Fort Bonifacio Development Authority v. Commissioner of Internal Revenue

SIXTEENTH DIVISION [CA-G.R. SP No. 60477. November 15, 2002.] FORT BONIFACIO DEVELOPMENT AUTHORITY , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE, REGIONAL DIRECTOR, REVENUE REGION NO. 8, BIR; and CHIEF, ASSESSMENT DIV., REVENUE REGION NO. 8, BIR , respondents . D E C I S I O N COSICO , J p : Petitioner Fort Bonifacio Development Authority (FBDA, for brevity) comes before us on a petition for review, assailing the Decision of the Court of Tax Appeals rendered on August 11, 2000 in CTA Case No. 5665. Under the said decision, petitioner was ordered to pay the assessed amount of P45,188,708.08 to the respondent Commissioner of Internal Revenue as deficiency Value Added Tax, (surcharges, interests and penalty, inclusive) for the 4th quarter of 1996, plus interest at 20% per annum from June 1, 1998. Petitioner claims such assessment is improper inasmuch as it violates provisions of substantive tax laws, providing for transitional or presumptive input taxes on the beginning inventory of goods that may be credited by a new VAT registered taxpayer against the output taxes paid by him to the national government. Petitioner specifically argues that Section 4.105-1 of Revenue Regulations No. 7-95 issued by the Bureau of Internal Revenue (BIR) is contrary to the provisions of Sections 100 and 105 of the National Internal Revenue Code, (NIRC) as amended, inasmuch as real estate dealers, including herein petitioner, were granted by the BIR presumptive input tax credits of merely "8% of the book value of improvements constructed on or after January 1, 1988", rather than "8% of the value of the beginning inventory" of the taxpayer, meaning the book value of the taxpayer's real estate put up for sale, as provided for under the NIRC. Petitioner is a domestic corporation duly registered and existing under Philippine laws. It is owned partly by the Bases Conversion and Development Authority and partly by private entities. Petitioner is engaged in development and sale of real-property. As such, it was the purchaser and developer of an area known as the Fort Bonifacio Global City, located in Fort Bonifacio, Taguig, Metro Manila. The said property was sold to the petitioner by the national government on February 8, 1995 by virtue of Republic Act No. 7227 and Executive Order No. 40, dated December 8, 1992. In January 1996, Republic Act No. 7716 took effect, restructuring the country's VAT system by further amending pertinent provisions of the NIRC, and imposing a value-added tax on, among other matters, the sale or real properties, which were not previously subject to VAT. 1 An essential characteristic of value-added taxation is the taxpayer's right to avail of a credit or input tax deduction upon its tax liability or output tax in the amount and manner provided under Section 104 of the NIRC, as amended. At the moment an entity becomes liable to VAT, it is granted a transitional or presumptive input tax credit, as provided for under Section 105 of the NIRC, to wit: "Section 105. Transitional input tax credits . A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials, and supplies equivalent to 8% of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax." Eventually, petitioner was able to sell two parcels of land within the Global City to the Metro Pacific Corporation, deriving P3,498,888,713.60, on which the output VAT payable to the BIR was P318,080,792.14. To pay said amount of P318,080,792.14 due to the BIR, petitioner made cash payments totaling P269,340,469.45 and utilized (a) part of its total transitional/presumptive input tax credit of P5,698,200,256.00 2 to the extent of P28,413,783.00, which is the portion of its total transitional/presumptive input tax credit allocated by petitioner to the two lots sold to Metro Pacific; and (b) its regular input tax credit of P20,326,539.69 on purchases of goods and services. Thereafter, petitioner informed the BIR of the above-said transaction and computation of its VAT payments, requesting the latter's ruling on whether or not petitioner's input VAT on its land inventory is in order. In sum, the Revenue Commissioner disallowed petitioner's computation of its presumptive input tax credit on the justification that the basis of the 8% presumptive input tax for real estate dealers is limited to the "book value of the improvements" made upon the land, in addition to petitioner's inventory of supplies and materials for use in its business, citing Revenue Regulation 7-95, dated December 9, 1995 and Revenue Memorandum Circular 3-96, dated January 15, 1996, and not the book value of the actual land in the petitioner's inventory. More specifically, the CIR relied on Section 4.105-1 and the Transitory Provisions of Revenue Regulation No. 7-95, issued in implementation of the amendments made by RA 7716, to wit: "Section 4.105-1. Transitional input tax on beginning inventories . Taxpayers who became VAT-registered persons upon effectivity of RA 7716 who have exceeded the minimum turnover of P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the following: (a) goods purchased for resale in their present condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use in the course of the taxpayer's trade or business as a VAT-registered person. "However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such as buildings, roads, drainage systems, and other similar structures constructed on or after the effectivity of EO 273 (January 1, 1988). "The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person. xxx xxx xxx "TRANSITORY PROVISIONS "(a) Presumptive Input Tax Credits xxx xxx xxx (iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements constructed on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed. For purposes of sub-paragraphs (1), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or properties and improvements showing the quantity, description and amount filed with the RDC not later than January 31, 1996. xxx xxx xxx' (pp. 2528, Rollo ) The same rules were reiterated in the BIR's Revenue Memorandum Circular No. 3-96. In short, the BIR directed petitioner to pay VAT deficiencies equivalent to the disallowed presumptive input tax on land inventory in the amount of P28,413,783.00 including surcharges, interest and penalties, for a total of P45,188,708.08. Petitioner brought the matter to the Court of Tax Appeals on petition for review. The case was docketed as CTA No. 5665. 3 In its decision, dated August 11, 2000, the CTA upheld the BIR's implementation of the provision of the NIRC and Revenue Regulation 7-95, and assessment of VAT delinquency upon the petitioner. As observed by the CTA: The facts of this case show that Petitioner purchased the real properties from the national Government in 1995 under a VAT-free sale transaction because the Government as seller was tax-exempt hence did not pass any VAT or sales tax as part of its purchase price paid by petitioner. Besides, in 1995 sale of real properties was still exempt from VAT. This fact alone suffices to exclude the Petitioner from availing of the transitional input tax credit provided by law. To base the 8% transitional input tax on the book value of the land is to negate the purpose of the law in granting such benefit. It would be tantamount to giving an undeserved bonus to real estate dealers similarly situated as Petitioner which the Government cannot afford to provide. "Corollary to our findings that the Petitioner was wrong in basing its transitional input tax credit on the book value of its real properties, is our firm conclusion that Respondent was correct in basing the 8% transitional input tax credit on the value of the improvements on the land such as buildings, roads, drainage systems and similar structures constructed on or after the effectivity of Executive Order 273, pursuant to the wordings of Section 4.105-1 of Revenue Regulations No. 7-95 ( supra ). Such basis is consistent with the purpose of the transitional input tax credit because when a real estate dealer puts up improvements on the real properties as those enumerated in Revenue Regulation No. 7-95, VAT is necessarily passed on to them either as part of the acquisition cost of the materials used in building the improvements or as part of the cost of services rendered in building the same. So, in the event those lots with improvements are sold by the dealers upon the effectivity of the E-VAT law or thereafter, the VAT passed on to them can be utilized to pay their output VAT liabilities. It is wrong therefore for the Petitioner to state that Section 4.105-1 of Revenue Regulation 7-95 is contrary to law, rather we find it to be consistent and in harmony with the law it seeks to implement." (pp. 118119, Rollo ) Thus the CTA ruled in the following manner: "WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED. Petitioner is ordered to pay the assessed amount of P45,188,708.08 to the Respondent Commissioner of Internal Revenue plus 20% delinquency interest per annum from June 1, 1998 until fully paid pursuant to Section 249 of the 1986 Tax Code. "SO ORDERED." (p. 119, Rollo ) Unhappy with the said ruling of the CTA, petitioner filed this petition for review with the court, under Rule 43 of the 1997 Rules of Civil Procedure, grounded on the following assignment of errors: A. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SECTION 4.105-1 OF REVENUE REGULATIONS NO. 7-95 OF THE BUREAU OF INTERNAL REVENUE IS NOT CONTRARY TO THE PROVISIONS OF SECTIONS 100 AND 105 OF THE NATIONAL INTERNAL REVENUE CODE. B. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT RESPONDENT COMMISSIONER OF INTERNAL REVENUE WAS CORRECT IN BASING THE 8% INPUT TAX CREDIT PROVIDED FOR IN SECTION 105 OF THE NATIONAL INTERNAL REVENUE CODE SOLELY ON THE VALUE OF IMPROVEMENTS ON THE LAND. C. THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE 8% INPUT TAX CREDIT MAY ALSO BE BASED ON THE VALUE OF THE TAXPAYER'S BEGINNING INVENTORY OF LAND. D. THE COURT OF TAX APPEALS, UNDER THE PRETEXT THAT SECTIONS 100 AND 105 OF THE NATIONAL INTERNAL REVENUE CODE, AS WELL AD THE TERM "TRANSITIONAL INPUT TAX CREDIT" FOUND IN SECTION 105 ARE NOT CLEAR AND THEREFORE NEED TO BE INTERPRETED AND CONSTRUED, VIRTUALLY AMENDED SECTION 105 BY REQUIRING A CONDITION NOT PROVIDED FOR THEREIN. E. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS NOT ENTITLED TO THE INPUT TAX CREDIT PROVIDED FOR IN SECTION 105 OF THE NATIONAL INTERNAL REVENUE CODE BECAUSE IT HAD NOT PREVIOUSLY PAID VALUE-ADDED TAXES OR SALES TAXES ON ITS INVENTORY OF LAND. F. THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE INPUT TAX CREDIT CLAIMED BY PETITIONER IS STATUTORILY PRESUMED. G. THE COURT OF TAX APPEALS ERRED IN ORDERING PETITIONER TO PAY THE COMMISSIONER OF INTERNAL REVENUE THE AMOUNT OF P45,188,708.08 PLUS 20% DELINQUENCY INTEREST PER ANNUM FROM JUNE 1, 1998 UNTIL FULLY PAID. Petitioner squarely confronts the validity of the BIR regulation limiting the amount of creditable transitional input value-added tax real estate companies are entitled to, to 8% of only the book value of "improvements" upon the taxpayer's real properties. Such regulation allegedly runs counter to the avowed prescription under Sections 100 and 105 of the NIRC, which bases the creditable input tax on the value of the taxpayer's beginning inventory of "goods", being defined to include "real properties held primarily for sale to customers or held for lease in the ordinary cause of trade or business." 4 In defense of the CTA's ruling, the public respondent maintains that the limitation of a real estate dealer's transitional input value-added tax to merely 8% of the book value of the improvements on its realty is consistent with the purpose of the enactment of the value-added tax system. It is incongruous to base the 8% transitional input tax credits of real property dealers on the book value of land inventory, as to do so would negate the purpose of the law in granting such benefits. To do so would be tantamount to giving an undeserved bonus to real estate dealers similarly situated as petitioner, which the government cannot afford to provide. The pivotal issue before the Court concerns the validity of the acts of the revenue bureau in holding the petitioner liable to pay deficiency value added taxes, and in upholding the BIR's ruling that petitioner can only avail itself of transitional input VAT based on the market value of improvements on its realty. Stated plainly, is the BIR acting in accordance with law when it issued and applied the revenue regulation limiting petitioner's transitional input tax credit to 3% of the book value of the improvements on petitioner's real properties? We rule to deny the petition. Due study of the applicable laws and rules pertinent to the issue establishes that the regulations embodied in Revenue Regulation No. 7-95, are a valid exercise of the BIR's delegated rule-making power, and are consistent with the letter and spirit of substantive laws establishing the value-added tax system, particularly, Sections 100 and 105 of the NIRC, which petitioner claims is being violated. The NIRC was amended by Congress when Republic Act 7716 was enacted, and came into effect in January, 1996. By virtue of such law, the government's value added tax system, instituted earlier under Executive Order No. 273, 5 was restructured, and, for the first time, a value added tax was imposed on the sale of real properties. Section 100 of the NIRC was amended to include such sale of real properties under the value added taxation system, as follows: "Sec. 100. Value-added tax on sale of goods or properties . (a) Rate and Base of Tax . There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value added tax equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or the transferor. (1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; xxx xxx xxx" An integral component of the value-added taxation system is that the VAT taxpayer, who surrenders 10% of the gross selling price or gross value of his taxable goods, properties or services, is entitled to a tax credit or input tax on the VAT already paid in the course of trade or business with another VAT-registered entity. At the first time the taxpayer becomes liable for VAT, he is entitled to a transitional input tax as provided for under Section 105 of the NIRC. 6 As worded, Section 105 provides that the VAT-registered person shall, "subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory, or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax." The said provision of law in clear and unmistakable terms provided that the basis for the inventory of goods, material and supplies upon which the 8% input VAT will be based shall be left to regulation by the appropriate administrative authority. SCETHa The decision of the BIR to use the improvements introduced upon the taxpayer's real properties as basis for his transitional input tax credit, under scrutiny of the Court, satisfies established constitutional and legal precepts. Administrative regulations adopted under legislative authority by a particular department must be upheld when they are in harmony with the provisions of law, and carry into effect the law's general provisions. 7 The transitional or presumptive input tax credit allowed a VAT-registered person under Section 105 of the NIRC, which took its roots from EO 273, was granted to persons and entities which became liable to VAT on their sale, barter or exchange of goods, which was the initial coverage of value added taxation. The accepted purpose of such transitional input tax was to recognize the sales/VAT component of the beginning inventory of the taxpayers and entitles which became subject to VAT. VAT-taxpayers were allowed a credit approximating or equivalent to the sales tax already paid upon their beginning inventory, which already constitutes a tax burden on such inventory. This being the nature and purpose of the transitional input tax's institution, we affirm the CTA's observation that Section 105 applies to the petitioner, but only insofar as it is also bears an input value added tax on its beginning inventory. Since real properties were previously not subject to value-added tax, then there is no legal or factual basis for the said real property inventory of realty dealers to form the basis of the transitional input tax that the taxpayer may avail of. The purpose for granting the transitional input tax credit to real estate dealers is to offset not the VAT component on the real properties, as there was definitely none under E.O. 273, but there was VAT component on the land improvements because the VAT system had already been in effect when real property dealers, like petitioner, became subject to VAT. This, in our estimation, is a legal and reasonable application of Section 105 of the NIRC, for it gives real property dealers who become subject to tax substantial and realistic relief from their output VAT expense, consistent with the purpose and spirit of the law. To rule otherwise, as in the manner advanced by the petitioner, will run counter to the policy and purpose of the enactment of the E-VAT law (RA 7716), for it will give real estate dealers an underserved premium or tax discount not enjoyed by other VAT-registered persons similarly situated. We agree with the petitioner, however, that the imposition of surcharge, interest and penalty by the BIR upon the assessed amount of additional VAT is unwarranted in view of the attendant circumstances. Petitioner has demonstrated an honest resolve not to evade payment of its VAT liability, and had come before the BIR in good faith seeking a ruling on its payment of VAT, after timely payment of what it thought was the appropriate amount. There was no failure on the petitioner's part to pay the tax imposed by RA 7716. What petitioner did was merely to request appropriate action on whether its use of its presumptive input VAT in partial payment of its output VAT for the fourth quarter of 1996 is in order. Petitioner, on its own, sought the BIR and the CTA's ruling on its computation and voluntary payment of value-added tax, which in its opinion, offers an unresolved legal issue that must be resolved to assess the correct tax liability. Conforming with earlier rulings of the High Court, 8 the Court resolves that the imposition of surcharges, interest and penalty by the BIR upon the petitioner must be set aside, leaving the principal amount of deficiency input tax chargeable for the appropriate period, payable by the petitioner. WHEREFORE, premises considered, the Decision of the Court of Tax Appeals, is hereby AFFIRMED with the MODIFICATION that the assessment of surcharge, interests and penalty by the BIR upon the principal deficiency amount of value added taxes payable by the petitioner, to be determined by the BIR, is hereby REMOVED from petitioner's liability. SO ORDERED. De Quia-Salvador and Maambong, JJ . , concur. Footnotes 1. Sec. 100(a)(1)(A) of the NIRC, as amended by RA 7716. 2. Based on petitioner's inventory listing of real properties owned by it with a total book value of P71,227,503,200.00. 3. p. 73, Rollo . 4. Section 100(a)(1)(A), NIRC, as amended by RA 7716. 5. Took effect January 1, 1988. 6. supra . 7. Eastern Shipping Lines, Inc . v. POEA , 166 SCRA 533 (1988). 8. C.M. Hoskins & Co., Inc. v. CIR , 71 SCRA 511; Cagayan Electric Power & Light Co., Inc. v. CIR , 138 SCRA 629 (1985).