UNIVERSITY OF SANTO TOMAS HOSPITAL, INC. v. COMMISSIONER OF INTERNAL REVENUE

RE PU BLI C O F TH E PHILIPP INES Court of Ta x App e als QUEZON CITY SECOND DIVISION UNIVERSITY OF SANTO TOMAS CTA CASE NO . 7919 HOSPITAL, INC. Petitioner, Members: -versus- CASTANEDA, JR., Chairperson CASANOVA, and MINDARO-GRULLA, J.J. COMMISSIONER Of INTERNAL Promulgated : REVENUE, Respondent. MAY 2 0 2010 / x-------------------------------------------------------------------------------~-------------------x \ J: Ol f"'" . D E CI S ION MINDARO -GRULLA, :!_.: This is a Petition for Review filed on April 17, 2009 by the University of Santo Tomas Hospital, Inc. , as petitioner, against the Commissioner of Internal Revenue (CIR) as respondent. for the Court in Division, pursuant to Rule 4, Section 3 (a) (2), in relation to Rule 8, Section 4(o), of the Revised Ru les of the Court o f Tax Appeals (RRCTA), over respondent's inaction on petitioner's administra tive c laim for tax refund. The tax refund involves the amount of P15,000,000.00, which represents documentary stomp tax (DST) paid on 488

University of Santo Tomas Hosp1ta~ Inc. v. Commissioner of Internal Revenue Page 2 of 16 CTA Case No. 7919 DECISION petitioner's approved credit line/facility under the Omnibus Loon and Security Agreement doted April l 2, 2007. Petitioner University of Santo Tomas Hospital, Inc. is a non-stock, non- profit corporation duly organized and existing under Philippine lows, with principal office address located at the University of Santo Tomas Compound, Espana Boulevard, Monilo. 1 Respondent, on the other hand, is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR) empowered to perform the duties of said office including, among others, the power tQ : decide, approve, and .. grant refunds or tax credits of erroneously or excessltlely paid taxes. He holds office at the BIR Notional Office Building, Aghom Rood, Dilimon, Quezon City. On April 12, 2007, petitioner, designated as "borrower", signed and executed on Omnibus Loon and Security Agreement (OLSA) 2 with other contracting parties, designated as "lenders"; composed of bonking institutions, namely: ( l) Development Bonk of the Philippines (DBP); (2) Land Bonk of the Philippines (LBP); (3) Philtrust Bonk; and (4) Development Bonk of the Philippines-Trust Services (DBP-Trust). The Development Bonk of the Philippines likewise served as Fodlity· Agent, Mortgage Trustee or DSRA Agent. 1 Annex "A", Petition for Review, Docket, pp. 32-42 2 Exhibit "A" L 489

University of Santo Tomas Hosp1ta" Inc. v. Commissioner of Internal Revenue Page 3 of 16 CTA Case No. 7919 DECISION In the said Agreement, the lenders agreed to provide loons to petitioner in the aggregate amount of P3,000,000,000.00, for the purpose of financing petitioner's projects 3 and other general financing requirements for its operations, subject to the terms and c onditions set forth therein .4 The said lenders referred to the Agreement as a syndicated term loon facility, with each lender bonk agreeing to provide its respective approved credit line/facility, detailed as follow s: lending Bank Credit line/ Facility DBP p l ,500,000,000 LBP l ,000,000 ,000 Phi/trust Bonk 300,000 ,000 DBP-Trust 200,000,000 TOTAL P3,000,000,000 On April 18, 2007, petitioner paid respondent the amount of P15,000,000.00 as documentary stomp ta xes (DST) for its approved credit line/ facility under the Omnibus Loon and Se c urity Agreement doted April 12, 2007. 5 However, the credit line/facility, as contained in the Omnibus Loon and Security Agreement, was never implemented and/or availed of although the 3 The 3-Phase redevelopment and expansion of the University of Santo Tomas Hospital involving the construction of the Benavides Cancer Institute Bui lding, a 21 -storey Medical Arts Building, a 7-storey Podium that will include clinics and office spaces for around 1,000 doctors comprising its·.~medical staff, parking spaces for lease, retai l facil ities and the renovation and expansion of existing facilities, including the acquisition of new hospital furniture and equipment; page 7 of OLSA dated April 12, 2007, Docket, p. 238 4 Exhibit "A", Docket, p. 233 5 Exhibits "F" and "F-1", Judicial Affidavit of Rev. Fr. Jose Ma. Tinoko,. O.P; pars. 1 and 3, Joint Stipulation of Facts and Issues (JSFI), Docket, pp. 179-180 ' ' .,_·• ' ,' '- I' 490

University of Santo Tomas Hosp1ta~ Inc. v. Commissioner of Internal Revenue Page 4 of 16 CTA Case No. 7919 DECISION documentary stamp taxes were already paid. In fa ct, petitioner never made a "drawdown" on the same approved credi t line/facility. Even tuall y, the approved credit line/facility was cancelled by petitioner after discovering that there were irregularities in ·the application for the said credi t line/facility as well as in its execution. 6 On October 2, 2008, petitioner filed an administrative claim for refund with the BIR District Office No. 32 of Manila, in the amount of P 15,000,000.00, representing erroneously paid DST for the approved credit line/facility under OLSA dated April 12, 2007 .7 To date, respondent has ye t to act on said administrative claim for refund. Hence, petitioner filed this Petition for Review on April 17, 2009. Respondent filed his Answers on May 13, 2009, alleging the following Special and Affirmative Defenses: "23. The petition is premature considering that petitioner's applic ation for th e refund of the alleged erroneously paid documentary stom p tax in the amount of Php 15,000,000.00 is still pending investigation with Revenue District Office No. 32, Revenue Region No.6, Manila. 6 Exhibit " B", Docket, p. 903; Exhibit "F", page 2 of Judicial Affidavit of Rev. Fr. Jose Ma. Tinoko, O.P., Docket, p. 908 7 Par. 2, JSFI, Docket, p. 179 8 Docket, pp . 157-161 49 1

University of Santo Tomas Hospttal, Inc. v. Commissioner of Internal Revenue Page 5 of 16 CTA Case No. 7919 DECISION 24. The subject 'Omnibus Loon and Security Agreement' (OLSA), as the words imply, is in itself a loon agreement subject to the documentary stomp tax under the Tax Code of 1997, as amended by R.A. 9243. Section 179 of the said Act further provides that only one d ocume ntary stomp tax shall be imposed on either loo n agreement, or promissory notes issued to secure such loon. 25. The documentary stomp tax was legally due and paid in accordance with low. 26. In Philippine Home Assurance Corporation, Philippine American Accident Insurance Company, Philippine American General Insurance Company and American International Underwriters (Phils.] , Inc. vs. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 119446 doted January 21, 1999 it was held that- In general, documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision , or termination of specific /ega/ relationships through the execution of specific instruments. Example s of such privileges, the exercise of which, as effected through the issua nce of particular documents, are subject to the payment of documentary stamp taxes are leases of lands, mortgages, pledges, and trusts, and conveyances of real property. Documentary stamp taxes are thus levied on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto . The documentary stamp taxes must be paid upon the issuance of the said instruments, without regard to whether the contrac ts which gave rise to them are rescissible, void, voidable, or unenforceable. xxx xxx xxx 27. Claim for refund is construed strictly against the claiman t and should not be allowed unless proven explicitly and categorica lly. 28. The allegations regarding tax refundobility do not ipso fa cto merit the refund c laimed." ..

University of Santo Tomas Hospita~ Inc. v. Commissioner of Internal Revenue Page 6 of 16 CTA Case No. 7919 DECISION During trial, petitioner presented as witness Rev. Fr. Jose Mo. Tinoko , O.P., petitioner's former Treasurer and Member o f the Board of Trustees. 9 Thereafter, petitioner filed its Formal Offer of Documentary Evidence 10 on October 8, 2009, from Exhibits "A" to "H", inclusive of sub-markings. This Court resol ved to admit all said exhibits in a Resolution 11 dated November 20, 2009. On the other hand, respondent waived the presentation o f his evidence considering that the administrative investigation of petitioner's claim for refund has not been completed yet and that the tax docket has already been forwarded to this Court. 12 On January 8, 201 0, this case was submitted for decision, considering respondent's Memorandum filed on December 22, 2009 and petitioner's . Memorandum filed on December 23, 2009. 13 The parties' jointly stipulated issues 14 submitted for this Court's consideration are as follows: "1 . Whether or not petitioner is entitled to a refund of th e PhP 15,000 ,000.00 doc umentary stamp taxes paid plus interest, if any, in connection with its approved credit lin e/facility under the Omnibus Loan and Security Agreement dated 12 April 2007. 9 Minutes of Hearing dated July 27, 2009, Docket, p. 199 10 Docket, p. 217 11 Docket, p. 917 12 Par. 3, Joint Stipulation of Facts filed on September 9, 2009, Docket, p. 207 13 Docket, p. 955 14 Docket, p. 180 49J

University of Santo Tomas Hospital, Inc. v. Commissioner of Internal Revenue Page 7 of 16 CTA Case No. 7919 DECISION 2. Whether or not petitioner erroneously paid the amount of PhP 15,000,000.00 as documentary stamp taxes relative to its approved credit line/facility under the Omnibus Loan and Security Agreement dated 12 April 2007." The above-stated two (2) issues ore joined as one ( 1) principal issue - whether petitioner is entitled to a ta x refund in the amount of P 15,000,000.00, arising from the alleged errof}eous payment of documentary stomp ta xes on the approved credit line/facility under the Omnibus Loon and Security Agreement doted April 12, 2007. The principal issue is answered affirmatively, as foll ows: 1. Petitioner has two (2) years from the dote of payment of ta x within which to file its claim for ta x refund. Petitioner paid the subject DST on April 18, 2007;15 filed its administrative c laim with respondent on October 2, 2008;16 and filed its judicial claim on April 17, 2009. Thus , counting from April 18, 2007, when petitioner mode its payment, both administrative and judicial claims were timely filed w ithin the two-year prescriptive period . Sections 229 and 204(C) of the Notional Internal Re ve nue Code (NIRC) of 1997 read : 15 Par. 3, JSFI, Docket, p. 180 16 Annex "J", Petition for Review, Docket, p. 140 49 4

University of Santo Tomas Hospital, Inc. v. Commissioner of Internal Revenue Page 8 of 16 CTA Case No. 7919 DECISION "SEC. 229. Recovery of tax erroneously o r illega lly co llected. - No suit or p roceeding sha ll be maintained in any court fo r th e recovery o f any no ti ona l internal revenue tax hereafter alleged to ha ve been erroneously or illega lly assessed o r collec te d , or o f any penalty c laimed to hove been co llec ted without authority, or of any sum a lleged to hove been excessively or in any manner w rong full y co llected , until a c laim for refu nd or c red it has been duly filed w ith th e Commissioner; but such su it o r proceeding may be maintained, whe th er or no t such tax, penalty, or sum has been paid und er protest o r duress. In any case, no suc h suit or proceeding shall be filed after the expiration of two years from th e dote o f payment o f the tax or penalty regard less of any superven ing cause that may arise after payment; Provided ho wever, That th e Com missioner may, eve n without a w ritten c laim th ere for, refund or c redit any ta x, where on th e face o f th e return upon w hic h payment was mode, such payment appears clea rl y to ho ve been erroneously pa id ." "S EC. 204. Authority of th e Commissioner to Compromise, Abate, and Refund or Credit Ta xes. -The Commissio ner may - XXX XXX XXX (c ) Cred it or refund taxes erroneously or illegal ly received or penalties imposed w ithou t authority, re fund the va lue o f internal reve nue stamps w he n th ey are re turn ed in good cond itio n by the purchaser, and, in his d iscre tion, redeem or c hange unused stomps that ho ve been rendered unfit fo r use and refund their value upo n proof of destru c tion. 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 o return filed showing an overpayment shal l be co nside re d as o w ritten cla im for credit or refund." (Emphasis supplied) 2. Section 179 of the NIR C of 1997, as amended b y Republic Act No. 9243, pro v ides: "SEC. 179. Stamp Tax o n All Deb t In strum en ts. - O n every original issue o f debt instruments, th ere sha ll be collected a doc ume ntary stomp tax of. One peso (Pl .OO ) o n eoc,; h Two hundred pesos (P 200), or fractional part there of, o f th e issue price o f any suc h debt in strum en ts: Provided, That fo r such debt 49 S

University of Santo Tomas Hosp1ta~ Inc. v. Commissioner of Internal Revenue Page 9 of 16 CTA Case No. 7919 DECISION instruments with terms of less than one ( 1) year, the documentary stomp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That on ly one documentary stomp tax shall be imposed on either loon agreement, or promissory notes issued to secure such loon. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certifica tes o f indebtedness, due bills, bonds, loan agreements , including th ose signed abroad wherein th e object of con tract is located or used in the Philippines, instruments and securities issued by the government or any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that ore either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity dote, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bonk notes issued for c irculation." (Emphasis supplied) Further, Sections 3(b) and 6 of Revenue Regulations No. 9-94 state that: "SECTION 3. Definition of Terms. - For purposes of these Regulations, th e following terms shall mean: XXX XXX XXX (b) 'Loon Agreement' - refers to a contract in writing where one of the parties delivers to another money or other consumable thing , upon the condition that the same amount of the same kind and quality shall be paid . The term sha ll include credit facilities , which may be evidenced by credit memo, advice or drawings. XXX XXX XXX SECTION 6. Stomp Tax on All Loon Agreements. -~.II loon agreements, whether mode or signed in the Philippines, or abroad when the obligation or right arises from th e Philippine sources or the property or object o f the con tra c t is loca ted or used in th e Philippines shall be subject to the documentary stomp tax of thirty centavos (P0.30) on each two hundred [_ 49G . ~· . .· ·;.

University of Santo Tomas Hosp1ta~ Inc. v. Commissioner of Internal Revenue Page 10 of 16 CTA Case No. 7919 DECISION pesos, or fracti o nal port thereof, of the fa ce value of any of such agreements, pursuant to Section 180 in relati on to Section 173 of the Tax Code. In cases where no formal loan agreements or promissory notes have been executed to cover credit facilities , the documentary stamp tax shall be based on the amount of drawings or availment of the facilities , which may be evidenced by credit/ debit memo; advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code, as amended. " (Emphasis supplied) Based on the foregoing, Section 179 of the NIRC of 19971 7, provides that debt instruments shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, and loan agreements . Under Sections 3(b) and 6 of Revenue Regulations No. 9-94, a loan agreement refers to a contract in writing where one of the parties delivers to 'another money or other consumable thing , upon the condition that the same amount of the same kind and quality shall be paid . Stated otherwise, for a loan agreement to be subject to DST, there must be delivery of money or other consumable thing by a lender to the borrower, with corresponding obliga tion of repayment. The debt instrument, which includes loan agreement, must represent borrowing and lending transaction . Clearly, if there is no delivery of money or other consumable thing upon the condition that the same amount . of the same kind and quality shall also be paid, there will be no DST to be imposed on the document evidencing such loan agreement. 17 Amended by Republic Act No. 9243 497

University of Santo Tomas Hospital, Inc. v. Commissioner of Internal Revenue Page 11 of 16 CTA Case No. 7919 DECISION Records show that in support of its claim for refund, petitioner presented the following documentary evidence : 1. Omnibus Loan and Security Agreement dated April 12, 2007 (Exhibit "A") representing petitioner's approved credit line/facility granted by creditor banks DBP, DBP-Trust Services, LBP, and Philtrust Bank; 2. Certification by Rev. Fr. Rolando V. De La Rosa , O.P. doted July 29, 2008 (Exhibit "B"), certifying that petitioner never made o drawdown on the some approved credit line/facility covered by the Omnibus Loan and Security Agreement doted April 12, 2007 and that the approved credit line/fa c ility was eventually cancelled ; 3. Development Bank of the Philippines Letter-Certification doted July 9, 2008 (Exhibit "C") certifying that no drawdown was mode by petitioner on DBP's partic ipation in the approved credit line/facility under OLSA doted April 12, 2007; 4. Philtrust Bonk C ertification dated February 3, 2009 (Exhibit "D") certifying that no drawdown was mode by petitioner on Philtrust Bonk's participation in the approved credit line/facility and that the said bank had already cancelled said credit line/facility under the OLSA doted April 12, 2007; 5. Land Bank of the Philippines Certification dated February 9, 2009 (Exhibit "E") certifying that no drawdown was made by petitioner on LBP's participation in the approved credit line/facility and that the said bank hod already c ancelled said c redit line/facility; 6. Judicial Affidavit of Rev. Fr. Jose Mo. Tinoko, (O .P.) (Exhibits "F" and "F-1 ") stating that petitioner erroneously paid the documentary stomp taxes in the amount of P15,000,000.00 in connection with its approved c redit line/facility under OLSA doted April 12, 2007. He further explained that petitioner was under the false impression or mistaken belief that it is obligated to pay documentary stamp taxes on the approved credit line/facility covered by the OLSA even though there is no actual drowdown on it yet ; 7. Development Bank of the Philippines-Trust Services Letter- Certification doted July 15, 2009 (Exhibit "G") certifying that no drawdown was made by petitioner on DBP-Trust Services' participation in the approved credit line/facility and that it had already cancelled said credit line/facility; and 493

University of Santo Tomas Hosp1ta~ Inc. v. Commissioner of Internal Revenue Page 12 of 16 CTA Case No. 7919 DECISION 8. Development Bonk of the Philippines Letter-Certification doted July 23, 2009 (Exhibit "H") cer tifying that petitioner never mode a drowdown on DBP's participation in the approved credit line/fa c ility and that it hod already cancelled the c redit line/fa cility under the OLSA. It is undispu ted that the O LSA doted April 12, 2007, exec uted b y petitioner a nd a consortium o f cred itor bonks (DBP , LBP , Philtrust Bon k, and DBP-Trust Services), is on agreement/commitment th a t the lenders-creditors will make available to petitioner a c redit line or credit facility in the total amount of P3,000,000,000.00, subject to certain cond iti ons. 18 Further, pursuant to the subject O LSA, a "Note" 19 is required to be executed by the borrower o nce it makes a drowdown on the cred it line/facility. However, as correctl y pointed out by petitioner, there was no conveyance or delivery o f the loa ned amount in this case . In fact, the lend e rs-creditors certified that petitioner did no t make on actual drowdown on th e said cred it line/ fa c ility and that the some creditors cance ll ed the approved c redit line/facility; hence, no DST accrued. Mere execution of the Omnibus Loon and Security Agreement, without the requisite delivery o f the loaned amount and the execution of other 18 Exhibit " A", Section 4, pp . 16- 18 of OLSA 19 Exhibit " A", Section 3.03, p. 12 of OLSA c 499

University of Santo Tomas Hospita~ Inc. v. Commissioner of Internal Revenue Page 13 of 16 CTA Case No. 7919 DECISION documents evidencing the amount of drawings will not give rise to DST liability on the part of petitioner. Credit facilities by themselves are not considered debt instruments that are subjec t to DST. There must be another document · to prove that such credit fa ci lity has indeed been converted into a loan agreement, either by the execution of a formal loan agreement, a promissory note, a credi t/debit memo, or an advice or drawings to prove that the credit facility has been availed of by the borrower. A credit facility is merely a facility or a line for making a specific amoun t available for the use o f the borrower. It is not tantamount to the delivery of the money to the borrower. Only when the borrower makes use of the available amount by drawing on this facility will there be delivery of the money that will give rise to a loan, but on ly up to the amount of the actual amount of money that was drawn from the credit facility.2o DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or tran sfer of an obliga tion, right or property incident thereto. DST is actually an excise ta x because it is imposed on the transaction rather than on the document. DST is also levied on the exercise by persons of certain privileges conferred by law for the 20 SIR Ruling No. DA-036-07, January 24, 2007 ( 500

University of Santo Tomas Hospital, Inc. v. Commissioner of Internal Revenue Page 14 of 16 CTA Case No. 7919 DECISION creation, revision, or termination of specific legal relationships through the execution of specific instruments. 21 Since petitioner did not avail of the credit line/facility under the OLSA petitioner also did not exercise a privilege considered taxable within the purview of Section 179 of the NIRC of 1997. In Maersk Filipinos, Inc. vs Commissioner of Internal Revenue 22 , this Court held that: "xxx Thus, pursuant to Section 229 of the NIRC of 1997, in relation to Section 204 (C) of the same Code and Article 2154 of the New Civil Code whi c h provides that 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, thus, respondent has the bounden duty to return the erroneo usly paid withholding tax made by petitioner." In the case of Hewlett-Packard ·Philippines Corporation vs. Commissioner of Internal Revenue23, it was likewise ruled that: "Basic is the principle that when money is paid to another under the influence of a mistake of fact, it may be recovered. The Government is not exempt from the scope of solutio indebiti principle. There being no doubt that petitioner paid its EWT for March 2006 twice, there arises an obligation on the port of the respondent to return what was mistakenly paid by petitioner". 21 Commissioner of Internal Revenue vs. First Express Pawnshop Company, Inc., G.R. Nos. 172045-46, June 16, 2009, citing Section 173 of the 1997 Tax Code and Michel J. Lhuillier Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 166786, May 3, 2006 22 C.T.A. Case No. 7073, April 4, 2007 23 C.T.A. Case No. 7756, August 6, 2009 50 :

University of Santo Tomas Hospita~ Inc. v. Commissioner of Internal Revenue Page 15 of 16 CfA Case No. 7919 DECISION In fine , this Court finds petitioner entitled to a refund of the amount of P15,000,000 .00, representing documentary stamp ta xes erroneously paid relative to the approved credit line/ fa c ility under the Omnibus Loan and Security Agreement dated April 12, 2007, but wh ich was not availed and was cancelled by the parties therein. WHEREFORE, the instant Petition for Review is hereby GRANTED . Accordingly, respondent Commissioner of Internal Revenue is DIRECTED TO REFUND in favor of petition~r the amount of FIFTEEN MILLION PESOS (P15 ,000,000.00) , representing erroneously paid documentary stamp ta xe s on the approved credit line/faci]ity dated April 12, 2007. SO ORDERED . ~ N. lvt~~-Cvwt£- ciEuTo N. MINDARO -GRULLA Associate Justice WE CONCUR: Q.._..,.__·,c_ c . a...;r~ .fUANITO C. CASTANEDA; Jlf Q., $ CAESAR A. CASANOVA Associate Justice Associate Justice 502

University of Santo Tomas Hosp1ta~ Inc. v. Commissioner of Internal Revenue Page 16 of 16 CTA Case No. 7919 DECISION CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution. it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~"'c·~~.Q <ffi _bj..JI-TO C . CASTANED.('v.ff . Acting Presiding Justice Chairperson. 2 nd Division ' .,. ·' i