,050.15 88 ,500 .00 8,045.45 5,699.98 518 .18 16,888.00 1,535.27 &

DECISION- CTA CASE No. 5761 Page 11 G-196 to G-198 Explorer Drilling Service 426 ,800 .00 38,800.00 G-235 to G-237 OSA Industries 305,434.80 27,766.80 G-255 to G-256 Scan Aire 753,386.64 68,489 .69 G-297 to G-299 Tuadles Construction 1' 129,593.30 102,690.30 G-306 to G-308 FED Construction 1,349,687.63 122,698 .88 G-335 to G-337 Explorer Drilling Service 367 ,500 .00 33,409.09 G-338 to G-340 Miescor Builders 200,000.00 18,181 .82 G-424 to G-425 Jakofs Corporation 2 ,072 ,000.00 188 ,363 .64 G-429 to G-431 Array Enterprises G-463 to G-465 BNJ Sash Corporation 23,000.00 2,090.91 G-480 to G-485 BNJ Sash Corporation 2,381 ,000.00 216,454.55 G-486 to G-488 Network Metal Industries G-501 to G-506 Scan Aire 360 ,483 .29 32,771 .21 G-614 to G-616 Euromerica Trade Phils 142,500.00 12,954.54 G-620 to G-625 BNJ Sash Corporation 1,407,738.49 127,976.22 G-689 to G-691 Domestic Trading Corporation 110,775.00 10,070.45 G-736 to G-739 Dwight Trade and Development 746,482 .93 67 ,862 .08 G-743 to G-745 AA Alarilla Construction 418 ,608.00 38 ,055 .27 G-759 to G-762 Jakofs Corporation 240,097.00 21,827 .00 G-1041 to G-1043 Richmond Machine Works 242,000 .00 22 ,000 .00 G-1058 to G-1059 Philcopy 4,986 ,890 .07 453 ,353.64 H-183 to 185 Uptown Industrial Sa les 200,000.00 18,181 .82 H-84 to H-86 Tuadles Construction 6,1 81 .82 H-156 to H-158 First Associated Tech 68 ,000 .02 2,559.55 H-214 to H-216 Network Metal Industries 28,155.00 119 ,000 .00 H-217 to H-218 Jakofs Corporation 1,309 ,000 .00 13,990.55 H-249 to H-250 Scan Aire 153,896.00 570 ,960.00 H-254 to H-256 Maddem Industrial 6 ,280 ,560 .00 53,127.08 H-342 to H-344 MV Jr Industrial Sales 584 ,397 .90 55 ,414 .75 H-411 to H-412 Jakofs Corporation 609 ,829 . 30 225 ,654 .55 H-448 to H-450 Advance Surface Protector 2,482 ,200 .00 6 ,834 .09 H-466 to H-468 BNJ Sash Corporation 75,175.00 109,769.04 H-472 to H-474 Network Metal Industries 1,207,459.45 181 ,990.56 H-519 to H-521 Information Products 2,001,896.21 79,271 .27 H-522 to H-531 Lighting Sales Mktg. 871 ,984.00 108,362.62 H-534 to H-536 Solem Company 1,191 ,988.82 22,709 .09 H-552 to H-554 Technical Experts 249,800.00 7,602.50 H-572 to H-574 LY Enterprises 83,627.50 6,781 .18 H-580 to H-582 Sogo Home and Office Center 74,593.00 1,818.1 8 20,000.00 29,551 .82 0 325 ,070 .00 6 ,540.00 586.36

DECISION- CTA CASE No. 5761 Page 12 H-600 to H-602 Freta General Trading 450 ,000 .00 40 ,909 .09 H-612 to H-614 MV Jr Industrial Sales 989 ,400 .00 89 ,945 .45 H-640 to H-642 Modern Business Methods H-720 to H-724 Urica Industrial Wire 28 ,750.04 2 ,613 .64 H-753 to H-754 MV Jr Industrial Sales 1,383 , 120.00 125 ,738 .18 H-864 to H-865 Pumpcraft Industrial Sales H-903 to H-904 Multi Electro Cirkel Phils. 146,367 .18 13,306.11 H-909 to H-911 Uptown Industrial Sales 320,430.55 29,130.05 H-928 to H-930 Emcar Industrial Sales 2,363.64 H-931 to H-933 Golden Harvest 26,000.00 8 ,544 .18 H-948 to H-953 Uptown Industrial Sales 93 ,986 .00 4,626.59 H-980 to H-982 lkeco Builders 50 ,892 .46 251 ,911 .64 H-1002 to H-1004 Leeleng Commercial Inc. 2,771 ,028.00 27 ,779 .37 H-1008 to H-1010 Maximum Electronic 305 ,573 .00 25 ,508 .00 H-1011 to H-1013 Fervid lnt'l Product 280,588.02 3,439.22 H-1017 to H-1019 Maddem Industrial 37 ,831.40 7,909 .09 H-1036 to H-1038 First Associated Tech 87 ,000 .00 H-1055 to H-1056 Alto Steel Industries 104,039.25 9,458 . 11 H-1057 to H-1059 MV Jr Industrial Sales 2,127,600.00 193,418.18 H-1067 to H-1069 NAR Power System 76 ,000 . 00 H-1089 to H-1091 Sunkyong Engineering 6 ,909 .09 H-1092 to H-1094 FED Construction 4 ,000 .00 363 .64 H-11 09 to H-1111 Lighting Sales Mktg. 175,182.00 H-1112 to H-1114 Wyler Enterprises Inc. 1,218,181 .05 15 ,925 .64 H-1126 to H-1128 Forza Kemika 36,384,071 .13 110,743.73 H-1146 to H-1148 Uptown Industrial Sales 2,139,451 .99 3,307 ,642.83 H-1155to H-1157 Sealand lnd'l Supply 194,495.64 H-1164to H-1166 LY Enterprises 25 ,235 .00 H-1312 to H-1314 Lighting Sales Mktg. 14,940 .00 2 ,294 .09 H-1321 to H-1326 Uptown Industrial Sales 211 ,519.00 1,358 .18 H-1400 to H-1411 Pumpcraft Industria l Sales 18,603 .00 19,229 .00 H-1409 to H-1411 LY Enterprises 470 ,295 .01 1,691 .18 H-1423 to H-1425 Benavidez Construction 19 ,800 .00 42 ,754 .09 H-1428 to H-1430 Priam Inc. 54 ,450 .00 1,800.00 H-1431 to H-1433 BNJ Sash Corporation 55 ,687 .85 4 ,950 .00 H-1434 to H-1436 Krismajay Construction 5,062.54 H-1442 to H-1444 Lepol Trading 1,250.00 Total 4,750.00 113.64 10,300 .00 431 .82 1' 730 ,350 .00 936 .36 1,578,251 .68 157 ,304 .55 2,421 ,968.56 143,477.43 73,797 .60 220,178.96 p 166,408,482.66 6,708.87 p 15,109,293.32

DECISION- eTA CASE No. 5761 Page 13 The above amounts of input taxes were duly supported by valid VAT invoices and/or official receipts. However, as to the remaining amount of P14,872,032 .18, this court is constrained to deny the same because, based on the evidence presented and the testimony of Ms. Karen Bulos (TSN dated June 27, 2002, page 11), they cannot be considered as pertaining to capital goods. The general vouchers supporting such amount used the following account titles: inventory/supplies/chemicals/materials for rehab, servtce charge, books and printing, repairs and maintenance, computer maintenance, vehicle maintenance, professional, security services, communications, dues and subscription, advertising, and miscellaneous, which are not within the definition of capital goods . Under Section 4.106-l(b) of Revenue Regulations No. 7-95, "capital goods" is defined as goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f) used directly or indirectly in the production or sale of taxable goods or services. Thus, goods or properties are considered capital goods if: (1) they have an estimated useful life greater that one year; (2) treated as depreciable assets; and (3) used directly or indirectly in the production or sale of taxable goods or services. (Italian-Thai Dev't Public Co. Limited- Phil. Branch Office vs. Commissioner ofInternal Revenue, CTA Case No. 6172, November 12, 2002). Petitioner was able to establish that the total input taxes claimed in the amount of P31 ,590,928.85 were not applied against any output VAT liability during and in the subsequent periods inasmuch as it did not have any output tax against which the said input taxes can be applied (Exhibits LL, MM, NN, 00, I, J, K, L, M, N, 0, P, Q, R, S, T

DECISION- eTA CASE No. 5761 Page 14 and U) . Although petitioner carried over its 1997 unutilized input VAT up to the fourth quarter of 2000, petitioner deducted the same as part of the amount of PI 07,468,940.30 reflected as "VAT Refund/TCC Claimed" in the first quarter of 2001 (Exhibit U-2; TSN dated October 23, 2001, pages 12 to 17) . Lastly, the administrative and judicial claims which were filed on March 30, 1999 and March 31 , 1999, respectively, (Annex H, original and amended Petitions for Review), are well within the two-year prescriptive period reckoned from the respective dates of filing of petitioner' s 1997 quarterly VAT returns. WHEREFORE, in view of the foregoing, the instant petition for review IS partially granted. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of PIS, 109,293 .32 representing unutilized input value-added tax for taxable year 1997. SO ORDERED. a"~ <C. 2CA.SCTA?NE~D~A~ f<R2~ c?'"ruANITO Associate Judge WE CONCUR: ~ LSL~ ERNESTO D. ACOSTA Presiding Judge Associate Judge

DECISION- eTA CASE No. 5761 Page 15 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 . Cl__-v. CW_ ERNESTO D. ACOS~ Presiding Judge