Fort Bonifacio Development Corp. v. Commissioner of Internal Revenue

NINTH DIVISION [CA-G.R. SP No. 61436. July 7, 2006.] FORT BONIFACIO DEVELOPMENT CORPORATION , petitioner , vs .COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44, TAGUIG & PATEROS, BUREAU OF INTERNAL REVENUE , respondents . D E C I S I O N AREVALO-ZENAROSA, M ., J p : Before Us is a petition 1 for review under Rule 43 of the Rules of Court seeking to reverse and set aside the Decision 2 dated October 12, 2000 of the Court of Tax Appeals (CTA) in CTA Case No. 5735, denying petitioner's claim for refund in the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47) . The facts of the case are as follow: Petitioner Fort Bonifacio Development Corporation is a domestic corporation duly registered and existing under the Philippine laws. Petitioner is a duly registered VAT taxpayer. It is owned, to the extent of forty-five per cent (45%) of its issued and outstanding capital stock, by the Bases Conversion and Development Authority ,a wholly owned government corporation created by Republic Act (R.A.) No. 7227 3 for the purpose of accelerating the conversion of military reservations into alternative productive uses and raising funds through the sale of portions of said military reservations in order to promote the economic and social development of the country in general. The remaining fifty-five per cent (55%) is owned by Bonifacio Land Corporation, a consortium of private domestic corporations. Petitioner is engaged in the development and sale of real property. It is the owner of, and is developing and selling, parcels of land within a new town development area known as the Fort Bonifacio Global City (hereinafter referred to as "Global City"),located within Fort Bonifacio, Taguig, Metro Manila. The said area developed by petitioner was formerly part of the Fort Bonifacio reservation but was sold on February 8, 1995 by the National Government to petitioner by virtue of R.A. No. 7227 and Executive Order (E.O.) No. 40 , 4 dated December 8, 1992. At that time, the purchase of real property by petitioner was exempted from payment of VAT . On January 1, 1996, R.A. 7716 5 took effect. The said law restructured the Value-Added Tax (VAT) system by further amending pertinent provisions of the National Internal Revenue Code (NIRC) ,as already amended by E.O. No. 273 6 which took effect on January 1, 1988 ,and imposed a value-added tax on sale of real properties, among others, Section 100 [a][1][A] 7 of NIRC , as amended by R.A. No. 7716. While prior to R.A. No. 7716 real estate transactions were not subject to VAT, they became subject to VAT upon the effectivity of R.A. No. 7716. In May 1996, petitioner commenced developing the Global City, and since October 1996, has been selling lots located thereat to interested buyers. With regard to the input tax credit of eight percent (8%) under Sec. 105 8 of the NIRC, petitioner submitted an inventory listing real property owned by it with a total value of Seventy-One Billion Two Hundred Twenty-Seven Million Five Hundred Three Thousand Two Hundred Pesos (P71,227,503,200.00). The aforesaid inventory was submitted to the BIR, Revenue District No. 44, Taguig and Pateros, on September 19, 1996. cSEaTH For the first quarter of 1997, petitioner derived the total amount of Three Billion Six Hundred Eighty-Five Million Three Hundred Fifty-Six Thousand Five Hundred Thirty-Nine Pesos and Fifty Centavos (P3,685,356,539.50) from its sales and lease of lots, on which the output VAT payable to the Bureau of Internal Revenue was Three Hundred Sixty-Eight Million Five Hundred Thirty-Five Thousand Six Hundred Fifty-Three Pesos and Ninety-Five Centavos (P368,535,653.95). The VAT returns filed by petitioner likewise showed that to pay said amount of Three Hundred Sixty-Eight Million Five Hundred Thirty-Five Thousand Six Hundred Fifty-Three Pesos and Ninety-Five Centavos (P368,535,653.95) due to the BIR, petitioner made cash payments totaling Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47) and utilized its regular input tax credit of Eight Million Eight Hundred Eighty-Three Thousand Six Hundred Forty-Four Pesos and Forty-Eight Centavos (P8,883,644.48) on purchases of goods and services. On November 17, 1998, petitioner filed with the BIR a claim for refund of the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47) which it paid as VAT for the first quarter of 1997. Earlier, on October 8, 1998, petitioner filed with the BIR a claim for refund of the amount of Two Hundred Sixty-Nine Million Three Hundred Forty Thousand Four Hundred Sixty-Nine Pesos and Forty-Five Centavos (P269,340,469.45) which it paid as VAT for the fourth quarter of 1996. On February 24, 1999, petitioner filed a Petition for Review before the Court of Tax Appeals (CTA) seeking for a refund of the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47) representing alleged overpaid VAT on Petitioner's sale of lots covering the first quarter of 1997. On October 12, 2000 ,CTA rendered a decision, denying the claim for refund, the pertinent portion of which reads: "In the case entitled Fort Bonifacio Development Corp. Vs Commissioner of Internal Revenue, et al. , CTA Case no. 5665 promulgated on August 11, 2000, this Court had the opportunity to uphold the provisions of Section 4.105-1 of Revenue Regulations No. 7-95 where respondent based the 8% transitional input tax credit on the value of the improvements, thus: "Corrolary to our findings that 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 system and similar structures construed 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 Regulations 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 the 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 Regulations No. 7-95 is contrary to law, rather we find it to be consistent and in harmony with the law it seeks to implement." WHEREFORE, in view of all the foregoing, the claim for refund representing alleged overpaid value-added tax covering the first quarter of 1997 is hereby DENIED for lack of merit. SO ORDERED." Hence, this petition. Petitioner argues that based on the facts the issues involved in the instant case are the following: 1. Whether the 8% input tax credit provided for in Section 105 of the National Internal Revenue Code, in relation to Section 100 thereof, may solely be based on the value of the improvements on the land, as claimed by respondents, or the same may also be based on the value of the taxpayer's beginning inventory of land, as claimed by petitioner. 2. Whether the taxpayer may be entitled to the input tax credit provided for in Section 105 of the National Internal Revenue Code only if it had previously paid value-added taxes or sales taxes on its inventory of land. 3. Corollary to the foregoing main issues, whether Section 4.105-1 of Revenue Regulations No. 7-95 of the Bureau of Internal Revenue is invalid and ineffective as being contrary to the clear provisions of Sections 100 and 105 of the National Internal Revenue Code. 4. Likewise corollary to the main issues, whether there was basis and necessity for the Court of Tax Appeals to interpret and construe Section 100 and 105 of the National Internal Revenue Code and the term "transitional input tax credit" found in Section 105, notwithstanding that the same are clear and unambiguous. 9 Petitioner further asserts that: 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. 10 HSaIDc The sole issue to be resolved in the instant petition is whether or not petitioner is entitled to a refund of the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47),paid by it as value added tax or to a tax credit for the said amount. We rule to affirm the decision of the CTA . Petitioner argues that there is nothing in Section 105 of the Tax Code which allows that the eight percent (8%) transitional input tax shall be based on the value of the improvements of such goods, materials or supplies; that Section 100 (a)(1)(A) ,in relation to Sections 104 (a)(2)(B) and 105 all of the Tax Code which provide that the presumptive input tax of eight percent (8%) on the cost of the inventory of goods or properties as of December 31, 1995 shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include real properties held primarily for sale to customer or held for lease in the ordinary course of trade or business and not only to improvements; that Section 100 (1)(A) of the NIRC, as amended by R.A. No. 7716, provides that the term "goods or properties" shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; that by logical conclusion the eight percent (8%) transitional input tax provided for under Section 105 in relations to Section 1.00 of the NIRC, should be based on the value of the taxpayer's beginning inventory of real properties and not only on the improvements thereon. It argues that when the words and phrases of the statute are clear and unequivocal, their meaning must be determined from the language employed and the statute must be taken to mean exactly what it says. 11 Thus, taking Section 105 in relation to Section 100 of the Tax Code to mean exactly what it says, petitioner is indubitably entitled to the input tax credit on its beginning inventory of land. We do not agree. To resolve this issue, we find it necessary to look at the historical background of transitional input tax credit. The transitional input tax credit was first introduced by E.O. No. 273, also known as the original VAT Law of 1988 . By virtue of E.O. No. 273, Section 105 of the Tax Code was amended to read as follows: "Section 105. Transitional input tax credit . 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 credited against the output tax ."(Emphasis Supplied) To implement Section 105, the Bureau of Internal Revenue issued Revenue Regulations No. 5-87. Section 26 (b) of the said Revenue Regulation provides as follows: "Section 26. Transitory provisions . ... (b) Transitory input tax credits (1) Manufacturers, producers, and importers. The unused deferred tax credit as of December 31, 1987 shall be allowed as input tax credits to all original sellers subject to the value-added tax for the first time ,provided that they have registered in accordance with the provisions of Section 107. For this purpose, the amount appearing in their books of accounts and corroborated by the amount reflected in the sales tax return as of December 31, 1987 shall be initially accepted as the transitional input tax which shall be carried over as allowable tax credits against output tax less any amount for which an application for the issuance of a tax credit certificate has been filed. In the case of corporations filing their sales tax returns on a fiscal quarter basis, they shall file a short period return for the period ending December 31, 1987 which in addition to their ledger account of deferred tax credit shall be the basis of the transitional input tax credits which will be provisionally allowed. "(Emphasis Supplied) A careful reading of Section 26 (b) of Revenue Regulations No. 5-87 reveals that the transitional input tax credit is a benefit granted by law to manufacturers, producers and importers who are being subject to VAT for the first time, and that the purpose of the said benefit is to recognize the input tax credit of the inventories had such goods been acquired during the effectivity of the VAT Law of 1988 . At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. 12 Unlike a direct tax, such as the income tax, which primarily taxes an individual's ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. It must be emphasized that the VAT Law abolished privilege taxes, percentage taxes and the sales tax on original or subsequent sale of articles. The transition from the sales tax system to the VAT system, left many manufacturers, producers, and importers with inventories with sales taxes paid or passed on as part of the invoice price or acquisition cost. To be able to utilize the sales taxes, the VAT Law of 1988 provides taxpayers the benefit of transitional input tax credit to pay for their VAT liability under the present system. This transitional input tax credit corresponds to eight percent (8%) of the value of the beginning inventories as provided for in Revenue Regulations No. 5-87. The original VAT Law of 1988 (E.O. 273) was later amended by Republic Act 7716, otherwise known as the E-VAT Law ,which includes the sale of real property under the term "sale of goods" hence, subject to VAT. Under the E-VAT Law, Section 105 of the Tax Code was not changed, hence, it retains the benefit of transitional input tax credit but this time for those not subject to VAT under the original VAT Law of 1988 but are now subject to VAT (under the E-VAT Law) such as real estate dealers. Its purpose was to provide taxpayers with the benefit of utilizing the VAT or sales tax component of inventories to pay for its output VAT liabilities under the E-VAT Law. The question now is why do these taxpayers have an input VAT in their beginning inventories, when they were exempt from paying the VAT under the original VAT Law of 1988? This is because these taxpayers have purchased good with the VAT passed on to them as part of the invoiced price or acquisition cost . Hence, the VAT that was passed on to these taxpayers should be considered as their tax credit in paying their output VAT. This is because this benefit is granted by Section 104 of the 1996 Tax Code ,which states: "Section 104. Tax Credits . (a) Creditable Input Tax. any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 108 hereof on the following transactions shall be creditable against the output tax: (1) Purchased or importation of goods: (A) For sale; or (B) For conversion into or intended to form part of a finished product for sale including packaging materials; or (C) For use as supplies in the course of the business; or (D) For use as materials supplied in the sale of service; or (E) For use in trade or business for which deduction for depreciation or amortization is allowed under this code, except automobiles, aircraft and yachts. (2) Purchase of services on which a value-added tax has been actually paid. The input tax on domestic purchase of goods or properties shall be creditable;" Since these taxpayers were not covered by the VAT Law prior to the amendments introduced by the E-VAT Law, the latter law gives them the benefits of transitional input tax credit on their beginning inventories equivalent to eight percent (8%). Petitioner's argument that it is entitled to a transitional input tax credit equivalent to eight percent (8%) of its beginning inventory of real property is based on the premise that the transitional input tax credit is granted by law to real estate dealers regardless of whether or not their beginning inventories contain sales tax or VAT. We believe that this argument is not in consonance with the purpose of the VAT Law, because the benefit of transitional input tax credit comes with the condition that business taxes should have been paid first and that said taxes may be used pay their output tax liability through the transitional input tax credit provided by Section 105. In other words, transitory input tax credit shall only be allowed provided that the business tax had been paid and passed-on as part of the invoice price or acquisition cost of the inventory and such inventory is brought into the VAT regime by its owner. Hence, if no business tax forms part of the inventory cost, as in the instant case where petitioner purchased the real estate from the National Government under a VAT-free sale transaction, no transitory input tax credit shall be allowed on the taxpayer's beginning inventory when the same is brought into the VAT regime. This is because during the transition of the business from non-VAT to VAT, the purpose of the transitional input tax credit for inventories brought into the VAT regime is to avoid imposition of a tax against tax. And prevent double taxation of the inventory. VAT is intended as a tax on value added on every movement of the inventory until it reaches the ultimate consumer against whom the full burden or cost of the tax is indirectly passed on as a part of his acquisition cost. Furthermore, under VAT Law an 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. 13 This is a case wherein the VAT is removed at the exempt stage (i.e.,at the point of the sale, barter or exchange of the goods or properties). CHATEa The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt. 14 It is important to emphasize that the petitioner at the time of purchase of the real estate was exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on input VAT. In the instant petition, petitioner purchased the real property from the National Government in 1995 under a VAT-free sale transaction because the National Government as seller was tax exempt, hence did not pass on any VAT or sales tax to the petitioner as part of the purchase price. Moreover, it must be emphasized that in 1995, sale of real property was still exempt from VAT. On the basis of the foregoing, petitioner should be excluded from availing of the transitional input tax credit provided by law. Otherwise, the eight percent (8% ) transitional input tax based on the book value of the land would negate the purpose of the law in granting such benefit and tantamount to giving an undeserved bonus to real estate dealers similarly situated as petitioner. Moreover, the transitory provisions of Revenue Regulations No. 7-95, provides: "TRANSITORY PROVISION (a) Presumptive Input Tax Credits. (i) For goods, materials or supplies not for sale but purchased for use in business in their present condition, which are not intended for further processing and are on hand as of December 31, 1995, a presumptive input tax equivalent to eight percent (8%) of the value of the goods or properties shall be allowed. (ii) For goods or properties purchased with the object of resale in their present condition, the same presumptive input tax equivalent to eight percent (8%) of the value of the goods unused as of December 31, 1995 shall be allowed, which amount may also be credited against the output tax of a VAT-registered person. (iii) For real estate dealers, the presumptive input tax of eight percent (8%) of the book value of improvements construed on or after January 1, 1988 (the effectivity of E.O. No. 273) shall be allowed ." (Emphasis Supplied) Moreover, as the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to great weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the exercise of his power under Section 245 of the NIRC to "make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of articles for sales tax and similar purposes. 15 WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Decision dated October 12, 2000 of the Court of Tax Appeals in CTA Case No. 5735, denying petitioner's claim for refund in the amount of Three Hundred Fifty-Nine Million Six Hundred Fifty-Two Thousand Nine Pesos and Forty-Seven Centavos (P359,652,009.47),is hereby AFFIRMED. SO ORDERED. Dacudao and Carandang, JJ .,concur Footnotes Rollo received on December 7, 2005. 1. Rollo ,pp. 7-66. 2. Annex D, Rollo ,pp. 141-160. 3. AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THE PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER PURPOSES, which took effect on March 13, 1992. 4. FURTHER AMENDING SECTION 163 OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED. 5. AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES. 6. ADOPTING A VALUE-ADDED TAX, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AND FOR OTHER PURPOSES. 7. (A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. 8. Sec. 105. Transitional/Presumptive Input Tax Credits. (a) 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 eight percent (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. 9. Rollo ,21-22. 10. Rollo ,pp. 22-23. 11. Baranda vs. Gustilo ,165 SCRA 757. 12. CONTEX CORPORATION vs. HON. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 151135, July 2, 2004. 13. BIR Revenue Regulations No. 7-95, Section 4.103-1. 14. Ibid ; CONTEX CORPORATION vs. HON. COMMISSIONER OF INTERNAL REVENUE, supra . 15. MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., vs. DEPARTMENT OF FINANCE SECRETARY, G.R. No. 108524, November 10, 1994.