G.R. No. 163835 - COMMISSIONER OF INTERNAL REVENUE, VS. EASTERN TELECOMMUNICATIONS PHILIPPINES, INC.. D E C I S I O N - Supreme Court E-Library

Ruling

Accordingly, the 3% franchise tax did not substitute the 10% [VAT] on [Eastern's] importation of equipment, machineries and spare parts for the use of its telecommunication system; Tax refunds are in the nature of tax exemptions. As such, they are regarded in derogation of sovereign authority and to be construed in strictissimi juris against the person or entity claiming the exemption. The burden is upon him who claims the exemption in his favour and he must be able to justify his claim by the clearest grant of organic or statute law and cannot be permitted to exist upon vague implication x x x; Taxes paid and collected are presumed to have been made in accordance with the laws and regulations; and It is incumbent upon the taxpayer to establish its right to the refund and failure to sustain the burden is fatal to the claim for refund. [9] Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the refund/credit of the unapplied input taxes , not on the basis of the "in lieu of all taxes" provision of its legislative franchise, [10] but rather, on Section 106(B) of the Tax Code, which states: SECTION 106. Refunds or tax credits of input tax. x x x x (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. [11] [Emphases supplied.] The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed refund/credit as all the elements of the above provision were present: (1) Eastern was a VAT-registered entity which paid 10% input taxes on its importations of capital equipment; (2) this input VAT remained unapplied as of the first quarter of 1997; and (3) Eastern seasonably filed its application for refund/credit within the two-year period stated in the law. However, the CTA noted that Eastern was able to substantiate only P21,487,702.00 of its claimed amount of P22,013,134.00. The difference represented input taxes that were allegedly paid but were not supported by the corresponding receipts, as found by an independent auditor. Moreover, it excluded P5,360,634.00 in input taxes on imported equipment for the year 1995, even when these were properly documented as they were already booked by Eastern as part of the cost. Once input tax becomes part of the cost of capital equipment, it necessarily forms part of depreciation. Thus, to grant the refund of the 1995 creditable input tax amounts to twice giving Eastern the tax benefit. Thus, in its July 17, 2000 decision, the CTA granted in part Eastern's appeal by declaring it entitled to a tax refund of P16,229,100.00, representing unapplied input taxes on imported capital goods for the taxable year 1996. [12] The CIR filed, on August 3