La Frutera, Inc. vs. And 5937 Commissioner of

D ECISION

Two (2) cases were elevated before this Court by way of Petition for Review seeking for the rcCuncl or for the issuance of a tax credit certilicate in the aggrcgall' amount of P868,598.99 allegedly representing Pditioner's excess or unutili zed erccl it:lhlc VAT inputs, thus:

CTA Case No.

5898 5937

TOTJ\L

Period In volved 2nd Quarter of 1997 y<~ Quarter o f 1997

AMOUNT

/\mount P564,073.¹ 0 304,525.79 In view of the fact that the aforesaid cases in volve the same parties and interrelated facts and issues. the Court, upon motion for leave of Court of herein Petitioner. ordered

CTA CASE NOS. 589S & 5937 the consolidZ~tion of the two (2) cases (sec CTA Resolution, March 27, 2000. CTA docket p. 52).

Thus, the !'acts as adduced !'rom the records or the case arc as follows: Petitioner is a domestic corporation organized and ex isting under the laws or the Republic of the Philippines with principal place of business at Datu Paglas Estate, Barangay Digal, Buluan, Maguindanao, Autonomous Region of Muslim Mindanao (ARMM) (sec Parties Joint Stipulation of Facts, ltcm No. I, CTA dockets p. 32 and 34). It is a VAT registered taxpayer as evidenced by the 131R Certificate of Registration (Ex h. 13), dated April 1, 19<J7. with RDO Control No. 97-107-0021 04V AT (Exhs. l3-1 and B-3). It is at the same time registered with the Board or Investments (1301) with Certificate of Registration No. EP-014-97 issued on Jul y 7. 1997 (Exh. A). Petitioner's I i ne of business is categorized as a Banana Ex porter with Phi I i ppinc S laiJclarcl lnd us try Classification No. 1141 (Ex h. 13-2).

i\s a V i\T registered taxpayer, Petitioner rcgulmly fi le ~ its 1110nthly VAT declarations and quarterly VAT returns.

On July 21. 1997, Petitioner filed its quarterl y VAT return Cor tl1e second c;ilendclr quarter or the year 1997 declaring a VAT input tax of P564.073. 1 0 f'rum its domestic purchases of goods and services but with no output tax li:tbility (Lxh. C). On October 23. 1997. Petitioner filed its quarterl y VAT rclur1: :~ 11 · lll1 . .' third calcnd;t r quarter of the year 1997 (Ex h. C-6) declarin 12- <m i:•J)ttt tax or P304.525.79 generated front its domestic purchases of goods and services and the input tax fl·om the previous qu<trlcr or P564.073. I 0 or a total input tax of P868,598.89 as of September 30. I LJ<n. l'ct itioncr 1o·..., - -A.

! u

DLCISIUN-

CT/\ C/\S I: NOS. 5X<)l) & 5937 [J;\(jl ·: 3 had no output tax, thus, pursua11t to Revenue Audit Memorandum Order (1{;\MO) No. 2-

93. Petitioner filed on .June 29, 199<). with the Tax and Revenue Group or the One-Stop- Shop Inter-Agency T;~ x Credit and Duty Drawback Center of the Department ol· Fin<II1Cc. an application ror lax credit/rerund or its excess creditable VAT input payments f'or the second quarter ended .June 30, 1997 in the amount of' P5o4,073 .1 0. Pursuant to the same RAMO, Petitioner likewise liled on August 19, 19<)9, with the same agency under the Department or Finance. an application l"or tax credit/refund or its excess creditable VAT input payment lor the third quarter ended September 30, 1997 in the amount or 1'304,525.79.

Meanwhile, on September 27. 1999, Petitioner lilcd an amended VAT retum lor the third quarter or 1997 (l :xh. C-4) declaring the total amount or P8G8,59R.89 as the total refundable amount or input VAT from its domestic purchase of goods and the input VAT carried over Crom the previous quarter.

Consequently. Petitioner also amended the quarterl y VAT return lor the 4th quarter or 1997 (Exh. II) to show that the input tax claimed was no longer carried over. This <llnendcd VAT rdum W<IS liled 011 l:ehru<try 23 . 2000.

Up to this date, herein Respondent has not yet approved Petitioner's application. hence. Petitioner filed the instant Petition for Review to toll the runtung of the prescriptive period for claiming a refund .

CTA Case No. 5898 was libl with this Court on June 30, 1999 whi le CTA Case No. SC)J7 was lilcd on September 29, 1999.

DI :CISION -

CT/\ C/\SL NOS. 58lJX & 5937 1'/\CJ I..: 4 For his part. Respondent accordingly lilcd an Answer with Special and ;\ll innati vc DciCnscs nn July 14. 1999 (lor CT;\ Case No. 5:-)n) and October 19. 1999 (fur CT1\ Case No. Sl)J 7).

Aller considering the stipulated issues presented by the parties, this Court deemed it proper to summarize them into nne main pi vo!<d i ~") U C of "WHLTII ER OR NOT

PETITI ONUZ IS

L·:N TITU ~ D TO Tl W Rl ~ FUN D OR TAX CREDIT OF P l:\6X.5<)~LX9

ALLEGE DLY

REPRESENTI NG

PETITIONE R' S

EXC L~SS OR

UNUTIU/TD

CREDITJ\13LE INPUT V i\T i\S OF SE PT LM BL~R 30. 1997. /\ RI SING l:IzOrvl ITS DOMESTIC PURC HJ\ S l ~ S OF GOO DS AN D SERVICES AN D ON Ci\ J>lTJ\L GOO DS IMPORTI,:D OR LOCA LLY J>URCI lASED."

The rcf'und or unutilized or C\Cess creditable input v i\T rrom domestic purchases of capital goods finds legal support in Section I 06(a)(b) or the 1995 National Internal Revenue Code. hereunder quoted as follows:

Section I 06. Rejiuuls or tax credits (~/ creditable i11put tax. - (a) Any VAT-registered person. whose sales ;nc /.cro - r<~ l cd ur cJTcctivcly zero-rated, may, within two (2) years ;1 1'ler the close or the taxable quarter when the sales were made. apply lor the issuance of a ta:-; credit ccrtiticatc or refund or crcJitablc input lax due or paid attri butable to such sales. except transitional input tax. to the extent that such input tax has not been applied against output tax: Pro vided. hmt'el•er, That in the case or ~ee ro - ratcd sales under Section I OO(a)(2)(!\)( i).(i i) <mel (b) and Section I 02(b)( I) and (2). the acceptable foreign currency exchange proceeds thcrco r had been duly accounted ror in accordance with tlte regul ations or the 13angko Scntral ng Pilipin a~; (BSP): J>rovided, j itrlher. That where the taxpayer is engaged in zero-rated or cfTcctivcly zrro-ratcd sale ami also in taxable or exempt sale of goods or properties or services. and the amou11 t or creditable input tax due or paid cannot be directly nnd enti rely ;1ttrihutcd to 10·; --· . ' v

DECI SION -

CT/\ C /\ St: NOS. 5WJX & 5lJ37

1'/\GE 5

any one or the transactions. it shall be allocated proportionately on the basis or the vo lume or sales.

(b) Capital goods. - J\ VAT-registered person may apply ror the issuance or a tax credit certificate or rcCund or input taxes paid on capital goods imported or locally purchased, to the ex tent that such input taxes have not been applied against output taxes. The application may be made only within two (2 ) years aller the close or the taxable quarter when the importation or purchase was made.

Based O il the forego ing provisions or law. Pet itio! ~ r may fi le a claim f"or re runcl o l" its excess creditable input V J\T on its domestic purchase and importation or capital goods ir the following requirements arc sati sfi ed. to wit: I. That the applicant must be a VAT-registered person;

2. That there be domestic purchase or importation or capital goods;

3. That the domestic purchase or importation of capital goods is substantiated by sullicicnt evidence;

4. That the input taxes have not been applied against the output taxes: <1 11d

5. That the application li>r tile rerum! or unutili/.ed or excess crcdit;thk i11put V i\T arising from the domestic purchase and importation or capi tal goods h;ts becl l made within tWO years afk r the close or the taxable quarter in \.Vhich the importation or purchase was made.

There is no doubt with regard to Petitioner's compliance with the fi rst. f(nlrlh ;md lirth requirement. The documentary evidence submitted to this Court vvou ld attest to the l ~tct that Petiti oner is indeed a VAT-registered taxpayer as evidenced by the nm Certificate of Registration dated April I, 1997 and with RDO Control No. 97-107- ~ Cl ·; ·-.

A.

' lJ

DEC ISION-

CTA CA SE NOS. 5S9S & 5937

PAGI: (>

002 I 045 V /\T (sec [xhs. l3. l3- I and l3-3 ). The va ri o u ~ quarterl y VAT ret urns presented by Petitioner likewise shows that the creditable input V /\T generated during the 3"1 and 4 111 quarters of' I 997 have not been applied against its output V ;\T liability !'or the said quarter (sec Exhs. C, C-4, C-6). Neither the same cred itable input V /\T vverc carried forward to the subsequent quarter (4 111 qu8rtcr o f' 1997) nor applied against any output VAT liability therein (Exh. I 1).

As to the question of prescription. records would reveal that both the administrative action as well as the judicial recourse undertaken by Petitioner were made within two years al'tcr the close or the taxable quarter in which l·1c importation or purchase was made. thus:

CTA

Close or the

/\el m in islrat i ve

Judicial

Case No.

Taxable Quarter

liling with 13 1R liling with CTA

Renwrks

5S98

June 30. 1997 June 28, 1999 June 30. 1909 likd on time 5937 September 30. I 997 !\ ugusl 19. I 999 September 29. 19<)<) filed ()ll t i 111 c The table above explicitly shows the timeliness or Petitioner's actio 11 with tl 1c 1~11 \ and with th is Court.

We will now proceed to resolve the crucial issue (in connection with the second requirement. as stated) of whether or not the purchases made by Petiti11ncr co uld be classilicd <IS capital goods based 011 the definition provided under Secti on 4. 1 ()(J- 1 (b) o l· Revenue Regulations No. 7-95. In the said regulation. capital goods or propL'rtics arc referred to as goods and properties with estimated useful li fe or grc<ller tlwn unc ( I ) yc<lr 1! 0 'I ~1 ..i!..

'

I

DLCISION -

CT/\ C/\SE NOS. 5S98 & 5937

P/\GE 7

and which arc treated :1s dcpreci:1blc ~1 sse t s under Section 29( 1'), used direct ly or indirectly in the production or sale of' taxab: c goods and services (emphasis ours). Corolbril y. Section 29( I) ol' thc Tax Code provides:

"(f) Dcpt·cciation. (I) Geneml Rule. - There shall be allowed as a depreciation deduction a reasonable allowance !'or the exhaustion. wear <tml tear (including reasonable allowance for obsolescence) of' property used in the trade or business."

It could be recalled that in the case at bar. Petitioner is claiming for a refund or input taxes it paid on purchases or goods that were used in the cultiv<ltion or the land li:r banana plantation, !or the propag<ttiotl and plantation of the seedlings, and for the maintcnaJJce or the plants and preservation ol' the l'ruits until harvest time (Sec TSN. dated March 6. 2000. pp. 7-1 0). It is the opinion of' the Petitioner that these purchase:-. were in the nature or capital goods.

This Court docs not subscribe to the theory propounded by the Petitioner. Our study leads liS to conclude that the purchases used ror the improvement or the land docs not qualify as capital goods. Contrary to the definition o!' capit;d goods. l;1nd a:-. well as the improvements introduced therein arc not subject to depreciation. This view linds support in the I .awol· Federal lnco111e T;1xation upo11 which the Philippi tiL'S h;tscd its laws on income taxation. thus:

" Because lam! docs not have a limited and determinable lik. it is not subject to depreciation apart from the improvements or physical devclopnlL'nt added to it."

(5 MERTENS Law of Federal Income Taxatio11 S2J ;\ .2lJ. Chap. 23A - page 6 I).

DI£ 1SION-

CT/\ C/\SF NOS. 5R98 & 5937

CTA CASE NOS. 589S & 5937

/\TTY. SISON:

Q.

Now Mr. Witness, in rclatio11 to the operations ol" La Frutcra. can you please describe to thi s Court, in summary. the nature ol" the purchases made in relation to the operations? Just to summari;.e it.

!\.

Just to summarize it, hclorc commercial operations. it is called pre- operating stage.

/\II expenses. not related to capital assets, we considered them as capital goods.

This is because, al l the operations that arc taking place during prc-opcr<lting st<Jge, we could not reach the commercial operation stage.

We could not generate a mother plant that could bear f'ruits and could give us revenue during commercial stage.

What I am sa);ing is. during the commercial stage. we doll .! plant anymore. We don ' t propagate the seed.

We don't maintain its growth. All we have to rely on is the mother plant. Once these mother plants arc harvested. a new generation will suckle or re- grow. In ordinary term, it is called. "child plant''. This is tile one which is going to take the place or the mother plant. Once this is harvested, another new one will come in. It is a continuing cyc le or harvesting once you are in the commercial stage. That is why all related expenses prior to commercial operation arc cmriecl in our Books under diiTerenl (sic) development costs and will be amortized when commercial operation started.

(TSN, elated March 6. 2000. pp. I 1-1 2) Based on the documents submitted. only the purchases or transportati llll equ ipment and onicc equipment can be considered capital goods since they arc subject to depreciation. and We again base our conclusion on the Law ol" l;cdcral lnco1nc Taxatio11, thus:

" Farm property subject to depreciation consists o I" buildings. mach i ncry. equipment (other than short-lived tools) and other physical properties." (5 MERTENS Law of Federal Income Taxation S23A.97. pp. 182-183)

DI T ISION-

CT/\ C/\S F NOS. 5X9S & 593 7

1'/\G I·: 10

The Court had already ruled against. Petitioner with respect lo land illlprnvemcnt i11 a similarl y situated case or Luisita l'ad\. Corporation vs. Commissioner ot' lntental Revenue, CTA Case No. 5754, May 21, 2001, thus:

"We do not agree with the Petitioner and the independent CP ;\ that expenses related to profit development cost arc in the nature or capital gnods. The project development cost although classilied as a capital expenditure is not within the meaning or the term "capital goods''.

The argument of Petitioner to the effect that roads. electrical posts and perimeter f'c ncc arc assets not for sale hence should be treated as capital goods is bereft of merit. They are not among the aforementioned list or Petitioner's depreciable assets. Although the roads, electrical posts and perimeter fence arc assets that cannot be sold. they arc improvements needed to be completed fi rst bclorc Petitioner could sell or lease its developed lots. Once the development or the land is completed. the costs of these improvements will eventuall y be realized by the increase in the selling price of the lot. rental or lease. The improvcme11ts in the industrial park arc evidently not subject to depreciation and therefore arc not classilicd as capital goods."

It is likewise signi!icant to note that we cannot consider the refuml or i1 1put taxes attributabl e to ex port sales pursuant to Section I ()(i (a) o l' the Tax Code. l\ci'ut1ds ol" input taxes under this provision shall be allowed only upo11 presentation ol· documents evidencing the actual exportation or goods in the course of trade ami business b y

~ ~ V J\T-

registered taxpayer. A thorough scrutiny or the VAT returns presented !'or the second and third quarters or taxable year 1997 do nut rcllcct any export sales. True ctw ugh. records would show that Petitioner's business is still in the pre-commercial stage ~tn d has not in any way commenced its export operations. Thercl'orc, under this light. we cannot grant a rel'und of input taxes attributable to ex port sales as there was sin1ply no s <~lc s yet. 108 J..

DEC ISION -

CT/\ CASE NOS. 5898 & 5937

1'/\GE II

[n SUm, onl y the input taxes O il purchases or equipment Ill the amount or P2R 1.978.27 should be refunded to Petitioner. Computed below arc the net cn.xlitablc input VAT or Petitioner for the 2 11d and 3'd quarters of' 1997 which are dul y substantiated by documentary evidence in the Conn or invoices and receipts. thus:

REFERENCE

INVOICE

INPUT

SUPPLIER

EXHIBIT

NO.

AMOUNT

VAT

Dl COMPUTER SYSTEMS, INC.

F-1 1

12042 p 9,500.00 p 863.64 PHILIPPINE MUL TICOR, INC.

F-38

6709 345,000 00 31,363.64

ISUZU MANILA

F-40

11 9 760,000.00 69,090.91

ISUZU MANILA

F-42

122 535,000.00 48,636.36 INTEGRATED ASIA CORP.

F-45/F-46

8810 325,000.00 29,545.45

DAVAO IMPORT DISTRIBUTORS

F- 11 7

137543 16,061.00 1,460.09

PHILIPPINE FUJI XEROX CORP

F- 167

214602 64,900.00 5,900 00 R. AUTOSHPERE

L-300

1994 524.300.00 47.663 64 R. AUTOSHPERE

L-306

1980 522,000.00 47,454.55

Total

p 3,101 ,761 .00 p 281 ,978.27 WIII~ REFORE, in view of' the f'oregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is ORDERED to REFUND or TO I S SUI ~ A

TAX CREDIT CERTIFICATE in

l ~t v or of the Petitioner the reduced amount or P281.978.27 representing the excess/unutilizecl creditable input V /\T for the 2 11

" and J"

1 quarters or 1997.

I CONCUR:

L -~~

l~ RNESTO D. ACOSTA

Presiding Judge

~ ~ ;

' , ;\ Associate J uc ge

DEC ISION-

CTA CA SE NOS. 5898 & 5937

PAGE 12

CERTIFICATION

I hereby eerti fy that the above decision was reached after clue consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article V II I of the Constitution.

1 08 '-~ ~- lO_c~ EJ{NESTO D. ACOSTA

Presiding Judge