Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.

FOURTH DIVISION [CA-G.R. SP No. 66341. April 16, 2002.] THE COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. , respondent . D E C I S I O N ABESAMIS , J p : At bar is a petition for review of the decision dated August 08, 2001 of the Court of Tax Appeals in CTA Case No. 5982 , entitled: "Burmeister and Wain Scandinavian Contractor Mindanao, Inc. vs. Commissioner of Internal Revenue", granting respondent's claim for issuance of tax credit certificate in the amount of P6,994,659.67, representing the alleged erroneously paid output VAT for the calendar year 1996. The facts, as summarized in the assailed decision, are as follows: "(Respondent) is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines . . . "It is represented that a foreign Consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd. and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of the latter's two (2) power barger. The Consortium appointed BWSC-Denmark as its coordination manager. "BWSC-Denmark established (herein respondent), Burmeister and Wain Scandinavian Contractor Mindanao, Inc. which subcontracted the actual operation and maintenance of NAPOCOR's two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines. "The NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen and Peso). The freely convertible non-Peso component is deposited directly in the Consortium's bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special designed bank account in the Philippines. On the other hand, the Consortium pays respondent in foreign currency inwardly remitted to the Philippines through the banking system. "In order to ascertain the tax implications of the above transactions, (respondents) sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if (respondent) chooses to register as a VAT person and the consideration for its services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate. "(Respondent) chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in favor of the (respondent) by the Revenue District Office No. 113 of Davao City. "For the year 1996, (respondent) seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14 . . . "On December 29, 1997, (respondent) availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provider in part, thus: 'Sections 4.102-2 (b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows: 'Sections 4.102-2(b)(2) Services other than processing, manufacturing or repacking for other person doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP."' "In conformance with the aforecited Revenue Regulations, (respondent) subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, (respondent) filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIR's collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows: Amount subject to 10% VAT P103,558,338.11 Multiply by 10% VAT Output Tax P10,355,833.81 Less: 1996 Input VAT 3,361,174.14 VAT Output Tax Payable P6,994,659.67 =========== "On January 7, 1999, (respondent) was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 "Insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%). "On the strength of the aforementioned rulings, (respondent) on April 22, 1999, filed a claim for the issuance of a tax credit certificate with the Revenue District No. 113 of the BIR. Respondent believed that is erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR." 1 On December 27, 1999, respondent filed a petition for review before the Court of Tax Appeals (CTA) in order to toll the running of the two-year prescriptive period. On August 8, 2001, CTA rendered its decision, 2 the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, the Petition for Review is hereby GRANTED. Respondent is ORDERED to ISSUE a TAX CREDIT CERTIFICATE in the amount P6,994,659.67 in favor of Petitioner. "SO ORDERED." Aggrieved by the said decision, herein petitioner Commissioner of Internal Revenue interposed this instant petition for review. The main issue posed before us, is whether or not the payments for the services of the respondent will qualify as zero-rated and consequently, entitled to the issuance of a tax credit certificate. The petition is bereft of merit. Petitioner's contention that the Court of Tax Appeals (CTA) erred in holding that the respondent's sale of services to the consortium is subject to VAT at zero rate percent pursuant to Section 108(B)(2) of the Tax Code and that said services of respondent to the Consortium are not similar to the services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 as subject to VAT at zero rate does not hold water. The basic law under which respondent claims zero rating privileges is Section 108(B)(2) of the Tax Code, thus: "(B) Transactions Subject to Zero Percent (0%) Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to zero rate: (1) Processing, manufacturing, or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. (2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with rules and regulations of the Bangko Sentral ng Pilipinas." Indisputably, the BIR through its ruling has confirmed that herein respondent is subject to VAT at zero-rate. In BIR Ruling No. 023-95 3 dated February 14, 1995, it opined that: "BWSC-Mindanao, being a duly registered corporation engaged in trade or business in the Philippines is subject to ordinary Philippine corporate income tax. Its gross receipts from the services it renders to the Consortium shall, however, be subject to VAT even if it fails to register as a VAT taxpayer. On the other hand, if it chooses to register as such, and the consideration for such services is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to zero-rate." EHSIcT Based on the aforementioned opinion of the BIR itself, this Court cannot accede to petitioner's asseverations that since the services of herein respondent are not destined to be consumed abroad, they are not of the same class or of the same nature as project studies, information services, engineering and architectural designs and other similar services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 as subject to zero-rated VAT and as such, they cannot legally qualify for zero-rated VAT but are subject to the regular VAT rate of 10%. In reply to herein respondent's request for confirmation, the BIR, VAT Review Committee in its ruling dated January 7, 1999 4 declared that: "In reply, please be informed that since BWSCMI's services comprise the actual operation and maintenance of the two power barges under contract to NAPOCOR, its services are effectively connected with the sale of electricity to NAPOCOR. In a memorandum-ruling of the Secretary of Finance dated January 26, 1998, it was held that the purchase of NAPOCOR of electricity from independent power producers are subject to VAT at zero-rate. Otherwise, the VAT may simply be passed on by the seller of electricity to NAPOCOR which in turn will result into a corresponding increase in the rate of electricity it charges to the customers. "Accordingly, the Peso component of the fees which NAPOCOR pays to the Consortium and which will be used to pay for the service of BWSCMI is subject to VAT at zero rate in accordance with the above ruling. On this basis, BIR Ruling No. 023-95 dated February 14, 1995 is reconfirmed insofar as it held that the services being rendered by BWSCMI is subject to zero percent (0%) VAT." Unstoppable in its quest to subject herein respondent to 10% VAT, petitioner strongly invokes the VAT Ruling No. 040-98 dated November 23, 1998 stating in part that in order for the project studies, information services, engineering and agricultural designs (here, the petitioner emphasizes that respondent's services are included herein) to enjoy the VAT zero-rating privilege, they must likewise be destined to be consumed abroad. We beg to differ. Perusal of the aforementioned Ruling No. 040-98 , shows that there are two kinds of transactions or services which are subject to VAT zero-rate, to wit: 1. Services other than repacking goods for other persons doing business outside the Philippines of goods which are subsequently exported; and 2. Services by a resident to a non-resident foreign client, each as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. 5 Petitioner stressed that respondent's services are embraced in the second classification and that in order for said services to enjoy the VAT zero-rating privilege, the same should be consumed abroad. However, the provisions itself does not expressly state or even imply that such services must be consumed abroad in order to qualify for VAT zero-rating. Only the first classification is required by the provision to be consumed abroad in order to be taxed at zero rate. In lieu of the absence of such express or implied stipulation in the statute, the second classification need not be consumed abroad. Thus, the second classification is now only left with three requirements that are expressly contained in the tax provision before its amendment, and they are: 1. That the payment of the service fees must be in acceptable foreign currency; 2. Inward remittance of the foreign currency into the Philippines; and 3. The inward remittance is accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. With reference to the first and second requirements, respondent was able to comply since records of this case reveal that the Sub-Contract fees were billed to BWSC-Denmark, being the Consortium coordinator, as shown by the respondent's sales invoices and this fact was admitted by the VAT Review Committee. This Court further rules there was indeed a foreign currency inward remittance to the respondent for its sale of services under the Sub-Contract Agreement. With regard to the last requirement, this Court agrees with the respondent that the sub-contract fees in foreign currency were inwardly remitted and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas since it is evidenced by the bank credit memos/certifications from the Bank of the Philippine Islands and Hongkong and Shanghai Bank. Be that as it may, and assuming that petitioner's interpretation of Section 4.102-2(b)(2) , as enunciated in VAT Review Committee Ruling 040-98 should prevail against an express CTA decision, respondent is still entitled to VAT zero-rating. This is because Section 4.102-2(b)(2) is void being an amendment to the Tax Code. It is a basic principle in administrative law that administrative regulations should merely provide the details for implementing the law . In the case of United BF Homeowner's Association v. Home Insurance and Guaranty Corporation, 6 the Supreme Court ruled that: "The power to promulgate rules in the implementation of a statute is necessarily limited to what is provided for in the legislative enactment. Its terms must be followed for an administrative agency can not amend an act of Congress. The rule making power must be confined to details regulating the mode or proceedings to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute". In the instant case, however, petitioner went beyond merely providing the implementing details. Petitioner went so far as to add an additional requirement to zero-rating. Section 108(B)(2) of the NIRC , as amended by the Comprehensive Tax Reform Act of 1997 . The section states: "(b) Transactions subject to Zero Percent (0%) rate. The following services performed in the Philippines by VAT registered persons shall be subject to zero percent (0%) rate: "xxx xxx xxx "(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas." On the other hand, Section 4.102-2(b)(2) of Revenue Regulations 5-96 provides: "Section 4.102-2(b)(2) Services other than processing, manufacturing and repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services and engineering and architectural designs and other similar services, the consideration for which is paid for in accordance with the rules and regulations of the BSP". It can be easily seen that Section 108(B)(2) of the Tax Code does not provide, in any manner, any other requisite other than the two mentioned. It does not provide that services must be " destined for consumption abroad " in order to be VAT zero-rated. Section 108(B)(2) of the Tax Code is clear. In order for services which were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules and regulations of the BSP . A cursory reading of Section 4.102-2(b)(2) would reveal, however, that these go far beyond merely providing details to carry into effect Section 108(B)(2) of the Tax Code . This is indicated by the additional phrase " as well as services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services ". In effect, this phrase adds not just one (1) but two (2) requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in nature of project studies, information services, etc. Thus, if petitioner would be sustained, we would have an incongruous situation. A taxpayer may have satisfied the requirements of the basic law for zero-rating, but fails to satisfy either of the two (2) additional requirements imposed in the administrative regulations. Clearly this situation cannot be allowed. Petitioner argues that according to VAT Ruling No. 040-98, our VAT law in general follows the destination principle, ( i.e., exports exempt, imports taxable). In effect, petitioner would have this Court believe that even if the additional requirements contained in Section 4.102-2(b)(2) are not found anywhere in Section 108(B)(2), then these may still be justified, as all VAT laws adhere to the destination principle. 7 Firstly, it is undeniable that the additional requisites in Section 4.102-2(b)(2) are not based on the basic law. Even if the petitioner sets forth an underlying principle, however laudable, it is basic that in case of doubt, the terms of the statute will be controlling. In other words, if the "destination principle" cannot be found in the express terms of Section 108(B)(2) , then it should not be applied here. In the case of Nasipit Lumber Company v. National Wages and Productivity Commission, 8 the Supreme Court held that: ". . . The law cannot be broadened by a mere administrative issuance. It is axiomatic that an administrative agency cannot amend an act of Congress." Moreover, if indeed the "destination principle" underlies and is the basis of the VAT laws, then petitioner's proper remedy would be to recommend an amendment of Section 108(B)(2) to Congress . In the absence of such amendatory law, however, petitioner is bound to apply the terms of the basic law. Petitioner can not resort, as it has done in the instant case, to administrative legislation . 9 WHEREFORE, the Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. The decision of the Court of Tax Appeals is AFFIRMED in toto . SO ORDERED. Verzola and Tria Tirona, JJ . , concur. Footnotes 1. pp. 22-25, Rollo . 2. p. 30, Rollo . 3. Annex "A", p. 117, Rollo . 4. Annex "B", pp. 120-121, Ibid . 5. Annex "D", p. 100, Ibid. 6. United BF Homeowner's Association v. Home Insurance and Guaranty Corporation, G.R. No. 124873, July 14, 1999. 7. p. 10. Petition for Review, Rollo. 8. Nasipit Lumber Company v. National Wages and Productivity Commission, 289 SCRA 667; 9. Toledo v. Civil Service Commission, 202 SCRA 507.