Magellan Cogeneration, Inc. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5765. February 26, 2002.] MAGELLAN COGENERATION INCORPORATED , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This involves a claim for refund or tax credit in the amount of P1,646,448.91 representing unutilized and/or unapplied input VAT for the period January 1 to June 30, 1997. The undisputed facts as contained in the Joint Stipulation Of Facts And Issues filed by the parties are as follows: 1. Petitioner is a corporation duly organized and existing under and by virtue of Philippines laws, engaged in the construction, operation and maintenance of a power plant, and with office address at 4th Floor, Ortigas Building, Ortigas Avenue, Pasig City. 2. Respondent is the duly appointed Commissioner of Internal Revenue, with authority, among others, to act upon and approve claims for refund or tax credit as provided by law. 3. Petitioner is registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) enterprise under VAT Registration No. 043-002-264-834. 4. Petitioner was registered with the Board of Investments (BOI) under Certificate of Registration No. 92-455 issued on March 12, 1993. Subsequently, it registered with the Philippine Economic Zone Authority (PEZA) pursuant to the provisions of Republic Act No. 7916, otherwise known as "The Special Economic Zone Act Of 1995", as an ECOZONE utilities enterprise under PEZA Certificate of Registration No. 97-01-U issued on August 11, 1997. 5. For the period January 1 to June 30, 1997, petitioner generated electricity from its power plant and sold such electricity to the National Power Corporation (NPC) pursuant to its Power Fuel Supply Agreement with said company. 6. For the quarter January 1 to March 31, 1997, petitioner paid input VAT in the total amount of P701,984.74 on its purchases of goods or services, which purchases were attributable to its sale of power to NPC during said period. 7. For the quarter April 1 to June 30, 1997, petitioner paid input VAT in the total amount of P944,464.17 on its purchases of goods or services, which purchases were attributable to its sale of power to NPC during said period. 8. On March 18, 1999, petitioner duly filed with the BIR an administrative claim for refund and/or issuance of a tax credit certificate in the amount of P1,646,448.91 representing unutilized and/or unapplied input VAT for the period January 1 to June 30, 1997. Respondent submitted this case for decision based on the pleadings and evidence presented by the Petitioner. While Petitioner filed its memorandum, Respondent failed to file his own memorandum and the case was submitted for decision based solely on the pleadings filed by the Petitioner. The parties likewise stipulated the issues, as follows: 1. Whether or not the sale by petitioner of electricity to NPC for the period covering January 1 to June 30, 1997 is subject to VAT at zero rates. 2. Whether or not the accumulated input VAT of P1,646,448.91 arising from petitioner's purchases of goods and services for the period covering January 1 to June 30, 1997, which purchases are attributable to the sale by petitioner of electricity to NPC for said period, is duly supported by VAT invoices and receipts. 3. Whether or not petitioner's accumulated input VAT of P1,646,448.91 for the period January 1 to June 30, 1997 was applied or utilized against its output VAT in the succeeding taxable quarters. IHEAcC With reference to the first issue, this court believes that the sale by petitioner of electricity to NPC for the period covering January 01 to June 30, 1997 is subject to VAT at zero rates. The applicable provisions in the Tax Code are Section 100 (c) in relation to Section 106 (a) of the Tax Code, now Section 106 A (2) (c) and Section 112 (A) of the Tax Reform Act of 1997, quoted hereunder: (2) The following sales by VAT registered persons shall be subject to zero percent (0%) rate: "C. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rates." Refund or Tax Credit of creditable input tax for zero-rated or effectively zero-rated sales may be refunded or credited under Section 106 (A) of the Tax Code: "(A) Zero-rated or Effectively Zero-rated Sales . 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)(1), (2) 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 rules and 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. In the case of Ernesto M. Maceda vs. Hon. Catalino Macaraig, G.R. No. 88291, May 31, 1991 , the total exemption of National Power Corporation (NPC) from all kinds of taxes whether direct or indirect was already settled by the Supreme Court. The NPC's exemption from all kinds of taxes was further elucidated in the High Court's Resolution dated June 8, 1993 resolving the same issue raised in the motion for reconsideration in this manner, thus: A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax-exempt from all forms of taxes direct or indirect. One common theme in all these laws is that the NPC must be enable to pay its indebtedness which, as P.D. No. 938 was P12 Billion in total domestic indebtedness, at any one time, and US$4 billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved. In the light of the aforementioned decision, the Secretary of the Department of Finance issued a Memorandum dated January 28, 1998, addressed to the Commissioner of Internal Revenue, upholding the ruling of the Supreme Court with respect to the total exemption of NPC from all kinds of taxes and further ruled that purchases by NPC of electricity from independent power producers are subject to VAT at 0%. Pertinent portions of said memorandum read as follows: As explained by the Supreme Court, the rationale for the NPC's tax exemption is to ensure cheaper power. If the BIR's recent view is to be implemented, the VAT, being an indirect tax, may be passed on by the seller of electricity to NPC. Effectively, this means that electricity will be sold at a higher rate to the consumers. Estimates show that a 10% VAT on electricity which is purchased by NPC from its independent power producers will increase power cost by about P109.4 million a month or about P1.30 billion a year. The effect on the consumer is an additional charge of P0.059 per kilowatt-hour. The recognition of NPC's broad privilege will inure to the ultimate benefit of the Filipino consumer. In view of the foregoing and using the power of review granted to the Secretary of Finance under Section 4 of Republic Act No. 8424, the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases by NPC of electricity from independent power producers are subject to VAT at zero-rate. (Emphasis supplied). In fact, in numerous VAT and BIR rulings, the Respondent had already acknowledged that purchases by NPC of electricity from independent power producers are subject to VAT at zero-rate (VAT Ruling Nos. 015-99, 022-99, 052-99, 067-99, 018-00, BIR Ruling Nos. DA-247-04-19-99, DA-632-11-10-99 and DA-209-04-04-99)., Records show that Petitioner is engaged in selling electricity to NPC. Therefore, the payments received by Petitioner for the services rendered in generating and selling of electricity to NPC are subject to VAT at zero percent. The same ruling was rendered by the Court in the cases of Southern Energy Quezon Inc. vs. Commissioner of Internal Revenue (CIR), CTA Case Nos. 5933 & 5984; Mirant (Phils.) Mobile Corporation vs. CIR, CTA Case Nos. 5935 & 5969; Mirant Navotas Corporation vs. CIR, CTA Case Nos. 5936 & 5968; Mirant (Navotas II) Corporation vs. CIR, CTA Case Nos. 5963 & 5944 . The legal issue having been settled, we now proceed to the second issue, whether or not the accumulated input VAT of P1,646,448.91 arising from Petitioner's purchases of goods and services for the period covering January 01 to June 30, 1997, which purchases are attributable to the sale by petitioner of electricity to NPC for said period, is duly supported by VAT invoices and receipts? The stipulation of facts admits that for the period January 1 to June 30, 1997, petitioner generated electricity from its power plant and sold such electricity to the NPC pursuant to its Power Supply and Purchase Agreement with NPC. Proof of such sale of electricity during the said period is supported by official receipts issued by petitioner to NPC and marked as Exhibits "D" to "D-12" in the total amount of P74,514,778.59. Considering that the sale of electricity is zero-rated, no output VAT liability arises. In connection with such sale of electricity to NPC, petitioner purchased goods and services during the period January 01 to June 30 1997 for which VAT input tax were passed on to it by its suppliers. For the first quarter, a total amount of P701,984.74 input VAT was paid by Petitioner covered by Exhibits "A-1" to "A-19" and the corresponding VAT Return was filed (Exh "A"). For the second quarter, a total amount of P944,464.17 input VAT was paid by Petitioner covered by Exh. "A-20" to "A-67" consisting of VAT invoices and official receipts. The corresponding VAT Return was filed (Exh "B"). After motion filed by the Petitioner and without objection on the part of the Respondent, the Court appointed SGV & Co., as an independent CPA pursuant to CTA Circular 1-95 to verify the accuracy of the "Summary of Input Taxes" prepared by the company for the period in the claim. Based on the procedures performed by SGV & Co. the following input taxes claims on purchases of goods & services are not properly substantiated for VAT purposes: AMOUNT OF INPUT TAX CLAIMED Findings 1st Quarter of 2nd Quarter of Total 1997 1997 1. Purchased of goods not P252.00 P252.00 supported by VAT invoices (Exhibit A) 2. Purchases of services not 9,936.86 P44,179.88 54,116.74 supported by VAT ORs (Exhibit B) (Exhibit AA) 3. Purchases of goods not supported by TIN-V or 4,490.91 5,804.19 10,295.10 TIN-VAT Invoices (Exhibit C) (Exhibit BB) 4. Purchases of services not supported by TIN-V or 139,090.91 139,090.91 TIN-VAT ORs (Exhibit CC) 5. Purchases without 341.82 341.82 supporting documents (Exhibit DD) 6. Purchases without 675,100.09 515,787.02 1,190,887.11 supporting documents (Exhibit D) (Exhibit EE) Total P689,779.86 P705,203.82 P1,394,983.68 ========== ========== ========== Based on the said findings the claim should therefore be reduced by P1,394,983.68. On the last issue, this Court concurs with the Petitioner that the evidence presented Exhibits "E" to "K" consisting of Quarterly VAT Returns from the third quarter of 1997 to the first quarter of 1999, show that the total claimable amount of P1,646,448.91 for the first and second quarter of 1997 remain unapplied or unutilized against any output VAT in the succeeding taxable quarters. Petitioner did not incur any output VAT liability from the period beginning third quarter of 1997 to first quarter of 1999 and hence was not able to apply the excess input VAT of P1,646,448.91. Said input VAT, which was carried over from the first and second quarters of 1997 until the first quarter of 1999, has been deducted from the total available input taxes of petitioner in the first quarter of 1999. (Exh "K-1") In view of all the foregoing, Petitioner claim may be granted but in a reduced amount of P251,465.23 after deducting the amount of P1,394,983.68 from the total claimable amount of P1,646,448.91. WHEREFORE, in view of the foregoing, the petition for review is hereby PARTIALLY GRANTED. Respondent is ordered to refund or issue a Tax Credit Certificate in the amount of P251,465.23 in favor of the Petitioner. SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge WE CONCUR: (SGD.) AMANCIO Q. SAGA Associate Judge (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge