Commissioner of Internal Revenue v. Cebu Toyo Corp.

SECOND DIVISION [CA-G.R. SP No. 60304. July 6, 2001.] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs . CEBU TOYO CORPORATION , respondent . D E C I S I O N AQUINO , J p : This is a petition for review seeking to reverse the Resolution dated May 31, 2000 of the Court of Tax Appeals in CTA Case No. 5650 as well as the Resolution dated August 2, 2000 denying petitioner's Motion for Reconsideration. The undisputed facts are as follows: Respondent Cebu Toyo Corporation is a domestic corporation engaged in the manufacture of lenses and various optical components used in television sets, cameras, compact discs and other similar devices with principal office located at the Mactan Processing Zone in Lapu-Lapu City. It is a subsidiary of Toyo Lens corporation, a non-resident corporation organized under the laws of Japan. Respondent is a zone export enterprise registered with the Philippine Economic Zone Authority (PEZA) pursuant the provisions of Presidential Decree No. 66 (Exhibit E). It is likewise registered with the Bureau of Internal Revenue as a VAT-registered entity (Exhibit D). As an export enterprise, respondent sells 80% of its products to its mother corporation Toyo Lens Corporation pursuant to an Agreement For Offsetting (Exhibits R and U) while it sells the remaining 20% to enterprises within the Mactan Export Processing Zone. Considering that both sales are considered export sales subject to VAT at 0% rate pursuant to Section 100 (a) (2) (A) of the 1996 Tax Code, respondent filed its quarterly VAT returns from April 1, 1996 to December 31, 1997 showing a total input VAT of P4,462,412.63. Out of this amount, respondent contends that P4,443,827.21 pertained to payments of input VAT on purchases of goods and services attributable to its zero-rated sales. Consequently on March 30, 1998, respondent filed with the Tax and Revenue Group of the One-Stop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance an application for tax credit/refund of VAT paid for the period April 1, 1996 to December 31, 1997 in the amount of P4,439,827.21 representing its excess creditable VAT input payments attributable to its zero-rated export sales (Exhibits S and T). Without waiting for the resolution of the petitioner Commissioner of Internal Revenue (CIR), respondent filed on June 26, 1998 a petition for review with the Court of Tax Appeals in order to toll the running of the two-year prescriptive period pursuant to Section 230 of the Tax Code. In support of its claim for refund, respondent presented various documentary exhibits consisting of official certificates of registration as well as official tax returns and receipts (Exhibits A to GG-4). In its Answer to the petition filed with the CTA, herein petitioner CIR contended, among others, that respondent is not entitled to a refund since: (1) it failed to prove that the foreign currency proceeds of its sales had been duly accounted for in accordance with the rules of the Bangko Sentral ng Pilipinas; (2) it failed to demonstrate that the subject tax was erroneously or illegally collected; (3) the taxes paid and collected are presumed to have been made in accordance with law; (4) claims for refund are strictly construed against the claimant as it partakes the nature of exemption from taxation. On January 28, 2000, the Court of Tax Appeals rendered a Decision ( Rollo , p. 52) holding that: (1) the respondent was able to file its claim for refund on time; (2) the respondent is a VAT registered entity; (3) respondent's sales to Toyo Lens Corporation and to certain establishments in the Mactan Export Processing Zone were export sales subject to VAT at 0% rate; and (4) the input taxes covered by respondents' claim have not been applied against any output tax. However, the CTA denied respondent's petition for refund for the latter's failure to: (1) present documentary evidence to show that there were foreign currency exchange proceeds from its export sales; and (2) submit the BSP's approval of the offsetting agreement with Toyo Lens Corporation and certification of constructive inward remittance. On February 21, 2000, respondent filed a Motion for Reconsideration arguing that: (1) proof of its inward remittance is not required by law; (2) BSP and BIR regulations do not require BSP approval on its Agreement for Offsetting nor do they require certification on the amount constructively remitted; (3) it is not legally required to prove foreign currencies payments on the remaining sales to MEPZ enterprises; and (4) it has complied with the substantiation requirements under Section 106 (a) of the Tax Code to be entitled to the claim for refund of unutilized VAT input tax. On May 31, 2000, the Court of Tax Appeals issued the challenged Resolution partially granting respondent's Motion for Reconsideration by ordering petitioner CIR to refund or issue a Tax Credit Certificate to respondent in the amount of P2,158714.46 representing unutilized input tax payments. On June 21, 2000, petitioner CIR filed a Motion for Reconsideration arguing that respondent was not entitled to a refund because as a PEZA registered enterprise, it was not subject to VAT pursuant to Section 24 of Republic Act No. 7916. Thus, since respondent was not subject to VAT, petitioner contends that the capital goods it purchased were considered not used in VAT taxable business. Therefore, it was not entitled to refund of input taxes on such capital goods pursuant to section 4.106-1 of Revenue Regulations No. 7-95. On August 2, 2000, the Court of Tax Appeals issued a Resolution denying petitioner's motion for reconsideration. CaDATc Petitioner CIR is now before this Court on petition for review praying for the reversal of the Resolutions of the Court of Tax Appeals dated May 31, 2000 and August 2, 2000 respectively reiterating its claim that since respondent was VAT-exempt, it was not entitled to a refund of input taxes. The petition is barren of merit. In denying petitioner's motion for reconsideration, the Court of Tax Appeals made the following pronouncement, to which this Court fully agrees: "Respondent (herein petitioner CIR) is correct in arguing that if an entity is registered with PEZA as an ecozone enterprise and is remitting 5% of its gross income to the national government, it is exempt from payment of the VAT pursuant to provision of Section 24 of Republic A ct No. 79 16, to quote: SECTION 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 . . . . However, We do not agree that the aforequoted law is applicable to the case at bar. Section 23 of Republic Act No. 7916 provides: SECTION 23. Fiscal Incentives . Business establishments operating within the ECOZONE shall be entitled to the fiscal incentives as provided for under Presidential Decree N o. 6 6, the law creating the E xport Processing Zo ne Authority, or those provided for under Book VI of Executive Or der No. 2 26, otherwise known as the Omn ibus Investment Co de of 1987. Under the aforementioned law, a PEZA registered enterprise has the option to choose between two sets of fiscal incentives. One, as those provided for under Presidential Dec ree No. 6 6, as amended, and Section 24 of R A 79 16 which includes the 5% preferential tax on gross income earned which is in lieu of national and local taxes; and second, as those provided for under Book VI of Executive Or der No. 2 26, including but not limited to an income holiday (ITH) of 4 or 6 years depending on whether an entity is registered as a pioneer or non-pioneer enterprise. If an ecozone enterprise chooses the 5% preferential tax, it is exempt from payment of all national and local taxes. However, if an ecozone enterprise opted for the income tax holiday, it is only exempt from payment of the income tax but still subject to other national internal revenue taxes including the value-added tax. These were explicitly elucidated by the Bureau of Internal Revenue in VAT Ruling No s. 03 7-98; 043-98; 027-99; and 063-99. It is clear from the records of the case that Petitioner (herein respondent) availed of the fiscal incentives under Executive Or der No. 22 6, that is, an income tax holiday for four years starting from its commercial operations on August 7, 1995. This fact is evidently shown in petitioner's (herein respondent) 1996 and 1997 Annual Corporation Income Tax Returns where petitioner (herein respondent) specified that it was availing of the tax relief under Executive Or der No. 2 26 (Exhs. B, B-1, C, and C-1). We do not also agree with the second ground raised by the Respondent (herein petitioner) because of the fact that petitioner (herein respondent) is subject to VAT. Moreover, petitioner (herein respondent) is not claiming input VAT on capital goods under Section 106 (b) of the T ax Co de but on domestic purchases of goods and services attributable to its zero-rated sales pursuant to Section 106 (a) of the sa me co de." As a matter of principle, appellate courts will not set aside the conclusion reached by an agency such as the Court of Tax Appeals unless there has been an abuse or improvident exercise of authority. By the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, the findings of the Court of Tax Appeals binds the appellate court (Commissioner of Internal Revenue vs. Court of Appeals, 303 SCRA 614). There is no reason to deviate from the general rule in the present case. As correctly held by the Court of Tax Appeals, respondent had two options under Section 23 of Republic Act No. 7916: whether to avail of an income tax holiday under Executive Order No. 226 and pay VAT at the rate of 0%, or, to avail of the 5% preferential tax under Presidential Decree No. 66 and enjoy VAT exemption. Since respondent availed of the incentives under Executive Order No. 226, then the 0% VAT rate would apply to it. Thus, any unutilized input VAT should be refunded to respondent upon proper application and substantiation with the BIR. Clearly, petitioner CIR's argument is based on the wrong assumption that respondent is VAT-exempt despite evidence showing that it is a VAT-registered enterprise subject to VAT at the rate of 0%. Hence, petitioner's contention that it is not entitled to a refund of unutilized input taxes because respondent is VAT-exempt must necessarily fall. WHEREFORE, finding no merit in the petition, this Court DISMISSES it and AFFIRMS the Resolutions dated May 31, 2000 and August 2, 2000 respectively of the Court of Tax Appeals. SO ORDERED. Austria-Martinez and Sabio, Jr . , JJ . , concur.