CTA Case No. 4220 (Decision)

'' REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY GRAPHICS INTERNATIONAL, INC., Petitioner, - versus - C.T.A. CASE MO. 4220 COMMISSIONER OF IHTERMAL REVENUE, Respondent. X- - - - - - - - - - - - - X .� DE CI S I 0 N This case involves a claim for a refund in the amount of P243,723.00 allegedly representing creditable taxes withheld on royalties. Petitioner is a resident foreign corporation duly licensed and doing business in the Philippines and is engaged in the manufacturing, printing, and sale of printing equipment and merchandise. It is also the licensor in the Philippines of Hallmark and other greeting cards which are exclusively marketed by National Bookstore, Inc. ( "NBS" ) .,. There are three basic types of greeting cards exlusively marketed by NBS for Petitioner, namely, Christmas, �Everyday and third Party greeting cards.

DECISION - C.T.A. CASE NO. 4220 - 2- Petitioner is paid royalties by NBS, net of withholding taxes. For the fourth quarter of 1985, Petitioner earned royalties amounting to P1,624,82S.OO on sales of Everyday and Christmas cards. The amount of P243,724.20 representing royalty taxes was withheld, paid and remitted to the BIR on January 10, 1986. For royalties on Christmas cards, a 20\ allowance for sales returns was provided. An itemized computation of the royalties and royalty taxes for the fourth quarter of 1985 is as follows: Item Royalty 15% Tax EVERYDAY CARDS: Ambassador Everyday p 11,280.00 .R....~.~. !....?..�..~...~. .9..9. Hallmark Everyday 488,150.00 ST Property 46,130.00 Peanuts 61,500.00 Marty Links 3,550.00 Joan Walsh Anglund 6,100.00 Peanuts Local Design 100.00 Sublicenses 13,610 .00 Total-Everyday Cards .......�. ~. 9. .!....~..?..9. .:. . 99. CHRISTMAS CARD SALES: Ambassador Christmas p 12,660.00 __.!...~.~. 1....!..?-~_:_?._Q. Hallmark Christmas 365,625.00 Ambassador Christmas 21,480.00 P243 724.20 Hallmark Christmas 843,245.00 Gross total :::::::::::::::::::::::!:::::::::::::::::::=::::::::: 1,243,010.00 Christmas Cards Less: 20% sales 248,602.00 returns allow. - ......- .9. .....~..~..~...1...~. ~..:...9.9. Total-Christmas Cards !:.! . f..��..~.~-�"��~� ?..~..:. .9..9. T0 TAL (See Exh. "A", p. 52, CTA rec.; Petitioner's Memorandum, p. 99, CTA rec.)

DECISION - C.T.A. CASE NO. 4220 - 3- Petitioner's fourth quarter withholding tax of P243,724.20 was included in the total amount of P1,618,842.50 which was withheld, paid and remitted to the BIR by NBS on January 10, 1986 (Exhs. D & E, p. 55, CTA rec. ). The said amount of P1,618,842.50 represented withholding taxes allegedly withheld by NBS on royalties earned by its various suppliers, authors and publishers, including Petitioner, for �'' the fourth quarter of 1985. In 1986, Petitioner's annual corporate income tax return showed an income of P34,465.00 and deductions of P154,011.00 or a net loss of P119,546.00. Petitioner claimed the amount of P243,724.00 as tax credit in its 1986 annual income tax return (Exhs. G & G-1, p. 57, CTA rec. ). And because of this net loss, the amount of P243,724.00 representing taxes on royalties earned by Petitioner in 1985 but withheld, remitted and paid by NBS on January 10, 1986 is therefore, according to Petitioner, refundable pursuant to then Section 53(c) of the National Internal Revenue Code as amended by P.O. 1800 which provides: 'Section 53(c) of the National Internal Revenue Code as amended by Presidential Decree No .. 1800 provides: "(c) Withholding tax on royalties - Royalties (except payments of any kind to mining claim-owners of lessees of mining 32

DECISION - C.T.A . CASE HO. 4220 . - 4- rights pursuant to any kind of agreement ) received by individuals residing in the Philippines and domestic and/or resident corporations from any person whether natural or juridical shall be subjec t to withholding tax at source at the rate of fifteen ( 15%) per cent thereof. .~.h.~.....!:.~.~. .f.5. .h.~ ~ .~..........!?..~..........~.!..! .h.h.~..!. .q.. ...........l:?.�. ............ ! .h.~ ............l?..~.Y..<?..F:::-. g .<?..!:.P..9..F.~.!.!...<?..I.:l......~!:l.q.!..9..!:.......... P..~.!: f.5.9. I.:l........~.!:l.q. .....P..~.!.q...........! .I.:l. .!:.h.~.....~.~.~.~............~.~.I.:l.I.:l.~.E.......~~ .q.............~.Y..l:?. t~.9..!.......! .9........!:.h.~.... f.5.~.1!1.~. .9..9..f.:l.q.~.! .!..<?..!:l. ~........~.~..............P..!:.9..Y.~.q.~.q.... ~.I.:l...........�.. ~.9..! .!.<?..I.:l........?..1....9..;. the National Internal Revenue Code: ' ' " ' '' ' ' ' 0 0 0 ' o 0 0 ' " ' ' '000M000-00'000-000000000_0_0oom o oo OOOOOOOOOOOOOM000-00- . . 00~-000 o0 _ _ _ . ., _,_00000o . .oOoo . . oOooo . .oO. .OO OOoO. . MO . .OooOOOo oHOOOO MOO O"O OOOo0000o'00o00000 0 >000>. . >00 0 ' 0000000 . . 00000'HM"''0000 . . . .00 Provided , however , .~.h.~.! ....! .h.~....!.~.~....~.!.!..h.h.~.Jq. ~.f.:l.q.~.!:...................!:.h.! . ~..........~.Y..!?..: .P..~.!:.~.9..!:.~.1?..h..........~.h.~.~}..........!?..~ gE.~.q.!...~.~.q....~.9..~.~ .I.:l.~..! ....! .h.~....~.I.:l.9..9..~.~....!..~.~.....! . ~.~.!?.. ~.! . ~..~..�. . �' .<?.J......! .h.~....!:.~.9.. ~.P.. ! .~.I.:l.! ....! .~.~.P..~.Y..~.!:.......; .9.E....! .h.~.....!.~.~.~.l.?..!.~. .�.~.~!:.. " ( Underlining supplied) 'As amended, the above tax shall be withheld by the payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 54 of the National Internal Revenue Code, which states: "SEC. 54. - Returns and payment of taxes withheld at source. - (a) Quarterly returns and payment of taxes withheld. - Taxes deducted and withhled under Section fifty - three shall be covered by a return and paid to the Revenue District Officer, Collection Agent, or duly a uthorized Treasurer of the city, or municipality where the withholding agent has his legal residence or principal place of business or where the withhol~ing agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the Government until paid to the collecting officers. The Commissioner of Internal Revenue may, with the approval, of the Minister of Finance, require these witholding agents to pay or deposit the taxes � deducted or withheld at more frequent intervals when necessary to protect the interest of the Government. The return for final withholding tax shall be filed and the ~ayment made within 25 days from the close of each .;,....: ' 33

DECISION - C.T . A. CASE NO . 4 2 20 - 5- c a 1 end a r qua r t e r , .~.h.!.!..~.... ~.h.~....... !:.~.! .l.l.!:.J.:l: .. . . . ~<?.E .~.:r.:. ~.~J.~-~.1.? !..~..........~.!.~hh.c:>.!..q.!.r.:t.<J........!..?..~. ~. ~.. . .....~.h.?..!..!... .....1.?.~. .~. !.! ~.q. . ..~.r.:tA... ~h.~... P ~.Y..r.t'..~.r.:t.~.....r.t'..~.~.~....r.:t.c:>.! ... !.?..~~� ...!-.h�t..r.:t. .~ h .~ ....!.~.~. ~......~.�t..Y.... <?..~..............~.h.~. . . r.t'..c:>.r.:t.~.h: ... ~ .c::>.!. !.c::>.~.! .r.:t.9......~h~. g..!.c::>. ~.~... ....c:>. t .........~.h.~.. .....9.':!..~E~.~.E................~.l.l�!.r.:t.<J..........~.h.!.s.h. ~.!.! .h.h.c:>. ! .~.! .r::l..9.............~.~.~...................!1l.~.q.~.. " (Un d e r 1 in in g supplied) Hence, this claim for refund. This claim was objected to by the Respondent on the following grounds: (1) that the allegation do e s no t appear to be in accord with t he letter of t h e Pe titioner to the Respondent dated J anuary 8, 1988 which categorically stated that the royalties in the total amount of P1,624,828.67 were received from t he NBS in 1985 and not 1986 as i t is later on cla i me d7 (2) failing to prove that the royaltie~ I� were r eceived in 1986 and not i n 198 5 , the royalty tax withheld in the amount of P243,724.00 is not c reditable but a final ta x wa s c orrectly applied pu rsu a nt to � P.O . 1994 whi c h too k e ff e ct on January 1, 1986 which providesa "xxx XXX XXX (e) Tax on royalties Royaltie s shall be subject to 15% final tax, the return and payment of which shall be in accordance with Section 51 and 52 of this Code." The issue on whether or not Petiti oner is entitled to a refund of P243,724.090 is only a� 3~

DECISION - C.T.A. CASE HO. 4220 - 6- corollary and in fact dependent upon the resolution of the main issue on whether or not the roya lties were received in 1985 or were they received in 1986. If the royalties were received in 1985, then the law applicable is then Section 53(c) of the Tax Code as amended by P.O. 1800 and is therefore a Hence, refundable. Otherwise, the law applicable is P.O. 1994 which took effect on January 1, 1986 . and which ~-1:.!.~1!.9 ~-q .!.h:.~....~. ~.!:..~.!:.~.... .....'?.. ~........~.-~- ~--�����!. ?..~.....~.!.!:..h:.~..'?..!.9. !.~.9.... !:..~~--���9..~....E.9...Y..~.!.~.!~-~ from a creditable to a final one. And thus, not refundable. The first ground for objection raised by the Respondent in this claim for refund, i.e., "thls allegation does not appear to be in accord with the aforesaid letter dated January 8, 1988 wherein petitioner categorically states that the royalties in the total amount of P1,624,828.67 were received from the National Bookstore, Inc. in 1986 and not 1985 as it now claimed" has already been sufficiently clarified by Petitioner in his Replr and more so in his Reply Memorandum. For indeed, !. J.<:>...l ............... ~u~t~. pertain to royalties earned in any quarters of 1986? Indubitably, it pertained to royalties earned in 1985, more specifically to the 3 u��--

DECISION - C.T.A. CASE NO. 4220 - 7- fourth quarter of 1985. Such was duly supported and proven not only by testimoni a l but a lso by various evidences presented by Petitioner . Having proven ~hat the royalties were realized and earned in 1985 although actually received in 1986, the royalties in question were thus subject to the 15% creditable withholding tax and were not � covered by P.D. 1994 which ~ took effect on January 1, 1986 which changed the nature of the 15% withholding tax on royal ties from a . S:E~.~.!. !:~!? !~--�~.9-�-�~ final one. And since the corresponding withholding tax was withheld and paid in 1986, correctly so, a claim for refund was being made for taxable year 1986 when Petitioner incurred a loss. Suffice lt to say, that it put to rest the second ground for objection raised by the Respondent. IN VIEW OF THE FOREGOING, the petitioner should have been granted the refund sought if only it declared the refundable amount as part of its gross income. Unfortunately, the petitioner did not. Such requirement of law if not satisfied is' fatal to the petitioner's case. The applicable provision of law is Section 54 (f) (now Section 51) of the Tax Code particularly subsection (f) as quoted: 3C

DECISION - C.T.A. CASE NO. 4220 - 8- "xxx XXX XXX "(f) Income of recipient. - !~~.<?.~~ .~.P...9..n... \.'l.:.h.! .~.h. . ..~.n.Y....�E.~.~.!~.~.~.!..~......!:.~~--����! .~......:r;.~ _cl~ ! .:r; ~-~- to be withheld at the source under Ooooo o ooooooo o ooooOo o o oo oo Ooooo . . ooo<00 0 '"' '"' "'''""'~"''''""'''"''''"000""'''00'0000 . . 0000"0"00"00000000"0""'"M""M"00'0"" ' "''"''"''''''''00�0'0'0"oOOO<o<O""'"''''"'M"�OO"OOO<O,oOOOOOOO<O ""''~'"'' ' '""' Section 53 shall be included in the E.~.~.~..:r:.~.....<?..~.....!.!:.~.....E.~.~.!.P...!.~.~.!:....t.?..~.~--������'9.:.~..�.....~.~..~.~.~. ~........<?..~. the amount of tax so withheld over the 0o<��o�o oo oooooOOO o OOOOOOOOOOOOOOOOOOOOO OOOOMOOOO"OOOOOO o0000 0000000 . . 0 0o . . OOO OOo OOOO<"OOoO . . oO OOoOo<00000 . . 000 0 0 . . 0 000 . . 00. . 00oOOo00000000ooO OO O. . <Oo00o>O<oO<OoooOo00oOoooO o oOOoo. . o o Oo o oo o Mo o O�o< o ooooo . . Oo0o . . 00�0o<0>0<0 . . 0oOoOOoo. . W . . OHo o -~-~-~...~.~.~....... .<?..~......h.!. ~.... ...:r::.~.!:.~.:r::.~....!.'!.h.c=.t..!.!.....!?..~.....!:.~. ~--~-~-~-~-~- .!:..<?........h. !.~.......!.'!.~.t.?.. t~.~.!:........!:.~...........!:.h.~ ........l?..:r:..<?.Y..!.:>..!..<?..~.!.'!........<?..~. n. -~--~�g�-~.!.5>.. . . ~.~.?..; if the income tax collected at source is less than tax due on his return, the difference shall be paid in accordance with the provisions of Section 51." (As amended by Batas Pambansa Blg. 41) Revenue Regulation No. 13-78 (as amended by Revenue Regulation No. 6-85) Section 10 likewise has the same requirement, thus: "Sec. 10. Claim for tax credit or refund. - Claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course .c:>.n.!..Y....~.h.~.~.......! .!:......!.!.'!....!.'!.h..<?..~!!......<?..!!....!:.h.~... ..:r::..~ .!:.~.:r:.~....!:.h.~.!:. .!:.h~--���� ! !!.g.9..!l'.~.:..... .l'..~..YI!'.~.~.!:.. ...:r::.~�.~.!..Y..~.~....\.'1.:.~. !.'!... ~-~--~.!..c=.t..:r: ~A -~.!.'!.....l?..c=.t..:r:.!:.........9..;......!:.h.~....9.:r:.9...!.3..~........~.~..9...9.1!'.~.....~.-~..~......!:..h.~....! .~g_!:. .9.! .. - ~-~. !:.h.h..9..!A ~--~.9.............~. ~.......~. !.3..~.~..t.?..! .~.!.'!.h.~.~........t.?..� ...~ ....~.s>.P.� .9. ~.. ..!:.h.~......::>.!:.c=.t..!:. ~ ~-~ -~.!:.....~.~.!.�....~ .~--~-~-~- ~��������t.?..�... !..h.~.... I?.. ~..Y.Q.E .!:..9...... ~.h.~........I?.. ~.Y.~ .~- ( BIR Form No. 17 4 3) ......!.'!.h.<?..~. ~.~9.. .!:.h.~....~.!l',9..~.~.!:...........1?..~.!.~....c=.l..~..~............�!:.h.~......c=.l..~.Q..~.~..!:........9J...........!: c=.l..~. ~-~.!:..h.h.~.!.~..............!:..h.~.:r:.~.-~.:r::.9.1!'.� " ( Un de r scoring supplied). Regulations issued by the implementing agency pursuant to the provisions of the law has likewise the force and effect of law. This Court has, motu propio, occassioned to interpret said provision of law in similar cases already brought before Us namely the Citytrust Finance Corporation vs. Commissioner of Internal 37 r

.� DECISION - C.T.A. CASE MO. 4220 - 9- Revenue, CTA Case No. 4134, November 11, 1991 and the more recent case of BPI Family Savings Bank, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4412 decided on August 17 , 1992. Note that this issue has not been raised by either party during the trial and this Court has on its own take cognizance of the same as it constitutes a statutory requirement which if overlooked will ,,. prove detrimental to the interest of the government. This Court is certainly ready to protect a taxpayer's right if violated but will also be vigilant to do same for the government. WHEREFORE, petitioner's claim for refund is hereby denied and accordingly this petition fqr ( ref ew is dismissed. SO ORDERED. Quezon City, Metro Manila, February 10, 1993 . ._..�:,~,~ ERHESTO D. ACOSTA Presiding .Judge GRUBA Judge I �~,.J~ RAHOH 0. DE VE I Associate Judg / 30

.. DECISION - C.T.A . CASE HO. 4220 - 10 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. <2~c-~ ERRESTO D. ACOSTA Presiding Judge Court of Tax Appeals 39