Mirant Sual Corp. v. Commissioner of Internal Revenue

SECOND DIVISION [C.T.A. CASE NO. 6259. February 27, 2008.] MIRANT SUAL CORPORATION (formerly SOUTHERN ENERGY PANGASINAN, INC.) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N PALANCA-ENRIQUEZ , J p : Only VAT invoices can be used for the sale of goods that are subject to VAT. The corresponding taxes thereon shall be allowed as input tax credits for those subject to VAT. Section 113 of the NIRC of 1997, as amended, expressly provides for the invoicing and accounting requirements for VAT-registered persons. A VAT-registered status, as well as compliance with the invoicing requirements, is sufficient for the effective zero rating of the transactions of a taxpayer. Conversely, non-compliance with the invoicing requirements will not give rise to effective zero-rating of the transactions of a taxpayer. THE CASE This is a Petition for Review filed by Mirant Sual Corporation (hereafter "petitioner") praying for the refund or issuance of a tax credit certificate in the amount of P240,463,818.16, representing the sum of petitioner's (a) unutilized input taxes of P6,472,197.86 on domestic purchases and importation of goods and services which are attributable to its zero-rated sales to the National Power Corporation, and (b) unutilized input taxes of P233,991,620.30 on purchases of capital goods, both for the calendar year 1999. THE FACTS The facts of the case, as culled from the records, are as follows: Petitioner is a corporation duly organized and existing by virtue of Philippine laws, with principal office located at Barrio Pangascasan, Sual, Pangasinan. It was originally registered with the Securities and Exchange Commission under the name "Pangasinan Electric Corporation" which was subsequently changed to "Southern Energy Pangasinan, Incorporated" on August 17, 1999. On June 28, 2001, petitioner's name was again changed from "Southern Energy Pangasinan, Incorporated" to "Mirant Sual Corporation". It is registered with the Bureau of Internal Revenue ("BIR") as a Value-Added Tax ("VAT") taxpayer engaged in the business of power generation services (Exhibit "C") . HSIADc Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue ("CIR") vested with authority to act as such, including, inter alia, the power to decide, approve and grant claims for refunds or tax credits of overpaid internal revenue taxes as provided by law, with office address at the BIR National Office Building, Agham Road, Diliman, Quezon City, where he may be served with summons and other court processes. In connection with petitioner's sales of power generation services to NPC, petitioner filed with respondent CIR an Application for Zero Rate for the sale of power generation services to National Power Corporation ("NPC") under a BOT scheme, which was subsequently approved covering the period May 13, 1999 to December 31, 1999 (Exhibit "H") . For the four quarters of calendar year ("CY") 1999, petitioner filed with the BIR its VAT returns declaring zero-rated sales in the amount of P304,767,687.98 and unutilized input taxes in the amount of P240,463,818.16, detailed as follows: Date filed Zero-rated Exhibit 1999 with the BIR Sales Input VAT D 1st quarter 04/12/99 P100,093,399.85 E 2nd quarter 07/12/99 37,028,319.68 F 3rd quarter 10/22/99 41,382,566.80 G 4th quarter 01/25/00 P304,767,687.98 61,959,531.83 P304,767,687.98 P240,463,818.16 ============= ============ On March 1, 2001, pursuant to Revenue Regulations No. 7-95, as amended, petitioner filed an administrative claim for refund of its unutilized input VAT with the BIR. For failure of the respondent to act on petitioner's claim for refund, on March 29, 2001, petitioner elevated its case to this Court by way of a Petition for Review. In his Answer, respondent, by way of special and affirmative defenses, alleged that the petition states no cause of action because on the assumption that petitioner filed an administrative claim for input VAT refund with the BIR there was no showing that petitioner submitted complete documents in support of the application for respondent to properly act on it, as required by Section 112 (D) of the Tax Code. HSTAcI Petitioner presented Ruben Rubio, the Court-commissioned Independent CPA, Rosalinda Sempio, its Senior Accountant, and Vicente Romasanta, its Accounting Manager, as witnesses, and documentary evidence, marked as Exhibits "A" to "FF" , inclusive of their submarkings, which were all admitted by the Court in a Resolution dated February 14, 2003. On the other hand, respondent presented Revenue Officer Bernadette Mangaoang, as witness, and formally offered documentary evidence, marked as Exhibits "1" and "2", inclusive of their submarkings, which were all admitted by the Court in a Resolution dated September 5, 2003. On rebuttal, petitioner presented Laura Baui, as witness, and formally offered documentary evidence, marked as Exhibits "GG" to "D 5 ", inclusive of their submarkings, which were admitted by the Court, except for Exhibits "FFF" to "ZZZ", "AAAA" to "ZZZZ", "A 5 " to "D 5 ", which were denied admission for these documents could not be found in the records of the case. Upon manifestation of counsel for respondent that he will not present sur-rebuttal evidence, respondent was granted thirty days from October 2, 2006 to file his memorandum, while petitioner was granted twenty days from notice. Petitioner having filed its memorandum, without respondent filing the same, the case was deemed submitted for decision. aAHDIc Hence, this decision. ISSUES As stipulated upon by the parties, the issues for this Court's consideration are: I WHETHER PETITIONER HAS UNUTILIZED VAT INPUT TAXES FOR CY 1999 ARISING FROM ITS (A) DOMESTIC PURCHASES AND IMPORTATION OF GOODS AND SERVICES WHICH ARE ATTRIBUTABLE TO ITS ZERO-RATED SALES OF POWER GENERATION SERVICES TO NPC DURING CY 1999; AND (B) PURCHASES OF CAPITAL GOODS DURING CY 1999. SaIHDA II WHETHER PETITIONER'S UNUTILIZED VAT INPUT TAXES FOR CY 1999 ARE SUBSTANTIATED BY DOCUMENTARY EVIDENCE IN THE FORM OF INVOICES AND OFFICIAL RECEIPTS. III WHETHER PETITIONER'S VAT INPUT TAXES FOR CY 1999 WERE APPLIED AGAINST ANY VAT OUTPUT TAXES IN THE SUBSEQUENT TAXABLE QUARTERS. IV WHETHER PETITIONER'S ADMINISTRATIVE CLAIM FOR REFUND FILED ON MARCH 1, 2001 WAS SEASONABLY FILED. The issues being interrelated will be discussed jointly. THE COURT'S RULING The petition is partly meritorious. Records reveal that the subject claim in the amount of P240,463,818.16 represents the sum of petitioner's (a) unutilized input tax credits of P6,472,197.86 arising from domestic purchases of goods and services which are attributable to its zero-rated sales of power generation services to NPC; and (b) unutilized input tax credits of P233,991,620.30 generated from purchases of capital goods for the four quarters of 1999. ETCcSa Petitioner's claim for Unutilized Input VAT of P6,472,197.86 on Domestic Purchases of Goods and Services which are Attributable to its Zero-Rated Sales of Power Generation Services to NPC for the Four Quarters of 1999 Petitioner anchors its claim on Section 112 (A) and (B) of the NIRC of 1997, as amended, which provides, as follows: " SEC. 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 where 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 attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. (B) Capital Goods. A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input takes 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. xxx xxx xxx." The aforequoted Section 112 (A) of the NIRC of 1997, as amended, allows the refund/tax credit of unutilized input VAT attributable to zero-rated or effectively zero-rated sales. Petitioner claims that its sale of electricity to NPC is effectively zero-rated, pursuant to Section 108 (B) (3) of the NIRC of 1997, in relation to Section 13 of Republic Act No. 6395, otherwise known as the "NPC Charter", which provide, as follows: DHETIS "SEC. 108. 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: xxx xxx xxx. (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 percent (0%) rate." "Sec. 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 investments, 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." Pursuant to Section 13 of RA 6395, the NPC is exempt from payment of all forms of taxes, including VAT. Hence, by virtue of said charter, services rendered by a VAT registered entity, like petitioner to the NPC, are effectively subject to zero percent (0%) VAT in accordance with Section 108 (B) (3) of the NIRC of 1997, as amended. In the case of Maceda vs. Macaraig, Jr., (223 SCRA 217), the Supreme Court affirmed NPC's tax exemption and ruled as follows: "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. xxx xxx xxx. One common theme in all these laws is that the NPC must be enabled to pay its indebtedness which, as of 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." CAHaST Likewise, the respondent Commissioner also approved petitioner's application for the zero-rating of its sales to NPC covering the period from May 13, 1999 to December 31, 1999 (Exhibit "H") . However, Section 108 (B) (3) of the NIRC of 1997, as amended, must be read in conjunction with Section 113 of the same Code, as implemented by Section 4.108-1 of Revenue Regulations No. 7-95, thus: "SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons (A) Invoicing Requirements. A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 237, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax." The law is very clear. Section 113 provides that a VAT registered person, shall, for every sale issue a duly registered VAT invoice or receipt covering a "zero-rated" sale imprinted on the invoice or receipt, in order that petitioner's sales of electricity to the NPC shall qualify for zero-rating. DTEcSa Corollary thereto, Section 4.108-1 of Revenue Regulations No. 7-95 provides: "SEC. 4.108-1. Invoicing Requirements. All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered receipts or sales or commercial invoices, which must show: 1. the name, TIN and address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. the word 'zero rated' imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. In the case of sale of real property subject to VAT and where the zonal or market value is higher than the actual consideration, the VAT shall be separately indicated in the invoice or receipt. Only VAT-registered persons are required to print their TIN followed by the word 'VAT' in their invoice or receipts and this shall be considered as a 'VAT Invoice'. All purchases covered by invoices other than 'VAT Invoice' shall not give rise to any input tax. aCTHDA If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A 'VAT Invoice' shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code. The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records." Furthermore, a perusal of the approved Application/Certificate for Zero Rate issued by the respondent to petitioner on May 13, 1999 (Exhibit "H") , shows that the following was indicated: Valid only for sale of services from May 13, 1999 up to December 31, 1.999 unless sooner revoked. Note: Zero-Rated Sales must be indicated in the invoice/receipt . (Emphasis supplied) A careful scrutiny of the official receipts (Exhibits "Z-1", "Z-3", "Z-5", "Z-7", "Z-9", "Z-11", "Z-13", "Z-15") supporting petitioner's reported zero-rated sales for the year 1999 in the amount of P304,767,687.98 shows that while said receipts bear the TIN-VAT number of the petitioner and the printer's BIR Permit number, the word "zero-rated" was not imprinted thereon, in clear violation of Section 4.108.1-1 of Revenue Regulations No. 7-95 and the conditions imposed on petitioner's approved Application/Certificate for Zero-Rate. The law and regulations require strict compliance with the invoicing requirements. Without valid VAT official receipts, petitioner's sales of electricity to the NPC for the year 1999 in the amount of P304,767,687.98 cannot qualify for VAT zero-rating, under Section 108 (B) (3) of the NIRC of 1997. Hence, the claimed unutilized input VAT attributable thereto in the amount of P6,472,197.86 cannot be granted. TAHcCI Petitioner's Claim for Unutilized Input Tax Credits in the Amount of P233,991,620.30 Generated from Purchases of Capital Goods We now proceed to petitioner's remaining claim for unutilized input tax credits in the amount of P233,991,620.30 generated from purchases of capital goods. Pursuant to the aforequoted provisions of Section 112 (B) of the NIRC of 1997, as amended, in order to be entitled to a refund/tax credit of input VAT paid on capital goods purchased, petitioner must prove the following: 1) That it is a VAT registered entity; 2) That the claimed input taxes were paid on capital goods; 3) That it did not offset or apply the claimed input taxes on capital goods purchased against any output VAT liability; and 4) That the claim for refund was filed within the two-year prescriptive period. As regards the first requisite, the fact that petitioner is a VAT registered entity is not disputed (Joint Stipulation of Facts and Issues, par. 1.2 and Exhibit "C") . Likewise, petitioner complied with the third requisite. Petitioner's claimed input VAT was not applied against any output VAT liability during the four quarters of 1999. Although petitioner carried-over the total claim of P240,463,818.16 (inclusive of the claimed input VAT on capital goods of P233,991,620.30) to the succeeding quarters until the second quarter of 2001, the same remained unutilized as petitioner had no output VAT liability during the said period. Moreover, the total claim of P240,463,818.16 was deducted as "Any VAT Refund/TCC Claimed" from the total available input tax of P487,922,591.54 as reflected in petitioner's VAT return for the second quarter of 2001 (Exhibit "O-2") . The resulting net creditable input tax of P246,597,452.38 to be carried-over to the succeeding third quarter of 2001 no longer included the subject claim of P240,463,818.16. TcAECH As regards the fourth requisite, it was established that the instant claim was filed within the two-year prescriptive period, both in the administrative and judicial levels, reckoned from the respective dates when petitioner filed its 1999 Quarterly VAT Returns on April 12, 1999, July 12, 1999, October 22, 1999 and January 25, 2000. However, as to the second requisite, whether or not petitioner's paid input taxes on the purchases of capital goods in the amount of P233,991,620.30, petitioner submitted various suppliers' invoices and official receipts (Exhibits "AA-1" to "AA-2273") , which were examined by the Court-commissioned auditing firm, SGV & Co. As correctly noted by SGV & Co. in its report dated March 14, 2002 (Exhibit "V"), the Court finds that out of P233,991,620.30 input taxes on purchases of capital goods, the following input taxes amounting to P10,994,181.65 was not properly substantiated by VAT invoices or official receipts in accordance with Sections 110 (A) and 113 (A) of the NIRC of 1997, as implemented by Sections 4.104-1 and 4.104-5 of Revenue Regulations No. 7-95, and should therefore be disallowed from petitioner's claim: 1. Over-claimed Input Taxes on Purchases of Services Reference Disallowed Supplier Invoice # OR # Input VA T First Quarter CEPA OPERATION PHILS. CORP. 0119 0368 P69,554.93 CEPA OPERATION PHILS. CORP. 122 0368 20,742.91 CEPA OPERATION PHILS. CORP. 120 0368 56,837.11 GEC ALSTHOM TURBINE GENERATORS 0203 301 334,585.80 GEC ALSTHOM TURBINE GENERATORS 0204 301 334,585.80 CEPA OPERATION PHILS. CORP. 0123 384 8,262.21 SUAL CONSTRUCTION CORP. 33 0069 1,142,103.81 SUAL CONSTRUCTION CORP. 0039 0071 1,523,866.20 SUAL CONSTRUCTION CORP. 40 0072 1,530,294.54 SUAL CONSTRUCTION CORP. 41 0074 547,888.04 GEC ALSTHOM TURBINE GENERATORS 245 302 470,298.87 ACCENT-MICRO TECHNOLOGIES, INC. 001868B 1,996.14 GEC ALSTHOM ELECTOMECANIQUE 061 280 190,253.64 GEC ALSTHOM ELECTOMECANIQUE 060 280 108,715.86 Second Quarter SPATIAL DESIGN CONCEPTS, INC. 974 37,037.84 SIEMENS, INC. 33668 7,597.85 SUAL CONSTRUCTION CORPORATION 0042 0075 167,503.60 SUAL CONSTRUCTION CORPORATION 0043 0075 34,288.60 SUAL CONSTRUCTION CORPORATION 0045 0077 45,961.36 MUSTARD SEED CUSTOMS BROKERAGE 198 193.06 SPATIAL DESIGN CONCEPTS, INC. 1067 5,290.69 INT'L. CONTAINER TERMINAL SERVICES 810830 5,248.60 Third Quarter GEC ALSTHOM TURBINE GENERATORS 262 303 404,589.72 GEC ALSTHOM TURBINE GENERATORS 287 304 287,170.04 GEC ALSTHOM TURBINE GENERATORS 288 309 456,093.65 SPATIAL DESIGNS, INC. 1076 2,734.01 Fourth Quarter GEC ALSTHOM TURBINE GENERATORS 289 305 612,982.33 GEC ALSTHOM TURBINE GENERATORS 292 306 511,220.06 GEC ALSTHOM TURBINE GENERATORS 65 308 254,240.00 GEC ALSTHOM TURBINE GENERATORS 66 308 254,240.00 GEC ALSTHOM TURBINE GENERATORS 67 308 254,240.00 GEC ALSTHOM TURBINE GENERATORS 68 308 181,600.00 GEC ALSTHOM TURBINE GENERATORS 69 308 181,600.00 sub-total P10,043,817.27 =========== 2. Input Taxes Claimed on Purchases of Services Supported by NV Official Receipts Second Quarter MOF COMPANY (SUBIC), INC. 168 4239 P1,400.85 MOF COMPANY (SUBIC), INC. 177 4224 599.06 Third Quarter MOF COMPANY (SUBIC), INC. 211 4313 840.84 MOF COMPANY (SUBIC), INC. 213 4296 859.66 MOF COMPANY (SUBIC), INC. 208 4340 349.10 MOF COMPANY (SUBIC), INC. 208 4340 1,000.59 MOF COMPANY (SUBIC), INC. 209 4361 2,298.47 MOF COMPANY (SUBIC), INC. 209 4361 534.55 MOF COMPANY (SUBIC), INC. 209 4361 765.02 MOF COMPANY (SUBIC), INC. 209 4361 765.02 MOF COMPANY (SUBIC), INC. 212 4361 1,082.82 MOF COMPANY (SUBIC), INC. 212 4361 516.99 subtotal P11,012.97 ======== 3. Input Taxes Claimed on Purchases of Services Supported by ORs with Stamped TIN-VAT Painted After July 31, 1991 Third Quarter TCM CONST. AND EQUIPMENT 11 026 P12,820.37 TCM CONST. AND EQUIPMENT 12 035 65,000.00 WORLD ISLAND-LINK EXPRESS 234 0111 471.02 WORLD ISLAND-LINK EXPRESS 234 0111 835.01 WORLD ISLAND-LINK EXPRESS 234 0111 835.01 WORLD ISLAND-LINK EXPRESS 239 0114 613.50 WORLD ISLAND-LINK EXPRESS 239 0114 601.52 P81,176.43 ======== 4. Input Taxes Claimed on Purchases of Services Supported by Documents Other Than VAT ORs Second Quarter ERNALYN ENGINEERING & CONS. 2460 P5,112.55 ERNALYN ENGINEERING & CONS. 2461 3,381.82 ERNALYN ENGINEERING & CONS. 2462 1,372.73 ERNALYN ENGINEERING & CONS. 2463 2,727.28 Third Quarter SAN CARLOS MKTG. CORP. 21625 2,650.50 subtotal P15,244.88 ========= 5. Input Taxes Claimed on Purchase of Services Supported by an OR With TIN only Third Quarter MOTOR PLAZA, INC. 55502 52015 P720.00 subtotal P720.00 ======= 6. Input Taxes Claimed on Purchase of Services Supported by an OR Issued Not in Petitioner's Name Third Quarter CARGOHAUS, INC. 626021 463366 P14.85 subtotal P14.85 ===== 7. Input Taxes Claimed on Purchases of Goods Supported by Invoices Without BIR Permit Third Quarter MANILA MACHINERY & SUPP. CO., INC. 23445 34587 P12,000.00 MANILA MACHINERY & SUPP. CO., INC. 23902 34587 6,000.00 TRIBOL TRADING & FABRICATION 0256 0302 3,036.55 TRIBOL TRADING & FABRICATION 280 0056 6,436.27 TRIBOL TRADING & FABRICATION 283 0318 3,150.00 TRIBOL TRADING & FABRICATION 284 0318 1,822.00 subtotal P32,444.82 ======== 7. Input Taxes Claimed on Purchases of Goods Supported by Invoices With TIN only First Quarter AGP FURNITURE AND INTERIORS PO#135 451 P7,272.73 Second Quarter AGP FURNITURE AND INTERIORS 202 451 7,272.73 Third Quarter AGP FURNITURE AND INTERIORS 215 027 863.64 subtotal P15,409.10 ======== 8. Input Taxes Claimed on Purchases of Goods Supported by Invoices Issued Not in the Name of Petitioner Third Quarter DON-DON SHIP SUPP. & MARINE SERV. 149 370 P55,720.45 REPUBLIC COMMODITIES CORP. 74500 04252 20,000.00 TOYOTA DAGUPAN CITY, INC. 35338 13454 447.61 TOYOTA DAGUPAN CITY, INC. 35374 13454 895.22 subtotal P77,063.28 ======== 9. Input Taxes Claimed on Purchases of Goods/Services Without Supporting Documents First Quarter AGP FURNITURE AND INTERIORS PO#00129 P863.64 MANILA BULLETIN PUBLISHING CORP. 3351935 752.00 M-PEC- EXECUTIVE EDITORS, INC. 3902A 500.00 UNIVERSAL FAR EAST CORPORATION PO#131 5,479.92 Third Quarter INT'L. CONTAINER TERMINAL SERVICES 864254 553.39 INT'L. CONTAINER TERMINAL SERVICES 864253 553.39 MIASCOR LOGISTICS CORPORATION 3533 43.85 FAMOUS PACIFIC FORWARDING PHILS. 207 362.20 INT'L. CONTAINER TERMINAL SERVICES 0210 421.41 subtotal P9,529.80 ======= 10. Input Taxes Claimed on Purchases of Services Supported by ORs with Stamped TIN-V Printed Before July 31, 1991 Third Quarter WOLF DEVELOPMENT CORPORATION 47 455 P428,105.94 subtotal P428,105.94 ========== 11. Input Taxes Claimed on Payments to Transportation Contractors First Quarter GERP RENT A CAR 964 221 P236.36 GERP RENT A CAR 1076 226 327.27 Second Quarter HARLEY RENT A CAR 798 2106 390.91 HARLEY RENT A CAR 906 2117 190.00 HARLEY RENT A CAR 795 1635 1,880.00 Third Quarter HARLEY RENT A CAR 765 2125 736.37 HARLEY RENT A CAR 916 2125 190.00 HARLEY RENT A CAR 917 2125 305.00 HARLEY RENT A CAR 919 2131 410.00 HARLEY RENT A CAR 930 2133 2,305.00 HARLEY RENT A CAR 932 2132 185.00 HARLEY RENT A CAR 937 2133 370.00 HARLEY RENT A CAR 1001 2145 2,370.00 HARLEY RENT A CAR 1011 2145 395.00 HARLEY RENT A CAR 1021 2057 150.00 HARLEY RENT A CAR 935 2142 150.00 HARLEY RENT A CAR 946 2142 765.00 GERP RENT A CAR 1300 380 163.64 GERP RENT A CAR 1301 380 163.64 GERP RENT A CAR 1327 379 240.91 GERP RENT A CAR 1329 379 254.55 GERP RENT A CAR 1369 397 490.91 GERP RENT A CAR 1370 403 245.46 GERP RENT A CAR 1384 396 490.91 GERP RENT A CAR 1404 411 363.64 GERP RENT A CAR 1491 445 163.64 GERP RENT A CAR 1498 445 163.64 subtotal P14,096.85 ======== 12. Input Taxes Claimed on Purchases of Goods Dated Outside the Period of Claim First Quarter APPLESEED SYSTEMS AND TECH. 919 852 P836.37 15359/152 CITIMEX, INC. 71 12252 176,063.26 SAN MIGUEL CAMPOCARNE CORP. 90010426 15208 272.73 subtotal P177,172.36 ========= 13. Purchases of Goods Supported by Photocopies of Certified True Copy Invoices First Quarter ACCENT MICRO TECHNOLOGIES 1894 P32,832.57 DOTCOM, INC. 278 205 2,060.55 ACCENT MICRO TECHNOLOGIES 1937 33,326.34 Third Quarter GOLDEN POWER DIESEL SALES CTR. 110 309 10,000.00 GOLDEN POWER DIESEL SALES CTR. 112 0307 10,000.00 subtotal P88,219.46 ======== 14. Input Taxes Claimed on Purchases of Goods Supported by Documents Other Than VAT Invoices ALAMINOS MARKETING CENTER 16285 P153.64 P153.64 =========== Total P10,994,181.65 =========== Records show that the substantiated input VAT amount of P222,997,438.65 [P233,991,620.30 less P10,994,181.65] pertains to purchases of supplies, materials, equipment, plant and machinery as well as civil, architectural, engineering, management, personnel, mobilization, operational and other services which were incurred by petitioner in connection with the installation, erection and commissioning of its 2 x 609-megawatt coal-fired thermal power plants at Sual, Pangasinan (Exhibits "P", "Q", "R" & "S"; Direct Testimony of Vicente Romasanta, TSN, October 30, 2001, pp. 12-14 & 17-21) . Petitioner's power plants and related facilities fall within the definition of "capital goods or properties" under Section 4.106-1 of Revenue Regulations No. 7-95, which states: AHcDEI "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. Notwithstanding the fact that petitioner's claimed input VAT amount of P222,997,438.65 is in the nature of input VAT paid on capital goods or properties, respondent however, objects to the refund thereof on the basis of the findings made by Revenue Officer, Ma. Bernadette B. Mangaoang, that the claimed input tax was not properly reflected in the balance sheet of petitioner as an asset or Deferred Input Tax. The revenue officer concluded that the input VAT on capital goods already formed part of the cost of the power plants that benefited petitioner in the form of depreciation expense deductible from its gross income (Exhibit "1") . Hence, it cannot claim tax refund or credit. On rebuttal, however, petitioner was able to prove that the findings of the revenue officer are bereft of legal and factual bases. Based on the examination and validation made by the Court-commissioned auditing firm, SGV & Co. on the rebuttal evidence submitted by petitioner, except for the amount of P8,275.14, the total claimed input VAT of P240,463,818.16 (including the substantiated input VAT of P222,997,438.65 on capital goods) was found to have been properly reflected in petitioner's Audited Financial Statements and Account Information Form. Below are the pertinent portions of the report of SGV & Co. (Exhibit "HHHH", pp. 10-12): 1. The input VAT per 1999 "Schedule of VAT Input" was accounted as follows : ITEM DESCRIPTION AMOUNT a. Input VAT per 1999 "Schedule of P239,300,564.82 VAT Input" traced to the 1999 Prepaid VAT Input account General Ledger b. Input VAT per 1999 "Schedule of P1,154,978.20 VAT Input" traced to the 2000 Prepaid VAT Input account General Ledger (please see Annex J ) c. Input VAT per 1999 "Schedule of P8,275.14 VAT Input" not traced to the 1999 Prepaid VAT Input account General Ledger. (please see Annexes K and L ) Total P240,463,818.16 ============ 2. During 1999 and 2000, the ending balance of Prepaid VAT Input account amounted to P523,408,483.55 (where the 1999 input VAT amounting to P239,297,437.45 were included) and P419,443,087.24 (where the 1999 input VAT amounting to P1,154,978.20 were included), respectively. This account is presented in its Audited Financial Statements under the "Prepaid Expenses and Other Current Assets" account. Per 1999 and 2000 Audited Financial Statements, "Prepaid Expenses and Other Current Assets" account has a balance of P14,684,397.49 and P35,507,250.00, respectively, broken down in the 1999 and 2000 Detailed Comparative Balance Sheet as follows: cSaATC 1999 2000 Deferred Income Tax P12,021,223.65 - Others 390,397.25 P9,987,805.15 Prepayments (net) 2,272,776.59 25,519,444.91 TOTAL P14,684,397.49 P35,507,250.06 ============ =========== "Prepayments" account is further broken down in the 1999 and 2000 trial balance as follows: 1999 2000 Prepaid General Insurance P - P4,951,719.26 Prepaid Vehicle Insurance 644,592.93 578,699.56 Prepaid VAT Input 523,408,483.55 419,443,087.24 Prepaid Employee Medical Insurance 79,082.03 23,987.30 Prepaid Employee Life Insurance 83,914.12 201,014.01 Prepayments Others 1,465,187.51 19,764,024.78 Total P525,681,260.14 P444,962,532.15 Less: Allowance for Unrefundable Prepaid VAT 523,408,483.55 419,443,087.24 Prepayments (net) P2,272,276.59 P25,519,444.91 ============ =========== The "Allowance for Unrefundable Prepaid VAT" account is presented in the Audited Financial Statements under the "Prepaid Expenses and Other Current Assets" account as presented previously. 3. In 2001, the Company filed a claim for refund/tax credit for its excess input taxes for the calendar year 1999 amounting to P240,463,818.16. Below are the journal entries trade by the Company in connection with the reclassification: Reclassification of Prepaid VAT Input Account to Accounts Receivable BIR Account upon filing for Claim for Refund/TCC of its Excess Input Taxes for the Calendar Year 1999 Debit Credit Accounts Receivable BIR 240,463,818.16 Prepaid VAT Input 240,463,818.16 Reclassification of the Related Allowance Debit Credit Allowance for Unrefundable 240,463,818.16 Prepaid VAT Input Allowance for Unrefundable VAT Input 240,463,818.16 Moreover, we noted that the "Accounts Receivable BIR" account has an ending balance of P841,035,674.08 during 2001. This amount is presented in the audited Financial Statements "Accounts Receivable" account. The "Accounts Receivable" account has a balance in the 2001 audited Financial Statements of P2,295,954,000.00 and is broken down as follows: cEHSTC Accounts Receivable Trade P2,236,788,000.00 Accounts Receivable Others (net) 59,166,000.00 Total P2,295,954,000.00 ============== The item "Accounts Receivable Others" is broken in the trial balance as follows: Debit Credit Advances Employees P61,980.68 Non-business Advances Employees 34,818.54 Sundry Receivables 101,006,244.28 Advances Suppliers 41,401,527.98 A/R Employee Associations Receivable 5,850.00 Accounts Receivable BIR 841,035,674.08 Allowance for Unrefundable VAT Input P841,035,674.08 Deferred Value Added Tax Input 21,372,791.39 Allowance for Deferred Value Added Tax Input 21,372,791.39 A/R SSS 120,766.67 Interest Receivable from Bank 17,567,139.52 Accumulated Provision for Bad & Doubtful Debts 101,032,541.52 Total P1,022,606,793.14 P963,441,006.99 =============== ============== Accounts Receivable Others (net) P59,165,786.15 =============== For the additional information of the Honorable Court, Accounts Receivable BIR is broken down as follows: CTA Case No. Amount Administrative Claim with the P29,763,958.71 BIR 5654 286,592,786.25 6125 284,215,110.96 6259 240,463,818.16 Total P841,035,674.08 ============== Considering that the above findings of SGV and Co. as regards the input VAT exception amounting to P8,275.14, which was not traced to the "Prepaid Input VAT" account of petitioner, is comprised of both input VAT on capital goods purchases and input VAT on purchases of goods/services attributable to zero-rated sales, only the input VAT of P4,783.40 (Annex L of Exhibit "HHHH"), pertaining to capital goods, as enumerated below, is hereby disallowed from petitioner's substantiated input VAT claim on capital goods of P222,997,438.65: Input Tax Supplier Ref. Claimed Inter'l. Container Terminal Services, Inc. 9757 P1,102.63 Inter'l. Container Terminal Services, Inc. 9758 344.60 Inter'l. Container Terminal Services, Inc. 9760 1,018.42 Carried Lumber Company, Inc. 6419 1,883.65 SK Hardware & Gen. Mdse. 1530 434.10 Total P4,783.40 ======= Hence, only the amount of P222,992,655.25 (P222,997,438.65 less P4,783.40) represents petitioner's valid input tax on purchases of capital goods, as reflected in petitioner's Audited Financial Statements and Account Information Form. Furthermore, petitioner has proven that while the subject input VAT was capitalized and formed part of the cost of its power plants, petitioner did not benefit from the same in the form of deductible depreciation for income tax purposes, contrary to the revenue officer's allegation. IcTCHD As clearly explained by petitioner's Financial Controller, Laura Baui, in her Affidavit and Supplemental Affidavit dated January 15, 2005 and March 30, 2005, respectively (Exhibits "YY" and "EEE"), the depreciation on the capitalized input VAT of P233,991,620.30 amounted to P1,836,834.00 for the year 1999 and P9,359,665.00 for every year thereafter, computed as follows: For CY 1999 Capitalized Input VAT P233,991,620.30 Divided by useful life of the power plant (in months) 300.00 Depreciation per month P779,972.07 Multiplied by the number of months elapsed from October 1999 to December 1999 x 2.355 Depreciation for the year 1999 P1,836,834.00 ============ For Every Year Thereafter Capitalized Input VAT P233,991,620.30 Divided by useful life of the power plant (in months) 300.00 Depreciation per month P779,972.07 Multiplied by 12 months x 12 Depreciation for every year after 1999 P9,359,665.00 ============ The depreciation of P1,836,834.00 was not claimed as deductible expense in petitioner's income tax return for the year 1999, but was included in the non-deductible reconciling item of P22,316,013.00, captioned as "Excess of book over tax depreciation" (Exhibit "MM-4") . The same holds true as regards the full year's depreciation of P9,359,665.00, as clearly shown in the Lapsing Schedule of the Capitalized Provision for Unrefundable Input VAT (Exhibit "TT"), prepared by petitioner based on its declarations in the financial statements (Exhibits "MM-7", "UU-4", "VV-4", "WW-4", "XX-4") and income tax returns from 1999 to 2003 (Exhibits "MM-4", "UU-7", "VV-7", "WW-7" & "XX-5") . The schedule reveals the consistent practice of petitioner in treating the depreciation on the capitalized input VAT as a non-deductible expense for tax purposes. Evidently, respondent's allegation that petitioner's capitalized input VAT was claimed as deduction in the form of depreciation expense is without factual and legal bases. In sum, the Court, therefore, finds that petitioner is entitled to a refund or issuance of a tax credit certificate in the reduced amount of P222,992,655.25, representing unutilized input VAT on capital goods purchased for the four quarters of 1999. WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of TWO HUNDRED TWENTY TWO MILLION NINE HUNDRED NINETY TWO THOUSAND SIX HUNDRED FIFTY FIVE & 25/100 PESOS (P222,992,655.25), representing unutilized input VAT on capital goods purchased for the four quarters of 1999. TAIaHE SO ORDERED. (SGD.) OLGA PALANCA-ENRIQUEZ Associate Justice Juanito C. Castaeda, Jr. and Erlinda P. Uy, JJ., concur.