Intel Technology Phil., Inc. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5759. April 25, 2001.] INTEL TECHNOLOGY PHIL., INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N The instant petition seeks the issuance of a tax credit certificate in the amount of P32,878,990.75 allegedly representing unutilized input value-added tax (VAT) paid by Petitioner on its domestic purchases of capital goods and services from January to March 1997. The antecedent facts follow. Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines with principal office at Gateway Business Park, Javalera, Gen. Trias, Cavite. It is engaged in the business of designing, developing, manufacturing and exporting advanced and large-scale integrated circuit components, commonly referred to in the industry as Integrated Circuits or "IC's." DACTSH On December 8, 1995, the Philippine Economic Zone Authority duly registered herein Petitioner as an Ecozone Export Enterprise with a pioneer status, pursuant to the provisions of Republic Act No. 7916 and was issued Certificate of Registration No. 95-133. Petitioner also registered itself as a value-added tax entity and was issued on January 30, 1996 a certificate of registration bearing RDO Control No. 96-540-000713. In its first quarter VAT return filed with Respondent's collection agent, DBP-Gateway Branch, Petitioner reported VAT input taxes on its domestic purchases of capital goods and services totalling P32,878,990.75 (Exh. F). The payments were allegedly made on its domestic purchases of capital goods and services used by Petitioner to start its commercial operations. On August 25, 1997 and March 12, 1999, Petitioner filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance applications for tax credit/refund of value-added tax paid amounting to P28,345,652.34 and P4,533,338.41, respectively, (Annexes D to G, Petition for Review). As alleged in its Petition for Review, Petitioner anchored its claim on Sections 100 (a)(2)(A)(i) and 108 [should be Section 102] (b)(1) of the Tax Code, to state: "SECTION 100. Value Added Tax on Sale of Goods (a) Rate and base of tax . "There shall be levied . . . (1) The term . . . (2) The following sales by VAT-registered persons shall be subject to 0%: (A) Export sales The term "export sales" means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and account for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas;" The Tax Code further declares: SECTION 102. Value Added Tax on Sale of Services and Use or Lease of Properties xxx xxx xxx (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: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)" In addition, Petitioner cited Section 8 (a) of Revenue Regulations (RR) No. 5-87 and Section 106 (a) of the Tax Code, thus: "SECTION 8. Zero-rating . (a) In general . "A zero-rated sale is a taxable transaction for value-added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods or services related to such zero-rated sale shall be available as tax credit or refundable in accordance with Sec. 16 of these Regulations. . . SECTION 106. Refunds or tax credits of input tax . (a) 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 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 , in the case of zero-rated sales under Section 100(a)(2)(A)(i), (ii) and (b) and Section 102(b) (1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted in accordance with the regulations of the Bangko Sentral ng Pilipinas. As Respondent failed to act on Petitioner's claim for refund and the two-year prescriptive period for the filing of a judicial claim for refund was about to lapse, the instant petition was filed on March 31, 1999 and subsequently amended on June 30, 1999. In his Answer filed on May 13, 1999, Respondent claimed by way of Special and Affirmative Defenses that: "5. Petitioner's alleged claim for refund is subject to administrative routinary investigation/examination by respondent's Bureau; 6. Petitioner failed to show that the taxes subject of the case at bar were erroneously or illegally collected on account of its failure to present proofs showing that its alleged sales are indeed zero-rated sales. 7. The amount of P32,878,990.75 being claimed by Petitioner as alleged VAT input tax for the period January to June 1997 was not properly documented. 8. In an action for refund/credit, 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/credit. 9. It is an elementary rule that claims for tax refund/credit are construed in strictissimi juris against the taxpayer as they partake the nature of exemption from tax." The issue We are tasked to resolve have been stipulated by the parties to be as follows: Whether or not Petitioner is entitled to a refund of the VAT input taxes paid arising from domestic purchases of taxable goods and services from January 1, 1997 to March 31, 1997 in the amount of P32,878,990.75. We find for the Petitioner. While Petitioner's reliance on Sections 100 (a)(2)(A)(i) and 102 (b)(1) of the Tax Code is erroneous as Petitioner was at the time still in its pre-operating stage where there were still no export sales to speak of, its claim for refund may nonetheless be given due course on the basis of Section 106 (b) of the 1997 Tax Code which provides: SECTION 106(b) Capital goods . A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made. As implemented, Section 4.106-1 (b) of Revenue Regulations 7-95 allows the refund or tax credit of input taxes paid on capital goods, thus: SECTION 4.106-1. Refunds or tax credits of input tax . (b) Capital Goods . Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made. Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations; the input tax refundable shall only be the ratable portion corresponding to the taxable operations. "Capital goods or properties" refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29 (f), used directly or indirectly in the production or sale of taxable goods and services. Finding Petitioner to be legally entitled to file a claim for refund, We dwell on the issue on whether or not Petitioner was able to substantiate its claim. To prove its case, Petitioner presented in evidence documents consisting of: a. Petitioner's Certificate of Registration No. 95-133 issued by Philippine Economic Zone Authority (Exhibit "A" & "A-1"); b. Petitioner's BIR Certificate of Registration with RDO Control No. 96-540-000713 issued on January 30, 1996 by Revenue District Office No. 54 (Exhibit "B"); c. Registration Agreement entered into by and between PEZA and Petitioner last December 8, 1995 (Exhibit C); d. Monthly VAT Returns for the month of January and February of 1997 (Exhibit D & E); e. Petitioner's Quarterly VAT Returns for whole year of 1997 including the amended return for the third and fourth quarters of 1997 (Exhibit F to K); f. Certification of inward remittance dated March 10, 1999 issued by RCBC (Exhibit S); g. Certification issued by Ms. Maria Wencita C. Salvador, independent CPA commissioned by the Court (Exhibit T); h. Summary of purchases attached as Annex "A" to the Certification marked as Exhibit "T" (Exhibit U); i. Schedule of input VAT paid with exception attached as Annex "B" to the Certification marked as Exhibit "T" (Exhibit W & W-1); j. Copies of Petitioner's supplier invoices and official receipts for the first quarter of 1997 (Exhibit V, V-1 to V-496). Respondent, on his part, submitted this case for decision without presenting evidence on the ground that there is no report of investigation (p. 213, CTA Records). As to whether or not Petitioner's claim for refund, both in the administrative and judicial level, was timely filed, the Court noted that Petitioner's 1997 quarterly VAT return was erroneously stamped as received by the BIR's collection agent bank on April 10, 1996 (Exh. F). The receipt of the return should have been dated April 10, 1997 to be logical. Therefore, counting from April 10, 1997, the filing of the claims for refund with the Respondent and with this Court were both well within the prescriptive period of two years in accordance with Section 230 of the Tax Code. DAHEaT Due to its voluminous documents, Petitioner engaged the services of an independent CPA, Ms. Maria Wencita C. Salvador, pursuant to CTA Circular No. 1-95, as amended by CTA Circular No. 10-97. Ms. Salvador was specifically tasked to make a special audit on Petitioner's claim for refund of input taxes on domestic purchases of goods and services. In her report dated June 28, 2000, Ms. Salvador opined that only the amount of P28,335,439.10 represents a valid claim for tax credit (Exh. T). After a thorough examination by this Court, however, of the invoices and official receipts presented by Petitioner and after taking into consideration the report of the independent CPA, the Court still found the need to reduce further the amount of input VAT being claimed either because some invoices or official receipts are not in Petitioner's name or are without supporting documents like official receipts from the Bureau of Customs per RAMO No. 2-93. There are also purchases of goods that cannot be considered as capital goods as defined under Section (2) (d) of Revenue Regulations No. 10-94. The Court also noted that the additional claim for tax credit/refund of P4,533,338.41 subject of Petitioner's Claimant Information Sheet No. 34402 (Annex E, Petition for Review) dated March 12, 1999 was not supported by evidence. The report submitted by the independent CPA even excluded the said additional claim. Based on the foregoing, We find Petitioner to be entitled only to the reduced amount of P27,472,195.04, computed as follows: Amount of Claim P32,878,990.75 Less: Disallowances (a) Unaudited claim/No supporting documents P4,533,338.41 (b) Per independent CPA's verification 10,213.24 (c) Per Court's verification (Annex A) 863,244.06 5,406,795.71 Refundable Amount P27,472,195.04 ============ Likewise, records show that the VAT input taxes of P28,345,652.34 were not applied against any output VAT liability as shown in Petitioner's amended quarterly VAT returns for the third and fourth quarters of 1997 (Exhs. I and J). In its amended third quarterly VAT return, the claimed input taxes of P28,345,652.34 were included in the total input taxes of P47,567,483.93 deducted as "Any Refund/TCC Claimed" from the "Total Available Input Taxes" of P94,754,804.08 resulting to an amount of P47,187,320.15 "Excess Input Taxes." Verily, Petitioner no longer carried over the claimed input taxes of P28,345,652.34 to the succeeding quarters. Finally, Respondent raised in his memorandum that Respondent's VAT registration was erroneous because it is covered by a special law. Citing Section 24 of Republic Act 7916, otherwise known as "The Special Economic Zone Act," which provides in part: "SECTION 24. Exemption from Taxes Under the NationalInternal RevenueCode . Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE . In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government . . ." Respondent argued that its sales are not zero-rated but are exempt from VAT, thus, it is not allowed any tax credit on input taxes paid. The issue has already been addressed by this Court a number of times, foremost of which was through a resolution promulgated on September 20, 2000 in CTA Case No . 5921 entitled Seagate Technology (Philippines) vs. Commissioner of Internal Revenue . In said resolution, this Court ruled: "Respondent is correct in arguing that if an entity is registered with PEZA as an ecozone enterprise and is remitting 5% of its gross income to the national government, it is exempt from payment of the VAT pursuant to the provisions of Section 24 of Republic ActNo.7916, to quote: "SECTION 24. Exemption from Taxes Under the NationalInternal RevenueCode . Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE . In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government . . ." Emphasis supplied. However, We do not agree that the aforequoted law is applicable to the case at bar. Section 23 of RepublicAct No.7916 provides: "SECTION 23. Fiscal Incentives . Business establishments operating within the ECOZONE shall be entitled to the fiscal incentives as provided for under Presidential DecreeNo.66, the law creating the Export Processing Zone Authority, or those provided for under Book VI of Executive OrderNo.226, otherwise known as the Omnibus InvestmentCodeof 1987." Under the aforementioned law, a PEZA registered enterprise has the option to choose between two sets of fiscal incentives. One, that which is provided for under Presidential Decree No. 66, as amended, and Section 24 of RA 7916 which includes the 5% preferential tax on gross income earned, which is in lieu of national and local taxes and second, as that provided for under Book VI of Executive Order No. 226, including but not limited to an income tax holiday (ITH) of 4 or 6 years depending on whether an entity is registered as a pioneer or non-pioneer enterprise. If an ecozone enterprise chooses the 5% preferential tax, it is exempt from payment of all national and local taxes. However if an ecozone enterprise opted for the income tax holiday, it is only exempt from payment of the income tax but still subject to other national internal revenue taxes including the value-added tax. These were explicitly elucidated by the Bureau of Internal Revenue in VAT Ruling Nos. 037-98; 043-98; 027-99; and 063-99. The records of the case convince Us that Petitioner availed of the fiscal incentives under Executive OrderNo.226 because of the fact that Petitioner is a VAT registered entity with Certificate of Registration RDO Control No. 97-083-000600-V duly issued by Respondent's Assistant Revenue District Officer, Ms. Gloria D. Decierdo, for and in behalf of Mr. Nieto A. Racho, Revenue District Officer, RDO No. 83, Dalisay, Cebu (Exh. B)." DCTSEA WHEREFORE, in the light of all the foregoing, Respondent is hereby ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner in the amount of P27,472,195.04 representing input value added tax paid by Petitioner on its capital goods from January to March of 1997. SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge I CONCUR: (SGD.) AMANCIO Q. SAGA Associate Judge ANNEX A Intel Technology Phils. Inc. Summary of Disallowed Input VAT per Court's Verification