VAT
GR 181858 – KEPCO Phils Corp v CIR (2010) 4. Hence this petition.
Mendoza J
KEPCO filed application for zero-rated sales. KEPCO then filed a claim for tax refund. Upon
petition for review before CTA, the CIR averred that the refund was denied due to the failure
of KEPCO to prove basis for refund. CTA partially granted petition allowing a portion of the
total amount being claimed. On petition to SC, SC affirmed CTA en banc decision ruling
particularly on the need to comply with the requirements (stamping “zero-rated” and TIN-
VAT on the invoices and receipts), failure to do so would amount to denial of claims.
DOCTRINE
On stamping of “zero-rated” and TIN-VAT:
o Section 4.108-1 of RR 7-95 proceeds from rule-making authority granted to
Secretary of Finance under Section 245 of 1977 NIRC for efficient enforcement of
the tax code and of course its amendments.
o Said requirement is deemed reasonable and in accord with efficient collection of
VAT from the covered of VAT from the covered sales of goods and services.
o RR 7-95 also specifically requires VAT registered person to imprint TIN-VAT on
invoices or receipts
Non-compliance with the requirements result in denial of refund of the claim
KEPCO Philippines Corporation (Kepco) – VAT-registered independent power producer
engaged in the business of generating electricity. It exclusively sells electricity to National
Power Corporation (NPC), an entity exempt from taxes under Section 13 of Republic Act
No. 6395 (RA No. 6395)
FACTS
1. KEPCO filed an application for zero-rated sales with the BIR which was approved
under VAT 64-01. It filed for four Quarterly VAT returns declaring zero-rated sales in
the amount of P3,285,308,055.85.
a. KEPCO claimed expenses reportedly sustained in connection with production and
sale of electricity with NPC claiming input VAT of P11,710,868.86 attributing the
same to its zero-rated sales of electricity with NPC for 2002.
2. KEPCO then filed CIR a claim for tax refund covering unutilized input VAT
payments attributable to its zero-rated sales transactions. Two days after KEPCO filed
a petition for review before the CTA.
a. CIR averred the claims for refund were strictly construed against taxpayer as it
was similar to a tax exemption, hence the burden to show that the taxes were
erroneous or illegal lay upon the taxpayer. There is failure on part of KEPCO to
prove the basis claimed as a tax refund.
b. KEPCO presented court-commissioned Independent CPA Machacon who
presented official receipts, invoices, and vouchers to claim the refund for unutilized
input VAT.
3. CTA ruled that out of total declared zero-rated sales of 3.285 Million, only 1.452 Million
was properly substantiated as zero-rated sales. CTA also disallowed 5.171 Million due
to failure to comply with substantiation requirement. Therefore only a total of 2.890
Million representing unutilized input VAT for 2002.
a. CTA En Banc denied appeal by KEPCO.
ISSUE with HOLDING
W/N CTA erred in disallowing claims due to non-compliance with invoicing requirements
(such as stamping of “zero-rated” and the “TIN-VAT” on invoices and/or ORs) – NO. CTA is
correct in disallowing the claims
 KEPCO: 1997 NIRC does not require the imprinting of the word “zero-rated” on invoices
and/or official receipts covering zero-rated sales, citing Section 113 in relation to
Section 237 of NIRC. Only Section 4.108-1 of RR 7-95 required it. KEPCO claims that
RR 7-95 cannot be considered as valid legislation considering the long settled rule that
administrative rules and regulations cannot expand the letter and spirit of the law they
seek to enforce.
 SC: Disagrees with KEPCO. Issue whether or not word zero-rated should be
imprinted on invoices and/or official receipts as part of invoicing requirement was
settled in Panasonic Communications v CIR and JRA Phil v Commissioner.
o In the said cases, the court ruled that Section 4.108-1 of RR 7-95 proceeds from
rule-making authority granted to Secretary of Finance under Section 245 of 1977
NIRC for efficient enforcement of the tax code and of course its amendments.
o Said requirement is deemed reasonable and in accord with efficient collection of
VAT from the covered of VAT from the covered sales of goods and services.
o Furthermore, the printing of the word zero-rated on the invoice helps segregate
sales that are subject to 10% (now 12% VAT) from the sales that are zero-rated.
 Unable to submit the proper invoices, petitioner Panasonic has unable to substantiate
claim for refund.
o Following the ruling, the RR neither expanded nor supplanted the tax code but
merely supplemented what the tax code already defined and discussed.
o In the present case, KEPCO failed to comply with the correct substantiation
requirement for zero-rated transactions.
ON TIN-VAT requirement on invoices or receipts - REQUIRED
 Also contrary to KEPCO’s allegation, the regulation (RR 7-95) specifically requires
the VAT registered person to imprint TIN-VAT on invoices or receipts.
o Thus CTA is correct when it ruled that TIN-VAT must be printed and not merely
stamped.
ON claim that the non-compliance should not result in denial of refund of the claim –
NO!
 BUT KEPCO argues that non-compliance of invoicing requirements should not result in
denial of taxpayers refund claim.
 SC however stated that the decision cited by petitioners (Atlas Consolidated v CIR) did
not make any categorical ruling that refund should be allowed for those who had
not complied with substantiation requirements.
ON interchanging invoices and Official Receipts – KEPCO is wrong
 KEPCO also argued that under Section 113(A) of NIRC, invoices and official receipts
are used interchangeably for purposes of substantiating input VAT, thus the CTA should
have accepted its substantiation of input VAT on purchases of goods with Official
Receipts and on purchases of services with Invoices.
 SC disagrees since under the law, a VAT invoice is necessary for every sale, barter or
exchange of goods or properties, while VAT official receipt properly pertains to every
lease of goods or properties, and for every sale, barter or exchange of services.
1
 o A VAT invoice is seller’s best proof of sale of goods or services to the buyer,
while the VAT receipt is the buyer’s best evidence of the payment of goods or
services received from the seller.
o Taken collectively, these invoices and receipts are necessary to substantiate the
actual amount or quantity of goods sold and their selling price (proof of
transaction), and the best means to prove the input VAT payments (proof of
payment). Hence invoice and receipt should not be confused as referring to one
and the same thing. They cannot be used alternatively.
 Tax refunds are in the nature of tax exemptions which represent a loss of revenue of
government. These exemptions must be strictly construed against the taxpayer, as
taxes are the lifeblood of the government.

DISPOSITIVE PORTION
Petition denied

DIGESTER: Dino De Guzman