Babcock Hitachi (Phils.), Inc. v. Commissioner of Internal Revenue

SEVENTH DIVISION [CA-G.R. SP No. 40703. November 21, 1996.] BABCOCK HITACHI (PHILS.) INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE & COURT OF TAX APPEALS , respondents . D E C I S I O N BRAWNER , J p : Sought to be reversed and set aside in this petition for review is the decision of the Court of Tax Appeals dated November 10, 1995, granting partial recovery of petitioner's claim for tax credit in the amount of P291,683.00 and the resolution dated May 8, 1996, denying petitioner's motion for reconsideration to increase the amount recoverable to P3,523,845.17 as the total amount of tax credit applied for: As culled from the facts of the case are as follows: Petitioner Babcock-Hitachi Phils., Inc. (the "petitioner"), a domestic corporation registered with the Board of Investment as a pioneer enterprise engaged in business of export producer of water tube boilers for industrial usage and utility power plants, and has been registered with the Bureau of Internal Revenue (the BIR) as a Value Added Tax (VAT) taxpayer with VAT Registration No. 32A-8-006603. For the period from April 1, 1989 to December 31, 1989, petitioner filed with the BIR quarterly VAT returns (Annexes "C" "D", "E", "F", "G") showing its accumulated input tax from domestic purchase of taxable goods and services and importation of taxable goods in the total amount of P3,523,845.17. Likewise, it reflected the amount of P2,983,987.65 as its zero-rated sales for the last quarter. On August 11, 1990, petitioner applied for a tax credit in the total amount of P3,523,845.17, P354,558.00 representing the tax paid on imported/locally purchased capital equipment and the difference of P3, 189,287.17 representing the total VAT paid on other purchases. The Commissioner failed to act upon petitioner's application, prompting the latter to file a petition for review before the Court of Tax Appeals (CTA) on June 27, 1991. On November 10, 1995, respondent CTA rendered its decision, partially reproduced as follows: "WHEREFORE, in view of the foregoing, the claim for tax credit is hereby granted but only in the amount of P294,683.00. Respondent is hereby ordered to issue tax credit certificate in said amount of petitioner. SO ORDERED." (Decision, Rollo, p. 20) The CTA found that only the amount of P294,683.00 representing input taxes on capital goods imported from September 1989 to October 1989 can be refunded. The refundable amount is supported by corresponding invoices, reproduced hereunder: Date O.R. No. Particulars Exhibit Input Taxes Paid 09-15-89 2761979 Steel Plate and seamless steel tube M-2 P9,129.00 09-15-89 2761980 Electrical Cables and tool cabinet N-2 187,393.00 09-15-89 2761986 Electrical Materials O-2 2,720.00 10-30-89 2892924 Electrical Materials P-2 88,424.00 10-30-89 2892924 Materials for Equipment Testing Q-2 7,017.00 TOTAL P274,683.00 ========= Other purchases of capital goods which were not claimed administratively (Exhs. R-2, Z, AF, AG, AR, AS, BC, BD, BE, BF, BK, CX, CY, DA, DB, DC, DD, DE, DM, DQ, DS, DT, DW, DZ, EA, EB, EC, ED, EF, EI, FA, FT, FU, GC, GI, GR, GW, IE, IH, II, IN, IZ, JG, JL, NQ, JR, KD, KX, LW, AND MP) were not allowed as tax credit. Likewise, the tax credit applied for based on export sales were disallowed since the invoices presented before the CTA did not pertain to purchases of goods and services attributable to the goods exported. Instead they consisted of invoices for expenses for repairs and maintenance, supplies such as letter head stationeries, envelopes, calling cards, folders, etc., car rental, security services, delivery services visa fees for the extension of Alien Certificates of Residence of company employees and manpower and janitorial services. Petitioner filed a Motion for Reconsideration on December 1, 1995. It submitted that the Court of Tax Appeals erred in allowing only partial tax credit out of petitioner's total claim. The CTA however denied the same in its resolution dated May 8, 1995. Hence, this petition for review pursuant to Supreme Court Revised Administrative Circular No. 1-95. Petitioner contends in its assignment of errors that respondent Court of Tax Appeals (CTA) erred to wit: I IN HOLDING THAT THE INPUT TAXES CLAIMED BY PETITIONER IN THE AMOUNT OF P3.1 M ARE BARRED BY PETITIONER'S FAILURE TO ADMINISTRATIVELY CLAIM THE SAME, THE TRUTH BEING THAT SAID AMOUNT WAS CLEARLY INDICATED IN PETITIONER'S APPLICATION FOR REFUND CREDIT AND INCLUDED IN ITS TOTAL CLAIM FOR VAT REFUND CREDIT. II IN HOLDING THAT THE BULK OF PETITIONER'S INPUT TAX PAYMENTS ARE NOT ATTRIBUTABLE TO THE GOODS WHICH IT EXPORTED AND MAY NOT ACCORDINGLY BE ALLOWED AS REFUND OR CREDIT SINCE PETITIONER, A 100% EXPORTER, IS ENTITLED TO A REFUND OR CREDIT OF ITS ENTIRE INPUT TAX PAYMENTS WHICH ARE ALL ATTRIBUTABLE TO ITS EXPORT SALES. Two issues need to be resolved, namely (1) whether or not petitioner's claim for tax credit in the amount of P3, 189,287.17 allegedly representing input taxes on local purchase of goods and services is barred of petitioner to claim it administratively with the BIR; and (2) whether or not petitioner's input tax payments are attributable to the goods exported and thus, petitioner, a 100% exporter, is entitled to a tax credit of the entire input tax payments made. ON THE FIRST ISSUE The CTA denied the petitioner's claim in the amount of P3,189,287.17 allegedly representing input taxes on local purchase of goods and services since petitioner did not include this amount in the VAT tax credit application form (Form No. 2552 ; Annex "H") under the heading "imported/locally purchased equipment". The Application contains the following details: APPLICATIONS FOR TAX CREDIT OF VALUE-ADDED TAX PAID I. ZERO-RATED SALES A. GOODS Export Sales P2,983,987.65 II. CAPITAL GOODS PURCHASED Date of Importation/Purchase Valuation/Purchase Price VAT Paid Sept. to Oct. 1989 P3,545,580.37 P354,558.00 xxx xxx xxx SUMMARY PARTICULARS INCLUSIVE DATES AMOUNT OF INPUT TAX PAYMENTS Tax paid on Imported Sept. 1989 to Oct. 1989 P354,558.00 Locally Purchased Capital Equipment Total VAT Paid on May 1989 to Dec. 1989 P3,189,287.17 Purchases Received During the Period of Which this application is applied Amount of Tax Credit/ Refund applied for P3,523,845.17 . . . (Annex "H") Petitioner contends that it inadvertently made a mistake in filling up the application form that under the heading "tax paid on imported/locally purchased capital equipment", it placed the amount of P354,558.00 only representing VAT input taxes on its importation of capital equipment, while the amount indicated in the heading "total VAT paid on purchase price per invoice received during the period for which this application is applied", actually represented all VAT input taxes on its local purchases, including local purchases of capital equipment. It went on to say that this inadvertence should not be taken so as to prejudice the petitioner in its claim for tax credit. Contrary to the findings of respondent CTA, We agree with the petitioner that although it declared the amount of P354,558.00 only under the heading "tax paid on imported/locally purchased capital equipment", without including the amount of tax paid on its locally purchased capital equipment, the latter amount was sufficiently claimed administratively under the heading "total VAT paid on purchase price per invoice received during the period for which this application is applied". Thus, the total amount of tax credit applied for as correctly reflected in the same application form, is P3,523,815.17. Furthermore, the CTA made an error in holding that the same exhibits would nevertheless be ignored or disallowed, even if they are considered as forming part of the total VAT paid or purchases per invoice under 111.3 of Form 2552, considering that Sec. 4 of Revenue Regulation 2-88 allows refund of input taxes only upon presentation of liquidation documents evidencing the actual utilization of the raw materials in the manufacture of goods, at least 70% of which have been actually exported. Since the exhibits disallowed consisted of invoices for acquisition of vehicles, steel cabinets, chairs, etc. as well as for compensation of services rendered for the installation of the boiler fabrication which could not very well be considered as "purchases of raw materials directly attributable to the manufacture of goods which are to exported", then they cannot correspondingly be subject to a tax credit. Respondent CTA's application of Sec. 4 of Revenue Regulation 2-88 is misplaced since the section applies to cases of refund of input taxes for zero-rated sale of goods consisting of the sale of raw materials to BOI-registered exporters or sale of raw materials to foreign buyers. In the case at bench, petitioner is engaged in business as an exporter of water tube boilers for industrial usage. ON THE SECOND ISSUE The Court of Tax Appeals nevertheless held that the amounts claimed as tax credit which it disallowed should in any event still be disallowed because they do not pertain to purchases of goods or services attributable to the goods exported, even if the petitioner exports 100% of its products. In denying petitioner's motion for reconsideration, the CTA held, to wit: "Further, assuming arguendo, that we are to consider the exhibits mentioned to form part of the total VAT paid or purchases per invoices under III.3 of Form 2552, the same exhibits will be again ignored or otherwise disallowed pursuant to Sec. 4 of Revised Regulations No. 2-88. Refunds of input taxes shall be allowed only upon presentation of liquidation documents evidencing the actual utilization of the raw materials in the manufacture of goods, at least 70% of which have been actually exported. Otherwise, only purchases of raw materials directly attributable to the manufacture of goods which are to be exported may be subject to a refund. A thorough scrutiny of the exhibits disallowed show that these were invoices for the acquisition of vehicles, steel cabinets, calculators, chairs, and for compensation of services rendered for the installation of the boiler fabrication which this Court believe(s) is "purchase of raw materials". And lastly with regard to the other exhibits which were disallowed as previously mentioned in the decision, the exhibits or invoices presented do not pertain to purchase of goods and services that are attributable to the goods exported. These exhibits were expenses for (a) repairs and maintenance account; (b) supplies; (c) car rental; (d) security services; (e) delivery services; (f) visa fees; (g) x-ray; and (h) janitorial services. "Webster's Third New International Dictionary defines "attribute" as: i. A quality extrinsic, inherent, naturally belonging to a thing or person; ii. A necessary or essential quality or characteristic of substance; iii. An object closely associated with and thought of as belonging to a specific person, thing or office. [cited in Allen Arthur (Manila) Inc. v. Commissioner of Int. Revenue CTA No. 1609, Feb. 6, '95]. Applying the foregoing definition in relation to Sec. 106(a) of the tax Code, it suggests that a refund of the input taxes paid shall be granted only if the goods and services purchased by the exporter and where input taxes were paid are directly and entirely attributable to the zero-rated transaction which in this case is the export sale of water tube boilers. Grant of refund privileges must be strictly construed against the taxpayer. (Comm. of Int. Rev. vs. Rio Tuba Nickel Mining Corporation, 207 SCRA 549)" (Resolution, May 8, 1996, p. 2-4) Section 106 of the National Internal Revenue Code provides the sources of creditable input tax, to wit: SEC. 106. Refunds or tax credits of input tax . (a) Export sales (sale is subject to zero-rate) . An exporter who is a VAT-registered person may, within two years from the date of exportation, apply for the issuance of a tax credit certificate or refund of the input tax attributable to the goods exported, to the extent that such input tax has not been applied to output tax and upon presentation of proof that the foreign exchange proceeds have been accounted for in accordance with the regulations of the Central Bank of the Philippines. (b) Zero-rated or effectively zero-rated sales . Any person, except those covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated may, within two years after the close of the quarter when such sales were made, apply for the issuance of a tax credit certificate or refund of the input taxes attributable to such sales to the extent that such input tax has not been applied against output tax. (c) Capital Goods . A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application for refund may be made only after the expiration of 2 succeeding quarters following the quarter in which the importation or local purchase was made; Provided, That a VAT-registered person who is just commencing business may apply for refund of input taxes under this paragraph not earlier that 180 days from the date of registration or actual start of business operations, whichever comes later; Provided, however, That the application is filed not later than 2 years from the dates herein prescribed. xxx xxx xxx (e) Period within which refund of input taxes may be made by the Commissioner . . . . No refund of input taxes shall be allowed unless the VAT-registered person files an application for refund within the period in paragraphs (a), (b), (c), as the case may be. There is nothing in the NIRC limiting or defining the phrase "input tax attributable to goods exported" in Sec. 106, only those input taxes on purchases which form part of the finished product. Pursuant to Revenue Regulations No. 7-95 (Consolidated Value Added Tax Regulations). "Input tax" means the value-added tax due from or paid by a VAT-registered person on importation of goods or services, including lease or use of property, from another VAT-registered person in the course of his trade or business . . . .(Sec. 4.104-1.) The same regulation provides that "purchase or importation of goods" consists of those: 1. For sale; or 2. For conversion into or intended to form part of a finished product for sale, including packaging materials; or 3. For use as supplies in the course of business; or 4. For use as raw materials supplied in the sale of services; or 5. For use in trade or business for which deduction for depreciation or amortization is allowed under the Code. The input taxes which were ignored by respondent CTA consisted of input taxes on locally purchased capital goods, expenses for repairs and maintenance, security services, supplies, janitorial and delivery services which were clearly incurred in the course of business of petitioner. Considering that petitioner exports 100% of its products, the input taxes incurred cannot but be attributed to the goods exported, since no other goods are produced other than those exported, as correctly observed by petitioner. The implementing rules of the VAT Law, as amended (Section 16 (c) (6) (I) of Rev.-Regulations No. 5-87, as amended by Rev.-Reg. 9-89) provides: "Purely zero-rated transactions. Where the applicant is exclusively engaged in zero-rated or effectively zero-rated transactions, he shall be held to the entire amount of the value added tax paid on purchases of goods and services, as well as on importation's, notwithstanding the existence of goods at the end of the quarter in which the zero-rated transactions were made. Pursuant to Sec. 12 of Revenue-Regulation No. 5-87, as amended, where a VAT-registered person is engaged in both VAT-taxable (either subject to 10% VAT such as local sales or 0% such as export sales) and VAT-exempt operations, the tax credit allowable will be computed under an apportionment formula. This requires the identification of expenses or purchases which are directly attributable to the zero-rated operations since no tax credit is allowed on the VAT-exempt transactions. By analogy, We arrive at the conclusion that, as in the case at bench, where petitioner exports 100% of its products, thus, engaged in purely zero-rated sales, there becomes no necessity of allocating which of the input tax payments are attributable to the VAT-taxable transactions, there being no VAT-exempt operations involved, the idea then being that the VAT-registered person is entitled to a tax credit of input taxes for both zero-rated operations and those subjected to 10% VAT. The amount of creditable input tax therefore in the case of a 100% exporter engaged purely in zero-rated sales, is the VAT paid correspondingly to the zero-rated sales of goods, properties or services as well as the input tax paid on capital goods imported and locally purchased in this case in the amount of P3,523,845.17, which is the total amount of tax credit applied for by petitioner. WHEREFORE, in light of the foregoing, We hereby REVERSE AND SET ASIDE the decision and resolution appealed from. Consequently, petitioner's claim for tax credit in the amount of P3,523,845.17 is hereby granted. Respondent Commissioner is ordered to issue tax credit certificate in the said amount. SO ORDERED. Cui and Tayao-Jaguros, JJ . , concur.