Industrial Inspection (Intl.), Inc. v. Chato

FIFTH DIVISION [CA-G.R. SP CASE NO. 44488. July 30, 1999.] INDUSTRIAL INSPECTION (INTL.), INC. , petitioner , vs . HON. LIWAYWAY VINZONS CHATO, in her capacity as the Commissioner of the BIR , respondents . D E C I S I O N SALAS, B. , J p : What We have is a Petition for Review, supposedly for the purpose of setting aside the contested Decision of the Court of Tax Appeals (Case No. 5152) reading: "WHEREFORE, in view of all the foregoing, the decision of respondent dated February 7, 1994, is hereby MODIFIED. The petitioner is hereby directed to pay the respondent the amount of P22,498.99, representing deficiency business (value-added) tax inclusive of surcharge for the third and fourth quarters of 1998-99, plus 20% interest per annum from the date prescribed for payment until its-full payment pursuant to Section. 249 of the National Interest Revenue Code. SO ORDERED." (Rollo, pp. 37-38). The petitioner faulted the Court below, thus: "ASSIGNMENT OF ERRORS THE RESPONDENT JUDGES GRAVELY ERRED IN HOLDING THAT THE PETITIONER AS A SUBCONTRACTOR TO HYUNDAI ENGINEERING IS NOT EXEMPTED FROM THE PAYMENT OF THE VAT FOR SERVICES RENDERED IN THE CONSTRUCTION OF THE ADB BUILDING IN EDSA, MANDALUYONG. THE RESPONDENT JUDGES GRAVELY ERRED IN HOLDING THAT THE TRANSACTION ENTERED INTO BY THE PETITIONER FALLS UNDER THE CATEGORY OF A ZERO RATED SALE OF SERVICES AS CONTEMPLATED UNDER SECTIONS 100 AND 102 IN RELATION TO REVENUE REGULATION 5-87, INSTEAD OF SECTION 103, (U) WHICH LATTER PROVISION PROVIDES FOR FULL TAX EXEMPTION." llcd (Ibid, pp. 11-12). We reverse. And this is how the case developed: 1) A deficiency Value Added Tax (VAT) was issued against the petitioner for P46,677.09 on account of the services it rendered to Alcorn Philippines and Hyundai Engineering and Construction Co., Ltd (Hyundai); 2) This assessment was protested by the petitioner, the latter contending that the sale of services to aforementioned customers are VAT exempt but this was denied by the respondent in its letter dated February 7, 1994, the latter arguing that the case falls under the category of zero-rated sale of services; 3) There was a Petition for Review with the Court of Tax Appeals on September 26, 1994, and 4) On June 5, 1997, a Decision was rendered affirming the respondent's findings of deficiency business tax relative to the sale of services to Hyundai, in effect reducing the assessment to P22,492.98, with penalties, hence, the Petition for Review before Us. In ruling against the petitioner, the CTA (Court of Tax Appeals) said, thus: "In addition, Section 8(c) (2) of Rev. Regs. No. 5-87 explicitly provides that the sale of goods and services to the Asian Development Bank shall be considered effectively zero-rated under special laws. However, there is a hitch, Section 8 (d) of the said regulation also provides for an additional requirement, that is, the need to file an application with the commissioner of Internal Revenue justifying the imposition of zero-rate on the said transactions. In the case at bar, petitioner failed to file the required application needed to be entitled to a zero-rate VAT. A close scrutiny of the BIR records would reveal that petitioner has not proven by documentary evidence that indeed it has applied for a zero-rate on this kind of transaction with Hyundai Engineering and Construction Co., Ltd.. Therefore, the gross receipts from Hyundai Engineering and Construction Co., Ltd. should be subject to the VAT." (Ibid, p. 36). The respondent also said that the VAT "zero-rate regime" of the transaction was not disputed by the petitioner, as a matter of fact, the latter merely relied on the "agreement" between the Republic of the Philippines and Asian Development Bank (ADB), the latter not even a "direct party" nor a "privy" thereto, thus, by implication enjoying a tax-exempt status. Moreover, laws granting exemption from tax are construed liberally in favor of the taxing power while exemption is an exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. The respondent added that he who claims an exemption must be able to justify his claim; and that the exemption cannot be permitted to exist upon a vague implication; furthermore, the tax burden is not necessarily shouldered by the purchaser and that the factual findings of the Tax Court should be entitled to the highest respect, because of its expertise on the subject of taxation, unless there has been an abuse or improvident exercise of its authority. We disagree. This brings Us to Section 102 (Value-added tax on sale of services, National Internal Revenue Code (NIRC) which provides an assessment of a value-added tax equivalent to ten (10%) percent of the gross receipts in the sale of services, provided however that the following services by a VAT-registered person shall be subject to 0% . . ., thus: "3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate." Also, Section 103 mentions transactions that are tax exempt from the VAT, thus: "xxx xxx xxx (u) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory . . ." Section 99 further provides that any person who in the course of business sales . . . renders services . . . shall be subject to the VAT, as provided for in Section 102. In denying petitioner's protest by the BIR, Commissioner, in her letter dated February, 1974 said (Rollo, p. 41): "After careful review of the facts of the case as well as the laws, rules and regulations applicable thereto, We come to conclude that your position cannot withstand the test of legal scrutiny for the following reasons: 1. Under Section 8 of Revenue Regulations 5-87, implementing the Value-Added Tax Law, it states: 'Any person claiming that its sales of good or services are effectively zero-rated under Sections 100 and 102 shall file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shall remain valid until revoked. 2. This requirement has been notably reiterated in BIR Rulings 513-88 and 088-90, the facts of which bear striking semblance to your case, and we quote the identical dispositive portions thereof. llcd '. . . In other words, billings by the seller of goods or services who executed the projects funded by ESF shall not include the value-added tax:: Provided, however, that the seller of said deeds of services shall first apply for zero rating in accordance with Section 9 (d) of Revenue Regulations No . 5-87 . (Emphasis Supplied). In the light of the foregoing, we sustain and reiterate the validity of the examiner's imposition re deficiency business tax liabilities [value-added tax] against your client. INDUSTRIAL INSPECTION INTERNATIONAL, INC., and requests you to advise your client to pay the total amount of P46,677.09 . . ." On March 20, 1985, the Republic of the Philippines and ADB (Asian Development Bank) executed a Memorandum of Understanding regarding the Headquarters of the ADB. Mentioned was that because of the need of ADB for additional space, and pursuant to the agreement between ADB and the government regarding the headquarters of ADB, the bank and the government in the later part of 1970's decided to develop a joint project for the building of a new headquarters in the proposed financial complex, reclaimed area, Roxas Blvd. In June, 1992, however, it was agreed that the headquarters building should be at a different location. Because of that, the bank subsequently purchased a six-hectare lot at the Ortigas Commercial Center in Mandaluyong. prcd In the implementation of the project, a supplementary agreement was signed by the government and the bank, on June 28, 1994, the main purpose being to make arrangements for the replacement of the present headquarter's premises, with a new building. The representative of the government and the bank then met to finalize the detailed arrangements with respect to compensation . . . and exemptions from indirect and direct taxes and the issuance of government permits and exemptions. Pursuant to Section 6(a) of the Supplemental Agreement, all materials . . . supplies and services required for the project were exempted from all taxes and other levies. ADB also reiterated that the bank seeks exemption from the contractors' tax; and that while the issue of exemption from contractors' tax on "overall basis" was not resolved, the parties however agreed , without prejudice to precedent "for any other case" that such exemption would apply for the project . The government also confirmed (Article III, Assistance. of the Government) that all the materials . . . and " all transactions " for the construction of the Headquarters Premises should be exempt from "all" taxes and other levies . The Government , under Section 7, even committed to provide ADB such assistance , as is reasonably requested by the ADB, its representatives . . . and contractors in order to obtain the necessary approvals . . . exemptions ", in connection with the construction of the Headquarters Premises. To Us, the Memorandum of Understanding between the Republic and ADB and the 1994 Supplementary Agreement provided for exemptions from all taxes and other levies in the matter of all transactions to be carried out for the construction of the new ADB Headquarters Premises and are therefore self-executing or without the need of an application for VAT exemption, as provided for in Section 102, NIRC, and as pretended by the respondent. On the other hand, instead of Section 102, what should apply as basis for VAT exemption is Section 103. The supply of services subject to zero-rate of an International Agreement to which the Philippines is a signatory, as provided for in par. 3, Section 102, for which an application for exemption should be formally executed as provided for in Regulation 5-87, of the BIR, possibly would apply to all other international agreements, but certainly not with respect to the sale of services in the construction of the new ADB Headquarters Building where the rule on exemption of the contractor's tax had been repeatedly mentioned. As a matter of fact, the government is even duty bound to provide assistance, as is reasonably requested, to include the contractors, if only to obtain the necessary approval of . . . exemption, in connection with the construction. We agree with the petitioner that the VAT, in this case, would amount to an imposition of indirect taxes, thus: "Finally, it is important to emphasize at this point the principle that assessments of this kind (VAT) partake the nature of indirect taxes. Indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else, (Pollock vs. Farmers, L & T Co. 1957, US 15 S. Ct. 673, 39 Law Ed. 759). In the instant case, a VAT, partaking the nature of an indirect tax was shifted by the herein Petitioner to Hyundai Engineering. But the said entity tossed back the assessment to the herein Petitioner contending that it is not liable to pay the VAT under the existing contracts and the applicable laws, particularly Section 103 (U) of the National Internal Revenue Code as factually supported by the agreements entered into by the Philippine Government with the Asian Development Bank. Hence, if the Petitioner is assessed the VAT in this particular transaction, it may pass the payment to Hyundai and in turn, the latter may pass the matter of payment to the ADB, an exercise in futility because the ADB will certainly refuse payment contending that it is not liable to pay the said tax based on the agreement cited." (Rollo, pp. 105-106). If Hyundai, as the principal contractor is exempt from payment of the VAT, without the need of executing a formal application for exemption, with more reason would the petitioner be exempted as it was merely a subcontractor. The letter of Undersecretary Marcelo N. Fernando, expressed the view that what should apply is Section 103, par . u , NIRC, thus: "2nd Indorsement Respectfully returned to the Acting Chairman, Philippine Coordinating Committee on the Asian Development Bank, Office of the President, Manila, the within papers bearing on the request of the Chief, ADB Special Project Office for clarification relative to the implementation of the Value Added Tax (VAT) concerning the tax exemption privileges of the ADB in relation to the transactions of the new ADB Headquarters Building Project. llcd In connection therewith, please be informed that all transactions related to the new ADB Headquarters Bldg., Project are exempt from the payment of the Value Added Tax, pursuant to section 6 of the Supplementary Agreement dated December 28, 1984 and paragraph 16 of the Memorandum of Understanding dated March 20, 1985 regarding the existing headquarters agreement between the Philippine Government and the Asian Development Bank as implemented by the Ministry Order No . 1-86 dated February 20, 1986 in line with Section 103 (u) of the National Internal Revenue Code, as amended by Executive Order No . 273 . (Emphasis supplied). By authority of the Secretary Marcelo N. Fernando Undersecretary" (Rollo, pp. 103-104). Certainly, the Court below (CTA) flawed when it invoked Internal Revenue Regulation No. 5-87 or the need of executing a formal application for exemption under Sections 100 and 102, NIRC. We cannot infer either from the 1985 Memorandum of Understanding between the Republic and ADB and the 1994 Supplementary Agreement that the zero-rate scheme under Section 102 should apply. Instead what We have are automatic and absolute exemptions, supposedly under Section 103. It cannot also be imputed that Revenue Regulation No. 5-87 qualifies Section 103 on Exempt Transactions, or the need of formally executing an Application for Exemption. THE FOREGOING CONSIDERED, judgment is hereby rendered, setting aside the contested Decision. and exempting the petitioner from the payment of the Value-Added Tax on the sole of services to Hyundai Engineering and ADB. LexLib SO ORDERED. Garcia and Rivera , JJ ., concur.