Commissioner of Internal Revenue v. Contex Corp.

SPECIAL SIXTH DIVISION [CA-G.R. SP No. 62823. September 3, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CONTEX CORPORATION , respondent . D E C I S I O N COSICO , J p : Before Us is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure from the decision, dated October 13, 2000, of the Court of Tax Appeals in CTA Case No. 5895, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the sum of Php 683,061.90, representing erroneously paid input VAT. SO ORDERED." Claiming that the appealed decision is contrary to existing Revenue regulations, petitioner interposes this appeal. Case in point is a claim for refund by respondent corporation (Contex, for brevity) for alleged erroneous payment of input taxes. Contex, a domestic corporation duly organized and existing under the laws of the Republic of the Philippines and with office address located at #7 Argonaut Hi-way cor. Efficiency St., Bay Industrial Port, SBMA, is engaged in the business of manufacturing hospital textiles, garments and other hospital supplies. Contex's plant is located at the Subic Bay Industrial Port (SBIP) in Zambales and registered with the Subic Bay Metropolitan Authority as a Subic Bay Freeport Enterprise pursuant to the provisions of Republic Act No. 7227, otherwise known as "The Bases Conversion Act". Being an SBMA-registered manufacturing firm, Contex is exempt from all local and national internal revenues taxes for the 5% preferential tax (Exhs. D and E). Contex likewise is registered with the Bureau of Internal Revenue as a non-VAT taxpayer as shown by its Certificate of Registration RDO Control No. 95-180-000133 (Exh. F). For the period January 1, 1997 to December 31, 1998, Contex claimed that it purchased supplies and materials from local suppliers necessary in the conduct of its manufacturing business and paid the total amounts of Php 539,411.88 and Php 504,057.49 as input taxes for the year 1997 and 1998, respectively. Believing that it was granted exemption from all national and local taxes by RA 7227, including value-added tax, Contex filed two synonymous applications for tax credit/refund of value-added tax paid. The first letter of application, dated December 29, 1998, was filed with the office of Revenue District Officer, Mr. Edilberto Carlos of BIR Revenue District Office No. 19 which was denied. The second letter, seeking a refund of the lesser amount of Php 1,108,307.72, was coursed through the BIR Revenue Region No. 4 which was not acted upon by the Regional Director prompting respondent to file an appeal with the Court of Tax Appeals on June 29, 1999 in order to preserve its right to judicially claim the refund or credit of erroneously paid input VAT. Contex cited as legal basis Section 112(A) in relation to Section 106(A)(2) of the Tax Code, as amended, and Section 12(b) and (c) of RA 7227. In answer to Contex's claim for refund, petitioner raised the following arguments: a) Contex's alleged claim for refund is subject to administrative routinary investigation/examination by the respondent Bureau; b) In a claim for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund; c) Rudimentary is the rule that claims for refund must be construed in strictissimi juris against the taxpayer for they partake the nature of exemption from tax; and d) Contex failed to prove that it has complied with the governing rules with reference to tax refund, which are found in sections 204 and 229 of the Tax Code, as amended. After due consideration of the parties' respective arguments, the tax court ascertained the following issues for its consideration: a) Whether or not Contex is entitled to the claim for refund or tax credit of input VAT on supplies and materials pursuant to Section 112(A) of the Tax Code as amended; or in the alternative b) Whether or not Contex is exempt from the payment of value-added tax on its purchases of supplies and materials pursuant to the proviso of Sec. 12(b) and (c) of RA 7227; and c) Whether or not Contex was able to support with substantial evidence its entitlement to the claim for refund or tax credit. The tax court upheld Contex's claim for refund or tax credit for erroneously paid input taxes. It reasoned out, viz: "Petitioner avers that the imposition of input VAT on its purchases of supplies and materials is erroneous because under Sec. 12(b) of R A 72 27, the Subic Special Economic Zone enjoys the incentive in the form of tax and duty-free importations of raw materials. Furthermore, under Sec. 12(c) of R A 72 27, no taxes, local and national shall be imposed within the Subic Special Economic Zone. Petitioner, as a duly registered SBF enterprise operating within the Subic Bay Freeport Zone is entitled to the tax and duty-free incentive on its purchases of goods and is only subject to the 5% preferential tax. We agree with petitioner. Sec. 43(a) and (b) of the Ru les and Regula tions Implementing the Provisions Relative to the Subic Special Economic and Freeport Zone and the Subic Bay Metropolitan Authority under R A 72 27, otherwise known as the "Bases Conver sion and Development Ac t of 1992 (Rule, for brevity), provides: SEC. 43. Tax Exemption . SBF Enterprise shall be exempt from all national and local taxes, including but not limited to the following : a) Customs and import duties and national internal revenue taxes, such as VAT, excise and ad valorem taxes on foreign articles; b) Internal revenue taxes, such as VAT, ad valorem and excise taxes on their sales of goods and services for which they are directly liable. xxx xxx xxx In lieu of paying taxes, all SBF Enterprises shall pay a final tax of five percent (5%) of gross income earned in accordance to the breakdown specified and defined under Section 57 hereunder. It is clear from the above implementing Rule that an SBF enterprise shall be exempt from customs and import duties and national internal revenue taxes, such as VAT, excise and ad valorem taxes on foreign articles. Foreign article is defined under section 3(m) of the same Rule in this wise: (A)rticles of foreign origin on which duties and taxes have not been paid, or upon which drawback or bounty has been allowed, or which have not previously entered into customs territory; or articles which are the growth, product or manufacture of the Philippines on which not all national internal revenue taxes have been paid, if subject thereto, or upon which drawback or bounty has been allowed. (emphasis supplied) It is understood that all articles administered by an SBF enterprise from Customs territory is considered exported pursuant to Sec. 48 of the Rule, thus: Section 48. Article Administered into the SBF from Customs Territory. Article which are admitted to the SBF from the Customs Territory under proper permit shall be considered exported for purposes of the laws and regulations of the Philippines, and shall be considered to be zero-rated and thereby become eligible for drawback, relief from duties and taxes, and any other tax or duty benefit conferred by reason of exportation ; provided, that articles which are returned to the Customs Territory from the SBF shall be considered imported for the purposes of the laws and regulations of the Philippines. (emphasis supplied) We, therefore, reach a conclusion that petitioner is exempted from the payment of input VAT on its purchases of supplies and materials. However, only the supplies and materials used by petitioner as raw materials in manufacturing hospital textile and garments, and hospital supplies are exempt from input VAT pursuant to the aforequoted Section 12(b) of RA 72 27. This was elucidated in Sec. 4 of Revenue Regulations No. 1-9 5 issued by the Department of Finance, to wit: Section 4. Exemptions and Incentives . A. All SBMA registered enterprises doing business within the Secured Area in the Zone shall enjoy the following: a. Exemption from customs and import duties and national internal revenue taxes on importations of raw materials for manufacture into finished products and capital goods and equipment needed for their business operation within the Secured Area. Consumption items, however, must be consumed within the Secured Area. Removal of raw materials, capital goods, equipment and consumer items out of the Secured Area for sale to non-SBMA registered enterprises shall be subject to the usual taxes and duties, except as may be provided herein (emphasis supplied); Moreover, only the raw materials used by petitioner in the manufacture of the product and which are not taken from petitioner's premises in Subic Bay Freeport Zone are exempt from the input VAT. Furthermore, Sec. 229 of the T,span>ax Co de, as amended, provides that the recovery of erroneously paid national internal revenue tax must be instituted within two years from the date of payment of the tax. SEC. 229 Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding 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 filed 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 a written claim therefore, 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. (emphasis supplied) It is to be noted that the present judicial action was instituted by petitioner on June 29, 1999, for the recovery of erroneously paid input VAT for the period January 1, 1997 to December 31, 1998. Clearly, petitioner cannot claim the refund of input VAT paid prior to June 29, 1997 in reference to the dated of filing of this petition which was on June 29, 1999, because the same fell outside the two-year period prescribed by Section 299 of the T ax Co de. In sum, the Court deemed it proper to disallow input VAT claimed by petitioner which are already barred by prescription; or those which were imposed for maintenance, Xerox, office supplies, and freight charges which cannot be categorized as raw materials; and those supplies and materials which were delivered to Makati and Pasay offices as reflected in the pre-marked invoices and official receipts." Not satisfied, petitioner is now before Us on the following assignment of errors: I "PETITIONER BEING REGISTERED AS NON-VAT TAXPAYER, IT IS NOT ENTITLED TO REFUND OF INPUT TAXES PAID ON ITS PURCHASES OF CAPITAL GOODS PURSUANT TO SECTIONS 4.106-1 AND 4.103-1 OF REVENUE REGULAT IONS NO. 7-9 5. II PETITIONER BEING EXEMPT FROM VAT, IT CANNOT CLAIM FOR REFUND OR TAX CREDIT THE ALLEGED INPUT VAT PAID ON ITS PURCHASES OF CAPITAL GOODS, SINCE IT FORMS PART OF THE COST OF THE GOODS, SHIFTED TO IT BY THE SHELTER. The exemption of Contex from the payment of National Internal Revenue Taxes, as well as customs duties, is sourced from Section 12(b) and (c) of Republic Act 7227, viz: SEC. 12. Subic Special Economic Zones . . . . The above-mentioned zone shall be subject to the following policies: xxx xxx xxx (b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippines territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes , three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the national government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter. The Subic Bay Metropolitan Authority (SBMA), acting within the power granted to it by RA 7227, promulgated the following relevant Rules and Regulations in the implementation of RA 7227, viz: SEC. 43. Tax Exemption . SBF Enterprises shall be exempt from all national and local taxes, including but not limited to the following: a) Customs and import duties and national internal revenue taxes, such as VAT, excise and ad valorem taxes on foreign articles; b) Internal revenue taxes, such as VAT, ad valorem and excise taxes on their sales of goods and services for which they are directly liable; xxx xxx xxx In lieu of paying taxes, all SBF Enterprise shall pay a final tax of five percent (5%) of gross income earned in accordance to the breakdown specified and defined under Section 57 hereunder. Petitioner argues that Contex's exemption under RA 7227 is limited only to direct taxes and not to indirect taxes such as the input tax in VAT as the same is merely a burden passed on by a VAT registered person to its end-users. Petitioner adds that a VAT is the direct liability of the supplier and not respondent. The tax and duty-free importations of raw materials, capital and equipment by SBF-registered Enterprises are guaranteed by the provisions of Section 12 of RA 7227 and Section 43(a) of the Implementing Rules and Regulations. As to whether or not this exemption covers indirect taxes like the input tax in VAT is the bone of contention of the parties herein. Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them, while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else 1 . The value-added tax, which took the place of the former sales tax, belongs to the category of indirect taxes because the burden of paying the same may be passed on by the seller/manufacturer/importer to the buyers or end-users. Now, Section 12(b) of RA 7227 provides for the exemption from duties and taxes on the importation of raw materials, capitals and equipment by enterprises operating within the Subic Special Economic Zone. By specific provision of Section 43(a) of the Implementing Rules and Regulations, this exemption covers "customs and import duties and national internal revenue taxes, such as VAT, excise and ad valorem taxes on foreign articles". There is no dispute that the questioned raw materials qualify as foreign articles under Section 3(m) of the Rules and Regulations formulated by the SBMA, viz: (A)rticles of foreign origin on which duties and taxes have not been paid, or upon which drawback or bounty has been allowed, or which have not previously entered into customs territory; or articles which are the growth, product or manufacture of the Philippines on which not all national internal revenue taxes have been paid, if subject thereto, or upon which drawback or bounty has been allowed. (emphasis supplied) Being such and by virtue of a specific grant, these raw materials are exempt from "customs and import duties and national internal revenue taxes, such as VAT, excise and ad valorem taxes". This Vat-exemption, however, should be understood to cover only the VAT imposable under Section 107 of the National Internal Revenue Code, which is a direct liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods. This must be so because the exemption granted by the above-cited provisions of law relates to the act of importation and Section 107 of the Tax Code specifically imposes the value-added tax on importations. This interpretation of the law is in accord with the well-entrenched rule that tax exemption, being in derogation of sovereignty, must be strictly construed against the taxpayer 2 and, if granted, must be couched in a language too plain to be mistaken and too clear to be misinterpreted. If, indeed, the exemption of SBF Enterprises covers the value-added tax of the seller-exporter which may eventually be passed on by the latter to SBF Enterprises, as claimed by Contex, why then does Section 43(b) of the same Rules and Regulations qualifies the exemption of SBF Enterprises from internal revenue taxes such as VAT, ad valorem and excise taxes on their sales of goods and services as pertaining only to those which they may be directly liable? Evidently, the legislative intention here is to grant exemption only to direct taxes which an SBF Enterprise may be held liable in connection with their importation of raw materials, capital and equipment as well as in the sale of their goods and services. Besides, the VAT exemptions being claimed by Contex were not the direct liability of the latter but its suppliers/exporters and is not even considered a tax but merely an additional cost of the goods or services which Contex must bear in order to obtain the goods. 3 We are not, however, unfamiliar with the doctrine enunciated by the Supreme Court in the case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc. 4 and Maceda v. Macaraig 5 which upheld the claim for refund of indirect taxes paid by certain tax-exempt entities by way of additional costs of the goods purchased by them. These twin cases, however, find no application to the case at bar because the tax exemption of the World Health Organization (in the case of Gotamco ) and the National Power Corporation (in the case of Maceda ) covers both direct and indirect taxes by specific grant of the treaty (WHO) and NAPOCOR's charter. RA 7227 and its Implementing Rules and Regulations do not, by clear and unambiguous language, grant the same exemption to SBF Enterprises. Neither should We. WHEREFORE, premises considered, the appealed decision is hereby RESERVED AND SET ASIDE. Contex's claim for refund of erroneously paid taxes is DENIED accordingly. SO ORDERED. Barcelona and * Reyes, JJ . , concur . Footnotes 1. Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., 148 SCRA 36 (1987). 2. Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., 309 SCRA 87 (1999). 3. Philippine Acetylene Co. v. Commissioner of Internal Revenue, 20 SCRA (1967). 4. See Note 1. 5. 197 SCRA 771 (1991). * Per Office Order No. 12-01-AM dated August 21, 2001.