Benguet Corp. v. Commissioner of Internal Revenue

FORMER FOURTEENTH DIVISION [CA-G.R. SP Nos. 37205, 38958 & 39435. July 10, 1998.] BENGUET CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N GUERRERO , B.J. , J p : This is a consolidated decision of three (3) petitions for review assailing the decisions and/or resolutions of the Court of Tax Appeals (hereafter, the "CTA") in the cases filed before it by the Benguet Corporation (hereafter, "petitioner"), namely: 1) SP 37205 which assails the decision in CTA Case No. 4945 dated 26 January 1995 (Rollo of SP 37205, p. 58) entitled "Benguet Corporation vs. Commissioner of Internal Revenue" which denied the claim for tax credit in the amount of P64,815,301.90 filed by petitioner; 2) SP 38958 which assails the decision dated 23 June 1995 (Rollo of SP 38958, p. 97) and Resolution dated 23 October 1995 in CTA Case No. 4627 entitled "Benguet Corporation vs. Commissioner of Internal Revenue" denying the claim for tax credit in the amount of P19,218,738.44 filed by petitioner; and 3) SP 39435 which assails the decision in CTA Cases Nos. 4686 and 4829 dated 27 September 1995 (Rollo of SP 39435, p. 34) entitled "Benguet Corporation vs. Commissioner of Internal Revenue" also denying the claim for tax credit filed by petitioner in the amount of P84,909,247.96. LLphil The common facts in these consolidated cases are as follows: Petitioner is a domestic corporation engaged in the exploration, development, operation of mining properties, and marketing of mine products. It is a VAT registered entity in accordance with Section 107 of the National Internal Revenue Code (hereafter, "NIRC") with VAT Registration No. 31-9-000027. It applied and was granted by the Bureau of Internal Revenue (hereafter, "BIR") a zero-rated status on its sale of gold to the Central Bank (hereafter, "CB") in January, 1988. During the taxable periods in question in the three cases, petitioner sold gold to the CB and the former treated these transactions as zero-rated. Petitioner filed for tax credit or refund on the excess input taxes it had incurred in the purchase of goods and services for the taxable periods in question. (a) The facts in SP 37205 are as follows: On 25 March 1992, petitioner filed with the BIR an application for tax credit of input taxes for the period 01 February 1991 to 30 April 1991 in the amount of P49,842,730.17. And then on 07 May 1992 it filed another application for tax credit of input taxes for the period 01 May to 31 July 1991 in the amount of P40,257,651.60. The total amount of tax credit applied for was P90,100,381.77. The BIR issued in favor of petitioner a tax credit certificate in the amount of P25,285,079.87. The remaining balance was not granted for the following reasons: P46,177,861.12 was disallowed because this corresponds to the output tax on petitioner's sale of gold to the Central Bank which is taxable at 10% such sale being considered as a local sale; P6,295,041.28 was disallowed because it lacked the necessary invoicing requirements provided by Sec. 108 of the Tax Code; P3,434,053.50 was deferred, to be credited to the output tax liability of succeeding quarters because this corresponds to input taxes directly traceable to the sale of gold; P8,908,346.00 is to be granted by the Bureau of Customs as this represents its excess input tax corresponding to actual export sales of mineral products. Thus, petitioner filed with the CTA a petition for review regarding its claim for a tax credit of value-added taxes in the amount of P64,815,301.90. At the hearings thereat, it was opined that the claim for tax credit in the amount of P46,177,861.12 was disallowed because the said amount corresponds to sale of gold to the Central Bank which the BIR considers as a domestic sale subject to 10% VAT. Petitioner on the other hand argued that such sales are zero rated in accordance with Section 100 (a) (2) of the National Internal Revenue Code (hereafter, "NIRC"). Petitioner therein also asserted that an assessment had been issued by respondent regarding their tax liability in the amount of P46,177,861.12 which corresponds to the output VAT it should have paid on its sale of gold to the Central Bank on the theory of the BIR that such sales are considered local sales subject to 10% VAT. According to petitioner, this is an attempt of respondent to offset the 10% VAT output taxes due on its claim for refund thus depriving petitioner the opportunity to assail and challenge the 10% VAT output tax assessment. The BIR filed its answer alleging that: the petition was without cause of action as it did not state the dates when the alleged input taxes were actually paid: petitioner's alleged separate applications for tax credit of input taxes is pending investigation before the Bureau of Internal Revenue; sale of gold and silver to the Central Bank is considered a local sale and is, therefore, not zero-rated, pursuant to Revenue Memorandum Order No. 22-92 and VAT Ruling No. 008-92 dated 23 January 1992; petitioner failed to prove that he is exempt from paying the VAT on the sale of the gold to the Central Bank; claims for refund of taxes are construed strictly against the claimant, the same being in the nature of exemption from taxes; petitioner's claim for refund cannot be entertained because it failed to prove that the taxes paid were erroneously or illegally collected; petitioner failed to comply with all the requirements of Section 230 of the Tax Code. On 26 January 1991, the assailed decision was issued denying the claim for tax credit filed by petitioner citing the following grounds: 1) petitioner failed to submit proof to substantiate the payment of the input VAT in the amount of P6,295,041.28; 2) the tax credit in the amount of P3,434,053.50 was not allowed because it would be applied to the output tax liability of petitioner for the succeeding quarters as provided in Section 104 (b) of the NIRC and as agreed upon by petitioner's counsel and representatives of the BIR during a conference; 3) to fall under the category of zero-rated sales under Section 100 (a) (2) of the NIRC, it must be shown that the buyer of the gold is entitled to an exemption under special laws or international agreements; 4) the retroactive application of VAT Ruling No. 008-92 will not be prejudicial to petitioner. (b) The facts in SP 38958 are as follows: On 20 November 1989, petitioner filed its VAT Return covering the period 01 August 1989 to 31 October 1989. Petitioner had a balance of P17,437,933.18 as creditable input tax. On 20 February 1990, petitioner filed its VAT Return covering the period 01 November 1989 to 31 January 1990. Petitioner had a balance of P11,780,805.26 as creditable input tax. Petitioner filed two separate applications for tax credit of input taxes with the BIR. On 10 November 1990, petitioner filed an application for tax credit of input taxes for the period 01 August 1989 to 31 October 1989 in the amount of P7,437,933.18. On 03 November 1990, petitioner filed another application for tax credit of input taxes for the period 01 November 1989 to 31 January 1990 in the amount of P11,780,805.26. The total amount involved was P19,218,738.44. The BIR failed to act on petitioner's applications within the 60-day period provided in Section 106 (e) of the NIRC. Thus, petitioner filed with the CTA a petition for review. At the hearings thereat, the BIR presented, evidence to the effect that petitioner could not be allowed to claim zero-rate treatment on its sale of gold to the Central Bank per VAT Ruling No. 008-92 dated 23 January 1992. The applicability of said ruling was made retroactive to 01 January 1988. Under said ruling, such sales considered domestic sales subject to 10% VAT. It was also argued that petitioner failed to prove that: the collection of the tax liability in question totalling P19,216,738.44 is illegal and erroneous; it is a VAT-registered corporation; it has an approved application for zero-rate on its sales of mining products; that for the periods covering 01 August 1989 to 31 October 1989 and 01 November 1989 to 21 January 1990 petitioner filed its VAT Return. The BIR also stated that no receipts, invoices, or other commercial documents were presented to prove that input tax payments for the period 01 August 1989 to 31 October 1989 allegedly totalling P21,971,175.85 (on its purchases of local as well as imported materials, supplies, and capital goods; and on purchases of services) were made, to reflect an alleged balance of P7,437,933.18 as creditable input tax. On 23 June 1995, the assailed decision was issued denying the claim for tax credit filed by petitioner on the ground that the evidence which would entitle petitioner to a tax credit/refund were not submitted. Such failure on the part of the latter to substantiate its claim and to show that the taxes already paid were illegal necessitated the disallowance of the claim. (c) The facts in SP 39435 are as follows: This petition for review assails the decision in two cases filed before the CTA, namely CTA Case Nos. 4686 and 4829. CTA Case No. 4686. On 21 May 1990, petitioner filed its VAT Return covering the period 01 February 1990 to 30 April 1990 reflecting therein zero-rated sales totalling P795,060,159.68. Petitioner had a balance of P22,020,426.62 as creditable input tax. On 20 August 1990, petitioner filed its VAT Return covering the period 01 May 1990 to 31 July 1990 reflecting zero-rated sales totalling P865,271,330.93. Petitioner had a balance of P14,543,822.04 as creditable input tax after applying P12,577,709.71 against the output tax for the same quarter and carrying over the balance of P595,864.62 to the succeeding quarter. Petitioner filed two separate applications for tax credit of input taxes with the BIR. On 17 April 1991, petitioner filed an application for tax credit of input taxes for the period 01 February 1990 to 30 April 1990 in the amount of P22,020,426.62. On 21 May 1991, petitioner filed another application for tax credit of input taxes for the period 01 May 1990 to 31 July 1990 in the amount P14,543,822.04. The total amount involved was P36,564,248.66. The BIR failed to act on petitioner's applications. Thus, petitioner filed with the CTA a petition for review, docketed thereat as CTA Case No. 4686. CTA Case No. 4829. On 20 November 1990, petitioner filed its VAT Return covering the period 01 August 1990 to 31 October 1990 reflecting therein zero-rated sales totalling P624,153,479.93. Petitioner had a balance of P25,490,310.37 as creditable input tax. On 20 February 1991, petitioner filed its VAT Return covering the period 30 November 1990 to 31 January 1991 reflecting zero-rated sales totalling P918,902,263.59. Petitioner had a balance of P22,854,688.93 as creditable input tax after applying P15,845,910.28 against the output tax for the same quarter. Petitioner filed two separate applications for tax credit of input taxes with the BIR. On 30 July 1991, petitioner filed an application for tax credit of input taxes for the period 01 August 1990 to 31 October 1990 in the amount of P25,490,310.37. On 02 December 1991, petitioner filed another application for tax credit of input taxes for the period 01 November 1991 to 31 January 1991 in the amount P22,854,688.93. The total amount involved was P48,344,999.30. The BIR failed to act on petitioner's applications. Thus, petitioner filed with the CTA a petition for review, docketed thereat as CTA Case No. 4829. On 27 September 1995, a decision in CTA Case Nos. 4686 and 4829 was issued denying the claims for tax credit filed by petitioner. Petitioner will not be unduly prejudiced by the retroactive application of VAT Ruling No. 008-92. Petitioner's claimed injury from the retroactive application of the questioned ruling is the alleged assessment purportedly issued by the BIR for deficiency output tax of P12,706,821.73. Evidence on record, however, does not show that a notice of assessment had in fact already been issued against petitioner. The common issues in the three consolidated cases are the following: 1) whether or not VAT Ruling No. 008-92 dated 23 January 1992 can be applied retroactively to sales of gold made by petitioner to the Central Bank, effectively subjecting said transactions to 10% VAT rate, instead of 0% under earlier VAT Rulings; 2) whether or not invoices and receipts are mandatory in order that a petitioner may claim tax credits under the VAT Law. PETITIONER'S BRIEF : We shall discuss jointly the arguments propounded in the three separate Briefs filed by petitioner in each of the petitions. Petitioner argues that VAT Ruling No. 008-92 which took effect on 23 January 1992 should not be applied retroactively to sales of gold made by petitioner to the Central Bank. It anchors this posture on Section 246 of the NIRC which proscribes the non-retroactively of BIR rulings. Any revocation, modification, or reversal of any of the rules and regulations or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers. According to petitioner, it was prejudiced by the retroactive application of VAT Ruling No. 008-92. Petitioner was precluded from recovering the input taxes (representing actual payments, costs, or express in the purchase of goods and services) when it relied on the BIR's 1988 to 1990 VAT rulings and did not pass on the cost of the input taxes to the CB when it sold gold to the CB in 1990 and 1991; and then the BIR denied petitioner's claims for tax credit. liblex When the BIR subjected petitioner's sales of gold to the CB to the 10% VAT rate (instead of 0%), the BIR in effect reduced petitioner's income by the amounts of input VAT in question. The remedies suggested by the CTA are insufficient to alter the situation the petitioner is in as a result of the retroactive application of the questioned VAT Ruling. The remedy of applying the input VAT against petitioner's other sales which are subject to 10% output VAT rate is not a real remedy because the petitioner's other sales subject to 10% rate are very minimal. The remedy of treating input VAT as cost and deducting the same from income for income tax purposes is a myth. If input VAT is cancelled out by an assessment, there is no cost that may be claimed as a deduction. Assuming that there is input VAT available for deduction, claiming it as a deduction does not result in a recovery of the input VAT cost because a tax benefit does not completely compensate for an economic loss. Thus, the deduction of a bad debt does not result in the recovery of the debt. Moreover, even if the input VAT were to be claimed as a deduction, the benefit is only to the extent of 35% thereof (35% being the corporate income tax rate imposed by law). Thus, the benefit is only up to this extent, and the remaining 65% cannot be recovered. This remedy suggested by the CTA is limited only to income taxes. On the other hand, under Section 104 (b) of the NIRC, the tax credit which petitioner applied for and was wrongly denied, is available for the payment of other internal revenue taxes. Further, under Chapter VII of the VAT Implementing Regulations, the input VAT incurred by a VAT-registered taxpayer is not a cost for income tax purposes. Input VAT is treated as an asset which can be applied against output VAT liabilities or claimed as a tax credit or refund. Further, Section 29 (a) of NIRC, petitioner is allowed a deduction for ordinary and necessary business expense incurred during the taxable year. However, when the CTA made the pronouncement that petitioner could deduct the input VAT from its gross income, it was already too late. Petitioner could not deduct the input VAT incurred in 1990 and 1991 from its gross income for 1996 as it was already beyond the period to deduct provided by law. Petitioner also avers that its failure to comply with the invoicing requirements of Section 108 of the NIRC is not a valid ground for denial of petitioner's claim for tax credit because other documentation as well as the testimony of the BIR Examiner attest to the existence of the expenses cited. There is no statutory provision which limits the substantiation of input tax credits to VAT invoices or VAT receipts of the seller. RESPONDENT'S MEMORANDUM (in SP 37205, Rollo, p . 215) and COMMENT (in SP 38958, Rollo, p . 224) : (The arguments in these two (2) writing shall be taken together). Petitioner is not entitled to the tax credits because it failed to present in evidence the sales invoices, receipts, or other commercial documents showing the input VAT on the purchase of goods and services. Sections 108 and 238 of the NIRC and Section 21 of Revenue Regulation No. 5-87 (VAT Implementing Regulations) strictly require that all purchases should be covered by VAT invoices for the same to be entitled to input tax. Petitioner failed to present VAT receipts or VAT invoices corresponding to the input taxes being claimed. The testimony of the BIR Examiner does not partake of the nature of a judicial admission because under Section 4, Rule 129 of the Rules of Court, only the admission of a party is considered a judicial admission. The BIR Examiner is not a party in any of the cases. Assuming that the latter's testimony is an admission in his capacity as an agent of the Commissioner of Internal Revenue, such testimony is not the best evidence of the sales invoices and receipt showing the input VAT. Assuming that petitioner validly substantiated its claims for refund, the claims are without legal bases. VAT Ruling No. 008-92 states that the sales of gold to the CB are not considered export sales for VAT purposes. Thus, these transactions are subject to a 10% VAT rate. This ruling has been applied in several cases before the CTA. These VAT Rulings or executive constructions of the VAT law made by the BIR Commissioner and other BIR officials are entitled to great weight and respect and should thereby have the force and effect of law, having been issued by the executive officers and/or administrative body charged with the duty of enforcing the VAT law. Moreover, the rulings of the CTA should be given weight and respect because by the nature of its functions, (it is dedicated exclusively to the study and consideration of tax problems), it has developed expertise on the matter. The retroactive application of VAT Ruling Nos. 008-92 and 59-92 is not prejudicial to the interests of petitioner as contemplated in Section 246 of the NIRC. Petitioner's claims for refund of input taxes are not lost. They are allowable on the output taxes on the sale of gold to the CB, on its output taxes on other sales, and as deductions on its income tax under Section 29 of the NIRC. Further, claims for refund are construed strictly against the claimants, the same being in the nature of an exemption from taxes. COURT'S RULING : The appeal is with merit. The pertinent provisions of the NIRC are the following: "Section 108. Invoicing and accounting requirements for VAT registered persons, (a) Invoicing requirements. A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the information required under Section 238, the following information shall be indicated in the invoice or receipt: LexLib "1) The VAT registration number; "2) If the seller bills the tax as a separate item in the invoice: "A. the amount of gross-selling price or gross receipts on which the value added tax is based; "B. the amount of value-added tax determined by multiplying the amount of gross selling price or gross receipt by the rate of tax; and "C. the sum of (i) the gross selling price or gross receipts and (ii) the value-added tax which the purchaser pays or is obligated to pay to the vendor. "3. If the seller elects not to bill the tax as a separate item in the invoice or receipt, the total amount charged against the buyer. xxx xxx xxx "Section 238. Issuance of receipts or sales or commercial invoices . All persons, subject to an internal revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or more, issues receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the case of sale, receipts or transfers in the amount of P100.00 or more, or, regardless of amount, where the sale or transfer is made by persons subject to value-added tax to other person also subject to value-added tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer, or client. The original of each receipt or invoice shall be issued to the purchaser, customer, or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business for a like period. xxx xxx xxx "Section 246. Non-retroactivity of rulings . Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding Section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayers deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith." Under Sections 108 and 238 of the NIRC, aforequoted, a VAT-registered entity is required to issue invoices or receipts for the transactions therein mentioned. These provisions of the NIRC are mandatory because the law consistently uses the word "shall". Even in the regulations issued to implement the VAT provisions on invoicing in the NIRC, the word "shall" is repeatedly used. As a general rule, the word "may" when used in a statute is permissive and operates to confer discretion; while the word "shall" is imperative, operating to impose a duty which may be enforced (Dizon vs. Encarnacion, 9 SCRA 714 [1963]). Moreover, the nature of the VAT system necessitates that invoices or receipts be issued. Since the VAT system is a multi-stage, multi-point tax where the tax is levied at all stages (although the total value is subject to tax only once), it is necessary and convenient that the seller issues an invoice or receipt in order to facilitate computation of the tax credits. Thus, a claim for tax credit which is not accompanied by the required invoices or receipts cannot be granted. It was, therefore, correct for the CTA to deny petitioner's claim for tax credit in the sum of P6,295,041.98 (in SP 37205) for failure to comply with the requirements of invoices or receipts being presented as provided in the NIRC. With respect to SP 37205 therefore, We can only grant the sum of P49,611,914.00 by way of tax credits out of the P55,906,955.92 tax credit being claimed by petitioner for the reason stated above. On the issue of whether or not there can be a retroactive application of VAT Ruling No. 008-92, We rule in the negative. The applicable provision of law is Section 246 of the NIRC quoted earlier. Under this provision, a ruling cannot be given retroactive effect if such application will be "prejudicial to the taxpayers". So, the important query is: does the retroactive application of VAT Ruling No. 008-92 cause undue prejudice to the petitioner? The term "prejudice" means "to injure by some action or judgments to damage" (Sibal, Philippine Legal Encyclopedia [1986], p. 750). Patently, petitioner will suffer substantial prejudice and injury if VAT Ruling No. 008-92 is applied retroactively. Previous to the issuance of VAT Ruling No. 008-92 on 23 January 1992, sales of gold to the CB were deemed export sales subject to a 0% rate of VAT. However, upon the issuance of VAT Ruling 008-92, said sales of gold to the CB were deemed local sales and imposed a 10% VAT rate. What caused injury and damage to petitioner is the issuance of VAT Ruling No. 59-92 providing for a retroactive application of VAT Ruling No. 008-92 to the year 1988. The imposition of a higher VAT rate on petitioner's sales of gold to the CB (10% VAT rate instead of 0%) in effect reduced petitioner's income. This must be so because when petitioner's claims for tax credits were denied citing VAT Ruling No. 008-92 and VAT Ruling No. 59-92, petitioner suffered financial damage equivalent to the sum of the disapproved claims. Had petitioner known that such sales were deemed local sales and subject to the 10% VAT rate (which rate was not the prevailing rate in 1988) it would have (as it was within its rights to do so) passed on the cost of the input taxes (representing actual payments, costs or expenses in the purchase of goods and services) to the CB. Petitioner did not do that since it relied on the VAT rulings then in effect that the transactions in question were deemed export sales and subject to the 0% VAT rate. The reduction in income is the injury and damage to petitioner which is well within the meaning of the provision herein cited. cdll As correctly presented by petitioner, the alternative remedies suggested by the CTA are not sufficient palliatives. The money values that these remedies provide do not approximate the money values of the tax credits petitioner lost after its claims for tax credits were disapproved due to the implementation of the two VAT Rulings in question. It is obvious, therefore, that the application of VAT Ruling No. 008-92 and VAT Ruling No. 59-92 effectively modifying the VAT rates imposable on the sales of gold to the CB from 0% to 10% will be prejudicial to petitioner. Thus, pursuant to Section 246 of the NIRC, the said rulings cannot be given retroactive effect. More importantly, this Court (Special Fifth Division composed of Justices Pedro Ramirez, Maximiano Asuncion, and ponente Eduardo Montenegro) in a decision promulgated on 05 June 1997 in CA-GR SP No. 38287 entitled "Manila Mining Corporation vs. Commissioner of Internal Revenue" had occasion to rule on the same issue. Citing Section 246 of the NIRC, it categorically stated that VAT Ruling 008-92 issued on 23 January 1992 cannot be applied retroactively, in these words: "The law is clear. VAT Ruling 008-92 issued on January 23, 1992 and Revenue Memorandum Order No. 22-92 cannot be applied retroactively to petitioner's sales to the Central Bank from July 1, 1990 to December 31, 1990." (Decision, "Manila Mining Corporation, Petitioner, versus Commissioner of Internal Revenue, Respondent", p. 04) Pertinently, it may be observed that the amendment of the VAT Law entitled "The New Expanded VAT Law" (Republic Act No. 7716) is revealing. Section 2 thereof amends Section 100 of the NIRC. The amended version of Section 100 of the NIRC, specifically Section 100 (a) (2) (A) (iv), expressly provides that "Sale of gold to the Bangko Sentral ng Pilipinas (BSP)" is an export sale subject to the 0% VAT rate. WHEREFORE, the appealed decisions are hereby REVERSED . The respondent Commissioner of Internal Revenue is ordered to award the following tax credits to petitioner. 1) in SP 37205 P49,611,914.00; 2) in SP 38958 P19,218,738.44; 3) in SP 39435 P84,909,247.96. SO ORDERED. Alino-Hormachuelos and Dacudao, JJ . , concur.