NOVABALA JV CORP., v. COMMISSIONER OF INTERNAL REVENUE

CTA Form No. 8 (For DCC) IIIIIIIIIIIIIIIIILIIII!I1IIIlIlILILIIlIlI_II!ILIIIILIIlIlIlILIIfIIfII REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION CTA CASE NO. 10287 NOVABALA JV CORP., Petitioner, versus NOTICE OF RESOLUTION COMMISSIONER OF INTERNAL REVENUE, Respondent. T () : OFFICE OF THE SOLICITOR GENERAL 134 AmorsoIo Street, Lcgazpi Village IMakati City ATTY. WILMER B. DEKIT ATTY. FELY ROSE R. DAGANTA Legal Division - Revenue Region 8B-South NCR 2nd Floor, BIR Regional Office Building, No. 313 Son. Gil Puyat Avenue, Makati City VIOVICENTE & PEREbVIOVICENTE LAW OFFICE Unit 810, One Corporate Centre Julia Vargas comer Meralco Avenue Ortigas Center. 1605 Pasig City GREETINGS : You are hereby notified by these presents that on June 19, 2024, a Resolution was rendered in the above-entitled case, copy of which is attached hereto. Quezon City, Philippines, June 20, 2024. Atty. M. ltte Y >rk of Court III Execu

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION NOVABALA JV CORP., CTA Case No. 10287 Petitioner, Members: -versus- DEL ROSARIO9 P. J., Chairperson, MANAHAN9 and REYES-FAJARDO, m COMMISSIONER OF Promulgated: INTERNAL REVENUE, Respondent . :OOPFq >(- - - - - - - - � - - - - - - - - - - - X RES 0 L U TI 0/N MANAHAN, J.: For resolution of the Court are the following: 1. Motion for Reconsideration (of the Decision dated 04 January 2024) filed by respondent on January 30, 2024 ("respondent's MotioN') ,1 with petitioner's Comment (To the Motion for Reconsideration of the Commissioner of Internal Revenuey,2 and 2. Motion for Partial Reconsideration filed by petitioner on January 31, 2024 ("petitioner's A/otton"),3 without respondent's comment.4 Both Motions assail the Court's Decision dated January 4, 2024 ("assailed DecisioN') ,5 the dispositive portion of which reads: WHEREFORE, in light of the foregoing considerations, the present Petition for Review is 1 Docket � Vol. III, p. 1591. 2 Docket � Vol. III, p. 1617. 3 Docket � Vol. III, p. 1598. 4 Per Records VerifIcation dated March 8, 2024. 5 Docket � Vol. III, PP. 1561-1590. Vue,#

RESOLUTION CTA Case No. 10287 Nouabala JV Corp. u. Commissioner of Internal Reuenue PARTIALLY GRANTED. Respondent is hereby ordered to refund petitioner the amount of P2,853,239.96, representing the latter's excess creditable withholding taxes for taxable year 2018. SO ORDERED. Respondent's Motion avers that petitioner failed to support its claim for refund of its creditable withholding taxes ("CWTs") for taxable year ("TY") 2018. According to respondent, petitioner's evidence did not show that the taxes withheld on the payments made by its client, Manila Water Company, Inc. ("MWCI"), were erroneously or illegally collected. Such taxes were legally due the government at the time they were remitted to the Bureau of Internal Revenue ("BIR"). This is because at the time of withholding, petitioner was not yet entitled to the tax exemption under its Board of Investments Certificate of Registration. On the other hand, petitioner's Motion seeks that the Court reconsider its finding that it is not entitled to refund the amount of P17,527,898.00 representing excess CWTs for TY 2017. Petitioner insists that since the CWTs pertained to unearned revenue which were only recognized as revenue after 2018 pursuant to the percentage of completion method of accounting, the withholding thereof became erroneous after its taxpayer status changed to VAT-exempt on June 28, 2018. Petitioner further argues that the "irrevoca-bility rule" under Section 76 of the 1997 National Internal Revenue Code ("NIRC"), as amended, does not apply to it as it is not a "corporation liable to tax under Section 27 [of the NIRC]." Since it will no longer incur income tax, there is no reason to subject it to said rule. Strict application of the rule would amount to deprivation of the income tax holiday granted to it and would constitute unjust enrichment on the part of government. Petitioner's Motion also points to the fact that it will no longer have business activity in view of the completion of the Manila Water Project. It seeks leave of Court to present as evidence the C'erti$cate of Completion and Hand Over CertiPcate - CERTIFICATE OF PHySICAL COMPLETION dated July 19, 2023 issued by MWCI. We resolve. V-l'~-/-

RESOLUTION CTA Case No. 10287 Nouabala JV Corp. u. Commissioner of Internal Revenue First , the arguments raised in respondent's Motion has already been addressed in the assailed Decision. For clarity, the Court reiterates that petitioner's CWTs for TY 2018 were indeed legally due the government at the time they were withheld. Nonetheless, as they constituted excess CWTs for the said TY, refund is proper upon petitioner's compliance with the requisites for a valid claim of refund ofunutilized excess CWTs. We quote the pertinent portion of the assailed Decision.6 "Nonetheless, although petitioner is eligible to the grant of ITH only from June 28, 2018, its alleged erroneous payments for taxable years 2017 and 2018 may still be refunded as excess creditable income tax withheld, if compliance with the provisions of law governing the refund of excess and unutilized creditable withholding taxes (CWTs) is established. As explained by the Supreme Court in Citibank, N. A. v Court of Appeals and Commissioner of Internal Revenue: "Withholding taxes are 'deposits' which are subject to adjustments at the proper time when the complete tax liability is determined . x x x As petitioner posted net losses in its 1979 and 1980 returns, it was not liable for any income taxes. Consequently and clearly, the taxes withheld during the course of the taxable year, while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the ax4bl_e_ys_41." [Emphasis added] Accordingly, the present claim shall be tested against the requisites for a claim of refund or tax credit of unutitized excess CWTs, particularly under Sections 76, 204(C), and 229 of the NIRC, as well as pertinent revenue regulations. 6 Docket � Vol. III, pp. 1576-1578. nl

RBSOLUTION CTA Case No. 10287 Nouabala JV Corp. u. Commissioner of Internal Revenue In the assailed Decision, the Court found that petitioner is compliant, viz: it indicated its option to be refunded in its Annual Income Tax Return ("ITR") for 2018 pursuant to Section 76 of the NIRC; its claim for refund was filed within the two- year prescriptive period under Sections 204(C) and 229 of the NIRC; the fact of withholding was duly established; and, the income upon which the taxes were withheld was included in its return. Since respondent's Motion did not assail these findings, the Court has no reason to disturb the same. Second, as regards petitioner's Motion, we emphasize that the withholding tax system is a method of collecting tax in advance.7 Petitioner is on the same page with the Court when it conceded "that at the time when the income payments were made by Manila Water, the latter had the legal obligation to withhold because petitioner was then not exempt from income tax." Likewise, we agree that when petitioner's status changed to tax exempt, the unutilized excess CWTs pertaining to its subsequently earned revenues took the nature of erroneously collected taxes. After all, as already stated, such is the nature of withholding taxes, which can be likened to "deposits" subject to adjustments at the proper time when the complete tax liability is determined. It is for this reason that petitioner was able to successfully claim its CWTs for TY 2018 after opting for a refund. However, with respect to its CWTs for TY 2017, petitioner made the option to carry-over and apply such CWTs against its income taxes for the quarters of the succeeding TYs. The real crtuc of the controversy therefore is whether the irrevocability rule under Section 76 of the NIRC�which bars a taxpayer from claiming a refund once it opts to carry-over�sttZZ applies to the CWTs covered by petitioner's annual ITR for 2017 despite its subsequent tax exemption. We answer in the affirmative. Section 76 of the NIRC, which expresses the irrevocability rules, is reproduced below for quick reference: 7 LG Electronics Philippines, Inc. u. Commissioner of Internal Reuenue, G.R. No. 165451, December 3, 2014 [Per J. Leonen, Second Division]. aH/

RESOLUTION CTA Case No. 10287 Nouabata JV Corp. u. Commissioner of Internal Reuenue SEC. 76. - FtnaZ 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 tar 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. ... Once the option to carry-ouer 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 therefor.8 Contrary to petitioner's assertion that the above provision does not apply because it is not a "corporation liable to tax under Section 27," petitioner was in fact a corporation liable to tax under Section 27 at the time it paid the taxes and filed its final adjustment return or annual ITR for TY 2017. As a corporation liable to tax during 2017, petitioner is required by Section 76 to file its annual ITR, and such ITR is necessarily subject to the requirements, conditions, and consequences imposed by law�including the irrevocability rule. The controlling factor for the operation of the irrevocabi- lity rule is that the taxpayer chose an option,9 i.e. to carry- over.10 Thus, petitioner's subsequent tax exemption does not retroactively lift the operation of the irrevocability rule, despite the fact that such exemption made the payment of CWTs erroneous. As held in Commissioner of Internal ReuerLue u. Bank of the Philippine Istands'. It 8 Emphasis supplied. 9 RhorrLbus Energy, Inc. u. Commissioner of Internal Reuenue, G.R. No. 206362, August 1, 20 18 [Per J. Bersamin, Third Division]. lo Uniuersity Physicians Services Inc. - Management, Inc. u. Commissioner of Internal Reuenue, G.R. No. 205955, March 7, 2018 [Per J. Martins, Third Division]. 11 G.R. No. 178490, July 7, 2009 [Per J. Chico-Nazario, Third Division]. db==-

RESOLUTION CTA Case No. 10287 Nouabala JV Corp. u. Commissioner of Internal Reuenue " ... after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry OIler has been made, 'no application for tax refund or issuance of a tax credit certificate shall be allowed therefor. "' Besides, as already discussed, settled, and emphasized, it is not unusual for CWTs to partake the nature of erroneously collected tax at the close of the TY when a corporation's income tax liability is adjusted. It is precisely by reason of such erroneousness that the law entitIes a corporate taxpayer to refund or carry-over, subject to the irrevocability rule. The law makes no distinction for erroneousness or overpayment arising from a subsequent tax exemption or incentive. When the law does not distinguish, courts should not distinguish. That the taxpayer is precluded from being refunded does not mean that unjust enrichment results. This has likewise been already addressed by jurisprudence: "The Court addressed the very same argument in Philam, where it elucidated that there would be no unjust enrichment in the event of denial of the claim for refund under such circumstances, because there would be no forfeiture of any amount in favor of the gouernrnent. The amount being claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable gears. D 12 As to petitioner's claim that it no longer has the chance to utilize its excess CWTs in the succeeding TYs due to the completion of the project for which it was exclusively organized, the Court notes petitioner's admission that it has not applied for tax clearance and certificate of dissolution. Such being the case, the Court cannot grant the refund based on mere invocation of the principle cessartte ratiorLe legis, cessat lex ipsa (when the reason for a law ceases, the law itself ceases). It is settled that administrative rules and regulations have the force 12 Commissioner of Internal Reuenue u. Bank of the Philippine Islands, G .R. Ho. 178490, July 7, 2009 [Per J. Chico-Nazario, Third Division]. ABHP.p

RESOLUTION CTA Case No. 10287 Novabala JV Corp. u. Commissioner of Internal Reuenue and effect of law.13 Unless declared invalid in an appropriate case by a competent court, they must be enforced accordingly. Petitioner's argument also overlooks the fact that the law has other reasons for imposing the irrevocability rule until dissolution, such as ensuring full settlement of tax liabilities, if any, and reducing government effort to collect taxes through more complicated remedies.14 The remedy of petitioner therefore is administrative, not judicial. To be entitled to the refund of its excess CWTs which it can no longer carry-over, it must first secure and submit the complete set of documentary requirements imposed by the BIR. On this score, we find it instructive to highlight the amendment introduced by Republic Act No. 1197615 to Section 76 of the NIRC:: SEC. 76. - Final AdJustment Return. Once the option to carry-over and apply the said excess income taxes paid against the 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 therefor: Provided, that in case the taxpayer cannot carry OIler the excess income tax credit due to dissolution or cessution of business, the taxpayer shall file an application for refund of any unutilized excess income tax credit, and the Bureau of Internal Revenue shall decide on the application and refund the excess taxes within two {2) years .from the date of the dissolution or cessation Qf business. 16 13 Caltex (Philippines), Inc. u. Court of Appeals, G.R. No. 104781, JuIY 10, 1998 [Per J- Romero, Third Division] . u University Physicians Seruices Inc. - Management, Inc. u. Commissioner of Intefnal Reuenuel (,.R. No. 205955, March 7, 2018 [Per J. Martires, Third Division]. IS Otherwise known as the "Ease of Paying Tm(es Act," January 5, 2024. The law took effect on January 22, 2024. 16 Emphasis supplied. aRE/

RESOLUTION CTA Case No. 10287 Nouabala JV Corp. u. Commissioner of Internal Revenue Meanwhile, Revenue Regulations No. 5-2024 provide that the two-year period shall commence from the submission of BIR Form No. 1905 (Application for Registration Information Update/Correction/Cancellation) together with the complete documentary requirements for closure of business and refund of excess income taxes due to cessation or dissolution of business. The approved refund, if any, shall be released only after mandatory audit of all internal revenue tax liabilities covering the immediately preceding year and the short period return and full settlement of all tax liabilities relative thereto. On a final note, the Court cannot concern itself with the wisdom or practicality of statutes. These are addressed not to the judiciary but to the legislative and executive departments, to which such function belongs in our scheme of government.17 By the principle of separation of powers, courts may only step in when there is a violation of the Constitution or the law. WHEREFORE, respondent's Motion for Reconsideration (of the Decision dated 04 January 2024) filed on January 30, 2024 and petitioner's Motion for Partial Reconsideration filed on January 31, 2024 are both DENIED for lack of merit. SO ORDERED. h WE CONCUR: CATHERINE T. MANAHAN Associate Justice (took no part) ROMAN G. DEL ROSARIO Presiding Justice M Q,,,, F K,,,,, 't.i,,#b MARIAN IVWr. REVtS-FAJARDO Associate Justice 17 Teues u. The Commission on Elections, G.R. No. 180363, April 28, 2009 [Per J- Ynares- Santiago, En Banc] .