COMMISSIONER OF INTERNAL REVENUE v. SUTHERLAND GLOBAL SERVICES PHILIPPINES, INC.

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC COMMISSIONER OF INTERNAL CTA EB No. 1156 REVENUE, (CTA CASE No. 8180) Petitioner, Present: DEL ROSARIO, P.J, CASTANEDA, JR., BAUTISTA, -versus- UY, CASANOVA, FABO N-VI CTO RI N0 I MINDARO-GRULLA, COTANGCO-MANALASTAS,and SUTHERLAND GLOBAL RINGPIS-LIBAN, JJ. SERVICES PHILIPPINES, INC., Respondent. Promulgated: APR 0 5 2016 /D:,-~Cii.P-t. x-------------------------------------------------------------~xL:L - RESOLUTION MINDARO-GRULLA, J.: Submitted for resolution is a Motion for Reconsideration filed by petitioner CIR, seeking the reversal of the Decision1 dated October 28, 2015, the dispositive portion of which, reads as follows: "WHEREFORE, premises considered, the petition is DENIED. The Decision and Resolution of the Third Division of this Court in CTA Case No. 8180 promulgated on January 13, 2014 and March 24, 2014, respectively, are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED." (!.. 1 En Bane docket, pp. 160-178.

CIR vs. Sutherland Global Services Philippines, Inc., Page 2 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION Petitioner asserts that respondent's failure to present and offer as evidence proof of payment of other taxes such as Value-Added Tax (VAT)/Percentage Tax Returns is fatal to its claim for refund. The Court En Bane finds no merit in this assertion. At the outset, it must be already emphasized that the amount being claimed as a refund in the case at bar represents erroneously paid S01o gross income taxes for the fiscal year July 1, 2007 to June 30, 2008, where respondent was supposed to be benefitting from an Income Tax Holiday (ITH) incentive granted by PEZA pursuant to the Supplemental Agreement2 dated February 2, 2007. Under the premises, what should only be considered by the Court En Bane in this case is whether or not respondent was able to substantiate its entitlement to the claim for refund. As a rule, enterprises registered with the Philippine Economic Zone Authority and established in these ecozones are granted incentives. Section 23 of the Republic Act 7916 provides as follows: SEC. 23. Fiscal Incentives. Business establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987. In sum, these incentives include an option between payment of a S0lo preferential tax on gross income earned in lieu of all national and local taxes3 or availing of an Income t.. 2 Annex "5", En Bane Docket, pp. 90-92 3 Sec. 24, R.A 7916, The "Special Economic Zone Act of 1995", as amended, by R.A No. 8748. June 1, 1999. XXX XXX XXX CHAPTER III OPERATIONS WITHIN THE ECOZONE XXX XXX XXX

CIR vs. Sutherland Global Services Philippines, Inc., Page 3 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION Tax Holiday of 4 to 6 years depending on whether an entity is registered as a pioneer or non-pioneer enterprise4 � In the case at bar, respondent is a non-pioneer Information Technology locator enterprise registered as an Ecozone IT Enterprise by virtue of its Philippine Economic Zone Authority (PEZA) Amended Certificate of Registration. Thus, as a PEZA-registered enterprise, it generally has an option to either pay the preferential tax rate of 5�/o on gross income or avail of the 4-year income tax holiday from commencement of its commercial operations. A perusal of the records would show that respondent's entitlement to the tax incentives is by virtue of the Registration Agreement and the Supplemental Agreement executed with PEZA. However, important consideration must be given to the pertinent provision of the Supplemental Agreement which provides as follows: XXX XXX XXX 1. (Sutherland) shall be entitled to a 4-year Income Tax Holiday (ITH) under a non- pioneer status and upon the expiration of the{ SEC. 24. Exemption from National and Local Taxes.- Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: a. Three percent (3%) to the National Government; b. Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located. 4 Article 39 (a)(1), Title III, E.O No. 226, The "Omnibus Investments Code". July 17, 1997. TITLE III INCENTIVES TO REGISTERED ENTERPRISES XXX XXX XXX ARTICLE 39. Incentives to Registered Enterprises. All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment; (a) Income Tax Holiday. (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. XXX XXX XXX

CIR vs. Sutherland Global Services Philippines, Inc., Page 4 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION ITH incentive, (Sutherland) shall be entitled to 5�/o gross income tax (GIT) incentive and to other incentives under the PEZA law" XXX XXX XXX 4. This Agreement shall form an integral part of the Original Contract. XXX XXX XXX Contrary to petitioner CIR's averment, respondent did not simultaneously avail of the fiscal incentives, thus, there is no double incentive to speak of. It clearly states in the Supplemental Agreement that respondent is entitled to four years income tax holiday (ITH) incentive, and upon the expiration of the ITH incentive, only then shall it be entitled to the S0lo gross income tax incentive. Unfortunately however, respondent inadvertently paid the S01o gross income tax for the first four years from the commencement of its commercial operations. When respondent realized that it erroneously paid the S01o gross income tax when it should have been exempt by virtue of its ITH incentive, it filed a claim for refund. Meanwhile, petitioner CIR contends that the filing of the Income Tax Return is contrary to its entitlement to the Income Tax Holiday (ITH) and refund of erroneously paid income taxes, and therefore, respondent must submit proof of VAT or Percentage Tax returns in order to confirm availment of the ITH incentive and that there was indeed an erroneous payment. This contention is misplaced. To reiterate, Section 24 of Republic Act 7916 provides as follows: SEC. 24. Exemption from National and Local Taxes.- Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5�/o) of the gross income earned by all business(

CIR vs. Sutherland Global Services Philippines, Inc., Page 5 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION enterprises within the ECOZONE (emphasis supplied) shall be paid and remitted as follows: XXX XXX XXX Corollary thereto, Revenue Regulation 12-97, which implements Section 24 of R.A 7916 defines "local taxes", to wit�I XXX XXX XXX i. "Local Taxes-shall refer to all local taxes, business taxes, real estate taxes, and other taxes, fees and charges imposed by the local government units pursuant to the Local Government Code of 1991, as amended" Based on the afore-cited prov1s1ons, the five percent (5�/o) preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all national taxes and local taxes. Considering that VAT is an internal revenue tax, particularly, a business tax, from which respondent as an entity is exempt, a presumption arises that when respondent mistakenly paid the 5�/o gross income taxes during the period from July 1, 2007 until June 30, 2008, such payment was made in lieu of all national and local taxes, including VAT. Consequently, the necessity of presenting proof of payment of VAT/Percentage Tax Returns are moot and irrelevant in this case. On another note, the Court in Division correctly held that in order to justify the claim for refund, Republic Act 7916 mandates that relevant income must be effectively related to the conduct of the registered trade or business. An effectively related income is that income derived from the business activity in which the corporation is engaged in, for an income may also be received that may not be directly connected or related to the registered business activity. The taxpayer must establish, among others, that its income relating to the subject tax refund was actually gained or received in relation to its registered operations. In support of its application for refund, respondent submitted the following documents to substantiate its claim: ~

CIR vs. Sutherland Global Services Philippines, Inc., Page 6 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION 1. PEZA Certificate of Registration No. 06-90-IT5 ; 2. Temporary Permit to Operate dated August 09, 20066 ; 3. PEZA Registration Agreement dated November 22, 20067 ; 4. Supplemental Agreement dated February 2, 20078 ; 5. Annual Income Tax Return for the fiscal year ending in June 30, 20089 ; 6. Amended Annual Income Tax Return for the fiscal year ending in June 30, 200810� Records disclose that respondent also submitted the following documents in addition to the afore-mentioned in order to prove that its revenue was indeed derived from its PEZA registered activities: 1. Various computer-generated billing invoices; 2. Debit memo; 3. Breakdown of Time and Cost Charges; 4. Schedule of Revenue for respondent company's Clark Special Economic Zone (CSEZ). With the exception of the breakdown of time and cost charges, the Court Commissioned Independent Certified Public Accountant (ICPA) was able to attribute and verify from such documents that the income earned within the CSEZ facility have been derived from its PEZA- registered activities. But since the period when income was earned from such activities within the CSEZ exempts respondent from payment of said gross income taxes, the amount being claimed became a proper subject of refund. It is also on this basis that the Court Commissioned ICPA was able to establish the correct amount that should be refunded to the respondent. Respondent paid and remitted to the BIR the 5�/o percent preferential tax rate on its gross income as indicated in its Annual Income Tax Return and Amended Income Tax Return for the fiscal year July 1, 2007 to June 30, 2008. This payment was erroneous since under the Supplemental Agreement, petitioner is covered by the 4-year ITH incentive t... 5 Annex "2", En Bane Docket, p. 80. 6 Annex "3", id., p.81. 7 Annex "4", id., pp.82-89. 8 Supra note 2. 9 Annex "6", En Bane Docket., p. 93. 10 Annex "7", id., p. 94.

CIR vs. Sutherland Global Services Philippines, Inc., Page 7 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION and its liability for the S01o gross income tax would only be effective upon the expiration of the 4-year ITH incentive. Therefore, the S01o gross income taxes remitted to the BIR clearly constitutes as "illegally or erroneously paid taxes" which is a proper subject of refund under Section 204(C) 11 in relation to Section 22912 of the NIRC of 1997, as amended. It however bears stressing that the afore-mentioned provisions provide no other requirements in connection with refund of taxes other than the existence of internal revenue taxes alleged to have been erroneously or illegally assessed or collected (emphasis supplied). For emphasis, an erroneous or illegal tax is defined as one levied without statutory authority or upon property not subject to taxation 13� Undoubtedly, the reason why respondent filed a claim for refund precisely is because it erroneously paid taxes which it should not have. Accordingly, there is also no specific revenue regulation which categorically enumerates the documents necessary to be presented when filing a claim for refund for erroneous payment of the S01o preferential income tax for PEZA- registered entities, such as respondent, unlike that for VAT refunds. As long as the taxpayer is able to fully substantiate the amount to be refunded, as well as show prima facie its( 11 Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner may XXX XXX XXX (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund. 12 Section 229. 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 alleged to have been excessively or in any manner wrongfully collected (emphasis supplied), until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. 13 Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation, G.R. No. 188497,April25, 2012

CIR vs. Sutherland Global Services Philippines, Inc., Page 8 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION entitlement to the refund, then this Court has no reason for denying the request. Thus, the Court En Bane is convinced that with the circumstances in the present case, the Court in Division has correctly granted respondent's claim for refund in the reduced amount of P11,916,827.02, representing erroneously paid 5�/o gross income taxes for the fiscal year ending in June 30, 2008. Incidentally, the Court does not agree with petitioner's position that she is not duty-bound to refute the evidence presented by respondent because the burden of proof rests only with the respondent. This mindset ignores the rule that the petitioner has an equally important responsibility of contradicting respondent's claim by presenting proof readily on hand once the burden of evidence shifts to its side. Let petitioner CIR be reminded of the Supreme Court's explanation in Jison vs. Court of Appeals14 : XXX XXX XXX Simply put, he who alleges the affirmative of the issue has the burden of proof, and upon the plaintiff in a civil case, the burden of proof never parts. However, in the course of trial in a civil case, once plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence shifts to defendant to controvert plaintiffs prima facie case, otherwise, a verdict must be returned in favor of plaintiff. (emphasis supplied) XXX XXX XXX In view of the foregoing, it is of this Court's opm1on that the documents already submitted are sufficient enough to determine whether respondent's claim is valid or not. Respondent was able to present documentary evidence necessary to establish prima facie its right to the refund. Regrettably, petitioner CIR waived her right to present rebuttal evidence. ( 14 Francisco Jison v. Court of Appeals, G.R. No. 124853. February 24, 1998.

CIR vs. Sutherland Global Services Philippines, Inc., Page 9 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION Emphasis must be given to the fact that tax refunds are based on the principle of contract or solutio indebitP 5 and the pertinent laws governing this principle are found in Articles 214216 and 21S417 of the New Civil Code of the Philippines. It is a basic postulate that no one should unjustly enrich himself at the expense of another. Moreover, when money is paid to another based on misapprehension of the existing facts, the right to recover arises. The caveat against unjust enrichment covers the governmentl8 . There being no doubt that petitioner paid S01o gross income taxes for the fiscal year July 1, 2007 to June 30, 2008 while being under the ITH incentive, there arises an obligation on the part of petitioner to return what was mistakenly paid by respondent pursuant to the principle of solutio indebiti. Thus, Government has to restore to respondent the sums representing the erroneously paid S01o gross income taxes. WHEREFORE, finding no cogent reason to reverse the Decision dated October 28, 201S, the Motion for Reconsideration is hereby DENIED. SO ORDERED. ~N.M~~-C~ CIELITO N. MINDARO-GRULLA Associate Justice 15 The Commissioner of Internal Revenue vs. Acesite (Philippines) Hotel Corporation, G.R. No. 147295, February 16, 2007. 16 Art. 2142. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another (emphasis supplied). 17 Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises (emphasis supplied). 18 Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008, citing Commissioner of Internal Revenue v. Firemans Fund Insurance Co., No. L-30644, March 9, 1987.

CIR vs. Sutherland Global Services Philippines, Inc., Page 10 of 10 CTA EB No. 1156 (CTA Case No. 8180) RESOLUTION WE CONCUR: Presiding Justice ~C.~I~� LOVELL R.c:::TA .10ANITO C. CASTANEf>A, JR. Associate Justice Associate Justice U- ER~P.UY CAESAR A. CASANOVA Associate Justice Associate Justice ESPE (On Leave) AMELIA R. COTANGCO-MANALASTAS Associate Justice ~- ~ ~ '- MA. BELEN M. RINGPIS-LIBAN Associate Justice