Hitachi Global Storage Technologies Philippines Corp. vs. Commissioner of Internal Revenue

DECISION

The present case seeks the refund or issuance of a tax credit certificate in the amount of P3,736,075.92 allegedly representing excess creditable VAT taxes paid by Petitioner on its domestic purchases of services for the period July 1, 1996 to September 30, 1996.

The antecedent facts follow.

Petitioner is a domestic corporation organized and existing under the laws of the Republic of the Philippines, with principal office at Special Export Processing Zone, Laguna Technopark, Binan, Laguna. It is engaged in the business of manufacturing, exporting, buying, selling or otherwise dealing in at wholesale electric, electronic and software products and industrial properties, including but not limited to hard disk drive and component parts, and supplies used or employed in or related to the manufacture of such products (Exhibit K). According to Petitioner, its manufactured products are sold 100% to export market.

DI·:CISION-

( T/\ C/\SI ·: NO. SC•7C• ('1\( il: 2 On May II. ltJtJ4. th L: l·:xport l'rocL:ss i11g /.onl: Authority (1':1'/./\) dul y n.:gisll:IUI Petitioner as an Export Enterprise at the Special Export Processi ng Zone declared lo r the purpose at Laguna Technopark, pursuant to the provisions of Presidential Decree No. 66, as amended, and was issued Certificate of Registration No. 94-28. It was also registered as a value-added tax taxpayer on June 28, 1994 and was issued a certificate of registration bearing ROO Control No. 94-570-00028 (Exhibit A). On October 7. 1994, the EPZA passed Board Resolution No. 94-212 (Exhibit L) approving the application of Petitioner for pioneer status of its small-sized, high density hard disk drive and thin fih)1 magnetic head manufacturing facility. The said resolution likewise granted a six (6) year income tax holiday to Petitioner subject to all applicable procedural guidelines under EPZA General Circular No. 90-00 1. On October 25, 1996, Petitioner filed with the Bureau of Internal Revenue (BIR) its 1996 third quarterly VAT return (Exhibit C). The said return, however, was subsequently amended on October 25, 1999 (Exhibit M), showing total input VAT payments from July I, 1996 to September 30, 1996 in the amount of P3.736.075.92. The payments were allegedly made on its domestic purchases of services totalling P37,360,759.20. On September 28, 1998, Petitioner filed with the Tax and Revenue Group of the One-Stop-Shop Inter-Agency Tax and Credit Duty Drawback Center of the Department of Finance, an Application for Tax Credit/Refund of Value-Added Tax Paid from July I, 1996 to September 30, 1996 in the amount ofP3,736,075.92. (Exhibit D) As the application for refund was not immedia:ely acted upon and to toll the running of the two-year prescriptive period under Section 230 of the Tax Code, Petitioner elevated its claim before this Court on September 30, 1998. 9iJ tj

In his Answer filed on November 4, 1998, Respondent claimed by way of Special and Affirmative Defenses that:

"4.

Granting without admitting that petitioner filed a claim for refund, the same is subject to investigation by the Bureau of Internal Revenue.

5.

Petitioner miserably failed to demonstrate that the tax subject of the case at bar was erroneously or illegally collected. 6.

Taxes paid and collected are presumed to have been paid 111 accordance with law and regulation, hence, not refundable. 7.

In an action for refund/credit, the taxpayer has the burden of showing that the taxes paid are erroneously collected and that failure to me.et such a burden is fatal to his cause, as such claim for refund is strictly construed against the claimant. (Citibank N.A. Philippine Branch vs. The Commissioner of Internal Revenue, CTA Case No. 4258, April I, 1994) 8.

The burden of proof lies upon the taxpayer to establish its right to refund, and failure to adduce sufficient proof is fatal to the action for tax refund/credit.

9.

It is incumbent upon the petitioner to show that it has complied with the provision of section 229 of the Tax Code, as amended. 10.

Claims for refund arc construed strictly against the claimants and cannot be allowed unless proven explicitly and categorically. (Caltex (Phil.) Inc. vs. Com. of Internal Revenue, CTA CASE No. 2871, January 29, 1986). The taxpayer has the burden of proof to show that it is entitled to the refund of the amount claimed as refundable because taxes arc presumed to have been collected in accordance with laws and regulations."

That the instant Petition was timely filed is not disputed by Respondent. Likewise, he admitted that Petitioner is both a VAT-registered entity and an EPZA-rcgistered export enterprise. Thus, to support its claim, Petitioner invokes the provisions of Section 1 06(A)(2)(a)(i) in relation to Section 112 (A) of the National Internal Revenue Code (NIRC) of 1997 (then Section 100 (a)(2)(A)( I) in relation to Section 106 (a) of the old 9tJ 5

L)ECISION-

Tax Code) which grants zero-rated exporters of goods the privilege to apply for a refund or tax credit of its unutilized input VAT payments insofar as they are attributable to its export sales. Respondent, however, counters Petitioner's argument by invoking Section 24 of Republic Act No. 7916, otherwise known as "The Special Economic Zone Act," which provides in part:

"SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. -Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government x x x" He alleges that being an ECOZONE or PEZA-registered enterprise, Petitioner is not subject to VAT under the aforementioned section of RA 7916. Consequently, it is not allowed any tax credit on VAT input tax previously paid pursuant to Section 4.103-1 of Revenue Regulations No. 7-95:

"SEC. 4.103-1. Exemptions. - (A) In general. - An exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid x x x." (underscoring supolied) Through a resolution promulgated on August 2, 2000 111 CT A Case No. 5650 entitled Ccbu Toyo Corporation vs. Commissionct· of lntcmal H.cvcnuc, this Court first passed upon the issue, thus:

"Respondent is correct in arguing that if an entity is registered with PEZA as an ecozone enterprise and is remitting 5% of its gross income to the national government, it is exempt from payment of the VAT pursuant to the provisions of Section 24 of Republic Act No. 7916, to quote:

"Section 24. Exemption fi"om Taxes Under the National Internal Revenue Code.- Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government x x x." Underlining supplied. However, We do not agree that the aforequoted law is applicable to the case at bar. Section 23 of Republic Act No. 7916 provides: "Section 23. Fiscal incentives. - Business establishments operating within the ECOZONE shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided for under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987." Under the aforementioned law, a PEZA registered enterprise has the option to choose between two sets of fiscal incentives. One, that which is provided for under Presidential Decree No. 66, as amended, and Section 24 of RA 7916 which includes the 5% preferential tax on gross income earned, which is in lieu of national and local taxes and second, as that provided for under Book VI of Executive Order No. 226, including but not limited to an income tax holiday (ITH) of 4 or 6 years depending on whether an entity is registered as a pioneer or non-pioneer enterprise. If an ecozone enterprise choos·cs the 5% preferential tax, it is exempt from payment of all national and local taxes. Howe, · ~r if an ecozone enterprise opted for the income tax holiday, it is only exempt from payment of the income tax but still subject to other national internal revenue taxes including the value-added tax. These were explicitly elucidated by the Bureau of Internal Revenue in VAT Ruling Nos. 037-98; 043-98; 027-99; and 063-99."

This aforequoted ruling was affirmed recently by the Court of Appeals in the case entitled Commissioner of lntemal Revenue vs. Seagate Technology Philippines, CA-G.R. SP No. 61189 promulgated on June 18, 2001. It is also important to note that the question of whether or not Petitioner is legally entitled to claim for a refund of its unutilized VAT input taxes paid had already been settled by this Court in a number of similar cases previously brought by Petitioner before Us, to wit:

1. Hitachi Computer Products (Asia) Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5651, promulgated February 2, 2001;

2. Hitachi Computer Products (Asia) Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5756, promulgated March 15, 200 l ; and

3. Hitachi Computer Products (Asia) Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5707, promulgated June 20,2001. ln all of the aforementioned cases, We upheld the legality of Petitioner's claim. We proceed, therefore, to the main issues raised in Petitioner's Pre-Trial Brief which were admitted by Respondent's counsel during the Pre-Trial Conference on February 17, 1999 and approved by this Court on June 2, 1999. These are: "I. Whether or not Petitioner has unapplied or unutilized creditable value-added tax inputs as of September 30, 1996 arising from its domestic purchases of goods and services which is a prc-.Jcr object of a claim for refund pursuant to Section 112 of the National Internal Revenue Code, as amended;

2.

Whether or not the said creditable value-added tax inputs of Petitioner for the Quarter ended September 30, 1996 are substantiated by documentary evidence in the form of invoices and official receipts; and 3.

Whether or not said unapplied or unutilized creditable value-added tax inputs for the Quarter ended September 30, 1996 was carried forward to the succeeding taxable Quarter and applied against any of the value-added tax output of the Petitioner for said period." For purposes of clarity, quoted hereunder arc Sections 100 (a)(2)(A)(i) and 1 06(a) ofthe 1996 Tax Code applicable to the case at bar and relied upon by Petitioner: "Sec. 100. Value-added tax on sale a/goods or properties. -(a) x x x

(2) The following sales by a VAT -registered person shall be subject to 0%:

(A) Export sales.-The term 'export sales' means:

(i) The sale and actual shipment of gJods from the Philippines to a foreign country, irrespective 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 and services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);"

"SEC. I 06. Refunds or tax credits of creditable input tax.-(a) Any VAT -registered person, whose sales arc zero-rated or effectively zero- rated, may, within two (2) years after the close of the taxable quarter when the sales 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 I 00 (a) (2) (A) (i), (ii) and (b) and Section I 02

(b) (1) and (2), the acceptable fo reign currency exchange proceeds thereof had been duly accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas (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." (U ndcrscori ng suppl icd) From the above, it is clear that a claimant is allowed to file a claim for refund or tax credit of its creditable input tax that can be directl y attributed to its zero-rated sales. In the absence of a showing, therclore, that Petitioner's products were exported in its entirety, then Petitioner's claim must correspondingly be reduced. For the period July I, 1996 to September 30, 1996, Petitioner allegedly paid input VAT in the amount of P3 ,736,075.92 arising from its domestic purchases of services. On the other hand, in its amended Quarterly Value-Added Tax Return for the 3rd quarter of 1996 (Exhibit M), Petitioner declared zero-rated sales amounting to PI ,707 ,608,362.80. Petitioner showed proofs of the inward remittances representing payments of export sales 9d J such as certifications from Rizal Commercial Banking Corporation (RCBC) and Pilipinas Bank (Exhibits H-8, R-2 & R-3) and Petitioner's passbook hom RCBC (Exhibits H-5 to H-7).

However. when verified by the independent CPA, only the total amount of PI ,3 73,232,468.22 was supported by export documents such as Export Sales Invoices, Export Declarations and Airway Bills (Exhibits Q-1 to Q-392, Addendum Report of SGY- Exhibit P) The amount of P334,375,894.58 was not properly documented. In the case of Commissioner of Internal R·!venue vs.

Philippine Bobbin

Corporation, CA-G.R. SP. NO. 59452 promulgated on February 19, 2001, the Court of Appeals denied the claim for refund of Philippine Bobbin because of its failure to submit export documents and We quote:

"By and large, export sales invoices alone are inadequate proofs that the subject goods were actually exported. Such invoices are merely written accounts of the particulars of merchandise shipped or sent to a purchaser or consignee with the value or prices and charges annexed (Philippine Law Dictionary, yu Ed .. p. 495).

By no means are they accurate confirmations that goods were actually shipped out of the country.

Yet, that is what the law requires.

Section 1 OO(a)(2) of the

National Internal Revenue Code (then in effect at the time of the alleged exportation) defines "Export Sales" as the salt. and shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported. In that case, it is imperative for any claimant of a tax refund or credit in relation to the Input VAT paid to prove not only the existence of the sale but also the actual shipment of the goods from the Philippines to a foreign country. Rather than limiting the documentary requirements to just the export invoices, the law specifically enjoined the production of "export documents" to affirm the authenticity of the export sales. In commercial practice, export documents include commercial invoices or receipts, bills of lading, airway bills, and export declarations or permits.

These

documents, taken collectively, are the best means to prove the exportation of goods." (Underlining supplied) 910

DECISION-

CT/\ C/\SI: NO. 5(J7(J

I'Nil ·: 'I

\\', , l111d 1111 • 1tl111\'1' 1!1'1 1'111111 iljljolll 11i,j,· Ill lit•· 1 ,, .,, 111 111 11 'tlllll ' lito ' l' 'o)lllll t111k:• :llllllllltlill)'. Ill I'\ 1·1. 1'/'•.H'I·I .'d( "' IC! ',)(", "' lill' ltd :d 1'.\ )Hlll ::: tit- :: "I' 1'1 .'/ 11'/ .1,1))(. llt.1.HII l:trk L':\)llll'l dol'llllll'lll s s11r lt :ts :tinv: ty hill :: :ttHil' .\ )HIII dn·l:tr:tliolls. Si 11n· I 'J. 'J X' ~u ol' lltL· :dll'gcd lol :d L'Xporl saks dct:l: 11n l hy l'cliliolll'l' l:tck lite IIL'CL'ss:try cx pml docuntcnl s. il l'ollows lhL:n tktl I l).5X'X, ol' tilL: :dlowahk inpul V /\T ol' l'clitiottl'r should bL: disallowL:d for the said portion cannot be said to bL: directly attributable to Petitioner's zero-rated export sales.

With reference to the second issue, Petitioner substantiated its claim by submitting various VAT invoices and oilicial receipts (Exhibits 1-1 to 1-226). But again, the special audit conducted by the independent CPA resulted in the disallowance of the amount of P432,803.47 because they were not properly substantiated for VAT purposes (Exhibit J - Report of SGV dated September 17, 1999). And further verification by this Court of the various invoices and orficial receipts also resulted to additional disallowances of the input VAT for the following reasons:

REFERENCE

INPUT

SUPPLIER

EXHIBIT

DATE

NO.

AMOUNT

VAT

(a) No supporting document CITY SERVICE CORP.

121,253.80 12,125.38

DOLPHIN ENVIRONMENTAL

8,909.10 890.91

PINPIN SECURITY

122,251 .10 12,225.11

Subtotal

252,414.00 25,241.40

(b) Not within the period of claim

DOLPHIN ENVIRONMENTAL

1-10 6/26/96 352 37,945.45 3,794.55

DOLPHIN ENVIRONMENTAL

1-11 6/17/96 342 23,236.36 2,323.64

DOLPHIN ENVIRONMENTAL

1-12 6/21/96 345 8,909.00 891 .00

DOLPHIN ENVIRONMENTAL

1-13 6/21/96 346 34,855.00 3,485.00 91.J..

PAGE IO

DOLPHIN ENVIRONMENTAL

1-14 6/26/96 351 11 ,636.36 1,163.64

DOLPHIN ENVIRONMENTAL

1-152 6/14/96 337 37,963.64 3,796.36

DOLPHIN ENVIRONMENTAL

1-153 6/5/96 376 42.508.87 4,250.89

DOLPHIN ENVIRONMENTAL

1-1 54 5/5/96 335 33,016.82 3,301.68

Subtotal

230,071 .50 23,006.76

(c) Overstatement of input VAT SAV.E. INT'L LANGUAGES INC.

1-2 10 9/5/96 10,658.18 Shld. Be 10.200 00 4,581.80 458.18 ALLKEY INT'L, INC.

1-1 to 1-5 7/13/96 6,380.45 Shld. Be 5,360.45 10,200.00 1,020.00

Subtotal

14,781 .80 1,478.18

Total

497,267.30 49,726.34 Therefore, out of th-e amount of P3.736,075 .92 input taxes being refunded by Petitioner, only the amount of P3,253,546.11 was properly substantiated, detailed as follows:

Amount Claimed

P3,736,075.92

Less: Disallowances

(a) Per SGV's verification (Exh. J)P432.803.47

(b) Per Court's verification 49.726.34 482,529.81

Allowable Input VAT

U253.546. I I Finally, anent the third issue, although Petitioner carried forward to the succeeding taxable quarter the unutilized creditable value-added tax inputs for the period July 1,1996 to September 30, 1996 as shown in the quarterly V /\T return lor the 4 111 quarter of taxable year 1996 (Exhibit N), the amount was also deducted from the total available input tax under Any VAT Refund/TCC Claimed (Exhi bit N-3). Hence, the amount being claimed was not applied against any output VAT.

..

91r::

PAGE II

In sum, Petitioner has shown its entitlement to the refund sought. However, in view of the disallowances made by the independent CPA and this Court, Petitioner's claim is accordingly reduced to the amount of P2,616,50 I. 78, computed as follows:

AMOUNT CLAIMED

P3,736,075.92

Less: Disallowances

(a) Per SOY's verification (Exh. J)P432,803.47

(b) Per Court's verification 49 726.34 482,529.81

ALLOWABLE INPUT VAT

Less: Portion pertaining to export sales without.export documents (P3,253,546.11 X 19.58%)

AMOUNT REFUNDABLE

P3,253,546.11 637 044.33 P2,616.501.78

WHEREFORE, in the light of all the foregoing, Respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of P2,616,50 I. 78 representing input value added tax paid by Petitioner on its domestic purchases of services for the period July 1, 1996 to September 30, 1996.

I CONCUR:

91 3 L-. Ls-~~ ERNESTO D. ACOSTA

Presiding Judge

PAG E I2

CERTIFICATION

l hereby certify that the above decision was reached after due consultation wi th the members of the Court of Tax Appeals in accordance with Section 13, Article Vlll of the Constitution.

LlQ~ C?~ ERNESTO D. ACOSTA

Presiding Judge