KEPCO Philippines Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5761. July 14, 2003.] KEPCO PHILIPPINES CORPORATION , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This is a Petition for Review claiming for the refund or issuance of a tax credit certificate in the amount of P31,590,928.85 allegedly representing unutilized input value-added tax for the taxable year 1997 arising from domestic purchases of goods or services attributable to the sale of electricity to the National Power Corporation ( NPC, for brevity ) and capital goods. The antecedents, as adduced from the records of the case, are summarized as follows: Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with its principal place of business located at Suite 2501-A, 25th Floor, Tektite Tower I, Exchange Road, Ortigas Center, City of Pasig (Joint Stipulation of Facts, Paragraph 1, CTA records, p. 51). It is a Value-Added Tax (VAT) registered taxpayer engaged in the production and sale of electricity (as an independent power producer), and sells electricity to the National Power Corporation (NPC) ( Joint Stipulation of Facts, Paragraph 2, CTA records, p. 51 ). For the four taxable quarters of calendar year 1997, petitioner duly filed its quarterly VAT returns with respondent BIR through the BIRs authorized agent bank ( Joint Stipulation of Facts, Paragraph 3, CTA records, p. 51 ). According to petitioner, during the four taxable quarters of 1997, it has incurred expenses representing domestic purchases of goods and services, for which it paid input VAT representing 10% of the total amount of the said purchases allegedly attributable to the production and sale of electricity to the NPC. The input VAT paid in the total amount of P31,590,928.85 were accordingly reported by petitioner in its quarterly VAT returns for the 1st, 2nd, 3rd and 4th quarters of 1997, detailed as follows: Quarter Input VAT Exhibit 1st P5,763,858.42 LL 2nd 6,634,853.17 MM 3rd 5,533,783.25 NN 4th 13,658,434.01 OO TOTAL P31,590,928.85 Petitioner alleged that the said input VAT it paid on its domestic purchases of goods and services had remained unutilized considering that petitioner does not have any output VAT against which the same could be applied. According to petitioner, the absence of any output VAT is explained by the fact that NPC is its sole customer such that all its sales are zero-rated and, therefore, do not result to any output VAT. Petitioner filed the appropriate Application for Effective Zero Rating of its sales of electricity to NPC with respondent Commissioner of Internal Revenue ( Joint Stipulation of Facts, Paragraph 4, CTA records, p. 52 ). On March 30, 1999, petitioner, through its external auditors, filed with RDO No. 42 of the Bureau of Internal Revenue, a claim for refund of the unutilized input VAT incurred for the four taxable quarters of calendar year 1997 ( Joint Stipulation of Facts, Paragraph 5, CTA records, p. 52 ). To date, respondent has not acted on the subject claim for refund or tax credit. Thus, on March 31, 1999, petitioner filed with this court a Petition for Review claiming for the refund of the amount of P31,590,928.85 as its unutilized input VAT for taxable year 1997. On June 4, 1999, respondent filed an answer to the instant petition for review, and raised therein the following Special and Affirmative Defenses, to wit: 1. "That the herein petitioner is not entitled to the refund of the amounts prayed for in the instant petition for review; 2. That the instant petition for review was prematurely filed as petitioner has not exhausted the administrative remedies required by law and jurisprudence on the action of this nature as no decision has as yet been rendered by the respondent; 3. Such being the case the Honorable court has no jurisdiction over the petition for review". Subsequently, in a Resolution promulgated on March 19, 2002, this court granted petitioners "Motion for Leave of Court to Admit Attached Amended Petition for Review" filed by petitioner on December 21, 2001 in order to include an additional cause of action in pursuing its claim for refund, particularly Section 106(b) of the 1995 Tax Code. Said law allows the refund of unutilized input VAT directly attributable to capital goods. Thereafter, petitioner presented additional oral and documentary evidence, among others, is the "Classified Summary of Domestic Purchases" to prove that its unutilized input VAT being claimed for refund or tax credit includes input VAT from domestic purchases of capital goods during the taxable year 1997. The claim for refund was recomputed as follows ( Exhibits V, Z, DD and HH) : The issues to be resolved in the case at bar are streamlined as follows: 1. Whether or not the sale of electricity by a VAT-registered entity to the National Power Corporation (NPC) qualifies as a sale of services subject to a VAT rate of zero percent (0%) or otherwise called as zero-rated VAT transaction ( Joint Stipulation of Issues, Paragraph 1, CTA records, p. 52 ); 2. Whether herein Petitioner, as a VAT-registered entity, did, for the calendar year 1997, actually incur expenses representing domestic purchases of goods and services, for which it incurred an input VAT in the amount of P31,590,928.85, which expenses represent the costs attributable to Petitioners production and sale of electricity to the NPC ( Joint Stipulation of Issues, Paragraph 2, CTA records, pp. 52 & 53 ). 3. Whether or not petitioner is entitled to the claimed input VAT payments on capital goods purchased for taxable year 1997. The issue of whether or not the sale of electricity by a VAT-registered entity to NPC is effectively zero-rated for VAT purposes is not one of first impression as the same had already been resolved by this court in the affirmative in a number of similar cases. Thus, the law applicable thereto is Section 102(b)(3) [now Section 108(B)(3)] of the Tax Code in relation to Section 13 of Republic Act No. 6395 (NPC Charter), as amended, to wit: "Sec. 102. Value-added tax on sale of services and use or lease of properties . (a) Rate and base of tax. . . . (b) Transactions subject to zero-rate. The following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1) . . . (2) . . . (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 rate ." (Emphasis supplied). xxx xxx xxx "Section 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government and Government Instrumentalities . The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance of effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings ." (Emphasis supplied). Clearly from the foregoing, NPC is an entity with a special charter, which categorically makes it exempt from payment of all taxes, whether direct or indirect, including VAT. Hence, by virtue of the said charter, services rendered by a VAT registered entity to NPC are effectively subject to zero percent (0%) VAT ( Mirant Navotas Corporation vs. Commissioner of Internal Revenue, CTA Case No. 6044, October 16, 2002 ). TAEcSC Moreover, no less than the Supreme Court affirmed NPCs tax exemption in the case of Maceda vs. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771, where the High Tribunal held that: ". . . Presidential Decree No. 938 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from all forms of taxes . . . The use of the phrase all forms of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the corporation to pay the indebtedness and obligations in furtherance and effective implementation of the policy enunciated in Section one of this Act, . . ." xxx xxx xxx "It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes . . . if it is to attain its goals (emphasis ours)." Thus, in order to qualify for effective zero-rating under Section 102(b)(3), petitioner must be able to prove the following: (a) that it is a VAT-registered entity and (b) that it actually derived sales from services rendered to NPC, an entity exempt from VAT by virtue of Republic Act No. 6395, as amended. The fact that petitioner is a VAT-registered entity is undisputed (par. 2, Joint Stipulation of Facts). It should be noted, however, that petitioners quarterly VAT returns for taxable year 1997 (Exhibits LL, MM, NN and OO) did not reflect any amount of the alleged zero-rated sales and failed to substantiate the same. Also, petitioner did not submit the corresponding invoices and/or official receipts showing its sales of electricity to NPC for the subject period. Since petitioner failed to submit documents evidencing that it has reported effectively zero-rated sales for 1997, it follows that the input VAT payments allegedly attributable thereto cannot be refunded. It is clear from the provisions of Section 106(a) [now Section 112(A)] of the Tax Code that there must be zero-rated or effectively zero-rated sales in order that a refund of input VAT could prosper, to wit: "Sec. 106. Refunds or tax credits of creditable 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, That 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 for in accordance with the regulations of the Bangko Sentral ng Pilipinas (BSP). 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 or 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. (Emphasis supplied). The only issue left for determination is whether or not petitioner is entitled to the claimed input VAT payments on capital goods purchased for taxable year 1997. Section 106(b) [now Section 112(B)] of the Tax Code, provides: "Sec. 106. Refunds or tax credits of creditable input tax . (a) . . . (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. Relative thereto, Sections 4.104-5 and 4.106-1 of Revenue Regulations No. 7-95 state, thus: "SEC. 4.106-1. Refunds or tax credits of input tax . (a) . . . (b) . . . "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 or services." Plainly, from the above provisions, in order to be entitled to a refund/tax credit of input VAT paid on capital goods purchased, petitioner must prove that: 1) it is a VAT registered entity; 2) it paid input VAT on capital goods purchased; 3) its input VAT payments on capital goods are duly supported by VAT invoices or official receipts; 4) it did not offset or apply the claimed input VAT payments on capital goods against any output VAT liability; and 5) the administrative and judicial claims for refund were filed within the two-year prescriptive period ( KEPCO Philippines Corporation vs. The Commissioner of Internal Revenue, CTA Case Nos. 5675 and 5704, March 18, 2003 ). Records reveal that petitioner substantially complied with all the aforementioned requirements. It is undisputed that petitioner is a VAT-registered entity. Records likewise show that petitioner paid input VAT on capital goods purchased. But out of the total input taxes of P29,981,325.50 reflected in the classified summary of petitioners input taxes on its purchases of capital goods, this court found that only P15,109,293.32 can be properly classified as capital goods, thus: The above amounts of input taxes were duly supported by valid VAT invoices and/or official receipts. However, as to the remaining amount of P14,872,032.18, this court is constrained to deny the same because, based on the evidence presented and the testimony of Ms. Karen Bulos ( TSN dated June 27, 2002, page 11 ), they cannot be considered as pertaining to capital goods. The general vouchers supporting such amount used the following account titles: inventory/supplies/chemicals/materials for rehab, service charge, books and printing, repairs and maintenance, computer maintenance, vehicle maintenance, professional, security services, communications, dues and subscription, advertising, and miscellaneous, which are not within the definition of capital goods. Under Section 4.106-1(b) of Revenue Regulations No. 7-95, "capital goods" is defined as 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 or services. Thus, goods or properties are considered capital goods if: (1) they have an estimated useful life greater than one year; (2) treated as depreciable assets; and (3) used directly or indirectly in the production or sale of taxable goods or services. ( Italian-Thai Devt. Public Co. Limited Phil. Branch Office vs. Commissioner of Internal Revenue, CTA Case No. 6172, November 12, 2002 ). Petitioner was able to establish that the total input taxes claimed in the amount of P31,590,928.85 were not applied against any output VAT liability during and in the subsequent periods inasmuch as it did not have any output tax against which the said input taxes can be applied ( Exhibits LL, MM, NN, OO, I, J, K, L, M, N, O, P, Q, R, S, T and U ). Although petitioner carried over its 1997 unutilized input VAT up to the fourth quarter of 2000, petitioner deducted the same as part of the amount of P107,468,940.30 reflected as "VAT Refund/TCC Claimed" in the first quarter of 2001 ( Exhibit U-2; TSN dated October 23, 2001, pages 12 to 17 ). Lastly, the administrative and judicial claims which were filed on March 30, 1999 and March 31, 1999, respectively, ( Annex H, original and amended Petitions for Review ), are well within the two-year prescriptive period reckoned from the respective dates of filing of petitioners 1997 quarterly VAT returns. WHEREFORE, in view of the foregoing, the instant petition for review is partially granted. Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of P15,109,293.32 representing unutilized input value-added tax for taxable year 1997. SO ORDERED. (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge (SGD.) LOVELL R. BAUTISTA Associate Judge