CTA Case No. 4392 (Decision)

- REPUBLIC OF TilE PHII.IPPINES COURT OF TAX APPEALS , QUEZON CITY PHILIPPINE COCOA CORPORATION, Petitioner. C.T.A . CASE NO. 4392 COMMISSIONER OF INTERNAL REVENUE AND TJIH SECRETARY OF TRADE AND INDUSTRY. Respondents. X - �� - - �� - - - - � - - - - - - - - .- - - X DECISION 1 hts case mvolves petitioner 's clatm for refund or tax credtt of overpatd mco me tax for the fiscal year 1987 amounting to P289 .03U 00 . lJetitioner avatled the net oper ating loss carry-over lor NOLCO for shortt on the remammg unapplied balance of J-i825 .BO l .UO , as net operating loss tncurred on its reg1stered operattons for the fiscal year 1981. 1lle matertaltacts are as follows : Petit1nner ts a cor poratiOn duly orga mzed and extsting under the laws nt the Republic of the Philippines. It was mcorpora ted on feh ru ary lJ , t 97<J . Petitioner ts engaged in the husmess of manuf ac turmg cocc a ancl chocolate products . 108 .

- DECISION - C.I.A . CASE NO . 'f39Z -2- On April 11 . 1980. petitioner \\'as registered with the Board of lnve~tment IBOI) as a non -pioneer enterprise enjoying certain incentive s as a registered agricultural enterprise under Presidential Decree No. 1159 . Petitioners registration covers the processing of cocoa powder and cocoa butter . It enjoys certain incentives granted to a registered agricultural enterprise. One of these is the NOLCO. Sec. 61d of P.D. 1159 (Prescribing Incentives For Investments In Agricultural Enterprise) provides: "SEC. 6. Incentives to a Kegistered Agricultural Enterprise. - A registered enterprise, to the extent engaged in a preferred of investment, shall be granted the following incentive benefits: XXX XXX X X X. (c) Net Operating Loss Carry -over . A net operating loss incurred in any of the first ten years of operations may be carried over as a deduction from taxable income for the six years immediately following the year of such loss. The entire amount of the loss ~hall be carried over to the first of the six taxable years lollO\\' ing the loss, and any portion of such loss which exceeds that taxab le income of such first year shall be deducted in like manner from the taxable income of the next remaining five year s. The net operating loss shall be computed in accordance with the provisions of the ational Internal Revenue Code, any provisions of this Decree to the contrary not\\'ithstancling, except that income not taxa ble either in whole or in part under this or other laws shall be included in gross income. XXX XXX X X x.'' Under BOI letter dated 1985 -07 -22 (july 22, 1985), the BOI approved petitioner's request to transfer its registration as a non- pioneer enterprise under P.D. No. 1159 to an export producer under

DEClSJON - C.T .A . CASE NO. 4392 -3- PD. ~ o. 1789. as amended . Pursuant. thereto, on January 21 , 1986, the BOI issued to petitioner a Cer ificate of Registration as an Existing Export Producer effective ).lay 18, l 984. in accordance with the provi~ions of P.D. No. 178<} (O mnibus Investment Codei, as amended by Bat as Pambansa Blg . 391 (An Act Declaring The 1983 Investment JncentiYe~ Policy By Modifying The System on the Grant of Investment Incentives l. The NOLCO incentives were not among the incent i �es granted to existing producers under the amendment. Fur the fiscal year ending June 30. 1981. petitioner incurred a net operating loss of P2.564 ,662.00. For taxable years 1982 and l 983, petitiuner dedu cte d from its taxable income the NOLCO in the amounts ()f P 1.7 2).763 .00 and P343.509.00. respectively. There remaineJ a balance uf net operating loss of P825.801.00 which was not applied for the years 1984, 198 5 and 1986. However. the amount of P825 .80 1.00 '\vas later applied in 1987, the sixth year following the loss. This was reflected in the Amended Income Tax Ret urn filed by petitioner \\'lth the Bureau of Internal Revenue on _, October 2. 1989. The BOJ -BIR Working Committee i\.1e moranclum. dated March l 0. l ()87 . ~ho\\� s that pelitioner deducted the net operating loss from its total taxable income as follows : }ear TAXABLE INCOME Total , OLCO J 9'32 UO I-reg op n Nnn -P,Oireg Availed 191l.3 Pl 5l 0.256 00 P21l6 50' 00 PJ 725 . 63 on Pl. 25 , �3 oo p 21 () 605 1)0 Pl23 91.14 no P 343 509 .00 P .H3 .509 00 Tile (nm mit tee findings disclosed that the net operating loss \.\�as deductible onJ\� fr om the taxab le i come from its registered 1 0 E) '(

DECISION - C.T.A. CASE NO . <f392 -4- operations. There was an unauthorized deduction of NOLCO in the amounts of P206j07.00 and P123.904.00 for the years 1982 and 1983. respectively. It was therefore recommended that the corresponding income taxes due thereon be paid. Thus, on Dece mber 30, 1987, petitioner paid the amounts of P99,6 43.2 0 and P53.385.60, representing deficiency income taxes for the years 1982 and 1983, respect ively. For fiscal y_ear ending june 30, 1987, petitioner 's Income Tax Return reflected an income tax due of P5,7 23.17 2.00, computed as follows: I ncnm e p 60,782.7 12.00 Les~ : Deductions 14.4 30.791 .00 Net Inc me lJ 16.351,92 1.00 Tax ue p 5.7 23.172.00 llpnn investigatic n. r titioner was asses ~ed by the Bureau of Internal Re\�enue < r Deficiency Income and E panded Withholding Tax for the fisca l year 19R7. On December 24 . 1987. petitioner paid the Deficiency Inc< me Tax of P21 .79 3.32. inclusive of interest. and �' the Deficiency E: panded Withholding Tax of P7 .16 9.93. inclusive of intere~t and com promise penalty. Sometime in September 19 88 , petitioner received from the BIR a pre -asse<;sment notice. dated Ju ly 2. 1988. for Additional Deficiency Income Tax for fi scal year 1987 in the amount of P8.h913 .00 . comp uted as follows: Net Income Per Return Pl 6,351 92 1.00 Add Di~allo\\�a n ce~ per �nvestigation . 60.000 .00 Net In rome Per In esligation Add Additional tlnalln' �<hie P l 6 411.921 00 DedtJctinn Per Return 21 000 00 A) Def In crlln e Tax !fY� 6 '.}0 '%) 1 B ~ See Srhedule nfTaxes

DECIS ION - C.T .A. CASE NO. 4392 -5- and Licen~e~ paid a~ 'Jf Pl6 .432 .92 1.00 6 '.30 ~ ~s:-� stamp recei ved p 5 75 1.522 00 10 ' 15 �<\- . Authority to Jssue Re"- Tax Receipt 5.744.172 00 Re paymen t of Def Income p 7,350 00 Ta x for 6 131)/ 86 � 1et In come Per Review l.HS 00 p 8,69'3 .00 Incn.me Tax Due Less Amoun ts PreYiously Paid . Per Return P5 723 172 00 Pt>r Investigation 21.000 .00 Def Income Tax Per Review Add 20"0 int p a fr l(l ' l6 / 8i lo 9 ' 15 /'3'3 ti) 1 '3 ~ 334) Total Def lllcllme Tax & Inter est On September 23. 1988 , petitioner paid the BIR P8 .731.00 , comprising the basic tax of P7.350.00 and interest of Pl.381.00 compu teu frnm October 16 . 1987 to Sep tember 23 , 1988 . .I In a letter dated Dece'mber 23. t 98 8, respondent informed petitioner that upon investigation no deficiency business tax was found due from it. But the sum of P37.693.6S. was foun d due and collected from petitioner, itemized as f llotwT P 0 No [JL o. Date Amount DeiH:ien <:y inc meta l272Ui4 4'79673) 12 -24 -87 P21 .793 32 Addi ti onal Defidency income tax 3374248 1))4ll344 9-23-88 8. 31.00 Deficiency expanded withh olding tax 12':'21_169 { 7%i34 12-24-87 7.169:) ~ Tota l P37.693 .6)' On October 2. 1989 . petitioner filed an Amended Income Tax Re t urn for fi~cal year end ing .June 30 , l 987. Petitioner applied the remaining . 10LCO of P82) .80 l .OO, as a ded uction from net income. The Amended Jnco me Tax Return of petitioner for FY 1987. showed a refundable amount of P289.030 .00. comput ed as follows :

DECISION - C.T .A. CASE NO. 'f.39Z -6- Income P60.782.712 .00 Less: Deductions 44.4 30.791.00 Net Income PlE.351.921.00 Less: Deductions under Special Laws Ne t Loss (arry-over 8/5.801 .00 Ne t Taxahle Income p 15.526,120 .00 Tax Due p 5.434.142 .00 Less: Tax Paid 5.7 23.17 2.0 0 Total Amount Refundable p 289 ,030.00 , claim for refund in the amount of P289.030.00 was filed with the HIR on October 9, 1989 . In order to toll the running of the prescripti':e period for filing a judicial claim for refund/credit of taxes . petitioner instituted the present petition on October 13. 1989. without \\�aiting for respondent . Co mmissioner of Internal Revenue. decision on the matter . In this petition. petitioner al~o impleaded as a necessary party respondent the Secretary< f Trade and Industry whc is the Chairman of the noard c . Gn � tornnp: of the BOI and \ ested w ith the authority to issu e/grant the claim for ta. credit app lied for b � petitioner as pr<widecl hy the Secretary of Finance Memorandum dated January 2(, . l 9g C) . The issue presented I efore Us or resolution is whether or not petitioner is entitled to deduct from the 1987 ta able income the NOLCO balance of P825 .80 1.00 under P.D. 1159 after it became .a registered existing export producer under P.D. 1789. as amended by B.P. Blg. 391. in order tc be entit led to the refund/credit of P289 .030 .00 . representing alleged overpaid income tax for said year .

DECISION -- C_T_A_ CASE NO. 1392 -7 - Petitioner alleged that the balance of P825.80 1.00 net operating Jo~s incurred in 1981 can ..;till be applied as a NOLCO for FY 1987. Petitioner maintains that its subsequent registration on January 21. 1986 as an Exi~ting Export Producer (effective May 18. 19841 under P.D. 1789. as amended by B.P. 39 1. did not revoke the NOLCO incentive which had alread y accrued in Hs favor since 1981 . Re~pondeni, on the other hand. contends that the BOI decided against the application of the balance of P825,80 1.00 NOLCO for FY _, 1987. The OLCO i~ not am ong the incenti\ es granted to petitioner as an Existing Export Producer under Article 48 of P.D. 1789. as amended by B.P. 391 . In other words. although it was entitled to a\�ail the '-l'OLCO incentive under its original registration as an Agricultural Enterprise. it however waived" the NOLCO incentive under P.D. 1159 when it opted to transfer its registration to an Existing Export Producer under P.D. 1789, as amended by B.P. 391. The \\�aiYe r of the NOLCO incentive is a precondition for registration under the new incentives law. P.D. 1789 !Omnibus Incentives Code I. effective january 16. 1981 . expres..;Jy repealed P.D. 115 9 and other investment incentives la\\�s. without prejudice to the righ{..; of an registered enterprise which at the time of effectivity of the Code have been registered under R.A. 5186. R.A .6135. P.D. 1159 and R.A. 5455 . Art. 45(c) of P.D. 1789 provides NOLCO incentives to registered enterprises. The NOLCO incentive was withdrawn under B.P. 391 {effective April 28. 198}) lim iting the a ailment of such incentive to registered domestic producers. The contention of petitioner ts not meritorious. The deduct ibilitv of the i\OLCO balance of P825.80 1.00 from the 1987 1 1),_,

DECISION - C.T .A . CI\Sf. NO. 1.392 -8 - taxable fiscal year finds no legal basis. Peti tioners claim for refund of P289.030 .00 ~hould therefore be denied. Petitioner was entitled to a\�ail of NOLCO incentives under its original registration a~ an agricultural enterprise und er P.D. 1159. �' The subsequent repeal of P.D. 11 )9 by P. D. 1789 did not prejudice any righ1s acquired prior to the effectivity- of the latter. Like any other right. ho\\�ever. the ! 1QLCO incentive may be wai ed and this petitioner did. When petitioner o ted t transfer its registration as an agricultural enterprise IP.D. 11 ~9) t an existing export producer ef(ecli_.::_e Mav 1.8�. 1984 IP.D. l78t . as amended b B.P. 391 ). it waivect all the incentives that may be a\'ailed under P.D. 1159. The \\'aiver finds its basis or1 Section 21 f B.P. 39 1 which provides : "Sec. 21. The pru\�isions of the preced ing section n()t\\�ithstanding. existing enterprises which are enjoying the incentives under the laws shall continue to enjoy <:uch incenti\�e s for the period therein stated. Provided. howe,�er. that thev may \\ ai\�e such incentives and opt to be go\'erned by the pro isions of this Act. in which event . their period of availment of the incentives herein provided shall be reckoned from the Qrjgj nal date of their entitlement to the incentive s under the said la\\�s.�� (Underscoring supplied.) This prm�ision clearly sho\\�s that enterprises ~-hich opt to be gO\�erned t:y the provisir ns of P.D. J 78CJ un B.P. 391 waive their incenti\�es that may be granted under previous incentive laws (P.D. ll59l. It is claimed by petitioner that B.P. 391 has only prospective and no retroactive application. Thus. what could be waived, according to petitioner. are those 1 OLCO incentives pertaining to any

DECISION - C.T .A. CASE NO. 4392 -9- net operating lo~s incurred from 1984 i the date of registration under P.D. 1789. as amended l. Petitioner added that NOLCO incentives "earned " by petitioner in 1CJ81 can not be affected and are still �' available and allowable to be claimed as deductions in 1987. This theory of petitioner has no leg to stand on. There is no basis for petitioner'~ argument that B.P. 391 is prospective. The law itself pro\'iues for its retroactive application in that the period of availm ent provided under B.P. 391, shall be reckoned from the original elate of their entitlement to the incentives under the previous la \\ s. \\1hen petitioner was registered as an export producer effe.ctive ~lay 18, 1984 under P.D. 1789. as amended , it became entitled to the incentives provided in said decree. Since NOLCO is not included in the package of incentives granted to export producers under P.D. 1789. as amended by B.P. 391 which took effect (April 28, 1983) earlier that petitioner 's registration ac: an export producer i !\lay 18 . 1984) then such NOLCO incentive is deemed not to have ever been granted to petitioner as an export producer. If petitioners argument is \�alid. then it could have availed of two sets of incentives - surely. that is not the intent of the la.,. �. From another perspect ive. the net operating loss to be deductible mu~t belong to the same set of registered operations from which the taxable income against \\ hich the losses will be deducted arises. The net operating loss in fiscal year 1981 was incurred from operations as an agricultural producer. Necessarily, it can be deducted only fr om income derived from the same operations. Howe \�e r. petitioner ad mit ted in its petition that effective May 18, 1984. it cea~ed to be an agricultural producer. Allowing petitioner then to deduct net operating loss incurred in 1981 from 1987

Df:CISJON - C.T . ~ . CASE NO. 139Z - JO - income on operation~ as registered export producer under P.D. 178 9. as amended. is improper and therefore should not be allowed. WHEREFORE. premi"es considered. judgment is hereby ren dered DENYING the instant petition for lack of merit. Costs again~t petitioner. SO ORDERED. (Juezon City. !\letro Manila. November 9. 1993. ~~Q .. ~ ERNESTO D. ACOST A Presiding Judge , ../ WE CONCUR: ~I� . GRUBA ssnciate lud e 0~ P~J..c RAMON 0 . Dn_tynYRA / Ass octat e Judge I CERTJFJC ATION I hereby certify that the decision \Vas reached after due comultatinn among the memher~ of the Court of Tax Appeals in � accordance with Section 13 . , rticle VIII of the Cm~st_itution . ~R : .CUa. ERNESTO D. ACOST A Presiding .ludge Court of Tax Appeals 1074