Commissioner of Internal Revenue v. Eastern Telecommunications Phils., Inc.

TENTH DIVISION [CA-G.R. SP No. 61157. October 1, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . EASTERN TELECOMMUNICATIONS PHILS., INC. , respondent . D E C I S I O N TRIA TIRONA , J p : Before Us is a petition for review under Rule 43 of the Rules of Court where the petitioner seeks the reversal and setting aside of the Decision, 1 dated 17 July 2000, rendered by the Court of Tax Appeals (hereafter CTA), containing the following decretal portion: "WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Petitioner's claim for refund for the year 1995 is hereby DENIED for lack of merit while petitioner's claim for refund for the year 1996 is GRANTED. Respondent is ORDERED to REFUND in favor of the petitioner the amount of P16,229,100.00, representing input VAT on imported capital goods. SO ORDERED." The facts, as found by the CTA, are as follows: Respondent is a domestic corporation organized and existing under the laws of the Philippines. It is a grantee of a legislative franchise under Republic Act No, 7617, dated 25 June 1992. Its main functions include the installation, operation and maintenance of telecommunication system throughout the Philippines. As a franchisee, it is allegedly subject to 3% franchise tax under Section 10 of R.A. 7617. For the period 01 July 1995 to 31 December 1996, respondent purchased various imported equipments, machineries and spare parts necessary in carrying out its business activities. The importation of these telecommunication equipments were subjected to 10% input VAT by the Bureau of Customs. DaACIH Subsequently, on 19 September 1997, respondent filed a written application for refund/credit of erroneously paid input VAT 2 in the amount of P22,013,134.00 before petitioner believing that it is exempt from the payment of the same by virtue of the "in lieu of all taxes" proviso under Section 10 of R.A. 7617 and Section 23 of R.A. 7925. In the alternative, respondent cited Section 106 (b) of the National Internal Revenue Code 3 as legal basis for its claim for refund which provides that a VAT-registered taxpayer may apply for tax credit or a claim for refund of input taxes paid on purchases of capital goods imported or locally purchased, to the extent that such input taxes have not been applied. However, respondent instituted an appeal 4 with the CTA without waiting for an action from petitioner on its claim in order to toll the running of the two-year prescriptive period under Sec. 112 (B) of the Tax Reform Act of 1997. Thereafter, CTA rendered its questioned Decision finding respondent liable to pay VAT by virtue of the enactment of R.A. 7716 which excluded franchises on telephone and telegraph systems, and radio broadcasting stations and other franchise form payment of franchise tax, instead subjecting these companies to pay the VAT. Nevertheless, CTA allowed respondent a partial refund of its input taxes in the amount of P16,229,100.00 for the year 1996, the same remaining unapplied as evidenced by its 1997 First Quarterly VAT Return. 5 Aggrieved with said Decision, petitioner filed its Motion for Reconsideration, 6 dated 03 August 2000, insisting that respondent is not entitled to a refund as there is no evidence showing that the input tax was paid by respondent in the course of its trade or business. Subsequently, petitioner filed its Supplemental Motion for Reconsideration, 7 dated 15 September 2000, arguing in the alternative that respondent is entitled only to a ratable proportion of the creditable input taxes awarded by CTA pursuant to Section 104 (a) (2) of the Tax Code, 8 which provides: "Sec. 104. Tax Credits . (a) Creditable Input tax . xxx xxx xxx (2) . . . A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows: (A) Total input tax which can be directly attributed to transactions subject to value-added tax; (B) A ratable portion of any input that which cannot be directly attributed to either activity." CTA denied petitioner's Motion for Reconsideration in an Order, 9 dated 20 September 2000, finding the imported telecommunications equipment, machinery, spare parts, fiber optic cables, and the like necessary in carrying out respondent's telecommunication franchise. However, the CTA failed to discuss petitioner's alternative defense posed in its Supplemental Motion for Reconsideration. Hence, this petition for review. The only issue to be resolved in the instant petition is whether or not Section 110 (A) (3) of the Tax Reform Act of 1997 is applicable in the case at bar to entitle respondent to only a ratable proportion of the creditable input taxes awarded by CTA. Petitioner maintains that the CTA erred in not considering the fact that respondent is also engaged in zero-rated sales and exempt sales in granting the refund in the amount of P16,229,100.00 as input tax on respondent's imported capital goods. Petitioner argues that where the taxpayer is engaged in zero-rated sales and exempt sales, only the proportionate share of input taxes allocated to zero rated sales can be refunded when the creditable input tax cannot be directly and entirely attributed to any of the said transactions. The petition is devoid of merit. The following requirements must be present before Section 110 (A) (3) of the Tax Reform Act of 1997 can be applied, to wit: 1.) The person claiming the creditable input tax must be VAT-registered; 2.) Such person is engaged in a transaction subject to VAT; 3) The person is also engaged in other transactions not subject to VAT; and 4.) The ratable portion of any input tax cannot be directly attributed to either activity. In the case at bar, the third and fourth requisites are not extent. It is undisputed that respondent is VAT-registered 10 and the importation of respondent's telecommunications equipment, machinery, spare parts, fiber, optic cables, and the like, as found by the CTA, is a transaction subject to VAT. However, there is no evidence on record that would evidently show that respondent is also engaged in other transactions that are not subject to VAT. The mere fact that the respondent's Quarterly VAT Returns 11 confirm that respondent's transactions involved zero-rated sales and exempt sales and exempt sales do not sufficiently establish that the same were derived from respondent's that are not subject to VAT. On the contrary, the transactions from which respondent's sales were derived are subject to VAT but are either zero rated (0%) or otherwise exempted for falling within the transactions enumerated in Section 108 (B) or Section 109 of the Tax Reform Act of 1997. Moreover, contrary to petitioner's stance, the input tax being claimed by respondent is directly attributed to the importation of respondent's telecommunications equipment, machinery, spare parts, fiber optic cables, and the like, which was subject to 10% VAT. Hence, in the absence of any evidence that would clearly establish that the respondent was engaged in other transaction not subject to VAT, the creditable input tax cannot be prorated pursuant to Section 110 (A) (3) of the Tax Reform Act of 1997. Be that as it may, the CTA correctly ruled that the applicable provisions in the case at bar is Sec. 112 (B) of the Tax Reform Act of 1997, which expressly states: "Sec. 112. Refunds or Tax Credits of Input Tax. (B) 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 may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made." ScaAET It may be recalled that in denying petitioner's Motion for Reconsideration, the CTA declared that the imported telecommunications equipment, machinery, spare parts, fiber optic cables, and the like are "considered capital assets and are within the scope and meaning of Revenue Regulations No. 7-95 under the term "goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Section 29 (f), used directly and indirectly in the production or sale of taxable goods and services." 12 Furthermore, it is undisputed that respondent's input taxes for the year 1996 remained unapplied as evidenced by its 1997 First Quarterly VAT Return. 13 Finally, respondent filed its written application for refund/credit of erroneously paid input VAT 14 on 19 September 1997, well within the two (2) year prescriptive period. Therefore, the CTA did not commit reversible error in ruling that respondent is entitled to a refund in the amount of P16,229,100.00 as the same is in accordance with the above-cited provision. WHEREFORE, finding no reversible error committed by the Court of Tax Appeals the instant petition for review is hereby DISMISSED. The appealed Decision, dated 17 July 2000, rendered by the Court of Tax Appeals is hereby AFFIRMED. No costs. SO ORDERED. Alio-Hormachuelos and Asuncion-Vicente , JJ . , concur. Footnotes 1. Rollo , p. 17. 2. Rollo , p. 38. 3. Now Section 112 (b) of the Tax Reform Act of 1997. 4. Rollo , p. 29. 5. Exhibit "S". 6. Rollo , p. 62. 7. Ibid , p. 68. 8. Now Section 110 (A) (3) of the Tax Reform Act of 1997. 9. Rollo , p. 26. 10. Exhibits "O" to "S". 11. Rollo , pp. 7279. Annexes "F" to "F-2" of Petitioner's Supplemental Motion for Reconsideration. 12. Rollo , p. 27, Resolution, dated 20 September 2000, p. 2. 13. Supra , note 5. 14. Supra , note 2.