Kepco Ilijan vs. Commissioner of Internal Revenue

DECISION

BAUTISTA, J.:

The instant Petition for Review seeks the refund or issuance of tax credit certificate in the amount of P119,696,268.89, representing the input value-added tax (VAT) allegedly incurred by petition ~r for calendar year 2003 from its importations and domestic purchases of goods/equipment and services for the sale of electricity to the National Power Corporation (NPC).

Kepco Ilijan Corporation (Petitioner) is a qomestic corporation duly organized and existing under by virtue of the laws of the Republic of the Philippines, with registered .

address at 2501 Tektite Tower I Exchange Road, Ortigas Center San Antonio, Pasig City. 1 Petitioner is likewise a VAT-registered taxpayer engaged in the production and sale of

(age 2 n f 12 electricity (as an independent power producer) solely to the NPC as its only customer by virtue of an Energy Conversion Agreement dated December 14, 2000.2 On the other hand, respondent is the duly ·appointed Commissioner of the Bureau of Internal Revenue (BIR), vested under the appropriate laws with the authority to carry out all the functions, duties and responsibilities of the said office, including, inter alia, the power to decide, approve, and grant refunds and tax credits of erroneously paid or illegally collected internal revenue taxes. He holds office at 5th Floor, BIR National Office Building, Agham Road, Quezon City.

On December 17, 2002, petitioner filed an Application for VAT Zero-rate with

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' ' • respondent for its sales of electricity to NPC from January 2, 2003 to D-ecember 31, 2003, which was subsequently approved.3 In the course of its operation, petitioner made domestic purchases of goods and services and accumulated therefrom creditable input taxes. Thus, for the four quarters of calendar year 2003, petitioner filed its VAT Returns showing that it incurred input VAT from ' its expenses on purchases of goods and services in the aggregate amount of P119,696,267.89, detailed as follows:

Exhibit

Year 2003

Input VAT

8 1st quarter p 41 504 900.22 c 2nd quarter 10 193 824.93

D

3'd \.juarter " 30 109 298.76

E

4th quarter 37 888 243.98

Total

P119,696,267.89 On March 7, 2005, petitioner fil!=d with respondent an administrative claim for refund of the input VAT incurred from its importations and domestic purchases of goods and services from its actual production and sale of electricity to the NPC for calendar year 2003, 2 Par. 2, Facts Admitted, Joint Stipulation of Facts, Docket, p. 48

3 Exhibit "F"

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. Page 3· c..f 12 which remains unacted up to this date. 4 Hence, this Petition for Review filed on April 25, 2005.

In his Answer filed on June 14, 2005, respondent interposed the following Special

and Affirmative Defenses:

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

7. 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 tantamount to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing autt"writy;

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9. The taxes sought to be refunded were paid in accordance with law; the burden of proof to the contrary is upon the petitioner-claimant to show with clear and unambiguous provision of law supporting the same." After trial on the merits, this case was submitted for decision on January 16, 2008, taking into consideration petitioner's Memorandum filed on December 12, 2007, sans respondent's Memorandum. The parties submitted the following issues5 for this Court's resolution: "1.

Whether the sale of electricity by a VAT-registered entity, as in the case of 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 cale[ldar (taxable) year 2003, actually incurred expenses representing importation and domestic purchases of capital goods and services and which represents cost attributable to Petitioner's production and sale of electricity to the NPC. 3.

Whether Petitioner is entitled to the refund of the amount of P119,696,268.89 representing the input VAT incurred for the four (4) taxable quarters of the calendar (taxable) year 2003 from its sale of electricity solely to the NPC.

4 Exhibit "G"

5 Joint Stipulation of Facts, Docket, pp. 49-50 ' DECISION

PagP. 4 of 12 4.

Whether the Petitioner's claim for refund is substantiated by documentary evidence."

··- These issues boil down into one major issue: "Whether or not petitioner is entitled to a refund or issuance of tax credit certificate in the amount of P119,696,268.89, representing unutilized input VAT incurred from its importations and domestic purchases of goods and services attributable to zero-rated sales for calendar year 2003." Section 112(A) of the National Internal Revenue Code (NIRC) of 1997 lays down the requisites for refund or issuance of a tax credit certificpte of input tax due or paid attributable to zero-rated or effectively zero-rated sales, which reads as follows: "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-rclted 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. xxx" From the foregoing, in order to be entitled to a refund or tax credit of input tax due or paid attributable to zero-rated or effectively zero-rated sales, petitioner must comply with the following requisites:

1. there must be zero-rated or effectively zero-rated sales;

2. that input taxes were incurred or paid;

3. that such input taxes are attributable to zero-rated sales or effectively zero-rated sales;

4. that the input taxes were not applied against any output VAT liability; and

5. that the claim for refund was filed within the two-year prescriptive period. Petitioner entered into an Agreement6 with the National Power Corporation (NPC) which provides, among others, that petitioner shall sell electricity only to NPC on a turn-key basis.

Section 13 of Republic Act No. 6395 (The Revised NPC Charter), as amended by

6 Exhibit "H"

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DECTSION

Presidential Decree Nos. 380 and 938, exempts NPC from the payment of all forms of taxes, whether direct or indirect (including VAT), duties and fees. 'further, petitioner's Application for VAT Zero-rate filed on December 17, 2002 was duly approved by the BIR. 7 Therefore, ' petitioner's sale of electricity to NPC qualifies as a VAT zero-rated transaction, pursuant to Section 108(6)(3) of the NIRC of 1997. In its VAT Returns for tt1e four quarters of calendar year 2003, petitioner declared the following zero-rated sales/receipts:

Zero-rated

Exhibit

Year2003

Sales/Receipts

B.

1 ~~ qtr p 1:.5136; 732,403.97 c 2nd qtr 1 ,670,193,585.24

D

3rd qtr 1,648,757,708.93

E

4th qtr 1,798,345,049.53

TOTAL

p 6, 704,028,7 47.67 Verification showed that the afore-stated zero-rated sales/receipts were actually derived from petitioner's sale of electricity to NPC as evidenced by the official receipts issued by petitioner to NPC for calendar year 2003. 8 It was established that while the total amount of zero-rated sales declared in the Quarterly VAT Returns is higher when compared with the total amount of zero-rated sales reflected in the official receipts g I SUCh discrepancy was brought about by petitioner's adoption of the "accrual method" instead of the "cash method" of accounting in recognizing its income for VAT purposes. Since no other sales were reported in its Quarterly VAT Returns, all of petitioner's purchases are attributable to its zero-rated sales and the input VAT arising from said purchases are eligible for refund.

7 Exhibit " F"

8 Exhibits ''J'' to "J-23"

9 Exhibit "YY"

' ~ ;{ \.

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UECISION

Petitioner submitted invoices, official receipts, import entry documents and summary lists10 in support of its input VAT claim for the fo·ur quarters- of calendar year 2003 in the ' amount of P119,696,267.89, broken down as follows:

Exhibit

2003

Input VAT

B

1st quarter p 41 ,504 ,900.22 c 2nd quarter 10,193,824.93

D

3rd quarter 30,109,298.76

E

4th quarter 37,888,243.98

TOTAL

p 119,696,267.89 In his Report dated November 8, 2006, the Court-commissioned Independent CPA recommended the reduction of petitioner's claim from P119,696,268.88 to P108,042,023.49 or a•total disallowance of P11,654,24S.J9 detaHe'd a4 ·foll~ws: ~. 1

Findinqs

Reference

Amount

Erroneous amounts indicated in the schedule of input · VAT as compared to sales invoices or official receipts resulting in net overstatement of the input VAT claim

Annex B

p 10057.08 Input VAT recognized and recorded in the books related to non-VAT suppliers

Annex C

10,317.36 Input VAT recognized but not supported by official receipts and/or sales invoices

Annex D

9 930 166.20 Input VAT recognized and supported by sales invoices/official receipts but not within the period claimed

Annex E

182 558.33 Input VAT recognized and supported by official receipts but TIN was rubber stamped only

Annex F

206 587.41 Input VAT on purchases which are not subjected to

VAT

Annex G

30,426.80 Transactions without supporting documents .Annex H 673 675.72 VAT on importations without import-export internal revenue declaration form

Annex I

373 461.00 VAT on importations with erroneous recording of VAT on GL as against the import-export internal revenue declaration form

Annex J

(20 713.00) VAT on domestic purchases which are supported by photocopied documents

Annex K

11 525.50 VAT on importation with photocopied Import Export

Internal Revenue Declaration Form

Annex L

246 183.00

TOTAL

p 11 654,245.39 12

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The Court agrees with the findings of the Independent CPA except for the amounts of P10,057.08 and P20,713.00 detailed under Annexes "B" and "J" of Exhibit "M". 10 Exhibits "N" to "MM", including sub-markings u Exhibit "M", pp. 2 and 3 12 Should be Pll,654,245.40

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12.

In arriving at the disallowance of Pl0,057.08, the Independent CPA deducted the understatement of petitioner's input ;VAT claim in the amount of P874.73 from the overstatement of petitioner's input VAT claim in the amount of P10,931.81. Inasmuch as the bases of the Petition are the VAT Returns as filed, the understatement of P874.73 should not be offset against the overstatement of P10,931.81. Thus, the amount of disallowance should be P10,931.81 instead of P10,057.08. The same holds true with the amount of P20,713.00. Since this figure represents the amount of excess input VAT as reflected in the Import-Export Internal Revenue .

.

Declaration over the input, VAT declared per' VAT:' Returns, the same should not be deducted ·,, from the other disallowances found by the Independent CPA. Therefore, the exceptions found by the Court-commissioned Independent CPA should .

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be adJusted from P11,654,245.40 to P11,675,833.13, as computed below: Input VAT disallowed by the independent CPA p 11, 654,245.40

Add:

Adjustments

a.) Overstatement of input VAT claim P10,931.81

Less: Disallowance by the ICPA

10,794.54 874.73 b.) Understatement of input VAT claim on importations 20 713.00 Input VAT disallowed by the independent CPA, as adjusted Plll6751833.13 Moreover, evidence on record shows that petitioner's claim should be further reduced by P6,786,500.07, broken down as follows:

Invoice/OR

Ex h.

Date

Supplier

Inout VAT

1. Purchase of goods supported by invoices with TIN-Vonly .

Q-8

2/28/2003 Quiet Stream Waters & Trade, Inc. p 2,727 .27

Q-71

3/31/2003 Quiet Stream Waters & Trade, Inc. 2,727.27

R-36

4/ 30/2003 Quiet Stream Waters & Trade, Inc. 2,727.27

S-86

2/14/2003 General Electric Phils., Inc. 39,893.14

T-110

6/30/ 2003 Quiet Stream Waters & Trade, Inc. 2,727.27

T-114

6/30/2003 Quiet Stream Waters & Trade, Inc. 2,727.27

T-118 to 121

various

Citimart Shop-On

827 .05

U-29

7/7/2003

Citimart Shop-On

368.18

U-92

7/31/2003 Quiet Stream Waters & Trade, Inc. 3,668.18

V-105

9/19/2003

Citimart Shop-On

9,632. 18

W-25

9/30/2003 Quiet Stream Waters & Trade, Inc. 2,636.36

X-59

10/31/2003 Quiet Stream Waters & Trade, Inc. 3,159.09 13 ·

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page !l of 12

X-125 to 128

X-142

Y-39

·various 11/11/2003 8/14/2003 '~ ., Jacos Industrial Corp.

Citimart Shop-On

Citimart Shop-On

·-

Y-42

11/30/2003 Quiet Stream Waters & Trade, Inc.

Subtotal

2. Purchase of goods supported by invoices that are not duly registered

with the BIR

N-194

V-39

X-9

1/7/2003 9/3/2003 9/29/2003 Trigon Management & Industrial Corp.

Up-Town Industrial Sales

Oracle Philippines, Inc.

Subtotal

3. Purchase of services supported by DRs w1th nN- V only

N-29

1/6/2003

Typo Grafika

N-60

1/10/2003 Premier Chemicals Enterpris~s

N-62

1/10/2003 Premier Chemicals Enterpr!ses

N-64

1/10/2003

Typo Grafika

N-85

1/20/2003

Balisong Intelligence & Security Services

0 -7 2/4/2003

Balisong Intelligence & Security Services

0-69 2/14/2003

I & E Industrial System Services

0-104 2/20/2003

Balisong Intelligence & Security Services

P-46

3/21/2003

Balisong Intelligence & Security Services

P-61

3/24/2003

Typo Grafika

Q-73

4/29/2003

Balisong Intelligence & Security Services

Q-7S

4/29/2003 ACE-COR Medical Services, Inc.

R-21

5/9/2003

Typo Grafika

R-23

5/13/2003

Typo Grafika

R-37

5/15/2003

Typo Grafika

R-80

5/29/2003 Typo Graf1ka

S-7

6/2/2003 Balisong Intelligence & Security .Services

S-12

6/24/2003

I & E Industrial System Services

T-32

7/8/2003

Balisong Intelligence & Security Services

T-89

7/25/2003

I & E Industrial System Services

T-99

7/25/2003

I & E Industrial System Service~

T-100

7/25/2003

Lajmar Management & Technology

U-34

8/7/2003

Balisong Intelligence & Security Services

V-73

9/12/2003

Balisong Intelligence & Security Services

V-76

9/12/2003

I & E Indu'strial System Services

V-87

9/16/2003

Typo Grafika

V-161

9/26/2003

I & E Industrial System Services

W-32

10/10/2003 . GAD Builders & Enterprises

W-43

10/14/2003

Balisong Intelligence & Security Services

W-117

10/24/2003

Typo Grafika

W-129

10/30/2003

Typo Grafika

X-46

11/11/2003

Typo Grafika

X-55

11/14/2003

Balisong Intelligence & Security Services

X-117

11/21/2003

I & E Industrial System Services

Y-4

12/2/2003

Balisong Intelligence & Security Services

Y-24

12/5/2003

Joel Chavez Equipment Rentals

Subtotal

14 1,260.46 768.61 462.73 2,500.00 p 78,812.33 p 25,725.68 120,362.12 7,090.25 p 153 178.05 p 95.45 86,363.64 4,344.87 63.64 -- 69,199.57 68,265.74 12,954.55 68,265.74 68,265.74 381.82 68,265.74 18,454.55 227.27 215.91 2,512.91 254.55 68,265.74 5,909.09 68,265.74 6,850.00 4,674.55 10,000.00 68,265.74 68,265.74 3,531.30 354.55 15,909.09 12,350.37 68,265.74 63.64 263.64 127.27 70,919.69 63,636.36 74,458.29 140,812.00 p 1 219,320.23

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4. Purchase of services supported by undated OR or OR with TAN

Q-83

4/30/2003 New RTC International Co.

W-130

ADP Electrical & Industrial Enterprises-

Subtota

5. Purchase of goods/services supported by invoices/DRs issued not in the name of Petitioner

U-68

8/19/2003 Omniworx, Inc.

W-131

11/4/2003

ABM Computech Enterprises

X-156

8/5/2003 Temprite Engineering, Inc.

Subtota

6. Purchase of goods and services supported by invoices or ORs outside the period of claim

P-45

9/11/2002 Vette Industrial Sales Co.

X-70

. ' x'-115 2/23/2004 2/23/2004 General Electric Phils., Inc. General ~lectric Phils., Inc.

Subtota

7. Purchase of goods or services not supported by invoices or ORs

JFA Electrical Construction

ACE-COR Medical Services, Inc. ACE-COR Medical Services, Inc. Access Frontier Technologies, Inc.

Jabez Motor Corporation

SUGECO

SUGECO

Up-Town Industrial Sales

SUGECO

SUGECO

Tri-Amp Corporation

Sarca Estate Development Corp.

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Subtotal

B. Purchase of goods and services included in the summary of purchases f;ut with no supporting documents

Eurotec Industrial Technologies

Hyosung Ebara Co. Ltd.

Questronix

Air Liquide Phils. Inc.

Adjustment

ABM Computech Enterprises

Subtotal

9. Input VAT on importations supported by IEIRD which are not machine validated or with no bank OR

Z-10to11

BB-6

CC-6

FF-3 to 4

1/6/2003 3/25/2003 4/22/2003 7/21/2003

Hytorc Unex Corporation

ISS Machinery

Mikuni Engineering Pte. Ltd.

Mitsubishi Corporation

15 p 72,000.00 9,077.63 p 81,077.63 p 15,625.02 10,353.94 7,867.27 p 33 846.23 p 12,163.64 134,967.36 7,547.39 p 154 678.39 - p 34,191.91 2,272.73 73,818.18 10,857.60 135,454.55 10,379.41 9,994.92 120,760.00 10,071.85 9,918.00 33,480.00 63,767.46 p 514 966.61 p 6,318.18 29,303.45 67,770.89 52,864.21 32,721.68 10,242.19 p 199 220.60 p 9,515.00 39,925.00 32,426.00 2,963,324.00

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JJ-1 to 2

JJ-8 to 9

KK-8 to 9

KK-10to11

11/19/ 2003 Fuji Trading Co., Ltd.

11/20/2003 ABB Industry Ple. Lld.

12/17/2003 Eastern Controls, Inc.

12/18/2003

Koehler Instrument Company

10. Input VAT on importations outside the period of claim

Z-12 to 13

11/ 14/2002 Tanabe International Ltd. 105,735.00 307,641.00 ' ~ 245,991.00 43,226.00

Subtotal

p 3 747 783.00 p 60,209.00 Subtotal f-P-+-_..::6..::0~,2:.::0:.::9~.0 ::..:0:....j

11. Input VAT on importations included in the schedule of input VAT but with no supporting documents 1/15/2003

Hytorc South Pacific

11/21/ 2003 Fuji Trading Co., Ltd.

p 540,679.00 2,728.00 S u bto ta I l--p-+-_..::5:....:4..:::3L4:.::0:..:.7.:..:. O::..:O::....J

12. piscrepancy between the to_tal amount of input v/JfaS:~efleped)n the : . Quarterly VAT Returns and the total input. VAT claim per Petition for

Review

p 119,696,267.89

Total Input VAT per Returns

Less: Total Input VAT Claim

119,696.268.88 1_._P-+-_ ____ l_._oo-l

Subtotal

P

1.00 TOTAL DISALLOWED INPUT VAT PER THIS COURT'S VERIFICATION p 6 786 500.07 In other words, out of the P119,696,268.89 input VAT claim for the four quarters of calendar year 2003, the amount of P18,462,333.20, as computed below, shall be disallowed for not being suppo1ted with the required documentary evidence under Sections 110(A) and 113(A) of the NIRC of 1997 and asimplemented by Sections 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulations No. 7-95: Input Taxes not properly substantiated

Amount

I Per CPA report p 11,675,833.13 Per this Court's further verification 6 786 500.07

Total Disallowances

P18 462,333.20 It was established that petitioner's claimed input taxes were not applied against any output VAT liability during the period of claim and in the succeeding quarters since all of petitioner's sales were zero-rated and there was no output VAT due thereon. Although the claimed input tax was carried over to the succeeding quarters until the second quarter of

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DECJSION

calendar year 2005, the same was deducted as "Any VAT Refund/TCC Claimed" 13 from the Total Available Input Tax as of the second quarter pf caleRdar year 2005. Hence, the claimed input tax did not form part of the excess input tax of P52,726,601.55 as of the

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second quarter of calendar year 2005, which was to be carried over to the succeeding third quarter of calendar year 2005. Lastly, records disclosed that the subject claim was seasonably filed both in the administrative and judicial levels. The reckoning of the two-year prescriptive· period for the filing of a claim for input VAT refund commences from the date of filing of the corresponding Quarterly VAT Return. 1 ~ Thus, counting from April 25, 2003 15 , July 25, 2003 16 , October 27, 200317, and January 26, 200418, the respective dates when petitioner filed its Quarterly VAT Returns for the first, second, third, and fourth quarters of 2003, both the administrative claim for refund filed on March 10, 200519 and the· Petition for Review filed on April 25, 2005 were well within the two-year prescriptive period. ' In sum, petitioner has sufficiently proven that it is entitled to a refund or issuance of a tax credit certificate corresponding to its unutilized input VAT for the four quarters of calendar year 2003 in the amount of P101,233,935.69, computed as follows:

Amount of Claim

p 119,696,268.89

Less:

Disallowances

Per CPA Report

p 11,675,833.13 Per this Court's Further Verification 6 786 500.07 18 462 333.20

Refundable Input VAT

P101,233 935.69

WHEREFORE, the Petition for Review is hereby PARTIAllY GRANTED. Accordingly, respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or-tO ISSUE A TAX CREDIT CERTIFICATE in the amount of ONE HUNDRED

13 Exhibit " L -1"

14 Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, G. R. Nos. 141104 and 148763, June 8, 2007

15 Exhibit "B"

16 Exhibit "C"

17

Exhibit "D"

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18 Exhibit "E"

19 Exhibit "G"

17 r.

ONE MILLION TWO HUNDRED THIRTY THREE THOUSAND NINE HUNDRED THIRTY SIX AND 69/100 PESOS (P101,233,935.69) in--favor of petitioner Kepco Ilijan Corporation, representing its unutilized input VAT for the four quarters of calendar year 2003.

WE CONCUR:

L ~ \J~

(With Concurring and Dissenting Opinion)

ERNESTO D. ACOSTA

Presiding Justice

CAESAR A. CASANOVA

Associate Justice

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. 18 ~~- ~ ERNESTO D. ACOSTA

Presiding Justice

Chairperson, First Division