CTA Case No. 5074 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CiTY FAR EAST BANK AND TRUST COMPANY, CTA CASE NO. 5074 Petitioner, Promulgated: - versus - _J_A_N _ 0 2--1 -=9 9 .7.;c:,:-. - _. . COMMISSIONER OF INTERNAL REVENUE, Respondent. X-- --- -- --- - ---- -- --- ----- -- X DEC SION This is a claim for refund in the original amount of P12,900,003.00 representing capital gains tax and documentary stamp tax (DST) aIIeged to have been paid by the petitioner on March 11,1992. This amount was reduced to only P2,150,000.00 for DST as the respondent subsequently granted th refund of the capital gains tax in the amount of P10,750,000.00 by the issuance of a Tax Credit Certificate in the said amount in favor of petitioner <Exhibit "T"). The pertinent facts are not in dispute. On June 28,1990, Ma'ao Sugar Central Co., Inc. <MSCI) mortgaged to petitioner bank, 30 parcels of land as security for a I oan obI i gation obtai ned by the former from the latter in the amount of P135,178,050.00. This

DECISION - C.T.A. CASE NO. 5074 -2 - real estate mortgage was later amended to include an additional seven (7) parcels of Iand a I I of which are located in Negros Occidental. The mortgagor, MSCI, fai I ed to pay its loan obligation on the agreed date which prompted the petitioner to file for the extra j udicial foreclosure of the sub j ect properties. ShortIy thereafter, an auction sale was held and petitioner, being the highest and sole bidder, was awarded aid properties. The petitioner then alleges that it consequently paid the capital gains tax and the DST in the total amount of .P 12,900,003.00, the detaiIs of which are as follows Certification Fee p 3.00 Documentary Stamp Tax Withholding Tax 2,150,000.00 TOTAL 10,750,000.00 P12,900,003.9Q Transfer Certificates of Title covering the sub j ect properties were soon issued in the name of petitioner (Exhibits "H" and "1"), but the Court of Appeals reversed the decision of the lower court and nullified tile sale of the sub j ect properties. The decision of the Court of Appeals was finally affirmed by the Supreme Court even after severaI motions for reconsideration fi I ed by the petitioner, in a resolution dated September 27, 1993. The nullification of 'the auction sale and the consequent cancellation of titles now a stark reality,

----- DECISION - C.T.A. CASE NO. 5074 -3- petitioner then filed a claim for refund in a letter dated December 2, 1993 and received by the respondent on December 10, 1993. Apparently, this letter did not eIicit any response from the respondent, so petitioner filed a petition for review with this Court on March 10, 1 99 4 . Respondent in answer to the petition averred the foIIowing SpeciaI and Affirmative Defense s , t 11 u s : 5. The petition does not state a cause of action, Documentary stamp tax and capital gains tax are taxes on the documnt or instrument evidencing the transaction agreed upon and the same are due and payable at th e time the transaction is accom p I i s 11 cd . T !1 e subsequent cancellation or nullification of tile transaction, therefore, does not inval iclate tl1c taxes a I ready coIIected, honcc, no refund/credit can be allowed for the tax paid; 6. Petitioner has not shown that the tax sought to be refunded/credited was actua I I y paid by it. In fact, Annex "G" of the petition indicates that no capital gains tax was p c i d because the vendor-mortgagor, hla-oa Suaar Central Co., 1nc. is a corporation exempt from the payment of capital gains tax; 7. Assuming, arguendo, that petitioner <mortgagee and buyer at the auction sale) paid the capital gains tax, it is not entitled to a refund or tax credit; "When a mortgagee at foreclosure pay the capital gains tax, he cannot ask for a refund from the government but he {the mortgagee) can ask for reimbursement from the mortgagor. {Nolledo, the National lntcrrwl Revenue Code, 1993 ed., page 964). "

DECISION - C.T.A. CASE NO. 5074 -4- B. Again, assuming that capital gains tax was paid, it is doubtful whether petitioner was the one who paid the same, considering that capital gains tax is normally paid by tl1e debtor-mortgagor and not the buyer-mortgagee; 9. A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business but a tax upon the privilege, opportunity or faciIities offered at exchanges for the transaction of the business. It is an excise upon the faciIiti e s use d i :1 t i1e transaction of the business separate and apart from the business itself. (Commissioner- of InternaI Revenue v. HeaId Lumber Co., 10 SCRA 372 [1964]); 10. The liability of an instrument to a documentary stamp tax and the amount thcr0of is determined on the face thereof and cannot be affected by proof of facts outside of the instrument itself (Jose Arenas, updated NationaI InternaI Revenue Code, 1980 e d . , p. 773). Thus, the state in collecting the tax is not bound to go beyond the face of the transaction and determine whether the transaction is vaIid or not. Consequent I y, when the transaction is canceIIed or nu I I if i ed there can no longer be refund/credit of the taxes paid. In effect, a person or entity entering into an invaIid transaction r�uns tile risk of forfeiting whatever documentary stamp tax he may have paid; 11. Petitioner has failed to show that it has complied with the provisions of Section 230 of the Tax Code which is a mnndatory requirement before an action for tax re�rund may be fiIed; 12. Filing of a claim for refund is mandatory and a prerequisite or a condition precedent to the prosecution of a suit fur the recovery of taxes said to have erroneously or iI legally collected, and non-compliance therewith bars and is fatal to the action. (Johnston Limber Co., Inc. vs. CTA and Collector 101 Phil. 151 [1957]); of Internal Revenue,

DECISION - C.T.A. CASE NO. 5074 -5 - 13. Tax refunds are in the nature of tax exemption, thus, it must be construed strictly against the claimant. In view of the grant of the refund of the capital gains tax, the issue tht confronts this Court is now confined to the determination of the question of whether or not petitioner is entitled to the refund of P2,150,000.00 representing the DST paid in 192. Petitioner argues that Section 196 of the Tax Code which imposes DST on sale of property contemplates of a consummated sale where the ownership in real property is transferred in favor of the purchaser and since the sale in question was declared a nullity, then the sale is deemed not to have taken place and therefore no real property was transferred in its favor. Furthermore, petitioner adds that DST is an excise tax and as such is imposed upon the privilege or faciIities used in the transaction, it follows then that if the privilege was taken away by the taxing power, then no transaction can be had and no tax shouId have been coIIected. Respondent, in her initial arguments, questioned the evidence presented by the petitioner because she contends that no sufficient evidence was offered to prove payment, however in her memorandum, she Iimited her arguments to the legal aspect of the refund of the DST. Sl1e contends that even if the sale was cancel led, no refund can be

DECISION - C.T.A. CASE NO. 5074 -6- granted because basicaIIy DST is a tax upon documents, instruments and papers and upon acceptances, assignments, sales and transfers of the obi igation, right or property incident thereto, citing Section 173 of the Tax Code. Therefore, the DST was due and payable at the time the transaction was made and completed, thus the consequent nul I ification of such transaction does not entitle the taxpayer the automatic return of s u c ll payment. Respondent agrees with the petitioner that DST is an excise tax imposed upon the privilege or faciI ities used in the transaction. She however contends that once this privilege is uti I ized, the consequent nuIIi �f i cation of such transaction would result in the forfeiture of the DST that may have been paid. We agree with respondent's contentions. Section 173 of the NIRC provides: "SEC. 173. Stamp taxes upon documents, instruments, and papers. Upon documents, instruments, and papers, and upon accepJ(nnce s , assignments, sales, and tra n s f e r s of the obligation, right, or ertv incid ent thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accompIished, the corrc;ponC: i ng documentary stamp taxes prescribed in the following sections of this Title, by tt1e p e rson making, signing, issuing, accepting, or transferring the same, and at the same time such act is done or transaction hacl: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein i1nposed, the other party thereto who is not exempt sl1a I l

DECISION - C.T.A. CASE NO. 5074 -7- be the one directly liable for the tax (as amended by Pres. Decree No. 1994)." In the instant case, the transfer of title was consummated as shown by the Transfer Certificates of Title presented as exhibits "H" and "I" issued in the name of herein petitioner. The transaction involves transfer of property. And since the transaction was effected by the actual transfer of the property in the name of petitioner as evidenced by exhibits "H" and "!" , the DST was rightfully and legally paid at tt1e time "such act is done or transaction had". Normally, tl1e DST and the Capital Gains Tax are paid before the property can be transferred in the name of the buyer. Wi t li t 11 e actua I transfer or with the "transaction (auction sale) had", the payment of the DST in advance actually effected the transfer. Otherwise, the property cannot be processed to effect the transfer without the payment of the DST and the Capital Gains Tax. The subsequent canceIIation of the auction sa I e by court decree is of no consequence because there was an actual transfer of property in the name of petitioner. In the case of Commissioner of Internal Revenue v. Heald Lumber Co. , 10 SCRA 372 [19641, the Supreme Court held that: "A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the

DECISION - C.T.A. CASE NO. 5074 -8- privilege, opportunity or faci I ity offered at exchanges for the transaction of the bu3iness. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. <Du P ont v. U.S., 300 U.S. 150; Thomas v. U.S., 192 U.S. 363; Nicol v. Ames, 173 U.S. 509). Witll I'Cspcct to stock certificates, it is levied upon the privilege of issuing them; not on tl1e money or property received by the issuing company for such certificates. Neither is it impo se d upon the share of stock. As Justice Learned ll �. d tux pointed out in one case, do cu m e nt ar y ste!mp is levied on the document and not on the property which it described. {Empire Trust Co. v. Hoey, 103 F 2d. 430). If, th ere f o r- e , as is apparent from the foregoing dis cu ssi on , that the tax in question is imposed on tile privi l cD e of issuing certificates, then t he tax n:ay be coI I ected onIy once: when the certificates a1'e first or originally issued. The reason is because a certificate is issued only once. Whatever documentary tax is due, is due nt that time. <Empire Trust Co. v. Hoey, supra). A Documentary Stamp Tax is an excise tax. It is a tax on the privi I ege to enter into a transaction. The tax is designed to raise revenues and not to render the document void. {NOLLEDO, Bar Reviewer in Taxation, 1990 Tenth and Rev. Ed., p. 597; see also the recent case of Commissioner of Internal Revenue v. Firemen's Fund Insurance Co., et. aI., L-30644, March 9, 1987). Similarly, the DST on the sale or transfer of real property is imposed on the privilege of transferring real property {by auction sale). Thus, the "transaction had" is the sale of real property effected by the transfer of property in the name of petitioner. Whatever documentary stamp tax is due, is due at the time. The

--- DECISION - C.T.A. CASE NO. 5074 -9 - annulment of the sale happened after the transfer of title. A subsequent event, that is, the declaration of nullity of the sale, wiII not affect the payment of the DST because the privilege was actually used and effected at the time that the title to the property was transferred in petitioner's name. In the consoIidated cases entitled American Internationa I . Underwriters <Phi Is. ) , Inc. v. Commissioner of Internal Revenue, CTA Case No. 4208; Phi Iippine American General Insurance Company v. Commissioner of Internal Revenue, CTA Case No. 4209; Phi Iippine American Accident Insurance Company v. Commissioner of Internal Revenue, CTA Case No. 4210; Phi Iippine Home Assurance Corporation v. Commissioner of Internal Revenue, CTA Case No. 4211, all dated April 26, 1993, this Court ruled that the subsequent canceIIation of the transaction from where the DST I i abiIity �attaches, does not have the effect of canceIIing such IiabiIity. We quote pertinent portions of the aforecited consoIidated cases, thus: A documentary stamp tax is "in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege, opportunity or faciIity offered at exchanges for the transaction of the business. It is an excise upon the faciIities used in tl1c transaction of the business separate and apart from the business itself." (Aranas, Updated National Internal Revenue Code, 1988 Edition, p. 772; Underscoring supplied). While it is true that a documentary stamp tax is levied on

.. DECISION - C.T.A. CASE NO. 5074 - 10 - the document and not on the property which it de s cribed, (Comm. v. Heald Lumber Co., 10 SCRA 372) the documentary s tamp tax is not intended to be a tax on the document alone, rather, the law the tran s action. taxe s the document because of It i s due and payable (Sec. 173, NIRC) at the time the transaction is had or accompli s hed (i.e., at the time of the i s s uance of the document). x x x. The payment or non-payment of the premium s by the ins urant s is immaterial sinc e documentary s tamp taxe s are in the nature of an "exci s e upon the faciIitie s used in tile trans action of the bu s ine s s separate and di s tinct from the bu s iness itself" (Under s coring s upplied; Arana s , i b i d .) Such being the ca s e, there Ruling No. 433 by which i s wi s dom in tile BIR thi s Court agrc0 fully that the " s ub s equent cancellation of insu,ance poIicie s i s s ued wiII not exempt t l1e i ssucr T rom the corre s ponding documentary s tamp tax." And thu s , "no refund can be allowed of t ile documentary s tamp tax paid on insuranc e poIicie s which for s ome rea s on or a n ot 11 e r 11 v e been canceIIed" (ibid) or for t hat matt c r , t !1 e premium s were unpaid." WHEREFORE, in view of the foregoing, the in s tant petition for review i s DISMISSED and the claim for refund in the amount of. P2,150,000.00 repre s enting payment of documentary s tamp tax i s hereby DENIED. SO ORDERED. czl� G ERNESTO D. A:OST Presidino Jud<Je t{4 RAMON 0. DE V A A s s ociate Ju ge

. . DECISION - C.T.A. CASE NO. 5074 - 11 - CERTIFICATION hereby certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, .A.rticle VIII of the Constitution. ERNESTO u. /.CCT:'\ P I' c s i d i n ; J i cJ 0 n Court of T3X AppcG:s