CTA Case No. 4899 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY KAO <Philippines> Inc., C.T.A. CASE No. 4899 Petitioner~, Promulgated: ~ - ver~sus - - -F-E-B- 2119~ COMMISSIONER OF INTERNAL ---- �-.. REVENUE, ---------- X Respondent, X -- -- -- .�� DECJ:SJ:ON This case is a claim for refund of overpaid creditable withholding tax in the amount of P159,047.00 for the calendar~ year~ ended December~ 31, 1'3'31.. Petitioner Kao Cot~pot~at ion is a domestic cor~por~at ion duly organized and existing under and by virtue of the laws of the Philipp.ines. It is a wholly owned sub~,icliat~y of Kao Corporation of Japan and is engaged in the business of tt~ading household pt�'oducts. One of its sot.wces of incc>me is the rental it receives from its affiliate Pilipinas Kao for the lease of the manufacturing assets used by the latter in producing household products. For the taxable year 1'391 Pilipinas ~<ao as lessee i;;\Tld withholding anent withheld the amount of P225, 000.00 out of the P'+, 500,000.00 r~ental it ~:dlegec:lly paid to petitionet~ 1-\ao Cor~pot~e:\tion <see E><hibit 424

DECISION - C.T.A. CASE No. 4899 - 2- "B") in compliance with the expanded withholding tax t~egulation. <Rev. Heg. 6���85, ,.c~ ,ec. 1' (c). Petitionet~ Kao Corporation declared in its income tax return for the year 1991 as part of its gross income the amount of P4,333,333.00 as t~ental income it t~eceived ft~om Pilipinas Kao <Exhibit "C") and indicated in the same return the amount of P225,000.00 as the tax withheld from the rental income <Exhibit "C-1">. In the afot~ementioned tax t~etm~n, the income tax due from the pet it i one t~ f o t~ the tax a b 1 e yeat~ 1. 99 1 i s in the amount of P65,933.00. This figure was determined after citing the following income t~eceived <and the deductions allowed for the said year: INCOME: Schedule I Gt~ o s s sa 1 e s p lt6, 725, Lt77 Schedule 4 p 4,333,333 Rental income Schedule 5 p 1.!750!867 p 52, 809, 67'7 Intet~est etc. LESS: Total: p 52!621!239 Deductions Net Income: p 188,438 Tax Due: p 65, 9~53 The Creditable tax withheld by lessee in the amount of P225,000 <Exhibit "C") is much mot~e than the tax due of petitioner for the year 1991 thus petitioner contends that there was overpayment of P159,047.00, computed as follows: 1992 Creditable Tax p,.. 2c:5, ooo LESS: Tax Due 1991 ITR Refundable 65,'353 p 159,047 425

DECISION - C.T.A. CASE No. 4899 - 3- There being an alleged ovet~payment of income tax fot~ 'the year~ 1991, petitioner~ filed a wr~itten claim fot~ r~efund with the r~espondent on Decem bet~ 15, 19'32. his 3' 1993, bat~ely tht~ee wee~<s ft~om the date he filed claim which was way ahead of the end of the pt~esc.~t~iptive period for claiming a refund and without waiting for the ruling of r~espondent c~ommissionet~, petitioner~ came t o t h i s Cotn�~t on a petition for review asking that judgment ordering r~espondent to gt~ant him a r~efund of excess Tax payment of P159,047.00 These r~ental payments which fot~m pat~t of the gross income of petitioner stem from a leasehold agreement between petitioner~ I.Zao Cot~pot~ation as lessor .:md Pilipinas I.Zao as lessee of the manufactm~ing assets owned by the fot~met~ and used by the latter~ in pt~oducing hous;ehold goods. The goods manufactured shall then be mat"'k et ed and sold by Kao Corporation in pursuance of a sales and marketing agreement between the two companies. The contt~act of lease pt~ovides among other things that the annual rental fee for the assets is P6,ooo,ooo.oo and shall be payable quarterly on a calendar~ yeat~ basis at the t~ate of P1,50o,ooo.oo. Fat~ the yeat~ 1'39.1, petitionet~ declat~ed in i t s income tax t~etut~n the amount of P4,333,333.00 as the total amount it received from Pilipinas ~<ao. Pilipinas Kao as withholding agent and in compliance with Sec. 51 of the Tax Code submitted a cet~tificate of ct~editable income tax withheld <Fot~m 1743-1.> 426

DECISION - C.T.A. CASE No. 4899 - 4- and declat~ed the amount of Pi.7~25, 000.00 as the t~ate of tax withheld t�'ept~esent ing 5'1- of the total amount of P4,500,000.00 it paid to petitione~ Kao Corporation for the yeat~ 1.991. The only issue pt~esented to t h i s Com~t fot~ t~esolution is whethet~ ot~ not petitionet~ is entitled to a t~efund of creditable withholding tax in the amount of Pl.59,047.00 for the calendat~ yeat~ ended Decembet~ 31., 1'3'31. Petitioner asserts that he is entitled to recover the amount of P159, OL~7. 00 it allegedly ovet~paid as withholding ta>< at sotwce fat~ the yeat~ 1991. He has shown in his petition as well as in his memot~andum that thet~e has been strict compliance with all the t~eq�.dt~ements of the law in validly claiming for a refund. Respondent maintains othet~wi se. In het~ respondent asserts the following special and affirmative defenses: 4. Petit i onet~ has fai 1 ed to state any cause of action under Section 204 of the Tax Code, under which the Commissioner of Internal Revenue allegedly may ct~edit ot~ t~efund taxes erroneously or illegally received. 5. In addition, well-settled is the doctt~ine t h a t pt~ovisions or the tax t~efund are constt~�.ted stt~ictly against �the taxpayet~ as they at~e in the nature of tax exemption. 6. Besides, in an action fat~ t~efund, the taxpayet~ has th!? btn~den to show that the taxes paid were erroneously or illegally paid and failure to do is fatal to the action for refund. 427

DECISION - C.T.A. CASE No. 4899 5- 7. Mor~eover, and in this case, the claim for refund is still under investigation. This Court agrees with the petitioner. In the case of Citytrust Finance Corporation vs. Co��issioner of Internal Revenue, CTA Case No. 4134, November~ 11, 1'3'31, this Com~t had the occasion to cite the following requirements for a valid refund of creditable withholding tax in excess of the amount of the tax due: 1) that the claim is filed with the Commissioner~ of Intet~nal Revenue within the two year period from the date of payment of the tax as required by Section 204 of the Tax Code; ;;::) it must be shown on the t~etJ..wn of the recipient that the income payment received was declared as part of the gross income, and 3) the fact of withholding is established by a copy of the statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld thet~eft~om. (see alscl Sec. 10, Hev. Heg. 6--85). The t~ecot~ds show that petitionet~ filed i t s claim for refund within the two year prescriptive period specified in f.h~t. 204 of �the T;ax Code. It filed its final income tax return for the taxable year 19'31 on Apr~i 1 l9'3C:~ <Exhibit "C") and filed a tm~itten claim fot~ t~efund on Decembet~ 15, ,_,, 1 '3'3;::: <Exhibit "E II). Twenty days 1 at et~ on Januat~y o::.� l '393, petition for review was filed with this Court. To further bolster his contention, petitioner presented evidence among others: Exhj.bit "A" -- lease contt~act bet\o'H~en petitionet~ and Pilipinas Kao 428

DECISION - C.T.R. CASE No. 4899 - 6- Exhibit "B" -- cey�tificate of withholding tax at source for the year 1991 in the amount of P225,000.00 Exhibit "C" �-- Petitionet~' s :1.991 ITR filed with the BIR on Apt~il 2, 19':32 "C-��1" ct~editable tax withheld P2c5,000.00 "C--2" tax payable P65, 95.3. 00 "D" �- petitionet~' s financial statement for 1991 is~ued by Carlos J. Valdez "E"- lettet~ claim for t~efund dated December 15, 1992 and t��ece i ved by the BIR on Decembet~ 15, 199i~ Respondent on his pat~t did not pt~oduce evidence to controvet~t petitionet~' s claim and opted to st\bmit the case for decision based on the records. Only the petitioner submitted his memorandum. counsel for respondent tried to establish that Kao Philippines and Pilipinas Kao are one and the same company and that the t~e J.at :i. on ship of 1 e ss ot~ and lessee was conveniently fot~med to set~ve as a tax sheltet~. However this line of questioning was not pursued as counsel fot~ t~espondent f a i l e d to e l i c i t the ~<ind of t~esponse ft~om witness that would strengthen this assertion as c~n be gleaned from excerpts of the cross examination conducted by counsel for respondent quoted hereunder: Q. Miss Witness, dm~ing the dit~ect examination, you mentioned that there was a contract of lease between Kao Philippines Inc. and Pilipinas Kao Inc., is that cort~ect? A. Yes. 429

DECISION - C.T.A. CASE No. 4899 - 7- (~. And whl?r-�ein the l<ao Philippines, Inc. is the lessot~? ~1. Yes. Q. And Pilipinas Kao Inc., as the lessee? ~1. Yes. Q. Aside from the lessor lessee r��elationship between Kao Philippines, Inc. and Pilipinas Kao Inc., is there any other relationship between the two companies ? Atty. Belen <counsel for petitioner> Objection ; your Honor, its no longer material to the Judge f4cost;:t Objection overruled. Please answer the question. Atty. Belen Please read back the question. Question being read back by Court stenographer. A. None. Q. IY!iss Witness, do you have a copy of the articles of incorporation of our company? f4. If I know? Q. Yes. A. Yes, I know. Q. And the ~tockholders are the same ? Not one stockholder of Pilipinas Kao is also a stockholder of Kao Philippines? A. I ~mow the s t ockho ldet~ of ~{ao Phi 1 i pp in e s. Q. And they ar~e completely diffet~ent ft~om the stockholder of Pilipinas Kao ? 430

DECISION - C.T.A. CASE No. 4899 - a- Atty. Belen (counsel for petitioner) Objection again your Honor, immaterial on the issue of refund, your Honor. Judge Acosta Could you explain to this Court the relevance of your question ? Atty. Capunong (counsel for respondent) Your Honor please, we are trying to establish the credibility of the contt~act of lease because that is bone of, ot�' the issue in which the t~efund is being claimed, your Honot~. Judge Acosta If you can prove that these are one and the same company there is really no ground. Atty. Capunong Yes, yotw Honot~. Judge 14costa All righ~, you proceed. Objection overruled. R. I know the Kao Philippines. Atty. Capunong No further questions, your Honor. 0 t~e s pond ent failed to submit evidence to dispute petitioner's claim. Respondent did not even bothet~ to file any comlnent on petitioner's formal offer of evidence by way of contesting 431

DECISION - C.T.A. CASE No. 4899 - 9- the evidence as to its vet~acity, matet~iality and pr�obative value. f~dditionally, no memot~andum was evet~ pl�~esented t o advance his arguments inorder to assist the Court in at~t~iving at an even-handed decision founded on equity and i mpa-r~t i a 1 i t y. It can be from the foregoing circumstances that respondent falls shcwt of the duty t~equit~ed of him in defense of the govet~nment, to which he belongs and represents. We find that the petit i onet~ has successfully established his -r��ight to claim fo-r~ a -r~efund. This Com~t however cannot award the amount of P159,047.00 as prayed for in the petition because of petitioner's failure to declare the cat~-r~ect t~ental income in i t s income ta>< t~etut~n which served as the basis for the alleged overpaid amount. R of the said income tax that petitioner declared only the amount of P4,333,333.00 as t~ental income fot~ the yeat~ 1.991, and not P4, 500,000.00 as indicated in the certificate of creditable income tax withheld submitted by withholding agent. This Cotwt has t~uled in sevet~al cases that claims for tax credit or refund of income tax deducted and withheld on income payments shall be recognized when it is shown on the tax return that the income payment received was declared as part of the ~;woss income and the fact of withholding is established by a copy of the statement duly issued by the payor to the payee showing the amount paid and the amount of 432

DECISION - C.T.A. CASE No. 4899 - 10 - tax withheld thet~eft~om, (Rev. Heg. E,--85, Sec 1.0; Citytrust Finance Corp. vs. CIR, CTA Case No. 41.34, Novembet�� 11., 1'3'31; BPI Savings Bank Inc. vs. CIR, CTA Case No. 4412 August 17, Us in g the t~ at e spec i f i e d in the income tax t~ e t m~n as t~ental income, thet��e will be a change in thf~ amount of the refund, thus computed: Hental Income (as declared in ITR) - P4, 333, 333. (>(> 5~ Tax withheld - Less tax due 1.'3'31 ITR - 216,666.65 Refundable amount 65,'353.00 p 150,713.65 In view of the foregoing, respondent is h~reby ordered to refund or grant a tax credit to petitioner in the amount of P150,713.65 representing overpaid withholding tax for the y eat~ 1'3'31. No pronouncement as to costs. SO ORDERED. GRUBA Associate Judge WE CONCUR: TO D. ACOSTA Ptesiding Judge R=~~E~~ I 433

DECISION - C.T.A. CASE No. 4899 - 11 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the membet~s of the Cotwt of Tax Appeals in accot~dance with Section 13, r.h~ticle VIII of the Constitution. ~Q.~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 434 /