Hopewell Power Corp. vs. Commissioner of Internal Revenue

DECISION

This petition for review is seeking for the refund or issuance of a tax credit certificate in the amount of P202,536,046.26, representing input value-added tax (VAT, for brevity) on capital goods for the period April 1, 1994 to September 30, 1995. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines.

It is engaged in t h e business of power generation and subsequent sale thereof (Exh. A).

It is registered with the Bureau of Internal Revenue as a VAT registered person with VAT Registration Certificate No. 330-001-726-870-V, dated July 16, 1992. (Exh. B). For the period April 1, 1994 to September 30, 1995, petitioner alleges that it paid input VAT on capital goods in the total amount o+ P202,536,046.26, the details

- 2 - of which are covered by the following amended quarterly VAT returns:

Period Covered Amount Exh.

04-01-94 to 06-30-94 P-103,580,276.96 E 07-01-94 to 09-30-94 1,089,286.81 G 10-01-94 to 12-31-94 41,881,463.28 I 01-01-95 to 03-31-95 46,575,122.82 K 04-01-95 to 06-30-95 9,291,832.01 M 07-01-95 to 09-30-95 118,064.38 N T 0 t a 1 .P202,536,046.26 On January 12, 1996, pursuant to Sectio n 106(b) of the Tax Code, as amended by Republic Act No.

7716, petitioner filed an application for tax credit/refund of value-added tax paid on capital goods with Revenue District Office No.

51 of the Bureau of Internal Revenue (Ex hs. V and V-1).

On June 26, 1996, petitioner lodged the instant petition for review in order to toll the running of the two- y ear prescriptive period for claiming a refund under the law.

In her Answer, respondent raises the following special and affirmative defenses: 5 • of a VAT the same routinary Petitioner ' s claim for the issuance Tax Credit Certificate is premature as is still un dergoing admi nistrative examination by respondent's Bureau; 6.

The alleged creditable i n put taxes were collected and paid pursuant to law and pertinent BIR implementing rules and regulations, hence the same are neither refundable nor may they be claimed as

- 3 - credit.

Petitioner must prove that the input taxes were actually paid. remitted received by respondent's Bureau and that same were paid on capital goods purchased have not been applied against output taxes; said and the and 7.

Petitioner failed to substantiate by proper documents that it is entitled to refund or the issuance of a tax credit certificate for the amount of P202.536.046.26; 8.

Claims for tax refund or tax credit are construed strictly against the claimant as they partake of the nature of a tax exemption.

It is therefore incumbent upon the petitioner to prove that it is entitled to such exemption under the law. and failure to do the same is fatal to its claim for tax refund or tax credit;

9.

Petitioner likewise failed to show that it had strictly complied with the provisions of Section 204 of the Tax Code in relation to Section 230 thereof with respect to the herein amount being claimed as tax credit. The issues to be resolved by this Court are follows:

as 1.

Whether or not petitioner's claim for refund has prescribed pursuant to the provisions of Section 204 of the Tax Code in relation with Section 230 of the same code; and 2.

Whether or not petitioner was able to support with substantial evidence its entitlement to the claim for refund pursuant to Section 106(b) of the Tax Code.

- 4 - The two-year· judicial prescriptive period in claiming a refund of i n put VAT is now reckoned from the filing of the quarterly VAT return as held in Our recent Resolutio n .

dated July

20. 1998. in t h e case of Atlas Consolidated Mining and Development Corpo r ation Commissioner of I nternal Revenue. C.T.A.

Ca s e No.

wherein We ruled:

"xxx (t)his Court. after a careful study of the arg um ents adduced by petitioner.

reconsiders the decision with regard to the issue of prescription and consequently agrees with the interpretation of petitioner that the two-year period should be counted from the date of filing of the corresponding VAT quarterly return whic h is wit h in twenty (20) days after the close of each taxable quarter.

This will harmonize Section 106 with Section 230 of the Tax Code whic h was interpreted by the Supreme Court in the cases of Commissioner of Interna l Revenue v s. TMX Sal es Inc.

and th e Co u rt of Appeals.

G.R.

No.

83736.

dated J a nuary 15.

199 2 ;

and ACCRA Investments Co r poration vs .

Commissi oner o f Int e rnal Revenue. 204 SCRA 957 .

that the two

(2) year period should be counted from t h e filing of the final income tax return.

because it is only during that date that the exact tax liability or refundability of tax can be determined.

In the same manner. it is only after the filing of the quarterly VAT return that we can determine the VAT liability or refundability of VAT. It should be noted that the basic requirement is that VAT refund can only be granted to the extent that the input taxes have not been applied against output tax.

All these things can only be determined if a return is filed.

It is logical therefore. to conclude that the two-year period should not immediately be counced from the close of the quarter but from the date o f f i l i ng of the VAT return .

( Underlining Ours)." v s .

5 2 96

DECISION -

C.T.A. CA S E NO. 5389. - 5 - Therefore, the judicial claim for refund of petitioner for the period April 1, 1994 to September 30, 1995 was timely filed within two years from the filing of petitioner's respective quarterly VAT returns, considering that the June 26, 1996, t h us: Period Covered petition for Ex h .

review was filed Original Date of Filing of Quarterly VAT Return ------------------------------------------------- 04-01-94 to 06-30-94 0 07-20-94 07-01-94 to 09-30-94 F 10-20-94 10-01-94 to 12-31-94 H 01-20-95 01-01-95 to 0 3-31-95 J 04-20-95 04-01-95 to 06-30-95 L 07-20-95 07-01-95 to 09-30-95 N 10-20-95 on We now delve on t h e legal a n d factual aspect of the case whic h is t h e second iss u e at bar. Petitio n e r a n cho r ed its e n title ment to t h e clai m for refund of input VAT on Section 106(b) of the 1995 Tax Code, as a mended b y R.A. 7716. For easy reference, Section 106(b) of the Tax is h ereby quoted as fo l lows: Sec. 106. Refunds or tax credits of input tax. -

(a) Export sales. - xxx.

(b) Capital goods.

A VAT-registered person may ap p ly f or the iss u ance of a tax credit certificate or ref u nd of i n put taxes paid on capital goods i mported or locally purchased, to t h e extent that suc h input taxes h ave not been applied against output taxes.

The application for refund may be made only Code ·.

6 - within two (2) years after taxable quarter when the purchase was made.

the close of importation the or Based on the above proviso, petitioner should prove that: (¹) it is a VAT registered person; (2) the input taxes claimed by petitioner were paid on capital goods;

(3) the input taxes have not been applied against output tax liability;

and ( 4) the administrative claim for refund was seasonably filed. After a circumspect study of the evidence presented by petitioner, it was established that petitioner is a VAT-registered person with VAT Registration Certificate N o • 330-001-726-870-V issued by the Bureau of Internal Revenue (Exh. B).

The input taxes allegedly paid on capital goods remain unapplied as shown by the second quarter VAT return for the year 1996 (Exhs. 0 and 0-1) .

Furthermore, the administrative claim for refund was seasonably filed within t h e time required under Section 106(b) of the Tax Code (Exhs. V and V- 1).

However, it appears that most of the purchases made by petitioner, as evidenced by the sales invoices and official receipts are ·f or engineering and structural services which according to respondent ' s revenue examiner do not constitute capital goods (Exhs. 2 and 2-a). Hence, We should resolve such corollary issue. Section 2(o) of Revenue Regulations No. 5-87 of the Value - Added Tax Regulations defines capital goods as -

- 7 - (o) "f..''apit:al goods" refer to goods 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.

Generally, a capital expenditure involves a payment which creates or enhances what is essentially a separate and distinct asset.

Statutorily, capital expenditures are specified as amounts paid out tor new buildings or for permanent improvements or betterments made to increase the value of any property or estate or amounts expended in restoring property or in making good exhaustion thereof for which an allowance is or has been made ( 6 MERTENS Law of Federal Income Taxation, S25.37, pp. 114 to 115).

In determining what constitutes capital goods, courts will look to the origin and character of the expenditure to determine whether it is a capital asset (6 MERTENS Law ot Federal Income Taxation, S25.37, p.

115, supra).

For example, it wa s held that "the cost of a topographical survey made tor the purpose of establishing boundary lines of the property, of ascertaining the topography of the land, and of recording the l .ocation on the property of valuable shrubs and shade trees is a capital expenditure" (Johnson vs. Comm., TC Memo 1955 - 247, cited in 6 MERTENS Law of Federal Income Taxation

- 8 - S25.63,

p. 179). The same treatment is accorded to amounts expended for maps, abstracts, legal title opinions, recording fees and survevs (6 MERTENS Law of Federal Income Taxation, S 25.63, p. 179, supra) . The records show that petitioner expended for engineering and structural services for the purpose of constructing power plant facilities needed in the production of electricity, which is petitioner's main product.

~..Je are therefore convinced that said expenses are necessary and should form part of the cost of the power plant facilities.

Such fact was also admitted by respondent's Revenue Exa miner, ~1 s.

Delia Rios, in the cross examination conducted by petitioner's counsel on t h e August 26, 1997 sessio n , to wit: Q.

What is the claim for refund of petitioner all about, Ms. Witness?

A.

The claim for refund of refund of input tax expenditures, Sir.

the petitioner for· their is for capital Q .

So, it has nothing to do with or exempt sales is that right, zero-rated sales Ms.

~.Jitness?

A.

Yes, Sir.

Q .

A •

><X X

XXX XXX.

Could you please tell us your understanding what a capital expenditure is, Ms. Witness? Capital expenditures are those expenditures purchases of capital goods which can depreciated for a period of more than one year, Sir.

of of be ( 1)

Q .

9 - I would assume, Ms.

encountered cases expenditures?

l-Ji tness, that involving you have capital A.

Yes, Sir.

Q.

In your opinion, Ms.

Witness, in the co nstruction of a plant, are services rendered, are cost of services in a construction of a plant considered a capital expenditure? A.

If the construction or the services render can be attributed to the building constructed, it can be classified as capital expenditure, Sir. Q .

So, it for t h e capital is your opinion that services rendered constr uction of building is considered expenditure, Ms. Witness? A.

Yes, Sir.

Q •

A •

Q.

A •

The How about services like, engineering structural services also connected to construction of that building, Ms. Witness? and the If it is really construction, that can expenditure, Sir.

attributed be classified to that as capital And so you have the opinion must form part of the amount capital goods, Ms. Witness? that those costs of purchases of Yes, Sir·.

Hearing) (pp. 21 to 29, TSN, August 26, 1997 issue that is left for our determination is petitioner's substantiation of input taxes claimed on capital goods.

This Court, after a careful scrutiny of petitioner's invoices and official receipts, together with the Certification issued by independent CPA, SGV & Co. (Exh.

W), is inclined to disallow some input taxes paid on the purchase of things which are not material constructio n of power follows:

Name of Supplier AUTS International, Inc. Datacom Systems Corp. NS Oscana Printwheel Enterprises AUTS International, Inc. OHL Yorldwide Express OHL Yorldwide Express Georkimart Kameraworld Photo Lab, Inc. Tong's Enterprises Vibal Social Prints Abenson, Inc.

Accurate Printing Inc. American Packing Industries Andrew Commercial Asian Alliance Enterprises Avesco Marketing Corporation Bearing Center & Machinery Oataman Systems Corporation DHL Worldwide Express Floro Blue Printing National Book Store, Inc. O'neals by Edna Perco Enterprises Printwheel Enterprise Ressein Commercial Rey Lapiz Vineza Industrial Sales Zenith Wire & Conduit Abenson, Inc.

Consolidated Paper Products Oataman Systems Corporation DHL Worldwide Express OHL Worldwide Express E-Plus Stationery, Inc. E-Plus Stationery, Inc. Executive Computer Systems Floro Blue Printing Kameraworld Photo Lab, Inc. Mega Photo PhotoLine Enterprises Corp. Print Wheel Enterprises P.P. Gocheco & Co., Inc. - 10 - plant facilities, detailed as Exh.

X-1 X-10 X-21 X-23 Y-17 Y-37 Y-38 Y-44 Y-51 Y-115 Y-127 Z-1 Z-5 Z-36 HO H3 Z-97 AA-1 AA-15 AA-17 AA-19 AA-20 AA-21 AA-22 AA-28 AA-32 AA-61 AA-86 AA-129 AA-130 AA-132 Input Tax p 32.27 904.55 29.09 263.64 32.27 339.15 229.95 2 7. 2 9 16.00 172.73 198.18 2,966.91 190.91 4,192.09 2.73 45.00 968.91 88.00 63.82 292.60 488.17 5.39 768.18 250.00 181.82 271.18 1,054.54 283.91 29.09 1,513.64 704.55 388.64 20.82 125.40 93.27 2 5. 4 5 127.27 1,496.73 55.57 18.82 137.27 118.18 390.91 Remarks Supplies Toner Xerox Letterhead Supplies Postage Postage Biscuits Film Developing Film Developing Call card Coleman Document envelopes No supporting document No supporting document No supporting document No supporting document No supporting document Supplies Postage Xerox Supplies No supporting document No supporting document No supporting document No supporting document No supporting document No supporting document No supporting document Colored TV & VHS Payslip w/ envelope Plastic dividers legal Postage Postage Copy paper Disk cleaner Floppy disk drive Xerox Film developing Film Xerox Calling card Table tennis w/ racket (j/

11 - The Landmark AA-164 107.98 Groceries Asian Alliance Enterprises AB-1 3.18 Scissors Contrade Enterprises, Inc. AB-16 40.18 Puncher, stapler & cutter Delta Diesel Parts 136.36 No supporting document Executive Computer Systems AB-22 106.82 Computer supply Kamerauorld Photo Lab, Inc . AB-38 13.51 Film developing Kamerauorld Photo Lab, Inc. AB-39 27.57 Film developing Print Wheel Enterprises AB-67 363.64 Check voucher Severo Sy Ling, Inc.

AB-70 45.00 Supplies Sunlife Bookstore 66.18 No supporting document Up-Toun Industrial Sales, Inc.

11. 4 5 No supporting document Up-Toun Industrial Sales, Inc. 29.32 No supporting document Abenson, Inc.

AC-1 104.18 Rice cooker Easycall Communication Phils. AC-21 50.91 Pager subscription Executive Computer Systems AC-23 454.55 Computer supply Gem Stationery Inc.

AC-30 71.36 Puncher, stapler, etc. Harson Electronic Parts AC-32 2 5. 4 5 Adaptor HJ Franklin, Inc.

AC-34 70.91 Supplies Perce Printing Press AC-86

61. 36 Supplies HJ Franklin, Inc.

AC-35 70.91 Supplies

T 0 T A L

P21,465 .68 Thus, the aforestated a moun t ot P 21, 465.68 s hould be deducted from the amount recommended by the independent auditors in their examination.

Below is the recomputation of the amount of petitioner's entitlement to the refund of input taxes on capital goods: Amount fo und by independent auditors as valid input taxes (Exh. W) Less: input taxes which are not attributable to the construction of power plant facilities Amount refundable

WHEREFORE, finding the petition P202,452,859.57 21,465.68 P202,431,393.89 for review partially meritorious, respondent is hereby ORDERED to REFUND or, in the alternative, to ISSUE a tax credit certificate in favor of petitioner the amount of P202,431,3~3. 9, l

- 12 - representing input tax payments on capital purchased for the period April 1, 1994 to September 1995.

WE CONCUR:

I {/ /lp.../' fl.J / ~AMON 0. DE VE A Associate Ju e I I /7 / Jui/5 ~(Q_,Q_~ ERNESTO D. ACOSTA Presiding Judge CERTIFICATION goods 30' I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with of the Constitution.

Section 13, Article VIII G-Q~~ ERNESTO D. ACOSTA Presiding Judge