MATSUSHITA BUSINESS MACHINE CORPORATION OF THE PHILIPPINES v. COMMISSIONER OF INTERNAL REVENUE

r REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MATSUSHITA BUSINESS MACHINE C.T.A. Case No. 5896 CORPORATION OF THE PHILIPPINES, Petitioner, -versus- COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. OCT 17 2001 -~*CI~-?"o~~ X------_�_--------------------------------------------- DE C I S I O N This is a Petition for Review filed by herein Petitioner on June 30,1999 which seeks for the refund or tax credit in the aggregate amount of NINE MILLION TWENTY FIVE THOUSAND SIX HUNDRED SEVENTY THREE & 71/100 (P9,025,673.71) allegedly representing the unutilized input VAT paid on domestic purchases of goods/services directly attributable to zc � -rated sales for the period covering April 1, 1997 to March 31,1998. The facts ofthe case are as follows: Petitioner is a corporation duly organized and existing under and by virtue of Philippine laws with principal office at Bo. Mapandan, Ortigas Avenue Extension, Taytay, Rizal. It is registered with the BIR as a VAT taxpayer under Certificate of Registration No. 95-460-001266 (Joint Stipulation of Facts, item Nos. 1 & 3, respectively, CTA records, page 43). 1243

DECISION - C.T.A. CASE NO. 5896 Petitioner is duly registered with the BOI in accordance with the provisions of the Omnibus Investment Code of 1987 as a preferred pioneer enterprise for the production and export of plain paper copiers, sub-assemblies, parts and components with Certificate of Registration No. EP 95-216 dated October 2, 1995 (Joint Stipulation of Facts, item no.4, CTA records page 43). Under the specific terms and conditions of its BOI registration, Petitioner is entitled to among other incentives, a six-year income tax holiday starting from April 1996 or actual start of commercial operations, whichever comes first but not earlier than the date of its registration (4111 page of Exhibit A, CTA records, page 142). Records reveal that on vanous dates from July 21 , 1997 to April 27, 1998, Petitioner filed its quarterly VAT returns for FY 1997 covering the period of April 1, 1997 to March 31, 1998 (Exhibits C to F, inclusive), declaring ~n aggregate arnount of P884,289,909.38 zero-rated sales, total taxable sales of P1 ,558,263.90 with the corresponding output VAT of P155,326.39 and accumulated input VAT payments of P9, 182,111.83 on its domestic purchases of goods/services broken down as follows : FY Period Zero-rated Taxable Output VAT Input VAT Exh 1997 Covered Sales Sales c 1st qtr Apr 1-Jun 30 '97 P156,697,129.46 p 3,556 ,501 .88 D 2nd qtr Jui1-Sept 30 '97 138.485,124.54 1' 125,239.67 E 3rd qtr Oct 1-Dec 31 '97 281,749,672.89 2,637 ,372.63 F 4th qtr Jan 1-Mar 31 '98 307,357.982.49 p 1,558,263.90 p 155,826.39 1,862,997.65 Total : P884 289 909 38 p 1 558 263 90 p 155 826 39 p 9 182 111 83 After offsetting the output VAT of P155 ,826.39 against the total input VAT payments of P9,182,111.83, Petitioner reflected in its FY 1997 fourth quarterly VAT 124 4

DECISION - C.T.A . CASE NO. 5896 return (Exhibit F) the amount of P9,025 ,673 .71 as excess input VAT payments for FY 1997. On September 10, 1998, Petitioner filed an applintion for tax credit/refund of its reported excess input VAT payments of P9,025 ,673 .71 for the period of April 1, 1997 to March 31 , 1998 which were allegedly directly attributable to its zero-rated sales for the same period. Due to the Respondent' s inaction on the aforementioned claim, Petitioner filed a Petition for Review with this Court on June 30, 1999. In answer to the instant Petition for Review, Respondent raised the following Special and Affirmative Defenses: 1. Petitioner' s alleged claim for refund is subject to administrative routinary investigation/examination by the Respondent's Bureau; 2. In a claim for refund , the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund ; 3. Rudimentary is the rule that claims for refund are construed in strictissimi juris against the taxpayer for they partake the nature of exemption from tax; 4. Moreover, Petitioner must prove that it has complied with the governing rules with reference to tax refund, which are found in Sections 204 and 229 of the Tax Code, as amended. 1245

DECISION - C.T.A. CASE NO . 5896 Petitioner for its part, introduced the following documentary evidence to substantiate its claim for refund, thus: EXHIBIT DESCRIPTION A Certificate of Registration No. EP 95-216 issued by the Bureau of Investments B VAT Certificate ofRegistration No. 95-460-001266 C, D,E,F Quarterly VAT Return fm' 15\ 2nd, 3rd and 4th quarters of G,H taxable year 1997 Quarterly VAT Return for 151 and 2nd quarters of taxable I year 1998 J and J-1 Certificate issued by Security Bank Corporation Letter-application for refund filed with the BIR L Certification issued by the Personnel Manager of MEPCO M Amended Quarterly VAT Return for 2nd Quarter of 1998 N,Y Report of SGV & Co on Petitioner's Excess Input Tax as well as its addendum thereto 0-1 to 0-19 Summary of Input Tax P-1 to P-30 Summary of Export Sales Q-1 to T-720 Various ORs and invoices issued to Petitioner for its domestic purchase of goods and services U-1 to X-506 Various export sales invoices a.r1d bank credit memos Z-1 to CC-529 Various Airway bills/ l3ills of Lading and Export Declai�ations DD-1 to DD-34 Supporting Export Sales Schedule for the 2nd Quarter of 1997 to 151 Quarter of 1998 As jointly stipulated by the parties, the issues to be resolved by this Court are as follows (Joint Stipulation of Facts & Issues, CTA records, pp. 43-44): 1.) Whether or not Petitioner's sales of its goods are zero-rated for VAT purposes. 2.) Whether or not Petitioner's input VAT, subject matter of the instant judicial claim for refund, is attributable to its zero-rated sales. 3.) Whether or not Petitioner's input VAT was not utilized or applied against its output VAT liabilities in subsequent quarters. 12 46

DECISION - C.T.A. CASE NO. 5896 4.) Whether or not Petitioner is entitled to the refund of the amount of P9,025 ,673 .71 representing unutilized input VAT for the period April 1, 1997 to March 31, 1998. In asseverating that its sales of goods for the period April 1, 1997 to March 31, 1998 is zero-rated for VAT purposes, Petitioner cited as its legal basis Section IOO(A)(2)(a)(i) ofthe Tax Code which provides: Section 100. Value added tax on sale of goods or properties. - (a) Rate and Base ofTax. x x x (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (A) Export Sales. - The term Export Sales means (i) The sale and actual shipment of goods from the Philippines to a foreign country, inespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; Corollarily, Section 4.100-2 of Revenue Regulations No. 7-95 also provides: Section 4.100-2. Zero rated sales. - (a) Ii1 general. - A zero-rated sale by a VAT registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax . However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations . On the basis of the testimonial and documentary evidence introduced to this Court, ' Petitioner was able to prove that its export sales from April 1, 1997 to March 31 , 1998 12 47

DECISION - C.T.A. CASE NO. 5896 qualify for zero-rating under Section 1OO(a)(2)(A)(i) [now 106(A)(2)(a)(I)] of the Tax Code]. During the course of the hearing, witness for the Petitioner testified that the company exported its products and such sales were classified as zero-rated sales, thus: r Atty. Agan: Mr. Witness, for the Quarter Ended June 30, 1997, how much input VAT was paid by the Petitioner? Mr. Asis: As shown in the Tax return, the company paid the amount of Atty: Agan: P3,586,501.88. For the same period, how much output VAT liability was incurred by the company as shown in Exhibit C? Mr. Asis: The company did not incur any output VAT liability for this period since the company exported its product and the company' s export sales was classified as zero-rated sales. (TSN, January 11, 2000, page 17) True enough, for the period of April 1, 1997 to March 1, 1998, Petitioner actually generated export sales amounting to P883 ,781,681.14 (page 3 of Exhibit Y) as evidenced by various export documents for the same period such as export invoices (Exl\ibits U-1 to U-487, V-1 to V-561 , W-1 to W-551 & X-1 to X-506,, inclusive), airway bills, bills of lading and export declarations (Exhibits Z-1 to Z-287, Z-289 to Z-528 , AA-1 to AA-257, AA-259 to AA-267, AA - 269 to AA-367, AA-369 to AA-602, BB-1 to BB-557, CC-1 to CC-529 & DD-1 to DD-34, inclusive). Likewise, the said export sales were paid for in US dollars, inwardly remitted and accounted for 111 accordance. with the rules and regulations of the Bangko Sentral ng Pilipinas as shown by the Security Bank Certification (Exhibit I) and various bank credit memoranda (Exhibits U-1 to U-487, V-1 to V-561 , W-1 to W-551 & X-1 to X-506, inclusive). 12 48

DECISION - C.T.A. CASE NO. 5896 Considering that its export sales are zero-rated, Petitioner is not liable to pay output VAT thereon and it can claim tax credit/refund of the unutilized input VAT payments directly attributable to such zero-rated sales as provided under Sections 104(b) [now 110 B] and 106(a) [now 112(A)] ofthe Tax Code. However, in order to be entitled to a refund/tax credit of the alleged unutilized input VAT payment ofP9,025,673.71, Petitioner must prove that: 1.) the claimed creditable input taxes are duly supported by VAT mvo1ces or official receipts in accordance with Section 4.104-5 of Revenue Regulations No. 7-95 in relation to Sections 108 [now 113] and 238 [now 237] of the Tax Code; 2.) the claimed creditable input taxes are directly attributable to zero-rated sales; 3.) the claimed creditable input taxes have not been applied against any output tax nor carried over to the succeeding months/quarters; and 4.) both the administrative and judicial claims for refund were filed within two- years after the filing of the quarterly VAT return as provided under Section 4.106-2(c) of Revenue Regulations No. 7-95. Whether or not Petitioner complied with the seconq and third requisites is similar to the second and third issues raised by both parties. Section 4.104-5 of Revenue Regulations No. 7-95 explicitly proviGies for the requisites in order to establish that a taxpayer is indeed entitled to the input tax credit being claimed. It provides thus: 124 8

DECISION - C.T.A. CASE NO. 5896 (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 tmder Section 108(a) and 238 ofthe Code. A review ofthe records of the case reveals an atten.pt on Petitioner's part to comply with the aforesaid requirement. However, the commissioned auditing firm discovered some unsubstantiated amount. In its report (Exhibit N), SGV & Co. found, that out of the total claimed input taxes ofP9,025,673.71 for the period of April 1, 1997 to March 31, 1998, the amount of P72,771.19 (CTA records, pp. 166-167) was not properly supported by VAT invoices or official receipts. A further verification by this Court of Petitioner's Summary of Input Tax (Exhibits 0-1 to 0-90) suppliers' invoices/official receipts (Exhibits Q-1 to Q-756, R-1 to R-622, S-1 to S-653 & T-1 to T-720, inclusive) disclosed that aside from the exceptions noted by SGV & Co ot P72,771.19, the input taxes of P1,956,719.58 (see A1mex A) were not also properly substantiated by VAT invoices or official receipts resulting to a total disallowance of P2,029,490.77 from Petitioner's total claim of P9,025,673.71. Hence, Petitioner was able to present valid VAT invoices or official receipts only for the remaining claim of P6,996, 182.94. With respect to the second requirement, Petitioner's FY 1997 quarterly VAT returns covering the period April 1 to March 31, 1998 (Exhibits C to F, inclusive) show that the claimed excess input taxes ofP9,025,673.71 were already net ofPetitioner's output VAT liability of P 155,826.39 for the same period and are therefore all attributable to its zero- rated sales. 12 50

DECISION - C.T.A. CASE NO. 5896 With reference to the third requirement, it was established that although the claimed excess input taxes of P9,025,673.71 were carried over to Petitioner's first and second qumiers of fiscal year 1998 as shown in its quatierly returns for said periods, (Exhibits G & M), the same were deducted as "Any VAT Refund/TCC Claimed" (Exhibit M-1) from the "Total Available Input Tax" of P13,862,841.61 indicated in Petitioner's FY 1998 amended second quarterly VAT return (Exhibit M). Thus, the resulting net excess creditable input taxes of P4,837,167.90 to be carried over to the succeeding third quarter of FY 1998, pertain only to Petitioner's declared excess input VAT payments for FY 1998 first and second quarters and did not include the claimed amount ofP9,025,673.71. Finally, counting from the respective dates when the quarterly VAT returns for the period April 1, 1997 to March 31, 1998 were filed (Exhibits C to F, inclusive), both the administrative and judicial claims filed by Petitioner on September 10, 1998 (Exhibit J) and June 30, 1999, respectively, fall within the two-year prescriptive period provided under Section 4.106-2(c) ofRevenue Regulations No.7-95 . In sum, Petitioner sufficiently proved that it is entitled to a refund/tax credit of excess input VAT payments for the period April I, 1997 to March 31 , 1998 which are directly attributable to its zero-rated sales for the same p.:.:riod but in a reduced amount of P6,996,182.94 computed as follows: Claimed Excess Input Taxes P 9,025,673 .71 Less: Disallowances P 72,771 .19 1.) PerSGVReport(ExhibitN) 1,956.719.58 2.029.490.77 2.) Per this Court's Further Verification (see Annex A) Refundable Excess Input Taxes p 6.996 182.94 12 51

DECISION - C.T.A. CASE NO. 5896 In view of the above findings , this Court finds that Petitioner is entitled to the refund but only up to the extent ofP6,996,182.94. WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or issue a Tax Credit Certificate in favor of Petitioner the reduced amount of SIX MILLION NINE HUNDRED NINETY SIX THOUSAND ONE HUNDRED EIGHTY TWO & 941100 (P6,996,182.94) representing the excess and unutilized input tax for the period of April 1, 1997 to March 31 , 1998. SO ORDERED. WE CONCUR: ~~.o~ ERNESTO D. ACOSTA Presiding Judge {2~(?.~/Q . dUANITO C. CASTANED~JR. Associate Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. LQ~~ ERNESTO D. ACOSTA Presiding Judge 125 2

ANNEXA CTA CASE NO. 5896 SCHEDULE OF ADDITIONAL DISALLOWANCES ON CLAIMED INPUT VAT FOR THE PERIOD APRIL 1, 1997- MARCH 31, 1998 PER THIS COURT'S VERIFICATION Month Supplier Exhibit Ref.# Invoice Disallowed Covered Amount Input VAT 1.) Invoices and/or Official Receipts not under the name of Matsushita Business Machine Corporation of the Philippines Apr. '97 Manila Emroidery Q-130 10610 p 223.30 p 20 .30 Apr. '97 Jacinto Kyung-ln Chemical Q-54 819.00 74.46 Apr. '97 Jacinto Kyung-ln Chemical Q-55 1736 7,650.00 695.46 May '97 Robinson's Dept. Store Q-330 297 .00 27.00 May '97 National Bookstore Q-360 1824 189.00 17 .18 June'97 Northgate Technologies Q-570 2,600 .00 236 .36 June'S? Cardinal Santos Center Q-576 37826 2,803 .85 254.89 June'97 Cardcraft Phils. Q-579 1,900.00 172.73 June '97 Odyssey Records Q-599 18613 560 .00 50 .91 June'97 Northgate Technologies Q-754 28 ,500.00 2,590 .91 July '97 East Garden Restaurant R-49 18335 6 ,000 .00 545.45 July '97 Nandau Restaurant R-50 3 ,333 .00 303 .00 Sept. '97 Steelite Construction R-425 197)41467 21 ,000.00 1,909 .09 Oct. '97 Takamura Japanese Rest. S-193 2,064.00 187.64 Oct. '97 Fit-Walk Shoes S-30 7915 132.75 12.07 Nov. '97 Cainta Trading Co. S-293 Jan'98 Electroworld T-39 1074 47 .00 4 .27 Feb. '98 Allbba T-224 10,995.00 999.55 Feb. '98 National Bookstore T-242 18335 718 . 18 Feb. '98 National Bookstore T-258 7 ,900 .00 Feb. '98 National Bookstore T-262 17189 129.89 11 .81 Feb. '98 National Bookstore T-262 372 .34 Mar. '98 D 'Rey Printing Corp. T-447 18787 4 ,095 .70 Mar. '98 Tropical Hut T-489 66 .75 6.07 Mar. '98 Steelite Construction T-648 0800 76 .57 842 .25 90 .91 879 1,000.00 8 .6 4 21936 95 .00 654 .55 7,200.00 200982 10,040.33 4877 3432 39940 2548 41111 41176 2959 24057 1052 subtotal p 2.) Invoices and/or Official Receipts not within the period of claim Apr. '97 Gemini Customs Services Q-138 957 p 2,800.00 p 254 .55 Apr. '97 National Bookstore Q-86 106 .75 9 .70 Apr. '97 Tropical Hut Q-87 477298 39 .75 3.61 Apr. '97 Foto World Sales Q-87 154.50 May '97 Rapid Air Freight Q-382 20551 14.05 May '97 NYK Fii-Japan Shipping Cor Q-383 1,084.45 98 .59 June'97 New Trading Paint Center Q-575 16246 24,046 .56 2,186 .05 Mar. '98 Lep lnt'l Inc. T-691 27.27 Mar. '98 Kaizenfreight Inc. T-695 97599 300 .00 465 .73 5 ,123 .00 5,772 .73 MNL-97-00028 63,500.00 8,832.27 1683 174806 183 subtotal p 3.) Without supporting documents 1632 p 23 ,980.00 p 2 ,180 .00 July '97 Pola Von Transport 12 53 page 1 of 3

. ANNEX A CTA CASE NO. 5896 SCHEDULE OF ADDITIONAL DISALLOWANCES ON CLAIMED INPUT VAT FOR THE PERIOD APRIL 1, 1997- MARCH 31, 1998 PER THIS COURT'S VERIFICATION Month Supplier Exhibit Ref.# Invoice Disallowed Covered Amount Input VAT Dec. '97 B.I.R. 10,698,685.36 972,607 .76 Mar. '98 Yerco Packaging Prod . 9,043 .98 822.18 subtotal p 973,429 .94 4.) Supported by documents other than Invoices and/or Official Receipts such as provisional receipt, delivery receipt, etc. May '97 Kim-Len Merchandise Q-361 1402 p 200.00 p 18.18 Aug . '97 Everlasting Photo Express R-212 898 13.73 151 .00 31.91 subtotal p 5.) Invoices and/or Official Receipts printed prior to July 31, 1991 with only TAN#NAT# Apr. '97 Esh & Mock-up Fabrication Q-100 358 p 3,225 .00 p 293 .18 Apr. '97 Encargo Q-198 780 6 ,944 .54 June'97 Manuel Metal Industries Q-588 87 76,389 .96 June'97 Encargo Q-652 SA14 109.09 June'97 Encargo Q-652 SA16 1,200 .00 566 .98 Feb. '98 Tropical Hut T-261 23330 943 .08 6,236 .80 7.36 10,373 .90 1 626 .51 80 .85 subtotal p 6.) Invoices and/or Official Receipts printed after July 31, 1991 without VNAT after TIN; TIN-VNAT May '97 Sta . Lucia East Q-330 .';'.584 p 265.00 p 24 .09 May '97 Sta. Lucia East Q-331 4 0 .86 June'97 Hapag-Lioyd Phils. Q-640 9682 449 .50 156.47 June'97 Hapag-Lioyd Phils. Q-641 27495 156.41 Mar. '98 DCM Interior & Supply T-495 28190 1,721 .20 1,701 .82 345 1,720.50 2 014.70 18,720 .00 subtotal p 7.) Invoices printed after July 31, 1991 with only stamped TINN May '97 J.A. Burgos Store Q-350 0350 p 2,535.00 p 230.45 Aug. '97 J.A. Burgos Store R-193 361 26 .38 Aug. '97 J.A. Burgos Store R- 194 389 290 .00 26 .36 Aug . '97 J.A. Burgos Store R-226 294 36.27 Feb. '98 J.A. Burgos Store T-230 443 290 .00 90 .91 399.00 410 .3 6 1,000.00 subtotal p 125 page 2 of 3

ANNEXA CTA CASE NO. 5896 SCHEDULE OF ADDITIONAL DISALLOWANCES ON CLAIMED INPUT VAT FOR THE PERIOD APRIL 1, 1997- MARCH 31 , 1998 PER THIS COURT'S VERIFICATION Month Supplier Invoice Disallowed Covered Amount Input VAT 8.) Non-VAT Official Receipt T-146 0003 p 921,291.36 p 83,753 .76 Jan . '98 Nancy Padilla 1671 83,753.76 subtotal p 9.) Invoice twice reported July '97 Pola Von Transport R-3 p 23,980.00 p 2,180 .00 2,180.00 subtotal p 10.) Claimed amount is not an input VAT p 9,618,397.75 p 874 ,399 .80 May '97 MEl Royalty - Tech . Fee Q-461 to Q-463 subtotal p 8741399.80 T o t a I p 119561719.58 1255 pag e 3 of 3