PHILIPPINE AIRLINES, INC. (PAL) v. COMMISSIONER OF INTERNAL REVENUE

,. . REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE AIRLINES, INC. (PAL), Petitioner, -versus- C.T.A. CASE NO . 5915 COMMISSIONER OF INTERNAL Promulgated : REVENUE BEETHOVEN L. RUALO, APR 10 2001, 13, Respondent . ---------------------------------------------------------------------------------------------------~\9/fo/{- ;;;t:>vtvv~ DECISION This case involves a claim for refund in the amount of two million eight hundred fifty six thousand five hundred fifty six & 491100 pesos (P2 ,856,556.49) allegedly representing unapplied creditable income taxes withheld for the fiscal year (FY) ended March 31, 1997. The facts of the case are C!!3 follows : Petitioner Philippine Airlin es , Inc. (PAL) is a domestic corporation organized in accordance with the laws of !h.e Republic pf the Philippines with principal office at PAL 1'~' I , .'~ ' . ! ' ' .. ' ' Building II , Legazpi St., Lep~zp,! Yi!~ ~ge , fv1akati City, where it may be served ~!!h . ., ' '� . :. ,� �--.'_,: . summons . .~ ~. ) On July 29 , 1997, Petitioner filed with the BIR its annual income tax return for the fiscal year ended March 31, 1997 declaring a net loss of P1.477,213,358.00 and unutilized creditable income taxes withheld of P4,584,022.00 which Petitioner indicated -~ 485

I DECISION- C. T. A. CASE NO. 5915 -2- as to be refunded (Exh. A) . The latter amount represents the sum of the prior year's (FY 1996) excess credits of P2 ,012 ,668.00 and creditable income ta xes withheld in FY 1997 of P2,571 ,354.00. Since it has already filed a separate claim for refund of the alleged prior year's (FY 1996) excess credits amounting to P2,012,668.00, Petitioner filed on August 13, 1997 an administrative claim for refund only in the amount of P2,571 ,354.00 corresponding to the reported excess creditable income taxes withheld in FY 1997 (Annex C of the Petition) . Subsequently , on July 23 , 1998, Petitioner filed an additional administrative claim for refund amounting to P285 ,202.49 allegedly representing excess creditable income taxes withheld in FY 1997, which were not included in its FY 1997 ITR and in the earlier claim for refund , filed on August 13, 1997 (Annex D of the Petition ; TSN , March 23, 2000, page 6) . Since Respondent did not act upon the aforestated claims for refund in the total amount of P2 ,856,556.49, Petitioner filed the instant Petition before this Court on July 23 , 1999 pursuant to Sections 204(3) [now Section 204(C)] and 230 [now 229] of the Tax Code, which are all hereinbeiO:~ !J ~qted, thus : ;~~;. ': ~).~,�~~ ~~ .....� .. "SEC. 204. Aut~Rr~ty of �the Commissioner to compromise, abate and refund!creq{t t~f~'s. - The Commissioner may - XXX ',� ,: ��.� iir: .l,-;,. ��:: XX X XXX Nq "(3) x x ~ x �cr~~i~� or: f~fund of taxes or penalties shall be ~ !lowed unless th~ ta ~�p~yer~J!l.e,�)tl..V;riting_with tne Commissioner,a . ~laim fpr credit or ref~jld ~ithtr)'� two''{2) years .after the payment of ~h~ t~x or penalty: x x x " �:. :;_;;�"' ~'� "� ,.... ,. "SEC. 230. Recovery of tax erroneously or illegally collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum 486

I DECISION- C. T. A. CASE NO. 5915 -3- alleged to have been excessive or in any manner wrongfully collected , until a claim for refund or Gredit has be �m duly filed with the Commissioner; x x x." "In any case , no such suit or proceeding shall be filed after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: x x x." In his Answer filed through registered mail on August 26, 1999, Respondent denied Petitioner's assertions and advanced the following Special and Affirmative Defenses: "1.) Petitioner's alleged claim for refund is subject to administrative routinary investigation/examination by the Respondent's Bureau; 2.) Taxes paid and collected are presumed to have been made in accordance with law, hence , not refundable . 3.) Petitioner must prove the following : a. That the total amount of P2,856,556.49 allegedly claimed as creditable income tax withheld for the fiscal year ended March 31 , 1997 has not been applied against any income tax liability for the succeeding taxable period. b. That it has incurred tax loss for the aforesaid taxable period . c. That the allegec.t< Ji)]qm~ tax payments from which the taxes were withheld w~r~~lr)pli:t~!3d in its gross income for 1997. ,}:~:-~-~~ :r.-_: f.,~;;~ 'r 4 .) Assuming but withRL!l .~ c:1rnittirw the fact that petitioner is entitled to tax re.fund , .it i( !nF,.YiT' Q~~t ;~pon the Ia:~~r to sho':"' that .it has . : com~lled w1th t~c:t p(?.'l::J~ IO~ f under Sect1on 204 1n rela~1on .to Sect1on 23p (n9~~f~~flJiq fl 2 ;a~ ) of the Tax Code . Othe,r:w1 ~�� 1ts . .t .." 4 failure to pr.pve t~~)1~m~� (? f~1~ ' to it~ claim for refund. . (':{.'::;;~ � -.,_...~, t~;:,...�~r~~~f-<.::�~-~'\:/ -:r �.:~�~ _:?~ ~~..~- ~- ) Claims for refu ~d are�. construed strictly against the claimqr,tt f x the �� ��:. � same partake t~e. nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma , 31 SCRA 95) and as such , they are looked upon with disfavor (Western Minolco Corp. vs . Commissioner of Internal Revenue , 124 SCRA 1211)." 48'(

DECISION- C. T. A. CASE NO. 5915 - 4- Petitioner presented testimonial and documentary evidence to support its claim . Respondent , on the other hand , submitted the case based on the pleadings. After the parties have submitted their respecti��e memorandum , the case was submitted for decision on December 12, 2000. The issues submitted by the parties for this Court's resolution are: 1.) Whether or not Petitioner PAL is entitled to the refund of the amount of P2 ,856,556.49 representing its unapplied creditable income tax withheld for the fiscal year ended March 31 , 1997; 2.) Whether or not the aforementioned amount has not been applied against any income tax liability of the Petitioner for the succeeding taxable period ; 3.) Whether or not Petitioner has incurred a tax loss for the aforesaid taxable period ended March 31 , 1997; 4.) Whether or not the income tax payments fro=n which the taxes were withheld were included in its gross income for 1997 ; and 5.) Whether or not Petitioner has complied with the provisions under Section 204 in relation to Section 229 of the Tax Code. (Stipulation of Facts, pages 83-84) Upon careful examination of th.~ evidence adduced solely by Petitioner, We find i '� the latter to be entitled to a partial retunP.. � , . . ,,'�_t \ � . ... . . >. Anent the third issue of whether or� not Petitioner has incurred a tax loss for i::! .. _;� :4.�[ ~' taxable period ended M"lrch :i1 , 1~~7 , We � ~mswer in the affirmative. Petitioner's F.� ! ~ � ~ -' ;j,: ~~ :.~�~. > ). i : ~.~~J .7 1997 ~ ~ nual income tax r~turn sufficiently wpves. that :� had indeed suff~reg a net '{>.~s. �. �~i ~-: .1 > ~t:_< ,.. :' �. ~ ~.til~ :~:-;~;. ~;~ � ~~:~ 1 , : �� ih �.� �. in t~~~ p!e FY 1997. As can b~ ~~e11 p_e~!lon -4, �(Resume of lncom~� ~rtq e ductto!ls-{ > jt:/� . � ~t"' : .. ~~�. ..... h .~ of the same return (E xh. A) , Petitioner's deductions amounting to P32 ,408,970,43B.QO (.Exh . A-5) exceeded its gross income of P30,931, 757,080.00 (Exh . A-6) resulting in a net loss of P1 ,477,213 ,358.00 (Exh . A-4) . Inasmuch as the FY 1997 ITR was prepared ' under penalties of perjury, the figures appearing therein are presumed to be true and 48o

I DECISION- C. T. A. CASE NO. 5915 -5- correct in the absence of contrary evidence (Paseo Realty and Development Corporation vs. Commissioner of Internal Revenue, CT.i Case No. 4693, July 29, 1993, affirmed by th e Court of Appeals in CA -GR SP. No. 33589, October 14, 1994) . Similarly, in the case of Citibank N. A. vs. Court of Appeals and Commissioner of Internal Revenue, G.R. No. 107434, dated October 10, 1997, the Supreme Court held that: "A refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding taxes and the fact of withholding . However, detailed proof of the truthfulness of each and every item in the income tax return is not required . That function i~ lodged in the Commissioner of Internal Revenue by the NIRC which requires the Commissioner to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the re' urn. In San Carlos Milling Co ., Inc. vs . Commissioner of Internal Revenue, the Court held that the internal revenue branch of government must investigate and confirm the claims for tax refund or credit before taxpayers may avail themselves of this option . The grant of a refund is founded on the assumption that the tax return is valid: that is, the facts stated therein are true and correct. In fact even without Petitioner's tax claim, the Commissioner cim proceed to examine the books, records of the petitioner-bank, or any data which may be relevant or material in accordance with Section 16 of the present NIRC." (Underlining supplied) .~....- With reference to the sec,e5,18 jssue, Petitioner proved that it did not apply or carry-over to the succeeding FY 1998 the claimed FY 1997 excess creditable no withholding taxes since there was e1mo ~ot indicated as "Prior Year's Excess Credits'! ): ~;~�~.~'! ~-;,, ~-:-i :~': ' . n:)(n . in its FY 1998 income tax retyrr ~). - ~�~ � :: �.�~~�-.� -~ t tg. f!e . .: . .. _ . We now proceeq to tre: firif:1~~~~~- whether or not Petitioner ~~~-~~titled ''�. �.. , - .. �� -~ ~ ,, �\'\\,, ' �~... ~�'i . :;�. ~ �.. .�-A� refund of P2 ,856 ,556.49 representing its ur\'applied creditable income t~x withh ~lO ~~ ,! I ~�.;..ri-~.:: the fisca l year ended March 31 , 1997 _ Sections 51 (f) [,now 58( D)], and 69 [now 76] of the Tax Code provide thus : 489

DECISION - C. T. A. CASE NO. 5915 -6- "Sec. 51. Returns and payment of taxes withheld at source. x x x (f) Income of recipient. - Income upon which any creditable tax is required to be withheld at the source under Section 53 (now 50) shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 295 (now 204); if the income tax collected at source is less than the tax due on his return , the difference shall be paid in accordance with the provisions of Section 50." "Sec. 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total income for the preceding calenda r or fiscal year. If the sum of the quarterly tax payments made du ri ng 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 excess tax still due ; or b.) Be refunded the excess amount paid , as the case may be . In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid , the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year." The foregoing provisions clew!y allow the refund of the excess amount of income tax withheld over the actual incom ~~ ta x computed and shown in the adjustment or final r;' � -� corporate income tax return of ~h~ taxpayer.".: �~ ;��~ ~~~:;' '�' .. :. �~ ...(: As earlier mentiored, fe~i~!qrer inGyrred a net loss in FY 1997, thus, it had. p . .~': . . . :~ ,~ ~t-.....-.:.~ 4. - : � ~ , ~-~-~ -~�' :�..'� �-~ ~::� :;.. :~ income tax liability against which ' tlie Claimed cred itable taxes withheld in�FY 199( . ~.'~ .: ; : ~� ~ < : �., ' :-:<~: '#. :' �� I :� ' ' (, P2 ,856 ,556.49 may be applied Qr credited . 'Further, the same were not carried forwarq as prior year's excess credits to the succeeding FY 1998. Hence , the claimed excess creditable taxes withheld in FY 1997 of P2,856,556.49 appears to be refundable in accordance with the above provisions of law. 490

DECISION- C. T. A. CASE NO. 5915 - 7- However, in order to be entitled to a refund of excess creditable withholding taxes , Petitioner must likewise prove its compliance with the following three requirements as provided under Revenue Regulations No. 12-94 and the prevailing jurisprudence on the matter: 1. That the claim for refund was filed within the two-year prescriptive period provided under Section 204(3) [now Section 204(C)] in relation to Section 230 [now Section 229] of the Tax Code; 2. That the fact of withholding is estab,;shed 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 ; and 3. That the income upon which the taxes were withheld were included in the return of the recipient [Revenue Regulations No. 12-94 (amending Revenue Regulations No. 6-85); Citibank, NA vs. Court of Appeals and CIR, 280 SCRA 459; ACCRA Investments Corporation vs. Court of Appeals, 204 SCRA 957] . The question of compliance with the first requirement is similar to the fifth issue raised by the parties. The reckoning of the two-year prescriptive period for the filing of a claim for refund commences from the date of filing of the final adjustment return (ACCRA Investments Corporation '{~- .C?ourt of Appeals, 204 SCRA 957) . The claimed excess creditable withholding taxes subject of the instant Petition were for the fiscal year C:: ending March 31, 1997 for whi ~h Pati~i oner fjle d its annual income tax return on July 29 , l !; : �� � :t, :. ;.l' 1997 (Exh. A-3). Countif19 fr~1rn thi~' ~-~Her c:i'~te, Petitioner's two separate administrativ~ ,: ;. r_ ~�;>:-~i :�:-; ~:'.' . ,';~ ,.., 1 t J clai~~ f?r refund filed orr {\ug~sl a ~ ~~ 7 ~n.d J ~~x 23, 1998 as well a~. m~ _petitio_n ~ '�i.�.," : "/,: '; ~;, ..,;"; . �..� t", " ,., "' .' I �~ ~ .\' ... \ ";-. "J._i: ~�, Review filed on July 23, 1999 f~ll within the two-year period prescribed under Saciton \. �, ::: ' !.<.:" . ,.� 204(3) [now Section 204(C)] in relation to Section 230 [now Section 229] of the Tax Code . 491

DECISION- C. T. A. CASE NO. 5915 - 8- In compliance with the second requirement, Petitioner submitted Certificates of Creditable Tax Withheld at Source (Exhs. C-2-1 -a to C-2-1-u, inclusive) which were examined by SGV & Co, the auditing firm commissioned by this Court pursuant to CTA Circular 1-95, as amended, to verify Petitioner's claim for refund . In its report (Exh. C, pages 4-6) , SGV & Co. certified that out of the claimed excess creditable withholding taxes of P2 ,856 ,556 .85, only the amount of P1 ,534 ,103.96 was properly supported by certificates . However, upon scrutiny of the said documents , this Court found out that the amount of P1 ,534, 103.96 includes creditable value-adcled taxes withheld amounting to P32,511 .08 detailed as follows : Period Income Creditable VAT Covered Ex h. Withholding Agent Payment Withheld C-2 - 1b 4/8/96 Bangko Sentral ng Pilipinas p 267 .30 p 14 .58 1 06/96 5,964 .60 7/1/96 Bangko Sentral ng Pilipinas 249 .50 325 .34 2/25 11/4/96 228 .60 3/25 5/7/96 Bangko Sentral ng Pilipinas 217.47 9.08 4/25 8/14/96 6,993 .80 5/25 01-09/96 Bangko Sentral ng Pilipinas 12.46 6/25 7/8/96 41 ,575.42 7/25 8/5/9 6 Bangko Sentral ng Pilipinas 3 ,000 .95 6 .73 8/25 9/96 3,226 .25 11/25 8/27/96 Bangko Sentral ng Pilipinas 381.48 12/25 16 ,935 .85 14/25 7/8/96 Bangko Sentral ng Pilipinas 34,035 .35 2,267 .74 15/25 6/96 p 112.695,09 4/96 Bangko Sentral ng Pilipinas 180.05 C-2 -1-e 1 Bangko S ~ ~r,al ng Pilipinas 175 .97 Bangko S ~fHral ng Pilipinas 1/12 923 .77 2!12 Bangko Ser1tral ng Pilipinas 1 856.47 ;�,t � ~/12 p 6,153 .67 Total Arnoll nt . _t :l; Less : SGV Oisallowances 2,986 .23 Net Arr\oHn! ~: :. ;;. � ' c' ~ ' a._ ��� J p 3 167.44 I ' ~ ~ ; !, � :. ' � 1 ..... � ~ .-.,o; "' �,: . I . .:: . . . , , . , Sef1 ate of the Ph i lip pine~ p 268,800.00 p 14,Q81 .82 S ~n~te t1J.1tj~ ;B hJUP.pine~ 134,400.00 . �~�7; 330 . 91 .. of San;:E:-tte::' th e� Ph ilip pine s ~:, .1;l 30 .91 -� 34,400 .00 p 2'9:343 .64 '. p 437 600,00 p 32.511 .08 ." @ r~nd TotaL These creditable value-added taxes withheld should be excluded from the amount of P1 ,534 ,103.96 since the same are deductible from Petitioner's output VAT liability and 4~2

DECISION- C. T. A. CASE NO. 5915 -9- not from its income tax liability as provided under Section 110(c) [now Section 114(C)] of the Tax Code , to wit: "(C) Withholding of Creditable Value-Added Tax. - The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall , before making payment on account of its purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 100 and 102 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contracto :: x x x x." Likewise, this Court observed that the creditable income taxes withheld of P532 ,243 .34 indicated in the following certificates include taxes withheld in FY 1996, which are outside of the period covered by the subject claim for refund . Period Withholding Agent Income Income Tax Covered Payment Withheld C-2-1-b 1/25 Mar '96 Bangko Sentral ng Pilipinas P 5,241 .90 p 285.92 C-2-1-e 4/12 Jan to June '96 Senate of the Philippines 703,063.20 31,957.42 C-2-1-0 2/2 Jan to Dec '96 Abacus Dist. Sys. Phils. 10,000 ,000.00 500,000.00 Total : p 10 708.305.10 p 532 243.34 Hence , the amount of P532,243.34 shall qjso be disallowed since this Court cannot \ �t I ;. ~ ascertain from the corre spo f1c1!~fl certj fic~nes the actual amount of creditable taxe ~ \ !~~ . \ 1. � �� .> ';-: withheld related only to PY 19a7 cav�~re�d by.the instant Petition . �1�~-~} � /� ~ '; ' � ' :. 0' : 0 ,. :; �: :.: ' .: , \ _. , .'::~< /. :_. Therefore, the arTj ount 'df F1'. ~~1. 1Q �.96 r~commended by SGV & () o. is f � ~;'~ .. )": ~ .: .. � .. ' ' f: - : . ~?� ~-� ~-,:_' �~~: reduced by the aforesaid djsa!lowances �~amounting to P564, 754.42 (the sum .pf ,~ J .� ' I ~. '. . ? ',' P32 ,511 .08 and P532 ,243.34) resulting to a net amount of P969 ,349.54 creditable income taxes withheld in FY 1997, which were substantiated by proper certificates . 483

( DECISION- C. T. A. CASE NO. 5915 - l0- Concerning the third requirement which is also t;1e fourth issue stipulated by the parties, Petitioner proved that it declared in its FY 1997 income tax return the income corresponding to the substantiated creditable income taxes withheld of P969 ,349.54. As certified by the commissioned auditing firm , SGV & Co. in its report, the income related to the creditable income taxes withheld of P1 ,534,1 03 .96 was verified to have been declared by Petitioner in its FY 1997 income tax return (Exh . C, page 4) . Consequently, the income corresponding to the creditable income taxes withheld of P969 ,349.54 which are properly supported by certificates was also declared by Petitioner in its FY 1997 ITR since the latter amount originated from the amount of P,1 ,534, 103.96 verified by SGV & Co. Contrary to the Respondent's allegation, Petitioner proved that it complied with all the requirements for the refund of excess creditable income taxes withheld but in the reduced amount of P969,349.54. WHEREFORE, in view of the foregoing premises , the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED TO REFUND the amount of NINE HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FORTY NINE AND 54/100 PESOS (P969,349.54) in favor of Petitioner representing unapplied creditable income taxes withheld fo~ ,. he fisca l year ende'd March 31. 1997. ~ -{SJ.Q~ ERNESTO D. ACOSTA Presiding Judge ~ , �\ � I CONCUR: 4!14

DECISION - C. T. A. CASE NO. 5915 - II - 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. L~-~ ERNESTO D. ACOSTA Presiding Judge 4~5