Commissioner of Internal Revenue v. Placer Dome Technical Services (Philippines), Inc.

FOURTH DIVISION [CA-G.R. SP No. 71458. June 30, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PLACER DOME TECHNICAL SERVICES (PHILIPPINES), INC. , respondent . D E C I S I O N TIJAM , J p : This is a Petition for Review of the Court of Tax Appeals' Decision 1 dated March 19, 2002 in C.T.A. Case No. 5685 which ordered petitioner to refund or issue a Tax Credit Certificate in respondent's favor in the amount of P17,178,373.12 representing respondent's unutilized input value-added tax (VAT) payments from September 23, 1996 to December 31, 1997, and its Resolution 2 dated June 20, 2002 which denied petitioner's Motion for Reconsideration . The facts are as follows: On March 24, 1996, mine tailings from the Taipan Pit started to escape through the Makulapnit Tunnel and Boac Rivers, resulting in the cessation of mining and milling operations at the San Antonio Mines in Marinduque owned by Marcopper Mining Corporation ("Marcopper"), and causing potential damage to said rivers and the immediate environment. To contain the damage and prevent further spread of the tailing leak, Placer Dome, Inc., as owner of 39.9% of Marcopper, through a subsidiary, undertook to perform the clean-up and rehabilitation of the Makalupnit and Boac Rivers ("the project"). Placer Dome, Inc. then engaged Placer Dome Technical Services Limited., a non-resident foreign corporation incorporated under the laws of British Columbia, Canada, with office at Vancouver, British Columbia, Canada ("PDTS-Vancouver") to carry out the project. PDTS-Vancouver, in. turn, engaged the services of respondent Placer Dome Technical Services (Philippines), Inc. ("respondent") to implement the project in the Philippines. Considering the potentially significant damage to the environment, the parties agreed to require respondent to immediately implement the project. Thus, in their Implementation Agreement 3 signed on November 15, 1996, respondent and PDTS-Vancouver stipulated that all implementation services rendered by respondent even prior to the signing thereof, shall be deemed to have been provided pursuant to said Implementation Agreement . Under the Implementation Agreement , all payments by PDTS-Vancouver to respondent would be in US Dollars and would cover all costs incurred by the latter in implementing the project, inclusive of the service fee equivalent to 1% of such costs. Respondent, a registered VAT taxpayer, duly filed its quarterly VAT returns for the last two quarters of 1996 and the four quarters of 1997, but simultaneously amended the same on August 10, 1998, declaring a total input VAT payment of P43,015,461.98 for the said quarters and P42,837,933.60 as its total excess input VAT. On September 11, 1998, respondent filed an administrative claim 4 for refund of its reported total input VAT payment for the said project in the amount of P43,015,461.98. In support thereof, respondent alleged that the revenues it derived from services rendered to PDTS-Vancouver qualify as zero-rated sales under Section 102(b)(2) [now 108(B)(2)] of the Tax Code, as amended because respondent was paid in foreign currency inwardly remitted to the Philippines. Thus, according to respondent, it is entitled to a refund of the input VAT payments directly attributable to such sales pursuant to Section 106(a) [now 112 (A)] of the Tax Code, as amended. Since petitioner had not yet acted upon the said claim for refund, respondent, to toll the running of the 2-year prescriptive period to appeal, filed a Petition for Reviews 5 with the Court of Tax Appeals, praying for the refund of the reported excess input VAT of P42,837,933.60. Answering 6 the Petition for Review , petitioner averred that respondent's claim for refund was subject to investigation by the Bureau of Internal Revenue; that taxes are presumed to have been collected in accordance with law; and that claims for refund are construed strictly against the claimants, the same being in the nature of tax exemption. On March 19, 2002, the Court of Tax Appeals rendered the assailed Decision ordering petitioner to refund or issue a tax credit certificate in favor of respondent in the reduced amount of P17,178,373.12 representing the unutilized. input VAT payments for the period beginning September 23, 1996 to December 31, 1997. According to the Tax Court, respondent's sale of services to PDTS-Vancouver constituted a zero-rated transaction under Section 102(b)(2) [now 108(B)(2)] of the Tax Code, as amended, inasmuch as these services were paid for in acceptable foreign currency which had been inwardly remitted to the Philippines in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas ("BSP"). However, the Tax Court found that out of the US$27,544,707.00 (or P758,216,698.36) paid by PDTS-Vancouver to respondent, only US$14,750,473.00 (or P396,413,652.14) was inwardly remitted and accounted for in accordance with the BSP rules and regulations. Thus, respondent's sale of services qualified for zero-rating only to the extent of US$14,750,473.00 (or P396,413,652.14). Accordingly, pursuant to Section 106(a) [now 112 (A)] of the Tax Code, as amended, respondent can claim a tax credit/refund of the input VAT it paid on domestic purchases of taxable goods or services directly attributable to such zero-rated sales. The Tax Court likewise found that of the reported total input VAT payments of P43,015,461.98, only P33,034,151.83 was properly supported by VAT invoices and/or official receipts. Moreover, the amount of P33,034,151.83 should further be reduced by P177,237.65 representing the output VAT on respondent's sales of surplus materials/equipment at the completion of the project and P15,678,541.06 representing respondent's input VAT on sales of services in the amount of P361,803,046.22 (P758,216,698.36 less P396,413,652.14) without the corresponding foreign currency remittances. Hence, only the resulting input VAT of P17,178,373.12 could be directly attributed to respondent's zero-rated sales of services, and be refunded. Petitioner filed a Motion for Reconsideration , 7 arguing that respondent's services are not zero-rated for VAT purposes because they are not similar to the zero-rated services mentioned in Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 as interpreted by VAT Ruling 040-98 dated November 23, 1998. Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 states: " Section 4.102-2(b)(2) . Services other than processing, manufacturing or 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, engineering and architectural designs and other similar services , the consideration for which is paid in acceptable currency and accounted for in accordance with the rules and regulations of the BSP." (Emphasis supplied.) while VAT Ruling No. 040-98, in pertinent part, provides: "Our VAT LAW, which was first adopted and promulgated under E.O. 273 effective January 1, 1988, basically adhered to the Consumption Type VAT Regime and, in general, follows the destination principle, viz : xxx xxx xxx Accordingly, the onus of taxation under our VAT system is in the country where goods, property or services are destined and consumed. This is the reason why under our VAT Law, goods, property or services destined to or consumed in the Philippines are subject to the 10% VAT whereas exports are zero-rated. (Sections 105 and 108, Tax Code of 1997) xxx xxx xxx The sales of services subject to zero percent (0%) VAT under Section 108 (B)(2) of the Tax Code of 1997, are limited to such sales which are destined for consumption outside of the Philippines in that such services are tacked-in as part of the cost of goods exported. The zero-rating also extends to project studies, information services, engineering and architectural designs and other similar services sold by a resident of the Philippines to a non-resident foreign client because these services are likewise destined to be consumed abroad . . ." (Emphasis supplied.) On the strength of the said ruling, petitioner argued that unlike the "project studies, information services, engineering and architectural designs" mentioned in Revenue Regulations No. 5-96, the technical services rendered by respondent to its non-resident foreign client were performed in the Philippines and were not destined to be consumed abroad. Thus, according to petitioner, the onus of taxation of the said services for VAT purposes is also within the Philippines. Accordingly, such services are not zero-rated but are subject to the regular 10% VAT. In a Resolution dated June 20, 2002, the Tax Court denied petitioner's Motion for Reconsideration , holding that the provisions of Section 108(B)(2) of the Tax Code, as amended, merely provides that services other than those enumerated in Section 108(B)(1) shall be subject to zero rate as long as the consideration is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, which have been satisfactorily met in respondent's case. In fact, said the Tax Court, VAT Ruling 040-98 digressed from Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 which did not require that the services rendered by a VAT-registered person should be destined, consumed or rendered abroad to be zero-rated. Hence, this petition on the following grounds: "1. THE TAX COURT ERRED IN HOLDING THAT RESPONDENT'S SERVICES ARE ZERO-RATED FOR VAT PURPOSES. 2. THE TAX COURT ERRED IN HOLDING THAT VAT RULING NO. 040-98 CONTRAVENES SECTION 102(b)(2) [NOW SECTION 108(B)(2)] OF THE TAX CODE AND SECTION 4.102-2 (b) (2) OF REVENUE REGULATIONS NO. 5-96. The petition lacks merit . Section 102 (b)(2) [now Section 108 (B)(2)] of the Tax Code, as amended, states: "Section 102. Value-Added Tax on Sale of Services and Use or Lease of Properties . (a) . . . (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: (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; DHaEAS (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 ." (Emphasis supplied.) Based on the foregoing, sale of services shall be zero-rated under the following conditions: (1) the taxpayer is VAT-registered; (2) the services are paid for in acceptable foreign currency; (3) the payment in acceptable foreign currency is inwardly remitted to the Philippines; and (4) the inward remittance is accounted for in accordance with the rules and regulations of the BSP. That respondent is a VAT-registered entity since September 23, 1996 is undisputed. Furthermore, as the Tax Court found, respondent has adequately established PDTS-Vancouver's payment in acceptable foreign currency, and the inward remittance thereof amounting to US$14,750,473.00 in accordance with the BSP rules and regulations. Petitioner, in fact, never disputed these findings. Time and again, the Supreme Court held that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed if they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax court. 8 Having met the conditions of Section 102(b)(2) [now Section 108(B)(2)] of the Tax Code, as amended, respondent's sale of services to PDTS-Vancouver to the extent of US$14,750,473.00 qualify for zero-rating for VAT purposes. Accordingly, respondent may be granted a refund or a tax credit of its input tax of P17,178,373.12 directly attributable to its zero-rated sales pursuant to Section 106(a) [now 112(A)] of the Tax Code, as amended, thus: "Section 106. Refunds or tax credits of creditable input tax . (a) 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 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 100(a)(2)(A)(i), (ii) and (b) and Section 102 (b)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the 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 attributable to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales." (Emphasis supplied.) Petitioner's proposition that respondent's services should have been destined and consumed abroad to be zero-rated, finds no basis in the basic law. Under Section 102 (b)(2) [now 108(B)(2)] of the Tax Code, as amended, as long as the payment was made in acceptable foreign currency and inwardly remitted to Philippines in accordance with the BSP rules and regulations, the sale of services are subject to 0% VAT. Thus, when VAT Ruling 040-98, interpreting Section 4.102-2(b)(2) of Revenue Regulations No. 5-96, provided the additional requirement that only sales of services " destined for consumption abroad " shall qualify for zero-rating, it effectively enlarged and modified the Tax Code, as amended. Accordingly, petitioner cannot make VAT Ruling 040-98 its basis to disqualify respondent's services from zero-rating. BIR rulings have been aptly described as "the best guess of the moment . . . sort of an information service to the taxpayer" and are "not binding on the courts". 9 Verily, "(w)hen an administrative agency renders an opinion or issues a statement of policy, it merely interprets a pre-existing law and the administrative interpretation is at best advisory for it is the courts that finally determine what the law means. Thus an action by an administrative agency may be set aside by the judicial department if there is an error of law, abuse of power, lack of jurisdiction or grave abuse of discretion clearly conflicting with the letter and spirit of the law." 10 As this Court said in the parallel case of CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc . 11 : "Moreover, if indeed the `destination principle' underlies and is the basis of the VAT laws, then petitioner's proper remedy would be to recommend art 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 ." Likewise, administrative regulations adopted under legislative authority by a particular department must be in harmony with the provisions of the law, and should be for the sole purpose of carrying into effect its general provisions. By such regulations, of course, the law itself cannot be extended. An administrative agency cannot amend an act of Congress. The rule-making power must be confined to details for regulating the mode or proceeding to carry into effect the law as it has been enacted. The power cannot be extended to amending or expanding the statutory requirements or to embrace matters not covered by the statute. 12 Department zeal may not be permitted to outrun the authority conferred by statute. 13 In CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc . 14 , this Court held that Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 expanded the statutory requirements of Section 102 (B)(2) [now 108 (b)(2)] of the Tax Code, as amended, thus: "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." In case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails. 15 Having complied with the requirements of the basic law, respondent's services in the amount of US$14,750,473.00 qualify for zero-rating. WHEREFORE, the instant petition is hereby DENIED. The assailed Decision of the Court of Tax Appeals dated March 19, 2002, and its Resolution dated June 20, 2002 are hereby AFFIRMED SO ORDERED. Jacinto and Sabio, Jr . , JJ . , concur. Footnotes 1. Rollo , pp. 2236. 2. Rollo , pp. 5054. 3. Rollo , pp. 7894. 4. Rollo , pp. 7075. 5. Rollo , pp. 5569. 6. Answer dated November 23, 1998; Rollo, pp. 173175. 7. Rollo , pp. 176181. 8. " Commissioner of Internal Revenue vs. Mitsubishi Metal Corp ., 181 SCRA 214, 220 (1990). 9. Aban, Benjamin B., Law of Basic Taxation in the Philippines, 1994, pp. 97 & 98, citing Quiazon & Lukban, Philippine Income Taxation, p. 18, Commissioner vs. Ledesma , L-17509, January 30, 1970 and Shell Refining Co. vs. Lingad , CTA Case No. 1394, October 12, 1966. 10. Baltazar vs. Comelec , 350 SCRA 518, 522 (2001). 11. CA-G.R. SP No. 66341; April 16, 2002. 12. People vs. Maceren , 79 SCRA 450, 458, cited in China Banking Corporation vs. The Members of the Board of Trustees, Home Development Mutual Fund (HDMF) , 307 SCRA 443, 458459 (1999). 13. China Banking Corporation vs. The Members of the Board of Trustees, Home Development Mutual Fund (HDMF), 307 SCRA 443, 458 (1999), citing; Radio Communication of the Philippines vs. Santiago , 58 SCRA 493. 14. CA-G.R. SP No. 66341; April 16, 2002. 15. People vs. Maceren , 79 SCRA 450, 458, cited in China Banking Corporation vs. The Members of the Board of Trustees, Home Development Mutual Fund (HDMF), 307 SCRA 443, 458459 (1999).