Luisita Industrial Park Corporation vs. Commissioner of Inter Nal

DECISION

This Petition for Review is seeking for 'the refund or issuance of a Tax Credit Certificate in the amount ofP1 ,630,527.79, allegedly representing unutilized input value- added tax (VAT, for brevity) on domestic purchases of capital goods and services for the calendar quarters ended March 31, 1997 and June 30, 1997. The fo llowing facts are undisputed:

Petitioner is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with principal office located at 11 111 Floor, Makati Sky Plaza, Oledan Square, 6788 Ayala Avenue, Makati City. Its business is to acquire and own, hold, use, sell, lease, assign, transfer, mortgage, exchange, dispose, develop, and manage industrial and residential estates, and to provide support infrastructure and facilities therefor. It is registered with the Bureau of Internal Revenue as a VAT taxpayer with Taxpayer Identification No. 050-005-036-1 96-VAT issued on March 6, 1997.

On Apri l 2 1, 1997, Petitioner seasonably fi led its 1997 fi rst Quarterly Value- Added Tax Return with the Bureau of Internal Revenue reflecting a totalunutilized input VAT on domestic purchases of goods/services in the amount of P635,3 14.35. On July 2 1, 1997, Petitioner fi led its second Qtv rterly Value-Added Tax Return, showing an accumulated input VAT in the amount of PI ,630,527. 79 as of June 30, 1997. On May 7, 1998, Petitioner registered with the Philippine Economic Zone Authori ty as an ecozone developer/operator of Luisita Industrial Park II in San Miguel, Tarlac, Tarlac as evidenced by Certificate of Registration No. EZ-98-05. On rebruary 11 , 1999, Petitioner fil ed with the Revenue District Office No. 50, South Makati, a written application for refund of input taxes paid lor the period January 1, 1997 to June 30, 1997, in the aggregate amount ofP I,630,527.79 on the ground that it had not yet started its commercial operations but was a lr~ad y incurring business expenses from which value-added taxes were imposed.

On March 29, 1999, Petitioner lodged its appeal with this Court in order to toll the running of the two-year prescriptive period under Section 230 of the Tax Code, as amended.

In his Answer, Respondent raised the fo llowing Special and Affi rmative defenses: 5.

Petitioner's claim for refund is under verification/investigation by respondent Commissioner of Internal Revenue;

6.

Tn an action for tax refund, Peti tioner Plust show that taxes were paid erroneously or collected illegally.

Failure to sustain this burden is fa tal to the action for refund ;

7.

Claims fo r refund are construed strictly against the claimants since they are in the nature of exemptions from taxation (Manila Electric Co. vs. Commissioner oflnternal Revenue, 76 SCRA 35 1); and

DECIS ION-

8.

Taxes are presumed to have been paid and collected 111 accordance with law.

In support of its claim for refund, Petitioner presented the following documentary exhibits:

I.

The Value-added Tax Returns for each of the four calendar quarters of the years 1997, 1998, and 1999 (Exhibits A, B, E, E-1, F, F-1 0, P, Q, R, S, T, U, and V);

2.

Schedule of input taxes for the months of March, April, May and June of the year 1997 (Exhibits C and D);

3.

Audited Balance Sheets of Petitioner for the years 1997 and 1998 (Exhibits G, G-1 , H, and H-1);

4.

Application for rcrund with the BlR (Exhs. l);

5.

Summaries of input taxes prepared by SGV & Co for the first and second quarters of 1997 together with the corresponding pre-marked ofticial receipts and/or invoices (Exhibits . .1, J-1, K, K-1 to K-16, L, L-1 to L-3, M, and M-1 to M-56); and 6.

The report of the commissioned independent CPA (Exhibit N). The case was submitted for decision on February 8, 200 I, without the evidence and memorandum of the Respondent.

The issues jointly stipulated by the parties are as follows: 1 I.

Whether or not Petitioner has unutili zed input VAT for the I stand 2 11d quarters oftaxable year 1997 in the amount ofP1,630,527.79;

2.

Whether or not the amount of PI ,630,527.79 represents input VAT paid on Petitioner's domestic purchases of capital goods and services; and 1.1oint Stipulation or Facts and Issues, CTA records, pp. 40 to 42.

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DEC ISION-

PAG E4

3.

Whether or not the said input taxes have remained unutilized for the succeeding quarters.

We answer the aforementioned numbers one and three issues in .the affirm ative. The records reveal that Petitioner registered with the Securities and Exchange Commission on October 24, 1996 and did not start its commercial operations until after December 3 1. 1998 as can be seen from Note No. I of .!1e Balance Sheets (Exhibits G-1 and H-1 ). Therefore, fo r the year 1997, Petitioner has no taxable income from which it •· can be held liable for value-added tax. However, during the same year, Petitioner was already engaged in the construction of its initial project which was the development of a 300-hectare property into a first class industr!_al_park called " Luisita Industrial Park 2" located at the Hacienda Luisita in San Miguel, Tarlac, Tarlac (Note No. I of the Balance Sheets, Ex hi bits G and H. CTA reco rds, pp. 83 and 90). Hence, all of Petitioner's input taxes paid on various purchases of goods and services relative to its pre-commercial operations and the construction of its initial project remain unapplied (Exhi bits A. B, E, F, 0, P, Q. R, S, T, U, and V).

Anent the second issue, Petitioner claims that it is entitled to the refund of input taxes paid on domestic purchases of capital goods based on Section I 06(b) of the Tax Code.

For easy reference. Section 106(b) ofthe Tax Code is hereby quoted as fo llows: Section 106. Refunds or tax credits of creditable input tax. - (b) Capital goods. - A VAT-registet'l•d person may apply fo r the issuance of a tax credit certificate or refund of input taxes paid on capital goods im ported or locall y purchased, to the extent that such input taxes have not been applied against output taxes. The application for

DECISION-

CTA CAS E NO. 5754

PAG E 5

refund may be made only after the expiration or 2 succeeding quarters following the quarter in which the importation or local purchase was made.

The subject input taxes are categorized into the following account titles as shown in Petitioner's schedules of input taxes, to wit: (Exhibits C and D)

Account Titles

March

April

May

June

Total

Office Equipment

16,736.37 6,570.45 515.09 23,821 .91

Office Supplies

1,311 .57 2,071 .62 735.59 418.44 4,537.22

Travel

4,996.81 12,024.07 3,600.00 (7,325.00) 13,295.88

Telephone/Facsimile

2,018.73 1,075.31 914.33 2,471 .96 6,480.33

Professional Services

250.17 1,014.39 1,314.35 178.40 2,757.31

Project Development Cost

610,000.00 915,000.00 1,525,000.00

Rent

12,696.68 12,696.68 12,696.67 38,090.03

Representation

134.26 274.90 6,164.34 6,573. 50 Books &. Subscription 1,124.38 1,124.38

Advertisement

2,266.9} 5,136.36 7,403.27

Repairs & Maintenance

1 ,443.27 1 ,443.27

Total

635,313.65 40,421 .34 20,050.94 934,741 .17 1,630,527. 10 Petitioner capitalized all the expenses related to the development of the project, including interest during the development period, as part of "Project Development Cost" (Note No. 2, Notes to Balance Sheets. Exhibit G. CTA records. p. 83). Wh ile the expenses incurred prior to its start or commercial operations are capitalized and charged to "Pre-operating Expenses and Deferred Charges'' account in the balance sheets and will be amortized over a period or five (5) years upon the start or the Petitioner's commercial operations (Exhibits G-1 ). Petitioner believes that the aforementioned input taxes are in the nature of capi tal goods and therefore are qualilied for refund based on Section I OG(b) of the Tax Code as amended.

t\ ·)2· ) ~ ....

DECI SION -

PAG E 6

However from the point or view of the commissioned independent CPA, only the input taxes paid on "Project Development Cost" in the amount or PI ,525,000.00 are related to capital goods (Exhibit N).

On the other hand, the Respo11dent's revenue officers opined that both the input taxes on pre-operating expenses and project development cost are not paid on capital goods. They explained this in their memorandum in this manner, thus: "Pre-operating expense. though classified as an asset and amorti zed for an estimated number of years, is not subject to wear or tear or obsolescence. Project development cost which is likewise an asset account will eventually be a part of its inventory since subject taxpayer is engaged in the business of acquiring, holding, selling, leasing, assigning, transferring and managing industrial anc!. r~s id e ntial estates. Inventories or ·stock in trade cannot also be depreciated and therefore cannot be classified as capital goods. Based on these facts, it is clear that the input taxes being claimed are not paid on capital goods as alleged by SG Y. x x x".

(Exhibit 2).

Given the above difTerent views. the Court is now tasked to resolve a corollary issue of what comprises capital goods. Section 2(o) or Revenue Regulations No. 5-87 of the Value-Added Tax Regulations defines capital goods as: ( o) "Capital goods" refer to goods with estimated useful I ife greater than one year and which are treated as depreciable assets under Section 29(1), used directly or indirectl y in the production or sa le of taxable goods or services (U nderlining supplied).

The Court noted from the balance sheets of Petitioner that only the fo llowing property and equipment were subjected to depreciation·. to wit: (Note No. 4. Notes to Balance Sheets. Ex hi bit G, CTA records, p. 84) Leasehold improvements Office equipment Furniture and fi xtures Pl ,960,9 16 976,753 48.066

DECI SION-

Total

Less depreciation and amortization

Book Value

P2.985,735 L2 12, 163 p 1.773.572 Accordingly. only the input taxes paid on leasehold improvements, office equipment, and furniture and fi xtures arc qualified for refund pursuant to the provisions of Section I 06(b) of the Tax Code in relation with Section 2(o) or Revenue Regulations No. 5-·87 uf the Value-Aclded Tax Regulations. The Court l'urther noted that from among the aforementioned depreciable assets, Petitioner is only claiming the refund of input taxes paid on office equipment in the amount of P23,82 1.94 based on the tabulated schedule of input taxes (Exhibits C and D). Out or the aforesaid s um ~ only the amount of P23,306.82 is duly substantiated Cor VAT purpos<;:s,_ to vvit:

Supglier

Ex h.

Input Tax '

Compex Sales Corp.

K-1

Pl 2,281 .82 Compex Sales Corp.

K-5

4.454.55 Com pumecl i cs

M-26

752.73 Compex Sales Corp.

M-27

727.27 Compex Sales Corp.

M-35

5.090.45

Total

P23,306.8?

We do not agree with the Petitioner and the independent CPA that expenses related to project development cost arc in the nature· of capital goods. The project development cost although classified as a capital expenditure is not within the meaning of the term ·'capital goods". The argument of' Petitioner to the effect that roads, electrical posts and perimeter renee are assets not lo r sale hence should be treated as capital goods is bereft of merit. They are not among the aforementioned list of Petitioner's depreciable assets. /\!though the roads, electrical posts and perimeter fence are assets that cannot be sold. they are improvements needed to be completed first before P ~.:: titi o n c r could sell or

DECI SION-

lease its developed lots. Once the development of the land is completed, the costs of these improvements will eventually be realized by the increa:;e in the sell ing price of the lot, rental or lease. The improvements on the industrial park are evidently not subject to depreciation and therefore are not classified as capital goods. It has been consistently held that the cost of improvements of subdivided real estate held for sale are capital expendi tures, allocable on the basis of the various unsold lots to be reali zed by the developer upon his ultimate sale of the property (5 MERTENS Law of Federal Income Taxation, S25.26, p. 178). Road construction expenditures in connection with the development of a subdi vision of rental property are not deductible (5 MERTENS Law of Federal Income Taxation, S25_. 2~, p. ' l78, supra). We find it appropriate to quote a United States tax case entitled Fnmk B. and Pauline Coop<~ •·, vs. Commissioner of Internal Revenue, 31 T.C. 1155, which resolved an issue of whether or not the improvements made by Petitioners on their real estate business arc subject to depreciation expense. The US Tax Court ruled in this wise: "The onl y issue be f"ore the Court is whether or not peti tioners me entitled to a deduction ror depreciation or the various improvements made by them to the Hilltop Addition subdivision. ln the event it should be held that they are entitled to that deduction, the parties have agreed on a basis of $ 19,848. 12, and a useful life of I 0 years fc r the property, and have further agreed to the use of the declining balance method of depreciating it.

Section 167 of the 1954 Internal Revenue Code, provides an allowance for depreciation fo r property "used in the trade or business" or "held for the production of income." See also sec. 1.1 67(a)-l , Income Tax Regs. This allowance is based on the fact that property used by a taxpayer in his trade or business, or held fo r the production of income, gradually approaches a point where its usefulness is exhausted. Thus, through annual depreciation, a taxpayer is allowed to recoup, as an operating expense for a given taxable period, that portion of the cost of the property t \ .J .:- ~ ) .... v

DECI SION-

PAGE lJ estimated to have been consumed in producing the income earned during the period. However, it is well settled that property held for sale does not constitute depreciable property within the meaning of the statute. Nul ex., Inc., 30 T.C. 769 (1958); Camp Wolters Enterprises, Inc., 22 T.C. 737 ( 1954), afT' d. 230 F.2d 555 (C.A., 1956).

The property here sought to be depreciated consists of improvements made to real estate which was subdivided and held by the petitioners for sale.

These improvements included the construction of roads, and the installation of curbs, gutters, waterlines, and storm sewers. Insofar as this record is concerned, there is nothing to indicate that all or any part or these improvements were, during the taxable period under consideration, used by petitioners in their trade or business or held by them for the production of income. In point of l~1 c t , the record establishes that they were held for disposal either as part or each lot sold, or by dedication to public use. Moreover, it has consistently been held that the cost of improvements such as these is a capital expenditure, allocable to the basis of the various unsold lots, to be realized by the developer upon his ultimate sale or the property. Wood v. Commissioner, 245 F. 2d.888 (C.A. 5, 1957), affirming in part T.C. Memo. 1955-301 ; Commissioner v. Laguna Land & W. Co., 118 F. 2d 11 2 (C.A.9, 1941 ); Fairview Co., 13 B.T.A. 743 ( 1928). We are therefore of the opinion that petitioner have not shown the improvements made to the Hilltop Addition constitute depreciable property within the meaning of section 167 of the Code, and, accordingly, we deny the claimed deduction."

WHEREFORE, in view of the foregoing, the Petition fo r Review is hereby PARTIALLY GRANTED. Respondent is ORDERED to REFUND or ISSUE a TAX CREDIT CERTl FICATE in the amount of P23,306.82 in favo r of Petitioner.

I CONCUR:

L\!).a~ ERNESTO D. ACOSTA Presiding .Judge

DECI SION -

CERTIFI CATION

I hereby certify that the above decision was reached arter due consultation with the members of the Court of Tax Appea ls in accordance vvith Section 13, Article VIII of the Constitution.

~U2-0~

ERNESTO D. ACOSTA

Presiding Judge