Philippine Associated Smelting and Refining Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5158. August 13, 2003.] PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION , petitioner , vs . THE HONORABLE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N Through a resolution promulgated on July 26, 2002, this case was remanded to us by the Court of Appeals for the reception of petitioner's evidence, consisting of nineteen (19) additional invoices, to support the denied portion of its claim for refund of excise taxes paid on petroleum products 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 exporting, processing, smelting and refining metals. It is registered with the Export Processing Zone Authority (EPZA) as a Zone Export Enterprise as shown by Certificate of Registration No. 82-40 ( Exh. N ) and with the Board of Investments (BOI) as an Export Producer with the status of a preferred pioneer enterprise under Certificate of Registration No. 80-1120 ( Exh. O ). Its plant is located at the Leyte Industrial Development Estate (LIDE), an area covered by the provisions of Presidential Decree No. 66, as amended, otherwise known as the "EPZA Law". 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: "Sec. 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 do 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 a Petition for Review on October 12, 1994 where petitioner consolidated all such claims. Respondent, in his Answer, adopted the same line of defenses as contained in his 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. It 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 did not present any evidence to prove his case, instead he submitted the same based on the records. He also failed to file his memorandum for this case. HEIcDT In a decision promulgated on February 17, 1998, the Petition for Review was denied due to insufficiency of evidence. However, petitioner filed a Motion for Reconsideration thereof which we granted to enable the petitioner to present additional evidence to support its claim for refund. 1 Upon admission of petitioner's additional evidence, this case was again submitted for decision on October 7, 1998. 2 In our decision promulgated on May 6, 1999, we determined that the issue to be resolved remains the same: Whether or not the petroleum products purchased and used by petitioner in its business operations in LIDE are exempt from duties and taxes, hence, it is entitled to the refund or issuance of a tax credit certificate in the amount of P3,019,071.00. We ruled in the affirmative for it was not the first time that this court had been confronted with such issue at hand. This court resolved the same issue in the cases of Philippine Phosphate Fertilizer Corporation vs. Hon. Commissioner of Customs, CTA Case No. 4661, May 31, 1993 and Philippine Phosphate Fertilizer Corporation vs. Hon. Commissioner of Customs, CTA Case No. 4957, October 5, 1995 , which are anchored on similar factual circumstances and on all fours with the case at bar. Thus, we found no cogent reason to depart from the wisdom of our decision in said cases, which declared, to wit: "Based on the above-quoted authority, petitioner, as an EPZA registered enterprise is exempted from the payment of excise taxes, and if said taxes were passed on by the supplier to EPZA registered enterprises like the petitioner, tax credit shall be granted to the latter . The fact that it was not the petitioner who had paid the taxes directly to the Bureau of Internal Revenue does not have an adverse effect on petitioner's action for refund. The law granting the exemption makes no distinction as to the circumstances when the law shall apply. Since the law makes no distinction, neither should we. The exemption is so broad as to cover the present situation. Since an export processing zone is not considered to be covered by Philippine customs and internal revenue laws, the taxes paid by the petitioner on the petroleum products should be refunded or credited in its favor . . ." (Emphasis supplied). The legal issue having been settled, the court then resolved the factual issue of whether or not petitioner had established by evidence its claim for refund. To support its claim, petitioner adduced in evidence, inter-alia , certifications issued by Petron attesting to the fact that it actually paid specific taxes to the Bureau of Internal Revenue (BIR) and billed the same to petitioner ( Exhibits C, F & I ). Likewise, petitioner presented the schedules of petroleum products sold and delivered by Petron to it ( Exhibits C-1, F-1 and I-1 ) as well as the Confirmation Receipts and Payment Orders issued by the BIR to Petron, to prove that the subject excise taxes were paid by the latter to the BIR. Further, petitioner submitted to the court the additional evidence subject of its Motion for Reconsideration consisting of invoices to support the schedules of petroleum products sold and delivered by Petron ( Exhibits P-1 to P-79 ). This court then held that after a minutiose scrutiny of the evidence adduced by petitioner ( Exhibits A to PP-79 ), it found the same sufficient to grant the desired relief of petitioner but only in the amount of P1,498,716.45, as this was the only amount duly supported by invoices. Respondent assailed our decision in a Motion for Reconsideration but raising the same arguments. Petitioner was likewise not satisfied with said decision and filed a Motion for New Trial on the ground that when it initiated a retirement program on that year (1999), numerous employees availed of the same. With the resignation of these employees, the office of the different departments of petitioner were rearranged and files were discovered. Among these files discovered were the files containing the invoices which would support the portion of petitioner's claim which was denied. Respondent vehemently opposed petitioner's motion, alleging that the invoices sought to be presented were merely "forgotten evidence" because they were already in its possession at the start of the trial of this case and petitioner did not even exercise reasonable diligence to locate the invoices in order to present them at the trial. Furthermore, respondent contended that petitioner was already given its day in court when it was granted its first motion to present the invoices necessary to prove its claim. In our resolution of August 17, 1999 3 , we denied both motions of the parties. We also held that the alleged newly-discovered evidence of petitioner can not be appropriately called "newly discovered" for they could have been very well presented during the original trial and first new trial, with the exercise of reasonable diligence, which apparently had not been observed by petitioner's counsel. Aggrieved, petitioner elevated the case to the Court of Appeals. In a decision promulgated on March 30, 2001, the Court of Appeals agreed with this court that the invoices petitioner sought to present in its second motion for new trial can not be considered as "newly discovered evidence". The appellate court thus held: We fail to see any due diligence on the part of petitioner to present the additional invoices as such invoices, according to petitioner, were merely misplaced in one of their offices. They could very well have been presented had petitioner exercised reasonable diligence to locate them. It is important to point out that petitioner was aware, through their counsel, that these invoices were crucial to their cause, as it was the absence of these invoices which caused the tax court to initially dismiss its claim and yet, they were satisfied to submit only the available invoices, without searching for the missing ones. Petitioner filed a Motion for Reconsideration arguing that contrary to the Tax Court and Court of Appeals' belief, it exercised reasonable diligence in locating the nineteen (19) invoices during the trial. It only happened that per corporate accounting and management policy, all such invoices should be lodged with the Budget/Capex department. However, it turned out that the Budget/Capex department did not have possession of all the pertinent invoices. Petitioner averred that efforts were made to search for the invoices in the other departments but not all the required invoices were found. Those that were located were presented before the CTA while the rest were deemed to have been lost. It was only when an early retirement/separation program was conducted by the petitioner, which program was initiated in the 1st quarter of 1999 or after the case had been submitted for the decision of the CTA, that nineteen (19) more invoices were found among the files and document surrendered by some retiring employees. With this convincing argument the Court of Appeals was persuaded to render an amended decision on July 26, 2002. It considered these nineteen (19) additional invoices newly discovered evidence because petitioner failed to find them and present them during trial despite exercise of due diligence citing the case of Tumang vs. Court of Appeals . 4 In fine, the Court of Appeals was convinced that petitioner really did exert effort in locating these invoices during trial but despite said due diligence failed to find them. The appellate court had these to say: In the case at bar, and similar to what transpired in the afore-quoted case, petitioner had no idea that the subject invoices were in the possession of an employee who was not supposed to have custody of said invoices. Cognizant as to the importance of these invoices to their claim for refund, petitioner searched for them in the place where they should properly be, in the Budget/CAPEX Department, in accordance with company policy. Since the invoices were not in the custody of the proper department, it is understandable on the part of petitioner to consider these invoices as lost and could not be found, even in the exercise of reasonable diligence. It is further understandable that petitioner did not even think of asking all of its employees if they have in their possession the missing invoices, considering that it has hundreds of them. In order that a particular piece of evidence may be properly regarded as "newly discovered" for purposes of a grant of new trial, what is primordial is that petitioner exerted reasonable efforts to locate these invoices in the place where they should properly be, in the Budget/CAPEX Department. Further, the additional nineteen (19) invoices cannot be considered "forgotten evidence". "Forgotten evidence" refers to evidence already in existence or available before or during trial, which was known to and obtainable by the party offering it and which could have been presented and offered in a seasonable manner were it not for the oversight or forgetfulness of such party or his counsel. As discussed above, the subject invoices were misplaced and could not reasonably be found by petitioners (sic). Anent the fact that petitioner had already been given a new trial, which is considered by respondent as an impediment to the granting of another new trial to herein petitioner, suffice it to state that a second new trial is expressly authorized by the rules if based on a ground not existing nor avoidable (sic) when the first motion was made. As long as there is adequate justification for petitioner's failure to make the additional invoices available during the original trial, and even in the new trial previously allowed by the CTA, a second new trial is allowed under the rules. We find as adequate justification the fact that the additional invoices were considered lost and misplaced by herein petitioner when they could not be found in the Budget/CAPEX Department. Finally, the CTA emphatically ruled that herein petitioner has established a clear legal ground for its claim for refund, the only question is how much of that claim can be substantiated by petitioner. Having thus established a clear right to claim a tax refund, it would certainly serve the ends of justice if petitioner is allowed, through a new trial allowed under the Rules of Procedure, to present the nineteen (19) additional invoices to substantiate such claim. Consequently, we set the case for hearing for the presentation of petitioner's nineteen (19) invoices on February 27, 2003. Surprisingly, petitioner's counsel did not appear. The case was ordered reset but with final warning to petitioner. 5 In the resetting held on April 10, 2003, petitioner moved for one last chance "to present its witness". 6 Respondent interposed no objection provided it would be the last resetting. On May 19, 2003, petitioner manifested that despite diligent effort, it still failed to locate the nineteen (19) invoices which are to be presented as petitioner's additional evidence, thus, she moved for another resetting of the hearing. Respondent did not object as long as it would be the last resetting. The court granted the same with final warning to the petitioner. 7 On June 19, 2003, petitioner's counsel again manifested that "the petitioner has until this time not located the additional evidence in this case". 8 Respondent moved that since it was the fourth time that the case had been reset, petitioner be considered to have waived the right to present the nineteen invoices. He further prayed that the resolution of the Court of Appeals on August 17, 1999 and the earlier resolution of this court be sustained allowing only the amount of P1,498,716.45 to be refunded to the petitioner. The case was submitted for decision on the same date. As clearly revealed by the facts in this case, petitioner, as represented by the Law Firm R.E. Cabote & Associates, was careless way back in 1999 when it filed a Motion for New Trial. As early as May 26, 1999 when said motion was filed, petitioner already alleged that the files containing the invoices which would support the portion of its claim which was denied by this court were found. Thus, petitioner prayed that it be allowed an opportunity to offer the said documents. In other words, when petitioner insisted that it be allowed to present the nineteen (19) invoices which would support the denied claim of P1,520,354.55, it asserted that said invoices were already in its possession and needed only to be presented to this court because they were ALREADY found, discovered or located by then. That was why when we denied its Motion for New Trial it bravely appealed to the Court of Appeals praying that our decision of May 6, 1999 be reversed and that the claim for refund be granted without the need of adducing the nineteen (19) invoices, or in alternative, it be allowed to present the nineteen (19) remaining invoices to evidence its claim . When the Court of Appeals denied petitioner's Petition for Review in its decision of March 30, 2001, petitioner filed a Motion for Reconsideration claiming that the nineteen (19) invoices to be presented fall within the purview of "newly discovered evidence" and that efforts were made to search for the invoices but not all the required invoices were found. It was only when an early retirement-separation program was conducted by the petitioner during which time the case had already been submitted for decision of the CTA, that the nineteen invoices were found among the files and documents surrendered by some retiring employees. So, petitioner was undoubtedly consistent in its stand that the nineteen invoices in its possession could not be found and presented during the trial despite due diligence but were discovered only after trial, thus, must be considered as "newly discovered evidence". Petitioner even argued that it is most unfair for the CTA to assume that petitioner did not exert every reasonable due diligence to locate those missing invoices as it is clearly "within their interest and to their advantage to have presented them during the trial had they in fact been effectively available to them at that time". 9 The Court of Appeals believed petitioner's declaration and rendered an amended decision on July 26, 2002. Hence, the case was remanded to us for the presentation of the said nineteen (19) invoices. However, as already discussed above, in the hearings conducted on April 10, 2003, May 19, 2003 and June 19, 2003, petitioner, through counsel, consistently manifested that it was not able to locate the nineteen invoices. We note though that in the Notice of Judgment of the Court of Appeals, petitioner's counsel was still the firm of R.E. Cabote & Associates. But in the Entry of Judgment thereof, petitioner was already represented by Ponce Enrile Reyes & Manalastas Law Firm. Whether or not there was complete turnover of petitioner's case, it was the new counsel's bounden duty to actively recover the records of the case, if indeed the Law Firm of R.E. Cabote & Associates really had the subject invoices. A new counsel who appears in a case in midstream is presumed and obliged to acquaint himself with all the antecedent processes and proceedings that have transpired prior to his takeover. 10 Therefore, whichever law firm undertook to handle petitioner's case should have been more careful in its representation of facts. It must be pointed out that the very reason the Court of Appeals rendered an amended decision and remanded this case to us for the reception of petitioner's nineteen (19) invoices was because it was made to believe that petitioner indeed had in its possession said invoices and what it lacked was the opportunity to present the same to support its claim for tax refund. Accordingly, this court holds both law firms, the R.E. Cabote & Associates and Ponce Enrile Reyes & Manalastas , responsible for the conduct of their handling lawyers. The firm should have been more careful in the supervision of their handling lawyers who should have made representation only after they have actually verified with certainty the availability of the alleged documents. Such conduct is not tolerated under the Code of Professional Responsibility. WHEREFORE, for failure on the part of the petitioner to present the nineteen (19) invoices despite its assertion that the same were already in its possession way back May 26, 1999, our decision promulgated on May 6, 1999 is hereby REINSTATED and the amount of P1,520,354.55 remains to be DENIED for being unsupported. SO ORDERED. (SGD.) LOVELL R. BAUTISTA Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge Footnotes 1. CTA Records, pages 173174. 2. CTA Records, page 273. 3. CTA Records, page 327329. 4. 172 SCRA 328. 5. CTA Records, page 512. 6. TSN, April 10, 2003, page 2. 7. CTA Records, page 515. 8. TSN, June 19, 2003, page 2. 9. Motion for Reconsideration, par. 3.2, CA-GR SP No. 54909, CTA Records, page 477. 10. Development Bank of the Phils. vs. Court of Appeals , 302 SCRA 362.