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

FOURTEENTH DIVISION [CA-G.R. SP No. 65995. 1 December 7, 2005.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HITACHI COMPUTER PRODUCTS (ASIA) CORP. , respondent . D E C I S I O N PERLAS-BERNABE, E ., J p : For the resolution of the Court is a Petition for Review seeking to reverse and set aside the Decision 2 of the Court of Tax Appeals (CTA) dated July 12, 2001 in CTA Case No. 5894 which decreed: "IN THE LIGHT OF ALL THE FOREGOING, Respondent is hereby ORDERED to REFUND in favor of herein Petitioner the amount of P2,145,22.1.09 representing the latter's excess/unutilized VAT input taxes for the period April 1, 1997 to June 10, 1997. No costs. "SO ORDERED." 3 The facts are undisputed. Respondent Hitachi Computer Products (Asia) Corp. (hereinafter Hitachi) is a domestic corporation with principal office at Special Export Processing Zone, Laguna Technopark, Bian, Laguna. It is registered with the Export Processing Zone Authority (EPZA) pursuant to the provisions of the Omnibus Investments Code of 1987 with Certificate of Registration No. 94-28 4 dated May 11, 1994. It is likewise registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) taxpayer with Certificate of Registration No. 94-570-000298 5 dated June 28, 1994. On July 21, 1997, Hitachi filed with the BIR its Quarterly VAT Return for the second quarter of 1997 showing an input VAT from domestic purchases of goods and services in the total amount of P3,293,828,72. The said return was amended on June 8, 1999 through an Amended Quarterly VAT Return 6 which declared a lower input VAT in the amount of P2,388,126.68. On November 8, 1999, Hitachi amended such return anew reflecting an input VAT in the amount of P2,388,126.68 and further declaring the amount of P1,790,445,543.26 as its total zero-rated sales for the same period. Meanwhile, on June 25, 1999, Hitachi filed an Application for Tax Credits/Refunds 7 of the above input VAT with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (OSS-DOF), the agency which takes care of processing claims for refund or tax credit of exporters in behalf of the Commissioner of Internal Revenue (hereinafter Commissioner). However, the revenue examiners therein representing the Commissioner failed to act on the claim within the two-year reglementary period. Thus, to prevent the claim from being barred, Hitachi filed on July 29, 1999 a petition for review before the CTA docketed as CTA Case No. 5894, praying for the refund or the issuance of tax credit certificate in its favor in the amount of P2,388,126.68. HTSIEa After due proceedings, the CTA issued the assailed Decision on July 12, 2001 granting Hitachi a lower refund of P2,145,221.09 representing excess/unutilized VAT input taxes for the period April 1, 1997 to June 30, 1997. Hence, the instant petition on the twin grounds that: "1. 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; and 2. 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" 8 The Commissioner contends that Hitachi, as a PEZA-registered enterprise, is exempt from national and local taxes, including VAT, under Section 24 of R.A. No. 7916, otherwise known as "The Special Economic Zone Act of 1995" 9 and then Section 103 (q) [ now 109(q)] of the National Internal Revenue Code (NIRC), 10 as amended by R.A. No. 7716. 11 Thus, it is not entitled to any refund or credit on input taxes previously paid as provided under Section 4.103-1 of Revenue Regulations No. 7-95 12 because it was engaged in non-VAT taxable business, notwithstanding its registration as a VAT taxpayer. Hitachi, on the other hand, counters that it is registered with the then EPZA ( now PEZA) under Presidential Decree (P.D.) No. 66, thus, it is not exempt from VAT under said Section 103(q) of the NIRC, as amended. It further contended that pursuant to Section 23 of R.A. No. 7916 which provided for alternative sets of fiscal incentives, it availed of the income tax holiday under Executive Order (E.O.) No. 226 for six years beginning October 7, 1994 which exempted it from the payment of income tax but not from the payment of other taxes such as VAT. Hence, according to Hitachi, its zero rated export sales are not exempt from VAT, entitling it to claim a refund or tax credit of its unutilized input VAT, contrary to petitioner's claim. Considering the submission of the parties and the evidence on record, the Court finds the petition bereft of merit . PEZA-registered enterprises are entitled to fiscal incentives under Section 23 of R.A. No. 7916 which provides: "SECTION 23. Fiscal Incentives . Business establishments operating within the ECOZONES 13 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 for under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987. "Furthermore, tax credits for exporters using local materials as inputs shall enjoy the same benefits provided for in the Export Development Act of 1994." (Emphasis Ours) Under the aforequoted provision of law, Hitachi had two options with respect to its tax burden. It could avail of tax exemptions on all taxes, including VAT under P.D. No. 66 14 and pay only the preferential tax rate of 5% under Rep. Act. No. 7916; or it could avail of an income tax holiday pursuant to the provisions of E.O. No. 226, 15 which exempts it from income taxes for a number of years but not from other internal revenue taxes such as VAT . 16 Records reveals that Hitachi availed of the income tax holiday regime under E.O. No. 226 which was similarly found by the CTA in the case of Hitachi Computer Products (Asia) Corp. vs. Commissioner of Internal Revenue , CTA Case No. 5651 dated February 2, 2001 cited in the assailed Decision. Moreover, in Commissioner of Internal Revenue vs. Hitachi Computer Products (Asia) Corp ., CA-G.R. SP. No. 65482 17 (a petition for review under Rule 43 of the CTA Decision in CTA Case No. 5707 granting Hitachi's claim for tax credit on VAT input tax paid for the last quarter of 1996), the Commissioner admitted that Hitachi availed of the income tax holiday regime under the Omnibus Investment Code. 18 Besides, the Commissioner failed to present evidence to support its claim that Hitachi availed of the 5% preferential tax rate which exempted it from national and local taxes including VAT. Its reliance on then Section 103(q) [ now 109(q)] of the NIRC which reads: "SEC. 103. Exempt Transactions . The following shall be exempt from the value-added tax: "xxx xxx xxx "(q) Transactions which are exempt under special laws, except those under Presidential Decree Nos. 66 , 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory; "xxx xxx xxx" (Emphasis Ours) negates its asseveration that Hitachi is exempt from VAT. Having been registered under P.D. No. 66, the latter's purchase transactions are not VAT-exempt and hence, covered by the VAT system. 19 In fine, Hitachi is engaged in taxable rather than exempt transactions. Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties or services. 20 Hitachi is an export enterprise with principal office at the Special Export Processing Zone within an ecozone. An ecozone indubitably a geographical territory of the Philippines is, however, regarded in law as foreign soil. 21 On the other hand, the national territory of the Philippines outside of the proclaimed borders of the ecozone shall be referred to as the Customs Territory. 22 Thus, sales to it, or conversely, purchases by it, even without actually being exported, shall in fact be viewed as constructively exported under Article 23, Chapter I, Title I, Book I of E.O. No. 226. Considered as export sales, such purchase transactions by Hitachi would indeed be subject to a zero rate pursuant to Section 106(A)(2)(a)(5) of the NIRC. 23 Under the value-added tax system, 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 purchase of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. 24 The CTA found that Hitachi is an export enterprise with both EPZA and VAT registrations, and which has availed of the income tax holiday under E.O. No. 226. Perforce, Hitachi is subject to VAT at 0% rate and is entitled to a refund or credit of its unutilized input taxes. It bears to stress that the Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject, unless there has been abuse or improvident exercise of authority. 25 Finding no cogent reason to deviate from this well-entrenched principle, the Court is not persuaded to overturn the assailed ruling. Finally, the Court noted that the entitlement of a VAT-registered PEZA enterprise to a refund or tax credit for input VAT had already been answered in the affirmative in the case of Commissioner of Internal Revenue vs. Cebu Toyo Corporation . 26 WHEREFORE, premises considered, the petition is hereby DISMISSED. The assailed Decision of the CTA dated July 12, 2001 in CTA Case No. 5894 is hereby AFFIRMED. SO ORDERED. Salazar-Fernando and Abdulwahid, JJ., concur. Footnotes 1. Part of the initial caseload assigned to the Ponente pursuant to Office Order No. 16-04-EV dated October 20, 2004. 2. Rollo , pp. 19-28. 3. Id . at 28. 4. Id . at 34. 5. Id . at 33. 6. Id . at 35. 7. Id . at 37. 8. Id . at 33. 9. SECTION 24. Exemption from Taxes Under the National Internal Revenue 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. . . . 10. NIRC of 1977. 11. SEC. 103. Exempt Transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (q) Transactions which are exempt under special laws, except those under Presidential Decree Nos. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory; xxx xxx xxx 12. SEC. 4.103-1. Exemptions. (A) In general. An exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt. 13. An ECOZONE or a Special Economic Zone has been described as "(s)elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following; industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers. (Part I, Rule I, Section 2 (f) of the Implementing Rules and Regulations of R.A. No. 7916, as amended. 14. SECTION 17. Tax Treatment of Merchandise in the Zone. (1) Except as otherwise provided in this Decree, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts and wares of every description, except those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such activity, shall not be subject to Customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding . (2) Merchandise purchased by a registered zone enterprise from the customs territory, if paid for in the United States dollar or in any convertible foreign currency and subsequently brought into the zone, shall be considered as exported, and the exporter hereof shall be entitled to the benefits allowed by law for such transaction. 15. ARTICLE 39. Incentives to Registered Enterprises. All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment; (a) Income Tax Holiday. (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. . . 16. Commissioner of Internal Revenue vs. Cebu Toyo Corporation , G.R. No. 149073, 16 February 2005. 17. Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices Conrado M. Vasquez, Jr. and Sergio L. Pestao, concurring. 18. Decision dated October 16, 2001 in CA-G.R. SP. No. 65482: Rollo , p. 92. 19. Commissioner of Internal Revenue vs. Seagate Technology (Phil.) , G.R. No. 153866, 11 February 2005. 20. Commissioner of Internal Revenue vs. Cebu Toyo Corporation , supra . 21. Commissioner of Internal Revenue vs. Seagate Technology (Phil.) , G.R. No. 153866, 11 February 2005. 22. Part I, Rule I, Section 2 (g) of the Implementing Rules and Regulations of R.A. No. 7916, as amended. 23. SECTION 106. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales . The term 'export sales' means: (5) Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws. 24. Commissioner of Internal Revenue vs. Cebu Toyo Corporation , supra . 25. Sca-Land Service, Inc. vs. Court of Appeals , 357 SCRA 441, 445-446. 26. G.R. No. 149073, 16 February 2005.