G.R. No. 179356, December 14, 2009
KEPCO PHILIPPINES CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

KEPCO Philippines Corporation (petitioner), an independent power producer selling electricity to the National Power Corporation (NPC), filed administrative and judicial claims for tax refund of unutilized input Value Added Tax (VAT) payments. The claims, consolidated before the Court of Tax Appeals (CTA), totaled ₱22,172,003.26 for the 3rd and 4th quarters of 1996. The CTA granted a partial refund of ₱8,325,350.35 for input VAT on domestic goods and services qualifying as capital goods but disallowed other claims. Petitioner filed an urgent motion for reconsideration, claiming an additional ₱5,012,875.67. The CTA denied this motion, noting that part of the amount involved 1997 purchases and the remaining ₱3,455,199.54 was not recorded under depreciable asset accounts, thus not considered capital goods. Petitioner appealed to the Court of Appeals, praying only for the refund of ₱3,455,199.54, arguing the purchases were used in rehabilitating the Malaya Power Plant Complex and should be considered capital goods. The appellate court affirmed the CTA’s decision, noting the account vouchers listed the purchases under various inventory accounts (e.g., Inventory supplies/materials, Repair and Maintenance) and not under depreciable asset accounts.

ISSUE

Whether the purchases amounting to ₱3,455,199.54 qualify as “capital goods” for purposes of claiming a refund of input VAT.

RULING

No. The Supreme Court denied the petition, upholding the decisions of the Court of Appeals and the CTA. For purchases to be considered “capital goods or properties” under Section 4.106-1(b) of Revenue Regulations No. 7-95, three requisites must concur: (1) the useful life of the goods or properties must exceed one year; (2) they must be treated as depreciable assets under Section 34(f) of the National Internal Revenue Code (NIRC); and (3) they must be used directly or indirectly in the production or sale of taxable goods and services. The Court found that petitioner’s evidence, specifically the account vouchers, indicated the disallowed purchases were recorded under inventory accounts, not under depreciable asset accounts. Petitioner’s failure to record these items under fixed or depreciable asset accounts militated against its claim. The Court rejected petitioner’s contention that its general ledger and accounting records treated the items as capital goods, holding that in case of variance between source documents (like account vouchers) and the general ledger, the former is preferred. Furthermore, tax refunds are in the nature of tax exemptions and are construed strictly against the taxpayer. The CTA’s expertise on tax matters was respected, as there was no showing of abuse or reckless exercise of authority. Thus, petitioner failed to establish that the disallowed items should be classified as capital goods.