KEPCO Philippines Corp. v. Commissioner of Internal Revenue

THIRD DIVISION [CA-G.R. SP No. 78288. December 11, 2006.] KEPCO PHILIPPINES CORPORATION , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ROMILLA-LONTOK , J p : On appeal by way of petition for review under Rule 43 of the Rules of Court is the decision rendered by the Court of Tax Appeals in CTA Cases Nos. 5675 and 5704 partially granting aforesaid petition and the resolution the same court issued denying petitioner's motion for reconsideration. The dispositive portion of said decision reads: "WHEREFORE, in the light of the foregoing, the instant petition is PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND to petitioner, the amount of P8,325,350.35 representing input VAT payment on capital goods purchased for the third and fourth quarters of 1996." Facts antecedent are as follows: KEPCO Philippines Corporation (KEPCO) is a domestic corporation, an independent power producer engaged in the production of electricity and sells the same exclusively to the National Power Corporation (NPC). KEPCO reported sales for the third and fourth quarters of 1996 in the amounts of P83,538,812.32 and P91,541,490.43. It made domestic purchases of capital goods and services for the same periods in the amounts of P48,956,364.47 and P132,280,267.73. Input VAT in said purchases amounted to P4,895,858.01 for the 3rd quarter and P13,191,278.00 for the fourth quarter, 1996. It likewise averred that for income payments received from NPC for the months of April and June, 1996, creditable VAT withheld totalled P4,084,867.25. cHaDIA On September 16, 1998, KEPCO filed its quarterly VAT Returns and on September 18, 1998, an application for the effective zero rating of its sales of electricity to NPC. On September 30, 1998, KEPCO filed claims for refund with the Commissioner of Internal Revenue for P8,980,725.26 representing INPUT VAT payment of P4,895,858.01 directly attributable to its sale of electricity to NPC for the 3rd quarter of 1996 and the creditable VAT of P4,084,867.25 withheld from payments received from NPC for April and June, 1996. On the same date, KEPCO filed the above claim for refund of P8,980,725.26 with the Court of Tax Appeals (CTA). Said case was docketed as CTA Case No. 5765. On December 28, 1998, KEPCO filed with the BIR another written claim for refund in the amount of P13,191,278 corresponding to its alleged unutilized input VAT attributable to its effectively zero rated sales to NPC for the fourth quarter of 1996 ( Rollo , p. 30) Said case was elevated to the CTA as CTA Case No. 5704. CTA Cases Nos. 5765 and 5704 were consolidated. The CTA granted petitioner's application for zero rating of its sales of electricity to NPC pursuant to Sec. 102(b)3, now 108(B)3 of the National Internal Revenue Code (NIRC) in relation to Sec. 13 of Act No. 6395, otherwise known as the National Power Corporation (NPC) Charter. Sec. 108 of the NIRC provides: "Sec. 108. Value added Tax on Sale of Services and Use or Lease of Properties: (A) Rate and base of tax. . . . (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) . . . (2) . . . (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." DCAHcT While KEPCO's reported sales are considered zero rated, the sales for which zero rating was applied were not sufficiently substantiated. KEPCO did not submit the corresponding invoices and official receipts showing its sales of electricity to NPC, so that there was failure to ascertain the exact input VAT payments attributable thereto. Said VAT payments cannot be refunded. The creditable VAT withheld in the sum of P4,084,867.25 on April and June, 1996 pertained to the second quarter of 1996; hence, outside the period covered by instant petition. Petitioner likewise claims for refund of the Input Vat on capital goods purchased by petitioner for the 3rd and 4th quarters of 1996 amounting to P4,895,858.01 and P13,191,278.00, respectively. After presentation of petitioner's testimonial and documentary evidence and without any controverting evidence from respondent the Court of Tax Appeals on March 18, 2003 granted KEPCO's claim for refund amounting only to P8,325,350.35 representing input VAT on purchases of capital goods not applied against output taxes pursuant to Section 106(b) now 112(B) of the Tax Code. Section 112(B) the Tax Code reads: "Section 112. Refund or tax credits of Input Tax. A) . . . B) Capital goods. A VAT registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years, after the close of the taxable quarter when the importation or purchase was made." Petitioner, through an Urgent Motion for Reconsideration claimed additional tax refund/tax credit of P5,012,875.67 in addition to the P8,325,350.35 already awarded. The CTA denied said motion, hence this petition for review on the ground that: THE CTA COMMITTED SERIOUS ERROR OF FACT AND LAW WHEN IT REFUSED TO CLASSIFY AS CAPITAL GOODS CERTAIN PURCHASES OF PETITIONER DURING THE THIRD AND FOURTH QUARTERS OF CALENDAR (TAXABLE) YEAR 1996 IN THE ADDITIONAL AMOUNT OF P3,455,199.54. SCHIcT The CTA disallowed the claim for refund in the amount of P5,012,875.67 because part thereof in the sum of P1,557,676.13 pertains to purchases for the year 1997 which is not within the period subject of the claim. The balance of P3,455,199.54 was disallowed on the ground that petitioner's purchases were booked as inventory items and not recorded or capitalized as part of the cost of the plant. The tax court rendered its resolution denying the motion for reconsideration in this wise: "A scrutiny of petitioner's supporting documents particularly the account vouchers attached to the invoices and/or official receipts show that the purchases related to the input VAT of P3,455,199.54 were not charged or recorded to any depreciable asset account but rather under any one of the following account titles: 1) Inventory Supplies/Materials; 2) Inventory Supplies, Lubricants; 3) Inventory Supplies/Spare Parts; 4) Inventory Supplies/Oil Products; 5) Cost/O & M/Supplies; 6) Cost/O & M/Uniforms & Working Clothes; 7) Cost/O & M/supplies; 8) Cost/O & M/Repairs & Maintenance; 9) Office Supplies; 10) R & M/Mechanics; 11) R & M Common/General; and 12) Rep. and Maint./Chemicals. If indeed these purchases represent expenditures incurred for the rehabilitation of petitioner's plant, how come they were not recorded or capitalized as part of the cost of the plant? This only proves that these purchases do not fall within the definition of capital goods under Section 4.106.1 of Revenue Regulation 7-95 and the related input VAT of P3,455,199.54 cannot be refunded." ( Rollo , pp. 26-27) Petitioner claims that the CTA failed to appreciate both testimonial and documentary evidence material to prove that the domestic purchases would classify as capital goods. Ms. Bulos, KEPCO's Senior Accountant, testified that capital goods pertain to those expenditures directly related to the rehabilitation of the plant and capitalized in the accounting records. (TSN, February 27, 2002, p. 26). Sec. 4.106.1 of Revenue Regulations No. 7-95 defines capital goods or properties as xxx xxx xxx ". . . goods or properties with estimated useful life greater than one year and which are treated as depreciable assets under Sec. 34 F of the Tax Code, used directly or indirectly in the production or sale of taxable goods." cEHSTC Inventory Accounts, save those inventory of supplies which are consumed upon use, are held for sale as contrasted to operating assets, which are used by the business in the course of its operations. These operating assets are usually held by the business until they are no longer of service to it because their service potential have been exhausted. As the service potential of an operating asset is consumed, the cost of the asset is allocated as an expense among the accounting periods in which the asset is used. This is called depreciation for plant assets, amortization for intangible assets and depletion for natural resources. (Financial Accounting by Robert Eskew and Daniel Jensen, p. 364, Fourth Edition.) The individual items KEPCO purchased ( Rollo , pp. 17-21) subjected to Input VAT and recorded in the entity's inventory accounts are not for sale. KEPCO is engaged in the sale of electricity solely in favor of the National Power Corporation. The inclusion of said individual items in the inventory accounts and not in the Fixed Asset or Property, Plant & Equipment account of KEPCO was done by KEPCO itself. The classification/recording in KEPCO's books was made by KEPCO's own personnel. Laws granting exemption for tax are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing power. ( Lung Center of the Philippines vs. Quezon City , 433 SCRA 119). Claims for tax refund/tax credit partake the nature of tax exemptions. The additional claim for tax refund/tax credit in the amount of P3,455,199.54 is hereby DENIED. WHEREFORE, in view of the foregoing, the decision of the Court of Tax Appeals is hereby AFFIRMED. SO ORDERED. Hormachuelos and Tolentino, JJ., concur.