CTA Case No. 6673 (Decision)

Republic of the Pllilinn�nes COURT Of TAX APPEALS Quezon Citv SECOND D/11/S/ON LOTUS SOFTWARE (PHILIPPINES), INC., C.T.A. C ~lSE NO. 6673 Petitioner, -versus- Me1nber~; Castafied :1, Jr., C!Irzirman Uy, and Palanca-l ~nriquez, II. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. x-------------------------------------------- --- --------x DECISION UY, .]_.: The instant petition for review filed by petitioner Lotus Soft vare (Philippines), Inc. against respondent Commissioner of Internal Revenue, involves a claim for refund or for the issuance of a tax credit certificate in the amount of Sf.: \'en Million Nine Hundred Thousand Three Hundred Forty Six Pesos (P7,900, .: 46.oo), allegedly representing petitioaer's overpaid income taxes for the taxable years 2110 0 and 2001.

DI CISION CTA CASE NO.6673 Paue2ol13 The Facts Petitioner is a corporation organized and existing under t!1e laws of the Philippines with offize address at the 2.nd -4th Floors, IBM Plaza, Ea~twood City, Cyber Park, Libis, Quezon City. It is engaged in the business of providing software services. Respondent, on the other hand, is the duly appointed Commissioner of the Bureau of Internal Revenue empowered, among others, to act on and approve claims for refund or tax credit, with office address at BIR National Office Building, Diliman, Quezon City. On Apri118, 2001, petitioner filed a Tentative Annual Income Tax Return for the taxable year 2000 reflecting a net loss of P5,236,933.00. On February 7, 2002, petitioner filed its Final (Amended) l 1lll1Ual Income Tax Return for taxable year 2000, this time reflecting a net loss of P7,935,188.oo and an income tax overpayment in the amount of P7,852,887.00, computed as follows: Sales Revenues/Receipts p 65,099,109.00 Less: Cost of Sales - - 50,575,262.00 Net Income from Operation p 14,523,847-00 Add: Non-Operating & Other Income Total Gross Income 811,997.00 Less: Deductic.ns l' 1;),335,844-00 Taxable Income �- 2"3,271,032.00 l ~ C7-Al3.~..o..oJ Income Tax D:.J '! p Less: Tax CreC.its/Payments ? 6,903,569.00 Prior Year's Excess Credit Tax Payments for the First Three Qua�ters - - -� 949.318 .00 Creditable Tax Withheld for the First .'hrce Quarters Creditable Tax Withheld Per BIR Fa n 2307 for the Fourth Quarter F. 7,852,887.00 Total Tax '_;;�edits/Payments Tax Payab le/ ~Overpayment) ~:., ~~r:~~QO) Petitioner opted to carry over the P7, ~�52,887.00 excess tax credit/payments as shown under Item 31 thereof (Exhibit D). For the taxable 2001, petitio! 1er claims that it was not able to utilize its prior year's excess tax credits/payments of P7,852,887.00 as it again suffe! ed a net loss. In its Final (Amended) Annual Income Tax Return for taxable year 2001 tiled on March 28,

DECISION CTA CASE NO. 6673 Page 3 ol13 2003, petitioner reflected a nil income tax due and an income tax owL�payment in the amount of P7,900,346.oo, computed as follows: p 7,29 1,743-00 ___:.c,823 . 2 4 5 . 0 0 Sales Revenu�~s/Receipts Less: Cost of Sales p (53 1,502.00) Net Income from Operation __ 1;?.J_3Z�..954_,_QQ Add: Non-Operating & Other Income p 21,841,452.00 Total Gross �lncome - - 21,841.452.00 Less: Deductions p Taxable Income Income Tax Due p Less: Tax Credits/Payments 47.459-00 Prior Year's Excess Credit ILJ. 900,346.00 Tax PaymE.nts for the First Three Quarters Creditable Tax Withheld for the First Three Quarters p;> ~o_0,3A-6&Q) Creditable Tax Withheld Per BIR Form 2307 for the Foutih Quarter Total Ta:<Credits/Payments Tax Payablc/(Ovcrpaymcnt) On April 11, 2003, petitioner filed a formal claim for rcfunc1 with respondent, through Revenue D1strict Office No. 40 of the Bureau of Internal Revenue ("BIR"), seeking the refunG of the amount of P7,900,346.oo allegedly representing alleged overpaid income t<:ues for taxable years 2000 and 2001. Respondent has not yet finally acted upon this claim. In order to toll the running of the two-year prescriptive period allowed under Section 229 of the National Internal Revenue Code of 1997, the i n~.1ant Petition for Review was filed on Apri115, 2003. The Issues This Court is tasked to resolve the following issues stipulated by the parties: 1. Whether or not Petitioner has complied with the prescribed requirements under Sections 204 and 229 of the National Internal Revenue Code (NIRC) of 1997. 2. Whe.:her or not Petitioner is entitled to the refund c,f overpaid income taxe., for taxable years 2000 and 2001.

DE�mSION CTA CASE NO. 6673 Page4of13 Petitioner's Clailns Relative to the first issue, petitioner asserts full compliance wit J the provisions of Sections 204 and 229 of the 1997 National Internal Revenue Code (NlRC) which require the filing of both the administrative claim for refund with the Comm\s~:ioner of Internal Revenue, and the judicial claim for refund with this Court, within two (2) years from the date of payment of taxes. To bolster its claim, petitioner cites the rulings of the Supreme Court in the cases of ACCRA Investm t!nts Corporation v. Commissioner of Internal Revenue, (204 SCRA 957, 1991) and Commissioner of Internal Revenue v. TMX Sales, Inc. (205 SCRA 184,1992) which h~ld that the two-year �prescriptive period within which to claim a refund commences to run, at the earliest, on the date of filing of the final adjustment return. Anent the s r~eond issue, petitioner contends that Sections 58(D) and 76 of the 1997 NIRC and Section 2.58.3 of Revenue Regulations No. 2-98, as :1 mended, clearly authorize the refund of the excess of the amount of tax withheld over the actual income tax computed and shown in the adjustment or final corporate income tax return; that in the event of an overpayment, the taxpayer can either carry over the EJ:cess tax credit, be credited or refundct! with the excess amount of tax paid by marking t be appropriate box in Item 31 of the Annual Income Tax Return. Furthermore, petitioner submits that although Section 76 cJfthe 1997 NIRC provides that once the election h made, the option chosen is irrevocable, and that while it opted to carry over its ~ ear 2000 excess credifsjpayments t(l the succeeding year, it was n~ longer in a positi c �1 to apply/utilize the same ~ account of cessation of its business. Consequently, the excess tax credits/payments in the aggregate amount of P7,900,346.oo should be refunded as provided for by law.

DE�CISION CTA CASE NO.6673 Paoe5 ol13 R espondent-'s D efenses Respondent, through counsel, raised the following Special '111d Affirmative Defenses in its Answer: 1. The claim for refund is still under examination by the respondent's Bureau; 2. The burden of proof is upon the petitioner to prove that it is entitled to the claim for refund; 3. The grant of the claim for refund tantamount [sic] to an exemption from taxation which is construed strictly against the claimant and in favor of the taxing authority; 4. The taxes sought to be refunded were paid in accordance with law; the burden of proof to the contrary is upon the petitioner-daimant to show with clear and unambiguous provision of law supr orting the same (Ro llo, p. 41). This Court's Ruling On the first issue of whether petitioner has complied with th~ requirements set forth under Sections :204 and 229 of the National Internal Revenue Code, these provisions pertain to the timeliness of this petition. Said provisions read: "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. -The Commissioner may -- "(A) X X X "(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 �estruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim fQr credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpaym-::nt shall be considered as a written claim for credit or refund." (Underscoring supplied)

DECISION CTA CASE NO. 6673 Page 6 ol13 "SEC. 229. Recovery of Tax Erroneously or Illegally Collected. -No suit or proceeding shall be maintained in any court for tbc recovery any nation(!l internal revenue tax hereafter alleged to ~t! D Ve 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, 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. "In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even vvithout a vvritten claim therefore, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." (Underscoring supplied) In the case a . bar, the two-year prescriptive period for filing a claim for refund commences to run on the date of filing of the 2000 and 2001 Arriual Income Tax Returns on April18, 2001 and Apri115, 2002, respectively. The writtt- n claim for refund having been filed with the Bureau of Internal Revenue on April 11, 2003 and the instant Petition for Review with this Court on Apri115, 2003, Sections 204 an\l 229 of the NIRC have been appropriately complied with. With respec1 to the second issue as to whether petitioner is ent~ 'Jed to the refund of allegedly overpaid income taxes for the taxable years 2ooo and 2001, the Court rules to deny the instant claim. ) When petitioner filed its tentative income tax return for the year 2ooo on April 18, 2001, it reflected a net loss of P5,236,933.oo but it did not ind~ '::ate its choice of option in any of the option boxes indicated in Item 31 of said retl.!rn (Annex '~" of petition, Rollo, p. 13). However, when it amended the same on Fe' ruary 7, 2002 to declare an increased net loss of P7,935,188 .oo under Item 20.,._, of said ~�eturn, it signified under Item No. 31, its option "to carry over the excess credits/}Jayments to the succeeding taxable quarter/year" (Exhibit "D", Rollo, p. 98). On April 15, 2002, petitioner filed its tentative income tax return for the year 2001 re." ccting no taxable

DECISION CTACASE NO. 6673 Page7ol13 income, and it did not indicate any option under Item No. 31 of said return (Exhibit "J", Rollo, p. 140). In its Final Amended Annual I~come Tax Return for 2001 f led on March 28, 2003, it reflected under prior year's excess credits found in Item 26A, the amount of P7,852,887.00, ar1cl further, it marked the option "to be refunded" under Item 31 of said return (Exhibit K, Rollo, p. 144). On April15, 2003, petitioner fil ed it:; .-'1..mended Annual Income Tax Return for the year 2002 showing that did it not carry CH Jr its prior year's excess tax credits/payments (Exhibit "N", Rollo, p. 164). Based on the returns presented in evidence, it appears that pelitioner's total claim for refund in the amount of P7,900,346.oo consists of the following: its alleged income tax overpayment for the year 2000 in the amount of P 7,8!).-:,887.00 (Exhibit "D") and its Creditable Tax Withheld for the First Three Quarters for the year 2001 amounting to P47.459.00 (Exhibit "K''). Petitioner maintains that Sections 58(D) and 76 of the 1997 NIRC and Section 2.58.3 of Revenue Regulations No. 2-98, as amended, clearly authorize the refund of the excess of the amount of tax withheld over the actual income tax computed and shown in the adjustment or final corporate income tax return, all quoted he ~eunder for easy reference: "SEC. sB. Returns and Pa ymen t of Taxes l 1'il-hheld at Source.- XXXX (D) Income of Recipient- Income upon which any ueditable tax is required to be withheld at source under Section 57 shall 1::� included in the return of its recipient but the excess of the amount of tm: so withheld over the tax due on his return shall be refunded to him wbject to the provisions of Section 204; if the income tax collected at sour~e is less than the tax due on his return, the difference shall be paid in accordance with the provisions of .:ection s6." "SEC. 76. Fin a l A djustment R e turn - Every co �poration liable to tax under Section 27 shall file a fin al adjustment return covering

DECISION CTA CASE NO. 6673 Page Bof13 the total taxable income for the preceding calendar or fiscal rear. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation 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 the option to carn~-over and apply the excess quarterly income ta-x against income tax due for the ta;"able quarters of the succeeding ta-xable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund o .'(' issuance of a tax cre dit certificate shall be allowed therefore (�~mphasis supplied). " "Revenue Regulation No. 2-98: SEC. 2.58.3. Claimfor Tax Cl�edit or R efund- (A) The amount of creditable tax withheld shall be allowed as a tax credit against income tax liability of the payee in the quarter of the taxable year in which income was earned or received. (B) Claims for tax credit or refund of any creditab1e income tax which was C.cducted and withheld on income payment shall be; given due course only when it is shown that the income payment has been declared as part of the g::-oss income and 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 amount of tax withheld therefrom. Proof of remittance is the responsibility of the withholding agent. (C) Excess Credits - An individual or corpor2.~'~ taxpayer's excess expanded withholding tax credits for the taxable quarter/ year shall automatically be allowed as a credit against his income tax due for the taxable quarters/years immediately succeeding the taxable quarters/years in which the excess credits arose, provided he submits with his income tax return, a copy of the first page of his income tax return for the previous taxable period showing the amount of excess withholding tax credits, and on which return he has not opted for a cash refund or tax credit eertificate.

DE CI SION CTA CASE NO. 6673 Page 9 ol13 (1) If in lieu of the automatic application of his exces~ credit, the taxpayer wants a cash refund or a tax credit certificate for use in payment of his other national internal revenue tax liabilities, he shall Ir.ake a written request therefor, with two years after the payment of the tax (.lef. Sec. 204 (c) and 229 of the Code), provided however, that if the ~-axpayer has indicated in his income tax retuh1 his option for either a cash refund or a tax credit certificate, such indication shall be considered sufficient for the purpose. Upon filing of his request, the taxpayer's income tax return showing the excess expanded withholding tax credits shall t e examined. The excess expanded withholding tax so determined, shall be refunded/credited to the taxpayer." Strictly appl:ring Section 76 above quoted, it appears that petit i _uer can no longer claim for a refund of the said amount of P7,852,887.00 because it alr�~:dy opted to carry -the issue~that-confr n:ts this Court is whether-petitioner shci ld be baried from filing this r claim for refund for its excess income tax payments on the ground 1.: :~lt it opted in its Amended Income Tax Return for the taxable year 2000 filed on February 7, 2002, to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years. ~ As clearly proscribed under the last sentence of Section 76, Dnce the option to carry-over has been made, such option shall be considered irrevocable for that taxable period, and no application for cash refund or issuance of a tax credit c�:-.rtificate shall be allowed. t is petitioner's submission that the cessation of ils busine:: ; operations from January 2002, will not allow it to utilize its 2000 income tax overpa:vments and 2001 creditable withhold _:ng tax payments by way of carrying over and ; pplying the same against income tax due for the taxable quarters of the succeeding taxa1)le years. And to prove its claim, pE�titioner presented the following: (1) the report of Independent Accountants, Joaquin Cunanan & Co., attach ed lo the audited financial statements dated November 25, 200~~ (Exhibit L); (2) Board Resolution signed October 2. ~ : 2003 where the

DWISION CTA CASE NO. 6673 PagelO of13 company's directors resolved to dissolve the corporation (Exhibit Q l. (3) Testimony of Ms. Ruth Chuaunsu on February 23, 2005 and (4) petitioner's A.pplication for Tax Clearance filed with the 13IR February 16, dated 2004 (Exhibit R). But these documents together with the income tax returns and certificates of creditable taxes witbhcld at source are not sufficient to prove petitiow; �.'s entitlement of the amount sought for. The Court notes that the person who signed the Report of Independent Accountants from the firm Joaquin Cunanan & Co. dated November 25 , 2002, a certain Blesilda A. Pestafio, was not presented in court to affirm and confirm the veracity of the statements contained therein (Ro llo} pp. 1_40-151). In said Report, it v'as stated, among others, that "the Board of Directors of the Company in its October 26, 2001 meeting, approved the cessalion of operations of the Company effective Janl'.ary 2, 2002, untu su ch time that the Stockholders deem it appropriate t o rr:sume bus iness op erations. Pencting such determination, the Company shall rem :tin in dormant or inactive status". TJ:-�e phrase "until such time that the Stockholders c�.�~em it appropriate to resume busin SE'� operation" indicates that the cessation of operafons of petitioner is not perman~ t, and that it was to remain dormant or in inact 1e status pending determination by the stocld1olders to resume its business operatiJns. Thus, the stoclrnolders have the discretionary option to resume busin ess oper�1tions shoulJ they deem it appropriate tD do so in the future. Cessation means a temporary or final ceasing or discontinuan.ce (as of action), inactivity or idlenes~,~ (Webster}s Third World Intemation ul Dictiou "J.ry). In business therefore, it can ei~her be a temporary or a final ceasing m� discontinuance of business operations. From the foregoing, it can be gathered that a mere cessatio:1 of operation does not preclude the corporation from returning to business.

DECISION CTA CASE NO. 6673 Page 11 of13 Distinguished from the dissolution of a corporation, dissolL�l:ion signifies th extinguishment of itf franchise and the termination of its corpora te exi:.tence for business purpose. The mere fact that the corpora.tion has ceased to do busines~ does not necessarily constitute a dissobtion (Villanueva, Philippine Corporate Law, 2001 Ed, p. 671). It denotes the complete destruction of the corporation and within cont~ mplation of the law, is equivalent to its death, being sometimes likened to the death of a n:.1tural person." (De Leon, Co11Joration Code oftlze Philippines, Annotated, 2002 Ed., p. 727). Section 122 of the Corporation Code provides for two leg;_;] steps m corporate dissolution. First, the termination of the corporate existence at least ::.; far as the right to go on doing ordinai'y business is concerned; and second, the windinr; t.p of its affairs, the payment ofits debts, and the distribution of its assets among the shareholders or members and other persons interested. After the winding-up, the existence of the corporation is terminated for all purryoses (De Leon, supra, pp. 728-729) . In the insta�1t case, what tra:r1spired was the purchase of pc1.� t:oner's assets and liabilities (except tax liabilities) by IBM. Petitioners operations were integrated with that of IBM's. In '~ ew of this integration, petitioner ceased open tion (Petitioner's Memorandum, par. 7, Rollo p. 187). Granting that IBM indeed purcilased the assets of petitioner, no evidence was presented to prove that petitioner (:id actually cease its operation thereafter. Noticeably, the Board Resolution for the dissoh..tion and liquida li9 of petitioner corpor:1tion was passed and approved only on April 30, ~~ ~Jt:13 or about two (2) years after the claimed cessation of operations, and a few days after this Petition for Review was filed on April 15, 2003, giving it little evidentiary v<lue and support to / petitioner's claim in this case. More impm t:"1ntly, Sections 52 (c) and 235 of the 1997 NIRC re:.:_i.tire: SEC. 52. Corporation Returns.- xxx XXX XXX XXX

DECISION CTA CASE NO. 6673 Page12 ol13 (C) Return of the Corporation Contemplating Diss olution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution; or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission; or for its reorganization, render a correct return to the Commission er, verified under oath, setting forth the terms of such resolution or plr,n and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe. The dissolving or reorganizing corporation sha~ i. prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, xxx, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission. SEC. 235� Preservation of Books of Accounts and Other Accounting Records.- xxx (a) xx.." (b) XXX (c) XXX (d) XXX. (e) xxx All corporations, partnerships or persons that retire from business shall within ten (10) days from fl.-.e date of retirement or within such period of time as may be allowed by the Commissioner in special cases, submit their book of ac:::ounts xxx to the Commissioner or any of his deputies for examill a'~ion, after which they shall be returned. Corporations and pa1rtnerships con~L emplating dissolution must notify the Com n; 1ssioner and shall not be dissolved until cleared of any tax liabiiity. (Emphasis supplied) The rationale behind these Sections is to insure that no corp,Jration may escape payment of taxes an G. other liabilities to the government simply by opting to dissolve the corporation and retire from business or reorganize its business. In this case, ;.>etitioner failed to prove that it was cleared from -:�r:y tax liability as required by Sec. 23�i. Petitioner merely presented its Application for Tax Clearance dated' February 16, 2004. Needless to state, an application differs from an approval thereof. Thus, this ::tpplication is not the tax clearance referred to by the law. Absent this clearance from the Bureau of Internal Revenue this Court cannot ascertain if indeed petitioner has already paid all its tax liabilities to entitle it to the refund claimed in this

DE 'ISION CTA CASE HO. 6673 Page13 of13 case. In fact, pf'titioner failed to present the certificate from -. ~ ~e Securities and Exchange Commission approving its dissolution. To grant the refund being claimed by petitioner without indubitable proof lhat it has been cleared of any and all tax liabilities would put the government in a most disadvantageous position considering that it can no longer run after a non-existing corporation. Tax refunds are in the nature of tax exemptions. The same :1re regarded as in derogation of sovereign authority and shall be construed strictissimi juris against the person claiming such exemption. In terms of evidence, the taxpayer has the burden of proving that it is entitled to the claim for ,refund (BPI-Family Saving~ Banlc vs. Court of Appeals, et al., 330 SCRA 507 [2002]). IN VIEW Cll" THE FOREGOING, the Petition for Revic "� is DENIED for insufficiency of evidence. SO ORDER~2D. l1'e Concur: (On leave) ~~-~~~ JUANITO C. CASTANEDA, JR. OLGA PALANCA-ENRIQUEZ Associate Justice Associ ate Justice CERTIFICATION I hereby certify that this decision was reached after due cons ultation among the members of this Division in accordance with the provisions of Sectio : 13, Article VIII of the Constitution.