Fort Bonifacio Development Corp. v. Commissioner of Internal Revenue

SEVENTH DIVISION [CA-G.R. SP No. 61517. November 6, 2003.] FORT BONIFACIO DEVELOPMENT CORP. , 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 TIJAM , J p : This is a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure over the Decision 1 of the Court of Tax Appeals in CTA Case No. 5926 denying petitioner's claim for tax refund in the amount of P347,741,695.74 representing the value-added tax it paid for the third quarter of 1997. This facts of this case are not disputed. 2 On February 8, 1995, by virtue of Republic Act No. 7227 3 and Executive Order No. 40 4 dated December 8, 1992, the National Government sold to petitioner Fort Bonifacio Development Corporation, under a VAT-free sale transaction, parcels of land within the Fort Bonifacio reservation ("subject parcels of land"), now known as the Fort Bonifacio Global City, which petitioner has developed and has been selling to interested buyers since October 1996. On January 1, 1996, Republic Act No. 7716, otherwise known as the Expanded Value-Added Tax Law (E-VAT Law), took effect, amending Section 100 of the old National Internal Revenue Code (NIRC) and imposing a 10% value-added tax on the sale of real properties. Thus, Section 100 of the NIRC, as amended, provides: "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 transferor. (1) The term "goods or properties" shall mean 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" (Emphasis supplied.) Consequently, the sale of the subject parcels of land to petitioner's customers became subject to a value-added tax (VAT) of 10%. CIETDc However, Section 105 of the NIRC grants to a person who becomes liable to value-added tax or who elects to be a VAT-registered person, a transitional "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 paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax." To avail of the said transitional input tax credit, petitioner, on September 19, 1996, submitted to respondent Bureau of Internal Revenue (BIR), Revenue District No. 44, Taguig and Pateros, an inventory of its real properties, with a total book value of P71,227,503,200.00 on which it claims a transitional input tax credit of P5,698,200,256.00. Petitioner also registered itself as a VAT taxpayer. For the third quarter of 1997, petitioner derived the total amount of P3,591,726,328.11 from its sales and lease of lots on which the output VAT payable to the Bureau of Internal Revenue was P359,172,632.81. To pay the said amount of P359,172,632.81, petitioner made cash payments totaling P347,741,695.74 and utilized its regular input tax credit of P19,743,565.73 on its purchases of goods and services. On May 11, 1999, petitioner filed with the BIR a claim 5 for tax refund of its output VAT cash payments for the third quarter of 1997 in the amount of P347,741,695.74. Petitioner claimed that the said amount was illegally collected from it because no transitional or presumptive input tax credit was taken into account by the BIR. As the BIR had not yet acted upon petitioner's claim for tax refund and the 2-year prescriptive period for actions to recover illegally collected tax under Section 230 of the NIRC was about to expire on August 25, 1999, petitioner, on August 24, 1999, filed a Petition for Review 6 against respondents before the Court of Tax Appeals. Petitioner claimed that pursuant to Section 105 in relation to Section 100 of the NIRC, it is entitled to a transitional input tax credit on its beginning inventory of real properties equivalent to 8% of their total book value (P71,227,503,200.00) or P5,698,200,256.00. Petitioner argued that its output VAT cash payments for the third quarter of 1997 in the amount of P347,741,695.74 could more than sufficiently be offset by its transitional input tax credit of 5,698,200,256.00 minus earlier similar claims for refund in the amounts of P269,340,469.45, P359,652,009.47 and P486,355,846.78 7 . Thus; it is supposedly entitled to the refund or tax credit of P347,741,695.74. Respondents, however, averred that pursuant to Section 4.105-1 of Revenue Regulations No. 7-95, the basis of the transitional input tax credit should only be the improvements and the book value of the land inventory, 8 thus: SEC. 4.105-1. Transitional input tax on beginning inventories . Taxpayers who became VAT-registered persons upon effectivity of RA No. 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; (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, construed 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." (Emphasis supplied.) Petitioner countered 9 that the said Revenue Regulations is invalid and ineffective insofar as it limits the 8% input tax credit to the value of the "improvements". According to petitioner, the 8% transitional input tax credit under Section 105 of the NIRC is based on the "beginning inventory of goods, materials and supplies" and under Section 100 of the NIRC, the term "goods and properties" includes "real properties", not just improvements. Thus, the 8% transitional input tax credit should not be limited to the value of the improvements but should be based on the beginning inventory of real properties including land. Petitioner averred that when there is a discrepancy between the basic law and a regulation implementing it, the former should always prevail. Respondents, however, insisted that petitioner is not entitled to any transitional input tax credit because it purchased the subject land under a VAT-free sale transaction. The Government, as vendor, was tax-exempt and accordingly did not pass on any VAT or sales tax as part of the price paid by the petitioner. Respondents cited Section 17 of Revenue Regulations No. 5-87 which implemented the first VAT law under Executive Order No. 273 effective January 1, 1988, where businesses subject to VAT as of January 1, 1988 were not accorded the benefit of any transitory input tax on their beginning inventory of land brought into the VAT regime beginning January 1, 1988, notwithstanding the fact that the same were used in the business or trade of the taxpayer. According to respondents, this principle remained with the passage of the E-VAT law (R.A. 7716) and has since received congressional acceptance. 10 Petitioner, however, argued that the use of the word "presumptive" in various BIR regulations to describe the transitional input tax, indicates that it is presumed to have been paid on goods or properties not then subject to VAT. In fine, petitioner need not show that taxes were paid on its inventory of land because the transitional input tax is presumed or "imputed" without necessarily being paid. 11 October 17, 2000, the Court of Tax Appeals rendered the assailed Decision 12 denying petitioner's claim for tax refund. The Court of Tax Appeals explained that the 8% transitional input tax was supposed to answer for the 10% output VAT liability of taxpayers under the E-VAT law. According to the Tax Court, the grant of the transitional input tax in premised on the fact that the VAT taxpayer, in acquiring goods or properties in the course of its trade and business has previously paid a sales or business tax that is tacked on the purchase price by the manufacturers or producers before the E-VAT law took effect. In allowing the transitional input tax credit, the law seeks to prevent the scenario wherein the taxpayer to whom tax is passed on could not utilize the tax it paid due to the transition from the sales tax system to the VAT system, or in the case of the E-VAT law, the transition from being VAT-exempt to being subject to VAT as in the case of real estate dealers. Thus, said the Tax Court, to avail of the benefit of the transitional input tax credit, there must be prior payment of VAT or sales tax. Petitioner, however, purchased the subject property under a VAT-free sale transaction, the National Government being tax-exempt. Consequently, the National Government did not pass an any VAT or business tax to the petitioner as part of the purchase price. To grant unto petitioner the 8% transitional input tax is to give it an outright bonus equivalent to the output VAT of 10% which it may tack on the properties it would sell to its buyers. Accordingly, the Court of Tax Appeals upheld the validity of Section 4.105-1 of Revenue Regulations No. 7-95 limiting the transitional input tax to the value of the improvements on the land because it is only in the construction of these improvements that the contractors and suppliers have presumably passed on to the owner of the land or real estate dealer, the business tax due thereon. Unconvinced, petitioner filed the instant Petition for Review on the following grounds: "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 AS 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 ( sic ) 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 DENYING PETITIONER'S CLAIM FOR REFUND." 13 The petition is without merit. Quite recently, or on April 22, 2003, this Court rendered a Decision in a parallel case involving the same petitioner, docketed as CA-G.R. SP No. 61516 entitled "Fort Bonifacio Development Corporation vs. Commissioner of Internal Revenue, et al." In the said case, this Court declared that petitioner is not entitled to the transitional input tax on its beginning land inventory and accordingly denied its claim for tax refund, thus: "Apparently, the petitioner harps on the mistaken premise that the law grants the benefit of transitional input tax credit to all real estate dealers whether or not their beginning inventories were previously subjected to business taxes (either sales tax or VAT). At this juncture, it is worth mentioning that as a real estate dealer, petitioner FBDC was not subjected to any form of sales tax under the Old Tax Code. What it used to pay was only a real estate dealers fixed tax. What is more crucial is that the petitioner acquired the contested property from the National Government under a VAT-free transaction. The Government, as a vendor was outside the operation of the VAT and ergo, could not possibly have passed on any VAT or sales tax as part of the purchase price to the petitioner as vendee . As aptly pointed out by the tax court in the assailed decision, the transition or passage from the sales tax system to the value-added tax system left many manufacturers, producers and importers with inventories consisting of goods upon which sales taxes were already 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 included a provision granting these taxpayers the benefit of transitional input tax credit from which they could offset their VAT liability under the present system. The most reasonable inference We could draw from this is that the grant of transitional input tax credit indeed presupposes that the manufacturers, producers and importers should have previously paid sales taxes on their inventories. They were given the benefit of transitional input tax credits, precisely, to make up for the previously paid sales taxes which were now abolished by the VAT Law. It bears stressing that the VAT law took the place of privilege taxes and sales taxes on original or subsequent sale of articles. These taxes were substituted by the VAT at the constant rate of 0% or 10% (Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 163 scra 371) . xxx xxx xxx Common sense prods Us to decline the petitioner's argument, lest We occasion inequitable and unreasonable consequences. Such absurdity, quite surely, is far from the intendment of the lawmakers in granting the transitional input tax credits. The law, after all, contemplates only that which is reasonable Lex semper intendit quod convenit rationi ." Petitioner's claim for tax refund in the instant case should similarly be denied. The concept of "transitional input tax" was first introduced by Executive Order No. 273, known as the original VAT law, which took effect on January 1, 1988. Aimed at simplifying tax collection, E.O. No. 273 eliminated privilege taxes, multiple rated sales tax on manufacturers and producers, advance sales tax and compensating tax on importations. 14 In their stead, E.O. 273 imposed the value-added tax (VAT) at the uniform rate of 0% or 10%. As the transition to the VAT system opens VAT taxpayers to a 10% VAT liability without the benefit of crediting the now abolished sales taxes which they had paid on their inventory of goods as of January 1, 1988, E.O. No. 273 introduced the transitional input tax credit which allowed VAT taxpayers 8% tax credit in its first payment of the 10% VAT. This was then incorporated as Section 105 in the NIRC. On January 1, 1996, Republic Act No. 7716, also known as the E-VAT law, took effect, expanding the coverage of the value-added tax to include the sale of real properties, thus amending Section 100 of the NIRC. The transitional input tax credit, however, was maintained in the Tax Code, only this time, it would benefit those who were VAT-exempt under the old VAT law but are now subject to VAT under the E-VAT law. The transitional input tax credit was indeed meant to alleviate the inequitable situation arising from the transition from the non-VAT or sales tax system to the VAT system under the old VAT law, or in the case of the E-VAT law, the transition from being VAT-exempt to being subject to VAT. As correctly observed by the Tax Court, the transition from the non-VAT (or sales tax) to the VAT system of taxation would leave many manufacturers, producers and importers with inventories of goods bought before January 1, 1988 upon which sales taxes were already paid by, or passed on to, them as part of the invoice price or acquisition cost, which taxes could not be credited as actual input VAT because the said goods had not been subjected to the 10% output VAT. The transitional input tax allows them to credit 8% of their beginning inventory of goods against their first output VAT payment to compensate for the sales taxes which they could not otherwise credit as actual input VAT under the VAT regime. Clearly, therefore, the grant of the transitional input tax presupposes that the VAT taxpayer had previously paid some form of business tax (like sales tax) on his inventory of goods. In the instant case, petitioner purchased the subject property from the National Government under a VAT-free sale transaction, the National Government being tax-exempt. Consequently, the National Government did not pass on any value-added tax or business tax to petitioner. Therefore, petitioner cannot avail of the transitional input tax because it made no prior tax payment against which the 10% output tax it paid could be credited. We agree with the Court of Tax Appeals that to accord petitioner the 8% transitional input tax to offset his output tax liability will have the effect of granting an outright bonus equivalent to the 10% VAT which it may tack on the purchase price of the lands it would sell to its buyers. That the transitional input tax could be availed of only by VAT taxpayers who had previously paid a business tax, is buttressed by Section 25 or the Transitory Provisions of the original VAT law (E.O. No. 273) which provides: "SEC. 25. Transitory provisions . (a) All VAT-registered persons shall be allowed transitional input taxes which can be credited against output tax in the same manner as provided in Section 104 of the National Internal Revenue Code as follows: 1) The balance of the deferred sales tax credit account as of December 31, 1987 which are accounted for in accordance with regulations prescribed therefor; 2) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not for sale the tax on which was not taken up or claimed as deferred sales tax credit ; and 3) A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit . Tax credit prescribed in paragraphs (2) and (3) shall be allowed only to a VAT-registered person who files an inventory of the goods referred to in said paragraphs as provided in regulations." (Emphasis supplied.) Based on the foregoing provision, the transitional input tax is to be enjoyed only by VAT taxpayers who have previously paid a business tax, specifically, the sales tax, hence, the reference to taxpayers who have a "balance of deferred sales tax credit" , or whose materials, supplies or goods for sale "the tax on which were not taken up or claimed as deferred sales tax credit" . Thus, consistent with this Court's ruling in CA-G.R. SP No. 61516 , petitioner's transitional input tax should be limited only to the value of the improvements and cannot be based on petitioner's beginning inventory of land which was never subject to any business tax. It is only with the construction of these improvements, such as buildings, roads and drainage systems, that the contractors or suppliers would presumably pass on to petitioner the business or value-added tax on the materials, supplies or services as part of the purchase price or cost of services, which tax petitioner can then offset against its output VAT liabilities when it sells its lots with improvements. Accordingly, Revenue Regulations No. 7-95 limiting the transitional input tax to the value of the improvements is a valid implementation of the NIRC. In CA-G.R. SP No. 61516 , We said: "FBDC's submission that Section 105 in relation to Section 100 thereof, is impeccably and clearly couched that it disposes of the need for interpretation is not well taken. We cannot cavil at the fact that taxation is a painfully variegated and extremely technical branch of the law that administrative instrumentalities often need to intervene in order to decipher and cast light upon hazy provisions which perplex, unsurprisingly, even the initiated. In this regard, let it be that construction given to a statute by entities charged with the interpretation and application of the same is entitled to great respect and should be accorded great weight by the courts, unless such construction is clearly shown to be in sharp conflict with the governing statute or the Constitution or other laws (Nestle Phils, vs. CA, 203 SCRA 504) . A contemporaneous construction and interpretation of a law by the implementing administrative agency is accorded great respect by the Court (Bagatsing vs. Committee on Privatization, Philippine National Oil, Co., 246 SCRA 337) ." It bears stressing that tax refunds are in the nature of tax exemption. As such, they shall be construed strictissimi juris against the claimant as they are in derogation of sovereign authority. 15 Tax exemption can only be given effect when the grant is clear and categorical 16 inasmuch as taxation is the rule and exemption is the exception. 17 The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic law or statute. 18 All doubts, therefore, must be resolved in favor of the taxing authority. 19 Finally, this Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. 20 We find no abuse or improvident exercise of authority on the part of the Tax Court in denying petitioner's claim for tax refund. WHEREFORE, the instant Petition is DENIED. The assailed Decision of the Court of Tax Appeals dated October 17, 2000 denying petitioner's claim for refund of the value-added tax it paid for the third quarter of 1997 in the amount of P347,741,895.74 is hereby AFFIRMED. SO ORDERED. Reyes and Cruz, JJ ., concur. Footnotes 1. Rollo , pp. 142158. With Associate Justice Amancio Q. Saga dissenting, Rollo , pp. 159167. 2. Rollo , pp. 108111 & 141146 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. 4. Implementing the Provisions of Republic Act No. 7227 Authorizing the Bases Conversion and Development Authority (BCDA) to Raise Funds through the Sale of Metro Manila Military Camps Transferred to BCDA to Form Part of its Capitalization and to be Used for the Purposes Stated in said Act. 5. Rollo , pp. 91103. 6. Rollo , pp. 6777. 7. Representing value-added taxes it paid on proceeds derived from its sale and lease of lots for the quarters ended December 31, 1996, March 31, 1997 and June 30, 1997, respectively. 8. Respondents' Answer, Rollo , 104106. Court of Tax Appeals' Decision, p. 6; Rollo , 147. 9. Rollo , p. 147148. 10. Rollo , p. 149. 11. Rollo , p. 150. 12. Supra , Note 1. 13. Rollo , pp. 1213. 14. Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan , 163 SCRA 371, 379 (1988). 15. Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. , 309 SCRA 87, 108 (1999). 16. Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, et al. , 202 SCRA 137, 146 (1991). 17. Cyanamid Philippines, Inc. vs. Court of Appeals, et al. , 322 SCRA 639, 650 (2000), citing Commissioner of Internal Revenue vs. Mitsubishi Metal Corp. , 181 SCRA 214, 223224 (1990). 18. China Banking Corporation vs. Court of Tax Appeals, et al. , G.R. No. 146749 (2003). Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. , 309 SCRA 87, 108109(1999). 19. China Banking Corporation vs. Court of Appeals, et al. , G.R. No. 146749 (2003). 20. Cyanamid Philippines, Inc. vs. Court of Appeals, et al. , 322 SCRA 639, 654 (2000).