Mirant Navotas Corp. v. Commissioner of Internal Revenue

SEVENTH DIVISION [CA-G.R. SP No. 66453. January 30, 2004.] MIRANT NAVOTAS CORPORATION (formerly: Southern Energy Navotas, Inc.) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N TIJAM , J p : This is a Petition for Review assailing the Court of Tax Appeals' Decision 1 dated May 4, 2001 in C.T.A. Case No. 5814 denying petitioner's claim for refund of unutilized creditable input value added tax in the amount of P194,906.48 for the first quarter of 1997, and the said Court's Resolution 2 dated August 9, 2001 denying petitioner's Motion for Reconsideration. The facts are as follows: Petitioner is a domestic corporation engaged in the business of power generation and the subsequent sale thereof. It is registered with the Bureau of Internal Revenue (BIR) as a value-added taxpayer in accordance with Section 107 of the National Internal Revenue Code (NIRC). 3 On March 1, 1996, it filed with the BIR Revenue District Office No. 51 of Pasay City an Application for Effective Zero Rating 4 for its services of construction and operation of a gas turbine power station under the build-operate-transfer (BOT) scheme with the National Power Corporation (NPC), which was not acted upon by the BIR. For the taxable quarter ending March 31, 1997, petitioner filed with the BIR, within the legally prescribed period, its value-added tax (VAT) return 5 reflecting an input tax amounting to P194,906.48 and domestic purchases of goods and services amounting to P1,949,064.47. On March 30, 1999, petitioner filed with respondent a claim for the refund of its input VAT of P194,906.48. In support thereof, petitioner alleged that its sale of power generation services to NPC is zero-rated for VAT purposes; that the said input VAT were directly attributable to its effectively zero-rated sales to NPC; and that the said input VAT were undiminished by any output VAT during the period covered. Respondent, however, did not act upon the said claim for refund, prompting petitioner to file a Petition for Review with the Court of Tax Appeals on April 16, 1999. On May 4, 2001, the Court of Tax Appeals rendered the assailed Decision denying the claim for refund for petitioner's failure to adduce in evidence its approved application for effective zero-rating as required under Section 8(d) of Revenue Regulations No. 5-87 which provides: "(d) Application for zero rate . Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 and 102 shall file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero-rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shall remain valid until revoked." According to the Tax Court, failure to get from respondent an approval for a zero-rating classification will make the sale of services an exempt transaction under paragraph (u) of Article 103 of the NIRC, and exemption under Section 9 of Revenue Regulations No. 5-87 means "Section 9. Exemptions . (a) In general. An exemption means that the sale of goods or services is not subject to value added tax (output tax). The seller is not allowed any tax credit on VAT (input tax) previously paid. " (Emphasis supplied.) The Court of Tax Appeals further said that petitioner should have filed a petition for mandamus to secure respondent's much needed approval of its application for effective zero rating. Said court was of the impression that petitioner did not make an effort to follow up its application. Petitioner, thus, filed a Motion for Reconsideration 6 which was denied in the Tax Court's Resolution dated August 9, 2001. Hence, the instant petition. At the core of this petition is the following issue: Whether or not the Court of Tax Appeals erred in denying petitioner's claim for refund on the sole ground that petitioner failed to obtain an approved application for effective zero-rating from the BIR . Petitioner argues that the refund is proper because: (i) pursuant to Republic Act No . 6395 and the Supreme Court's ruling in Maceda vs. Macaraig 7 , NPC is exempt from the payment of all forms of taxes, hence, the power generation services rendered to it by petitioner is effectively zero-rated under Section 108 of the NIRC which provides that services rendered to persons or entities exempt under special laws are effectively subject to 0%; (ii) the requirement of an approved application for effective zero-rating for a transaction to be subject to 0% is not found in the Tax Code, hence, Section 8(d) of Revenue Regulations No. 5-87 is a clear case of administrative legislation; (iv) petitioner's clear and substantive right to a refund must prevail over the requirement of an approved application for effective zero-rating which is a mere technicality imposed by the BIR; and (v) substantial justice, equity and fair play dictate that petitioner should not suffer the consequences of BIR's inaction on its application for effective zero-rating. Respondent counters that: (i) respondent has the power to promulgate rules for the effective enforcement of the Tax Code; (ii) Revenue Regulations No . 5-87 has the force and effect of law; (iii) the Tax Court has upheld the validity the Section 8(d) of the said Revenue Regulations in Kumagai-gami Co., Ltd. vs. CIR, CTA (Case No. 4670; July 29, 1997) . We find merit in the petition. Section 108 of the Tax Code in part provides: "Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . xxx xxx xxx (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 (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate ; xxx xxx xxx (Emphasis supplied.) Under Section 13 of Republic Act No. 6395 8 , the NPC is exempt from the payment of all forms of taxes, thus: "Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and other Charges by Government and Governmental Instrumentalities . The Corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby declared tax exempt : (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other governmental agencies and instrumentalities, on all petroleum products used by the Corporation in the generation transmission, utilization, and sale of electric power. The NPC's exemption from all taxes was upheld by the Supreme Court in the case of Maceda vs. Macaraig 9 , thus: "The use of the phrase 'all forms' of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC 'shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion.' . . . It is evident from the provisions of PD No. 938 that its purpose to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6395 and P.D. 380 if it is to attain its goals ." (Emphasis supplied) In a Resolution subsequently promulgated in the same case, 10 the Supreme Court maintained NPC's exemption from all taxes, saying: "One common theme in all these laws is that the NPC must be enabled to pay its indebtedness which, as of P.D. 938, was P12 Billion in total domestic indebtedness, at any one time, and US$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved ." (Emphasis supplied.) Likewise, the Department of Finance has issued on January 28, 1998, a Memorandum addressed to respondent, affirming NPC's exemption from all taxes, thus: "In view of the foregoing and using the power of review granted to the Secretary of Finance under Section 4 of Republic Act No. 8424, the DOF upholds the ruling of the Supreme Court that the NPC is exempt under its charter and subsequent laws from all direct and indirect taxes on its purchases of petroleum products and electricity. Thus, the purchases of NPC of electricity from independent power producers are subject to VAT at zero-rate ." (Emphasis supplied.) 11 Finally, in its VAT ruling No. 052-99 dated May 13, 1999, the BIR ruled that the sale of electricity to NPC "is subject to the zero percent (0%) VAT, pursuant to Section 108(B)(3) of the National Internal Revenue Code of 1997." 12 It is, thus, evident, that petitioner's sale of power generation services to NPC is effectively zero-rated. Section 112 of the Tax Code provides that a VAT-registered person may apply for a tax credit certificate or refund of creditable input taxes attributable to its effectively zero-rated sales, thus: "Sec. 112. Refunds or Tax Credits of Input Tax . (A) Zero-rated or Effectively Zero-rated Sales . Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." Petitioner's failure to adduce in evidence an approved application for effective zero-rating, should not prevent it from applying or claiming for a tax refund of its input taxes attributable to its effectively zero-rated sales. Petitioner filed its application for effective zero rating as early as March 1, 1996. However, the same was not acted upon by the BIR. Clearly, therefore, petitioner's failure to obtain and present in evidence before the Tax Court an approved application for effective zero-rating was on account of the BIR's inaction or undue delay. Justice requires that petitioner should not suffer the consequences if respondent's neglect and omission. Thus, this Court, in Mirant (Navotas II) Corporation vs. CIR 13 , citing Our previous ruling in CIR vs.Mirant Navotas Corporation 14 , held: "We agree with the Court of Tax Appeals that the inaction of the Revenue District Officer of RDO No. 51 of Pasay City, regarding respondent's application for zero-rating, should not prejudice the latter. After all, it appears that respondent has submitted the documents for approval of the registration. It is then the function and obligation of the Revenue District Officer to assess the documents with deliberate dispatch and accordingly deny or grant the application. However, more than six (6) years had already lapsed and the application remains unacted upon. No explanation whatsoever was given by petitioner for such unreasonable delay. To deny the Respondent Corporation's claim for refund solely on the ground that its application for effective zero-rating has yet to be approved by the Revenue District Officer is to sanction such indolence and neglect on the part of the said public officer. Had it been promptly processed and passed within the said administrative level, the present controversy would have been resolved earlier ." This Court, in the same Mirant (Navotas II) Corp. vs. CIR 15 case, further declared: "Still and all, this Court resolves to grant petitioner Mirant its refund. Just as the government is entitled to expect taxpayers to pay their taxes promptly, taxpayers are similarly entitled to expect that the government, through the BIR, shall also act promptly and expeditiously on their pending applications or papers. Respondent CIR's inaction or undue delay in approving petitioner Mirant's application cannot prejudice the latter's right to earned input VAT to which it is already entitled having already complied with the requirements set forth by law." In fact, the Tax Court has already reversed itself on this issue. Thus, in the parallel cases of Mirant (Navotas II) Corporation vs. CIR 16 [2001], Mirant (Phil.) Mobile Corporation vs. CIR 17 (2002], and Mirant Pagbilao Corporation vs. CIR 18 [2003], the Court of Tax Appeals held that the failure of respondent to act on a pending application for effective zero-rating should not be the sole basis for denying the claim for refund. According to the Tax Court, if respondent had a valid ground to disapprove the application, he would have done so swiftly instead of "sitting on" the application for an indeterminable length of time to the detriment of the taxpayer's right. It bears stressing, however, that the requirement of an approved application for effective zero-rating under Revenue Regulations No. 5-87 is not an improper exercise of the rule-making power of the Secretary of Finance. In the aforesaid Mirant (Navotas II) Corp. vs. CIR 19 case, this Court had the occasion to rule: ". . . Requiring VAT-registered entities to first apply for zero-rating is needed to ensure that only those which are qualified should be entitled to refund their input VAT . Given their complexity and their ability to confuse even the experts, this Court cannot leave the interpretation of Our tax laws, i.e. , on who is entitled to zero-rating and who is not, entirely to the taxpayer. Thus, in this case the taxpayer, petitioner Mirant, cannot alone determine for itself if it is a zero-rated entity, no matter how accurate that determination might be. It must still secure the approval or recognition of the government that it is in fact, a zero-rated entity ." (Emphasis supplied.) Nonetheless, because of respondent's unreasonable delay in resolving petitioner's application for zero-rating, petitioner's claim for input tax refund attributable to its effectively zero-rated sales to NPC should still be given due course. ISaTCD However, We find that this case should be remanded to the Court of Tax Appeals to determine whether or not petitioner's claim for tax refund in the amount of P194,906.48 has been substantiated by invoices, receipts and other relevant evidence which are not extant in the records of this Court. WHEREFORE, the petition is PARTIALLY GRANTED. The assailed Decision of the Court of Tax Appeals dated May 4, 2001 and its Resolution dated August 9, 2001 are hereby REVERSED AND SET ASIDE. The case is REMANDED to the Court of Tax Appeals to determine whether or not petitioner's claim for tax refund is supported by evidence, and if so, to order the refund or the issuance of the appropriate tax credit certificate in favor of the petitioner. SO ORDERED. Reyes and Cruz, JJ . , concur. Footnotes 1. Rollo , pp. 1218. 2. Rollo , pp. 1920. 3. Rollo , p. 63. 4. Rollo , p. 64 5. Rollo , p. 65. 6. Rollo , pp. 110123. 7. 223 SCRA 21 (1993). 8. An Act Revising the Charter of the National Power Corporation effective September 10, 1971. 9. 197 SCRA 771, 798799 (1991). 10. 223 SCRA 217, 239 (1993). 11. Rollo , p. 30. 12. Rollo , p. 30. 13. CA-G.R. SP No. 64811, October 9, 2002 Penned by Justice Remedios A. Salvador-Fernando. 14. CA-G.R. SP No. 69114, June 27, 2002 Penned by Justice Martin S. Villanueva, Jr. 15. Supra , Note 13. 16. C.T.A. Case No. 5911; December 12, 2001. 17. C.T.A. Case Nos. 5935 & 5969; January 15, 2002. 18. CTA Case No. 6133; March 18, 2003. 19. Supra , Note 13.