KEPCO ILIJAN CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City FIRST DIVISION ************** KEPCO IliJAN CORPORATION, Petition er, -versus - C.T.A. CASE NO. 6682 Members: COMMISSIONER OF INTERNAl ACOSTA, Chairperson REVENUE, BAUTISTA, and CASANOVA, JJ. Respondent. Promulgated: 009 ,� ~-!!/<j ~ X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---X DECISION CASANOVA, J. Before Us is a Petition for Review filed by Kepco Ilijan Corporation seeking that judgment be rendered ordering respondent Commissioner of Internal Revenue to refund or issue a tax credit certificate in favor of petitioner in the amount of P338,279,058.65 representing the input Value Added Tax (VAT) incurred for the calendar year 2001 arising from its importations and domestic purchases of capital goods and equipment preparatory to its production and sales of electricity to the National Power Corporation.~ 990

Decision G A Case No. 6682 Petitioner, Kepco Ilijan Corporation, is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with principal place of business at Suite 2501-A, 25th Floor, Tektite Tower I, Exchange Road, Ortigas Centre, City of Pasig . It is registered as a VAT taxpayer engaged in the production and sal e of electricity to the National Power Corporation (NPC/ . Likewise, petitioner is duly registered with the Bureau of Internal Revenue (BIR) beginning January 1, 1997 as per Certificate of Registration No. OCN 3RC0000162963.2 On the other hand, respondent is the duly appointed Commissioner of Internal Revenue, vested under the appropriate laws with the authority to carry out all the function s, duties and responsibiliti es of th e said office, including th e power to decide, approve, and grant refund s and or tax credits of erroneously paid or illegally collected internal revenue ta xes. Respondent holds office at the 5th Floor, BIR National Office Building, BIR Road, Diliman, Quezon City. 3 For the year 2001, petitioner fil ed its quarterly VAT returns with the following details : E xhibit Date F il ed4 P eri od Ou tpu t Inpu t VAT O verp ay ment VAT ( I,759.028 ,699.08) Ca n �y-Ove r� Do m est ic hn por ta ti ons S ubtota l ( I,890,068,834.09) Pu rc hases ( I,950,350,980.89) "8" 26-A pr-01 151 Qt r. 0 1 0 1.679,528,6 14.60 44,699,729.25 I,759,028.699.08 (2 ,0 17,807,673.251 34,800 ,355 .23 126 . 778.264.97 1.890.068.834 .09 "C" 25-Jul-0 I 2"d Qtr . 0 I 0 I,759,028.699.08 4,26 1.870.04 59.570.880 .00 1. 950.350 ,980.89 7 1I,266.80 5.323 .820.00 2.0 17,807,673.25 "D" 25-0 ct-01 3n1 Qtr. OI 0 I,890,068.834 .09 62. 132.872.36 ''E" 25-Ja n-02 4'11 Q t r. 0 I 0 1.950.3 50.980. 89 1 Pre-Trial Brief for the Petitioner, Rollo, pp . 3 1-33 ; Transcript of Stenographic Notes (TSN), August 26, 2003, p. 5. 2 Ibid; ibid; Exhi bit "A" . 3 Petition for Rev iew, Par. 2, Ro llo, pp. 1-2. 4 Supra note I, par. 3; TSN , August 26, 2003, p. 5. ~91

DeGision CTA Case No. 6682 Pag e 3 of 23 Based from the above returns, 5 petitioner allegedly incurred the amount of P338,279,058.65 as input VAT for its importations and domestic purchases for the year 2001, computed as follows: Total input VAT at the end of p 2,017,807,673.25 The 4th quarter of 2001 1,679,528,614.60 Less: Input VAT at the start of the year p 338,279,058.65 Input VAT incurred for 2001 Relying on the provision of Section 112 (B) of the 1997 National 1997 NIRC, petitioner filed a claim for refund on April 15, 2003 with the office of the respondent of its input VAT incurred from the first to the fourth quarters of 2001 in the amount of P338,279,058.65 through its prospective sale of electricity to the NPC6. Respondent, not having acted upon petitioner's claim, the instant Petition for Review was filed on April 23, 2003. In response thereto, respondent alleged the following Special and Affirmative Defenses in his Answer7 : "6. The claim for refund is still under examination by the respondent's Bureau; 7. The burden of proof is upon the petitioner to prove that it is entitled to the claim for refund; 8. The grant of a claim for refund [is tantamount] to an exe mption from taxation which is construed strictly against the claimant and in favor of the taxing authority; 9. The taxes sought to be refunded were paid in accordance with law; the burden of proof to the contrary is upon the petitioner- claimant to show with clear and unambiguous provision of law supporting the same.~ 5 Ibid. 6 Ex hibit " F". 7 Rollo, pp . 24 -25.

Decisio n CTA Case No. 6682 Pag e 4 of 23 Petitioner made an initial presentation of its evidence and thereafter formally offered its evidence on May 30, 2006. However, on August 29, 2006, petitioner filed a Motion to Reopen the Case to Allow Petitioner to Present Additional Evidence to further substantiate its claim. The motion was granted via a Resolution on October 3, 2006. After the presentation of additional evidence, the petitioner filed its Supplemental Formal Offer of Evidence on December 21, 2007 . Respondent was deemed to have waived his right to present evidence due to his consistent absences despite warning. 8 After petitioner submitted its Memorandum on August 21, 2008, the instant Petition was submitted for decision. 9 During the pre-trial conference, the parties agreed on the following "1. Wheth er or not respond ent is liable to the [p] etitioner for the refund of Php 338,279,058 .65 representing the [VAT] input incurred for four quarters of the calendar (taxable) year 2001[;] 2. Whether or not the [p]etitioner incurred accumulated input VAT from the purchase of goods and services for the four quarters of calendar year 2001, which purchases are attributable to the sale by [p]etitioner of electricity to NPC[;] 3. Whether or not the sale by petitioner of electricity to NPC for the four quarters of the cal endar year 2001 is subject to VAT at Zero rated[;] 4. Wh ether or not the alleged accumulated input VAT are duly supported by VAT invoices and/or official receipts[;].a._ 8 Resolution dated July 17, 2008, Rollo , p 523 . 9 Reso lution dated September 3, 2008, Ro llo , p. 573. 10 Supra note I; supra note I, p. 32. ~93

Decision CfA Case No. 6682 Pag e 5 of 23 5. Whether or not the accumulated input VAT for the four quarters of the ca lendar year 2001 were uti lized or applied by [t]he [p]etitioner to the succeeding taxable year." The above issues can be summarized as follows: (1) Whether or not the sal e of electricity by a VAT registered entity to the National Power Corporation is subject to value- added tax at zero (0%) percent; and (2) Whether or not petitioner is entitled to a refund of input value-added tax on its purchases of capital goods and goods and services in the total amount of P34,279,166.70, covering the four quarters of the taxable year 1999, allegedly attributable to its preparation for the production and eventual sale of electricity to the National Power Corporation. As regards the first issue, We rule in the affirmative. Section 102 (a)(3) of the 1997 NIRC, and Section 13 of Republic Act No. 6395 (the Revised NPC Charter), as amended by Presidential Decree Nos. 380 and 938, state that: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. - XXX 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: XXX XXX 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 supp ly of such services to zero percent (0%) rate . .@.. ~94

Decision CTA Case No. 6682 XXX XXX xxx'' "Sec. 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 devote all its returns from its capital investments, 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." Thus, it is clear that NPC, as a non-profit corporation, is exempt from the payment of all forms of taxes including the value-added tax; and the services rendered by a VAT registered corporation to the NPC are effectively subject to zero percent VAT. This is further bolstered by the case of Maceda vs. Macaraig, G.R. No. 88291, May 31, 1991, wherein the Supreme Court held that: "[P]residential Decree No. 938 amended the tax exemption by simp lifying the same law in general terms. It succinctly exempts NPC from 'all forms of taxes, duties, fees, imposts, as well as costs and services, including filing fees, appeal bonds, supersedeas bonds,' in any court or administrative proceedings. The use of the phrase 'all forms' of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC shal l devote all its returns from its capital investment as we ll as excess revenues from its operations, for expansion. x x x It is evident from the provisions of P.O. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6395 and P.O. No. 380 if it is to attain its goal."~ ~9 5

Dec ision CfA Case No. 6682 In a Memorandum dated January 28, 1998 issued by the Secretary of Finance and addressed to the respondent, it was categorically stated that: "In view of the foregoing and using the power of review granted to the Secretary of Finance under Section 4 of Republic Act No. 8424, the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases by NPC of electricity from independent power producers are subject to VAT at zero-rate." As regards the second issue, petitioner avers that during the four (4) quarters of the ta xable year 2001, it incurred expenses allegedly representing importations and domestic purchases of capital goods and goods and services pursuant to its preparation for the production and sale of electricity to the NPC by January 2002. A corresponding input value-added tax in the amount of P338,279,058.65 is thus sought to be refunded by petitioner. It is thus imperative to determine first whether the input value-added taxes incurred by petitioner for the subject period are attributable to its alleged zero-rated sales pursuant to Section 112 (A) of the 1997 NIRC, to quote: "SEC. 112. Refunds or Tax Credits ofInput Tax - (A) Zero- rated or Effectively Zero- rated Sales. - Any VAT registered persons, whose sales are zero-rated or effectively zero-rated, may, within two (2) years after the close of the taxable quarter when the sa les 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)(1), (2) and (B) and Section 108 (8)(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~ 99G

Deci sion �crA Case No. 6682 (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." For the taxable year 2001, petitioner admits that it was still on the pre- operating stage of its venture. For this reason, it had no record of any sale of electricity to the NPC. Based on the above law, refund of input value-added taxes attributable to zero-rated sales presupposes that sales were indeed made. It has been held that the provisions of Section 112 (A) of the 1997 NIRC mandate that in order to claim for a refund/ta x credit of input value-added tax, there must be a zero-rated sales or effectively zero-rated sales to which the input VAT sought to be refunded are attributable. 11 Therefore, in order to claim for a refund of input VAT attributable to zero-rated sales, a corresponding sale must have been incurred for how can an input VAT be made attributable to a zero-rated sale if there was no sale in the first place. It follows then that petitioner's claim for refund of input VAT allegedly attributable to its zero-rated sales cannot prosper. However, petitioner may still claim for the refund of input VAT on its capital goods pursuant to Section 112 (B) of the 1997 NIRC, hereunder quoted for easy reference: "Section 112. Refunds or Tax Credits ofInput Tax. - ~ 11 Kepco Philippines Corporation vs. The Commissioner ofi nternal Revenue, CT A Case No . 64 13, March l 0, 2005; San Roque Power Corporation vs. Commissioner ofinternal Revenue, CTA Case No. 62 13, Decem ber 23, 2004; Epson Precision (Philippines). inc. vs. Commissioner ofInt ernal Revenue, CTA Case No. 6 184, November 17, 2003; Placer Dome Technical Services (Philippines) Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6 106, May 14, 2002. ~97

Decisio n CTA Case No. 6682 XXX XXX 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 wh en the importation or purchase was made." Supplementary thereto are Sections 4.104-5 and 4.106-1 (b) of Revenue Regulations No. 7-95, which provide that: "Section 4 .104- 5. Substantiation of claims for input tax credit. - (a) Input taxes shall be allowed only if the domestic purchase of goods, properties or services is made in the course of trade or business. The input tax should be supported by an invoice or receipt showing the information as required under Sections 108 (a) and 238 of the Code x x x" "Section 4.106-1. Refunds or tax credits ofinput tax . - XXX XXX XXX (b) Capital Goods Only a VAT registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made. Refund of input taxes on capital goods shall be allowed on ly to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations. 'Capital goods or properties' refer to 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.~ ~9 3

DP.cision CTA Case No. 6682 From the above cited laws, petitioner must comply with the following requirements to qualify for a claim for refund of input VAT on its capital goods: 1. That petitioner is a VAT registered entity; 2. That input taxes claimed were paid on capital goods duly supported by VAT invoices and official receipts; 3. That petitioner did not offset or apply the claimed input VAT payment on capital goods against any output VAT liability; and 4. That the claim for refund was fil ed within the two-year prescriptive period both in the administrative and judicial levels ( Telecommunications Technologies Philippine~ Inc. vs. CIR, CTA Case No. 6018, November 24, 2003). The first requirement has been duly admitted by the parties and is supported by petitioner's Certificate of Registration No. OCN 3RC0000162963 12. As to the third requirement, it was established that the input VAT claim of P338,279,058.65 was never utilized as petitioner had not yet started commercial operations in the year 2001. Although the subj ect claim was carried-over in the succeeding quarters, the same remained unapplied against any output tax until it was fully deducted as "Any VAT Refund/TCC Claimed" in the second quarter of 2003 13 . Thus, petitioner could not have possibly utilized the subj ect claim in the succeeding quarters. As to whether or not the claim for refund was filed within the two-year prescriptive period, Section 112(8) of the 1997 NIRC states that the reckoning of the two-year prescriptive period for the filing of a claim for refund of input VAT on capital goods purchases starts from the close of the taxable quarter when the purchase was made. Records show that the claimed amount of P338,279,058.65A~--- 12 Supra notes I & 2. 13 Exh ibit " 1-1" , li ne 25A. 899

Qec isio n CTA Case No. 6682 pertains to the input VAT declared by petition er in its Quarterly VAT Returns for the four quarters of 2001 as follows: Exhibit 2001 Domestic INPUT VAT Total 1st Otr Purchases Importation of p 79 ,500,084.48 B 2nd Qtr p 34,800 ,355.23 3rd Qtr 4,26 1,870 04 Goods 131,040,135 .01 c 4th Qtr p 44,699 ,729 .25 60 ,282 ,146.80 Total 7 11 ,266 80 67 ,456 ,692 .36 0 62 ,132 ,872 .36 126 ,778 ,264 .97 P1 01 ,906 ,364.43 59 ,570 ,88 0 00 P338,279 ,058.65 E 5,323 ,820 .00 P236,372,694.22 Counting from March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001, the close of the first, second, third and fourth quarters of 2001, petitioner had until March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, respectively, within which to fil e its claim both in the administrative and judicial levels. Petitioner filed its administrative claim on April 15, 2003 14 and the Petition for Review on April 23, 2003. Clearly, both the administrative claim and the instant Petition for Review were filed out of time insofar as the claim for the first quarter of 2001 is concerned. Thus, petitioner is barred from claiming refund of the input taxes for th e first quarter of 2001 in the amount of P79,500,084.48 due to prescription. We shall proceed to the determination of petitioner's compliance with the second requisite with respect to the remaining input VAT claim covering the second, third and fourth quarters of 2001 in the remaining amount of P258,778,974.17 computed as follows: a_ 14 Ex hi bit " F". 1 000

Decis ion CTA Case No. 6682 Exhibit 2001 Domestic INPUT VAT Tota l 2nd Qtr Pu rchases Importation of 13 1,040 ,135 .0 1 c 3rd Qtr 4 ,26 1,870 04 4th Qtr Goods 60 ,282 ,146 .80 D Total 711 ,266 80 126 ,778,264.97 67 ,456,692 .36 62 ,132 ,872 .36 P258 ,778 ,974.17 E P67, 106,009.20 59 ,570 ,880 00 5,323 ,820 .00 P191 ,672 ,964.97 In order to prove that it incurred input VAT on capital goods purchased, petitioner presented among others, the following documents as evidence: 1. suppliers' invoices/official receipts 15; 2. Bureau of Customs (SOC) Import Entry and Internal Revenue Declarations (IEDs) with attached commercial invoices; 3. airway bills/bills of lading; 4. packing lists; 5. import duties/VAT calculation; 6. petitioner's letters to the UCPB-Batangas City for the issuance of Manager's Checks; 7. petitioner's letters to the Citibank authorizing the latter to debit its account as partial payment of customs duties and taxes; 8. bank statements of account and bank 0Rs 16 ; 9. Schedule of Input VAT Segregation of Capital Goods and Non-Capital Goods from January 2001 - December 2001 17 ; 10. Amended and Restated Contract between petitioner and Raytheon Ebasco Overseas Ltd 18 ; 11. Amended and Restated Contract among petitioner, United Engineers Int'l, Inc. and Mitsubishi Corporation 19; 12. Annual Income Ta x Returns for the years� 2002, 2003, 2004 and 200520,� and 13. Audited Financial Statements for the years 2000, 2001, 2002, 2003, 2004 and 2005 .21 Upon examination of the aforesaid documents, the Court-commissioned independent CPA (ICPA) reported that out of th e P258,858,733.35 input VA12.- 15 Exhibits "L-1" to "L- 1262". 16 Exhibits "GG- 1" to "GG -2295" . 17 Exhibits "R" to "CC", " DD" and "DD-1 " to "DD-14" . 18 Exhibit "HH". 19 Exhibit "RR". 20 Ex hi bits "AAA" " AAA- 1" to " AAA-3 " 21 Ex hi bits "ZZZ", :'ZZZ-1 " to "ZZZ-4". . 100 1

Decision CfA Case No. 6682 claim for the second, third and fourth quarters of 2001, only the amount of P257,713,421.13 relates to petitioner's capital goods purchases while the remaining amount of P1,145,312.22 perta ins to petitioner's non-capital goods purchases, broken down as follows22 : 2nd Quarter 3'd Quarter 4th Quarter Capital Goods P130,769,928 .37 P59,875,850 .77 P67,067,641.99 P257,713,421 .13 Non-Capital Goods 453 ,793.01 406,291.78 285,227.43 1,145,312.22 Total P131 ,223,721 .38 P60 ,282,142.55 P67 ,352 ,869.42 P258,858 ,733.35 This Court observed that there was a discrepancy of P79,759 .18 between the above input VAT of P258,858,733.35 reflected per petitioner's Schedule of Input VAT and the amount of P258,778,974.17 in petitioner's Quarterly VAT Returns/Petition for Review, as shown below: 2nd Quarter 3rd Quarter 4th Quarter Total Per Schedule P131 ,223,721.38 P60 ,282 ,142.55 P67 ,352,869.42 P258,858 ,733 .35 Per VAT Return/Petition for Review 131,040,135.01 60,282 ,146.80 67,456 ,692.36 258,778,974.17 Amount per Schedule is Over/( Under) p 183,586.37 p (4.25) p (103 ,822 .94) p 79,759 .18 However, upon a closer inspection of the records, this Court finds that there were really no discrepancies in the input VAT amounts reflected per schedule and per return for the third and fourth quarters of 2001 23 . The amounts of P4.25 and P103,822 .94 totaling P103,828.00 represent the difference between the understatement of input VAT in the amount of P79,759.03 and overstatement of input VAT in the amount of P183,587 .03 for the first and second quarters of 2001, respectively. The amount of P103,828.00 was erroneously deducted by the ICPA from the input VAT on Non-Capital Goods fo!fa_ 22 Exhibit " Ill " , p. 17. 23 Exhibit " Ill '', Attachment I , Annex EE . 10G2

Decision CTA Case No. 6682 the fourth quarter of 2001 24 . Thus, input VAT on non-capital goods for the fourth quarter of 2001 should have been P389,055.43 instead of P285,227.43 bringing the total input VAT on capital goods and non-capital goods from P67,352,869.42 to P67,456,697.42. Since the understatement of input VAT per schedule for the first quarter of 2001 in the amount of P79, 759.03 already formed part of the P79,500,084.48 input VAT disallowed earlier due to prescription, no further adjustment shall be made on petitioner's claim. While the input taxes per schedule for the second quarter of 2001 exceeded the amount shown per VAT return by P183,586.37, such excess amount shall not be considered in computing petitioner's refundable amount since it is a rule that the taxpayer cannot claim beyond what is prayed for in the Petition for Review. As to whether or not the input VAT claim for the second, third and fourth quarters of 2001 in the amount of P258,858,733.35 qualifies as capital goods purchases, this Court agrees with the !CPA's finding that the amount of P1,249,140.2225 pertains to non-capital goods purchases which should be denied because, as stated earlier, petitioner had no zero-rated or effectively zero-rated sales to which the said input VAT could be attributed. Only the input VAT claim of P257,713,421.13 which arose from petitioner's purchases of office furniture, machinery and equipments~ 24 Supra, note 22. 25 Input VAT on Non-Cap ital Goods per the !CPA 's Report (Exhibit " III ", page 17) PI , 145,312.22 and input VAT of PI 03 ,828.00 eiToneous ly deducted by the ICPA for the fourth quarter of 200 I 1 003

Decision CfA Case No. 6682 construction materials and all costs directly related to the building and construction of its power plant complex such as engineering and design services fall within the definition of "capital goods" under Section 4.106-1 of Revenue Regulations No. 7-95. Neverthel ess, not all of the input VAT claim on capital goods purchases is properly substantiated for VAT purposes. In his report dated June 13, 2007, the commissioned ICPA recommended for the disallowance of the amounts of P235,703.72 and P3,348,860.12 representing input VAT claims on locally purchased and imported capital goods, respectively, for the following reasons26 : Description Exh . Ill 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total Annex 9 On Domestic Purchases 144 ,545.45 3,240.52 3,240.52 3,181 .82 Input Taxes Claimed on Purchases of 147,727 .27 Se rvices Supported by 986,836.00 Non-VAT ORs Input Taxes Cla imed on Purchases of Goods Suppo rted by Documen ts Annex 15 15,214 .36 64,409.09 3,655 .30 227,824.20 Input Taxes Claimed on Purchases of Goods Wi thout Supporting Documents Annex 17 3,181 .82 Input Taxes Cla imed on Pu rchases of Goods Supported by Photocopied VAT Invoices Annex 18 1,457 .18 1,457.18 5,112.48 235 ,703 .72 Subtotal 15,214.36 67 ,649.61 On Importations Input taxes claimed on Annex 34 640,036.56 106,737 .00 244,839.00 1,978,448.56 importations supported only by photocopied -fL bank statements of acco unt 26 Exhib it " I ll ", page ll 1 004

D(3cision CTA Case No. 6682 Input taxes claimed on importations supported by certified true copy IEDs and ori gina l bank ORs/bank debit advi ces with a discrepancy in the amount of input taxes claimed Annex 35 319 ,819 .00 217 ,650.61 - - 537 ,469.61 Input taxes clai med on Annex 36 264,241 .23 610 ,246.98 4,862 .74 (46,409 .00) 832 ,941 .95 importations without 1,570 ,896.23 1,467 ,934.15 111 ,599.74 198 ,4 3 0 . 0 0 3,348,860.12 supporting documents 1,718 ,623.50 1,483 ,148.51 179 ,249 .35 203,542.48 3 ,584 ,563 .8 4 Subtotal Total This Court confirms the disallowance of the above input taxes except for the input taxes of P537,469.61 (Exhibit III, Annex 35). The ICPA erroneously disallowed the entire input VAT paid by petitioner as reflected in the supporting original bank ORs/bank debit advices instead of disallowing only the discrepancy between the said amounts vis-a-vis th e input taxes reflected per petitioner's schedule of input VAT. Thus, disallowances under this item should have been only P8,310 .57 for the first quarter and P209,830.61 for the second quarter of 2001 totalling to P218,141.18 (see detailed computation per Exhibit III, Annex 35). In other words, the ICPA's recommended disallowances shall be reduced from P1,718,623.50 to P1,407,115 .07 for the first quarter of 2001 and from P1,483,148.51 to P1,475,328.51 for the second quarter of 2001. This will bring the total disallowances for the four quarters of 2001 as recommended by the ICPA from P3,584,563.84 to P3,265,235.41. However, since the input taxes of P1,407,115.07 pertaining to the first quarter of 2001 were already disallowed earlier on th e ground of prescription, only the remaining input taxes of P1,858,120.34 (P3,265,235.41 less~

Decision CTA Case No. 6682 P1,407,115.07) shall be disallowed for failure to meet substantiation requirements. Aside from the disallowa nces recommended by the ICPA, the Court finds that th e input taxes in th e amount of P94,209,22 1. 58 should al so be disallowed, detailed as follows: Reasons for Denial Exhibit 2nd Qtr 3rd Qtr 4th Qtr Total On Domesti c Purchases 1. Input tax claimed on payment for construction services rendered by Raytheon Ebasco Overseas Ltd, supported by an OR dated outside the period of claim L-1262 38 ,244,779.71 38,244,779 .71 On Importations Exh . Ill , 41 ,356,690 .00 10,410 ,000.75 3,300,364.00 55,067 ,054.75 Annex 29 2. Input taxes claimed on importations supported by certified true copy of lEOs and photocopied bank statements of account 3. Input taxes claimed on Exh. Ill, 349,877 .12 24 ,070.00 - 373,9 47 .12 importations supported Annex 30 only by certified true copy lEOs 4. Input taxes claimed on importations without any BOC lED/OR or bank debit advice/OR but supported only by photocopied bank statement Supplier Aquatech International GG-1078 to 167,800 .00 167,800.00 GG-1083 , Aquatech International GG-1673 355,640 .00 355,6 4 0 .0 0 GG-1329 to 42 ,230 ,007 .12 94,209,221 .58 GG-1332 , GG-1681 Total 10,434 ,070 .75 41 ,545 ,143.71 Th e claimed input taxes of P38,244,779.71 on petitioner's payment for construction serv ices rendered by Raytheon Ebasco Overseas Ltd. shall be_.g_ 10Gu

Qec ision CTA Case No. 6682 disallowed because the official receipt supporting the same is dated January 28, 2002. Section llO(A) of the NIRC of 1997, is clear that the input tax shall be al lowed as tax credit to the purchaser only upon consummation of sale or upon payment of the compensation, as the case may be. Accordingly, it is imperative for petitioner to declare the input value added taxes on domestic purchases of goods and services at the end of the corresponding taxable quarter where purchases of goods were consummated, as evidenced by VAT invoices, and where purchases of services were paid, as evidenced by VAT official receipts. Thus, the claimed input taxes of P38,244,779.71 covered by VAT official receipt dated January 28, 2002 should have been declared by petitioner in its Quarterly VAT Return for the first quarter of 2002. The claimed input taxes on petitioner's importations in the amounts of P55,067,054.75, P373,947 .12, P167,800.00 and P355,640.00 shall likewise be denied because the bank statements of account supporting the said input taxes cannot be given evidentiary value for being mere photocopies in violation of the Best Evidence Rule. The same holds true with the IEDs stamped as "certified true copy". It cannot be ascertained whether the certifiers named therein are actually the custodians of the said documents. It bears stressing that tax refunds are in the nature of ta x exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption~ 1007

Decision CfA Case No. 6682 The burden of proof is upon the petitioner who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Petitioner having failed to fully prove its claim, this Court can only partially grant its prayer. WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED . Respondent is ORDERED to ISSUE a tax credit certificate or REFUND to petitioner the amount of P161,462,492.03 representing unutilized input VAT paid on its domestic purchases and importation of capital goods for the second, third and fourth quarters of 2001, as computed below: Amount of Input VAT Claim P1 ,145,31 2.22 P338 ,279,058 .65 Less: Prescribed Claim - 1st Quarter 2001 103 828 .00 79 500 084.48 Unprescribed Input VAT Claim Less : Input VAT Claim Pertaining to Non-Capital Goods p 1,8 58 ,120.34 P258 ,778 ,974 .17 94,209,221 .58 per the !CPA's Report 1 249 140.22 Add : Net Overstatement of Input VAT per schedule P257,529 ,833 .95 vs . Input VAT per return for the first and 96 ,067 ,341 .92 second quarters of 2001 P161 ,462 ,492.03 Unprescribed Input VAT Claim Pertaining to Capital Goods Less : Not properly Substantiated Input VAT a. Per th e !CPA's Report b. Per thi s Court's further verification Refundable Input VAT on Capital Goods Purchases SO ORDERED . CAESA~SANOVA Associate Justice 1 0 08

Decision CTA Case No. 6682 Pag e 20 of 23 WE CONCUR: ~~~~ - Q~ ERNESTO D. ACOSTA CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in cons ultation before the case was assigned to the writer of the opinion of the Court's Division. t..___,2\r. o~ ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division 1008

Decision GA Case No. 6682 ."-.ntte:I:&E .,.. Jr.E.I>CO llg;w CQ~Q'I1 CTA CfU:."Nv.. 6U1 DlscrepWtey i1< (l<e Ammsn.l afIn.put Ttt:t~ ;:litlml!xl tm Im{Ultiiuitms per Sc#erilll,e xr{lmpm1-r#4.uu; ~ PEJkifJttfnrR:.wi&M Flit t:ife Pr:m7 Qruut-u.r ufCMi:rtlklr ,Year ;rom . Quarter fiiP'Ul 'I'=~ aa;~61 au fiipui far.e!l G~timeif Oil rrti'fer<:~.lc:f - per ~tfieaulii nl fourthQmmcr lmpert.zd;~n 411 Ge~ ~ Jm~lw~ufG<I'<ildo r~w ImpPrtzili>u~ b <>vtm:ntcd f (undentirted) Se'b:edcli: ullm~-M ~tmlllii fn.r R,e;,iew / S\t.570.880.0(l Ci!i,759.03) 1S3,5!n.0.1 . o.M � I { ! I ' '' . ... _, .. . . ., ��~ , j . """

-a n oro OJ -l 1.0 ):> Q . ro n \D. Nwo NU>::J .0 .,z(!) No W� June 13, 2007 ""00'' Page 17 of18 N CAPITAL GOODS NON-CAPITAL GOODS GRAND TOTAL 1st 2nd 3rd 4"' TOTAL 1st 2nd 3rd �- 4th TOTAL (A+B) QUARTER QUARTER (A ) QUARTER (B) DESCRIPTION ANNEX QUARTER QUARTER QUARTER QUARTER. QUARTER i' - ..... .. I Input Taxes Claimed on ' .. i i Importations Without - 832,94!.95 i SUJll>Ortin2 Documents 36 264,241.23 610,246.98 4, 862 .74 (46,409.00) 832 941 .95 ! " -~ �...�.. '. I Discrepancy in the Amount ... ! of Input Taxes claimed on Importations per Schedule ... .Ll03,828.00) (I 03,828.00) (103,828.00) of Importations versus Petition for Review (see Annex EE of Attachment I}_ TOTAL :!! ~HI2 210 '2 1!~ 6 261 852 00 ~.88.0..Jlll ~ 5.323.H20.00 ~ 236.476.52'.i2 II - I! - I! .. (I 03 828 00) I! (I 03 828) 1P . ""' ' '�' ~a.: , IMPORTATIONS c ; I! 285 22143 ' .- 11 GRAND TOTAL ., I! 18 252 630 ~I D 110 7~Q Q? � 17 "' 52 815 850 11 ~ <7 0~7 <� QQ IP_ "< "'' n< <� I! ~60 624 so I! ~53 723 01 I! ~ I! I 606 00111 ill -i~~.21oo0'>H ~< 406 221 18 . I! - ~ c. ..1,_-�

Decis,.Jn erA Case No. 6682 Annex 35 KEPCO /lijan Corporation CTA Case No. 6682 Input Taxes claimed on Importations Supported by Certified True Copy IEDs and Original Bank ORs/Bank Debit Advices with a Discrepancy i1i tire Amount ofInput Taxes Claimed For the Four Quarters of Calendar Year 2001 Supplier Description lED Input Tax Claimed VAT per Bani< Debit Overstatement of (SN#) Ad vices/ Bani( ORs Input Taxes 1st Quarter Januaty Dael im Industrial Co., Ltd. While Alumihum Sheet 29299557 }l 294;026.00 jl 287,815.43 jl 6, 150.57 Subtotal p 294,026.00 p 287,875.43 p 6,150.57 February 4,336.00 }l 4,105.00 jl 23 1.00 11,144.00 I0,123 .00 1,021.00 Aquatech International Corp. Water Treatment Plant 293044 14 }l Materials Daelim Industria l Co., Ltd. Master Keyed Cylinder 30094154 Subtotal 15,480.00 p 14,228.00 p 1,252.00 10,313.00 }l March . 10,313.00 9,405.00 }l 908 .00 319,819.00 p .9,405.00 908.00 Daelim Industrial Co., Ltd. Control Power 30094285 }l 311,508.43 p 8,310.57 Transfonner 217,650.61 P- Subtotal Total P- 2nd Quarter April United Engi neers International Gas Turbine Generator 30358492 P- 7,820.00 P- 209,830 .61 In c. Parts & Accessories Total p 217,650.61 p 7,820.00 p 209,830.61 537,469.61 p 319,328.43 p GRAND TOTAL p 218,141.18 �-�--� ��-----------------------------------------� ~