THE COMMISIONER OF G.R. No.

147295
INTERNAL REVENUE,
Petitioner, Present:

QUISUMBING, J., Chairperson,

- versus - CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
ACESITE (PHILIPPINES)
HOTEL CORPORATION, Promulgated:
Respondent.
February 16, 2007
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari[1] under Rule 45 of the Rules

of Court, assailing the November 17, 2000 Decision[2] of the Court of Appeals
(CA) in CA-G.R. SP No. 56816, which affirmed the January 3, 2000 Decision[3] of
the Court of Tax Appeals (CTA) in CTA Case No. 5645 entitled Acesite
(Philippines) Hotel Corporation v. The Commissioner of Internal
Revenue for Refund of VAT Payments.

The Facts

The facts as found by the appellate court are undisputed, thus:

Acesite is the owner and operator of the Holiday Inn Manila

Pavilion Hotel along United Nations Avenue in Manila. It leases
6,768.53 square meters of the hotels premises to the Philippine
Amusement and Gaming Corporation [hereafter, PAGCOR] for
casino operations. It also caters food and beverages to PAGCORs
casino patrons through the hotels restaurant outlets. For the period
January (sic) 96 to April 1997, Acesite incurred VAT amounting to
P30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR during said period. Acesite tried to shift the
said taxes to PAGCOR by incorporating it in the amount assessed
to PAGCOR but the latter refused to pay the taxes on account of its
tax exempt status.

Thus, PAGCOR paid the amount due to Acesite minus the

P30,152,892.02 VAT while the latter paid the VAT to the
Commissioner of Internal Revenue [hereafter, CIR] as it feared the
legal consequences of non-payment of the tax. However, Acesite
belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax-
exempt entity. On 21 May 1998, Acesite filed an administrative
claim for refund with the CIR but the latter failed to resolve the
same. Thus on 29 May 1998, Acesite filed a petition with the Court
of Tax Appeals [hereafter, CTA] which was decided in this wise:

As earlier stated, Petitioner is subject to zero percent tax

pursuant to Section 102 (b)(3) [now 106(A)(C)] insofar as
its gross income from rentals and sales to PAGCOR, a tax
exempt entity by virtue of a special law. Accordingly, the
amounts of P21,413,026.78 and P8,739,865.24,
representing the 10% EVAT on its sales of food and
services and gross rentals, respectively from PAGCOR
shall, as a matter of course, be refunded to the petitioner for
having been inadvertently remitted to the respondent.

Thus, taking into consideration the prescribed portion of

Petitioners claim for refund of P98,743.40, and considering
further the principle of solutio indebiti which requires the
return of what has been delivered through mistake,
Respondent must refund to the Petitioner the amount of
P30,054,148.64 computed as follows:

Total amount per claim 30,152,892.02

Less Prescribed amount (Exhs A, X, & X-20)
January 1996 P 2,199.94
February 1996 26,205.04
 March 1996 70,338.42 98,743.40
P30,054,148.64
vvvvvvvvvvvvv
WHEREFORE, in view of all the foregoing, the instant
Petition for Review is partially GRANTED. The
Respondent is hereby ORDERED to REFUND to the
petitioner the amount of THIRTY MILLION FIFTY FOUR
THOUSAND ONE HUNDRED FORTY EIGHT PESOS
AND SIXTY FOUR CENTAVOS (P30,054,148.64)
immediately.

SO ORDERED.[4]

The Ruling of the Court of Appeals

Upon appeal by petitioner, the CA affirmed in toto the decision of the CTA
holding that PAGCOR was not only exempt from direct taxes but was also exempt
from indirect taxes like the VAT and consequently, the transactions between
respondent Acesite and PAGCOR were effectively zero-rated because they
involved the rendition of services to an entity exempt from indirect taxes. Thus, the
CA affirmed the CTAs determination by ruling that respondent Acesite was
entitled to a refund of PhP 30,054,148.64 from petitioner.

The Issues

Hence, we have the instant petition with the following issues: (1) whether
PAGCORs tax exemption privilege includes the indirect tax of VAT to entitle
Acesite to zero percent (0%) VAT rate; and (2) whether the zero percent (0%)
VAT rate under then Section 102 (b)(3) of the Tax Code (now Section 108 (B)(3)
of the Tax Code of 1997) legally applies to Acesite.

The petition is devoid of merit.

In resolving the first issue on whether PAGCORs tax exemption privilege

includes the indirect tax of VAT to entitle Acesite to zero percent (0%) VAT rate,
we answer in the affirmative. We will however discuss both issues together.

PAGCOR is exempt from payment of indirect taxes

 It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the
latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. (a) Franchise Holder: No tax of

any kind or form, income or otherwise, as well as fees, charges
or levies of whatever nature, whether National or Local, shall
be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax
of five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall
be due and payable quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or assessments of any
kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings

derived from the operations conducted under the franchise
specifically from the payment of any tax, income or otherwise,
as well as any form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with
the operations of the casino(s) authorized to be conducted
under this Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to
the Corporation or operator. (Emphasis supplied.)

Petitioner contends that the above tax exemption refers only to PAGCORs
direct tax liability and not to indirect taxes, like the VAT.

We disagree.
 A close scrutiny of the above provisos clearly gives PAGCOR a blanket
exemption to taxes with no distinction on whether the taxes are direct or
indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect
taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the
term Corporation or operator refers to PAGCOR. Although the law
does not specifically mention PAGCORs exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes
because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although,
differently worded, the provision clearly exempts PAGCOR from
indirect taxes. In fact, it goes one step further by granting tax
exempt status to persons dealing with PAGCOR in casino
operations. The unmistakable conclusion is that PAGCOR is not
liable for the P30,152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B
(3). R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with

PAGCOR, the legislature clearly granted exemption also from indirect taxes. It
must be noted that the indirect tax of VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the goods, properties, or services
subject to VAT. Thus, by extending the tax exemption to entities or individuals
dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of such
value, or charged as an additional 10% to the value. Verily, the seller or lessor has
the option to follow either way in charging its clients and customer. In the instant
case, Acesite followed the latter method, that is, charging an additional 10% of the
gross sales and rentals. Be that as it may, the use of either method, and in
particular, the first method, does not denigrate the fact that PAGCOR is exempt
from an indirect tax, like VAT.
VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within
the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108
[b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services (a) Rate and base
of tax There shall be levied, assessed and collected, a value-added
tax equivalent to 10% of gross receipts derived by any person
engaged in the sale of services x x x; Provided, that the following
services performed in the Philippines by VAT-registered persons
shall be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.

xxxx

(3) Services rendered to persons or entities whose exemption

under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D.
1869 and the extension of such exemption to entities or individuals dealing with
PAGCOR in casino operations are best elucidated from the 1987 case
of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc.,[5] where the
absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption of
contractee WHO should be implemented to mean that the entity or person exempt
is the contractor itself who constructed the building owned by contractee WHO,
and such does not violate the rule that tax exemptions are personal because
the manifest intention of the agreement is to exempt the contractor so that no
contractors tax may be shifted to the contractee WHO. Thus, the proviso in
P.D. 1869, extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT,
that may be shifted to PAGCOR.
Acesite paid VAT by mistake

Considering the foregoing discussion, there are undoubtedly erroneous

payments of the VAT pertaining to the effectively zero-rate transactions between
Acesite and PAGCOR. Verily, Acesite has clearly shown that it paid the subject
taxes under a mistake of fact, that is, when it was not aware that the transactions it
had with PAGCOR were zero-rated at the time it made the payments. In UST
Cooperative Store v. City of Manila,[6] we explained that there is erroneous
payment of taxes when a taxpayer pays under a mistake of fact, as for the instance
in a case where he is not aware of an existing exemption in his favor at the time the
payment was made.[7] Such payment is held to be not voluntary and, therefore, can
be recovered or refunded.[8]

Moreover, it must be noted that aside from not raising the issue of Acesites
compliance with pertinent Revenue Regulations on exemptions during the
proceedings in the CTA, it cannot be gainsaid that Acesite should have done so as
it paid the VAT under a mistake of fact. Hence, petitioners argument on this point
is utterly tenuous.

Solutio indebiti applies to the Government

Tax refunds are based on the principle of quasi-contract or solutio

indebiti and the pertinent laws governing this principle are found in Arts. 2142 and
2154 of the Civil Code, which provide, thus:

Art. 2142. Certain lawful, voluntary, and unilateral acts give rise to
the juridical relation of quasi-contract to the end that no one shall
be unjustly enriched or benefited at the expense of another.

Art. 2154. If something is received when there is no right to

demand it, and it was unduly delivered through mistake, the
obligation to return it arises.

When money is paid to another under the influence of a mistake of fact, that
is to say, on the mistaken supposition of the existence of a specific fact, where it
would not have been known that the fact was otherwise, it may be recovered. The
ground upon which the right of recovery rests is that money paid through
misapprehension of facts belongs in equity and in good conscience to the person
who paid it.[9]
The Government comes within the scope of solutio indebiti principle as elucidated
in Commissioner of Internal Revenue v. Firemans Fund Insurance
Company, where we held that: Enshrined in the basic legal principles is the time-
honored doctrine that no person shall unjustly enrich himself at the expense of
another. It goes without saying that the Government is not exempted from the
application of this doctrine.[10]

Action for refund strictly construed; Acesite discharged the

burden of proof

Since an action for a tax refund partakes of the nature of an exemption,

which cannot be allowed unless granted in the most explicit and categorical
language, it is strictly construed against the claimant who must discharge such
burden convincingly.[11] In the instant case, respondent Acesite had discharged this
burden as found by the CTA and the CA. Indeed, the records show that Acesite
proved its actual VAT payments subject to refund, as attested to by an independent
Certified Public Accountant who was duly commissioned by the CTA. On the
other hand, petitioner never disputed nor contested respondents testimonial and
documentary evidence. In fact, petitioner never presented any evidence on its
behalf.

One final word. The BIR must release the refund to respondent without any
unreasonable delay. Indeed, fair dealing is expected by our taxpayers from the BIR
and this duty demands that the BIR should refund without any unreasonable delay
what it has erroneously collected.[12]

WHEREFORE, the petition is DENIED for lack of merit and

the November 17, 2000 Decision of the CA is hereby AFFIRMED. No costs.

SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF
TAX APPEALS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

 RESOLUTION

FELICIANO, J.:

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal
Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other
things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as
amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed
a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case
No. 2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to
refund or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the
CTA and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the
refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit
against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) which represents the difference between the regular tax
of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends;
and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that
"the dividends received by its non-resident parent company in the US (P&G-USA) may be
subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the
present claim for refund or tax credit, which need to be examined. This question was raised for the
first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before
this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the refund instead of
transmitting such refund or tax credit to its parent and sole stockholder. It is commonplace that in the
absence of explicit statutory provisions to the contrary, the government must follow the same rules of
procedure which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of filing fees from which the
Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant,
be allowed to raise for the first time on appeal questions which had not been litigated either in the
lower court or on the administrative level. For, if petitioner had at the earliest possible
opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express
authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would have
been able forthwith to secure and produce such authorization before filing the action in the instant
case. The action here was commenced just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions
as well which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of
Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or
illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether
or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such
suit or proceeding shall be begun after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause that may arise after payment: . . .
(Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The

Commissioner may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D.
No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil.
a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as
referring to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus becomes
important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to
deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified
against any claims and demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is directly and independently liable 3 for the correct amount
of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties should the amount of the
tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay
a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a person should be
regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out
that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The
reason is to compel the withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not
made liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the
necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the
authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, is in the instant
case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such
parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to
commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of
the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from
the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309,
NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent
(15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.

(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to
35% of the gross income receipt during its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still further,
that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall
be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign
corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid
in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation,
goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for
"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other
words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes
deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the
Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular
thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20
percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC
does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are
the following:

Sec. 901 Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the
applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of
a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or
changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter
for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings),
against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating
to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under
subsection (a):

(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the
amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to
any possession of the United States; and

xxx xxx xxx

 Sec. 902. Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic corporation which owns at
least 10 percent of the voting stock of a foreign corporation from which itreceives dividends in any taxable year shall

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1)
(b)] of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same
proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any
foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of
such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect to any
foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without
reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such
profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the
income, war profits, and excess profits taxes imposed on or with respect to suchprofits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such
dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of
the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having
been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7

shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of
the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-
USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax
credit 8 for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually
paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the
Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount
remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket,
as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-
Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate
income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA,
are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation of the same income
stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent
(15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b)
(1), NIRC, and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend
tax waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA

x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USA

x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of
the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under
Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be
computed arithmetically as follows:

P65.00 Dividends remittable to P&G-USA

- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax
credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid
by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code,
specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR
of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative
rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana,
later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of
the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law
allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of credit
against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation
declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S. government will allow a
credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the
income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation
has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax
Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax,
 or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation
receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250

P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation
from a Philippine subsidiary is clearly more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the
dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the
dividends to be remitted by your client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which
are the bases of the ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax
deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation.
(Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20
October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by
the BIR even as the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly
the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations
abroad (say, in the United States) and which, therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .

(c) Taxes. . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of
this paragraphs, the tax imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the amount of
net income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis
supplied)
 Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US
governmente.g., for taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of the
NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority of the
voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the
same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country,
upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the
amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have
been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the
amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are
included. The term"accumulated profits" when used in this subsection reference to a foreign corporation, means the amount of
its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect
to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated
profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been
paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other
respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a
foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting
period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period.
(Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid"
by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate
stockholder is "deemed" under our NIRC to have paid a proportionate part of the US corporate income tax paid by its US subsidiary,
although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax
credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax
credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8),
NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate
rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the
US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation
arising after the legal question has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case:
the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US
tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the
applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC,
merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued
by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the
preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax
credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until the US
tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends

It is this practical or operating

have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11

circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular
foreign jurisdictions (e.g., Republic of Vanuatu 12Hongkong, 13 Denmark, 14 etc.) comply with the
requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax
rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced
dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability, as a matter of law, of a particular tax rate. Upon the other hand, upon the
determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent
the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine
corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually
subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the
taxable year involved. Since the US tax laws can and do change, such implementing regulations
could also provide that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage points
differential. The task of this Court is to settle which tax rate is applicable, considering the state of US
law at a given time. We should leave details relating to administrative implementation where they
properly belong with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that
reason alone, necessarily the correct reading of the statute. There are many tax statutes or
provisions which are designed, not to trigger off an instant surge of revenues, but rather to achieve
longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give
effect to the legislative design and objectives as they are written into the statute even if, as in the
case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-
five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of
P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a

developing economyforemost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed
on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate
tax need be imposed on dividends received by non-resident foreign corporations in the same
manner as the tax imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment
in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives it some relief from double
taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax"
income to subject to its own taxing power) by allowing the investor additional tax credits which would
be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit
at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901
tax credit.

P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

- 0 - US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset
the US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine,
could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the
dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine
Government, this should encourage additional investment or re-investment in the Philippines by
P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to
Taxes on Income," 15the Philippines, by a treaty commitment, reduced the regular rate of dividend tax
to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent
corporations:

Art 11. Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from
sources within that Contracting State by a resident of the other Contracting State shall not
exceed

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend
if during the part of the paying corporation's taxable year which precedes the date of
payment of the dividend and during the whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of the paying corporation was owned by
the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United
States that it "shall allow" to a US parent corporation receiving dividends from its Philippine
subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary] . 16 This is, of course, precisely the "deemed paid" tax credit provided for in
Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a
deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is
a maximum rate, there is still a differential or additional reduction of five (5) percentage points which
compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes
available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it
seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the
Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.
 COMMISSIONER OF INTERNAL G.R. Nos. 179045-46
REVENUE,
Petitioner, Present:

CORONA, C. J., Chairperson,

VELASCO, JR.,
- versus - LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.

SMART COMMUNICATION, INC., Promulgated:

Respondent. August 25, 2010
x----------------------------------------------------------
-x

DECISION

DEL CASTILLO, J.:

The right of a withholding agent to claim a refund of erroneously or illegally withheld

taxes comes with the responsibility to return the same to the principal taxpayer.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set
aside the Decision[1] dated June 28, 2007 and the Resolution[2] dated July 31, 2007 of the
Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Smart Communications, Inc. is a corporation organized and existing under

Philippine law. It is an enterprise duly registered with the Board of Investments.
On May 25, 2001, respondent entered into three Agreements for Programming and
Consultancy Services[3] with Prism Transactive (M) Sdn. Bhd. (Prism), a non-resident
corporation duly organized and existing under the laws of Malaysia. Under the
agreements, Prism was to provide programming and consultancy services for the
installation of the Service Download Manager (SDM) and the Channel Manager (CM),
and for the installation and implementation of Smart Money and Mobile Banking Service
SIM Applications (SIM Applications) and Private Text Platform (SIM Application).

On June 25, 2001, Prism billed respondent in the amount of US$547,822.45,

broken down as follows:

SDM Agreement US$236,000.00

CM Agreement 296,000.00
SIM Application Agreement 15,822.45
Total US$547,822.45[4]

Thinking that these payments constitute royalties, respondent withheld the amount
of US$136,955.61 or P7,008,840.43,[5] representing the 25% royalty tax under the RP-
Malaysia Tax Treaty.[6]

On September 25, 2001, respondent filed its Monthly Remittance Return of Final
Income Taxes Withheld (BIR Form No. 1601-F)[7] for the month of August 2001.

On September 24, 2003, or within the two-year period to claim a refund,

respondent filed with the Bureau of Internal Revenue (BIR), through the International
Tax Affairs Division (ITAD), an administrative claim for refund[8] of the amount
of P7,008,840.43.
Proceedings before the CTA Second Division

Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act
on the claim for refund, respondent filed a Petition for Review[9] with the CTA, docketed
as CTA Case No. 6782 which was raffled to its Second Division.
In its Petition for Review, respondent claimed that it is entitled to a refund because
the payments made to Prism are not royalties[10] but business profits,[11] pursuant to the
definition of royalties under the RP-Malaysia Tax Treaty,[12] and in view of the pertinent
Commentaries of the Organization for Economic Cooperation and Development
(OECD) Committee on Fiscal Affairs through the Technical Advisory Group on Treaty
Characterization of Electronic Commerce Payments.[13] Respondent further averred that
since under Article 7 of the RP-Malaysia Tax Treaty, business profits are taxable in the
Philippines only if attributable to a permanent establishment in the Philippines, the
payments made to Prism, a Malaysian company with no permanent establishment in the
Philippines,[14] should not be taxed.[15]

On December 1, 2003, petitioner filed his Answer[16] arguing that respondent, as

withholding agent, is not a party-in-interest to file the claim for refund,[17] and that
assuming for the sake of argument that it is the proper party, there is no showing that the
payments made to Prism constitute business profits.[18]

Ruling of the CTA Second Division

In a Decision[19] dated February 23, 2006, the Second Division of the CTA upheld
respondents right, as a withholding agent, to file the claim for refund citing the cases
of Commissioner of Internal Revenue v. Wander Philippines, Inc.,[20] Commissioner of
Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation[21] and Commissioner of Internal Revenue v. The Court of Tax Appeals.[22]

However, as to the claim for refund, the Second Division found respondent
entitled only to a partial refund. Although it agreed with respondent that the payments for
the CM and SIM Application Agreements are business profits,[23] and therefore, not
subject to tax[24] under the RP-Malaysia Tax Treaty, the Second Division found the
payment for the SDM Agreement a royalty subject to withholding tax.[25] Accordingly,
respondent was granted refund in the amount of P3,989,456.43, computed as follows:[26]

Particulars Amount (in US$)

1. CM 296,000.00
2. SIM Application 15,822.45
Total US$311,822.45

Particulars Amount
Tax Base US$311,822.45
Multiply by: Withholding Tax Rate 25%
Final Withholding Tax US$ 77,955.61
Multiply by: Prevailing Exchange Rate 51.176
 Tax Refund Due P3,989,456.43
The dispositive portion of the Decision of the CTA Second Division reads:

WHEREFORE, premises considered, the instant petition is partially

GRANTED. Accordingly, respondent Commissioner of Internal Revenue is
hereby ORDERED to REFUND or ISSUE a TAX CREDIT CERTIFICATE
to petitioner Smart Communications, Inc. in the amount of P3,989,456.43,
representing overpaid final withholding taxes for the month of August 2001.

SO ORDERED.[27]

Both parties moved for partial reconsideration[28] but the CTA Second Division denied
the motions in a Resolution[29] dated July 18, 2006.

Ruling of the CTA En Banc

Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions
for Review,[30] which were consolidated per Resolution[31] dated February 8, 2007.

On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial
refund granted to respondent. In sustaining respondents right to file the claim for refund,
the CTA En Banc said that although respondent and Prism are unrelated entities, such
circumstance does not affect the status of [respondent] as a party-in-interest [as its legal
interest] is based on its direct and independent liability under the withholding tax
system.[32] The CTA En Banc also concurred with the Second Divisions characterization
of the payments made to Prism, specifically that the payments for the CM and SIM
Application Agreements constitute business profits,[33] while the payment for the SDM
Agreement is a royalty.[34]

The dispositive portion of the CTA En Banc Decision reads:

WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the

assailed Decision and Resolution are hereby AFFIRMED.

SO ORDERED.[35]
Only petitioner sought reconsideration[36] of the Decision. The CTA En Banc, however,
found no cogent reason to reverse its Decision, and thus, denied petitioners motion for
reconsideration in a Resolution[37] dated July 31, 2007.

Unfazed, petitioner availed of the present recourse.

Issues

The two issues to be resolved are: (1) whether respondent has the right to file the
claim for refund; and (2) if respondent has the right, whether the payments made to Prism
constitute business profits or royalties.

Petitioners Arguments

Petitioner contends that the cases relied upon by the CTA in upholding
respondents right to claim the refund are inapplicable since the withholding agents
therein are wholly owned subsidiaries of the principal taxpayers, unlike in the instant case
where the withholding agent and the taxpayer are unrelated entities. Petitioner further
claims that since respondent did not file the claim on behalf of Prism, it has no legal
standing to claim the refund. To rule otherwise would result to the unjust enrichment of
respondent, who never shelled-out any amount to pay the royalty taxes. Petitioner, thus,
posits that the real party-in-interest to file a claim for refund of the erroneously withheld
taxes is Prism. He cites as basis the case of Silkair (Singapore) Pte, Ltd. v. Commissioner
of Internal Revenue,[38] where it was ruled that the proper party to file a refund is the
statutory taxpayer.[39] Finally, assuming that respondent is the proper party, petitioner
counters that it is still not entitled to any refund because the payments made to Prism are
taxable as royalties, having been made in consideration for the use of the programs
owned by Prism.

Respondents Arguments

Respondent, on the other hand, maintains that it is the proper party to file a claim for
refund as it has the statutory and primary responsibility and liability to withhold and remit
the taxes to the BIR. It points out that under the withholding tax system, the agent-payor
becomes a payee by fiction of law because the law makes the agent personally liable for
the tax arising from the breach of its duty to withhold. Thus, the fact that respondent is
not in any way related to Prism is immaterial.

Moreover, respondent asserts that the payments made to Prism do not fall under the
definition of royalties since the agreements are for programming and consultancy
services only, wherein Prism undertakes to perform services for the creation,
development or the bringing into existence of software applications solely for the
satisfaction of the peculiar needs and requirements of respondent.
Our Ruling

The petition is bereft of merit.

Withholding agent may file a claim for refund

Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit
Taxes. The Commissioner may

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a written claim for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
 In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without
a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously
paid. (Emphasis supplied)

Pursuant to the foregoing, the person entitled to claim a tax refund is the
taxpayer. However, in case the taxpayer does not file a claim for refund, the withholding
agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine

Manufacturing Corporation,[40] a withholding agent was considered a proper party to file
a claim for refund of the withheld taxes of its foreign parent company. Pertinent portions
of the Decision read:

The term taxpayer is defined in our NIRC as referring to any person subject to
tax imposed by the Title [on Tax on Income]. It thus becomes important to
note that under Section 53(c)[41] of the NIRC, the withholding agent who is
required to deduct and withhold any tax is made personally liable for such tax
and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments
effected by the withholding agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is directly and independently liable
for the correct amount of the tax that should be withheld from the dividend
remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been
withheld under law.

A person liable for tax has been held to be a person subject to tax and
properly considered a taxpayer. The terms liable for tax and subject to tax both
connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made
liable for tax as not subject to tax. By any reasonable standard, such a
person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were
illegally collected from him.
 In Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, this Court pointed out that a withholding agent is in fact the agent
both of the government and of the taxpayer, and that the withholding agent is
not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under
all circumstances. In effect, the responsibility for the collection of the tax as well
as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the
agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Governments agent. In regard to the
filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is
no ordinary government agent especially because under Section 53 (c) he is held
personally liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law.

If, as pointed out in Philippine Guaranty, the withholding agent is also an

agent of the beneficial owner of the dividends with respect to the filing of
the necessary income tax return and with respect to actual payment of the
tax to the government, such authority may reasonably be held to include
the authority to file a claim for refund and to bring an action for recovery
of such claim. This implied authority is especially warranted where, as in the
instant case, the withholding agent is the wholly owned subsidiary of the
parent-stockholder and therefore, at all times, under the effective control of
such parent-stockholder. In the circumstances of this case, it seems particularly
unreal to deny the implied authority of P&G-Phil. to claim a refund and to
commence an action for such refund.

xxxx

We believe and so hold that, under the circumstances of this case, P&G-Phil.
is properly regarded as a taxpayer within the meaning of Section
309,[42] NIRC, and as impliedly authorized to file the claim for refund and the
suit to recover such claim.(Emphasis supplied.)

Petitioner, however, submits that this ruling applies only when the withholding
agent and the taxpayer are related parties, i.e., where the withholding agent is a wholly
owned subsidiary of the taxpayer.

We do not agree.
 Although such relation between the taxpayer and the withholding agent is a factor
that increases the latters legal interest to file a claim for refund, there is nothing in the
decision to suggest that such relationship is required or that the lack of such relation
deprives the withholding agent of the right to file a claim for refund. Rather, what is clear
in the decision is that a withholding agent has a legal right to file a claim for refund for
two reasons. First, he is considered a taxpayer under the NIRC as he is personally liable
for the withholding tax as well as for deficiency assessments, surcharges, and penalties,
should the amount of the tax withheld be finally found to be less than the amount that
should have been withheld under law. Second, as an agent of the taxpayer, his authority
to file the necessary income tax return and to remit the tax withheld to the government
impliedly includes the authority to file a claim for refund and to bring an action for
recovery of such claim.

In this connection, it is however significant to add that while the withholding agent
has the right to recover the taxes erroneously or illegally collected, he nevertheless has
the obligation to remit the same to the principal taxpayer. As an agent of the taxpayer, it
is his duty to return what he has recovered; otherwise, he would be unjustly enriching
himself at the expense of the principal taxpayer from whom the taxes were withheld, and
from whom he derives his legal right to file a claim for refund.

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue[43] cited

by the petitioner, we find the same inapplicable as it involves excise taxes, not
withholding taxes. In that case, it was ruled that the proper party to question, or seek a
refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed
by law and who paid the same even if he shifts the burden thereof to another.

In view of the foregoing, we find no error on the part of the CTA in upholding
respondents right as a withholding agent to file a claim for refund.

The payments for the CM and the SIM

Application Agreements constitute

business profits
 Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of
any kind received as consideration for: (i) the use of, or the right to use, any patent, trade
mark, design or model, plan, secret formula or process, any copyright of literary, artistic
or scientific work, or for the use of, or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial, commercial or scientific
experience; (ii) the use of, or the right to use, cinematograph films, or tapes for radio or
television broadcasting.[44] These are taxed at the rate of 25% of the gross amount.[45]

Under the same Treaty, the business profits of an enterprise of

a Contracting State is taxable only in that State, unless the enterprise carries on business
in the other Contracting State through a permanent establishment.[46] The term permanent
establishment is defined as a fixed place of business where the enterprise is wholly or
partly carried on.[47] However, even if there is no fixed place of business, an enterprise of
a Contracting State is deemed to have a permanent establishment in the other Contracting
State if it carries on supervisory activities in that other State for more than six months in
connection with a construction, installation or assembly project which is being
undertaken in that other State.[48]

In the instant case, it was established during the trial that Prism does not have a
permanent establishment in the Philippines. Hence, business profits derived from Prisms
dealings with respondent are not taxable. The question is whether the payments made to
Prism under the SDM, CM, and SIM Application agreements are business profits and not
royalties.

Paragraph 1.3 of the Programming Services (Schedule A) of the SDM

Agreement,[49] reads:

1.3 Intellectual Property Rights (IPR)

The SDM shall be installed by PRISM, including the SDM
Libraries, the IPR of which shall be retained by PRISM. PRISM,
however, shall provide the Client the APIs for the SDM at no cost to
the Client. The Client shall be permitted to develop programs to
interface with the SDM or the SDM Libraries, using the related APIs as
appropriate.[50] (Emphasis supplied.)
 Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM
Agreement and paragraph 1.3 of the Programming Services (Schedule A) of the SIM
Agreement provide:

1.4 Intellectual Property Rights (IPR)

The IPR of all components of the CM belong to the Client with the
exception of the following components, which are provided, without
technical or commercial restraints or obligations:
ConfigurationException.java
DataStructures (DblLinkedListjava, DbIListNodejava, List
EmptyException.java, ListFullException.java,
ListNodeNotFoundException.java,
QueueEmptyException.java, QueueFullException.java,
QueueList.java, QueuListEx.java, and
QueueNodeNotFoundException.java)
FieldMappedObjeet.java
LogFileEx.java
Logging (BaseLogger.java and Logger.java)
PrismGeneric Exception.java
PrismGenericObject.java
ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.
java, DeliverMessage.java, Login.java, Logout.java, Nack.java,
SubmitMessage.java,
TemplateManagement (FileTemplateDataBag.java, Template
DataBag.java, TemplateManagerExBag.java, and
TemplateParserExBag.java)
TemplateManager.class
TemplateServer.class
TemplateServer$RequestThread.class
Template Server_skel.class
TemplateServer_stub.class
TemplateService.class
Prism Crypto Server module for PHP4[51]

xxxx

1.3 Intellectual Property Rights (IPR)

The Client shall own the IPR for the Specifications and the Source
Code for the SIM Applications. PRISM shall develop an executable
 compiled code (the Executable Version) of the SIM Applications for
use on the aSIMetric card which, however, shall only be for the Clients
use. The Executable Version may not be provided by PRISM to any
third [party] without the prior written consent of the Client. It is further
recognized that the Client anticipates licensing the use of the SIM
Applications, but it is agreed that no license fee will be charged to
PRISM or to a licensee of the aSIMetrix card from PRISM when SIMs
are supplied to the Client.[52] (Emphases supplied.)

The provisions in the agreements are clear. Prism has intellectual property right
over the SDM program, but not over the CM and SIM Application programs as the
proprietary rights of these programs belong to respondent. In other words, out of the
payments made to Prism, only the payment for the SDM program is a royalty subject to a
25% withholding tax. A refund of the erroneously withheld royalty taxes for the
payments pertaining to the CM and SIM Application Agreements is therefore in order.

Indeed, the government has no right to retain what does not belong to it. No one,
not even the State, should enrich oneself at the expense of another.[53]

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28,
2007 and the Resolution dated July 31, 2007 of the Court of Tax Appeals En Banc are
hereby AFFIRMED. The Bureau of Internal Revenue is
hereby ORDERED to ISSUE a TAX CREDIT CERTIFICATE to Prism Transactive
(M) Sdn. Bhd. in the amount of P3,989,456.43 representing the overpaid final
withholding taxes for the month of August 2001.

SO ORDERED.
G.R. No. 204142 November 19, 2014

HONDA CARS PHILIPPINES, INC., Petitioner,

vs.
HONDA CARS TECHNICAL SPECIALIST AND SUPERVISORS UNION, Respondent.

DECISION

BRION, J.:

We resolve the present petition for review on certiorari1 seeking to nullify the March 30, 2012
decision2 and October 25, 2012 resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 109297.
These rulings were penned by Associate Justice Noel G. Tijam and concurred in by Associate
Justices Romeo F. Barza and Edwin D. Sorongon.

The Factual Antecedents

On December 8, 2006, petitioner Honda Cars Philippines, Inc., (company) and respondent Honda
Cars Technical Specialists and Supervisory Union (union), the exclusive collective bargaining
representative of the companys supervisors and technical specialists, entered into a collective
bargaining agreement (CBA) effective April 1, 2006 to March 31, 2011.4

Prior to April 1, 2005, the union members were receiving a transportation allowance of 3,300.00 a
month. On September 3, 2005, the company and the union entered into a Memorandum of
Agreement5 (MOA) converting the transportation allowance into a monthly gasoline allowance
starting at 125 liters effective April 1,2005. The allowance answers for the gasoline consumed by the
union members for official business purposes and for home to office travel and vice-versa. The
company claimed that the grant of the gasoline allowance is tied up to a similar company policy for
managers and assistant vice-presidents (AVPs), which provides that in the event the amount of
gasoline is not fully consumed, the gasoline not used may be converted into cash, subject to
whatever tax may be applicable. Since the cash conversion is paid in the monthly payroll as an
excess gas allowance, the company considers the amount as part of the managers and AVPs
compensation that is subject to income tax on compensation.

Accordingly, the company deducted from the union members salaries the withholding tax
corresponding to the conversion to cash of their unused gasoline allowance.

The union, on the other hand, argued that the gasoline allowance for its members is a "negotiated
item" under Article XV, Section 15 of the new CBA on fringe benefits. It thus opposed the companys
practice of treating the gasoline allowance that, when converted into cash, is considered as
compensation income that is subject to withholding tax.

The disagreement between the company and the union on the matter resulted in a grievance which
they referred to the CBA grievance procedure for resolution. As it remained unsettled there, they
submitted the issue to a panel of voluntary arbitrators as required by the CBA.

The Voluntary Arbitration Decision

On February 6, 2009, the Panel of Voluntary Arbitrators6 rendered a decision/award7 declaring that
the cash conversion of the unused gasoline allowance enjoyed by the members of the union is a
fringe benefit subject to the fringe benefit tax, not to income tax. The panel held that the deductions
made by the company shall be considered as advances subject to refund in future remittances of
withholding taxes.

The company moved for partial reconsideration of the decision, but the panel denied the motion in its
June 3, 2009 order,8 prompting the company to appeal to the CA through a Rule 43 petition for
review. The core issue in this appeal was whether the cash conversion of the unused gasoline
allowance is a fringe benefit subject to the fringe benefit tax, and not to a compensation income
subject to withholding tax.

The CA Ruling
The CA Eight Division denied the petition and upheld with modification the voluntary arbitration
decision. It agreed with the panels ruling that the cash conversion of the unused gasoline allowance
is a fringe benefit granted under Section 15, Article XV of the CBA on "Fringe Benefits." Accordingly,
the CA held that the benefit is not compensation income subject to withholding tax.

This conclusion notwithstanding, the CA clarified that while the gasoline allowance or the cash
conversion of its unused portion is a fringe benefit, it is "not necessarily subject to fringe benefit
tax."9 It explained that Section 33 (A) of the National Internal Revenue Code (NIRC) of 1997 imposed
a fringe benefit tax, effective January 1, 2000 and thereafter, on the grossed-up monetary value of
fringe benefit furnished or granted to the employee (except rank-and-file employees) by the
employer (unless the fringe benefit is required by the nature of, or necessary to the trade, business
or profession of the employer, or when the fringe benefit is for the convenience or advantage of the
employer).

According to the CA, "it is undisputed that the reason behind the grant of the gasoline allowance to
the union members is primarily for the convenience and advantage of Honda, their employer."10 It
thus declared that the gasoline allowance or the cash conversion of the unused portion thereof is not
subject to fringe benefit tax.11

The Petition

Its motion for reconsideration denied, the company appeals to this Court to set aside the CAs
dispositions, raising the very same issue it brought to the appellate court whether the cash
conversion of the gasoline allowance of the union members is a fringe benefit or compensation
income, for taxation purposes.

The company reiterates its position that the cash conversion of the union members gasoline
allowance is compensation income subject to income tax, and not to a fringe benefit tax. It argues
that the tax treatment of a benefit extended by the employer to the employees is governed by law
and the applicable tax regulations, and notby the nomenclature or definition provided by the parties.
The fact that the CBA erroneously classified the gasoline allowance as a fringe benefit is immaterial
as it is the law Section 33 of the NIRC that provides for the legal classification of the benefit.

It adds that there is no basis for the CA conclusion that the cash conversion of the unused gasoline
allowance redounds to the benefit of management. Common sense dictates that it is the individual
union members who solely benefit from the cash conversion of the gasoline allowance as it goes into
their compensation income.

In any event, the company submits that even assuming that the cash conversion of the unused
gasoline allowance is a tax-exempt fringe benefit and that it erred in withholding the income taxes
due, still the union members would have no cause of action against it for the refund of the amounts
withheld from them and remitted to the Bureau of Internal Revenue (BIR).

Citing Section 204 of the NIRC, the company contends that an action for the refund of an erroneous
withholding and payment of taxes should be in the nature of a tax refund claim with the BIR. It further
contends that when it withheld the income tax due from the cash conversion of the unused gasoline
allowance of the union members, it was simply acting as an agent of the government for the
collection and payment of taxes due from the members.

The Unions Position

In its Comment12 dated April 19, 2013, the union argues for the denial of the petition for lack of merit.
Itposits that its members gasoline allowance and its unused gas equivalent are fringe benefits under
the CBA and the law [Section 33 (A) of NIRC] and is therefore not subject to withholding tax on
compensation income. Moreover, under that law and BIR Revenue Regulations 2-98, the same
benefit is not subject to the fringe benefit tax because it is required by the nature of, or necessary to
the trade or business of the company.

The union further submits that in 2007, the BIR ruled that fixed and/or pre-computed transportation
allowance given to supervisory employees in pursuit of the business of the company, shall not be
taxable as compensation or fringe benefits of the employees.13 It maintains that the gasoline
allowance is already pre-computed by the company as sufficient to cover the gasoline consumption
of the supervisors whenever they perform work for the company. The fact that the company allowed
its members to convert it to cash when not fully consumed is no longer their problem because the
benefit was already given.

Our Ruling

We partly grant the petition.

The Voluntary Arbitrator has no

jurisdiction to settle tax matters

The Labor Code vests the Voluntary Arbitrator original and exclusive jurisdiction to hear and decide
all unresolved grievances arising from the interpretation or implementation of the Collective
Bargaining Agreement and those arising from the interpretation or enforcement of company
personnel policies.14 Upon agreement of the parties, the Voluntary Arbitrator shall also hear and
decide allother labor disputes, including unfair labor practices and bargaining deadlocks.15

In short, the Voluntary Arbitrators jurisdiction is limited to labor disputes. Labor dispute means "any
controversy or matter concerning terms and conditions of employment or the association or
representation of persons in negotiating, fixing, maintaining, changing, or arranging the terms and
conditions of employment, regardless of whether the disputants stand in the proximate relation of
employer and employee."16

The issues raised before the Panel of Voluntary Arbitrators are: (1) whether the cash conversion of
the gasoline allowance shall be subject to fringe benefit tax or the graduated income tax rate on
compensation; and (2) whether the company wrongfully withheld income tax on the converted gas
allowance.

The Voluntary Arbitrator has no competence to rule on the taxability of the gas allowance and on the
propriety of the withholding of tax. These issues are clearly tax matters, and do not involve labor
disputes. To be exact, they involve tax issues within a labor relations setting as they pertain to
questions of law on the application of Section 33 (A) of the NIRC. They do not require the application
of the Labor Code or the interpretation of the MOA and/or company personnel policies. Furthermore,
the company and the union cannot agree or compromise on the taxability of the gas allowance.
Taxation is the States inherent power; its imposition cannot be subject to the will of the parties.

Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and original jurisdiction
to interpret the provisions of the NIRC and other tax laws, subject to review by the Secretary of
Finance. Consequently, if the company and/or the union desire/s to seek clarification of these
issues, it/they should have requested for a tax ruling17 from the Bureau of Internal Revenue (BIR).
Any revocation, modification or reversal of the CIRs ruling shall not be given retroactive application
if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following
cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR;

(b) Where the facts subsequently gathered by the BIR are materially different from the facts
on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.18

On the other hand, if the union disputes the withholding of tax and desires a refund of the withheld
tax, it should have filed an administrative claim for refund with the CIR. Paragraph 2, Section 4 of the
NIRC expressly vests the CIR original jurisdiction over refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other tax matters. The union has no cause of
action against the company

Under the withholding tax system, the employer as the withholding agent acts as both the
government and the taxpayers agent. Except in the case of a minimum wage earner, every
employer has the duty to deduct and withhold upon the employees wages a tax determined in
accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon the
CIRs recommendation.19 As the Governments agent, the employer collects tax and serves as the
payee by fiction of law.20 As the employees agent, the employer files the necessary income tax
return and remits the tax to the Government.21

Based on these considerations, we hold that the union has no cause of action against the
company. The company merely performed its statutory duty to withhold tax based on its
1wphi1

interpretation of the NIRC, albeit that interpretation may later be found to be erroneous. The
employer did not violate the employee's right by the mere act of withholding the tax that may be due
the government.22

Moreover, the NIRC only holds the withholding agent personally liable for the tax arising from the
breach of his legal duty to withhold, as distinguished from his duty to pay tax.23 Under Section 79 (B)
of the NIRC, if the tax required to be deducted and withheld is not collected from the employer, the
employer shall not be relieved from liability for any penalty or addition to the unwithheld tax.

Thus, if the BIR illegally or erroneously collected tax, the recourse of the taxpayer, and in proper
cases, the withholding agent, is against the BIR, and not against the withholding agent.24 The union's
cause of action for the refund or non-withholding of tax is against the taxing authority, and not
against the employer. Section 229 of the NIRC provides:

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

WHEREFORE, premises considered, we PARTLY GRANT the petition for review on certiorari filed
by Honda Cars Philippines, Inc. We REVERSE AND SET ASIDE the March 30, 2012 decision and
the October 25, 2012 resolution of the Court of Appeals in CA-G.R. SP No. 109297. We declare
NULL AND VOID the February 6, 2009 decision and June 3, 2009 resolution of the Panel of
Voluntary Arbitrators. No costs.

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE ASSOCIATED SMELTING AND

REFINING CORPORATION, Respondent.

RESOLUTION

REYES, J.:

The instant petition filed under Rule 45 of the Revised Rules of Court seeks to reverse and set aside the
Court of Tax Appeals (CTA) En Bane Decision1 dated November 12, 2008 in CTA E.B. Case No. 351 (CTA
Case No. 7565) entitled "Philippine Associated Smelting and Refining Corporation v. The Honorable
Commissioner of Internal Revenue" which ruled that respondent is a PEZA-registered enterprise and enjoys
tax exemption privilege; hence, it is exempt from paying the excise tax on petroleum products in issue and
entitled to seek a refund thereof. The Resolution2 dated January 30, 2009 denied the motion for
reconsideration filed by the Commissioner of Internal Revenue (petitioner).

The respondent Philippine Associated Smelting and Refining Corporation (PASAR) is a domestic corporation
engaged in the business of processing, smelting, refining and exporting refined copper cathodes and other
copper products, and a registered Zone Export Enterprise with the Export Processing Zone Authority
(EPZA).3 PASAR uses petroleum products for its manufacturing and other processes, and purchases it from
local distributors, which import the same and pay the corresponding excise taxes. The excise taxes paid are
then passed on by the local distributors to its purchasers. In this particular case, Petron passed on to PASAR
the excise taxes it paid on the petroleum products bought by the latter during the period of January 2005 to
October 2005, totalling eleven million six hundred eighty-seven thousand four hundred sixty-seven 62/100
(P11,687,467.62).

In December 2006, PASAR filed a claim for refund and/or tax credit with the Office of the Regional Director
of Region XIV, which denied the same in a letter dated January 3, 2007.4 cralawred

PASAR then filed a petition for review with the Court of Tax Appeals (CTA) Second Division, which was
contested by the petitioner. The petitioner also filed a motion to preliminarily resolve whether PASAR is the
proper party to ask for a refund. Thereafter, the parties agreed to the following stipulation of issues:chanRoble svi rtual Lawli bra ry

1. Whether or not petroleum products purchased from Petron and delivered to PASAR to be used in its
operation in LIDE are exempt from excise taxes under Section 17 of P.D. No. 66 and thus entitled to a
refund or issuance of a tax credit certificate.

2. Whether or not PASAR is the proper party to claim for refund or issuance of tax credit certificate for
excise taxes paid.

3. Whether or not the claim for tax credit/refund is properly substantiated by receipts and invoices.

4. Whether or not the claim for tax credit/refund is timely filed.5

On September 19, 2007, the CTA Second Division issued a Resolution6 granting the petitioner's motion to
preliminarily resolve whether PASAR is the proper party to ask for a refund, and dismissed its petition for
review. When its motion for reconsideration was denied in the Resolution7 dated December 3, 2007, PASAR
filed a petition for review with the CTA En Banc.

In the assailed Resolution8 dated November 12, 2008, the CTA En Banc set aside CTA Resolutions dated
September 19, 2007 and December 3, 2007, and ordered the remand of the petition for review to the CTA
Second Division for reception of evidence and determination of the amount to be refunded to the petitioner.
The petitioner filed a motion for reconsideration, which was denied by the CTA En Banc in the assailed
Resolution9 dated January 30, 2009.
In granting PASAR's petition for review, the CTA En Banc ruled that it is the proper party to claim the
refund/credit, citing Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.10 and Philippine
Phosphate Fertilizer Corporation v. Commissioner of Internal Revenue.11 According to the CTA, since PASAR
is a PEZA-registered entity enjoying tax exemption privilege under Presidential Decree (P.D.) No. 66 and
subsequently, Republic Act (R.A.) No. 7916, it is exempt from payment of excise taxes on petroleum
products. And following the Court's ruling in the Philippine Phosphate Fertilizer Corporation, PASAR,
therefore, may seek refund.12 cralaw red

The grounds relied upon in this petition are as follows: c hanRoblesv irt ual Lawlibra ry

I.

THE CTA SHOULD HAVE DISMISSED RESPONDENT'S PETITION FOR REVIEW FOR LACK OF JURISDICTION
OVER THE SUBJECT MATTER OF THE CASE.

II.

THE CTA EN BANC'S RELIANCE ON COMMISSIONER OF CUSTOMS V. PHILIPPINE PHOSPHATE FERTILIZER

CORPORATION AND PHILIPPINE PHOSPHATE FERTILIZER CORPORATION V. COMMISSIONER OF INTERNAL
REVENUE IS MISPLACED.

III.

RESPONDENT IS NOT THE PROPER PARTY TO CLAIM A TAX CREDIT AND/OR REFUND.

IV.

THE SPECIFIC TAXES HEREIN SOUGHT TO BE REFUNDED/CREDITED DO NOT FORM PART OF THE EXPORT
PRODUCTS MANUFACTURED BY RESPONDENT AND, THEREFORE, NOT REFUNDABLE.13

The petitioner contends that the CTA has no jurisdiction over the BIR Regional Director's denial of PASAR's
claim, arguing that the CTA's exclusive appellate jurisdiction pertains only to decisions of the Commissioner
of Internal Revenue, as provided in Section 7 of R.A. No. 1125, as amended by Section 7 of R.A. No. 9282.
The petitioner also objects to the CTA En Banc's application of the Commissioner of
Customs and Philphos cases in the present case and argues that Commissioner of Customs involved the tax
refund/credit of customs duties and not excise taxes; Philphos, on the other hand, did not squarely resolve
the issue of whether an EPZA-registered enterprise is exempt from paying the excise taxes on petroleum
products indirectly used. The petitioner also contends that the proper party to seek a tax refund/credit is the
statutory taxpayer or the person on whom the tax was imposed and paid the same, which in this case was
Petron, even though the latter subsequently shifted the burden to PASAR. Finally, the petitioner believes
that Section 17 of P.D. No. 66 does not clearly provide that petroleum products delivered to EPZA-registered
enterprises are exempt from taxes, and that the petroleum products purchased by PASAR from Petron do
not form part of the export products it manufactures.14 cralawre d

Respondent, meanwhile, claims that the petitioner is estopped from questioning the jurisdiction of the CTA.
Respondent also contends, in sum, that Commissioner of Customs and Philphos are applicable in this case,
that it is the proper party to apply for a tax refund and that it is exempted from paying excise taxes.15 cralawre d

At the outset, it must be stated that the Court will limit the issue to be resolved in this case to whether
PASAR is the proper party to claim the tax credit/refund on the excise taxes paid on the petroleum products
purchased from Petron. The other grounds raised by the petitioner, i.e., jurisdiction and the factual basis of
PASAR's claim for tax refund/credit, are not proper at the moment inasmuch as the CTA En Banc's review
only dealt with the petitioner's "motion to preliminary resolve the issue of whether or not [respondent] is the
proper party that may ask for a refund."16 And on this issue, the Court finds that the CTA En Banc did not
commit any reversible error when it ruled that PASAR is the proper party to file a claim for the refund/credit
of excise taxes. Hence, the petition must be denied.

PASAR is a business enterprise registered with the EPZA pursuant to P.D. No. 66.17 There is no dispute as
regards its use of fuel and petroleum products for the processing, smelting and refining of its export copper
products, and that Petron, from which PASAR purchased its fuel and petroleum, products, passed on the
excise taxes paid to the latter. In ruling that PASAR is the proper party to file the claim for the refund/credit,
the CTA En Bane chiefly relied on the Court's rulings in Commissioner of Customs v. Philippine Phosphate
Fertilizer Corp.18 and Philippine Phosphate Fertilizer Corporation v. Commissioner of Internal Revenue.19 cralawred

Commissioner of Customs involved a claim for refund by Philippine Phosphate Fertilizer Corporation
(Philphos) of the customs duties it indirectly paid on fuel and petroleum products purchased from Petron
Corporation for the period of October 1991 until June 1992. This was opposed by the Commissioner of
Customs. One of the issues raised in the case was the legal basis for Philphos' exemption from duties and
taxes, it being an EPZA-registered company. While it may be true that Commissioner of Customs involved
the refund of customs duties paid on petroleum products, it was nevertheless correctly applied by the
CTA En Banc.

Notably, in Commissioner of Customs, the Court squarely interpreted the exemption granted under Section
17 of P.D. No. 66 as applicable to both customs duties and internal revenue taxes, viz: chanrob lesvi rtua llawlib ra ry

The incentives offered to enterprises duly registered with the PEZA consist, among others, of tax
exemptions, x x x

Section 17 of the EPZA Law particularizes the tax benefits accorded to duly registered enterprises. It states:
SEC. 17. Tax Treatment of Merchandize in the Zone. - (1) Except as otherwise provided in this Decree,
foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts
and wares of every description, except those prohibited by law, brought into the Zone to be sold, stored,
broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated,
manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such
activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax
ordinances, the following provisions of law to the contrary notwithstanding.
The cited provision certainly covers petroleum supplies used, directly or indirectly, by Philphos to facilitate
its production of fertilizers, subject to the minimal requirement that these supplies are brought into the
zone. The supplies are not subject to customs and internal revenue laws and regulations, nor to
local tax ordinances. It is clear that Section 17(1) considers such supplies exempt even if they
are used indirectly, as they had been in this case.20 (Emphasis and underscoring ours)

Thus, the Court affirmed the refund of customs duties granted by the CTA and in closing, stated that "[t]he
grant of exemption under Section 17(1) is clear and unambiguous, x x x."21 cralawred

Philphos, meanwhile, involved Philphos' claim for refund of excise taxes passed on by Petron. One of the
issues identified by the Court in the case was whether the CTA should have granted the claim for refund. In
resolving said issue, the Court ruled that the CTA erred when it disallowed the petitioner's claim due to its
failure to present invoices as there is nothing in CTA Circular No. 1-95 that requires its presentation. The
issue of whether the petitioner was entitled to exemption from payment of excise taxes was not lengthily
discussed by the Court because it was already undisputed. Thus, the Court stated: chanRoblesvirt ual Lawlib rary

In this case, there is no dispute that petitioner is entitled to exemption from the payment of excise
taxes by virtue of its being an EPZA registered enterprise. As stated by the CTA, the only thing left to
be determined is whether or not petitioner is entitled to the amount claimed for refund.

xxxx

Since it is not disputed that petitioner is entitled to tax exemption, it should not be precluded from
presenting evidence to substantiate the amount of refund it is claiming on mere technicality especially in this
case, where the failure to present invoices at the first instance was adequately explained by
petitioner.22 (Emphasis ours)

Applying the foregoing rulings in this case, it is therefore undeniable that PASAR is exempted from payment
of excise taxes.

The next pivotal question then that must be resolved is whether PASAR has the legal personality to file the
claim for the refund of the excise taxes passed on by Petron. The petitioner insists that PASAR is not the
proper party to seek a refund of an indirect tax, such as an excise tax or Value Added Tax, because it is not
the statutory taxpayer. The petitioner's argument, however, has no merit.

The rule that it is the statutory taxpayer which has the legal personality to file a claim for refund23 finds no
applicability in this case. In Philippine Airlines, Inc. v. Commissioner of Internal Revenue,24 the Court
distinguished between the kinds of exemption enjoyed by a claimant in order to determine the propriety of a
tax refund claim. "If the law confers an exemption from both direct or indirect taxes, a claimant is
entitled to a tax refund even if it only bears the economic burden of the applicable tax. On the
other hand, if the exemption conferred only applies to direct taxes, then the statutory taxpayer is regarded
as the proper party to file the refund claim."25 In PASAR's case, Section 17 of P.D. No. 66, as affirmed
in Commissioner of Customs, specifically declared that supplies, including petroleum products, whether used
directly or indirectly, shall not be subject to internal revenue laws and regulations. Such exemption includes
the payment of excise taxes, which was passed on to PASAR by Petron. PASAR, therefore, is the proper
party to file a claim for refund.

WHEREFORE, the petition is DENIED for lack of merit. Accordingly, the Decision dated November 12, 2008
and its Resolution dated January 30, 2009 of the Court of Tax Appeals En Banc in CTA E.B. Case No. 351 are
hereby AFFIRMED in toto.

SO ORDERED.

KOPPEL (PHILIPPINES) INC., Petitioner-Appellant, v. COLLECTOR OF INTERNAL

REVENUE, Respondent-Appellee.

Carlos & Laurea for Petitioner-Appellant.

Solicitor General for Respondent-Appellee.

SYLLABUS

1. TAXATION; INCOME TAX; ACTION FOR REFUND; TAXPAYER NEED NOT WAIT FOR COLLECTORS
DECISION; TIME FOR BRINGING ACTION NOT EXTENDED BY DELAY IN GIVING NOTICE OF THE REJECTION
OF CLAIM. Knowing that the time for bringing an action for a refund of income tax is not extended by the
delay of the Collector of Internal Revenue in giving notice of the rejection of such claim (U.S. v. Michel, 282
U. S. 656, 51 S. Ct. 284; II Araas, N. I. R. Code, p. 719), a taxpayer should not fold his arms and wait for
the decision of the Collector before bringing the action for refund (Kierner Co. Ltd., v. S. David, [92 Phil.,
945; 49 Off. Gaz., No. 5, 1852]).

2. ID.; ID.; ID.; TAXPAYER DUTY BOUND TO FILE ACTION WITHIN THE TIME PRESCRIBED BY LAW;
PRESCRIPTION. Aware of the provisions of the law, it is the duty of the taxpayer to urge the Collector for
his decision and wake him up from his lethargy or file his action within the time prescribed by law. The
petitioner not having filed his claim within the time fixed by law, his cause of action has prescribed, and the
court should not give a premium to a litigant who sleeps on his rights.

3. ID.; ID.; ID.; GOVERNMENT NOT ESTOPPED BY ERRORS OF ITS AGENTS. Having failed to file his
action for refund on time, petitioner may not now invoke estoppel when he himself is guilty of laches. The
government is never estopped by error or mistake on the part of its agents (Pineda, Et. Al. v. CFI and
Collector of Internal Revenue, 52 Phil., 803)

DECISION

PAREDES, J.:

This is an appeal taken by the Koppel (Philippines) Inc., petitioner-appellant, from the decision dated March
5, 1956, rendered by the Court of Tax Appeals, declaring that it had no jurisdiction over the dispute, on the
ground that petitioners cause of action to seek the refund of P30,726.53, had already prescribed under
section 306 of the National Internal Revenue Code; and in sustaining the order of the respondent Collector
of Internal Revenue, denying the refund of P30,726.53, under section 30 par. (d), sub-par. (2) and sec. 30
par. (e) sub-par. (1), of the said revenue Code.

The case was submitted on a stipulation of facts: chanrob1es vi rtua l 1aw lib ra ry
The petitioner, it appears, is a domestic corporation of American capital duly organized and existing by
virtue of the Philippine laws. During the year 1942 to the early part of 1945, the petitioner sustained losses
arising from the occupation of the Philippines by the Japanese Military forces from 1941 to the battle of
liberation in 1945. On March 27, 1942, the U.S. Congress passed Public Law 506, (War Damage Insurance
Act) to cover insurance of all properties in the Philippines which might be damaged, destroyed or lost due to
the operations of war. The petitioner, relying on the provisions of this legislation, entered in its books as
"accounts receivable" from the U.S. Government the entire value of its properties damaged, destroyed and
lost during World War II. On April 30, 1946, the U.S. Congress enacted Public Law 370 (Philippine
Rehabilitation Act of 1946), which provided that the Philippine War Damage Commission supersedes the War
Damage Commission. Section 102 of Public Law 370 states: jgc:chan roble s.com. ph

". . . Provided further, that in case the aggregate amount of the claims which would be payable to anyone
claimant under the foregoing provisions exceeds $500, the aggregate amount of the claims approved in
favor of such claimant shall be reduced by 25 per centum of the excess over $500." cralaw virtua 1aw lib rary

On January 15, 1947, the U.S. -Philippine War Damage Commission, the agency entrusted with the
enforcement of said Public Law 370, issued a notice to the effect that February 25, 1947, was the date
agreed upon as the initial date for the issuance of forms for the claimants of war damages and the claims
could not be filed until after March 1, 1947. In 1947, the petitioner came to know that its losses equivalent
to 25% or P256,054.88 could not be recovered, for which reason petitioner could not claim deduction for
said losses in its 1945 and 1946 income tax returns. Petitioner, therefore, in its book of accounts for the
year 1947, wrote off as "bad debts", the said amount of P256,054.88. On June 6, 1949, the respondent
Collector of Internal Revenue, assessed against the petitioners income tax for 1947, the sum of P34,636.21,
corresponding to the amount of P256,054.88 as war losses sustained and ascertained to be unrecoverable in
1946. On June 29, 1949, the petitioner paid under protest with the Bureau of Internal Revenue the amount
of P34,636.21 (O. R. No. 58094) as alleged deficiency income tax due, based on the disallowed deduction of
P256,054.88. Petitioner repeatedly sought from respondent a reconsideration of the assessment and the
refund of the amount of P34,636.21 later reduced to P30,726.21, on the ground that said assessment was
illegal. The then Secretary of Finance, Pio Pedrosa, on September 11, 1951, sustained petitioners stand and
that of other taxpayers similarly situated, setting rules to be followed. The respondent issued general
Circular No. V-123 addressed to all Internal Revenue officers and income tax examiners to apply the rules in
the investigation of income tax returns involving war damage losses. On September 21, 1951, petitioner
reiterated its demand for the refund of the amount of P30,726.53. Petitioner, on July 28, 1953, received a
communication denying the refund of the amount, on the ground that the ruling of Finance Secretary
Pedrosa had already been revoked by his successor, Secretary of Finance Aurelio Montinola.

On August 27, 1953, petitioner filed a petition for review with the then Board of Tax Appeals (B.T.A. Case
No. 157), praying that the respondent be ordered to refund to the petitioner the sum of P30,726.53, to
which on September 5, 1953 respondent answered, praying for the dismissal of the case. The case was
submitted for decision after the parties had filed their respective memoranda. Notwithstanding the lapse of
60 days from the filing of the petition for review, the Board of Tax Appeals, had not rendered any decision.
On November 4, 1953, petitioner gave notice of intention to file an appeal, pursuant to section 21 of
Executive Order No. 401-A. On November 13, 1953, petitioner received a copy of the decision of the Board
of Tax Appeals dated October 26, 1953, confirming the order of the respondent Collector of Internal
Revenue, in denying the refund requested by the petitioner. A petition for review was presented before this
Court, being case No. L-5701.

In this Court, respondent did not file his brief, instead on April 21, 1954, he presented a motion to dismiss
the appeal. On April 29, 1954, this Court dismissed the petitioners appeal in said case "without prejudice,
following the decision in University of Sto. Tomas v. Board of Tax Appeals, G.R. No. L-6701." On May 18,
1954, petitioner filed a complaint with the Manila Court of First Instance, Civil Case No. 22893, entitled
"Koppel (Philippines) Inc. plaintiff v. Collector of Internal Revenue, defendant," praying that the latter be
ordered to refund to the former the sum of P30,726.53. Upon motion of the Solicitor General, the Manila
Court of First Instance remanded the case to the Court of Tax Appeals, pursuant to section 22 of Rep. Act
No. 1125, in which Court, on December 14, 1955, the parties submitted a stipulation of facts. On March 5,
1956, the Court of Tax Appeals rendered a decision, recited at the threshold of this opinion.

The petitioner alleges in its brief (first assignment of error) that the Court of Tax Appeals erred in holding
that it had no jurisdiction over the dispute on the ground that petitioners cause of action, seeking the
refund of P30,726.53 had already prescribed under section 306 of the National Internal Revenue Code. In
this connection, petitioner submits that the Court of Tax Appeals in dismissing the case (1) Disregarded the
fact that this is not a new case and that there are "peculiar circumstances involved herein" ; (2) That in the
previous case (Case No. 157 of the Board of Tax Appeals), the respondent did not raise the issue that
petitioners action has prescribed and respondent is thereby estopped from invoking it now for the first time
and (3) That the present action was filed by petitioner in accordance with the observations made by the
Supreme Court in said G.R. No. L-5701.

Petitioner argues that the "without prejudice" resolution in said case is now final and the "law of the case."
The "peculiar circumstances" mentioned were the fact that on September 18, 1951, the then Secretary of
Finance "issued a ruling in connection with the deductions for was losses, similar to plaintiffs (petitioner)
claim" which in substance held that war losses should "be allowed as deduction in the year the said notice of
approval was received" ; that the ruling was subsequently implemented by respondent himself in his
General Circular No. V-123; that prior to July 28, 1953, when plaintiff (petitioner), received a
communication from respondent, denying the refund of the said P30,726.53 on the ground that the ruling of
the former Secretary of Finance (Pio Pedrosa) was already revoked by the succeeding Secretary of Finance
(Aurelio Montinola) pursuant to an opinion of the Secretary of Justice, there was no justification for plaintiff
to go to Court; and it would have been ridiculous for petitioner to file a suit in court, when respondent
himself had issued a circular favorable to its claim for refund.

Section 306 of the National Internal Revenue Code provides as follows: jgc:chan roble s.com. ph

"No suit or proceeding shall be maintained in any court for the recovery of any national internal-revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to
have been collected without authority, or of any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Collector of Internal
Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or penalty." cralaw virtua1aw l ibra ry

In the case of Kiener Co. Ltd. v. S. David, G.R. No. L-5157, Apr. 22, 1953 (49 O.G. No. 5, 1852), this Court
declared:jgc:c han robles. com.ph

". . . To this end, and bearing in mind that the Legislature is presumed to have understood the language it
used to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say, without
doing violence to the context of either of the two provisions, that by the first is meant simply that the
Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been
committed, before he is sued but not, as the appellant contends, that pending consideration of the claim,
the period of the two years provided in the last clause shall be deemed interrupted. Nowhere and in no wise
does the law imply that the Collector of Internal Revenue must act upon the claim, or that the taxpayer shall
not go to court before he is notified of the Collectors action. Having filed his claim and the Collector of
Internal Revenue having had ample time to study it, the claimant may, indeed should, without the statutory
period of two years proceed with his suit without waiting for the Collectors decision. We understand the
filing of the claim with the Collector of Internal Revenue to be intended primarily as a notice or warning that,
unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will
follow. Previous and timely notice is, in other cases and for diverse salutary reasons, made a prerequisite to
the prosecution of contemplated proceedings without imposing on the party to whom the notice was sent
any obligation to make any move . . ." cralaw virtua1aw li bra ry

The record reveals that on June 29, 1949, the petitioner paid to the respondent the deficiency tax in
question. From the said date, the two years within which to file an action in court for the recovery of the tax
expired on June 29, 1951. Within the said period, the petitioner failed to file an action for refund either in
the Court of First Instance or the Board of Tax Appeals, immediately after the creation of the Board under
Executive Order No. 401-A promulgated on Jan. 5, 1951. Petitioner just waited for the decision of the
respondent Collector of Internal Revenue in its claim for refund, which was handed down on July 28, 1953,
after more than four (4) years from payment. It is clearly ruled in the Kiener case that the petitioner should
not have folded his arms and wait for the decision, knowing, that the "time for bringing an action for a
refund of income tax, fixed by statute, is not extended by the delay of the Collector of Internal Revenue in
giving notice of the rejection of such claim (U.S. v. Michel, 282 U.S. 656, 51 S. Ct. 284)" (II Araas, N.I.R.
Code, p. 719). There was an assessment; the petitioner paid; the petitioner asked for refund; it was denied;
a motion for reconsideration was presented and no resolution was forthcoming from the respondent
Collector. Aware of the provisions of the law, it was the duty of the petitioner to have urged the respondent
for his decision and wake him up from his lethargy or file his action within the time prescribed by law. While
it is true that there was a ruling couched in general terms, by the Secretary of Finance on the matter, which
was really controversial, because the same was later revoked by another Secretary of Finance, said
pronouncement, however, was not a decision by the respondent Collector on the specific controversy
relative to the refund of the deficiency tax in question. The court should not give a premium to a litigant who
sleeps on his rights. The lawyers of the petitioner may not come now and invoke estoppel when they have
been in laches themselves. The government is never estopped by error or mistake on the part of its agents
(Pineda, Et. Al. v. CFI and Coll. of Int. Rev., 52 Phil., 803). The reservation made by the Supreme Court in
the case No. L-5701 should not be interpreted as permitting the petitioner to file another case under all
circumstances, but as the facts and circumstances might warrant under the law. The ruling in the Kiener
case is still a sound one, and should be, as it is applied, as a matter of public policy, in the enforcement of
tax laws.

Having reached this conclusion, it would seem unnecessary to pass upon the second assignment of error.

The appeal is, therefore, dismissed, with costs.

THIRD DIVISION

G.R. No. 181459 June 9, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MANILA ELECTRIC COMPANY (MERALCO), Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
which seeks to annul and set aside the Decision1 of the Court of Tax Appeals, dated October 15,
2007, and its Resolution2 dated January 9, 2008 denying petitioner's Motion for Reconsideration in
the case entitled Commissioner of Internal Revenue v. Manila Electric Company (MERALCO),
docketed as C.T.A EB No. 262.

The facts of this case are uncontroverted.

On July 6, 1998, respondent Manila Electric Company (MERALCO) obtained a loan from
Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch in the amount of
USD120,000,000.00 with ING Barings South East Asia Limited (ING Barings) as the Arranger.3 On
September 4, 2000, respondent MERALCO executed another loan agreement with NORD/LB
Singapore Branch for a loan facility in the amount of USD100,000,000.00 with Citicorp International
Limited as Agent.4

Under the foregoing loan agreements, the income received by NORD/LB, by way of respondent
MERALCOs interest payments, shall be paid in full without deductions, as respondent MERALCO
shall bear the obligation of paying/remitting to the BIR the corresponding ten percent (10%) final
withholding tax.5 Pursuant thereto, respondent MERALCO paid/remitted to the Bureau of Internal
Revenue (BIR) the said withholding tax on its interest payments to NORD/LB Singapore Branch,
covering the period from January 1999 to September 2003 in the aggregate sum of
264,120,181.44.6

However, sometime in 2001, respondent MERALCO discovered that NORD/LB Singapore Branch is
a foreign government-owned financing institution of Germany.7 Thus, on December 20, 2001,
respondent MERALCO filed a request for a BIR Ruling with petitioner Commissioner of Internal
Revenue (CIR) with regard to the tax exempt status of NORD/LB Singapore Branch, in accordance
with Section 32(B)(7)(a) of the 1997 National Internal Revenue Code (Tax Code), as amended.8

On October 7, 2003, the BIR issued Ruling No. DA-342-2003 declaring that the interest payments
made to NORD/LB Singapore Branch are exempt from the ten percent (10%) final withholding tax,
since it is a financing institution owned and controlled by the foreign government of Germany.9

Consequently, on July 13, 2004, relying on the aforesaid BIR Ruling, respondent MERALCO filed
with petitioner a claim for tax refund or issuance of tax credit certificate in the aggregate amount of
264,120,181.44, representing the erroneously paid or overpaid final withholding tax on interest
payments made to NORD/LB Singapore Branch.10

On November 5, 2004, respondent MERALCO received a letter from petitioner denying its claim for
tax refund on the basis that the same had already prescribed under Section 204 of the Tax Code,
which gives a taxpayer/claimant a period of two (2) years from the date of payment of tax to file a
claim for refund before the BIR.11

Aggrieved, respondent MERALCO filed a Petition for Review with the Court of Tax Appeals (CTA)
on December 6, 2004.12 After trial on the merits, the CTA-First Division rendered a Decision partially
granting respondent MERALCOs Petition for Review in the following wise:

IN VIEW OF THE FOREGOING, petitioners claim in the amount of TWO HUNDRED TWENTY-
FOUR MILLION SEVEN HUNDRED SIXTY THOUSAND NINE HUNDRED TWENTY-SIX PESOS &
SIXTY-FIVE CENTAVOS (224,760,926.65) representing erroneously paid and remitted final
income taxes for the period January 1999 to July 2002 is hereby DENIED on the ground of
prescription. However, petitioners claim in the amount of THIRTY-NINE MILLION THREE
HUNDRED FIFTY NINETHOUSAND TWO HUNDRED FIFTY-FOUR PESOS & SEVENTY-NINE
CENTAVOS (39,359,254.79) is hereby GRANTED.

Accordingly, respondent is ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE to

petitioner in the amount of THIRTYNINE MILLION THREE HUNDRED FIFTY-NINE THOUSAND
TWO HUNDRED FIFTY-FOUR PESOS & SEVENTY-NINE CENTAVOS (39,359,254.79)
representing the final withholding taxes erroneously paid and remitted for the period December 2002
to September 2003.

SO ORDERED.13

On November 2, 2006, petitioner filed its Motion for Reconsideration with the CTA-First Division,
while on November 7, 2006, respondent MERALCO filed its Partial Motion for
Reconsideration.14 Finding no justifiable reason to overturn its Decision, the CTA-First Division
denied both the petitioners Motion for Reconsideration and respondent MERALCOs Partial Motion
for Reconsideration in a Resolution dated January 11, 2007.15

Unyielding to the Decision of the CTA, both petitioner and respondent MERALCO filed their
respective Petitions for Review before the Court of Tax Appeals En Banc (CTA En Banc) docketed
as C.T.A. EB Nos. 264 and 262, respectively.16 In a Resolution dated May 9, 2007, the CTA En Banc
ordered the consolidation of both cases in accordance with Section 1, Rule 31 of the Revised Rules
of Court and gave due course thereto, requiring both parties to submit their respective consolidated
memoranda.17 Only petitioner filed its Consolidated Memorandum on July 2, 2007.18

In its Decision19 dated October 15, 2007, the CTA En Banc denied both petitions and upheld in toto
the Decision of the CTA-First Division, the dispositive portion of which states:
In the light of the laws and jurisprudence on the matter, We see no reason to reverse the assailed
Decision dated October 16, 2006 and Resolution dated January 11, 2007 of the First Division.

WHEREFORE, premises considered, both petitions are hereby DISMISSED.

SO ORDERED.20

In the same vein, the motions for reconsideration filed by the respective parties were also denied in
a Resolution21dated January 9, 2008.

Hence, the instant petition.

The sole issue presented before us is whether or not respondent MERALCO is entitled to a tax
refund/credit relative to its payment of final withholding taxes on interest payments made to
NORD/LB from January 1999 to September 2003.

Petitioner maintains that respondent MERALCO is not entitled to a tax refund/credit, considering that
its testimonial and documentary evidence failed to categorically establish that NORD/LB is owned
and controlled by the Federal Republic of Germany; hence, exempted from final withholding taxes
on income derived from investments in the Philippines.22

On the other hand, respondent MERALCO claims that the evidence it presented in trial, consisting of
the testimony of Mr. German F. Martinez, Jr., Vice-President and Head of Tax and Tariff of
MERALCO, which was affirmed by a certification issued by the Embassy of the Federal Republic of
Germany, dated March 27, 2002, through its Mr. Lars Leymann, clearly defined the status of
NORD/LB as one being owned by various German States.23 Respondent MERALCO further argues
that in the Joint Stipulation of Facts, petitioner admitted the fact that NORD/LB is a financial
institution owned and controlled by a foreign government.24

Petitioners argument fails to persuade.

After a careful scrutiny of the records and evidence presented before us, we find that respondent
MERALCO has discharged the requisite burden of proof in establishing the factual basis for its claim
for tax refund.

First, as correctly decided by the CTA En Banc, the certification issued by the Embassy of the
Federal Republic of Germany, dated March 27, 2002, explicitly states that NORD/LB is owned by the
State of Lower Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania, and serves as a
regional bank for the said states which offers support in the public sector financing, to wit:

x x x x.

Regarding your letter dated March 1, 2002, I can confirm the following:

NORD/LB is owned by the State (Land)of Lower Saxony to the extent of 40%, by the States of
[Saxony-]Anhalt and Mecklenburg-Western Pomerania to the extent of 10% each. The Lower
Saxony Savings Bank and Central Savings Bank Association have a share of [26.66%]. The Savings
Bank Association Saxony-Anhalt and the Savings Bank Association Mecklenburg-Western
Pomerania have a share of [6.66%] each.
As the regional bank for Lower Saxony, Saxony-Anhalt and MecklenburgWestern Pomerania,
NORD/LB offers support in public sector financing. It fulfills as Girozentrale the function of a central
bank for the savings bank in these three states (Lander).

x x x25

Given that the same was issued by the Embassy of the Federal Republic of Germany in the regular
performance of their official functions, and the due execution and authenticity thereof was not
disputed when it was presented in trial, the same may be admitted as proof of the facts stated
therein. Further, it is worthy to note that the Embassy of the Federal Republic of Germany was in the
best position to confirm such information, being the representative of the Federal Republic of
Germany here in the Philippines.

To bolster this, respondent MERALCO presented as witness its Vice-President and Head of Tax and
Tariff, German F. Martinez, Jr., who testified on and identified the existence of such certification. In
this regard, we concur with the CTA En Banc that absent any strong evidence to disprove the
truthfulness of such certification, there is no basis to controvert the findings of the CTA-First Division,
to wit:

The foregoing documentary and testimonial evidence were given probative value as the First
Division ruled that there was no strong evidence to disprove the truthfulness of the said pieces of
evidence, considering that the CIR did not present any rebuttal evidence to prove otherwise. The
weight of evidence is not a question of mathematics, but depends on its effects in inducing belief,
under all of the facts and circumstances proved. The probative weight of any document or any
testimonial evidence must be evaluated not in isolation but in conjunction with other evidence,
testimonial, admissions, judicial notice, and presumptions, adduced or given judicial cognizance of,
and if the totality of the evidence presented by both parties supports the claimants claim, then he is
entitled to a favorable judgment. (Donato C. Cruz Trading Corp. v. Court of Appeals, 347 SCRA
13).26

Consequently, such certification was used by petitioner as basis in issuing BIR Ruling No. DA-342-
2003, which categorically declared that the interest income remitted by respondent MERALCO to
NORD/LB Singapore Branch is not subject to Philippine income tax, and accordingly, not subject to
ten percent (10%) withholding tax. Contrary to petitioners view, therefore, the same constitutes a
1w phi 1

compelling basis for establishing the tax exempt status of NORD/LB, as was held in Miguel J.
Ossorio Pension Foundation, Incorporated v. Court of Appeals,27 which may be applied by analogy to
the present case, to wit:

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it from
the payment of withholding tax on the sale of the land by various BIR-approved trustees and tax-
exempt private employees' retirement benefit trust funds represented by Citytrust. The BIR ruled that
the private employees benefit trust funds, which included petitioner, have met the requirements of
the law and the regulations and, therefore, qualify as reasonable retirement benefit plans within the
contemplation of Republic Act No. 4917 (now Sec. 28 [b] [7] [A], Tax Code). The income from the
trust fund investments is, therefore, exempt from the payment of income tax and, consequently, from
the payment of the creditable withholding tax on the sale of their real property.

Thus, the documents issued and certified by Citytrust showing that money from the Employees'
Trust Fund was invested in the MBP lot cannot simply be brushed aside by the BIR as self-serving,
in the light of previous cases holding that Citytrust was indeed handling the money of the Employees'
Trust Fund. These documents, together with the notarized Memorandum of Agreement, clearly
establish that petitioner, on behalf of the Employees' Trust Fund, indeed invested in the purchase of
the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came from an investment
by the Employees' Trust Fund, petitioner, as trustee of the Employees' Trust Fund, is entitled to
claim the tax refund of 3,037,500 which was erroneously paid in the sale of the MBP lot.28

Second, in the parties Joint Stipulation of Facts, petitioner admitted the issuance of the aforesaid
BIR Ruling and did not contest it as one of the admitted documentary evidence in Court. A judicial
admission binds the person who makes the same, and absent any showing that this was made thru
palpable mistake, no amount of rationalization can offset it.29 In Camitan v. Fidelity Investment
Corporation,30 we sustained the judicial admission of petitioners counsel for failure to prove the
existence of palpable mistake, thus:

x x x. A judicial admission is an admission, verbal or written, made by a party in the course of the
proceedings in the same case, which dispenses with the need for proof with respect to the matter or
fact admitted. It may be contradicted only by a showing that it was made through palpable mistake or
that no such admission was made.

xxxx

Upon examination of the said exhibits on record, it appears that the alleged discrepancies are more
imagined than real. Had these purported discrepancies been that evident during the preliminary
conference, it would have been easy for petitioners' counsel to object to the authenticity of the
owner's duplicate copy of the TCT presented by Fidelity. As shown in the transcript of the
proceedings, there was ample opportunity for petitioners' counsel to examine the document, retract
his admission, and point out the alleged discrepancies. But he chose not to contest the document.
Thus, it cannot be said that the admission of the petitioners' counsel was made through palpable
mistake.31

Based on the foregoing, we are of the considered view that respondent MERALCO has shown clear
and convincing evidence that NORD/LB is owned, controlled or enjoying refinancing from the
Federal Republic of Germany, a foreign government, pursuant to Section 32(B)(7)(a) of the Tax
Code, as amended, which provides that:

Section 32. Gross Income.

x x x x.

(B) Exclusions from Gross Income. The following items shall not be included in gross income and
shall be exempt from taxation under this title:

xxxx

(7) Miscellaneous Items.

(a) Income Derived by Foreign Government. Income derived from investments in the Philippines in
loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the
Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional financial institutions
established by foreign governments.
x x x x.32

Notwithstanding the foregoing, however, we uphold the ruling of the CTA En Banc that the claim for
tax refund in the aggregate amount of Thirty-Nine Million Three Hundred Fifty-Nine Thousand Two
Hundred Fifty-Four Pesos and Seventy-Nine Centavos (39,359,254.79) pertaining to the period
from January 1999 to July2002 must fail since the same has already prescribed under Section 229
of the Tax Code, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, of any sum alleged to have been excessively or in any manner wrongfully
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.33

As can be gleaned from the foregoing, the prescriptive period provided is mandatory regardless of
any supervening cause that may arise after payment. It should be pointed out further that while the
prescriptive period of two (2) years commences to run from the time that the refund is ascertained,
the propriety thereof is determined by law (in this case, from the date of payment of tax), and not
upon the discovery by the taxpayer of the erroneous or excessive payment of taxes. The issuance
by the BIR of the Ruling declaring the tax-exempt status of NORD/LB, if at all, is merely confirmatory
in nature. As aptly held by the CTA-First Division, there is no basis that the subject exemption was
provided and ascertained only through BIR Ruling No. DA-342-2003, since said ruling is not the
operative act from which an entitlement of refund is determined.34 In other words, the BIR is tasked
only to confirm what is provided under the Tax Code on the matter of tax exemptions as well as the
period within which to file a claim for refund.

In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive period for
initiating an action on the ground of quasi contract or solutio indebiti under Article 1145 of the New
Civil Code. There is solutio indebiti where: (1) payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who received the payment; and (2) the
payment is made through mistake, and not through liberality or some other cause.35 Here, there is a
binding relation between petitioner as the taxing authority in this jurisdiction and respondent
MERALCO which is bound under the law to act as a withholding agent of NORD/LB Singapore
Branch, the taxpayer. Hence, the first element of solutio indebitiis lacking. Moreover, such legal
precept is inapplicable to the present case since the Tax Code, a special law, explicitly provides for a
mandatory period for claiming a refund for taxes erroneously paid.

Tax refunds are based on the general premise that taxes have either been erroneously or
excessively paid. Though the Tax Code recognizes the right of taxpayers to request the return of
such excess/erroneous payments from the government, they must do so within a prescribed period.
Further, "a taxpayer must prove not only his entitlement to a refund, but also his compliance with the
procedural due process as non-observance of the prescriptive periods within which to file the
administrative and the judicial claims would result in the denial of his claim."36 In the case at bar,
respondent MERALCO had ample opportunity to verify on the tax-exempt status of NORD/LB for
purposes of claiming tax refund. Even assuming that respondent MERALCO could not have
emphatically known the status of NORD/LB, its supposition of the same was already confirmed by
the BIR Ruling which was issued on October 7, 2003. Nevertheless, it only filed its claim for tax
refund on July 13, 2004, or ten (10) months from the issuance of the aforesaid Ruling. We agree
with the CTA-First Division, therefore, that respondent MERALCO's claim for refund in the amount of
Two Hundred Twenty-Four Million Seven Hundred Sixty Thousand Nine Hundred Twenty-Six Pesos
and Sixty-Five Centavos (224,760,926.65) representing erroneously paid and remitted final income
taxes for the period January 1999 to July 2002 should be denied on the ground of prescription.

Finally, we ought to remind petitioner that the arguments it raised in support of its position have
already been thoroughly discussed both by the CTA-First Division and the CTA En Banc. Oft
repeated is the rule that the Court will not lightly set aside the conclusions reached by the CT A
which, by the very nature of its function of being dedicated exclusively to the resolution of tax
problems, has accordingly developed an expertise on the subject, unless there has been an abuse
or improvident exercise of authority.37 This Court recognizes that the CTA's findings can only be
disturbed on appeal if they are not supported by substantial evidence, or there is a showing of gross
error or abuse on the part of the Tax Court.38 In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CT A rendered a decision which is valid in every
respect.39 It has been a long-standing policy and practice of the Court to respect the conclusions of
quasi-judicial agencies such as the CT A, a highly specialized body specifically created for the
purpose of reviewing tax cases.40

WHEREFORE, the petition is DENIED. The October 15, 2007 Decision and January 9, 2008
Resolution of the Court of Tax Appeals in C.T.A. EB No. 262 are hereby AFFIRMED.

COMMISSIONER OF INTERNAL G.R. No. 173854

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

- versus - BRION,
DEL CASTILLO,
ABAD, and
FAR EAST BANK & TRUST PEREZ, JJ.
COMPANY (NOW BANK OF
THE PHILIPPINE ISLANDS), Promulgated:
Respondent. March 15, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

DEL CASTILLO, J.:

Entitlement to a tax refund is for the taxpayer to prove and not for the government
to disprove.
 This Petition for Review on Certiorari assails the January 31, 2006 Decision[1] of
the Court of Appeals (CA) in CA-G.R. SP No. 56773 which reversed and set aside the
October 4, 1999 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No.
5487. Also assailed is the July 19, 2006 Resolution[3] of the CA denying the motion for
reconsideration.

The CTA found that respondent Far East Bank & Trust Company failed to prove
that the income derived from rentals and sale of real property from which the taxes were
withheld were reflected in its 1994 Annual Income Tax Return. The CA found otherwise.

Factual Antecedents

On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR)
two Corporate Annual Income Tax Returns, one for its Corporate Banking Unit
(CBU)[4] and another for its Foreign Currency Deposit Unit (FCDU),[5] for the taxable
year ending December 31, 1994. The return for the CBU consolidated the respondents
overall income tax liability for 1994, which reflected a refundable income tax
of P12,682,864.00, computed as follows:
FCDU CBU
Gross Income P13,319,068 5,348,080,630
Less: Deductions 1,397,157 5,432,828,719

Net Income 11,921,911 [84,748,089]

Tax Rate 35% 35%

Income Tax Due Thereon 4,172,669 NIL

_______________________________________
Consolidated Tax Due for
Both CBU and FCDU Operations P 4,172,669

Less:

Quarterly Income Tax Payments

CBU -1st Quarter 633,085
-2nd Quarter 11,844,333
FCDU -1st Quarter 955, 280
-2nd Quarter 1,104,942

Less:
 Creditable Taxes 2,317,893
Withheld at Source
Refundable Income Tax [P12,682,864][6]

Pursuant to Section 69[7] of the old National Internal Revenue Code (NIRC),
the amount of P12,682,864.00 was carried over and applied against respondents income
tax liability for the taxable year ending December 31, 1995. On April 15, 1996,
respondent filed its 1995 Annual Income Tax Return, which showed a total overpaid
income tax in the amount of P17,443,133.00, detailed as follows:
FCDU CBU
Gross Income P16,531,038 7,076,497,628
Less: Deductions 1,327,549 7,086,821,354

Net Income 15,203,539 [10,423,728]

Tax Rate 35% 35%
Income Tax Due Thereon 5,321,239 NIL
_______________________________________
Consolidated Tax Due for
Both CBU and FCDU Operations P 5,321,239

Less:
Prior years (1994) excess
income tax credit 12,682,864
Additional prior years excess
income tax credit 6,283,484
Creditable Taxes
Withheld at Source 3,798,024
Refundable Income Tax [P17,443,133][8]

Out of the P17,433,133.00 refundable income tax, only P13,645,109.00 was

sought to be refunded by respondent. As to the remaining P3,798,024.00, respondent
opted to carry it over to the next taxable year.

On May 17, 1996, respondent filed a claim for refund of the amount
of P13,645,109.00 with the BIR. Due to the failure of petitioner Commissioner of
Internal Revenue (CIR) to act on the claim for refund, respondent was compelled to bring
the matter to the CTA on April 8, 1997 via a Petition for Review docketed as CTA Case
No. 5487.

After the filing of petitioners Answer, trial ensued.

To prove its entitlement to a refund, respondent presented the following documents:

Exhibits Nature and Description

A Corporate Annual Income Tax Return covering income of respondents

CBU for the year ended December 31,
1994 together with attachments

B Corporate Annual Income Tax Return covering income of respondents

FCDU for the year ended December 31,
1994 together with attachments

C Corporate Annual Income Tax Return covering income of respondents

CBU for the year ended December 31,
1995 together with attachments

D Corporate Annual Income Tax Return covering income of respondents

FCDU for the year ended December 31,
1995 together with attachments

N to Z; Certificates of Creditable
AA to UU Withholding Tax and Monthly Remittance Returns of Income
Taxes Withheld issued by various
withholding agents for the year
ended December 31, 1994

VV Letter claim for refund dated May 8, 1996 filed with the Revenue
District Office No. 33 on May 17, 1996[9]

Petitioner, on the other hand, did not present any evidence.

Ruling of the Court of Tax Appeals

On October 4, 1999, the CTA rendered a Decision denying respondents claim for refund
on the ground that respondent failed to show that the income derived from rentals and
sale of real property from which the taxes were withheld were reflected in its 1994
Annual Income Tax Return.
 On October 20, 1999, respondent filed a Motion for New Trial based on excusable
negligence. It prayed that it be allowed to present additional evidence to support its claim
for refund.

However, the motion was denied on December 16, 1999 by the CTA. It reasoned,
thus:

[Respondent] is reminded that this case was originally submitted for

decision as early as September 22, 1998 (p. 497, CTA Records). In
view, however, of the Urgent Motion to Admit Memorandum filed on April
27, 1999 by Atty. Louella Martinez, who entered her appearance as
collaborating counsel of Atty. Manuel Salvador allegedly due to the latter
counsels absences, this Court set aside its resolution of September 22, 1998
and considered this case submitted for decision as of May 7,
1999. Nonetheless, it took [respondent] another five months after it was
represented by a new counsel and after a decision unfavorable to it was
rendered before [respondent] realized that an additional material documentary
evidence has to be presented by way of a new trial, this time initiated by a third
counsel coming from the same law firm. x x x

Furthermore, in ascertaining whether or not the income upon which the

taxes were withheld were included in the returns of the [respondent], this
Court based its findings on the income tax returns and their supporting
schedules prepared and reviewed by the [respondent] itself and which, to
Us, are enough to support the conclusion reached.

WHEREFORE, in view of the foregoing, [respondents] Motion for

New Trial is hereby DENIED for lack of merit.

SO ORDERED.[10]

Ruling of the Court of Appeals

On appeal, the CA reversed the Decision of the CTA. The CA found that
respondent has duly proven that the income derived from rentals and sale of real property
upon which the taxes were withheld were included in the return as part of the gross
income.
 Hence, this present recourse.
Issue

The lone issue presented in this petition is whether respondent has proven its
entitlement to the refund.[11]

Our Ruling

We find that the respondent miserably failed to prove its entitlement to the
refund. Therefore, we grant the petition filed by the petitioner CIR for being meritorious.

A taxpayer claiming for a tax credit or refund of creditable withholding tax must
comply with the following requisites:

1) The claim must be filed with the CIR within the two-year period from the date
of payment of the tax;

2) It must be shown on the return that the income received was declared as part of
the gross income; and

3) The fact of withholding must be established by a copy of a statement duly

issued by the payor to the payee showing the amount paid and the amount
of the tax withheld.[12]

The two-year period requirement is based on Section 229 of the NIRC of 1997 which
provides that:

SECTION 229. Recovery of Tax Erroneously or Illegally Collected.

No suit or proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.
 In any case, no such suit or proceeding shall be filed after the expiration
of two (2) years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment: Provided, however, That
the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. (Formerly Section 230
of the old NIRC)

While the second and third requirements are found under Section 10 of Revenue
Regulation No. 6-85, as amended, which reads:

Section 10. Claims for tax credit or refund. Claims for tax credit or
refund of income tax deducted and withheld on income payments shall be
given due course only when it is shown on the return that the income payment
received was declared as part of the gross income and the fact of withholding
is established by a copy of the statement duly issued by the payer to the payee
(BIR Form No. 1743.1) showing the amount paid and the amount of tax
withheld therefrom.

Respondent timely filed its claim for refund.

There is no dispute that respondent complied with the first requirement. The filing of
respondents administrative claim for refund on May 17, 1996 and judicial claim for
refund on April 8, 1997 were well within the two-year period from the date of the filing
of the return on April 10, 1995.[13]

Respondent failed to prove that the income

derived from rentals and sale of real property
were included in the gross income as reflected
in its return.

However, as to the second and third requirements, the tax court and the appellate
court arrived at different factual findings.
 The CTA ruled that the income derived from rentals and sales of real property
were not included in respondents gross income. It noted that in respondents 1994 Annual
Income Tax Return, the phrase NOT APPLICABLE was printed on the space provided
for rent, sale of real property and trust income. The CTA also declared that the
certifications issued by respondent cannot be considered in the absence of the Certificates
of Creditable Tax Withheld at Source. The CTA ruled that:

x x x the Certificates of Creditable Tax Withheld at Source submitted by

[respondent] pertain to rentals of real property while the Monthly Remittance
Returns of Income Taxes Withheld refer to sales of real property. But, if we
are to look at Schedules 3, 4, and 5 of the Annual Income Tax Return of
[respondent] for 1994 (Exhibit A), there was no showing that the Rental
Income and Income from Sale of Real Property were included as part of
the gross income appearing in Section A of the said return. In fact, under
the said schedules, the phrase NOT APPLICABLE was printed by
[respondent]. Verily, the income of [respondent] coming from rent and sale
of real property upon which the creditable taxes withheld were based
were not duly reflected. As to the certifications issued by the [respondent]
(Exh. UU), the same cannot be considered in the absence of the requisite
Certificates of Creditable Tax Withheld at Source.

Based on the foregoing, [respondent] has failed to comply with two

essential requirements for a valid claim for refund. Consequently, the same
cannot be given due course. [14] (Emphasis supplied)

On the other hand, the CA found thus:

We disagree with x x x CTAs findings. In the case of Citibank, N.A. vs.

Court of Appeals (280 SCRA 459), the Supreme Court held that:

a refund claimant is required to prove the inclusion

of the income payments which were the basis of the
withholding taxes and the fact of withholding. However, a
detailed proof of the truthfulness of each and every item in the
income tax return is not required. x x x
 x x x The grant of a refund is founded on the assumption that
the tax return is valid; that is, the facts stated therein are true and
correct. x x x
In the case at bench, the BIR examined [respondent] Banks Corporate
Annual Income Tax Returns for the years 1994 and 1995 when they were filed
on April 10, 1995 and April 15, 1996, respectively. Presumably, the BIR
found no false declaration in them because it did not allege any false
declaration thereof in its Answer (to the petition for review) filed before
x x x CTA. Nowhere in the Answer, did the BIR dispute the amount of tax
refund being claimed by [respondent] Bank as inaccurate or erroneous. In
fact, the reason given by the BIR (in its Answer to the petition for review) why
the claimed tax refund should be denied was that x x x the amount
of P13,645,109.00 was not illegally or erroneously collected, hence, the
petition for review has no basis [see Record, p. 32]. The amount
of P17,433,133.00 reflected as refundable income tax in [respondent] Banks
Corporate Annual Income Tax Return for the year 1995 was not disputed by
the BIR to be inaccurate because there were certain income not included in the
return of the [respondent]. Verily, this leads Us to a conclusion that
[respondent] Banks Corporate Annual Income Tax Returns submitted were
accepted as regular and even accurate by the BIR.

Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR

is tasked to make an examination of returns and assess the correct
amount of tax, to wit:

Sec. 16. Power of the Commissioner to make assessment

and prescribe additional requirements for tax administration and
enforcement.

(a) After a return is filed as required under the provision

of this Code, the Commissioner shall examine it and assess the
correct amount of tax. x x x

which the [petitioner] Commissioner undeniably failed to

do. Moreover, noteworthy is the fact that during the hearing of the petition for
review before the CTA, [petitioner] Commissioner of the BIR submitted the
case for decision in view of the fact that he has no evidence to present nor
records to submit relative to the case x x x

Thus, although it is a fact that [respondent] failed to indicate said income

payments under the appropriate Schedules 3, 4, and 5 of Section C of its 1994
 Annual Income Tax Return (Exhibit A), however, We give credence to
[respondent] Banks assertion that it reported the said income payments
as part of its gross income when it included the same as part of the Other
Income, Trust Income, and Interest Income stated in the Schedule of
Income (referred to as an attachment in Section C of Exhibit A, x x x and in
the 1994 audited Financial Statements (FS) supporting [respondents] 1994
Annual Corporate Income Tax Return. The reason why the phrase NOT
APPLICABLE was indicated in schedules 3, 4, and 5 of Section C of
[respondents] 1994 Annual Income Tax Return is due to the fact that
[respondent] Bank already reported the subject rental income and income from
sale of real property in the Schedule of Income under the headings Other
Income/Earnings, Trust Income and Interest Income. Therefore, [respondent]
Bank still complied with the second requirement that the income upon which
the taxes were withheld are included in the return as part of the gross income.

xxxx

[Respondent] Banks various documentary evidence showing that it had

satisfied all requirements under the Tax Code vis--vis the Bureau of Internal
Revenues failure to adduce any evidence in support of their denial of the
claim, [respondent] Bank should, therefore, be granted the present claim for
refund.[15] (Emphasis supplied)
Between the decision of the CTA and the CA, it is the formers that is based on the
evidence and in accordance with the applicable law and jurisprudence.

To establish the fact of withholding, respondent submitted Certificates of

Creditable Tax Withheld at Source and Monthly Remittance Returns of Income Taxes
Withheld, which pertain to rentals and sales of real property, respectively. However, a
perusal of respondents 1994 Annual Income Tax Return shows that the gross income was
derived solely from sales of services. In fact, the phrase NOT APPLICABLE was
printed on the schedules pertaining to rent, sale of real property, and trust
income.[16] Thus, based on the entries in the return, the income derived from rentals and
sales of real property upon which the creditable taxes were withheld werenot included
in respondents gross income as reflected in its return. Since no income was reported,
it follows that no tax was withheld. To reiterate, it is incumbent upon the taxpayer to
reflect in his return the income upon which any creditable tax is required to be withheld at
the source.[17]
 Respondents explanation that its income derived from rentals and sales of real
properties were included in the gross income but were classified as Other Earnings in its
Schedule of Income[18] attached to the return is not supported by the evidence. There is
nothing in the Schedule of Income to show that the income under the heading Other
Earnings includes income from rentals and sales of real property. No documentary or
testimonial evidence was presented by respondent to prove this. In fact, respondent, upon
realizing its omission, filed a motion for new trial on the ground of excusable negligence
with the CTA. Respondent knew that it had to present additional evidence showing the
breakdown of the Other Earnings reported in its Schedule of Income attached to the
return to prove that the income from rentals and sales of real property were actually
included under the heading Other Earnings.[19] Unfortunately, the CTA was not
convinced that there was excusable negligence to justify the granting of a new trial.

Accordingly, the CA erred in ruling that respondent complied with the second
requirement.

Respondent failed to present all the

Certificates of Creditable Tax Withheld at
Source.

The CA likewise failed to consider in its Decision the absence of several

Certificates of Creditable Tax Withheld at Source. It immediately granted the refund
without first verifying whether the fact of withholding was established by the Certificates
of Creditable Tax Withheld at Source as required under Section 10 of Revenue
Regulation No. 6-85. As correctly pointed out by the CTA, the certifications (Exhibit
UU) issued by respondent cannot be considered in the absence of the required
Certificates of Creditable Tax Withheld at Source.

The burden is on the taxpayer to prove its

entitlement to the refund.

Moreover, the fact that the petitioner failed to present any evidence or to
refute the evidence presented by respondent does not ipso facto entitle the respondent to a
tax refund. It is not the duty of the government to disprove a taxpayers claim for
refund. Rather, the burden of establishing the factual basis of a claim for a refund rests on
the taxpayer.[20]

And while the petitioner has the power to make an examination of the returns and
to assess the correct amount of tax, his failure to exercise such powers does not create a
presumption in favor of the correctness of the returns. The taxpayer must still present
substantial evidence to prove his claim for refund. As we have said, there is no automatic
grant of a tax refund.[21]

Hence, for failing to prove its entitlement to a tax refund, respondents claim must
be denied. Since tax refunds partake of the nature of tax exemptions, which are
construed strictissimi juris against the taxpayer, evidence in support of a claim must
likewise be strictissimi scrutinized and duly proven.[22]

WHEREFORE, the petition is GRANTED. The assailed January 31,

2006 Decision of the Court of Appeals in CA-G.R. SP No. 56773 and its July 19, 2006
Resolution are REVERSED and SET ASIDE. The October 4, 1999 Decision of the
Court of Tax Appeals denying respondents claim for tax refund for failure to prove that
the income derived from rentals and sale of real property from which the taxes were
withheld were reflected in its 1994 Annual Income Tax
Return, is REINSTATED and AFFIRMED.

SO ORDERED.

G.R. No. L-23912 March 15, 1968

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
JOSE CONCEPCION, as Ancillary Administrator of the Estate of Mary H. Mitchel-Roberts
(deceased), and JACK F. MITCHELL-ROBERTS, respondents.

Office of the Solicitor General for petitioner.

Liedo, Andrada, Perez & Associates for respondents.

FERNANDO, J.:

In this petition for the review of a decision of the Court of Tax Appeals, the decisive question,
one of first impression, is whether a taxpayer who had lost his right to dispute the validity of an
assessment, the period for appealing to the Court of Tax Appeals having expired, as found by such
Court in a previous case in a decision now final, and who thereafter paid under protest could then,
relying on Section 306 of the National Internal Revenue Code1 sue for recovery on the ground of its
illegality? The Court of Tax Appeals, in the decision under review, answered in the affirmative. We
hold otherwise and accordingly reverse.

In CTA Case No. 669, respondent Jose Concepcion, as ancillary administrator of the estate of
Mary H. Mitchell-Roberts, and respondent Jack F. Mitchell-Roberts, husband of the deceased
sought a refund of the sum of P1,181.33 and P2,616.10 representing estate and inheritance taxes
on 50 shares of stock of Edward J. Nell Company issued in the names of both spouses "as joint
tenants with full rights of survivorship and not as tenants in common." The above assessment was
made by petitioner Commissioner of Internal Revenue on the ground that there was a transmission
to the husband of one-half share thereof upon the death of the wife, the above shares being conjugal
property. Respondents maintained on the other hand that there was no transmission of property
since under English law, ownership of all property acquired during the marriage vests in the
husband. Moreover, the shares of stock were issued to the spouses "as joint tenants with full rights
of survivorship and not as tenants in common." Not being agreeable to the theory entertained by
petitioner Commissioner of Internal Revenue, respondents, in a previous case, CTA Case No. 168,
appealed such a decision under Republic Act No. 1125. The Court of Tax Appeals, however,
dismissed such an appeal as the petition for review because it was filed beyond the reglementary
period of 30 days. That decision rendered on April 29, 1957, became final.

What next transpired was set forth in the appealed decision, CTA Case No. 669, thus:
"Whereupon, on June 14, 1957, petitioners paid the taxes in question amounting to P1,181.33 (as
estate tax) and P2,616.10 (as inheritance tax), inclusive of delinquency penalties, and at the same
time filed a claim for the refund of said amounts (Exh. A, BIR rec., pp. 83-87). In the claim for refund,
petitioners also invoked the reciprocity provision of Section 122 of the Revenue Code (CTA rec., pp.
92-93). Without waiting for the decision of respondent on the claim for refund, petitioner's instituted
the instant appeal on June 11, 1959 in order to avoid the prescriptive period of two years provided
for in Section 306 of the Revenue Code."2

Petitioner Commissioner of Internal Revenue, before the Court of Tax Appeals, raised as one
of its defenses the fact that respondents were "estopped from denying the legality and correctness of
the assessment for estate and inheritance taxes in view of the fact that they paid the same in
pursuance of a decision of the Commissioner which has become final, executory and demandable
as a result of the dismissal of CTA Case No. 168, . . ."3 Such a defense was considered unavailing
by the Court of Tax Appeals by virtue of its decision in La Paz y Buen Viaje Cigar & Cigarette
Factory v. Commissioner of Internal Revenue.4 It was the view of the Court of Tax Appeals that with
no procedural obstacle to stand in the way and with the spouses, both non-resident English subjects,
being married in England, their property relation thus being governed by English law, the national
law of the husband, by virtue of which there was no transmission of property from wife to husband,
governs, with the result that no tax was demandable. Petitioner Commissioner of Internal Revenue
was ordered to refund the inheritance and estate taxes paid in the amount of P3,797.43. Hence this
petition for review.

The Court of Tax Appeals in relying on its previous decision in the La Paz y Buen Viaje Cigar
& Cigarette Factory and ruling against the defense of the finality of the assessment, after the
dismissal of the appeal in CTA No. 168 in view of the failure to have it filed within the reglementary
period of thirty (30) days, must have been of the belief that this Court, in affirming its decision on
March 30, 1963, without however passing on the above question, did give an indication of its
probable thinking on the matter. Such is not a correct appraisal of the situation however, for on
March 30, 1963, the very same day its La Paz y Buen Viaje decision was affirmed, the opinion
in Republic of the Philippines v. Lopez5 was handed down. This is an appeal by the Republic from an
order of the Court of First Instance of Baguio dismissing its complaint for collection of a deficiency
income tax against defendant Lopez on the ground that the action had prescribed. After noting that
prescription as a defense did not lie, this Court, in an opinion by Justice J.B.L. Reyes, likewise
stated: "Another ground for reversing the dismissal of the complaint is that the proper remedy of the
taxpayer against the assessment complained of was to appeal the ruling of the Collector to the Court
of Tax Appeals. . . ." The precise question in this litigation then, while undoubtedly one of novelty, is
not without illumination supplied by radiations from past decisions.

For subsequently, in Republic v. Lim Tian Teng Sons & Co. Inc.,6 the above doctrine was
reaffirmed categorically in this language: "Taxpayer's failure to appeal to the Court of Tax Appeal in
due time made the assessment in question final, executory and demandable. And when the action
was instituted on September 2, 1958 to enforce the deficiency assessment in question, it was
already barred from disputing the correctness the assessment or invoking any defense that would
reopen the question of his tax liability on the merits. Otherwise, the period of thirty days for appeal to
the Court of Tax Appeals would make little sense." Once, the matter has reached the stage of finality
in view of the failure to appeal, it logically follows, in the appropriate language of Justice Makalintal,
in Morales v. Collector of Internal Revenue,7 that it "could no longer be reopened through the
expedient of an appeal from the denial of petitioner's request for cancellation of the warrant of
distraint and levy."

In the same way then that the expedient of an appeal from a denial of a tax request for
cancellation of warrant of distraint and levy cannot be utilized for the purpose of testing the legality of
an assessment, which had become conclusive and binding on the taxpayer, there being no appeal,
the procedure set forth in Section 306 of the National Internal Revenue Code is not available to
revive the right to contest the validity of an assessment once the same had been irretrievably lost not
only by the failure to appeal but likewise by the lapse of the reglementary period within which to
appeal could have been taken. Clearly then, the liability of respondent Concepcion as an ancillary
administrator of the estate of the deceased wife and of respondent Mitchell-Roberts as the husband
for the amount of P1,181.33 as estate tax and P2,616.10 as inheritance tax was beyond question.
Having paid the same, respondents are clearly devoid of any legal right to sue for recovery. The
decision of the Court of Tax Appeals ordering petitioner Commissioner of Internal Revenue to refund
the above total sum of P3,797.43 cannot stand.

WHEREFORE, the decision of the respondent Court of Tax Appeal under review is reversed.
With costs against respondents. 1wph1.t

PHILIPPINE NATIONAL BANK, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO JR., J.:

Nature of the Case

This is an appeal via a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to
reverse and set aside the Court of Tax Appeals (CTA) En Banc September 12, 2012 Decision, as reiterated in
a Resolution of February 12, 2013 in CTA EB Case No. 762, affirming the earlier decision of its First Division
denying petitioners claim for there fund of excess creditable withholding tax which it allegedly erroneously
paid the Bureau of Internal Revenue (BIR) in the amount of Twelve Million Four Hundred Thousand and Four
Pesos and Seventy-One Centavos (P12,400,004.71).

The Facts

GotescoTyan Ming Development, Inc. (Gotesco), a Filipino corporation engaged in the real estate
business,1 entered on April 7, 1995 into a syndicated loan agreement with petitioner Philippine National
Bank (PNB) and three (3) other banks. To secure the loan, Gotesco mortgaged a six-hectare expanse known
as the Ever Ortigas Commercial Complex, under a mortgage trust indenture agreement in favor of PNB,
through its Trust Banking Group, as trustee.2 chanroblesv irt uallawl ibra ry

Gotesco subsequently defaulted on its loan obligations. Thus, PNB foreclosed the mortgaged property
through a notarial foreclosure sale on July 30, 1999. On August 4, 1999, a certificate of sale was issued in
favor of PNB, subject to Gotescos right, as debtor and mortgagor, to redeem the property within one (1)
year from the date of inscription of the certificate of sale with the Register of Deeds of Pasig City on
November 9, 1999.3 chan roble svirtuallaw lib rary

On October 20, 2000, Gotesco filed a civil case against PNB before the Regional Trial Court of Pasig, Branch
168 (RTC) for the annulment of the foreclosure proceedings, specific performance and damages with prayer
for temporary restraining order (TRO) and/or preliminary injunction.4 chan roblesv irt uallawl ibra ry

On November 9, 2000, the RTC issued a TRO enjoining PNB from consolidating ownership over the
mortgaged property, then on December 21, 2000, a writ of preliminary injunction. PNBs motion for
reconsideration was subsequently denied.5 ch anro blesvi rt uallawli bra ry

PNB went to the Court of Appeals (CA) via a Petition for Certiorari. The CA ruled in favor of PNB and issued
an Order reversing and setting aside the writ of preliminary injunction issued by the RTC. Gotescos Motion
for Reconsideration was denied on December 22, 2003.6 As Gotesco did not challenge the CA ruling, the
setting aside of the writ of preliminary injunction became final and executory.

As it prepared for the consolidation of its ownership over the foreclosed property, PNB paid the BIR Eighteen
Million Six Hundred Fifteen Thousand Pesos (P18,615,000) as documentary stamp tax (DST) on October 31,
2003. PNB also withheld and remitted to the BIR withholding taxes equivalent to six percent (6%) of the bid
price of One Billion Two Hundred Forty Million Four Hundred Sixty-Nine Pesos and Eighty-Two Centavos
(P1,240,000,469.82) or Seventy-Four Million Four Hundred Thousand and Twenty-Eight Pesos and Forty-
Nine Centavos(P74,400,028.49) on October 31, 2003 and November 11, 2003.7 chan roblesv irt uallawl ibrary

Pending the issuance of the Certificate Authorizing Registration (CAR), the BIR informed PNB that it is
imposing interests, penalties and surcharges of Sixty-One Million Six Hundred Seventy-Eight Thousand Four
Hundred Ninety Pesos and Twenty-Eight Centavos(Php61,678,490.28) on captialgains tax and Fifteen Million
Four Hundred Ninety-Four Thousand and Sixty-Five Pesos (Php15,494,065) on DST. To facilitate the release
of the CAR, petitioner paid all the surcharges, interests and penalties assessed against it in the total amount
of Seventy-Seven Million One Hundred Seventy-Two Thousand Five Hundred Fifty-Five Pesos and Twenty-
Eight Centavos (Php77,172,555.28) on April 5, 2005.8 chan roblesv irt ualla wlibra ry

On the claim that what it paid the BIR was not entirely due, PNB lost no time in instituting the necessary
actions. Thus, on October 27, 2005, it filed an administrative claim for the refund of excess withholding
taxes with the BIR. A day after, or on October 28, 2005, it filed its petition for review before the tax
court,docketed thereat as CTA Case No. 7355.9 chanroblesvi rtua llawli bra ry

In its claim for refund, PNB explained that it inadvertently applied the six percent (6%) creditable
withholding tax rate on the sale of real property classified as ordinary asset, when it should have applied the
five percent (5%) creditable withholding tax rate on the sale of ordinary asset, as provided in Section 2.57.2
(J)(B) of Revenue Regulation (RR) No. 2-98 as amended by RR No. 6-01, considering that Gotesco is
primarily engaged in the real estate business.The applicable creditable withholding tax rate of five percent
(5%) of the bid price is equivalent to the amount of Sixty-Two Million Twenty-Three Pesos and Forty-Nine
Centavos (Php62,000,023.49). Therefore, PNB claimed that it erroneously withheld and remitted to the BIR
excess taxes of Twelve Million Four Hundred Thousand and Four Pesos and Seventy-One Centavos
(Php12,400,004.71).10 chanrob lesvi rtua llawli bra ry

On March 22, 2007, PNB filed another claim for refund claiming erroneous assessment and payment of the
surcharges, penalties and interests. Petitioner filed its corresponding Petition for Review on March 30, 2007,
docketed as CTA Case No. 7588.11 chan roblesv irtuallawl ib rary

Upon motion of petitioner, CTA Case Nos. 7355 and 7588 were consolidated. The consolidated cases were
set for pre-trial conference which CIR failed to attend despite several resetting. On September 21, 2007,
CIR was declared to be in default.12 chanro blesvi rt uallawli bra ry

CTA Decision
In its July 12, 2010 consolidated Decision,13 the CTA Special First Division (First Division), in CTA Case No.
7588, ordered the CIR to refund to PNB P77,172,555.28 representing its claim for refund of interests,
surcharges and penalties on capital gains taxes and documentary stamp taxes for the year 2003.14 chanro blesvi rt uallawl ibra ry

In CTA Case No. 7355, however, the First Division denied PNBs claim for the refund of excess creditable
withholding taxes for insufficiency of evidence. The tax court agreed with PNB that the applicable
withholding rate was indeed five percent (5%) and not six percent (6%).15 Nevertheless, it held that PNB,
while able to establish the fact of tax withholding and the remittance thereof to the BIR, failed to present
evidence to prove that Gotesco did not utilize the withheld taxes to settle its tax liabilities. The First Division
further stated that PNB should have offered as evidence the 2003 Income Tax Return (2003 ITR) of Gotesco
to show that the excess withholding tax payments were not used by Gotesco to settle its tax liabilities for
2003. The First Division elucidated: chanRob lesvi rtua lLawl ibra ry

With the above proof of payments, this Court finds that the fact of withholding and payment of the
withholding tax due were properly established by petitioner. xxx

However, it must be noted that although petitioner duly paid the withholding taxes, there was no evidence
presented to this Court showing that GOTESCO utilized the taxes withheld to settle its own tax liability for
the year 2003. Being creditable in nature, petitioner should have likewise offered as evidence the 2003
Income Tax Return of GOTESCO to convince the court that indeed the excess withholding tax payments
were not used by GOTESCO. The absence of such relevant evidence is fatal to petitioners action preventing
this Court from granting its claim. To allow petitioner its claim may cause jeopardy to the Government if it
be required to refund the claim already utilized.16
On July 30, 2010, PNB filed a Motion for Reconsideration (MR), attaching therewith, among others,
Gotescos 2003 ITR and the latters Schedule of Prepaid Tax, which the First Division admitted as part of the
records.

On April 5, 2011, the First Division issued a Resolution17 denying PNBs MR mainly because there were no
documents or schedules to support the figures reported in Gotescos 2003 ITR to show that no part of the
creditable withholding tax sought to be refunded was used, in part, for the settlement of Gotescos tax
liabilities for the same year. It stated that PNB should have likewise presented the Certificate of Creditable
Tax Withheld at Source (BIR Form No. 2307) issued to Gotesco in relation to the creditable taxes withheld
reported in its 2003 ITR. BIR Form No. 2307, so declared in the Resolution, will confirm whether or not that
the amount being claimed by PNB was indeed not utilized by Gotesco to offset its taxes. In denying the MR,
the First Division explained:chanR oblesvi rtual Lawl ibra ry

Petitioner attached to its Motion, income tax returns of GOTESCO for the taxable year 2003, to prove that
the latter did not utilize the taxes withheld by petitioner. The returns were submitted without any
attachment regarding its creditable taxes withheld. Except for GOTESCOs Unadjusted Schedule of Prepaid
Tax for the taxable year 2003, there were no other documents or schedules presented before this Court to
support the figures reported in the tax returns of GOTESCO for the same year under Lines 27 (C), (D) and
(G) of the Creditable Taxes Withheld.

We note that the amounts reported by GOTESCO as creditable taxes withheld for the year 2003 were just
P6,014,433.00 in total, which is less than P74,400,028.49, the creditable taxes withheld from it by the
petitioner. In fact, it is less than the P12,400,004.70 creditable taxes withheld being claimed by petitioner in
its present motion. However, this Court deemed that such observation alone, without any supporting
document or schedule, is not enough to convince us that no part of the creditable withholding tax sought to
be refunded is included in the total tax credits reported by GOTESCO in its tax returns for the taxable year
2003 which was used, in part, for the settlement of its tax liabilities for the same year.

To sufficiently prove that GOTESCO did not utilize the creditable taxes withheld, petitioner should have
likewise presented BIR Forms No. 2307 issued to GOTESCO in relation to the creditable taxes withheld
reported in its 2003 tax returns. Doing so will dispel any doubt as to the composition of GOTESCOs
creditable taxes withheld for 2003. This will settle once and for all that the amount being claimed by
petitioner was not utilized by GOTESCO, and thus the claim should be granted. Until then, this Court will
stand by its decision and deny the claim.18
In due time, PNB filed an appeal before the CTA En Banc by way of a Petition for Review, docketed as CTA
EB Case No. 762.19 PNB argued that its evidence confirms that Gotescos Six Million Fourteen Thousand and
Four Hundred Thirty-Three Pesos (P6,014,433) worth of tax credits, as reported and claimed in its 2003 ITR,
did not form part of the P74,400,028.49 equivalent to six percent (6%) creditable tax withheld. To support
the foregoing position, PNB highlighted the following: chanRob lesvi rtua lLawl ibra ry
 1. Gotesco continues to recognize the foreclosed property as its own asset in its 2003 audited financial
statements. It did not recognize the foreclosure sale and has not claimed the corresponding
creditable withholding taxes withheld by petitioner on the foreclosure sale.

2. Gotesco testified that the P6,014,4333.00 tax credits claimed in the year 2003 does not include the
P74,400,028.49 withholding taxes withheld and paid by petitioner in the year 2003.

3. PNB presented BIR Form No. 1606, the withholding tax remittance return filed by PNB as
withholding agent, which clearly shows that the amount of P P74,400,028.49 was withheld and paid
upon PNBs foreclosure of Gotescos asset.20

Finally, in its July 12, 2010 Decision, the First Division expressly provided that Gotescos2003 ITR was the
only evidence it needed to show that the excess withholding taxes paid and remitted to the BIR were not
utilized by Gotesco.

On September 12, 2012, the CTA En Banc, in the first assailed Decision,21 denied PNBs Petition for Review
and held: chanRoble svirtual Lawli bra ry

In this case, petitioner is counting on the Income Tax Returns of GOTESCO for the taxable year 2003 and on
a certain Unadjusted Schedule of Prepaid Tax for the same year to support its argument that GOTESCO did
not utilize the taxes withheld by petitioner; however, We are not persuaded.

To reiterate, since the claim for refund involves creditable taxes withheld from GOTESCO, it is necessary to
prove that these creditable taxes were not utilized by GOTESCO to pay for its liabilities. The income tax
returns alone are not enough to fully support petitioners contention that no part of the creditable
withholding tax sought to be refunded by petitioner was utilized by GOTESCO; first, there were no other
relevant supporting documents or schedules presented to delineate the figures constituting the creditable
taxes withheld that was reported in GOTESCOs 2003 tax returns; and second, this Court cannot give
credence to the Unadjusted Schedule of Prepaid Tax for the taxable year 2003 being referred to by
petitioner as the same pertains merely to a list of GOTESCOs creditable tax withheld for taxable year 2003
and was not accompanied by any attachment to support its contents; also it is manifest from the records
that petitioner failed to have this Schedule of Prepaid Tax offered in evidence, and thus, was not admitted as
part of the records of this case.22
After the denial of PNBs Motion for Reconsideration on February 12, 2013,23the bank filed this instant
petition.

Issue

Whether or not PNB is entitled to the refund of creditable withholding taxes erroneously paid to the BIR.
Subsumed in this main issue is the evidentiary value under the premises of BIR Form No. 2307.

The Courts Ruling

The petition is impressed with merit. As PNB insists at every turn, it has presented sufficient evidence
showing its entitlement to the refund of the excess creditable taxes it erroneously withheld and paid to the
BIR.

As earlier stated, the CTA predicated its denial action on the postulate that even if PNBs withholding and
remittance of taxes were undisputed, it was not able to prove that Gotesco did not utilize the taxes
thuswithheld to pay for its tax liabilities for the year 2003.

In its Decision, the First Division categorically stated, [P]etitioner should have likewise offered as evidence
the 2003 Income Tax Return of GOTESCO to convince this Court that indeed the excess withholding tax
payments were not used by GOTESCO. The absence of such relevant evidence is fatal to petitioners action
preventing this Court from granting its claim.24chanrob lesvi rtua llawli bra ry

Thus, apprised on what to do, and following the First Divisions advice, PNB presented Gotescos 2003 ITRs
as an attachment to its MR, which was subsequently denied however. In ruling on the MR, the First Division
again virtually required PNB to present additional evidence, specifically, Gotescos Certificates of Creditable
Taxes Withheld (BIR Form No. 2307) covering P6,014,433 tax credits claimed for year 2003, purportedly to
show non-utilization by Gotesco of the P74,400,028.49 withholding tax payments.
Although PNB was not able to submit Gotescos BIR Form No. 2307, the Court is persuaded and so declares
that PNB submitted evidence sufficiently showing Gotescos non-utilization of the taxes withheld subject of
the refund.

First,Gotescos Audited Financial Statements for year 2003,25 which it subsequently filed with the BIR in
2004, still included the foreclosed Ever Ortigas Commercial Complex, in the Asset account Property and
Equipment. This was explained on page 8, Note 5 of Gotescos 2003 Audited Financial Statements: chanRoblesvirt ual Lawlib rary

Commercial complex and improvements pertain to the Ever Pasig Mall. As discussed in Notes 1 and 7, the
land and the mall, which were used as collaterals for the Companys bank loans, were foreclosed by the
lender banks in 1999. However, the lender banks have not been able to consolidate the ownership and take
possession of these properties pending decision of the case by the Court of Appeals. Accordingly, the
properties are still carried in the books of the Company. As of April 21, 2004, the Company continues to
operate the said mall. Based on the December 11, 2003 report of an independent appraiser, the fair market
value of the land, improvements and machinery and equipment would amount to about P2.9 billion.

Land pertains to the Companys properties in Pasig City where the Ever Pasig Mall is situated.26
It is clear that as of year-end 2003, Gotesco had continued to assert ownership over the Ever Ortigas
Commercial Complex as evidenced by the following: (a) it persistently challenged the validity of the
foreclosure sale which was the transaction subject to the P74,400,028.49 creditable withholding tax; and (b)
its 2003 Audited Financial Statements declared said complex as one of its properties. Thus, it is reasonable
to conclude that since Gotesco vehemently refused to recognize the validity of the foreclosure sale, it stands
to reason that it also refused to recognize the payment of the creditable withholding tax that was due on the
sale and most especially, claim the same as a tax credit.

Certainly, Gotescos relentless refusal to transfer registered ownership of the Ever Ortigas Commercial
Complex to PNB constitutes proof enough that Gotesco will not do any act inconsistent with its claim of
ownership over the foreclosed asset, including claiming the creditable tax imposed on the foreclosure sale as
tax credit and utilizing such amount to offset its tax liabilities. To do such would run roughshod over
Gotescos firm stance that PNBs foreclosure on the mortgage was invalid and that it remained the owner of
the subject property.

Several pieces of evidence likewise point to Gotescos non-utilization of the claimed creditable withholding
tax.As advised by the First Division, Gotesco presented its 2003 ITR27along with its 2003 Schedule of
Prepaid Tax28 which itemized in detail the withholding taxes claimed by Gotesco for the year 2003
amounting to P6,014,433. The aforesaid schedule shows that the creditable withholding taxes Gotesco
utilized to pay for its 2003 tax liabilities came from the rental payments of its tenants in the Ever Ortigas
Commercial Complex, not from the foreclosure sale.

Further, Gotescos former accountant, Ma.Analene T. Roxas,stated in her Judicial Affidavit29 that the tax
credits claimed for year 2003 did not include any portion of the amount subject to the claim for refund. First,
she explained that Gotesco could not have possibly utilized the amount claimed for refund as it was not even
aware that PNB paid the six percent (6%) creditable withholding tax since no documents came to its
attention which showed such payment by PNB. As she also explained, had Gotesco claimed the entire or
even any portion of P74,400,028.49, corresponding to the six percent (6%) tax withheld by PNB, the
amount appearing in Items 27D30 and 27C31 of Gotescos 2003 ITR should have reflected the additional
amount of P74,400,028.49. The pertinent portions of Roxas Judicial Affidavit read: chanRoblesv irt ualLawl ibra ry

Q: In GOTESCOs 2003 ITRs, both Tentative and amended, the total tax
credits/payments amounted to Php6,014,433.00. Are you familiar with
the composition or breakdown of this Php6,014,433.00?
A: Yes.
Q: May we know, for the record, if any part of this Php6,014,433.00 of
GOTESCOs tax credits for year 2003 pertains to the 6% Creditable Tax
Withheld by PNB amounting to Php74,400,028.49? To be more specific,
does any part of the Php6,014,433.00 of GOTESCOs tax credits for year
2003 pertain to the Php12,400,004.70 amount subject to the present
claim for refund before the Honorable Court of Tax Appeals?
A: For the record and based on the ITRs of GOTESCO, the amount of
 Php6,014,433.00 tax credits for year 2003 did not encompass any
portion of the Php74,400,028.49 representing 6% Creditable Tax
Withheld, or to be more specific, said Php6,014,433.00 tax credits of
GOTESCO for year 2003 did not include any portion of the
Php12,400,004.70 amount subject to the present claim for refund.
Q: Why is this so, Ms.Analene? In theory, the Php74 million creditable
withholding tax should have benefited GOTESCO, right?
A: In theory, it is only proper for GOTESCO to claim and utilize the Php74
million creditable withholding tax.
However, GOTESCO was not aware that PNB paid 6% creditable
withholding tax on behalf of GOTESCO. There were no documents that
came to GOTESCOs attention which showed such Php74 million
creditable tax was paid to the BIR on behalf of GOTESCO.
Q: Considering that you mentioned earlier that you helped prepare
GOTESCOs 2003 ITR, do you have documents to support your
statement?
A: Yes. I have with me a document containing GOTESCOs Schedule of
Prepaid Tax. However, this Schedule of Prepaid Tax is still unadjusted.
The final figure is properly reflected in GOTESCOS 2003 ITR in the
column of Total Tax Credits/Payments.
Q: How can this unadjusted Schedule of Prepaid Tax support your
statement that GOTESCO did not utilize any portion of the
Php74,400,028.49 representing 6% creditable tax withheld by herein
Petitioner PNB?
A: As you can see, based on this Schedule of Prepaid Tax, there is a
comprehensive list of GOTESCO tenants and breakdown of their prepaid
tax or creditable tax withheld.
Although PNB was listed as a tenant of GOTESCO, the withholding tax of
PNB for year 2003 (as reflected in GOTESCOs Schedule of Prepaid Tax)
only amounted to Php65,985.44 due to the lease contract between PNB
and GOTESCO. This amount is too small if you compare it with the
Php74 million creditable tax withheld by PNB based on their foreclosure
of GOTESCOs Ortigas Mall Complex.
Q: Are you aware of any other document which would likewise confirm your
conclusion that GOTESCO did not utilize any portion of the
Php74,400,004.70 subject of the present claim for refund?
A: Yes. The 2003 Tentative and Amended ITRs of GOTESCO would prove
that GOTESCO did not utilize any portion of the Php74,400,028.49
representing 6% creditable tax withheld by herein Petitioner PNB.
Had GOTESCO claimed the entire or even any portion of
Php74,400,028.49, corresponding to the 6% tax withheld by PNB, the
amount appearing in Item 27D-Creditable Tax Withheld per BIR Form
 2307 for the Fourth Quarter should not only be Php1,362,965.00, but
should have reflected the additional amount of Php74,400,028.49.
The same observation can be applied in Item 27C Creditable Tax
Withheld for the First Three Quarters, such that the amount reflected
should not only be Php4,651,568.00 but Php74,400,028.49 more.32
All in all, the evidence presented by petitioner sufficiently proved its entitlement to the claimed refund.
There is no need for PNB to present Gotescos BIR Form No. 2307,as insisted by the First Division, because
the information contained in the said form may be very well gathered from other documents already
presented by PNB. Thus, the presentation of BIR Form No. 2307 would be in the final analysis a superfluity,
of little or no value.

In claims for excess and unutilized creditable withholding tax, the submission of BIR Forms 2307 is to prove
the fact of withholding of the excess creditable withholding tax being claimed for refund. This is clear in the
provision of Section 58.3, RR 2-98, as amended, and in various rulings of the Court.33 In the words of
Section 2.58.3, RR 2-98, That the fact of withholding is established by a copy of a statement duly issued by
the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld
therefrom.

Hence, the probative value of BIR Form 2307, which is basically a statement showing the amount paid for
the subject transaction and the amount of tax withheld therefrom, is to establish only the fact of withholding
of the claimed creditable withholding tax. There is nothing in BIR Form No. 2307 which would establish
either utilization or non-utilization, as the case may be, of the creditable withholding tax.

It must be noted that PNB had already presented the Withholding Tax Remittance Returns (BIR Form No.
1606) relevant to the transaction. The said forms show that the amount of P74,400,028.49 was withheld
and paid by PNB in the year 2003. It contains, among other data, the name of the payor and the payee, the
description of the property subject of the transaction, and the determination of the taxable base, and the tax
rate applied. These are the very same key information that would be gathered from BIR Form No. 2307.

While perhaps it may be necessary to prove that the taxpayer did not use the claimed creditable withholding
tax to pay for his/its tax liabilities, there is no basis in law or jurisprudence to say that BIR Form No. 2307 is
the only evidence that may be adduced to prove such non-use.

In this case, PNB was able to establish, through the evidence it presented, that Gotesco did not in fact use
the claimed creditable withholding taxes to settle its tax liabilities, to reiterate: (1) Gotescos 2003 Audited
Financial Statements, which still included the mortgaged property in the asset account Properties and
Equipment, proving that Gotesco did not recognize the foreclosure sale and therefore, the payment by PNB
of the creditable withholding taxes corresponding to the same; (2) Gotescos 2003 ITRs, which the CTA
Special First Division required to show that the excess creditable withholding tax claimed for refund was not
used by Gotesco, along with the 2003 Schedule of Prepaid Tax which itemized in detail the withholding taxes
claimed by Gotesco for the year 2003 amounting to P6,014,433.00; (3) the testimony of Gotescos former
accountant, proving that the amount subject of PNBs claim for refund was not included among the
creditable withholding taxes stated in Gotescos 2003 ITR; and(4) the Withholding Tax Remittance Returns
(BIR Form 1606) proving that the amount of P74,400,028.49 was withheld and paid by PNB in the year
2003.

Ergo, theevidence on record sufficiently proves that the claimed creditable withholding tax was withheld and
remitted to the BIR, that such withholding and remittance was erroneous, and that the claimed creditable
withholding tax was not used by Gotesco to settle its tax liabilities.

WHEREFORE, the Court resolves to GRANT the petition. The Decision of the Court of Tax Appeals En
Banc dated September 12, 2012 and its Resolution dated February 12, 2013 in CTA EB Case No. 762 are
hereby REVERSED and SET ASIDE, and a new one entered DIRECTING respondent Commissioner of
Internal Revenue to refund to petitioner Philippine National Bank, within thirty (30) days from the finality of
this Decision, the amount of Twelve Million Four Hundred Thousand and Four Pesos and Seventy-One
Centavos(Php12,400,004.71), representing excess creditable withholding taxes withheld and paid for the
year 2003.

G.R. No. 180290 September 29, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.

DECISION

LEONEN, J.:

Before this court is a petition for review1 under Rule 45 of the Rules of Court, seeking to annul the
October 1, 2007 decision2 and October 30, 2007 resolution3 of the Court of Tax Appeals En Banc in
C.T.A. E.B. No. 285.

The assailed decision denied petitioner's appeal and affirmed the January 30, 2007 decision4 and
May 30, 2007 resolution5 of the First Division of the Court of Tax Appeals, granting respondent a tax
refund or credit in the amount of 23,762,347.83, representing unutilized excess creditable
withholding taxes for taxable year 2000. The assailed resolution denied petitioners motion for
reconsideration.

The pertinent facts are summarized inthe assailed decision as follows:

In several transactions including but not limited to the sale of real properties, lease and
commissions, [respondent] allegedly earned income and paid the corresponding income taxes due
which were collected and remitted by various payors as withholding agents to the Bureau of Internal
Revenue ("BIR") during the taxable year 2000.

On April 18, 2001, [respondent] filed its tentative income tax return for taxable year 2000 which [it]
subsequently amended on July 25, 2001.

. . . [Respondent] filed again an amended income tax return for taxable year 2000 on June 20, 2002,
declaring no income tax liability . . . as it incurred a net loss in the amount of 11,318,957,602.00
and a gross loss of 745,713,454.00 from its Regular Banking Unit ("RBU") transactions. However,
[respondent] had a 10% final income tax liability of 210,364,280.00 on taxable income of
1,959,931,182.00 earned from its Foreign Currency Deposit Unit ("FCDU") transactions for the
same year. Likewise, in the [same] return, [respondent] reported a total amount of 245,888,507.00
final and creditable withholding taxes which was applied against the final income tax due of
210,364,280.00 leaving an overpayment of 35,524,227.00. . . .

....

In its second amended return, [respondents] income tax overpayment of 35,524,227.00 consisted
of the balance of the prior year's (1999) excess credits of 9,057,492.00 to becarried-over as tax
credit to the succeeding quarter/year and excess creditable withholding taxes for taxable year 2000
in the amountof 26,466,735.00 which [respondent] opted to be refunded. On November 11, 2002,
[respondent] . . . filed a claim for refund or the issuance of a tax credit certificate in the amount of
26,466,735.40 for the taxable year 2000 with the [BIR].

Due to [BIR's] inaction on its administrative claim, [respondent] appealed before [the Court of Tax
Appeals] by way of a Petition for Review on April 11, 2003.6 (Citation omitted)

On January 30, 2007, the Court of Tax Appeals First Division rendered a decision in favor of
respondent as follows:
WHEREFORE, premises considered, the petition is hereby GRANTED. Accordingly, respondent is
hereby ORDERED TO REFUND or ISSUE A TAX CREDIT CERTIFICATE to petitioner in the
reduced amount of Twenty Three Million Seven Hundred Sixty Two Thousand Three Hundred Forty
Seven Pesos and 83/100 (23,762,347.83)representing unutilized excess creditable withholding
taxes for taxable year 2000.7 (Emphasis in the original)

Petitioners motion for reconsideration was subsequently denied for lack of merit in the First
Divisions resolution dated May 30, 2007.

On appeal, the Court of Tax Appeals En Banc sustained the First Divisions ruling. It held that the
fact of withholding and the amount of taxes withheld from the income payments received by
respondent were sufficiently established by the creditable withholding tax certificates, and there was
no need to present the testimonies of the various payors or withholding agents who issued the
certificates and madethe entries therein. It also held that respondent need not prove actual
remittance of the withheld taxes to the Bureau of Internal Revenue because the functions of
withholding and remittance of income taxes are vested in the payors who are considered the agents
of petitioner.8

The Court of Tax Appeals En Banc also denied petitioners motion for Reconsideration9 in its
October 30, 2007 resolution.

Hence, this instant petition was filed.

Petitioner claims that the Court of Tax Appeals "erred on a question of law in ordering the refund to
respondent of alleged excess creditable withholding taxes because(:)

A. Respondent failed to prove that the creditable withholding taxes amounting to

23,762,347.83 are duly supported by valid certificates of creditable tax withheld at source;

B. Respondent failed to prove actual remittance of the alleged withheld taxes to the Bureau
of Internal Revenue (BIR); and

C. Respondent failed to discharge its burden of proving its entitlement to a refund."10

Petitioner questions the validity of respondents certificates of creditable tax withheld at source
(withholding tax certificates) and contends that even if the original certificates were offered in
evidence, respondent failed to present the various withholding agents to: (1) identify and testify on
their contents; and (2) prove the subsequent remittance of the withheld taxes to the Bureau of
Internal Revenue. Moreover, petitioner faults respondent for presenting the withholding tax
certificates only before the Court of Tax Appeals, and not at the first instance when it filed its claim
for refund administratively before the Bureau of Internal Revenue.11

In its comment,12 respondent counters that:

1) The petition should be dismissed for being pro forma because it does not specify the
reversible errors of either fact or law that the lower courts committed, and the arguments
raised are all rehash and purely factual;

2) It complied with all the requirements for judicial claim for refund of unutilized creditable
withholding taxes;
 3) The fact of withholding was sufficiently established by the 622 creditable withholding tax
certificates, primarily attesting the amount of taxes withheld from the income payments
received by respondent. Furthermore, topresent to the court all the withholding agents or
payors to identify and authenticate each and every one of the 622 withholding tax certificates
would be too burden some and would unnecessarily prolong the trial of the case; and

4) Respondent need not prove the actual remittance of withheld taxes to the Bureau of
Internal Revenue because the remittance is the responsibility of the payoror withholding
agent and not the payee.

In its reply,13 petitioner maintains that claims for refund are strictly construed against the claimant,
and "it is incumbent upon respondent to discharge the burden of proving . . . the fact of withholding
of taxes and their subsequent remittance to the Bureau of Internal Revenue."14

In the resolution dated February 2, 2009,15 the court resolved to give due course to the petition and
decide the case according to the pleadings already filed.

The petition, however, should be denied.

The petition is but a reiteration of reasons and arguments previously set forth in petitioners
pleadings beforethe Court of Tax Appeals En Banc, and which the latter had already considered,
weighed,and resolved before it rendered its decision and resolution now sought to be set aside.
Furthermore, the questions on whether respondents claim for refund of unutilized excess creditable
withholding taxes amounting to 23,762,347.83 were duly supported by valid certificates of
creditable tax withheld at source and whether it had sufficiently proven its claim are questions of
fact. These issues require a review, examination, evaluation, or weighing of the probative value of
1wphi1

evidence presented, especially the withholding tax certificates, which thiscourt does not have the
jurisdiction to do, barring the presence of any exceptional circumstance, as it is not a trier of facts.16

Besides, as pointed out by respondent, petitioner did not object to the admissibility of the 622
withholding tax certificates when these were formally offered by respondent before the tax
court.17 Hence, petitioner is deemed to have admitted the validity of these documents.18 Petitioners
"failure to object to the offered evidence renders it admissible, and the court cannot, on its own,
disregard such evidence."19

At any rate, the Court of Tax Appeals First Division and En Banc uniformly found that respondent
has established its claim for refund or issuance of a tax credit certificate for unutilized excess
creditable withholding taxes for the taxable year 2000 in the amount of 23,762,347.83. The Court of
Tax Appeals First Division thoroughly passed upon the evidence presented by respondent and the
report of the court-commissioned auditing firm, SGV & Co., and found: [O]ut of the total claimed
creditable withholding taxes of 26,466,735.40, [respondent] was able to substantiate only the
amount of 25,666,064.80 [sic], computed as follows:

Amount of Claimed Creditable Taxes Withheld 26,466,735.40

Less: 1.) Certificates which do not bear any date
or period when the indicated
creditable taxes were withheld 48,600.00
2.) Certificates dated outside the period of claim 730,151.10
3.) Certificate without indicated amount 8,794.50
 of tax withheld
4.) Certificates taken-up twice 9,000.00
Substantiated Creditable Taxes Withheld 25,670,189.80

....

[O]ut of the claimed amount of 25,670,189.80 supported by valid certificates, only the creditable
withholding taxes of 23,762,347.83, the related income of which were verified to have been
recorded in [respondents] general ledger and reported in [respondents] income tax return either in
the year 1999, 2000 or2001, satisfied the third requisite, computed as follows:

Creditable Taxes Withheld With Valid Certificates 25,670,189.80

Less: Creditable Taxes Withheld, the related

income of which was not verified against
the general ledger 1,907,841.97
Refundable Excess Creditable Taxes Withheld 23,762,347.8320
===============

(Emphasis supplied)

This court accords respect to the conclusion reached by the Court of Tax Appeals and will not
presumptuouslyset it aside absent any showing of gross error or abuse on its part.21

The certificate of creditable tax withheld at source22 is the competent proof to establish the factthat
taxes are withheld.23 It is not necessary for the person who executed and preparedthe certificate of
creditable tax withheld at source to be presented and to testify personally to prove the authenticity of
the certificates.24

In Banco Filipino Savings and Mortgage Bank v. Court of Appeals,25 this court declared that a
certificate iscomplete in the relevant details that would aid the courts in the evaluation of any claim
for refund of excess creditable withholding taxes:

In fine, the document which may be accepted as evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself, and not merely from the payee, and must indicate
the name of the payor, the income payment basis ofthe tax withheld, the amount of the tax withheld
and the nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes from the sale
of acquired assets can be found in BIR Form No. 1743.1. As described in Section 6 of Revenue
Regulations No. 6-85, BIR Form No. 1743.1 is a written statement issued by the payor as
withholding agent showing the income or other payments made by the said withholding agent during
a quarter or year and the amount of the tax deducted and withheld therefrom. It readily identifies the
payor, the income payment and the tax withheld. It is complete in the relevant details which would
aid the courts in the evaluation of any claim for refund of creditable withholding taxes.26(Emphasis
supplied, citations omitted)
Moreover, as correctly held by the Court of Tax Appeals En Banc, the figures appearing in the
withholding tax certificates can betaken at face value since these documentswere executed under
the penalties of perjury, pursuant to Section 267 of the 1997 National Internal Revenue Code, as
amended, which reads:

SEC. 267. Declaration under Penalties of Perjury. Any declaration, return and other statements
required under this Code, shall, in lieu of an oath, contain a written statement that they are made
under the penalties of perjury. Any person who willfully files a declaration, return or statement
containing information which is not true and correct as to every material matter shall, upon
conviction, be subject to the penalties prescribed for perjury under the Revised Penal Code.

Thus, upon presentation of a withholding tax certificate complete in its relevant details and with a
written statement that it was made under the penalties of perjury, the burden of evidence then shifts
to the Commissioner of Internal Revenue to prove that (1) the certificate is not complete; (2) it is
false; or (3) it was not issued regularly.

Petitioner's posture that respondent is required to establish actual remittance to the Bureau of
Internal Revenue deserves scant consideration. Proof of actual remittance is not a condition to claim
for a refund of unutilized tax credits. Under Sections 57 and 58 of the 1997 National Internal
Revenue Code, as amended, it is the payor-withholding agent, and not the payee-refund claimant
such asrespondent, who is vested with the responsibility of withholding and remitting income taxes.

This courts ruling in Commissioner of Internal Revenue v. Asian Transmission Corporation,27 citing
the Court of Tax Appeals explanation, is instructive:

. . . proof of actual remittance by the respondent is not needed in order to prove withholding and
remittance of taxes to petitioner. Section 2.58.3 (B) of Revenue Regulation No. 2-98 clearly
1wphi1

provides that proof of remittance is the responsibility of the withholding agent and not of the
taxpayer-refund claimant. It should beborne in mind by the petitioner that payors of withholding taxes
are by themselves constituted as withholding agents of the BIR. The taxes they withhold are held in
trust for the government. In the event that the withholding agents commit fraud against the
government by not remitting the taxes so withheld, such act should not prejudice herein respondent
who has been duly withheld taxes by the withholding agents acting under government authority.
Moreover, pursuant to Section 57 and 58 ofthe NIRC of 1997, as amended, the withholding of
income tax and the remittance thereof to the BIR is the responsibility of the payor and not the payee.
Therefore, respondent . . . has no control over the remittance of the taxes withheld from its income
by the withholding agent or payor who isthe agent of the petitioner. The Certificates of Creditable
Tax Withheld at Source issued by the withholding agents ofthe government are prima facieproof of
actual payment by herein respondent-payee to the government itself through said agents.28

Finally, petitioners allegation that the submission of the certificates of withholding taxes before the
Court of Tax Appeals was late is untenable. The samples of the withholding tax certificates attached
to respondents comment bore the receiving stamp of the Bureau of Internal Revenues Large
Taxpayers Document Processing and Quality Assurance Division.29 As observed by the Court of Tax
Appeals En Banc, "[t]he Commissioner is in no position to assail the authenticity of the CWT
certificates due to PNBs alleged failure to submit the same before the administrative level since he
could have easily directed the claimant to furnish copies of these documents, if the refund applied for
casts him any doubt."30 Indeed, petitioners inaction prompted respondent to elevate its claim for
refund to the tax court.

More importantly, the Court of Tax Appeals is not precluded from accepting respondents evidence
assuming these were not presented at the administrative level. Cases filed in the Court of Tax
Appeals are litigated de novo.31 Thus, respondent "should prove every minute aspect of its case by
presenting, formally offering and submitting ... to the Court of Tax Appeals [all evidence] . . . required
for the successful prosecution of [its] administrative claim."32

WHEREFORE, the petition is DENIED.

DR . FELISA L. VDA. DE SAN AGUSTIN, in substitution of JOSE Y.

FERIA, in his capacity as Executor of the Estate of JOSE SAN
AGUSTIN, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.

DECISION
VITUG, J.:

Before the Court is a petition for review seeking to set aside the decision of 24 February
1999 of the Court of Appeals, as well as its resolution of 27 April 1999, in CA-G.R. SP No.
34156, which has reversed that of the Court of Tax Appeals in CTA Case No. 4956, entitled Jose
Y. Feria, in his capacity as Executor of the Estate of Jose San Agustin versus Commissioner of
Internal Revenue. The tax courts decision has modified the deficiency assessment of the
Commission of Internal Revenue for surcharge, interests and other penalties imposed against the
estate of the late Jose San Agustin.
The facts of the case narrated by the appellate court would appear, by and large, to be
uncontroverted; thus viz:

Atty. Jose San Agustin of 2904 Kakarong St., Olympia, Makati died on June 27, 1990
leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic will
executed on April 21, 1980 giving all his estate to his widow, and naming retired
Justice Jose Y. Feria as Executor thereof.

Probate proceedings were instituted on August 22, 1990, in the Regional Trial Court
(RTC) of Makati, Branch 139, docketed as Sp. Proc. No. M-2554. Pursuantly, notice
of decedents death was sent to the Commissioner of Internal Revenue on August 30,
1990.

On September 3, 1990, an estate tax return reporting an estate tax due of

P1,676,432.00 was filed on behalf of the estate, with a request for an extension of two
years for the payment of the tax, inasmuch as the decedents widow (did) not
personally have sufficient funds, and that the payment (would) have to come from the
estate.

In his letter/answer, dated September 4, 1990, BIR Deputy Commissioner Victor A.

Deoferio, Jr., granted the heirs an extension of only six (6) months, subject to the
imposition of penalties and interests under Sections 248 and 249 of the National
Internal Revenue Code, as amended.

In the probate proceedings, on October 11, 1990, the RTC allowed the will and
appointed Jose Feria as Executor of the estate. On December 5, 1990, the executor
submitted to the probate court an inventory of the estate with a motion for authority to
withdraw funds for the payment of the estate tax. Such authority was granted by the
probate court on March 5, 1991. Thereafter, on March 8, 1991, the executor paid the
estate tax in the amount of P1,676,432 as reported in the Tax Return filed with the
BIR. This was well within the six (6) months extension period granted by the BIR.

On September 23, 1991, the widow of the deceased, Felisa L. San Agustin, received a
Pre-Assessment Notice from the BIR, dated August 29, 1991, showing a deficiency
estate tax of P538,509.50, which, including surcharge, interest and penalties,
amounted to P976,540.00.

On October 1, 1991, within the ten-day period given in the pre-assessment notice, the
executor filed a letter with the petitioner Commissioner expressing readiness to pay
the basic deficiency estate tax of P538,509.50 as soon as the Regional Trial Court
approves withdrawal thereof, but, requesting that the surcharge, interest, and other
penalties, amounting to P438,040.38 be waived, considering that the assessed
deficiency arose only on account of the difference in zonal valuation used by the
Estate and the BIR, and that the estate tax due per return of P1,676,432.00 was
already paid in due time within the extension period.

On October 4, 1991, the Commissioner issued an Assessment Notice reiterating the

demand in the pre-assessment notice and requesting payment on or before thirty (30)
days upon receipt thereof.

In a letter, dated October 31, 1991, the executor requested the Commissioner a
reconsideration of the assessment of P976,549.00 and waiver of the surcharge,
interest, etc.

On December 18, 1991, the Commissioner accepted payment of the basic deficiency
tax in the amount of P538,509.50 through its Receivable Accounts Billing Division.

The request for reconsideration was not acted upon until January 21, 1993, when the
executor received a letter, dated September 21, 1992, signed by the Commissioner,
stating that there is no legal justification for the waiver of the interests, surcharge and
compromise penalty in this case, and requiring full payment of P438,040.38
representing such charges within ten (10) days from receipt thereof.
In view thereof, the respondent estate paid the amount of P438,040.38 under protest
on January 25, 1993.

On February 18, 1993, a Petition for Review was filed by the executor with the CTA
with the prayer that the Commissioners letter/decision, dated September 21, 1992 be
reversed and that a refund of the amount of P438,040.38 be ordered.

The Commissioner opposed the said petition, alleging that the CTAs jurisdiction was
not properly invoked inasmuch as no claim for a tax refund of the deficiency tax
collected was filed with the Bureau of Internal Revenue before the petition was filed,
in violation of Sections 204 and 230 of the National Internal Revenue
Code. Moreover, there is no statutory basis for the refund of the deficiency
surcharges, interests and penalties charged by the Commissioner upon the estate of the
decedent.

Upholding its jurisdiction over the dispute, the CTA rendered its Decision, dated April
21, 1994, modifying the CIRs assessment for surcharge, interests and other penalties
from P438,040.38 to P13,462.74, representing interest on the deficiency estate tax, for
which reason the CTA ordered the reimbursement to the respondent estate the balance
of P423,577.64, to wit:

`WHEREFORE, respondents deficiency assessment for surcharge, interests, and other

penalties is hereby modified and since petitioner has clearly paid the full amount of
P438,040.38, respondent is hereby ordered to refund to the Estate of Jose San Agustin
the overpayment amounting to P423,577.64.[1]

On 30 May 1994, the decision of the Court of Tax Appeals was appealed by the
Commissioner of Internal Revenue to the Court of Appeals. There, the petition for review raised
the following issues:

1. Whether respondent Tax Court has jurisdiction to take cognizance of the case
considering the failure of private respondent to comply with the mandatory
requirements of Sections 204 and 230 of the National Internal Revenue Code.

2. Whether or not respondent Tax Court was correct in ordering the refund to the Estate of Jose
San Agustin the reduced amount of P423,577.64 as alleged overpaid surcharge, interests and
compromise penalty imposed on the basic deficiency estate tax of P538,509.50 due on the
transmission of the said Estate to the sole heir in 1990.[2]

In its decision of 24 February 1999, the Court of Appeals granted the petition of the
Commissioner of Internal Revenue and held that the Court of Tax Appeals did not acquire
jurisdiction over the subject matter and that, accordingly, its decision was null and void.
Hence, the instant petition where petitioner submits that -
1. The filing of a claim for refund [is] not essential before the filing of the petition for
review.

2. The imposition by the respondent of surcharge, interest and penalties on the

deficiency estate tax is not in accord with the law and therefore illegal.[3]

The Court finds the petition partly meritorious.

The case has a striking resemblance to the controversy in Roman Catholic Archbishop of
Cebu vs. Collector of Internal Revenue.[4]
The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax,
surcharge and interest and, forthwith, filed a petition for review before the Court of Tax
Appeals. Then respondent Collector (now Commissioner) of Internal Revenue set up several
defenses, one of which was that petitioner had failed to first file a written claim for refund,
pursuant to Section 306 of the Tax Code, of the amounts paid. Convinced that the lack of a
written claim for refund was fatal to petitioners recourse to it, the Court of Tax Appeals
dismissed the petition for lack of jurisdiction. On appeal to this Court, the tax courts ruling was
reversed; the Court held:

We agree with petitioner that Section 7 of Republic Act No. 1125, creating the Court
of Tax Appeals, in providing for appeals from -

`(1) Decisions of the Collector of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of the law administered by the Bureau of Internal
Revenue -

allows an appeal from a decision of the Collector in cases involving `disputed

assessments as distinguished from cases involving `refunds of internal revenue taxes,
fees or other charges, x x x; that the present action involves a disputed assessment;
because from the time petitioner received assessments Nos. 17-EC-00301-55 and 17-
AC-600107-56 disallowing certain deductions claimed by him in his income tax
returns for the years 1955 and 1956, he already protested and refused to pay the same,
questioning the correctness and legality of such assessments; and that the petitioner
paid the disputed assessments under protest before filing his petition for review with
the Court a quo, only to forestall the sale of his properties that had been placed under
distraint by the respondent Collector since December 4, 1957. To hold that the
taxpayer has now lost the right to appeal from the ruling on the disputed assessment
but must prosecute his appeal under section 306 of the Tax Code, which requires a
taxpayer to file a claim for refund of the taxes paid as a condition precedent to his
right to appeal, would in effect require of him to go through a useless and needless
ceremony that would only delay the disposition of the case, for the Collector (now
Commissioner) would certainly disallow the claim for refund in the same way as he
disallowed the protest against the assessment. The law, should not be interpreted as to
result in absurdities.[5]

The Court sees no cogent reason to abandon the above dictum and to require a useless
formality that can serve the interest of neither the government nor the taxpayer. The tax court has
aptly acted in taking cognizance of the taxpayers appeal to it.
On the second issue, the National Internal Revenue Code, relative to the imposition of
surcharges, interests, and penalties, provides thusly:
Sec. 248. Civil Penalties. -

(a) There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (25%) of the amount due, in the following cases:

(1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or

(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or

(4) Failure to pay the full or part of the amount of tax shown on any return required to
be filed under the provisions of this Code or rules and regulations, or the full amount
of tax due for which no return is required to be filed, on or before the date prescribed
for its payment.

Sec. 249. Interest. -

(A) In General. - There shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by rules and regulations, from the date prescribed for payment until the
amount is fully paid.

(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this
Code, shall be subject to the interest prescribed in Subsection (A) hereof, which
interest shall be assessed and collected from the date prescribed for its payment until
the full payment thereof.

(C) Delinquency Interest. - In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in
the notice and demand of the Commissioner, there shall be assessed and collected on
the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the
amount is fully paid, which interest shall form part of the tax.

(D) Interest on Extended Payment. - If any person required to pay the tax is qualified
and elects to pay the tax on installment under the provisions of this Code, but fails to
pay the tax or any installment hereof, or any part of such amount or installment on or
before the date prescribed for its payment, or where the Commissioner has authorized
an extension of time within which to pay a tax or a deficiency tax or any part thereof,
there shall be assessed and collected interest at the rate hereinabove prescribed on the
tax or deficiency tax or any part thereof unpaid from the date of notice and demand
until it is paid.

It would appear that, as early as 23 September 1991, the estate already received a pre-
assessment notice indicating a deficiency estate tax of P538,509.50. Within the ten-day period
given in the pre-assessment notice, respondent Commissioner received a letter from petitioner
expressing the latters readiness to pay the basic deficiency estate tax of P538,509.50 as soon as
the trial court would have approved the withdrawal of that sum from the estate but requesting
that the surcharge, interests and penalties be waived. On 04 October 1991, however, petitioner
received from the Commissioner notice insisting payment of the tax due on or before the lapse of
thirty (30) days from receipt thereof. The deficiency estate tax of P538,509.50 was not paid until
19 December 1991.[6]
The delay in the payment of the deficiency tax within the time prescribed for its payment in
the notice of assessment justifies the imposition of a 25% surcharge in consonance with Section
248A(3) of the Tax Code. The basic deficiency tax in this case being P538,509.50, the twenty-
five percent thereof comes to P134,627.37. Section 249 of the Tax Code states that any
deficiency in the tax due would be subject to interest at the rate of twenty percent (20%) per
annum, which interest shall be assessed and collected from the date prescribed for its payment
until full payment is made. The computation of interest by the Court of Tax Appeals -

Deficiency estate tax x Interest Rate x Terms

P538,509.50 20% per annum 11/2 mo./12 mos
(11/04/91 to 12/19/91)
= P13,462.74[7]

conforms with the law, i.e., computed on the deficiency tax from the date prescribed for its
payment until it is paid.
 The Court of Tax Appeals correctly held that the compromise penalty of P20,000.00 could
not be imposed on petitioner, a compromise being, by its nature, mutual in essence. The payment
made under protest by petitioner could only signify that there was no agreement that had
effectively been reached between the parties.
Regrettably for petitioner, the need for an authority from the probate court in the payment of
the deficiency estate tax, over which respondent Commissioner has hardly any control, is not one
that can negate the application of the Tax Code provisions aforequoted. Taxes, the lifeblood of
the government, are meant to be paid without delay and often oblivious to contingencies or
conditions.
In sum, the tax liability of the estate includes a surcharge of P134,627.37 and interest of
P13,462.74 or a total of P148,090.00.
WHEREFORE, the instant petition is partly GRANTED. The deficiency assessment for
surcharge, interest and penalties is modified and recomputed to be in the amount of P148,090.00
surcharge of P134,627.37 and interest of P13,462.74.Petitioner estate having since paid the sum
of P438,040.38, respondent Commissioner is hereby ordered to refund to the Estate of Jose San
Agustin the overpaid amount of P289,950.38. No costs.
SO ORDERED.

G.R. No. 96322 December 20, 1991

ACCRA INVESTMENTS CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioner.

GUTIERREZ, JR., J.:

This petition for review on certiorari presents the issue of whether or not the petitioner corporation is
barred from recovering the amount of P82,751.91 representing overpaid taxes for the taxable year
1981.

The petitioner corporation is a domestic corporation engaged in the business of real estate
investment and management consultancy.

On April 15, 1982, the petitioner corporation filed with the Bureau of Internal Revenue its annual
corporate income tax return for the calendar year ending December 31, 1981 reporting a net loss of
P2,957,142.00 (Exhibits "B", "B-1" to "B-10"). In the said return, the petitioner corporation declared
as creditable all taxes withheld at source by various withholding agents, as follows:

Withholding Agent Amount Withheld

a) Malayan Insurance Co., Inc. P1,429.97

 (Exh. "C")

b) Angara Concepcion Regala

& Cruz Law Offices P73,588.00

(Exh. "D")

c) MJ Development Corp. P 1,155.00 (Exh. "E")

d) Philippine Global Communications,

Inc. (Exh. "F") 6,578.94

TOTAL P82,751.91

(CTA Decision, p. 4; Records, p. 10)

The withholding agents aforestated paid and remitted the above amounts representing taxes on
rental, commission and consultancy income of the petitioner corporation to the Bureau of Internal
Revenue from February to December 1981.

In a letter dated December 29, 1983 addressed to the respondent Commissioner of Internal
Revenue (Exh. "G"), the petitioner corporation filed a claim for refund inasmuch as it had no tax
liability against which to credit the amounts withheld.

Pending action of the respondent Commissioner on its claim for refund, the petitioner corporation, on
April 13, 1984, filed a petition for review with the respondent Court of Tax Appeals (CTA) asking for
the refund of the amounts withheld as overpaid income taxes.

On January 27, 1988, the respondent CTA dismissed the petition for review after a finding that the
two-year period within which the petitioner corporation's claim for refund should have been filed had
already prescribed pursuant to Section 292 of the National Internal Revenue Code of 1977, as
amended.

Acting on the petitioner corporation's motion for reconsideration, the respondent CTA in its resolution
dated September 27, 1988 denied the same for having been filed out of time. It ruled that the
reckoning date for purposes of counting the two-year prescriptive period within which the petitioner
corporation could file a claim for refund was December 31, 1981 when the taxes withheld at source
were paid and remitted to the Bureau of Internal Revenue by its withholding agents, not April 15,
1982, the date when the petitioner corporation filed its final adjustment return.

On January 14, 1989, the petitioner corporation filed with us its petition for review which we referred
to the respondent appellate court in our resolution dated February 15, 1990 for proper determination
and disposition.

On May 28, 1990, the respondent appellate court affirmed the decision of the respondent CTA
opining that the two-year prescriptive period in question commences "from the date of payment of
the tax" as provided under Section 292 of the Tax Code of 1977 (now Sec. 230 of the National
Internal Revenue Code of 1986), i.e., "from the end of the tax year when a taxpayer is deemed to
have paid all taxes withheld at source", and not "from the date of the filing of the income tax return"
as posited by the petitioner corporation (CA Decision, pp. 3-5; Rollo, pp. 27-29).

Its motion for reconsideration with the respondent appellate court having been denied in a resolution
dated November 20, 1990, the petitioner corporation (ACCRAIN) elevated this case to us presenting
as main arguments, to wit:

ACCRAIN'S JUDICIAL ACTION FOR RECOVERY OF CREDITABLE TAXES

ERRONEOUSLY WITHHELD AT SOURCE WAS FILED ON TIME.

II

THE RECKONING DATE FOR THE COMMENCEMENT OF THE TWO-YEAR

PRESCRIPTIVE PERIOD IS 15 APRIL 1982. ACCORDINGLY, THE 13 APRIL 1984
ACTION OFACCRAIN FOR THE RECOVERY OF TAXES ERRONEOUSLY WITHHELD AT
SOURCE IN 1981 IS NOT BARRED AND ACCRAIN IS ENTITLED TO THE REFUND OF
P82,751.91 OF SUCH TAXES. (Rollo, p. 116)

We find merit in the petitioner corporation's postures.

Crucial in our resolution of the instant case is the interpretation of the phraseology "from the date of
payment of the tax" in the context of Section 230 (formerly sec. 292) of the National Internal
Revenue Code of 1986, as amended, which provides that:

Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall begin after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise
after payment: Provided, however, that the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears to have been erroneously paid. (Emphasis supplied)

The respondent appellate court citing the case of Gibbs v. Commissioner of Internal Revenue (155
SCRA 318 [1965]), construed the phrase "from the date of payment" as to be reckoned from "the
end of the tax year" when the petitioner corporation was deemed to have paid its tax liabilities in
question under the withholding tax system. (CA Decision, pp. 4-5; Rollo, pp. 28-29)

The respondent appellate court in this case has misapplied jurisprudential law. In
the Gibbs case, supra, cited by the Court of Appeals, we have clearly stated that:

Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means not only
the delivery of money but also the performance, in any other manner, of an obligation (id.,
Art. 1231). A taxpayer, resident or non-resident, does so not really to deposit an amount to
 the Commissioner of Internal Revenue, but, in truth, to perform and extinguish his tax
obligation for the year concerned. In other words, he is paying his tax liabilities for that year.
Consequently, a taxpayer whose income is withheld at source will be deemed to have paid
his tax liability end of the tax year. It is from twhen the same falls due at the his latter date
then, or when thtwo-year prescriptive period under Section 306 (now pae tax liability falls
due, that the rt of Section 230) of the Revenue Code starts to run with respect to payments
effected through the withholding tax system. ... (At p. 325; Emphasis supplied)

The aforequoted ruling presents two alternative reckoning dates, i.e., (1) the end of the tax year; and
(2) when the tax liability falls due. In the instant case, it is undisputed that the petitioner corporation's
withholding agents had paid the corresponding taxes withheld at source to the Bureau of Internal
Revenue from February to December 1981. In having applied the first alternative date - "the end of
the tax year" in order to determine whether or not the petitioner corporation's claim for refund had
been seasonably filed, the respondent appellate court failed to appreciate properly the attending
circumstances of this case.

The petitioner corporation is not claiming a refund of overpaid withholding taxes, per se. It is asking
for the recovery of the sum of P82,751.91.00, the refundable or creditable amount determined upon
the petitioner corporation's filing of the its final adjustment tax return on or before 15 April 1982 when
its tax liability for the year 1981 fell due. The distinction is essential in the resolution of this case for it
spells the difference between being barred by prescription and entitlement to a refund.

Under Section 49 of the National Internal Revenue Code of 1986, as amended, it is explicitly
provided that:

Sec. 49. Payment and assessment of income tax for individuals and corporations.

(a) Payment of tax (1) In general. - The total amount of tax imposed by this Title shall
be paid by the person subject thereto at the time the return is filed. ...

Section 70, subparagraph (b) of the same Code states when the income tax return with respect to
taxpayers like the petitioner corporation must be filed. Thus:

Sec. 70 (b) Time of filing the income return - The corporate quarterly declaration shall be
filed within sixty (60) days following the close of each of the first three quarters of the taxable
year. The final adjustment return shall be filed on or before the 15th day of the 4th month
following the close of the fiscal year, as the case may be. The petitioner corporation's taxable
year is on a calendar year basis, hence, with respect to the 1981 taxable year, ACCRAIN
had until 15 April 1982 within which to file its final adjustment return. The petitioner
corporation duly complied with this requirement. On the basis of the corporate income tax
return which ACCRAIN filed on 15 April 1982, it reported a net loss of P2,957,142.00.
Consequently, as reflected thereon, the petitioner corporation, after due computation, had no
tax liability for the year 1981. Had there been any, payment thereof would have been due at
the time the return was filed pursuant to subparagraph (c) of the aforementioned codal
provision which reads:

Sec. 70 (c) - Time payment of the income tax - The income tax due on the corporate
quarterly returns and the final income tax returns computed in accordance with Sections 68
and 69 shall be paid at the time the declaration or return is filed asprescribed by the
Commissioner of Internal Revenue. If we were to uphold the respondent appellate court in
making the "date of payment" coincide with the "end of the taxable year," the petitioner
 corporation at the end of the 1981 taxable year was in no position then to determine whether
it was liable or not for the payment of its 1981 income tax.

Anent claims for refund, section 8 of Revenue Regulation No. 13-78 issued by the Bureau of Internal
Revenue requires that:

Section 8. Claims for tax credit or refund Claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is shown
on the return that the income payment received was declared as part of the gross income
and the fact of withholding is established by a copy of the statement, duly issued by the
payor to the payee (BIR Form No. 1743-A) showing the amount paid and the amount of tax
withheld therefrom.

The term "return" in the case of domestic corporations like ACCRAIN refers to the final adjustment
return as mentioned in Section 69 of the Tax Code of 1986, as amended, which partly reads:

Sec. 69. Final Adjustment Return - Every corporation liable to tax under Section 24 shall file
a final adjustment return covering the total taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year the corporation shall
either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the
respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer
opting to ask for a refund must show in its final adjustment return the income it received from all
sources and the amount of withholding taxes remitted by its withholding agents to the Bureau of
Internal Revenue. The petitioner corporation filed its final adjustment return for its 1981 taxable year
on April 15, 1982. In our Resolution dated April 10, 1989 in the case of Commissioner of Internal
Revenue v. Asia Australia Express, Ltd. (G. R. No. 85956), we ruled that the two-year prescriptive
period within which to claim a refund commences to run, at the earliest, on the date of the filing of
the adjusted final tax return. Hence, the petitioner corporation had until April 15, 1984 within which to
file its claim for refund. Considering that ACCRAIN filed its claim for refund as early as December
29, 1983 with the respondent Commissioner who failed to take any action thereon and considering
further that the non-resolution of its claim for refund with the said Commissioner prompted ACCRAIN
to reiterate its claim before the Court of Tax Appeals through a petition for review on April 13, 1984,
the respondent appellate court manifestly committed a reversible error in affirming the holding of the
tax court that ACCRAIN's claim for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with
respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return
is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred
losses in its business operations. The "date of payment", therefore, in ACCRAIN's case was when its
tax liability, if any, fell due upon its filing of its final adjustment return on April 15, 1982.

WHEREFORE, in view of the foregoing, the petition is GRANTED. The decision of the Court of
Appeals dated May 28, 1990 and its resolution of November 20, 1990 are hereby REVERSED and
SET ASIDE. The respondent Commissioner of Internal Revenue is directed to refund to the
petitioner corporation the amount of P82,751.91.
SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

TMX SALES, INC. and THE COURT OF TAX APPEALS, respondents.

F.R. Quiogue for private respondent.

GUTIERREZ, JR., J.:

In a case involving corporate quarterly income tax, does the two-year prescriptive period to claim a
refund of erroneously collected tax provided for in Section 292 (now Section 230) of the National
Internal Revenue Code commence to run from the date the quarterly income tax was paid, as
contended by the petitioner, or from the date of filing of the Final Adjustment Return (final payment),
as claimed by the private respondent?

Section 292 (now Section 230) of the National Internal Revenue Code provides:

Sec. 292. Recovery of tax erroneously or illegally collected. No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner of Internal Revenue; but such
suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.

In any case no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of that tax or penalty regardless of any supervening
cause that may arise after payment: . . . (Emphasis supplied)

The facts of this case are uncontroverted.

Private respondent TMX Sales, Inc., a domestic corporation, filed its quarterly income tax return for
the first quarter of 1981, declaring an income of P571,174.31, and consequently paying an income
tax thereon of P247,010.00 on May 15, 1981. During the subsequent quarters, however, TMX Sales,
Inc. suffered losses so that when it filed on April 15, 1982 its Annual Income Tax Return for the year
ended December 31, 1981, it declared a gross income of P904,122.00 and total deductions of
P7,060,647.00, or a net loss of P6,156,525.00 (CTA Decision, pp. 1-2; Rollo, pp. 45-46).

Thereafter, on July 9, 1982, TMX Sales, Inc. thru its external auditor, SGV & Co. filed with the
Appellate Division of the Bureau of Internal Revenue a claim for refund in the amount of
P247,010.00 representing overpaid income tax. (Rollo, p. 30)

This claim was not acted upon by the Commissioner of Internal Revenue. On March 14, 1984, TMX
Sales, Inc. filed a petition for review before the Court of Tax Appeals against the Commissioner of
Internal Revenue, praying that the petitioner, as private respondent therein, be ordered to refund to
TMX Sales, Inc. the amount of P247,010.00, representing overpaid income tax for the taxable year
ended December 31, 1981.

In his answer, the Commissioner of Internal Revenue averred that "granting, without admitting, the
amount in question is refundable, the petitioner (TMX Sales, Inc.) is already barred from claiming the
same considering that more than two (2) years had already elapsed between the payment (May 15,
1981) and the filing of the claim in Court (March 14, 1984). (Sections 292 and 295 of the Tax Code
of 1977, as amended)."

On April 29, 1988, the Court of Tax Appeals rendered a decision granting the petition of TMX Sales,
Inc. and ordering the Commissioner of Internal Revenue to refund the amount claimed.

The Tax Court, in granting the petition, viewed the quarterly income tax paid as a portion or
installment of the total annual income tax due. Said the Tax Court in its assailed decision:

xxx xxx xxx

When a tax is paid in installments, the prescriptive period of two years provided in
Section 306 (now Section 292) of the Revenue Code should be counted from the
date of the final payment or last installment. . . . This rule proceeds from the theory
that in contemplation of tax laws, there is no payment until the whole or entire tax
liability is completely paid. Thus, a payment of a part or portion thereof, cannot
operate to start the commencement of the statute of limitations. In this regard the
word "tax" or words "the tax" in statutory provisions comparable to section 306 of our
Revenue Code have been uniformly held to refer to the entire tax and not a portion
thereof (Clark v. U.S., 69 F. 2d 748; A.S. Kriedner Co. v. U.S., 30 F Supp. 274; Hills
v. U.S., 50 F 2d 302, 55 F 2d 1001), and the vocable "payment of tax" within statutes
requiring refund claim, refer to the date when all the tax was paid, not when a portion
was paid (Braun v. U.S., 8 F supp. 860, 863; Collector of Internal Revenue v. Prieto,
2 SCRA 1007; Commissioner of Internal Revenue v. Palanca, 18 SCRA 496).

Petitioner Commissioner of Internal Revenue is now before this Court seeking a reversal of the
above decision. Thru the Solicitor General, he contends that the basis in computing the two-year
period of prescription provided for in Section 292 (now Section 230) of the Tax Code, should be May
15, 1981, the date when the quarterly income tax was paid and not April 15, 1982, when the Final
Adjustment Return for the year ended December 31, 1981 was filed.

He cites the case of Pacific Procon Limited v. Commissioner of Internal Revenue (G.R. No. 68013,
November 12, 1984) involving a similar set of facts, wherein this Court in a minute resolution
affirmed the Court of Appeals' decision denying the claim for refund of the petitioner therein for being
barred by prescription.

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is
warranted under the circumstances to lay down a categorical pronouncement on the question as to
when the two-year prescriptive period in cases of quarterly corporate income tax commences to run.
A full-blown decision in this regard is rendered more imperative in the light of the reversal by the
Court of Tax Appeals in the instant case of its previous ruling in the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted in
relation to the other provisions of the Tax Code in order to give effect to legislative intent and to
avoid an application of the law which may lead to inconvenience and absurdity. In the case
of People vs. Rivera (59 Phil 236 [1933]), this Court stated that statutes should receive a sensible
construction, such as will give effect to the legislative intention and so as to avoid an unjust or an
absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT
EVITATUR INCONVENIENS ET ABSURDUM. Where there is ambiguity, such interpretation as will
avoid inconvenience and absurdity is to be adopted. Furthermore, courts must give effect to the
general legislative intent that can be discovered from or is unraveled by the four corners of the
statute, and in order to discover said intent, the whole statute, and not only a particular provision
thereof, should be considered. (Manila Lodge No. 761, et al. v. Court of Appeals, et al., 73 SCRA
162 [1976]) Every section, provision or clause of the statute must be expounded by reference to
each other in order to arrive at the effect contemplated by the legislature. The intention of the
legislator must be ascertained from the whole text of the law and every part of the act is to be taken
into view. (Chartered Bank v. Imperial, 48 Phil. 931 [1921]; Lopez v. El Hogar Filipino, 47 Phil. 249,
cited in Aboitiz Shipping Corporation v. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now
Section 230) of the National Internal Revenue Code but also the other provisions of the Tax Code,
particularly Sections 84, 85 (now both incorporated as Section 68), Section 86 (now Section 70) and
Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now
Section 232) on keeping of books of accounts. All these provisions of the Tax Code should be
harmonized with each other.

Section 292 (now Section 230) provides a two-year prescriptive period to file a suit for a refund of a
tax erroneously or illegally paid, counted from the tile the tax was paid. But a literal application of this
provision in the case at bar which involves quarterly income tax payments may lead to absurdity and
inconvenience.

Section 85 (now Section 68) provides for the method of computing corporate quarterly income tax
which is on a cumulative basis, to wit:

Sec. 85. Method of computing corporate quarterly income tax. Every corporation
shall file in duplicate a quarterly summary declaration of its gross income and
deductions on a cumulative basis for the preceding quarter or quarters upon which
the income tax, as provided in Title II of this Code shall be levied, collected and
paid. The tax so computed shall be decreased by the amount of tax previously paid
or assessed during the preceding quarters and shall be paid not later than sixty (60)
days from the close of each of the first three (3) quarters of the taxable year, whether
calendar or fiscal year. (Emphasis supplied)

while Section 87 (now Section 69) requires the filing of an adjustment returns and final payment of
income tax, thus:

Sec. 87. Filing of adjustment returns final payment of income tax. On or before the
fifteenth day of April or on or before the fifteenth day of the fourth month following the
close of the fiscal year, every taxpayer covered by this Chapter shall file an
Adjustment Return covering the total net taxable income of the preceding calendar or
fiscal year and if the sum of the quarterly tax payments made during that year is not
equal to the tax due on the entire net taxable income of that year the corporation
shall either (a) pay the excess tax still due or (b) be refunded the excess amount paid
as the case may be. . . . (Emphasis supplied)

In the case at bar, the amount of P247,010.00 claimed by private respondent TMX Sales, Inc. based
on its Adjustment Return required in Section 87 (now Section 69), is equivalent to the tax paid during
the first quarter. A literal application of Section 292 (now Section 230) would thus pose no problem
as the two-year prescriptive period reckoned from the time the quarterly income tax was paid can be
easily determined. However, if the quarter in which the overpayment is made, cannot be
ascertained, then a literal application of Section 292 (Section 230) would lead to absurdity and
inconvenience.

The following application of Section 85 (now Section 68) clearly illustrates this point:

FIRST QUARTER:

Gross Income 100,000.00

Less: Deductions 50,000.00

Net Taxable Income 50,000.00

=========

Tax Due & Paid [Sec. 24 NIRC (25%)] 12,500.00

=========

SECOND QUARTER:

Gross Income 1st Quarter 100,000.00

2nd Quarter 50,000.00 150,000.00

Less: Deductions 1st Quarter 50,000.00

2nd Quarter 75,000.00 125,000.00

Net Taxable Income 25,000.00

=========

Tax Due Thereon 6,250.00

Less: Tax Paid 1st Quarter 12,500.00

Creditable Income Tax (6,250.00)



THIRD QUARTER:

Gross Income 1st Quarter 100,000.00

2nd Quarter 50,000.00

3rd Quarter 100,000.00 250,000.00

Less: Deductions 1st Quarter 50,000.00

2nd Quarter 75,000.00

3rd Quarter 25,000.00 150,000.00

100,000.00

=========

Tax Due Thereon 25,000.00

Less: Tax Paid 1st Quarter 12,500.00

2nd Quarter 12,500.00

=========

FOURTH QUARTER: (Adjustment Return required in Sec. 87)

Gross Income 1st Quarter 100,000.00

2nd Quarter 50,000.00

3rd Quarter 100,000.00

4th Quarter 75,000.00 325,000.00

Less: Deductions 1st Quarter 50,000.00

2nd Quarter 75,000.00

3rd Quarter 25,000.00

 4th Quarter 100,000.00 250,000.00

Net Taxable Income 75,000.00

=========

Tax Due Thereon 18,750.00

Less: Tax Paid 1st Quarter 12,500.00

2nd Quarter

3rd Quarter 12,500.00 25,000.00

Creditable Income Tax (to be REFUNDED) (6,250.00)

=========

Based on the above hypothetical data appearing in the Final Adjustment Return, the taxpayer is
entitled under Section 87 (now Section 69) of the Tax Code to a refund of P6,250.00. If Section 292
(now Section 230) is literally applied, what then is the reckoning date in computing the two-year
prescriptive period? Will it be the 1st quarter when the taxpayer paid P12,500.00 or the 3rd quarter
when the taxpayer also paid P12,500.00? Obviously, the most reasonable and logical application of
the law would be to compute the two-year prescriptive period at the time of filing the Final
Adjustment Return or the Annual Income Tax Return, when it can be finally ascertained if the
taxpayer has still to pay additional income tax or if he is entitled to a refund of overpaid income tax.

Furthermore, Section 321 (now Section 232) of the National Internal Revenue Code requires that the
books of accounts of companies or persons with gross quarterly sales or earnings exceeding Twenty
Five Thousand Pesos (P25,000.00) be audited and examined yearly by an independent Certified
Public Accountant and their income tax returns be accompanied by certified balance sheets, profit
and loss statements, schedules listing income producing properties and the corresponding incomes
therefrom and other related statements.

It is generally recognized that before an accountant can make a certification on the financial
statements or render an auditor's opinion, an audit of the books of accounts has to be conducted in
accordance with generally accepted auditing standards.

Since the audit, as required by Section 321 (now Section 232) of the Tax Code is to be conducted
yearly, then it is the Final Adjustment Return, where the figures of the gross receipts and deductions
have been audited and adjusted, that is truly reflective of the results of the operations of a business
enterprise. Thus, it is only when the Adjustment Return covering the whole year is filed that the
taxpayer would know whether a tax is still due or a refund can be claimed based on the adjusted and
audited figures.

Therefore, the filing of quarterly income tax returns required in Section 85 (now Section 68) and
implemented per BIR Form 1702-Q and payment of quarterly income tax should only be considered
mere installments of the annual tax due. These quarterly tax payments which are computed based
on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income,
should be treated as advances or portions of the annual income tax due, to be adjusted at the end of
the calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides for the
filing of adjustment returns and final payment of income tax. Consequently, the two-year prescriptive
period provided in Section 292 (now Section 230) of the Tax Code should be computed from the
time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue v. Antonio Prieto (2 SCRA 1007 [1961]), this Court held
that when a tax is paid in installments, the prescriptive period of two years provided in Section 306
(Section 292) of the National internal Revenue Code should be counted from the date of the final
payment. This ruling is reiterated in Commission of Internal Revenue v. Carlos Palanca (18 SCRA
496 [1966]), wherein this Court stated that where the tax account was paid on installment, the
computation of the two-year prescriptive period under Section 306 (Section 292) of the Tax Code,
should be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year
prescriptive period should be counted from the filing of the Adjustment Return on April 15, 1982,
TMX Sales, Inc. is not yet barred by prescription.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DENIED. The decision of the
Court of Tax Appeals dated April 29, 1988 is AFFIRMED. No costs.

SYSTRA PHILIPPINES, INC., G.R. No. 176290

Petitioner,
Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.

COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
September 21, 2007

x---------------------------------------------------x

RESOLUTION
CORONA, J.:
 This resolves petitioner Systra Philippines, Inc.s (1) motion for leave to file
a second motion for reconsideration and (2) second motion for reconsideration of
the Courts March 28, 2007 resolution.

On March 9, 2007, petitioner filed a petition for review on certiorari

assailing the January 18, 2007 decision[1] of the Court of Tax Appeals (CTA) in
CTA EB Case No. 135. The Court denied the petition in its March 28, 2007
resolution on the following grounds:
(a) failure of petitioners counsel to submit his IBP[2] O.R.[3] number
showing proof of payment of IBP dues for the current year (the IBP
O.R. No. was for 2006, i.e., it was dated November 20, 2006);
(b) submitting a verification of the petition, certification of non-forum
shopping and affidavit of service that failed to comply with the 2004
Rules on Notarial Practice with respect to competent evidence of
affiants identities and
(c) failure to give an explanation why service was not done personally as
required by Section 11, Rule 13 in relation to Section 3, Rule 45 and
Section 5(d), Rule 56 of the Rules of Court.

On July 5, 2007, petitioners motion for reconsideration was denied with

finality as there was no compelling reason to warrant a modification of the March
28, 2007 resolution. Thus, the present motions.

Petitioner claims that this Court has granted second and even third motions
for reconsideration for extraordinarily persuasive reasons. It avers that this Court
should look into the importance of the issues involved in deciding whether leave to
file a second motion for reconsideration should be granted or not. It prays that its
petition should not be denied on the basis of procedural lapses alone and points out
that the substantial amount involved in the petition justifies relaxation of technical
rules. It asserts that there is an important legal issue involved in this case: whether
the exercise of the option to carry over excess income tax credits under Section 76
of the National Internal Revenue Code of 1997, as amended (Tax Code) bars a
taxpayer from claiming the excess tax credits for refund even if the amount
remains unutilized in the succeeding taxable year. Finally, it contends that the
assailed CTA decision was contradictory to the decisions of the Court of Appeals
(CA)[4] in Bank of the Philippine Islands v. Commissioner of Internal
Revenue[5] and Raytheon Ebasco Overseas Ltd. Philippine Branch v.
Commissioner of Internal Revenue[6] which involved the same issue as that in this
case. According to petitioner, in view of those CA decisions, it is unjust to deprive
it of the right to claim a refund.

We deny petitioners motions.

A SECOND MOTION FOR

RECONSIDERATION IS
PROHIBITED

The denial of a motion for reconsideration is final. It means that the Court
will no longer entertain and consider further arguments or submissions from the
parties respecting the correctness of its decision or resolution.[7] It signifies that, in
the Courts considered view, nothing more is left to be discussed, clarified or done
in the case since all issues raised have been passed upon and definitely resolved.
Any other issue which could and should have been raised is deemed waived and is
no longer available as ground for a second motion. A denial with finality
underscores that the case is considered closed. [8] Thus, as a rule, a second motion
for reconsideration is a prohibited pleading.[9] The Court stressed in Ortigas and
Company Limited Partnership v. Velasco:[10]

A second motion for reconsideration is forbidden except for

extraordinarily persuasive reasons, and only upon express leave first
obtained.[11] (emphasis supplied)

It is true that procedural rules may be relaxed in the interest of substantial

justice. They are not, however, to be disdained as mere technicalities that may be
ignored at will to suit the convenience of a party.[12] They are intended to ensure
the orderly administration of justice and the protection of substantive rights in
judicial proceedings.[13] Thus, procedural rules are not to be belittled or dismissed
simply because their non-observance may have resulted in prejudicing a partys
substantive rights.[14] Like all rules, they are required to be followed except only
when, for the most persuasive of reasons, they may be relaxed to relieve a litigant
of negative consequences commensurate with the degree of thoughtlessness in not
complying with the prescribed procedure.[15]

In this case, contrary to petitioners claim, there was no compelling reason to

excuse non-compliance with the rules. Nor were the grounds raised by it
extraordinarily persuasive.[16]

Moreover, petitioner can neither properly nor successfully rely on the

decisions of the CA in the Bank of the Philippine Islands and Raytheon Ebasco
Overseas Ltd. Philippine Branch cases. First, the CA and the CTA are now of the
same level pursuant to RA 9282.[17] Decisions of the CA are thus no longer
superior to nor reversive of those of the CTA. Second, a decision of the CA in an
action in personambinds only the parties in that case. A third party in an action in
personam cannot claim any right arising from a decision therein. Finally and most
importantly, while a ruling of the CA on any question of law is not conclusive on
this Court, all rulings of this Court on questions of law are conclusive and binding
on all courts including the CA. All courts must take their bearings from the
decisions of this Court.[18]

ON THE SUBSTANTIVE ASPECT,

THE PETITION HAS NO MERIT

The antecedents of this case are as follows:

On April 16, 2001, petitioner filed with the [Bureau of Internal

Revenue (BIR)] its Annual Income Tax Return (ITR) for the taxable
year ended December 31, 2000 declaring revenues in the amount of
[P18,252,719] the bulk of which consists of income from management
consultancy services rendered to the Philippine Branch of Group Systra
SA, France. Subjecting said income from consultancy services of
petitioner to 5% creditable withholding tax, a total amount of
[P4,703,019] was declared by petitioner as creditable taxes withheld for
the taxable year 2000.

For the same period, petitioner reflected a total gross income of

[P3,752,129], a net loss of [P17,930] and a minimum corporate income
tax (MCIT) of [P75,043]. Said MCIT of P75,043 was offset against its
total tax credits for the year 2000 amounting to [P4,703,019] thereby
leaving a total unutilized tax credits of [P4,627,976], computed as
follows:
Gross Income P3,752,129.00
Less: Deductions P3,770,059.00
Net loss P 17,930.00
Minimum Corporate Income Tax Due P75,043.00

Less: Tax Credits

Prior years excess credits P -
Creditable taxes withheld P4,703,019.00 P4,703,019.00
during the year
Tax Overpayment P4,627,976.00
 Petitioner opted to carry over the said excess tax credit to the
succeeding taxable year 2001.

For the taxable year ended December 31, 2001, petitioner filed
with the BIR its Annual ITR on April 12, 2002, reflecting a total gross
income of [P4,771,419] and a total creditable taxes withheld of
[P1,111,587] for consultancy services. It likewise declared a taxable
income of [P1,936,851] with corresponding normal income tax due in
the amount of [P619,792]. After deducting the unexpired excess of the
previous year MCIT [1999 and 2000] in the amount of [P222,475] from
the normal income tax due for the period, petitioners net tax due of
[P397,317] was applied against the accumulated tax credits of
[P5,739,563]. Said reported tax credits comprised of prior years excess
tax credits in the amount of [P4,627,976] and creditable taxes withheld
during the year 2001 in the sum of [P1,111,587]. These excess tax
credits were utilized to pay off the income tax still due of [P397,317]
resulting to an overpayment of [P5,342,246], computed as follows:

Gross Income P4,771,419.00

Less: Deductions P2,834,568.00

Taxable Income P1,936,851.00

Income Tax Due at the Normal Rate of 32% P 619,792.00

Less: Unexpired Excess of Prior Years MCIT
Over Normal Income Tax Rate P 222,475.00 P 397,317.00
Income Tax Still Due
Less: Tax Credits
Prior years excess credits P4,627,976.00
Creditable taxes withheld
during the year 1,111,587.00 P5,739,563.00

Tax Overpayment P5,342,246.00

Petitioner indicated in the 2001 ITR the option To be issued a Tax

Credit Certificate relative to its tax overpayments.

On August 9, 2002, petitioner instituted a claim for refund or

issuance of a tax credit certificate with the BIR of its unutilized
creditable withholding taxes in the amount of P5,342,246.00 as of
December 31, 2001.
 Due to the inaction of the BIR on petitioners claim for refund and
to preserve its right to claim for the refund to its unutilized CWT for
CYs 2000 and 2001 by judicial action, petitioner filed a petition for
review with the Court in Division on April 14, 2003.[19]

In its August 3, 2005 decision, the First Division of the CTA partially
granted the petition and ordered the issuance of a tax credit certificate to petitioner
in the amount of P1,111,587 representing the excess or unutilized creditable
withholding taxes for taxable year 2001. The CTA, however, denied petitioners
claim for refund of the excess tax credits for the year 2000 in the amount
of P4,627,976. It ruled that petitioner was precluded from claiming a refund
thereof or requesting a tax credit certificate therefor. Once it was made for a
particular taxable period, the option to carry over became irrevocable.

Petitioner moved for reconsideration but it was denied. Petitioner elevated

the case to the CTA en banc which rendered the assailed decision. Thus, this
petition.

As already stated, petitioner formulated the issue in this petition as follows:

whether the exercise of the option to carry-over excess income tax credits under
Section 76 of the Tax Code bars a taxpayer from claiming the excess tax credits for
refund even if the amount remains unutilized in the succeeding taxable year.
Petitioner contends that it does not.

We disagree.

Section 76 of the Tax Code provides:

SEC. 76. Final Adjustment Return. Every corporation liable to tax

under Section 27 shall file a final adjustment return covering the total
 taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable net income of that year the
corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the

case may be.

In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess amount shown
on its final adjustment return may be carried over and credited against
the estimated quarterly income tax liabilities for the taxable quarters of
the succeeding taxable years. Once the option to carry-over and apply
the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefor. (emphasis supplied)

A corporation entitled to a tax credit or refund of the excess estimated

quarterly income taxes paid has two options: (1) to carry over the excess credit or
(2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If
the option to carry over the excess credit is exercised, the same shall be irrevocable
for that taxable period.

In exercising its option, the corporation must signify in its annual corporate
adjustment return (by marking the option box provided in the BIR form) its
intention either to carry over the excess credit or to claim a refund. To facilitate tax
collection, these remedies are in the alternative and the choice of one precludes the
other.[20]
 This is known as the irrevocability rule and is embodied in the last sentence
of Section 76 of the Tax Code. The phrase such option shall be considered
irrevocable for that taxable period means that the option to carry over the excess
tax credits of a particular taxable year can no longer be revoked.

The rule prevents a taxpayer from claiming twice the excess quarterly taxes
paid: (1) as automatic credit against taxes for the taxable quarters of the succeeding
years for which no tax credit certificate has been issued and (2) as a tax credit
either for which a tax credit certificate will be issued or which will be claimed for
cash refund.[21]

In this case, it was in the year 2000 that petitioner derived excess tax credits
and exercised the irrevocable option to carry them over as tax credits for the next
taxable year. Under Section 76 of the Tax Code, a claim for refund of such excess
credits can no longer be made. The excess credits will only be applied against
income tax due for the taxable quarters of the succeeding taxable years.

The legislative intent to make the option irrevocable becomes clearer when
Section 76 is viewed in comparison to Section 69 of the (old) 1977 Tax Code:

SECTION 69. Final Adjustment Return. Every corporation liable

to tax under Section 24 shall file a final adjustment return covering the
total net income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable net income of that year the
corporation shall either:

(A) Pay the excess tax still due; or

(B) Be refunded the excess amount paid, as the case may be.
 In case the corporation is entitled to a tax credit or refund of the
excess estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year.

Under Section 69 of the 1977 Tax Code, there was no irrevocability rule.
Instead of claiming a refund, the excess tax credits could be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding
taxable year, that is, the immediately following year only. In contrast, Section 76 of
the present Tax Code formulates an irrevocability rule which stresses and fortifies
the nature of the remedies or options as alternative, not cumulative. It also provides
that the excess tax credits may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding
taxable years until fully utilized.

Furthermore, this case is closely similar to Philam Asset Management, Inc.

v. Commissioner of Internal Revenue.[22] In that case, Philam Asset Management,
Inc. had an unapplied creditable withholding tax in the amount of P459,756.07 for
the year 1998. It carried over the said excess tax to the following taxable year,
1999. In the next succeeding year, it had a tax due in the amount of P80,042 and a
creditable withholding tax in the amount of P915,995. As such, the amount due for
the year 1999 (P80,042) was credited to its P915,995 creditable withholding tax for
that year. Thus, its 1998 creditable withholding tax in the amount of P459,756.07
remained unutilized. Thereafter, it filed a claim for refund with respect to the
unapplied creditable withholding tax of P459,756.07 for the year 1998. The Court
denied the claim and ruled:
 Section 76 [is] clear and unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes irrevocable. Petitioner
has chosen that option for its 1998 creditable withholding taxes. Thus, it
is no longer entitled to a tax refund of P459,756.07, which corresponds
to its 1998 excess tax credit. Nonetheless, the amount will not be
forfeited in the governments favor, because it may be claimed by
petitioner as tax credits in the succeeding taxable years. (emphasis
supplied)

Since petitioner elected to carry over its excess credits for the year 2000 in
the amount of P4,627,976 as tax credits for the following year, it could no longer
claim a refund. Again, at the risk of being repetitive, once the carry over option
was made, actually or constructively, it became forever irrevocable regardless of
whether the excess tax credits were actually or fully utilized. Nevertheless, as held
in Philam Asset Management, Inc., the amount will not be forfeited in favor of the
government but will remain in the taxpayers account. Petitioner may claim and
carry it over in the succeeding taxable years, creditable against future income tax
liabilities until fully utilized.[23]

WHEREFORE, petitioners motion for leave to file a second motion for

reconsideration and the second motion for reconsideration are hereby DENIED.

Costs against petitioner.

No further pleadings shall be entertained. Let entry of judgment be made in

due course.

SO ORDERED.

BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs. COURT OF APPEALS,

COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL
REVENUE, respondents.
 DECISION

PANGANIBAN, J.:

If the State expects its taxpayers to observe fairness and honesty in paying
their taxes, so must it apply the same standard against itself in refunding
excess payments. When it is undisputed that a taxpayer is entitled to a refund,
the State should not invoke technicalities to keep money not belonging to it.
No one, not even the State, should enrich oneself at the expense of another.

The Case

Before us is a Petition for Review assailing the March 31, 1995 Decision of
the Court of Appeals (CA) in CA-GR SP No. 34240, which affirmed the
[1]

December 24, 1993 Decision of the Court of Tax Appeals (CTA). The CA
[2]

disposed as follows:

"WHEREFORE, foregoing premises considered, the petition is

hereby DISMISSED for lack of merit." [3]

On the other hand, the dispositive portion of the CTA Decision affirmed by the
CA reads as follows:

"WHEREFORE, in [view of] all the foregoing, Petitioners claim for

refund is hereby DENIED and this Petition for Review is
DISMISSED for lack of merit." [4]

Also assailed is the November 8, 1995 CA Resolution denying

[5]

reconsideration.

The Facts

The facts of this case were summarized by the CA in this wise:

"This case involves a claim for tax refund in the amount

of P112,491.00 representing petitioners tax withheld for the year
1989.
In its Corporate Annual Income Tax Return for the year 1989, the
following items are reflected:

Income.............................P1,017,931,831.00
Deductions........................P1,026,218,791.00
Net Income (Loss).................(P8,286,960.00)
Taxable Income (Loss).............P8,286,960.00

Less:

1988 Tax Credit...............P185,001.00

1989 Tax Credit...............P112,491.00

TOTAL AMOUNT......................P297,492.00
REFUNDABLE

"It appears from the foregoing 1989 Income Tax Return that
petitioner had a total refundable amount of P297,492 inclusive of
the P112,491.00 being claimed as tax refund in the present case.
However, petitioner declared in the same 1989 Income Tax
Return that the said total refundable amount of P297,492.00 will
be applied as tax credit to the succeeding taxable year.

"On October 11, 1990, petitioner filed a written claim for refund in
the amount of P112,491.00 with the respondent Commissioner of
Internal Revenue alleging that it did not apply the 1989 refundable
amount of P297,492.00 (including P112,491.00) to its 1990
Annual Income Tax Return or other tax liabilities due to the
alleged business losses it incurred for the same year.

"Without waiting for respondent Commissioner of Internal

Revenue to act on the claim for refund, petitioner filed a petition
for review with respondent Court of Tax Appeals, seeking the
refund of the amount of P112,491.00.

"The respondent Court of Tax Appeals dismissed petitioners

petition on the ground that petitioner failed to present as evidence
its Corporate Annual Income Tax Return for 1990 to establish the
fact that petitioner had not yet credited the amount of
P297,492.00 (inclusive of the amount P112,491.00 which is the
subject of the present controversy) to its 1990 income tax liability.
 "Petitioner filed a motion for reconsideration, however, the same
was denied by respondent court in its Resolution dated May 6,
1994." [6]

As earlier noted, the CA affirmed the CTA. Hence, this Petition. [7]

Ruling of the Court of Appeals

In affirming the CTA, the Court of Appeals ruled as follows:

"It is incumbent upon the petitioner to show proof that it has not
credited to its 1990 Annual income Tax Return, the amount of
P297,492.00 (including P112,491.00), so as to refute its previous
declaration in the 1989 Income Tax Return that the said amount
will be applied as a tax credit in the succeeding year of 1990.
Having failed to submit such requirement, there is no basis to
grant the claim for refund. x x x

"Tax refunds are in the nature of tax exemptions. As such, they

are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming
the exemption. In other words, the burden of proof rests upon the
taxpayer to establish by sufficient and competent evidence its
entitlement to the claim for refund."
[8]

Issue

In their Memorandum, respondents identify the issue in this wise:

"The sole issue to be resolved is whether or not petitioner is

entitled to the refund of P112,491.00, representing excess
creditable withholding tax paid for the taxable year 1989." [9]

The Courts Ruling

The Petition is meritorious.

 Main Issue: Petitioner Entitled to Refund

It is undisputed that petitioner had excess withholding taxes for the year 1989
and was thus entitled to a refund amounting to P112,491. Pursuant to Section
69 of the 1986 Tax Code which states that a corporation entitled to a refund
[10]

may opt either (1) to obtain such refund or (2) to credit said amount for the
succeeding taxable year, petitioner indicated in its 1989 Income Tax Return
that it would apply the said amount as a tax credit for the succeeding taxable
year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue
(BIR) that it would claim the amount as a tax refund, instead of applying it as a
tax credit. When no action from the BIR was forthcoming, petitioner filed its
claim with the Court of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund. Since
petitioner declared in its 1989 Income Tax Return that it would apply the
excess withholding tax as a tax credit for the following year, the Tax Court
held that petitioner was presumed to have done so. The CTA and the CA
ruled that petitioner failed to overcome this presumption because it did not
present its 1990 Return, which would have shown that the amount in dispute
was not applied as a tax credit. Hence, the CA concluded that petitioner was
not entitled to a tax refund.

We disagree with the Court of Appeals. As a rule, the factual findings of the
appellate court are binding on this Court. This rule, however, does not apply
where, inter alia, the judgment is premised on a misapprehension of facts, or
when the appellate court failed to notice certain relevant facts which if
considered would justify a different conclusion. This case is one such
[11]

exception.

In the first place, petitioner presented evidence to prove its claim that it did not
apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda
Esmundo, the manager of petitioners accounting department, testified to this
fact. It likewise presented its claim for refund and a certification issued by Mr.
Gil Lopez, petitioners vice-president, stating that the amount of P112,491 "has
not been and/or will not be automatically credited/offset against any
succeeding quarters income tax liabilities for the rest of the calendar year
ending December 31, 1990." Also presented were the quarterly returns for the
first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioners
claim. In fact, it presented no evidence at all. Because it ought to know the tax
records of all taxpayers, the CIR could have easily disproved petitioners claim.
To repeat, it did not do so.

More important, a copy of the Final Adjustment Return for 1990 was attached
to petitioners Motion for Reconsideration filed before the CTA. A final
[12]

adjustment return shows whether a corporation incurred a loss or gained a

profit during the taxable year. In this case, that Return clearly showed that
petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have
applied the amount in dispute as a tax credit.

Again, the BIR did not controvert the veracity of the said return. It did not even
file an opposition to petitioners Motion and the 1990 Final Adjustment Return
attached thereto. In denying the Motion for Reconsideration, however, the
CTA ignored the said Return. In the same vein, the CA did not pass upon that
significant document.

True, strict procedural rules generally frown upon the submission of the
Return after the trial. The law creating the Court of Tax Appeals, however,
specifically provides that proceedings before it "shall not be governed strictly
by the technical rules of evidence." The paramount consideration remains
[13]

the ascertainment of truth. Verily, the quest for orderly presentation of issues
is not an absolute. It should not bar courts from considering undisputed facts
to arrive at a just determination of a controversy.

In the present case, the Return attached to the Motion for Reconsideration
clearly showed that petitioner suffered a net loss in 1990. Contrary to the
holding of the CA and the CTA, petitioner could not have applied the amount
as a tax credit. In failing to consider the said Return, as well as the other
documentary evidence presented during the trial, the appellate court
committed a reversible error.

It should be stressed that the rationale of the rules of procedure is to secure a

just determination of every action. They are tools designed to facilitate the
attainment of justice. But there can be no just determination of the present
[14]

action if we ignore, on grounds of strict technicality, the Return submitted

before the CTA and even before this Court. To repeat, the undisputed fact is
[15]

that petitioner suffered a net loss in 1990; accordingly, it incurred no tax

liability to which the tax credit could be applied. Consequently, there is no
reason for the BIR and this Court to withhold the tax refund which rightfully
belongs to the petitioner.
Public respondents maintain that what was attached to petitioners Motion for
Reconsideration was not the final adjustment Return, but petitioners first two
quarterly returns for 1990. This allegation is wrong. An examination of the
[16]

records shows that the 1990 Final Adjustment Return was attached to the
Motion for Reconsideration. On the other hand, the two quarterly returns for
1990 mentioned by respondent were in fact attached to the Petition for
Review filed before the CTA. Indeed, to rebut respondents specific contention,
petitioner submitted before us its Surrejoinder, to which was attached the
Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment
Return for 1990. [17]

CTA Case No. 4897

Petitioner also calls the attention of this Court, as it had done before the CTA,
to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its
claim for refund for the year 1990. In that case, the Tax Court held that
"petitioner suffered a net loss for the taxable year 1990 x x x." Respondent,
[18]

however, urges this Court not to take judicial notice of the said case. [19]

As a rule, "courts are not authorized to take judicial notice of the contents of
the records of other cases, even when such cases have been tried or are
pending in the same court, and notwithstanding the fact that both cases may
have been heard or are actually pending before the same judge." [20]

Be that as it may, Section 2, Rule 129 provides that courts may take judicial
notice of matters ought to be known to judges because of their judicial
functions. In this case, the Court notes that a copy of the Decision in CTA
Case No. 4897 was attached to the Petition for Review filed before this Court.
Significantly, respondents do not claim at all that the said Decision was
fraudulent or nonexistent. Indeed, they do not even dispute the contents of the
said Decision, claiming merely that the Court cannot take judicial notice
thereof.

To our mind, respondents reasoning underscores the weakness of their case.

For if they had really believed that petitioner is not entitled to a tax refund,
they could have easily proved that it did not suffer any loss in 1990. Indeed, it
is noteworthy that respondents opted not to assail the fact appearing therein --
that petitioner suffered a net loss in 1990 in the same way that it refused to
controvert the same fact established by petitioners other documentary
exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of
petitioners case. It is merely one more bit of information showing the stark
truth: petitioner did not use its 1989 refund to pay its taxes for 1990.

Finally, respondents argue that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the claimant. Under the facts
of this case, we hold that petitioner has established its claim. Petitioner may
have failed to strictly comply with the rules of procedure; it may have even
been negligent. These circumstances, however, should not compel the Court
to disregard this cold, undisputed fact: that petitioner suffered a net loss in
1990, and that it could not have applied the amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of petitioner.
Technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it and thereby enrich itself at the
expense of its law-abiding citizens. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments of such taxes. Indeed,
the State must lead by its own example of honor, dignity and uprightness.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision

and Resolution of the Court of Appeals REVERSED and SET ASIDE. The
Commissioner of Internal Revenue is ordered to refund to petitioner the
amount of P112,491 as excess creditable taxes paid in 1989. No costs.

SO ORDERED.

PHILAM ASSET G.R. Nos. 156637/162004

MANAGEMENT, INC.,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez
- versus - Corona,
Carpio Morales, and
Garcia, JJ
COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondent. December 14, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
 DECISION

PANGANIBAN, J.:

U
nder Section 76 of the National Internal Revenue Code, a taxable
corporation with excess quarterly income tax payments may
apply for either a tax refund or a tax credit, but not both. The
choice of one precludes the other. Failure to indicate a choice,
however, will not bar a valid request for a refund, should this option be
chosen by the taxpayer later on.

The Case

Before us are two consolidated Petitions for Review[1] under Rule 45

of the Rules of Court, seeking to review and reverse the December 19,
2002 Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 69197
and its January 30, 2004 Decision[3] in CA-GR SP No. 70882.

The dispositive portion of the assailed December 19, 2002 Decision, on

the one hand, reads as follows:
WHEREFORE, the petition is hereby DENIED. The assailed
decision and resolution of the Court of Tax Appeals
are AFFIRMED.[4]
That of the assailed January 30, 2004 Decision, on the other hand, was
similarly worded, except that it referred to the May 2, 2002 Decision of the
Court of Tax Appeals (CTA).[5]
The Facts

In GR No. 156637, the CA adopted the CTAs narration of the facts as

follows:
Petitioner, formerly Philam Fund Management, Inc., is a domestic
corporation duly organized and existing under the laws of the
Republic of the Philippines. It acts as the investment manager of
both Philippine Fund, Inc. (PFI) and Philam Bond Fund, Inc. (PBFI),
which are open-end investment companies[,] in the sale of their
shares of stocks and in the investment of the proceeds of these
sales into a diversified portfolio of debt and equity securities. Being
an investment manager, [p]etitioner provides management and
technical services to PFI and PBFI. Petitioner is, likewise, PFIs and
PBFIs principal distributor which takes charge of the sales of said
companies shares to prospective investors. Pursuant to the separate
[m]anagement and [d]istribution agreements between the [p]etitioner
and PFI and PBFI, both PFI and PBFI [agree] to pay the [p]etitioner,
by way of compensation for the latters services and facilities, a
monthly management fee from which PFI and PBFI withhold the
amount equivalent to [a] five percent (5%) creditable tax[,] pursuant
to the Expanded Withholding Tax Regulations.

On April 3, 1998, [p]etitioner filed its [a]nnual [c]orporate [i]ncome

[t]ax [r]eturn for the taxable year 1997 representing a net loss
of P2,689,242.00. Consequently, it failed to utilize the creditable tax
withheld in the amount of Five Hundred Twenty-Two Thousand
Ninety-Two Pesos (P522,092.00) representing [the] tax withheld by
[p]etitioners withholding agents, PFI and PBFI[,] on professional
fees.

The creditable tax withheld by PFI and PBFI in the amount

of P522,092.00 is broken down as follows:
 PFI P496,702.05
PBFI 25,389.66_
Total P522,091.71

On September 11, 1998, [p]etitioner filed an administrative claim for

refund with the [Bureau of Internal Revenue (BIR)] -- Appellate
Division in the amount of P522,092.00 representing unutilized
excess tax credits for calendar year 1997. Thereafter, on July 28,
1999, a written request was filed with the same division for the early
resolution of [p]etitioners claim for refund.

Respondent did not act on [p]etitioners claim for refund[;] hence, a

Petition for Review was filed with this Court[6] on November 29, 1999
to toll the running of the two-year prescriptive period.[7]

On October 9, 2001, the CTA rendered a Decision denying petitioners

Petition for Review. Its Motion for Reconsideration was likewise denied in
a Resolution dated January 29, 2002.

In GR No. 162004, the antecedents are narrated by the CA in this wise:

On April 13, 1999, [petitioner] filed its Annual Income Tax
Return with the [BIR] for the taxable year 1998 declaring a net loss
of P1,504,951.00. Thus, there was no tax due against [petitioner] for
the taxable year 1998. Likewise, [petitioner] had an unapplied
creditable withholding tax in the amount of P459,756.07, which
amount had been previously withheld in that year by petitioners
withholding agents[,] namely x x x [PFI], x x x [PBFI], and Philam
Strategic Growth Fund, Inc. (PSGFI).

In the next succeeding year, [petitioner] had a tax due in the

amount of P80,042.00, and a creditable withholding tax in the
amount of P915,995.00. [Petitioner] likewise declared in its 1999 tax
return the amount of P459,756.07, which represents its prior excess
credit for taxable year 1998.
 Thereafter, on November 14, 2000, [petitioner] filed with the
Revenue District Office No. 50, Revenue Region No. 8, a written
administrative claim for refund with respect to the unapplied
creditable withholding tax of P459,756.07. According to [petitioner,]
the amount of P80,042.00, representing the tax due for the taxable
year 1999 has been credited from its P915,995.00 creditable
withholding tax for taxable year 1999, thus leaving its 1998
creditable withholding tax in the amount of P459,756.07 still
unapplied.

The claim for refund yielded no action on the part of the BIR.
[Petitioner] then filed a Petition for Review before the CTA on
December 26, 2000, asserting that it is entitled [to] the refund
[of P459,756.07,] since said amount has not been applied against its
tax liabilities in the taxable year 1998.

On May 2, 2002, the CTA rendered [a] x x x decision denying

[petitioners] Petition for Review. x x x.[8]

Ruling of the Court of Appeals

The CA denied the claim of petitioner for a refund of the latters excess
creditable taxes withheld for the years 1997 and 1998, despite compliance
with the basic requirements of Revenue Regulations (RR) No. 12-94. The
appellate court pointed out that, in the respective Income Tax Returns
(ITRs) for both years, petitioner did not indicate its option to have the
amounts either refunded or carried over and applied to the succeeding year.
It was held that to request for either a refund or a credit of income tax
paid, a corporation must signify its intention by marking the corresponding
option box on its annual corporate adjustment return.
The CA further held in GR No. 156637 that the failure to present the 1998
ITR was fatal to the claim for a refund, because there was no way to verify
if the tax credit for 1997 could not have been applied against the 1998 tax
liabilities of petitioner.

In GR No. 162004, however, the subsequent acts of petitioner

demonstrated its option to carry over its tax credit for 1998, even if it again
failed to tick the appropriate box for that option in its 1998 ITR. Under RR
12-94, its failure to indicate that option resulted in the automatic carry-over
of any excess tax credit for the prior year. The appellate court said that the
government would not be unjustly enriched by denying a refund, because
there would be no forfeiture of the amount in its favor. The amount
claimed as a refund would remain in the account of the taxpayer until
utilized in succeeding taxable years.

Hence, these Petitions.[9]

The Issues

Petitioner raises two issues in GR No. 156637 for the Courts

consideration:
A.

Whether or not the failure of the [p]etitioner to indicate in its [a]nnual

[i]ncome [t]ax [r]eturn the option to refund its creditable withholding
tax is fatal to its claim for refund.

B.
 Whether or not the presentation in evidence of the [p]etitioners
[a]nnual [i]ncome [t]ax [r]eturn for the succeeding calendar year is a
legal requisite in a claim for refund of unapplied creditable
withholding tax.[10]

In GR No. 162004, petitioner raises one question only:

Whether or not the petitioner is entitled to the refund of its unutilized

creditable withholding tax in the taxable year 1998 in the amount
of P459,756.07.[11]

In both cases, a simple issue needs to be resolved: whether petitioner is

entitled to a refund of its creditable taxes withheld for taxable years 1997
and 1998.

The Courts Ruling

The Petition in GR No. 156637 is meritorious, but that in GR No. 162004

is not.

Main Issue:
Entitlement to Refund

The provision on the final adjustment return (FAR) was originally found in
Section 69 of Presidential Decree (PD) No. 1158, otherwise known as the
National Internal Revenue Code of 1977.[12] On August 1, 1980, this
provision was restated as Section 86[13] in PD 1705.[14]
On November 5, 1985, all prior amendments and those introduced by PD
1994[15] were codified[16] into the National Internal Revenue Code (NIRC)
of 1985, as a result of which Section 86 was renumbered[17] as Section 79.[18]
On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all
net income phrases appearing in Title II of the NIRC of 1977 to taxable
income. Section 79 of the NIRC of 1985,[19] however, was not amended.

On July 25, 1987, EO 273[20] renumbered[21] Section 86 of the NIRC[22] as

Section 76,[23] which was also rearranged[24] to fall under Chapter 10 of Title
II of the NIRC. Section 79, which had earlier been renumbered by PD
1994, remained unchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under

PD 1705; later, as Section 79 under PD 1994;[25] then, as Section 76 under
EO 273.[26] Finally, after being renumbered and reduced to the chaff of a
grain, Section 69 was repealed by EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as

Section 76, which reads:
Section 76. Final Adjustment Return. -- Every corporation liable to
tax under Section 24 shall file a final adjustment return covering the
total net income[27] for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year
is not equal to the total tax due on the entire taxable net income [28] of
that year the corporation shall either:
 (a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case
may be.

In case the corporation is entitled to a refund of the excess

estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of
the succeeding taxable year.

GR No. 156637

This section applies to the first case before the Court. Differently
numbered in 1977 but similarly worded 20 years later (1997), Section 76
offers two options to a taxable corporation whose total quarterly income
tax payments in a given taxable year exceeds its
total income tax due. These options are (1) filing for a tax refund or (2)
availing of a tax credit.

The first option is relatively simple. Any tax on income that is paid in
excess of the amount due the government may be refunded, provided that
a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on

the FAR of a given taxable year, against the estimated quarterly income tax
liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature.[29] The choice
of one precludes the other. Indeed, in Philippine Bank of Communications v.
Commissioner of Internal Revenue,[30] the Court ruled that a corporation must
signify its intention -- whether to request a tax refund or claim a tax credit --
by marking the corresponding option box provided in the FAR. [31] While a
taxpayer is required to mark its choice in the form provided by the BIR,
this requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same
excess income taxes paid. Failure to signify ones intention in the FAR does
not mean outright barring of a valid request for a refund, should one still
choose this option later on. A tax credit should be construed merely as an
alternative remedy to a tax refund under Section 76, subject to prior
verification and approval by respondent.[32]

The reason for requiring that a choice be made in the FAR upon its filing is
to ease tax administration,[33] particularly the self-assessment and collection
aspects. A taxpayer that makes a choice expresses certainty or preference
and thus demonstrates clear diligence. Conversely, a taxpayer that makes
no choice expresses uncertainty or lack of preference and hence shows
simple negligence or plain oversight.

In the present case, respondent denied the claim of petitioner for a refund
of excess taxes withheld in 1997, because the latter
(1) had not indicated in its ITR for that year whether it was opting for a
credit or a refund; and (2) had not submitted as evidence its 1998 ITR,
which could have been the basis for determining whether its claimed 1997
tax credit had not been applied against its 1998 tax liabilities.

Requiring that the ITR or the FAR of the succeeding year be presented to the
BIR in requesting a tax refund has no basis in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely
requires the filing of the FAR for the preceding -- not the succeeding --
taxable year. Indeed, any refundable amount indicated in the FAR of the
preceding taxable year may be credited against the estimated income tax
liabilities for the taxable quarters of the succeeding taxable year. However,
nowhere is there even a tinge of a hint in any of the provisions of the Tax
Code that the FAR of the taxable year following the period to which
the tax credits are originally being applied should also be presented to the
BIR.

Second, Section 5[34] of RR 12-94, amending Section 10(a) of RR 6-85,

merely provides that claims for the refund of income taxes deducted and
withheld from income payments shall be given due course only (1) when it
is shown on the ITR that the income payment received is being declared
part of the taxpayers gross income; and (2) when the fact of withholding is
established by a copy of the withholding tax statement, duly issued by the
payor to the payee, showing the amount paid and the income tax withheld
from that amount.[35]

Undisputedly, the records do not show that the income payments received
by petitioner have not been declared as part of its gross income, or that the
fact of withholding has not been established. According to the CTA,
[p]etitioner substantially complied with the x x x requirements of RR 12-94
[t]hat the fact of withholding is established by a copy of a statement duly
issued by the payor (withholding agent) to the payee, showing the amount
paid and the amount of tax withheld therefrom; and x x x [t]hat the income
upon which the taxes were withheld were included in the return of the
recipient.[36]

The established procedure is that a taxpayer that wants a cash refund shall
make a written request for it, and the ITR showing the excess expanded
withholding tax credits shall then be examined by the BIR. For the grant of
refund, RRs 12-94 and 6-85 state that all
pertinent accounting records should be submitted by the taxpayer. These
records, however, actually refer only to (1) the withholding tax statements;
(2) the ITR of the present quarter to which the excess withholding tax
credits are being applied; and (3) the ITR of the quarter for the previous
taxable year in which the excess credits arose.[37] To stress, these regulations
implementing the law do not require the proffer of the FAR for the taxable
year following the period to which the tax credits are being applied.
Third, there is no automatic grant of a tax refund. As a matter of procedure,
the BIR should be given the opportunity to investigate and confirm the
veracity[38] of a taxpayers claim, before it grants the refund. Exercising the
option for a tax refund or a tax credit does not ipso facto confer upon a
taxpayer the right to an immediate availment of the choice made. Neither
does it impose a duty on the government to allow tax collection to be at
the sole control of a taxpayer.[39]

Fourth, the BIR ought to have on file its own copies of petitioners FAR for
the succeeding year, on the basis of which it could rebut the assertion that
there was a subsequent credit of the excess income tax payments for the
previous year. Its failure to present this vital document to support its
contention against the grant of a tax refund to petitioner is certainly fatal.

Fifth, the CTA should have taken judicial notice[40] of the fact of filing and
the pendency of petitioners subsequent claim for a refund of excess
creditable taxes withheld for 1998. The existence of the claim ought to be
known by reason of its judicial functions. Furthermore, it is decisive to and
will easily resolve the material issue in this case. If only judicial notice were
taken earlier, the fact that there was no carry-over of the excess creditable
taxes withheld for 1997 would have already been crystal clear.
Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in
writing within two years after payment of the taxes erroneously received by
the BIR.[41] Despite the failure of petitioner
to make the appropriate marking in the BIR form, the filing of its written
claim effectively serves as an expression of its choice to request a tax refund,
instead of a tax credit. To assert that any future claim for a tax refund will be
instantly hindered by a failure to signify ones intention in the FAR is to
render nugatory the clear provision that allows for a two-year prescriptive
period.

In fact, in BPI-Family Savings Bank v. CA,[42] this Court even ordered the
refund of a taxpayers excess creditable taxes, despite the express
declaration in the FAR to apply the excess to the succeeding year.[43] When
circumstances show that a choice of tax credit has been made, it should be
respected. But when indubitable circumstances clearly show that another
choice -- a tax refund -- is in order, it should be granted. Technicalities and
legalisms, however exalted, should not be misused by the government to
keep money not belonging to it and thereby enrich itself at the expense of
its law-abiding citizens.[44]

In the present case, although petitioner did not mark the refund box in its
1997 FAR, neither did it perform any act indicating that it chose a tax
credit. On the contrary, it filed on September 11, 1998, an administrative
claim for the refund of its excess taxes withheld in 1997. In none of its
quarterly returns for 1998 did it apply the excess creditable taxes. Under
these circumstances, petitioner is entitled to a tax refund of its 1997 excess
tax credits in the amount of P522,092.

GR No. 162004

As to the second case, Section 76 also applies. Amended by Republic Act

(RA) No. 8424, otherwise known as the Tax Reform Act of 1997, it now
states:
SEC. 76. Final Adjustment Return. -- Every corporation liable
to tax under Section 27 shall file a final adjustment return covering
the total taxable income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable income of
that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount
paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of

the excess estimated quarterly income taxes paid, the excess
amount shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a
tax credit certificate shall be allowed therefor.
The carry-over option under Section 76 is permissive. A corporation that is
entitled to a tax refund or a tax credit for excess payment of quarterly income
taxes may carry over and credit the excess income taxes paid in a given
taxable year against the estimated income tax liabilities of the succeeding
quarters. Once chosen, the carry-over option shall be considered
irrevocable[45]for that taxable period, and no application for a tax refund or
issuance of a tax credit certificate shall then be allowed.

According to petitioner, it neither chose nor marked the carry-over option

box in its 1998 FAR.[46] As this option was not chosen, it seems that there
is nothing that can be considered irrevocable. In other words, petitioner
argues that it is still entitled to a refund of its 1998 excess income tax
payments.

This argument does not hold water. The subsequent acts of petitioner
reveal that it has effectively chosen the carry-over option.

First, the fact that it filled out the portion Prior Years Excess Credits in its
1999 FAR means that it categorically availed itself of the carry-over option.
In fact, the line that precedes that phrase in the BIR form clearly states
Less: Tax Credits/Payments. The contention that it merely filled out that
portion because it was a requirement -- and that to have done otherwise
would have been tantamount to falsifying the FAR -- is a long shot.
The FAR is the most reliable firsthand evidence of corporate acts
pertaining to income taxes. In it are found the itemization and summary of
additions to and deductions from income taxes due. These entries are not
without rhyme or reason. They are required, because they facilitate the tax
administration process.

Failure to indicate the amount of prior years excess credits does not mean
falsification by a taxpayer of its current years FAR. On the contrary, if an
application for a tax refund has been -- or will be -- filed, then that portion
of the BIR form should necessarily be blank, even if the FAR of the
previous taxable year already shows an overpayment in taxes.

Second, the resulting redundancy in the claim of petitioner for a refund of its
1998 excess tax credits on November 14, 2000[47] cannot be countenanced.
It cannot be allowed to avail itself of a tax refund and a tax credit at the same
time for the same excess income taxes paid. Besides, disallowing it from
getting a tax refund of those excess tax credits will not enervate the two-year
prescriptive period under the Tax Code. That period will apply if the carry-
over option has not been chosen.

Besides, tax refunds x x x are construed strictly against the

taxpayer.[48] Petitioner has failed to meet the burden of proof required in
order to establish the factual basis of its claim for a tax refund.
Third, the first-in first-out (FIFO) principle enunciated by the CTA[49] does
not apply.[50] Money is fungible property.[51] The amount to be applied
against the P80,042 income tax due in the 1998 FAR[52] of petitioner may
be taken from its excess credits in 1997 or from those withheld in 1998 or
from both. Whichever of these the amount will be taken from will not
make a difference.

Even if the FIFO principle were to be applied, the tax credits would have
to be in consonance with the usual and normal course of events. In fact,
the FAR is cumulative in nature.[53]Following a natural sequence, the prior
years excess tax credits will have to be reduced first to answer for any
current tax liabilities before the current years withheld amounts can be
applied. Otherwise, there will be no sense in requiring a taxpayer to fill out
the line items in the FAR to segregate its sources of tax credits.

Whether the FIFO principle is applied or not, Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually or constructively,
it becomes irrevocable. Petitioner has chosen that option for its 1998
creditable withholding taxes. Thus, it is no longer entitled to a tax
refund of P459,756.07, which corresponds to its 1998 excess tax credit.
Nonetheless, the amount will not be forfeited in the governments favor,
because it may be claimed by petitioner as tax credits in the succeeding
taxable years.
WHEREFORE, the Petition in GR No. 156637 is GRANTED and the
assailed December 19, 2002 Decision REVERSED and SET ASIDE. No
pronouncement as to costs.

The Petition in GR No. 162004 is, however, DENIED and the assailed
January 30, 2004 Decision AFFIRMED. Costs against petitioner.

COMMISSIONER OF G.R. No. 178490

INTERNAL REVENUE,
Petitioner, Present:

YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
- versus - VELASCO, JR.,
NACHURA, and
PERALTA, JJ.

Promulgated:
BANK OF THE
PHILIPPINE ISLANDS,
Respondent. July 7, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review assailing the Decision[1] dated 29 April 2005
and the Resolution dated 20 April 2007 of the Court of Appeals in CA-G.R. SP
No. 77655, which annulled and set aside the Decision dated 12 March 2003 of the
Court of Tax Appeals (CTA) in CTA Case No. 6276, wherein the CTA held that
respondent Bank of the Philippine Islands (BPI) already exercised the irrevocable
option to carry over its excess tax credits for the year 1998 to the succeeding years
1999 and 2000 and was, therefore, no longer entitled to claim the refund or
issuance of a tax credit certificate for the amount thereof.

On 15 April 1999, BPI filed with the Bureau of Internal Revenue (BIR) its
final adjusted Corporate Annual Income Tax Return (ITR) for the taxable year
ending on 31 December 1998, showing a taxable income of P1,773,236,745.00
and a total tax due of P602,900,493.00.

For the same taxable year 1998, BPI already made income tax payments for
the first three quarters, which amounted to P563,547,470.46.[2] The bank also
received income in 1998 from various third persons, which, were already subjected
to expanded withholding taxes amounting to P7,685,887.90. BPI additionally
acquired foreign tax credit when it paid the United States government taxes in the
amount of $151,467.00, or the equivalent of P6,190,014.46, on the operations of
formers New York Branch. Finally, respondent BPI had carried over excess tax
credit from the prior year, 1997, amounting to P59,424,222.00.

Crediting the aforementioned amounts against the total tax due from it at the
end of 1998, BPI computed an overpayment to the BIR of income taxes in the
amount of P33,947,101.00. The computation of BPI is reproduced below:

Total Income Taxes Due P602,900,493.00

Less: Tax Credits:
Prior years tax credits P59,424,222.00
Quarterly payments 563,547,470.46
Creditable taxes withheld 7,685,887.90
Foreign tax credit 6,190,014.00 636,847,594.00
------------------- -------------------
Net Tax Payable/(Refundable) P(33,947,101.00)

BPI opted to carry over its 1998 excess tax credit, in the amount
of P33,947,101.00, to the succeeding taxable year ending 31 December
1999.[3] For 1999, however, respondent BPI ended up with (1) a net loss in the
amount of P615,742,102.00; (2) its still unapplied excess tax credit carried over
from 1998, in the amount of P33,947,101.00; and (3) more excess tax credit,
acquired in 1999, in the sum of P12,975,750.00. So in 1999, the total excess tax
credits of BPI increased to P46,922,851.00, which it once more opted to carry over
to the following taxable year.

For the taxable year ending 31 December 2000, respondent BPI declared in
its Corporate Annual ITR: (1) zero taxable income; (2) excess tax credit carried
over from 1998 and 1999, amounting to P46,922,851.00; and (3) even more excess
tax credit, gained in 2000, in the amount of P25,207,939.00. This time, BPI failed
to indicate in its ITR its choice of whether to carry over its excess tax credits or to
claim the refund of or issuance of a tax credit certificate for the amounts thereof.

On 3 April 2001, BPI filed with petitioner Commissioner of Internal

Revenue (CIR) an administrative claim for refund in the amount
of P33,947,101.00, representing its excess creditable income tax for 1998.

The CIR failed to act on the claim for tax refund of BPI. Hence, BPI filed a
Petition for Review before the CTA, docketed as CTA Case No. 6276.

The CTA promulgated its Decision in CTA Case No. 6276 on 12 March
2003, ruling therein that since BPI had opted to carry over its 1998 excess tax
credit to 1999 and 2000, it was barred from filing a claim for the refund of the
same.

The CTA relied on the irrevocability rule laid down in Section 76 of the
National Internal Revenue Code (NIRC) of 1997, which states that once the
taxpayer opts to carry over and apply its excess income tax to succeeding taxable
years, its option shall be irrevocable for that taxable period and no application for
tax refund or issuance of a tax credit shall be allowed for the same.

The CTA Decision adjudged:

A close scrutiny of the 1998 income tax return of [BPI] reveals that it
opted to carry over its excess tax credits, the amount subject of this claim, to the
succeeding taxable year by placing an x mark on the corresponding box of said
return (Exhibits A-2 & 3-a). For the year 1999, [BPI] again manifested its
intention to carry over to the succeeding taxable period the subject claim together
with the current excess tax credits (Exhibit J). Still unable to apply its prior years
excess credits in 1999 as it ended up in a net loss position, petitioner again carried
over the said excess credits in the year 2000 (Exhibit K).

The court already categorically ruled in a number of cases that once the
option to carry-over and apply the excess quarterly income tax against the income
 tax due for the taxable quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefore (Pilipinas Transport
Industries vs. Commissioner of Internal Revenue, CTA Case No. 6073, dated
March 1, 2002; Pilipinas Hino, Inc. vs. Commissioner of Internal Revenue, CTA
Case No. 6074, dated April 19, 2002; Philam Asset Management, Inc. vs.
Commissioner of Internal Revenue, CTA Case No. 6210, dated May 2, 2002; The
Philippine Banking Corporation (now known as Global Business Bank, Inc.) vs.
Commissioner of Internal Revenue, CTA Resolution, CTA Case No. 6280,
August 16, 2001. Since [BPI] already exercised the irrevocable option to carry
over its excess tax credits for the year 1998 to the succeeding years 1999 and
2000, it is, therefore, no longer entitled to claim for a refund or issuance of a tax
credit certificate.[4]

In the end, the CTA decreed:

IN VIEW OF ALL THE FOREGOING, the instant petition for review is
hereby DENIED for lack of merit.[5]

BPI filed a Motion for Reconsideration of the foregoing Decision, but the
CTA denied the same in a Resolution dated 3 June 2003.

BPI filed an appeal with the Court of Appeals, docketed as CA-G.R. SP No.
77655. On 29 April 2005, the Court of Appeals rendered its Decision, reversing
that of the CTA and holding that BPI was entitled to a refund of the excess income
tax it paid for 1998.

The Court of Appeals conceded that BPI indeed opted to carry over its
excess tax credit in 1998 to 1999 by placing an x mark on the corresponding box of
its 1998 ITR. Nonetheless, there was no actual carrying over of the excess tax
credit, given that BPI suffered a net loss in 1999, and was not liable for any income
tax for said taxable period, against which the 1998 excess tax credit could have
been applied.

The Court of Appeals added that even if Section 76 was to be construed

strictly and literally, the irrevocability rule would still not bar BPI from seeking a
tax refund of its 1998 excess tax credit despite previously opting to carry over the
same. The phrase for that taxable period qualified the irrevocability of the option
of BIR to carry over its 1998 excess tax credit to only the 1999 taxable period;
such that, when the 1999 taxable period expired, the irrevocability of the option of
BPI to carry over its excess tax credit from 1998 also expired.
 The Court of Appeals further reasoned that the government would be
unjustly enriched should the appellate court hold that the irrevocability rule barred
the claim for refund of a taxpayer, who previously opted to carry-over its excess
tax credit, but was not able to use the same because it suffered a net loss in the
succeeding year.

Finally, the appellate court cited BPI-Family Savings Bank, Inc. v. Court of
Appeals[6] wherein this Court held that if a taxpayer suffered a net loss in a year,
thus, incurring no tax liability to which the tax credit from the previous year could
be applied, there was no reason for the BIR to withhold the tax refund which
rightfully belonged to the taxpayer.[7]

In a Resolution dated 20 April 2007, the Court of Appeals denied the Motion
for Reconsideration of the CIR.[8]

Hence, the CIR filed the instant Petition for Review, alleging that:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN

HOLDING THAT THE IRREVOCABILITY RULE UNDER SECTION 76 OF
THE TAX CODE DOES NOT OPERATE TO BAR PETITIONER FROM
ASKING FOR A TAX REFUND.

II

THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT

REVERSED AND SET ASIDE THE DECISION OF THE COURT OF TAX
APPEALS AND HELD THAT RESPONDENT IS ENTITLED TO THE
CLAIMED TAX REFUND.

The Court finds merit in the instant Petition.

The Court of Appeals erred in relying on BPI-Family, missing significant

details that rendered said case inapplicable to the one at bar.

In BPI-Family, therein petitioner BPI-Family declared in its Corporate

Annual ITR for 1989 excess tax credits of P185,001.00 from 1988
and P112,491.00 from 1989, totaling P297,492.00. BPI-Family clearly indicated in
the same ITR that it was carrying over said excess tax credits to the following
year. But on 11 October 1990, BPI-Family filed a claim for refund of
its P112,491.00 tax credit from 1989.When no action from the BIR was
forthcoming, BPI-Family filed its claim with the CTA. The CTA denied the claim
for refund of BPI-Family on the ground that, since the bank declared in its 1989
ITR that it would carry over its tax credits to the following year, it should be
presumed to have done so. In its Motion for Reconsideration filed with the CTA,
BPI-Family submitted its final adjusted ITR for 1989 showing that it
incurred P52,480,173.00 net loss in 1990. Still, the CTA denied the Motion for
Reconsideration of BPI-Family. The Court of Appeals likewise denied the appeal
of BPI-Family and merely affirmed the judgment of the CTA. The Court, however,
reversed the CTA and the Court of Appeals.

This Court decided to grant the claim for refund of BPI-Family after finding
that the bank had presented sufficient evidence to prove that it incurred a net loss
in 1990 and, thus, had no tax liability to which its tax credit from 1989 could be
applied. The Court stressed in BPI Family that the undisputed fact is that [BPI-
Family] suffered a net loss in 1990; accordingly, it incurred no tax liability to
which the tax credit could be applied. Consequently, there is no reason for the BIR
and this Court to withhold the tax refund which rightfully belongs to the [BPI-
Family]. It was on the basis of this fact that the Court granted the appeal of BPI-
Family, brushing aside all procedural and technical objections to the same through
the following pronouncements:

Finally, respondents argue that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi juris against the claimant. Under
the facts of this case, we hold that [BPI-Family] has established its claim.[BPI-
Family] may have failed to strictly comply with the rules of procedure; it may
have even been negligent. These circumstances, however, should not compel the
Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in
1990, and that it could not have applied the amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of [BPI-
Family]. Technicalities and legalisms, however exalted, should not be misused by
the government to keep money not belonging to it and thereby enrich itself at the
expense of its law-abiding citizens. If the State expects its taxpayers to observe
fairness and honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments of such taxes. Indeed, the State must
lead by its own example of honor, dignity and uprightness.[9]

It is necessary for this Court, however, to emphasize that BPI-

Family involved tax credit acquired by the bank in 1989, which it initially opted to
carry over to 1990. The prevailing tax law then was the NIRC of 1985, Section
79[10] of which provided:

Sec. 79. Final Adjustment Return. - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated

quarterly income taxes-paid, the refundable amount shown on its final adjustment
return may be credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable year. (Emphases ours.)

By virtue of the afore-quoted provision, the taxpayer with excess income tax
was given the option to either (1) refund the amount; or (2) credit the same to its
tax liability for succeeding taxable periods.

Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC

of 1997,[11] with the addition of one important sentence, which laid down
the irrevocability rule:

Section 76. Final Adjustment Return. - Every corporation liable to tax

under Section 24 shall file a final adjustment return covering the total net income
for the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated

quarterly income taxes paid, the refundable amount shown on its final adjustment
return may be credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no
 application for tax refund or issuance of a tax credit certificate shall be
allowed therefor. (Emphases ours.)

When BPI-Family was decided by this Court, it did not yet have
the irrevocability rule to consider. Hence, BPI-Family cannot be cited as a
precedent for this case.

The factual background of Philam Asset Management, Inc. v. Commissioner

of Internal Revenue,[12] cited by the CIR, is closer to the instant Petition. Both
involve tax credits acquired and claims for refund filed more than a decade after
those in BPI-Family, to which Section 76 of the NIRC of 1997 already apply.

The Court, in Philam, recognized the two options offered by Section 76 of

the NIRC of 1997 to a taxable corporation whose total quarterly income tax
payments in a given taxable year exceeds its total income tax due. These options
are: (1) filing for a tax refund or (2) availing of a tax credit. The Court further
explained:

The first option is relatively simple. Any tax on income that is paid in
excess of the amount due the government may be refunded, provided that a
taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on

the [Final Adjustment Return (FAR)] of a given taxable year, against the estimated
quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The

choice of one precludes the other. Indeed, in Philippine Bank of
Communications v. Commissioner of Internal Revenue, the Court ruled that a
corporation must signify its intention -- whether to request a tax refund or claim a
tax credit -- by marking the corresponding option box provided in the FAR. While
a taxpayer is required to mark its choice in the form provided by the BIR, this
requirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same
excess income taxes paid.[13] x x x

The Court categorically declared in Philam that: Section 76 remains clear

and unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocable. It mentioned no exception or qualification
to the irrevocability rule.
 Hence, the controlling factor for the operation of the irrevocability rule is
that the taxpayer chose an option; and once it had already done so, it could no
longer make another one. Consequently, after the taxpayer opts to carry-over its
excess tax credit to the following taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997
is explicit in stating that once the option to carry over has been made, no
application for tax refund or issuance of a tax credit certificate shall be allowed
therefor.

The last sentence of Section 76 of the NIRC of 1997 reads: Once the option
to carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocable for that taxable period and no
application for tax refund or issuance of a tax credit certificate shall be allowed
therefor. The phrase for that taxable period merely identifies the excess income
tax, subject of the option, by referring to the taxable period when it was acquired
by the taxpayer. In the present case, the excess income tax credit, which BPI opted
to carry over, was acquired by the said bank during the taxable year 1998. The
option of BPI to carry over its 1998 excess income tax credit is irrevocable; it
cannot later on opt to apply for a refund of the very same 1998 excess income tax
credit.

The Court of Appeals mistakenly understood the phrase for that taxable
period as a prescriptive period for the irrevocability rule. This would mean that
since the tax credit in this case was acquired in 1998, and BPI opted to carry it over
to 1999, then the irrevocability of the option to carry over expired by the end of
1999, leaving BPI free to again take another option as regards its 1998 excess
income tax credit. This construal effectively renders nugatory the irrevocability
rule. The evident intent of the legislature, in adding the last sentence to Section 76
of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and
avoid confusion and complication as regards said taxpayers excess tax credit. The
interpretation of the Court of Appeals only delays the flip-flopping to the end of
each succeeding taxable period.

The Court similarly disagrees in the declaration of the Court of Appeals that
to deny the claim for refund of BPI, because of the irrevocability rule, would be
tantamount to unjust enrichment on the part of the government. The Court
addressed the very same argument in Philam, where it elucidated that there would
be no unjust enrichment in the event of denial of the claim for refund under such
circumstances, because there would be no forfeiture of any amount in favor of the
government. The amount being claimed as a refund would remain in the account of
the taxpayer until utilized in succeeding taxable years,[14]as provided in Section 76
of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess
income tax, which prescribes after two years from the filing of the FAR, there is no
prescriptive period for the carrying over of the same. Therefore, the excess income
tax credit of BPI, which it acquired in 1998 and opted to carry over, may be
repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and
so on and so forth, until actually applied or credited to a tax liability of BPI.

Finally, while the Court, in Philam, was firm in its position that the choice of
option as regards the excess income tax shall be irrevocable, it was less rigid in the
determination of which option the taxpayer actually chose. It did not limit itself to
the indication by the taxpayer of its option in the ITR.

Thus, failure of the taxpayer to make an appropriate marking of its option in

the ITR does not automatically mean that the taxpayer has opted for a tax
credit. The Court ratiocinated in G.R. No. 156637[15] of Philam:

One cannot get a tax refund and a tax credit at the same time for the same
excess income taxes paid. Failure to signify ones intention in the FAR does
not mean outright barring of a valid request for a refund, should one still
choose this option later on. A tax credit should be construed merely as an
alternative remedy to a tax refund under Section 76, subject to prior verification
and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its
filing is to ease tax administration, particularly the self-assessment and
collection aspects. A taxpayer that makes a choice expresses certainty or
preference and thus demonstrates clear diligence. Conversely, a taxpayer that
makes no choice expresses uncertainty or lack of preference and hence shows
simple negligence or plain oversight.

xxxx

x x x Despite the failure of [Philam] to make the appropriate marking in

the BIR form, the filing of its written claim effectively serves as an expression
of its choice to request a tax refund, instead of a tax credit. To assert that any
future claim for a tax refund will be instantly hindered by a failure to signify ones
intention in the FAR is to render nugatory the clear provision that allows for a
two-year prescriptive period.[16] (Emphases ours.)
 Philam reveals a meticulous consideration by the Court of the evidence
submitted by the parties and the circumstances surrounding the taxpayers option to
carry over or claim for refund. When circumstances show that a choice has been
made by the taxpayer to carry over the excess income tax as credit, it should be
respected; but when indubitable circumstances clearly show that another choice a
tax refund is in order, it should be granted. Technicalities and legalisms, however
exalted, should not be misused by the government to keep money not belonging to
it and thereby enrich itself at the expense of its law-abiding citizens.

Therefore, as to which option the taxpayer chose is generally a matter of

evidence. It is axiomatic that a claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit or refund. Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.[17]

In the Petition at bar, BPI was unable to discharge the burden of proof
necessary for the grant of a refund. BPI expressly indicated in its ITR for 1998 that
it was carrying over, instead of refunding, the excess income tax it paid during the
said taxable year. BPI consistently reported the said amount in its ITRs for 1999
and 2000 as credit to be applied to any tax liability the bank may incur; only, no
such opportunity arose because it suffered a net loss in 1999 and incurred zero tax
liability in 2000. In G.R. No. 162004 of Philam, the Court found:

First, the fact that it filled out the portion Prior Years Excess Credits in its
1999 FAR means that it categorically availed itself of the carry-over option. In
fact, the line that precedes that phrase in the BIR form clearly states Less: Tax
Credits/Payments. The contention that it merely filled out that portion because it
was a requirement and that to have done otherwise would have been tantamount
to falsifying the FAR is a long shot.

The FAR is the most reliable firsthand evidence of corporate acts

pertaining to income taxes. In it are found the itemization and summary of
additions to and deductions from income taxes due. These entries are not without
rhyme or reason. They are required, because they facilitate the tax administration
process.[18]

BPI itself never denied that its original intention was to carry over the
excess income tax credit it acquired in 1998, and only chose to refund the said
amount when it was unable to apply the same to any tax liability in the succeeding
taxable years. There can be no doubt that BPI opted to carry over its excess income
tax credit from 1998; it only subsequently changed its mind which it was barred
from doing by the irrevocability rule.
 The choice by BPI of the option to carry over its 1998 excess income tax
credit to succeeding taxable years, which it explicitly indicated in its 1998 ITR, is
irrevocable, regardless of whether it was able to actually apply the said amount to a
tax liability. The reiteration by BPI of the carry over option in its ITR for 1999 was
already a superfluity, as far as its 1998 excess income tax credit was concerned,
given the irrevocability of the initial choice made by the bank to carry over the said
amount. For the same reason, the failure of BPI to indicate any option in its ITR
for 2000 was already immaterial to its 1998 excess income tax credit.

WHEREFORE, the instant Petition for Review of the Commissioner for

Internal Revenue is GRANTED. The Decision dated 29 April 2005 and the
Resolution dated 20 April 2007 of the Court of Appeals in CA-G.R. SP No. 77655
are REVERSED and SET ASIDE. The Decision dated 12 March 2003 of the
Court of Tax Appeals in CTA Case No. 6276, denying the claim of respondent
Bank of the Philippine Islands for the refund of its 1998 excess income tax credits,
is REINSTATED. No costs.

SO ORDERED.

ASIAWORLD PROPERTIES G.R. No. 171766

PHILIPPINE CORPORATION,
Petitioner, Present:

CARPIO, Chairperson,
VELASCO, JR.,*
PERALTA,
ABAD, and
- versus - MENDOZA, JJ.

COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent.
July 29, 2010
x--------------------------------------------------x
 DECISION

CARPIO, J.:
The Case
This petition for review assails the 24 August 2005 Decision[2] and the 31
[1]

January 2006 Resolution[3] of the Court of Appeals in CA-G.R. SP No. 82027.

The Facts

Petitioner Asiaworld Properties Philippine Corporation (petitioner) is a domestic

corporation with principal office at Asiaworld City, Aguinaldo Boulevard,
Paraaque, Metro Manila. Petitioner is engaged in the business of real estate
development.

For the calendar year ending 31 December 2001, petitioner filed its Annual Income
Tax Return (ITR) on 5 April 2002. Petitioner declared a minimum corporate
income tax (MCIT) due in the amount of P1,222,066.00, but with a refundable
income tax payment in the sum of P6,473,959.00 computed as follows:

Income:
Realized Gross Profit P49,234,453.00
Add: Other Income 11,868,847.00
Gross Income P61,103,300.00
Less: Deductions 58,148,630.00
Taxable Income P 2,954,670.00

Tax Due (MCIT) P 1,222,066.00

Less: Tax Credit/Payments
a. Prior Years Excess Credit P7,468,061.00
b. Tax Payments For the 160,000.00
First Three Quarters
c. Creditable Tax Withheld 67,964.00
For the First Three Quarters
d. Creditable Tax Withheld 7,696,025.00
For the Fourth Quarter P6,473,959.00
Total Amount of Overpayment

In its 2001 ITR,[4] petitioner stated that the amount of P7,468,061.00 representing
Prior Years Excess Credits was net of year 1999 excess creditable withholding tax
to be refunded in the amount of P18,477,144.00. Petitioner also indicated in its
2001 ITR its option to carry-over as tax credit next year/quarter the overpayment
of P6,473,959.00.

On 9 April 2002, petitioner filed with the Revenue District Office No. 52, BIR
Region VIII, a request for refund in the amount of P18,477,144.00, allegedly
representing partial excess creditable tax withheld for the year 2001. Petitioner
claimed that it is entitled to the refund of its unapplied creditable withholding
taxes.
On 12 April 2002, before the BIR Revenue District Office could act on petitioners
claim for refund, petitioner filed a Petition for Review with the Court of Tax
Appeals to toll the running of the two-year prescriptive period provided under
Section 229[5] of the National Internal Revenue Code (NIRC) of 1997.

In its Decision dated 11 September 2003, the Court of Tax Appeals denied the
petition for lack of merit. Petitioner moved for reconsideration, which the Court of
Tax Appeals denied in its Resolution dated 17 December 2003. In denying the
petition, the Court of Tax Appeals explained:
While we agree with the findings of the commissioned independent CPA
that petitioner has unapplied creditable withholding taxes at source as of
December 31, 2001, still the excess income tax payment cannot be
refunded.

Upon scrutiny of the records of the case, this court noted that the amount
sought to be refunded of P18,477,144.00 actually represents petitioners
excess creditable withholding taxes for the year 1999 which petitioner
opted to apply as tax credit to the succeeding taxable year as evidenced
by its 1999 income tax return (Exhibit K). Under Section 76 of the Tax
Code, petitioner is precluded to claim the refund or credit of the excess
income tax payment once it has chosen the option to carry-over and
apply the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding years.[6]

Petitioner appealed to the Court of Appeals, which affirmed the Decision and
Resolution of the Court of Tax Appeals.
 The Ruling of the Court of Appeals

The Court of Appeals held that under Section 76 of the NIRC of 1997, when the
income tax payment is in excess of the total tax due for the entire taxable income
of the year, a corporate taxpayer may either carry-over the excess credit to the
succeeding taxable years or ask for tax credit or refund of the excess income taxes
paid. Section 76 explicitly provides that once the option to carry-over is chosen,
such option is irrevocable for that taxable period and the taxpayer is no longer
allowed to apply for cash refund or tax credit. In this case, petitioner chose to
carry-over the excess tax payment it had made in the taxable year 1999 to be
applied to the taxes due for the succeeding taxable years. The Court of Appeals
ruled that petitioners choice to carry-over its tax credits for the taxable year 1999
to be applied to its tax liabilities for the succeeding taxable years is irrevocable and
petitioner is not allowed to change its choice in the following year. The carry-over
of petitioners tax credits is not limited only to the following year of 2000 but
should be carried-over to the succeeding years until the whole amount has been
fully applied.

On 27 April 2006, petitioner filed a petition for review with this Court.

The Issue

The primary issue in this case is whether the exercise of the option to carry-over
the excess income tax credit, which shall be applied against the tax due in the
succeeding taxable years, prohibits a claim for refund in the subsequent taxable
years for the unused portion of the excess tax credits carried over.

The Ruling of the Court

The petition has no merit.

The resolution of the case involves the interpretation of Section 76 of the NIRC of
1997, which reads:
SEC. 76. Final Adjustment Return. Every corporation liable to tax under
Section 27 shall file a final adjustment return covering the total taxable
income for the preceding calendar or fiscal year. If the sum of the
 quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation
shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid,
as the case may be.

In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a
tax credit certificate shall be allowed therefore. (Emphasis supplied)

The confusion lies in the interpretation of the last sentence of the provision which
imposes the irrevocability rule.
Petitioner maintains that the option to carry-over and apply the excess quarterly
income tax against the income tax due in the succeeding taxable years is
irrevocable only for the next taxable period when the excess payment was carried
over. Thus, petitioner posits that the option to carry-over its 1999 excess income
tax payment is irrevocable only for the succeeding taxable year 2000 and that for
the taxable year 2001, petitioner is not barred from seeking a refund of the unused
tax credits carried over from year 1999.
The Court cannot subscribe to petitioners view. Section 76 of the NIRC of 1997
clearly states: Once the option to carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit certificate
shall be allowed therefore. Section 76 expressly states that the option shall be
considered irrevocable for that taxable period referring to the period comprising
the succeeding taxable years. Section 76 further states that no application for cash
refund or issuance of a tax credit certificate shall be allowed therefore referring to
that taxable period comprising the succeeding taxable years.

Section 76 of the NIRC of 1997 is different from the old provision, Section 69 of
the 1977 NIRC, which reads:
SEC. 69. Final Adjustment Return. Every corporation liable to tax under Section
24 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly
income taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year. (Emphasis supplied)

Under this old provision, the option to carry-over the excess or overpaid income
tax for a given taxable year is limited to the immediately succeeding taxable year
only.[7] In contrast, under Section 76 of the NIRC of 1997, the application of the
option to carry-over the excess creditable tax is not limited only to the immediately
following taxable year but extends to the next succeeding taxable years. The clear
intent in the amendment under Section 76 is to make the option, once exercised,
irrevocable for the succeeding taxable years.
Thus, once the taxpayer opts to carry-over the excess income tax against the taxes
due for the succeeding taxable years, such option is irrevocable for the whole
amount of the excess income tax, thus, prohibiting the taxpayer from applying for a
refund for that same excess income tax in the next succeeding taxable years. [8] The
unutilized excess tax credits will remain in the taxpayers account and will be
carried over and applied against the taxpayers income tax liabilities in the
succeeding taxable years until fully utilized.[9]

In this case, petitioner opted to carry-over its 1999 excess income tax as tax credit
for the succeeding taxable years. As correctly held by the Court of Appeals, such
option to carry-over is not limited to the following taxable year 2000, but should
apply to the succeeding taxable years until the whole amount of the 1999 creditable
withholding tax would be fully utilized.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24

August 2005 and the Resolution dated 31 January 2006 of the Court of Appeals in
CA-G.R. SP No. 82027.

SO ORDERED.