Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc.

SIXTEENTH DIVISION [CA-G.R. SP No. 59106. September 27, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. , respondent . D E C I S I O N AGNIR , JR. , J p : This is a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure seeking to reverse and set aside the Decision dated 10 March 2000 of the Court of Tax Appeals in C.T.A. Case No. 5593 ordering petitioner Commissioner of Internal Revenue to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba Information Equipment (Phils.) Inc. in the amount of P16,188,045.44 representing unutilized input value added tax payments for the first and second quarters of 1996. Also assailed is the Resolution dated 24 May 2000 of the same court denying petitioner's Motion for Reconsideration of the aforesaid Decision. Herein Respondent is a domestic corporation duly organized and existing under Philippine laws. It is engaged in the business of manufacturing and exporting electrical and mechanical machinery, equipment, systems, accessories, parts, components, materials and goods of all kinds, including without limitation to those relating to office automation and information technology and including all types of computer-based equipment and systems, computer hardware and software of all kinds, including but not limited to HDD, CD, ROM and personal computer printed circuit board. Respondent is registered with the Philippine Export Zone Authority (PEZA) as an ECOZONE Export Enterprise under Certificate of Registration No. 95-99 as well as with the Bureau of Internal Revenue (BIR) as a value-added (VAT) taxpayer under VAT Registration No. 95-570-001544. For the period 01 January 1996 to 30 June 1996, respondent filed its first and second VAT returns which reflect input taxes amounting to P13,118,524.00 and P5,128,761.94 respectively, or a total of P18,247,303.94 It is respondent's position that since it has not yet engaged in any business activity or transaction for which it may be liable for output VAT, the input taxes it paid during the period 01 January 1996 and 30 June 1996 were not utilized as there is no output VAT against which the said input payments may be credited. Thus, on 27 March 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (CENTER-DOF) two separate applications for tax credit/refund of its alleged unutilized VAT input payments: the first from 01 January 1996 to 31 March 1996 in the amount of P14,176,601.21, and the second from 01 April 1996 to 30 June 1996 in the amount of P5,161,820.79, or a total of P19,338,442.07. Respondent's application for tax credit/refund was pursuant to the provisions of Section 112 (b) (formerly Section 106 (b)) of the Tax Code and Revenue Audit Memorandum Order No. 2-93. Since respondent's application for tax credit/refund was not immediately acted upon and the two-year prescriptive period under Section 230 of the Tax Code within which the said application may be availed of by a taxpayer was about to expire, respondent filed a Petition for Review against herein petitioner with the Court of Tax Appeals. The aforesaid petition, docketed as C.T.A. Case No. 5593, was subsequently amended in order to conform to the evidence presented. Petitioner (respondent below) filed an answer to the petition for review, raising the following special and affirmative defenses: 5. Assuming without admitting that petitioner (herein respondent) filed a claim for refund/tax credit, the same is subject to investigation by the Bureau of Internal Revenue; 6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner (herein respondent) must prove that the taxes sought to be refunded were erroneously or illegally collected; 7. Petitioner (herein respondent) must prove the allegations supporting its entitlement to a refund; 8. Petitioner (herein respondent) must show that it has complied with the provisions of Section 204 (C) and 229 of the 1997 Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of said tax; and 9. Claims for refund are construed strictly against claimants, the same being in the nature of an exemption from taxation ( Annex "D" to the Petition, Rollo, p. 63 ). After considering the evidence adduced by the contending parties, the CTA rendered the assailed Decision dated 10 March 2000 directing herein petitioner (respondent below) to refund or, in the alternative, to issue a tax credit certificate to herein respondent (petitioner below) in the reduced amount of P16,188,045.44 representing the latter's unutilized VAT payments for the first and second quarters of 1996 ( Annex "A" to the Petition, Rollo, pp. 21-27 ). Petitioner filed a Motion for Reconsideration but in a Resolution dated 24 May 2000, the CTA denied the same ( Annex "B" to the Petition, Rollo, pp. 33-34 ). Hence, petitioner elevated the case to this Court by means of the instant Petition for Review anchored on the following grounds: 1. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN ECONOMIC EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916; AND 2. SINCE RESPONDENT'S BUSINESS IS NOT SUBJECT TO VAT, THE CAPITAL GOODS AND SERVICES IT PURCHASED ARE CONSIDERED NOT USED IN VAT TAXABLE BUSINESS, AND, THEREFORE, IT IS NOT ENTITLED TO REFUND OF INPUT TAXES ON SUCH CAPITAL GOODS PURSUANT TO SECTION 4.106-1 OF REVENUE REGULATIONS NO. 7-95 AND OF INPUT TAXES ON SERVICES PURSUANT TO SECTION 4.103-1 OF SAID REGULATIONS. The issue for consideration is whether respondent is entitled to a tax refund/credit in the amount of P16,188,045.44 representing unutilized input VAT payments for the first and second quarters of 1996. The Petition is without merit. To begin with, the Court notes that the arguments relied upon by petitioner in the instant petition were not raised in the court a quo. Basic is the rule that "points of law, theories, issues and arguments not brought out in the proceedings below will ordinarily not be considered by the reviewing court as they can not be raised for the first time on appeal because this would be offensive to the basic rules of fair play, justice and due process" ( Romago Electric Co. Inc., vs. CA, et al., G.R. No. 125947, 08 June 2000 ). This procedural lapse alone is fatal to the cause of petitioner. But even on the merits, the petition must likewise fail. As a general rule, PEZA registered enterprises are imposed a preferential tax rate of five percent (5%) based on gross income in lieu of all taxes except the real property tax, pursuant to Section 24 of Republic Act No. 7916, as amended by Republic Act No. 8748, which reads as follows: Sec. 24. Exemption from National and Local 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 (5) percent of the gross income earned by all businesses and enterprises within the ECOZONE shall be paid and remitted as follows: xxx xxx xxx This tax incentive granted to PEZA-registered enterprises applies only in respect of the enterprise's operation within the ECOZONE that is being managed and operated by the PEZA as a separate customs territory. The term "customs territory" is defined as "the national territory of the Philippines outside of the proclaimed boundaries of the ECOZONES except those areas specifically declared by other laws and/or presidential proclamations to have the status of special economic zones or free ports" (Sec. 1 (g), PEZA Rules and Regulations) . The tax treatment of sales of goods, property and services made by a VAT-registered supplier from the customs territory to a PEZA registered enterprise within the ECOZONE as well as the sale transactions made by PEZA-registered enterprises within and without the ECOZONE are regulated by the pertinent provisions of the National Internal Revenue Code (NIRC or the Tax Code) as amended by Republic Act 7716, Republic Act No. 7916 as amended by Republic Act No. 8748, Omnibus Investment Code, revenue regulations and BIR rulings. The sale of goods made by a VAT-registered supplier from the customs territory to a PEZA-registered enterprise subject to the five percent (5%) special tax regime is treated as an indirect export hence, considered subject to zero percent (0%) VAT pursuant to Section 106 (A)(2)(a)(5) of the Tax Code as amended, and Section 23 of Republic Act No. 7916 in relation to Article 77 (2) of the Omnibus Investment Code ( see Section 3 (1)(a) of Revenue Memorandum Circular No. 74-99, 15 October 1999) . Similarly, the sale of services made to such PEZA-registered enterprise by a VAT-registered supplier from the customs territory is treated subject to zero percent (0%) VAT under Section 108 (B)(3) of the Tax Code as amended in relation to Republic Act No. 7916 and the "cross border doctrine" of the VAT system as enunciated in VAT Ruling No. 032-98 issued on 5 November 1998 ( see Section 3 (1)(b) in relation to Section 3 (2)(b) of Revenue Regulation No. 74-99, 15 October 1999 ). Meanwhile, Section 4.100-2 and Section 4.102-2 of Revenue Regulation No. 7-95 directs that a zero-rated sale of goods and services by a VAT-registered supplier, which is a taxable transaction for VAT purposes, shall not result in any output tax while the input tax on the purchase of goods and services subject to such zero-rated transaction shall be available as a tax credit or refund. Applying the foregoing discussion in the case at bench, it is clear that the CTA did not err in ordering petitioner to refund or issue a tax credit certificate to respondent for the unutilized input taxes it paid for the first and second quarters of 1996. Be it noted that respondent is a duly registered PEZA export enterprise operating within the ECOZONE. Accordingly, its purchases of goods and services from VAT-registered suppliers in the customs territory for the aforementioned period as substantiated by receipts per findings of the CTA is subject to zero percent (0%) VAT, thus entitling respondent to a refund or tax credit of the input taxes it paid pursuant to such zero-rated transactions. Parenthetically, petitioner invokes Section 103 (q) of the Tax Code (now Section 109 (q)) in arguing that respondent is not entitled to the tax refund/credit of its input taxes. To our mind, however, the reliance on the said provision is misplaced. Section 103 (q) (now Section 109 (q)) of the Tax Code as amended applies only in the following cases: 1) transactions made by a VAT-exempt supplier from the customs territory to a PEZA-registered enterprise operating within the ECOZONE, 2) sale of goods by a PEZA-registered enterprise, whether or not subject to the five percent (5%) special tax regime, to another PEZA-registered enterprise and 3) sale of service by a PEZA-registered seller subject to the five percent (5%) tax regime to another PEZA-registered enterprise ( see Section 5, Section 6(3) and Section 6(4)(a) of Revenue Memorandum Circular No. 74-99) . Section 103 (q) (now Section 109 (q)) of the Tax Code as amended does not apply in transactions entered into by a registered supplier subject to zero percent (0%) VAT and a PEZA-registered enterprise covered by the special five percent (5%) tax regime. As discussed earlier, what apply in these transactions are Section 106 (A)(2)(a)(5) and Section 108 (B)(3) of the Tax Code as amended. WHEREFORE, premises considered, the instant Petition is DISMISSED. The Decision dated 10 March 2000 of the Court of Tax Appeals ordering petitioner Commissioner of Internal Revenue to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba Information Equipment (Phils.) Inc. in the amount of P16,188,045.44 representing unutilized input value-added tax payments for the first and second quarters of 1996, is AFFIRMED. SO ORDERED. Valdez, Jr. and Del Castillo, JJ . , concur.