UPSI MANAGEMENT, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION UPSI MANAGEMENT, INC., CTA CASE No. 7762 Petitioner, Members: - versus- Acosta, PJ, Uy, and Pabon-Victorino, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION ACOSTA, PJ: This is a claim for refund through the issuance of tax credit certificate allegedly due to excess or unutilized creditable withholding tax in the total amount ofP1 ,912,195 .00 for the taxable year 2005. The records of the case disclose that petitioner is a corporation duly incorporated and existing under Philippine laws, with business address at 1122 fj9 3

DECISION CTA CASE NO .. 7762 .. Page 2 of24 General Luna Street, Paco, Manila. Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue with office address at the Fifth Floor, BIR National Office Building, BIR Road, Diliman, Quezon City, where he may be served with summons and other legal processes.' On April 17, 2006, petitioner filed its annual income tax return for the year ended December 31, 2005 with the Revenue District No. 34 of the Revenue Region No.6 of the Bureau of Internal Revenue (BIR), declaring, among others, the fo ll owing: 2 Sal es/Reven ue s/Rece ipts/F ees p 18,741 ,488.00 Less: Cost of Sales/Services 14,325,299.00 Gross Income from Operation 4,416,189.00 Add: Non-Operating & Other Income · 466.00 Total Gross Income 4,416,655.00 Less: Deductions 4,524,900.00 Taxable Income ( 108,245.00) Minimum Co rporate Income Tax 88 ,333.00 Income Tax Due 88,333.00 Less: Tax Credits/Payments Prior Year's Excess Credits 4,570,705.00 Creditable Tax Withheld for the First Three Quarters 1,664,028.00 Creditab le Tax Withheld for the Fourth Quarter 248,167.00 Total Tax Credits/Payments 6,482,899.00 Tax Overpayment (6,394,566.00) 1 Paragraphs I and 2, Joint Stipulation of Facts, page 298, Rollo. 2 Paragraph 3, Join1 Stipulation of Facts, page 299, Rollo and Exhibit A. 593 .......

DECISION CTA CASE NO. 7762 Page 3 of24 Moreover, petitioner indicated in the corresponding box of the said return its intention to be issued a tax credit certificate (TCC) by marking the appropriate box thereon. 3 On 7 March 2008 , within the period prescribed by law, petitioner filed a claim for the issuance of a tax credit certificate in the total amount of Pl,912,195.00 representing unutilized creditable income taxes for the taxable year 2005 pursuant to Section 204(C ) and 229 of the National Internal Revenue Code (NIRC). 4 While its claims for refund is still pending administrative investigation, petitioner filed on April 14, 2008 the instant Petition for Review pursuant to Section 229 of theN ational Internal Revenue Code. 5 In his Answer filed on May 27, 2008, respondent prayed that the petition be dismissed w ith cost. He likewise raised the fo llowing Special and Affirmative Defenses, 6 viz: 1. Petitioner's claim for refund IS sti ll pending ad mini strative investigat ion; 2. Petitioner has the burden of proof to show that it is entitl ed to the refund of the amo unts claimed as refundable because taxes are presumed to have been co ll ected in accordance with laws and regulations (Caltex Phils. Inc. vs. Commissioner of Internal Revenue, CTA Case No . 2871, January 29, 1986). 3 Paragraph 9. Joint Stipulation of Facts, page 299, Rollo. 4 Paragraph 4, Join t Stipulation of Facts, page 2, Rollo; and Ex hibit C. 5 Paragraphs 14 and 17, .Joint Stipulation of Facts, page 3, Rollo. 6 Pages 274-277, Rollo. 600 -&.· : ; ~ - ' . '· : · .•

DECISION CT A CASE NO. 7762 Page 4 of24 3. C laim s for refund are to be co nstrued stri ctly aga in st the petiti oner, the same be ing in the nature of an exemption form (s ic) taxation. Fai lure on the part of the petitioner to prove the same is fatal to its c laim for tax refund (Meralco Electric Co. vs. Commissioner of Internal Revenue, 67 SCRA 35 1; Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95). 4. Petiti one r mu st prove that th e a lleged refundable taxes were neith er automatically app li ed as tax credit against its tax liability for the succeeding quarters of the succeed in g year nor included as creditable taxes declared or applied to the succeeding taxabl e years. 5. U nde r Section 76 of the 1997 Tax Code, petiti oner's excess creditab le tax withhe ld for taxable year 2005 may e ither be refunded , claimed as tax credit or carried over/applied to the succeedin g taxable years as could be explicitl y g leaned out from the petiti one r's annual income tax return (Annex " A") . However, once an option has been made, the same becomes irrevocable for that taxable period and no application for cash refund a nd/or tax cred it certificate shall be all owed therefore. 6. In the case at bar, petitioner opted to claim as tax credit the amount of Pl ,9 12, 195 onl y, but the said a mount represents the mere unutili zed creditabl e tax with held for taxab le year 2005 , which amount excludes the petiti oner ' s prior excess tax c redits. Und oubtedl y, petitioner has violated Secti on 76 of the 1997 Tax Code for claiming only partia l tax credit certificate option w hil e automatically carry ing-over the remamm g overpayme nt of tax spec ified in item 3 1 of the ITR. Said petiti oner' s practice of splitting c laims would not only confuse the respondent of petiti oner's c laim bu t it is likewise hi ghl y irregular, improper and e rroneous. 7. While the petitioner's act of carry in g-over is a ll owed und er the Tax Code, the fact of partial carry-over creates se ri ous co nfli ct where respondent would be in a state of quandary in determining whether or not he wo uld a ll ow petiti oner' s claim for refund and/or tax credit on one hand and the automati c carryi ng-over on the other. Respondent maintains that the petitioner could not cla im an opti on of carry-over and refund and/or tax cred it at the same time ; that is, partl y as tax refund/tax cred it certificate and partly as automatic carryi ng over of excess tax credits. Such petiti oner's splittin g of options is c learly vio lat ive of Section 76 of the 1997 Tax Code; 8. Mo reover, the existe nce of an excess cred ita ble withh o ldin g taxes alo ne does not per se e ntitle petitioner to a refund . The petitioner mu st prove that, (1) its cla im for refu nd is filed with the respondent within the two (2) year period from the date of payment ofthe tax required und er Section 204 of th e 1997 Tax Code; (2) it mu st be shown on petitioner's return that the income payment received was dec lared as part of its gross inco me; and (3) th e fact of withholding is_ establi shed by cop ies of statement duly iss ued by petitioner's payo rs show ing the amo un t paid and the amount of taxe s withhe ld (Citytrust Finance Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4134, Nove mber 11, 1991 ; Paseo Realty & Development fa_ co: .. -··~ ..· .,.• ....... ·.-..... ... ....... -: ·. .. . . . ' , ~- - ,

DECISIO N CT A CASE NO . 7762 Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4254, August 10, 1993). After trial, this case was submitted for decision on January 20, 201 0 taking into consideration respondent 's memorandum fil ed on November 23 , 2009 and petitioner ' s memorandum fi led on November 25 , 2009, including petitioner's comment to respondent's memorandum fi led on December 17, The issues to be tried or resolved by this Court are j ointly stipulated by the parties, viz: 1. W hether or not the fact of w ithholdin g is establi shed by a copy of a statement dul y iss ued by th e payors (w ithh o ld ing agents) to petitioner, show ing th e amount pa id and th e amount of tax w ithhe ld therefrom . 2. Wheth er or not the excess credi tab le w ithh olding tax of P 1,912 , 195 .00 for taxabl e year 2005 sought to be refund ed were actuall y w ithheld a nd re mitted by peti tioner' s w ithholdin g agents to the Bureau of Interna l Reve nue in accord ance w ith the provi sions of the Tax Code. 3. W heth er or not petitioner's inco me tax return s for taxab le year 2005 include income payments, that were subjected to creditable withh o lding tax, as part of petit ioner' s gross income for taxab le year 2005 . 4. W hether or not petitioner' s cla im for refu nd/ issuance of tax credit certificate of P l,9 12, 195.00 for taxabl e year 2005 instead of P6,394,566.00 is deemed a waiver of the remai ning amount ofP4,570,705.00. 4 . I W heth er or not petitioner cou ld validly have a du al option und er Item 31 of its 2005 ITR, by partly c lai min g a tax refund /iss uance of tax credit certificate of P1 ,912, 195 .00 for excess w ithho ld ing tax c redits ari sing from taxab le year 2005 and partly a utomat ically carry ing-over its prior years' tax c red it. 7 Page 1240, Vo l.li , Rollo. 602 .. , ..· .I . .;. . •'

DECISION CTA CASE NO. 7762 Page 6 of24 4. 2 Wh eth er or not petitiOn er co uld va lidl y carry-ove r th e am o unt of P2,3 31 , 102 .00 in its 2006 ITR with o ut vi o latin g Secti o n 76 of the 1997 Tax Code. The crux of the aforequoted jointly stipulated issues is the determination of whether or not petitioner is entitled for refund of its alleged excess or unutilized creditable withholding tax in the amount of P1 ,91 2,195 .00 for the taxable year 2005 . The following are the basic requirements8 before a refund or issuance of tax credit certificate of excess creditable withholding taxes may be granted, viz : I. T he c la im fo r refund mu st be fil ed within th e two-year presc ripti ve peri od prov ided under Secti on 204(C) in re lati o n to Section 229 of the N IRC of 1997, as amend ed; 2. T he fact of w ithho lding is establi shed by a copy of a statement issued by the payo r (withho lding agent) to th e payee, showin g th e a mount paid and th e amount of tax w ithheld th erefrom ; and 3. The in come upon w hi ch the taxes we re w ithhe ld were in c lud ed in th e return of th e rec ip ient. Equally important, aside from the above-quoted requirements, IS that petitioner must prove that it did not carry-over its excess creditable withholding taxes to the succeeding taxable year. 9 Thi s additi onal requirement is an offshoot of th e "irrevocable rul e" introduced in the last sentence of Section 76 8 C ilibank N .A. vs . Court o f Appeals and Co mm issioner of Internal Reve nu e, 280 SCRA 45 9 a nd Section 2.58.3 (8 ) of Reven ue Regu lati o ns N o. 2-98 cited in Golden Arches Realty Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7201, May 17, 200 7. 9 Go lden Arches Realty Co rpora ti o n vs. Comm iss ioner of Intern a l Revenue, CTA (Firs t Di vision) Case No. 72 0 1. May 17, 2007. 6 0J ,. . ... ... .,.. .- ..... . ~ :_ ... _. , . .... ,., .. . " )

DECIS IO N CTA CASE NO. 7762 ,, Page 7 of24 of the 1997 National Internal Revenue Code (NIRC) . The said provis ions of the NIRC provide: " Secti on 76 . F inal Adjustment Return.- Every corporati on liabl e to tax und er Secti on 27 sha ll fi le a fin a l adju stm ent return covering th e total taxabl e income for the preceding calendar or fi scal year. lf the sum of th e qu arterl y tax payments made du ring th e sai d taxable year is not equa l to the total tax du e on th e entire taxabl e income of that year, the corporation sha ll eithe r: (A) Pay th e balance of tax still due; or (B) Carry ove r th e excess credit; or (C) Be c redited or refund ed with th e excess amoun t paid, as th e case may be. In case the corporati on is entitled to a tax credit or refund of th e excess estimated qu arterl y income taxes paid, the excess amount shown on its fin a l adju stm ent return may be carri ed over and credited aga inst th e estimated qu arterl y inco me tax lia biliti es fo r th e taxable quarters of the succeed ing taxa ble 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 therefor." (Emph ases suppli ed) In the case of Systra Philippines, Inc. vs. Commissioner of Internal Revenue, 10 the Supreme Court held that the legislative intent to make the option irrevocable becomes clearer when Section 76 is viewed in comparison to 11 Secti on 69 of the (o ld) 1977 Tax Code. Accordingly, und er Section 69 of the 10 G .R. No. 176290, September 21 , 2007 Resoluti on. 11 Section 69. Final Adjustment Return. - Every corporatio n liab le to tax under Secti on 24 shall fil e a fin al adjustm ent return covering th e tota l net income for th e preceding calendar or fi sca l year. If the sum of th e qu a rte rl y tax payments made durin g the said taxab le year is not equ al to th e total tax du e on th e entire taxab le net income of th at year the corporation shall either: (A) Pay th e excess tax sti ll du e; o r (B) Be refund ed th e excess amo un t paid, as th e case may be. In case th e co rporati on is entitled to a tax credi t or refun d of th e excess estim ated quarte rl y inco me taxes paid, th e re fundable amoun t shown o n its fin al adjustm en t return may be credited aga inst th e estimated quarterly income tax li a biliti es fo r the taxab le qu arters of th e succeeding taxab le yea r. . - .... -~

DECISION CTA CASE N O. 7762 1977 Tax Code, there was no irrevocability rule. Instead of claiming a refund, the excess tax credits could be "credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year," that is, the immediately following y ear only. In contrast, Section 76 of the present Tax Code formulates an irrevocability rule which stresses and fortifies the nature of the remedies or options as alternative, not cumulative. It also provides that the excess tax credits "may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years" until fully utilized. After having mentioned the four requirements for the entitlement of refund of excess or unutilized creditable withholding tax, we are now going to determine petitioner's compliance therewith. Section 204(C) 12 of the 1997 National Internal Revenue Code (NIRC) in relation to Section 229 13 of the same Code provide that the claim for refund both 12 Sec . 204. Authority of the Commissioner to compromise, abate and refi.mdlcredit taxes. - T he Commi ssioner may - (C) Credi t or refun d taxes e rroneou sly or ill ega ll y received or pe nalties imposed without a uth ority, re fun d th e valu e of intern al revenu e stamps when th ey are return ed in good co nditio n by th e purchase r, and, in hi s di screti o n, redee m o r c ha nge unu sed stamps that have bee n re ndered unfit for use and refund th e ir valu e upo n proof of destru cti on. No credi t or refun d of taxes or penalti es sha ll be a ll owed unl ess the taxpayer fil es in writin g wi th th e Commi ss ione r a c laim fo r tax credit or refun d w ithin two (2) years after th e payment of the ta x or penalty : Provided, however, T hat a return fil ed show in g an overpay ment sha ll be co nsidered as a wri tten cla im fo r refun d. " 13 Sec. 229. Recovery of Tax Erroneously or Illegally Collected - No suit or proceed ing sha ll be ma in ta in ed in any court for th e recovery of any nati ona l inte rn al revenu e tax hereafter a lleged to have been erro neo us ly or il lega ll y assessed or co ll ec ted, or a ny pe na lty c la im ed to have been coll ected witho ut a uth ority, or of an y sum a ll eged to have been excess ive ly or in any ma nn er wro ngfully co ll ected, until a c la im for re fund or cred it has 1~ 60 5 .· -r ·.

DECISION CT A CASE N O . 7762 in the administrative and judicial levels must be filed within two (2) years from the date of payment of the tax. For the filing of a claim for refund or tax credit certificate of excess creditable withholding tax, it is already settled that the reckoning point of the two-year prescriptive period is from the date of filing of the annual income tax return 14 because it is only from this time that the refund is ascertained. 15 Applying the said provisions of Jaw and jurisprudence in the case at hand would show that petitioner' s claim with the BIRon March 7, 2008 and its Petition for Review before this Court on April 14, 2008 , were both filed within the two (2) year prescriptive period reckoned from April 17, 2006 , the date the 2005 Annual Income Tax Return was fil ed. Therefore, petitioner has complied with the first requirement. In order to prove compliance of the second requirement concerning the fact of withholding of creditable taxes by the withholding agents on income subject to withholding tax, petitioner offered the following evidence, namely: Certificates of Creditable Tax Withheld at Source issued by various withholding been dul y fi led w ith th e Commi ssioner; bu t such sui t or proceedin g may be mainta ined, w hether or not such tax. penalty, or sum has been pai d un der protest or duress. In any case, no such suit or proceed ing sha ll be fil ed afte r th e exp iration of two (2) yea rs from the date of pay ment of the tax or pena lty regard less of any supervening cause th at may ar ise afte r payment: Provided, however, th at th e Commi ss io ner, may eve n w ithout a wr itten claim therefor, refund or credit any tax, w here on th e face of the return upon w hi ch pay ment was made, such payment appears c learly to have been erro neo usly paid. 14 ACCRA Investment Co rporation vs . Court of A ppeals, 204 SCRA 957; Commi ss io ner of In terna l Revenue vs . TMX Sales, Inc., 205 SCRA 184; and T he Commi ssio ner of In tern al Reve nu e vs. Asia A ustrali a Express. Ltd. , rep rese nte d by Sovia mont Stea mshi p Agenc ies, Inc. and th e Court of Tax Appea ls, GR No. 85956. April 10, 1989. 15 Commi ss ioner of Intern a l Reve nu e vs . T he A meri can Life Insurance Co. , 244 SCRA 446. . -,._~.:-:.or........, ' ,~ ;. . . . ··. ...-~.:: ~ ·1 .. ; , •..... '!.!..· • '.- ~ -.: ,. .,. . -,, '~. •.·

DECISION CTA CASE NO. 7762 Page 10 of24 agents ; Annual Information Return of Creditable Income Taxes Withheld; A lpha List of Payees Subject to Expanded Withholding Tax; and Summary of 16 Monthly Remittance of Expanded Tax Withheld at Source. Careful examination of the aforesaid documentary evidence, particularly, the Certificates of Creditable Tax Withheld at Source issued by various withholding agents of the petitioner reveals that the aggregate amount of Pl ,912,795.16 tax was withheld from petitioner as shown in the table below, viz: Ex hibit Pa yor Amo un t of Income Tax Wit hh eld F; F-l :F-1-a Emilio Aguinaldo Education al Corporation 4,230.50 423 08 F-2 ; F-2-a Emilio Aguinaldo Educational Corporation 41 ,945. 17 4, 194.53 F-3 ; F-3 -a Emilio Aguinaldo Educational Corporation 120,027 .0 1 12,002 .71 F-4 ; F-4 -a Emilio Aguinaldo Educational Corporati on 125 ,204 . 17 12,520.44 G; G-l , G-1-a Hospital Management Services, Inc. 378,057 .54 37,805 .76 G-2 ; G-2-a Hospital Management Services, Inc. 594,858.29 59,485 .83 G-3; G-3-a Hos pital Management Services, Inc. 378 ,057.54 37,805.75 G-4 ; G-4-a Hospital Manageme nt Services, Inc. I ,098,756 .55 I 09,875.66 G-5; G-5-a Ho spital Management Services, In c. 797,23 1.62 79,723.16 H; H-1 , 1-1 -1-a House of Knowledge, Inc 11 3,534.32 II ,353.44 H-2 ; H-2-a House of Knowl edge, Inc 75 ,429.38 7,542 .94 UPS I Mgt. In c. (Note: immaculate Conc:epnon Academy, Inc. 1.\· the payor per Annual Uem111ance Return) 63 ,589.90 6,358 .99 Lope De Vega Tower Co ndominium .1 ; J-1 ; .1-1-a; LLL-2 Assoc iation, Inc. 62 ,532.37 6.253.24 Lope De Vega Tower Co nd ominium .1-2 ; .1-2-a Assoc iat ion, Inc. 70,948.42 7,094.84 K; K -1 , K-1-a ; LLL-1 Rural Bank ofDasmarinas, Inc 4,628.38 462.84 K-2 ; K-2-a Rural Bank of Dasmarinas, In c 9,256.76 925.68 K-3 ; K-3-a Rural Bank of Dasmarinas, Inc 19,897.74 1,989 .77 K-4 ; K-4 -a Rural Bank of Dasmarin as , In c 16,783.32 1,678.33 L; L- 1; L-1-a; KKK-I Pearl of th e Orient Seas Hotel , Resons & Recrearions. In c. 340, 120.24 34 ,0 12 .04 16 Exhi bits F, F-1 , F-2 , F-3 , F-4, G, G-1 , G-2, G -3, G -4, G -5 , H, H-1 , 1-1-2, I, J, .J-1 , K , K -1 , K-2 , K -3 , K -4 , L, L- 1, L-2. L-3 , L-4 , M , M- 1, M-2. M-3, N, N -1 , 0-1,0-2,0-3 , 0 -4 , P , P-1 , III-I , 111-2, 111-3, .IJJ , KKK -I , KKK-2 , KKK-3, KKK-4, LLL-1 , LLL-2 , MMM , Q, R, S. T, U, V, W , X , Y, Z, AA, BB , CC. DO, EE, FF, GG, 1-lH , II , .J.J , KK, LL, MM , NN, a nd 00. ' >,: • _-. ·.".;

DECISION CTA CA SE NO. 7762 Page I I of24 L-2 ; L-2-a; KKK -2 Pearl o f th e Orie nt Seas Hotel, Reso t1S & Recreati ons, Inc . 520,666.95 52 ,066.70 L-3; L-3-a KKK- 3 Pearl of th e Orient Seas Hot el, Reso t1 S & Recrea tion s, In c. 7 15,893. 19 7 1,589.32 L-4 ; L-4-a KKK-4 Pearl o f th e Ori ent Seas Ho tel, Re so rts & Recre ation s, In c. 729,659 .93 72,966 .00 M; M-1 ; M-1-a ; III-I UPS! Property Holdings, Inc. 3,200,000 .00 320,000 .00 M-2 ; M-2-a; 111-2 UPSI Property Holdings, In c. 3,200,000 .00 320,000.00 M-3 ; M-3-a: 111-3 UPS! Property Holdings, Inc. 3,200,000 .00 320 ,000.00 N; N-1 ; N-1-a .1.1.1 Emilio Ag uin aldo Educational Corporation 127, 179.00 12,717 .90 0 -1 ; 0 -1-a Yaman Lahi Foundation, Inc . 412,272.81 41 ,227.29 0 -2; 0-2 -a Yaman La hi Foundation, In c. 412,272.8 1 41 ,227.29 0-3 ; 0 -3-a Yaman Lahi Foundation, Inc. 38 1,959.70 38 , 195 .98 0 -4 ; 0-4-a Yaman Lahi Foundation, Inc. 421 ,864. 10 42 , 186.42 P; P-1 ; P- 1-a: MMM UPS ! Property Holdings, Inc. I ,491 ,092.30 149, I 09.23 Total 19, 127,950.0 I 1,912,795. 16 Moreover, petitioner' s creditable withholding tax for taxable year 2005 was accounted by the Commissioned Independent CPA, Mr. Richard S. Querida 18 in his Report dated February 21 , 2008, 17 and in his Judicial Affidavit executed on February 16, 2009, viz: "Co mpari son of Creditable Withholding Tax Certificates per Schedule of Income, Collections and Cred itab le Withholding Taxes again st the amounts reported per Incom e Tax Return (ITR) for Taxable Year 2005 are as follow s: Cred itab le Withholding Tax Supported by Certificates per Annex 1 PI ,874,989.40 Cred itable Withholdin g Tax Shown in the 2005 ITR 1,9 12, 195.00 Difference p (37.205.60) Presented below is the breakdown of the difference : HMSI P37 ,805.76 EAEC (600.14) Total P37 ,205 .60 The cred itab le withholding tax certificate issued by Hospital Management Serv ices, In c. (HMSI) in favor of the Com pany (Exhibit G-1) was exc luded in the claim for iss uance of tax cred it certifi cate presented in Annex I because the total amount of creditab le withholdin g tax certificate issued by HMSI in favor of th e Compan y wi ll exceed the cred itabl e tax that should be w ithhe ld from th e management fee 111 co me recognized in 2005. 17 Ex hi bit PPP . 18 Exhibit QQQ. 608 r, • ··,."' . '.

DECISION CT A CASE NO . 7762 Page 12 of24 C reditabl e Withholding Tax Certificate iss ued in 2005 p 324,696. 16 Creditable Withholding Tax that should be withheld from Man agement fee in 200 5 [(P2,608,094 .54+ P260,809.46)x I 0%] 286,890.40 Total p 37.805.76 On the other hand , the difference of P600. 14 is attributab le to the und erstate ment of th e a mount of cred itable withho ldin g taxes reported in th e 2005 JTR against the amount of creditab le withholding tax certificate issued by Emili o Aguin aldo Educat io nal Corporation (EAEC) (Exhibir F-4)." It appears that out ofthe total creditable withholding tax ofP1 ,912,795 .16 as reflected in the Certificates of Creditab le Tax Withheld, PI ,9 12,195.00 thereof has been reflected in the Income Tax Return. As accounted by the Commissioned Independent CPA, there was understatement of creditable withholding tax of P600.14 pertaining to the Certificate of Creditable Tax Withheld issued · by Emilio Aguinaldo Educational Corporation (EAEC). Moreover, out of th e reported Pl ,912,195.00 creditable withholding tax, P37,805.76 thereof which is based on the Certificate of Creditable Tax Withheld issued by Hospital Management Services, Inc . (HMSI) in petitioner's favor will be excluded, as noted by the Commissioned Independent CPA, since it will exceed the creditable tax that should be withheld from the management fee income recognized in 2005. Hence, only the amount of P 1,786,656.40 (PI , 8 74, 989. 4 0 creditable withholding tax supported by Certificates as per Report of the Commissioned Independent CPA less the Minimum Corporate Incom e Tax due for 2005 amounting to P88, 333. 00) may be the subj ect of refund . f~ .. . ......•• .......... - - ·.• >. :.-. - ... ' ... - ·~~ .: ,

DECISION CTA CAS E NO. 7762 Page 13 ol24 As regards the third requirement, the Commissioned Independent CPA reported the following: 19 "Comparison of Management Fees per Schedule of Income, Collections and Credita bl e Withholdin g Taxes again st the amoun ts reported per Audited Financial Statem ents ("AFS ") and Incom e Tax Return (" ITR") for Taxabl e Year 200 5 a re as follow s: Management fees per Annex I P18 ,741 ,488 .34 Management fees per AFS and !TR 18,741,488.00 Difference P.34 Difference is due mainl y to roundin g-off of amounts reported per A FS and !TR." Based on this report, it readily appears that petitioner' s income amounting to P18,741 ,488.34, upon which the creditable taxes is withhe ld, were 20 included as part of the gross income declared in the 2005 income tax return. With respect to the last requirement, petitioner presented its 2006 Annual Income Tax Return 2 1 to prove that it did not carry over its claimed excess or unutilized creditable withholding taxes to taxable year 2006. Respondent argued that petitioner has violated Section 76 of the 1997 Tax Code when it merely claimed a partial refund of P 1,912, 19 5.00 instead of the total tax credit of P6,394,566.00 for 2005. He likewise questioned the action of the petitioner which opted to claim the amount ofP1 ,912,195.00 as tax credit in the 2005 income tax return and at the same time opted to carry-over the 19 Notes 17 and 18, Supra. 20 Ex hibit A. 21 Ex hi bit B. bl 0 ..... 1

DECISION CTA CASE NO. 7762 Page 14 of24 amount of P2,331 , 102.00 as the alleged excess tax credit in the 2006 income tax return, for violation of the same Section of the Tax Code. Accordingly, the claim for refund on one hand and the automatic carry-over on the other creates confusion because petitioner is not allowed under the law an option of refund and carry-over at the same time. Lastly, respondent questioned petitioner as to how the amount ofP2,331,102.00, representing as the prior year's excess credit for 2006, was computed. Petitioner argued that for taxable year 2005 its excess withholding tax credits is only Pl,912,195.00, and not P6,394,566.00. The latter amount include not only the overpayment for taxable year 2005 but also overpayments from prior taxable years, which are not anymore eligible for refund because of the two-year prescriptive period. Accordingly, it is iniquitous for respondent to require it to seek the refund of an overpayment which is no longer eligible for refund. Petitioner likewise clarified that it categorically chose the option of tax refund through the issuance of a tax credit certificate for all its excess creditable withholding tax in the amount ofP1,912,195.00 for taxable year 2005 ; not only a portion thereof, by placing an "x" mark corresponding to the said choice in the income tax return, and thus the absence of the alleged splitting of options. For the excess creditable withholding tax arising from years prior to taxable year 61 1 .' '. _s .~ - ....... ...· ~:: .. ,.•, . .

DECISION CTA CASE NO. 7762 Page 15 of24 2005 (except those which are subject of separate claims for refund), it opted to carry-over to succeeding taxable year. Hence, its action does not and should not cause any confusion. Accordingly, it has chosen only one option for taxable year 2005, which is to refund, through the issuance of tax credit certificate, all its excess tax credits in the amount of Pl ,912,195.00, arising solely from taxable year 2005. Petitioner further argued that it has the right to choose a different option every taxable year. Its prior choice to can-y-over its excess tax credits arising from prior taxable years does not make a bar from choosing a different option in the succeeding taxable years. Accordingly, the "irrevocable rule" is applicable only to a particular taxable period and not across several taxable periods, contrary to what respondent is trying to impl y. Petitioner concluded that there is nothing inconsistent with its 2006 income tax return compared to the option it has chosen for taxable year 2005, since the amount carried-over in the 2006 income tax return pertains to the amount arising from taxable years other than taxable year 2005. As regards respondent ' s question as to the basis of the amount of P2,331 , 102.00 indicated as prior years excess credits in petitioner's income tax return for taxable year 2006, petitioner argued that the same has already been addressed in the report of the Independent Certified Public Accountant. "l ,_'l b. •• .. ' • .: : - •• # : ~· •

DECISION CTA CASE NO. 7762 Page 16 of24 Respondent's arguments are bereft of merit. It 1s an error for the respondent to state that petitioner violated the provisions of Section 76 of the NIRC simply because the latter opted to claim the amount of Pl,912,195.00, not the total tax credit of P6,394,566.00, as well as by choosing the option of tax credit in the 2005 income tax return and at the same time opted to carry-over the excess tax credit accumulated prior to 2005 the amount of P2,331, 102.00 to the income tax return of 2006. 22 In Commissioner of Internal Revenue vs. Bank of the Philippine Islands, the Supreme Court ruled that: "Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, "no application for tax refund or issuance of a tax credit certificate shall be allowed therefor. " The last sentence of Section 76 ofthe NIRC of 1997 reads: "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 tax refund or issuance of a tax credit certificate shall be allowed therefor." The phrase "for that taxable period" merely identifi es the excess income tax , subject of the option. by referring to the taxab le period when it was acquired by the taxpaver. In the present case, the excess income tax credit, which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to appl y for a refund o f the very same 1998 excess income tax credit. The Court of Appeals mistakenly understood the phrase " for that taxable period" as a prescriptive period for the irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998, and BPJ opted to carry it over 22 G.R. No . 178490, Jul y 7, 2009. I~ b""1 ..)'1 t. . , .... ,II -~ ' ' ~ I I... .... ~ .r. • •

DECISION CTA CASE NO. 7762 Page 17 of24 to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to again take another option as regard s its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability rule. The evident intent ofthe legi s lature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-floppin g on its options, and avoid confusion and complication as regards said taxpayer's excess tax credit. The interpretation of the Court of Appeals onl y delays the flip-floppin g to the end of each succeeding taxable period. The Court similarly disagrees in the declaration of the Court of Appeals that to den y the claim for refund of BPI, becau se of the irrevocability rule, would be tantamount to unjust enrichment on the part of the government. The Court addressed the very same argument in Phi/am , where it elucidated that there would be no unju st enrichment in the event of denial of the claim for refund under such circumstances, because there would be no forfeiture of any amount in favor of the government. The amount being claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable years, as provided in Section 76 of the NJRC of 1997. It is worthy to note that unlike the option for refund of excess income tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period for the carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over, may be repeatedly carried over to succeeding taxable years, i. e. , to 1999, 2000, 2001, and so on and so forth , until actually applied or credited to a tax liability ofBPI." (Emphasis supplied) It is clear from the aforementioned jurisprudence that the excess or unutilized creditable withholding taxes, from which the carry over option was chosen, may be repeatedly carried over to the succeeding taxable years, as petitioner did when it carried over to its 2006 income tax return its excess or unutilized creditable withholding taxes obtained prior to taxable year 2005 in the amount of P2,331 , 102.00. The said amount of prior years excess credits has been accounted by the Commissioned Independent CPA as follows: 23 "U pon examination of the ITR for Taxable Year 2004,2005 and 2006 to validate the a ppropriateness of the carry-over creditable withholding taxes in excess of creditable withholding taxes being claimed, we present below the results: r~ 23 Notes 17 and 18, Supra. b"'1 ' ~t

DECISION CTA CASE NO. 7762 Page 18 of24 Prior Year's Excess Creditable Withholdin g Taxes per 2003 ITR (Exhibit 000) p 2,546,6 19.00 Creditable Withholding Taxes for Taxable Year 2003 (Exhibit 000) 2,089,252.00 Total Creditable Withholding Taxes 4,635,871.00 Less: Creditable Withholding Taxes Applied to 2003 Minimum Corporate Income Tax (MCIT) (Exhibit 000) 58,719.00 Unutilized Creditable Withholding Taxes for 2003 Claimed as Tax Refund/Credit (CTA Case No. 7436) 2,089,252.00 Total Prior Year's Excess Creditable Withholding Taxes per Amended ITR for Taxable Year 2004 (Exhibit E) 2,487,900.00 Creditable Withholding Taxes for Taxable Year 2004 (Exhibit E) 2, 151 ,269.00 Less: Creditable Withholding Taxes Applied to 2004 MCIT (Exhibit E) 68,464 .00 Total Prior Year's Excess Creditable Withholding Taxes per Amended TTR for Taxable Year 2005 (Exhibit A) 4,570,705.00 Creditable Withholding Taxes for Taxable Year 2005 (Exhibit A) 1,912,195.00 Total Creditable Withholding Taxes 6,482,900.00 Less: Creditable Withholding Taxes Applied to 2005 MCIT (Exhib it A) 88,333.00 Unutilized Creditable Withholdin g Taxes for 2004 Claimed as Tax Refund/Credit (CTA Case No. 7602) 2, 151,269.00 Unutilized Creditable Withholding Taxes for 2005 Claimed as Tax Refund/Credit (CTA Case No . 7762) 1,91 2,195.00 Total Excess Creditable Withholding Taxes for carry-over to 2006 ITR P2.33 I. I 03.00 As stated on our report dated February 21 , 2008, we reiterate that the Company did not amend the 2005 tax return to reflect the claims for unutili zed creditable withholding taxes for the year 2004. This was due to the Letter of Authority ("LOA") dated July 21, 2006 (Exhibit ZZ) issued by the Bureau of Internal Revenue and was received by the Company on July 27, 2006. The said LOA pertain to the examination of the Company's books of accounts and other accounting records for all internal revenue taxes for the taxable year 2005 , thu s, prohibiting the Company to make any amendments to the ITR filed for 2005. However, the Company reflected their claim for Tax Refund of excess/unutilized creditable withholding taxes for 2004 and 2005 in the ITR for Taxable Year 2006 (Exhibit 8)." Thus, respondent cannot insist that petitioner should have claimed the total tax overpayment of P6,394,566.00 for taxable year 2005 because portion thereof in the amount of ?2, 151 ,269.00 was already claimed by petitioner in a separate case docketed as CTA Case No. 7602 ; another portion in the amount of /0 615

DECISION CT A CASE NO. 7762 Page 19 of24 Pl ,912,195.00 is the subject of the present case; and lastly, the amount of P2,331,103.00 was carried over by petitioner to its 2006 income tax return. The amount of P2,331,103.00 cannot be the subject of refund because of the irrevocable rule. Notwithstanding the above discussion, petitioner still has failed to prove that it did not carry over its claimed excess or unutilized creditable withholding taxes to the succeeding quarters of taxable year 2006. Records of the case disclosed that petitioner failed to present as evidence its 2006 quarterly income tax returns. Although, petitioner presented its 2006 Annual Income .Tax Return wherein it shows that it did not carry over as tax credit its claimed unutilized creditable withho lding taxes of Pl,912,195.00 to the succeeding taxable year 2006, however, this evidence is not enough to conclude that petitioner did not apply the said excess or unutilized creditable withholding taxes against the income tax due for the first three quarters of 2006. Petitioner should have presented its 2006 quarterly income tax returns. The said quarterly income tax returns could help the Court determine whether petitioner effectively opted to carry over the 2005 excess or unutilized creditable withholding taxes to the subsequent taxable year. If petitioner applied the said excess or unutilized creditable withholding taxes against the income tax due for the first three quarters of taxable year 2006, it therefore effectively exercised the option to . . l ur> b. ·' ) . ..... ._ -

DECISION CT A CASE NO. 7762 Page 20 of24 carry over the 2005 excess or unutilized creditable withholding taxes to the succeeding taxable year 2006; thus, its claim for refund should be denied pursuant to Sec. 76 of the 1997 National Internal Revenue Code, which explicitly state that once the option to carry over has been made, no application for tax refund or issuance of a tax credit certificate shall be allowed therefor. In the case of Benguet Management Corporation vs. Commissioner of Internal Revenue, 24 the Comi En Bane agreed with the findings of the Court in Division that petitioner therein indeed carried over its declared overpayment for 2001 to the subsequent quarters as proved by its quarterly income tax returns of 2002, and, hence, affirmed the denial of petitioner's claim. Pertinent portion of the decision in the said case are hereunder quoted: " However, petitioner carried over the declared overpayment for 2001 in the amount of P6,249,534.00 to the succeeding quarters of taxable year 2002 as prior year's excess credits (A nnexes C toE, Petition/or Review, pp. 10-12). As petitioner's own evidence would show (original/tentative annual ITR for CY 12/2001, Exhibit "A"), the total declared overpayment of P6,249,534.00 for th e calendar year 200 l, was carried over by the petitioner to the first quarter of 2002 filed on June 11 , 2002 (Quarterly Income Tax Return for the I st Quarter of 2002, Annex C, Petition for Review). When petitioner filed its second quarte rl y return for the year 2002, it likewise carried over the amount of P6,249,534 .00 as prior year's excess credits (Quarterly Income Tax Return for the 2nd Quarter of 2002, Annex D, Petition for Review). For the third quarter of 2002, petiti oner still carried over the sam e amount of P6,249,534 .00 as pri or year's excess credits (Quarterly Income Tax Return for 3rd Quarter of 2002, Annex E, Petition for Review). The total amount of P5 ,700,272 .00 subject of this claim , formed part of the P6,249,534. 00 overpayment for calendar year 2001 (Exhibit A-1 )." 24 CT A EB No. 200, April 4, 2007 affirming the decis ion of Benguet Management Corporation vs. Commiss ioner of Internal Revenue, CT A Case No. 6890, January 9, 2006. 61 7 ,., ·: '-... ·- .• l' ...... ( ~ . - · ~, :"" ... . ' . ..

DEC ISION CTA CASE NO. 7762 Page 2 1 of24 " When petiti o ner fil ed its co rporate annu al in come tax return for the ca lendar year 2002 on April 14, 2003, it still carried over th e am o unt of P6,249, 534.00 as pri or year's excess credits (Exhibit F, Records, pp. 91-93) . The fact that petiti oner amend ed its 2002 tax return on Octo ber 9, 2003 (Exhibit G, Records, pp. 94-96) does not alter th e fact that petiti o ne r in fact carried th e amount of P6,249,5 34.00 which the claimed am ount of P5 ,700,272 .00 fo rm ed a part of, to th e succeeding first, seco nd and third quarters of 2002. And in its 2002 ori g ina l corpo rate in come tax return , petiti oner aga in carri ed over th e sam e a mo unt of pri or year's excess credits. (Emphasis supplied) In fact, Section 2.58.3 of Revenue Regulations No. 2-98 implementing Republic Act No. 8424 even provides: " Secti o n 2-58-3. C la im for Tax Credit or Refund. - (A) . T he amo unt of creditabl e tax w ithhe ld sha ll be a ll owed as a tax credit aga inst the income tax liability of the payee in th e quarter of th e taxabl e year in w hi ch income wasearned or received . (B ) C laim s fo r tax c redit o r refund o r any creditabl e in co me tax w hi c h was deducted a nd w ithhe ld on income payments sha ll be given du e co urse onl y when it is shown th at the in co me payme nt has been declared as part of th e gross income and th e fact of withh oldin g is establi shed by a copy of th e w ithho lding tax statement dul y issued by th e payor to th e payee showin g the amount paid and th e am o unt oftax w ithhe ld th erefrom . (C) Excess C redits- An indi v idua l or corpo rate taxpayer' s excess ex panded wi thh oldin g tax credits for the taxabl e qu arter/year sha ll auto maticall y be all owed as a c redit again st hi s income tax due for th e taxa bl e qu arters/years immedi ately succeedin g the taxabl e qu arters/years in w hi ch the excess credit a rose, prov ided he submits w ith hi s income tax return , a co py of th e first page of hi s in come tax return fo r th e prev io us taxabl e peri od show in g th e amo unt of hi s excess w ithho ldin g tax credi ts, and o n whi ch return he has no t o pted fo r a cash refund or tax credit certificate. 1. If in li e u of the a utomat ic applicat io n of hi s excess credi t, the taxpayer wants a cas h refund or a tax credit certifi cate for use in payme nt of hi s oth er nati o na l intern a l revenu e tax li abilities, he sha ll ma ke a written requ est therefo re, w ithin two years after the payment of th e tax (Ref. Sees. 204( c) and 229 of th e Code), prov ided however, that if the taxpayer has_ indi cated in hi s income tax return his option fo r e ither a cash refund o r a tax credi t certificate, suc h indicatio n sha ll be co nsidered suffi c ie nt fo r the r~ 6.1 3 .... ..~ . .,; - --.. ... ... ...~

DECISION CTA CASE NO. 7762 Page 22 of24 purpose. Upo n filin g of hi s requ est, th e taxpayer's in come tax return s how ing th e excess expand ed withh o ldin g tax credits sha ll be examin ed . T he excess expand ed withh o ldin g tax so determin ed, sha ll be refund ed/c redited to th e taxpaye r. 2. Sa mpl e co mputati on of appli cati on of excess credits-o rdinary Tax Period 1997 1998-QTR I 1998-QTR2 1998-QTR3 Tax Due I ,000 200 200 500 Less: Tax With held ( I ,500) (500) (300) 0 Net Tax Payable/Creditable (500) (300) ( I 00) 500 In th e above illu stration, th ere is an excess credi t in 1997 th at can be applied to th e sub sequ ent quarter. A nd if th e o ptio n to appl y th e excess credit is initiated in th e first quarter of 1998, th e taxpayer cann ot ava il of a refund/tax c redit certificate of th e excess credit of P500 in 1997." (Emphas is Suppli ed) Thus, the presentation of the quarterly income tax returns is very ·important. Without which, it cannot be full y ascertained whether petiti oner did not carry over the 2005 excess or unutilized creditable w ithh olding taxes to the subsequ ent quarters of 2006. Petitioner may have carri ed over its 2005 excess or unutilized creditable withholding taxes to its quarterly income tax returns fo r 2006, and it may have amended said quarterl y returns before the fi ling of the 2006 annual income tax return whereby such excess or unutilized creditable withholding taxes are no longer refl ected therei n; and thus, it fo llows that its 2006 annual income tax return will likewise not show th e amount of P l ,9 12, 195.00 as part of its prior year 's excess credit. This doubt could have been avoided had petitioner presented its quarterly income tax returns for 2006 . 6.1 0 ..·' ' ~ - ,I _ ·_, ..,. • -- '

DECISION CTA CASE N O. 7762 Page 23 of24 It is a settled rule that tax refunds, like tax exemptions, are construed strictly against the taxpayer and that the claimant has the burden of proof to estab lish the factual basis of its claim for tax credit or refund. 25 Failure of the petitioner to present the quarterly income tax returns for 2006 is fatal to its claim for refund or tax credit. In a similar case of Millennium Business Service, inc. vs. Commissioner of Internal Revenue, 26 this Court denied the claim for refund of unutilized creditable withholding taxes on the ground that the claimant therein was not able to present its quarterly income tax returns of the subsequent period of its claim. WHEREFORE, petitioner' s claim for refund IS hereby DENIED for insufficiency of evidence. SO ORDERED. L~-~ ERNESTO D. ACOSTA Presiding Justice WE CONCUR: ERLINDA . UY Associm{J usti ce 25 Sili con Phil ippines, Inc. vs. Commi ssio ner of Internal Revenu e, CTA EB Case No . 298, .J anuary 18. 2008 citing Ci tibank, N.A. vs. Court of Appeals and the Commissioner of Internal Revenue, 280 SCRA 459. 26 Febru ary I I, 2009, A me nded Decision, First Di visio n, CT A Case No. 744 ! . '"' " 0 b" ' , .~ '> .• ·.. _...

.. DECISION CTA CASE NO. 7762 Page 24 of24 CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals, First Division in accordance with Section 13 , Article VIII of the Constitution. ~ \.« • l-L--.--1_ ERNESTO D. A COSTA Presiding Justice ... , •'\- ' .. . . . .. .. _,. '•