CTA Case No. 5350 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY NESTL~ PHILIPPINES, INC. C.T.A. CASE NO. 5350 (formerly, MAGNOLIA NESTL~ Promulgated: CORPORATION), JAN 201998 ~ Petit i oner , - versus - HON. LIWAYWAY VINZONS-CHATO COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION This case involves a claim for refund of the sum of P.2,125,900.00, representing overpaid income tax resulting from excess payments of quarterly income tax and creditable withholding tax for calendar year ended December 31, 1993. The facts are simple. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines. It is engaged in the business of manufacturing assorted foods and beverage s including ice cream and other chilled products with principal office at Km. 46, Bgy. Niyugan, Cabuyao, Laguna. On January 19, 1996, pursuant to the approval of the Security and Exchange Commission of the Plans of Merger dated December 7, 1995 and January 8, 1996 of Magnolia Nestle Corporation and Nestle Philippin es , Inc., with the latter as the continuing and surviving corporation, petitioner Nestle Philippine s , amo(ij) Inc . assume s ,

DECISION - C . T . A . CAS E NO. 5350. - 2- others, all the assets, liabilities, claims, cases or actions in litigation of Magnolia Nestle Corporation (Exhs. A, A- 1, and A-2). One of the claims of Magnolia Nestle Corporation is the present claim for refund of overpaid income tax for the calendar year 1993. The records s h ow that on April 15, 1994, Magnolia Nestle Corporation filed its 1993 Corporation Annual Income Tax Return reflecting a net loss from operations of P24,556,772.00 but with a total amount refundable of P2,125,900.00, representing first quarter income tax payment of P326,451.00 and creditable taxes withheld on service fees and rentals of P1,799,449.00. This overpaid income tax refundable of P2,125,900.00 was opted by Magnolia Nestle Corporation "TO BE APPLIED AS TAX CREDIT TO SUCCEEDING TAXABLE YEAR". However, in the year 1994, petitioner still suffered net loss from operations. Thus, the application of its excess income tax payment in the year 1993 to anticipated income tax liability of 1994 became nugatory. On November 8, 1995, Magnolia Nestle Corporation filed an administrative claim for refund/tax credit of overpaid income taxes for the calendar year ended Dece mber 31, 1993 with the Bureau of Internal Revenue. On April 12, 1996, petitioner Nestle Philippines, Inc. after acquiring personality of pursuing a suit d~

DECISION - C.T.A. CASE NO. 5350. - 3- to the approved plans of merger, filed the instant judicial action pursuant to Section 230 of the Tax Code. In her Answer, respondent raised the following special and affirmative defenses: 7. Petitioner's claim for tax refund is still ~ndergoing administrative routinary investigation/examination by respondent's Bureau; 8. The amount of tax sought by the petitioner to be refunded/credited was collected and paid pursuant to law and BIR implementing rules and regulations, hence, the same is not refundable. Petitioner must prove that the said income tax was actually paid, remitted and received by respondent's Bureau, and that, the income from which the amount of tax was paid, were declared and included in its gross income during the year under review; 9. Petitioner's allegations that it sustained losses during the year under review does not ipso fact:o warrant the refund. Petitioner must prove that the deductions claimed by it from its gross income must be allowable deduction under the Tax Code and its implementing rules and regulations. Moreover, the same must be supported by evidence; 10. Petitioner must likewise prove that the alleged refundable taxes were neither automatically applied as tax credit against its tax liability for the succeeding quarter/s of the succeeding year nor included as creditable taxes declared and applied to the succeeding taxable year/s; 11. Claims for tax refund are construed strictly against the claimant as it partakes of the nature of an exemption from tax and it is incumbent upon the petitioner to prove that it is entitled thereto under the law. Failure on the part of the petitioner to prove the same is fatal to its claim for tax refund;

DECISION - C.T . A. CASE NO. 5350. - 4- 12. Moreover, petitioner must prove that it has complied with the provision of Section 230 of the Tax Code, as amended. In order to support its entitlement to the refund sought, petitioner presented the following evidence which were all admitted by the Court in a Resolution dated February 4, 1997: 1. Certificate of filing of the Articles of Merger, Articles of Merger and the Plan of Merger (Exhs. A, A-1, and A-2); 2. Corporation Quarterly Income Tax Returns for first, second, and third quarters of 1993 (Exhs. B, E, E- 1, H, and H-1); 3 � The 1993 and 1994 Corporation Annual Income Tax Returns together with the attachments of audited financial statements and certifications of independent CPAs (Exhs. K, K-1, K-2, K-3, K-4, K-5, K-6, K-7, N, N-1, and N-2); 4 . Certificates of Creditable Income Tax Withheld at Source (Exhs. C, 0, F, G, I, J, L, and M); and 5. The letter-claim for refund with the Bureau of Internal Revenue (Exhs. 0, and 0-1). On May 8, 1997, upon oral motion of petitioner, respondent was declared by the Court to have waived her right to present evidence due to the failure of her

DECISION - C.T.A . CASE NO. 5350. - 5- counsel to appear and present evidence for the fourth time. This case was s u b mitted for decision after both parties presented their respective memoranda. The sole issue to be resolve d by this Court i s whether or not petitioner is entitled to t h e refund/tax credit of the sum of ~2,125,900.00, representing alleged overpaid income tax for the calendar year 1993. Petitioner be l ieves t h at it is entitled to the claim for ref u nd c o ntending that it met t h e followi n g three basic req u irements laid down by t h is Court in numerou s cases involving clai ms for refu n d of excess creditable with h olding tax at source: 1. That it filed a claim for refund within the two (2) year period from date of pay ment of the tax as prescribed under Section 299 ( n ow 230 ) of the National Internal Reve n ue Code, as amended; 2 . That the i n co me upon which t h e taxes were wit h held at source under Sectio n 53 were i n c lud ed as part of t h e i n co me declared in t h e i n co me tax return of t h e recipient; and 3. Th e fact of withholding is established by a copy of the statement (BIR Form 174 3.1) duly issued by t he payor ( with h olding agent) to t h e pa y ee, s howing the a mo u nt paid an d t h e a mount of tax wit h held t h erefro m. [Sec. 10. Rev. Reg. 6 - 85; see Citytrust Finance Corporation vs. The Commissioner of Internal Revenue. CTA Case No. 4134. November 11. 1991; affirmed by the Court of Appeals in Citytrust Finance Corporation vs. Court of Tax Appeals and the Commissioner of

DEC I S ION - C.T.A. CAS E NO. 5350 . - 6- Internal Revenue, CA - G.R . SP No . 28239, March 14, 1994; and Citytrust Finance Corpo r ation (Formerly Investo r ' s Finance Corporation/FNCB Financ e ) vs. Commissioner of Inte rnal Revenue, CTA Ca s e No. 4046, Feb r uary 24, 1993; aff i rmed by the Court of Appeals in Commissioner of Internal Revenue v s . Citytru s t Finance Corpo r ation (Formerly Investors Fi nance Corporation/FNCB Finan c e) and the Court of Ta x Appeals, CA-G.R. SP No . 31104, Apr i l 18, 1994]. On the other hand, respondent remains firm that petitioner is no longer entitled to the claim for refund arguing that a mere allegation of net loss in the corporate annual income tax return does not ipso fact:o merit a tax refund/credit. Respondent further rea s oned that there was no evidence showing that loss was indeed incurred. After weighing the evidence, records, pleadings, and s urrounding circum s tance s of the case, We find in favor of the petitioner. We can not subscribe to respondent's aforementioned ratiocination. In the case entitled Bank of the Philippine Isla n d s as Liquid a tor o f Pa r amount Ac c eptan ce Corporation v. Commissioner of Int e rnal Revenue, CTA Case No. 4257, Decembe r 20 , 1993 the said argument was dealt with wherein we ruled: Despite the reservation of respondent with respect to the veracity of the return still up to the time given for respondent to present her evidence and up until the submission of this case for decision nothing was shown during the hearing that the return was erroneous nor wa s

DECIS ION - C.T .A. CASE NO . 5350. - 7- there evidence presented that there exist any irregularity in the co mputation or preparation of the return which will taint their reliability or sufficiency and competency as proof of overpaid income tax for the year 1985. At the time the return was filed on April 14, 1986, respondent's examiners had all the time to examine and audit the return. Up to this time nothing was heard from the respondent disputing the correctness of the return for otherwise she would have, upon knowledge of any irregularity, issued an assessment for said year or at least notified this Court if there was any. It is wit hin the competence of respondent to examine petitioner's financial statements and audit report as these are documents necessarily attached to the return filed by petitioner and formed part of the BIR records. Respondent is thereby considered to have ad mitted the truth of the contents of these exhibits. Hence, in the absence of contrary evidence, the Income Tax Returns and the Confirmation Receipts of payment of the quarterly taxes should be given credence as proof of overpaid income tax for 1985 in the amount of P65,259.00. It should be pointed out that the 1993 and 1994 annual income tax returns of Magnolia Nestle Corporation were prepared and signed under the penalties of perjury. In fact these income tax returns were examined by independent CPAs as required under Section 232 of the Tax Code wherein the auditors expressed an unqualified opinion on the financial positions of Magnolia Nestle Corporation for the years 1993 and 1994. Further, as testified by petitioner ' s witness Mr. Enrique Vargas, there was no deficiency tax assessments issued against it nor has the company have any pending tax liability (see TSN, October 8, 1996, pp. 7 and 22).

DECISION - C . T . A. CASE NO. 5350. - 8- With respect to petitioner's entitlement to the amount of claim for refund, the Court finds the same to be meritorious. Indeed petitioner was successful in substantiating its overpaid income taxes. First, the claim for refund with the BIR and the judicial action with this Court were filed within the two-year prescriptive period prescribed under Section 230 of the Tax Code. Th e letter-claim for refund wit h t h e BIR was filed on November 8. 1995 (Exhs. 0 and 0- 1) while the instant petition for review was filed on April 12, 1996. The two-year period, in the instant case, commences to run on April 15, 1994, the actual date of filing of Magnolia Nestle Corporation's 1993 Corporation Annual Income Tax Return (Commissioner of Inte rnal Revenue v. TI'IX sales. Inc. et al .� G.R. No. 83736. January 1 5. 1992). Second, as explained by petitioner's witness, Mr. Enrique Vargas, the income upon which the creditable withholding taxes were paid were included in petitioner's gross income (T S N, October 8, 1996, pp. 8 to 20). The income received from Philippine Dairy Products Corporation in the amount of P33,315,386.20 was treated as a reduction of expenses which is tantamount to being recorded as taxable income since the reduction of expenses resulted in the increase of taxable income ( Exhs. K and K-6) � With regard to the income received

DECISION - C.T.A. CASE NO. 5350. - 9- from Philippine Multiline Sales and Marketing Corporation in the amount of P2,673,601.00, the same formed part of the other income under Schedule 5 of the 1993 Annual Income Tax Return (Exhs. K and K-7). And third, the fact of withholding was established when petitioner presented in evidence the certificates of creditable withholding tax at source (BIR Form 1743.1) duly issued by the withholding agents showing the amount of income payments made and the amount of tax withheld therefrom (Exhs. C, D � F, G, I � J' L, and M). Further, petitioner also proved that the first quarter income tax in the amount of P326,450.68 was paid to the Bureau of Internal Revenue as reflected in the 1993 annual income tax retur�n of petitioner (Exhs. K and K-3). Below is the detailed computation of the overpaid income taxes paid by Magnolia Nestle Corporation for the calendar year ended December 31, 1993 which was later on assumed by the petitioner in view of the approved plan of merger: Amount of Amount of Withholding Agent Income Payment Tax Withheld Ex h. Philippine Dairy Products Corp. p 7,159,661.40 p 357,983.07 Philippine Multilines Marketing Corp. 834,007.20 41,700.36 Philippine Dairy Products Corp. 7,507,043.20 375,352.16 F Philippine Multilines Marketing Corp. 834,007.20 41,700.36 6 Philippine Dairy Products Corp. 11,751,398.20 587,569.91 Philippine Multilines Marketing Corp. 273,316.00 13,665.80 Philippine Dairy Products Corp. 6,897,283.40 344,864.17

DECISION - C.T.A. CASE NO. 5350. 10 - Philippine Multilines Marketing Corp. 732,271.20 36,613.56 Total 949,257,050.00 91,799,449.39 Add first quarter income tax payment 326,451.00 K-3 Total amount refundable 92,125,900.39 WHEREFORE, in view of the foregoing, the petition for review is hereby GRANTED. Respondent is ORDERED to REFUND in favor of petitioner the sum of ~2,125,900.00, representing overpaid income tax for the calendar year 1993. No pronouncement as to cost. SO ORDERED. ~~ ~ ERNESTO D. ACOSTA Presiding Judge CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~Ls14 ~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals