DASH ENGINEERING PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals QUEZON CITY SECOND DIVISION DASH ENGINEERING C.T.A. CASE NO. 7243 Members: PHILIPPINES, INC., Petitioner, -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, OCT 0 4 Z007 Respondent. X ----------------------------------------------------------------------------------- X D E.C IS I 0 N PALANCA-ENRIQUEZ, J.: Another case involving refund of creditable input VAT attributable to zero-rated sales. Pursuant to Section 112 (A) of the National Internal Revenue Code of 1997 (hereafter "NIRC of 1997"), as amended, a 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. To do so, however, petitioner must be able to show th~

C.T.A. CASE NO. 7243 2 DECISION complied with all the requisites prescribed by law. Failure to show proof of compliance with the requirements provided by law is fatal to one's claim for refund or credit. THE CASE This is a Petition for Review filed by Dash Engineering Philippines, Inc. (hereafter "petitioner") praying for a refund in the aggregate amount of P2,149,684.88, representing the VAT input taxes paid or incurred on its purchases of goods and services attributable to its zero-rated sales for the period January 1, 2003 to June 30, 2003. THE FACTS In their "Joint Stipulation of Facts and Issues", the parties stipulated as follows: "1. Petitioner is a corporation organized and existing under Philippine laws, with current address at 8th - 1oth Floors, PIPC - Dash Engineering Science Building, Asia Town, IT Park, Cebu City. 2. Respondent Commissioner of Internal Revenue is the official of the Republic ofthe Philippines charged with the duty, among others, of acting on claims for tax refund or tax credit. He holds office at the BIR National Office Building, BIR Road, Diliman, Quezon City. 3. Simultaneous with the filing of the petitiOn, petitioner paid to the Honorable Court of Tax Appeals, the docket and other lawful fees in postal money order in the total amount of P13 ,378.43 as required under Section 1, Rule 17 of the Rules of the Court of Tax Appeals, as amended. ~

C.T.A. CASE NO. 7243 3 DECISION 4. Petitioner is a VAT-registered entity engaged in the export sales of computer-aided engineering and design. It is a corporation duly registered with the Securities and Exchange Commission authorized to do business in the Philippines, and presently registered with the Philippine Economic Zone Authority (PEZA) as an ecozone IT (Export) Enterprise. 5. Petitioner is a VAT [Value Added Tax] registered entity with VAT Registration Certification No. 94-800-000340 issued on 13 June 1984. 6. Petitioner filed its VAT returns for the period 1 January 2003 to 30 June 2003 with the Bureau of Internal Revenue. 7. On August 9, 2004, petitioner filed a claim for tax credit/refund for the amount ofP2,149,684.88. 8. As of date, respondent has not yet acted upon the claim for tax refund/tax credit filed by petitioner." In his Answer, respondent, by way of special and affirmative defenses, alleged that the amount of P2,149,684.88 being claimed by petitioner representing the input taxes it paid for the 1st and 2nd quarters of the year 2003 is not properly documented; in an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund/credit; petitioner must show that it complied with the provisions of Sections 204 (C) and 229 of the Tax Code on the prescriptive period for claiming tax refund/credit; and claims for refund are construed strictly against the (ffo �

C.T.A. CASE NO. 7243 4 DECISION claimant for the same partake of the nature of exemption from taxation, and such, they are looked upon with disfavor. Petitioner presented Loraine Joy Y. Singculan, its Accounting Staff, and Yukihiro Mimura, its President, as witnesses, and documentary evidence, marked as Exhibits "A" to "Y", inclusive of their submarkings, which were all admitted by the Court, after petitioner filed a "Motion for Reconsideration" of the ResDlution dated May 26, 2006. On the other hand, respondent submitted the case for decision, without presenting any evidence. Thereafter, both parties were ordered to file their simultaneous memoranda, within thirty (30) days from notice. However, on October 10, 2006, petitioner filed a "Motion to Allow Reception of Additional Evidence for Petitioner And To Defer Submission of Memorandum", which the Court granted in a Resolution dated December 4, 2006. Thus, petitioner presented Milagros Remillano Madayag of Mizuho Corporate Bank Ltd., Manila Branch, as additional witness, and documentary evidence, additionally marked as Exhibits "Z" to "Z-7", "AA ", and "AA-1 ",which were all admitted by the Court. Both parties having filed their respective memorandum, the case was deemed submitted for decision. Hence, this decision.

C.T.A. CASE NO. 7243 5 DECISION ISSUE As stipulated upon by the parties, the sole issue for this Court's consideration is: WHETHER OR NOT PETITIONER IS ENTITLED TO A TAX REFUND/TAX CREDIT OF ITS UNUTILIZED VALUE-ADDED TAX INPUT TAXES ON ITS PURCHASES OF GOODS AND SERVICES. Petitioner's Arguments Petitioner contends that pursuant to Sections 110 and 112 of the NIRC of 1997, as amended, it is entitled to a tax refund/tax credit of its unutilized value-added tax input taxes on its purchases of goods and services; it has complied with all the requirements for VAT refund or credit since it is a VAT-registered entity, its export sales are zero-rated; it complied with the invoicing requirements under Sections 113 and 237 of the NIRC of 1997, as amended, and Section 4.108-1 of Revenue Regulations 7-95; its VAT input taxes are duly supported by VAT t invoices and official receipts which have not been offset against any output taxes; and its export proceeds had been inwardly remitted in accordance with applicable banking regulations. THE RULING OF THE COURT The petition is partly meritorious. ~

C.T.A. CASE NO. 7243 6 DECISION In the recent case of Intel Technology Philippines, Inc. vs. Commissioner ofInternal Revenue, G.R. No. 166732, April 27, 2007, the Supreme Court laid down the requisites to be entitled to a refund or issuance of a tax credit certificate of input taxes attributed to zero-rated sales, as follows: "Under Sections 106 (A)(2)(a)(l) in relation to 112(A) of the Tax Code, a taxpayer engaged in zero-rated or effectively zero-rated transactions may apply for a refund or issuance of a tax credit certificate for input taxes paid attributable to such sales upon complying with the following requisites: ( 1) the taxpayer is engaged in sales which are zero-rated (like export sales) or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; (4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax; and (5) in case of zero-rated sales under Section 106(A)(2)(a)(l) and (2), Section 106(B), and Section 108(B)(l) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with BSP rules and regulations. It is added 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 or entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of the sales." Pursuant to the above ruling, to be entitled to a refund or issuance of a tax credit certificate of input taxes attributable to zero rated sales, petitioner must comply with the following requisites: (1) the taxpayer is engaged in sales which are zero-rated or effectively zero-rated; (2) the

C.T.A. CASE NO. 7243 7 DECISION taxpayer is VAT-registered; (3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; (4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax; and (5) in case of zero-rated sales the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with BSP rules and regulations. The first and fifth requisites being interrelated will be discussed jointly. Records show that out of P62,787,889.17 declared as zero-rated sales by petitioner, only the amount of P62,277,136.49 consists of direct export sales to Japan by the petitioner, which will qualify for zero-rating. The amount of 138,028,531.00 Japanese Yen or P62,277,136.49 in Philippine Peso covering petitioner's sales for the period of January 1, 2003 to June 30, 2003 was duly substantiated. Petitioner presented Sales Invoices (Exhibits '"H ", "1", "J ", "K", "L ", 110", up ", "Q", "R ", "S", HT", "U", "V", and "W") and Official Receipts {Exhibits "H-1 ", "1-1 ", "J-1 ", "K-1 ", "L- 1 ", " 0-1", "P-1 ", " Q-1 ", "R-1 ", "S-1 ", " T-1", "U-1", "V-1", and "W-1 ''), wht"ch are all zero- rated. The proceeds of the said export sales were inwardly remitted to petitioner, as evidenced by the Certification of the Vice President and Manager for Operations 2 of Mizuho Corporate Bank, Lt~

C.T.A. CASE NO. 7243 8 DECISION .... - Manila Branch (Exhibit "Z "), and copies of petitibner's Bank Statements with Mizuho Corporate Bank, Ltd. (Exhibits "Z-1 " to "Z-7"), and Credit Advices (A nnexes "G-6", "G- 10 ", "G-13 ", "G-25", "G-29" "G-38", "G-43" and "G-46 " ofthe Petition for Review). However, with regard to the amount of 8,304 US Dollars or its Philippine Peso equivalent to P51 0,752.68, a perusal of the Sales Invoices (Exhibits "M " and "N ') and Official Receipts (Exhibits "M-1 " and "N-1 ') shows that said amount does not pertain to direct export sales. Petitioner failed to substantiate that said sales were made to entities that are zero- rated. Hence, this Court caJmot consider them as zero-rated sales. In this regard, Section 106 (2) fij' the NIRC of 1997, as amended, provides as follows: "SEC . 106. Value-added Tax on Sale of Goods or Properties. - XXX XXX (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) . Export Sa.les.- The te. rm 'export sales' means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, ilTespective of any shipping alTangement 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 culTency or its equivalent in goods or servi:t~s, and accounted for i~

C.T.A. CASE NO. 7243 9 DECISION accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; (2) Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export- oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production ; (4) Sale of gold to Bangko Sentral ng Pilipinas (BSP); and (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws. xxx xxx." Corollary thereto, Section 108 (B) of the NIRC of 1997, as amended, provides: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.- XXX XXX (B) Transactions Subject to Zero Percent (0%) 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 accounte~

C.T.A. CASE NO. 7243 10 DECISION in accordance with th e rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (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); (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 percent (0%) rate; (4) Services rendered to vessels engaged exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production." As regards the second requisite, the Court finds that the same was complied with by petitioner. Petitioner is a duly registered VAT entity with Tax Identification No. 800-001-943-838-V, as shown in its BIR A Certificate of Registration, bearing RDO Control No. 94-800-000340 (Exhibit "A") . As to the third requisite, the Court finds that petitioner's claims for refund for the first and second quarters of 2003 were filed within the two- year prescriptive period. It is settled that the two-year prescriptive period for filing a claim for refund/credit input VAT on zero-rated sales is counted from the date ~

� C.T.A. CASE NO. 7243 11 DECISION of filing of the return and payment of the tax due (Atlas Consolidated Mining Dev't. Corp. vs. Commissioner of Internal Revenue, G.R. Nos. 141104 andl48763, June 8, 2007), which should be made within 25 days following the close of each taxable quarter (Section 114 ofthe NIRC of 1997, as amended) . A perusal of the records shows the following dates pertinent to the case, to wit: Period Date ofFiling Date of Filing Date of Filing Date ofFiling Covered (Original (Amended (Application (Case w/ CTA) Return w/ BIR) Return w/ BIR wl BJR) 1st Quarter April 25 , 2003 July 24, 2004 August 9, 2004 April 26, 2005 2003 (Exhibit '"E-2 ") (Exhibit "EJ-5", (Exhibit "B-1 ') (Petition for 2na Quarter July 23 , 2003 CPA Report) Review July 24, 2004 August 9, 2004 April 26, 2005 2003 (Exhibit "EJ-9 ", (Exhibits "E-4 ' (Exhibit "B-1 ') (Petition for CPA Report) and "El-l I ", Review) . CPA Report) The above table readily shows that petitioner's administrative claims for refund of input VAT on its zero-rated sales for the first and second quarters of 2003 were both filed within the prescriptive period. Likewise, petitioner' s judicial claim for refund for the first and second quarters of 2003 was filed within the two-year prescriptive period. Since petitioner filed its amended quarterly VAT returns for the first and second quarters of 2003 on July 24, 2004, petitioner had until July 24, 2006 within which to file its judicial claim for refund. Records show that petitioner filed it judicial claim for refund with this Court on April 26,

C.T.A. CASE NO. 7243 12 DECISION 2005, thus, its judicial claim for refund was filed within the prescriptive period . Going to the fourth requisite, We shall now determine whether petitioner was able to substantiate with proper documents its reported unutilized input VAT for the first and second quarters of 2003 in the amount ofP2, 149,684.88. In his report dated February 17, 2006 (Exhib it "Y'), the commissioned Independent CPA, Benjamin C. Hortelano, noted the following exceptions, in so far as petitioner' s input VAT claim of P2, 149,684.88 is concerned: Exceptions/Findings Exhibit No. , Amount of CPA Report Input VAT a) Supporting documents "F-1 " P16,884.64 not in the name of the "F-2" 15,061.69 Company "F-3 " 18,881.24 "F-4" 97 ,082 .84 b) Exceptions supported "F-5 " 15,3 79.48 only by tape receipts "F-6" 20,470.00 c) Expenses not incurred P183,759.89 (Exhibit "Y') within the period ~ d) Supporting documents are not VAT registered e) ORs not on file for the sale of service f) Invoices not on fil e for purchase of goods Total .� "�:

C.T.A. CASE NO. 7243 13 DEC ISION After a careful examination of the CPA report and verification of the supporting invoices and receipts covering petitioner's domestic purchases of goods and services (Exhibits "Cl- 1 " to "C1-89", "C2-1" to "C2- 101 ", "CJ-1" to "CJ-11 7", "C4-1" to "C4- 111 ", "C5-1 " to "C5-121" and " C6- 1" to "C6-163" of Exhibit "Y '), this Court agrees with the independent CPA that the total input VAT of P183 ,759.89 excepted by him should be disallowed by this Court from petitioner's claim. In addition to the disallowed input VAT ofP183,759.89, the Court finds that the amount of P808,828.73 (detailed breakdown, attached as Annex "A" ofthis Decision) should also be denied for the following reasons: This Court ' s Findings Input VAT a) Input VAT on purchases of P1,418.18 goods supported by zero rated 327.27 invoice and dated not within the period of claim; 17,589 .08 755 ,080 .05 b) Input VAT on purchases of goods dated not within the 5,721.71 period of claim; c) Input VAT on purchases of goods without invoices and with "NV" Official Receipts altered to VAT; d) Input VAT on purchases of services supported by "TAN" VAT Official Receipts; e) Input VAT on purchases of goods/services supported by invoices/Official Receipts not in the name of the petitioner; f) Supporting documents show .~ .

C.T.A. CASE NO. 7243 14 DECISION that the purchases pertain to 28,692.44 automobi les, which should be P808,828.73 excluded fi:om the claim for refund of input VAT, pursuant to Section 4.104-1 of Revenue Regulations No. 7-95; Total Input VAT Denied In sum, of the total input VAT claim of P2, 149,684.88, only the amount ofP1,157,096.26, as computed below, is duly supported by VAT invoices and/or receipts, in accordance with Section 4.104-5 of Revenue Regulations No. 7-95, in relation to Sections 11 O(A) and 113 of the NIRC of 1997, as amended: Amount of Input VAT Claim P183 ,759.89 P2 , 149 ,684.88 Less: Disallowances 808 ,828.73 P992,588.62 a) Per CPA's Report Pl,l57,096.26 b) Per this Court's findings Total Disallowances Validly Supported Input VAT Records further show that the substantiated input VAT of P1,157,096.26 was not applied against any output VAT during the first and second quarters of 2003 (Exhibits "E-2 ", "E-4" and Exhibits "El -5 " and "El-ll " of Exhibit "Y '). Also, petitioner did not file a claim of the said input VAT from other government agencies, as evidenced by the Certification dated May 18, 2004, issued by the Executive Director of the Department of Finance (Exhibit "C'') .

C.T.A. CASE NO. 7243 15 DECISION For all the foregoing, this Court, therefore, concludes that petitioner has sufficiently proven its entitlement to a refund or issuance of a tax credit certificate, representing unutilized excess input taxes, which are directly attributable to its zero-rated sales for the period January 1, 2003 to June 30, 2003, but in the reduced amount of P1,147,683.78, computed as follows: Substantiated Zero-rated Sales P62,277, 136.49 Divided by Total Zero-Rated Sales per 62,787,889.12 Amended VAT Returns 1,157,096.26 Multiplied by Validly Supported Input Pl,l47,683.78 VAT Input VAT Attributable to Substantiated Zero-Rated Sales WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED. Respondent is hereby ORDERED TO REFUND OR TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of ONE MILLION ONE HUNDRED FORTY SEVEN THOUSAND SIX HUNDRED EIGHTY THREE and 78/100 PESOS (P1,147,683.78), representing the unutilized input VAT incurred for the months of January to June 2003. SO ORDERED. a_,_~<~ OLGAPALANCA-IrNRIQUEZ Associate Justice

C.T.A. CASE NO. 7243 16 DEC lSI ON WE CONCUR: r ~#o~c?sfANE~ ~.� EAsR~~~tUicYe Associate Justice ATTESTATION I attest 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. ~~�v a.QY--~~ SJ. JUANITO C. CASTANEDA,CJ'R: Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, 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. t----~. C)._./L- ERNESTO D. ACOSTA Presiding Justice

C.T.A. CASE NO. 7243 Annex "A" D EC ISION Additional Input VAT Disa llowed P er This Cour�t's Verifi cation First and Second Quarters of 2003 This Court's Findings Exhibit No., Amount of T otal CPA Report Input VAT Amount of Input VAT a) Input VAT on purchase of goods supported by zero rated invoice and dated not w ithin the period of claim 1. Medon Industri al Trade C 1-40 P1 ,4 18.18 b) Input VAT on purchases of goods dated not within the peri od of claim 1. Vital One Enterpri se, Inc. C 1-84 P l 90.9 1 2. WES Automati on Corp. C l -89 136 .36 Total P 32 7. 27 c) Input VAT on purchases of goods without invo ices and with "NV" Official Receipts a ltered to VAT I. Pink R ibbon Bakeshop, fn c. C l -66 Pl ,240.91 2. Pink Ribbon Bakeshop, Inc. C 1-67 805 .00 3. Pink Ribbon Bakeshop, Inc. C l -6 8 830.45 4. Pink Ribbon Bakes hop, Inc. C l -69 712.73 5. Pink Ribbon Bakeshop, Inc. C2-68 735 .00 6. Pink Ribbon Bakes hop, Inc. C2 -69 846.36 7. Pink Ribbon Bakeshop, Inc. C2-70 �- 855.91 8. Pink Ribbon Bakeshop, Inc. C3 - 81 719 .09 9. Pink Ribbon Bakeshop, Inc. C3 -82 413.64 10 . Pink Ribbon Bakes hop, Inc. C3-83 906 .82 11 . Pink R ibbon Bakeshop, Inc. C3 -84 1,021.36 12. Pink Ribbon Bakeshop, Inc. C3 -85 871.82 13 . Pink R ibbon Bakeshop, Inc. C 4-7 8 1,177.27 14. Pink Ribbon Bakes hop, Inc. C4-79 1,040.45 15. Pink Ribbon Bakeshop, Inc. C4-8 0 680.9 1 16. Pink Ribbon Bakeshop, Inc. C5 -76 2,310 .00 17. Pink Ribbon Bakeshop, Inc. C6- 118 801.82 18 . Pink Ribbon Bakeshop, Inc. C6- 11 9 1,005.45 19. Pink Ribbon Bakeshop, Inc. C6 - 120 614 .09 Total P 17,5 89.08 d) Input VAT on purchases of services supported by "TAN" VAT Official Receipts 1. WT Constructi on, Inc. C3- 11 6 P359,561.93 2. WT Constructi on, Inc. C6 - 162 395,518.12 Total P755,080 .05 e) Input VAT on purchases of goods/services supported by in voices/Offic ial Receipts not in th e name of the petitioner 1. Electroworld C3 -3 1 P 117.73 2. Pan Pacific Trave l Corp . C3-60 321.82 ' 3. BPI/MS Insurance Corporati on C6- 12 3,436 .20 page~

C.T.A. CASE NO. 7243 Annex "A" D EC ISIO N 4. BPI!MS Ins uran ce Corporati on C6- 14 1,845.96 Total P5 ,721.71 t) Supporting doc um ents show that the purchases perta in to a utomobiles, which should be excluded from the claim for refund of input VAT, pursuant to Secti on 4. 104-1 of Revenue Regul ations No. 7-95 1. BOT Lease & Finance Phils., Inc. C4-6, Pl ,871.07 I C4-7, 2,361.20 C4-8, & 2,888. 73 C4-9 16,474.56 2. BOT Lease & Finance Phi Is. , Inc . C4-10, C4- 1,837 . I 8 3,259.70 11, & C4- P2 8,692.44 12 P808.828. 73 3. BOT Lease & Finance Phils., Inc. C4- 13, C4- 14, C4- 15, & C4- 16 4. BOT Lease & Finance Phil s., Inc. C5-5 , C5-6, and C5-7 5. BOT Lease & Finance Phils., Inc. C5-9, C5- 10 & C5- 11 6. BOT Lease & Finance Phils., Inc. C6-8, C6-9, C6- IO & C6- II Total Total Input VAT Disallowed Per Court's Findings page 2 of2