PHILIPPINE BANK OF COMMUNICATION v. COMMISSIONER OF INTERNAL REVENUE
REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals QUEZON CITY SECOND DIVISION PHILIPPINE BANK OF C.T.A. CASE NO. 6177 Members: COMMUNICATION, Petitioner, -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. Promulgated: COMMISSIONER OF INTERNAL REVENUE, JUN 3 0 ZOOS / Respondent. ~ J:2o r�m. X ------------------------------------------------------------------------------------ X DECISION PALANCA-ENRIQUEZ, J.: THE CASE This is a Petition for Review filed by Philippine Bank of Communication (hereafter "petitioner") praying for the cancellation of the assessments for deficiency income tax, percentage tax, withholding tax on compensation, 20% final tax, 10% onshore final tax and documentary stamp taxes for the years 1996 and 1997 and that respondent be ordered to desist from collecting said taxes from petition~
C.T.A. CASE NO. 6177 2 DECISION THE PARTIES PBCom is a banking corporation organized and existing under the laws of the Republic of the Philippines, with principal office address at PBCom Building, Juan Luna Street, Binondo, Manila. Respondent Commissioner of Internal Revenue, on the other hand, is the Chief of the Bureau of Internal Revenue ("BIR"), the government agency charged with the collection of national internal revenue taxes, with office at the BIR National Office Building, Diliman, Quezon City, where she may be served with summons and other processes. THE FACTS The facts of the case, as culled from the records, are as follows: On December 14, 1999, PBCom received a Final Notice of Assessment dated November 5, 1999 and eight (8) Assessment Notices with Assessment Nos. ST-INC-96-0115-99; ST-GRT-96-0116-99; ST- WC-96-0117-99; ST-FT-97-0118-99; ST-OFT-0119-99; ST-OFT-97- 1020-99; ST-DST-96-0121; and ST-DST-97-0122-99, all bearing the same date, from the BIR, through Asst. Commissioner-Enforcement Service, Percival T. Salazar, Esq., in connection with PBCom's alleged 1996 and 1997 internal revenue tax liabilities. ~
C.T.A. CASE NO. 6177 3 DECISION The total deficiency tax of petitioner for taxable years 1996 to 1997 amounts to P389, 185,343.78 1 detailed as follows: , A. Income Tax 1996 1997 Total Basic Interest P53,287,765.11 - Compromise - 29,278,666.50 Amount Due & Collectible - P82,566,43 1.6I - B. Percentage Tax (Gross Receipt Tax) P82,566,43 1.61 Basic P5,528, I06.44 - Interest Compromise 3,286 , 152 . 16 - Amount Due & Collectible - - C. Withholding Tax on Compensation P8,8I4,258.60 - P8,814,258.60 Basic P3 ,637.46 - Interest Compromise 2,2I0.77 - Amount Due & Collectible - - D. 20% Final Tax Basic P5 ,848 .23 - P5,848.23 Interest Compromise - PI 0,668,737.52 - 4,172,661.78 Amount Due & Collectible - - E. I0% Onshore Final Tax PI4,84I,399.30 Basic Interest PI ,565,5 I2.36 P548,3 82.36 P2, 113,903.72 Compromise 929,745 .74 2I4,478.43 I, 144,224.17 45,000.00 Amount Due & Collectible - - P3,303, 127.89 F. Documentary Stamp Tax P2,495,267. I0 P762,860.79 Basic Interest p I54,454,966.84 22,295,384.20 176,750,35 1.04 93,874,296.5I 9,029,630.60 I02,903,927.II Amount Due & Collectible P248,329,263.35 P3I ,325 ,0I4.80 P279,654,278.15 (A nnex "A", Petition for Revie&� 1 In the Formal Notice dated November 5, 1999, the total assessment of deficiency tax is P389, 140,343.78. There is a di fference of P45,000.00 vis-a-vis the sum of the details of the deficiency assessment.
C.T.A. CASE NO. 6177 4 DECISION On January 13, 2000, petitioner filed a protest letter to the Assessment Notices. On March 13, 2000, petitioner filed with the BIR the supporting documents for such protest. Since respondent failed to act on the protest within the 180-day period, on October 9, 2000, petitioner elevated its case to this Court by way of Petition for Review. In his "Answer" filed on December 1, 2000, respondent, by way of special and affirmative defenses, alleged that: the worthlessness of the loans cannot be ascertained; the assessment for deficiency withholding tax on payment of compensation is based on Section 34 (K) of the 1997 Tax Code ; the proceeds of petitioner's Initial Public Offering ("IPO") from previous years were placed in its trust department declared as income allegedly subjected to final tax. However, petitioner's allegation that correct taxes were withheld was not supported. Thus, respondent added said income placed in trust department to petitioner's taxable income, pursuant to Sec. 2. 57 (A) of Revenue Regulations No. 2-98; the investigation conducted shows that petitioner failed to include other interest income in its gross income, which petitioner claimed to have already been subjected to the 20% final tax. Thus, petitioner w~
C.T.A. CASE NO. 6177 5 DECISION assessed of deficiency gross receipts tax on the basis of Section 121 ofthe Tax Code on Tax on Banks and Non-bank Financial Intermediaries ; the investigation conducted shows that there was a discrepancy in the 20% final withholding tax on interest expense for the year 1997; hence petitioner was assessed of deficiency tax; petitioner was assessed of the 10% deficiency onshore final withholding tax on the basis of Section 27 (D) (3) of the 1997 Tax Code, in relation to Section 28 (a) (7) (b) of the same Code. For 1996 and 1997, there is a discrepancy; the investigation conducted revealed that some of the bank transactions were not subjected to documentary stamp tax, under Sections 180, 181, and 182 of the Tax Code. Petitioner presented Domingo Aure, Pepita Bravo, Rene Alejandrino, Rowena Ong Tan, Annabelle Yeo, Lorenzo Francisco, Richard Arvisu, Charisee Dolina, Leo Villanueva, Felimon Baltazar, Francisco Capalar, Ave Reyes, as witnesses, and Revenue Officer Edison Larin, as an adverse witness, and formally offered documentary evidence, marked as Exhibits "A" to "RRR ", inclusive of their submarkings, which were admitted by the Court in a Resolution dated May 18, 2005, except for Exhibits "QQQ-5" to "QQQ-8 ", "QQQ-12 ", "QQQ-17 ", "QQQ- 19 " to "QQQ-21", "QQQ-23" to "QQQ-28 ", "QQQ-31 " to "QQ~
C.T.A. CASE NO. 6177 6 DECISION 46 ", "QQQ-49 ", "QQQ-50", "QQQ-51-b ", "QQQ-53", and "QQQ- 54 ", which were denied admission for failure to present their original coptes. On the other hand, respondent presented Revenue Officer Edison Larin, as witness, and formally offered documentary evidence, marked as Exhibits "1 " and "2 ", which were all admitted by this Court in a Resolution dated March 19, 2007. Thereafter, both parties were granted thirty days from notice to file their simultaneous memoranda, afterwhich the case shall be deemed submitted for decision. Petitioner having filed its memorandum, without respondent filing the same, the case was deemed submitted for decision. Hence, the instant Petition for Review raising the following: ISSUES As stipulated upon by the parties, the following are the issues for this Court's consideration: I WHETHER THE BIR CORRECTLY DISALLOWED THE ACCOUNTS WRITTEN OFF IN THE YEARS 1996 ANDn. i i 1997. {91'"-
C.T.A. CASE NO. 6177 7 DECISION II WHETHER THE BIR CORRECTLY ASSESSED THE DEFICIENCY WITHHOLDING TAX ON PAYMENT OF COMPENSATION FOR 1996. III WHETHER THE BIR CORRECTLY COMPUTED THE TAXABLE INCOME OF PBCOM FOR 1997 AS BASIS FOR THE FINAL WITHHOLDING TAX. IV WHETHER THE BASIS USED BY THE BIR IN COMPUTING THE GROSS RECEIPT TAX WAS CORRECT. v WHETHER THE BASIS USED BY THE BIR IN COMPUTING THE FINAL WITHHOLDING TAX ON "INTEREST EXPENSE ON BORROWINGS" WAS CORRECT. VI WHETHER THE BIR CORRECTLY COMPUTED THE 1996 AND 1997 FINAL TAX ON ONSHORE INCOME. VII WHETHER THE BIR CAN LEGALLY ASSESS PBCOM FOR ALLEGED DOCUMENTARY STAMP TAX FOR 1996 AND 1997. THE COURT'S RULING The petition is partly meritorious.
C.T.A. CASE NO. 6177 8 DECISION The First. Second and Third Issues The first, second and third issues, being interrelated and pertain to deficiency assessment for income tax, will be discussed jointly. A. Income Tax for Taxable Year 1996 Petitioner was assessed by respondent of deficiency income tax in the aggregate amount of P82,566,431.61, inclusive of interest, for taxable year 1996 (Assessment No. ST-INC-96-0115-99), computed as follows: Computation of Proposed Deficiency Income Tax For the Year 1996 Net Income per Return 57,243 ,533 .00 Add: Adjustments Salaries & Wages 18,765.46 Interest income from trust 41 ,862,957.00 Interest income from others (Note A) 67,536,016.29 Accounts Written off 11 ' 796,000.00 121,213,738.75 Adjusted Net Income 178,457,271.75 Rate of Tax 35 .00% Tax Due Thereon 62,460,045. 11 Less: Payments Per Annual Return Per Quarterly Returns 2,729,700 .00 Creditable Withholding Tax 6,442,580.00 9,172,280.00 Sub-Total 53,287,765. 11 Add: Penalties Interest (4-16-97 to 6-30-99) 29 ,278 ,666.50 Compromise - 29,278,666.50 Deficiency Income Tax Year 96 82,566,431.61 (Exhibit "2 " and Exhibit "III'') From the above computations, it appears that the following items were added back to petitioner's net interest income per return: a) Accounts written-off disallowed as an expense in taxable year 1996 amounting to Pll, 796,000.00; b) Compensation not subjected to withholding tax, disallowed as an expense, amounting to P18,765.46; ~
C.T.A. CASE NO. 6177 9 DECISION c) Interest income from trust, for allegedly not being subjected to final tax, amounting to P41,862,957.00; and d) Interest income from other sources, for allegedly not being subjected to final tax, amounting to P67,536,016.29. While the amount of P6,442,580.00 was deducted as creditable withholding tax. First Issue a) Accounts written-off disallowed as an expense for taxable year 1996 amounting to Pll, 796,000.00. Petitioner's Arguments Petitioner avers that it complied with the requirements of write-off with respect to the amount ofP11,296,000.00; that the borrowers have no leviable properties; the value of the mortgaged properties (collateral) is substantially less than the outstanding loan and the expenses that will be deducted if the property was to be foreclosed. Respondent's Counter-Arguments Respondent counters that pursuant to Section 34 (E) of the NIRC of 1997, as amended, the accounts written-off were disallowed as expense, although approved by the BSP, as said accounts could not be ascertained to be worthless based on the schedule submitted; that there are lands and checks used a collateral for the loans.
C.T.A. CASE NO. 6177 10 DECISION In this regard, Section 29(e) of the NIRC of 1977, as amended, provides, as follows: "SEC. 29. Deductions from gross income. - In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: XXX XXX (e) Bad Debts. - In general. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 30 (b) of this Code." Pursuant to the foregoing provision, the requisites for deductibility of bad debts are: 1) There must be an existing indebtedness; 2) The debt must be ascertained to be worthless, as when the debtor is insolvent; 3) It must be actually charged off within the taxable year; and 4) The debt must be connected with one's profession, trade or business.
'' C.T.A. CASE NO. 6177 11 DECISION After a careful review of the evidence on record, the Court finds that petitioner failed to comply with the said requirements. Being interrelated, the first and fourth requisites will be discussed jointly. Petitioner failed to prove that the amount of P11 ,796,000.00 constitutes existing indebtedness due to petitioner that are connected with its trade or business. Without petitioner' s books of accounts and source documents, there is no way for the Court to determine whether the amount of P11 ,796,000.00 represents loans and advances that are valid, legally demandable and enforceable against the debtors, and that said amount was granted in the ordinary course of petitioner' s business. As regards the second requisite, although the Bangko Sentral ng Pilipinas ("BSP") ascertained the worthlessness and uncollectibility of the accounts and authorized that the same be written-off (Exhibits "B ", "B-1 " to "B-6 ''), under the NIRC of 1977, as amended, which is the applicable law to the instant case, the approval of the BSP is not one of the requirements for the deductibility of bad debts. Moreover, well-settled is the rule that the burden of proof is on the taxpayer to show not only that the debt is worthless but also that it became worthless during the taxable year. The burden accorded the taxpayer can be overcome if the taxpayer can point ~
C.T.A. CASE NO. 6177 12 DECISION to some certain event or events occurring within the taxable year which evidences the worthlessness of the debt (Hunsaker vs. Comm, 615 F.2d 1253). In the present case, although petitioner claims that the amount of P11 ,796,000.00 represents worthless and uncollectible accounts, and petitioner presented notices, demand letters and complaints against its creditors (Exhibits "F to "PP ") to support its claim; however, some of the documents presented by petitioner do not show any connection to the accounts subject of write-off. Specifically, Exhibit "EE ", which is an "Application With Motion To Recall Warrant of Arrest" in Crim. Case No. 3636, entitled "People of the Philippines vs. Clarita de Guzman ", does not show any iota of connection with the account of Clarita de Guzman amounting to P1 ,140,000.00 and P3 ,670,000.00, respectively, subject of write-off in the instant case. While Exhibit "CC " is an Order of the Regional Trial Court of San Fernando, La Union in Civil Case No. 5073, entitled "Philippine Bank of Communication vs. Cynthia de Guzman ", declaring defendant in default. But, nowhere in the said Order was it indicated that the said case was filed against Cynthia de Guzman in connection with the amount of P200,000.00, subject of write-off in the instant case. Moreover, petitioner failed to establish the worthlessness and uncollectibility of the following accounts : ~ ~)
C.T.A. CASE NO. 6177 13 DECISION AMOUNT NAME OF BORROWER REQUESTED FOR 1) Abat, Ernesto WRITE-OFF 2) Chan, Ernesto P150 ,000 .00 3) Chan, Laureano 100,000.00 4) Guzman, Antonio de 100,000.00 5) Guzman, Gerardo de 150,000 .00 6) Jallorena, Miguel 140,000 .00 7) Lucero, Domingo 100,000.00 8) Tan, Melchor 100,000.00 100,000 .00 In other words, other than the mere schedule of Accounts Requested for Write-Off (Exhibits "B-2" and "B-3 ''), showing the name of the borrowers, booking unit, collateral, date turned past due, amount requested for write-off and justification for write-off, petitioner did not present any proof that notices and/or demand letters were sent and/or actions were instituted against the aforementioned accounts . Even assuming arguendo that the accounts composing of the amount of P11 ,796,000.00 were indeed worthless and uncollectible, it bears stressing that in the schedule of Accounts Requested for Write-Off (Exhibits "B-2" and "B-3 ''), the dates the accounts subject of write-off turned passed due were as early as 1983, 1984, 1993. The latest is only in 1994. With said schedule showing that the component accounts in the aggregate amount of P11 ,796,000.00 became past due as early as 1983, 1984, 1993 and 1994, petitioner failed to prove that said accounts ha~
C.T.A. CASE NO. 6177 14 DECISION become worthless in taxable year 1996, the year when said bad debts were claimed as expenses. Contrary to petitioner' s claim that the accounts contained in the Schedule of Accounts Requested for Write-Off are worthless and uncollectible, however, petitioner' s witness, Pepita Bravo, on direct examination testified that petitioner was able to collect the collectible accounts from the following persons: Emesto Chan, Romano Chan, Antonio de Guzman, Gerano de Guzman, Miguel Jallorina, Rolando de Jesus, Domingo Lucero, Emesto Abad and Ariel Galvez (TSN dated October 4, 2001 , p . 28) . Petitioner, therefore, failed to comply with the second requisite. As regards the third requisite, although petitioner presented a Secretary' s Certificate regarding a Resolution dated March 26, 1996 approving the write-off of various accounts in the sum of Pl3 ,040,474.97 (Exhibit "C") and Letter dated April 26, 1996 informing the BSP of the write-off of the total accounts of P13 ,040,416.97, consisting of 20 accounts with individual balances of P1 00,000.00 or more amounting to P11 ,796,000.00, and 38 accounts with individual balances of less than P100,000.00 amounting to P1,244,474.97 (Exhibit "E'') , petitioner failed to ~
C.T.A. CASE NO. 6177 15 DECISION prove that said accounts were actually written-off from its books of accounts during the taxable year 1996. Considering that petitioner failed to comply with the prescribed requisites for the deductibility of bad debts, We uphold respondent's disallowance, as expense, the accounts written-off amounting to P11 ,796,000.00 for taxable year 1996. a-1) Accounts Written-off disallowed as expense for taxable year 1997 amounting to P22,255,863.18. As to respondent' s disallowance of accounts written-off for the year 1997 in the amount of P22,255 ,863.18, the same is erroneous and has no relevance to the instant case. Petitioner was not assessed of any deficiency income tax for taxable year 1997 in the Final Notice dated November 5, 1999 (A nnex "A", Petitionfor Review) . Second Issue b) Compensation not subjected to withholding tax, disallowed as an expense, amounting to P18, 765.46. Anent the second issue, respondent partly disallowed the salaries and wages amounting to P18,765.46 incurred by petitioner for taxable year 1996 due to alleged non-compliance with the Revenue Regulations on withholding tax on compensation, pursuant to Section 34 (k) ofthe Tax Code. ,
C.T.A. CASE NO. 6177 16 DECISION Petitioner counters that respondent arbitrarily imputed an alleged variance of P18,765.46, without explaining how said amount was arrived at. After a careful examination of the records of the case, the Court finds that in respondent's Analysis of Withholding Taxes on Compensation For Taxable Year 1996 (Exhibit "2 ", BIR Records, p. 99), respondent erroneously used the amount of "Compensation and Fringe Benefit", per FS in comparing with petitioner's salaries and compensation, per alphalist to arrive at the alleged salaries and wages expense not subjected to withholding tax in the amount ofP18,765.46. Since what is being disallowed is petitioner' s claimed compensation expense allegedly not subjected to withholding tax, respondent should have compared the compensation per alphalist with petitioner's claimed "Salaries and Wages", per Account Information Form (BIR Form 1702AIF- I , BIR Records, p. 380). This is so, because the amount of "Salaries and Wages", per Account Information Form, is the one that is being deducted in the computation of petitioner' s taxable income. Considering that respondent used an erroneous basis m determining whether petitioner' s salaries and wages expense was indeed subjected to withholding tax, it necessarily follows that the amount of ~
C.T.A. CASE NO. 6177 17 DECISION Pl8,765.46 found by respondent, as salaries and wages allegedly not subjected to withholding tax, is also erroneous. Thus, respondent' s disallowance of the amount of Pl8,765.46, as deduction from gross income, is without factual and legal basis. c) Interest income from trust, added to the taxable income for allegedly not being subjected to final tax, amounting to P41,862,957.00. Respondent added the taxable income from trust amounting to P41 ,862,957.00 for taxable year 1996 to petitioner's taxable income for petitioner' s failure to submit proof that said amount was subjected to final tax. Petitioner, on the other hand, counters that respondent' s inclusion of the interest income from trust ofP41 ,862,957.00 to petitioner' s income subject to corporate income tax is tantamount to double taxation for the following reasons: (1) said interest income not subjected to income tax was earnings from investment of petitioner' s capital (equity) funds generated from the public offering of its shares; (2) said interest income was previously subjected to final withholding tax of 20%, which the BSP withheld; and (3) said interest income was already added, as an adjustment to the account "other income" in petitioner's audited financial ~
C.T.A. CASE NO. 6177 18 DECISION statement, as evidenced by petitioner's Working Profit and Loss for Taxable Year 1996 (Exhibits "DDD " and "DDD-1 "). An examination of the records shows that other than petitioner's bare allegation that the amount of P41,862,957.00 pertains to earning from investment of petitioner's capital (equity) funds generated from the public offering of its shares, petitioner did not present any documentary evidence that will determine the nature of the amount of P41 ,862,957.00. Said proof of the nature of the amount ofP41 ,862,957.00 is material for purposes of determining the applicable tax/tax rate, considering that petitioner claims that the amount of P41,862,957.00 has been previously subjected to final tax. Petitioner's allegation that the amount ofP41,862,957.00 is subject to final tax and therefore should not form part of its taxable income is even contrary to its own averments and actuations. Petitioner averred, also tried to prove during trial (TSN dated September 16, 2004, pp. 9-11) , and even presented documentary evidence (Exhibits "DDD " and "DDD-1 '') that the amount ofP41,862,957.00 was added as an adjustment to petitioner's "net interest earnings" reflected in its audited Financial Statements ("FS"). Petitioner's act of adjusting its net interest earnings per FS by adding the amount of P41,862,957.00 clearly shows that said amoun~
C.T.A. CASE NO. 6177 19 DECISION was not subjected to final tax, since petitioner believes that an income subject to final withholding tax is not required to be reported in the income tax return of the taxpayer (Petitioner 's Memorandum dated May 10, 2007, p. 12). In fact, during the trial, petitioner's witness, Annabelle Yeo, testified that petitioner did not submit documentary evidence to prove that correct taxes were withheld and remitted to respondent on the interest income from trust (TSN dated September 16, 2004, pp. 17-18). Petitioner's contention that since the amount of P41 ,862,957.00 was already added to petitioner's net interest earnings perFS, as shown in its Working Profit and Loss for Taxable Year 1996 (Exhibits "DDD " and "DDD-1 "), respondent's inclusion in the computation of petitioner' s deficiency income tax is tantamount to double taxation, is devoid of merit. A perusal of said Working Profit and Loss for the Taxable Year 1996 shows that the amount ofP32,685,333.00 was added as an adjusting entry to the account "Interest Income on Trading and Investment Securities". A careful examination of Part V of petitioner's Account Information Form (BIR Form 1702AIF-1 ), attached to the Annual Income ~
C.T.A. CASE NO. 6177 20 DECISION Tax Return for 1996, reveals that the amount of interest income on "trading account securities" subjected to corporate income tax reflected only the amount of P1 ,736,876.00. A comparison of the trading account securities, per Account Information Form with petitioner' s Schedule of Interest Income and Other Income for the period ending December 31 , 1996 (Exhibit "FFF '') shows that the amount of P1,736,876.00 trading account securities reflected in petitioner's Account Information Form (subjected to corporate income tax), consisted only of the following accounts: (I) Interest income - taxable investment p 538,020 .83 (2) Interest income - reverse repo (RRP) 1, 181 ,894.60 (3) Interest income on trading and investment sec 16,960 .00 - branches P1,736,875.43 Total P1,736,876.00 Rounded off to The adjusting entry of P32,685 ,333.00 (forming part of the P41 ,862,957.00 alleged income from trust) was not reported in petitioner' s Account Information Form, as interest income on trading account receivables. Clearly, notwithstanding said petitioner' s adjustment of the alleged income from trust to form part of its net interest earnings per FS, the adjustment of P41,862,957.00 (consisting of addition to interest on trading and investment account in the amount of P32,685 ,333.00 and ~
C.T.A. CASE NO. 6177 21 DECISION deduction in the interest expense in the amount of P9, 177,624.00 (Exhibits "DDD " and "DDD-1 ''), was still not reported in petitioner' s Account Information Form, as one of the taxable incomes. Therefore, contrary to petitioner's claim, the adjustment ofP41,862,957.00 was not subjected to corporate income tax. Considering that under Section 28 of the NJRC of 1977, as amended, gross income is defined as "all income from whatever source derived, including (but not limited to) the following items: xxx (4) Interest; xxx", respondent's addition ofthe amount ofP41 ,862,957.00 to petitioner's net income per return for purposes of computing petitioner's deficiency income tax for taxable year 1996 (Exhibit "III'') has therefore legal and factual basis. Accordingly, We sustain respondent's inclusion of the amount of P41 ,862,957.00 to petitioner' s income subject to corporate income tax. d) Interest income from other sources, also added to the taxable income for allegedly not being subjected to final tax, amounting to P67,536,016.29. Respondent avers that petitioner failed to submit documents to prove that the amount of P67,536,016.29, computed as follows , was not subjected to final tax: ~
C.T.A. CASE NO. 6177 22 DECISION Interest income per Reconciliation of Income & Retained Earnings On Trading Account Securities p 71 ,106,609.28 On Tax Paid Investment 124,117,261.66 On Tax Paid Investment (Acctg) 199,750.69 On Interbank Call Loans 171,472,905.66 On Tax Paid Trading Gain 23,100,380.00 837~320.00 P390~834~227.29 Less: Interest income per F/S On trading & investment P233,767,718.00 On deposit with banks 89~530~493.00 P323,298,211.00 Understatement of Interest Income P67,536,016.29 (Note A, Exhibits "2" and "III'') Petitioner counters that (1) respondent misclassified certain items of interest and erroneously applied the corresponding tax rate; (2) in computing the alleged deficiency income tax for the taxable years 1996 and 1997, respondent failed to properly consider the sub-accounts classified respectively under the account Interest Income, namely: (i.) Interest Income on Receivables from Customer; (ii.) Interest Income on Deposit with Banks; and (iii.) Interest Income on Trading and Investment Securities (Exhibit "JJJ-1 '') ; (3) the BIR examiners unjustifiably failed to include in their analysis of petitioner's interest income the account "Interest Income on Receivables from Customers". The only items considered and included were "Interest Income on Deposit with Banks" and "Interest Income on Trading and Investment Securities"; and (4) ~ Q)
C.T.A. CASE NO. 6177 23 DECISION during the trial, petitioner proved that what the BIR examiners did was to obtain some of the component accounts (or sub-accounts) of the "Interest Income on Deposit with Banks" and "Interest Income on Trading and Investment Securities" only. That, in making said comparison or reconciliation, the account "Interest Income on Receivables from Customer" was not taken into consideration. Thus, a variance would definitely and logically result therefrom. Hence, it is erroneous for the BIR examiners to treat such variance, which they themselves had created, as deficiency income tax for the years 1996 and 1997. 1. Interest Income on Receivables from Customers, including Interbank Call Loans ofP171,472,905.66. While We agree with petitioner that its account "Interest Income" consists of the following sub-accounts: (i.) Interest Income on Receivables from Customer; (ii.) Interest Income on Deposit with Banks; and (iii.) Interest Income on Trading and Investment Securities (Exhibit "JJJ-1 ''), We, however, do not agree with petitioner that respondent examiner's non-inclusion of the account "Interest Income on Receivables from Customers" in its comparison/reconciliation of petitioner's interest income is unjustifiable. ~
C.T.A. CASE NO. 6177 24 DECISION Respondent is correct in not deducting the account "Interest Income on Receivables from Customers" from the said amount of P390,834,227.29, consisting of the sum of interest income items found by respondent that were not subjected to corporate income tax. A review of the records reveals that the account "Interest Income on Receivables from Customers" is composed of the following sub- accounts: (Exhibit "FFF") : Head Office Branches Total-Regular FCDU Total Per Books Adjusting Audited 1,9 13,036,741.21 Entries Ba lance Interest Income- P518,236,828.1 ~ Discount Earned Interest Income- 9,462 .5 ( Demand Loans Interest Income- I76,356,037.4( Time Loans Interest Income-Past 38 ,742,232.7~ Due/ TTL Interest Income- Import Bills & 93 , 208 , 595.2~ Acceptances Interest Income- Interbank Call 3, 15 6,990.50 Loans Receivable Interest Income- Interbank Loans Receivable-Tx Pd 171 ,472,905.66 fNT EREST INCOME ON I,00 I, 183,052.2 1 911 ,853,689.00 125,936,342.0( 2,038,973 ,083.21 25,455,7 17.79 2,064,428,80 I.OC RECE IV ABLES FROM CUSTOMERS A comparison of the above audited balance of Interest Income on Receivables from Customers with the Interest Income on Receivables from Customers, as reported in petitioner's Account Information Form, subjected to corporate income tax, shows a difference ofP297,409,248.0~
,� C.T.A. CASE NO. 6177 25 DECISION (P2,064,428,801.00- P1,767,019,553 .00). Said difference was accounted by this Court, as follows: Interest income receivable -FCDU (subject to a Amount Exhibit 125,936,3 42.00 separate return ) "FFF" Interest Income-Interbank Loans Receivable-Tx Pd 171 ,472,905.66 ?297,409,247. 66 "FFF" To ta l rounded off into P297,409,248.00 On the basis of the foregoing, it is clear that the amount of P171,472,905.66, representing interest income-Interbank Loans Receivable-Tx Pd was not declared by petitioner, as income subject to corporate income tax. Hence, respondent is correct when it did not deduct the total amount of interest income on receivables from customer from the sum of interest income items found by respondent that were not subjected to corporate income tax. Petitioner, however, contends that the above interest income on interbank lendings (Interbank Loans Receivable-Tx Pd) was subjected to 20% final withholding tax by petitioner's borrowers; hence, the same should not be subjected to corporate income tax. Further verification of the records reveals that out of the interest income from Interbank Loans Receivable of P171 ,472,905 .66, only the amount of P128,518,452.48 was subjected to 20% final withholding tax, pi
C.T.A. CASE NO. 6177 26 DECISION as certified by the Court-Commissioned Independent CPA (Exhibit "MA- 3", TSN dated Jan. 22, 2003, p . 15) . This is evidenced by BIR Forms No. 1745 and certifications from various banks {Annexes "B-1 " to "B-24 " of Exhibit "MA -3 ") that the total amount of P25,703 ,690.00, representing 20% final tax, was withheld on the amounts due from them (Exhibit "MA- 3 ''). The Court, therefore, finds that the Interest Income - Interbank Loans Receivables - Tax Pd that was not subjected to final withholding tax and was not included in the income subjected to corporate income tax and should therefore be added to petitioner's income subject to corporate mcome tax 1s only P42,954,453.18 (P171,472,905.66 P128,518,452.48), and not the whole amount of P171 ,472,905.66, as computed by the respondent. 2. Interest Income on Trading Account Securities of P71,106,609.28, on Tax Paid Investment of P124,117,261.66, on Tax Paid Investment (Acctg) of P199,750.69, and on Tax Exempt Investment of P83 7,320. 00. In the reconciliation of petitioner's income (Note A, Exhibits "2" and "III''), respondent deducted the amount of P233,767,718.00 representing Interest Income per FIS on Trading and Investment Securities, from the amount of P390,834,227.29, the sum of interest income items found by ~
C.T.A. CASE NO. 6177 27 DECISION respondent that were not subjected to income tax. Considering that in petitioner's Schedule of Interest Income and Other Income (Exhibit "FFF "), the accounts interest income on Trading Account Securities of P71 ,106,609.28, Tax Paid Investment of P124,117,261.66, Tax Paid Investment (Acctg) of P199,750.69 and Tax Exempt Investment of P837,320.00 are component accounts of Interest Income on Trading and Investment Sec of P233 ,767,717.08, respondent' s findings that said accounts were not subjected to corporate income tax was deemed offset. Respondent, having accounted said understatement of interest income, the deficiency assessment on Trading Account Securities ofP71 ,106,609.28, Tax Paid Investment ofP124,117,261.66, Tax Paid Investment (Acctg) of P199,750.69 and Tax Exempt Investment of P837,320.00 are hereby ordered cancelled. 3. Interest Income on Tax Paid Trading Gain of P23,100,380.00 vis-a-vis Deposit with Banks of P89,530,493.00. In respondent's computation of petitioner' s understatement of interest income (Note A, Exhibits "2 " and "III''), respondent found that the amount of P23 ,100,380.00 interest income on tax paid trading gain was not subjected to corporate income tax. In reconciling said deficiency assessment, respondent compared the amount of P23 ,100,380.00, {9R
C.T.A. CASE NO. 6177 28 DECISION allegedly pertaining to tax paid trading gam, with the amount of P89,530,493.00, representing interest income per F/S on deposit with banks, by deducting the amount of P89,530,493.00 from the amount of P390,834,227.29, consisting of the sum of interest income items found by respondent that were not subjected to income tax. We find this erroneous considering that per petitioner' s Schedule of Interest Income and Other Income (Exhibit "FFF") , interest income on tax paid trading gain is not a component account of the interest income on deposit with banks. The account interest income on deposit with banks with a total amount of P89,530,493.00 consists only of the following accounts: Interest income � with foreign banks and interest income-deposit with BSP. � Since the interest income on tax paid trading gam of �� P23 ,100,380.00 is not a component of the account interest income on deposit with banks of P89,530,493.00, the Court finds that there is a mismatching in respondent's computation of petitioner's understatement of interest income with respect to these two accounts. Further examination of the records shows that respondent failed to provide a computation on how the deficiency assessment on tax paid trading gain of P23 ,100,380.00 was arrived at.
C.T.A. CASE NO. 6177 29 DECISION We, therefore, cancel the deficiency income tax assessment with respect to the amount of P23 ,100,380.00 for lack of factual and legal basis. In sum, out of the understated interest income of P67,536,016.29 found by the respondent, the Court finds that petitioner is liable to pay deficiency income tax of P42,954,453.18 only, computed as follows : PER PER TH IS COURT'S FINDINGS RESPON DENT'S Interest Income Ordered Defi ci ency (1) On Interbank Call Loans FIN DINGS C ance ll ed/ Income Tax Excluded from Pl71 ,472,905.66 the Assessment P42,954,453 .18 p 128,518,452.48 (2) On Trading Account Securi ties 71 , 106,609.28 71 , 106,609.28 On Tax Paid Investment 124, 117,26 1.66 124, 117,26 1.66 On Tax Paid Investment (Acctg) 199,750.69 199 ,7 50.69 On Tax Exempt Govt 83 7,320.00 83 7,320.00 Securities (3) On Tax Paid Trading Gai n 23, I00,380.00 23, I00,3 80.00 Total Less: Interest income per F/ S P390,834,22 7.29 P347,879,774. 1I P42,954,453 .18 On trading & investment 233 ,767,718.00 233,767,7 18.00 On deposit wi th banks 89,530,493.00 89,53 0,493.00 Sub-total Understatement of Interest 323,298,2 11.00 323,298,2 11.00 Income P67,536,016.29 P24,581,563.11 P42,954,453.18 e) Creditable withholding tax ofP6,442,580. 00. Petitioner contends that respondent failed to recogmze the creditable withholding tax m favor of petitioner in the amount~
C.T.A. CASE NO. 6177 30 DECISION P21 ,945 ,212.29 (Exhibits "QQQ "and "RRR '') . As a result, petitioner' s income tax liability has increased by P21 ,945,212.29. A perusal of the records shows that most of the amounts claimed as creditable withholding tax by petitioner pertain to capital gains tax assumed and paid by petitioner's buyers. Petitioner contends that pursuant to Revenue Memorandum Circular ("RMC '') No. 7-90, all sales, exchanges, or transfers of real properties (whether classified as ordinary or capital asset) by corporations, consummated on or after January 1, 1990, are subject to creditable withholding tax. That the amount of withholding tax paid is creditable against its income tax liability for the quarter in which payment or remittance of tax was made. Thus, petitioner claims that it is entitled to deduct those creditable withholding taxes for the sale of its assets in 1996 from its income tax liability for the same taxable year. Paragraph 2 ofRMC No. 7-90, however, provides: "2. When tax deducted and withheld creditable. In case of a corporation all sales or exchange of real property, whether classified as ordinary or capital asset, shall be subject to the expanded withholding tax. The amount of withholding tax paid during the quarter to the BIR evidenced by Confirmation/Official Receipts (CR/ROR) and covered by BIR Form Nos. 1743W and 1743-B, is creditable against its income tax liability for the quarter in which payments or ~ remittance of taxes were made. ~)
C.T.A. CASE NO. 6177 31 DECISION On the other hand, the sale or exchange of real property by an individual, estate, or trust becomes subject to withholding tax only if the property is classified as an ordinary asset. The corresponding withholding taxes deducted and withheld, which are paid or remitted to the BIR (CR/ROR and BIR Form Nos. 1743W and 1743-B, may be credited against his income tax liability for the taxable year. No withholding of tax is required where the real property sold by an individual is a capital asset subject to the 5% capital gains (final) tax." Pursuant to the foregoing provision, all sales of real property, whether classified as ordinary or capital asset, by a corporation, shall be subject to the expanded withholding tax. The amount of withholding tax paid during the quarter, as evidenced by Confirmation/Official Receipts (CR/ROR) and covered by BIR Form Nos. 1743W and 1743-B shall be creditable against its income tax liability. In this regard, in Banco Filipino Savings and Mortgage Bank vs. Court ofAppeals, 519 SCRA 99, the Supreme Court ruled as follows: "Petitioner also asserts that the confusion or difficulty in the implementation of Revenue Memorandum Circular 7- 90 was the reason why CDB took upon itself the task of withholding the taxes arising from the sale, to ensure accuracy. Assuming this were true, CDB should have, nevertheless, accomplished the necessary returns to clearly identify the nature of the payments made and file the same with the BIR. Section 2 of the circular clearly provides that the amount of withholding tax paid by a corporation to the BIR during the quarter on sales or exchanges of property and which are creditable against the corporation's tax liability are ~
C.T.A. CASE NO. 6177 32 DECISION evidenced by Confirmation/Official Receipts and covered by BIR Form Nos. 1743W and 1743-B. On the other hand, Revenue Regulation 6-85 states that BIR Form No. 1743.1 establishes the fact of withholding. Since no competent evidence was adduced by petitioner, the failure to offer these returns as evidence of the amount of petitioner's entitlement during the trial phase of this case is fatal to its cause". A perusal of the documentary evidence presented by petitioner shows that most of them are Capital Gains Tax Returns (BIR Form 1701- E/A), and not BIR Form Nos. 1743W and 1743-B, as prescribed by RMC No. 7-90. Petitioner, therefore, failed to comply with the provisions of RMC 7-90. Pursuant to the aforecited case, failure to offer competent evidence is fatal to petitioner's case. Also, it bears stressing that in a Resolution dated May 18, 2005, this Court denied admission most of the documentary evidence offered by petitioner in support of its claim for creditable withholding tax of P21 ,945,212.29 for petitioner's failure to present the originals thereof. In this regard, it is with more reason that We should deny the amounts claimed by petitioner as creditable against its income tax liability with regard to those exhibits that were denied admission. Finally, further verification shows that some of the amounts included in petitioner's Schedule of Creditable Withholding Tax were not supported by documentary evidence.
C.T.A. CASE NO. 6177 33 DECISION For all the foregoing, this Court allows the amount of P8,683,575.00 only, as creditable withholding tax against petitioner's income tax liability. The Schedule of Creditable Withholding Tax Allowed and Disallowed, as found by this Court, is hereby made part and parcel of this decision as Annex "A". In sum, petitioner is liable to pay deficiency income tax for taxable year 1996 in the reduced amount of P64,154,921.34 (inclusive of deficiency interest), computed as follows: Net Income per Return P57,243,533.00 Add: Adjustments Pll ,796,000.00 P96,613,410 . 18 Accounts Written-off 41 ,862,957.00 p 153,856,943.18 Interest Income from trust 42,954,453.18 Interest Income from others 35% Adjusted Net Income P53,849,930 . 11 Rate of Tax Tax Due Thereon P2 ,729 ,700 .00 Less: Pay ments Prior years credit (1995 Corporate 8,683,575.00 11 ,413,275.00 Annual Income Tax Return, BlR P42,436 ,655 . 11 Records, p. 368) Creditable Withholding Tax (Hereto 21,718,266.23 attached as Annex "A'') P64 154 921.34 Basic deficiency Income Tax Add : Interest (4-16-97 to 11-5-99) Deficiency Income Tax Liability for 1996 Fourth Issue Whether the basis used by the BIR in computing the gross receipts tax is correct.
.� C.T.A. CASE NO. 6177 34 DECISION B. Percentage Tax (Gross Receipts Tax) For Taxable Year 1996 Respondent alleged that the deficiency gross receipts tax for 1996 amounting to P8,814,258.61 represents the discrepancy between the GRT returns filed and the computation based on audit, pursuant to Section 121 of the Tax Code. Respondent's computation of said deficiency is reproduced hereunder, to wit (Exhibit "HHH"): Interest Income 2,064 ,428 ,801.00 2,387,727,012 .00 On Receivable from customer 233,767 ,718.00 On Trading and investment securities 89,530,493.00 468,697,681 .29 On deposits with banks 2,856,424,693.29 67,536 ,016 .29 Other Income 4 I,862,957.00 238,475,011.31 Other income (see income notes) 117,904,601.00 2,617,949,681.98 Interest income from trust 36,171,770.00 Service charges 205,222.337.00 79,451,342 .00 Trading foreign exchange gains 2,697 ,401,023.98 Miscellaneous 33,939,448.31 837,320.00 88,405,963.00 Gross Income perFS 345,604.00 2,608,995 ,060.98 Less: 2.498,432,932 . 11 202,981,061.00 20% Final Tax paid on Income 37I 578.00 110,562, 128.87 Tax exempt income 5% Dividend Income 34,986,542.00 FCDU 973 ,803.00 5,528,106.44 Share in subsidiary 3,286,152. 16 Net Taxable Income 43,490,997.00 8,814,258.6~ Add: Unearned discount, end 29,332,574.00 Advance rental received 1,019,703.00 Accrued interest receivable, beg Sub-total 58,053,686.00 Less: Unearned discount, beg Advance rental 1995 Accrued interest receivable, end Tax base per verification Tax base per GRT Di fference Rate of Tax Add: Interest Compromise Deficiency on GRT
C.T .A. CASE NO. 6177 35 DECISION Petitioner claims that (1) in computing the GRT for the year 1996, the basis used by the BIR was erroneous; (2) the BIR examiners committed a double inclusion of certain income that was already included under its account "Interest Income". The "Analysis of GRT for the Year Ended 1996" demonstrates that the BIR considered twice the accounts "Interest Income from Trust" amounting to P41 ,862,957.00 and "Other Income" amounting to P67,536,016.29, which already formed part of the account "Interest Income" reflected in its audited financial statements (Exhibit "HHH ''); (3) in order to properly determine the tax base for GRT, only the account "Interest Income on Receivable from Customer" must be considered in the computation, and the variance of P67,536,016.29 for 1996 and P12,781 ,130.78 for 1997 must not be added anymore because they are already part of the said account; and (4) as proved during the trial, the main reason for the assessment of deficiency GRT was the double counting of "Other Income" and "Interest Income from Trust" (Exhibit "KKK '') . Other Income ofP67,536,016.29. We agree with the petitioner that respondent' s addition of the amount of P67,536,016.29 to petitioner' s income subject to GRT is tantamount to subjecting to GRT said income twice. In respondent's
C.T.A. CASE NO. 6177 36 DECISION computation of deficiency GRT (Exhibit "HHH''), respondent already added the following items of interest mcome reflected m petitioner's audited FS: Interest Income P2,064,428,80 1.00 2,387,727,0 12.00 On Receivable from customers 233, 767,718 .00 On Trading and investment securities 89,5 30,493.00 On Deposit with banks P117 ,9 04 ,601.00 35 9,298, 708 .0 0 Other Income 36, 171 ,770.00 P2 ,747 ,025, 720 .00 Service Charges Trading foreign exchange gains 205,222,3 37.00 Mi scell aneous Gross Income per FS It is well to note that the amount ofP67,536,016.29 (Exhibit "III'') is composed of the above-mentioned accounts, namely: (1) interest income on receivable from customers, specifically interest income-interbank loans receivable-txpd amounting to P171 ,472,905.66 (Exhibit "FFF ''); (2) interest income on trading and investment sec, specifically, (i) interest income-trading account securities-tx pd amounting to P71 ,106,609.28, (ii) interest income-tax paid investment amounting to P124,117,261.66, (iii) interest income-tax exempt investment amounting to P837,320.00, and (iv) interest income-tax paid investment (Acctg) amounting to P199,750.69 (Exhibit "FFF '') ; and (3) trading foreign exchange gain or tax paid foreign gain amounting to P23 ,100,380.00. Clearly, the amount of P67,536,016.29 already formed part of the above gross income per FS.
C.T.A. CASE NO. 6177 37 DECISION To add the amount of P67,536,016.29 again to petitioner's gross income perFS would be tantamount to subjecting said amount twice to GRT. Interest Income from Trust ofP41,862,957.00. As regards the interest income from trust, petitioner contends that said amount was already adjusted by its external auditors to form part of the account "Interest Income" reflected in its audited financial statements (Exhibit "HHH"). However, a perusal of petitioner's Working Profit and Loss Statement (Exhibit "DDD ") shows that out of the total interest income from trust of P41,862,957.00, only the amount of P32,685,333.00 was added to trading and investment securities to arrive at the audited amount of P233,767,718.00, reflected in petitioner's FS (Column 6, Row 4, Exhibit "DDD "). The remaining amount of P9, 177,624.00 was adjusted to interest expense (Column 6, Row 7, Exhibit "DDD ") . Thus, what was added by the external auditors to petitioner's gross interest income was only the net amount of P32,685,333.00, and not the whole/gross amount of P41,862,957.00. Since petitioner failed to prove that the balance of P9,177,624.00 (P41,862,957.00- P32,685,333.00) was included to form part of petitioner's gross income, then said amount must be added to the tax base for purposes of computing the deficiency GRT. ~
C.T.A. CASE NO. 6177 38 DECISION 20% Final Tax Deductedfrom the Gross Income per FS Petitioner contends that respondent understated the item "20% Final Tax Paid on Income", representing the 20% final withholding tax on income from its investment in government securities, trading securities, etc; the BIR examiners erroneously recorded or deducted the amount of P33 ,939,448.31 , instead of P74,206,854.00, thereby resulting to an understatement by P40,267,406.00 of the amount of final tax actually paid. Petitioner's contention is without merit. It must be noted that for purposes of computing the GRT, the 20% final withholding tax is not excluded from the tax base. In China Banking Corporation vs. Court of Appeals, 403 SCRA 643, involving the issue of whether the 20% final withholding tax on interest income should form part of CBC ' s gross receipts in computing the GRT on banks, the Supreme Court categorically ruled in the negative, to wit: "We rule that the amount of interest income withheld in payment of the 20% final withholding tax forms part of CBC's gross receipt in computing the gross receipts tax on banks. " Pursuant to the above jurisprudence, We find that there is no understatement of P40,267,406.00 by the respondent. In fact, the final ~ ~)
C.T.A. CASE NO. 6177 39 DECISION withholding tax on treasury bills withheld by the Bureau of the Treasury in the amount of P33,939,448.31 should not be deducted from the gross income perFS. To do otherwise would be contrary to the above settled doctrine. Petitioner, therefore, is liable for deficiency GRT for 1996 in the reduced amount of P3,450,218.30 (inclusive of deficiency interest), computed as follows: Interest Income ?2,064,428,80 1.00 On Receivable from customers 233,767,718.00 On Trading and investment securities 89,530,493.00 P2,387,727,012.00 On deposit with banks P9 , 177 ,624.00 368,476,332.00 Other Income 117,904,601.00 P2, 756 ,203,344.00 Interest income from trust 36,171,770.00 Service charges 205,222,337.00 Trading foreign exchange gains Miscellaneous 837,320.00 204,535,563.00 345,604.00 2,551,667,781.00 Gross Income per FS 202,981,061.00 Less: 371,578.00 Tax exempt income 34,986,542.00 79,45I,342.00 Dividend income 973,803 .00 2,631 , 119, 123.00 FCDU Share in subsidiary 43,490,997.00 Net Taxable Income Add: 29,332,574.00 88,405,963.00 Unearned discount, end I,019,703 .00 2,542,713,160.00 Advance rental received 2,498,432,932.11 Accrued interest receivable, beg 58,053,686.00 Sub-total 44,280,227.89 Less: 5% Unearned discount, beg Advance rental 1995 P2,2I4,01l.39 Accrued interest receivable, end 1,236,206.91 Tax base per verification Tax base per GRT P3,450,218.30 Difference Rate of Tax Basic deficiency GRT Add: Interest (01-21-97 to 11-05-99) Deficiency GRT for 1996
,� C.T.A. CASE NO. 6177 40 DECISION Fi(th Issue Whether the basis used by the BIR in computing the final withholding tax on "Interest Expense on Borrowings" is correct. C. 20% Final Tax For Taxable Year 1997 Respondent computed the 20% final tax on interest expense from savings, time deposits and other deposit substitutes for taxable year 1997 based on Section 24(e) of the Tax Code, which resulted to the deficiency final tax on interest expense amounting to P14,841,399.30 (Exhibit "2"), computed as follows: Interest Expense on Deposits (Per FS) 44, 156,250.30 I ,758,458,712.00 Interest Expense on Borrowed Funds 13 413.97 768,283,055 .00 Total Less: Interest Expense (FCDU) 73,456,5 12.08 2,526,741 ,767.00 Interest Expense on RBU 85,133,854.16 395,844,643.00 Less: Tax Exempt (EI & RP) 111 ,645 ,83 1.08 136.440,557.11 2, 130,897, 124.00 Agri Loan Fund 4,172,661.78 Tax Base 44,169,664.27 Rate of Tax 2,086 ,727,459 .73 Final Tax Due Less: Tax Paid per Return 20% 417 ,345 ,491.95 1st Quarter 2"d Quarter 406,676,754.43 3'd Quarter I 0,668, 737 .52 4th Quarter Sub-total 4,172,661.78 Interest ( 1-26-96 to 12-31-99) Pl4,841,399.3~ Compromise Deficiency 20% Final Tax
�' C.T.A. CASE NO. 6177 41 DECISION Petitioner contends that the basis of the BIR's computation of the Final Withholding Tax is overstated. Accordingly, this computation includes the following types of interest expense, which are not subject to 20% final withholding tax, but to ordinary income tax, namely: a) Interest paid on Bills Payable (Borrowed Funds) - Private Firms and Individuals; b) Interest paid on Borrowed Funds - Interbank Call Loans; c) Other Expense - Premium Paid. Petitioner claims that (1) the interest paid on Bills Payable represents the interest payments on direct borrowings it obtained from private firms (other than banks and non-bank financial intermediaries) and individuals for the limited purpose of financing its needs, hence, not subject to the 20% final tax; (2) the interest payments on the inter-bank call loans cover the deficiency in reserves are not considered as deposit substitute, hence, any interest thereon is not subject to the 20% withholding tax; and (3) the other expense account represents premium paid on foreign exchange forward contracts with clients, which is different from interest income.
C.T.A. CASE NO. 6177 42 DECISION Petitioner further argues that of the interest expense incurred in Foreign Exchange Forward Contracts for 1997, a total of P2,251,698.91 represents revaluation gains that were not subject to income or other taxes (Exhibit "AAA-4 "). Although petitioner contends that respondent's computation of deficiency final tax is overstated smce there are expenses that are allegedly not subject to final tax, but to ordinary income tax, petitioner failed to establish how much of said interest expense computed by the respondent was not subject to interest income. Petitioner only made a general statement that part of the interest expense of P2,526,741,767.00 was not subject to final tax for the aforesaid reasons stated by petitioner. Without presentation of concrete documentary proof to support its claim, there is no way for the Court to determine the veracity of petitioner's claim. Hence, We are constrained to uphold respondent's assessment on deficiency final withholding of P14,841,399.30. D. 10 % Onshore Final Taxes for Taxable Years 1996 and 1997 Respondent assessed petitioner of deficiency final taxes on onshore income for taxable years 1996 and 1997, in the amounts ofP2,495,267.10 and P762,860.79, respectively, pursuant to Section 27(D)(3) of the Tax Code, computed as follows: ~ {;) ;
C.T.A. CASE NO. 6177 43 DECISION Taxable Year 1996 Onshore Income Subject to I0% Final Tax p 125,936,342.00 Rate of Tax Tax Due Thereon 10% Less: Tax Absorb by Borrower Sub-total 12,593,634.20 Less: Payments - First Quarter Second Quarter 12,593,634 .20 Third Quarter Fourth Quarter 11028,112.84 Sub-total I ,565,521.36 Add: Penalties Interest ( 1-26-97 to 12-31-99) 929,745 .74 929,745 .74 Compromise P2,495,267.10 Deficiency 10% Final Tax - (Exhibit "2 ") Taxable Year 1997 Onshore Income Subject to I0% Final Tax P407 ,806,947 .00 10% Rate of Tax P40, 780,694.70 Tax Due Thereon - Less: Tax Absorb by Borrower P40 ,780 ,694 .70 Sub-total I, 736,834.00 Add : All others P42,517 ,528 .70 Sub-total 1,736,834.00 P40 ,780,694 .69 Less: Tax Payments (FCDU QRT) P40,232,312.34 First Quarter 237,661.85 548 ,382 .36 Second Quarter 534, 842 .77 214,478.43 P762 860.79 Third Quarter 381,969.39 (Exhibit "2 '') ~ Fourth Quarter 582,360.00 Onshore Income Subject to 10% Final Tax Less: Payments (Per 1743w WCI90 [10%] January 2,553,065.27 February 2,215,864. 13 March 2,565,927 .26 Apri l 2,680,966 .54 May 2,783,696.75 June 2,786,634.62 July 3,507,267.01 August 3,649,330.23 September 4,033,713 .61 October 4,628,649 .66 November 4, 180,792.88 December 4,646,404 .38 Sub-total Add : Penalties Interest ( 1-26-98 to 9-15-99) 2 14 ,478.43 Compromise - Deficiency 10% Final Tax ~)
C.T.A. CASE NO. 6177 44 DECISION Petitioner avers that (1) in computing the 1996 and 1997 Final Taxes on Onshore Income, respondent included certain incomes which were already subjected to Final Withholding Tax; and (2) the deficiency final tax resulted from respondent's failure to consider the taxes already withheld by borrowers/clients amounting to P763,980.52 and P661,142.61 for the years 1996 and 1997, respectively, as shown in the "Comparison of the BIR Assessment and the Bank's Verification of the 10% Final Tax" for the taxable years 1996 and 1997. As summarized and certified by the Court-Commissioned Independent CPA, the amounts of P763,980.52 and P661,142.61, corresponding to 10% final withholding taxes for 1996 and 1997, respectively, were assumed and paid by petitioner's borrowers, to wit: Date Withholding Agent TIN of 10% Tax 10% Tax Remitted Withholding Withheld Withheld in US$ in Peso Agent 1996 Philippine Global Communications, Inc. 4,976 .56 130,346.12 10-Apr Philippine Global Communications, Inc. 000-665-693 4,695 .83 123 ,040.23 10-Jul Philippine Global Communications, Inc. 000-665-693 4,732.67 124,317.72 10-0ct Manila Electric Company 000-665-693 3, 133.90 82 ,061.10 24-Apr Manila Electric Company 350-000-101-528 2,642 .77 69, 171.97 25-Jul Manila Electric Company 350-000-101-528 2,396.64 62 ,910.47 25-0ct 350-000-10 1-528 PhilipJ>ine Global Communications, Inc. 4,419.25 116,305.79 1997 Manila Electric Company 000-665-693 2,123 .35 55,827. 12 10-Apr 350-000-101-528 $29 120.97 763 980.52 27-Jan TOTAL FOR 1996 350-000-101-528 1,788.46 47 ,074.16 1997 Manila Electric Company 350-000-101-528 1,496.40 39,451.01 25-Apr Manila Electric Company 350-000-101-528 1,254.17 38,064.03 25-Jul Manila Electric Company 000-665-693 3,972.22 104 ,727 .64 25-0ct Philippine Global Communications, Inc. 000-665-693 4,038 .16 106 ,607 .31 10-Apr Philippine Global Communications, Inc. 000-665-693 3,791.67 134,850.63 10-Jul Philippine Global Communications, Inc. 10-0ct
C.T.A. CASE NO. 6177 45 DECISION 1998 Philippine Global Communications, Inc. 000-665-693 3,515.19 157,8 10.99 12-Jan Philippine Global Communications, Inc. 000-665-693 929.89 32,556.84 24-Jan TOTAL FOR 1997 $20,786.16 661,142.61 (Exhibit "AAA-7''). A careful examination of the records shows that indeed the amounts of P763,980.52 and P661, 142.61 corresponding to 10% final withholding taxes for 1996 and 1997, respectively, were assumed and paid by Philippine Global Communications, Inc. and Manila Electric Company, as evidenced by their Summary of Interest Payments and Withholding Tax and Monthly Remittance Return of Income Taxes Withheld (A nnexes "F-1 " to "F-35" ofExhibit "AAA -7'') . Hence, petitioner is liable for deficiency onshore final tax for taxable year 1996 in the reduced amount of P1,246,890.11, computed as follows: Deficiency Final Tax on Onshore Income for Taxable Year 1996 Onshore Income Subject to I0% Final Tax p 125 ,936,342.00 10% Rate of Tax p 12,593 ,634.20 Tax Due Thereon 763,980.52 Less: I Tax Assessed and Paid P11,829,653 .68 11,028,112.84 Sub-total P801 ,540.84 445 ,349.27 Less: I Payments P1,246,890.11 Sub-total Add: I Interest ( 1-26-97 to 11-5-99) Deficiency 10% Final Tax However, for taxable year 1997, considering that the amount of P661 ,142.61 final withholding tax on onshore income that was withheld ~ ~)
.. C.T.A. CASE NO. 6177 46 DECISION and paid by petitioner's borrowers is more than the basic 10% final tax deficiency assessment of P548,382.36, as computed by the respondent, the 10% final tax deficiency assessment in the amount of P762,860.79 (basic: P548,382.36 +interest: P214,478.43), is without factual and legal basis, and is hereby ordered cancelled. E. Documentary Stamp Taxes for Taxable Years 1996 and 1997 Respondent assessed petitioner of deficiency documentary stamp taxes in the amounts of P248,329,263.35 and P31 ,325,014.80 for taxable years 1996 and 1997, respectively, pursuant to Sections 175, 179, 180, 181, 182, 195 and 196 ofthe Tax Code, computed as follows: Computation of Proposed Deficiency DST-HO For the Taxable Year 1996 Beginning Balance P1 ,09 1,032.50 Add : Purchases 63,300,000 .00 Total Available for Use P64,39 1,032.50 Less: Ending Balance 1,832,853.05 Total Documentary Stamp Used P62,558, 179.45 Less: Documentary stamp tax due (Hereto attached as Annex "B'') 2 17,0 13,146.29 Sub-total p 154,454 ,966.84 Add: Penalties Interest P93 ,874,296.51 93,874,296 .51 Compromise - Deficiency documentary stamp tax P248 329 263.35 (Exhibit "2 '') Computation of Proposed Deficiency DST-HO For the Taxable Year 1997 Beginning Balance P3 ,586, 184.27 Add: Purchases 64,690,495.89 Total Avai lable for Use P68 ,276,680.16 Less: Ending Balance 3, 11 9,8 19.84 Total Documentary Staml' Used P48,0 I0,417.02
C.T.A. CASE NO. 6177 47 DECISION Less: Documentary stamp tax due (Hereto 70,3 05,80 1.22 ? 22,295,384.20 attached as A nnex "C'') 9,029,63 0.60 Sub-tota l P31 325 014.80 Add: I Penalties (Exhibit "2 ") I 20% Interest Sec. 249 Deficiency documentary stamp tax On the other hand, petitioner counter-argues that the deficiency DST assessments for 1996 and 1997 is without factual and/or legal basis on the ground that respondent' s computation of the taxable base is patently overstated. The Court will now determine the validity of the assessments for deficiency DST. 1996DST a) DST on sale ofreal properties. Petitioner contends that the amount of P1 ,981 ,654.00 DST was assumed and paid by its buyers. A review of the records reveals that out of P1 ,981 ,654.00 DST certified by the Court-Commissioned Independent CPA (Exhibit "AAA-2 "), as having been assumed and paid by petitioner' s buyers, only the amount of P1 ,948,654.00 was duly supported and substantiated by petitioner (A nnexes "A -93 " to "A- 106 ", "A -147" to "A -211 " of Exhibit "AAA -2 ", Exhibits ~ "QQQ-57" to "QQQ-61 '').
'. C.T.A. CASE NO. 6177 48 DECISION Considering that petitioner's buyers had already remitted to the BIR the DST in the amount of P1 ,948,654.00, the deficiency DST assessment of P1 ,563,115.00 has clearly no basis and is hereby ordered cancelled. b) DST on letters ofcredits. Petitioner contends that the DST was improperly and unjustifiably imposed on each stage of a single letter of credit transaction considering that the cycle of a letter of credit consists of three stages. On the alleged first stage, when the buyer applied with petitioner for the opening of a letter of credit, petitioner booked the approved letters of credit for domestic transactions in "Unused letter of credit-domestic" and "Letter of Credit Foreign" for importations. On the alleged second stage, when petitioner forwarded the approved letters of credit to the advising bank and the advising bank paid the seller/exporter after the latter delivered the goods to the buyer/importer, petitioner used the "Customer Liability Foreign Account". The third or final stage according to petitioner happens when the applicant has insufficient funds with petitioner, thus requires t~
C.T.A. CASE NO. 6177 49 DECISION recording of the "trust receipts account". In 1996, petitioner used the account "Import Bill under TR" and "Domestic Bill under TR". Petitioner' s contention cannot be sustained. Petitioner did not present any evidence to support its claim. The same are pure allegations. The settled rule is that bare allegations, unsubstantiated by evidence, are not equivalent to proof under our Rules (Manzano vs. Perez, 362 SCRA 439). Without any documentary evidence showing that indeed the accounts "Unused Letter of Credit-Domestic" and "Letter of Credit Foreign", "Customer Liability Foreign Account", and "Import Bill under TR" and "Domestic Bill under TR" arose from only one transaction - letter of credit transaction, We sustain respondent's imposition of DST on each of the foregoing accounts. In fact, a simple reading of the foregoing accounts will readily show that there is a great disparity in the amounts and the accounts under each of the alleged stages. In the alleged first stage, the account "Unused LC Domestic" has a balance of P189,031 ,227.47, and the account "LC Foreign" has a balance of P3 ,038,308,281.03. For the alleged second stage, petitioner has only the account "Customer Liability Foreign" with a balance of only P780,122,658.76. While in the alleged third stage, there are again two accounts, one is "Domestic Bills under TR" with a balanc~
C.T.A. CASE NO. 6177 50 DECISION of P211,252,710.15, and another "Import Bill under TR" with a balance of P1 ,907,449,852.17. If petitioner's allegation is true that all said four different accounts only constitute stages and pertain to one transaction - the letter of credit transaction, it is incomprehensible why in the alleged first stage, there are two accounts, one for the alleged domestic transactions and another for the alleged foreign importations, while in the alleged second stage there is only one account, the "Customer Liability Foreign", which by its title obviously pertains to importations. But, in the alleged third stage there are again two accounts, one denominated as domestic bill and another import bill. Said denomination of accounts is inconsistent with petitioner' s averments. Moreover, the balances of the accounts appearing on every stage do not reconcile with one another. For this alone, petitioner's contention cannot be given credence. Furthermore, a letter of credit and a trust receipt are two distinct and separate documents. A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds ()1#
.' C.T.A. CASE NO. 6177 51 DECISION mentioned in the letter of credit, plus credit or commitment fees mutually agreed upon (Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 267) . Thus, there is in effect a loan agreement between the buyer and the issuing bank in a letter of credit (Notes and Cases on Banks, Negotiable Instruments and Other Commercial Documents, Aquino, F1 ed. , p. 512). Letters of credit are, therefore, subject to DST under Section 182 of the NIRC of 1977, as amended, if they are drawn in but payable out of the Philippines. A "trust receipt", on the other hand, is defined as an agreement by virtue of which a banker advances money to a person for the importation of goods, the former taking full title to the goods at the very beginning and continuing to do so until he is paid, or if the goods have been sold, until the proceeds of the sale are turned over to him by the importer or successors in interest. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full , or if the merchandise has already been sold, the proceeds of the sale be turned over to him by the importer or by his representative or successor in interest (Philippine National Bank vs. Viuda e Hijos de Angel Jose, 63 Phil. 821). A trust receipt is considered, therefore, as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the
C.T.A. CASE NO. 6177 52 DECISION importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased (53 Am. Jur. 961, cited in Sarno vs. People, 115 Phil. 349). Trust receipt therefore, is a contract distinct from the letters of credit. Settled is the rule that a trust receipt, executed to secure an indebtedness, accomplished and effected as a security for the payment of an account, with authority to sell the property or merchandise to pay the debt or obligation, requires no further argument to show that, as in deeds of trusts, they are subject to the affixture ofDST, pursuant to Section 195 of the NIRC of 1977, as amended. Considering that DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto, petitioner' s use of the facility of the trust receipt is a privilege subject to DST. Said privilege of using the facility of trust receipt for purposes of security is distinct and separate from the privilege of using the facility of the letters of credit, which is for the purpose of obtaining loan. Accordingly, letters of credit are subject to DST, separate and distinct from the DST imposed on trust receipts. ~~ (J ;
.\ C.T.A. CASE NO. 6177 53 DECISION c) DST on Interbank Call Loans Petitioner contends that interbank call loans entered into by banks not for a lending purpose, but primarily, to cover its cash position at the end of the day shall not be considered as deposit substitutes; that under the 1993 Tax Code, they are exempt from DST; and even if they are considered deposit substitutes under Section 180 of the 1993 Tax Code, deposit substitutes are not one of the enumerated items subject to DST. While We cannot give credence to petitioner' s allegation that the interbank call loans were entered into by petitioner only for the purpose of covering its deficiency in reserves, absent any documentary evidence to substantiate its claim, We agree, however, with petitioner that under Section 180 of the NIRC of 1977, as amended, deposit substitutes are not one of the enumerated items subject to DST. The provision subjecting deposit substitutes to DST appeared only in the NIRC of 1997, which took effect on January 1, 1998. Considering that the taxable period involved in this case is 1996, the applicable law is the NIRC of1977, as amended, and not the NIRC of1997, as amended. In Section 2, h(a) of Revenue Regulations 17-84, otherwise known as "Income Taxation of Interest Derived from Bank Deposits and Yield from Deposit Substitutes ", one of the implementing regulations of th~
C.T.A. CASE NO. 6177 54 DECISION NIRC of 1977, as amended, interbank borrowings by or among banks and non-bank financial institutions, shall be considered as deposit substitutes. Since deposit substitutes are not one of the enumerated items in Section 180 of the NJRC of 1977, as amended, subject to DST, petitioner's interbank call loans are, therefore, not subject to DST. Hence, respondent's imposition of deficiency DST on interbank call loans is hereby ordered cancelled. d) DST on Reverse Repurchase Agreement Like in the case of interbank call loans, the provision regarding the reverse repurchase agreement, appeared only in the NJRC of 1997, as amended, when the definition of deposit substitutes was expanded to include not only repurchase agreements, but "repurchase agreements including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank xxx". However, prior to the passage of the NJRC of 1997, Section 20(y) of the NIRC of 1977, as amended, which is the governing law in the present case, defines deposit substitutes, to wit: "xxx an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower' s own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their o~
C.T.A. CASE NO. 6177 55 DECISION needs or the needs of their agent or dealer. These instruments may include but need not be limited to banker's acceptances, promissory notes, repurchase agreements, certificates of assignments or participation and similar instruments with recourse xxx. (emphasis supplied) Since reverse repurchase agreement was not considered as one of the deposit substitutes under the NIRC of 1977, as amended, the same is likewise not subject to DST, by express mandate of Section 180 of the NIRC of 1977, as amended, that deposit substitutes is not one of the enumerated items subject to DST. Accordingly, respondent's imposition of DST on reverse repurchase agreement is hereby ordered cancelled. e) Bills Payable-Deposit Substitutes amounting to P84,851,004,023.15. Petitioner contends that the amount of Bills-Payable indicated in the schedule of DST for 1996 is exorbitantly and grossly overstated; the financial records of petitioner recognized and reported only Bills Payable Account of P5,151 ,376,708.02 for taxable year 1996 (Exhibits "PPP " and "PPP-1 ") ; however the amount of Bills Payable, as computed by respondent amounted to P84,851,004,023.15. We agree with petitioner that the amount of P84,851 ,004,023.15 Bills Payable computed by respondent is grossly overstated. This Court w cannot ascertain how respondent was able to arrive at said amount of
C.T.A. CASE NO. 6177 56 DECISION P84,851 ,004,023.15, when petitioner's bills payable in 1994 amount to P7,925 ,821 ,223.16 only (Exhibits "000 " and "000-1 "); in 1995 to P8,240,952,078.38 only (Exhibits "000-2" and "000-3 '') ; and in 1997 to P7,448,979,091.53 only (Exhibit "MMM'') . Moreover, in the daily posting of petitioner's Bills Payable for the whole year of 1996, the total amount of Bills Payable recorded by petitioner is P5 ,151 ,376,708.02 only (Exhibits "PPP and "PPP-1 ''). Said amount is more correct, taking into consideration the amount of petitioner's Bills Payable appearing in its Schedule ofDST for the years 1994 to 1997, compared with respondent's computation, which has no basis at all. Finally, as heretofore ruled, deposit substitutes under the NIRC of 1977, as amended, were not yet subject to DST. Since petitioner' s Bills Payable partake of deposit substitutes, pursuant to Section 180 of the NIRC of1977, as amended, the same is not subject to DST. Thus, respondent' s assessment of DST on Bills Payable-deposit substitute is hereby ordered cancelled. By and large, the Court finds the following assessments against petitioner without factual and legal basis: Ite rn s/Acco unts Amo un t Rate DST Amount I) Bills Payable ?84,851 ,004,023.15 .30 on each P200 p 127,276,506.03 2) Interbank loan or .15% 23, 043,000, 000. 00 .30 on each P200 34,564,500.00 or .15%
C.T.A. CASE NO. 6177 57 DECISION P1 5.00 for every 3) Sale of real P1 ,000.00 or pro pe rt ies Reverse repurchase 104 ,20 7,66 6 .6 7 1.50% 1,563, 11 5.00 12, 198,575,780. 18 4) agreement .30 on each P200 18,297,863.67 Total P l81 ,70 1,984.70 or . 15% Considering that the above disallowed DST assessment, as found by this Court, is higher that the basic deficiency DST assessment of P154,454,966.84, as computed by the respondent, clearly the deficiency DST assessment for 1996 against petitioner in the amount of P248,329,263 .35 (basic: P154,454,966.84 + interest: P93 ,874,296.52) is without factual and legal basis, and is hereby ordered cancelled. 1997 DST a) DST on sale ofreal properties. Respondent assessed petitioner of deficiency DST on sale of real properties in the amount ofP733 ,910.22 (Exhibit "2"). Petitioner contends that for petitioner' s sale of real property in 1997, the amount of P4,591 ,748.00 DST was assumed and paid by its buyers. The Court-Commissioned Independent CPA, in its Schedule of Creditable Withholding Tax Remitted, Capital Gains Tax Paid and Documentary Stamp Tax Paid (Exhibit "AAA-2 "), certified that the total ~
.. C.T.A. CASE NO. 6177 58 DECISION amount of DST assumed and paid by its buyers for 1997 1s P4,591,748.00. However, a rev1ew of the records reveals that the Court- Commissioned Independent CPA committed an error in adding the total DST assumed and paid by petitioner's buyers. As verified by this Court, the total DST assumed and paid by petitioner's buyers amounts to P628,440.00 only, and not P4,591,748.00. Further verification of the documentary evidence adduced by petitioner (Annexes "A-2 " to "A-92 " of Exhibit "AAA-2", "A-108 " to "A-142" of Exhibit "AAA-2", Exhibits "QQQ-26-a " and "QQQ-24-a'') shows that the amount of P628,440.00 DST was indeed paid and remitted to the BIR. Petitioner, therefore, is liable to pay deficiency DST on sale of real properties in the reduced amount of P105,470.22 (assessment of P733,910.22- assumed and paid ofP628,440.00). b) DST on letters ofcredits. Petitioner claims that the deficiency DST was improperly and unjustifiably imposed on each of the three stages of a single letters of credit transaction; that in the alleged first stage consisting of approved letters of credit, petitioner allegedly used the account "Unused Letter of Credit Domestic"; while in the alleged second stage, petitioner used (j)J) (w )
C.T.A. CASE NO. 6177 59 DECISION accounts such as "Inward Bills for Collection", "Outward Bills for Collection - Domestic", and "Outward Bills for Collection - Foreign"; and in the alleged third stage, petitioner used the accounts "Loans under TR - Local" and "Loans under TR - Foreign". Petitioner's contention is unmeritorious, being pure allegations. Petitioner failed to present any evidence to support its claim that indeed the accounts "Unused Letter of Credit Domestic", "Inward Bills for Collection", "Outward Bills for Collection - Domestic", "Outward Bills for Collection - Foreign", "Loans under TR- Local", and "Loans under TR - Foreign" arose from only one transaction - the letter of credit transaction. Furthermore, a simple reading of the foregoing accounts and a comparison of the Schedule of the DST for the year 1997 (Exhibit "MMM") with the Schedule of DST for the year 1996 (Exhibit "LLL "), clearly shows inconsistency in petitioner's contention. The accounts "Inward Bills for Collection", "Outward Bills for Collection - Domestic", and "Outward Bills for Collection - Foreign", purportedly the accounts used in the second stage of its 1997 letters of credit transaction, were also present in the Schedule of DST for the year 1996 (Exhibit "LLL "); yet, in 1996 the same were not part of the alleged second stage. According to petitioner, (Wv {;2)
.' C.T.A. CASE NO. 6177 60 DECISION for the second stage it used the account "Customer Liability Foreign Account". With such inconsistencies in petitioner' s averments, this Court cannot give evidentiary weight to its argument that the aforesaid accounts partake of only one transaction - the letter of credit transactions. To reiterate, a trust receipt is separate and distinct from a letter of credit. Petitioner' s use of the facility of a trust receipt is a privilege subject to DST, separate and distinct from the privilege of using the facility of a letter of credit, which accordingly, is also subject to a different DST. Hence, We sustain respondent's imposition ofDST on each ofthe accounts: "Unused Letter of Credit Domestic", "Inward Bills for Collection", "Outward Bills for Collection - Domestic", "Outward Bills for Collection - Foreign", "Loans under TR - Local", and "Loans under TR - Foreign". c) DST on Interbank Loans As heretofore discussed m the related assessment for 1996 deficiency DST, under Revenue Regulations 17-84, interbank loans are considered as deposit substitutes. Since Section 180 ofthe NIRC of 1977, as amended, the governing law in this assessment, does not impose DST
C.T.A. CASE NO. 6177 61 DECISION on deposit substitutes, petitioner's interbank loans in the amount of P19,387,500,000.00 are, therefore, not subject to DST. As such, respondent' s imposition of deficiency DST on interbank loans is hereby ordered cancelled. d) DST on Reverse Repurchase Agreement. As previously discussed, reverse repurchase agreement under the NIRC of 1977, as amended, is not one of the items subject to DST. It is only in the NIRC of 1997 that reverse repurchase agreement was considered as deposit substitute subject to DST. We, therefore, cancel the deficiency DST assessment on reverse repurchase agreement. e) DST on Assets Held In Trust- Loans. Petitioner argues that the imposition of DST on assets-held-in-trust is without legal basis on the ground that they are not deposits accounts or deposit substitutes. We agree with petitioner that assets-held-in-trust are not subject to DST. Trust agreements or assets-held-in-trust accounts do not fall under the term "certificates of deposit" because no debtor-creditor relationship arises in both transactions. What is established, rather, is a trustor-trustee relationship. In a trust agreement, no absolute transfer of ownership over (}II
C.T.A. CASE NO. 6177 62 DECISION the money or property happens. What is merely extended to the trustee- bank is the right to manage and invest the object of the trust under the instructions of the trustor-client. Therefore, the trustee-bank is not obliged to guarantee a positive return on the money or property subject of the trust. Considering that assets-held-in-trust does not fall under the term "certificate of deposit", respondent's assessment against petitioner for deficiency DST on its assets-held-in-trust transactions is without factual and legal basis, and is hereby ordered cancelled. f) Mathematical error in respondent's computation of petitioner's deficiency DSTfor 1997. We agree with petitioner that respondent committed a mathematical error in computing petitioner's alleged DST liability for taxable year 1997. In deducting the ending balance of P3,119,819.94 from the total available for use of P68,276,680.16, respondent came up with a difference of P48,010,417.02, pertaining to the total documentary stamp used. But, the same is erroneous. As a result, petitioner was assessed of basic deficiency DST ofP22,295 ,384.20, plus 20% deficiency interest ofP9,029,630.60, or for a total amount ofP31 ,325,014.80.
C.T.A. CASE NO. 6177 63 DECISION However, as correctly pointed out by petitioner, the correct documentary stamp used should be P65, 156,860.32 (P68,276,680.16 - P3 ,119,819.94), and not P48,010,417.02, as computed by respondent. Thus, the correct computation of the basic deficiency DST assessment for 1997 should be: Beginning Balance P3,586, 184.27 Add: Purchases 64,690,495 .89 Total Available for Use 68,276,680.16 Less: Ending Balance (3,119,819.94) Total Documentary Stamp Used Less: Documentary Stamp Tax Due P65,156,860.32 Deficiency DST (70,305,80 1.22) p 5,148,941.10 In sum, in addition to the above erroneous computation, the Court finds the following DST assessment against petitioner without factual and legal basis: Items/ Accounts Amount Rate DST Amount p 19,387,500,000 .00 .30 on each P200 I) Interbank loan or .15% P29,081 ,250.00 P3,468,898,307 .74 P628,440.00 2) Sale of real P3 ,160,305,925 .70 .30 on each P200 properties or .15% (pertains to .30 on each P200 DST assumed Reverse or .15% and paid by 3) repurchase petitioner's buyers agreement Assets-held-in- P5,203 ,347.46 4) trust Total P4,740,458 .89 P39,653,496.35 Since the above disallowed DST assessment found by this Court is more than the deficiency DST assessment of P31,325,014.80, as
'. C.T.A. CASE NO. 6177 64 DECISION computed by the respondent, the deficiency DST assessment for 1997 against petitioner in the amount ofP31 ,325,014.80 is without factual and legal basis, and is hereby ordered cancelled. WHEREFORE, premises considered, the present Petition For Review is PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED to pay respondent Commissioner of Internal Revenue the reduced amounts of SIXTY FOUR MILLION ONE HUNDRED FIFTY FOUR THOUSAND NINE HUNDRED TWENTY ONE AND 34/100 PESOS (P64,154,921.34), representing deficiency income tax; THREE MILLION FOUR HUNDRED FIFTY THOUSAND TWO HUNDRED EIGHTEEN AND 30/100 PESOS (P3,450,218.30), representing deficiency gross receipts tax; and ONE MILLION TWO HUNDRED FORTY SIX THOUSAND EIGHT HUNDRED NINETY AND 11/100 PESOS (P1,246,890.11), representing deficiency 10% final tax on onshore income, all for taxable year 1996, or the total amount of SIXTY EIGHT MILLION EIGHT HUNDRED FIFTY TWO THOUSAND TWENTY NINE AND 75/100 PESOS (P68,852,029.75); and FOURTEEN MILLION EIGHT HUNDRED FORTY ONE THOUSAND THREE HUNDRED NINETY NINE AND 30/100 PESOS (P14,841,399.30), representing deficiency 20% final tax for taxable y~
C.T.A. CASE NO. 6177 65 DECISION 1997, or the aggregate amount of P83,693,429.05 for both taxable years 1996 and 1997, broken down as follows: DEFICIENCY TAX DUE 1996 Income Tax GRT 10% Final Tax Total P45 ,452,207 .34 Basic P42,436,655.11 P2,214,011.39 P80 I,540.84 Interest 23,399,822.41 Total 21,718,266.23 I ,236,206.91 445,349.27 P68,852,029. 75 P64,154,921.34 P3,450,218.30 P1,246,890.11 1997 20% Final Withholding Tax Basic PI0,668,737.52 Interest 4,172,661.78 Total P14,841,399.30 AGGREGATE AMOUNT (1996 and 1997) P83,693,429.05 In addition, petitioner is hereby ORDERED to pay respondent 20% delinquency interest per annum on the total amount of P83,693,429.05, computed from December 14, 1999, until full payment thereof, pursuant to Section 249(C) ofthe NIRC of1997, as amended. The deficiency assessments ofP762,860.79, representing 10% final tax on onshore income for taxable year 1997, P248,329,263.35, representing DST for taxable year 1996, and P31,325,014.80, representing DST for taxable year 1997, are hereby ordered cancelled. SO ORDERED. ~~ ~ OLGA PALANCA-ENRIQUEZ Associate Justice
C.T.A. CASE NO. 6177 66 DECISION EA~ ~1~s'tic.UeY WE CONCUR: ~ G. -at:ro.-U!~ ,c;;.. . JUANITO C. CASTANEm, JR. Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court' s Division. ~~~a. . ~,Q. JUANITO C. CASTANEDA,CJR: Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson' s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the cases were assigned to the writer of the opinion of the Court' s Division. ~--~ - ~ ERNESTO D. ACOSTA Presiding Justice
C.T.A. CASE NO. 6177 67 DECISION A nnex "A" Schedule of Creditable Withholding Tax Allowed and Disallowed Per this Court's Findings Particulars Supporting Exhibit Admitted/ Denied/ Reason I ) Juan ito Lim Number Allowed Disallowed Document!Natu "QQQ-1" P31 ,250.00 re "QQQ-2" 34,620.00 "QQQ-3" 15 ,000.00 Monthly "QQQ-4" 71 ,250.00 Remittance 39,300.00 Return of Income Taxes Withheld (BIR Form 1743-W) 2) Adela Rulloda BIR Form 1743-W 3) Leonardo Sia B!R Form 1743-W 4) Southwest Lines Capital Gains 83,250.00 Ruling in Banco P89,897 .58 Filipino Savings and Limqueco Compound Tax Return Mortgage Bank vs. 81 ,241.80 Court of Appeals (5 19 Culi at, T. Sora, Q.C. SCRA 99) Resolution dated May 5) Sps. Severino & Capital Gains "QQQ-5 " 18, 2005 - failure to present original copy, Aniceta Francisco Tax Return and ruling in Banco Filipino Savings and 6) Raul Jose Go Capital Gains "QQQ-6" Mortgage Bank vs. 7) Sps. Rosendo & Emma "QQQ-7" Court of Appeals, Lopez "QQQ-8" Sl!J2Ia 8) Sps. Antonio & Filma "QQQ-9" Same reason as No. 5 Galla 9) Nat' I Conciliation & Tax Return "QQQ-10" Mediation Board Capital Gains "QQQ-11 " 206,131.51 Same reason as No. 5 I 0) Phil. Spring Water "QQQ-12" Tax Return II) Wenelita R. Pamatong 12) Philip Paul Trading Capital Gains 101,558.10 Same reason as No. 5 Tax Return Certificate of 4,595.76 Pertains to prior year Creditable Tax Withheld at Source for the period Jan . to Sept. 1995 Certificate of 2,250.00 Pertains to pric..r year Creditable Tax Withheld at Source for the period April 95 to December 95 BIR Form 1743-W BIR Form 5,475,000.00 Resolution dated May 18, 2005 - failure to 1743-W present original copy. 13) Oscar Cruz BIR Form "QQQ-13" 1743-W
C.T.A. CASE NO. 6177 68 DECISION 14) Phil. Spring Water Certificate of "QQQ-14" 800 .00 Reso urces 608,02 5.00 Creditable Tax " QQQ-15 " 140,00 0.00 "QQQ- 16" Withheld at "QQQ-17" 900 .00 "QQQ- 18" Source fo r the "QQQ-1 9 900.00 "QQQ-20" 6,439,680 .00 peri od Jan. to " QQQ- 2 1" " QQQ- 22 " March 96 " QQQ- 23" "QQQ-24" 15) Bo. Mapulang Lupa, BIR Form " QQQ- 25" Valenzuela, M.M. 16) Ulpiano Tamayo 1743-W "Q QQ- 26" " QQQ -2 7" 17) Sps. Florencio & Rigor BIR Fo rm " QQQ-28" Jav ier " QQQ- 29 " 18) Sps. Elpidi o & 1743-W Milagros Apo " QQQ- 30" 19) 1. Pelaez Capital Gains 182,770.22 Same reason as No. 5 "QQQ-3 1" 278,755.55 Same reason as No. 4 20) Sps. Lino and A. Lim Tax Return " QQ Q-32" 2 1,485 .47 Same reason as No. 5 2 1) Sps. Antonio & L. Capital Gains 40,078.25 Same reason as No. 5 Asok 37,268.46 Same reason as No. 5 22)Lawrence Chan Tax Return 206,2 15.18 Same reason as No. 4 31,628.22 Same reason as No. 5 23) Sps. Macario Balaan & Capital Gains 246,533.39 Same reason as No. 5 Aida Balaan 24) Sps. Leng Leng Tax Return 48,205 .88 Same reason as No. 5 Castillo Uy & Mariano 165,000.00 Same reason as No. 12 Loo Capital Gains 33,750.00 Same reason as No. 12 25) Phi l. Water Resources Tax Return 11 ,511.68 Same reason as No. 5 36,362.86 Same reason as No. 5 Capital Gains Tax Return Capital Gains Tax Return Capital Gains Tax Return Capital Gains Tax Return Certificate of Creditable Tax Withheld at Source 26) Nestor Mendoza Capital Gai ns Tax Return 27) 1001" Ce ntu ry BIR Form Townhouse, 20th Ave., 1743-W Cubao 28)Emmanuel Caballero & BIR Form Spouse 1743-W 29) Phil. Spring Water Certificate of Resources Creditabl e Tax Withheld at Source for the peri od Aug. to Oct. 96 30)Clavall Properties, Inc. BIR Form 1743-W/ Certificate of Creditable Tax Withheld at So urce 3 1) Mr. Benito Ang as Capital Gains AIF of Felomina Arancon Tax Return 32) Mr. Nathaniel Dela Capital Gains Pena & Sps. Tax Return Richard/Presci la Sabillo, as
C.T.A. CASE NO. 6177 69 DECISION NF of AgaQitl Dela Pena Capital Gains "QQQ-33" 237,663.23 Same reason as No. 5 33) Sps. Eusebio/Vietor Tax Return "QQQ-34" 150,457.40 Same reason as No. 5 Buchan Capital Gains "QQQ-35" 50,235.30 Same reason as No. 5 34) Sps. Eusebio/Vietor Tax Return "QQQ-36" 32, 157.23 Same reason as No. 5 Buchan Capital Gains "QQQ-37" 35) Sps. Alfredo/Erlinda Tax Return "QQQ -38 " 12,205.45 Same reason as No. 5 Marcos Capital Gains 29,591.05 Same reason as No. 5 36) Sps. Alfredo/Erlinda Tax Return "QQQ-39" Marcos Capital Gains "QQ-40" 112,3 15 .10 Same reason as No. 5 37) Sps. Paganono!Lourdes Tax Return "QQQ-41 " 47,737.37 Same reason as No. 5 Ursua Capi tal Gains "QQQ -42 ' 194,666.27 Same reason as No. 5 38) Mr. Benito Ang, as Tax Return "QQQ-43" 30,356.60 Same reason as No. 5 NF of Sps. Licerio/Araceli "QQQ -44 " 44,843.00 Same reason as No. 5 Pagdilao Capital Gains "QQQ-45" 2 1,307.00 Same reason as No. 5 39) Sps. Carmelito/Teresita "QQQ-46" 25,2 17.11 Same reason as No. 5 Obrero Tax Return "QQQ-47" 40) Sps. Benito/Betty Ang 4,603 .23 Same reason as No. 5 Capital Gains "QQQ -48 " Tax Return "QQQ-49" "QQQ-50" 4 1) Sps. Paganini/Lourdes Capital Gains "QQQ-51" "QQQ-52" Ursula Tax Return "QQQ-5 3" 42) Sps. Daniei!Leticia Capital Gains "QQQ-54" Salanga Tax Return 43) Sps. Jacinto!Rosalinda Capital Gains lndong Tax Return 44) Sps. Rainer/Mary Beth Capital Gains Garay Tax Return 45) Sps. Wilfredo/Vangie Capital Gains Montero Tax Return 46) Sps. Bonifacio/Salome Capital Gains Yuson Tax Return 47) Tan Kam Enterprises/ BIR Form I ,200,000.00 16,770.00 Toppers Knitting 1743-W 300.00 Corporation 48) Jose T. Cabrera Certificate of Withholding Tax at Source 49) Cirilo Basalo, Jr. Capital Gains 28,724.72 Same reason as No. 5 23,962.17 Same reason as No. 5 50) Sps. Ronald Dennis & Tax Return 623 ,598.73 Same reason as No. 4 Helen Joseph Arellano 51) Sps. Alejandro/Joselita Capital Gains Lim 52) Phil Spring Water Tax Return Resources Capital Gains Tax Return Certificate of Creditable Tax Withheld at Source (B IR Form No. 1743/750) 53) Sps. Conrado/Neriza Capital Gains 120,665.46 Same reason as No. 5 Elcamel 54) Teodoro Legal & Tax Return Spouse 55) Sps. Emmanuel Capital Gains 84,660.57 Same reason as No. 5 Caballero Tax Return 33,750.00 No supporting documentary evidence w Q)
C.T.A . CASE NO. 6 177 70 DECISION 56) Gonzalo Brillantes III Capital Gains "QQQ-55" 12,265.00 Same reason as No. 4 57) Suzanne Berba Tax Return "QQQ-58" Certificate 12,967.50 Certificate Authorizing Registration 11,407 .50 Authorizing 15,405 .00 45,000.00 Registration states that P8,683,575.00 it was subject to P8 ,683 ,575.00 withholding tax withheld and remitted to the BIR under Official Receipt indicated therein as evidenced by BIR Nos. 1743W/1743B 58) Milagros Canieso Certificate "QQQ-59" Same reason as No. 57 59) Fidel Gemudiano Authorizing "QQQ-60" 60) Ma. Nemia Lizada Registration "QQQ-61" Same reason as No. 57 61) Jaime & Evelyn Uy Certificate Authorizing Same reason as No. 57 Registration Certificate Authorizing Registration 1,233,119.22 No supporting 52 ,061.00 158,514.00 documentary evidence 62) Mrs. Jamili (Pueblo 722,535.03 No supporting Concepcion) 344,686 .94 63) Aty. Builders documentary evidence No supporting documentary evidence 64) CA Square No supporting documentary evidence 65) Miller Construction/ Capital Gains "QQQ-62" Same reason as No. 4 Betty Go Tax Return 66) Eastern Global Corp. 130,400.00 No supporting 32,066.70 Pll ,977,854. 79 documentary evidence 67) ETY DTD 11.18.96 No supporting documentary evidence T otal Creditable Withholding T ax-Allowed/Disallowed I ,283,782.50 P21,945,212.29 Error on petitioner's addition (attributed to creditable tax Pl3,261,63 7.29 withheld on Suzanne Berba, which was reflected a~ P 12,96750, but per verification, the correct amount should be ? 1 2 ,967 .50) Total C reditable W ithholding Tax per Schedule
C.T.A. CASE NO. 6177 71 DECISION Annex "B"- Schedule of DST for 1996, as computed by the BIR Schedule of DST For the Year 1996 Transaction Amount A. P7 ,679 ,602 ,822.12 092- Bills Discounted 1,362,681 ,355.24 093- Time Loans-Clean 2,263 ,620,003.33 111 - Other Agri-Credit Loan 595,739,846.61 121 - Export Bills Purchase 49 ,475,276 .76 122- Domestic Bills Purchase 24,586,783.54 123- Foreign Bills Purchase 1,893,850,213 .66 131 - Customers Liability (Import Bill) 1,907,449,852. 17 132- Import Bill under TR 211 ,252,710.15 133- Domestic Bills under TR 780, 122,658.76 142- Customer Liability Foreign 2,715,873,190.22 281 - Time Certificate of Deposit 9,000 ,000 .00 290- TCD Special Financing 371- Bills Payable- Deposit Substitute 84,851 ,004,023 . 15 390- Cash LC 495 ,950 ,502 .51 500- Unused LC Domestic 189,031 ,227.47 510- LC Foreign 530- Inward Bills for Collection 3,03 8,308,281 .03 540- Outward Bills for Collection- Domestic 70,488,558 .96 550- Outward Bill for Collection - Foreign 33, 139,780.05 Interbank Loan Total 220,601,327.52 Rate 23,043,000,000 .00 Documentary Stamp Tax Due P131 ,434,778,413 .25 B. On proceeds from sale of real property 0.15% Total Amount p 197,152,167.62 Rate of Tax Basic Tax Due PI 04,207,666.67 1.50% C. Industry Issue RRP Pl ,563 , 115.00 Rate Basic Tax Still Due p 12,198,575,780. 18 0. 15% D. Capital Stocks Subscribed 1995 p 18,297 ,863.67 Subscribed 1996 Additional Subscribed Capital Stock 8,391 ,977.00 Rate of Tax 8,39 1,977.00 Tax Due Tax Paid - Tax Deficiency 1.00% Total Tax Due - 0 - P217,013, 146.29
C.T.A. CASE NO. 6177 72 DECISION Annex "C"- Schedule of DST for 1997, as computed by the BIR Schedule of DST For the Tax Year 1997 Transaction Amount A. P828, 709,882.49 2,614,600.64 12500- Export Bills Purchase - Reg 31,066,739.19 12510- PDO 10 ,762 ,769.35 764 , 164,989. 86 12600- Domestic Bills Purchase 2,959,459,552.12 2,039,069,386.21 12601 - Foreign Bills Purchase 404,54 1,116.77 33,904,583.29 12800- Loans under TR - Domestic 7,448,979,09 1.53 393,883,237.56 12801 - Local CY 483,484,595. 11 2,422,976 .50 12802- Foreign 5,097,670.00 3,058 ,778 ,361.90 20200- Time Certificate of Deposit - Dom I ,190,602,938.35 233,788,454 .63 20300- TCD Special Financing 39,5 19,064.72 42,4 13,571.83 2 1202- Bills Payable - Domestic & Priv Firm 391 ' 129,550.73 19,387,500,000.00 21700- Cash LC P39,751 ,893, 132.78 51000- Unused LC Domestic - Sight 0.15% P59 ,627 ,839.70 51001 - Unused LC Domestic- Usance 48,927 ,3 48.00 51002- Unused LC Domestic - Standby 1.50% 51100- Unused Comm LC Foreign - Sight P733 ,9 10.22 51 101- Unused Comm LC Foreign- Usance 3,468,898,3 07.74 3,160,305,925.70 51102- Unused Comm LC Foreign- Standby P6,629,204,233.44 52001 - Inward Bills for Collection 0. 15% 9,943,806 .35 52100 - Outward Bill for Collection- Domestic 839, 197,700.00 52101- Outward Bill for Collection- Foreign 2,629,482,795.00 I,790,2 85,095.00 11 603- Interbank Loan 1.00% Total P17,902,850.95 Rate 17,902,606.00 244 .95 Documentary Stamp Tax Due P70,305,80 1.22 B. On sale of Real Properties Proceeds from disposal of real properties (F/S) Rate of tax C. Industry Issue 13600 - Govt Sec. Purchase under RRP 55200 - Assets held in Trust- Loans Total Rate Basic Tax Still Due D. Capital Stocks Subscribed 1996 Subscribed 1997 per F/S Additional Subscribed Capital Stock Rate of Tax Tax Due Tax Deficiency TOTAL DST DEFICIENCY (I nc! ofl ndustry issue) {;)_ )
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