CTA Case No. 5754 (Decision)

REPUBLIC OF THE PHILIPPINES . COURT OF TAX APPEALS QUEZON CITY LUISITA INDUSTRIAL PARK CORPORAT ION, Petiti oner, - versus - C.T.A. CASE NO. 5754 COMMISSIONER OF INTER NAL Prom ulgated : MAY 2 1 2001 REVENUE, Res p o nde n t. 41\{jllj~~~ X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION T hi s Petition for Rev iew is seeking fo r 'the refund or iss uance of a Tax Credit Certifica te in the am ount ofP1 ,630,527.79, all eged ly representing unutili zed in put value- add ed tax (VAT, fo r brev ity) on domestic purchases of capital goods and services fo r the calendar quarters end ed March 3 1, 1997 and June 30, 1997. T he fo ll owing fac ts are undisputed : Petitio ner is a corporati on dul y orga ni zed and existing under and by virtue of the laws of the Rep ublic of th e Philippines w ith principal offi ce located at 11 111 Floor, Makati Sky Plaza, Ol edan Square, 6788 Aya la Avenue, Makati C ity. Its business is to acq uire and own, hold , use, sell , lease, ass ign, transfer, m ortgage, exchange, dispose, deve lop, and manage indu strial and residenti al estates, and to prov ide suppo rt infrastructure and fac ili ties therefor. It is registered w ith the Burea u of Intern al Revenue as a VAT taxpayer w ith Tax paye r Ide ntifica tio n No. 050-005-036-1 96-VAT issued on March 6, 1997.

DEC I SION- CT A C A SE NO. 5754 PAGE 2 On A pri l 2 1, 1997, Pe titioner seasonabl y fi led its 199 7 fi rst Q ua rterly Va lue- Added Tax Return w ith the Bureau of Internal Revenue refl ecting a totalunutili zed input VAT on do mestic purchases o f goods/services in the amount of P635,3 14.35 . On Jul y 2 1, 1997, Petiti oner fi led its second Qtv rterl y Value-Added Tax Return , showing a n acc umulated input VAT in the amount of PI ,63 0,527. 79 as of June 30, 1997. On May 7, 1998, Petiti oner registered w ith th e Philippine Eco no mic Zone A uthori ty as an ecozone developer/operator of Lui sita Industri al Park II in San M iguel, Ta rl ac , T arlac as evidenced by Certifi cate of Registra ti on No . EZ-98-05. On reb ru ary 11 , 1999, Petiti oner fil ed w ith th e Revenue Di stri c t Office No . 50, South Maka ti, a w ritte n appli cat ion fo r refund of input taxes paid lor the pe ri od January 1, 1997 to June 30, 1997, in the aggregate amount ofP I,63 0,527.79 on th e gro und that it had not ye t started its co mmercial operati ons but was a lr~ad y incurrin g business expenses from w hi ch va lue-added taxes we re imposed. On March 29, 1999, Petiti oner lodged its appea l w ith thi s Court in order to to ll the runnin g of the two-year prescripti ve peri od unde r Secti on 23 0 of the Tax Code, as amended. In his A nswer, Respondent ra ised the fo llowi ng Spec ial and Affi rm at ive de fenses: 5. Petitioner's claim fo r refu nd is und er veri fica ti on/in vesti gatio n by res ponde nt Commi ssio ner of Intern al Revenue; 6. Tn an ac ti on fo r tax refund , Peti tioner Plust show th at taxes were paid erro neo us ly o r co llected illegall y. Fai lure to sustain thi s burde n is fa tal to the acti o n for refund ; 7. C laims fo r refund a re construed stri ctl y aga inst the claima nts si nce they a re in the nature of exemptions fro m taxati on (M anila Electric Co. vs. Co mm issione r oflnt ern al Reve nue, 76 SCRA 35 1); and

DECIS ION- CTA CASE NO. 5754 PAGE 3 8. Taxes are pres um ed to have been paid and collected 111 accordance with law. In s upport of its claim for refund , Petitioner presented the following docum e ntary ex hibits: I. The Value-added Tax Returns for each of the four calendar quarters of the years 1997, 1998, and 1999 (Exhibits A , B, E, E-1, F, F-1 0, P , Q, R, S, T , U, and V) ; 2. Schedule of input taxes for the months of March, April, May and June of the year 1997 (Exhibits C and D) ; 3. Audited Balance Sheets of Petitioner for the years 1997 and 1998 (Exhibits G, G-1 , H , and H-1) ; 4. Application for rcrund with th e BlR (Exhs . l) ; 5. Summaries of input taxes pre pared by SGV & Co for the first and second quarters of 1997 togeth er with the corresponding pre-marked ofticial receipts and/or invoices (Exhibits . .1, J-1, K , K-1 to K-16 , L, L-1 to L-3, M, and M-1 to M-56); and 6 . The re port of th e commissioned independent CPA (Exhibit N). The case was s ubmitted fo r decision on February 8, 200 I, without the ev idence and memorandum of th e Respondent. The iss ues jointl y stipulated by the parties are as follow s: 1 I. Whether or not Petitioner has unutili zed input VAT for th e I st a n d 2 11 quarters d oftaxable yea r 1997 in the amount ofP1,630,527.79; 2. Whether o r not the amount of PI ,630,52 7.79 represe nts input VAT paid on Petitioner's domestic purchases of capital goods and services; and 1.1oint Stipulation or Facts and Iss ues, CTA reco rds, pp. 40 to 42. l\u' ~I (-)

DEC ISION- CTA CA SE NO. 5754 PA G E4 3. Wheth er o r not the sa id input taxes have re mained unutili zed for the s ucceedin g qu arte rs. We an swe r the a fo rementi o ned numbe rs o ne and three iss ues in .th e a ffirm ati ve. The reco rd s reveal that Pe titi o ner registe red w ith th e Securiti es and Excha nge Commi ss io n o n Octo be r 24, 1996 and did no t start its co mmerc ial o perati ons until after December 3 1. 1998 as ca n be see n fro m No te No . I of .!1e Ba lance S hee ts (Ex hibits G-1 and H- 1). T herefo re, fo r the year 1997, Petiti o ner has no taxa bl e inco me fro m whi ch it �� can be he ld li ab le fo r va lue-add ed tax. However, durin g the same year, Pe titi o ner was a lready engaged in th e co nstructi o n of its initi a l p roj ect w hi ch was th e deve lop me nt of a 300- hec ta re pro perty into a first c lass industr!_al_park ca ll ed " Lui s ita Ind ust ri a l Park 2" located a t the H ac iend a Lui s ita in San Mi gue l, Ta rl ac, Ta rl ac (No te No. I of th e Ba lance S heets, Ex hi b its G and H. CT A reco rd s, pp . 83 and 90). Hence, a ll of Petiti o ner 's input taxes pa id o n vari o us purchases of goods a nd se rvi ces re lative to its pre-co mmerci al ope rati o ns a nd th e co nstructi o n o f its initi a l proj ect re main un appli ed (Ex hi bits A . B, E, F, 0, P, Q. R, S, T, U, and V). A nent the seco nd iss ue, Petiti o ner c la ims that it is entitl ed to th e refund o f input taxes pa id o n do mes ti c purchases of ca pita l goods based on Sec ti o n I06(b) of th e Tax Code. Fo r easy refe rence. Sec ti o n 106(b) o fth e Tax Code is he re by q uo ted as fo ll ows: Section 106. Refund s or tax credits of creditable input tax . - (b) Capita l goods. - A V AT-reg istet'l �d pe rso n m ay app ly fo r th e iss uance of a tax credit ce rtifi cate o r refund of input taxes pa id o n cap ita l goods im po rted o r loca ll y purchased, to th e ex tent th at s uch in put taxes have no t been appli ed aga inst o utput taxes . T he appli ca ti o n fo r

DECIS I ON- CTA CAS E NO. 5754 PAG E 5 refund may be made onl y after the exp irati on o r 2 succeed ing quarters foll owin g the quarter in which the importation or loca l purchase was made. The subj ect input taxes are catego ri zed into the following account titl es as shown in Petiti oner' s sched ul es of input taxes, to wit: (Exhibits C and D) Account Titles March April May June Total Office Equipment Office Supp lies 16,736 .37 6,570.45 515 .09 418.44 23,821 .91 Travel 1,3 11 .57 2,071 .62 735.59 (7,325 .00) 4,537.22 Telephone/Facsimile 4 ,996 .8 1 12,024 .07 3,600 .00 Professional Services 2,018 .73 1,075 .31 914 .33 2,471 .96 13,295.88 Project Development Cost 250.17 1,014.39 1,314.35 178.40 6,480 .33 Re nt 2,757.31 Repre sentatio n 610,000 .00 12 ,696 .68 12,696 .68 915 ,000 .00 Books &. Subscription 134.26 274 .90 12,696 .67 1,525,000.00 Advertiseme nt 635 ,3 13.65 6 , 164 .34 38 ,090.03 Repai rs & Maintenance 1,124.38 20,0 50 .94 6,573. 50 2,266.9} 5 , 136 .36 1,124.38 Total 1,443 .27 7,403 .27 40,421 .34 934 ,741 .17 1,443. 27 1,630,527. 10 Petitioner cap itali zed all the ex penses related to the deve lopment of the project, including interest during the development period , as part of " Proj ect Development Cost" (Note No. 2, Notes to Balance Sheets. Ex hibit G. CTA record s. p. 83). Wh ile the ex penses incurred pri or to its start o r co mm ercial ope rati ons are capitali zed and cha rged to " Pre-opera tin g Expenses and Deferred Charges'' accou nt in the balance sheets and will be amorti zed ove r a peri od or five (5) years upon the start or the Petiti oner' s commercia l operati ons (Exhibits G-1 ). Petiti oner beli eves th at the aforementioned input taxes are in the nat ure of capi tal goods and therefo re are qualilied for refund based on Section IOG(b) of the Tax Code as amended. t \ �)~ .... 2� )

DECI SION - CTA CASE NO. 5754 PAG E 6 Howeve r from the point or view of the co mmi ss ioned ind epend ent C PA, onl y the input taxes paid on " Proj ect Deve lopm ent Cost" in the amount o r PI ,525,000. 00 are related to ca pi ta l goods (Ex hibit N). On the other hand , the Res po11dent 's reve nue o ffi ce rs opin ed th at both the input taxes on pre-o perating ex penses and project deve lopment cost are not pa id on capital goods. T hey ex pl ained thi s in their memorandum in thi s manner, thus: " Pre-operat in g ex pense. th ough class ifi ed as an asset and amorti zed for an estim ated number of years, is not subj ect to wear or tear or obso lesce nce. Project developm ent cost whi ch is likew ise an asse t acco unt will eve ntuall y be a part of its inventory since subj ect taxpaye r is engaged in the business of acquirin g, holding, se lling, leasing, ass ignin g, trans ferrin g and managing industrial anc!. r~s id e ntial estates . In ve ntori es or �stock in trade ca nnot also be deprec iated and th erefo re ca nn ot be class ifi ed as capital goods. Based on these fac ts, it is clea r that the input taxes being cl aimed are not paid on ca pital goods as alleged by SG Y. x x x". (Ex hibit 2). Give n the above difTerent views. the Court is now tas ked to reso lve a co roll ary iss ue of what co mpri ses capital goods. Secti on 2(o) o r Revenue Regul ati ons No . 5-87 of the Value-Added Tax Regulations defin es capital goods as: (o) "Capital goods" refer to goods with estim ated useful Iife grea ter than one yea r and whi ch are trea ted as deprec iab le asse ts unde r Sec ti on 29(1), used directl y or indirec tl y in th e producti on or sa le of taxa bl e goods or se rvices (U nderlinin g suppli ed). The Co urt noted from the balance sheets of Petiti oner that onl y the fo ll owing prope rt y and equipm ent we re subj ec ted to deprec iati on�. to wit: (Note No. 4. No tes to Balance Sheets. Ex hi bit G, CTA record s, p. 84) Lease hold improvements Pl ,960,9 16 Offi ce equipment 97 6,753 Furniture and fi xtures 48 .066

DECI SION- CTA C A SE NO. 5754 PAGE 7 Total P2.985,735 Less deprec iati on and amorti zati on L2 12, 163 Boo k Va lue p 1.773.572 Acco rdin gly. onl y the input taxes paid on leasehold improve ments, office equipment, and furniture and fi xtures arc qu alifi ed fo r refund pursuant to the prov isions of Secti on I06( b) of the Tax Code in relati on with Secti on 2(o) o r Revenue Regul ations No. 5-�87 uf the Va lu e-Acld ed Tax Reg ul ati ons. Th e Co urt l'urther noted that from among the afo rementi oned depreci abl e asse ts, Petiti oner is onl y claimin g the refund of input taxes paid on offi ce equipment in the amount of P23,82 1.94 based on the ta bulated schedul e of input taxes (Ex hibits C and D). Out o r the aforesa id s um ~ onl y the amount of P23,306.82 is dul y substantiated Cor VAT purp os<;:s,_to vvit : Supgli er Ex h. Input Tax ' Compex Sa les Corp. K-1 Pl 2,2 81 .82 Compex Sales Co rp. K-5 Co mpumecl ics M- 26 4.45 4.55 Co mpex Sa les Co rp . M- 27 752.73 Co mpex Sa les Co rp . M-35 72 7.27 T o ta l 5. 090 .45 P23,3 06. 8? We do not agree with the Pet iti oner and the ind ependent CPA that expenses related to projec t deve lopment cost arc in th e nature� of capital goods. The project developm ent cos t alth ough cl ass ifi ed as a capital ex penditure is not within the meanin g of the term �'ca pital goods". The argument of' Petiti oner to the effec t that roads, electrical posts and perim eter re nee are asse ts not lo r sa le hence should be treated as capita l goods is bereft of merit. They are not among the afo rementi oned li st of Petiti oner's depreciabl e asse ts. /\ !though the roads, electri ca l pos ts and perimeter fence are asse ts that ca nnot be so ld . they are improve ments needed to be co mpleted first before P ~.:: titi o n c r co ul d se ll or

DECI SION- CTA CASE NO. 5754 PAGE 8 lease its deve loped lots. Once the deve lopment of the land is co mpl eted, the costs of these improve ment s will eventuall y be rea li zed by the in crea:;e in the se ll ing pri ce of the lot, rental or lease. The improve men ts on the industri al park are ev ide ntl y not subject to deprec iation and therefore are not class ified as cap ita l goods. It has bee n co nsistently held that the cost of improvements of subd ivided real estate held for sa le are cap ital expe ndi tures, all ocab le on th e bas is of the various unso ld lots to be rea li zed by the develope r upo n hi s ult imate sa le of the pro perty (5 MERTENS Law of Federal In co me Taxati on, S25.26, p. 178). Road constructi on expenditu res in co nnection with th e deve lopm ent of a subdi vision o f rental propert y are not deduct ible (5 MERTENS Law of Federal Inco me Taxati on, S25_. 2~, p. ' l 78, sup ra). We fin d it appropriate to quote a United States tax case entitl ed Fnmk B. and Pauline Coop<~ ��, vs. Commissioner of Internal Revenue, 31 T.C. 1155, whi ch reso lved an issue of wheth er or not the improve ments made by Petiti oners on their rea l estate busin ess arc subject to deprec iati on ex pense. The US Tax Co urt rul ed in thi s wise: "The onl y iss ue be f"ore the Co urt is wheth er or not peti tioners me entitl ed to a deducti on ro r depreciati on o r the vari ous improve ments made by them to the Hilltop Additi on subdivisio n. ln th e event it shoul d be held that th ey are entitl ed to that deducti on, the parti es have ag reed on a bas is of $ 19,848. 12, and a useful life of I0 years fc r the prope rty, and have further ag reed to the use o f the dec linin g ba lance method of dep rec iating it. Sec tio n 167 of the 1954 Internal Reve nue Code, provi des an all owance for deprec iati on fo r property " used in the trade or bu sin ess" or "held for the producti on of inco me." See also sec. 1.1 67(a)-l , Income Tax Regs. Thi s all owance is based on the fac t that property used by a tax payer in his trade or business, or held fo r the production of inco me, graduall y approac hes a po in t where its usefuln ess is ex hausted. Thu s, through annual de prec iati on, a tax paye r is all owed to reco up, as an operat in g expe nse for a give n taxab le peri od, that porti on of the cost of the property t \ .J .:- ~ ) .... v

DECI SION- CTA C A SE NO. 5754 PAGE lJ estimated to have bee n consum ed in producin g the income earned durin g the period. However, it is well settl ed that property held for sa le does not constitute deprec iabl e property within the meaning of the statute. N ul ex., In c., 30 T.C. 769 (195 8); Camp Wolters Enterpri ses, Inc ., 22 T.C. 737 ( 1954), afT' d. 230 F. 2d 555 (C.A., 1956). T he property here so ught to be deprec iated co nsists of improvements made to real es tate whi ch was subdi vid ed and held by the petiti oners for sa le. T hese improvements in cluded the co nstructi on of road s, and the install ati on of curbs, gutters, wa terlines, and storm sewers. In so far as thi s or reco rd is co nce rn ed, th ere is nothing to indi ca te that all or an y part these improve ments we re, durin g the taxa bl e peri od und er co nsid erati on, used by petiti oners in their trade or business or held by them for th e producti on of inco me. In po int of l~1c t , the reco rd establi shes th at they we re held fo r di sposa l either as part o r each lot so ld , or by dedicati on to pu bli c use. Moreove r, it has co nsistentl y been held that the cost of improvements such as these is a capital ex penditure, all ocabl e to the bas is of the vario us unso ld lots, to be rea li zed by the deve loper upon hi s ultima te sa le o r th e pro perty . Wood v. Co mmi ss ioner, 245 F. 2d.888 (C.A. 5, 1957), a ffirmin g in part T. C. Memo. 1955-301 ; Co mmi ss ioner v. Lag un a Land & W. Co ., 118 F. 2d 11 2 (C.A .9, 1941 ); Fairview Co. , 13 B.T.A . 743 ( 1928). We are therefo re o f the opini on that petition er have not shown the improve ments mad e to the Hilltop Additi on co nstitute depreciable propert y within the mea ning of secti on 167 of the Code, and , acco rdingly, we deny the claim ed deducti on." WHEREFORE , in view of the fo rego in g, the Pet iti on fo r Rev iew is hereby PARTIALLY GRANTED. Res pond ent is ORDERED to REFUND or ISS UE a TAX CREDIT CERTl FICATE in the am ount of P23,306.82 in favo r of Petiti oner. SO ORDERED. L\!).a~ ERNESTO D. ACOST A Pres iding .Judge I CONCUR:

DECI SION - CTA CASE NO. 5754 PAGE 10 CERTIFI CATION I hereby ce rtify that the above decision was reac hed arter due co nsultati on wit h the members of the Co urt of Tax Appea ls in accordance vvith Section 13, Artic le VIII of the Co nstituti on. ~U2-0~ ERNESTO D. ACOSTA Pres iding Jud ge