PHILIPPINE BANK OF COMMUNICATIONS v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court ofTax Appeals QUEZON CITY SECOND DIVISION PHILIPPINE BANK OF C.T.A. CASE NO. 7435 COMMUNICATIONS, Members: Petitioner, CASTANEDA, JR., Chairperson -versus- UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF Promulgated: INTERNAL REVENUE, OCT2 9 2009/ R espon dent. X ---------------------------------------------------------------~-~-~~_[_�-~-�-- X AMENDED DECISION PALANCA-ENRIQUEZ, J.: This resolves: 1) petitioner's "Motion For Reconsideration" filed on August28,2009;and 2) respondent's "Opposition (Motion for Reconsideration dated August 28, 2009)" filed on September 22, 2009. The motion is partly meritorious. Petitioner contends that the presentation of its Quarterly Income w Tax Returns for the 15\ 2nd, and 3rd quarters of succeeding taxable year is 1220

C.T.A. CASE NO . 7435 2 AMENDED DECISION not necessary to prove its entitlement to the refund of its excess creditable withholding tax, citing the case of Philippine Asset Management, Inc. vs. CIR (G.R. No. 156637 and 162004, December 14, 2005); that petitioner's income upon which the creditable withholding taxes were withheld, was included in its annual income tax return for the year 2003; and that the creditable withholding taxes for the year 2003 were properly supported by BIR returns and other documents evidencing remittances of the ta~es withheld and paid to the BIR. On the other hand, respondent counter-argues that the Philam case has no relation with the instant case; in the Philam case, there is no doubt on the withholding tax statements of petitioner which is essential to a claim for refund of excess withholding tax, as provided in RR 12-94 and 6-85; in the instant case, there is substantial misinformation and lack of evidence with the withholding tax statements which now necessitates the Final Adjusted Return for the succeeding year to clarify the ambiguity; there is no proof from the various documents presented by petitioner that the income allegedly withheld was declared as part of its gross income; lastly, in an action for refund, the burden of proof is on the taxpayer to _j establish its right to refund and failure to sustain the burden is fatal to the claim for tax refund/credit. c _) 1221 I'

C.T.A. CASE NO. 7435 3 AMENDED DECISION To start, the denial of petitioner's claim for refund was primarily anchored on its failure to present the Quarterly Income Tax Returns for the first, second, and third quarters of taxable year 2004. We ruled that without the presentation of such returns, the Court cannot determine whether petitioner had carried over/applied the claimed 2003 excess tax credits of P17,578,318.00 to the succeeding first three quarters of 2004 and later amended the said returns, such that no amount of the 2003 excess credits is reflected therein and in the 2004 Annual Income Tax Return. After taking a second hard look at petitioner's "Motion for Reconsideration", with the attached Quarterly Income Tax Returns for the first, second, and third quarters of taxable year 2004, and in the light of the ruling of the Supreme Court in the case of Phi/am Asset Management Incorporated vs. Commissioner of Internal Revenue {477 SCRA 761, 773), we rule in favor of petitioner. In the Philam Asset case, the Supreme Court ruled that the succeeding returns need not be presented in Court to determine whether the claimed excess tax credits were not utilized in the succeeding years. Thusly: "Requiring that the ITR or the FAR of the succeeding _j year be presented to the BIR in requesting a tax refund has no basis in law and jurisprudence. 1222

C.T.A. CASE NO. 7435 4 AMENDED DECISION First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the preceding -- not the succeeding -- taxable year. Indeed, any refundable amount indicatyd in the FAR of the preceding taxable year may be credited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year. However, nowhere is there even a tinge of a hint in any of the provisions of the Tax Code that the FAR of the taxable year following the period to which the tax credits are originally being applied should also be presented to the BIR. Second, Sec. 5 ofRR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for the refund of income taxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the ITR that the income payment received is being declared part of the taxpayer's gross income; and (2) when the fact of withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the amount paid and the income tax withheld from that amount. XXX XXX The established procedure is that a taxpayer that wants a cash refund shall make a written request for it, and the ITR showing the excess expanded withholding tax credits shall then be examined by the BIR. For the grant of refund, RRs 12-94 and 6-85 state that all pertinent accounting records should be submitted by the taxpayer. These records, however, actually refer only to (1) the withholding tax statements; (2) the ITR of the present quarter to which the excess withholding tax credits are being applied; and (3) the ITR of the quarter for the previous taxable year in which the excess credits arose. To stress, these regulations implementing the law do not require the proffer of the FAR for the taxable year following the period to which the tax credits are being applied. Third, there is no automatic grant of a tax refund. As a matter of procedure, the BIR should be given the opportunity ~ 1223 I I ! LJ

C.T.A. CASE NO. 7435 5 AMENDED DECISION "to investigate and confirm the veracity" of a taxpayer's claim, before it grants the refund. Exercising the option for a tax refund or a tax credit does not ipso facto confer upon a taxpayer the right to an immediate availment of the choice made. Neither does it impose a duty on the government to allow tax collection to be at the sole control of a taxpayer. Fourth, the BIR ought to have on file its own copies of petitioner's FAR for the succeeding year, on the basis of which it could rebut the assertion that there was a subsequent credit of the excess income tax payments for the previous year. Its failure to present this vital document to support its contention against the grant of a tax refund to petitioner is certainly fatal." In the recent case of Commissioner of Internal Revenue vs. PERF Realty Corporation (G.R. No. 163345, July 4, 2008), the Supreme Court ruled, as follows : "IlL The failure of respondent to present in evidence the 1998 ITR is not fatal to its claim for refund. The CIR takes the view that the CA erred in considering the 1998 ITR of PERF. It was not formally offered in evidence. Section 34, Rule 132 of the Revised Rules of Court states that the court shall consider no evidence which has not been formally offered. The reasoning is specious. PERF attached its 1998 ITR to its motion for reconsideration. The 1998 ITR is a part of the records of the case and clearly showed that income taxes in the amount of !!1,280,504.00 were not claimed as tax credit in 1998. I J In Filinvest Development Corporation v. Commissioner of Internal Revenue, the Court held that the @1JQ 1224 J

C.T.A. CASE NO. 7435 6 AMENDED DECISION 1997 ITR attached to the motion for reconsideration is part of the records of that case and cannot be simply ignored by the CTA. Moreover, technicalities should not be used to defeat substantive rights, especially those that have been held as a matter of right. We quote: In the proceedings before the CTA, petitioner presented in evidence its letter of claim for refund before the BIR to show that it was made within the two-year reglementary period; its Income Tax Returns for the years 1995 and 1996 to prove its total creditable withHolding tax and the fact that the amounts were declared as part of its gross income; and several certificates of income tax withheld at source corresponding to the period of claim to prove the total amount of the taxes erroneously withheld. More importantly, petitioner attached its 1997 Income Tax Return to its Motion for Reconsideration, making the same part of the records of the case. The CTA cannot simply ignore this document. Thus, we hold that petitioner has complied with all the requirements to prove its claim for tax refund. The CA, therefore, erred in denying the petition for review of the CTA' s denial of petitioner's claim for tax refund on the ground that it failed to present its 1997 Income Tax Return. The CA's reliance on Rule 132, Section 34 26 of the Rules on Evidence is misplaced. This provision must be taken in the light of Republic Act No. 1125, as amended, the law creating the CTA, which provides that proceedings therein shall not be governed strictly by technical rules of evidence. Moreover, this Court has held time and again that technicalities should not be used to defeat substantive rights, especially those that have been established as a matter of fact. xxxx We must also point out that, simply by exercising the CIR's power to examine and verify petitioner's claim for tax exemption as granted by law, respondent CIR could have easily verified petitioner's claim by presenting the latter's 1997 Income Tax Return, the original of which it has in its files. Howeyer, records show that in the proceedings before I the CTA, respondent CIR failed to comment on petitioner's _) formal. offer of evidence, waived its right to present its own evidence, and failed to file its memorandwn. Nei~ it 1225

C.T.A. CASE NO. 7435 7 AMENDED DECISION file an opposition to petitioner's motion to reconsider the CTA decision to which the 1997 Income Tax Return was appended. That no one shall unjustly enrich oneself at the expense of another is a long-standing principle prevailing in our legal system. This applies not only to individuals but to the State as well. In the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty. The harsh power of taxation must be tempered with evenhandedness. Hence, under the principle of solutio indebiti, the Government has to restore to petitioner the sums representing erroneous payments oftaxes. Further, We sustain the CA that there is no need to rule on the issue of the admissibility of the 1998 ITR since the CTA ruled that PERF already complied with the requisites of applying for a tax refund. The verification process is not incumbent on PERF; it is the duty of the CIR to verify whether or not PERF had carried over the 1997 excess income taxes." Clearly, therefore, taxpayers are not mandated to prove whether they had carried over their claimed excess tax credits to the succeeding taxable years, as long as they have proven their entitlement to the refund sought for the particular taxable year. Even so, a careful perusal of the returns attached to petitioner's Motion For Reconsideration reveals that only the amount of P40,211,676.00 was reflected in its 15 \ 2nd, and 3rd Quarterly Income Tax Returns for taxable year 2004. This clearly shows that petitioner did not carry over the claimed excess tax credits in the amount of P17, 578,318.00. I I' I ~J

C.T.A. CASE NO. 7435 8 AMENDED DECISION We now consider the other evidence adduced by petitioner m �support of its claim for refund. To reiterate, petitioner must be able to prove full compliance with the following requisites in order to be entitled to a claim for refund or issuance of a tax credit certificate of excess creditable withholding tax at source, as prescribed under Section 2. 58.3 of Revenue Regulations No.2-98, otherwise known as the Withholding Tax Regulations, to wit: 1) That the claim for refund was filed within the two-year reglementary period, prescribed under Section 204(C), m relation to Section 229 of the NIRC of 1997, as amended; 2) That the fact of withholding is established by a copy of the statement duly issued by the payor (withholding agent) to the payee (BIR Form No. 1743-A), showing the amount paid and the amount of tax withheld therefrom; and 3) That it is shown on the return of the recipient that the income payment received was declared as part of the gross income declared in the income tax return of the recipient (Citibank NA. vs. Court of Appeals and Commissioner of Internal Revenue, 280 SCRA 459). .J 1227 J

C.T.A. CASE NO. 7435 9 AMENDED DECISION As regards the first requisite, this Court has already ruled that petitioner has complied with the prescriptive period for filing its claim. As regards the second requisite, records show that to prove the fact of withholding of creditable taxes, the Court-Commissioned Independent Certified Public Accountant (ICPA), Jerome Antonio B. Constantino of the Constantino Guadalquiver & Co., noted in his Reports dated December 3, 2007 and December 18, 2007 (Exhibit "YYYY", pp. 3 to 5 and Exhibit "YYYY-15 ", p. I) the following findings: Findings Annex Ref. Amount of CWT A. Creditable withholding tax payments properly supported by original Withholding Tax Remittance Returns (BIR Form 1606), Capital Gains Tax Remittance (BIR Form 1706), Cel}:ificates of Creditable Tax Withheld at Source (BIR Form 2307), CAR-BIR Returns, PVS and other documents evidencing remittance oftaxes withheld (remittance receipt). Sale o[Property Annexes 1 and 8 P 13,001 , 191.27 I. Creditable withholding tal{ payments Annex 2 171 ,000.00 Annex 3 173 ,400.00 supported by BIR Returns stamped as Annex 4 54,000.00 "Received" by the BIR agent and other Annex 5 documents evidencing remittance such as 1,776,000.00 Bank Validated Deposit Slip or Bank Official Receipt 2. Creditable withholding tax payments supported by BIR Returns not stamped as "Received" by the BIR agent but with other documents evidencing remittance such as Bank Validated Deposit Slip or Bank Official Receipt 3. Creditable withholding tax payments supported by Certified True Copy of BIR Returns stamped as "Received" by the BIR agent and other documents evidencing remittance such as Bank Validated Deposit Slip or Bank Official Receipt 4. Creditable withholding tax payments supported by Certified True Copy ofBIR Returns not stamped as "Received" by the BIR agent but with other documents evidencing remittance such as Bank Validated Deposit Slip or Bank Official Receipt 5. Creditable withholding tax payments supported by CAR and PVS 1228 I J

C.T.A. CASE NO. 7435 10 AMENDED DECISION 6. Creditable withholding tax payments Annex 6 52,488.00 supported by CAR and Bank Validated Annex 7 Deposit Slip or Bank Official Receipt 758,964.11 Annex 9 p 15,987,043.38 Lease of Offlce Space Annex 10 I . Creditable withholding tax payments 1,590,824.62 450.00 supported by Certificate of Creditable Tax Withheld at Source (BIR Form 2307) p . 1,591,274.62 Subtotal p 17,578,318.00 B. Other Findings Sale ofProperty 1. Creditable withholding tax payments without available supporting documents Lease ofOfflce Space I. Creditable withholding tax payments without available supporting documents Subtotal TOTAL As regards the third requisite, this Court finds that in petitioner's Annual Income Tax Return for taxable year 2003, petitioner reflected a gross income amount of Pl,401,140, 111.00 (Exhibit "A", Line 14C). However, as regards the substantiation to prove that the income withheld was declared as part of petitioner's gross income, the ICPA found that the amount of P10,496,972.58 was not duly supported, and it cannot be determined whether it was declared as part of petitioner's Annual ITR and in the Audited FS, thus: Findings Annex Ref. Amount of CWT � A. Creditable withholding tax payments with related income included in the Company's Annual Income Tax Return Sale o(Property Annex 11 p 4 ,3 0 9 , 9 8 0 .00 I. Creditable withholding tax payments with related income included in the Company's Annual ITR as traced to Deed of Absolute Sale, Ticket, Subsidiary Ledger, Company- prepared Reconciliation of PLASE, Audited FS, Annual ITR, and Official Receipt I J

C.T.A. CASE NO. 7435 11 AMENDED DECISION 2. Creditable withholding tax payments with Annex 12 695,880 .00 related income included in the Company's Annex 13 18,000.00 Annual ITR as traced to Deed of Absolute Annex 14 Sale, Ticket, Subsidiary Ledger, Company- Annex 15 1,713 ,000.00 prepared Reconciliation of PLASE, Audited FS, and Annual ITR 344,485.42 p 7,081,345.42 3. Creditable withholding tax payments with related income included in the Company's Annual �ITR as traced to Deed of Absolute Sale, Subsidiary Ledger, Company-prepared Reconciliation of PLASE, Audited FS, Annual ITR and Official Receipt 4. Creditable withholding tax payments with related income included in the Company's Annual ITR as traced to Ticket, Subsidiary Ledger, Company-prepared Reconciliation of PLASE, Audited FS, Annual ITR and Official Receipt Lease ofOfflce Space 1. Creditable withholding tax payments with related income included in the Company's AnnuallTR as traced to Contract of Lease for Office Space, BIR Form 2307, Official Receipt, Partial Subsidiary Ledger, Company- prepared Reconciliation of Miscellaneous Income Rental, Audited FS, and Annual ITR Subtotal B. Other Findings Annex 16 p 36,000.00 Sale o[Property Annex 17 579,000.00 1. Creditable withholding tax payments with Annex 18 12,000.00 Annex 19 related income traced to Deed of Absolute 715,428.00 Sale, Ticket, and Official Receipt 2. Creditable withholding tax payments with Annex 20 3,888.00 related income traced to Deed of Absolute Sale and Ticket Annex 21 690,048.00 3. Creditable withholding tax payments with related income traced to Ticket Annex 22 383,277.00 4. Creditable withholding tax payments with related income traced to Deed of Absolute Annex 23 7,662,402 .89 Sale and Official Receipt 5. Creditable withholding tax payments with w related income traced to Deed of Absolute Sale and incomplete Official Receipt 6. Creditable withholding tax payments with related income traced to Deed of Absolute Sale 7. Creditable withholding tax payments with related income traced to Official Receipt 8. � Creditable withholding tax payments without available supporting document to trace the related income to the Company's Annual 11R Lease ofOffice Space I I J 1230

C.T.A. CASE NO. 7435 12 AMENDED DECISION l. Creditable withholding tax payments with Annex 24 127,499.48 related income traced to Contract of Lease for Annex 25 Office Space, Certificate of Creditable Tax Annex 26 93 ,859.14 Withheld at Source (BIR Form 2307), and Official Receipt 193 ,570.07 p 10,496,972.58 2. Creditable withholding tax payments with p 17,578,318.00 related income traced to Contract of Lease for Office Space, Certificate of Creditable Tax Withheld at Source (BIR Form 2307), and incomplete Official Receipt 3. Creditable withholding tax payments without available supporting document to trace the related income to the Company's Annual ITR except for the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) Subtotal TOTAL The creditable withholding tax payments with related income traced to the Company's Annual ITR amounted to P7,081,345.42 xxx. However, out of the total amount of P7,081,345.42, only P6,805,421.42 were properly supported with BIR Returns and other documents evidencing remittance of creditable tax withheld. We were not able to check whether the related income of the withholding tax payments amounting to P10,496,972.58 were included in the Company's Audited FS and Annual ITR because the related documents were not available for examination as of the date of our report. xxx" {Exhibit "YYYY", pp. 7 to 9) A further scrutiny of the records shows that the amount of P7,081,345.42 is broken down as follows: Payor CWT I Abdulhamid Aleen Imran p 54,000.00 2 Ang, Bernardo 90,000.00 3 Callao, Loreto 36,000.00 4 Cantomayor, Dorothy A. 44,280.00 5 Carpio, Daisy 12,000.00 6 Erce, Elma-Marilao Branch 48,000.00 7 GGO Summit Corp. 1,020,000.00 8 Hobitton, Inc. 780,000.00 9 KS Haulers Inc. 78,000.00 I 10 Lim, Ma. Michaela Diamzon Magtoto 180,000.00 11 Lu, Joaquin 600,000.00 J 12 Mangilet, Marilyn 48,000 .00 13 Murphy, Celeste M. 67,500.00 1231 I I _J

C.T.A. CASE NO. 7435 13 AMENDED DECISION 14 Pasiba1o, Roberto/Josephine 90,000.00 15 Potot, Jeffrey 4,200.00 16 Saavedra, Felix U. 17 Shogun Properties Holding Corp. 78,000.00 18 Teh, Maricon and Ronald 420,000.00 19 Urutia Mariarlne Borguyan 198,000.00 20 Villodres, Roberto & Venus 21 Yu, Edward 72,000 .00 22 Chua, Charlie/Shi Shan Ling 90,000 .00 23 Chua, Joselito Calipana 300,000.00 24 Tiu, Elena 480,000.00 25 Trillanes, Isabel ita Hernandez 104,880.00 26 Faeldonia, Josephine 60,000.00 27 Gusa Realty & Development Corp 51,000.00 28 Tubupan, Editha 18,000.00 29 La Farge Cement Service Inc. 1,635,000.00 30 La Farge Cement Service Inc. 78,000.00 31 La Farge Cement Service Inc. 100,931.70 32 LG System Philippines 100,931.70 33 LG System Philippines 107,028.82 34 LG System Philippines 35 LG System Philippines 450.00 450.00 TOTAL 17,346.60 17,346.60 p 7,081,345.42 (Exhibit "YYYY", Annexes 11 to 15) This Court, however, finds that as regards the creditable withholding tax payments with related income traced to petitioner's Annual ITR amounting to P7,081,345.42, the same must be reduced, as follows: 1. Discrepancy in amount claimed Claim BIRForm 1606 Differente YYYY-3.46 Shogun Properties Holding Corp. p 420,000.00 p 390,526.00 p 29,474.00 Subtotal p 29,474.00 2. Supported with BIR Form 1706 Capital Gains Tax Return p 90,000.00 YYYY-3 .55 � Ang, Bernardo YYYY-3 .60' Lu, Joaquin 600,000.00 YYYY-3 .64 Potot, Jeffrey YYYY-3.67 Villodres, Roberto & Venus 4,200.00 YYYY-3.68 Yu, Edward 90,000.00 Subtotal 300,000.00 p 1,084,200.00 3. Without supporting documents Remarks 1� Sr ;:..'.')c'.). I I._II

C.T.A. CASE NO. 7435 14 AMENDED DECISION Abdulhamid Aleen Imran Included in Annex 9 of CPA Report p 54,000.00 Erce, Elma-Marilao Branch Included in Annex 9 of CPA Report Mangilet, Marilyn Included in Annex 9 of CPA Report 48,000.00 Faeldonia, Josephine Included in Annex 9 of CPA Report LG System Philippines Included in Annex 10 ofC~A Report 48,000 .00 Subtotal 18,000 .00 TOTAL 450 .00 p 168,450.00 p 1,282,124.00 Even though the related income pertaining to the amount of Pl,084,200.00 (under item 2) was verified by the ICPA to have been reported as part of petitioner' s income, the same should be disallowed as the supporting documents show that said amount pertained to capital gains tax and not to creditable withholding tax. Thus, this Court holds that the claimed creditable withholding taxes in the amount of P7,081,345.42, the related income of which was verified by the Independent CPA to have been reported in petitioner's 2003 Annual ITR, should be reduced by P1,282,124.00, in accordance with the above-findings. In sum, petitioner has sufficiently complied with the first, second and third requisites, but only to the extent of P5,799,221.42 out of the total claimed creditable withholding taxes of P17,578,318.00, computed as follows: Amount of claimed creditable withholding taxes p 17,578,318.00 p 10,496,972.58 . Less: Disallowances a. Creditable withholding taxes the related income of which was not verified to have been included in Petitioner's annual income tax return for 2003 1{.;33 ,I

C.T.A. CASE NO. 7435 15 AMENDED DECISION l ,282,124.00 11 ,779,096.58 b. Creditable withholding taxes not dul y supported by p 5,799,221.42 valid proofs. of withholdin g Refundable creditable withholding taxes WHEREFORE, premises considered, petitioner's "Motion For Reconsideration" is hereby PARTLY GRANTED. Accordingly, the dispositive portion of our Decision dated August 10, 2009 is hereby AMENDED, to read as follows: "WHEREFORE, premises considered, respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND OR TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the reduced amount of FIVE MILLION SEVEN HUNDRED NINETY NINE THOUSAND TWO HUNDRED TWENTY ONE PESOS AND 42/100 (P5,799,221.42), representing unutilized creditable withholding taxes for taxable year 2003." SO ORDERED. ~ -~-s::~ OLGA PALANCA-ENRIQUEZ Associate Justice WE CONCUR: ) ~~~ (2. (4r~c:4(.~ . EA~~uPst.iUcYe .riJANITO C. CASTANEDA:, JR. Associate Justice 1234 !' �-'

C.T.A. CASE NO. 7435 16 AMENDED DECISION ATTESTATION I attest 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. ~~~c..~~~ \) . mANITo c. cAsTANEnA.f.ii. Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, 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. Lv. . oe-,...;\._ ERNESTO D. ACOSTA Presiding Justice ~' iI ~J' I '-) II w