Jenny's Garments, Inc.

November 10, 2008 BIR RULING [DA-(VAT-030) 408-08] Sec. 113; RR 7-95; VAT Ruling Nos. 073-97 & 084-02; DA-375-2003 Jenny's Garments, Inc. JG Building, C Raymundo Avenue Maybunga, Pasig City Attention: Mr. Alexander Ng Lim Vice-President Gentlemen : This refers to your letter dated June 18, 2007 requesting a ruling relative to the issues that arose from your application of tax refund on the excess input taxes covering the period January 1, 2004 up to December 31, 2004. From the documents submitted, it appears that Jenny's Garment, Inc. ("JGI") bought real properties from Norgate Apparel Manufacturing, Inc. ("NAMI"), consisting of garment factory buildings, staff house, guard house, generator house and canteen, with Property Record Form (Tax Declaration) Numbers, E-050-02074; E-018-18284; E-018-18285, respectively. The foregoing improvements are constructed on the four (4) parcels of land covered by Transfer Certificate of Title Nos. T-110066, T-205520, T-205521 and T-05522, issued by the Registry of Deeds of Laguna, and owned by Phil-Japan Realty Corporation ("PJRC"). JGI, likewise, bought the above four parcels of land from PJRC. On both sales of properties by NAMI and PJRC to JGI, no official receipts were issued. The said sale transactions were separately covered by a Deed of Absolute Sale both executed on March 10, 2004. The taxes due on the above sale transactions were paid, including, among others, the withholding tax, the documentary stamp tax and the value-added tax (VAT). NAMI and PJRC have included in their respective first quarter VAT payments for the taxable year 2004 their transactions to JGI, in the amounts of P2,827,386.19 and P2,528,100.00, respectively. The total VAT paid by JGI on the said sale transactions amounted to P5,355,486.19. JGI, on the other hand, has included the same in its schedule of purchases and input taxes for the first quarter of 2004. JGI paid the VAT passed on to it in the above transactions without demanding for VAT invoice as it has not anticipated that it would have some adverse effect on its claim for input tax credit later on. JGI relied only on the Deeds of Absolute Sale executed for the sale of the aforementioned realties in its favor. JGI, on the other hand, was issued VAT invoices on the sale in its favor by NAMI of its inventories. From the foregoing, you, in effect, pose the following questions: Is JGI entitled to tax credit for the input VAT it derived from its VATable transactions with NAMI and PJRC despite the fact that no VAT invoices or official receipts were issued covering the said transactions? In reply, please be informed that Section 4.108-1 of Revenue Regulations (Rev. Regs.) No. 7-95, the regulations applicable to the above sale transactions, and which implemented then Section 108 of the Tax Code of 1977, as amended (Section 113 of the Tax Code of 1997), requires that all VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices. These sales invoices or receipts are necessary to substantiate the actual amount or quantity of goods sold and their selling price, and will serve as documentary evidence of the purchaser to substantiate his deduction of input taxes from his output tax. 1 A sales or commercial invoice on which the taxpayer's identification number, prefixed with the word TIN and suffixed with the word "VAT", appears, qualifies such invoice or receipt as a VAT invoice 2 which, when issued by a VAT-registered seller for taxable transactions, can be used by a VAT-registered purchaser to substantiate his claim for an input tax credit. Consequently, purchases covered by invoices other than VAT invoice shall not give rise to any input tax. In other words, "purchases covered by invoices other than 'VAT Invoice' will not entitle a VAT-registered purchaser to input tax credit". 3 ADECcI In the instant case, the transactions of JGI with NAMI and PJRC, specifically on March 10, 2004, were not covered by VAT-registered invoices. Notwithstanding this fact, JGI should not be prejudiced by the non-compliance of NAMI and PJRC of the requirements as laid down in Rev. Regs. No. 7-95. As represented and as the attached documents show, NAMI and PJRC have included in their first quarter VAT payments for the taxable year 2004 their transactions to JGI. JGI, on the other hand, has included the same in its schedule of purchases and input taxes for the first quarter of 2004. The regulations specifically state that purchases covered by any document of sale other than the required VAT invoice shall not give rise to any input tax. However, such rule admits of exceptions more often based on equity. Thus, disallowing the claim of JGI for input tax credits on the foregoing transactions will not be justified as the Government will, in effect, be unjustly enriched at the expense of the former. It is important to note that tax credits (or tax refunds) are based on the legal principle of quasi-contract or solutio indebiti. The Government comes within the scope of the solutio indebiti principle, and as stated by the Supreme Court: "Enshrined in the basic legal principles is the time-honored doctrine that no person shall unjustly enrich himself at the expense of another. It goes without saying that the Government is not exempted from the application of this doctrine". 4 In addition thereto, in the case of BPI-Family Savings Bank, Inc. vs. Court of Appeals, Court of Tax Appeals and the Commissioner of Internal Revenue, 5 no less than the Supreme Court emphasized that: "Technicalities and legalism, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding taxes". It must be emphasized that JGI was only the supposed recipient of the VAT invoice/receipt. Unfortunately, it has not been issued any. JGI paid the VAT passed on to it without demanding for VAT invoice as it has not anticipated that it would have some adverse effect on its claim for input tax credit later on. It would therefore be most unfair if by reason of such a technicality which happened through no fault of its own, JGI would be made to suffer by unjustly disallowing its claim. Based on the foregoing, it is the considered opinion of this Office that the application for input tax credit by JGI, particularly to the input VAT on the transactions done in the first quarter of taxable year 2004 amounting to P5,355,486.19, should be granted, however, subject to verification by the concerned office of the authenticity of the documents submitted substantiating its claim. Finally, the Revenue District Officer (RDO) concerned is hereby ordered to impose the corresponding penalty against NAMI and PJRC as prescribed in Revenue Memorandum Order No. 56-2000, in relation to Section 264 of the Tax Code of 1997, for failure to issue the prescribed receipts. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cADSCT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. See Atlas Consolidated Mining & Development Corporation, C.T.A. Case Nos. 4984, 5008, 5037 & 5061, November 14, 1997. 2. Regs. 07-95, Sec. 4.108-1. 3. Regs. 5-87, Sec. 21. 4. Commissioner v. Fireman's Fund Insurance Co., L-30644, March 9, 1957, citing Ramie Textiles, Inc. v. Mathay, 89 SCRA 586. 5. G.R. No. 122480, dated April 12, 2000.