Filsyn Corporation vs. Commissioner of Internal Revenue

DECISION

instituted by the petitioner on the decision of respondent denying its protest on the assessment issued for the first quarter of 1988 in the total amount of P30,585,669.26 corresponding to alleged deficiency Value-added taxes for the period mentioned.

Petitioner is a domestic corporation duly registered as a preferred pioneer enterprise with the Board of Investment as a producer of polyester fibers, filament yarnI and bottle grade polyethylene terephthalate resin.

It is also a Registration No.

<Exhibit "A").

Vat-registered taxpayer under 32-4-0005&4 as of January 1, VAT 1988.

As a registered preferred pioneer enterprise, petitioner has been granted under Repub I i c Act 5186, certain tax exemption privileges from all taxes DECISION C.T.A. CASE NO. 5073 ..

- - 2 - under the National Internal Revenue Code, except income tax, in the following manner:

100% - January 1 , 1980 - December 31 , 1984 75% - January 1 , 1985 - December 31 , 1987 50% - January 1 , 1988 - December 31 , 1989 20% - January 1 , 1990 - November 30, 1991 (see Exhibit .. B .. )

Petitioner alleges that it received an assessment notice from respondent for deficiency value added-tax for the first quarter of 1988 in the sum of P30,585,669.26.

The detai Is of the assessment are specified hereunder (p.

34, BIR records), thus:

Deficiency Value-Added Tax -1st Quarter 1988 First Quarter Output tax P8,639,075.00 Less:

Input tax per return P33,672,060.25 Less:

Unallowable PlY P10,868,502.71 Domestic purchase of 541,548.76 taxable goods 1,083,097.52 (50%) Importations 7,740,566.33 (50%) 3,870,283.16 18,391,725.62 Total P15,280,334.63 Balance carried to succeeding quarter Less:

Balance carried to succeeding quarter per return Deficiency AddB 25% surcharge p 9,752,650.62 20% interest from 4/21/88 to 4/21/91 compromise penalty 25,032,985.25 P15,280,334.63 3,820,083.66 11,460,250.97 25,000.00

TOTAL AMOUNT

DUE AND COLLECTIBLE

Petitioner duly protested this letter, dated February 25, 1992, P30,585,669.26 assessment and received in a by respondent on February 27, 1992 <Exhibit "D").

In this DECISION C.T.A. CASE NO.

5073 - 3 - letter, petitioner asked for a re-investigation of its alleged tax liabilities and volunteered to present documents to j ustify the tot a I amount of its inventories which was partly the reason for the VAT deficiency as assessed by the examiners of respondent. Respondent denied the protest in a letter received by the petitioner on February 8, 1994, declaring therein that petitioner's fa i I ure to present pertinent documents to controvert the sub j ect assessment led to the eventual denial of the protest.

Consequently, petitioner made an appeal to this Court on March 10, 1994 praying for the cancellation of the assessment for the period corresponding to the first quarter of 1988.

Respondent averred the affirmative defenses, thus: following special 4.

Respondent's d i sa I I owances of a portion of petitioner 's claim for 8% presumptive input tax in the amount of P10,868,502.71 and the 50% of the input tax credit for the first quarter of 1988 was in accordance with Section 105 as implemented by Section 17 of Revenue Regulations No.

5-87, which reads:

"SEC.

105.

Transitional input tax credits.

-A person who becomes I iable to value-added tax or any person who elects to be a VAT­ reg i s t ere d per son .

's h a I I , s u b j e c t t o the f iIi ng of an inventory as prescribed by regu I at ions, be a I I owed input tax on his beginning inventory of goods, materia Is and supp I i es equivalent to 8% of the val
e of such inventory on the actual value-added and DECISION C.T.A. CASE NO.

5073 - 4 - tax on such goods, supp I i es whichever is shall be creditable output tax. "

materials and higher, which against the and Section implementing provides:

17, Revenue Section 105 Regulations No.

of the Tax SEC.

17. -Presumptive tax on beginning inventories- (a) XXX XXX XXX;

(b) XXX XXX XXX .

VAT-registered persons also engaged in exempt transactions or services under Section 103(a), (b), (c) and (f) who shall volunteer to be covered by the value-added tax system by f i I i ng an app I i cation for any of his exempt activities shall be entitled to a presumptive input tax equivalent to 8% of the value of the inventory on hand as of the beginning of the month following the approval of his application consisting of goods for resale in their present condition, materials for further processing, finished goods that have been manufactured by him, goods in process, and supplies, all of which must be directly attributable to the activity that is registered or actual value-added tax paid on such inventory, whichever, is higher. "

5.

Petitioner 's claim for input credit is a I I ow a b I e only for input corresponding to the taxable portion of sales during the period involved. 5-87 Code, tax taxes its 6.

Respondent's tax assessment is prima facie correct and it .'behooves petitioner to prove the contrary (I nterprov inc i a I Autobus Co. , Inc.

vs.

Collector of Internal Revenue, G.R.

No.

L-6741, January 31, 1959, 98 Phil.

2 9 0 ;

C o mm .

o f I n t .

R e v .

v s .

A v e 11 i n o , G . R .

No .

L-17715, July 31, 1963, 85 SCRA 572).

DECISION C.T.A.

CASE NO.

5073 - 5 - The issue which faces this Court in this case is whether or not petitioner should be made to pay the deficiency value-added taxes inclusive of increments in the total sum of P30,585,669.26 for the first quarter of 1988.

Coro I I ary to this issue is the question of whether or not Section 12 of Revenue Regulation No.

5-87 also known as the VAT Implementing Regulations, s@1all apply to the present status of petitioner as a preferred pioneer enterprise registered with the Board of Investment.

The deficiency value-added tax stemmed from respondent's d i sa I I owance of input tax credit which' originated from two sources, namely, the 8% presumptive input tax (PIT) granted under Section 105 of the Tax Code and the input taxes paid by petitioner on its domestic p u r c h a s e s a n d i 111 p o r t a t i o n s m a d e d u r i n g t h e f i r s t quarter of 1988.

Respondent justified these disallowances by invoking the provision found in Section 12 and 1 7 of Revenue Regulation No.

5-87.

Section 12 of RR 5-87 provides the following: SEC.

12.

Apportionment of input taxes • between taxable and exempt operations. -If a VAT-registered person is also engaged in other activities, the input taxes paid for purchases of goods and services which cannot be directly a t t r i b u t e d t o e i t h e r' ope r a t i o n s h a I I be a I I ocated between the VAT taxable operation and the other exempt operation.

For this purpose, the amount of VAT taxable sales or receipts over the total sales/receipts multiplied by the total input tax paid during tAe quarter that DECISION C.T.A. CASE NO.

5073 - 6 - cannot be directly attributed to either operation sha I I be the cred i tab I e input tax.

Section 17 of the same Revenue Regulation, provides the following:

SEC.

1 7.

Presumptive tax on beginning inventories.

XXX XXX XXX VAT-registered persons also engaged in exempt transactions or services under Section 13 (a), (b),

(c) and

(f) who shall volunteer to be covered by the value-added tax system by filing an application for any of his exempt activities shal I be entitled to a presumptive input tax equivalent to 8% of the value of the inventory on hand as of the beginning of the month following the approval of his application consisting of goods for resale in their present condition, materials for further processing, finished goods that have been manufactured by him, goods in process, and supplies, all of which must be directly attributable to the activity that is registered or actual value­ added tax paid on such inventory, whichever is higher.

From the above-quoted provisions, respondent concluded that petitioner erred in applying the amount of P13,759,088.07 representing the 8% presumptive input tax

( P I T )

based on submitted by p 1 71 1 9 8 8 1 6 0 4 • 1 2 • the gross amount of the inventory the petitioner in the sum of It is the opinion of respondent that only a portion of the value of the inventory is allowable for the purpose of compu fng the 8% PIT and that the allowable portion is also sub j ect to apportionment or allocation at the rate of 75% which was the rate en j oyed f by the petitioner as a registered preferred pioneer DECISION C.T.A. CASE NO.

5073 - 7 - enterprise as of December 1987.

To i I lustrate the theory of respondent, We find it appropriate to cite the examiners' computation of the petitioner's alleged deficiency presumptive input tax, found on page 24, BIR records, tl1us:

Computation of deficiency presumptive input tax Total inventories per return Less:

Allowable Unallowable 8% Presumptive input tax Add:

75% Exempt 1987 (P144,529,280.96 X 75% X 8%) Total unallowable PIT Add:

25% surcharge 20% interest up to 10/20/90 Compromise penalty Total deficiency PIT From the same aforecited Regulation No.

5-87, respondent P171 ,988,604.09 144,529,280.96 p 27,459,323.13 p 2,196,745.85 8,671 '756.86 p 10,868,502.71 2,717,125.68 6,792,814.20 1,000.00 p 20,379,442.59 provisions of Revenue likewise disallowed the input tax credit corresponding to petitioner's domestic purchase of taxable goods and importations to the extent of 50% corresponding to the rate of exemption enjoyed by petitioner for the period covering 1988. In summary, the disallowances resulting i n t 11 e value-added tax deficiency is due to the theory of respondent that petitioner ' s claim for input tax credit .

' is allowable only for input taxes corresponding to the taxable portion of its sales during the period involved.

As a preferred pioneer enterprise infused with tax benefits, respondent maintains that to apply alI the DECISION C.T.A.

CASE NO.

5073 - 8 - input taxes incurred or paid without apportioning or allocating the tax exempt portion of the input tax is violative of the provisions found in Sections 12 and 1 7 of Revenue Regulations No.

5-87.

P e t i t i o n e r d i s p u t e s t 11 e a f o r e 111 e n t i o n e d t h eo r y of respondent and advocates the proposition that the provisions reI i ed upon by respondent is not applicable to SOl-registered enterprises and it is therefore entitled to claim input taxes in full without apportionment or allocation primarily because to apply the same would diminish the exemption pr i vi I ege granted by Repub I i c Act No.

5186.

Secondly, petitioner claims that Section 12 of Revenue Regulation No.

5-87 contemplates of a situation where an enterprise is engaged in both VAT-taxable and VAT-exempt operations making such provision a I i en to its present status because its sales of goods are in fact sub j ect to VAT as they are not engaged in VAT-exempt operations.

We agree with the petitioner and submit that respondent erred in applying the provision found in Section 12 of Revenue Regulation 5-87 in the computation of petitioner's value-added tax deficiency for the first quarter of 1988.

A close perusal and analysis of the provision in question (Section 12 of Revenue Regulh tion 5-87), reveals DECISION C.T.A. CASE NO.

5073 - 9 - that said section contemplates of a situation where a VAT-registered person is engaged in both taxable and exempt operations and that the input taxes paid in a given period cannot be directly attributed to either operation such that an a I I ocat ion or apportionment of the input taxes between the VAT taxable operation and the exempt operation is proper to be able to determine the amount of creditable input tax.

Basic is the principle that VAT-exempt sales transactions are not entitled to input tax credits as provided in Section 9

(a) of Revenue Regulation 5-87, thus:

SEC.

9.

Exemptions-(a) In general.

-An exemption means that the sale of goods or service is not subject to value-added tax (output tax).

The seller is not allowed any tax credit on VAT (input tax) previously paid.

The person making the exempt sale of goods or services sha I I not separate I y b iII any output tax to his customers because the said transaction is not subject to VAT.

On the other hand, a VAT-registered purchaser of goods or services which are exempt from VAT is not entitled to any input tax on such purchase.

x

(underscoring supplied) So in a situation where a VAT-registered person is engaged in a VAT taxable activity and a VAT exempt Section 104 of the Tax Code._provides the following: Section 104 X X X X X X X X .

A vat-registered person who is also engaged in transactions not, subject to the va I ue-added tax sha I I be a I I owed tax credit as follows:

one, DECISION C.T.A. CASE NO.

5073 - 10 - A) Total input tax which can be directly attributed to transactions subject to va I ue-added tax;

and B) A ratable portion of input tax which cannot directly attributed any be to either activity;

xxx (underscoring supp I i ed ) Section 12 of Revenue Regulation 5-87 provides a formula to implement the aforecited section of the Tax Code so as to determine the allowable creditable input tax by apportioning the input tax between the taxable and V A T exempt operation.

T he example found In Section 12

(RR 5-87)

llustrates this point clearly, thus:

Example 1:

"A", a V A T-registered person is engaged in the sale of

V A T

taxable goods and at the same time is also engaged in the restaurant business, which is subject to another kind of tax, in the same business estab I I shment.

During the quarter he made sales of goods in the amount of P300,000.00 plus a value-added tax of P30,000.00.

T he sales of the restaurant amounted to P200,000.00 with a separate percentage tax of P8,000.00 for a total of P208,000.00.

During the same quarter, repairs on the building amounted to P50,000.00 plus a value-added tax of P5,000.00 Supplies purchased for common use amounted to P10,000.00 plus P1,000.00 value-added tax.

Since the value-added tax of P5,000.00 and P1,000.00 or a total of P6,000.00, cannot be directly attributed to either taxable operation or the non-V A T taxable operation, it should be allocated as follows: Input tax to VAT taxable operation Sales on VAT Taxable Operations Total Sales (VAT Taxable and Non-VAT Taxable) or Total Input Tax <From VAT paid x on rCpairs and or purchase of supp I i es) DECISION C.T.A.

CASE NO.

5073 - 11 - P300,000.00 x P6,000.00 = P3,600.00 P500,000.00 The remaining P2,400.00 is input tax corresponding to the non-VAT taxable operations which is computed as follows:

P200,000.00 X P6,000.00 P2,400.00 P500,000.00 Total input taxes that cannot be directly allocated Less:

Input taxes on non-VAT taxable operation Input taxes to VAT taxable operation P6,000 2,400 P3,600 The input taxes allocated to non-VAT taxable operations should be charged to operations under the fo I I owing entry:

Dr.

Repairs Supplies Cr.

Input Taxes The above adjustment is total input taxes of P6,000 debited to input taxes.

P2,000 400 P2,400 necessary if the were previously The petitioner in the instant case does not fa I I into the category aforementioned because the nature of the goods sold by petitioner corporation does not fal I witDin the exempt transactions as specified under Section 103 of the Tax Code, thus:

SEC.

103.

Exempt .

• Transactions.

-The following shall be exempt from the value-added tax:

(a) marine original Sale of nonfood agricultural, and forest prodEcts in their state by the primary producer or DECISION C.T.A.

CASE NO.

5073 - 12 - the owner of the land where the same are produced;

(b) Sale original state food products, kind generally producing foods or importation in their of agricultural and marine I ivestock and poultry of a used as, or yielding or for human consumption, and breeding stock and genetic material therefor;

Products classified under this paragraph and paragraph (a) sha I be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, smoking or stripping.

Polished and/or husked rice, corn grits and raw cane sugar shall be considered in their original state for purposes of this paragraph.

(c) Sale or importation of fertilizers, pesticides and herbicides;

formulation of chemical for the pesticides;

seeds, seedlings fingerlings;

fish, animal and and poultry feeds;

and soya bean and fish meals;

(d) Sale or importation of petroleum products (except I ubr i cat i ng o i I, processed gas, grease, wax and petrolatum) subject to excise tax imposed under the Tit I e VI;

(e) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products (except lubricating o i I and grease) subject to excise tax;

(f) Printing, publication, importation or sale of books and any newspaper, magazine, review, or bulletin which appears at .'regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of advertisements;

(g) Importation cargo vessel of more of pa
senger and/or than ten thousand DECISION C.T.A. CASE NO.

5073 - 13 - tons, whether coastwise or ocean- going, including engine and spare parts of said vessel, to be used by the importer himself as operator thereof;

(h) Importation of personal and household effects belonging to residents of the Phi I i pp i nes returning from abroad and non-resident citizens coming to resettle in the Philippines:

Provided, That such goods are exempt from customs duty under the Tariff and Customs Code of the Philippines.

( i) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects except any vehicle, vessel, aircraft, machinery, other goods for use in manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle for the first time in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Phi I i pp i nes and that the change of residence is bona fide;

(j) Services rendered by persons subject to percentage tax under Title V;

(k) Services contract growers and palay into rice, corn cane into raw sugar;

by agricultural mi II ing for others of into grits and sugar (I) Medical, dental, veterinary services;

hospital and (m) Educati.&nal services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports, and those rendered by government educational institutions;

f DECISION C.T.A.

CASE NO.

5073 - 14 - ( n ) Sale by the artist himself of his works of art, I i terary works, mus i ca I compositions and similar creations, or his services performed for the production of such works;

(o) Services performed as actors or actresses, talents, singers and emcees;

radio and television broadcasters, choreographers;

musical, radio, movie, television and stage directors; (p) Services professional athletes; performed as (q) Leasing of real property;

(r) Services performed in the exercise of profession on ca I I i ng (except customs brokers) subject to the occupation tax under the Local Tax Code, and professional services performed by registered general professional partnerships;

( s ) Services rendered by individuals pursuant relationship;

to an employer-employee (t) Services rendered by regional or area headquarters estab I i shed in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their aff iIi ates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

(u) Transactions under special laws agreements to which the signatory;

which are exempt or international Philippines is a <v> Export sales by persons who are not VAT-registered'and;

(W) Sales and/or services performed by persons other than those mentioned in the preceding paragraphs whose annual .

f gross sales and/or rece1pts do not exceed the amount prescribed in regulations to be - DECISION C.T.A. CASE NO. 5073 - 15 - promulgated by the which shall not be higher than P500,000.

Secretary of Finance less than P100,000 or The petitioner is in fact taxable for value-added tax on its sales of goods such that input taxes it actually paid and its presumptive input tax, is allowed by I aw to be credited to its output tax.

The fact that the petitioner is a pioneer preferred enterprise granted by law with certain tax incentives does not change the nature of its transactions as they are sti II I iable to pay output tax on their sales of goods.

It is only by virtue of these tax pay only a portion incentives that they are of their output tax iable to I i ab i I i ty depending upon the rate of tax exemption granted for a particular period.

These tax incentives as earlier discussed have been granted to registered pioneer enterprise such as the petitioner, under Repub I i c Act No.

5186, Section 8(a) which provides as follows: Sec.

8.

Enterprise.

In Incentives to addition to the a Pioneer incentives provided In the preceding section, pioneer following enterprises shal I be granted the incentives benefits:

(a) Tax Exemptions.

- Exemption from all taxes under the National Internal Revenue Code, except income tax, to the fo I I owing extent:

( 1) One hunctred per cent up to December 31, 1972;

(2) Seventy-five per cent December 31, 1975;

up to \ DECISION - - C.T.A.

CASE NO.

5073 - 16 - (3) Fifty per December 3 1 , 1 977;

cent (4) Twenty per cent December 3 1 , 1 979;

up to up to (5) Ten per cent up to December 3 1 , 1 98 1 .

The aforec i ted tax exemption pr i vi I ege was extended by the Board of Investments in favor of the petitioner up to the following extent: 1 00% January 1 ' 1 980 - December 3 1 ' 1 984 75% January 1 ' 1 985 - December 3 1 ' 1 987 50% January 1 ' 1 988 - December 3 1 ' 1 989 20% January 1 ' 1 990 - November 30, 1 99 1 (see Exhibit "B" , p.

54, CTA records) The foreseen confusion sought to be remedied by the formula enunciated in Section 1 2 of Revenue Regulation No.

5-87 does not exist in the present case because a I I input taxes paid by the petitioner are alI attributed to VAT taxab I e operations so there is no need to a I I ocate or apportion the input taxes paid and this holds true even to the 8% presumptive input tax that was uti I i zed by the petitioner for the first quarter of 1 988.

otherwise will be to render i nut i I e the tax ..

To hold incentives en j oyed by SOl-registered enterprise and if We wi I I adopt the respondent's interpretation then it would appear that .

...

a non-BOI registered enterprise would be in a better pas it ion than one who has ava i I ed of the tax incentives because of the full deductibi I ity of input taxes on its DECISION C.T.A. CASE NO.

5073 - 17 - output tax I iabi I ity.

This is a situation that could not possibly be conceived by the lawmakers. On the contrary, the fo I I owing paragraph of Section 104 of the NIRC, quoted hereunder strengthens our stand that the incentives provided for by the BOI is recognized and respected under the VAT law:

"In case of tax exempt products of a pioneer enterprise registered with the BOI as of August 1, 1986 are so I d domest i ca I I y to value added tax registered person, the value added tax otherwise due on such products shal I also be considered as input tax creditable against his output tax payable."

This provision not only explicitly recognizes that the product of a pioneer enterprise is not sub j ect to VAT but went further to consider the same as if paid by the pioneer enterprise so that the VAT registered enterprise to whom the same is sold can claim it as a creditable input tax.

with respect to the inventories submitted by the petitioner as the basis of the 8% presumptive input tax, respondent d i sa I I owed a portion of the same and based the presumptive input tax on the amount of P144,529,280.96 instead of the P171,988,604.09 originally submitted by the petitioner !Exhibit "1" , page 3 of BIR records) thus allowing only a total presumptive input tax in the sum of P11 ,562,342.47.

In this respondent because there regard, We have to agree with is a prdsumption that the DECISION -- - C.T.A. CASE NO.

5073 - 18 - findings of the BIR on the inventory as basis of the 8% presumptive input tax is in order in the absence of a contrary evidence from the petitioner .

The same is as provided for in Section 26 of Revenue Regulation No.

5-87 which reads in part, tl1us:

For purposes of sub-paragraphs (2) and (3) above, an inventory as of December 31, 1987 of such goods showing the quantity, description and amount shou I d be f i I ed with the Revenue District Officer not later than January 31, 1988.

The value allowed for income tax purposes on inventories shal I be the basis for the computation of the 8%.

(Underscoring supplied).

Nevertheless, even if we uphold the disallowed portion of the inventory as declared by the respondent, which resulted in presumptive input the reduction of the amount tax, petitioner cannot be held for any Value Added Tax for the first quarter of of iable 1988 because its input tax credits st iII far exceed its output tax I iabi I ity for the said period. WHEREFORE IN

VIEW OF

THE FOREGOING, the assessment of alleged deficiency Va lue Added Tax in the amount of P30 ,..585 I 669. 26 issued by the respondent for the first quarter of 1988 is hereby CANCELLED for ack of merit.