Total (Philippines) Corp. v. Commissioner of Internal Revenue

SPECIAL SECOND DIVISION [C.T.A. CASE NO. 7855. September 15, 2016.] TOTAL (PHILIPPINES) CORPORATION , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION CASTAEDA, JR. , J p : STATEMENT OF THE CASE This is a remanded case involving Total (Philippines) Corporation's claim for refund or issuance of tax credit certificate (TCC) in the amount of Eight Million Eight Hundred Forty-Three Thousand Two Hundred Twenty-Eight Pesos and Thirty Centavos (P8,843,228.30),representing unutilized input value-added tax (VAT) for the period covering October 1, 2006 to December 31, 2006, pursuant to the Amended Decision dated August 27, 2013 issued by the Court of Tax Appeals En Banc. STATEMENT OF FACTS Petitioner Total (Philippines) Corporation is a domestic corporation duly registered with and licensed by the Securities and Exchange Commission (SEC) to do business in the Philippines, with principal office address at Penthouse, Total Corporate Center, 1012 Triangle Drive, North Bonifacio, Bonifacio Global City. 1 It is a VAT-registered entity as evidenced by its Certificate of Registration No. OCN 8RC0000019580 with assigned Taxpayer's Identification Number (TIN) 005-145-964-000. 2 As stated in its Articles of Incorporation, petitioner's primary purpose is to "acquire, assemble, install, construct, equip, repair, remodel, maintain, develop, operate, hold, own, lease and otherwise deal with oil terminals and service station networks; to develop and operate a wholesale distribution network and carry out the purchase, acquisition, including importation, if appropriate, storage, marketing, distribution, transport, use, wholesale, exportation, refinement, treatment, distillation and manufacture of, and generally deal in, Fuel Oils, Gas Oils, Gasolines, Lubricants and, subject to market conditions, Bitumens, Solvents and Kerosenes and, subject to the written agreement of the stockholders any and all kinds of oil products, such as Jet Fuel and liquefied petroleum gas." 3 On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue empowered to perform the duties of his office, including, among others, to act on and approve claims for refund or tax credit as provided by law. He holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City. During the fourth taxable quarter of 2006, petitioner exported goods to companies located in foreign countries and to companies located in Special Economic Zones and Freeport Zones. And it purportedly incurred or paid input taxes on its purchases of VATable goods and services for the said period. As declared in its Quarterly VAT Return, 4 the sales and purchases for the fourth quarter of 2006 are as follows: Zero-rated Exempt Sales Subject to Output Tax Purchases Input Tax Sales Sales 12% VAT P75,273,816.73 P150,618.31 P6,024,195,649.40 P722,903,477.93 P5,971,569,508.60 P716,588,254.94 Petitioner filed its application for the issuance of tax credit certificate for the unutilized VAT input taxes in the amount of P8,843,228.30, along with all supporting documents, on December 18, 2008 5 with the Large Taxpayers Service-Large Taxpayer Audit and Investigation Division II. CAIHTE Respondent failed to act on petitioner's claim for refund, prompting petitioner to file this Petition for Review before this Court on December 22, 2008. 6 Respondent filed his Answer 7 on February 6, 2009, interposing the following Special and Affirmative Defenses: "4. He reiterates and re-pleads the preceding paragraphs of this Answer as part of his Special and Affirmative Defenses. 5. Petitioner's alleged claim for tax credit/refund is subject to administrative routinary investigation/examination by respondent's Bureau. 6. Taxes collected are presumed to be in accordance with laws and regulations. 7. Petitioner's judicial claim for tax credit/refund was prematurely filed for failure to comply with the provision of Section 112 (C) of the 1997 National Internal Revenue Code (NIRC), as amended, which states: ' Section 112. Refunds or Tax Credits of Input Tax. (C) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.' (Italics supplied) As stated in the Petition, petitioner filed its administrative claim for tax credit/refund with respondent on 18 December 2008. After only four (4) days or on 22 December 2008, the instant Petition for Review was filed with this Honorable Court. Obviously, the 120-day period given to respondent to decide on the claim has just started. Such action on the part of petitioner is tantamount to a wanton disregard of the doctrine of exhaustion of administrative remedies. Well settled is the rule that before a party may seek the intervention of the court, he should first avail of all the means afforded him by administrative processes (Zabat vs. Court of Appeals, 338 SCRA 551) .This rule on exhaustion of administrative remedies was explained thus: 'The underlying principle of the rule on exhaustion of administrative remedies rests on the presumption that the administrative agency, if afforded a complete chance to pass upon the matter, will decide the same correctly. There are both legal and practical reasons for the principle. The administrative process is intended to provide less expensive and more speedy solution to disputes. Where the enabling statute indicates a procedure for administrative review and provides a system of administrative appeal or reconsideration, the courts for reasons of law, comity and convenience will not entertain a case unless the available administrative remedies have been resorted to and the appropriate authorities have been given an opportunity to act and correct errors committed in the administrative forum.' (Union Bank of the Philippines vs. Court of Appeals, 290 SCRA 198) 8. Grantia argumenti that the instant claim for tax credit/refund was not prematurely filed, it is imperative for petitioner to prove its compliance with the following, viz. : a. The registration requirements of a value-added taxpayer under the pertinent provision of the 1997 NIRC, as amended, and its implementing revenue regulations. b. The invoicing and accounting requirements for VAT-registered persons, as well as the filing and payment of VAT pursuant to the provisions of Sections 113 and 114 of the 1997 NIRC, as amended. Failure to comply with the invoicing requirements on the documents supporting the sale of goods and services will result in the disallowance of the claim for input tax of the taxpayer claimant (Revenue Memorandum Circular No. 42-2003). c. The submission of complete documents in support of the administrative claim for tax credit/refund pursuant to Section 112 (C) of the 1997 NIRC, as amended, otherwise, there would be no sufficient compliance with regard to the filing of administrative claim for tax credit/refund which is a condition sine qua non prior to the filing of such claim. d. That the input taxes of P8,843,228.30 allegedly representing unutilized input VAT from its purchases of goods and services attributed/allocated to its export sales and sales to companies located in the special economic zones/freeport zones were: i. paid by petitioner; ii. attributable to its zero-rated or effectively zero-rated sales; and, iii. such input taxes paid should not have been applied against any output tax. DETACa e. That petitioner's claim for tax credit/refund allegedly representing unutilized input VAT in the amount of P8,843,228.30 was filed within two (2) years after the close of the taxable quarter when the sales were made in accordance with Section 112 (A) of the 1997 NIRC, as amended. 9. Furthermore, in an action for tax credit/refund, the burden of proof rests upon the taxpayer to establish by sufficient and competent evidence its entitlement to a claim for refund. 10. Basic is the rule that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the entity claiming the same. (Philippine Geothermal, Inc. vs. Commissioner of Internal Revenue, G.R. No. 154028, July 27, 2005) .Moreover, statutes in derogation of sovereignty such as those containing exemption from taxation should be strictly construed in favor of the State. In this regard, taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted (Sea-Land Service, Inc. vs. Court of Appeals, 357 SCRA 444) ." During trial, petitioner presented documentary and testimonial evidence. 8 Respondent's counsel, however, manifested that respondent has no evidence to present. 9 Petitioner filed its Memorandum 10 on January 17, 2011 and respondent filed his Memorandum 11 on January 17, 2011 through registered mail and received by the Court on January 31, 2011. Afterwards, the case was declared submitted for decision via Resolution 12 dated January 26, 2011. On June 30, 2011, the Court of Tax Appeals Second Division dismissed the Petition for Review for lack of jurisdiction. 13 Petitioner then filed a Motion for Reconsideration 14 on July 15, 2011; while respondent filed a Comment (Re: Motion for Reconsideration) 15 on August 9, 2011. In the Resolution 16 dated September 14, 2011, petitioner's motion was denied for lack of merit. As a result, petitioner filed a Petition for Review 17 before the Court of Tax Appeals En Banc on October 3, 2011. Respondent filed a Comment (Re: Petition for Review dated September 30, 2011) 18 on November 14, 2011. In the Resolution 19 dated December 21, 2011, the Court of Tax Appeals En Banc resolved to give due course to petitioner's Petition for Review, and ordered both parties to submit their Memoranda. On February 22, 2012, respondent filed a Manifestation (Re: Resolution dated January 27, 2012) 20 stating therein that respondent is adopting the arguments raised in the Comment to the Petition for Review filed before the Court of Tax Appeals En Banc on January 27, 2012 as respondent's Memorandum. Petitioner, on the other hand, filed its Memorandum 21 on March 2, 2012. In the Decision 22 dated February 21, 2013, the Court of Tax Appeals En Banc dismissed the Petition for Review for lack of merit. Petitioner filed a Motion for Reconsideration 23 on March 21, 2013; while respondent filed a Comment (Re: Motion for Reconsideration dated 20 March 2013) 24 on May 10, 2013. On August 27, 2013, the Court of Tax Appeals En Banc issued an Amended Decision, 25 the dispositive portion of which is quoted as follows: " WHEREFORE ,premises considered, the instant Motion for Reconsideration is PARTIALLY GRANTED .The Decision dated February 21, 2013 of the Court En Banc is hereby REVERSED and SET ASIDE . Accordingly, CTA Case No. 7855 is hereby REMANDED to the Second Division of this Court, for a complete determination whether petitioner complied with the other legal requirements in claiming for refund or issuance of a tax credit certificate for its alleged unutilized input VAT incurred from its domestic purchases of taxable goods and services attributable to its zero-rated sales for taxable year 2006. SO ORDERED. " Respondent filed a Motion for Reconsideration (Re: Amended Decision promulgated on 27 August 2013) 26 on September 19, 2013; while petitioner filed its Comment to Respondent's Motion for Reconsideration on the Amended Decision promulgated on 27 August 2013 27 on November 18, 2013. However, in the Resolution 28 dated December 18, 2013, the Court En Banc denied the Motion for Reconsideration for lack of merit. Respondent filed a Petition for Review 29 on February 24, 2014 through registered mail and received by the Supreme Court on March 5, 2014, but the same was denied in the Resolution 30 dated March 19, 2014. Respondent filed a Motion for Reconsideration 31 on March 20, 2014 through registered mail and received by the Supreme Court on March 26, 2014. However, in the Resolution 32 dated July 14, 2014, the Supreme Court denied the Motion for Reconsideration with finality. The Entry of Judgment 33 was issued by the Supreme Court on September 5, 2014. Hence, the case was remanded to this Court. In the Resolution 34 dated April 17, 2015, the Court of Tax Appeals Special Second Division set the case for the presentation of petitioner's evidence. However, during the trial on July 29, 2015, petitioner manifested that it will not present additional evidence in this case. Hence, the parties were granted thirty (30) days to file their respective memoranda. 35 Petitioner filed its Supplemental Memorandum 36 on September 28, 2015. On the other hand, respondent failed to file a Memorandum as per Records Verification 37 of the CTA Judicial Records Division dated September 30, 2015. Hence, the case was declared submitted for decision as of the promulgation of Resolution dated October 7, 2015. 38 STATEMENT OF THE ISSUES The parties submitted the following issues 39 for this Court's resolution: A. WHETHER OR NOT THE PETITIONER SEASONABLY FILED ITS ADMINISTRATIVE AND JUDICIAL CLAIMS FOR REFUND OR ISSUANCE OF TAX CREDIT CERTIFICATE. B. WHETHER OR NOT PETITIONER IS REGISTERED AS A VALUE ADDED TAXPAYER PURSUANT TO THE PROVISIONS OF THE 1997 NIRC, AS AMENDED. C. WHETHER OR NOT PETITIONER HAS COMPLIED WITH THE INVOICING AND ACCOUNTING REQUIREMENTS FOR VAT-REGISTERED PERSONS, AS WELL AS THE FILING AND PAYMENT OF VAT PURSUANT TO THE PROVISIONS OF THE 1997 NIRC, AS AMENDED. aDSIHc D. WHETHER OR NOT PETITIONER HAS UNUTILIZED INPUT VAT FOR THE FOURTH QUARTER OF TAXABLE YEAR 2006 IN THE TOTAL AMOUNT OF P716,588,254.94, ARISING FROM ITS DOMESTIC PURCHASES OF TAXABLE GOODS AND SERVICES AND IMPORTATION OF GOODS, AND P8,843,228.30 IS PROPERLY ALLOCATED TO ITS ZERO-RATED SALES AND SALES TO COMPANIES LOCATED IN SPECIAL ECONOMIC ZONE/FREEPORT ZONES. E. WHETHER OR NOT THE UNUTILIZED CREDITABLE INPUT TAXES FOR THE FOURTH QUARTER OF CY 2006 THAT ARE ALLOCATED TO ITS ZERO-RATED SALES AND SALES TO COMPANIES LOCATED IN SPECIAL ECONOMIC ZONE/FREEPORT ZONES WERE NOT UTILIZED IN THE SUCCEEDING TAXABLE QUARTER(S) OR APPLIED AGAINST ANY OUTPUT VAT LIABILITY OF THE PETITIONER. F. WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND AND/OR ISSUANCE OF TAX CREDIT CERTIFICATE FOR THE UNUTILIZED CREDITABLE INPUT TAXES FOR THE FOURTH QUARTER OF CY 2006 THAT ARE ALLOCATED TO ITS ZERO-RATED SALES AND SALES TO COMPANIES LOCATED IN SPECIAL ECONOMIC ZONE/FREEPORT ZONES. DISCUSSION/RECOMMENDATION Petitioner's claim finds legal basis on Section 112 (A) and (C) of the National Internal Revenue Code (NIRC) of 1997, as amended, quoted hereunder for ready reference: "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 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 of 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: Provided, finally ,That for a person making sales that are zero-rated under Section 108 (B)(6),the input taxes shall be allocated ratably between his zero-rated and non-zero-rated sales. xxx xxx xxx (C) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals." Pursuant to the above-quoted provision and as laid down by the Supreme Court in a number of cases, 40 a taxpayer engaged in zero-rated or effectively zero-rated sales is entitled to a refund or tax credit of input taxes attributable to such sales upon compliance with the following requisites: 1. that there must be zero-rated or effectively zero-rated sales; 2. that input taxes were incurred or paid; 3. that such input taxes were attributable to zero-rated or effectively zero-rated sales; 4. that the input taxes were not applied against any output VAT liability; and 5. that the claim for refund was filed within the two-year prescriptive period. Petitioner's compliance with the fifth requisite had already been settled by the Court of Tax Appeals En Banc in the following manner: 41 "In this case, it was established that petitioner's refund claim pertains to its alleged input tax for the fourth quarter of 2006 ( i.e. , from October 1 to December 31, 2006), and that the administrative claim (along with all supporting documents) was filed by petitioner with respondent on December 18, 2008. However, it appears that petitioner did not wait for the lapse of the 120-day period under Section 112 of the National Internal Revenue Code (NIRC) of 1997, and it filed its judicial claim on December 22, 2008, or only four (4) days after it filed its administrative claim. Clearly, while petitioner timely filed its administrative claim, it never complied with the 120+30-day periods under the earlier quoted Section 112(C) of the NIRC of 1997, as amended RA 9337. Nevertheless, in view of BIR Ruling No. DA-489-03 vis-a-vis the above-quoted jurisprudential pronouncements, petitioner may be excused from complying with the 120+30-day periods as its refund claim was filed within the period from December 10, 2003 until October 6, 2010. Correspondingly, petitioner's Petition for Review in CTA Case No. 7855 is deemed timely filed, pursuant to the San Roque case; and therefore, the Court in Division has jurisdiction to entertain the same." With the timely filing of petitioner's claim for refund of its excess and unutilized input VAT paid for the fourth quarter of 2006, before the administrative and judicial levels, petitioner complied with the fifth requisite. The Court shall now proceed to determine petitioner's compliance with the other requisites. Anent the first requisite, petitioner alleges that during the fourth quarter of taxable year 2006, it sold goods to companies located in Special Economic Zones and Freeport Zones. Petitioner asserts that such sales are subject to zero-percent (0%) VAT pursuant to Section 106 (A) (2) of the NIRC of 1997, as amended. 42 The Court agrees with petitioner. ETHIDa Sales by a VAT-registered taxpayer from the customs territory to entities located in export processing zones are considered export sales under Executive Order (E.O.) No. 226, otherwise known as the "Omnibus Investments Code of 1987," the relevant portions of which provide as follows: "ARTICLE 23. 'Export Sales' shall mean the Philippine port F.O.B. value, determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of exports products exported directly by a registered export producer or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same: Provided ,That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents: Provided, further , That without actual exportation the following shall be considered constructively exported for purposes of this provision :(1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones ;..." (Emphasis supplied) "ARTICLE 77. Tax Treatment of Merchandise in the Zone. (1) Except as otherwise provided in this Code, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts and wares of every description, except those prohibited by law, brought into the zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise whether directly or indirectly related in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding. (2) Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the zone, shall be considered as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such transaction. " (Emphasis supplied) Moreover, under Sections 8 and 24 of Republic Act (RA) No. 7916, as amended, otherwise known as "The Special Economic Zone Act of 1995" and Section 15 of RA No. 7227, as amended, otherwise known as "Bases Conversion and Development Act of 1992," the Ecozones and the Clark Freeport Zone shall be treated as separate customs territories and the business establishments operating therein shall be entitled to certain fiscal incentives, to wit: cSEDTC "SECTION 8. ECOZONE to be Operated and Managed as Separate Customs Territory. The ECOZONES shall be managed and operated by the PEZA as separate customs territory . The PEZA is hereby vested with the authority to issue certificates of origin for products manufactured or processed in each ECOZONE in accordance with the prevailing rules of origin, and the pertinent regulations of the Department of Trade and Industry and/or the Department of Finance. xxx xxx xxx SECTION 24. Exemption from National and Local Taxes. Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: (a) Three percent (3%) to the National Government; (b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." (Emphasis supplied) "SEC. 15. Clark Special Economic Zone (CSEZ) and Clark Freeport Zone (CFZ). Subject to the concurrence by resolution of the local government units directly affected, the President is hereby authorized to create by executive proclamation a Special Economic Zone covering the lands occupied by the Clark military reservations and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, located within the territorial jurisdiction of Angeles City, municipalities of Mabalacat and Porac, Province of Pampanga, and the municipalities of Capas and Bamban, Province of Tarlac, in accordance with the provisions as herein provided insofar as applied to the Clark military reservations. The Clark Air Base proper with an area of not more than four thousand four hundred hectares (4,400 has.) with the exception of the twenty-two-hectare commercial area situated near the main gate and the Bayanihan Park consisting of seven and a half hectares (7.5 has.) located outside the main gate of the Clark Special Economic Zone, is hereby declared a freeport zone. The CFZ shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital equipment within, into and exported out of the CFZ, as well as provide incentives such as tax and duty-free importation of raw materials and capital equipment. However, exportation or removal of goods from the territory of the CFZ to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Tariff and Customs Code of the Philippines, as amended, the National Internal Revenue Code of 1997, as amended, and other relevant tax laws of the Philippines. The provisions of existing laws, rules and regulations to the contrary notwithstanding, no national and local taxes shall be imposed on registered business enterprises within the CFZ. In lieu of said taxes, a five percent (5%) tax on gross income earned shall be paid by all registered business enterprises within the CFZ and shall be directly remitted as follows: three percent (3%) to the National Government, and two percent (2%) to the treasurer's office of the municipality or city where they are located." (Emphasis supplied) Since the Ecozone/Freeport Zone is viewed as a foreign territory by legal fiction, sales made by a VAT-registered person in the customs territory to an entity registered and operating within the Ecozone/Freeport Zone are considered exports to a foreign country subject to zero percent VAT. This was elucidated by the Supreme Court in the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.), Inc. , 43 to wit: "Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign territory .As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise? The Philippine VAT system adheres to the Cross Border Doctrine ,according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT ;while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT." (Emphasis supplied) Similarly, in the case of Commissioner of Internal Revenue vs. Sekisui Jushi Philippines, Inc. , 44 the High Court held: "Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil .Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero percent." (Emphasis supplied) Clearly, sales of goods to entities located in the Special Economic Zones and Freeport Zones are considered "export sales" subject to zero percent VAT rate pursuant to Section 106 (A) (2) (a) (5) of the NIRC of 1997, as amended, which states: "SEC. 106. Value-Added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided ,That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%),after any of the following conditions has been satisfied: xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. The term 'export sales' means: xxx xxx xxx (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws ." (Emphasis supplied) In its amended Quarterly VAT Return 45 for the fourth quarter of 2006, petitioner reported an amount of P75,273,816.73 zero-rated sales/receipts out of the total sales/receipts of P6,099,620,084.52, as follows: Particulars Amount Vatable Sales/Receipts P6,009,433,352.91 Sale to Government 14,762,296.57 Zero-rated Sales/Receipts 75,273,816.73 Exempt Sales/Receipts 150,618.31 Total Sales/Receipts P6,099,620,084.52 ============== As aptly found by the Court-commissioned Independent Certified Public Accountant (CPA), 46 out of the reported zero-rated sales of P75,273,816.73, the following amount of P1,109,957.08 was not properly supported by VAT zero-rated sales invoices: SDAaTC Supporting VAT Invoices/Debit Notes were not provided (Exhibit "V-2") P(317,945.72) Supported by VAT Invoices but no signature of the customer on the face of the invoice and no related delivery note (Exhibits "V-3-1" to "V-3-4") 1,427,902.80 Total P1,109,957.08 ============= To establish that its clients are Special Economic or Freeport Zone enterprises, petitioner submitted various Certifications issued by the Philippine Economic Zone Authority (PEZA) and Clark Development Corporation (CDC), detailed as follows: Issuing Validity of Exhibit Business Name Authority Certification O-1 ANALOG DEVICES GEN. TRIAS, INC. PEZA 2006 O-2 DUNLOP SLAZENGER (PHILS.),INC. PEZA 2001 O-3 ICHINOMIYA ELECTRONICS PHILS. CORP. PEZA 2006 O-4 MOOG CONTROLS CORPORATION (PHIL. BRANCH) PEZA Not indicated O-5 NIDEC PRECISION PHILS. CORP. PEZA 2006 O-6 PAN CENTURY SURFACTANTS, INC. PEZA 2006 O-7 PHOENIX GOLD ENERGY, INC. CDC Feb. 01, 2008 to Jan. 31, 2009 O-8 R.D. POLICARPIO & CO.,INC. CDC May 25, 2004 to May 12, 2007 O-9 SAKAMOTO ORIENT CHEMICALS CORP. PEZA 2006 Since the period covered by the instant claim is the fourth quarter of taxable year 2006, only the Certifications which are indicative of the fact that the named entities therein are duly registered with the PEZA or CDC, as the case may be, and only during the effectivity thereof, which must be within the fourth quarter of 2006, shall be considered valid for purposes of determining petitioner's zero-rated sales for the said period. Thus, petitioner's sales to the following entities amounting to P34,439,708.98 shall be denied of VAT zero-rating for the reasons stated as follows: 1. Effectivity period of Certification has expired: Dunlop Slazenger (Phils.),Inc. (2001); AaCTcI 2. Effectivity period cannot be determined because of incompleteness of documents: Moog Controls Corporation (Phil. Branch);and 3. Effectivity period of Certification was after the fourth quarter of 2006, i.e. ,February 1, 2008 to January 31, 2009: Phoenix Gold Energy, Inc. Below is the breakdown of the disallowed zero-rated sales of P34,439,708.98: Customer Date Invoice No. Exhibit Amount Dunlop Slazenger Phils. October 2006 Dunlop Slazenger Phils. 10/10/2006 40021429 V-1-b-1 P389,790.00 Dunlop Slazenger Phils. 10/11/2006 40021652 V-1-b-3 389,790.00 Dunlop Slazenger Phils. 10/12/2006 40022026 V-1-b-5 389,790.00 Dunlop Slazenger Phils. 10/16/2006 40022444 V-1-b-7 389,790.00 Dunlop Slazenger Phils. 10/18/2006 40022896 V-1-b-9 389,790.00 Dunlop Slazenger Phils. 10/19/2006 40023143 V-1-b-11 389,790.00 Dunlop Slazenger Phils. 10/20/2006 40023368 V-1-b-13 389,790.00 Dunlop Slazenger Phils. 10/23/2006 40023800 V-1-a-16 117,600.00 Dunlop Slazenger Phils. 10/23/2006 40023719 V-1-b-19 389,790.00 Dunlop Slazenger Phils. 10/25/2006 40024083 V-1-b-21 389,790.00 Dunlop Slazenger Phils. 10/26/2006 40024331 V-1-b-23 389,790.00 Dunlop Slazenger Phils. 10/27/2006 40024558 V-1-b-27 389,790.00 Dunlop Slazenger Phils. 10/27/2006 40024715 V-1-b-29 389,790.00 Dunlop Slazenger Phils. 10/30/2006 40025058 V-1-b-31 292,195.00 Dunlop Slazenger Phils. 10/30/2006 40025120 V-1-b-33 389,790.00 Dunlop Slazenger Phils. 10/31/2006 40025383 V-1-a-28 100,800.00 Dunlop Slazenger Phils. 10/31/2006 40025389 V-1-a-29 67,200.00 Subtotal P5,645,065.00 November 2006 Dunlop Slazenger Phils. 11/2/2006 40025478 V-1-b-35 P389,790.00 Dunlop Slazenger Phils. 11/3/2006 40025664 V-1-b-37 389,790.00 Dunlop Slazenger Phils. 11/6/2006 40026215 V-1-b-43 389,790.00 Dunlop Slazenger Phils. 11/7/2006 40026399 V-1-b-47 389,790.00 Dunlop Slazenger Phils. 11/8/2006 40026690 V-1-b-49 389,790.00 Dunlop Slazenger Phils. 11/9/2006 40026848 V-1-b-51 389,790.00 Dunlop Slazenger Phils. 11/10/2006 40027033 V-1-b-55 389,790.00 Dunlop Slazenger Phils. 11/13/2006 40027391 V-1-b-57 389,790.00 Dunlop Slazenger Phils. 11/14/2006 40027645 V-1-b-59 370,000.00 Dunlop Slazenger Phils. 11/15/2006 40027837 V-1-b-63 370,000.00 Dunlop Slazenger Phils. 11/16/2006 40027990 V-1-a-51 52,928.58 Dunlop Slazenger Phils. 11/16/2006 40027992 V-1-a-52 134,400.00 Dunlop Slazenger Phils. 11/16/2006 40027993 V-1-b-65 33,600.00 Dunlop Slazenger Phils. 11/17/2006 40028170 V-1-b-67 172,638.60 Dunlop Slazenger Phils. 11/20/2006 40028552 V-1-a-54 360,000.00 Dunlop Slazenger Phils. 11/21/2006 40028839 V-1-b-71 360,000.00 Dunlop Slazenger Phils. 11/22/2006 40029001 V-1-b-73 360,000.00 Dunlop Slazenger Phils. 11/24/2006 40029585 V-1-a-64 360,000.00 Dunlop Slazenger Phils. 11/28/2006 40030158 V-1-b-87 360,000.00 Dunlop Slazenger Phils. 11/29/2006 40030413 V-1-b-89 360,000.00 Dunlop Slazenger Phils. 11/30/2006 40032088 V-1-b-105 360,000.00 Subtotal P6,771,887.18 December 2006 Dunlop Slazenger Phils. 12/1/2006 40031645 V-1-b-93 P360,000.00 Dunlop Slazenger Phils. 12/7/2006 40031915 V-1-b-103 360,000.00 Dunlop Slazenger Phils. 12/8/2006 40032118 V-1-b-107 360,000.00 Dunlop Slazenger Phils. 12/13/2006 40032701 V-1-b-109 360,000.00 Dunlop Slazenger Phils. 12/13/2006 40032762 V-1-b-111 360,000.00 Dunlop Slazenger Phils. 12/14/2006 40032990 V-1-b-113 360,000.00 Dunlop Slazenger Phils. 12/16/2006 40033337 V-1-b-115 360,000.00 Dunlop Slazenger Phils. 12/18/2006 40033540 V-1-b-117 360,000.00 Dunlop Slazenger Phils. 12/20/2006 40033888 V-1-b-119 360,000.00 Dunlop Slazenger Phils. 12/26/2006 40034712 V-1-b-121 360,000.00 Dunlop Slazenger Phils. 12/29/2006 40035385 V-1-a-131 360,000.00 Dunlop Slazenger Phils. 12/29/2006 40035550 V-1-a-144 43,500.00 Subtotal P4,003,500.00 Total Dunlop Slazenger Phils. P16,420,452.18 Moog Controls Corp. (Phil. Branch) December 2006 Moog Controls Corp. 12/1/2006 40034550 V-1-a-122 P452,144.00 Total Moog Controls Corp. (Phil. Branch) P452,144.00 Phoenix Gold Energy, Inc. December 2006 Phoenix Gold Energy, Inc. 12/4/2006 40031284 V-1-a-70 P492,644.00 Phoenix Gold Energy, Inc. 12/6/2006 40031654 V-1-a-74 344,850.80 Phoenix Gold Energy, Inc. 12/7/2006 40031918 V-1-a-82 365,031.80 Phoenix Gold Energy, Inc. 12/8/2006 40032069 V-1-a-85 344,850.80 Phoenix Gold Energy, Inc. 12/11/2006 40032441 V-1-a-86 344,850.80 Phoenix Gold Energy, Inc. 12/12/2006 40032574 V-1-a-88 344,850.80 Phoenix Gold Energy, Inc. 12/12/2006 40032585 V-1-a-89 492,644.00 Phoenix Gold Energy, Inc. 12/12/2006 40032587 V-1-a-90 344,850.80 Phoenix Gold Energy, Inc. 12/13/2006 40032815 V-1-a-93 344,850.80 Phoenix Gold Energy, Inc. 12/13/2006 40032816 V-1-a-94 344,850.80 Phoenix Gold Energy, Inc. 12/14/2006 40032885 V-1-a-95 492,644.00 Phoenix Gold Energy, Inc. 12/14/2006 40032916 V-1-a-96 344,850.80 Phoenix Gold Energy, Inc. 12/14/2006 40032981 V-1-a-97 344,850.80 Phoenix Gold Energy, Inc. 12/15/2006 40033108 V-1-a-99 492,644.00 Phoenix Gold Energy, Inc. 12/15/2006 40033131 V-1-a-100 344,850.80 Phoenix Gold Energy, Inc. 12/15/2006 40033164 V-1-a-101 344,850.80 Phoenix Gold Energy, Inc. 12/16/2006 40033354 V-1-a-102 344,850.80 Phoenix Gold Energy, Inc. 12/16/2006 40033355 V-1-a-103 492,644.00 Phoenix Gold Energy, Inc. 12/18/2006 40033711 V-1-a-105 344,850.80 Phoenix Gold Energy, Inc. 12/19/2006 40033732 V-1-a-106 492,644.00 Phoenix Gold Energy, Inc. 12/19/2006 40033746 V-1-a-107 344,850.80 Phoenix Gold Energy, Inc. 12/20/2006 40033887 V-1-a-110 350,030.80 Phoenix Gold Energy, Inc. 12/20/2006 40033923 V-1-a-111 500,044.00 Phoenix Gold Energy, Inc. 12/20/2006 40033939 V-1-a-112 350,030.80 Phoenix Gold Energy, Inc. 12/21/2006 40034073 V-1-a-114 500,044.00 Phoenix Gold Energy, Inc. 12/21/2006 40034119 V-1-a-115 350,030.80 Phoenix Gold Energy, Inc. 12/21/2006 40034159 V-1-a-116 500,044.00 Phoenix Gold Energy, Inc. 12/22/2006 40034313 V-1-a-118 350,030.80 Phoenix Gold Energy, Inc. 12/22/2006 40034346 V-1-a-119 350,030.80 Phoenix Gold Energy, Inc. 12/22/2006 40034365 V-1-a-120 500,044.00 Phoenix Gold Energy, Inc. 12/26/2006 40034690 V-1-a-124 350,030.80 Phoenix Gold Energy, Inc. 12/27/2006 40034820 V-1-a-127 500,044.00 Phoenix Gold Energy, Inc. 12/27/2006 40034850 V-1-a-128 500,044.00 Phoenix Gold Energy, Inc. 12/28/2006 40035180 V-1-a-129 350,030.80 Phoenix Gold Energy, Inc. 12/28/2006 40035200 V-1-a-130 407,739.80 Phoenix Gold Energy, Inc. 12/28/2006 40035090 V-1-b-123 500,044.00 Phoenix Gold Energy, Inc. 12/29/2006 40035548 V-1-a-143 350,030.80 Phoenix Gold Energy, Inc. 12/29/2006 40035677 V-1-a-145 350,030.80 Phoenix Gold Energy, Inc. 12/29/2006 40035683 V-1-a-146 517,218.00 Phoenix Gold Energy, Inc. 12/30/2006 40035885 V-1-a-147 500,044.00 Phoenix Gold Energy, Inc. 12/30/2006 40035889 V-1-a-148 350,030.80 Phoenix Gold Energy, Inc. 12/30/2006 40035844 V-1-b-125 500,044.00 Phoenix Gold Energy, Inc. 12/16/2009 40033760 V-1-a-108 492,644.00 Total Phoenix Gold Energy, Inc. P17,567,112.80 DISALLOWED ZERO-RATED SALES WITHOUT PROPER PEZA/CDC CERTIFICATION P34,439,708.98 In fine, only the sales made by petitioner to Analog Devices Gen. Trias, Inc., Ichinomiya Electronics Phils., Corp., Nidec Precision Phils., Corp., Pan Century Surfactants, Inc., R.D. Policarpio & Co., Inc., and Sakamoto Orient Chemicals Corp., which are all duly supported by PEZA/CDC Certifications and VAT zero-rated sales invoices, qualify for VAT zero-rating under Section 106 (A) (2) (a) (5) of the NIRC of 1997, as amended. Accordingly, of the P75,273,816.73 zero-rated sales declared by petitioner for the fourth quarter of 2006, only the amount of P39,724,150.67 is considered valid, computed as follows: Amount Zero-Rated Sales per VAT return P75,273,816.73 Less: Disallowances Not properly supported by VAT zero-rated sales invoices per ICPA report 1,109,957.08 Without proper PEZA/CDC Certification per this Court's verification 34,439,708.98 Total Disallowances 35,549,666.06 Valid Zero-Rated Sales P39,724,150.67 ============ Petitioner's valid zero-rated sales amounting to P39,724,150.67 is broken down as follows: Exhibit Customer Invoice No. Date Amount OCTOBER 2006 V-1-a-1 Nidec Precision Phils. Corp. 40019953 10/2/2006 P360,000.00 V-1-a-4 Nidec Precision Phils. Corp. 40020712 10/5/2006 360,000.00 V-1-a-11 Nidec Precision Phils. Corp. 40022208 10/12/2006 480,000.00 V-1-b-15 Nidec Precision Phils. Corp. 40023482 10/20/2006 480,000.00 V-1-b-25 Nidec Precision Phils. Corp. 40024448 10/26/2006 480,000.00 Subtotal P2,160,000.00 V-1-a-19 Pan Century Surfactants, Inc. 40024218 10/2/2006 P254,800.00 V-1-a-20 Pan Century Surfactants, Inc. 40024219 10/2/2006 254,800.00 V-1-a-21 Pan Century Surfactants, Inc. 40024220 10/4/2006 254,800.00 V-1-a-22 Pan Century Surfactants, Inc. 40024221 10/6/2006 254,800.00 V-1-a-43 Pan Century Surfactants, Inc. 40026482 10/9/2006 254,800.00 V-1-a-44 Pan Century Surfactants, Inc. 40026483 10/9/2006 254,800.00 V-1-a-30 Pan Century Surfactants, Inc. 40025790 10/11/2006 254,800.00 V-1-a-31 Pan Century Surfactants, Inc. 40025791 10/11/2006 254,800.00 V-1-a-32 Pan Century Surfactants, Inc. 40025793 10/16/2006 254,800.00 V-1-a-33 Pan Century Surfactants, Inc. 40025794 10/16/2006 254,800.00 V-1-a-34 Pan Century Surfactants, Inc. 40025796 10/19/2006 70,237.20 Subtotal P2,618,237.20 V-1-a-2 RD Policarpio & Co.,Inc. 40020218 10/3/2006 396,261.60 V-1-a-3 RD Policarpio & Co.,Inc. 40020662 10/5/2006 566,088.00 V-1-a-5 RD Policarpio & Co.,Inc. 40021206 10/9/2006 390,012.00 V-1-a-6 RD Policarpio & Co.,Inc. 40021688 10/11/2006 390,012.00 V-1-a-7 RD Policarpio & Co.,Inc. 40021838 10/12/2006 182,000.00 V-1-a-8 RD Policarpio & Co.,Inc. 40021839 10/12/2006 12,866.80 V-1-a-9 RD Policarpio & Co.,Inc. 40022057 10/13/2006 383,762.40 V-1-a-10 RD Policarpio & Co.,Inc. 40022069 10/13/2006 383,762.40 V-1-a-13 RD Policarpio & Co.,Inc. 40022687 10/17/2006 545,032.00 V-1-a-14 RD Policarpio & Co.,Inc. 40023352 10/20/2006 534,904.00 V-1-b-17 RD Policarpio & Co.,Inc. 40023669 10/23/2006 534,904.00 V-1-a-17 RD Policarpio & Co.,Inc. 40023970 10/24/2006 120,034.00 V-1-a-18 RD Policarpio & Co.,Inc. 40023971 10/24/2006 76,480.00 V-1-a-23 RD Policarpio & Co.,Inc. 40024332 10/26/2006 520,000.00 V-1-a-24 RD Policarpio & Co.,Inc. 40024594 10/27/2006 364,000.00 V-1-a-25 RD Policarpio & Co.,Inc. 40024594 10/27/2006 364,000.00 V-1-a-27 RD Policarpio & Co.,Inc. 40024919 10/30/2006 520,000.00 Subtotal 6,284,119.20 V-1-b-45 Sakamoto Orient Chemicals 40026359 10/13/2006 P211,601.00 V-1-a-26 Sakamoto Orient Chemicals 40024763 10/14/2006 325,756.80 V-1-a-12 Sakamoto Orient Chemicals 40022231 10/16/2006 365,906.00 V-1-b-39 Sakamoto Orient Chemicals 40025795 10/18/2006 256,134.20 V-1-a-15 Sakamoto Orient Chemicals 40023762 10/20/2006 369,036.00 V-1-a-41 Sakamoto Orient Chemicals 40026358 10/24/2006 349,036.00 V-1-b-41 Sakamoto Orient Chemicals 40025797 10/24/2006 256,134.20 V-1-a-35 Sakamoto Orient Chemicals 40025798 10/25/2006 256,134.20 V-1-a-36 Sakamoto Orient Chemicals 40025821 10/27/2006 256,134.20 V-1-a-42 Sakamoto Orient Chemicals 40026391 10/27/2006 332,916.00 V-1-a-37 Sakamoto Orient Chemicals 40025822 10/30/2006 252,000.00 V-1-a-38 Sakamoto Orient Chemicals 40025823 10/31/2006 252,000.00 Subtotal P3,482,788.60 Total October 2006 P14,545,145.00 NOVEMBER 2006 V-1-a-48 Analog Devices Gen. Trias, Inc. 40027026 11/10/2006 P563,318.00 V-1-b-91 Analog Devices Gen. Trias, Inc. 40030486 11/29/2006 563,318.00 Subtotal P1,126,636.00 V-1-a-39 Ichinomiya Electronics Phils.,Corp. 40026026 11/4/2006 P10,270.29 V-1-a-62 Ichinomiya Electronics Phils.,Corp. 40029485 11/24/2006 10,270.29 Subtotal P20,540.58 V-1-b-53 Nidec Precision Phils. Corp. 40027018 11/10/2006 P360,000.00 V-1-b-61 Nidec Precision Phils. Corp. 40027811 11/15/2006 360,000.00 Subtotal P720,000.00 V-1-a-40 RD Policarpio & Co.,Inc. 40026110 11/6/2006 P520,000.00 V-1-a-45 RD Policarpio & Co.,Inc. 40026587 11/8/2006 514,644.00 V-1-a-46 RD Policarpio & Co.,Inc. 40026979 11/10/2006 514,644.00 V-1-a-47 RD Policarpio & Co.,Inc. 40026999 11/10/2006 514,644.00 V-1-a-50 RD Policarpio & Co.,Inc. 40027908 11/16/2006 514,644.00 V-1-b-69 RD Policarpio & Co.,Inc. 40028258 11/17/2006 500,044.00 V-1-a-53 RD Policarpio & Co.,Inc. 40028529 11/20/2006 500,044.00 V-1-a-59 RD Policarpio & Co.,Inc. 40029205 11/23/2006 500,044.00 V-1-a-60 RD Policarpio & Co.,Inc. 40029210 11/23/2006 350,030.80 V-1-a-61 RD Policarpio & Co.,Inc. 40029425 11/24/2006 500,044.00 V-1-a-63 RD Policarpio & Co.,Inc. 40029581 11/24/2006 350,030.80 V-1-a-65 RD Policarpio & Co.,Inc. 40030157 11/28/2006 500,044.00 V-1-a-66 RD Policarpio & Co.,Inc. 40030408 11/29/2006 125,000.00 V-1-a-67 RD Policarpio & Co.,Inc. 40030827 11/30/2006 500,044.00 Subtotal P6,403,901.60 V-1-a-55 Sakamoto Orient Chemicals 40029016 11/2/2006 P242,134.20 V-1-a-56 Sakamoto Orient Chemicals 40029018 11/3/2006 242,134.20 V-1-a-57 Sakamoto Orient Chemicals 40029019 11/6/2006 238,000.00 V-1-a-58 Sakamoto Orient Chemicals 40029020 11/7/2006 242,134.20 V-1-b-75 Sakamoto Orient Chemicals 40029021 11/8/2006 242,134.20 V-1-b-77 Sakamoto Orient Chemicals 40029022 11/8/2006 242,134.20 V-1-b-79 Sakamoto Orient Chemicals 40029023 11/9/2006 242,134.20 V-1-a-49 Sakamoto Orient Chemicals 40027057 11/11/2006 244,325.20 V-1-b-81 Sakamoto Orient Chemicals 40029024 11/13/2006 238,000.00 V-1-b-83 Sakamoto Orient Chemicals 40029025 11/14/2006 242,134.20 V-1-b-85 Sakamoto Orient Chemicals 40029026 11/14/2006 242,134.20 V-1-a-75 Sakamoto Orient Chemicals 40031673 11/20/2006 242,134.20 V-1-a-76 Sakamoto Orient Chemicals 40031675 11/21/2006 242,134.20 V-1-b-95 Sakamoto Orient Chemicals 40031678 11/21/2006 242,134.20 V-1-a-77 Sakamoto Orient Chemicals 40031677 11/22/2006 242,134.20 V-1-a-78 Sakamoto Orient Chemicals 40031680 11/24/2006 238,000.00 V-1-a-79 Sakamoto Orient Chemicals 40031682 11/27/2006 238,000.00 V-1-b-97 Sakamoto Orient Chemicals 40031683 11/28/2006 242,134.20 V-1-b-99 Sakamoto Orient Chemicals 40031684 11/28/2006 242,134.20 V-1-b-101 Sakamoto Orient Chemicals 40031685 11/29/2006 242,134.20 Subtotal P4,828,338.20 Total November 2006 P13,099,416.38 DECEMBER 2006 V-1-a-92 Ichinomiya Electronics Phils.,Corp. 40032795 12/13/2006 P10,270.29 Subtotal P10,270.29 V-1-a-71 Nidec Precision Phils. Corp. 40031306 12/4/2006 P360,000.00 V-1-a-81 Nidec Precision Phils. Corp. 40031870 12/7/2006 360,000.00 Subtotal P720,000.00 V-1-a-68 RD Policarpio & Co.,Inc. 40030946 12/1/2006 P500,044.00 V-1-a-72 RD Policarpio & Co.,Inc. 40031484 12/5/2006 350,030.80 V-1-a-73 RD Policarpio & Co.,Inc. 40031502 12/5/2006 500,044.00 V-1-a-80 RD Policarpio & Co.,Inc. 40031729 12/6/2006 350,030.80 V-1-a-83 RD Policarpio & Co.,Inc. 40032039 12/8/2006 500,044.00 V-1-a-84 RD Policarpio & Co.,Inc. 40032054 12/8/2006 500,044.00 V-1-a-87 RD Policarpio & Co.,Inc. 40032479 12/12/2006 500,044.00 V-1-a-91 RD Policarpio & Co.,Inc. 40032708 12/13/2006 500,044.00 V-1-a-98 RD Policarpio & Co.,Inc. 40033103 12/15/2006 500,044.00 V-1-a-104 RD Policarpio & Co.,Inc. 40033458 12/16/2006 500,044.00 V-1-a-109 RD Policarpio & Co.,Inc. 40033867 12/20/2006 500,044.00 V-1-a-113 RD Policarpio & Co.,Inc. 40034063 12/21/2006 350,030.80 V-1-a-117 RD Policarpio & Co.,Inc. 40034293 12/22/2006 500,044.00 V-1-a-123 RD Policarpio & Co.,Inc. 40034670 12/26/2006 500,044.00 V-1-a-132 RD Policarpio & Co.,Inc. 40035486 12/29/2006 500,044.00 Subtotal P7,050,620.40 V-1-a-69 Sakamoto Orient Chemicals 40030985 12/2/2006 P233,041.20 V-1-a-133 Sakamoto Orient Chemicals 40035536 12/4/2006 237,860.00 V-1-a-134 Sakamoto Orient Chemicals 40035537 12/5/2006 241,994.20 V-1-a-135 Sakamoto Orient Chemicals 40035538 12/6/2006 241,994.20 V-1-a-136 Sakamoto Orient Chemicals 40035539 12/7/2006 241,994.20 V-1-a-137 Sakamoto Orient Chemicals 40035540 12/7/2006 241,994.20 V-1-a-138 Sakamoto Orient Chemicals 40035541 12/11/2006 237,860.00 V-1-a-139 Sakamoto Orient Chemicals 40035542 12/12/2006 237,860.00 V-1-a-140 Sakamoto Orient Chemicals 40035543 12/12/2006 237,860.00 V-1-a-141 Sakamoto Orient Chemicals 40035544 12/13/2006 237,860.00 V-1-a-142 Sakamoto Orient Chemicals 40035546 12/14/2006 237,860.00 V-1-a-149 Sakamoto Orient Chemicals 40036938 12/18/2006 237,860.00 V-1-a-150 Sakamoto Orient Chemicals 40036939 12/19/2006 237,860.00 V-1-a-151 Sakamoto Orient Chemicals 40036940 12/19/2006 237,860.00 V-1-a-152 Sakamoto Orient Chemicals 40036942 12/21/2006 237,860.00 V-1-a-121 Sakamoto Orient Chemicals 40034404 12/22/2006 239,226.40 V-1-a-125 Sakamoto Orient Chemicals 40034762 12/28/2006 241,994.20 V-1-a-126 Sakamoto Orient Chemicals 40034765 12/29/2006 237,860.00 Subtotal P4,298,698.60 Total December 2006 P12,079,589.29 VALID ZERO-RATED SALES P39,724,150.67 Consequently, only the portion of the input VAT claim attributable to the valid zero-rated sales of P39,724,150.67 will be considered for refund. The rate to be applied is based on the valid zero-rated sales over the total amount of reported sales, computed as follows: Valid Zero-Rated Sales P39,724,150.67 = = 0.651256% Total Declared Sales P6,099,620,084.52 After having resolved that petitioner had VAT zero-rated sales for the fourth quarter of 2006 in the amount of P39,724,150.67, the Court shall ascertain the amount of input VAT incurred by petitioner in connection thereto. EcTCAD In its amended Quarterly VAT Return 47 for the fourth quarter of 2006, petitioner reflected a total amount of P715,898,545.59 48 allowable input VAT arising from its amortization of input VAT on purchases of capital goods exceeding P1Million, domestic purchases and importation of goods other than capital goods, and domestic purchases of services for the said period, detailed as follows: Input Tax Deferred on Capital Goods exceeding P1Million from Previous Quarter P3,897,238.58 Add: Input Tax on Capital Goods exceeding P1Million Purchased this Quarter 934,336.08 Total Unamortized Input Tax on Capital Goods exceeding P1Million P4,831,574.66 Less: Input Tax on Purchases of Capital Goods exceeding P1Million deferred for the succeeding period 4,586,947.93 Amortization of Input Tax on Capital Goods exceeding P1Million P244,626.73 Add: Input Tax on Domestic Purchases of Goods Other than Capital Goods 138,184,828.47 Importation of Goods Other than Capital Goods 562,794,961.15 Domestic Purchases of Services 14,674,129.24 Total Allowable Input Tax per return P715,898,545.59 ============= A review of the Independent CPA report, together with the documents supporting the input VAT claim of P715,898,545.59, shows that the amount of P121,387,705.84 should be disallowed for not being properly substantiated by VAT invoices or receipts as required under Sections 110 (A), 113 (A) and (B), 237, and 238 of the NIRC of 1997, as amended, in relation to Sections 4.110-1, 4.110-8, and 4.113-1 of Revenue Regulations (RR) No. 16-05, as amended. Below is the breakdown of the P121,387,705.84 disallowed input VAT: Disallowed Findings Input VAT Exhibit Certain supporting documents were not provided P23,593,745.93 W-2 Certain invoices and official receipts were dated outside the quarter of claim 75,995,417.15 W-3 Certain invoices and official receipts did not show the amount of input VAT as separate item 8,953,778.76 W-4 Certain invoices and official receipts with transactions amounting P1,000 or more did not show petitioner's TIN 3,064,697.60 W-5 Certain invoices and official receipts did not show the nature of transaction 432,620.00 W-6 Certain invoices and official receipts did not indicate the TIN of the supplier 36,956.46 W-7 Certain invoices and/or official receipts were supported by Non-VAT invoice and/or Non-VAT official receipts 2,358.73 W-8 Input VAT on purchase of capital goods exceeding P1Million before November 1, 2005 should have already been claimed in full in 2005 and not amortized over the succeeding periods 2,272.74 W-9 Purchase transactions whose invoices and official receipts were mere photocopies 3,912.00 W-10 Importations with original Import Entry and Internal Revenue Declaration but without Bureau of Customs (BOC) Form 38-A 691,967.00 W-11 Importations with photocopied Import Entry and Internal Revenue Declaration and without BOC Form 38-A 6,708,712.00 W-12 Invoices and/or official receipts with manual alterations 1,807,644.00 W-13-a Invoices and official receipts issued not in the name of petitioner 93,623.47 W-13-c Total P121,387,705.84 ============= In sum, petitioner's properly substantiated input VAT for the fourth quarter of 2006 amounted only to P594,510,839.75 which when compared with its output VAT liability for the same period in the amount of P722,903,477.94, there still remains an output VAT due in the amount of P128,392,638.19, as shown below: Total Allowable Input VAT per return P715,898,545.59 Less: Disallowances 121,387,705.84 Properly Substantiated Input VAT 594,510,839.75 Less: Output VAT 722,903,477.94 Output VAT Still Due P128,392,638.19 ============= Clearly, petitioner's properly substantiated input VAT for the fourth quarter of 2006 is not enough to cover its output VAT for the same period. While petitioner reported an input VAT carried over from previous quarter in the amount of P411,598,506.73, 49 the Court found that petitioner failed to present VAT invoices or official receipts to prove the existence of such amount. Hence, the input VAT carry-over of P411,598,506.73 cannot be validly applied against petitioner's output VAT pursuant to Section 110 (A) in relation to Section 110 (B) of the NIRC of 1997, as amended, which states: "SEC. 110. Tax Credits. (A) Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: xxx xxx xxx (B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. ..." (Emphasis supplied) Since petitioner's output VAT liability is a lot higher than the valid input VAT, there is no excess input VAT which may be the proper subject of a claim for refund or tax credit under Section 112 (A) of the NIRC of 1997, as amended. Consequently, the instant claim must be denied. Basic is the rule that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the entity claiming the same. 50 The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed. 51 In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim under substantive law. It must also show satisfaction of all the documentary and evidentiary requirements for the granting of a claim for refund or tax credit. 52 WHEREFORE ,premises considered, the instant Petition for Review is hereby DENIED for lack of merit. SO ORDERED. (SGD.) JUANITO C. CASTAEDA, JR. Associate Justice Caesar A. Casanova and Cielito N. Mindaro-Grulla, JJ. ,concur. Footnotes 1. Par. 1.1, Joint Stipulation of Facts and Issues (JSFI),docket, vol. I, pp. 111-112. 2. Exhibit "C",docket, vol. I, p. 315. 3. Exhibit "B",docket, vol. I, p. 294. 4. Exhibits "F" and "G",docket, vol. I, pp. 320-323. 5. Exhibit "D",docket, vol. I, pp. 316-318; Par. 1.6, JSFI, docket, vol. I, p. 114. 6. Par. 1.7, JSFI, docket, vol. I, p. 114. 7. Docket, vol. I, pp. 57-63. 8. Formal Offer of Evidence, docket, vol. I, pp. 266-292. 9. Minutes of the hearing on November 17, 2010, docket, vol. II, p. 539. 10. Docket, vol. II, pp. 560-579. 11. Docket, vol. II, pp. 586-606. 12. Docket, vol. II, p. 585. 13. Docket, vol. II, pp. 612-624. 14. Docket, vol. II, pp. 625-647. 15. Docket, vol. II, pp. 655-683. 16. Docket, vol. II, pp. 686-690. 17. Docket, vol. II, pp. 691-726. 18. Docket, vol. II, pp. 750-780. 19. Docket, vol. II, pp. 782-783. 20. Docket, vol. II, pp. 794-796. 21. Docket, vol. II, pp. 797-830. 22. Docket, vol. II, pp. 833-845. 23. Docket, vol. II, pp. 855-866. 24. Docket, vol. II, pp. 880-894. 25. Docket, vol. II, pp. 897-916. 26. Docket, vol. II, pp. 917-931. 27. As culled from the Resolution dated December 18, 2013, docket, vol. II, p. 937. 28. Docket, vol. II, pp. 937-945. 29. Docket, vol. III, pp. 952-981. 30. Notice issued by the Second Division of the Supreme Court, docket, vol. III, pp. 1033-1034. 31. Docket, vol. III, pp. 1035-1043. 32. Notice issued by the Second Division of the Supreme Court, docket, vol. III, pp. 1048-1049. 33. Docket, vol. III, pp. 1056-1057. 34. Docket, vol. III, pp. 1060-1062. 35. Minutes of the hearing, docket, vol. III, p. 1072. 36. Docket, vol. III, pp. 1080-1105. 37. Docket, vol. III, p. 1106. 38. Resolution dated October 7, 2015, docket, vol. III, p. 1107. 39. JSFI, docket, vol. I, pp. 114-115. 40. Commissioner of Internal Revenue vs. Toledo Power Company ,G.R. Nos. 195175 and 199645, August 10, 2015; Luzon Hydro Corporation vs. Commissioner of Internal Revenue ,G.R. No. 188260, November 13, 2013; Southern Philippines Power Corporation vs. Commissioner of Internal Revenue ,G.R. No. 179632, October 19, 2011; Silicon Philippines, Inc. (Formerly Intel Philippines Manufacturing, Inc.) vs. Commissioner of Internal Revenue ,G.R. No. 172378, January 17, 2011; AT&T Communications Services Philippines, Inc. vs. Commissioner of Internal Revenue ,G.R. No. 182364, August 3, 2010; San Roque Power Corporation vs. Commissioner of Internal Revenue , G.R. No. 180345, November 25, 2009; Intel Technology Philippines, Inc. vs. Commissioner of Internal Revenue ,G. R. No. 166732, April 27, 2007. 41. Amended Decision, Total (Philippines) Corporation vs. Commissioner of Internal Revenue , CTA EB No. 838 (CTA Case No. 7855), August 27, 2013, docket, vol. II, pp. 897-916. 42. Par. 11, petitioner's Memorandum, docket, vol. II, p. 565. 43. G.R. No. 150154, August 9, 2005. 44. G.R. No. 149671, July 21, 2006. 45. Exhibit "G",docket, vol. I, p. 320. 46. Mr. Enrico T. Pizarro. 47. Exhibit "G",docket, vol. I, pp. 320-321. 48. Exclusive of the P411,598,506.73 input tax carry-over from previous quarter. 49. Exhibit "G",Line 20A, docket, vol. I, p. 320. 50. Philippine Geothermal, Inc. vs. The Commissioner of Internal Revenue ,G.R. No. 154028, July 29, 2005. 51. National Power Corporation vs. Province of Isabela ,G.R. No. 165827, June 16, 2006, citing Cyanamid Philippines, Inc. vs. Court of Appeals ,379 Phil. 689, 703 (2000). 52. Western Mindanao Power Corporation vs. Commissioner of Internal Revenue ,G.R. No. 181136, June 13, 2012.