BANK OF THE PHILIPPINE ISLANDS v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY BANK OF THE PHILIPPINE ISLANDS, C.T.A. CASE NO. 5458 Petitionet~, - - vet~sus DECISION This is a judicial claim of P16,879,572.03 allegedly representing overpaid t~eceipts taxes ("GRT" fot~ bt~evity> paid fot~ the fom~th quarter of year 1994 and the first, second, third and fourth quarters of year 1995. Petitioner is a domestic banking corporation duly organized and existing under the laws of the Republic of the Philippines, with head office located at the BPI Bldg., Ayala Avenue corner Paseo de Roxas Street, Makat i City. The facts are simple. For each of the abovestated quarters, Petit i onet~ allegedly paid the corresponding amount of 5% GRT which was arrived at by including from the tax base the twenty (201-) percent final taxes on passive income already withheld and paid to Respondent by various withholding agents. On Sept em bet~ 24, 1996, Petitioner filed with I Respondent a written claim for the refund of the aforesaid amount of GRT pursuant to this Court's decision in CTA Case No .. 4720 entitled, "Asian Bank Corporation

DECISION - C.T.A. CASE NO. 5458 2 vs. Com missioner of Internal Revenue " pt~omulgated on January 30, 1996, wherein it was ruled that the basis for determining the gross receipts tax on banks and non-bank financial intermediaries should be the gross receipts of said institutions minus the twenty final taxes already withheld by various withholding agents on interest and other passive income of said institutions. Due to the inacti on of the Respondent on said claim, however, Petitioner was constrained to ele vate its case befor e this Court. Hence, this petition filed on January 17' 1997. Petitioner reasserts its stance a quo. On the other hand, Respondent contends, by way of special and affirmative defenses, that Petitioner's claim for r~e fund is still pending administrative examination and evaluation; taxes paid and collected are presumed to have been made in accordance with law and regulations, hence, not refundable; that it is incumbent upon the Petitioner to show compliance with the provisions of Section 230 of the Tax Code, as amended; and that the rule is well- settled that claims for refund are construed strictly against claimants as it partake the same/ attribute as exemption from taxation.

DECISION - C.T.A. CASE NO. 5458 Records show that it was only the Petitioner which filed a Memorandum. In it, Petitioner merely reiterated its previous as s ertions. The sole issue to be adjudicated in this case is whether or not Petitioner is legally and factually entitled to its claim for refund of overpaid gross t~ece i pt s taxes. After a painstaking scrutiny of the attending facts, the disquisition of the parties and the laws and in point, this Court rules against the petitioner on the ground of insufficiency of evidence. The legal aspect of petitioner's claim for refund is not a case of first impression. As adverted to above, the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720 promulgated on Januat'Y 30, 1996, has already enunciated the rule that the 201- final taxes alt�eady withheld by withholding agents on the passive income of banks and non - banl-<ing intermediaries are to be excluded in the computation of the latter's obligation on the payment of gross receipts tax. We do not intend to depart fl�'om the wisdom of said case which is hereunder quoted, to wit: "The assessment for GRT is based on Section 119 of the Tax Code, quoted het�eundet' thus:

DECISION - C.T.A. CASE NO. 5458 -4 SEC. 119. Tax on banks and non- bank 'Financial intermediat�ies. -Ther��e shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non- bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived. Short-term maturity not in excess of two (20 years 5% Medium-term maturity-over two years but not exceeding four~ (4) years 3% Long-term maturity: ( i ) Over~ four~ (Lt.) years but not exceeding seven (7) years 1% ( i i) Over~ seven (7) years 0% (b) On dividends 01- (c) On royalties, rentals of pr~oper~ty, r~eal or~ per~sonal, pr~ofits from exchange and all other items treated as gross income under Section 28 of this Code 5% Pr�ovided, ho~�ve~-'er�, That in case the maturity period referred to in par~agr�aph (a) is shor~tened thr~u pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be applied accordingly. Nothing in this Code shall preclude the Commissioner from imposing the

DECISION - C.T.A. CASE NO. 5458 5- same t<a>< her~ein pt~ovided on per~sons per~fot~ming similar~ banking activities. The aforequoted provision of the law speaks of gross receipts as the basis of the 5% bank tax or GRT, and it is petitioner's contention that the interest income included as part of such gross receipts should be computed minus the final tax already withheld by various withholding agents for the reason that such amount did not actually go to its funds, hence was not actually received by them. We agree with the petitioner that the 20% final withholding tax on its interest income should not form part of its taxable gross r~eceipts. Revenue Regulations No. 12-80 dated November~ 7, 1980 on Taxation of Cer~tain income Derived from Banking Activities provides that the rates of tax to be imposed on the gross receipts of such financial institution; shall be based on all items of income actually r~ece i ved, thus: SEC. L,.� XXX XXX XXX (e) Gr~oss r~eceipts tax on banks, non-bank Financial inter~med.iar~ies, f'inancing comp,.::mies, and other non-bank Financial intermediaries not perForming quasi-banking activities.-The rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. Mere accr~ual shall not be consider~ed, but once payment is received on such accrual or in cases of prepayment, then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder. (Underscoring supplied) Ft~om the for~egoing, i t is but logical to infer that the final tax, not having been received by the petitioner but instead went to the coffers of the government, should no longer form part of its gross receipts for the purpose of computing the GRT. This conclusion is in accord with the interpretation of the Supreme Court in the case entitled Collector of Internal Revenue vs. Manila Jockey Club, 1.08

DECISION - C.T.A. CASE NO. 5458 �- 6 - Phil. 821, as quoted by this Court in disposing of a similar issue in the case entitled Campania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated Novembe1�~ 14, 1966, thus: In the second place, the highest tribunal of the land intet~pt~eted the tet~m "gt~oss receipts: to mean all receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayet~. Thus, i t was held: "xx xx. The govet~nment could not have meant to tax as gross receipt of the Manila Jockey Club the 1/2 % which it directs same club to tm~n ovet~ to the Boat~d of Races. Th�~ latter being a Government institution, there would be double taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, to winning horses and Jockeys-admitted 5%. It is true that the law says that out of the total wager funds 12 1/2 ~ shall be set aside as the 'Commission' of the track owners but the law itself takes official notice, and virtually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5~ out of the 12 1/2 ~ commission. As it did not at that time contemplate the application of gross receipts' revenue principle, the law in making a distribution of the total wager funds, took no trouble of separating one item from the other; and for convenience, grouped three items under one common denomination. "Needless to say, gt~oss t~eceipts of the proprietor of the amusement place should not include any money which although delivered to the

DECISION - C.T.A. CASE NO. 5458 - 7- amusement place has been especially earmarked by law or regulation for some person other than the pt~opt~ietot~. 11 <The Commissionet~ of Intet~nal Revenue vs. f'r1anila Jockey Club, Inc., G. R. Nos. L-13890 & L- 13887, June 30, 1960) It is to be noted that, undet~ Section 260 of the Tax Code, a race-track is subject to an amusement tax of 20~ of its gross receipts and the term gross t~eceipts' embt~aces a l l the ,.~eceipts of the pt~opt~ietot~, lessee, or~ opet~ator~ of the amusement place. 11 Notwithstanding the broad and all-embracing definition of the ter�'m 11 gt~oss t~eceipts 11 found in our~ amusement tax law, our Supreme Court did not adopt a literal interpretation of the said term in the case of the Manila Jockey Club, Inc., supra . 11 With the legal setting of this case settled, We go now into the examination of the exhibits adduced in evidence by the Petitioner to attain the burden of proof required in proving its claim for refund. A detailed analysis of Petitioner~' s evidence <Exhibits A - L, inclusive) fails to show convincingly that the amount being claimed for refund has indeed been paid to the Respondent and that the gross receipts on passive income corresponding to such overpaid gross receipts taxes have been duly reported. Petitioner was able to prove that the passive income reported as part of the gross receipts in the quarterly percentage tax returns was declared in an overall total, inclusive of the 20% final withholding taxes. It failed

DECISION - C.T.A. CASE NO. 5458 - 8- however to present proof of the individual transactions from which the alleged interest and passive income were sourced. The Certification issued by the auditing firm of Joaquin Cunanan & Co. <Exhibits L> would have sufficed to rectify this defect but, unfortunately, no pre-marked exhibits of the individual transactions supporting said Certification and the schedule contained therein were made and adduced in evidence. In earning its income, Petitioner is of course expected to have in its possession documents and computerized records of each and every transaction it has entered into, from which the aggregate amount of gross receipts as declared in the quarterly returns were based. In this regard, Petitioner should have endeavored to prove that the alleged receipts of interest and passive income were the ones duly reported as such in each of the quarterly percentage tax returns. Inasmuch as the gross receipts reported in said returns pertain to a conglomeration of various income subjected to final and creditable withholding taxes, there was therefore a need for the Petitioner to show that the particular portion of reported passive income tallies with its proof of individual transactions.

DECIS I ON - C.T.A. CASE NO. 5458 - 9- WHEREFORE , in view of the foregoing, herein Petition for~ Review is her'eby DENIED for insufficiency of evidence. No pronouncement as to costs. SO ORDERED. WE CONCUR: ez-~. ~ ERNESTO D. ACOSTA Pr~esiding Judge ( dissenting ) AMANCIO Q. SAGA Associate Judg e CERTIFICATION I hereby certify that this decision was reached after due consutation with the members of the Court of Tax Appeals in accordance with Section 13, Ar~t ice VI I I of the Constitution. ~tQ,~ ERNESTO D. ACOSTA Pr-esiding Judge Court of Tax Appeals

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY BANK OF THE PHILIPPINE ISLANDS, Petitioner, - versus - C.T.A. CASE NO. 5458 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - DISSENTING OPINION The denial in the instant case as held by my esteemed collegues, was based on petitioner's failure to substantiate its claim for refund with sufficient evidence. with due respect to the decision in the above- entitled case, strongly believe that the denial should have been based on petitioner's lack of legal bases in claiming for a refund of gross receipts tax. In this regard, I would also ike to express my dissent to this Court's decision in the case of Asian Bank vs. Commissioner of Internal Revenue, CTA Case No. 4720 dated January 20, 1996 upon which Petitioner anchored its claim for refund. In said case, this Court concluded that the amount representing the final tax, not having been received by the petitioner, should no longer form part of its gross receipts for purposes of computing the gross receipts tax.

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 2- As I have already mentioned in previous similar cases, such conclusion in law is legally objectionable for two (2) reasons, to wit: 1) Section 4(e) of Revenue Regulations No. 12-80 is not a computation determinative of the amount of gross receipts as basis of the gross receipts tax under Section 119 of the Tax Code. Said revenue regulations merely authorize the determination of the amount of gross receipts on the basis of the method of accounting being used by the taxpayer under Section 37 of the Tax Code. Such accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions (Consolidated Mines, Inc. vs. CTA, L-18843, August 29, 1974). The two principal accounting methods expressly and impliedly recognized by the Tax Code and the Income Tax Regulations are: (a) Cash receipts and disbursement method or cash basis. Income earned by the taxpayer is not included in gross income unt i I received and expenses are not deducted unti I paid within the taxable year; and ( b) Accrual basis. Income is included in gross income when earned, whether received or not, and expenses are a I Iowed as deductions when incurred although not yet paid within the year. 2) That the non-inclusion of the 20% final withholding income tax from the gross interest income for purposes of the gross receipts tax operates as an exemption from tax. Being an exemption from tax, the same must be construed strictly not against the government but against the one who asserts the claim of exemption. Tax exemption can only be given effect when the grant is clear and categorical inasmuch as taxation is the rule and exemption is the exception, section 26, Tax Code. The holding therefore in the Asian Bank Corporation to the effect that the non-inclusion of the 20% final withholding income tax from the gross

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 3- receipts can logically be inferred from the wordings of said Section 4(e) of Revenue Regulations No. 12-80, is misplaced. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent (51 Am Jur 361). It should not be construed as to permit the taxpayer to easily evade the payment of the tax (Caban Steel Co. vs. Lewelyn, 251 U.S. 501). Thus, the good faith of the taxpayer is not sufficient justification for exemption from the payment of surcharges imposed by law (Commissioner vs. Royal lnterocean Lines and CTA, L-26506, July 30, 1970). A tax statute should be construed to avoid the possibilities of tax evasion (Lorenzo vs. Posadas, 64 Phi Is. 353). The High Court's decision in the case of Commissioner of Internal Revenue vs. The Mani Ia Jockey C I ub, Inc. 108 Phils. 821, June 30, 1960, which was reaffirmed by the said Court in the case of Visayan-Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357, February 27, 1965 cannot be considered as precedent cases, hence, inapplicable to the two cases decided by this Honorable Court in the cases of Campania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1966 and Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720 dated January 30, 1996, for the following reasons: 1) In the Mani Ia Jockey Club, Inc. case, the Club was authorized to operate horse races in which betting was made through the sale of tickets to the public. The total amount of bets called "wager fund" were distributed

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 4- pursuant to Executive Order No. 320 and Republic Act No. 309, as follows: 87~% as dividends to holders of winning tickets 12~% as "commissions" of the Mani Ia Jockey Club, of which~% was assigned to the Board on Races and 5% was distributed as prizes for owners of winning horses and authorized bonus for jockeys. According to the above-mentioned distribution of the "wager fund", the then Co I I ector of Internal Revenue assessed the Club on the whole amount of its "commission" of 12~%. But since the Club had already paid the amusement tax based on its 7% share of the "commission", the amount assessable pertains only to the 5~% for the period from November 1946 to October 1950. On various instances, the Club protested the proposed assessments and was sustained by the opinions of the Secretary of Justice rendered on three different occasions (Opinion No. 345, series of 1941; Opinion No. 249, series of 1952 and Opinion No. 340, series of 1955). Notwithstanding the opinions of the Secretary of Justice to the effect that the amount corresponding to the 5~% was held only by the Club in trust for the owners of winning horses and authorized bonuses of jockeys, the then Co I I ector of Internal Revenue demanded payment of amusement taxes for the period November 1946 to October 1950. Said demand letter was timely appealed to the

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 5- Court of Appeals wherein a unanimous judgment was obtained reversing the Col lector's stand on the matter. In the High Court, the position of the Secretary of Justice was sustained thereby upholding the Court of Tax Appeals' decision. Accordingly, gross receipts of the proprietor of the amusement place should not include any money which, although delivered to the amusement place was "especially earmarked" by law or legal rule or regulations for some persons other than the proprietor. Undeniably, they are money received by the racing club but they are moneys earmarked by law or regulations for winning horse owners and jockeys and never for a minute become the property of the race track. The same is true in the case of the~% which the law directs the club to deliver to the Board on Races. The High Court therefore agrees with the stand of the Court of Tax Appeals that such funds representing 5~% of the 12~% "commissions" of the race track do not form part of the gross receipts, hence not subject to the amusement tax of 20%. The above-mentioned decision of the High Court was also applied in the case of Vi sayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357, Nos. L-19530 and L-19444, February 27, 1965. The legal issue involved in this case is the interpretation of the management contract entered into by and between the

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 6- Bureau of Customs and Visayan Cebu Terminal Co., Inc. whereby the latter as contractor was appointed the sole manager of the Arrastre Service at the Port of Cebu City. In the said Management Contract, it was further agreed and understood that in consideration of the rights and pr i vi Ieges granted the Contractor for the management of the Arrastre Service, the Bureau of Customs shall receive twenty eight (28%) percent of the total monthly gross income derived from whatever source in connection with the operations of the Arrastre Service, payable within ten (10) days of the succeeding month. The main legal issue involved in this case is whether or not the gross receipts corresponding to the 28% of the total gross income of the Service Contractor delivered to the Bureau of Customs within ten (10) days of the following month should form part of the gross receipts subject to 3% contractor's tax under Section 191 of the Tax Code. The Court of Tax Appeals ruled in favor of the petitioner, holding the view that the said 28% payment by the Arrastre Contractor based on its monthly gross income should not form part of the gross receipts subject to 3% contractors tax and that paragraph 23 of the said Management Contract can legally be construed as a "regulation". As the learned trial court has aptly observed: "x x x the government could not have intended to consider as gross receipts the 28% that went to one of

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 7- its institutions, the Bureau of Customs, and thereby collect percentage tax on it from petitioner. To hold petitioner I iable for the payment of percentage tax is unquestionably unjust and not contemplated by Section 191 of the Tax Code." AI I the above-mentioned decisions of the High Court made specific reference to gross receipts which are especially "earmarked by law or legal rule or regulation" as not forming part of the taxable gross receipts for purposes of the gross receipts tax under the Tax Code. For this purpose, it is pertinent to define the word "earmark" as a mark put upon a thing to distinguish it from another. Originally and I iterally, a mark upon the ear, a mode of marking sheep and other animals. Property is said to be earmarked when it can be identified or distinguished from other property of the same nature. To set apart from others (Black's Law Dictionary, 6th Edition, p. 508). In the case of the Manila Jockey Club, Inc. Executive Order No. 320 and Repub I i c Act No. 309 made the specific "earmarking" for distribution of the total wager fund to different persons other than the proprietor. The same is true in the case of Visayan Cebu Terminal Co., Inc. where the specific earmarking of the 28% of the total monthly gross income to be delivered to the Bureau of Customs by the Contractor was provided in paragraph 23 of the Management Contract. Such specific

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 8- earmarking of the twenty (20%) percent f ina I income tax as not includible in the gross receipts for purposes of the gross receipts tax was not provided by any law or legal rule or regulations, hence the non-appl icabi I ity of the above-cited High Court decisions to the Asian Bank Corporation case. This legal observation is also in point in the case of Campania Maritima case where the non-inclusion of the 10% reserve from the total cash collection to avoid claim for refund on freight and passengers tickets not taken is not provided by any law or legal rule or regulations. In the Asian Bank Corporation case, petitioner bank a I I eges that subjecting the gross receipts to the 20% final withholding income tax and later to the 5% gross receipts tax is not only oppressive and obnoxious but even a confiscatory form of double taxation. Double taxation has been defined "as the taxing of the same item or piece of property twice to the same person, or taxing it as the property of one person and again as the property of another, but this does not include the imposition of different taxes concurrently on the same property or income (e.g. federal and state income taxes), nor the taxation of the same piece of property to different persons when they hold different interests in it or when it represents different values in their hands, as when both the mortgagor and mortgagee of property are

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 9- taxed in respect to their interests in i t, or when a tax is laid upon the profits of the corporation and also upon the dividends paid to its stockholders" <Black's Law Dictionary, 6th Edition, p. 491). This acceptable form of double taxation is reflected in B IR Ru I i ng No. 223 dated November 2, 1989, thus: "The 5% gross receipts tax under Section 120 of the Tax Code is collectible on alI finance companies doing business in the Phi I ippines from interests, discounts, and all other i terns treated as gross income under the Tax Code. Accordingly, your income derived from investing the excess funds in short-term market placements through commercial banks constitutes income hence, subject to the 5% gross receipts tax under said Section. The fact that it has been subjected to the 20% final withholding income tax under Section 50(a) is immaterial. Besides, the withholding tax is imposed under Tit Ie I I of the Tax Code while the finance tax is provided under Title V thereof." (BIR Ruling No. 223, November 2, 1989) For as long as the basis for the claim for refund or tax credit certificate is based on the non-inclusion of the amount representing the final withholding income tax under Section 50(a) as part of the gross income subject to gross receipts tax, this dissenting opinion wi I I stand. The fact that petitioner-claimant is able to estab I ish by competent documentary and testimonial evidence is of no moment. For purposes of the amusement tax under Section 260 of the Tax Code, the term 'gross receipts' embraces 'all the receipts' of the proprietor,

DISSENTING OPINION - C.T.A. CASE NO. 5458 - 10 - lessee, or operator of the amusement place. The words 'a I I the receipts' refer to the total amount of cash received which becomes part of the funds of the taxpayer and does not include any money which has been specially earmarked by any law or legal rule or regulation for some other person other than the proprietor, lessee or operator of the amusement place. Receipts means actually received (Phi I ippine Long Distance Telephone Co. vs. Co I I ector of Internal Revenue, G.R. No. L-3222, January 21, 1952) for itself and not for others, for otherwise they would not be receipts <Manila Jockey Club, I no. vs. Co I I ector of Internal Revenue, CTA Case No. 205, Apr i I 15, 1958; Jai Alai Corporation of the Philippines vs. Araneta, CTA Case No. 108, July 31, 1956 (Annotated, NIRC by Commissioner Jose Aranas, 1988 Edition, p. 687). WHEREFORE, in view of the foregoing, recommend that the entire claim for refund be DENIED due to lack of legal bases. lJ! ate~ Associ