AYALA LIFE ASSURANCE, INC. v. COMMISSIONER OF INTERNAL REVENUE

I REPUBLIC OF THE PHILIPPINES COURT OF TAX APPLEAS QUEZON CITY AYALA LIFE ASSURANCE, IN C., J>cti tio nc1�, - VCI'SUS - CTA Case NO. 5793 Pnmwlgatcd: COMMISSIONER OF INTERNAL HEVENUI~ , Respondent NOV 09 2001 ~tt!jr.-�Pf X-------------------------------- ----- ---------------------- X DECISION This IS a Petition for Review seeking fo r the refund of the amo unt of SEVENTEEN MILLION ONE HUNDRED FIFTY-SEVEN TllOUSAND FOUR HUNDRED E IGHTY-NINE PESOS (P 17, 157,489.00) alleged ly representing the excess and unutili zecl creditable withholding taxes withheld at source for the calendar year ended December 31, 1996. Petitioner is a corporatio n duly organized a11d existing under the laws of th e Republic of the Philippines, authorized to engage in lik in s urance business with principal place of business located at the 9111 floor, Aya la Life Bld g., Ayala Aven ue, Makati C ity. 1 Records show tlmt on April 23, 1997, Petitioner filed with the Bureau of Internal Revenue (throug h_. .it.s BIR-Accredited Bank of the Philippine Is lands, Makati 13ranch-OO I) its Corporation Annual Income Tax Return (Exhibit II) for the calendar year ended 3 1 1 Joint Stipulation (lFacls, it em No.I. CTA docket p.36 /333-A-

Decision- CTA Case No. 5793 Page 2 December 1996 reflecting the amount of P 24,6 I 5,903.00 as excess and/or unutilized creditable income tax withheld at source, computed as follows: Gross Income P I ,002,452,399.00 Less: Deductions I ,045,504,596.00 Taxable Income ( 43,052,197.00) Tax Due NiL Less: Tax Credits/Payments 24,615,903.00 Alleged Refundable Amount p _�24.615 .903.00) The breakdown of the aggregate tax credits/payments of P24,615,903.00 as above shown allegedly consists of the following items : (a) Prior Year's Excess Credit of P7,458,414.00; and (b) creditable tax withheld for the calendar year 1996 amounting to P17,157,489.00. The amount of Pl7,157,489.00 representing a portion of the total refundable excess creditable withholding taxes Jl�om income payments to the Petitioner during the calendar year 1996 comprising of gain from sale of real estate and rental inc<_:>me was carried over to the succeeding year 1997 as prior year's excess credit. However, since Petitioner incurred a net loss during the first quarter of calendar year 1997 (Exhibit C) and for the entire calendar year ended December 31, 1997 (E.x!Jihit D). said amount remained unapplied and unutilized. True enough, for the first quarter of 1997, Petitioner incurred a net loss of P64,676,944.55 and an excess creditable withholding tax of PI ,483,259.87 as evidenced by Petitioner's Quarterly Income Tax Return for the Ist Quarter of 1997 (Exhibit C) which was filed with the 81R on May 29, 1997. Fo;� the entire calendar year ended December 31, 1997, Petitioner likewise incurred a net loss in its business operations .. ....~,_ amounting toP I,735,207.00 and an excess creditabl e withholding lax or'P31, 118,917 .00. /333 - 8

Decision - CTA Case No. 5793 Page 3 These amounts are clearly renccted 111 Petitioner's Corporation Annual Income Tax Return (Exhibit D) for the calendar year ended December 31, 1997, filed on April 15,1998. Said 1997 Annual Income Tax return re1lected the following amounts: Gross Income p 1,167,301,353 .00 Less: Deductions 1' 169,036,560.00 Taxable Income (Net Loss) ( 1,735,207.00) Tax Due NIL Less: Tax Credits/Payments 24,615,903 .00 31,118,917.00 (a) Prior Years Excess Credit 1.00 31.118.917 .00) (b) Quarterly Payments (c) Creditable Tax withheld 6,503,014.00 p Tax Payable/Overpayment (P As can be seen from the foregoing, the amount of P 24,615 ,903.00 representing prior ye~trs excess credit (1'7,458,414 .00 for 1995 and P 17,157,489 for 1996) was neither utili zed nor applied in the year 1997 because of the Petitioner's net-loss position in its business operations. On December 6, 1997 (should be December 3 as per Exhibit "B"), Petitioner filed with the BIR, Revenue Region No . 8, a letter request for tax credit/refund of the amount of P 17,157,489.00 for unutilizecl withholding ta x for taxable year 1996.2 1\s the Respondent undertook no action on Petitioner's administrative claim for refund, Petitioner elevated his cause of action to this Court on April 14, 1999 via Petition for Review in order not to be barred from seeking judicial recourse to claim said refund/ tax credit by reason of prescription. For his part, Respondent, on July I, 1999, filed an Answer and raised therewith the following Special and Affirmative Defense, thu s: 2 ibid , item No.6, C TA docket p.37 /333 ~c.

Decision - CTA Case No. 5793 Page 4 1. Jn an action for tax refund , Petitioner must show that taxes were paid erroneously or collected illegally . Failure to sustain this burden is 1~ttal to the action for refund; 2. Claims for refund are construed strictly against the claimants since they are in the nature of exemptions from taxation. (Manila Electric Co. vs. Commissioner (~{Jntemal Revenue, () 7 ,)'CRA 351),� 3. Taxes arc presumed to have been paid and collected in accordance with Jaw. In order to substantiate its claim for refund, Petitioner presented the following documentary evidence which have been duly admitted by this court in its Resolution dated July 7, 2000 and March 2, 200 I, to wit: Exhibit Description A,D Petitioner's Corporate Annual Income Tax Returns fur the B calendar years ending December 31, I996 and 1997 c Letter-claim for refund to the BIR E toY Corporate Quarterly Income Tax Return for the 1st Quarter of Calendar Year 1997 Various Certificates of Creditable Taxes Withheld at Source for Taxabl e Ycar 1996 issued by various withholding agents with Petitioner as payee AA,CC, Various Monthly Remittance Returns of Jncome Taxes and DD withheld for the months of September, October & .Jul y 1996 EE Monthly Remittance Return of Income Taxes withheld for th e year I 996 Summary of Petitioner's exhibits regarding creditable taxes withheld at source in I 996 from rental and sale of real property FF&GG (Supplemental Evidence) Letter request to 'the Chief of the Revenue Accounting Division of BIR and the Cerlilicalion 13 33- D

Decision - CTA Case No. 5793 Page 5 attesting that the co ll ections fro m Petitioner we re ve ri fi cd against the Tax Returns/ ATAPs batch Contro l Sheets o n fil e with the Di vis io n On the other hand , co unsel for the Respo ndent opted not to present any controverting evide nce but instead submitted its case based on the pleadin gs. The case was submitted for decision o n Jul y 20,200 I, after the Petitioner presented its memo randum . The lone issue to be resolved by this Co urt, as j ointly stipulated by the parties is centered on WHETHER OR NOT PETIT IONER IS EN TIT LED TO A TAX R E FUN D O F T HE AMO UNT OF P 17, 157,489.00 FOR UN UTILI ZED CRE DJTA 13 LE WITHHO LDIN G TAX FO R TAXABLE YEAR 1996. Pe titi o ner c ites Section 69 o f the old Tax Code (now Section 76 o f the 1997 Tax Reform Ac t ) as its lega l bas is for the claim lor refund , which is hereund er quoted as foll o w s : "Section 69. Finaladjustmeut retum. - Every co rporation li abl e to tax under Section 24 shall fil e a fin al adj ustment return cove rin g the total taxable income fo r the precedin g ca lendar or !i scal year. Jf the sum of the quarterl y tax pay ments made durin g the said taxable year is not equal to the total tax due o n the enti re taxab le in co me of that yea r, the corporation shall either: (A) Pay the excess tax still du e; or (B) Be refund ed the excess amoun t paid , as the case may be. In case the corporati on is entitl ed to a tax credit or refund of the excess estimated quarterl y income taxes pa id , the refund a bl e amo unt shown on its fi nal adjustment return, may be credited against the estimated quarterl y inco me tax Iiab iIiti es for the taxa ble q uarlers of the succeeding taxable year. " -� I 3 33 -- E

Decision - CTA Case No. 5793 Page (j We agree with the Pe titioner th at a refund or tax credi t is in order. A per usal of th e records would show that the Petitione r's c red itab le taxes for taxable year 1996 were not app lied to the income lax liability of th e subsequent year because Petiti o ner incurred a net operatin g loss durin g th <:: taxable year 1997 (Exhihit D). However, since we are dealing with th e re fund of unutili zed credita ble wi thh o lding taxes, this Court bas la id down three bas ic requirements [in the following cases: Cilytn1st Finance Corponttion vs. The Honorable Commissioner of Jntemal Revenue, CTA Case No. 4134, November 11, 1991; affirmed by the Com�t of Appeals in Citytmst Finance Coqwr�ation vs. Com�t of Tax Appeals and the Commissiune�� of Internal Revenue, C.A. G.R. SP No, 28239, Ma��ch 14, 1994; and Citytrust Finance Corporation (formerly Investor's Finance Corporation/FNCB Finance) vs. Commissionct� of lntcmal Revenue, CTA Case No. 4046, February 24, 1993; affinucd by the Court of Appeals in Commissionet� of Intunal Revenue vs. Citytt�ust Finance Coqwration (fonucl"ly Investor' s Finance Cor'p./FNCB Finance) and the Com�t of Tax Appeals, C.A. G.R. SP No. 31104, April 18, 1994] hereunder en umerated as follows: 1. That the claim for refund is filed wit hin the two-yea r reglc men tary peri od pursuant to Secti on 23 0 of the Tax Code, as a mend ed; 2. That the income upon which the taxes vc re wi thheld were includ ed as part of the gross income declared in th e income tax return of the recipient; 3. That th e fact of w ithh o lding is established by a copy of the statement dul y issued by the payor to th e payee showing th e amo unt paid and the amount of tax withheld thcrefl�om. /333- {:" ,

Dec is io n - CTA Case No. 5793 Page 7 These requirements were arfirmed by th e Sup reme Co urt in the landmark case of Citibau/( N.A. vs. Court of Appeals, Commissiouer of Jutemal Revenue, G.R. No. 107434, dated October 10, 1997. Alle r an examinati on o r all the do cum e nts prese nted in evidence, thi s Co urt llnds th at Pe titioner bas substanti all y compli ed w ith th e a fo resa id requirements. As to the first require me nt, records revea l tha t Petitioner fil ed w ith th e 8 1IZ its written claim fo r re fund on Decembe r 3, 1997 and the Petition for Review on April 14, 1999. S ince the co unting of th e two-yea r pe riod co mmences to run on A pril 23, 1997, the date w hen the fin a l adjustment return lor taxab le yea r 1996 was fil ed (Commissioner of Juternal Revenue vs. Asia Australia Ltd., G.R. No. L-85956, April/0,1989), c learl y Pe titioner's action was fil ed we ll w ithin the two-yea r pe ri od provided by law. As to w he ther or not Pe titioner included th e income from whi ch the taxes were w ithheld in the gross income declared in its income tax re turn, W e are co nvinced that Petitioner has complied w ith the seco nd requirem ent. Petiti oner 's income was deri ved from the re ntal and sa le o f real properli es. Based on th e 1996 ITR, Petiti oner declared the gain on sale of real esta te, land a nd buildin g a mou ntin g to I' 198,445,995. 00 in whi ch the amo unt of Pl4, 192, 11 7. 00 has been w ithhe ld , a nd the re ntal income a mo unt ing to P30,394, 168.00 in which the amount o f P2,965,372 .00 has been withheld by the lessees. The total c reditabl e taxes withheld Jo r the ca le ndar yea r 1996 amo un ted to PI 7, 157,489.00. However, Petiti oner made a typograp hi ca l e rror w hen it inte rchan ged the two amounts of wi thholding taxes. Thi s was ex pl ained by Petitioner 's w itness, Ms. M aria Carmela L. Toribio, durin g the hearin g held on December 14, 1999, and We qu ote, thu s: /3 33- G

Decision - CTA Case No. 5793 !'age 8 Q : Were there any so urces o f inco me th at were s ubjected to w ithho lding tax, Mada me W itness? A: Yes. Q: Can yo u please po int th em o ut to us ir it is s hown in Ex hibit "A". A : T he incom e s ubj ect to w ithho lding tax are shown in Schedul e 3 of th e Inco me Tax Return . These are th e ga in o n sale o f rea l es tate, latH.! and building o f P 198,44 5,995. 00 w ith the correspo ndin g tax w ithhe ld o f P14, 192 ,117.00 ; Re nta l Inco me of 1'30,3 94, 168 .00 with th e co rrespondin g tax w ithheld o f P2,965,372 .00. We j ust no ted tha t the re was s light typographi ca l erro r in th e Inco me Tax Re turn th a t th e amo unt o f Tax Withhe ld o n th e Re nta l Inco me was typed bes ide fro m " Inco me o r Gai n of Sa le". Q: Do yo u te ll us tha lthl s lax w ithheld co rrespondin g lo gain on sa le sho uld instead be the tax w ithhe ld lo r th e renta l incom e? A: Yes. Q : A nd , the tax w ithhe ld o r� P 14. 192, 11 7.00 sho uld be typed bes ide and refers to th e tax w ithhe ld o n gain o r sale. A: Yes. Howeve r, th e taxes w ithhe ld in th e am o unt o r P32,8 09.25 fro m th e Bank of th e Philippine .Island s (Ex hi bit H-2) represe ntin g Petiti o ne r's inco me rro m p rofess io na l (juridical) services of P656, 18 5.00 were no t rell ccted in Pe titi o ner 's 1996 a nnu a l inco me tax re turn . O nl y the taxes w ithhe ld fro m renta l inco me and sale of real properties we re declared in th e 1996 inco me tax return, hence, thi s Co urt deemed it prop er to di sall ow th e credita ble withho lding taxes refe rrin g to prol'ess io na l (juridi cal) services. Petitio ner 's submi ssio n of th e va ri o us ce rti fica tes of Creditabl e In co m e Tax Withhe ld at So urce indi cates co mpli a nce w ith the thi rd requireme nt. Pe titi o ne r prese nted .� /333~/~

Decision - C"l'A Case No. 5793 Page 9 the various Certificates o f Creditabl e Taxes Wi thhe ld at So urce-13HZ Form 1743-750 and th e payors' Monthl y Remittance Returns of Income Taxes Withheld- BIR Form 1743W (Exhibits E to Y, inclusive of sub-markings. A/\, and CC to EE). Howeve r, from the abovementioned documents, th e certifi cate of cred itab le tax withheld at so urce issued by Radio Communications or the Philippines (Exhibit W) should be di sallo wed because th e certificate has no date. Moreover. a comparison o f th e taxes w ithheld from the sa le or real properties as reflected in the I996 annual incom e tax return a mo unting to Pl4,192,117.00 is less than th e amount of taxes w ithheld reflected in the monthly remittance returns in the total amount of P 15,789,2 17 .50. Onl y th e amo unt declared in th e annua l income tax return should be allowed . Based on th e foregoing, thi s Co urt recomm ends th e granting of Pe titio ne r' s claim for re fund in the reduced amount of P 14.797,996.97 co mputed as follows: CREDITAIJLE TAXES WITHHELD FROM RENTAL INCOME WITHHOLDING AGENT EXHIBIT PERIOD INCOME TAX COVERED PAYMENT WITHHELD AROMIN , SlY & AS SOC . E 1996 p 1,520,395.00 p 76 ,019 .74 3,240 .00 162.00 AYALA BAIN INSURANCE F Jui-Sep 96 72,900 .00 3,645 .00 AYALA INSURANCE G Apr-Jun 96 :.. 0,475 .00 1,023 .75 81,900 .00 4 ,095 .00 BANK OF THE PHIL IS. H Nov 96 10,42 2.20 10,422 .20 521 .11 BANK OF THE PHIL IS. H-1 1996 10,422 .20 521 .11 222 ,750 .00 521 .11 BORDEN INTL I Feb -96 22 2,750 .00 11 ,137.50 22 2,750.00 11 ,137 .50 BORDEN INTL 1- 1 Jul -96 222 ,750 .00 11 ,137.50 222,750 .00 11,137 .50 BORDEN INTL 1-2 May-96 222 ,750 .00 11 ,137.50 222,750 .00 11 ,138 .00 BORDEN INTL 1-3 Jan -96 222,750 .00 11 ,137 50 11 ,137. 50 BORDEN INTL 1-4 Feb-96 BORDEN INTL 1-5 Mar-96 BORDEN INTL 1-6 Apr -96 BORDEN INTL 1-7 May-96 BORDEN INTL 1-8 Jun -96 BORDEN INTL 1-9 Jul -96 BORDEN INTL 1-10 N ov -96 /333 - E l

Decision - J 1996 84,000.00 4 ,200 .00 C TA Case No. 5793 194,996.40 9,749 .82 Page /0 K Jan-Mar 96 194,996.40 9 , 7 4 9 .82 CEBAP LENDING HOUSE K-1 Apr-Jun 96 DEL MONTE FRESH 194 ,9 9 6 . 4 0 9,749.82 PRODUCE K-2 Oct-Dec 96 DEL MONTE FRESH 44,180.00 2,209 .00 PRODUCE L Jan-Mar 96 45,825 .00 2,291 .25 DEL MONTE FRESH 1,725,605.30 86, 280 .24 PRODUCE L-1 Apr-Jun 96 2 18,700.00 10,935.00 DHL PHILIPPINES 217,728 .00 10,886.40 DHL PHILIPPINES N 1996 105,000.00 5,250.00 EDINET PHILS 11 5,500 .00 5,775 .00 EMPIRE SALES 0 1996 122,472 .00 6,006 .00 E .B. LOREDO REALTY 416,666 .25 20,833 .31 GLOBE TELECOM p 1996 637,21 1.00 31,860 . 55 JRS BUSINESS CORP 256,122 .00 12 ,806 . 10 JRS BUSINESS CORP Q 1996 328,050 .00 16,402 .50 J.P. TOLENTINO 3, 158,965.86 157,948.29 LBC EXPRESS R Apr-Jun 96 MAKATI ROTARY CLUB 546,750 .00 27,337 .55 MANAGEMENT ASSOC. R-1 Jui-Sep 96 UNIVERSAL 12,119,941 .2 1 p 6 0 5 , 8 7 9 .97 REINSURANCE s 1996 UNITED JANITORIAL T 1996 Subtotal u 1996 v 1996 X 1996 y 1996 p ADD: CREDITABLE TAXES WITIIIIELIJ FROM SA~ES OF REAL PROPERTIES WITHHOLDING AGENT EXHIBIT PERIOD INCOME TAX COVERED PAYMENT WITHHELD AYALA LIFE ASSURANCE AA Sep-96 p 41,408 ,000.00 p 2,070,400.00 904,600 .00 AYALA LIFE ASSURANCE cc O c t -9 6 18 ,092 ,000 .0 0 692 ,5 0 0 .00 AYALA LIFE ASSURANCE DO 1996 13 ,850,000 .00 12, 121,7 17.50 AYALA LIFE ASSURANCE EE 1996 161 ,622,900.00 15,789 ,217 .50 Subtotal p 234,972,900.00 p Less: Und ec lared c reditable ta xes withheld p 1 597 100. 50 A ll owab le creditable taxes withheld li�om p 14 192 117.00 sa les of real prope rti es AMOUNT REFUNDABLE ~ :l4,Z9Z,.9llii.ll.Z ,' /333 - J

Decision - C TA Case No. 5793 Page II WHEREFORE, 111 v1ew of th e !o rcgo in g, th e instant Petition for Re view is PARTIALLY GRANTED. Respondent is hereby ORDERED TO REFUND OR TO ISSUE A TAX CREDIT CERTIF ICATE in fav or of the Petitioner in the reduced amount of FOURTEEN MILLION SEVEN HUNDRED NINE~Y SEVEN THOUSAND NlNE HUNDRED NINETY SIX & 97/ 100 (P 14,797,996.97) representing unutili zed creditable taxes withheld at source for the calendar yea r ended December 31 , 1996. SO ORDERED. L~ --C~ ERNESTO D. ACOSTA Pres iding Judge WE CONCUR: Uc.~G C?. ~~-e�.--o0 Q auAN JTO C. CASTANEDA, Jkf , Associate .I udge CERTIFICATION T hereby certify that the above dec ision was reached after clue consultation w ith the members of the Court of Tax Appeals in accordanct with Section 13 , Article V fff of the Constitution. L - [9. \rl-yyk_ ERN ESTO D. ACOSTA Presiding Judge (333 ~ K