Commissioner of Internal Revenue v. Hitachi Computer Products (Asia) Corp.

TWELFTH DIVISION [CA.-G.R. SP No. 65482. October 16, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HITACHI COMPUTER PRODUCTS (ASIA) CORPORATION , respondent . D E C I S I O N VILLARAMA , JR. , J p : The central issue in this petition for review under Rule 43 of the 1997 Rules of Civil Procedure , as amended, is whether or not respondent, as an ecozone export enterprise, is entitled to a tax credit or refund of excess or unutilized input VAT on its purchase of goods and services. The facts of the case are simple: 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 hard disk drives, plain field head and other computer paraphernalia for export. Respondent registered with the Export Processing Zone Authority (EPZA) pursuant to the provisions of the Omnibus Investments Code of 1987 per Certificate of Registration No. 94-28 dated May 11, 1994. It was granted a pioneer status. Accordingly, it availed of a six (6)-year income tax holiday as evidenced by EPZA Certification of Board Resolution No. 94-212. In addition, it is registered with the Bureau of Internal Revenue as a value-added taxpayer on its sale of goods effective June 28, 1994 per Certificate of Registration No. 94-570-00298. Having registered with the Bureau of Internal Revenue (BIR) as a value-added tax (VAT) taxpayer, respondent filed its quarterly return with the BIR, for the period October 1, 1996 to December 31, 1996. It later filed an amended quarterly return for the same period reflecting therein alleged unapplied VAT input taxes in the amount of P3,137,535.45 paid by it in connection with its purchase of goods and services. On December 22, 1998, respondent filed with the One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (CENTER-DOF) an application for tax credit/refund of VAT input taxes paid for the period October 1, 1996 to December 31, 1996. There being no action on its application for tax credit/refund despite the recommendation of the said agency to the BIR, 1 under Section 112 (B) of the 1997 National Internal Revenue Code (Tax Code), as amended, respondent filed, within the two (2)-year prescriptive period under Section 229 2 of said Code, a petition for review 3 with the Court of Tax Appeals on December 29, 1998. Petitioner filed its Answer 4 to the petition asseverating that: (1) assuming without admitting that a claim for tax credit/refund was filed, said claim 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 or illegally collected; (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; (5) it is incumbent upon the respondent to show that it has complied with the provisions of Section 204, in relation to Section 229 of the Tax Code . Failure to discharge such duty is fatal to his action; and (6) claims for tax credit/refund are construed strictly against the taxpayer as this is in the nature of a tax exemption. Thus, it is looked upon with disfavor. Accordingly, petitioner prayed for the denial of respondent's petition. On June 20, 2001, the Court of Tax Appeals rendered a Decision 5 , the dispositive portion of which reads: "WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner in the amount of P2,195,573.54 representing excess creditable VAT input taxes paid for the period October 1, 1996 to December 31, 1996. "SO ORDERED." Hence, this petition. Petitioner herein argues that respondent is not entitled to such tax credit/refund based on the following grounds: I Respondent being registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section 24 of R.A. No. 7916. II Since respondent's business is exempt from VAT, it is not allowed any tax credit on VAT input tax previously paid pursuant to Section 4.103-1 of Revenue Regulations No. 7-95. 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 P2,195,573.54 representing excess or unutilized creditable VAT Input taxes paid for the period October 1, 1996 to December 31, 1996 paid on its purchase of 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 Nati onal Internal Reven ue Code . 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 businesses 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 Decree Nos. 6 6, 529 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 as it is covered by a special law and therefore, its sales are not zero-rated for VAT purposes. Consequently, respondent, being outside the coverage of the VAT law, it cannot avail of a tax credit/refund under its provisions. Significantly 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 Decr ee No. 6 6, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Or der No. 2 26, otherwise known as the Omnib us Investment Co de of 1987. Furthermore, tax credits for exporters using local material as inputs shall enjoy the same benefits provided for in the Export Development Act of 1994." Consequently, 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 . 6 The tax treatment is likewise the same insofar as sale of service is concerned under the cross border doctrine of the VAT system. 7 The difference lies in the refund of input taxes claimed by an ecozone export enterprise. If the firm 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, petitioner admitted 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, after verifying the documents submitted by respondent and those submitted by an independent certified public accountant (SGV) and thereafter disallowing claims that if found to have been not properly substantiated ruled that insofar as those accounts it found in order, 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. 8 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 June 20, 2001 of the Court of Tax Appeals in CTA Case No. 5707 is hereby AFFIRMED and UPHELD. No pronouncement as to costs. SO ORDERED. Vasquez, Jr. and Pestao, JJ . , concur. Footnotes 1. See Motion for Execution Pending Appeal annexed to Petitioner's Motion to Stay Judgment, Rollo , pp. 69, 75. 2. Previously Section 230 of the NIRC. 3. Rollo , p. 29. 4. Rollo , p. 38. 5. Rollo , p. 18. 6. Section 3 of Revenue Memorandum Circular No. 74-99. 7. Ibid. 8. Commissioner of Internal Revenue vs. Court of Appeals, et al., 298 SCRA 83.