F.F. CRUZ AND COMPANY INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* F. F. CRUZ AND COMPANY, INC., C.T.A. CASE NO. 7216 Petitioner, Members: -versus- ACOSTA, Chairperson BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, ~/ttf' Respondent. x----------------------------------------- - -- ----- DECISION BAUTISTA,,L: This case involves a claim for the issuance of a tax credit certificate in the amount of P33,065,762.00 allegedly representing unutilized excess creditable withholding tax credits as of December 31, 2002. Petitioner is a corporation organized and existing under the laws of the Philippines and engaged in the construction business with business address at 800 E. de los Santos Avenue, Quezon City. Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue, empowered to perform the duties of his office induding, among others, the duty to act upon and approve daims for refund or tax credit as provided for by law, with office address at Sh Floor, BIR National Office Building, Diliman, Quezon City. 1 1 Paragraphs 1 and 2, Joint Stipulation of Facts, Records, page 128

DECISION C.T.A. CASE NO. 7216 Page 2 On April 16, 2003, petitioner filed with the Bureau c:i Internal Revenue (BIR) its income tax return for taxable year 20022, but subsequently amended the same on May 9, 20033� In its amended 2002 income tax return, petitioner declared an income tax due of P3,022,521.00 on taxable income of P13,572,486.00. However, petitioner had accumulated tax credits in the total amount c:i P46,638,248.00, representing the sum c:i the prior year's excess credits of P21,880,195.00 and creditable taxes withheld during the year in the amount of P24,758,053.00. After offsetting the income tax liability of P3,022,521.00 against the total tax credits of P46,638,248.00, petitioner reflected an income tax overpayment of P33,065,762.00, computed as follows: Sales/Revenue/Receipts/Fees P1 ,355,667,766.00 Less: Cost of Sales/Services 1 221.608,038.00 Gross Income from Operation Add: Non-Operating & Other Income p 134,059,728.00 Total Gross Income 17.066.337.00 Less: Deductions Taxable Income p 151 ,126,065.00 Income Tax Due 108.712.046.00 Less: Tax Credits p 42 414 019 00 Prior Year's Excess Credits p 13.572.486.00 Creditable Taxes Withheld for the First Three Quarters Creditable Taxes Withheld for the Fourth Quarter p 21 ,880,195.00 Total Tax Credits 13,171 ,573.00 ... Tax Overpayment 11.586.480.00 ' p 46.638.248.00 p 33 065 762 00 Petitioner, as indicated in the return, opted to be issued a tax credit certificate for the income tax overpayment of P33,065,762.00. Through a letter dated May 2, 2003 and filed with the BIR on May 12, 2003, petitioner formalized its request for the issuance of a tax credit certificate corresponding to its reported excess tax credits as of December 31, 2002 in the amount of P33,065,762.00.4 On June 10, 2003, respondent issued a Letter of Authority No. 00002545, authorizing the Revenue Officers named therein to examine the books of accounts and accounting Z Exhibit �Aw 3 Exhibit ~sw 4 Exhibit �cw

DECISION C.T.A. CASE NO. 7216 Page 3 records relative to petitioner's internal revenue taxes for the period from January 1, 2002 to December 31, 2002.5 As there was no report on the instant claim by respondent's examiners, petitioner filed a follow-up letter with the BIR on March 29, 2005, reiterating its request for the issuance of a tax credit certificate in the amount of P33,065,762.00.6 Inasmuch as the two-year prescriptive period for the filing of a judicial claim under Section 229 of the National Internal Revenue Code (NIRC) of 1997, as amended, was about to lapse without action on the part of respondent, petitioner elevated its case before this Court on April15, 2005. Respondent, in his Answer filed on June 8, 2005, raised the following Special and Affirmative Defenses: "4. He reiterates and repleads the preceding paragraphs of this answer as part of his Special and Affirmative Defenses. 5. Petitioner's claim for refund is undergoing administrative investigation/examination by the Bureau of Internal Revenue (BIR). 6. In a letter of authority issued to its Revenue Officers, the BIR authorized the examination of petitioner's books of accounts and other accounting records for all internal revenue taxes (taxable for the period from January 1, 2002 to December 31, 2002). The period covers the same year petitioner claims to have made an excess income tax payment in the amount of Thirty Three Million Sixty Five Thousand Seven Hundred Sixty Two Pesos (Php 33,065,762.00); 7. Be that as it may, petitioner's alleged excess income tax payment for the year 2002 is not properly documented; 8. Furthermore, petitioner must clearly show that its alleged claim was timely made and does not violate the provisions of Section 204 (c) and 229 of the Tax Code on the prescriptive period for claiming tax refund/credit; 9. Claims for refunds are construed strictly against the claimant as they partake the nature of a tax exemption. It is incumbent upon petitioner to clearly prove that it is entitled thereto under the law. 5 Exhibit "D" 6 Exhibit" E"

DECISION C.T.A. CASE NO. 7216 Page 4 Failure to prove the same is fatal to its daim for tax refund. Exemptions from taxation are highly disfavored in law and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague implications (Asia Petroleum Co., vs. Uamas, 49 Phil 466). During trial, petitioner presented documentary and testimonial evidence. Respondent, on the other hand, was considered to have waived his right to present evidence because of the absence of his counsel during the hearing on February 27, 2007, despite the final warning issued by the Court on January 16, 2007.7 After the parties have filed their respective memoranda, the case was considered submitted for decision on May 11, 2007. The parties submitted the following issues" for this Court's resolution: "1. Whether or not petitioner is entitled to the refund in the amount of P33,065,762.00 representing its alleged excess income tax payments? 2. Whether or not the daim for refund was filed within the period allowed under the law? 3. Whether or not the alleged excess income tax payments for the year 2002 is properly documented." Petitioner anchors its daim on Section 76 of the National Internal Revenue Code (NIRC) of 1997, which states: "SEC. 76. Final Adjustment Retum. - 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 7 Records, page 372 8 Records, page 129

DECISION C.T.A. CASE NO. 7216 Page 5 excess quarter1y income tax against income due for the taxable quarters of the sucx:eeding 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." (Emphasis supplied) Based on the aforequoted provisions, the corporate taxpayer's excess tax credits or overpaid income tax in a given taxable year maybe refunded (either in the form of cash or tax credit certificate) or applied against its income tax liabilities of the succeeding taxable years. However, once the option to carry-over has been made, such option becomes irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. A perusal of petitioner's amended income tax return for taxable year 20029 shows that the excess tax credits of P33,065,762.00 as of December 31, 2002 consisted of the balance of the prior year's (1998, 2000, and 2001) excess credits in the amount of P8,307,709.00 and creditable taxes withheld during the year 2002 in the amount of P24,758,053.00, as shown below: Income Tax Due p 13,572,486.00 Less: Prior Year's Excess Credits (1998, 2000 & 2001 ) 21 .880.195.00 Balance of Prior Year's Excess Credits Add: Creditable Taxes Withheld During the Year p _ 8,307,709.00 .-. Excess Tax Credits as of December 31 , 2002 24.758.053.00 ~ p 33 065 762 00 While it appears that petitioner was unable to utilize its prior years' excess tax credits from 1998, 2000, and 2001 in the amount of P8,307,709.00 in 2002, the same should be denied outright pursuant to Section 76 of the NIRC of 1997, as quoted earlier. Since petitioner exercised the option of carry-over with regard to the prior year's excess credits of P8,307,709.00, the same is irrevocable and petitioner cannot daim a refund/tax credit certificate therefor. Petitioner's only recourse is to carry-over the unutilized tax credits of P8,307,709.00 to the succeeding taxable years until the same is fully utilized (Subic Bay 9 Exhibit ~B"

DECISION C.T.A. CASE NO. 7216 Page 6 case Distribution, Inc. vs. The Commissioner ofIntemal Revenue, CTA No. 6640, November 3, 2004). Furthermore, other than the income tax returns for 1998, 1999, 2000 and 2001, petitioner did not present withholding tax certificates to prove the existence of the prior year's excess credits of P21,880,195.00. Consequently, the income tax due of P13,572,486.00 shall be deducted from the 2002 creditable withholding taxes that may be found to be properly substantiated. The Court will now discuss the remaining claim of P24,758,053.00, which pertains to the creditable taxes withheld during the taxable year 2002. In its income tax return for the said year, petitioner marked the option "To be issued a Tax Credit Certificate".10 In which case, petitioner's creditable taxes withheld for taxable year 2002 of P24,758,053.00 maybe the proper subject of a claim for the issuance of a tax credit certificate under Section 76 of the NIRC of 1997, as amended. However, as oft-cited by this Court in a number of similar cases, the following requisites must be complied with in order that the subject claim may be granted: 1.) That the claim for refund was filed within the two-year prescriptive period provided under Section 204(C) in relation to Section 229 of the NIRC of 1997, as amended; 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; and 3.) That the income upon which the taxes were withheld were included in the return of the recipient [Sedion 2.58, Revenue Regulations No. 2-98, as amended; Citibank N.A. vs. Court ofAppeals and CIR, 280 SCRA 459; ACCRA Investment Corporation vs. CA, 204 SCRA 957j. Here, petitioner complied with the first requirement. The reckoning of the two-year prescriptive period for the filing of a claim for refund/tax credit certificate of excess creditable withholding tax/quarterly income tax payment starts from the date of filing of the annual 10 Exhibit ~aN

DECISION C.T.A. CASE NO. 7216 Page 7 income tax return. 11 Petitioner originally filed its income tax return for taxable year ended December 31, 2002 on April 16, 2003. u Counting from this date, petitioner had until April 15, 2005, year 2004 being a leap year, within which to file its daim for refund/tax credit certificate, both administratively and judicially. Therefore, petitioner's administrative claims filed on May 12, 2003 and March 29, 200513 and the Petition for Review filed on April 15, 2005 were timely filed. In compliance with the second requirement, petitioner presented Certificates of Creditable Tax Withheld at Source duly issued to it by its withholding agents/clients for the year 2002 showing creditable withholding taxes in the amount ci P24,757,949.62, broken down as follows: Exhibit Period Covered Withholding Agent Income Income Payment Tax Withheld On Construction Services F Jan 1 -Mar 31 , 2002 Asian Terminals, Incorporated p 66,246,100.00 p 1,324,921 .85 585,214.00 11 ,704.28 F-1 Jan 1 -Mar 31 , 2002 Asian Terminals, Incorporated 121 '1 27,220.00 2 ,446 ,004 .31 F-2 Apr. 1- June 30, 2002 Asian Terminals, Incorporated 133,584,300.00 2,671,687.95 F-3 July 1- Sept 30, 2002 Asian Terminals, Incorporated 104,616.00 2,092.32 239,683,060.00 4 ,793,663 .2 6 F-4 July 1- Sept 30, 2002 Asian Terminals, Incorporated 45,847.00 916.94 F-5 Oct. 1-Dec. 31 , 2002 Asian Terminals, Incorporated Bases Conversion 532,882.50 10,657.65 F-6 July 1- Sept 30, 2002 Development Authority Bases Conversion 5,168,669.50 103,373.39 F-7 July 1- Sept 30, 2002 Development Authority Dept of Public Works & 11 ,973,330.50 239,466.61 F-12 Feb. 1-Feb 28, 2002 Highways Dept. of Public Works & 8 ,768,878 .00 175,377.56 F-13 Mar. 1-31 , 2002 Highways Dept of Public Works & 16,545,190.50 330,903.81 F-14 Apr. 1-30, 2002 Highways 391,831.58 Dept. of Public Works & 19,591 ,579.00 F-15 May 1-31, 2002 Highways 491 ,646.23 Dept of Public Works & 24,582,311 .50 F-16 June 1-30, 2002 Highways 423,132.51 Dept. of Public Works & 21,156,625.50 F-17 July 1-31,2002 Highways 66,631 .30 Dept. of Public Works & 3,331,565.00 F-18 Oct. 1-31 , 2002 Highways 290,852.36 Dept of Public Works & 14,542,618.00 404 ,387 . 14 F-19 Oct. 1-31, 2002 Highways 20,219,357.00 Dept. of Public Works & F-20 Oct. 1-31 , 2002 Highways F-21 Dec. 1-27, 2002 Dept. of Public Works & Sa,les/ ~~~I~~estments Corporation vs. Court Appeals, 204 SCRA 957; Commissioner of Internal Revenue vs. TMX Inc., U Exhibit "Aw 13 Exhibits "C" and "E"

DEOSION C.T.A. CASE NO. 7216 Page 8 F-22 Jan. 2.June 27, 2002 Highways 24,082,736.00 481 ,654.72 F-25 Jan 1-Mar31, 2002 478,239.53 9,564.77 F-26 Apr. 1.June 30, 2002 DPWH Region Ill San Fdo 506,292.28 F-28 Jan. 1-Mar. 31 , 2002 Panp 183,189.60 10,125.84 F-29 Apr. 1.June 30, 2002 177,840.97 9,159.48 Freyssinet Philippines, Inc. 8,892.05 F-30 July - Sept 2002 3 ,063 ,978 .35 Freyssinet Philippines, Inc. 5 5 ,7 0 8 .7 0 F-31 May 1-31 , 2002 11 ,001,820.65 Go Alan Co 2 0 0,0 3 3. 10 F-32 Dec. 1-31 , 2002 4 ,548,854.50 F-33 May 1-31 , 2002 Go Alan Co 8,940,272.06 82,706.45 F- 34 Apr 1-30, 2002 Mandaue Realty & Resources 3,025 ,849 .7 5 89,402.72 F-35 Mar 31 . 2002 Corp. 14,880 ,549 .40 30,258.50 F-36 Jan. 1-31 , 2002 Metropolitan Waterworks & 2,635,761 .09 148,805.49 F-37 no indicated period Sewerage Sys 182,895,212.97 26,357.61 F-41 Aug. 1-Sept 30, 2002 MetropoHan Waterworks & 295,157,521 .06 1,828 ,9 5 2. 13 F-42 Oct. 1-31 , 2002 Sewerage Sys 7 ,830,822 .32 5,903,150.42 156,616.44 F-43 Feb. 1-Mar 31, 2002 Philippine Ports Authority 4 ,810 ,477 .50 96,209.55 F-44 May 1-31, 2002 Philippine Ports Authority 2 ,582 ,120.25 51 ,642.41 F-45 Jul 1-Sept30, 2002 Philippine Ports Authority 19,551 ,047.54 391 ,020.95 F-46 Oct. 1-Dec. 31 , 2002 Philippine Ports Authority 3 5 ,4 8 3 ,538.06 709,670.75 F-47 July 1-Sept 30, 2002 Philippine Ports Authority 941 647.27 94164.98 Shimizu/F.F. Joint Venture P1.330.567. 135.15 P24.563.348.11 Shimizu/F.F. Joint Venture Shimizu Corporaton-Manila Branch Shimizu Corporato~Manila Branch Shimizu Corporaton-Manila Branch Shimizu Corporaton-Manila Branch Subic Bay Metropolitan Authority Sub-total: On Rental Income F-8 Jan 1 -Mar 31 , 2002 Central Visayas Trucking p 386,221 .82 p 19,311 .10 Services, Inc. F-9 Apr. 1- June 30, 2002 Central Visayas Trucking 375 ,826. 18 18,791 .30 Services, Inc. F-10 July 1- Sept 30, 2002 Central Visayas Trucking 136,080.00 6,804.00 Services, Inc. F-11 Oct. 1-0ec. 31 , 2002 Central Visayas Trucking 204,120.00 10,206.00 F-23 Apr. 1.June 30, 2002 Services, Inc. 1,090 ,909 .0 8 54,545.46 F-24 Jan. 31-Mar. 31 , 2002 1,090,909.08 54,545.45 F-27 July 1-Sept 30, 2002 F.F. International Mfg. Corp. F-38 Jan 1-June 30, 2002 136,363.63 6 ,818 . 1 9 F-39 July 1-31 , 2002 F.F. International Mfg. Corp. 420,640.00 19,120.00 F-40 Feb. 3, 2002 Geotechnics Phiilippines, Inc. 54,560.00 2,480.00 43 560.00 1,980.00 Salinas (IM) Corporation p 19~601.51 p 3,939,189.79 Salinas (IM) Corporation ~24.l5l,949,�2 ~1,334.606,324.94 Salinas (IM) Corporation Sub-total: Grand Total: Ukewise, petitioner proved that the income payments of P1,330,567,135.15 from construction services and the income payments of P3,939,189.79 from its rental or lease of real properties related to the substantiated creditable withholding taxes of P24,757,949.62, formed part of the gross income of P1,355,667,766.00 from sale of construction services I

DEGSION C.T.A. CASE NO. 7216 Page 9 and rental income of P13,930,592.00 reported by petitioner in its 2002 amended income tax return. 14 In sum, petitioner have complied with the requisites for the refund of excess creditable withholding taxes for taxable year 2002 in the amount of P11,185,463.62, computed as follows: Income Tax Due P13,572,486.00 Less: Substantiated Creditable Taxes Withheld (2002) 24.757.949.62 Refundable Excess Tax Credits P11.185.463.62 WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED to ISSUE TAX CREDIT CERTIFICATE in favor of petitioner in the reduced amount of ELEVEN MILUON ONE HUDRED EIGHTY FIVE THOUSAND FOUR HUNDRED SIXTY THREE PESOS 62/ 100 (P11, 185,463.62), representing unutilized excess tax credits for taxable year 2002. SO ORDERED. WE CONCUR: (L_- \r.. ~ ERNESTO D. ACOSTA Presiding Justice (Inhibited) CAESAR A.CASANOVA Associate Justice r 14 Exhibits ~B-1 N and ~s-

DECISION C.T.A. CASE NO. 7216 Page 10 CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, 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's Division. ~~ -~ ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division