CTA Case No. 5898 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY LA FR UT ERA, I NC., Petiti oner, - versus - C.T.A. CASE NOS. SWJX and s<n7 COMMI SS IONE R OF Promul gated: INT ERNAL REVENUE, SEP 17 2001 !< /!(~r!,..,f.~:,, )"~-.:-:-- '. Respo ndent. . /-;) . , /' /' . ' 1/< \/)/ )J.- X - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - :\ D EC ISION Two (2) cases were elevated before thi s Court by way of Pe titi o n for Review seeking for the rcCuncl o r for the issuance of a ta x credit certilicate in the agg rcgall' amount of P868,598.99 allegedly representing Pditione r's excess o r unutili zed e rccl it:l hlc VAT inputs, thus: CTA Case No. Pe riod In vo lve d /\mount 5898 2nd Quarter of 1997 P564,073.1 0 5937 y<~ Quarter o f 1997 304,525.79 TOTJ\L AMOUNT In view of the fact that the aforesaid cases in vo lve the sa me parties and inter related facts and issues. the Co urt, upon motion for leave of Co urt of herein Petitioner. o rd ered

DE C I SI O N - CTA CASE NOS. 589S & 5937 PAGE 2 the consolidZ~tion of the two (2) cases (sec CTA Reso luti on, March 27, 2000. CTA docket p. 52) . Thus, the !'acts as adduced !'rom the record s or the case arc as follows: Petitioner is a domestic co rporation organized and ex isting under the laws or the Republic o f the Philippines with principal place of business at Datu Paglas Es tate , Barangay Digal , Buluan, Maguindanao, Autonomous Region of Muslim Mindanao (ARMM) (sec Parties Joint Stipulation of Facts, ltcm No. I, CTA dockets p. 32 and 34). It is a VAT regi stered taxpa ye r as evidenced by the 131R Certificate of Registrati on (Ex h. 13), dated April 1, 19<J7. with RDO Co ntrol No. 97-107-0021 04V AT (Exhs . l3 - 1 and B-3) . It is at the same tim e reg istered with the Board o r Inves tm ents (1301) with Certificate of Registration No . EP-014-97 issued on Jul y 7. 1997 (Exh. A). Petitioner's Iine of business is categorized as a Banana Ex porter with Phi Iippinc SlaiJclarcl lnd ustry Classification No . 1141 (Ex h. 13-2). i\ s a Vi\T regi stered taxpayer, Petiti oner rc gulml y fi le ~ its 1110nthl y VAT declarations and quarterl y VAT return s. On Jul y 21. 1997, Petitioner filed its quarterl y VAT return Cor tl1e seco nd c;il endcl r quarter o r the year 1997 declaring a VAT input tax o f P564.073. 10 f'rum its domestic purchases of goods and services but with no output ta x li :tbility (Lxh . C). On October 23. 1997. Petitioner fil ed its quarterl y VAT rclur 1: :~ 11� lll1.' third calc nd;t r quarter of the year 1997 (Ex h. C-6) decl arin 12- <m i:�J)tt t ta x or P304.525.79 ge nerated front its domestic purchases of goods and services and the input tax fl�o m the prev ious qu<trlcr or P564.073. I0 or a total input ta x of P8 68,598.89 as of September 30. I LJ<n. l'ct ition cr 1o �.., - -A. ! u

DLCISIUN- CT/\ C/\S I: NOS. 5X<)l) & 5937 [J;\(jl �: 3 had no output tax, thus, pursua11t to Re ve nue Audit Memorandum Order (1{ ;\MO) No. 2- or 93 . Petitioner filed on .June 29, 199<). with the Tax and Revenue Group the One-Stop- Shop Inter-Agency T;~ x C redit and Duty Drawback Center of the Departm ent ol� Fin<II1Cc. an application ror lax credit/rerund or its excess creditable VAT input payments f'or the second quarter ended .June 30, 1997 in the amount of' P5o4,073 . 10. Pursuant to the same RAMO , Petitioner likewise liled on August 19, 19<)9, with the sa me agency under the Department or Finance. an application l"or tax credit/refund o r its excess creditable VAT or input payment lor the third quarter ended September 30, 1997 in the amount 1' 304,525.79. Meanwhile, on September 27. 1999, Petitioner lilcd an amended VAT retum lor the third quarter or 1997 (l :xh. C-4) declarin g the total amount or P8G8 ,59R.89 as the total refundable amou nt or input VAT from its domestic purchase of goods and the input VAT carried over Crom the previous quarter. Consequently. Petitioner al so amended the quarterl y VAT return lor the 4th quarter or 1997 (Ex h. II ) to sho w that the input tax claim ed was no longer carried over. Thi s <lln endcd VAT rdum W<IS liled 011 l:ehru <try 23 . 2000. Up to this date, herein Respondent has not ye t approved Petitioner 's application . hence. Petitioner filed the instant Petition for Revi ew to toll the runtun g o f the prescriptive period for claiming a refund . CTA Case No. 5898 was libl with thi s Co urt on June 30, 1999 whi le CTA Case No. SC)J7 was lilcd on September 29, 1999.

DI :CISION - CT/\ C/\SL NOS. 58lJX & 5937 1'/\CJ I..: 4 Fo r hi s part. Res pond ent acco rdin gly lilcd an Answe r with Special and ;\ll inn ati vc Dc iCn scs nn Jul y 14. 1999 (lo r CT;\ Case No. 5:-)n) and Octobe r 19. 1999 (fu r CT 1\ Case No. Sl)J 7). Aller consid erin g the stipulated iss ues presented by the parti es, thi s Co urt dee med it proper to summ ari ze them into nne main pi vo!<d i ~") UC o f "W HLTII ER OR NOT PETITI O NUZ IS L�:N TITU ~ D TO Tl W Rl ~ FUN D O R TAX C REDIT O F P l:\6X.5<)~LX9 A LL EGE DLY REPR ESEN TI NG PETITI ONE R' S EXC L~SS O R UNUT IU /TD C REDITJ\13LE IN PUT Vi\T i\ S O F SE PT LM BL~R 30. 1997. /\ RI S ING l:IzOrvl ITS DOMESTI C PURC HJ\ S l ~ S O F GOO DS AN D SE RVICES AN D ON Ci\ J>lTJ\L GOO DS IMPO RTI ,:D O R LOCA LLY J> URC IlASE D. " The rcf'und o r unutili zed or C\Cess creditable input vi\ T rrom do mes ti c purchases o f capital goods find s lega l support in Secti on I06(a)( b) o r the 1995 Na ti onal Intern al Revenue Code. hereund er quoted as fo ll ows: Section I 06. R ejiuuls or tax credits (~/ creditable i11put tax . - (a) Any VA T-reg istered pe rso n. whose sales ;nc /.cro - r<~ l cd ur cJTccti vc ly zero- rated, may, within two (2) yea rs ;1 1'ler the close o r the ta xa bl e quarter when the sa les we re made. apply lo r the iss uance o f a ta:-; credit ccrtiti catc or refund o r crcJitab lc inpu t lax due or paid attri butable to such sal es. except transiti onal input tax. to the ex tent that suc h in put tax has not been appli ed against output tax: Pro vide d. hmt'e l�er, That in the case or ~ee ro - ratcd sa les und er Sec ti on IOO(a)(2)(!\)( i).(i i) <mel (b) and Sec ti on I02( b)( I) and (2). the acceptabl e foreign currency exchange proceeds thcrco r had been dul y accounted ror in acco rdance with tlte regul ati ons or th e 13an gko Scntral ng Pilipin a~; (BSP): J>rovided, j itrlher. That whe re the ta xpaye r is engaged in zero-rated or cfTccti vc ly zrro- ratcd sale ami also in or taxa ble or exempt sale o f goods or properti es or se rvices. and th e amou11 t creditabl e input tax due or paid ca nnot be direct ly nnd enti rely ;1ttrihutcd to 1 0. �; --� ' v

D ECI SION - CT/\ C /\ St: NOS . 5WJX & 5lJ 37 1'/\G E 5 an y one or the transac ti ons. it shall be all ocated proporti onately on the basis or the vo lum e o r sa les . (b) Capital goods. - J\ VAT-reg istered pe rso n may appl y ro r th e issuan ce o r a tax credit certifi cate or rcCund o r input taxes paid on ca pital goods imported or loca ll y purchased, to th e ex tent th at such input taxes ha ve not been appli ed aga in st output ta xes. The appli ca ti on ma y be made onl y within two (2 ) years aller the close o r th e taxab le quarter when th e importati on or purchase was made. or Based O il the forego ing prov isions law. Pet iti o! ~ r may fi le a cla im f"o r re runcl o l" its excess creditabl e in put VJ\T on its domesti c purchase and impo rtati on o r cap ital goods ir the fo ll ow in g requirements arc sa ti sfi ed. to wit : I. That the appli cant must be a VAT-reg istered person; 2. That there be domesti c purchase or importatio n or cap ital goods; 3. That the domesti c purchase or importati on o f ca pital goods is subs tantiated by sullicicnt ev idence; 4. That the input taxes have not been appli ed again st the output taxes: <1 11 d 5. That th e appli ca ti on li> r til e re rum! o r unutili /.ed or excess crcdit;thk i11put Vi\T aris ing fro m the do mesti c purchase and im po rtati on or capi tal good s h;ts becl l made within tWO yea rs afk r the close o r the taxable quarter in \.Vhic h the importati on or purchase was made . Th ere is no do ubt with regard to Pet iti oner' s co mpli ance with the fi rst. f(nlrlh ;md lirth requirement. Th e documentary ev idence submitt ed to thi s Court vvou ld attest to the l~tct th at Petiti oner is indeed a VAT-registered taxpayer as ev id enced by the nm Certifi ca te o f Reg istrati on dated Ap ril I, 1997 and wi th RD O Co ntro l No. 97- 107- ~ Cl �; lJ�-. A. '

D EC ISION- CTA C A SE NOS . 5S9S & 5937 PA G I: (> 002 I 045 V/\ T (sec [x hs. l3. l3- I and l3 -3 ). Th e va ri o u ~ qu art erl y VAT ret urn s presented by Petiti oner likewise shows that th e creditabl e input V/\T generated durin g th e 3"1and 4111 quarters of' I 997 have not bee n applied aga inst its output V;\T li ability !'o r the sai d quart er (sec Ex hs. C, C-4, C-6) . Ne ith er the sa me cred it ab le input V/\ T vve rc ca rri ed fo rwa rd to the subseq uent quarter (4111 qu 8rtcr o f' 1997) nor appli ed aga inst an y output VAT liability therein (Ex h. I 1). As to the ques ti on of presc ripti on. reco rds wo uld reveal that both th e admini strat ive acti on as we ll as the judi cial recourse undertaken by Pet itioner we re made w ithin two years al'tcr the cl ose o r the tax able quarter in whi ch l�1c importati on or purcha se was made. thus: CTA Close o r the /\el min islrative Jud icial lilin g with 13 1R lilin g with CTA Case No. Ta xa bl e Quarter Renw rks 5S98 June 30. 199 7 June 28, 1999 June 30. 1909 likd on tim e 5937 Septembe r 30 . I 99 7 !\ ugusl 19. I 999 Se pte mbe r 29 . 19<)<) filed ()ll ti111 c or The tabl e above exp li citl y shows the timeliness Pet iti oner 's actio 11 with tl 1c 1~11 \ and with th is Co urt. We will now proceed to resolve the crucial issue (in co nn ecti on w ith the second requirement. as stated) o f whether or not th e purchases made by Pet iti11 ncr co uld be class ilicd <IS capital goods based 011 the definiti on pro vided und er Sec ti on 4. 1()(J- 1(b) o l� Revenue Regulati ons No. 7-95 . In the sa id reg ul ati on. ca pit al goods or propL'rtics a rc or referred to as goods and properti es with es tim ated use ful li fe grc<ller tlwn unc ( I ) yc<lr 0 1! 'I ~1 ..i!.. ' I

DLC ISION - CT/\ C/\ SE NOS. 5S98 & 5937 P/\ GE 7 and which arc treated :1s dcpreci:1blc ~1 sse t s under Section 29( 1'), used direct ly or indirectl y in the production or sa le o f' ta xa b: c goods and serv ices (emphasis ours). Corolb ril y. Section 29( I) ol' thc Tax Code provides: "(f) Dcpt�cciation. (I) Geneml Rule. - There shall be allowed as a depreciation deduction a reaso nable allowance !'o r the ex haustion. wear <tml tear (including reaso nable allowance for obso lesce nce) of' property used in the trade or business." It could be recalled that in the case at bar. Petitioner is claiming for a refund or input ta xes it paid on purchases or goods that were used in the cultiv<ltion o r the land li:r banana plantation, !or the propag<ttiotl and plantation o f the seedlings, and for the maintcnaJJce or the plants and prese rva tion ol' the l'ruits until harvest time (Sec TSN. dated March 6. 2000. pp . 7-1 0). It is the opinion of' the Petition er that these purchase:-. were in the nature or capital goods. This Co urt docs not subscribe to the theory propo unded by the Petitioner. or Our study leads liS to co nclud e that the purchases used ror th e impro ve ment the land docs not qualify as capital goods. Co ntrary to the definition o!' capit;d goods. l;1 nd a:-. well as the improvem ents introduced therein arc not s ubject to depreciati on. Thi s vie w lind s support in the I.awol� Fed eral lnco111 e T;1xation upo11 which th e Philippi tiL'S h;tscd it s laws on income taxa ti on. thus: " Because lam! docs not ha ve a limited and determinable lik. it is not subject to deprecia tion apart from the impro ve ment s or ph ys ical devclopnlL'nt added to it. " (5 MERTENS Law of Federal Income Taxa tio11 S2J ;\ .2lJ . Chap. 23A - page 6 I).

DI� 1SION- CT/\ C /\SF NOS . 5R98 & 59 37 1'/\liL R " No depreciation is allowed unless an asset has a limited and determinable exi stence . The allowance lor depreciation is the amount which would be set aside each year so that at the end ol' the asset' s uscl'ul life these amounts. plus an y salvage value. would equal the cost or otltLT h;1sis ol� thL' property . The uscl'ulli!C is the period over which the asset ma y reasonabl y be expected to be usdul to the taxpayer in its trade or business or in the production or its income. Although exhaustion or an asset may actuall y be taking place, no depreciation will be permitted u1tless the amount 1 I' cxlwu stion is susceptible ol� measurement. " (5 Ml ~ RTI.~NS Law ol� Federal Income Taxation S23!\. 57. page I05 ). The purchases used for the improvement or the land \Vhich Petitioner con sidered as capital goods were those used lor the harrowin g and plowin g or the lalld and ror the digging or canal s for the drainage sys tem . It must likevvi sc be pointed out that the Court. after an examination or the offi cial receipts <lltd in voi ces. lo und that Petitioner did not usc heavy equipment that can be considered capital good s. What wa s rellccted in the o !'lici;d receipts and invoices were small tools such as sho vel s and the like which cann ot quali I)' as capital goods pursuant to ex isting regulation s. Furthermore. thi s Court docs not agree with Petitioner that the good s purchascd ror the propagation and plantation or the seedlings. and !'or the maintenance o r the plants and preservation or the fruits until harvest time arc capital goods. /\I though these purchases are capitalized, they arc not considered capital goods. In l~tct. it is very clear rrom tile testimon y ol' Petitioner 's Accountin g Mana ge r. Mr. Reynaldo Jemini co. clurin t'- th e hearing held on March 6, 2000, that all or Petitioner's pre-operatin g ex pen ses were charged to clcfcrrecl development costs and amorti zd at the start or� it s co1nmcrcial operation. to quote: .1. 0'1 '� ' .....

DEC ISI ON- CTA CASE NOS. 589S & 5937 PAGE 9 /\TTY. SISON: Q. Now Mr. Witness, in rclatio11 to the operations ol" La Frutcra. can yo u please describe to thi s Co urt, in summary. the nature ol" the purchases made in relation to the operations? Just to summari ;.e it. !\. Just to summarize it, hclorc co mmercial operations. it is called pre- operating stage. /\II expenses. not related to capita l assets, we co nsidered them as capital goods. Thi s is becau se, al l the operations that arc taking place durin g prc-opcr<ltin g st<J ge, we could not reach the commercial operati on stage. We could not generate a mother plant that could bear f'ruits and could give us revenue during commercial stage. What I am sa);ing is. during the commercial stage. we doll .! plant anymore. We don ' t propa gate the seed. We don't maintain its growth. All we ha ve to rel y on is the mother plant. Once these mother plants arc harvested. a new generation will suckle or re- grow. In ordinary term, it is called. "child plant''. This is til e one which is going to take the place or the mother plant. Once thi s is harvested , another new one will come in . It is a continuing cyc le or harvesting once you are in the commercial stage. That is why all related expenses prior to commercial operation arc cmriecl in our Books under diiTerenl (sic) de ve lop ment costs and will be amortized when commercial opera tion start ed. (TSN, elated March 6. 2000. pp. I 1-1 2) Based on the documents submitted. only the purchases or tran sportati ll ll equ ipm ent and onicc equipment can be considered capital goods since the y arc subj ect to depreciation. and We again base our conclusion on the Law ol" l;cdcral ln co1 nc Taxat io11 , thus : " Farm property s ubject to depreciation consists o I" buildings. mach incry. equipment (other than short- li ved tool s) and other ph ys ical properti es." (5 MERTENS Law of Federal In come Taxa tion S23A.97. pp. 182-183)

DI T ISION- CT/\ C/\S F NOS . 5X9S & 593 7 1'/\ G I�: 10 The Court had alread y ruled again st. Petitioner with respec t lo land illlprn ve mcnt i1 1 a similarl y situated case o r Luisita l'ad\. C orporation vs. Commiss ioner ot' lntent al Revenue, CTA Case No. 5754, May 21, 2001, thu s: " We do not agree with the Petiti oner and the independ ent C P;\ that ex penses related to pro fit deve lopment cos t arc in the nature o r ca pital gnods. Th e proj ect deve lopm ent cost although class ili ed as a ca pital ex penditure is not within the meaning o r the term "capital goods''. Th e argum ent o f Petiti oner to the e ffect th at roads. e lectri ca l posts and perimeter f'c ncc arc asse ts not for sale hence should be trea ted as capital good s is be reft of merit. They are not among the aforementi oned li st o r Petiti oner's deprec iabl e asse ts. Alth ough the roads, electri cal posts and perim eter fen ce arc asse ts that ca nnot be so ld . they arc improve ments needed to be co mpl eted fi rst bclo rc Petiti one r co uld se ll or lease its deve loped lots. Once the devel opm ent or the land is compl eted. the costs of these improvements will eventuall y be rea lized by the increase in the sellin g pri ce o f th e lot. rental or lease. The improvcme11ts in the industri al park arc ev identl y not subj ect to deprec iatio n and therefore arc not class ili cd as capital goods." It is likew ise signi!i cant to note th at we ca nnot co nside r the refuml or i1 1p ut taxes attributabl e to ex port sales pursuant to Secti on I()(i (a) o l' the Tax Code. l\ci'ut1d s ol" input tax es und er thi s provi sion shall be all owed onl y upo11 presen tat ion o l� docum ents ev idencin g the ac tual exportatio n o r goods in th e co urse o f trade ami bus in ess by ~~ VJ\T- registered ta xpayer. A thorough sc rutin y or th e VAT returns presented !'o r the second and third quarters o r taxab le yea r 1997 do nut rcllcc t any expo rt sales. T rue ctw ugh. reco rds wo uld show that Pe titi oner's business is still in the pre-co mmercia l stage ~tn d has not in an y way co mmenced its ex port operati ons. Therc l'o rc, under thi s li ght. we cannot grant a rel'und o f input taxes attributab le to ex port sales as there was sin1pl y no s <~lc s yet. 108 J.

DEC IS IO N - CT/\ CASE NOS . 5898 & 5937 1'/\GE II [n SUm, onl y th e input taxes O il purchases or equipm ent Ill th e am ount or P2R 1.978 .27 should be re fund ed to Petiti oner. Computed below arc the net cn.xlitablc input VAT or Petiti oner fo r the 211d and 3'd quarters o f' 1997 whi ch are dul y s ubstanti ated by docum entary ev id ence in the Co nn o r in vo ices and rece ipts. thus: REFERENCE INVOIC E IN PUT AMOUNT VAT SUPPLIER EXHIBIT NO . Dl COM PUTER SYSTE MS, INC . F-1 1 12042 p 9,500 .00 p 863 .64 PHILIPPINE MULTI COR, INC. F-38 6709 ISUZU MANILA F-40 11 9 345,000 00 3 1,363 .64 ISUZU MANILA F-42 122 INTEGRATED AS IA CORP . F-45/F-46 8810 760,000 .00 69 ,090 .9 1 DAVAO IMPORT DI STRIBUTORS F- 11 7 137543 PHILIP PIN E FUJI XEROX CORP F- 167 2 14602 535,000 .00 48 ,636.36 R. AUTOSHPERE L-300 1994 R. A UTOS HPE RE L-306 1980 325 ,000 .00 29 ,545.45 To tal 16,06 1.00 1,460 .09 64 ,900 .00 5,900 00 52 4.300.00 47.663 64 522 ,000.00 47, 45 4.55 p 3,101 ,761 .00 p 281 ,978 .27 WIII~ REFORE, in view of' th e f'orego in g, th e in stant Petiti on for Review is hereby PARTIALLY GRANTED. Res pond ent is ORDERED to REFUND or TO I S SUI~ A or TAX CREDIT CERTIFICATE in l~tv or of th e Petiti oner the redu ced amount P281. 978 .2 7 re prese ntin g th e excess/unutili zecl creditab le input V/\ T fo r the 211 and J "1 " quarters or 1997. SO ORDERED . ~ ~; ', ;\ Assoc iate Jucge I CONCUR: L- ~~ l~ RNESTO D. ACOSTA Presidin g Jud ge

D EC ISION- CTA C A SE NOS. 5898 & 5937 PA GE 12 CERTIFICATION I hereby ee rti fy that the above dec ision was reached after cl ue co nsult ati on w ith the members of the Court of Tax Appeal s in acco rd ance with Secti on 13, Arti cle V II I o f the Constituti on. ~- lO_c~~ EJ{NESTO D. ACOSTA Presid ing Judge 1 08 '-~