ENGTEK PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

_js...l,lL-......._Pl-rD wL- 1-c (_)lI:.' TH .... _ E-- .Lr_lH...ITL IDr P--TNJ~.-�.L..� s_ J ( .'/ourt G~{ Ta.:t~ /-i[JjJeals ,'<~\TJT~F~7-0 N C- IT'�_1,. . 'l ENGTEK PHILIPPH'JlfS, INC., CTA CASE NO. 6644 Petitione1~ lVIembers: - versus - CASTP.J~ED.t:-...., JR., Chainnan lJ'{, J1lcl COlVllviiSSIC>l',JER OF INTERN.t:.J.. REVENlJE, PALANCA-ENRIQUEZ, JJ. Respondent. Promulgated: JAN 26 2005 tff4A7~ X ------------------------------------------------ --------------------------------- - �----- X PALANCA-ENRIQUEZ, J.: Is Engtek Philippines, Inc. (hereafter petitioner) entitled to a refund or ta..x credit for the amount of ~7,500,000.00, representing paytnent of incmne ta::( on the declared cash dividends ~Jleged to have been erroneously p3id? THE C .\SE 8' - .~,'""'\ ~~ ., This issue is before Us in this Petition for Review. Petitioner seeks for a refund of the amount of Seven Ivlillion Five Hundred Thousand Pesos (F7,500,000.00), or in the alternative, for the is:;~111ce of ta.x credit certit1cate for said a1nount., representing income t~tx erroneously p3.icl on AprillO, 2001 to respondent~

CTA CASE NO. 6644 2 DECISION THE FACTS Petitioner, a dmnestic corporation duly registered and organized under Philippine laws, is engaged in the manufacturing and marketing of electronics and tnechanical tnachinery products, patts atld accessories_ It is 99.99~~ owned by Eng Teknologi Holdings Bhcl (hereafter UETHB"), a corporation duly registered and existing under the laws of I\t1alaysia_ On Iv1arch 7, 2002, petitioner filed an achnirristrative clailn for ta.,"\ credit with Revenue District No_ 56 of Calamba, Laguna, :in the amount of ~7,500,000.00, representing withholding t.a."\ on the cash dividends to be paid in favor of ETHB_ This clailn for refund is anchored on the proposition that. petitioner resolved to reverse said cash dividend declaration on October 8, 2001 for reasons pertaining to the financial sttucture of the Eng Tek Group of Cmnpan:ies (to which the petitioner belongs), which at that time had not yet renlitted any such dividends to its parent cotnpany_ The petition states that petitioner requested the Bureau of Inten1al Revenue (hereafl:.er "BIR'') to offset the withheld amount of ~7,500, 000 . 00 1vith ta.,"\es that may becotne due on futlu-e declat�ation of cash dividends_ The BIR detlied the request on the gromlCl that ta.,"\es paid could not be offset "\vith futlu-e liabilities_ The claim for ta.,"\ reftu1d filed with the BIR not having been acted upon, the petitioner elevat.ed its clailn to Uris Colu-t via tl1e present Petition for Review_ {1 fV

CTA CASE NO. 6644 3 DECISION The Conunissioner of Internal Revenue (hereafter respondent), in his answer, alleged, by way of special and affun1ative defenses: "4. Settled is the tule that ta.x exetnptions cannot be created by itnplications as they are highly disfavored in law. And consideting further that a claitn for ta.x refund pattakes of the nature of an exetnption, it Gumot be allowed unless granted in the tnost explicit and categorical language (BIR Ruling No. 126-86 dated July 23, 1986). 5. In an action for refund/credit, the burden of proof is on the ta.."<payer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refun<llcredit. 6. Petitioner has failed to establish any clear interest in or right over the alleged erroneous :incon1e tax paytnent on .April 10, 2001. 7. Petitioner must show that it has cotnplied vrith the provisions of Sections 204 (C) and 229 of the Ta.x Code on the presctiptive period for claitni.ng ta.x refund/ credit." Petitioner presented Ma. Pottia E. Rosell and Lyn Legaspi, as witnesses, and subrni.tted docun1entary evidence, marked as Exhibits "ft.:.', ''E'' ''G'' "H' ' "N", and "0", together with their :0 ' � subrnarkings . On the other hand, respondent subrnitted the case for decision 'vi.thout presenting any evidence. Thereaft.er, both patttes 'vere ordered to file their respective rnernoranda witlrin tlill.ty (30) days from notice. Both patties having cotnplied thereto, the case was deerned subtni.tted for decision. ~~ ~

CTA CASE NO. 6644 4 DECISION THE ISSlJES As stipulated upon by the patties, the following are the issues for tiris Cotut' s con~ideration. I Vlhether or not pet.ilioner has cotnplied with tile provisions of Sections 204 (C) and 229 of the Ta..'{ Code on ti1e prescriptive period for filing admi:tristrative and judicial clai:tns for the issuance of ta."{ refund or tax credit. cettificate. II Whether or not petitioner declared cash dividends i:t1 the amount of Fifty IVWlion Pesos (I:!50,000J100.00) on 20 December 2000. III \Vhether or not Eng Teknologi Holdi:t1gs BIID is a stockholder of the petitioner wlrich owns 99.99%, of the total capital stock of ti1e petitioner IV \Vhet11er or not the reversal of the declaration of dividends is valid. \l \Vhether or not petitioner actually ':~:.rithheld and renritted to the Bm�eau of lnternal Revenue t11e arnount of Seven :tv:I:illion Five Hm1dred Thousand pesos (I!7,500,000.00) as i:t1come ta.."{ due on t11e declared cash dividends .. VI V.lhether or not petitioner is the proper patty to cbirn for refund or tax credit i:t1 ti1e i:t1stant case. tfl~

CTA CASE NO. 6644 5 DECISION THE COURT'S RULING .~ regards the fust issue, the Coutt finds that the administrative and judicial claitns for refund were filed '\vith:in the statutory period of two (2) years aft.er the paytnent of the ta."'{. A petusal of the '"11onthly Remittance Return of Final Incotne Ta.xes \Vithheld" shows that the ta.x on dividends in the atnount of P7,500,000.00 '\Vas remitted to the BIR on April 10, 2001 (E:x:hibtt "B"). Petitioner, therefore, had up to AprillO, 2003 within 'vhich to file the administrative and judicial claitns for reft:mct pursuant to Secnons 204 and 229. respectively, r>fthe 1\fational Internal Revenue Code of 1997. as amended. Petitioner filed its administrative claitn for refund on Septen1ber 17, 2002 (b:htbit "G'�') and the judicial claim for refu.nd on April 8, 2003, both well within the two-year prescriptive period. As regards the second issue, petitioner presented the Secretat)''s Certificate dated January 26, 2001, which shows that on Decetnber 20, 2000, the Boat�d of Directors of the petitioner declared cash dividends in tl1e amount of P50,000.000.00. The Secretary's Cettificate (Exhibit "X'), :in patt, reads: "SECRETi\RY' S CERTIFICATE XXX X,'XX 2. A.t the rneeting of the Boat�d of Directors of the Corporation held on 20 Decernber 2000, tl1e follo,ving resolutions were appro-ved: 'RESOL\lED, That the Corporation be, as it 1s hereby, resolved to declare cash ~

CIA CASE NO. 6644 6 DECISION dividends in the total atnount of Fifty :NI:illion pesos (P50.000,000.00) payable to all shareholders of record as of 30 Novetnber 2000 to be taken frmn the unrestricted retained eaurings of the Corporation as of 30 Noven1ber 2000 .' 3. The foregoing are in accordance \vith the records of the cmporation in n1y possession. x.x.x x.x.x x.x.x." E.-wbit '\t\:' was identified and attested in open colut by !via. Pmtia E. Rosell, petitioner's Assistant Corporate Secretat:y. Anent the third issue, a perusaL of the GeneraL Inforn1ation sheet tiled with the Securities and Exchange Conuniss'ion shows that Eng Teknologi Holdings BHD 0"\\'llS 74,999,993 shares of stock (b:htbit "N-T'). This was testified to and continued by petitioner's Assistant Corporate Secretat1', 1\ia. Portia E. Rosell, on direct examination. Thus: "DIRECT EXM1INATION: ATTY. FERNANDO Q. You stated earlier, Atty. Rosell, that the l\i1alaysian con1pany and Eng Teknologi Holdings perhaps owned ninety-nine point ninety-nine percent (99 .99~/~) of the Petitioner, Engtek Philippines, incorporated, can you please sho-;,v where in this docurnent does it indicate? ATTY. ROSELL A. On page hvo (2) of the GeneraL Information Sheet for itetn indicating subscribed capital is the itetn :indicated Subscribed Capital in the total subscribed is P75 tnillion and on page three on the lower half, thereof is the list of the stockholders and one of the entries is Eng Teknologi Holdings which stlled as having subscribed to 74,999,99~

CIA CASE NO. 6644 ""1 I DECISION shares_ So, by tnat.hematical con1putat.ion, str, Eng Teknologi Holdings -m.\med 99.99%> of the total subscribed capital of Engt.ek Philippines, Incorporated" ( TSN, July 29, �-�1r.)(Dj"', f'f'- r r r -� �) 11-U ., With respect to the fifth issue, the petitioner presented the Cett.ification dated July 17, 2002, issued by Angel A_Monte de Ramos, Jr., Senior Personal Banker OIC, RCBC-Canneh�ay Business Center, cettifying to the fact that they remitted the amount of ~7, 646)00.00, representing payn1ent of Engtek Philippines, Inc_ of its final income tax, to the BIR on April 10, 2001 under BCS No_ A00049 (Exhibit "C'), and the Bank Valiclat.ecl Transfer Fonn!Debit Advice dated April 9, 20l11 (Ex:hibit "D'-'), the authenticity of \vhich were never disputed nor controverted by the respondent With regard to the n1erits of this petition, tl1e pivotal issue is whetl1er or not the petitioner was able to prove that there was enoneous renlittance of witl1holding ta.x tnacle to BIR., and, hence, is entitled to a refund of tl1e incon1e tax it paid to the governm.ent Petitioner argues for the validity of the reversal of declaration of dividends inasmuch as the san1e Vi.'as made by petitioner's Board of Directors in a tneeting held on October 8, 2001 and �wllich was \Vithin the scope of the Board of Directors' corporate puv;rers_ Petitioner assetts that '"for reasons pettaining to the financial structure of the Engtek Gmup of Comp:lnies (to which petitioner belongs), petition~

CTA CASE NO. 6644 8 DECISION resolved to reverse said cash dividend declaration, and it has not yet remitted any such dividends to its parent cotnpany, ETHB". Citing Section 2.57.4 of Revenue Regulations No. 2-98, as amended, respondent, on the other hand, claims that the ta.x on dividends accrues upon the declaration of the dividends without the need of actual receipt of the incotne thereof The cash dividends having been declared on December 20, 2000, the incotne on dividends by Eng Teknologi Holdings BHD \Vas already taxable, the date of actual receipt thereof being :imrnaterial. Respondent finally contends that petitioner presented no other donunents to prove the validity of the reversal of the dividends or that the sarne was rnade pursuant to the reasonable needs of petitioner's business. \Vhat was subrnitted was only the Corporate Secretary's Certificate dated :rv'larch 31, 2003 showing the resolution of the Board of Directors on October 8, 2001 approving the resolution reversing the previous declaration of cash dividends. A dividend is that patt or pottion of the protlts of a corporation set aside, declared and ordered by the directors to be paid rat.ably to tl1e stockholders on demand or at a fL'Xed time (Fisher vs. Trinidad, 43 Phil. 480; It is a payment to the stock11olders of a corporat1on as a return upon their investlnent. It is a chat�acteristic of a dividend that. all stockholders of F

CIA CASE NO. 6644 9 DECISION the satne class share in it in proportion to the respective atnounts of stock which they hold (13 A.m. Jur.637-639). Parenthetically, Section 43 ofthe Corporation Code provides insofar as pertinent: "SEC. 43. Power to declare dividends. - The board of directors of a stock corporation tnay declare dividends out of the mu-estticted retained eam:ings which shall be payable in cash, in propetty or in stock to all stockholders on the basis of outstanding stock held by thetn: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balat1ce on the subscription plus costs and expenses, while stock dividends shall be "\Vithheld from the delinquent stockholders until his unpaid subscription is fully paid~ Provide(!, further, That no stock dividend shall be is::ru.ed "\Vithout the approval of stockholders representing not less than t\ovo-thirds (2/3) of the outstatlding capital stock at a regular or special meeting duly called tbr the purpose. X.XX X.XX xx.x. ." Pursuant to the aforecitecl pro�vision, the board of directors of a stock corporation has the power to declare dividends out. of the "mu-estricted retained earnings" which shall be payable in cash, in propetty, or in stock to 3ll stockholders on the basis of outstanding stock held by thetn. A n1ere majority of the quotutn of the board of directors is sufficient to declare cash dividends. The boat�d may declare dividends other U1at1 stock wit110ut. need of stockholders ' approval. Under the la\v, to justify the declaration of dividends, there tnust be an actu,1l bonafide S'urphls profits or earnings over and above all debts and lfb

CTA CASE NO. 6644 10 DECISION liabilities of the corporation (Steinberg vs. VeLasco, 52 PhiL 953). A dividend declaration ordinarily requires the concunence of two things, namely: 1) the existence of "unrestricted retained eanrings" out of which the dividends tnay be declared and paid~ and 2) a corporate resolution of the board of directors declaring the corporate policy of paying a pot1ion or all of such earnmgs to the stockholders. The retained earnings of a corporation is the difference behveen the total present value of its assets after deducting losses and liabilities and the atnount of its capital stock (i 1 FLetcher 1041). Stat.ecl othenvise, the ordinary \Vay of determining whether a corporation has retained earnings or not is to cornpute the value of all its assets, and deduct therefrotn all of its liabilities including legal capital, and thus asce11.ain whether the balance exceeds the amount of its outstanding shares of capital stock. Thus, the retained earnings \vill be the balance of the net worth or net dSsets after deducting the value of the corporation's outstanding capital stock. They refer to the accunnllat.ed undistributed earnings or profits realized by a corporation arising fron1 the transaction of its business and the n1anagetnent of its affairs, out of current and prior years. Such earnings or pottions thereof are said t.o be mu-estricted, and therefore, available for dividend distribution, if they have not. been reserved or set a:.-:Ude by the board of directors for some corporate purpose nor are required by law to be eartnarked for son1e other purpose specified by such law (The La�v~� on Partnerships ana.' Private G:Jrporations, p 1997 Ed., by HectorS~ a'e Lzon, p. 318). ~

11 DECISION In the case at bench, record shovvs that on Decernber 20, 2000, the Board of Directors of petitioner adopted the following Resolution to declare cash dividends, to vvi.t: "RESOLVED, That the Cotporation be, as it hereby, authorized to declare cash dividends in the totalarnount of fifty :Million Pesos (~50,000,000.00) payable to all shareholders of record as of 30 Novernber 2000 to be taken from the mu-estticted retained eanrings of the Cot-poration as of 30 November '" 1 (v)ii(.)" (.�..I..;.':r.�I.tu� [.D�it ��-�:.-.�11 �,��.) L � The resolution's staternent., "x.x,x: to declare cash dividends in the total amount of Fifty :t-v1illion Pesos (~50,000,00ll00) payable to all shareholders of record as of 30 Noven1ber 2000 to be t.3ken frorn the unrestrictec1 retained earnings of the Corporation as of 30 Noven1ber 2000", clearly shows that petitioner had unrestricted retained earnings as ofNovetnber 30, 2000, out of which cash dividends tnaybe declared and paid. Prenrisecl on the foregoing, the only logical conclusion is that there was a valid declaration of cash dividends made by petitioner on Decetnber 20, 2000. Record ftuther sho\vs that the \Vith:holding tax was remitted to the BIR on 1fl.�\.pt�ill(), "L Q. . ()l (.I.;"'"'x1m. 1o�it�s ana "''~" ' 1 "L/ ), ' ' ), . It follows, of course, th~11 a cash dividend, properly and fairly declared by a solvent corporation possessed of ample lllldividecl profits and surplus, under circunlSta:nces that tnade its declaration entilely cornpetent and proper, cannot be revoked by the subsequent resolution of the Board of Dilectors of the corporation adopted ten (10) months after the declaration of the c~

r�r ,\ c \C'E NO 664 \_.. i"i. .1\.;:t ' l . t t ' q,f 12 DECISION dividends on the alleged gt"ound that the declaration vvas inopportune.. The Resolution dated October 8, 2001, reversing the declaration of the cash dividends reads: "\XlHEREAS, the Corporation declared cash dividend in favor of its stockholders on 20 Decetnber 2000; w'HEREAS, the Corporation found the declaration of dividends to be inoppottune; RESOLVED, Thdt. the Corpordtion be, ;:-tS it is hereby, authorized to reverse its resolution to declare cash dividends ddted 20 Decetnber 2000~ RESOL\lED FIN.ALLY, That the Corpordtion's Finance Controller be as he is hereby, authorized to sign, execute and deliver any and ~dl donunents necessaqr to cart)7 into effect the foregoing resolution" (E..i:hibit "H-'-'). The fact th:ll. the petitioner declared cash dividends on Decen1ber 20, 2000 presupposes, and, in fact, clearly shm,vs that the petitioner had actual bonat1cle surplus prot1ts or earnings over and above all debts and liabilities of the corporation. As a rule, dividends catu1ot be declared by a corpor:llion until it has eluninated a deficit rr.sulti.ng frotn its operations of preceding years. Dividends are, thus, payable only when there are profits earned by the corpor:llion. In other lvorcls, 1;vhen a corporJ1ion issues cash dividends, it sho,vs tl1at no det1cit exists. Petitioner's argument th:ll for reasons pettai.tli:ng to the financial structure of the Eng Tek Group of Cmnpatlies (to 1vhich petitioner belongs), it resolved to reverse said cash dividend declaration, is t1avved, and without ::::u1ci ,_u .fc.-ac."r""t..l'...~1 .c. 1...ectr�-'"c'.1u 1c 1'"~ '""1.C.:''..

CTA CASE NO. 6644 13 DECISION Other than the Corporate Secretary's Cetiificate dated March 31, 2003, sho\ving the resolution of the Board of Directors on October 8, 2001 to prove that on said date the Board approved the resolution reversing the declaration of cash dividends, no other document was presented by the petitioner to prove the financial structure of Eng Tek Group of Companies, to which the petitioner allegedly belongs. Petitioner did not present its book of accounts, cetiified balance sheet, profit and loss statements, or other equivalent books, that would prove that it had no unrestricted retained earnings at the tune of the declaration of cash dividends on Decetnber 20, 2000. The allegation silnply rernained an allegation and no coutt of justice will regard it as truth. It is well-settled that in an action for refund, the ta.xpayer has the burden of proof to establi:=;h the right to refund. Failure to sustain the burden is fatal to the claim for refund/credit (rVestern lvfinolco Corp. Petitioner has failed to discharge this burden of proof Since petitioner's claim for the entitlement of ta.x refund or credit rernains ru1proven and unsubstantiated, the sarne caru1ot he gt�arrted. It is a."\iomatic in the l;.l\V of ta."Xation that t.a.xes ar�e the lifeblood of the nation. Hence, "exemptions therefrmn are highly disfavored in la\v and he 1.vho claims ta."X exemption nmst be able to justify his clairn or right" (..-1,t1.::;-co

,-.'T' ,\ c-� ,\ 6<ii4' 4� MQ '--� .l l�~ ~'""t-::J�.1I.:.fJ 1., � 14 DECISION \VHEREFORE, premises considered, the present Petition for Re\'iew is hereby DISlVIISSED for lack of merit. No pronouncetnent as to costs. SO ORDERED. ~t~CA~~UEZ .Associate Justice \VE CONCUR: E~~ ~~~lS.tiUceY 9zt~n, e . a.Y::~c:& ~.'9-r .JlTANITO C. CASTAl'1EDA3 qR. Associate Justice c;ERTIFICATJON I hereby cet1ify that this decision v.ras reached after due consultation a1nong the n1e1nhers of this Division in accordance with the provisions of Section 13, A.t1icle VIII of the Constitution. ~)4<2 .~~ Q.., .i tJANITO C. C~i\.~TANED~( 6R. Associate Justice Chainnan, Second Division