Rules and Regulations to Implement Executive Order No. 589

SECOND DIVISION [C.T.A. CASE NO. 8062. October 18, 2011.] SUMISETSU PHILIPPINES, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION CASTAEDA, JR. , J p : This case involves a Petition for Review filed by Sumisetsu Philippines, Inc. (petitioner) to seek the refund or the issuance of tax credit certificate in the amount of P39,355,139.27, allegedly representing its unutilized input value-added tax (VAT) attributable to effectively zero-rated sales for taxable year 2008. Petitioner is a domestic corporation duly organized and existing under Philippine laws, with principal office at 4th Floor, Glass Tower Building, 115 C. Palanca St., Legaspi Village, Makati City. 1 It is a VAT-registered taxpayer and is covered by Bureau of Internal Revenue (BIR) Certificate of Registration No. 8RC0000019261. 2 Petitioner is engaged in the business of providing electrical and mechanical services for electrical transmission and distribution systems, air conditioning and ventilation systems, telephone and communications systems, and other allied services. 3 Respondent is the duly appointed Commissioner of the Bureau of Internal Revenue, empowered to perform the duties of said office including, among others, the duty to act upon and approve claims for refund or tax credits as provided by law. She holds office at the 5th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City. Petitioner filed its Quarterly VAT Returns for taxable year 2008 on the following dates: ISTECA EXHIBITS TAXABLE QUARTER DATE FILED "I" First Quarter April 24, 2008 "J" Second Quarter July 24, 2008 "K" Third Quarter October 23, 2008 "L" Fourth Quarter January 26, 2009 On February 22, 2010, petitioner filed with the BIR an administrative claim for refund and/or tax credit of excess input VAT in the total amount of P38,654,939.61, attributable to sale of services to Philippine Economic Zone Authority (PEZA)-registered entities for the period covering January 1, 2008 to December 31, 2008. 4 On March 24, 2010, petitioner filed an amended claim for refund with the BIR, increasing the amount covered by the original refund claim from P38,654,939.61 to P39,355,139.27. 5 Due to respondent's inaction on its administrative claim, petitioner filed the instant Petition for Review before this Court on March 31, 2010. In her Answer, 6 respondent interposed the following Special and Affirmative Defenses: "11. The petition for review should be dismissed on the following grounds: (a) Lack of cause of action on the part of the petitioner for non-exhaustion of administrative remedies. Under Section 112(C) of the National Internal Revenue Code (NIRC), respondent has 120 days from the date of submission of complete documents, within which to rule on an application for tax refund or credit. And only after the lapse of this period without any action on his part or receipt of his adverse decision that the aggrieved party may, within 30 days elevate the case to the Honorable Court. Petitioner filed its administrative claim for refund of its alleged unutilized input VAT for the four (4) quarters of 2008 in the amount of P39,355,139.27 on March 24, 2010. Thus, respondent had until July 22, 2010, within which to make a ruling. Thereafter, petitioner had 30 days or until August 21, 2010, to challenge his adverse ruling or inaction with the Honorable Court. Petitioner sprinted to the Honorable Court and prematurely filed the instant Petition for Review on March 31, 2010, or before the 120-day period granted unto the respondent lapsed effectively depriving the respondent of the opportunity to rule on the claim for refund. The failure of the petitioner to exhaust all available administrative remedies, justifies the dismissal of the instant petition. The taxpayer is given a period of two (2) years before appealing to the Court of Tax Appeals; and to notify the government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure (Bermejo vs. Collector, L-3028, July 29, 1950) . The petition is pro-forma and was done merely to comply with the letter of the law and yet it disregarded the spirit or the very substance of the law. Section 112 indicates no exception justifying deviation from the required 120-day period granted unto respondent to resolve the claim for refund. The petitioner should have filed its claim for refund at the earliest possible time and should not have waited until the last moment because by then it would be too late for the respondent to act on petitioner's claim thereby destroying the essence of the doctrine of exhaustion of administrative remedies. Such delay on the part of the petitioner should not be rewarded with a grant of exception from the requirements of the law. CITSAc Petitioner's utter disregard to follow the provisions of Section 112(C) of the NIRC will undoubtedly lead to undesirable results and unimaginable chaos. A taxpayer desirous to resort directly to the Court can effectively bypass respondent by filing administrative claim for refund only days before the expiration of the 2-year prescriptive period then immediately thereafter, on the pretext of the 'inaction' of respondent and the prescriptive period will lapse, file a corresponding petition for review with the Honorable Court. Such course of action will render nugatory the authority granted by law upon respondent to act accordingly on the claims for refund. (b) Lack of jurisdiction for there was no decision or inaction which is tantamount to denial by the Commissioner that the Court of Tax Appeals could review simply because respondent was not given an opportunity to reach that decision. Only upon denial or the expiration of the allowable period of 120 days without any action on the part of respondent that petitioner may, within the period of 30 days from notice, invoke this Honorable Court's competence to hear its petition for review. Prior to that, the Honorable Court has no jurisdiction to entertain petitioner's appeal. The Court of Tax Appeals is a court of special jurisdiction and as such, it can take cognizance only of such matters as are clearly within its province. 12. Petitioner's sales of services to PEZA-registered enterprises to qualify as effectively zero-rated sales, the latter should have availed of the 5% preferential tax; otherwise, they are subject to 12% VAT under Section 108 of the NIRC. It bears stressing that under Section 23 of Republic Act No. 7916, two different fiscal incentives are granted to an ecozone enterprise, to wit: 'SEC. 23. Fiscal Incentives. Business establishments operating within the ECOZONE shall be entitled to the fiscal incentives as provided for under the Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided for under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987.' Based on the aforequoted Section 23 of Republic Act (RA) No. 7916, a PEZA registered enterprise has the option to choose between two sets of fiscal incentives. One, is that provided for under Presidential Decree No. 66, as amended, and Section 24 of RA 7916 which includes the 5% preferential tax on gross income earned which is in lieu of national and local taxes, and second, as those provided for under Book VI of Executive Order No. 226, including but not limited to an income tax holiday (ITH) of 4 to 6 years depending on whether or not an entity is registered as a pioneer or non-pioneer enterprise. If an ecozone enterprise chooses the 5% preferential tax, it is exempt from payment of all national and local taxes. However, if an ecozone enterprise chooses the income tax holiday, it is only exempt from payment of the income tax but still subject to other national internal revenue taxes including the value-added tax. It must be pointed out that an ecozone enterprise cannot avail of these two sets of fiscal incentives at the same time. This was explained by the Bureau of Internal Revenue in VAT Ruling Nos. 037-98; 043-98; 027-99; and 063-99 (Read-Rite Philippines, Inc. (Formerly Sunward Technologies Phils., Inc. vs. Commissioner of Internal Revenue, CTA Case No. 5659, September 29, 2000) . Thus, if the petitioner's PEZA-registered enterprises clients have availed of the fiscal incentives under Executive Order No. 226, that is, an income tax holiday, they are [became] (sic) subject to value-added tax. Therefore, petitioner's sales of goods, property and services to them shall be subject to 12% VAT. Under Sections 4.100-3 and 4.102-2 of Revenue Regulations No. 7-95, implementing Sections 100(a)(2)(C) and 100(b)(3) of the old National Internal Revenue Code (NIRC) [now Sections 106(A)(2)(c) and 108(B)(3) of the NIRC of 1997, as amended, the term 'effectively zero-rated sale of goods, property and services' shall only apply to sales made by a VAT-registered person to a person or entity who is exempt from indirect tax, pursuant to the provisions of a special law or international agreement in which the Philippines is a signatory. CTcSAE The special law in this case is R.A. No. 7916, otherwise known as the Special Economic Zone Act of 1995. There is no existing provision under this law that a PEZA-registered enterprise is exempt from indirect tax. Hence, petitioner's PEZA-registered clients are only exempt from income taxes during their Income Tax Holiday. Even after the expiration of the Income Tax Holiday, petitioner's PEZA-registered clients shall only be exempt from all national and local taxes. However, all these taxes to which petitioner's PEZA-registered clients shall enjoy exemption refer to direct taxes. On the other hand, the 12% VAT imposed on its purchases of goods, property, or services are direct taxes in the hands of its supplier (petitioner in this case) but indirect taxes in the hands of petitioner's PEZA-registered clients since the same are passed-on as part of the cost of its purchases. Accordingly, PEZA-registered enterprises' suppliers of services (petitioner in this case) cannot qualify for zero percent (0%) VAT, hence, shall be subject to 12% VAT on their sales to such PEZA-registered enterprises pursuant to Section 108 of the NIRC of 1997. 13. Taxes paid and collected are presumed to have been made in accordance with law and regulations, hence, not refundable. 14. In action for tax refund/credit, the burden of proof is on the taxpayer to establish its right to refund and failure to adduce sufficient proof is fatal to the action for tax refund/credit. 15. It is incumbent upon the petitioner to show that it has complied with the provisions of Section 112(A)(C) of the 1997 Tax Code, as amended, including Revenue Regulations No. 5-87 as amended by Revenue Regulations Nos. 3-88 and 7-95. 16. Claims for refund are construed strictly against the claimant for the same partakes the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-13509, January 30, 1970, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121) ." During trial, petitioner presented Mr. Leonard Lyle M. Tabalon, Ms. Marichu M. Go, Ms. Cecilia S. Magalona and Mr. Jerome Antonio B. Constantino as witnesses, and documentary evidence marked as Exhibits "A" to "III-1", inclusive of their submarkings. These pieces of evidence were all admitted by this Court in the Resolution 7 dated June 1, 2011. Upon manifestation by respondent, through counsel, that she is constrained to submit the instant case for decision considering that no Report Investigation was submitted to her office, both parties were required to present their respective memorandum. 8 The case was submitted for decision on August 31, 2011, considering petitioner's Memorandum 9 filed on August 10, 2011 and the report of this Court's Records Division that respondent failed to file her Memorandum. 10 The parties submitted the following issues 11 for this Court's resolution: "1. Whether the petition for review should be dismissed for lack of cause of action on the part of the Sumisetsu for non-exhaustion of administrative remedies by filing the instant petition before the expiration of the 120-day period as provided for under Section 112 (C) of the NIRC. cCaEDA 2. Whether the Honorable Court has jurisdiction over the instant petition inasmuch as there was no decision or inaction which is tantamount to denial by the Respondent Commissioner that the Court of Tax Appeals could review simply because the Respondent Commissioner was not given an opportunity to reach that decision or to act accordingly on the claim for refund within the 120-day period. 3. Whether Sumisetsu's sale of services to PEZA-registered enterprises is subject to 12% or 0% VAT. 4. Whether Sumisetsu has an unutilized input VAT in the amount of P39,355,139.27 for the four (4) quarters of 2008. 5. Whether the said unutilized input VAT for the four (4) quarters of 2008 were applied against its output taxes or carried over to the succeeding taxable quarters/years. 6. Whether Sumisetsu's claim for refund/tax credit allegedly representing unutilized input VAT for the four (4) quarters of 2008 in the total amount of P39,355,139.27 is substantiated by documentary evidence. 7. Whether Sumisetsu is entitled to a tax refund or a tax credit certificate for the input VAT payments attributable and allocated to services rendered to PEZA-registered entities for 2008 in the aggregate amount of P39,355,139.27." Petitioner seeks the refund of or the issuance of tax credit certificate for its input VAT payments attributable and allocated to services rendered to PEZA-registered entities during taxable year 2008. Pertinent to a claim for refund or tax credit of input tax is Section 112 (A) of the National Internal Revenue Code (NIRC) of 1997, as amended, which is quoted hereunder for easy reference. "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 of 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: Provided, finally, That for a person making sales that are zero-rated under Section 108(B)(6), the input taxes shall be allocated ratably between his zero-rated and non-zero-rated sales." DaTICc From the foregoing provision, in order to be entitled to a refund or tax credit of input VAT due or paid attributable to zero-rated or effectively zero-rated sales, the following requisites must be satisfied: 1. there must be zero-rated or effectively zero-rated sales; 2. that input taxes were incurred or paid; 3. that such input taxes are attributable to zero-rated or effectively zero-rated sales; 4. that the input taxes were not applied against any output tax liability; and 5. that the claim for refund must be filed within the two-year prescriptive period. The Court reckons that it would be more appropriate to determine first the timeliness of the filing of the instant claim as it will determine the necessity of resolving petitioner's compliance with the other requirements of input VAT refund. The High Tribunal in the landmark case of Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc. 12 explained that the Tax Code provides a period of two years after the close of the taxable quarter when the sales were made, within which a VAT-registered person, whose sales are zero-rated or effectively zero-rated, may file an administrative claim for the issuance of tax credit certificate or refund of its unutilized input tax. Should the Revenue Commissioner deny the claim or fail to act on the claim within one hundred twenty (120) days from the filing of the administrative claim and submission of supporting documents, the affected taxpayer is granted a period of thirty (30) days from the denial or inaction within which to appeal his case before this Court. In the present case, the first and the last taxable quarters wherein petitioner's sales of services to PEZA-registered enterprises were made ended on March 31, 2008 and December 31, 2008. Counting two years from the said dates, petitioner had until March 31, 2010 and December 31, 2010 to file its administrative claim for refund. Petitioner filed its original claim for refund on February 22, 2010, 13 which was amended on March 24, 2010, 14 with the BIR. Clearly, the administrative claim for refund was successfully filed within the two-year prescriptive period. DTSIEc Even though the administrative claim was filed within the two-year prescriptive period, this Court is constrained to deny the claim on the ground that the Petition for Review was prematurely filed before this Court. In the same case of Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc. , 15 the Supreme Court emphasized the importance of the periods provided under Section 112 (D) of the NIRC of 1997, in the determination of the timeliness of filing of an appeal with this Court, to wit: " The filing of the judicial claim was premature However, notwithstanding the timely filing of the administrative claim, we are constrained to deny respondent's claim for tax refund/credit for having been filed in violation of Section 112(D) of the NIRC, which provides that: SEC. 112. Refunds or Tax Credits of Input Tax . xxx xxx xxx (D) Period within which Refund or Tax Credit of Input Taxes shall be made. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals . (Emphasis supplied.) EHCcIT Section 112(D) of the NIRC clearly provides that the CIR has '120 days, from the date of the submission of the complete documents in support of the application [for tax refund/credit],' within which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days. In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this reason, we find the filing of the judicial claim with the CTA premature. Respondent's assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial claim as long as both the administrative and the judicial claims are filed within the two-year prescriptive period has no legal basis. There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A) of the said provision states that 'any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two 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.' The phrase 'within two (2) years . . . apply for the issuance of a tax credit certificate or refund' refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of subsection (D) of the same provision, which states that the CIR has '120 days from the submission of complete documents in support of the application filed in accordance with Subsections (A) and (B)' within which to decide on the claim. In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA . AHDacC xxx xxx xxx In fine, the premature filing of respondent's claim for refund/credit of input VAT before the CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA ." (Emphasis supplied) Here, the original and the amended administrative claims for refund were filed on February 22, 2010 and March 24, 2010, respectively. 16 Counting 120 days from the filing of the administrative claims, respondent had until June 22, 2010 or July 22, 2010 to decide on petitioner's administrative claims for refund. Considering that the judicial claim was filed on March 31, 2010, petitioner prematurely invoked the power of this Court to take cognizance of this case without waiting for the decision of the Bureau of Internal Revenue or the expiration of the 120-day period provided by law. Due to petitioner's failure to observe the 120-day period prescribed under Section 112 (D) of the NIRC of 1997, the filing of the Petition for Review is deemed to be premature. Consequently, this Court has no jurisdiction to entertain the instant case. WHEREFORE , the instant Petition for Review is hereby DISMISSED for lack of jurisdiction. SO ORDERED . (SGD.) JUANITO C. CASTAEDA, JR. Associate Justice Caesar A. Casanova and Cielito N. Mindaro-Grulla, JJ., concur. Footnotes 1. Par. 2, Stipulation of Facts, Joint Stipulation of Facts and Issues (JSFI), rollo , p. 109. 2. Par. 4, Stipulation of Facts, JSFI, rollo , p. 109. 3. Par. 1, Stipulation of Facts, JSFI, rollo , p. 108. 4. Exhibit "F". 5. Exhibit "G". 6. Rollo , pp. 58-64. 7. Rollo , pp. 261-262. 8. Rollo , p. 264. 9. Rollo , pp. 265-284. 10. Rollo , p. 287. 11. Rollo , pp. 111-112. 12. G.R. No. 184823, October 6, 2010. 13. Exhibit "F". 14. Exhibit "G". 15. Supra . 16. Pars. 13 and 14, Stipulation of Facts, JSFI, rollo , p. 110.