SYSTRA PHILIPPINES, INCORPORATED v. COMMISSIONER OF INTERNAL REVENUE

REPUBUC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* SYSTRA PHILIPPINES, INCORPORATED, C.T.A. CASE NO. 6655 Petitioner, Members: -versus- ACOSTA, Chainnan COMMISSIONER OF INTERNAL REVENUE, BAUTISTA, and Respondent. CASANOVA, Jl. Promulgated: AUG 0 3 2005 x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION CASANOVA, C., J.: Before Us is a Petition for Review under Section 11 of Republic Act No. 9282 seeking a refund or an issuance of a Tax Credit Certificate ("TCC'') in the amount of Five Million Three Hundred Forty Two Thousand Two Hundred Forty Six Pesos (P5,342,246.00) due to allegedly excess or unutilized creditable withholding taxes for taxable years 2000 and 2001.1 Systra Philippines, Inrorporated (''petitioner'') is a rorporation duly organized and existing under and by virtue the laws of the Republic of the Philippines with office address at Unit 2205-B, 22/F West Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City. It is primarily engaged in ronsultancy and ,' 1 '}

DECISION C.T.A. CASE NO. 6655 Page 2 management services for firms and entities engaged in the field of railways, urban and mass transit systems and other areas in transportation and romrnunications and provides planning, development services, systems/project studies, ronstruction, supervision and project engagement, modernization and rehabilitation of networks, training of technical staff and other related services. It is registered with the Bureau of Internal Revenue ("BIR") under Taxpayer Identification No. 004-665-254-000.2 On April 16, 2001, petitioner filed with the BIR its Annual Income Tax Return (''ITR'') for the taxable year ended December 31, 2000 3 declaring revenues in the amount of Eighteen Million Two Hundred Fifty Two Thousand Seven Hundred Nineteen Pesos (P18,252,719.00) the bulk of which consists of income from management consultancy services rendered to Philippine Branch of Group Systra SA, France. Subjecting said income from consultancy services of petitioner to 5% creditable withholding tax, a total amount of Four Million Seven Hundred Three Thousand Nineteen Pesos (P4,703,019.00) was declared by petitioner as creditable taxes withheld for the taxable year 2000. For the same period, petitioner reflected a total gross income of Three Million Seven Hundred Fifty Two Thousand One Hundred Twenty Nine Pesos (P3,752,129.00) and a net loss of Seventeen Thousand Nine Hundred Thirty Pesos (P17,930.00) and a minimum corporate inrome tax ("MCIT'') of Seventy Five Thousand Forty Three Pesos (P75,043.00). Said MCIT of P75,043.00 was offset against its total tax credits for the year 2000 amounting to Four Million Seven Hundred Three Thousand Nineteen Pesos (P4,703,019.00) thereby leaving a total unutilized tax credits of Four Million Six - - - - - - - - � - - -.. - - - - - - - - - - - - - - - - - - - 1 Rollo, pp. 8-9 &.291 2 Rollo, p. 90, Joint Stipulation of Facts and Issues 3 Exhibit H

DfQSION C. T.A. CASE NO. 6655 Page 3 Hundred Twenty Seven Thousand Nine Hundred Seventy Six Pesos (P4,627,976.00), computed as follows: P3,752,129.00 3, 770,059.00 Gross Income Less: Deductions p 17.930 00 Net loss p 75,043.00 Minimum Corporate Income Tax Due p Less: Tax Credits e 4.703.019.00 4.703.019.00 Prior year's excess credits 4.627.~1.�...� Creditable taxes withheld during the year Tax Overpayment Petitioner opted to carry over the said excess tax credit to the succeeding taxable year 2001. 4 For the taxable year ended December 31, 2001, petitioner filed with the BIR its Annual ITR on April 12, 2002, 5 reflecting a total gross income of Four Million Seven Hundred Seventy One Thousand Four Hundred Nineteen Pesos (P4,n1,419.00) and a total creditable taxes withheld of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1,111,587.00) for consultancy services. It likewise declared a taxable income of One Million Nine Hundred Thirty Six Thousand Eight Hundred Fifty One Pesos (P1,936,851.00) with corresponding normal income tax due in the amount of Six Hundred Nineteen Thousand Seven Hundred Ninety Two Pesos (P619,792.00). After deducting the unexpired excess of the previous years' MCIT [1999 and 2000]6 in the amount of Two Hundred Twenty Two Thousand Four Hundred Seventy Five Pesos (P222,475.00) from the nonnal income tax due for the period, petitioner's net tax due of Three Hundred Ninety Seven Thousand Three Hundred Seventeen Pesos (P397,317.00) was applied against the accumulated tax credits of Rve Million Seven Hundred Thirty Nine Thousand Five Hundred Sixty Three Pesos 4 Exhibit H-6 5 Exhibit! fT fl

DECISION C.T.A. CASE NO. 6655 Page 4 (P5,739,563.00). Said reported tax credits romprised of prior year's excess tax credits in the amount of Four Million Six Hundred Twenty Seven Thousand Nine Hundred Seventy Six Pesos (P4,627,976.00) and creditable taxes withheld during taxable year 2001 in the sum of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1,111,587.00). These excess tax credits ~ere utilized to pay off the income tax still due of Three Hundred Ninety Seven Thousand Three Hundred Seventeen Pesos (P397,317.00) resulting to an overpayment of Five Million Three Hundred Forty Two Thousand Two Hundred Forty Six Pesos (P5,342,246.00), romputed as follows: Gross Income p 4,771,419.00 Less: Deductions 2.834.568.00 p 1.936 851 00 Taxable Income Income Tax Due at the Nonnal Rate of 32% p 619,792.00 Less: Unexpired Excess of Prior Year's MCIT 222.475.00 over Normal Income Tax Rate p 397,317.00 Income Tax Still Due p 4,627,976.00 1,111.587.00 5,739,563.00 Less: Tax Credits p 5 342 246 00 Prior year's excess credits Creditable taxes withheld during the year Tax Overpayment Petitioner indicated in the 2001 ITR the option "To be issued a Tax Credit Certitic:ate"7 relative to its tax overpayments. On August 9, 2002, petitioner Instituted a daim for refund or issuance of a tax credit certificate with the BIR for its unutilized creditable withholding taxes in the amount of Five Million Three Forty Two Thousand Two Hundred Forty Six Pesos (P5,342,246.00) as of December 31, 2001.8 6 Line 23, Part II of Exhibits G & H 7 Exhibit I-6 8 Rollo, p. 92 -- Joint Stipulation of Facts and Issues '1

OEOSION C.T.A. CASE NO. 6655 Page 5 The inaction of the BIR on its daim for refund prompted the petitioner to institute the present Petition for Review before this Court on April 14, 2003.9 In the Answer filed on May 6, 2003, the Commissioner of Internal Revenue ("respondent'') alleged, inter-alia, that the claim for refund is still pending investigation by the BIR; the taxes sought to be refunded were paid in accordance with the law; the burden of proof is upon the petitioner to prove that it is entitled to the claim for refund or issuance of tax credit certificate; and a claim for refund is tantamount to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority. 10 On April 11, 2005, the case was submitted for decision sans the memorandum of the respondent. The parties jointly interposed the following issues for the consideration of the Court: 1. Whether or not petitioners withholding tax credits as of December 31, 2000 in the amount ofP4,703,019.00, and as ofDecember 31, 2001 in the amount of P1,111,587.00 are duly substantiated by the necessary statements issued by the withholding agent, showing the amount oftax withheld from petitioner. 2. Whether or not the income upon which creditable taxes were withheld by the income payor was included and tepOrted as part of petitioners revenues in its annual income tax retums for taxable years 1996!02001. 3. Whether or not the amount of PS,342,246. 00 representing unutilized withholding tax credits ofpetitioner as of December 31, 2001 was unutilized or applied against its inrome tax liability for the subsequent taxable year. 4. Whether or not petitioner is entitled to the refund or issuance of a tax aedit certificate in the amount of PS,342,246.(}{} representing unutilized/excess creditable withholding taxes as of December 31,2001. 11 9 Rollo, p. 1 10 Rollo, p. 63 11 Rollo, pp. 92-93, Joint Stipulation of Facls a nd Issues

DEOSION C.T.A. CASE NO. 6655 Page 6 The focal point of the controversy hinges on petitioner's entitlement to a refund of unutilized/excess creditable withholding taxes in the amount of Five Million Three Hundred Forty Two Thousand Two Hundred Forty Six Pesos (P5,342,246.00). The issues being intertwined, the same shall be jointly discussed. Petitioner anchored its daim for refund on Section 76 of the 1997 National Internal Revenue Code (NIRC) which reads: SEC 76. Final Adjustment Retum. - Every corpomtiOn liable to tax under Section 27 shall file a final adjustment retum covering the total taxable income for the preceding calendar or fiscal year. Ifthe sum oftile quarterly tax payments made during the said taxable year is not equal to the total tax due on tile entire taxable income of that year, the corpomtion shall either: (A) Pay the balance oftax still due; or (8) carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case maybe. In the case the corpomtion 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 f&_QJ]fion to carry-over and apo/y the excess ouartedy income tax against income tax due for the taxable QUarters of the succeeding taxable vears has been made.,. such Q[Jtion Shall be ronsidered irrevocable for that taxable period and no application for cash refund or issuance of a tax qedit certificate shall be allowed therefor. (Underscoring Ours for emphasis). The law decrees that the corporate taxpayer's excess tax credits or overpaid income tax in a given taxable year may be refunded or claimed as a tax credit or carried over and applied against its income tax liabilities for the taxable quarters of the succeeding taxable years. These remedies are to be availed of in the alternative and not cumulatively.

DECISION C.T.A. CASE NO. 6655 Page 7 Applying the foregoing in the case at bar, petitioner's total claim for refund in the amount of Five Million Three Hundred Forty Two Thousand Two Hundred Forty Six Pesos (P5,342,246.00) constitutes excess creditable withholding taxes for the year 2000 in the amount of Four Million Two Hundred Thirty Thousand Six Hundred Rfty Nine Pesos (P4,230,659.00) and for the year 2001 in the amount of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1,111,587.00). Based on the evidence on record, petitioner indicated on the face of the 2000 income tax return its option to carry over as tax credit to succeeding taxable quarter/year its excess tax credits.12 In fact, it actually exercised said option to carry-over and apply the excess credits of taxable year 2000 against the 2001 tax liabilities. 13 Petitioner, through its Deputy Manager, Cristin Collin Carbajal, attested to the company's decision of carrying- over to and applying the excess credits for taxable year 2000 against the tax due for taxable year 2001, to wit: II ATTY. TERRADO: Your Honors, we would like to manifest that this 'x"mark under line 31 to be carried over as tiJx credit next year has been sub-marked as Exhibit ''H- 6'; for the petitioner. Q. Ms. Witness, would you recall if the amount was carried over in (sic) the subsequent year 2001? MS. CARBAJAL: A: Yes, it was carried over. A TTY. TERRADO: Q: And what document ifany can you show that the Creditable Taxes for the year 2000 was carried over to the Sllbsequent tiJxable year 2001? MS. CARBAJAL: A: The Corporate Annual Income Tax Return for the year 2001. A TTY. TERRADO: Q: If I were to show you a ropy of such document will you be able to identify it? 12 Exhibit H-6 13 Exhibit I

DEOSION C.T.A. CASE NO. 6655 Page 8 MS. CARBAJAL A: Yes. ,J4 5ection 76 earlier dted is unequivocal. Once the option to carry-over has been made, the same becomes irrevocable and no application for cash refund or issuance of a tax credit shall be allowed for that taxable period.15 This Court in a resolution dated March 11, 2003, defined the meaning of "taxable period" In the case of United International Pictures AB vs. Commissioner of Internal Revenue: 16 'm the phrase 'taxable period should refer to the year 1998 when petitioner incurred the excess income tax payment and at the same time elected the option ''[T]o be aJrried as tax credit next year."' To apply the phrase 'taxable period' to the year 1999 when the option was exercised Jf would contradid the provisions of Section 76 of the 1997 Tax Code, Sl.lpra, beaJuse the application of excess credit is clearly 'against income tax due for the taxable quarters of the Sl.la:eeding taxable years. ' Thus, the use of the phrase ''succeeding taxable years, implies that once the option to cany over is made, the Jaw alreadY allows a perpetual carry- over since a change from caay--over to reti.tnd ;s no Joager oennttted. The raoonal interpretation .t/'lerefore, is to i!fJJJ/y_ the Dhrase 'taxable perf()(/' tv tbe year wben the 'Qption mc:any-over' was made. '' Thus, petitioner is precluded from claiming for a refund or an issuance of a tax credit certificate on its unutilized tax credits for the taxable year 2000 in the sum of Four Million Two Hundred Thirty Thousand Six Hundred Fifty Nine Pesos (P4,230,659.00). It must be pointed out however that the irrevocability of the option to carry-over will not prejudice the taxpayer since Section 76 of the 1997 NIRC permits the application of the excess tax credit against the estimated income tax liabilities of the 14 TSN dated October 6, 2003, pp. 17 -18 u Paseo Realty and Development Corporation vs. Court of Appeals, Court ofTax Appeals !llld Commis.-.ioner of Internal Revenue , 440 SCRA 235 (2004); Comsys Philippines, Inc. vs. The Commissioner of Internal Revenue, CTA Case No. 6651, April28, 2005; Permanent Homes, Inc. vs. Commissioner oflntemal Revenue, CTA Case No. 6441, September 7, 2004; Family Medicare Services, Inc. vs. Commis.'lioner of Internal Revenue, CTA Case No. 6453, June 7, 2004; Australasia Cylinder Corporation vs. Commissioner of Internal Revenue, CTA Case No. 6269, June 16, 2003 and Bank of the Philippine Islands vs. Commissioner of Internal Revenue, CTA Case No. 6276, March 12,2003 16 CI'A Case No. 6240, March 11, 2003

"' .. DECISION C.T.A. CASE NO. 6655 Page 9 succeeding taxable years until the said excess income tax payment is fully utilized Y The claim for refund of petitioner's 2000 excess/unutilized tax credits amounting to P4,230,659.00 having been denied, what is lett for determination is the propriety of petitioner's claim of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1,111,587.00) representing excess/unutilized creditable withheld taxes for the year 2001. A scrutiny of the records reveals that petitioner elected the option "To be issued a Tax Credit Certificate" of its total excess creditable tax withheld in 2001. 18 And petitioner no longer carried over to the succeeding taxable year 2002 said excess tax credits. 19 We now proceed to the issue on whether or not petitioner complied the substantiation rule with regard to the excess{unutilized tax credits in the amount of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1 ,111,587.00). Petitioner's right to daim for a refund is conditioned upon its compliance with the three (3) requirements2�, to wit: {1) That the daim for refund was Hied within the two years period under Section 230 ofthe NIRC,.21 (2) That the fact of withholding is est1Jblished by a ropy of a statement (BIR Fonn 1743.1) duly issued by the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom;Zl and (3) That the income upon which the taxes were withheld were included in the return ofthe recipient 17 Com ~ys Philippines, Inc. vs. The Commissi<mer of fntemal Revenue, supra; United International Pictures AB vs. Commissioner of Internal Revenue, CTA Case No. 6240, ~' f't .12, 2<X>2 18 Exhibit I-6 19 Exhibit J 20 CitiOO:nk N.A. vs. Court ofAppeals & Commissioner of Internal Revenue, 280 SCRA 459 11 Now Section 229 of the 1997 NlRC 22 Secti01r 10 of Revenue Regulations No. 6-85

DECISION C.T.A. CASE NO. 6655 Page 10 Petitioner satisfied the first requirement of filing the administrative and judidal claims for refund within the two (2)-year period. Sections 204 (C) and 229 of the 1997 NIRC prescribe the period in daiming for a tax refund, viz: SEC 204. Authority of the Commissioner tv Compromise, Abate and Refund or Credit Taxes. - xxx XXX XXX XXX (C) x x x No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Conmissioner a daim for credit or refund within too (2) years after the payment of the tax or penalty: X X X SEC 229. Recovery of Tax Erroneously or Illegally Collected. _ No suit or proceeding shall be maintained in any court for the recovery ofany national internal revenue tax hereafter alleged tv have been erroneously or illegally assessed or collected, or ofany penalty daimed to have been collected without authority, or of any sum alleged tv have been excessively or in any manner wrongfully collected, until a daim 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. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date ofpayment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner maYt even without a written daim therefor, refund or credit any tax, where on the fact of the retum upon which payment was made, such payment appears dearly to have been erroneously paid. It bears stressing that the two-year period for filing a refund involving rorporations commences from the date of the filing of the final adjustment return. 23 The rationale being that it is only at this period when it can be finally ascertained if the 23 Commissioner of Internal Revenue vs. 1MX Sales, Inc., 205 SCRA 184; ACCRA Investments Corporation vs. Court of Appeals, 204 SCRA 957; ASB Development Corporation vs. Commissioner of Internal Revenue, CfA Case No. 6445, February 9, 2005 J

DEClSION C.T.A. CASE NO. 6655 Page 11 taxpayer has still to pay additional inrome tax or it is entitled to a refund of overpaid income tax. 24 In the instant case, petitioner duly filed its administrative claim for refund and Petition for Review on August 9, 2002 and April 14, 2003 before the BIR and this Court, respectively. Counting from April 12, 2002, the date when the final adjustment return for taxable year 2001 was filed, petitioner's claim was instituted within the two-year period allowed by law. Petitioner romplied with the second requirement. This Court, in the case of AB capital and Investment Corporation vs. Corrvnissioner of Internal Revenue/5ruled that the certificates of creditable taxes withheld at source are sufficient proofs of the actual withholding of the income tax provided under Revenue Regulations No. 6-85, as amended. The fact of withholding by Systra Philippine Branch was duly corroborated by various Certificates of Creditable Tax WithheJd at source26 on income payments derived from professional or talent services in the amount of Seventeen Million Nine Hundred Ninety Four Thousand Seven Hundred Seventy Nine Pesos and 10/100 (P17,994,n9.10), detailed as follows: Exhibit Period Covered Income Payment Tax Withheld 0 1/1/01 to 3/31/01 p 4,287, 740.20 p 214,387.01 p 4/1/01 to 6/30/01 4,150,887.80 207,544.39 Q 7/1/01 to 9/30/01 5,319,186.80 265,959.34 10/1/01 to12/31/01 R 1.2~~.264.~0 -.-123.696.43 flZ,~2~,ZZ2.1Q e l Ul,~aZ.lZ Anent the third requirement, petitioner included in its 2001 return the taxable income 27 of Seventeen Million Nine Hundred Ninety Four Thousand Seven Hundred 24 ACCRA Investments Corporation vs. Court of Appeals, supra; Bank of ttM>. Philippine Islands vs. Commissioner of Internal Revenue, CIA Case No. 6276, March 12, 2003 H CTA Case No. 5798, July 5, 2000 26 Exhibits 0, P, Q & R 27 Exhibit I

DECISION C.T.A. CASE NO. 6655 P!ge 12 Seventy Nine Pesos and 10/100 (P17,994,779.10) with the corresponding taxes withheld for the year in the sum of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1,111,587.00). The amount of Seventeen Million Nine Hundred Ninety Four Thousand Seven Hundred Seventy Nine Pesos (P17,994,779.00) covered by Certificates of Creditable Taxes Withheld at Source for year 200128 is the same figure reflected In the tax return specifically indicated in Une 14 thereof denominated as "sales/revenues/receipts/fees". 29 Evidently, petitioner complied with the substantiation requirements with respect to its claim of excess/unutilized tax credits for the year 2001 in the total amount of P1,111,587.00. However, petitioner's chosen option therefor as indicated in its 2001 income tax return is "To be issued a Tax Credit Certificate". In addition, its daim with the BIR filed on August 9, 2002, was to be issued a tax credit certificate for its excess creditable withholding taxes.30 Considering so, We grant only petitioner's claim for an issuance of a tax credit certificate. WHEREFORE, premises oonsidered, the Petition is hereby PARTIALLY GRANTED. Respondent is ORDERED to ISSUE a TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of One Million One Hundred Eleven Thousand Five Hundred Eighty Seven Pesos (P1,111,587.00) representing excess/unutilized creditable withholding taxes for taxable year 2001. SO ORDERED. CAESAR~ANOVA Associate Justice 28 Exhibits 0, P, Q and R 29 Exhibit I 30 Annex E, Petition for Review

DEOSION C.T.A. CASE NO. 6655 Page 13 WE CONCUR: ~u.- a~ ERNESTO D. ACOSTA Presiding Justice l R. BAUTISTA Associate Justice CERTIFICATION I hereby rertify that the above decision was reached after due consultation with the members of the Division of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. (G-~.~ ERNESTO D. ACOSTA Chairman, First Division Presiding Justice ; : '~ f) i. : ''