G.R. No. 179356 - KEPCO Phil. Corp. vs. Commissioner of Internal Revenue

Petitioner: KEPCO Philippines Corporation, an independent power producer engaged in selling electricity to the National Power Corporation (NPC).
Respondent: Commissioner of Internal Revenue.

KEPCO Philippines Corporation was incorporated and registered with the Securities and Exchange Commission on June 15, 1995.
Soon after incorporation, the petitioner entered into a Rehabilitation, Operation, Maintenance and Management Agreement with NPC for the rehabilitation and operation of the Malaya Power Plant Complex in Pililia, Rizal.

On September 30, 1998, the petitioner filed an administrative claim with the Commissioner for a tax refund comprising:

An amount of P4,895,858.01 for unutilized input VAT payments on domestic purchases of goods and services for the 3rd quarter of 1996.
An amount of P4,084,867.25 for creditable VAT withheld from payments received from NPC during the months of April and June 1996.

Concurrently, the petitioner filed a judicial claim before the Court of Tax Appeals (CTA), docketed as CTA Case No. 5765, based on the same refund amounts.
On December 28, 1998, another claim was submitted to the Commissioner for refund representing unutilized input VAT payments attributable to zero-rated sale transactions with NPC, including domestic purchases for the 4th quarter of 1996 amounting to P13,191,278.00.
This additional claim was also filed before the CTA (docketed as CTA Case No. 5704), and both petitions were later consolidated for a total refund claim of P22,172,003.26.

Auditor Ruben R. Rubio, commissioned by the court, concluded that a total amount of P20,550,953.93 was properly substantiated for VAT purposes and thus eligible for a valid refund.

On March 18, 2003, the CTA granted a partial refund concerning unutilized input VAT payments on domestic goods and services classified as capital goods for the 3rd and 4th quarters of 1996, amounting to P8,325,350.35.
All other refund claims submitted by the petitioner were disallowed.

The petitioner filed an urgent motion for reconsideration seeking an additional refund amounting to P5,012,875.67.
On July 8, 2003, the CTA denied the motion, ruling that:

A portion of P1,557,676.13 pertained to purchases made in 1997, which were not applicable.
The remaining amount of P3,455,199.54 was not recorded under depreciable asset accounts and therefore could not qualify as capital goods.

The petitioner appealed under Rule 43 of the Rules of Court, limiting the relief solely to the refund of P3,455,199.54.
The central argument on appeal was that the disputed purchases, used in the rehabilitation of the Malaya Power Plant Complex, should be considered as capital expenses and thus fall within the definition of capital goods.
The appellate court examined the account vouchers submitted by the petitioner, which recorded the disputed purchases under various inventory accounts such as:

After the denial of reconsideration and affirmance by the appellate court, the petitioner filed the present petition for review on certiorari.
The petitioner faulted the appellate court for not considering the disputed purchases (amounting to P3,455,199.54) as capital goods, contending they were used in the rehabilitation of the power plant.
Central to the dispute is whether the contested purchases should have been capitalized as depreciable assets rather than being recorded as inventory items.

Whether the purchases amounting to P3,455,199.54 should qualify as “capital goods” despite being recorded under inventory accounts and not as depreciable assets.
Whether such classification affects the eligibility for the corresponding VAT input tax refund.

The weight of evidence between the account vouchers and the general ledger: determining which record should govern the classification of purchased items.
Whether the general ledger testimony should override the information provided by the more conclusive source documents (account vouchers).

Whether the petitioner adequately met the requisites under Revenue Regulations No. 7-95 and Section 34(F) of the NIRC for an item to be considered a capital good.
Whether the CTA and the appellate court correctly applied the legal standards and interpretation of the tax laws regarding non-capitalization of the disputed items.