PRHC PROPERTY MANAGERS, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* PRHC PROPERTY MANAGERS, INC., C.T.A. CASE NO. 7442 Petitioner, Members: -versus - ACOSTA, Chairperson BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. 0CT 23 2008 ; 2.'3o,...,_, X- - -------- -- ---- -- ---- - ---------- ----- --~ DECISION CASANOVA, J. : THE CASE This instant case seeks for the refund or issuance of a tax credit certificate in the total amount of P2,095,916.00 allegedly representing petitioner's unutilized creditable tax withheld for the taxable year 2003. THE FACTS Petitioner PRHC Property Managers, Inc. is a corporation duly organized and existing under and by virtue of the laws of the Philippines with principal offices and business address at E-2003B East Tower, PSE Centre, Exchange Road, Ortigas Center, Pasig City. 1 It is engaged in the business of managing, operating, administering, maintaining, servicing, buying, leasing or selling rea l and/or personal properties either for itself or other~ 1 Paragraph 2, Joint Stipulation of facts, Rollo, pp. 63-64. 2 Paragraph 3, Ibid, Rollo, p. 64.

DECISION C.T.A. CASE NO . 7442 On the other hand, respondent is the duly appointed Commissioner of Internal Revenue, vested by law in general to implement and enforce the provisions of the National Internal Revenue Code (NIRC) and other tax laws, and in particular, decide claims for refund of internal revenue taxes. 3 On April 15, 2004, petitioner filed with the Bureau of Internal Revenue (BIR) its Annual Income Tax Return (BIR Form 1702) for the taxable year 2003 reflecting a corporate income tax due of P462,095.00 and creditable tax withheld of P7,775,728.00, thereby resulting in an excess creditable tax withheld of P7,465,046.00.4 On May 17, 2004, petitioner filed with the Revenue District Office No. 43 Assistance Division of the Bureau of Internal Revenue its letter dated April 15, 2004, requesting for issuance of a tax credit certificate for the excess creditable tax withheld for the taxable year 2003 in the amount of P7,465,046.00.5 On September 5, 2005, petitioner filed an amended request for refund of its unutilized creditable taxes for the year 2003 in the amount of P2,095,916.00. This letter superseded petitioner's letter dated April 15, 2004.6 The Revenue District Office No. 43 has not acted on petitioner's request for refund of its unutilized creditable taxes withheld at source for the year 2003 before the expiration of the two (2) year period for the filing of a claim for tax credit or refund provided under Section 204 (C) of the NIRC, as amended.7 Due to the failure of respondent to act on petitioner's claim for tax refund on its unutilized creditable tax withheld in the amount of P2,095,916.00, petitioner filed the instant Petition for Review on April 12, 2006 pursuant to Section 204 (C) of the NIRC, as amended. Based on the Income Tax Return for the taxable year ending December 31, 2003, petitioner's taxable income for its operations amounted to P1,444,046.00 and its income tax due for the same period amounted to P462,095.00 which is equivalent to thirty-two percenpt - 3 Paragraph 1, Ibid., Rollo, p. 63. � Paragraph 4, Ibid., Rollo, p. 64. 5 Paragraph 5, Ibid. 6 Paragraph 6, Ibid. 7 Paragraph 7, Ibid, Rollo, pp. 64-65 .

DECISION C.T.A. CASE NO. 7442 (32%) of its gross income for the taxable year 2003. Furthermore, petitioner indicated therein that it will apply for a refund of its said unutilized creditable taxes withheld at source for the taxable year 2003 in the amount of P2,095,916.00.8 Respondent, in his Answer filed on May 16, 2006, interposed the following Special and Affirmative Defenses, to wit: " 3. Claims for refund are strictly construed against the taxpayer as the same partakes the nature of a tax exemption; 4. The taxpayer has the burden to show that the taxes were erroneously or illegally paid. Failure on the part of the [p]etitioner to prove the same is fatal to its cause of action; 5. The [p]etitioner must prove that the amount of creditable withholding tax being claimed as refund was not utilized; 6. The [p]etitioner should prove its legal basis for claiming the amount being refunded." To support its claim, petitioner presented documentary and testimonial evidence, while respondent waived his right to present evidence. On January 16, 2008, the case was submitted for decision taking into consideration the Memorandum of petitioner filed on December 6, 2007 sans respondent's memorandum. STATEMENT OF ISSUES As jointly stipulated by the parties, the issues the Court is tasked to resolve are: 1. Whether or not petitioner has unutilized creditable withholding taxes for the year 2003 in the amount of P2,095,916.00; 2. Whether or not the income upon which the taxes were withheld for the taxable year 2003 were included in the income tax return of petitioner for the year 2003; 3. Whether or not petitioner's overpaid creditable withholding tax in the amount of P2,095,916.00 is substantiated by documentary evidence; and 4. Whether or not petitioner is entitled to the issuance of a tax credit certificate representing its unutilized creditable withholding tax for the taxable year 2003~ 8 Paragra phs 9 and 10, Ibi d., Roll o, p. 65.

DECISION C.T.A. CASE NO. 7442 THE COURT'S RULING Section 76 of the National Internal Revenue Code (NIRC) of 1997 provides as follows: "SEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of the tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return maybe carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore ." Based on the afore-quoted provisions, a corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the option to carry-over the excess credit is exercised, the same shall be irrevocable for that taxable period. In exercising this option, petitioner, being a corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other (SYSTRA PHILIPPINES, INC. vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 176290, September 21, 2007). A scrutiny of petitioner's income tax return for the taxable year 2003 (Exhibit ':.4 ") shows that it had an income tax due at the regular rate of 32% in the amount o~

DECISION C.T.A. CASE NO. 7442 P462,095.00 which was partially offset against the unexpired excess of prior year's MCIT over Normal Income Tax Rate in the amount of P151,413.00. The remaining income tax due of P310,682.00 was charged against the prior year's excess credits in the amount of P5,679,812.00. Thus, the excess tax credits of P7,465,046.00 as of December 31, 2003 is composed of the balance of the prior year's excess credits of P5,369,130.00 and creditable taxes withheld for the four quarters of 2003 in the amount of P2,095,916.00, as shown below: Total Gross Income p 5,505,473.00 Less: Deductions 4.061.427.00 Taxable Income p 1.444.046.00 Income Tax Due (32%) p 462,095.00 Less: Unexpired Excess of Prior Year's MCIT 151.413.00 over Normal Income Tax Rate p 310,682.00 Income Tax Still Due Less: Tax Credits 5.679.81 2.00 p 5,369,130.00 Prior Year's Excess Credits Balance of Prior Year's Excess Credits 2,095.916.00 Add: Creditable Taxes Withheld - four qtrs of 2003 Excess Tax Credits p 1.465.046.00 The present claim covers only the excess creditable taxes withheld in 2003 in the amount of P2,095,916.00. Inasmuch as petitioner indicated its intention to have the excess amount of P2,095,916.00 refunded by marking the appropriate box in the return (Exhibit�~ - 4"), the same may be a proper subject of a claim for refund pursuant to Section 76 of the 1997 NIRC, as amended. Nonetheless, as cited by this Court in a number of similar cases, petitioner's entitlement to a claim of excess creditable withholding taxes is dependent on its compliance with the following requirements: I. That the claim for refund was filed within the two-year prescriptive period provided under Section 204(C) in relation to Section 229 of the NIRC of 1997; 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. 2-98, as amended; Citibank, N.A. vs. Court ofAppeals and CIR, 280 SCRA 459; ACCRA Investments Corporation vs. Court ofAppeals, 204 SCRA 957)~

DECISION C.T.A. CASE NO. 7442 A perusal of the records of the case reveals that petitioner have complied with the first requirement. The two-year prescriptive period for the filing of a claim for refund of excess income tax paid/withheld commences from the date of filing of the final adjustment return (ACCRA Investments Corporation vs. Court of Appeals, supra). The claimed excess creditable withholding taxes pertain to taxable year 2003 for which petitioner filed its income tax return on April 15, 2004 (Exhibit ':.4-5). Counting from this date, petitioner had until April 17, 2006 (April 15, 2006 being a Saturday) within which to file its claim both in the administrative and judicial levels. Clearly, petitioner's administrative claim filed originally with the BIR on May 17, 2004 (Exhibit ''J-1 ") and the Petition for Review filed before this Court on April 12, 2006, fall within the two-year prescriptive period . Anent the second requisite, petitioner in order to prove the fact of withholding of its claimed creditable withholding taxes for taxable year 2003 in the amount of P2,095,916.00, presented Certificates of Creditable Tax Withheld at Source (Exhibits "8-2" to ''8-23'; ''D-1 " to ''D-18'; ''F-2" to " F-24" and ''H-2" to ''H-21 j issued by its various clients. However, not all of the certificates of creditable withholding taxes fall within the period of claim. The amount of P29,076.14 pertain to the taxable year 2002, which is outside the period of claim, hence, must be denied by the Court: Exhibit Period Covered Withholdinq Aqent/Pavor Income Income Tax Pavment Withheld D-8 07/0 1/02 to 09/30/02 Leeleng Realty , Inc. p 19,500.00 p 975.00 D-15 10/01/02 to 12/31/02 PSEI 19,547.50 390 .95 H-7 04/30/02 to 06/30/02 Cityland Wack Wack Royal 304,8 12 .0 0 27 710.19 p 29,076.14 Also, the certificate marked as Exhibit D-18 reflecting creditable withholding taxes of P25,263.35, whose original was not presented before the Court for comparison shall be disallowed because petitioner failed to establish its authenticity@-

DECISION C.T.A. CASE NO. 7442 Thus, out of the claimed creditable withholding taxes of P2,095,916.00, only the amount of P2,090,931.75 is supported by valid withholding tax certificates, detailed as follows : Exhibit Period Covered Withholding Agent/Pavor Income Income Tax Pavment Withheld F-17 Amounts Paid to Certain Brokers & Agents p 149,090.90 p 14,909.08 F-2 04/01/03 to 06/30/03 PBCom 17,409.10 1,740.91 F-20 04/01/03 to 06/30/03 A Brown Company, Inc. H-10 04/01/03 to 06/30/03 PRHC 116,764.05 11,676.41 H-4 07/01/03 to 09/30/03 Golden Maple Holdings 70,500 .00 7,050.00 B-7 07/01/03 to 09/30/03 Benter Management 15,000.00 B-8 11/01/03 to 11/30/03 Gilmore Townhomes Condo. 31,492 .50 750 .00 B-17 10/1/03 to 12/31/03 Hartsdale Dev't. Corp. 60,915 .00 3, 149.25 B-18 10/1/03 to 12/31/03 Phi lippine Bank of Com. 4,545.44 6,091.50 10/1/03 to 12/31/03 Ph ilippine Heart Assoc., Inc. 68 000.00 sub-total p 533 716.99 454 .54 6,800.00 p 52 621.69 Income Payments to Prime Contractors/ Sub-contractors D-12 01/01/03 to 03/31/03 Osong Development Ent. p 10,500.00 p 1,050.00 137,340.38 2,746.81 D-14 01/01/03 to 03/31/03 PSEI 2,700.00 54 .00 140,522 .19 2,810.43 F-21 04/01/03 to 06/30/03 PRHC 13,636.36 272.73 11,997.75 240.15 F-22 04/01/03 to 06/30/03 PSEI 4,496 .27 89.55 87,000.00 1,581.81 F-6 6/24/2003 Bank of Phil Isalnds 142 513 .11 2 850.27 F-10 01/01/03 to 03/31/03 Greenhills Properties p 550,706.06 p 11695.75 F-11 04/01/03 to 06/30/03 Greenhills Properties B-14 10/1/03 to 12/31/03 One Wilson Place Condo. B-20 10/1/03 to 12/31/03 PSEI sub-total F-10 Professional/Management Fees p 219,615 .00 p 21,961.50 F-11 01/01/03 to 03/31/03 Greenhills Properties 219,615.00 21,961.50 F-15 04/01/03 to 06/30/03 Greenhills Properties 209,187.24 20,918.72 H-12 04/01/03 to 06/30/03 ODC International 219,615.00 21,961.50 H-16 07/01/03 to 09/30/03 Greenhi lls Properties 201,610 .72 20,161.07 H-18 07/01/03 to 09/30/03 ODC International 7,000 .00 700 .00 B-19 07/01/03 to 09/30/03 Osong Development Ent. 78,672.00 7,867 .20 D-1 10/1/03 to 12/31/03 PRHC 105,054.45 10,505.46 D-10 01/01/03 to 03/31/03 Avalon Condominium Corp. 96,240.36 9,624 .03 D-11 01/01/03 to 03/31/03 Nobel Plaza Condo. Corp. 105,609.69 10,560.97 D-13 01/01/03 to 03/31/03 ODC International 61,636 .35 6,163.65 D-16 01/01/03 to 03/31/03 Pearl Plaza, Inc. 600,000 .00 60, 000 .00 D-17 01/01/03 to 03/31/03 PSEC Condo. Corp. 374,890 .92 37,489 .08 D-2 01/01/03 to 03/31/03 The Makati Tuscany 491 , 257 .00 49, 125 .70 D-4 01/01/03 to 03/31/03 SA-Lepanto Condo Corp. 9,982 .50 998 .25 D-5 01/01/03 to 03/31/03 Casa Miguel Condo. Corp. 277,101.81 27,710.19 D-7 01/01/03 to 03/01/03 Cityland Wack Wack Royal 78,045.00 7,095 .00 D-9 01/01/03 to 03/31/03 Gilmore Townhomes Condo. 340,949.49 34,094.94 F-10 01/01/03 to 03/31/03 LTA Condo. Corp. 35,072.00 3,061.70 F-11 01/01/03 to 03/31/03 Greenhills Properties 39,000.00 3,900.00 F-12 04/01/03 to 06/30/03 Greenhi lls Properties 478,358.60 47,835 .87 04/01/03 to 06/30/03 IEB Premium Properties Corp.

DECISION C.T.A. CASE NO. 7442 F-13 04/01/03 to 06/30/03 LTA Condo. Corp. 340,949.49 34,094 .94 F-14 04/01/03 to 06/30/03 Nobel Plaza Condo. Corp. 102,656.40 10,265.63 F-16 04/01/03 to 06/30/03 Osong Development Ent. 10,500.00 1,050.00 F-18 04/01/03 to 06/30/03 Pearl Plaza, Inc. 64,718 . 19 6,471.81 F-19 04/01/03 to 06/30/03 PRHC 141,900.00 14,190.00 F-23 04/01/03 to 06/30/03 PSEC Condo. Corp. 3,509,090.88 350,909.12 F-24 04/01/03 to 06/30/03 The Makati Tuscany 374,890.92 37,489.08 F-3 04/01/03 to 06/30/03 Avalon Condominium Corp. 105,054.45 10,505.46 F-4 04/01/03 to 06/30/03 BA-Lepanto Condo Corp. 530, 084 .50 53,008.45 F-5 04/01/03 to 06/30/03 Casa Miguel Condo. Corp. 10,648.00 1,064.81 F-7 04/01/03 to 06/30/03 Cityland Wack Wack Royal 290,956.92 29,095.68 F-9 04/31/03 to 06/30/03 Gilmore Townhomes Condo. 78,045.00 7,095 .00 H-11 07/01/03 to 09/30/03 Gi lmore Townhomes Condo. 81,947.25 7,449.75 H-13 07/01/03 to 09/30/03 IEB Premium Properties Corp. 506,244 .23 50,624.42 H-14 07/01/03 to 09/30/03 LTA Condo. Corp. 340,949.49 34,094.94 H-15 07/01/03 to 09/30/03 Nobel Plaza Condo. Corp. 101,052.39 10,105 .23 H-19 07/01/03 to 09/30/03 Pearl Plaza, Inc. 64,718.19 6,471.81 H-2 07/01/03 to 09/30/03 Avalon Condominium Corp. 104,705.47 10,855.76 H-20 07/01/03 to 09/30/03 PRHC 79,353 .70 7,935.37 H-21 07/01/03 to 09/30/03 PSEI 2,781,818 .16 278,181.84 H-3 07/01/03 to 09/30/03 BA-Lepanto Condo Corp. 476,673 .00 47,667 .30 H-5 07/01/03 to 09/30/03 Casa Miguel Condo. Corp. 10,980.75 1,098.09 H-9 07/01/03 to 09/30/03 The Makati Tuscany 374,890 .92 37,489 .08 B-10 10/1/03 to 12/31/03 LTA Condo. Corp. 340,949.49 34,094.94 B-11 07/31/03 to 09/30/03 Meltip Realty Corp. 33,500.00 3,350 .00 B-12 10/1/03 to 12/31/03 Nobel Plaza Condo. Corp. 101,052 .39 10,105 .23 B-13 10/1/03 to 12/31/03 ODC International 165,981.77 16,598.19 B-15 10/1/03 to 12/31/03 Osong Development Ent. 10,500.00 1,050.00 B-16 10/1/03 to 12/31/03 Pearl Plaza, Inc. 64,718 .19 6,471.81 B-2 10/1/03 to 12/31/03 Avalon Condominium Corp. 108,556.27 10,855.64 B-21 10/1/03 to 12/31/03 PSEC Condo. Corp. 1,690,909 .08 169,090.92 B-22 10/1/03 to 12/31/03 The Makati Tuscany 387,387 .28 38,738.72 B-3 10/1/03 to 12/31/03 BA-Lepanto Condo Corp. 449,908.40 44,990 .84 B-6 10/31/03 to 12/31/03 Gilmore Townhomes Condo. 81,947 .2 5 7,449 .75 B-7 10/1/03 to 12/31/03 Greenhills Properties 219,615.00 21,961.50 B-9 10/1/03 to 12/31/03 IEB Premium Properties Corp. 465,191.74 46 519 .17 sub- total P18 851 558.29 p 1882 186.61 Rentals - Real Property D-6 01/01/03 to 03/31/03 Epsys Inc. p 431,181.84 p 21,559.08 F-8 04/01/03 to 06/30/03 Epsys Inc. 431,181.84 21,559 .08 H-6 07/01/03 to 09/30/03 Cityland Wack Wack Royal 320,052.60 29,095.68 H-8 07/01/03 to 09/30/03 Epsys Inc. 431,181.84 21,559 .09 B-4 10/1/03 to 12/31/03 Cityland Wack Wack Royal 320,052.60 29,095 .68 B-5 10/1/03 to 12/31/03 Epsys Inc. 431 181.84 21 559.09 sub- total p 2,364 832.56 p 144,427.70 Total P22 300 813.90 p 2 090 931.75 Anent the third requisite, petitioner, in its 2003 income tax return (Exhibit ':.4 -6'), reflected the following amounts of sales of services and non-operating/ other i ncome~

DECISION C.T.A. CASE NO. 7442 Sale of Services Gross Income Non-Operating & Other Income Per ITR Rental p 19,761 ,447.00 Gain on Sale of Assets Others p 1,796,591.00 Total 561 ,082.00 136,492.00 p 2,494, 165 .00 The certificates show that the creditable withholding taxes of P2,090,931.75 were withheld on income payments in the total amount of P22,300,813.90, broken down as follows: Per Certificates Income Income Tax Payments Withheld Sale of Services p 533,716.99 p 52,621.69 550,706.06 11, 695 .75 Amounts Paid to Certain Brokers & Agents Income Payments to Prime Contractors/ Sub-Contractors 18 851 558.29 1 882 186.61 Professional/Management Fees P19 935 981.34 P1 946,504.05 sub-total Rentals - Real Property p 2,364 832.56 p 144 427.70 sub-total p 2 364 832.56 p 144 427.70 Total P22 300 813.90 P2 090,931.75 Apparently, petitioner's revenues from sales of services in the amount of P19,761 ,447.00 as reflected in its 2003 income tax return is lower by P174,534.34 than the amount of P19,935,981.34 stated in the certificates of withhold ing tax. Also since petitioner failed to explain the amount of discrepancy in its sales of services in the amount of P174,534.34, the corresponding withholding taxes in the amount of P17,041.14 shall be disallowed from its claim, computed as follows : Gross income from sales of services per certificates p 533,716.95 Amou nts paid to certain brokers & agents 550 ,70 6.0 6 Income payments to prime Cont ractors/ sub-contractors Professional/Management fees 18 851 558.29 Total P19,935,981.34 Less: Gross income from sa les of services per ITR 19,761,447.00 Discrepancy in gross income from sales of services p 174 534.34 Percentage of discrepancy to tota l income per certificates 0. 875474% Multiply by: Creditable taxes withheld per certificates p 52,621.69 Amounts paid to certain brokers & agents Income payments to prime Contractors/sub-contractors 11,695. 75 Professional/Management fees Disallowed creditable withholding taxes 1 882 186.61 1,946 504.05 p 17 041.14

DECI SIO N C.T.A. CASE NO. 7442 Likewise, the rental income of P1,796,591.00 declared per petitioner's 2003 income tax return is lower by P568,241.56 when compared with the rental income of P2,364,832.56 shown per certificates. For petitioner's failure to prove that it declared the rental income of P568,241.56, the related creditable withholding taxes of P28,412.08 shall be denied, computed as follows : Rental income per certificates p 2,364,832.56 1 796 591.00 Less : Rental income per income tax return p 568,241.56 Discrepancy in rental income 0.05 Multiply by 5% withhold ing tax rate p 28,412.08 Disallowed creditable withholding taxes In sum, petitioner complied with the third requisite but only to the extent of P2,045,478.53, out of the total claimed creditable withholding taxes of P2,090,931.75 which has valid certificates, computed as follows : Claimed creditable taxes withheld with valid certificates p 2,090,931.75 17,041.14 Less: a. Creditable taxes withheld pertaining to the discrepancy in 28 412.08 Sales of services per income tax return and per certificates p 2 045,478.53 b. Creditable taxes withheld pertaining to the discrepancy in Rental income per income tax return and per certificates Claimed creditable taxes withheld pertaining to petitioner's declared income per income tax return Therefore, petitioner have sufficiently established its entitlement for a refund of its unutilized creditable taxes withheld for taxable year 2003 but in the reduced amount of P2, 045,478 .53 . WHEREFORE, in light of the foregoing, the instant petition is PARTIALLY GRANTED. Respondent is ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the amount of P2,045,478.53 representing its unutilized creditable withholding tax for the taxable period 2003. SO ORDERED. ~ CAESAR A. CASANOVA Associate Justice

DECISION C.T.A. CASE NO. 7442 WE CONCUR: Q~N~ES~TO -~ D. ACOSTA Presiding Justice (On Leave) LOVELL R. BAUTISTA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~ LA- 0~ ERNESTO D. ACOSTA Presiding Justice Chairman, First Division