CTA Case No. 5811 (Decision)

I REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ALLTEL INTERNATIONAL RESOURCE MANAGEMENT INC. (PHILIPPINE BRANCH), Petiti oner, - versus - C.T.A. CASE NO. 5811 COMMISSIONER OF INTERNAL l't�omulgatcd: REVENUE, JUL 09 2001 Res po nd ent. f ;,h .Cl/'1 \ ~ vt"l /}-?,'{)IfIh/ 'j ('- t r- X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION Thi s case invo lves a claim for refund in the amoun t offou r million five hundred seventy thousand six hundred sixty three p esos (P4,570,663 .00) representing unutili zed tax credits/payment for taxabl e year 1996. The facts are simple. Petiti oner is a foreign corporation dul y organi zed and ex isting under the Jaws of the United Stales of Ameri ca, dul y registered with the Philippine Securities and Exchange Commission (SEC) and authori zed to transact business in the Philippines as a branch offic e. Petitioner is engaged in the business of re nd ering consultancy services for vari ous types of software programs and app li cati ons, with offi ce address at the 161h Floor, Citibank Tower, Valero Street, Salcedo Vill age, Makati City, Metro Manil a. (Admitted fact, CTA reco rds, page 32) On April 15, 1997, Petitioner fil ed its 1996 annual income tax return (Exhibit "A") refl ecting thereo n a net loss of PI ,026,76 1.00 and a refundable amount of PI 0,538,837.00, the latter representing the sum of the 1996 second quarterl y income 840

,' DEC ISION- CT1\ CASE N O. 58 1I PAGE 2 tax payment of P4,347,08 1.00 (Exhibi t A-6-1 ) and creditab le taxes w ithheld d uring 1996 of P6, 19 1,756.00 (Ex hibit A-6-2). Petitioner opted to carry -over the refund abl e amount of P 10,538 ,83 7.00 to th e succeedi ng year 1997 (Ex hibit A-1 ). However, in its 1997 IT R fil ed on April 15, 1998 (Ex hi bit B), Petitioner fa il ed to full y utili ze its 1996 excess tax cred its/payments of P I0,538 ,83 7.00 as its reported income tax due for 1997 amounted onl y to P5,968, 174 .00 (Ex hibit B-6). Consequentl y, Petitioner was still left w ith a balance of P4,570,663. 00 unutili zed 1996 excess tax credits/pay ments as of Decem ber 3 1, 1997 (Ex hi bit B-3). On April 15, 1999, Petiti oner fil ed an admin is trative clai m fo r refund in the amount of P4,5 70,663.00 correspondi ng to the all eged unapp lied 1996 excess creditabl e income taxes (Ex hibit H). Petitioner cited the fo ll owing provisions of Secti on 69 [now 76] in relati on to Secti o n 204(3) [now 204(C)] of the Tax Code as legal bases of its claim, thus: "Sec. 69. Final Adjustment Retur11. - Every corporati on liab le to tax under Section 24 shall fil e a fin al adjustment return coverin g the tota l income fo r the precedin g calend ar or fi sca l year. If the sum of the qua rterl y tax pay ments made durin g the sa id taxable yea r is not equ al to the total tax due on the entire taxable income of that year the corporati on shall eithe r: a.) Pay the excess tax still cl ue; or b.) Be refunded th e excess amoun t pa id, as the case may be. In case the corporati on is entitl ed to a refund of the excess estimated quarterl y income taxes paid, the refundabl e amount shown on its fin al adj ustment return may be credited against th e estimated quarterl y income tax liabiliti es for the taxabl e quarters of the succeedin g taxab le year." "SEC. 204. Authority of th e Commissioner to compromise, abate am/ refwul/credit taxes. - The Com missioner may - XXX XXX XXX 84 1 )

DEC ISION- CT A CASE NO. 58 11 PA GE 3 "(3) Credit or refund taxes erroneo usly or illegall y received, penalties imposed w itho ut authority, n.:fund the value of internal revenue stamps when they are returned in good condition by the purchase r, anC: in hi s discretion, redeem o r change unused stamps that have been rendered unfit fo r use and re fund their va lue upo n proo f o f destruction. No credit or refund o f taxes or penalties shall be allowed unl ess the tax payer file s in writin g w ith the Commi ss ioner a claim for credit or refun d w ithin two (2) years after the pay ment of the tax or penalty: x x x " On th e same date or on A pril I 5, 1999, Pe titi oner fil ed w ith thi s Co urt the insta nt Petition for Review pursuant to Secti on 230 [now 229] o f th e Tax Code which provides, thus: "SEC. 230. Recove1y of tax erroneously or illegally collected. -� No suit or proceedin g shall be maintained in an y court fo r the recovery of a ny nati onal internal revenue tax hereafter alleged to have been erroneo usly or ill egall y assessed or co llected, or of any penalty cl aimed to have bee n co llected w ithout authority, or of any sum all eged to have been excessive or in any manner w rongfull y co ll ected, until a cl aim for refund or credit has been dul y fil ed w ith th e Commi ssioner; x x x." "In any case, no such suit or proceedin g shall be fil ed after the ex pirati on of two years from the date of payment of the tax or penalty regardl ess of any supervenin g cause th at may ari se after payment: x x x." In his A nswer to the Petition, Respondent ad mi t'ed the ex istence as we ll as the filin g of Petiti oner's I 996 & 1997 income tax returns and ad mini strati ve claim for refund but denied th e truth and th e ve rac ity of th e co ntents th ereof. As Special and Affirm ati ve Defenses, Res pondent ave rred that: 1.) Petitioner's cl aim for refund is still undergo in g administrati ve routin ary investi gation/examinati on by th e Respondent 's Bureau; 2.) Petitioner failed to demonstra te that the tax subj ect o f the case a t ba r comes within the scope of claims for refund . Well-entrenched in thi s jurisdiction is th e rul e that tax recovery or refunds may encompass the foll owing payments: (a) erroneo usly or ill egall y received or coll ected 84 2 .\ �'

f' DECISION- CTA CASE NO . 581 I PAGE4 internal revenue taxes; (b) penalties imposed without authority (Sec. 204(c), Tax Code). 3.) Petitioner must prove that it is indeed entitled to a refund under Section 229 of the 1997 Tax Code and its implementing rules and regulations. Moreover, the same must be supported by evidence. 4.) Claims for tax refund arc construed strictly again st the claimant as they partake of the nature of an exemption from tax and it is incumbent upon the Petitioner to prove that it is entitled thereto under the law. Failure to prove the same is fatal to its claim for tax refund. Exemptions from taxation are highl y disfc>vored in law and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague implications. (Asiatic Petroleum Co., vs. Llamas, 49 Phil. 466) 5.) Moreover, Petitioner must prove that it has complied with the governing rules with reference to tax recovery or refund , which arc found in Sections 204 and 229 of the Tax Code as amended. Petitioner, to support its case, presented the following as evidence: Ex hibit 1.) 1996 Corporation Annuallncome Tax Return A 2.) 1997 Corporation Annual Income Tax Return B 3.) 1996 2nd Quarterly Income Tax Return C 4.) 1996 Certificates of Creditable Tax Withheld at Source 0-G 5.) Letter Claim for Refund H 6.) 1998 Corporation Annual Income Tax Return I 7.) 1997 Certificates of Creditable Tax Withheld at Source J-L 8.) 1996 Summary of Certificates of Creditable Tax Withheld at Source M 9.) 1997 Summary ofCertificates ofCreditable Tax Withheld at Source N I0.) Testimony of Ms. Geraldine Osea, Petitioner's Accounting Manager (TSN. August 2, 1999 & September 2, 1999) Respondent, on his part, submitted as evidence. among others, the Assessment Notice No. LAI69520-96-00-594, dated March 17, 2000, (Exhibit 4) finding Petitioner liable for deficiency income taxes for taxable year 1996 in the total amount of P441 ,885 ,640.17.

DEC ISION- CTA CASE NO. 58 11 PAGE 5 To prove that the said assessment was dul y protested and that no fin al decision has yet been made on its protest, Petitioner submitted through a Suppl emental Formal Offer of Ev idence, the foll owin g: Ex hibit 1.) Letter addressed to Petitioner dated June 29, 1999 from the Special Investigation Di vision, Revenue Region No. 8, informing Petitioner that the company's 1996 internal revenue tax case has been referred to the SID for evaluation 0 2.) Letter dated April 17, 2000 fil ed by Petiti oner's ex ternal auditor on behalf of the company protesting the assessment issued by the BIR against Petitioner for the taxable year 1996 p 3.) Rubber stamp receipt by Revenue Region No . 8 showing the date of receipt of th e protest - April 17, 2000 P-1 4.) Testimony of Ms. Geraldine Osca, Petiti oner's Accounting Manage r (TSN , October 5, 2000) After the parti es have fil ed their respective memorandum , thi s case was submitted for dec ision on April 23, 200 I. The sole issue We are tasked to reso lve is: WHETHER OR NOT PETITIONER IS ENTITLED TO THE REFUND OF ITS 1996 EXCESS CREDI TABLE INCOME TAXES IN TH E AMO UNT OF P4,570,663 .00. After considering the altending facts, the evi dence submilted by both parti es, the jurisprudence and laws applicable in thi s case, We partiall y rul e in favo r of Petitioner. There 's no questi on as to Petiti oner' s lega l ri ght to claim a refund of excess tax credits/pay ments as thi s is clearl y prov ided for under Sec tion 69 [now 76] of the Tax Code.

DECISION- CTA CASE NO. 5811 PAGE6 However, as oft-cited by this Court in a number of similar cases, the granting of a refund of excess creditable withholding taxes IS dependent on Petitioner's compliance with the following three basic requirements: I. That the claim for refund was filed within the two-year prescriptive period provided under Section 204(3) [now Section 204(C)] in relation to Section 230 [now Section 229] of the Tax Code; 2. That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom ; and 3. That the income upon which the taxes were withheld were included in the return of the recipient [Revenue Regulations No . 12-9-1 (amending Revenue Regulations No . 6-85) ;Citibank, NA vs. Court" of Appeals and CJR, 280 SCRA -159; ACCRA Investments Corporation vs. Court ojAppeals, 20'-1 SCRA 95 7]. Further, since Petitioner' s claim for refund of P4,570,663 .00 arose not only from the reported 1996 creditable taxes withheld of P6 , 191,756 but al so from the 1996 second quarterly income tax payment of P4,347,081.00, Petitioner must show proof of actual payment ofthe amount ofP4,347,081.00. Also, Petitioner must prove that the claimed amount of P4,570,663.00 representing unutilized 1996 excess tax credit/payment as of December 31, 1997 was not carried over to the succeeding year 1998 . Records show that Petitioner complied with the first requirement. The reckoning of the two-year prescriptive period for the filing of a claim for refund commences from the date of filing of the final adjustment return (ACCRA investments Corporation vs. Court of Appeals, 20-1 SCRA 95 7). The claimed excess tax credits/payments cover taxable year 1996 for which Petitioner filed its annual income tax return on April 15, 1997 (Exhibit A). Counting from this latter date, Petitioner's 845

DEC ISION- CTA CASE NO. 58 11 PAGE 7 admini strati ve (Ex hibit H) a nd judicial claims for refund fil ed on Ap ril 15, 1999 fall within the two-year peri od prescribed und er Secti on 204(3) [now Secti on 204(C)] in rel ati on to Secti on 23 0 [now Secti on 229] o f th e Tax Code. To prove th e fac t o f wi thho lding of th e claimed c reditabl e taxes of P6, 191 ,756.00, Petitioner presented Certificates o r C reditable Tax Withheld at Source issued by va ri ous w ithholding age nts fo r the year 1996 . However, the amount of creditable taxes withheld shown in the certificates amounted onl y to P5,742,465. 01 detailed as fo llows: Ex h. Period Withholding Ag ent Incom e Income Ta x Covered Pay m e nt Withheld D April to Metropolitan Bank & June 1996 Trust Company p 19,987, 334 .60 p 999 ,366 .73 E Jan. 1 to Allied Information Servi ces Dec 31 , 1996 of th e Phils ., Inc. 991,4 38.71 F Apr. 1 to Pilipino Telephone Jun 30 , 1996 Corporation 20,426,398 .60 1,021 ,319.93 G Jan . to Systematics Technology Dec. 1996 Services, Inc. 53, 621 ,962.40 2,730,339 .64 P 94 035..695.60 P5.742.465.01 As to the third requirement, Petiti oner proved that it decla red in its 1996 income tax return as part of its gross income o r P 123,4g I,237.00 (Ex hi bit A-3) the income pay ment of P 11 3,864,469 .8 1 (Ex hibit M) re lated to the cred itab le taxes withheld of P5,742,465.0 I . As to the all eged 1996 second qu arter income tax payment of P4,347,081. 00, Petitioner established that it actuall y pai d the said amount as shown by the machine validation on the lowe r porti on of Petiti oner's 1996 s~co nd quarterl y income tax return (Ex hibit C-4). fi nall y, Petiti oner was abl e to establish th at the claimed 1996 excess creditable incom e tax es of P4,5 70,663 .00 were not ca rri ed ove r to taxab le year 199 8. While 84 8

DECISION- CTA CAS E NO. 58 11 PAGE 8 there was an amount of P8 ,540,5L10 .00 indicated as "Pri or yea r's excess credits" (Exhibit I-3) in Petitioner's 199 8 ITR, nevertheless, the same docs not at a ll pertain to the claimed 1996 excess creditab le income ta xes. As can be ga thered from the 1997 Certificates of Creditable Tax Withheld at Source (Exhibits .J , K & L) which were summarized in Ex hibit N and from th e testimony of Ms. Geraldine Osea, Petitioner's Acco untin g Manager (sec TSN, September 2, 1999), the amount of P8 ,540 ,540.00 refers to creditable taxes withheld in 1997. [n sum, thi s Court find s Petiti oner to have suffi c ientl y prove n its entitlement to the refund of the 1996 excess tax credits/paym ents but in a reduced amount of P4 , 121 ,3 72.00 computed as follovvs: For Calendar Year 1996 Net Loss PI 1.026.761 .00) Income Tax Due(Exh. A) p Less: Tax Credits/Payment 1.) 1996 2nd qtr income tax payment (Exh. C-4) p 4,347,081 .00 2.) 1996 creditable taxes withheld (Exhs. D toG , inclusive) 5 742 465 .00 10,089 ,546.00 Income Tax Refundable (carried over to CY 1997) p (1 0 089 ,546.00) For Calendar Year 1997 Taxable Income (Exh . B) p 17,051.925.00 Income Tax Due p 5,968,174 .00 Less: Tax Credits/Payment 10 089 546 .00 1.) Prior year's (1996) excess credits PI 4,121 372 ,00) Income Tax Refundable Contrary to Respondent's a llegation , Petitioner's pending income tax deficiency assessment for 1996 do es not operate as a bar to its entitlement to a refund as this Co urt had a lready ruled in previous cases, thus: 1. Phi/tread Tire & Rubber Co1poration vs. Commissioner of Internal Revenue, CTA Case No. 5598, dated Janumy I 8, 2000; 8 4'1'

DEC ISION- CTA CA SE N O. 58 11 PAGE9 2. Golde n Arches Development Corporation vs. The Commissioner of internal Revenue. CT/1 Case No. 53./8, dated March 26, 1999,� 3. Citicenter Buildin~ Corporation vs. Commissioner of internal Revenue, CT/1 Case No. 524{ dated December 9. 1997; 4. Benguet Corporation vs. Commissioner of 1ntem al Revenue, CTA Case No. 5045, dated April 23, 1996. T he issue relating to the assess ment is com plete ly separa te from the claim fo r refund subj ect o f th e in stant Petiti on. Thi s Court is not in a posit ion to dec ide as to whether or not th e assess ment was proper as it is not the iss ue in th e present case. As correctl y pointed out by Petitioner in his memorand um , th is Court acquires no jurisdiction over the assessment unl ess the same is elevated before thi s Co urt by way of a Petiti on for Review. Moreover, taxes cannot be the subject of a set-off or compensati on. In the case of Citicenter Buildin g Corporati on vs. Commi ss ioner of Inte rnal Revenue, CTA Case No . 5244, ela ted December 9, 1997, thi s Court rul ed that: "The argum ent advanced by Responde nt cannot serve as an obstacle to grant the instant clai m fo r refund because Petiti oner's alleged tax defi ciencies fo r the taxab le year 1992 is not the iss ue presented befo re us in th is petiti on fo r review. By bringing up the iss ue of petiti oner's alleged tax defici encies, respondent seeks to bl ock the grant of the refund by presenting the argument th at no refun d of taxes is possible because after all th e petiti oner has an outstandin g debt due the government, sugges ting th e possi bility of lega l compensati on or set- off taxes . It is already well -settl ed th at intern al revenue taxes cannot be the subject of set-ofT or co m�1ensati on (Re publi c vs. Mambulao Lumber Com pany, 4 SCRA 622). The reason is th at th e gove rnm ent and tax paye r are not mutuall y creditors and de btors of each other un der Article 1278 of the C ivil Code as a claim fo r taxes is not such a debt, demand , contrac t or judgment as is allowed to be set-off (Co rdero bs. Gonda, 18 SCRA 33 1). In th e instances where the Supreme Court allowed legal co mpensati on or set-off of taxes, such taxes we re already clue and demandabl e, thus co mpensati on under A rti cle 1279 o f th e Civil Code, took place by operatio n of law." 848

DECISION- CTA CASE NO. 5811 PAGE 10 WHEREFORE, in view of the foregoing premises, the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED TO REFUND the amount of FOUR MILLION ONE HUNDRE D TWENTY ONE THOUSAND THREE HUNDRED SEVENTY TWO PESOS (P4,121,372.00) in favor or Petitioner representing unutili zed ta x credits/payments lor taxable year ISl96. SO ORDERED . I CONCUR: L~s..~ ERNESTO D. ACOSTA Presiding Judge CERTIFICATION I hereby certify that the above deci sio n was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~ls2- ~ ERNESTO D. ACOSTA Presi ding Judge 84 ~1