Tariff and Customs Code of the Philippines - Volume II

[C.T.A. CASE NO. 5158. February 17, 1998.] PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION , petitioner , vs . THE HONORABLE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This case involves a claim for refund or issuance of tax credit certificate in the amount of P3,019,071.00 representing excise taxes alleged to have been paid by petitioner on petroleum products if purchased from Petron Corporation for the period covering October 1992 to March 1994. Philippine Associated Smelting and Refining Corporation (PASAR) is a domestic corporation engaged in the business of processing, smelting, refining, and exporting metals. It is duly organized and existing under and by virtue of the laws of the Philippines and registered with the Export Processing Zone Authority (EPZA) as shown by Certificate of Registration No. 82-40 (Exh. "N") and is a registered export producer with the Board of Investments (BOI) under Certificate of Registration No. 80-1120 (Exh. "O"). Petitioner's business operations require the indispensable use of petroleum products such as diesel fuel, bunker fuel oil, lubricants and other petroleum products and as such, petitioner purchased these products from local distributors like Petron Corporation (Petron). Petitioner alleged that specific taxes imposed by law on these petroleum products were paid by Petron to the Bureau of Internal Revenue and Petron subsequently passed on to the petitioner the amount of taxes it paid on the fuel oil eventually sold to petitioner. Petitioner, believing that it is exempt from paying the said taxes under Section 17 of P. D. No. 66, applied for tax credit of specific taxes paid on purchases of petroleum products from Petron through the following letters: EXHIBIT DATE AMOUNT PERIOD COVERED B June 11, 1993 P135,500.55 Oct. to Nov. 1992 E Feb. 18, 1994 1,633,755.90 Dec. 1992 to Aug. 1993 H July 12, 1994 1,249,814.55 Sept. 1993 to Mar. 1994 P3,019,071.00 =========== Petitioner anchors its claim on the tax incentive provided for by Section 17 of P.D. No. 66 creating the Export Processing Zone Authority which states, thus: "Section 17. Tax Treatment of Merchandise in the Zone . (1) Except as otherwise provided in this Decree, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts and wares of every description. except those prohibited by law, brought into the zone, to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise or used, whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of the law to the contrary notwithstanding." Respondent did not controvert the amount prayed for in the petition but instead concentrated on disputing the legal basis of the request for refund/tax credit. Through a letter, dated September 2, 1994 (Exhibit "L"), respondent denied petitioner's claim for refund covering the period October 1991 to November 1992 on the ground that the provisions of Section 17 of P.D. No. 66 and BIR Ruling No. 126-86 does not state clearly that petroleum products sold and delivered to EPZA registered enterprises are exempt from taxes. Respondent maintains that it is a settled rule in taxation that tax exemptions cannot be created by implication because exemptions from taxation are highly disfavored in law and one who claims exemption from tax must be able to justify his claim by the clearest grant of organic or statute law. Respondent also asserts that the petroleum products purchased by the petitioner do not form part of the export products manufactured, thus falling outside the ambit of Section 18(i) of P.D. No. 66 as amended by P.D. 1449, to quote: "(i) Tax Credit . Every registered zone enterprise shall enjoy a tax credit equivalent to the sales, compensating, and specific taxes and duties on supplies, raw materials, and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof : Provided, that the tax credit shall accrue to the registered zone enterprise only after the final product has in fact been exported. The tax credit shall be used by the Secretary of Finance upon presentation of the export documents, and shall be in lieu of refunds . It may be used to pay taxes, duties, charges and fees due to the national government in connection with its operation. A tax credit shall be non-transferable, except when such transfer is by hereditary succession or occurs by operation of law, it may be used by the person or entity to whom it is issued only for as long as it enjoys the benefits and incentives provided for in this Decree; and may not be used so as to result in a refund." (emphasis supplied) And finally, respondent contends that at the time the products in question were sold and delivered to the petitioner by Petron, the same were already tax paid and the use of these products within the zone does not render the collection of the tax illegal or erroneous with respect to the tax previously paid by Petron. The taxes having been legally paid and collected at the time of payment, the same cannot be the subject of refund or tax credit. Petitioner construed this particular denial by the respondent as an implied rejection of its other claims for refund of a similar nature, hence petitioner filed the instant petition for review on October 12, 1994 where petitioner consolidated all such claims. cdll Respondent in her Answer, adopted the same line of defenses as contained in her letter of denial addressed to the petitioner. Quoted hereunder are the special and affirmative defenses maintained by the respondent: "3. Section 17(l) of P.D. No. 66 relied upon by the petitioner does not clearly state that the petroleum products sold and delivered to EPZA registered enterprises are exempt from taxes. Settled is the rule that tax exemptions cannot be created by implications as they are highly disfavored in law. And considering further that a claim for tax refund partakes of the nature of an exemption, it cannot be allowed unless granted in the most explicit and categorical language. (BIR Ruling No. 126-86 dated July 23, 1986); 4. Contrary to the petitioner's assertions, Section 18(i) of P.D. No. 66, as amended by P.D. No. 1449, states that the tax credit to be given to a registered zone enterprise shall cover the sales, compensating and specific taxes and duties on supplies, raw materials and semi-manufactured products used in the manufacture or processing or production of its export products and forming part thereof. Certainly, the ad valorem and specific taxes herein sought to be refunded/credited by the petitioner do not form part of the export products manufactured by it and therefore, not refundable; 5. Moreover, an indirect tax (i.e., ad valorem and specific taxes) when added to the cost of goods sold is no longer a tax but an additional cost which the purchaser has to pay to obtain the goods (Commissioner vs. American Rubber Co., 18 SCRA 1056). In the instant case, petitioner merely paid the added cost of the regular gasoline and diesel fuel, not the ad valorem tax, the entity or person subject thereto being Petron Corporation, the manufacturer; 6. A cursory reading of the 1981 Opinion of the then Ministry of Justice, the Ministry of Finance Ruling dated December 11, 1984, L.O.I. No. 942 dated October 16, 1979 and Article 79 of the Omnibus Investment Code being invoked by the petitioner does not in any way show much less provide that the alleged ad valorem and specific tax erroneously billed to petitioner by Petron Corporation in the total amount of P3,019,071.00 for the period October 1992 to March 1994 is refundable to the former on its purchases of regular gasoline and diesel fuel from the latter; 7. Petitioner which has the burden of proving its entitlement to the tax refund has failed to establish any clear interest in or right over the alleged ad valorem and specific taxes in the total amount of P3,019,071.00; 8. In an action for tax refund/credit, the burden of proof is upon the taxpayer to show that the tax paid was erroneously or illegally collected and failure to substantiate the same is fatal to the action; 9. If is likewise incumbent upon the petitioner to show that it has complied with the provisions of Sections 204 and 230 of the Tax Code." Respondent manifested that she will not present any evidence but will submit her case based on the records. She also failed to file her memorandum for this case. prcd The primordial issue to be resolved in this case is whether or not petitioner, as an EPZA-registered enterprise, is entitled to a refund or tax credit for taxes it had paid on petroleum products purchased from Petron in the total amount of P3,019,071.00 covering the period October 1992 to March 1994. The foregoing issue had long been settled by this Court through precedent cases where it ruled that petroleum products purchased and used by an EPZA-registered enterprise are exempt from duties and taxes, thus entitling the petitioner to the refund or tax credit sought ( Philippine Phosphate Fertilizer Corporation vs . The Honorable Commissioner of Customs , CTA Case No . 4661 , May 31 , 1993 ; Philippine Associated Smelting and Refining Corporation vs . The Honorable Commissioner of Internal Revenue , CTA Case No . 4709 , February 13 , 1995 ). Quoted hereunder are portions of the leading case of Philippine Phosphate Fertilizer Corporation vs . The Honorable Commissioner of Customs , CTA Case No . 4661 , May 31 , 1993 for emphasis: "Section 17 (l) covers domestic merchandise, raw materials, supplies, articles and wares of every description, except those prohibited by law, brought into the zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activity shall not be subject to customs and internal revenue laws and regulations. Oil products produced by local oil companies may be classified as domestic merchandise, raw materials, or supplies as legally defined in the Supreme Court case of Commissioner of Customs vs. Caltex (Philippines), Inc. (G.R. No. L-13067, Dec. 29, 1959, 106 Phil 829) which states that supplies or materials shall include gasoline and other petroleum products for purposes of exemption from customs duties under Article 103 of Republic Act No. 387. For that purpose, among others, these products may be brought into the zone for processing, manipulation, manufacture, mixed with foreign or domestic merchandise or used directly or indirectly in such activity. In our particular case, the petroleum products delivered to petitioner is used in the processing of fertilizer for export. While respondent may be correct that these products did not form part of the fertilizer exported nevertheless , the law does not provide for such requirement but only requires the use of such materials directly or indirectly in such activity . The use of petroleum products such as bunker oil as fuel will easily fall under the phrase "used directly or indirectly in such activity". Clearly , these petroleum products can easily qualify for tax and duty free privileges under Section 17(l) of P . D . 66 ." (emphasis supplied) On the issue invoked by the respondent that since it was Petron Corporation, the manufacturer of the petroleum products which was directly subjected to the ad valorem tax in question, and the same being merely passed on to the petitioner as indirect taxes, the latter is not the proper party to claim for a refund/tax credit, the case of Philippine Associated Smelting and Refining Corporation vs . The Honorable Commissioner of Internal Revenue , CTA Case No . 4709 , February 13 , 1995 , has this to say: "Anent the issue of whether petitioner is the proper party to ask for a refund, this Court rules in the affirmative. The tax exemption privilege provided by Presidential Decree No. 66 extends to EPZA-registered enterprises, therefore, petitioner as an EPZA-registered enterprise has the personality to invoke this privilege." prLL We also agree with the petitioner that the issuance of Letter of Instruction No. 942, dated October 16, 1979, further bolstered their claim that EPZA-registered enterprises are entitled to refund/credit of taxes paid on purchases of petroleum products. Letter of Instruction No. 942 issued on October 16, 1979 provides that: "7. Sales and delivery of products to bonded warehouse of export-oriented manufacturers and to export processing zone enterprises can be considered as " export sales " and products constructively exported, so that tax credit and duly drawback can be availed of immediately , without awaiting for actual exportation of the finished products abroad. For this purposes, the requirement that the exporter has in fact exported shall include constructive exportation as defined." The basic policy in establishing a zone is to attract enterprises especially foreign investors who will be manufacturing products primarily for export and be able to do so without their supplies and raw materials entering, and the export products leaving the Philippine territory within the context of customs and revenue regulations. Export is the backbone of our economy and is being encouraged by providing enterprises with all the incentives including those which we have discussed above. For which reason the law further states "All doubts concerning the benefits and incentives granted enterprises and investors by the Code shall be resolved in favor of investors and registered enterprises." ( Philippine Phosphate Fertilizer Corporation vs . The Honorable Commissioner of Customs , supra ) We are therefore convinced that the petitioner's arguments explaining the merits of its claim for refund rests on a firm legal ground, however, a close scrutiny of all the evidence presented by the petitioner led this Court to deny the instant claim for refund due to petitioner's failure to present sufficient evidence to support the amount claimed. To prove its claim, all the applications for tax credit filed by the petitioner with the respondent were accompanied by certifications issued by Petron attesting to the fact that it actually paid specific taxes to the Bureau of Internal Revenue and billed the same to PASAR (Exhs. "C", "F", and "I"). Petitioner also presented as evidence the schedules of petroleum products sold and delivered to PASAR by Petron (Exhs. "C-1", "F-1", and "I-1") as well as Confirmation Receipts and Payment Orders issued by the Bureau of Internal Revenue to Petron for tax payments made by the latter. We find the foregoing evidence insufficient to substantiate its claim for refund in the amount of P3,019,071.00. The petitioner failed to submit the invoices supporting the schedules of petroleum products sold and delivered by Petron to PASAR (Exhs. "C", "F", and "I"). It is only through these invoices that this Court could verify the truthfulness of the amount claimed by the petitioner. Such failure on the part of the petitioner is fatal to its claim for refund. The Rules of Evidence clearly provide that the Court shall consider no evidence which has not been formally offered (Rule 132, Section 35 of the Revised Rules of Court). In this Court's resolution, dated June 27, 1996 (pp. 91-92. CTA records), We denied the admission of all the exhibits offered by the petitioner due to its failure to show photocopies of the said exhibits which were allegedly marked in Court and before a court-appointed Commissioner. When We finally reconsidered this resolution on August 21, 1996, We still did not admit the invoices and receipts needed to prove the amount claimed because of the obvious fact that these were not offered in evidence by the petitioner. The certifications issued by Petron (Exhs. "C", "F", and "I") as well as the Confirmation Receipts and Payment Orders (Exhs. "D" to "D-4", "G" to "G-5") issued by BIR to Petron are futile to the claim of the petitioner for lack of supporting documents that would prove the authenticity of the amount sought to be refunded by the petitioner. 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 exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim ( Towa Industry , Inc . vs . Commissioner of Internal Revenue , CTA Case 5219 , May 13 , 1997 ). In the case at bar, petitioner failed to establish the veracity of its claim for refund of ad valorem and specific taxes in the total amount of P3,019,071.00 WHEREFORE, in view of all the foregoing, the instant claim for refund is hereby DENIED due to insufficiency of evidence. llcd SO ORDERED. (SGD.) RAMON O. DE VEYRA Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge (SGD.) AMANCIO Q. SAGA Associate Judge