Burmeister and Wain Scandinavian Contractor Mindanao, Inc. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 6220. January 29, 2003.] BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This case involves a claim for refund or issuance of a tax credit certificate in the amount of P1,834,388.55 allegedly representing petitioner's unutilized input value-added tax (VAT) paid on its domestic purchases of goods and services attributable to zero-rated sale of services for the fourth quarter of 1998. Petitioner is a Filipino corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal business address at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City (par. 1, Summary of Admitted Facts) . It was incorporated on November 23, 1993 primarily to construct, erect, assemble, commission, operate, maintain, rehabilitate and manage industrial and power-generating plants and related facilities for the conversion into electricity of coal distillate, and other fuel provided by and under contract with the Government of the Republic of the Philippines, or any government owned and controlled corporations, or other entities engaged in the development, supply or distribution of electricity (page 1, Exhibit P) . Records disclose that a non-resident foreign consortium (hereinafter referred to as the "Consortium") composed of Burmeister & Wain Scandinavian Contractor A/S (BWSC Denmark, for brevity), Mitsui Engineering & Shipbuilding, Ltd. and Mitsui Co., Ltd. entered into an Operations and Maintenance (O&M) Agreement with the National Power Corporation (NAPOCOR, for brevity) for the operation and maintenance of the latter's two (2) 100-Megawatt power barges. As the appointed Coordination Manager of the Consortium, BWSC Denmark established Burmeister & Wain Scandinavian Contractor, Mindanao, Inc. (BWSCMI, for brevity), herein petitioner, to subcontract the actual operation and maintenance of the two (2) power barges and to perform the duties and acts which necessarily have to be done in the Philippines. In consideration for the services rendered by petitioner, the Consortium shall compensate and remunerate, by way of fees paid by inward remittance to petitioner in convertible foreign currency, the equivalent of all reasonable and legitimate expenses incurred by petitioner plus a certain fee. The subcontract agreement shall terminate on the date the power barges are returned to NAPOCOR under the O&M Agreement (pages 6 & 7, TSN, June 4, 2001; page 1 of Exhibit P) . On February 14, 1995, petitioner was issued BIR Ruling No. 023-95 which stated that: "BWSC-Mindanao, being a duly registered corporation engaged in trade or business in the Philippines, is subject to ordinary Philippine corporate income tax. Its gross receipts from the services it renders to the Consortium shall, however, be subject to VAT even if it fails to register as a VAT taxpayer. On the other hand, if it chooses to register as such, and the consideration for such services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to zero-rate" On May 26, 1995, petitioner was registered as a value-added tax taxpayer and was issued a Certificate of Registration bearing RDO Control No. 95-113-007556 ( Exhibit C ). On January 7, 1999, BIR Ruling No. 023-95 was reconfirmed by the BIR in its VAT Review Committee Ruling numbered 003-99 which stated that: "(o)n this basis, BIR Ruling No. 023-95 dated 14 February 1995 is expressly reconfirmed insofar as it held that the services being rendered by BWSCMI is subject to zero percent (0%) VAT". On January 21, 1999, petitioner filed its quarterly VAT return for the fourth quarter of 1998 reflecting zero-rated sales of P68,761,361.50 and input VAT of P1,834,388.55 paid on its domestic purchases of goods and services for the said quarter ( Exhibit B ). Believing that its sales of services are zero-rated, petitioner, on July 21, 1999, filed an Application for Tax Credit/Refund of Value-Added Tax Paid for the period of July to December, 1998 in the amount of P4,154,969.51 ( Exhibit A ). IHSTDE As the respondent did not act on the aforesaid claim, petitioner, on January 9, 2001, filed the instant Petition for Review with this court praying for the refund or issuance of a tax credit certificate in the amount of P1,834,388.55 representing its alleged unutilized input VAT payment for the fourth quarter of 1998. Respondent, in his Answer filed on February 15, 2001, interposed the following Special and Affirmative Defenses: "5. Petitioner's alleged claim for refund is subject to administrative investigation/examination in Revenue Region No. 19, Davao City; 6. Since petitioner does not have an approved application for zero-rating, its transaction otherwise subject to zero percent VAT shall only be considered exempt from VAT pursuant to Revenue Regulations No. 7-95. Hence, petitioner is not entitled to refund of tax input; 7. Petitioner failed to demonstrate that the tax subject of the case at bar was erroneously or illegally collected. Petitioner's bare allegation that its transactions qualify as zero-rated does not "ipso facto" warrant the credit. Well entrenched is the rule that taxes paid and collected are presumed to have been paid in accordance with law and regulations, hence, not refundable; 8. Petitioner must properly adduce sufficient evidence to prove that the aforementioned amount of One Million Eight Hundred Thirty Four Thousand Three Hundred Eighty Eight and 100/55 (sic) ( Php: 1,834,388.55 ) representing its alleged purchases of goods and services are covered by the provisions of Section 112 [A] (Section 106 [a] of the old law) of the Tax Reform Act of 1997; 9. In an action for tax refund/credit, the burden of proof is on the taxpayer to establish its right to refund, and failure to adduce sufficient proof is fatal to the action for refund/credit; 10. Furthermore, petitioner must show compliance with the provisions of Sections 204 [C] and 229 of the Tax Code; and 11. Finally, tax refunds are in the nature of tax exemptions. As such, they are regarded as derogation of sovereign authority and are to be construed in strictissimi juris against the person or entity claiming the exemption. On March 20, 2001, petitioner filed a Reply to respondent's Answer and alleged that the requirement of securing an approved application for zero-rating under Section 4.107-1(d) of Revenue Regulations No. 7-96 ( should be 7-95 ) is relevant only to effectively zero-rated transactions. Citing Section 108(b)(2) of the old Tax Code, Section 4.102-2(b)(2) of Revenue Regulations No. 7-95 and Revenue Memorandum Circular 17-96, petitioner argued that its sales of services are automatically zero-rated transactions which do not require prior application for zero-rating. In their Joint Stipulation of Facts filed on June 7, 2001 and approved by this court on June 11, 2001, the parties agreed to limit the issues to be resolved to the following: 1. Whether or not the payments for the services of BWSCMI qualify as zero-rated transactions; 2. Whether or not BWSCMI's claim for refund is substantiated by documentary evidence; and 3. Whether or not petitioner is entitled to the refund claim. Petitioner, to support its claim, presented testimonial and documentary evidence. Respondent, on the other hand, merely submitted the case for decision as he had no witness to present ( CTA records, page 142 ). On September 24, 2002, this case was submitted for decision sans the memorandum of respondent. Anent the issue of whether or not the payments received by petitioner for services rendered to the Consortium qualify as zero-rated or not, the answer is in the affirmative. Petitioner proved that it is a VAT registered entity as evidenced by its VAT Registration Certificate ( Exhibit C ). Likewise, petitioner was able to establish that it renders sub-contracting services to the Consortium for the actual operation and maintenance of NAPOCOR's two (2) 100-Megawatt power barges located in Mindanao (pages 6 & 7, TSN, June 4, 2001; page 1 of Exhibit P) , which services fall under the category of those referred to in Section 108(B)(2) of the 1997 Tax Code, to wit: "(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); (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)" (Emphasis supplied) Also, petitioner presented various FCDU credit memos and a certification from the Bank of the Philippine Islands, Davao Lanang Branch ( Exhibits K, L, M, N & O ) proving its receipt of sub-contract fees in acceptable foreign currency (i.e., in US$1,604,914.00) inwardly remitted and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas for the fourth quarter of 1998. Since its sales of services qualify for zero-rating under Section 108(B)(2) of the 1997 Tax Code, petitioner is not liable to pay output tax on such sales and can claim tax credit/refund of the input VAT it paid on purchases of goods, properties or services which are directly attributable to such zero-rated sales as provided under Section 112(A) of the 1997 Tax Code, to wit: "Section 112. Refunds or Tax Credits of Input Tax . (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 106(A)(2)(a)(1), (2) and (B) and Section 108(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 attributable to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." cHSTEA Proceeding now to the issue of whether or not petitioner was able to substantiate by documentary evidence its claim for refund, the commissioned auditing firm, Punongbayan and Araullo, in its report dated June 27, 2001 ( Exhibit P ) stated that out of petitioner's total claimed input taxes of P1,834,388.55, the amount of P277,474.87 should be disallowed and only the remaining amount of P1,556,913.68 represents petitioner's valid claim. However, this court cannot ascertain the accuracy of the said report since petitioner failed to present the suppliers' invoices and official receipts which were verified by Punongbayan and Araullo. Mere listing of VAT invoices and receipts, even if certified to have been previously examined by an independent Certified Public Accountant, would not suffice to establish the truthfulness and accuracy of the contents thereof. These invoices and receipts must be made available for verification by the court itself. Moreover, CTA Circular 10-97, amending the provisions of CTA Circular 1-95, clearly provides that: "2. The method of individual presentation of each and every receipt, invoice or account for marking, identification and comparison with the originals thereof need not be done before the Court or Clerk of Court anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices, vouchers or other documents covering the said accounts or payments to be introduced in evidence must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party who desires to check and verify the correctness of the summary and CPA certification. " The foregoing provisions of Circular 10-97 does not permit the petitioner to present only the CPA Certification and Summary Listings of Invoices and Receipts in lieu of submitting the voluminous photocopies of the invoices and receipts before this court. The said circular merely aims to avoid the time-consuming procedure of presenting, identifying and marking each document before this Court or Clerk of Court, thus, encouraging speedy administration of justice." ( Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, CTA Case Nos. 5130, 5161 & 5190, February 5, 1998 ) It bears stressing that under Section 16(c) of Revenue Regulations No. 5-87, as amended by Revenue Regulations No. 3-88, one of the essential requisites in an application for refund/tax credit of input VAT is the presentation of the "photocopy of the purchase invoice or receipt evidencing the value added tax paid". The said invoices/receipts should conform to the invoicing requirements under Section 4.104-5 of Revenue Regulations No. 7-95 in relation to Sections 113 and 237 of the Tax Code. Hence, without the suppliers' invoices and official receipts, petitioner's claim must fail. It must be stressed at this point that a refund of taxes partakes the nature of a tax exemption and are construed in strictissimi juris against the taxpayer and in favor of the taxing authority. ( Insular Lumber Co. vs. Court of Tax Appeals, 104 SCRA 710; Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation and the Court of Tax Appeals, 207 SCRA 549 ). cETDIA WHEREFORE, in the light of the foregoing, the instant petition for review is hereby DENIED due to insufficiency of evidence. SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge WE CONCUR: (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge (SGD.) LOVELL R. BAUTISTA Associate Judge