SYSTRA PHILIPPINES INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES Coon ol Tax Appeals QUEZON CITY SECOND DIVISION SYSTRA PHILIPPINES, INC., C.T.A. CASE NO. 7178 Petitioner, Members: -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, AUG 2 4 2007/ -�----------- Respondent. X X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION UY,~.: This is a Petition for Review praying for the issuance of a Tax Credit Certificate in the amount of P2 ,889,675.00 allegedly representing petitioner's unutilized excess creditable withholding taxes (CWT) for taxable years 2002 and 2003. THE FACTS Culled from the records of this case and as stipulated by the parties in their Joint Stipulation of Facts and Issues,1 these are the facts of the case . Pi 1 Joint Stipulation of Facts and Issues (JSFI), Records, pp. 105-112 .

DECISION C.T.A. CASE NO. 7178 Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office address at Unit 2204-D, 22nd Floor, West Tower, Philippine Stock Exchange Centre, Exchange Road , Ortigas Center, Pasig City. It is primarily engaged in consultancy and management services for firms and entities engaged in the field of railways, train and mass transit systems and other areas in transportation and communications; and provides planning and development services, systems/project studies, construction supervision and project management, modernization and rehabilitation of networks, training of technical staff and other related services. 2 It is registered with the Bureau of Internal Revenue (BIR) as an income, value-added and withholding taxpayer with Tax Identification No. 004-665-254-000. 3 On March 31 , 2003, petitioner filed with the BIR its Annual Income Tax Return (ITR) for the calendar year (CY) ended December 31 , 2002 indicating thereon its intention to carry-over its unutilized withholding tax credits of P1 ,588,639.00 to the succeeding CY 2003.4 It reflected the computation of tax as follows :5 Sales Revenues/Receipts/Fees 16,856,626 .00 Less:Cost of Sales/Services 12,140,697 .00 Gross Income from Operation Add : Non Operating & Other Income 4,715,929 .00 Total Gross Income 135,265 .00 Less: Deductions Taxable Income 4,851 ' 194.00 Tax Rate 4 ,850 ,042 .00 Income Tax Minimum Corporate Income Tax (MCIT) Tax Due 1' 152.00 Tax on transactions under Regular Rate 32 % 369 .00 97,024 .00 97,024 .00 2 Par. 3 of Admitted Facts, JSFI. 3 Par. 4 of Admitted Facts, JSFI. j I. A � � 4 Par. 8 of Admitted Facts , JSFI. ' Exhibit " A"; Docket, pp. 172-174; Par. s of Admitted Facts, JSF/!JY'I

DECISION C.T.A. CASE NO. 7178 Less: Unexpired Excess of Prior Year's MCIT over Normal Income Tax Rate 97,024 .00 Balance 97 ,024.00 Aggregate Income Tax Due 1' 155,984.00 Less: Creditable Tax Withheld for the First Three Quarters 529 ,679 .00 Creditable Tax Withheld Per BIR Form No. 2307 for the Fourth Quarter 1,685,663 .00 Total Tax Credits/Payments (1 ,588,639 .00) Tax Payable/Overpayment (1 ,588,639.00) Total Amount Payable Then on April 2, 2004, petitioner filed its Annual Income Tax Return for CY 20036 with the BIR and indicated on the return , its intention to claim a tax credit certificate for its unutilized creditable withholding taxes as of December 31 , 2003. The computation of tax was stated as follows :7 Sales Revenues/Receipts/Fees 14,438,084 .00 Less:Cost of Sales/Services 9,098 ,319.00 Gross Income from Operation 5,339,765 .00 Add : Non Operating & Other Income 6,111 .00 Total Gross Income 5,345,876 .00 Less: Deductions 5,401 ,257 .00 Taxable Income (55,381 .00) Tax Rate 0.32 Income Tax NIL Minimum Corporate Income Tax (MCIT) Tax Due 106,918 .00 Tax on transactions under Regular Rate 106,918 .00 Less: Unexpired Excess of Prior Year's MCIT over Normal Income Tax Rate Balance 106,918 .00 Aggregate Income Tax Due 106,918 .00 Less: Prior Year's Excess Credits 1,588,639 .00 Creditable Tax Withheld for the First Three Quarters 949,235 .00 Creditable Tax Withheld Per BIR Form No. 2307 for the Fourth Quarter 458,718 .00 Total Tax Credits/Payments 2 ,996 ,592 .00 Tax Payable/Overpayment (2 ,889,675 .00) Total Amount Payable (2 ,889,675 .00) It appears in petitioner's Annual Income Tax Return for the Calendar Year 2004, that petitioner did not carry-over its unutilized creditable withholding taxes of December 31 , 2003 to the following taxable year - - --/pAvJLJ 6 Par. 9 of Admitted Facts, JSFI.f 7 Exhibit " B", Docket, pp. 189- 19 1.

DECIS ION C.T.A. CASE NO. 7 178 Calendar Year 2004. Neither did it utilize the same in payment of its income tax liabilities for the Calendar Year 2004. 8 On January 6, 2005, petitioner filed with the BIR - Revenue District Office (ROO) No. 43, Pasig City, two administrative claims for the issuance of tax credit certificates for its unutilized creditable withholding taxes of P1 ,588,639.00 and P1 ,301 ,036.00 for 2002 and 2003, respectively, or a total of -P-2 ,889,675.00. 9 As respondent neither approved nor denied petitioner's claim for refund or issuance of tax credit certificate, petitioner instituted the present Petition for Review on March 30, 2005. Respondent, in his Answer filed on May 30, 2005, alleges, among others, that the claim for refund is still under examination by the respondent's bureau ; the burden of proof is upon the petitioner to prove that it is entitled to the claim for refund or issuance of tax credit certificate; the grant of claim for refund is tantamount to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority; the taxes sought to be refunded were paid in accordance with law and the burden of proof to the contrary is upon the petitioner-claimant to show with clear and unambiguous provision of law supporting the same.10 During trial , petitioner presented its documentary and testimonial evidence, while respondent's counsel submitted the case for decision without presenting any evidence because this case , allegedly, has no report of investigation . The Court directed both parties' counsel to file their respective 8 Exhibit "C", Docket, pp. 206-208 ; Par. 13 of Admitted Facts? JSFI. 9 Par. 14 of Admitted Facts, JS FI. 10 Answer, Docket, pp. 83-85.

DECISION C.T.A. CASE NO. 7178 memorandum .11 On October 26, 2006, this case was deemed submitted for decision after petitioner filed its memorandum , while respondent failed to file his memorandum within the given period.12 THE ISSUES The parties stipulated the following issues for this Court's resolution : 1. Whether or not petitioner's withholding tax credits of P1 ,685,663.00 and P1 ,407,953.00 for the years 2002 and 2003, respectively , are duly substantiated by documentary evidence; 2. Whether or not the income from which the subject creditable taxes were withheld were reported as part of petitioner's revenues in its Annual Income Tax Returns for CYs 2002 and 2003; 3. Whether or not petitioner's unutilized creditable withholding taxes for 2002 and 2003 were applied against its income tax liability in the succeeding taxable year/s ; and 4. Whether or not petitioner is entitled to refund (of) its excess/unutilized creditable withholding taxes in the amount of P-2,889,675.00 for the years 2002 and 2003 . The four issues boil down to the central issue of whether or not petitioner was able to comply with legal and substantiation requ irements with respect to its application for the refund of its unutilized excess creditable withholding taxes (CWT) for taxable years 2002 and 2003. THE COURT'S RULING The petition is partly meritorious. ~ 11 Minutes of hearing held on August 9, 2006, Docket, p. 330. 12 Resolution dated Octobe r 26, 2006, Docket, p. 370.

DECISION C.T.A. CASE NO. 7178 Petitioner's subject claim for refund is anchored on the provisions of Section 76 of the National Internal Revenue Code (NIRC) of 1997, which provides : SEC. 76. Final Adjustment Return . - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid , the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable 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 quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore. (Emphasis Ours.) Section 76 offers two options to a taxable corporation whose total quarterly income tax payments in a given taxable year exceed its total income tax due. These options are (1) filing for a tax refund or (2) availing of a tax cred it. The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be refunded , provided that a taxpayer properly applies for the refund . The second option works by y applying the refundable amount as shown on the Final Adjustment Return (FAR) of a given taxable year, against the estimated quarterly income

DECISION C.T.A. CASE NO. 7178 liabilities of the succeeding taxable year. These two options under Section 76 are alternative in nature. The choice of one precludes the other. 13 Petitioner indicated on the face of its 2002 Income Tax Return (ITR) of its intention to carry-over its excess tax credit of .P.1 ,588,639.00 to the succeeding taxable quarter/year through an "X" mark on the box indicating the option : To be carried over as tax credit next year/quarter. And petitioner actually exercised said option to carry-over by applying its excess credit for taxable year 2002 against the 2003 tax liabilities as reflected under line 27-A of its Annual Income Tax Return for taxable year 2003. 14 This matter was admitted by petitioner's witness , its former Deputy Branch Manager, Kirsten Colleen Carvajal , when she testified in court. We quote: " Q: How much withholding tax credits were withheld from SPI's income in CY 2003? A: For CY 2003, the company had withholding tax credits in the amount of P1,407,953 .00. However, we carried over our excess and unutilized creditable withholding taxes for CY 2002 in the amount of P1.588,639.00 to CY 2003. Hence, we reported total withholding tax credits of P2,996,592.00 in our Annual Income Tax Return for CY 2003. Q: How much of SPI's withholding tax credits for CY 2003 remained unutilized by December 31, 2003? A: The company had unutilized and excess withholding tax credits in the aggregate amount of P2,889,675.00 as of the end of CY 2003. This amount includes the excess withholding tax credits for CY 2002 of P1.588,639 .00 which we carried over to 2003, and the excess withholding tax credits for 2003 of P1,301,036.00."15 (Underscoring Ours.) 13 Philam Asset Management, Inc. vs . Commissioner oflnternal Revenue, 477 SCRA 761 (2005) . ';vAvJVJ 14 Exhibit " B", Supra. at p. 189. 15 Page 5 of Exhibit "S"; Docket, p. 232.

DECIS ION C.T.A. CASE NO. 7178 Based on the foregoing oral testimony of petitioner's witness , it is admitted that petitioner carried over its excess and unutilized withholding tax credits for CY 2002 in the amount of P-1 ,588 ,639.00 to the succeed ing calendar year 2003. As held by the Supreme Court in the case of Paseo Realty and Development Corporation vs. Court of Appeals, once the taxpayer has exercised the option to carry-over and to apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years , such option is irrevocable for that taxable period and no application for cash refund or issuance of tax credit certificate shall be allowed.16 And , the phrase "taxable period" is applied to the year when the "option to carry-over" was made.17 Consequently, petitioner is precluded from applying for the issuance of a tax credit certificate on its unutilized tax credits for the taxable year 2002 in the amount of P.1 ,588,639.00. With respect to petitioner's remaining claim for the excess/unutilized creditable withheld taxes for the year 2003 amounting to P.1 ,301 ,035.00, it appears that petitioner selected the option "To be issued a Tax Credit Certificate" of its total excess creditable tax withheld in 2003.18 Petitioner did not carry-over the excess tax cred its from 2003 to the succeeding year 2004 .19 To be entitled to the subject claim for refund of excess creditable income tax, petitioner must comply with the following requ irements : 16 ~ 440 SCRA 235 (2004). 17 United International Pictures AB vs . Com missioner of Internal Revenue, CTA Case No . 6240, March II , 2003. 18 Exhibit " B-7"; Docket, p. 189. 19 Exh ibit "C- 1"; Docket, p. 206.

JECISION C.T.A. CASE NO. 717 8 1) That the claim for refund was filed within the two years period under Section 229 (previously Section 230) of the NIRC , 2) That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom , 3) That the income upon which the taxes were withheld were included in the return of the recipient. 20 It is clear from the records that petitioner has complied with the first requirement. The remaining excess unutilized withholding taxes being claimed for the issuance of a tax credit certificate were for the taxable year 2003. Petitioner filed its original annual ITR for 2003 on April 2, 2004. Petitioner's administrative claim for the issuance of a tax credit certificate was filed on January 6, 2005,21 while its Petition for Review was filed before this Court on March 30, 2005. Hence, both the administrative and the judicial claims were filed within the two (2)-year period pursuant to Section 229 of the NIRC of 1997. The second requirement was likewise complied with by petitioner. To prove the fact of withholding , petitioner presented the Certificates of Creditable Tax Withheld at source issued by Systra-Philippine Branch (SPB) and Maunsell Philippines Inc. (MPI) for the taxable year 2003 reflecting creditable withholding taxes in the amount of .121 ,407,594.23, which is lower by P358.77 than the reported amount of P1 ,407,953.00, detailed as follows : 20 Banco Filipino Savings and Mortgage Bank vs . Court of Appeals, Court of Tax Appea ls and Commiss ioner of lnt? e nal l Revenue, G.R. No. 155682, March 27, 2007. 21 Paragraph 14 of Admitted Facts, JSFI, Docket, p. 108 .

iJECISION C.T.A. CASE NO. 7178 Exhibit Period Covered Payor's Name Income Payment Tax Withheld Systra-Ph ilippines Branch 3,942,024. 60 394,202.46 L 01-01-2003 to 03-31-2003 Systra-Philippines Branch 2, 173,717.50 2 17 , 371.75 M 04-01-2003 to 06-30-2003 Systra- Philippines Branch 3,535, 99 5 .8 0 353 , 599 .58 N 07-01-2003 to 09-30-2003 Systra- Ph ilippines Branch 4,363,636.50 436,363.65 10-01-2003 to 12-31-2003 MPI 6 0, 567. 9 0 6,056.79 0 10-01-2003 to 12-31-2003 p 14, 075,942.30 1,407,594.23 As to the third requirement, the gross revenues reported in petitioner's 2003 ITR is P-14,438,084.00, which is higher by P-362,141.70 as compared from the total income payments amounting to P-14,075 ,942.30 as shown above. The difference of P.362,141 .70 was brought about by the fact that "(a) an income in the amount of P-148,376.41 was reported as part of petitioner's revenues for September 2003 but no corresponding Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) was issued thereto ; (b) the petitioner's income in the amount of P-213,574.83 was accrued and reported as part of its revenues for November 2003 although it was not collected during the year; and (c) the income reported in petitioner's cred itable withholding tax certificate for November 2003 was only P.1 ,560,568.00, but what was recorded in the books was P.1 ,560,758.98."22 In other words , petitioner properly declared in its 2003 ITR the income of P-14,075,942.30 corresponding to the substantiated withholding taxes of P.1 ,407,594.23. Thus, petitioner sufficiently complied with the substantiation requirements with respect to its claim of excess/unutilized tax credits for the CY 2003 in the reduced amount of P.1 ,300,676.23 computed as follows : Gross Income P 5,345 ,876.00 5,401 ,257 .00 Less: Deductions (55 ,381 .00 ) Net Loss 106,918 .00 1,407 ,594 .23 Minimum Corporate Income Tax Due 1,300,676 . ~ Less: Substantiated Creditable Withhold ing Taxes Tax Overpayment Available for Refund P. 22 Par. 27 of Petitioner's Memorandum ; docket, pp. 348-349. See also Exhibit "Q."

DECISION C.T.A. CASE NO. 7178 WHEREFORE, premises considered , the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is ORDERED to ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of ONE MILLION THREE HUNDRED THOUSAND SIX HUNDRED SEVENTY SIX and 23/100 PESOS (P-1 ,300,676.23) representing excess/unutilized creditable withholding taxes for taxable year 2003. On the other hand , petitioner's claim for the refund of its excess/unutilized creditable withholding taxes for the taxable year 2002 in the total amount of P1 ,588,639.00 is DENIED. SO ORDERED. WE CONCUR : ~a . ~__;-~ ~~R�. ~~A~ Associate Justice JUANITO C. CASTANEDA, Associate Justice ATTESTATION I attest 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's Division . Q~-.;4. c.~~. ~ VJUANITO C. CASTANEDA, J~ . Associate Justice Chairperson

DEC ISION C.T.A. CASE NO . 7178 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. ~~- ~ E NESTO D. ACOSTA Presiding Justice