Commissioner of Internal Revenue v. Sekisui Jushi Philippines

SPECIAL TWELFTH DIVISION [CA-G.R. SP. No. 64679. August 16, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . SEKISUI JUSHI PHILIPPINES , respondent . D E C I S I O N VILLARAMA , JR. ,, J p : This is a petition for review under Rule 43 of The 1997 Rules Of Civil Procedure , as amended, seeking the reversal of the Decision 1 dated April 26, 2001 of the Court of Tax Appeals in CTA Case No. 5751 entitled "SEKISUI JUSHI PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL REVENUE". Respondent is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office located at the Special Export Processing Zone, Laguna Technopark, Bian, Laguna. It is principally engaged in the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale such goods as strapping bands and other packaging materials and goods of similar nature, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products. 2 Having registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer, respondent filed its quarterly returns with the BIR, for the period January 1 to June 30, 1997, reflecting therein input taxes in the amount of P4,631,132.70 paid by it in connection with its domestic purchase of capital goods and services. Said input taxes remained unutilized since respondent has not engaged in any business activity or transaction for which it may be liable for output tax and for which said input taxes may be credited. On November 11, 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (CENTER-DOF) two (2) separate applications for tax credit/refund of VAT input taxes paid for the period January 1 to March 31, 1997 and April 1 to June 30, 1997, respectively. There being no action on its application for tax credit/refund under Section 112 (B) of the 1997 National Internal Revenue Code (Tax Code), as amended, private respondent filed, within the two (2)-year prescriptive period under Section 229 3 of said Code, a petition for review 4 with the Court of Tax Appeals on March 26, 1999. Petitioner filed its Answer 5 to the petition asseverating that: (1) said claim for tax credit/refund is subject to administrative routinary investigation by the BIR; (2) respondent miserably failed to show that the amount claimed as VAT input taxes were erroneously collected or that the same were properly documented; (3) taxes due and collected are presumed to have been made in accordance with law, hence, not refundable; (4) the burden of proof is on the taxpayer to establish his right to a refund in an action for tax refund. Failure to discharge such duty is fatal to his action; (5) respondent should show that it complied with the provisions of Section 204 in relation to Section 229 of the 1997 Tax Code ; and (6) claims for refund are strictly construed against the taxpayer as it partakes of the nature of a tax exemption. Hence, petitioner prayed for the denial of respondent's petition. On April 26, 2001, the Court of Tax Appeals rendered the assailed Decision, the dispositive portion of which reads: "WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. Respondent is hereby ordered to refund or to issue a Tax Credit Certificate in favor of the Petitioner in the amount of P4,377,102.26 representing excess input taxes paid for the period covering January 1 to June 30, 1997. "SO ORDERED." Hence, this Petition. Petitioner herein argues that respondent is not entitled to such tax credit/refund based on the following grounds: I Petitioner being registered with the PEZA as an Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section 24 of R.A. No. 7916 in relation to Section 109 of the 1997 Tax Code , as amended by R.A. 7716. II Since petitioner's business is not subject to VAT, the capital goods and services it purchased are considered not used in VAT taxable business, and therefore, it is not entitled to refund of input taxes paid on such capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and of input taxes paid on services pursuant to Section 4.103-1 of the same regulations. Considering the foregoing grounds, We limit the issue for resolution in this recourse as to whether or not respondent is entitled to a tax credit/refund of input taxes in the amount of P4,377,102.26 representing unutilized input taxes paid on its domestic purchase of capital goods and services in view of the fact that it is a duly registered Ecozone Export Enterprise. Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1995" provides: "SECTION 24. Exemption from Taxes Under the National Int ernal Revenue Co de . Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all business and enterprises within the ECOZONE shall be remitted to the national government. This five percent (5%) shall be shared and distributed as follows: (a) . . .; (b) . . .; and (c) . . ." Corollarily, Section 109, paragraph q of the 1997 Tax Code , as amended, provides: "SECTION 109. Exempt transactions . The following shall be exempt from the value-added tax: (q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Dec ree Nos. 6 6, 52 9 and 15 90;" From the foregoing provisions of law, petitioner posits that respondent is exempt from the coverage of the VAT law, and thus, its registration as a VAT taxpayer is erroneous. Consequently, respondent, being outside the coverage of the VAT law, cannot avail of a tax credit/refund under its provisions. However, petitioner failed or refused to comment on Section 23 of R.A. No. 7916 cited by the Court of Tax Appeals as basis for its ruling. Said section provides: "SECTION 23. Fiscal Incentives . Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Ord er No. 2 26, otherwise known as the Omnibus Investment Code of 1987. Furthermore, tax credits of exporters using local material as inputs shall enjoy the same benefits provided for in the Export Development Act of 1994." Thus, an Ecozone Export Enterprise is entitled to choose between two (2) fiscal incentives: (1) the 5% preferential tax rate based on the gross income earned, among others, under P.D. No. 66 which created the Export Processing Zone Authority and revised R.A. No. 5490. Under this regime, the ecozone export enterprise, after payment of the 5% preferential tax rate is exempt from payment of all national and local taxes (including VAT) except real property tax; and (2) income tax holiday from four (4) to six (6) years depending on whether the ecozone export enterprise is a pioneer firm or not, on top of other incentives under E.O. No. 226 or the Omnibus Investments Code . The ecozone export enterprise, in this case, is not exempt from payment of national and local taxes, except as otherwise specifically provided by law. Anent the VAT liability of such firms whether it be under the 5% preferential tax regime or under the income tax holiday regime, since the sale of goods or services by a registered domestic VAT taxpayer to an ecozone export enterprise is treated as an indirect export, the sale is subject to zero percent (0%) VAT pursuant to Section 106 (A) (2) (a) (5) of the 1997 Tax Code , as amended and Section 23 of R.A. No. 7916 in relation to Article 77 (2) of the Omnibus Investments Code . 7 The tax treatment is likewise the same insofar as sale of service is concerned under the cross border doctrine of the VAT system. 8 The difference lies in the refund of input taxes claimed by an ecozone export enterprise. If the film opted to avail of the incentives under the 5% preferential tax rate, it cannot apply for a refund or tax credit of input taxes paid to its domestic purchases of goods or service from a registered VAT taxpayer as the said sale is considered an export transaction which is zero-rated. Being a zero-rated transaction, the seller (domestic VAT registered firm) cannot charge the buyer, the ecozone export enterprise, VAT for its purchases as the latter is exempt from all national and local taxes. If the seller did charge the buyer (ecozone export enterprise), the latter still cannot claim said VAT payments (supposedly input tax) in an action for refund or tax credit as there is no provision of law allowing the same. However, We are of the view that the same may be claimed as deduction from the 5% preferential tax rate based on gross income earned as part of the cost of goods or service purchased by the ecozone export enterprise. Going now to the VAT liability of an ecozone export enterprise whose fiscal incentive is governed by the Omnibus Investments Code , VAT payments (input tax) on domestic purchases of goods or service may be charged by a VAT registered domestic firm for purchases made by the former. It should be recalled that under the income tax holiday regime, the ecozone export enterprise is not exempt from payment of national and local taxes, of which VAT is included. Hence, when the ecozone export enterprise was made to pay VAT (input tax) on its domestic purchases of goods and/or service, it has two (2) options to recoup the same: either offset its VAT payments with its output tax, if any, or apply for refund or issuance of tax credit certificate if it has no output tax within which to offset the same. In the present case, it was not disputed by petitioner that respondent availed of the income tax holiday regime under the Omnibus Investments Code . Furthermore, respondent was able to prove that being an export only enterprise, it has no output tax within which it could offset its paid input tax. Thus and so, the subject input tax paid for its domestic purchases of capital goods and service remained unutilized. This being the case, respondent could very well apply for refund or tax credit of the subject input tax upon compliance with the requisites for a refund/tax credit. At this juncture, it is well to point out that the Court of Tax Appeals found that respondent complied with the procedural and substantiation requirements in order for a claim for refund be favorably acted upon. The receipts, invoices and supporting papers relative to its claim were presented as evidence before said court; the subject input taxes were paid on capital goods; the same were not applied against any output tax liability; and that the claim and the petition was filed within the two (2)-year prescriptive period under Section 229 of the 1997 Tax Code, as amended. Indeed, it is a basic rule in taxation that factual findings of the Court of Tax Appeals, when supported by substantial evidence, will not be disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts. 9 There being no gross error committed by the Court of Tax Appeals in this case, We have no recourse but to sustain its findings. WHEREFORE, premises considered, the present petition for review is hereby DENIED DUE COURSE, and accordingly DISMISSED, for lack of merit. The Decision dated April 26, 2001 of the Court of Tax Appeals in CTA Case No. 5751 is hereby AFFIRMED and UPHELD. No pronouncement as to costs. SO ORDERED. Vasquez, Jr. and De Los Santos, JJ ., concur. Footnotes 1. Rollo , p. 21. 2. See Petition, Rollo , p. 10. 3. Previously Section 230 of the NIRC. 4. Rollo , p. 33. 5. Rollo , p. 45. 6. Previously Section 103 of the NIRC. 7. Section 3 of Revenue Memorandum Circular No. 74-99. 8. Ibid . 9. Commissioner of Internal Revenue vs. Court of Appeals, et al., 298 SCRA 83.