Commissioner of Internal Revenue v. Seagate Technology (Philippines)

NINTH DIVISION [CA-G.R. SP No. 65797. September 5, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . SEAGATE TECHNOLOGY (PHILIPPINES) , respondent . D E C I S I O N GUARIA III , J p : Respondent Seagate Technology Philippines is a multinational corporation that opened an office in the Philippines to manufacture and export computer components. It was able to register with the Philippine Economic Zone Authority (PEZA) pursuant to RA No. 7916 as an ecozone export enterprise, and with the Bureau of Internal Revenue as a VAT 1 taxpayer. For the first quarter of 1998 2 , the company filed monthly VAT declarations and a quarterly VAT return which were amended in 1999 to show accumulated input taxes of P52,045,039.94 as of March 31, 1998. Out of this amount, the sum of P16,101,245.34 was claimed to be payment of input VAT on domestic purchases of capital goods for the aforesaid quarter. In October 1999, the company filed with the Bureau of Internal Revenue a written application for refund of VAT input taxes paid for six quarters from January 1998 to June 1999 inclusive of the P16,101,245.34 that is the subject of this petition. It grounded its claim on the fact that it did not commence commercial operations in the Philippines and had filed a notice of cessation of business with the PEZA in June 1999. When the BIR did not act on its application for refund, it filed a petition for review with the Court of Tax Appeals. This was done to toll the two-year prescriptive period under Section 230 of the Tax Code. After hearing, the court granted the petition and ordered the Commissioner of Internal Revenue to refund Seagate the sum of P16,101,245.34, based on this ratiocination: "We agree with the contention of Respondent 3 that if an entity is registered with PEZA as an ecozone enterprise and remitting 5% of its gross income to the national government, it is exempt from the payment of VAT. However, We do not agree that the aforequoted provisos are applicable to the case at bar. First, the records show that Petitioner 4 is a VAT registered entity with Certificate of Registration RDO Control No. 97-083-0000600-V issued by the Revenue District Office No. 83 of the Bureau of Internal Revenue. Therefore, contrary to Respondent's allegation, Petitioner is evidently subject to value-added tax. Second, section 103(q) of the Tax Code, as amended, specifically excepted, among others, transactions under Presidential Decree No. 66 (now RA 7916), from transactions which are exempt from the VAT under special laws. Hence Petitioner, being registered with the PEZA under the provisions of Presidential Decree No. 7916, 5 is not exempt from the payment of the value-added tax (see Resolution, Seagate Technology (Philippines) vs. Commissioner of Internal Revenue, CTA Case No. 5921, September 20, 2000). Third, Petitioner never remitted 5% final tax to the government because it was not able to commence its commercial operations in the Philippines. In sum, Petitioner is entitled to the refund of unutilized input taxes, in the amount of P16,101,245.34 which were all substantiated by VAT official receipts." The Commissioner appeals to Us now by way of a petition for Review under Rule 43 of the 1997 Rules of Civil Procedure. The following grounds are invoked for a reversal of this judgment: cDAISC "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 Republic Act No. 7916 in relation to Section 103 of the Tax Code, as amended by RA No. 7716. II. Since respondent's business is not subject to VAT, the Capital goods it purchased are considered not used in Vat taxable business, and, therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Sections 4.106-1 and 4.103-1 of Revenue Regulations No. 7-95." The lynchpin of the appeal of the Commissioner is the argument that (a) respondent Seagate is engaged in a business not subject to VAT, but (b) having registered as a VAT taxpayer, it becomes subject to VAT without right to a tax credit for input VAT. Rollo, at 13. The reasoning begins with Section 24 of RA No. 7916 which states that a business establishment operating within an ecozone will be exempt from all national and local taxes, but in lieu of such taxes, it shall remit to the government 5 percent of the gross income earned by it. Section 109 of the Tax Code 6 is said to provide in turn that "transactions which are exempt under special laws" shall be exempt from VAT, thereby excluding Seagate from VAT since it operates as an ecozone enterprise under a special law. Rollo, at 12. Having recognized that the respondent was engaged in a non-VAT taxable business, the Commissioner contends that it was error for Seagate to register as a VAT taxpayer, and the fact that it did so would not entitle it to any tax credit for input VAT. This is because the last paragraph of Section 109 states that a person who issues a VAT invoice or receipt, even if he is not subject to VAT, will not enjoy the benefit of input tax credit . In the event of exempt operations, Section 4.106-1 and 4.103-1 of Revenue Regulations No. 7-95 allow only refund of the input tax to a ratable portion corresponding to the VAT taxable operation. Rollo, at 14-15. Seagate is considered totally exempt. The argument begs the question whether respondent enjoys a VAT-exempt status as an ecozone enterprise. For purpose of elucidation, We quote Section 103 in its amended form as follows: "Section 103. The following shall be exempt from the value-added tax: xxx xxx xxx (q) transactions which are exempt under special laws, except those granted under Presidential Decree No. 66, 529, 972, 1491 and 1596, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory." The Court of Tax Appeals was willing to agree that Seagate is exempt from VAT if, being registered with the PEZA, it remits the required 5 percent final tax pursuant to RA No. 7916, which carries over the exemptions contained in PD No 66. Rollo, at 25. But, as it has noted, the respondent did not have the occasion to pay this final tax simply because it had never commenced operation in the Philippines. Despite the peculiar craftmanship of Section 103(q), it should be clear that what are not VAT-exempt transactions are those which are exempt from taxes under PD No. 66, now RA No. 7916. The Commissioner has apparently glossed over the phrase except those granted under Presidential Decree No. 66 , which refers to tax-exempt transactions not covered by the exemption from VAT. The exclusion of an ecozone enterprise from VAT exemption is consistent with the intent of RA No. 7716 to widen the tax base of VAT, Tolentino vs. Secretary of Finance 249 SCRA 628, at 651. It is, therefore, evident that the enjoyment by Seagate of a tax-exempt status under RA No. 7916, whether it remits the 5 percent tax or not, does not exclude it from the coverage of VAT. If it does not fall within the coverage of RA No. 7916, with more reason is it subject to VAT. The Court of Tax Appeals was correct in one of its reasons for holding in favor of the respondent. We refer to its observation, earlier quoted, that under the amendment to Section 103(q), meaning RA No. 7716, transactions under PD No. 66, now RA No. 7916, are excepted from those which are exempt from VAT. It is only curious that the decision had to make a gratuitous concession to the Commissioner by saying, several lines earlier, that the respondent could be deemed exempt from VAT if it had remitted the 5 percent tax. With this needless opening, We have all been riders on a merry-go-round discussing an issue that at the outset should have been resolved by a simple application of RA No. 7716. Since the respondent is a VAT-registered entity which has paid input VAT on capital goods purchased by it, and has shown compliance with the other requirements of the law, it is entitled to the amount of refund claimed and found due to it by the Tax Court. IN VIEW OF THE FOREGOING, the petition is DISMISSED and the decision of the Court of Tax Appeals dated July 4, 2001 AFFIRMED. No pronouncement as to costs. SO ORDERED. aTEHIC Vasquez, Jr. and Reyes, Jr . , JJ . , concur. Footnotes 1. Value-added tax. 2. CTA decision, Rollo , at 21. 3. Commissioner of Internal Revenue. 4. Seagate Technology (Philippines). 5. Should be R.A. No. 7916. 6. Pursuant to the Tax Reform Act of 1997. This was previously Section 103 as amended by RA No. 7716.