MIRANT (PHIL) ENERGY CORP. v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES Coon of To IPPBIIS QUEZON CITY SECOND DIVISION MIRANT (PHILIPPINES) ENERGY C.T.A. CASE NO. 7214 CORPORATION, Members: Petitione r, CASTANEDA, JR., Chairperson -versus - UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, NAY 1 5 2008 Respondent. / (' 7 8: 07 4 '~ ' X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ - - - - - - - - - - - X DECISION CASTANEDA, JR.,~.: The instant "Petition for Review" seeks the refund or issuance of a tax cred it certificate with the aggregate amount of SIXTEEN MILLION THREE HUNDRED SIXTY-SIX THOUSAND FOUR HUNDRED THIRTEEN PESOS (P16,366,413.00), representing excess creditable withholding taxes for calendar years 2002 and 2003. Mirant (Philippines) Energy Corporation (petitioner) is a corporation duly organized and existing under and by virtue of the laws of the Republic of <jk- the Philippines, with principal office at Suite 501 , CTC Bu ilding , 2232 Roxas

DEC IS ION C.T.A. CASE NO. 72 14 Boulevard , Pasay City.1 Petitioner is registered with the Bureau of Internal Revenue (BIR) with Taxpayer's Identification No. 002-243-275. 2 It is primarily engaged in the business of developing , designing , constructing , erecting , assembling , commissioning , owning , operating , maintaining , rehabilitating , and managing gas turbine and other power generating plants and related facilities for the conversion into electricity , coal , distillate and other fuel provided by and under contract with the government of the Republic of the Philippines , or any subdivision , instrumentality or agency thereof, or any government-owned or controlled corporations or any entity engaged in the development, supply or distribution of energy.3 Respondent is the duly appointed Commissioner of the Bureau of Internal Revenue , who is vested with the authority to act as such , including inter alia, the power to decide, approve and grant refunds or tax credits of overpaid internal revenue taxes as provided by law. He holds office at the BIR National Office Building , Agham Road , Diliman , Quezon City.4 On August 16, 2001 , petitioner filed with the Securities and Exchange Commission (SEC) its Amended Articles of Incorporation stating its intent to change its corporate name from Mirant (Philippines) Mobile Corporation to Mirant (Philippines) Energy Corporation ; and to include the business of supplying and delivering electricity and providing services necessary in 1 Par. I, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 274. 2 Par. 4, Joi ntl y Stipulated Facts, JSF I, Docket, p. 275. 3 Par. 1, Joi ntl y Stipulated Facts, JSFI , Docket, p. 275 . 4 Par. 2, Adm itted Facts, JSFI , Docket, p. 274.

DECISION C.T.A . CASE NO. 72 I4 Page 3 of I3 connection with the supply or delivery of electricity. The SEC approved the same on October 22 , 2001 .5 Petitioner filed its Annual Income Tax Return (ITR) for calendar years 2002 and 2003 on April 15, 2003 and April 15, 2004, respectively, reflecting overpaid income taxes or excess creditable withholding taxes , detailed as follows : Gross Income p 40 ,116,829 .00 20037 Add : Non-Operating & other Income Total Gross Income 40 ,116,829 .00 (44,470 ,276 .00) Less: Deductions 62 ,759 ,099 .00 1, 103 ,514 .00 Taxable Income (Loss) (22 ,642 ,270 .00) (43 ,366 ,762 .00) Tax Rate 32 % 191 ,604,886 .00 Minimum Corporate Income Tax 802 ,337.00 (234,971 ,648 .00) 32% Income Tax Due 802,337 .00 0 Less: Creditable Tax Withheld for 1 st 3 Quarters 4,303 ,356 .00 Creditable Tax Withheld for 41h Quarters 2 ,730,98 4 .00 0 0 Total Tax Credits/Payments 7,034 ,340.00 5,788 ,032 .00 10,134,410.00 Tax Overpayment (P6,232,003.00) (1 0, 134,410.00) Petitioner indicated in the same ITRs its option to refund the tax overpayments for calendar years 2002 and 2003. On March 22 , 2005 , petitioner filed an administrative claim for refund or issuance of tax credit certificate with the BIR in the total amount of P16,366,413 .00, representing overpaid income tax or excess creditable withholding tax of petitioner for calendar years 2002 and 2003.8 Due to the inaction of respondent and in order to toll the running of the f-' two-year prescriptive period for claiming a refund under Section 229 of the 5 Pars. 2 and 3, Jointly Stipulated Facts, JSF I, Docket, p. 275. 6 Exhibit " I". 7 Exhibit "J". 8 Par. 6, Jointly Stipu lated Facts, JSFI , Docket, p. 275 .

DEC IS ION C.T.A. CASE NO. 72 14 National Internal Revenue Code (NIRC) of 1997, petitioner filed the instant Petition for Review on April 14, 2005. Respondent in his Answer interposed the following Special and Affirmative Defenses: "3. He reiterates and repleads the preceding paragraphs of this answer as part of his Special and Affirmative Defenses ; 4. Petitioner's claim for refund is still subject to the administrative routinary investigation/examination by the respondent's Bureau ; 5. Taxes paid and collected are presumed to have been made in accordance with law and implementing regulations , hence, not refundable. 6. Petitioner's claim for refund/issuance of tax credit in the amount of P16,366,413.00, as alleged overpaid income taxes or excess creditable withholding taxes for taxable year ended December 31 , 2002 and December 31 , 2003 were not fully substantiated by proper documentary evidence. 7. Petitioner failed to prove that the amount of P16,366,413.00 as alleged overpaid income taxes or excess creditable withholding taxes for taxable year ended December 31 , 2002 and December 31 , 2003 were included as part of its gross income for the said taxable years 2002 and 2003 , and did not carry-over to the succeeding taxable quarter/year the subject of its claim , and the same were not utilized in payment of its income tax liability for the succeeding taxable quarter/year. 8. The filing of the instant petition for review with this Honorable Court was premature since respondent was given an ample opportunity to examine its claim for refund . 9. Assuming but without admitting that petitioner is entitled to tax refund , it is incumbent upon the latter to show that it complied with the provisions of Sections 204 in relation to Section 230 (now 229) of the Tax Code . Otherwise, its failure to prove the same is fatal to its claim for refund . 10. Claims for refund are construed strictly against the claimant (/v for the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such , they are looked upon with disfavor

DEC ISION C.T.A. CASE NO . 72 14 (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 1211)."9 After trial on the merits, the case was submitted for decision on November 29, 2007, without respondent's Memorandum. The issues10 as stipulated by the parties are as follows : "1. Whether or not petitioner is entitled to the refund of P16,366,413 .00 representing excess and unutilized creditable withholding taxes for calendar years 2002 and 2003 by showing that- a. The creditable withholding taxes amounting to P16,366,413.00 are duly supported by Certificates of Creditable Tax Withheld at Source ; b. The income from which these creditable taxes were withheld were duly declared as part of Petitioner's income in its annual income tax returns for calendar years ended December 31 , 2002 and December 31 , 2003 ; c. Petitioner had shown that it did not carry over its unutilized creditable withholding taxes for calendar years ended December 31 , 2002 and December 31 , 2003 to the succeeding taxable period ; d. Petitioner had duly filed both the administrative and judicial cla ims for refund within the two-year prescriptive period provided under Sections 204 and 229 of the National Internal Revenue Code, as amended ." The issues above can be summed into one primordial issue, viz., "Whether or not petitioner is entitled to the refund of P16,366,413.00, representing excess and unutilized creditable withholding taxes for calendar years 2002 and 2003". ~ 9 Answer, Docket, pp. 249-25 0. 10 Jointly Stipul ated Issues, JS FI, Docket. p. 276.

D EC IS IO N C.T.A. CASE NO. 72 14 Petitioner's claim for refund is anchored on Sections 76 and 204(C) of the National Internal Revenue Code of 1997, which are quoted below for ready reference , to wit: "SEC. 76. Final Adjustment Return . - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total ta xable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the taxable year is not eq ual to the total tax due on the entire taxable incom e of that year, the corporation shall either: (A) Pay the balance still due; or (B) Carry-over the excess credit; or (C) Be cred ited or refunded with the excess amount paid , as th e case may be . In case the corporati on is entitled to a tax credit or refund of the excess estim ated quarterly income taxes pa id, the excess amount shown on its final adjustment return may be carried over and credited again st the estimated quarterly income tax liabilities for the taxa bl e quarters of the succeeding taxable years . Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable years has been made, such option shall be considered irrevocable for tha t taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor ." "SEC. 204. A uthority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.- XXX XXX XXX (C) Cred it or refu nd ta xes erroneously or illegally received or penalties imposed without authority, refund the value of intern al revenue stamps when they are returned in good condition by the purchase r, and, in his discretion , redeem or change unused stamps that have been rendered unfit for use and refund their val ue upon proof of destruction . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. Provided , however, That a return filed showing an overpayment sh all be cons idered as a written claim for credit or refun d." (Emphasis supplied) ~

DECISION C.T.A. CASE NO. 7214 Settled is the rule that a corporation must signify in its Annual ITR its intention whether to request refund of the overpaid income tax or claim the automatic tax credit to be applied against its income tax liabilities for the quarters of the succeeding taxable year by marking the appropriate box in the same ITR 11 . In the present case , petitioner signified its intention that the excess creditable tax withheld for calendar years 2002 and 2003 be refunded . Under Line 30 of the 2002 Annual ITR 12, petitioner marked "x" the box "To be refunded ". In order to prove that petitioner did not carry-over its 2002 excess withholding tax , petitioner presented its 2003 Annual ITR13 which does not have any entry in Line 27A "Prior Year's Excess Credits". Under Line 31 of the same 2003 Annu al ITR, petitioner marked "x" the box "To be refunded " and petitioner presented its 2004 Annual ITR14, showing no entry in Line 27A "Prior Years Excess Credit" to prove that it did not carry-over its 2003 excess withholding tax. However, petitioner's entitlement to refund is still subject to the satisfaction of the requirem ents laid down by the NIRC of 1997, as amended , namely: 1. That the cla im for refund was filed within the two-year reglementary period pursuant to Section 230 of the Tax Code , as amend ed ; 2. That the fact of withholding is established by a copy of the 7-' statement duly issued by the payor to the payee showing the amount paid and the amount withheld therefrom ; and 11 Commissioner on Internal Revenue vs. Philippine National Bank, G.R. No. 161997, October 25, 2005. 12 Exhibi t " I-I ". 13 Exh ibit "J-4". 14 Exhibits " Q-1 " to " Q-7".

DECISION C.T.A. CASE NO . 7214 3. That the income upon which the taxes were withheld is included as part of the gross income declared in the income tax return of the recipient. 15 As regards the first requirement, Section 204(C) , in relation to Section 229 of the NIRC of 1997, as amended , provides : "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.- XXX XXX XXX (C) Credit or refund ta xes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and , in his discretion , redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refun d within two (2) years after the payment of the tax or penalty. Provided , however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund ." (Emphasis supplied) "Section 229. Recovery of ta x erroneously or illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleg ed to have been erroneously or illegally assessed or collected , or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected , until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained , whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after paym ent: Provided , however, That the Commissioner may, even without written claim therefor, f z - refund or credit any tax, where on the face of the return upon 15 Banco Filipino Savings and /vlortgage Bank vs. Court of Appeals, Court of Tax Appeals and Commissioner of Internal Re venue, G.R. No. 155682, March 27, 2007 ; Citibank N.A. vs. Court of Appeals and Commissioner of Internal Revenue, G.R. No. I 07434 , October 10, 1995.

DECISION C.T.A. CASE NO. 7214 which payments was made, such payment appears clearly to have been erroneously paid ." (Emphasis supplied) Petitioner com plied with the first requis ite. The subject claim involves calendar years 2002 and 2003 . Petitioner filed its Annual Income Tax Returns on April 15, 2003 and April 15, 200416 Counting from these dates, petitioner had until April 15, 2005 and April 15, 2006 within which to file its administrative and judi cial claims for refund. Petitioner filed with the BIR its administrative claim fo r refund on March 22 , 2005n The instant petition was filed on April 14, 2005 . Hence, both the administrative and judicial claims for refund were timely filed within the two-yea r prescriptive period . Anent the seco nd requirement, the Supreme Court enunciated in the case of Banco Filipin o Savings and Mortgage Bank vs. Court of Appeals, Court of Tax Appeals and Commissioner of Internal Revenue18 that the fact of withholding is established by a copy of the statement duly issued by the payor to the payee through the Certificates of Creditable Taxes Withheld at Source . In the present case , petitioner submitted to this Court as part of its documentary evidence ten (1 0) Certificates of Creditable Taxes Withheld at Source, which provid e the fo llowing detail s: Exhibit Withholding Agent Period Covered Amount of Tax Withheld K-1 Republi c Cement Corporation Jan to Mar 2002 Apr to Jun 2002 p 781 ,820.01 K-2 Republi c Cement Corporation Jul to Sep 2002 1,955,218 .28 Oct to Dec 2002 1,566,317 .51 K-3 Republi c Cement Corporation Oct to Dec 2002 1,607 ,109 .60 1,123,874 .00 K-4 Republic Cement Corporation pt.- p 7,034,339.40 K-5 Mirant (Philippines) Industrial Power Corp. Total 2002 Tax With held 16 Par. 5, Jointly Stipulated Facts. .I SF L Docket. p. 275. 17 Par. 6, Jointl y Stipulated Facts. .JSFI , Docket. p. 275. 18 G.R. No. 155682, Marc h 27 . 2007.

D EC I SION C.T.A. CASE NO. 72 14 L-1 Republic Cem ent Corpo ra tio n Jan to Mar 2003 1,443,426 .63 Ap r to Jun 2003 1,886 ,028.61 L-2 Republ ic Cem ent Corporation Ju l to Sep 2003 1,789 ,226.40 Oct to Dec 2003 1,583 ,627.55 L-3 Republic Cement Corporation Oct to Dec 2003 3.432,101 .01 p 10,134,410.20 L-4 Republ ic Cem ent Corporation p 17.168.749.60 L-6 Solid Develop ment Co rporatio n Total 2003 Tax Withheld Total Taxes Withhel d for 2002 & 2003 The aggregate am ount of P17, 168,749. 60 constitutes the creditable withholding taxes with held from the Certificates of Creditable Tax Withheld at Source on its services to Repu bli c Ce ment Corporation , Mirant (Philippines) Industrial Power Corporation and Sol id Devel opment Corporation for taxable years 2002 and 2003. Regarding the third requ isite, the incom e from which the creditable taxes were withheld were duly declared as part of petitioner's income in its Annual Income Tax Returns for 2002 19 and 200320 , showing the following : Gross Income 2002 2003 Add : Non-Operating an d othe r Income p 40 ,116,829 .00 Total Gross Income (44,470 ,276 .00) 40 116 829 .00 1 103 514.00 (43 .366 .762.00) The aboveme ntioned declarations are further supported by the testimonies 21 of Ms . Imelda Dela Cruz Tag ama, petitioner's Accounting Manager and Mr. Ruben R. Rubio , the Independent Certified Public Accountant (ICPA) duly commi ssioned by the Court, proving that the total amount of Credita ble W ithhol ding Tax per petitioner's Annual ITRs for calendar years end ed December 31 , 2002 and December 31 , 2003 agrees with the total amou nt of Creditable With holding Tax presented on petitioner's Schedule of Creditab le Withhol ding Tax Certificates for the calendar years ~ 19 Exhi bit " I". 20 Exhibit "J". 21 Exhibits "G", " H", T", and "U".

DECISION C.T.A. CASE NO. 72 14 Page II of 13 ended December 31 , 200222 and December 31, 200323. Moreover, the total amount of gross sales/revenue reported in the Annual ITRs for calendar years 2002 and 2003 is equ al to th e amounts re corded in the General Ledger Listing of the Cred itable Withhold ing Tax on the Transfer of Real Property and Sale of Electricity, 2002 Reconciliati on of Revenue per ITR and per General Ledger.24 Hence, the third requirement is satisfied . To recapitul ate , si nce petiti oner has complied with the requirements for tax refund claim provided in Secti on 204 of the NIRC of 1997 and applicable jurisprudence; thus , petiti oner is entitl ed to the refund of its unutilized creditable withhold ing ta xes computed as follows : Taxable Year 2002 p 802 ,337.00 Minimum Corporate Incom e Tax 7, 034,339.39 Less : Creditable W ithhol ding Tax Excess Tax Credits p (6 ,232,002.39) Taxable Year 2003 p 10 , 134,410 .20 Tax Due (1 0,134,410.20) Less: Creditable W ithhold ing Tax Excess Tax Credits p 116.366.412.591 Total Excess Ta x Credits WHEREFORE , th e instant "Petiti on for Review" is hereby GRANTED. Accordingly, responde nt is hereby ORDER ED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the modified amount of SIXTEEN MILLION TH REE HU NDRED SIXTY-SIX THOUSAND FOUR JL- HUNDRED TWELVE AND 59/1 00 (P 16,366,412.59), representing petitioner's 22 Exhibit "N". 23 Exhibit " 0 ". 24 Exhibits " M-1 " to " M- 15".

DEC IS ION C.T.A. CASE NO . 72 14 excess and unutilized creditable with holdi ng ta xes for calendar years 2002 and 2003. SO ORDERED. a ~n;G.~e4 .Q . q UANITO C. CASTANEDN/JR. Associate Justice WE CONCUR: f;c;J~~RIQUEZ Associate Justice ~E~ :s~s""ti.UcYe ATT ES TA T ION attest that the concl usi ons in the above Decisi on were reached in consultation before th e case was assigned to th e writer of the opinion of the Court's Division . Q j,.,�.a~ cC. C~ AST~ ANE~D.(Q~R..� c:::"'JOAN1T6 Associate Justice Chairperson \

DECISION C.T.A. CASE NO. 7214 Page I3 of I3 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 case was assigned to the writer of the opinion of the Court. L"'- o~ ERNESTO D. ACOSTA Presiding Justice