CTA Case No. 3469 (Decision)

REPUBLI C OF THE P H ILIPP INE S COURT OF TAX APPEALS QU EZON C I TY PLANTERS PRODUCTS INC., Petitioner-~ -- ver- s us - C.T . A. CASE NO . 3 469 COMMISSIONER OF INTERNAL REVENUE, Respondent. >{ - - - - -- ----,.~ DEC I s I 0 N This refer-s to petitioner-'s c l aim for- judicial r-e f und and/or- ta >: cr�ed i t in the tot a 1 amount o �f F'4 ~ 50.1 ~ 980.00, r� epr-esenting the over-paid cor� por-a te income ta:-: �for- the second~ and thir-d quar-ter-s of .t 980 . The basi s � of this over; payment came about when the Fer-ti 1 izer� and Pest.i.c .ide Author-ity her-ein after- as FF'A for� br-evity) adopted a new fertilizer- cash subsidy scheme wher-ein Planter-s Pr-oducts Inc. was allowed a 5% mar-k-up on loca l ly produced gr-ades of fer-tilizer- and 2/. mar-k - up on impor-ted wher-ein petitioner- was able to gener-ate income in its fer-ti 1 i zer� oper-ations instead of the "no - 1 ass no - gain" scheme (pp � .5-8 .� CTA rec :.:: .). 50G

DECISION CTA CASE NO. 3469 - 2- As borne out by the pleadings and evidences presented~ petitioner is a duly registered domestic corporation and is engaged in the business of importing~ manufacturing~ and s e l l i n g fertilizer~ agricultural chemicals~ and industrial produ c ts~ with prin c ipal office at the PPI building~ Esteban Street Legaspi Village~ Makati~ Metro Manila. The case at bar has been submitted for decision based on the pleadings and the records of the Bureau of In ter-�na 1 Revenue~ sans the par-ties filing their respective memoranda. F'eti tioner as such manufacturer~ importer and s eller of ferti 1 i zer products has been receiving subsidy from the FPA in the form of reimbursement of all losses incurred by petitioner in its fertilizer business. In other words~ the ./ ferti 1i zer operation of herein petitioner was subsidized by the government on a full cost basis under the "no - loss no - gain" scheme~ F'ursuan t.: to this cash subsidy scheme the financial statement of petitioner reflected no income ta x due and payable to the government. Petitioner under this cash subsidy scheme filed its quarterly income tax returns for the first~ second and third quarters of 1980 in the total amount of F'4~574~128.00 for� its net ta:-:able income on agricultural chemicals and 5 0 '(

DECISION CTA CASE NO. 3469 - 3- industrial products operations (petitior,- for IV pp. 1-2 .� a d m i t t e d in par. answer~ p. 4~ CTA recs.). During the last quarter of 1980 the FPA adopted a new fertilizer cash subsidy scheme thereby allowing petitioner a 5% mark - up on locally produced fertilizer grades and 2% mark-up on imported grades~ enabling petitioner to generate income in its ferti 1 i zer operations (Ann ex "A- .J" .� p. 8 .� CTA recs.). ::)L Under this new subsidy scheme~ petitioner f i 1e its subsidy c 1aim with FPA on a quarterly basis wherein FPA pays 80% of the claims upon completion of all the necessary papers while t .he remaining 20% is withheld until after the termination of the books of accounts of petitioner and a favor-able endorsement by the Commission on Audit. According 1y ~ petitioner obtained on Apr-i 1 3 ~ 1981 ..an au thor i ty from the FPA in accordance with the new cash subsidy scheme~ subsequently petitioner on Mar ch ~ 1981 requested for an authority to defer the recognition of income of 20% of its subsidy claim in the year of receipt effective January 1, 1981 and not in the year the claim for such amount was filed~ respondent granted said request in a 1et ter dated Apr i 1 3 ~ 1981 we 5 0d

DECISION CTA CASE NO. �3469 - 4- quote at length which we consider as authority in support of this decision (Annex "8" .� p. 9 .� CTA rec:s.). REPUBLIKA NG PILIPINAS MINISTRI NG PANANALAPI KAWANIHAN NG RENTAS INTERNAS QUEZON CITY April 3~ 1981 Mr. Rosmo A. Pleyto Partner~ Carlos J. Valdes & Co. 1130 Perez St.~ Manila S i r: This refer to your letter of,, March 10~ 1981 relative to your request that your client~ Planters Products Inc., herein after referred to as P P I 11 11 ~ be permitted to change its accounting method in recognizing as income its subsidy from the Ferti 1i zer and Pestic ide Authority, herein after referred to as FPA 11 11 in the year of ac tua 1 receipt and not in the year it files its claim for subsidy. You represented that present 1y your c 1 ien t, the "PP I 11 recognizes for income ta:-: purposes 1001. of the FPA 11 11 subsidy upon filing of their request for subsidy although what is . immediately given as subsidy corresponds on 1y to 801. of the tota 1 subsidy. The remaining 201. of its annual subsidy is withheld by FPA 11 11 pending the completion of the audit conducted by the Commission on Audit. You now request that to effectuate the reality of the transaction as discussed above~ your client be permitted to Befer the recognition of income of the remaining 201. in the year of the receipt of such subsidy beginning January 1, 1980. sou

DECISION CTA CASE NO. 3469 - 5- In reply, please be informed that your request is hereby granted. Accordingly your client, "PPI", may declare the subsidy it receives from the "FPA" as part of gross income in the year of actual receipt. Very truly yours, TOMAS C. TOLEDO Deputy Commissioner TAN T4338-J2227-A-9 On April 15, 1981, on the basis of the Authority granted to petitioner, final adjustment of income ta>: return was filed reflecting already the deferral of the recognition, as income the remaining 20% of petitioner's subsidy claim (Annex "C" .� p. 1tJ~ CTA re<::s � .J. Because of the deferral, petitioners claimed an alleged overpayment in the amount of P4,501,980.00 for the 1980 corporation income tax to wit: HX>t 1st qtr. P3 ~ 2..)4, 970.00 2nd qtr. 1,369,158.00 3rd qtr. 4th qtr. P4, 574, !28.(X) Incane Tax D...te/(Credit) after deferral � � � � � � � � � � � � ---'�~)~4.1.9.1-..i!..!,~ Over/(Under) Payment P4,369,217 .0() Add: Withholding Taxes 51 0

DEC ISION CTA CASE NO. 3 469 - 6- Inter� est c:n Savings deposit ... 1.1.9 ~ ~'(X) � 00 Rerltal Ir1c:c:oe .. " . . . . . . . � . . . . 3 ~ 2~'(). 00 Dividend Inccllne ...........�.. 42.1.00 Ta:�: Cn~:h.t: C'.-ert:. 1\b. 01.699 --�---�_9_,_~5.7::.!. ~~~~ Total Prnc:unt Refundable On J anuar�y 8 ~ 1982 petitioner filed with respondent's claimed for refund and/or ta:�: credit o �f the alleged overpayment of the 1980 corporate income ta x (Annex "K"~ p. 37, CTA re cs .J. It must be stated and emphasized in this connection that only the fertilizer operation of petitioner was being subsid .i. zed~ concerning its agr�.icul tur-al chemicals included in the financial reports of petitioner as other products are not subsidized. Taking res pondent's failure to make a definite r�uJ..ing on its claim for� refund and/or ta:�: credit �filed on ~Jam.l ar.. y 8~ 1982, petitioner filed into this court .its petition for review on May 2, .1982. e <SUP:./ ~ The sole posed on this appea l is wh et h er or not petitioner is entitled to the refund and/or tax credit of the alleged overpaymen t of corporate income tax on the total sum of P4,501,980.00 representing the first, second , and third quarters of 1980. Petitioner strictly maintained that on the basis of the authority granted by respondent, ( An n e .'X.� " B" .� Ex h � " B" .� p � :-:J _. CT A r e c :.=: � J i t had a resultant overpayment to the govern ment in t h e 511

DECISION CTA CASE NO. 3 4 69 - 7- amount of P4,501,980.00 for the first, second, and third quarters of 1980. It basically arose from the fact that 20/. subsidy retained by the Fertilizer and Pesticide Authority should be declared for taxation purposes in the year as it is received and not to be entered in the books in the year it is earned or the claim for subsidy is filed. A close scrutiny of the records will show that this claim of petitioner was never contested by respondent, furthermore, the records will show that e:�:aminer Conrado A. Agustin prepared a memorandum on November 30, 1985, addressed to the Commissioner of Internal Revenue, recommending that the said amount P4,492, 387.00 be refunded to, or a tax credit issued in favor of the herein petitioner. However, the said recommendation was not acted upon by respondent. Salient portion of the said memorandum (pp. 56-57~ BIR recs.J is hereby quoted below: ,_, ,,,, ',�,' It is the practice of the Fertilizer and Pesticide Authority to withhold twenty percent (20/.) of the fertilizer subsidy until the Commission on Audit have completed its audit of PPI books of accounts and have tendered its recommendation on the subsidy. Planters 512

DECISION CTA CASE NO. 3469 - 8- Products Inc. being on the accrual basis of accounting accrued in its book of twenty percent ( 20/.) subsidy retained by FPA. In 1ine with the above-men t.ioned situation PPI requests our office that it be allowed to declare as income the twenty percent (20/.) retention in the year it is received. Our off ice~ on April 3 ~ 1981 granted th e reque s t of PPI~ hence the request for ta >: credit dated January 7~ 1982 . It s hould be noted that only the fertili z er business is subsidized by FDA. Agr- icu 1 tura 1 chemic a 1 s presented in the financial statements as other products is not subsidized. \ The f inane ia 1 statement )' J of the compan for the year 1980 f disclosed a net loss of P15~496~225.00 on J the fertilizer business after considering fl the retention of P35~060~878.00 ( J) equivalent to 20/. of the subsidy while other products revea 1ed a net income of P13,940~754.00. The net loss of P15,496~225.00 on the fertilizer business and the net income of P13~940,754.00 taken together will reflect a net loss of P1~555~471.00. This factor is definitely the basis of the request for ta:-: credit in the amount of P4~501,980.00. This examiner see that the claim for ta:�: credit is the aftermath of a ruling that the ( 20/.) twenty per cent subsidy retained by the Fertilizer and Pesticide Authority should be declared for- taxation purposes in the year it is received and not to be accrued in the books in the year it is earned. The application of the subsidy is true not only to the fertilizer business but also to the non- subsidized products. Having in this view~ this examiner is 1eft no alternative save to recommend the approval of the tax credit in the amount of P4~492~388.00 presented as follows: 513

DECISION CTA CASE NO. 3469 - 9- Tr.Jt.al F'ayrT"Il?.nts: 5.::)().EK> P3~204~970.00 .12 � .1. ElO .1 ~ -:::.69 ~ 1.:58. 00 W/Ta>: - Rental Incare . . . . . . . . . . . . 3 !1 2~). (x) W/Ta>:-Int.er-est. . _________t+.~.!l.~+. ~ .~~~=~ Savings Deposit T 0 TAL P4~697 ~Z79.(X) Less: Income t.a:-: � -���-��-~-=.>:':1:.!1~!:?..~ .~=~=~ due pe.>r- r-etun1 ::::a?.oo P4 492 :::::o:o~::::::::::::::::!::::::::::::::::::- ��-"' Re�fundable To sustain petitioner-'s posi tioh that. it is entitled to r-e �fund and/crr taN cr-edit of P4~501.~980.00 is the ver-y actuation of r-espondent's counsel which per-haps would indicate that petitioner-'s action is legally tenable~ that even dur-ing the pendency of this case~ par-ticular-ly the hear-ing of December- 1.9~ 1986 (m.inutes hear.ing _. p.81 .� CTA recs.) wher-ein the qover-Tunent counsel has manifested that fa vo r� able r-ecommendation is now pending appr�nva 1 by the Commissioner- of Inter-nal Revenue. We ar-e fully convinced of the position of the pet.i t.ioner-� that .it should be en t.i t 1ed to r-�e �fund and/or- tax cr-edit for- the over-payment. of its cor�por-�at.r.~ inco me tax cover-�ing the fir-st~ sec:onc:l ~ and thir-d quar-t.er-�s of 1.980. Thus~ ta:-: cor--r-ect 1 y stated by pet..i. tioner� in par-agr-aph IX o �f its petition for- r-eview~ "as a na tur-�a 1 ccmsequence of such pet.i. t.i.oner� had n?.sul tan t 51 -j

DECISION CTA CASE NO. 3469 - 10 - overpayment to the respondent in the total sum of F'4 ~ 501 ~ 980.00 for its corporate income ta>:." Consequently~ since petitioner paid its corpor. ate incr.Jme ta>: under the old cash subsidy scheme then being implemented by the FF'A, up to the first, second, and third quarters of 1980~ instead of under the new cash subsidy scheme which took effect at about the last quarter of 1980~ wherein pet.i tioner� had obtained the au thor i ty a 11 owing it to dec 1are as income the twenty per cent ( 20/. ) retention in the year it is received which is from January 1~ .1980. The app 1 ica tion of the subsidy~ however~ is applied also to the non - subsidized products. It should be noted that only the fertilizer business of petitioner is subsidized by FF'A. Other products reflected in its financial statements like agricultural products are not subsidized. The financial statements of Planters Products Inc. showed a net loss of F'.15~496~225.00 on i t s fertilizer operation after taking into account the amount retained equivalent to twenty per cent (20/.) the subsidy in the sum of P35~000~878.00. However~ other products showed a net income of 513

DEC ISION CTA CASE NO. 3469 - 11 - P1 3 ~940~754.00 which taken together will refle c t a net loss of P1~555~471.00. This arrange ment i s the basis of petitioner for tax refund and/or tax credit in t h e amount of P4~501~980.00 (par. 4 .~ Exa miner � s re p ort, pp. 57 BIR re cs .). WHEREFORE, respondent Commissioner of Intern a l Revenue is hereby o rdered to refund to petitioner, Planters Products Inc., the sum of P4,492,387.00 representing its overpaid corporate income tax paid by it for the peri od from the first, second, and third quarters of 1980. Without pronouncement as to costs. SO ORDERED . Que z on City~ Metro Ma nila, December 15, 1 9 89. ~z. REV WE CONCUR: ,...____ C. ROAQUIN ,Judge 516

DECISION CTA CASE NO. 3469 - 12 - CERTIFI C ATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. AMANTE Presidi g Judge Court of Tax Appeals