Court of Tax Appeals · First Division

First Division Kepco Philippines Corporation vs. The Commissioner of Internal Revenue

CTA Case No. 6679 October 26, 2005

REPUBUC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

FIRST DIVISION

*************

KEPCO PHILIPPINES CORPORATION,

Petitioner,

- versus -

THE COMMISSIONER OF INTERNAL REVENUE,

Respondent.

C.T.A. CASE NO. 6679

Members:

A COST A, Chairperson

BAUTISTA, and

CASANOVA, JJ.

Promulgated:

OCT 2·6 ?IR~

~1}J,h1;&;~

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -~ - - - - - -x

DECISION

ACOSTA, E. fd.:

This is a judicial claim seeking the refund of alleged input value-added tax incurred for the calendar year 2001 , from petitioner's sale of electricity to the National Power Corporation in the amount of P5,670,275.63. Petitioner likewise prays that respondent be ordered to pay attorney's fees in the amount of at least P500,000.00 and the cost of suit. Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal place of business located at Suite 2501-A, 25th Floor, Tektite Tower I, Exchange Road, Ortigas Centre, City of Pasig. It is a value-added tax (VAT) registered taxpayer engaged in the

DECISION

C.T.A. CASE NO . 6679

Poge2

production and sale of electricity as an independent power producer and sells electricity to the National Power Corporation [NPC]. Petitioner. on December 22. 2000. filed with the respondent its Application for Effective Zero-Rating for its sale of electricity to the NPC for the year 2001. This application was duly approved by the respondent. For the calendar year 2001 . petitioner was a duly registered Value-Added Tax IV AT) taxpayer under the jurisdiction of Revenue District Office !RDO) No. 43 of Pasig City.

During the four (4) quarters of 2001. petitioner allegedly incurred expenses representing domestic purchases of goods and services. for which it incurred an input VAT in the amount of P5.670,275.63. The aforementioned expenses allegedly represent costs attributable to its production and sale of electricity to the NPC. Thus, petitioner filed with the respondent. thru its RDO No. 43, claims for refund of excess input VAT incurred for the four !4) quarters of calendar year 2001 in the total amount of P5.670.275.63 on October 1, 2001, for the first two quarters and on June 24. 2002, for the third and fourth quarters. Due to respondent's inaction on its claims and to toll the running of the prescriptive period, the instant Petition for Review was filed on April 22. 2003. In his Answer filed on June 24. 2003. respondent raised the following Special

and Affirmative Defenses:

"6. The claim for refund is still under examination by the respondent's Bureau;

The burden of proof is upon the petitioner to prove that it is entitled to the claim for refund; 8.

The grant of a claim for refund tanamounts [sic] to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority; 9.

The taxes sought to be refunded were paid in accordance with the law: the burden of proof to the contrary is upon the petitioner-

Poge3

claimant to show with clear and unambiguous provision of law supporting the same." 1 The parties stipulated the following issues for resolution of the Court: " 1, Whether or not the sale of electricity by a VAT-registered entity, as the Petitioner, to the National Power Corporation (NPC), qualifies as a sale of services subject to a VAT rate of zero percent (0%) or otherwise called a zero-rated VAT transaction.

2. Whether Petitioner, as a VAT-registered entity and during the calendar (taxable) year 2001, actually incurred expenses representing domestic purchases of goods and services and which expenses represent costs attributable to Petitioner's production and sale of electricity to the NPC.

3. Whether or not Petitioner is entitled to the refund of the total amount of P5,670.275.63, representing the input VAT incurred for the four (4) taxable quarters of the calendar(taxable) year 2001 from its sale of electricity to the NPC." 2 The issues being interrelated and all relate to whether or not petitioner, based on the evidence presented. is entitled to the refund of the amount of P5,670,275.63 allegedly representing unutilized input VAT on domestic purchases of goods and services which are directly attributable to effectively zero-rated sales for the taxable year 2001, shall be discussed jointly. Petitioner is a VAT-registered entity with Certificate of Registration No. OCN 3RC0000154314 dated January 1, 1997.3 As a VAT- registered entity, petitioner filed its Quarterly VAT Returns for the four quarters of taxable year 2001 declaring, among others, the following information:

QUARTER

INVOLVED

EXHIBIT

1st Qtr.

s~ 200 Qtr.

C

3rd Qtr.

D

4th Qtr.

ES

Totals

1 Records, pages 50-51

DATE

FILED

5/30/01 7/25/01 10/25/01 2/20/02 1 Joint Stipulation of Issues, Records, page 90

3 Exhibit A

4 Amended :fl Quarterly VAT Return

5 Amended 4" Quarterly VAT Return

...

ZERO-RATED

SALES

p 647.453, 136.79 846,401.571.38 827,316,739.27 l.JQ9.819,954.72 P..J..4.~~21.AO~.J~

INPUT

TAXES

p 682,991.08 1 ,406,628.80 1 ' 135,229.24 2.445.426.51 e,5,,,67,Q.2Z~QJ

Believing that it is entitled to the refund of input VAT attributable to the above-declared zero-rated sales of electricity to NPC. petitioner filed four separate applications for refund of input VAT with the respondent on two occasions. The first two applications6 were made on October 1, 2001 , for input VAT paid for the first and second quarters of taxable year 2001 in the sum of P2.089,619.88 (P682,99l.08 + P 1 .406.628.80). The second two applications were made on June 24, 2002 for input VAT paid for the third and fourth quarters of 200F in the total amount of P3.580,655.75 (Pl , 135.229.24 + P2.445.426.51 ). Petitioner's claim for refund is anchored on Section 108(8)(3) of the National Internal Revenue Code of 1997. The issue of whether the sale of electricity to the National Power Corporation (NPC) qualifies as a sale of services subject to VAT at zero-percent rate (0%) has already been resolved by this Court in favor of the independent power producer, such as petitioner. in a number of cases. The recent decisions regarding the matter are Mirant Pagbilao Corporation [Formerly Southern Energy Quezon, Inc.], vs. Commissioner of Internal Revenue, CTA Case No. 6417, August 31 , 2005 and Kepco Philippines Corporation vs. Commissioner of Internal Revenue, CTA Case No. 6287, August 31. 2005.

The governing law is Section 108(8)(3) of the National Internal Revenue Code in relation to Section 13 of Republic Act No. 6395 {The Revised NPC Charter), as amended by Presidential Decree Nos. 380 and 938. To quote: "SEC. 108. Value-added Tax on Sole of Services and Use or Lease of Properties. -- " (A) Ra te and base of tax.- xxx "(B) Transactions Subject to Zero Percent (0%) Rate_ - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:

6 Exhibits G & H

substantiate its claim by compliance with the requisites laid down by law and its implementing rules and regulations: ( 1) Section 112(B) of the 1997 Nationallntemal Revenue Code which provides:

SEC. 112. Refunds or Tax Credits of Input Tax. - (A) Zero-rated or Effectively Zero-rated Sales. -

Any VAT-registered

person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the soles were mode, apply for the issuance of a tax credit certificate or refund ot creditable input tax due or paid attributable to such soles. except transitional input tax. to the extent thai such input tax has not been applied against output tax: Provided. however. That in the case of zero- rated sales under Section I 06(A)(2)(a)( 1). (2) and (B) and Section I 08 (B)(l) and (2). the acceptable foreign currency exchange proceeds !hereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided. turther, 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.

(2) Sections 4.1 06-1 of Revenue Regulations No. 7-9 5 which states: "SEC. 4.106-1. Refunds or tax credits of Input tax. -

(a) Zero-rates sales of goods and properties or services - Only a VAT-registered person may be given a tax credit certificate or refund of VAT paid corresponding to the zero-rated sales of goods, properties or services. excluding the presumptive input tax and to the extent that such input tax has not been applied against the output tax. The application should be made within the two (2) years after the close of the taxable quarter when the sales were made.

XXX

(3) Section 4.104-5 of Revenue Regulations No. 7-95 quoted hereunder. "SEC. 4.104-5. Substantiation of claims for Input tax credit.- (a) Input taxes shall be allowed only if the domestic purchase of goods, properties or services is made in the course of trade or business. The input tax should be supported by an invoice or receipt showing the information as required under Section 1 08(a) and 238 of the Code 'XXX'. In the case of Mirant Pagbi/oo Corporation [Formerly Southern Energy Quezon, Inc.] vs. Commissioner of Infernal Revenue. CTA Case No. 6417, August 31, 2005. this Court had the opportunity to again enumerate the requirements in order ····---··--·· --·--··-------------- ------ -

8 Kepco Philippines Corporation ~- Commissioner of Internal Revenue, CTA case No. 6287, August 31, 2005

to be entitled to the refund of input VAT on purchases of goods and services attributable to zero-rated sales:

1. Both the administrative and judicial claims for refund were filed within the two year prescriptive period;

2. The claimed input VAT payments are directly attributable to zero-rated sales;

3. The claimed input VAT payments are duly supported by VAT invoices or official receipts and;

4. The claimed input VAT payments were not applied against any output tax carried over to the succeeding month (s). Were the administrative and judicial claims for refund filed within the two- year prescriptive period?

For purposes of computing the two-year prescriptive period. the counting should be reckoned from the date of the filing of the corresponding original quarterly VAT return."

The instant claim covers the four quarters of taxable year 2001. For the first quarter. petitioner merely presented its Amended Quarterly VAT Return. Without the presentation of the VAT return originally filed by petitioner for the said quarter. the Court cannot ascertain whether petitioner's claim for the 1 '1 quarter in the amount of P682.99 1.08 was timely filed. Hence. the Court deems it proper to disallow the amount of P682.99 1.08 from the total claim of P5.670.275.63. Anent the claims for the second and third quarters. records reveal that the corresponding original VAT returns were filed on July 25. 2001 and October 25. 2001. respectively. Counting from these dates. petitioner had until July 25. 2003 and October 27. 200310 within which to file its claim for the said quarters both in the administrative and judicial levels. Since the administrative claim for refund was flied on October 1. 2001 for the 2nd quarter and June 24. 2002 for the 3rc1 quarter and the 9 Mirant Pagbllao Corporation [Formerly Southern Energy Quezon, Inc.] vs. Commissioner of Internal Revenue, supra 10 October 25, 2003 being a Saturday

Petition for Review on April 22, 2003. the claims for refund for the 2nd and 3'd quarters in the respective amounts of P 1,406.628.80 and P 1,135.229.24 fall within the two-year prescriptive period.

Regarding the claim for the 41h quarter in the amount of P2.445,426.51 , petitioner presented its amended VAT return filed on February 20, 2002. Unlike the claim for the first quarter, the submission of the original VAT return is no longer necessary because even if petitioner filed its 4 t t1 quarterly VAT return earlier than the supposed date of filing. which is January 25. 2002. the same falls within the two-year period.

Based on the foregoing, petitioner partially complied with the first requirement.

Were

the claimed input

VAT

payments directly attributable to zero-rated sales?

As to the second requisite, petitioner presented in evidence the Rehabilitation. Operation. Maintenance and Management Agreement between the National Power Corporation and Korea Electric Power Corporation and the Accession Undertaking of petitioner11• Petitioner likewise presented the various official receipts it issued to the National Power Corporation as follows:

ExhlbH

Date Issued

0 3/7/2001 0-1 4/6/2001 0 -2 6/5/2001 0-3 5/4/2001 0-4 7/4/2001 0-5 8/7/2001 0-6 9/6/2001 0 -7 10/8/2001 0-8 11/7/2001 0-9 12/5/200 1

Total

11 Exhibits K & K-1

Amount

p 74.805.719.27 74.809.416.27 74,783.865.75 67.339.449.22 72.324.894.68 7 4.432.437.91 72.253.521 .24 74.713.164.44 73.9 18.480.44 71 .483.260.05 • f730 864 209.27

Poge 9

* Two official receipts (Exhibits 0-10 & 0-11) are denied for dates were in 2002.

In its Quarterly VAT Returns. petitioner declared zero-rated sales in the aggregate amount of P3.430.991 .402.16, broken down as follows: 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Total

p 647.453,136.79 846.401,571.38 827,316.739.27 1 '109,819,954.72 f3.430,191A02.1lt From the foregoing, it can easily be seen that petitioner failed to substantiate all its declared zero-rated sales. Hence, the Court is constrained to allocate the input taxes against the substantiated zero-rated sales. Petitioner's total claim for refund of P5,670,275.63 input VAT is attributable to zero-rated sales in the amount of P3.430,991.402.16.

However. since petitioner was able to substantiate zero-rated sales in the aggregate amount of P730.864.209.27 then only an aliquot portion of the total input VAT thereto may be subject of a refund pursuant to Section 1 I 2 of the 1997 National Internal Revenue Code and Section 12 of Revenue Regulations No. 5-

87. computed as follows:

Substantiated Zero-rated Sales

Divided by Total Declared Zero-rated Sales

Ratio of Substantiated Sales to Total Declared Sales

p 730.864,209.27 P3.430,991 .402.16 21.% Therefore. only 21% of the allowable input VAT may be a proper subject of a claim for refund.

Were

the claimed input

VAT

payments duly supported by VAT invoices or official receipts? Based on the findings of the commissioned independent CPA 12, the following amounts should be disallowed:

12 Exhibit p

Annex

Amount of Input VAT claimed • Invoices and/or statements of account and/or official receipts subject to overseas

A

communication tax

B

• Input VAT recognized for unpaid service Invoices and/or statements of accounts

C

• Erroneous amounts indicated in the Schedule of Input VAT as compared to related invoices or statements of account or official receipts resulting to net overstatement of the

Input VAT Claim

D

• Erroneous rate used for input VAT recognized and recorded in the books

E

Total

P5.670.275.64 (1 04.987.50) (58.559.23) (10.431.28) 817.36 P5.497.114.99 Ukewise. after careful scrutiny, the Court also notes that the following input VAT payments in the sum of P199,993.55 were not duly supported by valid VAT invoices or official receipts in accordance with Section 4. 104-5 of Revenue Regulations No. 7-95 in relation to Sections 113 and 237 of the NIRC of 1997, to wit:

Reference

Tax

Input

Exhibit

Supplier

Number

Base

VAT

(a) Purchase of goods/services not In the name of KEPCO

P-18-F

Photoline Entrp

OR 9884

p 105.50 p 10.55

P-18-N

Allied Seal Auto Supply

Sl252728

3,627.27 362.73

P-19-00

NE Measures

OR 187

1.272.70 127.27

P-19-P

Tanay Hardware & Const.

Sl8196

690.91 69.09

P-19-PP

Hi-Octane Motorist Center

OR 38820

398.20 39.82

P-19-QQ

Hi-Octane Motorist Center

OR 01918

300.00 30.00

P-20-AA

Ruvyrich Trading

Sl 7704

68.18 6.82

P-20-C

MFTrading

Sl12158

127.60 12.76

P-20-Z

Ruvyrich Trading

Sl6602

540.91 54.09

P-21-B

Allied Seal Auto Supply

51258031 1.818.18 181.82

P-21-C

Black Sea Marine Services

Sl 646

1.318.18 131.82

P-23-K

Christine Auto Supply

Sl 18315

581.80 58.18

P-24-B

Data Hardware

5109890 136.36 13.64

P-26-S

Pililla Shell Rling Station

Sl 123686

528.00 52.80

P-26-T

Pililla Shell Filing Station

Sl 123839

539.00 53.90

P-26-U

Pililla Shell Filing Station

Sl 124254

550.00 55.00 P-28-ll

Maya Parts Enterprises

$1280324 1,927.30 192.73

P-28-S

Robinson's

81.59 8.16

P-29-1

Pililla Shell Filing Station

Sl 125489

454.50 45.45

DECISION

CLA, CASE NO. 6679 Page I!

(b)

P-29-J

P-30-K

P-32-AA

P.32-CC P.32-EE

P-33-CCC

P-34-A

P-35-AA

P-35-S

P-35-T

P-35-X

P.35-Y

P-35-2

P-38-FFF

P-38-GGG

P-36-HHH

P.38-HH

P-38-WW

P-38-XX

P-38-Z

P-40-A

P-41-O

P-4)-P

P-41-Q

P-41-R

P-42-C

P-42-G

P-42-QQ

P-43-HH

P-43-NN

P-43-O0

Pilla Shell Filing Station

Milwaukee Builders Center

CG&E Shell Service

Shell Station

Cityfill Service Station

Allied Seat Auvio

Hi-Ociane Motorist Center

MIA Caltex

Alabang Gas & Service

Gashouse Mdsg

Harvard Service Center

MS Petron Service Station

Gashouse Mdsg

Harvard Service Center

Edsa/Boni Serv Ctr

Caltex South Serv Rd

Allied Seat Auto

F. Fernando Auto Supply

NE Manzures Aircon

Powerway Mkig

Bulawan Floating Restaurant

Caltex Service Station

Gashouse Mdsg

Photo Shoppe & Gen Mdse

Quisao Hardware

Subtotal

$I 125578

SE1113

S| 32053

Si 4516/7179

SEI71616

St 268762

SI 34649

St 221784

$1 126540

S} 101467

S! 80551

Si 58613]

St 293345

Si. 176027 S1.191100

Si 56678

Si 102067

OR 572916

OR 602281

St 549503

Si 272409

S$! 200742 $2145

SE1910

SI 1909

OR 1734

S$! 232803 3 126666 51 68293

SE16417

S}15783

454.50 54.09 545.40 1,272.80 181.80 972.80 454.50 454.50 181.80 272.70 636.40 454.50 636.40 636.40 454.55 454.55 454.55 90.90 454.50 309.10 1,054.56 90.90 272.70 90.90 3,318.30 672.70 636.40 454,50 209.10 909.10 69.10 P_32,271.1 Purchase of goods/services supported only by statement of account or billing statement

P-18-B

P-18-MM

P-18-5

P.20-A

P-20-L

P-21-BB

P-21-G

P-2}-K

P-23-D

P-23-1

P-23-V

P-24-D

P-25-8

P-26-Y

P-27-A

P-28-V

P-29-F

P-29-Y

P-3}-H

Giobe Telecom

PLDT

Globe Telecom

PLOT

Globe Telecom

Fairways & Bluewater Resort

PLDT

PLOT

Globe Telecom

PLDT

Globe Telecom

PLDT

Globe Telecom

PLDT

Globe Telecom

Various

1900396537

Various

P 25,911.10 30,452.30 5,181.60 5,181.80 4,701.90 6,317.70 35,852.90 24,867.30 109,090.90 3,359.90 19,005.20 6,802.20 5,449.20 7,427.80 5,358.40 26,530.70 8,727 40 5,592.00 19,996.40 P 2,591.1) 3,045.23 516.16 518.18 A/0.19 631.7?

3,585.29 2,486.93 10,909.09 335,99 1,900.52 680,22 544.92 742,78 535.84 2,653.07 872.74 559.20 1,999.64

Poge 12

P-31 -II

PLOT

P-43-J

MAPFRE Asian Insurance

SA 6750017

1~.7aZ.~Q J .~Z§.Z5

Subtotal

p 818,711.10 PB1 .871. 11 {c) Purchase of goods/services supported by NONVAT invoice, TAN official receipt

P-31-·PP

Caltex North Point

Sl 036571

p 450.50 p 45.45

P-26--LL

Fifipinas Fabricators & Sales

OR985

120.788.20 12,078.82

Subtotal

p 121.242.70 p 12,124.27

Total

p 2Z2 224.~2 P ~z 222.4~ Out of the total claimed input VAT payments of P5,670,275.63, only the amount of P4. 716.901.41 are fully substantiated for VAT purposes. computed as follows:

Total Claim for Refund

Less: Disallowances

(a) Per commissioned independent CPA's verification Pl73, 160.65

(b) Per Court's further verification

i. Without Original Quarterly

VAT Return

P682,991.08 fi. Invalid documents for VAT purposes -'!Z.222...49 780.213.57

Validly Supported Input VAT

Were

the claimed input

VAT

payments unapplied against any output tax carried over to the succeeding month{s}?

P5,670,275.63 953,374.22 ~~Z16 701.41

Poge 13

Petitioner deducted from the total available input VAT the claim for refund for the first and second quarters of taxable year 2001 in the sum of P2,089 ,6 19.88 as shown in its second Quarterly Value-Added Tax Return for taxable year 2002.13 likewise, the claim for refund for the third and fourth quarters of taxable year 2001 in the total amount of P3,580,655.75 was deducted from the total available input VAT as shown in petitioner's 3rd Quarterly VAT Return for taxable year 2002.14 Thus, petitioner was able to fully establish that the input taxes remained unapplied against any output tax.

In fine, the Court finds petitioner to have sufficiently proven its claim in the amount of P990,549.30, computed as follows:

Validly Supported Input VAT

Multiply by Ratio of Substantiated

Sales to Total Declared Sales

Refundable Amount

P4,716,90l.41 With regard to petitioner's claim for attorney's fees and cost of suit the same cannot be granted. Although as a general rule the prevailing party as a matter of course shall be allowed to recover costs, Section I of Rule 142 of the Revised Rules of Court, provides that no cost shall be adjudged against the Republic of the Philippines unless otherwise provided for by law. The Court hereby finds that there is no basis in law for the claim of attorney's fees and costs prayed for by petitioner.

WHEREFORE, petitioner's claim for refund is PARTIAllY GRANTED. Respondent is hereby ORDERED to REFUND the petitioner the reduced amount of ?990,549.30 representing unutilized input value-added tax for taxable year 2001 .

SO ORDERED.

13 Exhibit L

H ExhibitM

Q.z-"'-~ ERNESTO D. ACOSTA

Presiding Justice

/' { l

WE CONCUR:

ssociate Justice CAESAR A. CASANOVA

Associate Justice

CERTIFICATION

I hereby certify that the above decision was reached after due consultation with the members of the Division of the Court of Tax Appeals in accordance with Section 13. Article VIII of the Constitution.

LL- ~ ~ ~

ERNESTO D. ACOSTA Chairperson, First Division