COMMISSIONER OF INTERNAL REVENUE v. SPLASH CORPORATION

REPUBLIC OF THE PHILIPPINES CC)UHT OF TAX APPEALS QUEZON ClTY EN BANC COMMISSIONER OJ:~ INTERNAL REVENUE, l \:Li lioner, -versus- C.T.A. EB No. 330 (C.T.A. Case No. 7197) Present: Acosta, P.J. Cas taiieda, Jr. Bautista, Lfy, CasmTO'lJa, and Palmzca-Enriquez, Jl. SPLASH CORPORATION, Respondent. Prornulgated: - i:l tf;~?;/:.7,~ .r-.---t..u.~ ' , - l /!�.'.' ~" .,�..:"' j ~~ -, r :~ , 1"11\Y 0 5 2008 x----------------------------------------------~--------~----------------------------------------x DECISION BAUTISTA,[.: Before Us is a Pt�Lilion for Revicw 1 filed by herein petitioner ori December 7, 2007, praying tor the reversal of: (1) the Decision de1Led May 29, 2007 of the Second Division of the Court ("Court in Division") in C.T.A. Case No. 7197, 1 Rollo, pp. 7 - 41, with Annexes. 470

., DECISION J CTA EB No. 330 (CTA Case No. 7197) granting herein respondent's claim for refund in the amount of Forty Seven .tv1illiun Four 1-:l.undred Sixty Nine Thousand Five Hundred Forty hight and 29/100 Pesos (P47,469,5L!8.29) ~ representing its excess income taxes paid for its exempt products for the id:\iible year 2002; and (2) the Rcsulutiu11 dated OLLober 30, 2007 denying herein petitioner's IYJotiun for Reconsideration. Antecedent Facts The antecedent l<Kls, i.IS narrated by the Courl m Division m its Decision, are as follovvs: "Petitioner:> is a domestic corporation organized and existing under Philippine Jaws wllh office at the HBC Corporate Centre, 2nd Floor, No. 5-W i\lindanao Avt~nue, Quezon City. It is engaged prilnarily to mCJilldi.ldure, bullle, pac'k, and market cosmetics and other beauty J1roduds in the F'hilippinr:>s and overseas. lt is large- scale taxpayer duly registered with the Bureau of Internal Revenue with Tax ldenlit�tl:<tliun No. UOJ -096-221-000. ll is likewise registered as a withholding <1gent, and as such, withheld taxes on the wages/ salaries of ils em pluyees and on income payments to individuals or corp()ralions subject to the expanded withholding tax. As the invenlur/ owner of variuus skin care composition products, petitioner vvds issued Certificate of Utility Model/ Design Registration Numbt~rs UM-8471, 2-I997-l5095 and 2-1999-00320 by the Bureau of P<.Llenls and the Intellectual Property Office on December 23, 1997, Jww 29, 2000 and September 19, 2000, respectively, for the registration of its patented products under the brand nan1.es Exlradenn Plus, Extract and Maxipeel. 2 Herein Respondent. 471

DECISION CTA EB No. 330 (CTA Case No. 7197) On llw other hand, respondent CornmissionerJ is the head of the Bureau o1 Lull!llli:d l<t:v~:uue (l:ll R) with office address dl th~~ J31R National Office, Uilimdtt, Quezon City. For the ldX<tble period 2002, petitioner, on April 14, 2003, paid its~nnual incuoll~ taxes in the total amount of Sixty Five Million Five 1-lundred Ninety Four Thousand Six Hundred Thirty Seven and 76/ !LJO (l'f,s,:�i94,637.76). On Seplt'mber 2.(), 2004, in view of peti honer's application for a tax exernpl:ion pursucmt lo the tax incentives as provided for under Republic Ad Nu. (IU\.) 7459, or otherwise known as the Inventors and (nvenliun.s Incentives Act of the Philippines, for the following Patent Rq~istre~tion/Utility 1\llodel Nos., to wit: 1. Ufvl-d-1'/ l - A Skin Care Composition for the Tn=-<~lruent uf Acne and Pigmentary Disorder 2. 2-l'J':J/-15U95 - A Skin Care Composition for Ube <1~> c1 htcidl Cleanser 3. 2-l':J':J':J..OlJ320- A Skin Care Composition the BIR Deputy Cummissiuner for Leg<d and Inspection Group Jose Mario C. Buil.ag issul~d c1 ruling confirming petitioner's entitlement to the income l<tx exem~llion under Section 6 of the said R.A.., which exemption could bt! avdiled of during the first ten (10) years from the date of the first sale un a commercial scale, subject lu specific conditions, regislfaliun processes, as well as, payment of taxes not covered by the inu~nlive. In this regard, pelitioner then filed on April 7, 2005 an administralive daiut tor refund for its alleged excess income taxes paid for the taxable )'l~ar 2002 in the amount of P47,469,548.29 computed as fullows: Regular Curporatiun Income Tilx P65,594,637.79 (paid on April 14, 2003) Less: RegLdar Curpnrate 18,125,W39.50 Income Tax (alter laking Into consideration the income Tax exe1npLiun granlecl) Total Refundable P47,469,548.29 3 Herein Petitioner. 472

DECISION CTA EB No. 330 (CTA Case No. 7197) Without vvaiting for the decision of the n'sponclenl and before it vnmld be bilrred by prescription, petitioner then elevated this appeal to this Court tlu-ough o Petition for Review on April12, 2005. ~ In his Answer filed un June 14, 2005, respondent raised the following as� his bpe(:i<11 <tnd Affirmativt> Defenses: '4. l'etitiuuer'o; <1llL~ged cldim for reiundjtax credit is sul1jed lu administrative rouliuary exatuinalillll/ investigation by the respondent's Bureau; 5. Petitioner fdilt�d miserably to show that the total amuunl ut J'ltp c.ll,'lb<J,54~.29 claimed as overpaid income lax lor taxable year 2002 was erroneously or illeg<illy culleded, or that the same was properly docu me nll'd; 6. Taxes pdid and collected as presumed to have been paid irt ctl:curdcmce with law; hence, not refundable; 7. In an aclillll lor Ldx refund/credit, the taxpayer has the �... burdt�n to establish its ri~~ht to rdund, and failure to suslaitl lite burden is lata] to tlw claim for refund; . 8. It is i11curnbent upon petitioner to show that il has complied with the provisions of Section 204 in relation to Sediun :22<J of the Tax Code; and 9. Well-established is the rule !hat refund/tax credits are construed strictly against the taxpayer as they partake the nilture uf exemption from lax.' It is noted llwt, after hearing and presentation of evidence, petitioner, in its 1\ !t�muumd um filed on December 5, 2006, modified its prayer/ relid tu sf tll\V the anwunl uf P52,665,854.33 (instead of the original prayer ol Pc17,469,54t:.29) representing its overpaid incon1.e taxes fur the year 2002, which amount is based on lhe Report of the Cuurl-Luttuuissiont~d Certified Public Accountant. This case was subsequently submitted for decision on December 18, 2006, sans respundent's lvlemorandum. The parties st1pulated the follmving as the issues of the case: 1. VVhether or nul the respondent Commissioner can disregard the income lax holiday ('ITIT) incentives Lo which tlw petitioner is entitled under Republic Act 473

DECISION '>, ) ) CTA EB No. 330 (CTA Case No. 7197) ('R.A.') No. 7459, otherwise known as the 'Investors and InvenlillllS Ad of the Philippines.' 2. WheU1er ur not the petitioner overpaid its income tax for the ycc~r ended December 31, 2002. 3.~Vhellwr l)r nollhe petitioner is entitled to the claim for refund fur lilt~ excess income taxes paid for the taxable year 2002. " 1 (C "itatwn::; Ollll fled) The l~ul ing of tire Court in Division On May 29, 2007, lilt-: Court in Division granted herein respondent's Petition for Review and ordered herein petitioner to refund respondent the amount of P47,469,548.2LJ representing its excess income taxes paid for its exempt products for lhe lc~xill>le year 2002. The Court in [)ivision found thz1t respondent had satisfactorily shown that, on separate ddtes ~f December 23, 1997, June 29, 2000 and September 19, 2000, it was issued Certificates of Registration for its utility models, UM-8471, 2-t<.J�!7-15095 <1nd 2--1999-000320, respectively, of skin care compositions by the Bureau of Palent nnd Intellectual Property Office of the Philippines. For tllis reason, it is entitled tq the income tax exemption under Section 6 of Republic Act No. 7459, otherwise known as "The Inventors and lnvenliunlncenlives Act" ("RA 7459"). Under the said law, any income derived by respondent from the sale of its patented products is exempt from the payment of income taxes for a period of ten (10) years from the date uf the product's first sale on a commercial scale. 4 Rollo, pp. 22- 26,�Assail~d lkc:isiun dalcu tvlay ~'), 20\17, pp. I �- 5. 474

DECISION CTA EB No. 330 (CTA Case No. 7197) However, as regards the amount of refund respondent is entitled to as a result of its overp<1_vment, the Court in Division ruled that it cmmot grant respondent's modi lied claim as this is more than what is being asked for in the administrative cl<1ill1 for refund, as well as, in the Petition filed before the Court ii1 Lhvisiun. According to the Court in Division, the difference of P5,19b,3Ub.Ucl (1'52,6b5)35�1.33 - P47,469,548.2LJ) not included in respondent's claim for re!Ltnd ~;vas already deemed waived. It thus disposed ut the case as follcrws: "WHEREFORE, this instant Petition for Review is GRANTED. Acundm~~.ly, respondent is hereby OROEH.ED to REFUND to peliliuner the dmotmt of FORTY SEVEN MILLION FOUR HUNDRED SIXTY NINE THOUSAND FIVE HUNDRED FORTY EIGHT AN IJ 2'Jjl00 PESOS (P47,469,548.29) representing petitioner's excess in1.:ume taxes paid fnr its exempt products for the taxable year 2002. SO ORDERED."5 On June 25, 2U07, herein petitioner filed a Motion for Reconsideration6 of the Ut>cision dated l'vlay 29, 2007. On July 9, 2007, ht:>rein respondent filed a Motion t<? Expunge/Reject (Re: Motion for Reconsidt~ration dated 25 June 2007).7 In the said Motion, respondent prayed that Lite I\lulion for Reconsideration filed by herein petitioner be expunged frurn the records for the follovving reasons: (1) the Motion did not indicate the time and date of hearing; (2) the respondent 5 Rollo, p. 32, Assailed Decision dated May 2Y, 2007, p. 11. I 6 Records, C.T.A. Case No.7! <J7, pp. 4~4- 4'J2. 7 Jd, pp. 494- 502. 475

DECISION CTA EB No. 330 (CTA Case Nu. 7197) failed to include tl1e material dates to determine the timeliness of the Motion; (3) the lvfotiun is delective in substance; and (4) the Motion is pro- forma. On September 11, 2007, the Court in Division issued a Resolution denying the Motion to Uxpunge/Reject for lack of merit.S Subsequently un Uduber 30, 2007, the Court m Division denied herein petitioner's 1vlotion for Reconsideration.9 The Issues Hence, the inst<ml recourse where petitioner ratses the following grounds: I. The Honordble Court's Second Division erred in holding the~t income derived by respondent from its sales of its pi:tlertled products in taxable year 2002 are exempt from p<1yments of income t~xes because respondent's exemption covers a period of len (10) years hom llle date of lhe pmducl sale on comn1ercial scale. II. The Honuraldt: Second Division did not touch upon the implicaLion o/ l<evenue Regulation (RR) No. 19-93 in arriving at 21 L:ondusion. III. The Honorable Second Division erred In entertaining the instant cast~. s Records, C.T.A. Case No. 7197, pp. 544- 546. I 9 Rol/o, pp. 34-38, Assailed Resolution dated October .30. 2007, pp. I-- 5. 476

DECISION CTA EB No. 330 (CTA Case No. 7197) The Ruling of the Court En Bane The Petition for Review has no merit. The administrative IZ1Jd judicial clainzs ~)t rt:(lllul were filed 1.oithiu the period set l1y law We shall first resolve the third ground raised by petitioner. The fact that the judicial claim for refund was filed by respondent only on April 12, 2005, or barely a few days after it filed its administrative claim for refund on Apri I '7, 2005 does not make the administrative claim pro Janna. As explained by respondent in its Comment, it filed the administrative refund only on April 7, 2005 as BIR Ruling D.A-506-2004 dated September 24, 2U04 10 cunfinning respondent's eligibility to the tax incentives under RA 7459, came to the knowledge of the respondent at a much later date. Besides, a taxpayer cannot be faulted for taking advantage of the full two-year period set by ir1vv for filing his claim for refund for there is no provision in the Tax Code requiring that the claim for refund be filed at the earliest instance in order to give the Commissioner an opportunity to rule on it and the Court to review lhe ruling of the Commissioner of Internal Revenue on appeal. 10 Rollo, pp. 84 - 86. I 477

DECISION CTA EB No. 330 (CTA Case No. 71lJ7) Moreover, it bears stressing that when the two-year period is about to prescribe and the clain1 fur refund with the Conunissioner of Internal Revenue has not been acted upon, for the protection of the in.terest of the taxpayer, he should Jile 21 pdition for review with this Court within the said two-year period; utl1enN ise, if the decision of the Cornmissioner is adverse to the taxpayer c"llld i l vVCIS made after the two-year period he can no longer appeal the Sdllle tu this Court. 11 This is precisely what respondent did and it cannot be faulted for doing so. Respondent is entitled lo its claim for refund We shall now procet~d to the first and second grounds. Being closely interrelated, We shall disntss then1 jointly. There is no dispute Uwt respondent, on separate dates of Decen<ber 23, 1997, June 29, 2000 cmd September 19, 2000, was issued Certificates of Registration for its utility models, Ufvl-fl.:17J, 2-1997-15095 and 2-1999- 000320, respectiveJy, of skin care compositions by the Bureau of Patent and the Intellectual Property Office of the Philippines. Neither is there any question that respondent as a registered inventor of these products is entitled to the tax incentives under RA 7459. B I 11 Co.mmissioner of Internal Revenue v. II itachi Computed l'ruducts (Asia) Corporation, CA-G.R. SP No. 63340;Fobnmcy 7, 2002. 47

DECISION CTA EB No. 330 (CTA Case No. 7197) The only issue in this case is the implication of Section 4 (B) of Revenue Regulations No. (1\.1() 19-CJ]l:.! on respondent's claim. Petitioner is of the view that since under R.R. 19-93 the effectivity of the tax exemption commences on the date of the approval of the application for tax exemption, in this case un September 28, 2004, the sales of tax exempt designs and products of rt:�spondent for the year 2002 are not covered. In short, petitioner contends the1l only claims for refund subsequent to the issuance of the SeplembL:r 21:\, 20U-J RIR Ruling may be covered by the income tax exemption. We are not persuaded. It is well-settled tl~e1l cdl administrative issuances must not override, but must remain consistent and in bcumony with the law they seek to apply and implement ds ddwillistrative rules and regulations are intended- to carry out, neither t�o supplant nor modify, the law.B In case of discrepancy betwet;n the b<1sic ]a w and an implementing rule or regulation, the former prevdils.l.t Section 6 of R/\ 7cJ:50 provides that: 12 "SECTION 4. Condiliunsjin� .-lt�uilment o/ /'ox Incentives and Ten: E:remptions. - XXX XXX XXX B. Upon approval of lite applic:nliull, a Certificate of Tax Exernption sitall be issued by the Commissioner of Internal Revenue \\'hich shall be effective on the date of approval thereof." 13 Commissioner of Internal Rewnue v. Deutsche Bunk AG J'vlanila Branch, C.T.A. Ell Nn. I 13 (C.T.A. Case No. 6566), September ll), 21JI)b. 14 Philippine Petroleum Corporation v. /'vlunicipality of l'ililla. Rizal, G.R. No. 90776, llJ8 SCiv\ 82, June 3,1991. 479

DECISION CTA EB No. 330 (CTA Case No. 7197! "SEC:TIC>r'-J i). /in Clt'lllf'lion. - Tu promote, encourage, develop and <1u:t: k1 "lL' cutll!llen�i,diza lion of technologies developed by luc<d n:sc'<Hclwrs or adapted locally from foreign sources including .inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten flO) years from the date of first sale, subject to the rules and regulations of the Department of Finance. Provided, that this tax exen1pLion privilt.�gl' pertaining Lo invention shall be extended to the legal heir ur assignee upon dealh of the inventor. The technuJogies, their manufacture and sale, shall also be exen1pt from pd\'lltenl ul lic�ense, 1wrmit fees, customs duties and charges on imports." (1~111plu1sis Ours) From the foregoing l'rcwision, it IS clear that any income derived from respondent's inventions shall be exempted from all kinds of taxes during the first ten (10) years from the date of first sale. The reason for this exemption is to encourd~'.e Filipino inventors to create more inventions and innovations beneficie1l to the people and to the country. Is Section 2 of RA 7iJ5LJ n~ads: 11SECTION 2. Declilrafioll of Noliouul Policy and Progmm. - It is hereby dedcHeLl tt> [,e the mthunal policy to give priority Lo invention and its utilization on the counb-y's productive system and national life; <md lo this end provide incentives to inventors and protect their exclusive right lo t�heir invention, particularly when the invention is beneficial to the people and contributes to national development and progress. Pursuant tu tl1e national policy, the Government shall provide a program to set up a climate conducive to invention and innovation, give encouragement and support to inventors who are creative and resuurceful, as well as im btwd wilh a deep sense of nationalism, and maximize the capability and productivity of inventors though incentives and other forms of assistance and support. 11 (EIILf'lfllsis Uurs) I 480

DECISION CTA EB No. 330 (CTA Case No. 7197) Thus, to i:lL'lt:'~l[ rwtllioner's VJeW that only clairns for refund subsequent to the issuance of the UIR ruling <1pproving the application for income tax exen'1ption should be granted, would not only be inconsistent ...... with under Section 6 otl~A 'JiJ59 which expressly states that "any income derived from these technologies shed! be exempted from all kinds of taxes during the first ten (JO) years from the cLlte of first sale," but would also defeat the spirit and inte11t of the law. In fact, it is vvell to note thnl: the subject BIR 1\.uling itself acknowledges that the se1id ex.t~mption L'clll be availed of during the first ten (10) years from the dale olthe first sale on commercial scale. A perusal of the records of the case reveals that respondent was able to show that the income ldxes paid by it for its exempt products for the taxable year 2002 are well within the period of ten (10) years from the date of its first sale in commercial scale. Ms. Lilia D.C. Francisco, the Accounting Manager oi ~1fddsh Corporation from 1999 to 2004, declared in her judicial affidavit1'' that the utility models, UM-8LJ71, 2-1997-]5095 and 2-1999-000320, were first suld as patented products in the year 2001, 1997, and 1999, respectively. We find no reason to suspect the veracity of her statement as it is supported by the income tax return ("lTR")17 and supporting audited financictl statements submitted by respondent. In fact, 16 Records, C.T.A. Case No. 71 'J7, pp. 1"12 -� 1-13, E>.hibit ��J.�' I 17 !d., pp. 148- 149, Exhibit ��u." 48l

DECISION :~ CTA EB No. 330 (CTA Case No. 7197) Page13of15 respondent's testimonial and documentary evidence were never disputed by petitioner. And co1 tlrm-y to the claim o� petitioner, respondent complied with all the requirt�ments stated in the BIR Ruling as respondent is duly registered with the L>ll~ as a withholding agent and withholds taxes on the wages/salaries of employees and on income payments to individuals or corpunttiuns subject to the expanded withholding tax.JB Thus, Vve find no reason to deny respondent's claim for refund. Considering that respondent paid thru error or rnistaJ<;.e and the petitioner accepted the flCI)'!llent, the principle of solutio indel11.ti under Article 2154 of the New Civil Code, which provides that "if something is received when there is nu rigltt to demand it, and it was unduly delivered through mistake, the obligation to return it arises," must be applied, as aptly ruled by the Cuurt in Uivision.J'! To recover the arnuunt paid thru error or mistake, the following must be established: ("1) that there vvas an actual collection and receipt by the Government of the tax sought tu be recovered, and (2) that he has� complied with the statutory requirements relative to the two-year prescriptive period �or filing daims for refund. 20 18 Records, C.T.A. Case No. 71 'J7. p. J l-1. Joint Stipulations ul Facts, p. I. �19 Rollo, p. 37, Assailed Resolution dated Octnber 30. 2007. pA. 2 Feliciano C. Badillo, represented by J{udy C. Badillo v. Commissioner of Internal Revenue, C.T.A. Case No. 5320, June I 0, I998. 482 I

DECISION CTA EB No. 330 (CTA Case No. 7197) Page 14 ofl5 In this case, rl'~jXltH!t�nl was able to show that it indeed filed and paid its 2002 income taxes. l<eLords also show that the respondent filed its ... claim for refund will1ill the tvvo-year prescriptive period. Petitioner therefore has the oblig<tlion under !he law to refund the erroneously paid taxes of respondent. It has been said tht~l: "A taxpayer should not be held to suffer loss by his good intention Lu nnnply with what he believes is his legal obligation, where suLII ,,bll~jlllion dues not really exist. \l\ll1en money is paid to another under the inlluence of a mistEike of fact, that is to say, on the mistaken supposition of the existence of a specific fact which would not have been known thcll Lilt: fact ~.-vas otherwise, it may be recovered. The ground upon which the right of recovery rests is that money paid through misapprehension of facts b~c�longs in equity and in good conscience to the_ person who paid it."='' In closing, \Ne reiterate the ancient principle that no one, not even the State, shall enrich oJwsell at the expense of another.22 fn the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal vvith l<lxpayers with fc1irness and honesty for the harsh power of taxation must bt~ le111pered with evenhandedness.23 21 Far East Bank and Trust Cutnpany v. t :otumissi.oner or lntemal Revenue, C.T.A. Case No. 6050, August 8, 2001. 22 Citibank, N.A. v. Court ofAppe�tls, (i.R. No. 107434. 2/W SCRA 459, October 10, 1'197. 23 Filinvest Development Corporation v. Cununissioner or Internal Revenue, G.R. No. 146941, 529 SCRA 605, August 9, 2007. 483

.~~ DECISION ., CTA EB No. 330 (CTA Case No. 7197) WHEREFORE, lhe instant Petition for Review is hereby DISMISSED. Accorc!ingly, the Decision dated May 29, 2007 and ... Resolution dated Octuber JU, 2007 are hereby AFFIRMED. SO ORDERED. /~ ( LO �.t\Ssociate Justice WE CONCUR: c ~ .~-u�., ru --"; ~ L~l<.N LSTO D. ACOSTA [)residing Justice . ~~C. ~~o!./9.-.. E~~-UY jUANITO C. CASTANEDA,CjR. Assoc � ustice Associate Jus lice CAESAR A. CASAN 0 VA L ~-�~~ Associate Justice OLGl PALANCA-ENRIQUEZ Associate ]ustice CERTIFICATION Pursuant to Section '13, 1\rliLie Vlfl of the Constitution, it is hereby certified that the above Decision hos been rer-1checl in consultation with the members of the Court fn nu111 � before the cE~se was assigned to the writer of the opinion of this Court. ~~~. c.~ ERNESTO D. ACOSTA Presiding Justice 484