PILIPINAS TOTAL GAS, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court ofTax Appeals QUEZON CITY Third Division PILIPINAS TOTAL GAS, INC., CTA CASE NO. 7863 Petitioner, Members: versus - BAUTISTA, Chairperson FABON-VICTORINO, and RINGPIS-LIBAN, 11. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. JU N 1 9 2018 X--------------------------------------------------------c-.----------2----:.-:s---o--'-('-�----.---------X DECISION BAUTISTA, J.: The Case Before the Court is a Petition for Review1 filed by petitioner on January 23, 2009, pursuant to Section 7(a)(2)2 of Republic Act ("RA") No. 11253, as amended by RA No. 92824 and RA No. 95035, in relation to 1 Records, CTA Case No. 7863, Vol. 1, Petition for Review ("PFR"), pp. 1-178, with annexes. 2 Sec. 7. Jurisdiction.- The Court of Tax Appeals shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: XXX XXX XXX (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; 3 An Act Creating the Court of Tax Appeals, as amended. 4 An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes. sAn Act Enlarging the Organizational Structure of the Court of Tax Appeals, Amending for the Purpose Certain Sections of the Law Creating the Court of Tax Appeals, and for Other Purposes. I

DECISION CTA CASE NO. 7863 Page2of22 Section 3(a)(1)6, Rule 4 of the Revised Rules of the Court of Tax Appeals ("RRCTA")l, seeking for the Court to render judgment ordering respondent to refund or to issue a tax credit certificate ("TCC") in favor of petitioner in the amount of Php7,898,433.98 representing unutilized input Value-Added Tax ("VAT") arising from its zero-rated transactions for the period covering the first and the second quarters of taxable year ("TY") 2007.8 The Parties Petitioner Pilipinas Total Gas, Inc. is a domestic corporation duly organized and existing under Philippine laws, with principal office at MDD 121 East Science Avenue, Laguna Technopark, Bifian, Laguna.9 It is engaged in the sale, transportation, and distribution of industrial gas, as well as the sale of gas equipment and other related business, as shown in its Securities and Exchange Commission Certificate of Registration Number AS095-011466.JO Petitioner is registered with the BIR as a VAT taxpayer, as shown in its BIR Certificate of Registration bearing Taxpayer Identification Number 004-609-538-000.11 Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue ("CIR"), vested with authority to act as such, including, among others, the power to decide, approve, and grant refunds or tax credits of erroneously or excessively paid taxes.12 6 Sec. 3. Cases within the jurisdiction of the Court in Division. -The Court in Division shall exercise: (a) Exclusive original over or appellate jurisdiction to review by appeal the following: xxx XXX XXX XXX (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case; XXX r 7 A.M. No. 05-11-07-CTA, November 22,2005. s Records, Vol. 1, PFR, Prayer, pp. 22-23. 9 Id., Vol. 2, Decision, The Parties, p. 712. w Id., The Facts, p. 712. 11 Id. 12 Id., The Parties, p. 712.

DECISION CTA CASE NO. 7863 P.age 3 of22 The Facts On April20, 2007 and July 20, 2007, petitioner filed with the BIR its Original Quarterly VAT Returns for the first and the second quarters of TY 2007, respectively.n However, on May 20, 2008, petitioner filed with the BIR its Amended Quarterly VAT Returns for the first and the second quarters of TY 2007, reflecting the following details: VATABLE SALES ZERO-RATED EXEMPT SALES DOMESTIC DOMESTIC SALES PURCHASES- PURCHASES- GOODS OTHER THAN CAPITAL SERVICES 1ST Php 1,169,920.98 Php 47,262,774.66 Php - GOODS Php 1,462,946.16 2ND 713,132.06 31,906,108.49 5,270,691.44 TOTAL PHP PHP 79,168,883.15 PHP 18,026,481.31 Php 36,308,089.75 PHP 6,733,637.6014 1,883,053.04 18,026,481.31 24,661,608.92 PHP 60,969,698.67 For the first and the second quarters of TY 2007, petitioner incurred unutilized input VAT credits from its domestic purchases of non-capital goods and services in the total amount of Php8,124,400.35, vzz.: UNUTILIZED INPUT VAT CREDITS 2007 TAXABLE DOMESTIC PURCHASES DOMESTIC TOTAL QUARTER -GOODS OTHER THAN PURCHASES- CAPITAL GOODS SERVICES 1ST PhE_ 4,356,970.77 Ph_p 175,553.54 Php 4,532,524.31 2ND 2,959,393.07 632,482.97 3,591,876.04 TOTAL PHP 7,316,363.84 PHP 80~,03~.51 L PH_]? ~124,400.35~ --- - - - - -~ Of the total accumulated input VAT in the amount of Php8,124,400.35, the amount of Php7,898,433.98 is the excess or unutilized input VAT for the first and the second quarters of TY 2007.16 On May 15, 2008, petitioner filed an administrative claim for refund of unutilized input VAT for the two quarters of TY 2007, along with additional supporting documents.17 13 Records, Vol. 2, Decision, The Facts, p. 713. 14 Id. 1s Id. at 713-714. 16 Id. at 714. 17 Id. I

DECISION. CTA CASE NO. 7863 Page4of22 In view of respondent's inaction, on January 23, 2009, petitioner filed its judicial claim for refund via the present Petition for Review with the Court.lB In the course of the proceedings before the First Division, petitioner presented (1) Ms. Rosalia T. Yu, the Finance Supervisor of petitioner,19 and (2) Mr. Richard D. Go, the court-appointed Independent Certified Public Accountant, 20 as its witnesses. On January 6, 2010, petitioner filed its Formal Offer of Evidence ("FOE") praying that Exhibits "A," "B," "B-1," "C," "D," "E," "E-1" to "E-7," "F," "G," "G-1" to "G-7," "H," "I," "J," "J-1" to "J-7," "K," "L,' "L-1" t0 "L-7I " "MI" "NI " "0I" "PI " "P-1" to "P-7I " "QI" "RI " "SI " "TI " "U," "U-1" to "U-7," "V," "W," "X," "X-1" to "X-5," "Y," "Z," "Z-1" to "Z-5," "AA," "BB," "BB-1'' to "BB-5," "CC," "DD," "EE," "FF," "GG," "GG-1" to "GG-5," "HH," "II," "II-1" to "II-5," "JJ," "KK," "LL," "MM," "NN," "NN-1," "00," "00-1," "PP," "QQ," "RR," "WW," "WW-1" to "WW-4," "WW-4-1" to "WW-4-6," "WW-5," "WW-5-1" to "WW-5-5" with submarkings, "WW-6," "WW-7," "WW-7-1" to "WW- 7-6" with submarkings, "WW-8," "WW-8-1" to "WW-8-38," "WW- 10," "WW-11," "WW-12," "XX," "XX-1," "YY," "YY-1," "ZZ," and "ZZ-1" be admitted as evidence for petitioner.21 Thereafter, the case was transferred to the Court pursuant to CTA Administrative Circular No. 01-2010.22 Petitioner's FOE was resolved by the Court in a Resolution dated March 9, 2010 by admitting all evidence offered.23 On May 27, 2010, counsel for respondent manifested that she is no longer presenting evidence.24 18 Records, Vol. 2, Decision, The Facts, p. 714. 19 Records, Vol. 1, Judicial Affidavits of Ms. Rosalia T. Yu, pp. 246-264, 282-294, and 325-329; Records, Vol. 1, April30, 2009 Minutes ofHearing, p. 265; Records, Vol. 1, May 28, 2009 Minutes ofHearing, pp. 295-296; Records, Vol. 1, September 22, 2009 Minutes ofHearing, p. 330; Records, Vol. 1, October 20, 2009 Minutes ofHearing, p. 338. 2o Records, Vol. 1, Judicial Affidavits of Mr. Richard D. Go, pp. 301-311, and 332-339; Records, Vol. 1, June 11,2009 Minutes of Hearing, p. 297; Records, Vol. 1, July 16,2009 Minutes ofHearing, p. 312. 21 Records, Vol. 1, Petitioner's Formal Offer of Evidence ("FOE"), pp. 342-379. 22 Id., Vol. 2, Order, p. 603. 23 Id., Resolution on Petitioner's FOE, pp. 606-608. 24 Records, Vol. 2, May 27, 2010 Minutes ofHearing, p. 619; Records, Vol. 2, June 11, 2010 Resolution, p. 621. f

DECISION CTA CASE NO. 7863 Page5of22 On January 13, 2011, the Court promulgated a Decisionzs dismissing the Petition for Review for being prematurely filed due to petitioner's failure to prove that it submitted complete supporting documents (notwithstanding the fact that it submitted supporting documents along with its administrative claim for refund on May 15, 2008, and a Certification from the Department of Finance on August 28 2008)26 - to warrant the grant of the refund and to reckon the commencement of the one hundred and twenty (120)-day period for the CIR to decide on its claim.27 While petitioner contends that the 120- day period should start from August 28, 2008, the Court ruled that per Revenue Memorandum Order ("RMO") No. 53-98, the Summary List of Local Purchases and Certifications from the Board of Investments, Bureau of Customs and Office of the PEZA, are indispensable in the claim for refund.28 The dispositive portion thereof reads as follows: WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE COURSE, and, accordingly DISMISSED for having been prematurely filed. SO ORDERED.29 Aggrieved, petitioner filed its Motion for Reconsideration3o on February 2, 2011 claiming that (1) the submission of the alleged incomplete supporting documents does not make the judicial appeal dismissible for lack of jurisdiction; (2) even assuming that the supporting documents are incomplete, the two (2) year prescriptive period for claiming a refund was already about to lapse when the Petition for Review was filed; and (3) the Court acquired jurisdiction over the Petition for Review. On April19, 2011, the Court issued a Resolution, finding no valid or compelling reason to reverse its Decision. The dispositive portion thereof reads in the following manner: 25 Records, Vol. 2, Decision, pp. 711-726; with Associate Justice Lovell R. Bautista's Dissenting Opinion, see pp. 727-731. 26 Records, Vol. 2, Decision, p. 720. 27 Id. at 723. 213 Id. 29 Records, Vol. 2, Decision, Dispositive Portion, p. 725; emphases retained; penned by now retired Associate Justice Olga Palanca-Enriquez, with Associate Justice Lovell R. Bautista dissenting and now retired Associate Justice Amelia R. Cotangco-Manalastas concurring. Associate Justice Lovell R. Bautista voted to give due course to the Petition for Review on the basis that the judicial claim was filed within the prescribed period. 30 Records, Vol. 2, Motion for Reconsideration, pp. 732-744. I

DECISION CTA CASE NO. 7863 Page 6of22 WHEREFORE, premises considered, petitioner's "Motion for Reconsideration" is hereby DENIED for lack of merit. SO ORDERED.31 On May 10, 2011, petitioner filed its Petition for Review32 with the Court En Bane docketed as CTA EB No. 776, seeking the review and reversal of the January 13, 2011 Decision and the April 19, 2011 Resolution of the Court.33 This Petition for Review was likewise dismissed for lack of merit on October 11,2012. The dispositive portion of the Court En Bane's Decision reads, to wit: WHEREFORE, the Petition for Review filed by petitioner Pilipinas Total Gas, Inc. on May 10, 2011, is hereby DENIED[] for lack of merit. SO ORDERED.34 The Court En Bane started counting the 120-days from the filing of the administrative claim on May 15, 2008, ending on September 12, 2008, hence, petitioner had thirty (30) days therefrom or until October 12, 2008 to file a Petition for Review with the Court.3S The Court En Bane noted that petitioner's Petition for Review was filed in the court a quo belatedly on January 23, 2009, depriving it of competence to entertain the judicial action.36 On November 20, 2012, petitioner reiterated its arguments in its Motion for Reconsideration37, which was denied by the Court En Bane on May 8, 2013 for lack of merit. The dispositive portion thereof reads, vzz.: 31 Records, Vol. 2, Resolution, Dispositive Portion, p. 754; emphases retained; penned by now retired Associate Justice Olga Palanca-Enriquez, with now retired Associate Justice Amelia R. Cotangco- Manalastas concurring, and Associate Justice Lovell R. Bautista maintaining his dissent. 32 Records, Vol. 2, Court En Bane Petition for Review, pp. 757- 33 Rollo, CTA EB No. 776, CTA En Bane Petition for Review, pp. 1-50, with annexes. 34 Id., Court En Bane Decision, pp. 139-160; emphases retained; penned by Associate Justice Esperanza R. Pabon-Victorino, with Associate Justice Lovell R. Bautista maintaining his dissent, Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaneda, Caesar A. Casanova, Olga Palanca-Enriquez, and Cielito N. Mindaro-Grulla concurring. 35 Rollo, Court En Bane Decision, pp. 155-156. 36 Id. at 156. 37 Id., Court En Bane Motion for Reconsideration, pp. 161-173. f

DECISION CTA CASE NO. 7863 .Page 7 of22 WHEREFORE, the Motion for Reconsideration dated November 19,2012, filed by petitioner is hereby DENIED[] for lack of merit. SO ORDERED.38 On June 27, 2013, petitioner filed its Petition for Review on Certiorari with the Supreme Court En Bane docketed as G.R. No. 207112. On December 8, 2015, the Supreme Court promulgated a Decision39, the dispositive portion thereof reads: WHEREFORE, the petition is PARTIALLY GRANTED. The October 11, 2012 Decision and the May 8, 2013 Resolution of the Court of Tax Appeals En Bane, in CTA EB No. 776 are REVERSED and SET ASIDE. The case is REMANDED to the CTA Third Division for trial de novo. SO ORDERED.40 The Supreme Court found that the judicial claim was timely filed and that it was not premature; that the 120-day period should be reckoned from August 28, 2008 when the complete supporting documents were submitted; that RMO No. 53-98 merely serves as a guide for revenue examiners, and not a benchmark to determine whether documents are complete to support a refund claim; that respondent neither gave notice to petitioner that its documents are inadequate nor ruled to deny its claim within the 120-day period; that counting from August 28, 2008, respondent had until December 26, 2008 to decide the claim, which he failed to do; that, therefrom, petitioner had 30 days or until January 25,2009 to file its judicial claim; and that petitioner timely filed its Petition for Review with the Court on January 23, 2009. The Supreme Court failed to rule on the issue of petitioner's entitlement to a refund or the issuance of a TCC in the amount of Php7,898,433.98, considering that the Petition for Review was denied due course and dismissed by the Court solely on the ground of 38 Rollo, Court En Bane Resolution, pp. 201-204; emphases retained; penned by Associate Justice Esperanza R. Pabon-Victorino, with Associate Justices Juanito C. Castaneda, Lovell R. Bautista, Cielito N. Mindaro-Grulla, and Amelia R. Cotangco-Manalastas concurring. 39 Rollo, CTA EB No. 776, Supreme Court Decision. 40 Id.; emphases retained. !

DECISION CTA CASE NO. 7863 P.age 8 of22 premature and/ or belated filing. Hence, the case was remanded to the Court for trial de novo. On January 21, 2016, an Entry of Judgment was issued by the Deputy Clerk of Court and Chief Judicial Records Officer of the Supreme Court certifying that on December 8, 2015, the Decision rendered in the case docketed as G.R. No. 207112, has become final and executory and was recorded in the Book of Entries of Judgments.41 On July 12, 2016, the Court En Bane issued a Resolution, which reads as follows: With the Entry of Judgment issued by the Supreme Court, stating that its Decision dated December 8, 2015 has become final and executory on January 21, 2016, let the instant case be remanded to the CTA Special Third Division for further proceedings. SO ORDERED. Accordingly, on August 9, 2016, the Court issued a Resolution42 setting the case for hearing, on November 8, 2016, to determine whether the parties find it necessary to present additional evidence in relation to the issue of petitioner's compliance with the other requisites provided under Section 112 of the 1997 National Internal Revenue Code, as amended ('"1997 NIRC"). On February 7, 2017, in view of the cancelled hearing set last November 8,2016 due to the retirement of Associate Justice Amelia R. Cotangco-Manalastas, the Court ordered the parties to file their respective manifestations stating whether they find it necessary to present additional evidence in relation to petitioner's compliance with the other requisites provided under Section 112 of the 199 NIRC.43 On February 20,2017, petitioner filed its Motion for Extension of Time to File Manifestation44, which was granted4S by the Court. Thereafter, on March 2, 2017, petitioner filed its Manifestation and 41 Rollo, CTA EB No. 776, Supreme Court Entry ofludgment. 42 Records, Vol. 3, Resolution, pp. 1400-1404. 43 Id., Resolution, p. 1406. 44 Id., Motion for Extension of Time to File Manifestation, pp. 1407-1409. 45 Id., Resolution, p. 1411. (

DECISION CTA CASE NO. 7863 P~ge 9of22 Motion46. The Motion was likewise granted by the Court on March 17, 2017.47 Consequently, a commissioner's hearing was set on April 6, 2017 for the pre-marking of petitioner's exhibits; and the initial presentation of petitioner's evidence was scheduled on June 5, 2017. The commissioner's hearing was later rescheduled to May 16,2017.48 On May 31, 2017, the Supplemental Judicial Affidavit of Ms. Rosalia T. Yu (In a form of Questions and Answers as Part of her Testimony on Direct Examination)49 was filed. During the hearing held last June 5, 2017, only the counsel of petitioner was present, along with witness Ms. Rosalia T. Yu.so The Court, thereafter, granted petitioner until June 15, 2017 to file its supplemental FOE. Thereafter, a Supplemental FOES1 was submitted by petitioner offering Exhibits "AAA," "BBB," "CCC," and "CCC-1" as evidence. The Court resolved to admit all of the aforestated exhibits on August 1, 2017.52 In view of petitioner's Supplemental Memorandum53 filed on September 4, 2017, and respondent's failure54 to file his memorandum despite due notice; the Court resolved to submit anew the case for decision through its Resolutionss dated October 12, 2017; hence, this Decision. The Issues56 WHETHER PETITIONER HAS COMPLIED WITH THE INVOICING AND ACCOUNTING REQUIREMENTS FOR VAT-REGISTERED PERSONS, AS 46 Records, Vol. 3, Manifestation and Motion, pp. 1412-1414. 47 Id., Resolution, p. 1416. 48 Id., Resolution, p. 1423. 49 Id., Exhibit IICCC," Supplemental Judicial Affidavit of Ms. Rosalia T. Yu (In a form of Questions and Answers as Part ofher Testimony on Direct Examination), pp. 1427-1431. so Id., June 5, 2017 Minutes of Hearing, p. 1432. 51 Id., Supplementary FOE, pp. 1434-1439, with annexes. 52 Records, Vol. 3, Resolution, pp. 1442-1443. 53 Id., Supplemental Memorandum, pp. 1444-1447. 54 Id., Records Verification Report, p. 1448. 55 Id., Resolution, p. 1449. 56 Records, Vol. 1, Resolution, p. 245; Records, Vol. 1, Joint Stipulation of Facts and Issues ("]SFI"), Issues to be Resolved, Items 2 to 5, pp. 237-238. (

DECISION CTA CASE NO. 7863 ~age 10of22 WELL AS THE FILING AND PAYMENT OF VAT, IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 113 AND 114 OF THE 1997 NIRC; WHETHER PETITIONER'S INPUT TAXES OF PHP7,898,433.98, REPRESENTING EXCESS AND UNUTILIZED CREDITABLE INPUT VAT FOR THE FIRST AND THE SECOND QUARTERS OF TY 2007, ARE ATTRIBUTABLE TO ZERO-RATED SALES; WHETHER PETITIONER'S ALLEGED UNUTILIZED INPUT VAT FOR THE FIRST AND THE SECOND QUARTERS OF TY 2007 WERE PAID AND APPLIED AGAINST ITS OUTPUT TAXES; AND WHETHER PETITIONER IS ENTITLED TO ITS CLAIM FOR REFUND OR TO THE ISSUANCE OF A TCC ON ITS UNUTILIZED INPUT TAX IN THE AMOUNT OF PHP7,898,433.98, INCURRED DURING THE FIRST AND THE SECOND QUARTERS OF TY 2007. Ultimately, the only issue to be resolved is: WHETHER PETITIONER IS ENTITLED TO A REFUND OR TO THE ISSUANCE OF A TCC IN THE AMOUNT OF PHP7,898,433.98 REPRESENTING UNUTILIZED INPUT VAT ARISING FROM ITS ZERO- RATED TRANSACTIONS FOR THE PERIOD COVERING THE FIRST AND THE SECOND QUARTERS OF TY 2007. Petitioner's Argumentss7 Petitioner alleges that it is entitled to the refund or to the tax credit sought since (1) it has complied with the invoicing and accounting requirements for VAT-registered persons, as well as the filing and payment of VAT, pursuant to the provisions of Sections 113 and 114 of the 1997 NIRC; (2) that input taxes in the amount of Php7,898,433.98 representing excess and unutilized creditable input VAT are attributable to zero-rated sales; and (3) that none of the 57 Records, Vol. 2, Memorandum, Discussion, pp. 640-675. (

DECISION CTA CASE NO. 7863 Page 11 of22 unutilized input VAT was carried over nor applied against output taxes of succeeding taxable quarters. Petitioner further argues that the authority to issue a certification that it has not applied for any tax credit and duty drawback forTY 2007 is lodged with the Department of Finance ("DOF") and not with any other agency or instrumentality of the government. Respondent's Counter-Argumentsss Respondent counters that petitioner failed to prove that it is entitled to the claim for refund applied for. The Ruling of the Court Petitioner is entitled to the issuance of a TCC, albeit at a reduced amount. In view of the Supreme Court's settlement of the issue regarding jurisdiction, the Court proceeds to determine whether petitioner is entitled to a refund or to an issuance of a TCC in the amount of Php7,898,433.98 representing unutilized input taxes for the first and the second quarters of TY 2007. Section 106(A)(2)(c) of the 1997 NIRC provides as follows: SEC.l06. Value-Added Tax on Sale ofGoods or Properties.- (A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. XXX XXX XXX (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: 58 Records, Vol. 2, Memorandum (For Respondent), Arguments/Discussion, pp. 695-704. (

DECISION CTA CASE NO. 7863 Page 12of22 XXX XXX XXX (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. In relation to the above, Section 3(3) ofRMC No. 74-99 states: SECTION 3. Tax Treatment of Sales Made by a VAT Registered Supplier from the Customs Territory, to a PEZA Registered Enterprise. - XXX XXX XXX (3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.106(A)(2)(a)(S), NIRC, in relation to ART.77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Sec.108(B)(3), NIRC, in relation to the provisions of R.A.7916 and the 'Cross Border Doctrine' of the VAT system. This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by Revenue Regulations No.7-95 effective as of the date of the issuance of this Circular. Petitioner claims that under the above sections, its sales to entities duly registered with PEZA are deemed zero-rated; and that as a result, it is entitled to the refund of its unutilized input taxes. (

DECISION CTA CASE NO. 7863 Page 13 of22 This Court agrees with petitioner that its sales to PEZA- registered entities are deemed zero-rated. Among the measures adopted by the government, to implement the policy of promoting preferential use of Filipino labor, domestic materials, and locally produced goods, and to help make them internationally competitive, is the establishment of special economic zones or freeports. In pursuit of these social and economic objectives, enterprises registered and authorized to conduct business operations in designated economic zones enjoy fiscal incentives, among which is relief or exemption from payment of national and local taxes, in lieu of which they pay a flat rate on gross income.59 Although an ecozone is undeniably a sovereign geographical territory of the Philippines, treating the zone as a special customs territory is necessary to give meaningful effect to the objectives expressed in the special law creating a particular economic zone. In effect, what is created is a fiction of a foreign territory. The entity that manages this fiction of foreign territory is the Philippine Economic Zone Authority (PEZA").60 In the context of the fiction of foreign territory, the destination principle (as a basis for jurisdiction of the Philippines to impose VAT) as well as the situs of the transaction, as criteria for determining the place where the transaction occurred as the taxable event, will apply. As a result of the destination principle, RMC No. 74-99 provides that any sale of goods and services made by a VAT-registered supplier in the customs territory to any registered enterprise operating in the economic zone, regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to zero percent (0%) VAT.61 This was affirmed by the Supreme Court in the case of Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils), Inc.62 wherein the Supreme Court ruled that services rendered to a PEZA-registered enterprise effectively subjects the supply of such services to VAT at zero percent (0%). 59 The Value Added Tax in the Philippines, Copyright 2000, First Ed. by Victor A. Deoferio, Jr. and Victorino C. Mamalateo, pp. 198-202. 6o Id. 61 Id. 62 G.R. No. 150154, August 9, 2005, 466 SCRA 211. I

DECISION CTA CASE NO. 7863 . Page 14 of 22 Likewise, in BIR Ruling [DA-736-06], the BIR held that the sale of industrial gases and equipment by petitioner to its PEZA-registered customers pursuant to contracts entered into prior to the effectivity of RA No. 9337 is subject to zero percent (0%) VAT and requires no prior approval for zero-rating based on RMC No. 74-99. The case of Coral Bay Nickel Corporation v. Commissioner ofInternal Revenue63, the Court En Bane explained that the sale to an enterprise within the economic zone is actually a sale outside the territory, hence no VAT shall be imposed. The relevant portion of the Decision states that: The Cross Border Doctrine provides that noVAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Since, an ECOZONE is regarded as a foreign territory by RA 7916, the sales of goods and services therefore by VAT registered enterprises to PEZA-registered enterprises are subject to VAT at zero percent rate. Accordingly, no output VAT shall be shifted to or passed on to PEZA-registered enterprises; conversely, no input VAT shall be paid by PEZA- registered enterprises from said purchases. There being no input VAT paid by PEZA-registered enterprises, it necessarily follows that they are not entitled to refund, or issuance of tax credit certificate from their purchases of goods and services. From the foregoing, it appears that petitioner must first prove that its clients are situated in an economic zone or is a PEZA-registered entity to qualify its sales as zero-rated. In support of its claim, petitioner submitted certificates64 from PEZA and Clark Development Corporation certifying that its clients are PEZA-registered. Upon examination of said certificates, this Court finds petitioner to have aptly proven its right to claim for a VAT refund. With said certificates, its sales to the PEZA-registered entities are thus deemed zero-rated. From the first and the second quarters of TY 2007, petitioner generated zero-rated sales in the amount of Php79,168,883.15. Consequently, petitioner is not liable to pay any output VAT thereon and the reported unutilized input VAT attributable thereto may be the 63 CTA Case No. 7022, March 10, 2008. 64 Records, Vol. 1, Exhibits "QQ" and "RR," pp. 577-579. i

DECISION CTA CASE NO. 7863 Page 15 of22 proper subject of a claim for refund or the issuance of a TCC under Section 112(A) of the 1997 NIRC, to wit: SEC.112. Refunds or Tax Credits ofInput 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: Provided, however, That in the case of zero- rated sales under Section 106(A)(2)(a)(l), (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): Provided, 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, in order to be entitled to a refund or tax credit of unutilized input VAT, the following requisites must be complied with: 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 (2)- year prescriptive period. (

DECISION CTA CASE NO. 7863 .Page 16 of 22 With respect to the first requisite, Section 106(A)(2)(c) of the 1997 NIRC and RMC No. 74-99 qualifies petitioner's sales as zero-rated and is properly a subject for a refund or credit under Section 112(A) of the 1997 NIRC. However, Section 112(A) must be read together with Section 113 of the same Code, as implemented by Section 4.108-1 of Revenue Regulations ('~RR") No. 7-95, which state that: 1997 NIRC SEC.113. Invoicing and Accounting Requirements for VAT- Registered Persons. - (A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. XXX XXX XXX RR No. 7-95 SECTION 4.108-1. Invoicing Requirements - All VAT registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN and address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; !

DECISION CTA CASE NO. 7863 Page 17of22 5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. XXX XXX XXX Only VAT-registered persons are required to print their TIN followed by the word 'VAT' in their invoice or receipts and this shall be considered as a 'VAT Invoice'. All purchases covered by invoices other than 'VAT Invoice' shall not give rise to any input tax. If the taxable person is engage in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A 'VAT Invoice' shall be issued only for sales of goods, properties or services subject to VAT imposed in Section 100 and 102 of the Code.... Based on the foregoing law and regulation, petitioner must show that duly registered VAT invoices or official receipts ("OR") were issued and contain all the necessary information, i.e., petitioner's TIN- VAT number and the imprinted words "zero-rated," in order for its sales to PEZA-registered entities be deemed fully entitled for VAT zero-rating. In its Quarterly VAT Returns for the first65 and the second66 quarters of the TY 2007, petitioner declared the amount of Php99,078,417.50 as total sales, Php79,168,883.15 of which is zero- rated; broken down as follows: Vatable Sales 1ST QUARTER 2ND QUARTER TOTAL Zero-Rated Sales (EXHIBIT "U"l Exempt Sales (EXHIBIT "J") Php 713,132.06 Php 1,883,053.04 TOTAL SALES 79,168,883.15 Php 1,169,920.98 31,906,108.49 18,026,481.31 47,262,774.66 18,026,481.31 PHP 50,645,721.86 PHP 99,078,417.50 - PHP 48,432,695.64 In support thereof, petitioner submitted various documents, such as: (1) Summary of Sales and Receipts67, (2) Schedule of Sales and 65 Records, Vol. 1, Exhibit "J," pp.422-424. 66 Id., Exhibit "U," pp.465-467. 67 Petitioner's FOE, Box 1, Exhibits WW-1 to WW-12 Folder, Exhibit "WW-7." (

DECISION CTACASENO. 7863 Page 18 o�22 Receipts (January 2007 to June 2007) 68, and (3) 0Rs69 and Invoices7o. Upon examination of the documents presented, only the amount of Php77,610,519.85 (Php79,168,883.15 less Php1,558,363.30) is considered to be valid zero-rated sales. The amount of Php1,558,363.30 should be denied for reasons stated hereunder: CUSTOMER AMOUNT EXH.NO. REASONS Sumisetsu Phils. Zero-rated Sales Not Indicated Sumisetsu Phils. Php 42,857.14 2115 Zero-rated Sales Not Indicated Sumisetsu Phils. 214,285.71 2116 Zero-rated Sales Not Indicated Rohm Mechatech Center 28,571.43 2117 Invoice not Dated Clarion Manufacturing Corp. 5,500.00 2154 Noted alteration on Customer's name 133,251.06 2196 Without countersignature Le Firenze Zero-rated Sales Not Indicated Sumisetsu Phils. 328,005.30 Zero-rated Sales Not Indicated Sumisetsu Phils. 128,571.43 2334 Zero-rated Sales Not Indicated Abbot Laboratories 14,285.71 2335 Zero-rated Sales Not Indicated Le Firenze 58,880.00 2336 Zero-rated Sales Not Indicated Ingasco, Inc. 157,242.40 2355 Zero-rated Sales Not Indicated Abbot Laboratories 28,221.76 2357 Zero-rated Sales Not Indicated Le Firenze 243,677.00 2442 Zero-rated Sales Not Indicated Le Firenze 167,872.86 2536 Zero-rated Sales Not Indicated TOTAL 7,141.50 2537 PHP 1,558,363.30 After resolving that petitioner had valid zero-rated sales for the first and the second quarters of TY 2007 in the aggregate amount of Php77,610,519.85, the Court shall now proceed with the determination of whether it incurred or paid input taxes in connection thereto. In its Quarterly VAT Returns for the first and the second quarters of TY 2007, petitioner reported input VAT in the total amount of Php8,124,400.35, broken down as follows: Input Tax: 1ST QUARTER 2ND QUARTER TOTAL Goods Services Php 4,356,970.7771 Php 2,959,393.0772 Php 7,316,363.84 175,553.5473 632,482.9774 808,036.51 TO'!'_Ah_ll'!_PUT_'!AX _ L_PHP 4,532,524.31 PHP 3,591,876.04 PHP 8,124,400.35 To determine the accuracy of petitioner's declaration, the ICPA 68 Petitioner's FOE, Box 1, Exhibits WW-1 to WW-12 Folder, Exhibits "WW-7-1" to "WW-7-6." 69 Id., Exhibits "2 769" to "3291," Pilipinas Total Gas, Inc. Official Receipt Nos. 2769-3291. 70 Id., Exhibits "2115" to "2768," Folder, Sales Invoice (PTGI) Nos. 2115-2768. n Records, Vol. 1, Exhibit "J-4," line 21F, p. 423. 72 Id., Exhibit "U-4," line 21F, p. 466. 73 Id., Exhibit "J-5," line 21J, p. 423. 74 Id., Exhibit "U-5," line 21J, p. 466. (

DECISION CTA CASE NO. 7863 page 19of22 examined the documents75 in support of its claim for refund. Based on his examination, the ICPA came up the following findings: NATURE EXHIBIT AMOUNT REFERENCE Input tax supported by documents dated beyond the period of claim. WW-9-1 Php 27,788.91 Input VAT on purchases of goods and services supported by ORs not in the name of the co. WW-9-2 17,483.27 Input VAT on purchases of goods and services where no withholding taxes were recognized. WW-9-3 11,119.29 Input VAT on purchases of goods and services without original supporting documents. WW-9-4 8,998.37 Other invalid input VAT claims on purchases of goods and services. WW-9-5 17,494.97 Difference between allocated input VAT and actual input VAT utilized/ applied Exh. WW Table3 on output VAT on vatable sales. 77,426.51 _PHP 160,311.32 _ TOTAL - - - - - - - - - - --- --�-� - - - --- Upon further study and evaluation of the above findings, this Court is in accord with the !CPA's conclusions. However, an additional input VAT of Php258,469.15 should be denied for reasons stated hereunder: EXHIBIT SUPPLIER AMOUNT REASONS 3 Republic Courier Php 163.20 VAT not separately indicated 10 Wack Wack Golf VAT not separately indicated 21 PCM Industrial 3,698.04 OR pre-printed with "Not a valid source of Input VAT" 22 Shell 27,620.70 VAT not separately indicated 31 PCM Industrial 3,994.82 OR pre-printed with "Not a valid source of Input VAT" 33 PCM Industrial 21,452.06 OR pre-printed with "Not a valid source of Input VAT" 45 Ingasco 5,850.61 VAT not separately indicated 53 Phil. Pub 1418 5,428.04 VAT not separately indicated 57 Titanic 1,157.14 VAT not separately indicated 433 Blackgold VAT not separately indicated 445 PCM Industrial 639.12 OR pre-printed with "Not a valid source of Input VAT" PCM Industrial 707.14 OR pre-printed with "Not a valid source of Input VAT" 448-450 PCM Industrial 3,441.47 OR pre-printed with "Not a valid source of Input VAT" 451 Ingasco 19,702.78 VAT not separately indicated 464 Ingasco 612.00 VAT not separately indicated 465 Shell 8,571.43 VAT not separately indicated 471 Airfrieght 2100 5,428.04 VAT not separately indicated 847 Bureau of Customs 3,306.26 IEIRO without machine validation 1276 Honjin 69.64 VAT not separately indicated 1281 Republic Courier 9,911.00 VAT not separately indicated 1284 Hidden Valley Spring 85.72 VAT not separately indicated 1293 Phil. Pub 1418 109.80 VAT not separately indicated 1306 Ingasco 15,645.32 VAT not separately indicated 1314 Ingasco 1,607.14 VAT not separately indicated 1315 Oencom 5,428.04 VAT not separately indicated 1316 PLOT 8,571.43 VAT not separately indicated 1317 PLOT 333.95 VAT not separately indicated 1318 PLOT 160.00 VAT not separately indicated 1319 PLOT 515.38 VAT not separately indicated 1320 PLOT 185.91 VAT not separately indicated 1321 Philippine Today 1,119.60 VAT not separately indicated 1662 Isla Upana 363.62 VAT not separately indicated 1672 PCM Industrial 1,944.00 OR pre-printed with "Not a valid source of Input VAT" Niko Niko Food Services 412.50 VAT not separately indicated 1673/74 100,134.68 1690 98.57 75 Petitioner's FOE, Box 1, Exhibits "W-5-1" to "W-5-5," with supporting documents labeled as supplier's invoices numbered 1 to 2114. ~

DECISION I I PHP 258,469.15 CTA CASE NO. 7863 Page20of22 j TOTAL From the foregoing, out of the total input VAT in the amount of Php8,124,400.35, only Php7,705,619.88 is supported with valid ORs, invoices, and schedules76; while the input VAT of Php418,780.47 is disallowed for not being properly substantiated by supporting documents, as prescribed under Sections llO(A), 113(A) and (B) and 237 of the 1997 NIRC, computed as follows: Input Tax: Php 7,316,363.84 Goods 808,036.51 Services Php 8,124,400.35 Total Input Tax Less: Php 160,311.32 258,469.15 Php 418,780.47 Disallowance per ICPA PHP 7,705,619.88 Disallowance per Court TOTAL VALID INPUT TAX However, a portion of the Php7,705,619.88 shall be applied against the reported output VAT liability of Php225,966.37 (Php140,390.5277 plus Php85,575.857B). Consequently, only the remaining input VAT of Php7,479,653.51 can be attributed to the total zero-rated sales amounting to Php79,168,883.15 and only the input VAT of Php7,332,423.73 is attributable to the valid zero-rated sales of Php77,610,519.85, computed as follows: Valid Input VAT Php 7,705,619.88 225,966.37 Less: Output Tax Due Php 7,479,653.51 Total 79,168,883.15 77,610,519.85 Divide by Total Zero- Rated Sales PHP 7,332,423.73 Multiply by Valid Zero-Rated Sales EXCESS INPUT VAT ATTRIBUTABLE TO VALID ZERO-RATED SALES - -- -- - The claimed input VAT was not carried over by petitioner in the succeeding periods and was never utilized because it was deducted as "VAT Refund/TCC Claimed" in its Quarterly VAT Returns for the first79 and the secondso quarters of TY 2007. Therefore, the excess input 76Petitioner's FOE, Box 1, Exhibits "W-5-1" to "W-5-5," with supporting documents labeled as supplier's invoices numbered 1 to 2114. 77 Records, Vol. 1, Exhibit "J-6," BIR Form No. 2550-Q, line 19B, p. 423. 78 Id., Exhibit "U-6," BIR Form No. 2550-Q, line 19B, p. 466. 79 Id., Exhibit "J," BIR Form No. 2550-Q, line 23D, amounting to Php4,392,133.79, p. 424. 80 Id., Exhibit "U," BIR Form No. 2550-Q, line 23D, amounting to Php3,506,300.19, p. 467. ~

DECISION CTA CASE NO. 7863 Flage 21 of 22 VAT of Php4,708,508.1181 as of the end of the second quarter of 2007, which was carried over to the succeeding third quarters2 of 2007, no longer includes the subject first and second quarters claimed. WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner Pilipinas Total Gas, Inc. in the reduced amount of SEVEN MILLION THREE HUNDRED THIRTY-TWO THOUSAND FOUR HUNDRED TWENTY-THREE AND 73/100 PESOS (Php7,332,423.73), representing its unutilized and excess input VAT attributable to zero-rated sales for the first and the second quarters of TY 2007. SO ORDERED. WE CONCUR: LOVELt. BAUTISTA ... Associate Justice Q'AA. ~ . } ' - . MA. BELEN M. RINGPIS-LIBAN Associate Justice 81 Records, Vol. 1, Exhibit "U-7," BIR Form No. 2550-Q, line 29, p. 467. 82 Id., Exhibit "BB-3," BIR Form No. 2550-Q, line 20A, p. 495.

DECISION CTA CASE NO. 7863 ;'age 22 of 22 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. LOVEI~( BAUTISTA Associate Justice Chairperson 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. w Presiding Justice