Commissioner of Internal Revenue v. KSS Philippines

SPECIAL FIRST DIVISION [CA-G.R. SP No. 66720. March 19, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .KSS PHILIPPINES , respondent . D E C I S I O N REYES , B. , J p : By way of a petition for review under Rule 43 of the Rules of Court, the Commissioner of Internal Revenue assails the decision of the Court of Tax Appeals dated August 20, 2001 which granted herein respondent's claim for tax refund in the amount of P18,551,282.40 representing the alleged unutilized input VAT paid on domestic purchases of goods and services for the period covering February 1, 1997 to December 31, 1997. Respondent KSS Philippines, Inc. is a duly organized domestic corporation engaged in the manufacture and sale of surface mounted device quartz crystals used for computers, videotape recorders, television sets and other telecommunications equipment. It conducts business at its principal office at the New Cebu Township One, Special Economic Zone, Brgy. Cantao-an, Naga, Cebu. Said respondent company is registered with the Philippine Export Processing Zone Authority as evidenced by PEZA Certificate of Registration No. 97-016 issued on February 20, 1999. It is likewise a VAT registered entity as borne by a Registration Certificate with Control No. 97-083-000614-V. On April 6, 1999, respondent company filed with the petitioner BIR Commissioner a claim for refund of VAT input taxes in the amount of P18,552,093.33 for the period between February 1, 1997 to December 31, 1997. However, no action on the claim for refund has been taken by the Commissioner of Internal Revenue. Inasmuch as the two (2) year prescriptive period set forth under the Tax Code was about to expire without any decision being rendered by the said Commissioner, the respondent company was prodded to elevate the matter to the Court of Tax Appeals in accordance with the provisions of Sec. 4.106-2(c) of Revenue Regulation No. 7-95. In due course, the Tax Court rendered its decision. The dispositive portion of the said judgment reads as follows: "WHEREFORE, in view of the foregoing, Petitioner's claim for refund is hereby GRANTED. Respondent is ORDERED to REFUND in favor of petitioner the sum of P18,551,282.40, representing unutilized input VAT for the period February 1, 1997 to December 31, 1997. SO ORDERED." In doubt of the propriety of the refund, the Commissioner of Internal Revenue interposed the present appeal. The petitioner, in praying for the reversal of the assailed judgment, rests on the strength of the following imputation of errors: I RESPONDENT COMPANY, 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 7716. II SINCE RESPONDENT COMPANY IS EXEMPT FROM VALUE ADDED TAX, 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. SETAcC III TAX REFUNDS BEING IN THE NATURE OF TAX EXEMPTIONS ARE CONSTRUED STRICTISSIMI JURIS AGAINST CLAIMANTS. For purposes of facility, the issues assigned above shall be condensed into a single query: Is respondent KSS Philippines, Inc. entitled to a tax refund in the amount of P18,551,282.40 as alleged unutilized input VAT payments for the period commencing February 1, 1997 to December 31, 1997? The answer, We hold, is in the affirmative. The petitioner BIR Commissioner postulates that the respondent company is not legally entitled to the refund being claimed inasmuch as it is registered with the Philippine Economic Zone Authority (PEZA) as an ecozone enterprise. As such, its business is purportedly not subject to VAT by virtue of Sec. 24 of RA No. 7916, to wit: "Sec. 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 ..." Sec. 103 of the Tax Code is similarly invoked by the petitioner BIR Commissioner, viz: "Sec. 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 Nos. 66 ..." The petitioner theorizes that transactions of ECOZONES or PEZA-registered establishments, being exempt from internal revenue taxes under Sec. 24 of RA No. 7916, fall under the phrase "transactions which are exempt under special laws". Hence, they are supposedly exempt from VAT in conformity with the aforequoted provisos. The BIR Commissioner further asseverates that inasmuch as respondent corporation is exempt from VAT, it is not allowed any refund on VAT input taxes paid on its purchases of goods alleged to be attributable to its zero-rated sales. We find such posturing to be amiss. A circumspect reading of the very provision alluded to by the BIR Commissioner elicits a conclusion antithetical to his claim. While Sec. 103 of the Tax Code specifically excepted from the coverage of VAT transactions which are exempted under special laws, those transactions made under Pres. Decree No. 66, among others, are deemed excluded and fall outside the umbrage of the said exemption. Proceeding from the undisputed fact that the respondent company is registered as an ecozone under the provisions of Pres. Decree No. 66, it would be safe to surmise that the latter is not covered by the exemption enumerated under the invoked provision. Corollarily, under Sec. 23 of RA 7916 (Special Economic Zone of 1995), there are two categories of tax and fiscal incentive regimes under which an ecozone may fall under: SEC. 23. Fiscal Incentives . Business establishments operating within the ECOZONES 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 under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987. As may be clearly deduced from foregoing provision, PEZA registered enterprises may chose between: a) the benefit embodied under Section 24 of the PEZA Law whereby they are required to remit 5% of their gross income in lieu of payment of all local or national taxes, including VAT; b) the benefit of an income tax holiday under which they shall be exempt only from income tax pursuant to Arts. 121 and 76(b), Book VI of EO 226 which states as follows: Art. 76. Incentives to Registered Enterprises . All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment: xxx xxx xxx (b) Income Tax Holiday . For eight (8) years from commercial operation for pioneer firms and for five (5) years from commercial operation for non-pioneer firms, new registered firms shall be fully exempt from income tax levied by the National Government. Art. 121. Additional Incentives . A zone registered enterprise shall also enjoy all the incentive benefits provided in Article 75 and 76 hereof under the same terms and conditions stated therein. As evidence would readily establish, the respondent company's application as a Special Ecozone Export Enterprise has been duly approved by the PEZA. Pursuant to such approval, a Registration Agreement was entered into between the PEZA and the said corporation. Under Art. 1.1 of the said Registration Agreement, the applicable rights and incentives granted by Book VI of the Omnibus Investments Code of 1987 apply in favor of the respondent company. As such, it is entitled to an income tax holiday for four years from the start of its commercial operations. Accordingly, they are exempted from payment of income taxes only. Art. 1.1 of the Registration Agreement provides: 1.1 The applicable rights and privileges and incentives granted by Book VI of the Omnibus Investments Code of 1987 and Republic Act No. 7916 and its Implementing Rules and Regulations to ECOZONE Export Enterprise at the regular ECOZONES shall equally apply and benefit the REGISTRANT operating under this Special ECOZONE. Respondent's submission is bolstered by the certification issued by the PEZA Deputy Director General for Operations dated August 1, 2000 that the respondent company was under an income tax holiday regime during the period from February 1, 1997 to December 31, 1997. The foregoing certification thusly recites: "This is to certify further that the available incentives to (Respondent) KPI under its Registration Agreement with PEZA are the following: 1. Incentives under Book VI of EO 226 which include the following: a. Corporate income tax holiday (ITH) for four (4) years for original project effective on the date of start of commercial operation, or the actual date of start of commercial operations, whichever is earlier. xxx xxx xxx." It must be stressed that an ecozone cannot avail of the two sets of fiscal incentives at the same time. Logically, being under an income tax holiday regime from February 1, 1997 to December 31, 1997, the respondent corporation could not possibly be under the special 5% tax regime available to PEZA-registered enterprises. It was therefore only exempt from the payment of income tax but was nevertheless covered by and remained subject to other national internal revenue taxes, including the Value Added Tax. As a VAT registered person, respondent company's export sales for the subject period were zero-rated pursuant to Sec. 100(a)(2)(A) of the National Internal Revenue Code of 1993, which states: "Sec. 100. Value-added tax on sale of goods or properties. xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to 0%: A. Export sales ..." In fine, conclusions arrived at by the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, are accorded respect, unless there has been an abuse or improvident exercise of its authority. Apropos, absent a showing of misapprehension of facts and/or misappraisal of evidence, We are behooved to sustain the findings of the said Tax Court (Commissioner of Internal Revenue vs. Court of Appeals, 298 SCRA 83). DCHaTc The respondent's entitlement to the refund having been clearly established, We shall do away with the last ascribed error. Verily, although tax exemptions are, as a general proposition, construed in strictissimi juris against the taxpayer, it does not mean that every application for tax refund, even by a deserving claimant, should be unjustly denied. WHEREFORE, in view of the discussions that prescind, the assailed decision rendered by the Court of Tax Appeals is hereby AFFIRMED IN TOTO. SO ORDERED. Barrios and De Guia-Salvador, JJ . , concur.