Commissioner of Internal Revenue v. American Express International, Inc.-Philippine Branch

FIFTH DIVISION [CA-G.R. SP No. 62727. February 28, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . AMERICAN EXPRESS INTERNATIONAL, INC.-PHILIPPINE BRANCH , respondent . D E C I S I O N GUEVARA-SALONGA , J p : This is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure to reverse and set aside the Decision dated January 2, 2001 1 of the Court of Tax Appeals in CTA Case No. 5813, entitled "American Express International, Inc.-Philippine Branch, Inc., vs. Commissioner of Internal Revenue", ordering herein petitioner to refund to herein respondent the amount of P3,352,406.59 allegedly representing overpaid excess input VAT paid for the year 1997. THE ANTECEDENT FACTS The facts as found by the Court of Tax Appeals are as follows: "Petitioner is a Philippine branch of American Express International, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in the Philippines at the Ground Floor, ACE Building, corner Rada and de la Rosa Streets, Legaspi Village, Makati City. It is a servicing unit of American Express International, Inc.-Hongkong Branch (Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK receivables from card members situated in the Philippines and payment to service establishments in the Philippines. Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office No. 47 (East Makati) as a value-added tax (VAT) taxpayer effective March 1988 and was issued VAT Registration Certificate No. 088445 bearing VAT Registration No. 32A-3-004868 (Exh. A). For the period January 1, 1997 to December 31, 1997, petitioner filed with the BIR its quarterly VAT returns as follows: Exhibit Period Covered Date Filed D 1997 1st Qtr. April 18, 1997 F 2nd Qtr. July 21, 1997 G 3rd Qtr. October 2, 1997 H 4th Qtr. January 20, 1998 On March 23, 1999, however, Petitioner amended the aforesaid returns and declared the following: Taxable Output Zero-rated Domestic Input VAT Exh 1997 Sales VAT Sales Purchases I 1st qtr. P59,597.20 P5,959.72 P17,513,801.11 P6,778,182.30 P677,818.23 J 2nd qtr. 67,517.20 6,751.72 17,937,361.51 9,333,242.90 933,324.29 K 3rd qtr. 51,936.60 5,193.66 19,627,245.36 8,438,357.00 843,835.70 L 4th qtr. 67,994.30 6,799.43 25,231,225.22 13,080,822.10 1,308,082.21 Total: P247,045.30 P24,704.53 P80,309,633.20 P37,630,604.30 P3,763,060.43 ========= ========= =========== =========== =========== On April 13, 1999, Petitioner filed with the BIR a letter-request for the refund of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived at after deducting from its total input VAT paid of P3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively. Petitioner cites as basis therefor, Section 110 (B) of the 1997 Tax Code, to state: Section 110. Tax Credits . xxx xxx xxx (B) Excess Output or Input Tax . If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112. There being no immediate action on the part of the Respondent, the instant petition was filed on April 15, 1999. In support of its Petition for Review, the following arguments were raised by Petitioner: A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with existing regulations of the Bangko Sentral ng Pilipinas, are subject to value-added tax at zero percent (0%). According to petitioner, being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the Tax Code, to wit: Section 102. (sic) Value-added tax on sale of services . (a) Rate and base of tax . There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors: stock, real estate, commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties: Provided That the following services performed in the Philippines by VAT-registered persons shall be subject to 0%: (1) . . . (2) Services other than those mentioned in the preceding subparagraph, the consideration is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the BSP . . . " (Emphasis supplied) In addition, Petitioner relied on VAT Ruling No. 080-89, dated April 3, 1989, the pertinent portion of which reads as follows: "In Reply, please be informed that, as a VAT registered entity whose service is paid for in acceptable foreign currency which is remitted inwardly to the Philippines and accounted for in accordance with the rules and regulations of the Central bank of the Philippines, your service income is automatically zero rated effective January 1, 1998. [Section 102(a)(2) of the Tax Code as amended]. For this, there is no need to file an application for zero-rate." B. Input taxes on domestic purchases of taxable goods and services related to zero-rated revenues are available as tax refund in accordance with Section 106 (now Section 112) of the National Internal Revenue Code and Section 8(a) of Regulations No. 5-87, to state: Section 106. Refunds or tax credits of input tax. (A) Zero-rated or effectively Zero-rated Sales. Any VAT-registered person, except those covered by paragraph (a) above, whose sales are zero-rated or are effectively zero-rated, may, within two (2) years after the close of the taxable quarter when such sales were made, apply for the issuance of tax credit certificate or refund of the input taxes due or attributable to such sales, to the extent that such input tax has not been applied against output tax. . . " [Section 106(a) of the Tax Code] Section 8. Zero-rating . (a) In general. A zero-rated sale is a taxable transaction for value-added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods or services related to such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations. . . " [Section 8(a), Revenue Regulations No. 5-87]. Respondent, in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses that: "7. The claim for refund is subject to investigation by the Bureau of Internal Revenue; 8. Taxes paid and collected are presumed to have been made in accordance with laws and regulations, hence, not refundable. Claims for tax refund are construed strictly against the claimant as they partake of the nature of tax exemption from tax ( Commissioner of Internal Revenue vs. Ledesma , G.R. No. L-13509, January 30, 1979, 31 SCRA 95) and it is incumbent upon the Petitioner to prove that it is entitled thereto under the law ( Western Minolco Corp. v. Commissioner of Internal Revenue , 124 SCRA 121) and he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden can not be permitted to exist upon vague implications ( Asiatic Petroleum Co. vs. Llamas, 49 Phil. 466 cited in Collector vs. Manila Jockey Club Inc. L-8755, March 23, 1956) ; 9. Moreover, Petitioner must prove that it has complied with the governing rules with reference to tax recovery or refund, which are found in Sections 204(C) and 229 of the Tax Code, as amended, which are quoted as follows: Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes . The Commissioner may . . . (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after payment of the tax or penalty: Provided, however , That a return filed with an overpayment shall be considered a written claim for credit or refund." "Section 229. Recovery of tax erroneously or illegally collected . No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun ( sic ) after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however , That the Commissioner may, even without written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." 2 From the foregoing, the Court of Tax Appeals, through the Presiding Judge Ernesto D. Acosta rendered a decision in favor of the herein respondent holding that its services are subject to zero-rate pursuant to Section 108 (b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations No. 5-96, the decretal portion of which reads as follows: "WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious and in accordance with law. Accordingly, Respondent is hereby ORDERED to REFUND to Petitioner the amount of P3,352,406.59 representing the latter's excess input VAT paid for the year 1997. SO ORDERED." 3 THE ISSUES Undaunted, the Commissioner of Internal Revenue is now before us via the instant petition for review alleging that the Tax Court erred in holding that respondent's services are subject to zero-rate for value-added tax (VAT) purposes, considering that its services are not similar to the services mentioned in Section 4.102-2 (b) (2) of Revenue Regulations No. 5-96 which are subject to zero-rate. THE COURT'S RULING We find no merit in the petition. The main issue to be resolved is whether or not the services performed by herein respondent, a VAT-registered entity in the Philippines, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, are zero-rated under the National Internal Revenue Code (NIRC, for brevity) of 1997. We rule in the affirmative. Section 108 (B) of the NIRC enumerates the services that are subject to zero-rate for VAT purposes, thus: "(B) Transactions Subject to Zero Percent (0%) Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: "(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to vessels engaged exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production." (Emphasis ours) Section 4.102-2 (b)(2) of Revenue Regulations No. 7-95, as amended by Rev. Regulations No. 5-96, provides as follows: "Section 4.102-2 (b)(2). Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported , as well as services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. " (Emphasis supplied) There is no question that respondent's services fall under the aforequoted provisions of law. As can be gleaned from the records, the respondent is a servicing unit of AMEX whose function is primarily to facilitate the collection of receivables from card members by receiving bills of service establishments in the Philippines and forwarding the same to its Regional Operating Centers which in turn will collect from the card members. Such service is paid to the respondent in US dollars and accounted for in accordance with the BSP rules and regulations. Necessarily, petitioner's contention that since respondent's services were not of the same class or of the same nature as "project studies, information services, engineering and architectural designs and other similar services" the same could not qualify for zero-rated VAT but is subject to the regular VAT rate of 10%, must fail. Section 4.102-2(b)(2) of Rev. Regs. No. 7-95, as amended by Rev. Regs. No. 5-96 enumerates two classes of services that are subject to zero-rated VAT: 1) services other than processing, manufacturing or repacking for other persons doing business outside the Philippines of goods which are subsequently exported; and 2) services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services. In any case, the consideration therefore is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Petitioner's reliance on the 2nd class of services is erroneous as respondent's services fall under the 1st category of services embodied in the aforesaid section, which are ' services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, the consideration of which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP .' As a last-ditch effort to convince this Court that the services performed by the respondent can not qualify as zero-rated VAT, petitioner further submits that it is a requirement under VAT Ruling No. 040-98 dated November 23, 1998 that for services to be zero-rated, the same "must be consumed abroad." Thus: "Our VAT law, which was first adopted and promulgated under E.O. No. 273 effective January 1, 1998, basically adhered to the Consumption Type VAT Regime and, in general, follows the destination principle, viz: 'When considering a VAT, an important decision to be made by a country concerns what regime to adopt for international trade. The origin principle (exports taxable, imports exempt), or the destination principle ( export exempt, imports taxable ).' [ Value Added Tax VAT by Antonio Carlos Rodriguez, Harvard Law School, 1995, citing Shoup (1986) on destination principle, viz: 'the country taxes all value-added, at home and abroad, of goods that have as their destination the consumers of that country. Exports are exempt, imports are taxable. This is comparable with the consumption type VAT' .] Accordingly, the onus of taxation under our VAT system is in the country where goods, property or services are destined and consumed. This is the reason why under our VAT Law, goods, property or services destined to or consumed in the Philippines are subject to the 10% VAT whereas exports are zero-rated . ( Sections 105 and 108, Tax Code of 1997 )" (Emphasis Ours) 4 "The sales of services subject to zero-rate percent (0%) VAT under Section 108(B)(2), of the Tax Code of 1997, are limited to such sales which are destined for consumption outside of the Philippines in that such services are tacked-in as part of the cost of goods exported. The zero-rating also extends to project studies, information services sold by a resident of the Philippines to a non-resident foreign client because these services are likewise destined to be consumed abroad . The phrase "project studies, information services, engineering and architectural designs and other similar services" does not include services rendered by travel agents to foreign tourists in the Philippines following the doctrine of ejusdem generis , since such services by travel agents are not of the same class or of the same nature as those enumerated under the aforesaid section. Considering that the services by your client to foreign tourists are basically rendered within the Philippines, it follows that the onus taxation of the revenue arising therefrom, for VAT purposes, is also within the Philippines . For this reason, it is our considered opinion that the tour package services of your client to foreign tourists in the Philippines can not legally qualify for zero-rated (0%) VAT but rather subject to the regular VAT rate of 10%." (Emphasis ours)" 5 We are not persuaded. VAT Ruling No. 040-98, while purportedly interpreting Section 4.102-2 (b) (2) of Revenue Regulations No. 5-96, can not contravene the terms of the said revenue regulations as well as the Tax Code, the language of which are clear and unequivocal. From the afore-quoted provisions of Rev. Regs. No. 5-96 and Section 108 (B)(2) of the NIRC, it is apparent that the requirement that the services must be consumed abroad which, VAT Ruling No. 040-98 imposes, is not mandated therein in order that the services be zero-rated. VAT Ruling No. 040-98 does not only expand the language of the NIRC but also Rev. Regs. No. 5-96, the regulations interpreting the NIRC. In fact, it imposes a higher standard of care or stricter requirement than that imposed by the NIRC as it improperly extended the operative effect or enlarged the policy of the Tax Code, the governing statute. Therefore, petitioner's reliance on VAT Ruling No. 040-98 which was rendered by the Commissioner of Internal Revenue is unwarranted since said ruling went beyond the sphere of interpretation and into that of legislation. In fine, there was an attempt to exercise legislative powers on the part of the Commissioner that has not been delegated to him. It is an elementary rule that administrative rules and regulations to be valid must not be in conflict with the law which, it seeks to implement. In the case of Cebu Oxygen and Acetylene Co., Inc. vs. Drilon, 6 the Supreme Court held that administrative rules and regulations must be confined to details for regulating the mode of proceeding to carry into effect the law as it has been enacted. The rule-making power can not be extended to amending or extending the statutory requirements or to embrace matters not covered by the statute or beyond its terms and provisions. Interpretative rulings of quasi-judicial bodies or administrative agencies must always be in perfect harmony with statutes and should be for the sole purpose of carrying their general provisions into effect. By such interpretative or administrative rulings, of course, the scope of the law itself can not be limited. Indeed, a quasi-judicial body or an administrative agency for that matter can not amend an act of Congress. Hence, in case of discrepancy between the basic law and an interpretative or administrative ruling, the basic law prevails. 7 Corollarily, while the Commissioner's interpretation of Section 108 (B)(2) of the Tax Code, as contained in his VAT Ruling 040-98, is entitled to great weight, the same is not judicially binding since it is contrary to law, i.e. the NIRC. Moreover, granting arguendo that said ruling is valid, the same can not be given retroactive effect since it would be harsh and oppressive to the respondent, who had relied on VAT Ruling No. 080-89 which clearly recognized respondent's services as zero-rated. Well-settled is the rule that rulings, circulars, and rules and regulations promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply would be prejudicial to taxpayers. 8 In fact, Section 246 of the NIRC, provides, to wit: "Sec. 246. Non-Retroactivity of Rulings. Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers, except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. In the case under consideration, the prejudice that would result to the respondent is beyond question for it would be deprived of the substantial amount of P3,352,406.59 representing the latter's excess input VAT paid for the year 1997. In so far as the enumerated exceptions are concerned, we find respondent not falling under any of them. Accordingly, petitioner's asseveration that the respondent could not dwell on VAT Ruling No. 080-89 dated April 13, 1989 stating that respondent's service income is zero-rated effective January 1, 1988, deserves scant consideration. It is undisputed that respondent's services remained the same and is not affected by the amendments introduced by Revenue Regulations No. 5-96, hence, VAT Ruling No. 080-89 still applies. Granting arguendo that VAT Ruling No. 080-89 is no longer applicable to the transactions involved in the case at bar, the records reveal that respondent's services are still subject to zero percent (0%) rate pursuant to Section 108 (B)(2) of the National Internal Revenue Code. As correctly found by the Court of Tax Appeals, the respondent presented a VAT Registration Certificate showing its registration as a VAT entity and was able to show that it renders services to AMEX-HK by facilitating the collection of AMEX receivables from card members situated in the Philippines and payment to service establishments in the Philippines, which services fall under Section 108 (B)(2) of the 1997 Tax Code. Respondent likewise submitted various telex advices and demand deposit statements to prove that its service fees totaling P80,122,668.95 (per verification by the commissioned auditing firm, Punongbayan & Araullo) were paid for in acceptable foreign currency (US $) inwardly remitted to the Philippines and accounted for in accordance with BSP rules and regulations. Certainly, the services performed by the respondent in the Philippines and paid for in US dollars and accounted for in accordance with the rules and regulations of the BSP, fall under Section 108 (B)(2) of the NIRC and Section 4.102-2 (b)(2) of Revenue Regulations No. 7-95, as amended by Rev. Regs. No. 5-96. In view of the foregoing, the revenues of respondent from the sales of services amounting to P80,122,668.95 undoubtedly qualify as zero-rated. Necessarily, respondent is not liable to pay output tax on such sales of services and therefore could claim a tax credit/refund of the input VAT it paid on the purchases of services which are directly attributable to such zero-rated sales in accordance with Section 4.102-2 of Rev. Regs. No. 7-95, in relation to Section 110(B) and 112(A) of the NIRC, which are heretoquoted as follows: "Sec. 4.102-2. Zero-Rating . (a) In general . A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. " (Emphasis ours) "SEC. 110. Tax Credits . (B) Excess Output or Input Tax . If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112. " (Emphasis ours) "SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-rated or effectively Zero-rated Sales . Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales , except transitional input tax, to the extent that such input tax has not been applied against output tax ; Provided, however, That in the case of zero-rated sales under Section 106 (A)(2)(a)(1), (2) and (B) and Section 108 (B)(1)and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) ; Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid can not be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." (Emphasis ours) One final point. Factual findings of the Court of Tax Appeals are generally not disturbed on appeal when supported by substantial evidence and in the absence of gross error or grave abuse of discretion. 9 As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, 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, unless there has been an abuse or improvident exercise of authority. 10 In view of the foregoing disquisition, we find no plausible reason to reverse the findings of the Court of Tax Appeals. WHEREFORE, premises considered, the petition is hereby DISMISSED for lack of merit. The assailed decision of the Court of Tax Appeals is AFFIRMED in toto. SO ORDERED. Jacinto and Bello, Jr . , JJ . , concur. Footnotes 1. Annex "A", p. 21 Rollo 2. pp. 1-6 of Annex "A", pp. 21-27, Rollo 3. p. 35, ibid 4. p. 15, Rollo 5. p. 14, Rollo 6. 176 SCRA 24, 29; also UST v. Board of Tax Appeals , 93 Phil 376 7. Sunga v. Comelec , 288 SCRA 76, 87 8. Comm. Of Internal Revenue v. Telefunken Semi-Conductor Phils., Inc ., 249 SCRA 401, 407; ABS-CBN v. CTA , 108 SCRA 142, 148 9. CIR v. B.F. Goodrich Phils., Inc ., 303 SCRA 546, 552 10. CIR v. CA , 303 SCRA 614, 621