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

SPECIAL FIRST DIVISION [CA-G.R. SP No. 66092. July 21, 2006.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HITACHI COMPUTER PRODUCTS (ASIA) CORP. , respondent . [CA-G.R. SP No. 67262. July 21, 2006.] HITACHI COMPUTER PRODUCTS (ASIA) CORP. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE. , respondent . D E C I S I O N REYES, R.T ., P.J p : THE consolidated cases involve petitions 1 separately filed by the Commissioner of Internal Revenue (the Commissioner) and Hitachi Computer Products (Asia) Corp. (Hitachi) that seek the review of the Decision 2 of the Court of Tax Appeals (CTA) ordering a refund or the issuance of a tax credit certificate but disallowing the entire claimed amount for excess input Value-Added Taxes (VAT). The Antecedents The CTA summarized the factual antecedents of this controversy as follows: "Petitioner is a domestic corporation organized and existing under the laws of the Republic of the Philippines, with principal office at Special Export Processing Zone, Laguna Technopark, Bian, Laguna. It is engaged in the business of manufacturing, exporting, buying, selling or otherwise dealing in at wholesale electric, electronic and software products and industrial properties, including but not limited to hard disk drive and component parts, and supplies used or employed in or related to the manufacture of such products (Exhibit K). According to Petitioner, its manufactured products are sold 100% to export market. "On May 11, 1994, the Export Processing Zone Authority (EPZA) duly registered Petitioner as an Export Enterprise at the Special Export Processing Zone declared for the purpose at Laguna Technopark, pursuant to the provisions of Presidential Decree No. 66, as amended, and was issued Certificate of Registration No. 94-28. It was also registered as a value-added tax taxpayer on June 28, 1994 and was issued a certificate of registration bearing RDO Control No. 94-570-00028 (Exhibit A). "On October 7, 1994, the EPZA passed Board Resolution No. 94-212 (Exhibit L) approving the application of Petitioner for pioneer status of its small-sized, high density hard disk drive and thin film magnetic head manufacturing facility. The said resolution likewise granted a six (6) year income tax holiday to Petitioner subject to all applicable procedural guidelines under EPZA General Circular No. 90-001. "On October 25, 1996, Petitioner filed with the Bureau of Internal Revenue (BIR) its 1996 third quarterly VAT return (Exhibit C). The said return, however, was subsequently amended on October 25, 1999 (Exhibit M), showing total input VAT payments from July 1, 1996 to September 30, 1996 in the amount of P3,736,075.92. The payments were allegedly made on its domestic purchases of services totalling P37,360,759.20. "On September 28, 1998, Petitioner filed with the Tax and Revenue group of the One-Stop-Shop Inter-Agency Tax and Credit Duty Drawback Center of the Department of Finance, an Application for Tax Credit/Refund of Value-Added Tax Paid from July 1, 1996 to September 30, 1996 in the amount of P3,736,075.92. (Exhibit D) "As the application for refund was not immediately acted upon and toll the running of the two-year prescriptive period under Section 230 of the Tax Code, Petitioner elevated its claim before this Court on September 30,1998." STcaDI "In his Answer filed on November 4, 1998, Respondent claimed by way of Special Affirmative Defenses that: '4. Granting without admitting that petitioner filed a claim for refund, the same is subject to investigation by the Bureau of Internal Revenue. 5. Petitioner miserably failed do demonstrate that the tax subject of the case at bar was erroneously or illegally collected. 6. Taxes paid and collected are presumed to have been paid in accordance with law and regulation, hence, not refundable. 7. In an action for refund/credit, the taxpayer has the burden of showing that the taxes paid are erroneously collected and that failure to meet such a burden is fatal to his cause, as such claim for refund is strictly construed against the claimant. ( Citibank N.A. Philippine Branch vs. The Commissioner of Internal Revenue , CTA Case No. 4258, April 1, 1994). 8. The burden of proof lies upon the taxpayer to establish its right to refund, and failure to adduce sufficient proof is fatal to the action for tax refund/credit. 9. It is incumbent upon the petitioner to show that it has complied with the provision of section 229 of the Tax Code, as amended. 10. Claims for refund are construed strictly against the claimants and cannot be allowed unless proven explicitly and categorically. (Caltex (Phil.) Inc. vs. Com. of Internal Revenue, CTA CASE NO. 2871, January 29, 1986). The taxpayer has the burden of proof to show that it is entitled to the refund of the amount claimed as refundable because taxes are presumed to have been collected in accordance with laws and regulations. 3 Hitachi's claim for refund of the amount of P3,736,075.92 is based on Section 106(A)(2)(a)(1), in relation to Section 112(A) of the National Internal Revenue Code of 1997, granting zero-rated importers of goods the privilege to apply for a refund or tax credit of its unutilized input VAT payments. 4 On July 24, 2001, the CTA rendered judgment finding Hitachi's claimed refund meritorious. However, the claimed amount of P3,736,075.92 was not refunded in full. Deductions were made from this amount. The findings of the independent certified public accountant and the CTA showed that P482,529.81 was disallowed. An amount of P637,044.33 was also deducted on the finding that 19.58% of the allowable input VAT lacked any export document substantiating the fact of exportation. 5 We quote the CTA computation in this regard: "AMOUNT CLAIMED P3,736.075.92 Less: Disallowances (a) Per SGV's verification (Exh. J) P432,803.47 (b) Per Court's verification 49,726.34 P482,529.81 Allowable Input VAT P3,253,546.11 Less: Portion pertaining to export sales without export documents (P3,253,546.11 x 19.58%) 637,044.33 AMOUNT REFUNDABLE P2,616,501.78" The fallo of the CTA decision reads: "WHEREFORE, in the light of all the foregoing, Respondent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of P2,616,501.78 representing input value added tax paid by Petitioner on its domestic purchases of services for the period July 1, 1996 to September 30, 1996. 6 The CTA ratiocinated: aAHTDS "From the above, it is clear that a claimant is allowed to file a claim for refund or tax credit of its creditable input tax that can be directly attributed to its zero-rated sales. In the absence of a showing, therefore, that Petitioner's products were exported in its entire, then Petitioner's claim must correspondingly be reduced. "For the period July 1, 1996 to September 30, 1996, Petitioner allegedly paid input VAT in the amount of P3,736,075.92 arising from its domestic purchases of services. On the other hand, in its amended Quarterly Value-Added Tax Return for the 3rd quarter of 1996 (Exhibit M), Petitioner declared zero-rated sales amounting to P1,707,608,326.80. Petitioner showed proofs of the inward remittances representing payments of export sales such as certifications from Rizal Commercial Banking Corporation (RCBC) and Pilipinas Bank (Exhibits H-8, R-2 & R-3) and Petitioner's passbook from RCBC (Exhibits H-5 to H-7). However, when verified by the independent CPA, only the total amount of P1,373,232,468.22 was supported by export documents such Export Sales Invoices, Export Declarations and Airway Bills (Exhibits Q-1 to Q-392, Addendum Report of SGV-Exhibit P) The amount of P334,375,894.58 was not properly documented. "In the case of Commissioner of Internal Revenue vs. Philippine Bobbin Corporation , CA-G.R. SP NO. 59452 promulgated on February 19, 2001, the Court of Appeals denied the claim for refund of Philippine Bobbin because of its failure to submit export documents and We quote: xxx xxx xxx "We find the above decision applicable to the case at bar since the export sales amounting to P334,375,894.58 or 19.58% of the total export sales of P1,707,608,362.80 lack export documents such as airway bills and export declarations. Since 19.58% of the alleged total export sales declared by petitioner lack the necessary export documents, it follows then that 19.58% of the allowable input VAT of Petitioner should be disallowed for the said portion cannot be said to be directly attributable to Petitioner's zero-rated export sales. "With reference to the second issue, Petitioner substantiated its claim by submitting various VAT invoices and official receipts (Exhibits I-1 to 1-226). But again, the special audit conducted by the independent CPA resulted in the disallowance of the amount of P432,803.47 because they were not properly substantiated for VAT purposes (Exhibit J-Report of SGV dated September 17, 1999). And further verification by this Court of the various invoices and official receipts also resulted to additional disallowance of the input VAT for the following reasons: xxx xxx xxx "Finally, anent the third issue, although Petitioner carried forward to the succeeding taxable quarter the unutilized creditable value-added tax inputs for the period July 1, 1996 to September 30, 1996 as shown in the quarterly VAT return for the 4th quarter of taxable year 1996) (Exhibit N), the amount was also deducted from the total available input tax under any VAT Refund/TCC Claimed (Exhibit N-3). Hence, the amount being claimed was not applied against any output VAT." 7 The Commissioner elevated this decision to Us via a petition for review on August 29, 2001. On the other hand, Hitachi moved for partial reconsideration but its motion was denied in a Resolution dated September 26, 2001. 8 It later filed its own petition for review before this Court. Issues The Commissioner cites the following grounds in its petition "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 R.A. NO. 7716. cHCSDa "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." 9 For its part, Hitachi anchors its petition. on the following grounds: "I. PETITIONER'S ZERO-RATED EXPORT SALES ARE FULLY SUBSTANTIATED BY EVIDENCE. "II. THERE IS NO LEGAL BASIS FOR THE DEDUCTION FROM THE PETITIONER'S ALLOWABLE CLAIM FOR REFUND AN AMOUNT REPRESENTING THE PERCENTAGE OF THE PETITIONER'S TOTAL EXPORT SALES NOT SUPPORTED BY EXPORT DOCUMENTS." 10 The foregoing grounds translate into the following issues: 1. Whether or not Hitachi may apply for a tax refund. 2. Whether or not Hitachi is fully entitled to its claimed refund. Our Ruling Both petitions lack merit. Hitachi Can Apply For A Tax Refund In its petition, the Commissioner argues that Hitachi, being a PEZA-registered enterprise, is exempt from paying national and local taxes, including the VAT under R.A. 7916 or "The Special Economic Zone Act". Instead of paying these taxes, a PEZA-registered enterprise pays a 5% tax on its gross income. Because of its status as such, Hitachi is not allowed any tax credit on its VAT input tax previously paid pursuant to Section 4.103-1 of Revenue Regulation No. 7-95, which provides that the VAT-exempt seller "is not allowed any tax credit on VAT (input tax) previously paid". 11 We find no merit in this argument. The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers. 12 That a PEZA-registered enterprise like Hitachi is VAT-exempt does not necessarily mean that it cannot claim any tax credit on its input taxes. The VAT input tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered person on the importation of goods or local purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person. 13 The right to obtain a tax credit on unutilized input tax even by a VAT-exempt enterprise has been made clear in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) : 14 "Business companies registered in and operating from the Special Economic Zone in Naga, Cebu like herein respondent are entities exempt from all internal revenue taxes and the implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempt transactions has little significance, because the net result is that the taxpayer is not liable for the VAT . Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such refund or credit ." The reason behind the right of a PEZA-registered enterprise to seek a tax credit on VAT-input taxes despite its exempt status is well explained in Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils) : 15 "It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities. In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this Court already made such distinction 'An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VAT-exempt or not of the party to the transaction . . . 'An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT. . . ' "Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon . "Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under Presidential Decree No. 66 are not . Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended, under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended ." ECISAD Here, there is evidence showing that Hitachi had paid VAT input taxes arising from its domestic purchase of services. Note must be taken that while Hitachi is VAT-exempt, the transactions that it entered into were not so exempt. It is liable for paying VAT. However, it cannot shift the burden of paying the VAT by including the cost of paying it in the purchase price of its goods for exportation. In the cited Seagate Technology (Philippines) case, the Supreme Court held: "If respondent enters into such sales transactions with a purchaser usually in a foreign country for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent, unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated. "Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory. This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority ." To give substance to the VAT-exempt status of PEZA-registered enterprises like Hitachi, the VAT input taxes they have paid may be refunded in cash or in the form of a tax credit certificate under 106(A)(2)(a)(i) of the National Internal Revenue Code. Under this provision, Hitachi may apply for a tax refund. Barred from passing VAT output tax, it is entitled to claim a tax credit/refund for its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales. 16 To repeat, the VAT is a tax imposed on consumption , not on business. Although Hitachi as an entity is exempt, the transactions it entered into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited. 17 Thus, the contention by the Commissioner that Hitachi is not entitled to a refund or the issuance of a tax credit lacks any basis. Hitachi Is Not Entitled Wholly To Its Claimed Refund Of P3,736,075.92 Although We find that Hitachi is entitled to a refund, it is not, however, entitled to its entire claim of P3,736,075.92. Arguing against the deductions made by the CTA, Hitachi maintains that the exportation of its products has been fully substantiated by evidence. 18 It also adds that the reduction lacks any legal basis. 19 In the scheme of things, a tax refund amounts to tax exemption. To be sure, statutes that grant tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. 20 Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims; and of showing, by words too plain to be mistaken, that the legislature intended to exempt them. 21 Laboring under this tremendous evidentiary burden, Hitachi should have presented proof of the fact of export as to the entire amount of its claim. We quote the CTA at this juncture: "For the period July 1, 1996 to September 30, 1996, Petitioner allegedly paid input VAT in the amount of P3,736,075.92 arising from its domestic purchases of services. On the other hand, in its amended Quarterly Value-Added Tax Return for the 3rd quarter of 1996 (Exhibit M), Petitioner declared zero-rated sales amounting to P1,707,608,326.80. Petitioner showed proofs of the inward remittances representing payments of export sales such as certifications from Rizal Commercial Banking Corporation (RCBC) and Pilipinas Bank (Exhibits H-8, R-2 & R-3) and Petitioner's passbook from RCBC (Exhibits H-5 to H-7). However, when verified by the independent CPA, only the total amount of P1,373,232,468.22 was supported by export documents such Export Sales Invoices, Export Declarations and Airway Bills (Exhibits Q-1 to Q-392, Addendum Report of SGV-Exhibit P). The amount of P334,375,894.58 was not properly documented ." 22 Hitachi failed to present any cogent reason to convince Us to disregard the findings of the CTA. It neither showed that the CTA disregarded or misappreciated any documentary evidence favorable to its position. aATHIE We leave the determination of the correct amount of the refund to the discretion of the CTA. A special tribunal, its factual findings deserve utmost respect and by reason of its knowledge and expertise in tax cases, it is in a better position to pass judgment on the contending claims. In the absence of palpable error or denial of due process, We refuse to disturb the figures that the CTA has arrived at. 23 WHEREFORE, the petitions are DENIED for lack of merit. SO ORDERED. WE CONCUR: De Guia-Salvador and Arevalo-Zenarosa, JJ., concur Footnotes * Vice J. Roxas per Office Order No. 172-06-RTR dated July 07, 2006. 1. Rollo , CA-G.R. SP No. 66092, p. 6; Rollo , CA-G.R. SP No. 67262, p. 35. 2. Dated July 24, 2001 in CTA Case No. 5676 penned by Presiding Judge Ernesto D. Acosta with Associate Judge Amancio Q. Saga, concurring, Rollo , CA-G.R. SP No. 66092, p. 18; Rollo , CA-G.R. SP No. 67262, p. 9. 3. Commissioner of Internal Revenue's Petition for Review, pp. 2-4; Rollo , pp. 7-10. 4. Rollo , p. 39. 5. Rollo , p. 19. 6. Rollo , C.A. SP No. 67262, p. 19. 7. Rollo , pp. 15-19. 8. Rollo ., p. 40. 9. Commissioner of Internal Revenue's Petition for Review, p. 5; Rollo , CA-G.R. SP No. 66092, p. 10. 10. Hitachi's Petition for Review, p. 7; Rollo , CA-G.R. SP No. 67262, p. 41. 11. Commissioner of Internal Revenue's Petition for Review, pp. 2-4; Rollo , CA-G.R. SP No. 66092, pp. 7-10. 12. ABAKADA Guro Party List vs. Hon. Executive Secretary , G.R. No. 168056. September 1, 2005. 13. Ibid. 14. G.R. No. 153866. February 11, 2005. 15. G.R. No. 150154. August 9, 2005. 16. Supra . Footnote No. 14. 17. Supra . Footnote No. 13. 18. Rollo , p. 41. 19. Ibid ., p. 44 20. Supra ., Footnote No. 13. 21. Supra. , Footnote No. 13. 22. Emphasis Supplied, Rollo , CA-G.R. SP No. 67262, p. 15. 23. Santos vs. Manalili , G.R. No. 157812. November 22, 2005.