Maxima Machineries, Inc. vs. Commissioner of Internal Revenue

DECISION

CASTANEDA, JR., J.:

THE CASE

Before this Court is a Petition for Review filed by Maxima Machineries, Inc. on November 27, 2015, praying for the issuance of tax credit certificate (TCC) in the amount of P22,242,848.81 representing unutilized input value-added tax (VAT) arising from its zero-rated transactions for the period covering the first quarter of fiscal year (FY) ending March 31, 2014. 7'-'

THE FACTS

Petitioner Maxima Machineries, Inc. is a domestic corporation duly organized under and by virtue of the laws of the Philippines, with principal business address at 871 Quezon Avenue, Bgy. Sta. Cruz, Quezon City. It is a VAT-registered taxpayer, with Tax Identification No. (TIN) 006-618-023-000.2 As stated in its Amended Articles of Incorporation,3 its primary purpose is:

"To buy, sell, barter, trade, lease out, manufacture, import, export or otherwise acquire, dispose of, and deal with any kind of goods, wares, and merchandise such as spare parts or replacement parts and/or complete assemblies of agricultural, industrial or commercial machineries, automobiles, buses, trucks, tractors or other motor vehicles and/or related machineries and equipment of every kind and description and to carry on such business as manufacturers, wholesaler, importers and exporters, except the manufacture of food, drugs and cosmetics. xxx" On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR) who has the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto or other matters arising under the National Internal Revenue Code (NIRC) or other laws or portions thereof administered by the BIR. He holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City.

On July 22, 2013, petitioner filed with the BIR its Quarterly VAT Return for the period covering April 1, 2013 to June 30, 2013 (first quarter of FY ending March 31, 2014).4 Petitioner claims that it made zero-rated sales amounting to P260,115,930.50, and that for the current period, petitioner made domestic purchases of goods other than capital goods and domestic purchases of services in the total amount of P893,497,256.47; in which it generated input taxes in the total amount of P107,219,670.78. Petitioner also points out that for the period April 1, 2013 to June 30, 2013, the accumulated excess input VAT credit of petitioner from its domestic purchases of goods other than capital goods, importation of goods other than capital j:z--

goods, and domestic purchases of services that is allocated to its VAT zero-rated transactions is in the aggregate amount of P22,242,848.81, which has not been applied against output tax in the succeeding quarters/years. 5 On June 30, 2015, petitioner filed with the BIR, through the Large Taxpayers Service-Regular LT Audit Division I, an administrative claim for the issuance of tax credit certificate totaling P22,242,848.81 representing excess input VAT that is allocable to its VAT zero-rated sales for the first quarter of FY 2014.6 Petitioner alleges that respondent did not act on its administrative application for refund or tax credit, and with the expiration of the 120-day period under Section 112(C) of the NIRC of 1997, as amended, on October 28, 2015, petitioner filed the instant Petition for Review on November 27, 2015, which is within 30 days from October 28, 2015.

On December 28, 2015, respondent filed a Motion for Extension of Time to File Answer/ which the Court granted in an Order8 dated January 5, 2016.

On February 1, 2016, respondent filed an Answer,9 containing the following arguments and Special and Affirmative Defenses: "4. As a matter of course, a claim for refund is subject to investigation as it involves removal of accrued revenue from the coffers of the Government. It has been held by the Supreme Court that a claim for refund is not ipso facto granted because the Commissioner of Internal Revenue still has to investigate and ascertain the veracity of the claim.

5. Respondent submits that petitioner failed to demonstrate that the amount of P22,242,848.81 which is the subject of the case at bar was erroneously or illegally collected. Taxes remitted to the BIR are presumed to have been made in the regular course of business and in accordance with provisions of law. c;e--

6. Before the instant Petition for Review should be given due course, petitioner should prove that it submitted the relevant pieces of documents to substantiate its claim and had observed the procedure laid down in Section 112 (C) of the National Internal Revenue Code (NIRC) of 1997, as amended, which reads: '(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) hereof.

7. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of one hundred twenty

(120) day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

8. Clearly, the law requires the submission of complete documents in support of the application filed with the Bureau of Internal Revenue before the 120-day audit period shall apply, and before the taxpayer could avail of judicial remedies as provided for in the law, petitioner's failure to comply with the duly mandated legal requirements in such claims for refund/tax credit warranted the denial by inaction of the administrative claim.

9. Furthermore, Section 112 (C) of the 1997 NIRC clearly states that there should be a prior administrative claim filed with respondent before judicial resort can be had in the Court of Tax Appeals, where relevant documents must be submitted by the taxpayer to support its claim for refund. Failure on the part of the taxpayer to file the administrative claim and submit relevant documents on administrative level, makes the administrative claim for tax refund or credit pro-forma and shall be construed as if no administrative claim was filed at all.

10. In case such as this, before judicial inquiry into the issue of whether taxpayers, in general, are entitled to a refund/tax credit under substantive law may be considered, they have an initial burden to discharge. They must prove that they complied with all the administrative requirements continuing up to judicial review. In other words, before trial de novo proceeds and disposes of the issue of refund entitlement under substantive law, it must first be proved that there was procedural compliance in pursuing the 9t- administrative claim leading to the appellate proceedings. As stated

by the Honorable Supreme Court:

'Petitioner's contention that non-compliance with Revenue Regulations 3-88 could not have adversely affected its case in the CTA indicates a failure on its part to appreciate the nature of the proceedings in that court. First, a judicial claim for refund or tax credit in the CTA is by no means an original action but rather an appeal by way of petition for review of a previous.

unsuccessful administrative claim. Therefore, as in every appeal or petition for review, a petitioner has to convince the appellate court that the quasi- judicial agency a quo did not have any reason to deny it claims. In this case. it was necessary for petitioner to show the CTA not only that it was entitled under substantive law to the grant of its claims but also that it satisfied all the documentary and evidentiary requirements for an administrative claim for refund or tax credits. Second, cases filed in the CTA are litigated de novo. Thus, a petitioner should prove every minute aspect of its case by presenting, formally offering and submitting its evidence to the CTA. Since it is crucial for a petitioner in a judicial claim for refund or tax credit to show that its administrative claim should have been granted in the first place. part of the evidence to be submitted to the CTA must necessarily include whatever is required for the successful prosecution of an administrative claim.' (Emphasis and underscoring supplied) 11.

Petitioner

failed to substantiate its claim for refund/issuance of tax credit certificate in the amount of P22,242,848.81 representing unutilized input taxes that is allocable to its VAT zero-rated transactions as declared in its Quarterly VAT Return for the period April 1, 2013 to June 30, 2013 for its Fiscal Year ending March 31, 2014.

12. The implementing rule for these complete documents required by law is RMO No. 53-98. Annex B-1 of said RMO lists all the required documents as follows:

XXX

XXX

XXX

13.

In the case entitled Commissioner of Internal Revenue vs. Rosemarie Acosta, the Honorable Supreme Court had the occasion to say: ~

'xxx Noteworthy, the requirements under Section 230 (now Section 204) for refund claims are as follows:

1. A written claim for refund or tax credit must be filed by the taxpayer with the Commissioner;

2. The claim for refund must be a categorical demand for reimbursement;

3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in court within two (2) years from date of payment of the tax or penalty regardless of any supervening cause.

In our view, the law is clear. A claimant must first file a written claim for refund, categorically demanding recoverv of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure xxx.' (Emphasis and understanding supplied)

14. In the present case, petitioner failed to submit all the necessary documents needed for the application of its VAT refund.

15. The purpose of requiring the filing of the administrative claim for refund/tax credit and submission of supporting documents relevant to a claim for tax refund/credit is to give the administrative agency concerned the opportunity to ascertain the veracity and validity of the claim. This is the very essence, the very substance of the doctrine of exhaustion of administrative remedies. The doctrine rests upon the presumption that the administrative body, board, or officer, if given the chance to correct its mistake or error, may amend its decision on a given matter and decide it properly. Thus, non- compliance with a condition precedent renders the Petition for Review dismissible.

16.

In this case, the revenue officers who audited petitioner's claim for refund made the following findings: 'To validate their claims, verification of the import entry and internal revenue declaration (IERD), local ~ purchases invoices of goods and services disclosed the following audit findings, to wit:

a.

The summary of importation as revised totaled P99,175,781.58. However, the IEIRD attached was not in sequence with the schedule, various copies were not readable, the computation of the input tax differs from the actual input tax as shown per sampling; b.

The original attachment of the application showed loose photocopies for the domestic purchases. In as much as the subject taxpayer still failed to submit the complete import entry and internal revenue declaration, complete sales invoices and official receipts in sequence with the required schedule, the revenue officer has no other recourse but to deny the claim. A letter of denial will be sent to the subject taxpayer. Considering that the subject taxpayer also filed a 'Petition for Review with the CTA'

17. Based on the above findings of the revenue officers who conducted the audit, they recommended for the denial of the tax credit/refund for failure to submit the additional documents material to the granting of the tax credit/refund. 18.

The failure of petitioner to substantiate its claim for refund before the office of the respondent and the filing of the instant petition before this Honorable Court deprived respondent of the opportunity to fully exercise her function to decide claims for refund, correct, modify or affirm the findings of her subordinates. It must be remembered, that in the case of Jariol vs. Commission on Elections, the Supreme Court reasoned that a party must not merely initiate the prescribed administrative procedure to obtain relief, the party concerned must pursue this relief until the appropriate conclusion takes place before seeking judicial intervention in order to give the administrative body an opportunity to decide the matter by itself correctly and prevent unnecessary and premature resort to the court.

19. The power to tax is the most effective instrument to raise needed revenues to finance and support the myriad of activities of the government for the delivery of basic services essential to the promotion of the general welfare and enhancement of peace, progress and prosperity of the people. Consequently, any delay in implementing tax measures would be to the detriment of the public. It is for this reason that claims for refund are required to be done within certain time frames. r

20. Exemptions from taxation are highly disfavored in law and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague implications.

21. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund. Hence, a taxpayer is charged with the heavy burden of proving that he has complied with and satisfied all the statutory and administrative requirements to be entitled to the tax refund. Failure to comply therewith warrants a dismissal of the taxpayer's claim for refund. Respondent humbly submits that petitioner failed to establish its right to refund. 22.

It can never be emphasized enough that in this jurisdiction tax refunds/credits are in the nature of tax exemptions, hence, laws relating to them call for a strict application against the claimant. As held by the Honorable Supreme Court: 'Tax refunds are in the nature of tax exemptions, and are to be construed strictissimi juris against the entity claiming the same. Thus, the burden of proof rests upon the taxpayer to establish by sufficient and competent evidence, its entitlement to a claim for refund.'

23. Taxes collected are presumed to be in accordance with laws and regulations.

24.

Claims for refund are construed strictly against the claimant for the same partake of the nature of exemption from taxation and as such, they are looked upon with disfavor. Basic is the rule that tax refunds are regarded as tax exemptions that are in derogation of the sovereign authority and are to be construed in strictissimi juris against the person or entity claiming the exemption. The law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted.

25. Based on the foregoing, petitioner's claim for refund has no basis in fact and in law. Thus, the instant petition should be denied for lack of merit."

On February 9, 2016, the Court set the pre-trial conference of the instant case on March 17, 2016 and ordered both parties to submit ~ their respective Pre-Trial Briefs.*° Respondent submitted his Pre-Trial Brief! on March 11, 2016; while petitioner submitted its Pre-Trial Brief?? on April 11, 2016.

The parties then filed their Joint Stipulation of Facts and Issues?? on April 29, 2016, which was subsequently approved by this Court in the Pre-Trial Order!* promulgated on May 10, 2016.

On July 13, 2016, upon motion of petitioner pursuant to Rules 12 and 13 of the Revised Rules of the Court of Tax Appeals, this Court commissioned Mr. Neil U. Sison as the Independent Certified Public Accountant (ICPA) for the case.° Petitioner, aside from the ICPA, presented as witnesses Ms. Marlene D. Manuel and Mr. Yusuke Yamada, petitioner’s Finance Officer and Chief Finance Officer, respectively.

Thereafter petitioner filed its Formal Offer of Evidence® on October 27, 2016. On January 12, 2017, the Court resolved to admit all of petitioner’s exhibits except for Exhibits “P-8”, “P-28”, “P-34” and “P-41”, for failure of the exhibits formally offered and identified to correspond with the documents actually marked; Exhibits “P-55” and “P-72, for failure to present the originals for comparison; and Exhibits “P-78-J-1” to “P-78-J-2", “P-78-P-141”, “P-78-P-755”, “P-78-P-1512”, “P-78-P-2069”, “P-78-P-2323", “P-78-P-2421”, “P-78-P-2462”, “P-78- V-9", “P-78-V-15", “P-78-V-24", “P-78-V-25”", “P-78-X-162”, “P-78-AD- 2”, “P-78-AD-3”, “P-78-AD-217”, “P-78-AI-204”, “P-78-AI-205”, “P-78- AL-190”, “P-78-AL-191”, “P-78-AQ-2”, “P-78-AR-9”, “P-78-AR-10”, “P- 78-AU-3", “P-78-AU-6", “P-78-AU-7", “P-78-AU-9", “P-78-AW-12” to “P-78-AW-118”, “P-78-BA-928”, “P-78-BA-1025”, “P-78-BA-1315", “P- 78-BA-1367”, “P-78-BA-1700", “P-78-BA-1701”, “P-78-BA-1702”, “P- 78-BA-1707", “P-78-BA-1708”, “P-78-BA-1863”, “P-78-BA-1874” to “P- 78-BA-1886”, “P-78-BA-1888”, “P-78-BA-1996”, “P-78-BA-1997”, “P- 78-BA-1998”, “P-78-BB-363”, “P-78-BC-1” to “P-78-BC-7”, “P-78-BC-9” to “P-78-BC-12”, “P-78-BC-30” to “P-78-BC-41", “P-78-BC-43” to “P- Je

78-BC-45", and "P-78-BC-48", for not being found in the records of the case. 17 On February 8, 2017, petitioner filed a Supplemental ICPA Report.18 Petitioner filed a Motion for Reconsideration to the Resolution dated January 12, 201719 on February 17, 2017. During the hearing on February 13, 2017 for the presentation of respondent's lone witness, Revenue Officer Felina Guimbao, counsel for respondent orally offered Exhibits "R-1 ", "R-2", "R-3", "R-4", "R-5", "R-6", "R-7", and "R-7-1". The Court admitted all of respondent's evidence, there being no objections interposed by petitioner's counsel. 20 In the Resolution21 dated September 8, 2017, the Court set a hearing on October 11, 2017 for the identification of the Supplemental ICPA Report filed on February 8, 2017, subject to the payment of a fine of P5,000.00, and held in abeyance the resolution of petitioner's Motion for Reconsideration to the Resolution dated January 12, 2017. After petitioner's presentation of additional evidence on October 11, 2017, petitioner filed its Supplemental Formal Offer of Evidence22 on October 18, 2017.

In the Resolution23 dated November 28, 2017, the Court partially granted petitioner's Motion for Reconsideration to the Resolution dated January 12, 2017. Accordingly, the Court admitted petitioner's Exhibits "P-8" "P-28" "P-34" "P-41" "P-55" "P-72 "P-78-J-1" to "P-78-J-2"

I

I

I

I

I

I

I

"P-78-P-141", "P-78-P-1512", "P-78-P-2069", "P-78-P-2323", "P-78-P- 2421" "P-78-P-2462" "P-78-V-9" "P-78-V-15" "P-78-V-24" "P-78-V- ,

I

I

I

I

25" "P-78-X-162" "P-78-AD-2" "P-78-AD-3" "P-78-AD-217" "P-78- ,

I

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AI-204", "P-78-AI-205", "P-78-AL-190", "P-78-AL-191", "P-78-AQ-2", "P-78-AR-9", "P-78-AR-10", "P-78-AU-3", "P-78-AU-6", "P-78-AU-7", "P-78-AU-9", "P-78-BA-1315", "P-78-BA-1367", "P-78-BA-1700", "P- /!-

78-BA-1701" "P-78-BA-1702" "P-78-BA-1707" "P-78-BA-1708" "P- ' ' ' ' 78-BA-1863", "P-78-BA-1874" to "P-78-BA-1886", "P-78-BA-1888", "P- 78-BB-363", "P-78-BC-1" to "P-78-BC-7", "P-78-BC-9" to "P-78-BC- 12", and "P-78-BC-30" to "P-78-BC-39".

However, the Court still denied Exhibits "P-78-P-755", "P-78-BA-928", "P-78-BA-1025", "P-78- BA-1996", "P-78-BA-1997", "P-78-BA-1998", "P-78-BC-40" to "P-78- BC-41", "P-78-BC-43" to "P-78-BC-45", and "P-78-BC-48", for not being found in the records of the case.

Thereafter, petitioner filed its Memorandum24 on June 25, 2018; while respondent filed his Memorandum25 on February 1, 2018. Subsequently, in the Resolution26 dated February 6, 2018, the Court declared the instant case submitted for decision.

THE ISSUE

The parties submitted the following issue27 for the Court's resolution:

"Whether Petitioner is entitled for the issuance of tax credit certificate in the amount of P22,242,848.81 representing its excess and/or unutilized input VAT allocable to its VAT zero-rated sales for the period April 1, 2013 to June 30, 2013 (1st Quarter of fiscal year ending March 31, 2014)."

THE COURT'S RULING

Pertinent to the resolution of the case at bench are Sections 112(A) and (C) of the NIRC of 1997, as amended, which read: "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 rr-

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 106(A)(2)(a)(¹), (²) and (b) and Section 108(8)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the 8angko Sentral ng Pilipinas (8SP): 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 of 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: Provided, finally, That for a person making sales that are zero-rated under Section 108(8)(6), the input taxes shall be allocated ratably between his zero-rated and non-zero-rated sales.

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(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals."

Pursuant thereto, in order to be entitled to a refund or tax credit of unutilized input VAT attributable to zero-rated or effectively zero- rated sales, it is imperative to prove the following:

1. that the taxpayer is VAT-registered;

2. that the claim for refund was filed within the prescriptive period both in the administrative and judicial levels;

3. that there must be zero-rated or effectively zero-rated sales;

4. that input taxes were incurred or paid;

5. that the input taxes due or paid were attributable to zero-rated sales or effectively zero-rated sales; and f'G-

6. that the input taxes were not applied against any output VAT liability.

FustRequisfte:Peaaoner

is a

VAT-registered

entity.

Petitioner is registered with the Bureau of Internal Revenue as a VAT taxpayer with Taxpayer Identification No. 006-618-023-000, as evidenced by its BIR Certificate of Registration.28

Second

Requisite:

Petitioner timely filed its administrative and judicial claims.

Pursuant to the above-quoted Section 112(A) of 1997, as amended, the administrative claim for the issuance of a TCC or refund of input VAT must be filed with the BIR within two (2) years after the close of the taxable quarter when the zero-rated or effectively zero- rated sales were made.

The present claim covers the first quarter of FY ending March 31, 2014, which closed on June 30, 2013. Counting two years therefrom, petitioner had until June 30, 2015 within which to file its administrative claim for refund or issuance ofTCC. Clearly, petitioner's administrative claim29 was timely filed on June 30, 2015. As to the timeliness of petitioner's judicial appeal, Section 112(C) of the NIRC of 1997, as amended, provides that respondent has 120 days from the date of the submission of the complete documents in support of the application for refund or tax credit within which to grant or deny the claim. In case of full or partial denial by respondent, the taxpayer's recourse is to file an appeal before this Court within 30 days from receipt of the decision of respondent. However, if after the 120- day period, respondent fails to act on the application for refund or tax Jk--

CfA CASE NO. 9210 credit, the remedy of the taxpayer is to appeal the inaction of respondent to this Court within 30 days.

Accordingly, from the filing of petitioner's administrative claim, together with the supporting documents, on June 30, 2015, respondent had 120 days or until October 28, 2015 to act on the said claim.

Considering that respondent failed to act on the said claim within the 120-day period, petitioner had 30 days or until November 27, 2015 within which to file a judicial claim before this Court. Evidently, petitioner's judicial appeal by way of a Petition for Review was, likewise, timely filed on November 27, 2015.

Third

Requisite:

Petitioner is engaged in zero-rated or effectively zero-rated sales.

As stated in its Amended Articles of Incorporation, petitioner's primary purpose is to buy, sell, barter, trade, lease out, manufacture, import, export or otherwise acquire, dispose of, and deal with any kind of goods, wares and merchandise such as spare parts or replacement parts and/or complete assemblies of agricultural, industrial or commercial machineries, automobiles, buses, trucks, tractors or other motor vehicles and/or related machineries and equipment of every kind and description and to carry on such business as manufacturers, wholesalers, importers and exporters, except the manufacture of food, drugs and cosmetics. 30 Petitioner maintains that its sales of goods and services to entities registered with the Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Clark Development Authority (CDA), Cagayan Economic Zone Authority (CEZA), Clark Development Corporation (CDC) and Board of Investments (BOI) during the period covering April 1, 2013 to June 30, 2013 are subject to zero percent (0°/o) VAT, pursuant to Sections 106(A)(2)(a)(³), (5) and (c) and 108(B)(3) of the NIRC of 1997, as amended. The pertinent provisions of Sections 106(A)(2)(a)(3), (5) and (c) and 108(B)(3) of the NIRC of 1997, as amended, state: ~

CfA CASE NO. 9210

"SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(A)

Rate and Base of Tax - xxx

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XXX

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(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

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

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(3) Sale of raw materials or packaging materials to export- oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;

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(5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws.

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(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate." "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. -

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(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:

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XXX1'-"

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;"

Relative thereto, Sections 4.106-5 and 4.108-5 of Revenue Regulations (RR) No. 16-2005, as amended by RR No. 04-07, also provide:

"SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. - xxx The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export sales.- 'Export Sales' shall mean:

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(5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws.

'Considered export sales under Executive Order No. 226' shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same; Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents; Provided, further, That pursuant to EO 226 and other special laws, even without actual exportation, the following shall be considered constructively exported: (1) sales to bonded manufacturing warehouses of export- oriented manufacturers; (2) sales to export processing zones pursuant to Republic Act (RA) Nos. 7916, as amended, 7903, 7922 and other similar export processing zones; (3) sale to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority pursuant to RA 7227; ( 4) sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of ~

Internal Revenue (BIR) and the Bureau of Customs (BOC); (5) sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not. For purposes of zero-rating, the export sales of registered export traders shall include commission income. The exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee: and Provided, finally, that sales of goods, properties or services made by a VAT-registered supplier to a BOI-registered manufacturer I producer whose products are 100°/o exported are considered export sales. A certification to this effect must be issued by the Board of Investment {BOI) which shall be good for one year unless subsequently re-issued by the BOI.

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(c) 'Sales to Persons or Entities Deemed Tax-exempt under

Special Law or International Agreement~ -

Sales of goods or property to persons or entities who are tax-exempt under special laws, e.g. sales to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority {SBMA) pursuant to R.A. No. 7227, sales to enterprises duly registered and accredited with the Philippine Economic Zone Authority {PEZA) or international agreements to which the Philippines is signatory, such as, Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc., shall be effectively subject to VAT at zero-rate." (Emphasis supplied) "SEC. 4.108-5. Zero-Rated Sale of Services. -

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(b) Transactions Subject to Zero Percent (0%) VAT Rate.- The following services performed in the Philippines by a VAT- registered person shall be subject to zero percent (0°/o) VAT rate:

XXX

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XXX

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent {0°/o) rate;" (Emphasis supplied) ?""

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SEC. 2. Section 15 of the Republic Act No. 7227, as amended, is hereby amended to read as follows:

'SEC. 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). -

Subject to the

concurrence by resolution of the local government units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, xxx. The CFZ shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital equipment within, into and exported out of the CFZ, as well as provide incentives such as tax and duty-free importation of raw materials and capital equipment. xxx The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed on registered business enterprises within the CFZ. xxx

XXX

XXX

XXX

Duly registered business enterprises that will operate in the Special Economic Zones to be created shall be entitled to the same tax and duty incentives as provided for under Republic Act No. 7916, as amended: Provided, That for the purpose of administering these incentives, the PEZA shall register, regulate, and supervise all registered enterprises within the Special Economic Zones."

"REPUBLIC ACT NO. 7916 (as amended by Republic Act No. 8748)

AN ACT PROVIDING FOR THE LEGAL FRAMEWORK AND

MECHANISMS FOR THE CREATION, OPERATION, ADMINISTRATION, AND COORDINATION OF SPECIAL ECONOMIC ZONES IN THE PHILIPPINES, CREATING FOR <p:-

Further, the special laws specific to this case are Republic Act (RA) No. 7227, as amended by RA No. 9400, otherwise known as "Bases Conversion and Development Act of 1992", RA No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995", and RA No. 7922, otherwise known as "Cagayan Special Economic Zone Act of 1995". The relevant portions of said laws are quoted hereunder for ready reference:

"REPUBLIC ACT NO. 9400 AN ACT AMENDING REPUBLIC ACT NO. 7227, AS AMENDED, OTHERWISE KNOWN AS THE BASES CONVERSION AND DEVELOPMENT ACT OF 1992, AND FOR

OTHER PURPOSES

SECTION 1. Section 12 of Republic Act No. 7227, as amended, otherwise known as the Bases Conversion and Development Act of 1992, is hereby amended to read as follows: 'SEC. 12. Subic Special Economic Zone.- xxx

XXX

XXX

XXX

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines.

(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed within the Subic Special Economic Zone. xxx 9-

THIS PURPOSE, THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AND FOR OTHER PURPOSES.

XXX

XXX

XXX

SECTION 8. ECOZONE to be Operated and Managed as Separate Customs Territory.- The ECOZONE shall be managed and operated by the PEZA as separate customs territory. The PEZA is hereby vested with the authority to issue certificates of origin for products manufactured or processed in each ECOZONE in accordance with the prevailing rules of origin, and the pertinent regulations of the Department of Trade and Industry and/or the Department of Finance.

XXX

XXX

XXX

SECTION 24. Exemption form National and Local Taxes. - Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. xxx" "REPUBLIC ACT NO. 7922

AN ACT ESTABLISHING A SPECIAL ECONOMIC ZONE AND

FREE PORT IN THE MUNICIPALITY OF SANTA ANA AND THE

NEIGHBORING ISLANDS IN THE MUNICIPALITY OF

APARRI, PROVINCE OF CAGAYAN, PROVIDING FUNDS THEREFOR, AND FOR OTHER PURPOSES SECTION 1. Short Title. - This Act shall be known as the 'Cagayan Special Economic Zone Act of 1995'.

XXX

XXX

XXX

SEC. 3. The Cagayan Special Economic Zone and Free Port - In accordance with the foregoing declared policy, there is hereby established a special economic zone and free port, to be known as the Cagayan Special Economic zone, hereinafter known as the Zone, which shall cover the entire area embraced by the Municipality of Santa Ana and the islands of Fuga, Barit, and Mabbag in the Municipality of Aparri, Province of Cagayan. 1'-

SEC. 4. Governing Principles.- The Cagayan Special Economic Zone shall be managed and operated under the following principles:

XXX

XXX

XXX

(b) Business establishments operating within the Zone shall be entitled to the existing fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority (EPZA), or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987;

(c) Any provision of existing law, rules or regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the Zone. xxx" Since the Ecozone is viewed as a foreign territory by legal fiction, sales of goods and services made by a VAT-registered person in the Philippine customs territory to an entity registered and operating within the Ecozone are considered exports to a foreign country subject to 0°/o VAT. This was elucidated by the Supreme Court in the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc.,31 to wit:

"This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory.

xxx An ECOZONE or a Special Economic Zone has been described as- ... [S]elected areas with highly developed or which have the potential to be developed into agro- industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following:

industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers. j-

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory.

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT32." (Emphasis supplied) Evidently, sales of goods and services by a VAT-registered taxpayer, such as herein petitioner, to entities located in the Ecozones, as well as, to SOl-registered entities whose products are 100°/o exported are considered "export sales" subject to 0°/o VAT rate pursuant to Sections 106(A)(2)(a)(3), (5) and (c) and 108(8)(3) of the NIRC of 1997, as amended, and as implemented by Sections 4.106-5 and 4.108-5 of RR No. 16-05, as amended.

To prove that its clients are duly registered with the PEZA, SBMA, CDC, CEZA and BOI, petitioner submitted various Certifications issued by said agencies. Likewise, petitioner presented the letters of PEZA Director General, Ms. Lilia B. de Lima, and PEZA Deputy Director General for Finance and Administration, Mr. Justo Porfirio Li. Yusingco, dated June 6, 201633 and July 26, 201634, respectively, addressed to petitioner's Chief Financial Officer, Mr. Yusuke Yamada and a Certification issued by the BOI Director-Incentives Service, Ms. Erlinda 1-- 32 Now at 12% VAT rate.

F, Arcellana, on June 7, 2016*° confirming the issuance of VAT zero- rating certifications to certain clients of petitioner. Listed below are petitioner’s clients with the corresponding proof of VAT zero-rating:

Registration

Date

Name of Customer Proof of VAT zero-rating — Exhibit No. Validity Period

BOI Certification Letter —

SBMA Cert. of Registration

and Tax Exemption

BIR Ruling No. ITAD - 49-07 | dated April 13, 2007 confirming and validating | 79.:0.

ADB'sCert. of VAT, P7802 Exemption dated Nov. 29, ae

DNAMA MINING

RESOURCES

ASIA INTERNATIONAL

AUCTIONEERS INC

P-78-O-1; P-5 May 24, 2013 to May 23, 2014

_ ASIAN DEVELOPMENT

| BANK

ATLANTIC GULF AND

PACIFIC COMPANY OF _ PEZA Cert. No. 2013-0563; | MANILA, Confirmation Letters from | P-6; P-76;P-77 Aug6,2008 | TY 2013

INCORPORATED PEZA |

BOI Catification BOT”

Certification Letter issued on | Jun 7, 2016 SBMA Cert. of Tax

Exemption

‘BOI Certification; BOI | Certification Letter issued on | ce JUN7, 2016 BOI Certification; BOI _ Certifi cation Letter issued on | | PEZA Certificate No. 2013- | | | 1630; Confirmation Letters | P-16; P-76;P-77 Feb8,1995 TY 2013 from PEZA i i | January 1, 2013 to

_ BERONG NICKEL

December 31, 2013

- CORPORATION

P-78-O-3; P-75. May 28, 2007 July 27, 2012 to July 26, 2013

& DEVELOPMENT

JRPORATION

» CAGDIANAO MINING

CORP.

P-78-0-4; P-13 January 1, 2013 to 0 | P-78-0-5; P-75 | December 31, 2013 _ Sep 13, 1999 | January 1, 2013 to | ' December 31, 2013 P-78-O0-6; P-15;

P-75

_ CARMEN COPPER

_ CEBU TOYO

| CORPORATION (CTC)

LARK |

» INTERNATIONAL : COC Cert. of Registration

_ AIRPORT and Tax Exemption

_ CORPORATION _

- CORAL BAY NICKEL

| CORPORATION

April 6, 2013 to April 5, 2016 PEZA Cert. No. 2013-0301;

Confirmation Letters from | BOI Certification; BOI | Certification Letter issued on | Jun 7, 2016 BOI Certification; BOI ' Certification Letter issued on | ‘BOI Certifi cation; “BOI ' Certification Letter issued on | vd 7, 2016 PEZA Cert. No. 2013-0121;

Confirmation Letters from

PEZA

PEZA Cert. No. 2013-0059;

Confirmation Letters from

on PE

Dec 27, 2002 TY 2013 January 1, 2013 to | December 31, 2013 |

_ CONSTRUCTION AND

_ MINING

CORPORATION

P-78-O-9; P-18;

P-75

| Apr 17, 2008 | January 1, 2013 to - December 31, 2013 P-78-O-10; P-20;

| FCF MINERAL CORP. p-75 Nov 4, 2010 January 1, 2013 to 7 December 31, 2013 | Oct 6, 1980 / May 27, 1991

_ HINATUAN MINING

_ CORPORATION

ONDA PARTS

_ MANUFACTURING

| CORPORATION

“HOUSE TECHNOLOG INDUSTRIES PTE., ETD. (HTIPL) P-78-O-11; P-75 _ P-78-0-12; P-22;

P-76; P-77 TY 2013 Jan 18, 1993 P-78-0-13; P-23;

P-76; P-77 TY 2013 Jan 5, 1996

HYS-YACHT PHILS.

SBMA Cert. of Tax LTD CQ INC.

~.

-ACIIIIJUVI

INTEVALUE SERVICES

CEZA Certification

INC.

JAE PHILIPPINES, INC.

PEZA Cert. No. 2013-0114;

Confirmation Letters from

(JAEPI)

PEZA

JAMJLE EQUIPMENT$

SBMA Cert. of Tax

& GENERAL

Exemption

MERCHANDISE INC

MAJESTIC LANDSCAPE

PEZA Cert. No. 2013-0047;

CORPORATION (MLC)

Confirmation Letters from

P~ZA

PHILIPPINE

ASSOCIATED

PEZA Cert. No. 2013-03341

SMELTING AND

2013-0391; Confirmation

REFINING

Letters from PEZA

CORPORATION

(PASAR)

PHIL. BATTERIES PEZA Cert. No. 2013-1364;

Confirmation Letters from

INCORPORATED (PBI)

PEZA

PHILIPPINE MAKOTO

PEZA Cert. No. 2013-0073, Confirmation Letters from

CORPORATION (PMC)

PEZA

PHILIPPINE SINTER

PEZA Cert. No. 2013-0860;

Confirmation Letters from

CORPORATION (PSC)

P~ZA

PLATINUM GROUP

BOI Certification; BOI

METALS

CORPORATION

Certification Letter issued on

(PGMC)

Jun 7, 2016

REDONDO QUARRY

SBMA Cert. of Tax

AND DEVELOPMENT

Exemption

CORPORJI.TIQN

RIO TUBA NICKEL

BOI Certification; BOI

MINING

Certification Letter issued on

CORPORATION

Jun 7, 2016 ' CENTER (GLOBAL !

Confirmation Letters from ! c::n::GJNC::: .... c?~MC::Gc::J). L...

...........................

P~ZA

..... .

! SUBIC .

, CONSOLIDATED SBMA Cert. _of Tax ! PROJECTS INC

Exemption

P-78-0-14; P-9

P-10

P-25; P-76; P-77 P-78-0-15; P-26 P-78-0-16; P-27;

P-76; P-77 P-78-0-17; P-28;

P-76; P-77 P-78-0-18; P-29;

P-76; P-77 P-33; P-76; P-77 P-78-0-19; P-30;

P-76; P-77 P-78-0-20; P-32;

P-75

P-78-0-21; P-35 P-78-0-22; P-75 P-78-0-24; P-8, P-76; P-77 P-78-0-25; P-37

SUNWEST WATER

BOI Cert. of Registration No.

P-78-0-26; P-39

AND ELECTRIC CO

2010-206 (as RE Developer)

INC.

PEZA Cert. No. 2013-1288;

Confirmation Letters from

PEZA

BOI Certification; BOI

TAGANITO MINING

Certification Letter issued on

CORPORATION

Jun 7, 2016 P-78-0-27; P-40;

P-76; P-77 P-78-0-28; P-75 Nov 11, 1999 July 18, 2002 I Mar 8, 2012 Sep 23, 1982 Jun 7, 2006 Oct 1, 1993 Jan 31, 2011 Nov 16, 2007 Mar 1, 1974 I Aug 16, 2004 Oct 4, 1995 Sep 1, 2008 Nov 24, 2010 Jan 7, 2010 Jul 23, 1998 July 15, 2013 to July 14, 2014 September 9, 2013 to August 15, 2014

TY 2013

Oct 3, 2012 to October 2, 2013

TY 2013

TY 2013

TY 2013

TY 2013

TY 2013

January 1, 2013 to December 31, 2013 August 24, 2012 to August 23, 2013 January 1, 2013 to December 31, 2013

TY 2013

...........

until June 30, 2013 January 4, 2013 to January 3, 2014

TY 2013

January 1, 2013 to December 31, 2013

TRANS ASIA

.

.

CONSTRUCTION

CDC Cert. of Reg1st~at10n ! DEVELOPMENT CORP.

and Tax Exemption

P-78-0-29; P-41 Apri11, 2013 to March 31, 2016 i TRAVELLERS r PEZA Cert. No. 2013-

: INTERNATIONAL

!

012012013-1719;

P-78-0-30; P-34;

. HOTEL GROUP, INC ! Confirmation Letters from .

P-76; P-77 i (TIHGI) i

PEZA

!

I ui\JlcHAMP MINERAL 1 PEZA cert No.2o13-16i9; ' ! PHILIPPINES INC.

! Confirmation Letters from P-43; P-76; P-77 ! CVMP.D ......

i

PEZA

.

Dec 16, 2008 [ May 3, 2013

TY 2013

TY 2013

' ' l)lr-

VISAYAS SLAKED LIME

PEZA Cert. No. 2013-0908;

P-78-0-31; P-76;

Aug 11, 2010

TY 2013

Confirmation Letters from

CORP (VSLC)

PEZA

P-77

PEZA Cert. No. 2013-0055;

WU KONG SINGAPORE

Amended Cert. of P-78-0-32; P-44;

Feb 17, 1995 I

TY 2013

PTE. LTD. (PHIL.

Registration No. 95-21;

P-77

Nov 9, 2011

BRANCH) (WKSPL)

Confirmation Letter from

PEZA

Thus, petitioner's sales to the afore-mentioned entities for the period covering the first quarter of FY 2014 qualify for VAT zero-rating pursuant to Sections 106(A)(2)(a)(3), (5) and (c) and 108(8)(3) of the NIRC of 1997, as amended, provided that the same comply with the invoicing requirements under Sections 113(A)(1) and (2), (8)(1), (2)(c) and (3) of the NIRC of 1997, as amended, as implemented by Sections 4.113-1(A)(1) and (2), (8)(1) and (2)(c) of RR No. 16-05, which are all quoted hereunder:

"SEC. 113. Invoicing and Accounting Requirements for VAT- Registered Persons. - (A) Invoicing Requirements. -A VAT-registered person shall issue:

(1) A VAT invoice for every sale, barter or exchange of goods or properties; and (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. (B) Information Contained in the VAT Invoice or VAT Official Receipt - The following information shall be indicated in the VAT invoice or VAT official receipt:

(1) A statement that the seller is a VAT-registered person, followed by his Taxpayer's Identification Number (TIN);

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided, That:

XXX

XXX

XXX

(c) If the sale is subject to zero percent (0%) value-added tax, the term 'zero-rated sale' shall be written or printed prominently on the invoice or receipt; ~

XXX

XXX

XXX

(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and" (Emphasis supplied) "SEC. 4.113-1. Invoicing Requirements.- (A) A VAT-registered person shall issue:-

(1) A VAT invoice for every sale, barter or exchange of goods or properties; and

(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. Only VAT-registered persons are required to print their TIN followed by the word 'VAT' in their invoice or official receipts. Said documents shall be considered as a 'VAT Invoice' or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any input tax. VAT invoice/official receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records. (B) Information contained in VAT invoice or VAT official receipt. - The following information shall be indicated in VAT invoice or VAT official receipt:

(1) A statement that the seller is a VAT-registered person, followed by his TIN;

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT; Provided, That:

XXX

XXX

XXX

(c) If the sale is subject to zero percent (0%) VAT, the term 'zero-rated sale' shall be written or printed prominently on the invoice or receipt;" (Emphasis supplied) p-c- In its Quarterly VAT Return for the 1% quarter of FY 2014°°, petitioner reported total sales of P1,208,918,976.53, that included zero-rated sales in the amount of P260,115,930.50, to wit:

_VATable Sales | P___932,114,519.60 | | Zero-Rated Sales | 260,115,930.50 | _ Total Sales P1,208,918,976.53 | In support of its declared zero-rated sales of ?260,115,930.50, petitioner presented its Schedule of Zero-Rated Sales?’ and the related invoices and official receipts (ORs),7° which were examined by the Court-commissioned ICPA, Mr. Neil U. Sison.

In his report, the ICPA ascertained that the sales in the amount of ?212,860,730.90 qualify for VAT zero-rating, while the remaining amount of P47,255,199.60 does not qualify as zero-rated sales. The ICPA’s findings are summarized as follows:°°

Exhibit

Reference

Description Amount

_ Charge Sales Invoices properly classified as zero-rated | sales with permit on zero-rating expiring on December | 31, 2013 printed in the invoice Charge Sales Invoices properly classified as zero-rated | _ sales with permit on zero-rating expiring on March 31, | 2014 printed in the invoice een 8, 872,00 fficial Receipt and Charge Sales invoices ‘properly — | Charge ‘Sales Invoices ‘properly Classified as zero-rated | sales with permit on zero-rating expiring on December | _ 31, 2012 printed in the invoice but supported by _ Certification of Zero-rating expiring on December 31,

_P-78-R

__P-78-S |

_P78-T

P-78-U _2013 14,566,518.03 | Total Valid Zero-rated Sales P 212,860,730.90 ~ | Charge ‘Sales invoices supporting sales of goods not | _Properly classified as zero-rated sales ss smn en 4 415,188.21 fficial Receipts supporting sales of services not _ roperly classified as zero-rated sales serene 924,339 ,28 Zero-rated sales supported by documents other than ales invoice and official receipt nner d( 489,894.57 Zero-rated sales which should be declared as Vatable Sales tle, 298,501.00 | © Docket (Vol. IT), Exhibit “P-49”, pp. 1008-1009.

3” Docket (Vol. II), Exhibit “P-69”, pp. 1178-1194.

38 Exhibits “P-78-R-1” to “P-78-R-233”, “P-78-S-1”, “P-78-T-1” to “P-78-T-48”, “P-78-U-1” to “P-78- U-279", “P-78-V-1”" to “P-78-V-31", “P-78-W-1” to “P-78-W-10", “P-78-Y-1” to “P-78-Y-104”, and “P-78-Z-1".

39 Docket (Vol. II), Exhibit “P-79”, ICPA Report, pp. 867-868, par. 5.d.1 and 2.

GR

| Zero-rated sales without Certificates of VAT zero-rating _ OO CSCO eS cu soon ennnnnnrsnnne d 994,00 _Zero-rated sales not supported by any document 10,564,212.54 | _Total Invalid Zero-rated Sales P _47,255,199.60 | Based on the foregoing, the Court adopts the above findings of the ICPA insofar as the denial of VAT zero-rating on the amount of P47,255,199.60 for petitioner’s failure to comply with the invoicing requirements as prescribed under the afore-quoted law and regulations.

In addition, the reported zero-rated sales in the amount of P109,062,764.53 shall be denied VAT zero-rating for the following reasons:

__Exhibit No. Customer Name Amount _4. Sales of goods supported by charge sales invoices with unreadable details P-78-R-157___ Carmen Copper Corp. P 84,606.00 |

P-78-R-161

P-78-R-164

P-78-R-171 7,040.00.

P-78-R-175

P-78-R-182

P-78-R-186

P-78-R-195 Carmen Copper Corp.

P-78-R-202

P-78-R-205 : 35,734.00 P-78-R-212 Carmen Copper Corp.

P-78-R-215 Carmen Copper Corp. | 1,169,242.08 P-78-R-218 Carmen Copper Corp. 1,474,358.96 P-78-T-10 CTP Construction and Mining Corp.

P-78-T-13 CTP Construction and Mining Corp. 3,600.00

P-78-T-16

P-78-T-29 CTP Construction and Mining Corp. 102,284.00 Platinum Group Metals Corp 4,136.00

Platinum Group Metals Corp

4,136.00 | subtotal P 25,810,642.19 Je

| 2. Sales of goods supported by charge sales invoices dated outside the period of claim | | P__12,487,730.91_

3. Sales of goods supported by charge sales invoices without the words "zero-rated | sales” written or imprinted therein 10,088.00 | P 902,250.50 | 4, Sales to entities not registered with PEZA, SBMA, CDC, CEZA or BOI; without proof | of VAT zero-rating

P-78-T-39

_ Marubeni Corporation P 4,199,427.36 ui P 57,709,889.⁴ Sales to entities with proof of VAT zero-rating but outside the validity period or _ without validi jon unP278-Y-3____ Clark International Airport Corporation On 82514 12,144,000.

BP 12,152,251.47_ | P 109,062,764.53_ Thus, only the amount of P?103,797,966.37 represents petitioner’s valid zero-rated sales, computed as follows:

_ Total Reported Zero-Rated Sales

__..... Additional disallowances by this Court 109,062,764.53 | 156,317,964.1 _ Valid Zero-Rated Sales P103,797,966.37 |

Fourth and Fifth Requisites:

Petitioner incurred input taxes during the 1% quarter of FY 2014 which are attributable to its zero-rated or effectively zero-rated sales for the same period.

For the first quarter of FY 2014, petitioner declared input taxes in the total amount of P109,078,927.32, out of which the amount of P22,242,848.81 is the subject of petitioner’s claim for refund, to wit: a

Asdeclared per —s_ As Claimed for VAT Return® refund*?

_ Input Tax Deferred on Capital Goods exceeding P1M from

_ Previous Quarter _

_ Less: Input Tax on Purchases of Capital ‘Goods exceeding PIM deferred for the succeeding period _ Amortized input tax on capital goods exceeding P1M from _ previous period

Goods

On Importation of Goods Other than Capital 99,175, 780.86 97,511,739.78 P107,219,670.78 P109,078,927.3 | 1,208,528.19 | Less: Input tax directly allocable to Vatable Sales __P 22,242,848.81_ | Claimed Input tax allocable to zero-rated sales In support of its total reported input taxes of ®109,078,927.32, petitioner submitted various sales invoices, ORs and other related documents* and Import Entry and Internal Revenue Declarations (IEIRDs) with Bank Certificate/Confirmation.*3 Upon examination of the said documents, the ICPA noted exceptions in the total amount of ?11,390,208.54, as summarized below, which shall be disallowed for failure to meet the substantiation requirements under Sections 110(A), 113(A) and (B), and 237 of the NIRC of 1997, as amended, in relation to Sections 4.110-1, 4.110-2, 4.110-8, and 4.113-1 of RR No. 16-05, as amended:**

Exhibit

Reference | Description

a. On Domestic Purchase of Goods and Services ' Domestic purchases of goods and services with no supporting

Amount

TV COS 398,720.44 | iomestic purchases of services supported by documents other than T official receipts voices claimed outside the taxable period/year — ewe 158,995.87 omestic purchases of goods and services supported ‘by, VAT oices and official recei m ye “© Docket (Vol. II), Exhibit “P-49”, p. 1008.

“1 Docket (Vol. III), Memorandum for the Petitioner, pp. 1392-1394.

42 Exhibits “P-78-AA-1” to “P-78-AO-5", “P-78-AT-1” to “P-78-AW-11”, and “P-78-AX-1” to “P-78- AY-26".

43 Exhibits “P-78-AP-1” to “P-78-AS-1”.

“* Docket (Vol. IT), Exhibit “P-79”, ICPA Report, pp. 869-872, pars. 6.a.2, b.2 and c.2.

' Domestic purchases of goods supported by VAT invoices issued in | | the name of the petitioner wherein VAT amount was not separately | iSClOSCG nent Domestic purchases of services supported by VAT ORs issued in the _ name of the petitioner wherein VAT amount was not separately disclosed | Domestic purchases of goods and s services bs supported by VAT | invoices/ VAT ORs issued in the name of the petitioner but without with incorrect name, TIN and/or address of the petitioner ss Domestic purchases of services supported by VAT official receipts — with unreadable date or with no date indicated omestic purchases of goods and services supported by VAT sales joices and official receipts with unreadable details ; Domestic purchases of goods and services supported by Non-VAT sales invoices and official receipts = “<a Total input tax disallowed on local purchases | P 9,439,071.37 | b. On Importations of Goods ' Importation of goods supported by Import Entry Declarations Input VAT difference per return vs. per petition filed | _ Total disallowed input tax on importations _ ¢. On Deferred Input Tax on Domestic Purchase of Capital Goods exceeding 1,664,041.40 | P 1,826,108.69_ | Input tax deferred on purchases of capital goods exceeding P1M | supported by sale invoices but not in compliance with invoicing _ supported by unreadable tape receipts/invoices _ Input VAT on purchases of goods other than capital ‘goods classified as input VAT on purchases of capital goods exceeding 1 Million _ nput VAT on purchases of services classified as input VAT on __.. purchase of capital goods exceeding P1 Million. | Deferred Input VAT from purchases of capital goods exceeding PIM upported by documents other than sales invoices __ Deferred input VAT from purchases of capital goods exceeding Pl | Total disallowed deferred input tax | P 125,028.48 | Total disallowances found by ICPA |__P11,390,208.54_ In addition to the above disallowances made by the ICPA, input VAT in the amount of ?10,795,971.58 shall likewise be disallowed for the reasons stated hereunder:

Input VAT

Exhibit No. Name of Supplier Amount Reason for disallowance Supported by VAT invoice but dated outside Authority to Print (ATP) .

Supported by VAT invoice but without BIR's Supported & by VAT invoice but without BIR's ATP vmnmmnsntnrnanniin pported by VAT OR wherein the input VAT Cortes & Reyna Law Firm i ,392,86 | amount was not separately shown 7,402.38 | hot 7B-AB-1 supported by VAT OR but without BIR's ATP Supported by VAT OR with notation "NOT

/ALID AS SOURCE OF INPUT T/

Supported by VAT OR but without the address f petitioner Supported by VAT invoice issued not in the name of petitioner Supported by VAT OR issued not in the name f petitioner | Supported by VAT OR issued n& _ of petitioner P 21,944.03

Sure Weld Canvas Trading

COMP nnn sayan Electric Company in the name

| Visayan Electric Compan

_ subtotal

4. On Importations of Goods

P-78-AC-14

| Supported by IEIRDs with Bank

| Cert/Confirmation but the amount per | supporting document is lower than the amount |

Supported ‘by TEIRDs with Bank _

| Cert/Confirmation but the amount per | supporting document is lower than the amoun | Bangkok Komatsu Co. Ltd . (P3,927,760.77 per claim 3 P3,904,267.00 per do ne 3/493:

Bangkok Komatsu Co. Ltd | (P552,210.16 per claim less 48,059.00 per doc.)

Cert/Confirmation but the amount per | supporting document is lower than the amoun Bangkok Komatsu Co. Ltd i (P2,075,231.61 per claim Supported by IEIRD but without machine validation _.

upported ‘by TEIRD but without machine alidation — Supported ‘by TEIRD but without machine validation — Supported ‘by TEIRD but without machine validation — Supported ‘by IEIRD but without machine validation _.

i Supported ‘by TEIRD but without machine

BOMAG FAYAT Group

OMAG FAYAT Group

BOMAG FAYAT Group

ewoo International

Daewoo International

78-AP-32 Daewoo International MIAO nan Supported by IEIRD but without machine validation | _.

upported ‘by TEIRD but without machine alidation

P-78-AP-40 Hensley Industries Inc

_ Hyundai Corporation Supported ‘by SSDT but the amount per a | _ (P2,362,880.79 per claim | supporting document is lower than the amount P-78-AP-74 less P2,289,784.00 per doc __73,096.79 | claimed (Overclaim) _ | Supported by IEIRD but without machine validation and dated outside the period of | Supported by IEIRD but without machine alidation _.

Supported by TEIRD but without machine - validation, — Supported by SSDT but the amount. per | supporting document is lower than the amount | claimed (Overclaim) id upported by SSDT but the amount. per :

_ supporting document is lower than the amount | claimed (Overclaim) _ oo upported by IEIRD but without machine alidation _.

Supported by TEIRD but without machine i

H

i

| Hyundai Corporation

328,139.93 undai Corporation

P-78-AP-77

Hyundai Corporation 1,634,812.15

Hyundai Mobis

| (P75,223.26 per claim less P74,114.00 per doc.)

yundai Mobis | (P221,302.32 per claim less _P219,727.00 per doc.)

P-78-AP-78

P-78-AP-97 undai Mobis

CfA CASE NO. 9210

P-78-AP-132 I ~oma.!~u Lt9 ...... .

P~?.?:AQ:?. ...... J ... tlY.Y..IJ9~.L.M.91;l!_~m-··· ..

P-78-AR-1

BOMAG

n "70 ·rsupported by SSDTbut-the amount per !

I supporting document is lower than the amount ! ••••• l• ••••••••••••••••••}~l~?~.~-~-~•••••l•••~~-~-~'.!l.E:!9 .. (QYE:!~~.~.~.i.'.!l1..m•••••• •••••••••••••••••••• • ••••••••••••••••••!

Supported by IEIRD but without machine · j validation and the VAT amount claimed does ?.t§~~:.99 !rJ9t!~I!Y ~i!bJh~t!h!:!YAI9r:!.!QYIJtP~~J~~gp 1 Supported by document with unreadable 14 650.00 · details .-.-.... _._. .. _..-;-'"" .-.-.-.-.-.-...... .-.. _..-mL.-.-.-.-.-.-._ .. _._._._._._._._.,_._._._._._._._._._._._._._..__._._._._._._._._._._.._._.__._._._._._._._._..__. .. _._._._._._._._.._.__._._._._._._., i The document per exhibit r 1,160.00 I refer to the amount claimed Supported by document with unreadable P-78-AR-13 ! Komatsu Ltd 2,281.00 details ~bw~ n~n~u~37

c. On Deferred Input Tax on Purchase of Capital Goods exceeding I' 1M i Supported by VAT invoice but without the TIN

: P-78-AT-5

lJ~R:APPI!~Il~~~~D.!~r.....

L.P 1.9~J?L9fP~!i~i9rJ~r · j !

i Supported by VAT invoice but without the TIN ; ..... P-78-AT-16 i G.919.~1J~~t(F~r~~g)JIJ~~ L.

§?.§~9~L9tP~~i~iQIJ~r m•m•·•·· ' · · ! Supported by VAT invoice issued not in the

P-78-AT-31

1 J & R Appliance Center

24.91 ! name of petitioner . subwtal j , 711.18\ ! Total i P10,795,971.58 I In sum, out of the reported input VAT of P109,078,927.32, only the amount of P86,892,747.20 represents petitioner's valid input VAT for the first quarter of FY 2014, computed as follows: l ..... ~_QPL.!t .. VAIP~ER~~L.!.riJ?. ...... .

1 Less: Disallowances

Per ICPA reoort ' Per court's further verification Total Valid In_l!ut VAT p ················+···· P 1 L390,208.54 i Tm······· t6)95;97t.s8fm mm-22,186,186:i2l p 86,892,747.20 1 Petitioner also maintains that from the total input taxes on current purchases and importations, the amounts of P4,061,978.62 and P1,208,528.19 are directly attributable to its VATable sales and sales to government, respectively, and thus, not included in the subject input VAT claim. However, considering that petitioner failed to identify from among the declared input VAT the specific input VAT directly attributable to such sales, it cannot be determined with certainty whether the same is already included in the valid or the disallowed input VAT. As such, the exclusion of the same from the subject amount of its claim shall be disregarded.

Considering further that petitioner is engaged in taxable sales subject to 0°/o and 12°/o rates, and its input VAT cannot be directly or p..

entirely attributed to any of the transactions, the valid input VAT of P86,892,747.20 shall be allocated proportionately on the basis of the volume of its sales. Thus:

VAT Sales to

-, - ----

Private Entities

Sales to Gov't

Zero-Rated Sales

Total Sales

(a} (b) (c) _(d = a+b+c} Sixth Requisite: Petitioner has no excess input VAT available for refund.

Having determined that petitioner had valid input VAT attributable to its zero-rated sales, the Court will now determine whether the same was not applied against its output VAT liability. After deducting the input tax attributable to VATable sales to private entities in the amount of P67,446,877.12 from its output VAT liability of P112,604,762.47 from the said sales, petitioner still has a net output VAT payable of P45,157,885.35, as computed below: 0~-~PYtYA.I ___ P.~r.B.~!~rQ_________ _ __________________________ [________ ----------~!.JJ,§?.~t7.1~:~_?. ____ j dd: Adjustment of output tax on vatable sale treated as zero- i i r9.~~q _____ !?.~-~~--{~§,~?..?t_?.9.1~_Q_Q ____ ~!~~~q1 ___________________________ l _____________________________________________ 7?.!,9.?.9:!_?. _____ ! gjy_~t~9 .... 0Yt.PYt. ... YA.I ... Ii~Q.jlit.Y .. ••••••••• ••••••••••••••••••••••••••••••••••••••••••••

Om•••••••L

••••••••• ,,,,,,,,!1?.t§91,Z§?..~.17 Less: Inout VAT attributable to VATable sales to orivate entities 67,446.877.12

Net Output VAT Payable

P45,157,885.35 ~ 45 46 L~rn9~iifii~~Y~±~~!~~6 .

. ..

· Less: Reported as zero-rated sales which should be declared as Vatable sales as found by the !CPA (Exh. P-78-Y) Adjusted amount of zero-rated sales ........ !"..... ?.~?.,!A~r~l?.,~Q 6.258,501.00 P938,373,020.60 1 '" ?.~Q;!i~;~~Q-~91 6,258,5ol.oo I P253,857 ,429.50 -

Considering that petitioner’s input VAT attributable to VATable sales to private entities is not enough to cover its output VAT liability, the valid input VAT attributable to zero-rated sales shall be utilized against the remaining output VAT liability of ?45,157,885.35. However, the input VAT attributable to zero-rated sales of P18,246,358.83 is significantly lower than the net output VAT payable of P45,157,885.35. Consequently, petitioner still has net output VAT due of ?26,911,526.51, computed as follows:

Net Output VAT Payable

_Less: Input VAT attributable to zero-rated sales

_Net Output VAT Still Due

18,246,358.83 P26,911,526.51 | Petitioner posits that its input tax carried over from the previous period in the amount of #331,752,463.44 and the deferred tax on capital goods in excess of #1 million from previous quarters in the amount of #3,317,356.48 or the aggregate amount of P335,069,819.92 may be credited against its output tax due on its VATable sales for the instant period of claim.

However, the Court finds that although petitioner’s Quarterly VAT return for the 1% quarter of FY 2014 reflected the amount of P331,752,463.44*’ as “Input Tax Carried Over from Previous Period”, petitioner failed to fully substantiate the same.

Moreover, aS can be gleaned from petitioner’s Quarterly VAT Returns for the 2", 3 and 4" quarters of FY 2013, petitioner declared total input VAT of #586,724,287.23, detailed as follows:

| 2nd Quarter 3rd Quarter 4th Quarter _ (Exh. P-78-AZ-1) | (Exh. P-78-AZ-2) |

Input Tax Deferred on Capital Goods

Exceeding P1M from Previous Quarter P__ 1,282,220. | Add: Input Tax on Purchases of Capital | oods exceeding P1M during the quarte nut 105,986.94 _...6)525,951.46 _ 2,486,278.87 _ fe) joods exceeding P1M deferred for the

SUCCEEDING PTO

| Amortized input VAT on purchase of i 6377,937:7

on Domestic Purchase of

' ····················· 1 !

!

Services

7,321,742.14 I 6,953,172.94 I 5,197,968.61 I 19,472,883.69 In his report, the !CPA ascertained that out of the reported input VAT amount of P586,724,287.23, only the input VAT on importation in the amount of P406,653,353.9248 was verified. Even assuming that the amount of P406,653,353.92 was valid input VAT attributable to VATable sales to private entities and zero-rated sales, still, the same is not enough to cover its reported output VAT on VATable sales to private entities for the same period in the aggregate amount of P466,422,198.3049, thereby resulting in net output VAT payable of P59,768,844.38 (P466,422,198.30 less P406,653,353.92). Needless to say, petitioner failed to prove that it has excess input VAT carried over from previous period.

Consequently, the input tax carry-over of P331,752,463.44, cannot be validly applied against petitioner's output tax pursuant to Section llO(A) in relation to Section llO(B) of the NIRC of 1997, as amended, to wit:

"SEC. 110. Tax Credits. - (A) Creditable Input Tax. -

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax:

XXX

XXX

XXX

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, however, that any input tax attributable to zero- rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112."50 ~ 48 Docket (Vol. II), Exhibit "P-79", ICPA Report, par. 8.d), p. 873. 49 J f.' ........ !!'1,!31~,.~.~.?,.25 p 125.260,567.

p 256.342.295.31 1"466,422,198.30 50 As amended by RA No. 9361, November 21, 2006.

Verily, in claiming excess or unutilized input VAT from zero-rated transactions, it is the excess over the output VAT which should be refunded to the taxpayer or credited against other internal revenue taxes.

Hence, it is important for the taxpayer to prove that it has enough prior year's excess input VAT credits to cover its output VAT liability for the current taxable year. Consequently, there being no excess input VAT which may be the subject of a claim for refund or issuance of tax credit certificate, the instant claim must be denied. It bears stressing that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. 51 Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the refund. 52 The pieces of evidence presented entitling a taxpayer to an exemption are also strictissimi scrutinized and must be duly proven. 53 Hence, an applicant for a claim for tax refund or tax credit must not only prove entitlement to the claim but also compliance with all the documentary and evidentiary requirements. 54

WHEREFORE, premises considered, the instant Petition for Review is DENIED for lack of merit.

Associate Justice

51 Citibank N.A. vs. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 107434, October 10, 1997.

52 Commissioner of Internal Revenue vs. S.C. Johnson and Son/ Inc./ eta/., G.R. No. 127105, June 25, 1999.

53 Kepco Philippines Corporation vs. Commissioner of Internal Revenue, G.R. No. 179961, January 31, 2011.

54 Eastern Telecommunications Philippines/ Inc. vs. Commissioner of Internal Revenue, G.R. No. 183531, March 25, 2015.

!CONCUR:

?~'Jv~ CATHERINE T. MANAHAN

Associate Justice

ATTESTATION

I attest 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.

~~h,C.~~~ Q .JffANITO C. CASTANEDA~Jit' ..

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, 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. ROMAN G. DEL ROSARIO

Presiding Justice