PHILIPPINE AIRLINES INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE AIRLINES INC., C.T.A. CASE NO. 5536 Petitioner~, Promulgated: COMMISSIONER OF INTERNAL FEB 11 1999 REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - DECISION This case involves a judicial action for the refund of the sum of P3,068,596.24, representing overpaid income tax resulting from an excess payment of creditable withholding taxes at source for the fiscal years ended 1995 and Mar~ch 31, 1996. The amount claimed was reduced to P2,926,279.42 in petitioner's memorandum (seep. 154, CTA r~ ecot~ds). The facts are simple. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines with principal office located at PAL Building II, Legaspi Village, Makati City. On July 28, 1995, petitioner filed its Corporation Annual Income Tax Return for the fiscal year ended March 31' 1995, reflecting a net loss from operations in the amount of P362,676,420.00, a nil income tax liability but

DECISION - C.T.A. CASE NO. 5536. - 2- with a refundable amount of P2,465,067.00, arising from various creditable withholding taxes at source in the amount of P1,055,928.00 and prior year's excess credit of Pi, 409, 139.00 <Exhs. A to A-3, inclusive). On July 29, 1996, petitioner filed its Corporation Annual Income Tax fiscal year ended March 31, 1996, reflecting another net loss from operations in the amoun t of P1,432,429, 182.00, a nil income tax liability but with a refundable amount of P3,068,596.00, various creditable withholding taxes at source in the amount of P2,012,668.00 and prior year's excess credit of P1,055,928.00 <Exhs. B to B-3, inclusive). Petitionet~, belie v ing that it is entitled to the refund of excess payment of income tax pursuant to Section 204(3) of the Tax Code, as amended, filed on two sep,:n~ate occasions, le t tet�'-claims fat~ -r~efund. The fir~st letter was filed on July 8, 1996, in the amount of P1,055,927.80 representing excess income tax payment for fiscal year ended March 31, 1995 <Exhs. C to C-3, inclusive) and the second letter was filed on September 30, 1996, in the amount of P2,012,668.44 r~ept~esenting ovet~paid income tax fat~ fiscal year~ ended IYlat~ch 31, 1996. The inaction of the respondent on both claims for refund compelled petitioner to file the instant petition for review on June 25, 1997 in order to conform with the

DECISION - C.T.A. CASE NO. 5 536. - 3- reglementary period of two years as provided for under Section 230 of the Tax Code, as amended. Respondent, in his Answer~, raises the following special and affirmative defenses: 6. The petition states no cause of action as it does not allege the date/s when the taxies sought to be refunded was/were actually paid. <Manuractur er's Bank and Tr ust Co . as Truste e r or Gen Tru s t P l a n vs . CIR, CTA Case No. 1654, Nov e mber 2 9 , 1965). 7. The best evidence of the payment and remittance to the BIR of the withholding taxes allegedly withheld by the payor are the official receipts <ATAPS>; 8. The expenses claimed by petitioner in its income tax returns in question are not totally allowable, thus even if gr~anting, for�' the sake of argument, that the withholding tax payments for that (sic) years are correct and accurate, the same are insufficient to cover the payment of its deficiency taxes; 9. Petitioner has not shown proof that it has incurred losses in the years involved, mere declaration in the return without being supported by records of pertinent papers proving that the claimed deductions were really paid or incurred during the year in question is insufficient; 10. Petitioner~ has not shown pr~oof that the deductions claimed are all allowable in accordance with the conditions mandated in Section 29<a>, (b), (c), (d), (e), (f), <g>, (h) and (i) of the National Inter~nal Revenue Code <NIRC>, as amended; 11. In claiming for refunds, it is incumbent upon petitioner to prove that it is indeed entitled thereto. It must be able to point positively a provision of law granting such r~ight, other~wise, it would be fatal to the claim for refund;

DECISION - C.T.A. CASE NO. 5536. 4- 12. Claims for refund are construed strictly against the claimant, the same being in the nature of exemption from taxes <Commissioner of Internal Re v en ue vs. Ledesma, 31 SCRA 95 <1970>; Manil a Electr ic Co. v s. CIR, 67 SCRA 35 (1975> ; and 13. It is incumbent upon petitioner to show compliance with the provision of Section ;::~30 of the NIRC. Dur~ing tr~ial, pet i t ioner~ pr~esented, a mong ot h er~s, the following documentary exhibits in order to support its judicial claim for refund: a. The Corporation Annual Income Tax Returns for fiscal year~s ended Mar~ch 31, 1995, 1996 and 1997 together with the audited financial statements <Exhs. A to A-3, B to B-3, and G to G-4); b. The letter-claims for refund with the Bureau of Internal Revenue <Exhs. C to C-3 and D to D-2); and c. The report of the independent CPA discussing the results of the audit and verification of petitioner's claim for~ together~ with the certificates of creditable withholding taxes <Exhs. H to H-4-1-x, inclusive). This case was submitted for decision sans the evidence and memorandum of the respondent. The issue to be resolved in this case is whether or not petitioner is entitled to the refund of the total sum of P2,926,279.42, representing alleged overpaid income taxes for the fiscal years ended March 31, 1995 and Mar~ch 31' 1996.

DECISION - C. T.A. CASE NO. 5536. - 5- We shall resolve the issue in the light of existing j m~ is pr~ud ence. In the case of Ci t ytrust F inance Corporation vs. Court o f Tax Appeal s and The Commissioner of Internal Revenue, CA G.R. SP No. 28239, d at e d March 14, 1994, thf~ of Appeals affirmed this Court's decision and declared that for a claim for refund of excess creditable withholding tax to prosper, three basic conditions must be met, to wit: 1. that it filed a claim for refund within the tw o (2) year�� period as prescribed under Section 230 (now 229) of the National Internal Revenue Code; 2. that the income upon which the taxes were withheld were included in the return of the recipient; and 3. the fact of withholding is established by a copy of statement <BIR Form 1743. 1) duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom. (Sec. 10, Rev. Reg. 6-85; see Citytrust Finance Corporation vs. The Commiss i oner of Internal Reven u e, CTA Case No. 4 134 , November 11, 1991; and Citytrust Finance Co rpo rati on <Formerly Invest or' s Finance Corpo r a t ion/FNCB Finance) vs. Commissioner of Internal Revenue, CTA Case No. 4 046, February 24, 1993 ) . Based on the records of the case, petitioner has satisfactorily proven its compliance with the above r~equisites. First, the claim for ref und was timely filed within two years from the date of payment of the tax pursuant to

DECISION - C.T.A. CASE NO. 5536. - 6- Section 230 of the Tax Code, as amended. The claims fat~ r�efund covet~ing taxable years ended Mat~ch 31, 1'3'35 and Mat~ch 31, 1'3'36 wet~e filed with the Bw~eau of Intet~nal Revenue on July 8, 1'3'36 and September 30, 1'3'36, t~espectively, and the instant petition for review was .- . e .::....; ' f i l e d 1 '3'37 . The two-yeat~ period commences to on June t~un on Ju 1 y 28, 1'3'35, for income tax paid in fiscal year ended Mat~ch 31, 1 '3'35 and on Ju 1 y 2'3, 1 '3'36, fat~ income tax paid in fiscal year ended March 31, 1'3'36 (Commissioner o f Inte r nal Revenue v. TMX Sa l es, I nc. et a l ., G. R. No. 837736, Jan uary 15, 1992) . Petitioner also established the fact that the income upon which these creditable withholding taxes were paid wet~e included in petitionet~'s final adjustment returns. It was positively pointed out by petitioner's witness, Mr. Mario Aguas, that income from which the taxes were withheld were included in petitioner's annual income tax the testimony of Mr. Aguas reads as follows: ATTY . VENTANILLA Q .. In coming up with this report Mr. Aguas, what wet~e the documents that you audit eel ancl examined? A. We have sta t ed in our report that we have checked and if I may read the procedures that we have carried out. Q. Go ahead.

DECISION - C.T.A. CASE NO. 5536. 7- A. First of all we checked the completeness of the available certificates which evidence the taxes withheld from Philippine Airlines, Inc. And then we proceeded to reconcile these amounts per certificates with the schedule of taxes withheld provided to us by Philippine Ait~lines, Inc. And f~~orn thet~e we exc\rnined the certificates and we ascertained the following: xxx. And last pt~ocedtwe, we ascertained that the correspondinq income from which the related taxes withheld were withheld from Phili pp ine Airlines, Inc., was declared as part of its gross income fot~ income tax p twposes, by tt~acing the same against the related source post by Philippine Airlines, Inc. xxx. XXX XXX XXX ATTY. VENTANILLA Afte~~ you ha v e conducted this audit, what was the result of your findings, Mt~. t~guas? A. Our findings are contained in the report and if I may again read the report. Q. Please. A. On the basis of the p~~ocedm~es that we have performed which we have stated previously, we noted that the claim for refund by Philippine Airlines, Inc. representing the unapplied creditable withholding taxes for the fiscal years ended tr1a~~ch 31, 1'395 and Mat~ch 31, 19'36 amounting to P2,'316,885.02 which are shown in exhibit H-2 is properly supported by the required certificates of withholding taxes BIR Form 1743-750, the said represents taxes withheld from Philippine Ait~l ines, Inc. which at~e evidenced by certificates of withholding taxes, BIR Form 1743-750 made available to us as of Febt~uaJ�~y 23, 1998 and fot~ which the correspondin g income was declared by Philippine Ai~~lines, Inc. as p at~t of its gross income for income tax purp oses in those yeat~s. <t. s. n., Febt~uat~y 24, 1998, pp. 8 to l4; Under~lining supplied)

DECISION - C.T.A. CASE NO. 5536. - 8- The above-named CPA is an independent audita~~ commissioned by the Court to examine petitioner's claim for refund pursuant to CTA Circular 1-95, as amended. In conclusion, We find for and in favor of the petitione~~. The amount of P2,926,279.42 is duly supported by Certificates of Creditable Withholding Tax at Sout~ce <BIR Fot~m No. 1743. 750) and this was confi~~med by the commissioned auditor <Exhs. H to H-4-1-x). As regards respondent's objections that the best evidence of payment and remittance to the BIR of the withholding taxes are the official receipts <ATAPs); and that the income tax returns of petitioner are not conclusive evidence that petitione~~ net operating losses from business, the Supreme Court in the case of Ci tibank, N. A. vs. Court of Appeals and Comm i ssio n e r of Internal Revenue, G.R. No. 107434, dated October 10, 1997, has settled such issues. Quoted hereunder is an excerpt of the said decision: "In gene~~al, thet~e is no disa!;weement that a claimant has the burden of proof to establish the factual basis of his or her claim for tax c~~edit m~ t��efund. Tax ~~efunds, like tax exemptions, are construed strictly against the taxpayer. The mechanics of a tax refund is p~~ovided in Rev. Reg. No. 13-78: "Section 8. Claims For' tax cr�edit or� r�erund. Claims fm~ tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is declared as part of the gr~oss income and the fact of

DECISION - C.T.A. CASE NO. 5536. - 9- withholding is established by a copy of the statement, duly issued by the payor to the payee <BIR Form 1743-A) showing the amount paid and the amount of tax withheld thet~eft~om." 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, detailed proof of the truthfulness of each and every item in the income tax return is not required. That function is lodged in the Commissioner of Internal Revenue by the NIRC which requires the commissioner to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return. xxx. (Underlining supplied) The above pronouncement does not mention that official receipts need to be produced in or~der~ to establish facts of payment of income tax. The matt et~s that are required to be shown are the inclusion of the income payments in the income tax return and the fact of ~'IIi thho ld i ng. Neither is petitioner required to show proof of the truthfulness of every item in the income tax respondent counsel failed to consider that the certificate of creditable withholding tax produced by the petitioner is sufficient evidence to show payment as it is issued pursuant to their own Revenue Regulations 6-85. In sum, petitioner has overcome the burden of proof and should be entitled to the relief sought. WHEREFORE, finding the petition respondent :is hereby ORDERED to REFUND in favor of the petit i ont-!t"' the sum of ~2,926,279.42,

DEC I SION - C.T.A. CASE NO. 5536. - 10 - ovet~paid income taxes fat~ fiscal yeat~s Mat~ch 31, 1995 and Mc:n~ch 31, 1996. SO ORDERED. WE CONCUR: ~Q~~ ~~~TO D. ACOSTA :~i~ Jud/ RAMON 0. DE~~~ Associate JurY I CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. (L;Q. ~ ERNESTO D. ACOSTA Pt~esiding Judge