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

FIFTH DIVISION [CA-G.R. SP No. 59872. October 13, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. , respondent . D E C I S I O N CARANDANG , J p : This is a petition for review of the Decision 1 of the Court of Tax Appeals in CTA Case No. 5672, entitled "Toshiba Information Equipment (Phils.), Inc. vs. Commissioner of Internal Revenue", granting TOSHIBA a refund for input value-added tax (VAT) payments on capital goods and services for the period July 1 to December 31, 1996 in the amount of P8,452,493.43; as well as the Resolution 2 denying petitioner's motion for reconsideration. ETDaIC The facts of the case as found by the Court of Tax Appeals are as follows: "Petitioner [TOSHIBA] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office located at 103 East Main Ave., SEPZ, Phase III, Laguna Technopark, Bian, Laguna. It is licensed by the Securities and Exchange Commission to engage primarily in the business, among others, of manufacturing, assembling, importing 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 (Exh. A). It is an ecozone export enterprise registered with the Philippine Economic Zone Authority pursuant to the provisions of Republic Act No. 7916 with Certificate Registration No. 95-99 (Exh. B). It is likewise registered with the Bureau of Internal Revenue as a VAT entity with VAT Registration Certificate No. 004-739-137, dated December 29, 1995 (Exh. C). For the period July 1, 1996 to December 31, 1996, petitioner [TOSHIBA] alleges that it generated a total export sales in the amount of P665,510.00 which are subject to zero percent rate of output VAT pursuant to Section 100(a)(2)(A) of the Tax Code. On October 21, 1996 and January 20, 1997, petitioner [TOSHIBA] seasonably filed its 1996 third and fourth quarters' VAT returns showing, among others, a total input VAT in the amount of P10,770,842.48. Out of the aforesaid amount, petitioner [TOSHIBA] asserted that the sum of P276,545.04 pertains to payments of input VAT on capital goods and services as well as payments on domestic purchases of goods and services directly attributable to its zero rated export sales and which is the subject of the present petition, to wit: Input VAT Input VAT Quarter Involved Exh. Per Return Per Petition July to September 1996 D, D-1 & D-2 P5,394,064.82 P 5,111,697.52 October to December 1996 E, E-1 & E-2 5,376,777.66 5,164,847.52 Total P10,770,842.48 10,276,545.04 =========== ========== Believing that it is entitled to the refund of input VAT, petitioner [TOSHIBA], on September 22, 1998, filed with the Central Records Management Division of the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance two separate applications for tax credit/refund of value-added tax paid pursuant to BIR Revenue Audit Memorandum Order No. 2-93. The first application was for the period July 1, 1996 to September 30, 1996 in the amount of P5,111,697.52; and the second application was for the period October 1, 1996 to December 31, 1996, in the amount of P5,164,847.52 (Exhs. M, N, N-1, N-2, P, Q, Q-1 and Q-2). Without waiting for an action from the respondent, petitioner [TOSHIBA] on September 29, 1998, filed the instant petition for review in order to toll the running of the two-year prescriptive period under Section 230 of the Tax Code". 3 SDHacT On May 8, 2000, with proof that respondent Toshiba was a duly registered VAT entity and that the applications for refund/credit were filed within the two-year reglementary period, the Court of Tax Appeals (CTA) partially granted respondent's claim for tax refund. The CTA granted TOSHIBA's claim for input VAT on capital goods and services amounting to P8,452,493,43 but denied its claim with respect to its input VAT on domestic goods and services attributable to zero-rated export sales due to TOSHIBA's failure to declare said sales in its 1996 fourth quarter VAT return. The Commissioner of Internal Revenue [CIR] filed a motion for reconsideration stating that TOSHIBA had failed to substantiate its claim for refund by clear and convincing evidence. The CTA denied the motion for reconsideration for lack of merit. Hence, the Commissioner of Internal Revenue filed the instant petition for review raising the following issues: I. RESPONDENT BEING REGISTERED WITH THE PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA) AS AN ECOZONE EXPORT ENTERPRISE, ITS BUSINESS IS NOT SUBJECT TO VAT PURSUANT TO SECTION 24 OF REPUBLIC ACT NO. 7916 IN RELATION TO SECTION 103 OF THE TAX CODE, AS AMENDED BY R.A. NO. 7716. II. 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 INPUT TAXES ON SERVICES PURSUANT TO SECTION 4.103-1 OF SAID REGULATIONS. Petitioner CIR posits the view that respondent TOSHIBA, being a PEZA-registered enterprise, is exempt from all kinds of taxes imposed under the National Internal Revenue Code (NIRC). Republic Act No. 7916 4 , provides that: "SEC. 24. Exemption from Taxes Under the National Internal Revenue Code . Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government . . . " Petitioner asserts that the exemption from NIRC taxes granted by law to respondent as an Ecozone Export Enterprise includes the Value-Added Tax. Petitioner further argues that transactions of ECOZONE or PEZA-registered enterprises such as those of respondent TOSHIBA are Exempt Transactions under the VAT Laws 5 , squarely falling under the phrase " transactions which are exempt under special laws ". IHTASa Petitioner CIR concludes that if a taxpayer is not subject to VAT, he is not allowed any tax credit because "exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid . . . " 6 Respondent met the foregoing issues with the following arguments: First, the Certificate of Registration issued by the Bureau of Internal Revenue (BIR) clearly shows TOSHIBA as a VAT-taxable entity. Second, an entity registered with PEZA is not automatically exempt from the payment of VAT, using as basis Republic Act No. 7916, which provides for fiscal incentives to ECOZONE enterprises. Respondent asserts that as a PEZA registered enterprise it has the option of choosing between the tax exemption under R.A. No. 7916, or the benefits of an Income Tax Holiday under the Omnibus Investments Code 7 , and having chosen to avail of the latter option by obtaining registration as a VAT entity, it is thus not VAT exempt. We find merit in respondent's contention. Although the CIR was correct in saying that the applicable provision in the instant case is Section 103(q) of the Tax Code, as amended by R.A. No. 7716, it committed an erroneous application thereof by placing respondent's transactions under the category of "exempt under special laws". Petitioner CIR failed to realize that the same Section 103, which provides for transactions exempted from VAT, also gives a number of exceptions therein which, among others, include transactions defined or covered under P.D. No. 66. The provision adverted to states in full as follows: "SEC. 103. Exempt Transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66 , 529, 972, 1491 and 1590, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory;" (Emphasis supplied) Presidential Decree No. 66 is the law creating the Export Processing Zone Authority, the forerunner of the existing Philippine Economic Zone Authority, created under R.A. No. 7916, to which evolved the authority for the operation of the ECOZONE. Section 103, paragraph (q) on Exempt Transactions specifically refers to P.D. No. 66 as an exception to the exemption, which only means that these entities covered are not VAT-exempt. In other words, EPZA or PEZA-registered enterprises are excluded from the general provision that transaction under special laws are VAT-exempt, supporting respondent's assertion that it is not automatically VAT-exempt by virtue of its being a PEZA-registered enterprise. The fiscal incentives granted to zone-registered enterprises under Book VI of Executive Order No. 226 or the Omnibus Investments Code is a reiteration of the economic incentives granted to EPZA-registered enterprises under P.D. No. 66 8 . A thorough study of the pertinent provisions of R.A. No. 7916 reveals a clear grant of fiscal incentives to Ecozone Export Enterprises, to wit: "SEC. 23. Fiscal Incentives . Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66 , the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226 , otherwise known as the Omnibus Investments Code of 1987. . . ." 9 (Emphasis supplied) TaCIDS Book VI of E.O. No. 226 lists the incentives given to zone-registered enterprises and makes an additional reference to the incentive benefits enjoyed by pioneer and non-pioneer enterprises registered with the Board of Investments, including, but not limited to the provisions on Income Tax Holidays, to wit: "ART. 78. Additional Incentives . A zone-registered enterprise shall also enjoy all the incentive benefits provided in Article 39 hereof under the same terms and conditions stated therein". "ART. 39. Incentives to Registered Enterprises . All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment: (a) Income Tax Holiday (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. IaDTES As an Ecozone Export Enterprise registered with the Philippine Economic Zone Authority, respondent TOSHIBA can avail of an income tax holiday for a fixed period granted by law within which period Section 24 of R.A. 7916 pertaining to the five percent (5%) of the gross income as well as the corresponding exemption from NIRC taxes will not apply. We agree therefore that notwithstanding its being a PEZA-registered enterprise, respondent TOSHIBA could properly register as a VAT-taxable entity and claim input taxes under the VAT Law pursuant to the fiscal incentives under the PEZA Law and the Omnibus Investments Code. It is important to note that respondent TOSHIBA'S claim as a VAT-taxable entity was never disputed by the BIR, either upon application for VAT registration or upon respondent's subsequent filing of VAT returns. Even the Department of Finance did not object but readily accepted respondent's application for tax credit. Administratively, therefore, nothing appears irregular with respondent's registration as a VAT-taxable entity despite its being a PEZA-registered enterprise. Moreover, the fact that respondent TOSHIBA is a VAT-taxable entity entitled to a refund of input taxes paid on its purchases of capital goods and services had been acknowledged and affirmed by the Court of Tax Appeals. Convinced that TOSHIBA paid input VAT on various purchases of capital goods and services for the period July 1 to December 31, 1996 upon close scrutiny of the evidence presented, consisting of photocopies of purchase invoices examined by the Commissioned independent auditor, the Court of Tax Appeals granted TOSHIBA'S claim for tax refund. 10 It cannot be overly emphasized that such findings of a highly specialized body, like the Court of Tax Appeals, exercising particular expertise over the review of tax cases take persuasive hold absent a finding of an improvident exercise of its authority. 11 In the instant case, we uphold such findings. DaScHC WHEREFORE, the petition is DISMISSED. The Decision of the Court of Tax Appeals dated May 8, 2000, as well as its Resolution dated July 11, 2000, is AFFIRMED. SO ORDERED. Labitoria and Gozo-Dadole , JJ. , concur. Footnotes 1. Dated May 8, 2000, Annex "A" of the Petition, Rollo, pp. 1928. 2. Dated July 11, 2000, Annex "B" of the Petition, Rollo, p. 29. 3. CTA Decision, Rollo , pp. 1921. 4. The Special Economic Zone Act of 1995. 5. Section 103(q) of the Tax Code, as amended by Republic Act No. 7716 (The New Expanded VAT Law). 6. Section 4.103-1 of Revenue Regulation No. 7-95. 7. Executive Order No. 226. 8. See Articles 76 to 78 of E.O. No. 226 and Section 16 to 18 of P.D. No. 66. 9. Section 24, R.A. No. 7916. 10. CTA Decision, Rollo , pp. 2728. 11. Philippine Refining Company vs. Court of Appeals , 256 SCRA 667 and Commissioner of Internal Revenue vs. Court of Appeals , 303 SCRA 614.