CTA Case No. 3158 (Decision)

' REPU BLIC 0 F THE P HILIPP INES COURT OF TAX PPEALS QUEZON! CITY DCCD ENGINEER ING CORPORATION, Pet i t i one r, - ver sus - C.T .~ . CASE NO. 3158 THE COMMISS I ONER OF I NTERNAL REVENUE ,. X- - - - - - - - -Re_sp,_ondent .-X .. DE C I S I 0 N This r e f er s to t he cla im fo r refu nd of peti tioner DCCD , En g in eer i ng Cor porat i on f o r t he s um of ~96 ,3 4 7 .52 as alleged erroneous p a ymen t o f the 3% c ontractor ' s t ax for 1976, i nc lusi ve of the 25% su rchar ge, deficiency inter est and compromi se pe nalty . Pe t i tioner , a domestic corporation e ngaged in bu s iness as gene r a l contr actor and as desi gn and con- pultan t eng i neers , e ntered i nto an "Agreemeht for Super- vi s ion o f Construct ion �Services" with the Phil ippine Government , thr u the Min istry of Public Highways , f or the Tarlac-Lingayen Road , Dagupan-Damor tis Roa d and Ur daneta-Dagupa n Road . Afte r inve stiga t ion of t he business tax liability of petitione r for 1976, r esponden t Commi ss ione r o f Inter nal Reve nue a ssessed an d emanded from t he c omp any t he amo un t of ~96,342.52 as deficiency . contractor 9 s tax , when it wa s found that the 3%� c on- tr actor 8 s tax on the gross r ece ipts derive d by pe t iti oner 281

DECIS IOr - CTA CASE NO . 315a 2- from i t s constr uction supervision servic es of the above- mentioned pro jects was neither pa id nor wi thheld by t he Mi ni stry of Public Highwa ys. Pe tit i one pai d the s a i d �t ax to the Bureau of Interna l Reven ue on pctober 25 , 19 7a per Revenue Tax Receip t No . 367 a 9535 . (Annex " B" , p . s; CTA r ecords . ) In v i ew of Sect ~ o~6 . 03 and 6 .04 of Ar ticle VI o f t he afo r esaid "Agreement", pet i t ioner bille d -on November 6 , 1 97a the Min i stry of Pub l i c Highways t he amoun t of ~96 , 34 2 . 5 2 wh i ch it paid to the Bu r eau of I nter nal Revenue , enc los i ng therewith t he "Cer t i f i ca ti on " of tax exempti on issued by the Secretary of the then Departmen t of Publ i c Highways t o support its c l aim. (Annexes "C" and "D ", pp . 6-7 , CTA reco r ds .) As no fu nd was p r ov ided for t he paymen t of sa i d contr acto r ' s t ax , t he Mi nistr y o f Publi c Highways re ques t e d t he Mi ni stry of Finance in a le tte r dated Nove mbe r 1 4 , 1 97a to i ntercede on i ts behalf f or t he . � r e fund o f the sum of ~96,342 . 5 2 to peti ti oner DCCD Engineering Corpor at ion , c i ting Letter of I nstruc ti ons No . 128 dated September 1 4 , 19 73 as authori zing the Mi n is t r y o f Public Highways t o gran t tax e xempt status t o cons tancy agreements similar t o that of peti tioner ' s . (Annex "E", p . a , CTA records ) The Ministr y of Finance in t urn i ndorsed on J anuary a , 1979 the letter of the Mini stry o f Public Highways to r espondent Comm issione r o f In t e rna . Revenue f or com- men t and r ecommendat i on . (Annex "F " , p. 9, CTA records .)

DECISION - CTA CASE N O ~ 3158 - 3- On February 12, 1979 , r espondent Commissioner of Internal Revenue informed petitioner t a t its c aim for �r e fund was referred to the Chief , Services and Miscel- l aneous Tax Division of his office for study , but since then~o action or decision was seasonably t a ke n or ren- dered by respondent on t he matter . \ He n c e this.. petition for review . .... The case was submitted for dec i sion on the basis o f the p eadin~s and the records of th e Bureau of Intetnal Reven e i n this proceeding , and no memoranda were filed by the par ties . Petitioner c ontends that on the bas i s of Sec�tion 6 . 03 of Article VI of the 11 Ag reement" it entered into with the Government through the Ministry of Public Highways , � t aking into c onsiderati on the mandate of Lette r of Ins- tructions No . 1 28 , petitioner i s not liable for the payment of the contractor ' s tax assessed ! gainst it . and i s therefore enti t led to the r efund of'. the amount of P96 , 342 . 52 fr om respondent . Section 6 . 03 of Article VI is reproduced hereundet: (pp . 7-S . of the Agreement, p. 113, BIR recor ds .) " 6.03 Any and al l compensat ions , pay ments, reimbur s ements or e xpens�es undertaken to be paid or assumed by the Government in favor of t he Consultant under this Agr eement ar e understood to have been deter mined and established to be net of the Contractor Tax , Joint Ven t ur e Tax, duti e s a nd other fo rms of Government levy attr ibutable to the services under this Agreement . The Gover nment , f or and on beha lf o f t he Consu ltant , $hal l assume the burden of such taxes whether national or local, duties or levies , if any , payable on any and 283

DECI SION - CTA CAS E O. 3158 - 4- a ll compen ations , paymen ts, reimbu r sements o e xpen ses under t a ke n to be pa id o ass umed by t he Government un de r th i s Agr eemen t in f avo r of t he Consultant." Letter of In str uction s No. 128 date d Sep t embe r 14 , 1973 , cited by the Mini str y of Pu blic Highway s a s au t hor - :. i zi ng i t to agree to t he above cond i tion , i s as f ol lows : {pp . 124-1 25 , BIR r e c ords . ) "l'1ALACA.NAHG Ma nila September 14, 1973 LETTER OF INSTRUCTIONS NO . 1 28 TO : 1 . The Secretary of Fina nce 2. The Dir ec tor-General Nat ional Economic and Developmen t Autho ri t y In order to secure uniformity in the tax treatment of cons ul tants contracted by t he Philippine Government, its agencies , � entities and i nstr umental iti es in c onnection ~ith pro j e cts , f i nanced with ~or e ign l oans , the fol l ow- i ng guidelines , in adq ition to those a lready observed in t he r eview and appr oval of pro- j ects proposed f or f oteign f inanc ing, shall be f urther observed: 1 . Approval of projec ts proposed by government agencies shall prescribe t he con- . dition that in negotia t i ng tax provisions in consu l t ancy contracts entered i nto by such a genci es in i mplementa ti on of the for eign loan and i nvol ving utilization of l oan proceeds , t he agency concerned shall agree to provisions exempting consultants from taxes and duties unless otherwi s e i nd icated by the cons ultan t s . 284

DECISION - CTA CASE NO . 3158 - 5- 2. With respect to proj ects proposed by "proprietary" government corporations , as well as those involving the private section ava il- i ng of government feasibility loans, approva of such proj ects shall be under the condition that the consultancy contracts to be ent ered into by such "proprietary" government corpo- . rations, including pr ivate sector contracts , 1 n � implementa tion of the foreign loan and i n- volving uti l i zation of loan proceeds , shall pr ovide for the ,imposition of taxes and duties on the consultants irrespective of whether the .. �.taxes and .�iuties are to be paid by the consu t ants or by the other party on a reimbursement basis . You a~e hereby enjoined to act ac coFdingly . (SGD ) FERDINAND E. MARCOS President Republic of the Philippines" Responden t i n his Answer alleges, among othe rs , as special and affirmative defense , that the, provision in the agreement executed between pe titi oner and the Min i~ try _of Public Hi ghways "is the concern of the contracting par ties and therefore 8 c a nnot bind the r es.p. ondent in � recognizi ng t heir stipulations regarding exemption from the payment of tax . " And that a' Tax exempti on privileges should always emanate from statutes expressly granting such pr i vileges and never implied. " 'The records of the Burea u of I nternal Revenue show th a t when this matt e r wa s referr ed to that office .by the Ministry of Finance f or comment on the reques t for inter- cession by t he Ministry of Public Highways to consider the tax exempt status of petitioner and the granting of 285

DECISION - CTA CASE NO. 3158 - 6- i ts claim f or r efund , the chief s of said Bureau ' s di f - fe ren t l e gal divisions rendered two divergent v i e\'rs . 1The vi ew entertained by th e major ity was .for favorable acti on on petitioner ' s claim for r efund while t he minor- i ty wa~ f or t he d en i a l of the refund & The op in ion of he Chief of the Law Di vi sion (p . 1 97 , BIR r ~cords ) ~ concurred in by the Deputy Com- . miss i oner of Internal Revenue and t he Chie f of the Lit i gation Divi'G i on p. 202 an d pp . 22 9-2.36 , .BIR recor ds )'� is tha t the Commiss i oner of I nte rn a l Revenue should g ran t the refund. To quote : "i do not subscribe to t he proposed act ion of the Appellate Division 'seeking to d eny the c laim for re fund. As stated in my Memorandum o f J anuar y 15 , 1980 , t he taxpayer i s exempt f rom the payment o f t he contractor as t ax based o n LOI 1 28 wh ich p rovi des tha t "the. agency c oncerned shall agr e e t o provis ion exempting c onsul t ants f rom taxes a nd duties unless other- wi se indicated by the c onsu l tants ." (Unde r - . s c or i ng s uppl ied ). It may be stated that the agre ement prov idi ng tax exemp tion i s �based on Section 4-A of R. A. No . 486 0 , as in ser ted by P.D . No . 150 , quoted as follows : . �� uSEC . 4�- A. Upon the recommend . ation of the .Secretary o f Finance , in consul t a tion with the National Economic and De velopment Authority a nd approval ot t he President of the Phil i ppines, l oan agreements as we l l as contracts invol ving the availment of or ut i l i zation of the proceeds of loans , c redi ts or indebtedness obta ined under the pro- . v isions of thi s Act , may provide f o r t he exemption fr om taxes , charge s, or other l evi es . 0 The provi s o in the Agreement between the Phili ppine Governmen t , thr u the Ministr y o f ." ~86 .

DECISION - � CTA CASE NO e 3158 -7 Publ i c Highways , and the taxpayer s tating that pa yments by t he for mer shall be 11 net of the Con tractor Ta '9 i mplements the above provisions of LOI 1 28 and P .D . No. 150 . This means that the contrac tor shall rece ive amount without billing the contractor 0 s tax against the � Phili pp ine Government~ In this par ticu l ar case, the t axpayer , i n effec t , was not allowed ~o. pass on the t ax to the Governmen t . For in the case of the contractor ' s ta , the con- . t ractor althoug~ d irectly liable for t he pay- . m~nt of t he tax may legally pass on the same ~o the c ontractee. For this reason, and s i nce the government also agr eed t o assume the pay- ment of the tax, it i s c lear that the t axpayer was relieved fr om paying the contractor 9 s tax . Such being the cas e , the payment of t he con- . t ractor 1 s tax by the taxpayer i s erroneous which enti tles i t to a refund . In view thereof , it i s r espectfully recom- mended that favorable action be taken on the above 6la im for r efund . " On the o ther hand , the grou nds relied on by the Chief . of the Appellate Division and t he Revenue Service Chief (Legal ) .in sus ta i ning the opposite vi ew are as fo l l ows : (p. 198, BIR records .) "1. t or No . 128 i s no t a tax- exemption grant. The said directive merely enjoins government agencies concerned to agr~e to a provision ~~ exempting consultants from taxes and duties unless otherwise indicated by the c onsultants. 11 2. The agr e emen t betwee n. the Mi n istry of Publ i c Highways and t he herein taxpaye r is not a tax-~xemp ti on grant ei t her , but it merely �stipulates who shal l assume the bu rden of pay- i ng the t ax . 11 It is argued f urther that si nce the 3% contractor ' ~ tax paid by petitioner was not er roneously or illegall y recei ved by the Bureau of Internal Revenue, t he reim- �� bursement of t he tax pai d should be a mat ter to be

�. DECISION - CTA CASE NO. 3158 - 8- resolved be tween the . Mini s try of Public Hi ghways and petitioner DCCD Eng ineering Corporation . Undoubtedly , there i s no dispute that in accor d- ance with t he Agreement, the government i s under obli- gati on to refund the said contractor ' s tax to peti t i oner . The ~on trove rsy h inge s on who should issue the refun d ? I s i t ' the Ministry of Publ ic Highways or the Comm iss i oner of Internal Revenue? We are in accord . with the majority view that re~- pondent Commissioner of Inter na l Revenue should issue the refund � . As pointed out by the Chief of the Law Divi s1on , Art ic l e VI , Sec tion 6.03 of the "Agr eeme nt for Super- vision of C6nstruction Services" imp leme nts the pro- v is i ons of Letter o f Instr uctions No. 128 and Sect i on 4-A of Republic Act No G 4860 as in serted by Presidential . Decree No . 150 . 'There is no doubt that theabove- mentioned � Sec ti on 6 . 03 was included to comply with the provision of Le t ter of Instru ctions No . 128 tha t " appr oval of projects proposed by gove rnmen t agencies shall pres- cribe the condi tion that in negotiating tax provi sions in consultancy contracts entered into by such agencies in impl ementation o f the for e i gn l oan and i nvolving uti- lization of loan proceeds, t he agency shall agree to provisions exempting c onsultan ts fr om t axes and du ti es ,/ 288

�. DECISION - CTA CASE NO . 3158 - 9- ~n l ess o therwise i nd icated by the consultants." (Under- seer ing s upplied . ) . The intention behind t he promul- . gat i on of Letter of I nstructions No . 1 28 � is to secure uni formity in the tax treatment of consultants con- .. tracted by the Philippine Government and i ts agenc ies in connecti on with projects financed wi th foreign l oans . ' 1hus , Ar t icle VI , Section 6 . 03 i s e xpl icit - that "any and a ll c ompensations , payments , reimbu r sements or expens es undertaken to be paid or assumed .by t he Governmen t i n favor of t he Consultant under t his Agre e- men t are understood t o have been dete r mi ned and esta b- �l i s hed to be net of the Contr actor Tax", which bu'rden the Government shal l assume fo r and on behalf of the Consu ltant e Under the above proviso , petitione rw s gros~ r ece i pts are not exempted from the payment of the contractor ' s ... tax , but pet i tione r i s r elieved f rom such" t ax liabi li ty by r easorr o f the assumption by the Government o f the bur den of s uch tax l iabi l ity . While i t is true that th i s t ax e xemp t ion agreement is no t a direc t t ax exemption grant , it i s neverthel ess bindi ng upon r espondent as it i ~ c learly s anctioned by Letter of I ns tructions No . 128 and Sec t ion 4-A of Republic Act No . 4860 . Since by authority of the afor ement ioned l aws the Ph i lippine Government had assumed peti tioner 8 s liabil ity for t he contract or ' s tax , r esponden t er r ed. i n col l ecting from petitioner t he said tax . 289

DECISION - CTA CASE NO s 3158 - .10 - ' The proponents for the denial of the claim for refund i ns i st t hat by virtue of Artic l e VI , Section 16 e04 which is quoted below , the proper agency to make the r eimburs ement is the Ministry of Public Highways whicH is the party t o the Agreement: ( P o 8 of ,Agree-, . ment , p. 113, BIR reqords. ) . � "6.04 If notwithstanding the assurances o f the preceding paragraph , the Consultant is, for any reason , compelled t o pay the Con- tractor Tax , Joi nt Venture Tax , duti es or l evies, then , in that event , the Gover nment will anticipate payment to or immediately re imburse t he Consu ltant f or such t axes , duti es or levies ment ioned in Art . 6 . 03 assessed and collected against him in con- necti on wi th the Services. " T~e authority to r efund erroneous l y or illegally receive d i nternal revenu e taxes , and the 3% contractor ' s . tax is undisputedly an internal r evenue .tax , is vested exclusively with the Commissioner of Internal Revenue � under Section 309 (now Sec tion 295) _of the National Internal Revenue Code . Sec tion 309 (now ~.ection 295) of the Tax Code clear ~y and explicitly authorizes t he Comm i ssi oner of Internal Revenue to cred i t or r e f und taxes erroneously or illegally received . Since t he defici ency contractor ' s tax under consider ation was er roneou s ly , if not i llegally, col lected fr om peti t i oner by responden t, it follows that r espondent Comm i ssioner of In ternal Revenue , and not t he Ministry of Public Hig~ways, should i ssue the re fund . .. 290

., �. DECISION - CTA CASE NO. 3158 - 11 - ACCORDINGLY, re sponden t Commissioner of I nternal Revenue is hereby ordered to refund t o petitioner DCCD I Eng ineer ing Corporation t he amount of ~96 , 342 . 52 . Withou t pronouncement as t o c osts. �so- ORDERED. Que zon City , Metro Manila, December 27, 1984 . Presidin � I CONCUR: � ROAQUIN e J udge Dissents i n sze�p. arate opinion . ALEX REYES Assoc i ate Judge .... .' 291 '.

./ � ,. � ~�� ,~ REPUBLIC O F TH� PHILIPPINE:; Ir COURT OF TAX A.PP.EA.LS QUEZON CIT1' DCCD ENG I NEERING CORPORATION , Petitioner , - versus - C.T.A o CASE NO. 3158 � THE COMt-1ISSIONER OF INTERNAL REVENUE, Respondent . X ~- -- -�- X . .. DISSENTING OPINION Upon the facts on record and as so provide d in an �Agreement f o r Super v ision of Construct i on Services between the Government represented by the Ministry of Public Highways and the Norconsult A.S. / DCCD Engineer- ing Corporation , is that "The Gover nment, f or and on behalf of the Consu l tant , shall a ssume th e burde n of such t axes whether national or l ocal, duties or levies , if any 11 (Sec. 6 .03) '� c on formably with the authority that the "Agency concer ned shall agree to provisions exempting consul tants from taxes and dut~es unless otherwise indic ated by the c onsultants . 01 (LOI No . 128 , September 14 , 1973 ) �. This contr actua l stipulation i s by no means t he conte mp l ated statuto ry grant of ~ax exemp tion pr i vilege binding upon the Bureau of Internal Revenue. The respondent Commissioner of I nternal Reve- nue ha d t herefor e rightly demande d and collected the correspond ing contractor 's tax l ega lly due on the pe.ti- .. tioner 's undertakingse 292

�, '. IF DISSENTING OPINION - CTA CASE NO . 3158 2 Nonetheless , the payment by the petitioner of the tax did not exculpate the Ministr y of Public 1 Highways from complying with its obligation per Agreement which remains valid and enforceablee As thus , ."If notwithstanding the assurances of the pre- ceding paragraph, the consultant is, for any r eason , \ coll\i?el led to pay the Contractor vs Tax , Joint Venture Tax, duties or l evies , in that event , the Government will an~icip ate payments to or i mmediate ly reimburse the consultan t for such t axes, duties or levies men- tioned i n Article 6 . 03 assessed and collected against him in cortnection to the services. 11 (Sec . 6 &04 ,of the Agreement).. Suffice it t o state that Ministry of Public Highways has not r eneged in its commitment ' with s uch reassurance that "As a corollary action, we a re r equesti ng the Budget Commission for the r elease of funds to cover the reimbursement in ~ase the reconsi- deration is denied .. " (Letter of the Minister of Public Highways to the Minister of Finance on November 14 , 1978 ) ~ The chips otherwise l eviable on the petitioner bu t for the contractual stipulation definitely l'ie with the Min istry of Public High\'ray s upon which any recourse for relief must be addressed . The respondent Commissioner of Internal Revenue cannot serve as a conven ient "wailing wall " as wou l d 293

I DISSENTING OPINION - CTA CASE NO . 3158 -3 reli eve pet i tioner 8 ~ p redicament in a ti zzyl y whipped- up short order cla im to a re f und o Th is sounds sor t � of a ba rki ng a t the wrong tree expecting the unexpec t ed . I c a nnot see my way c l ear in t reading t he same path pr eci- p itat~l y blazed by my dist i nguished co lleagues . Petition has to be dismi ssed with costs. \ Quezon Ci ty, Metro Mani l a , Feb ru a ry 11 , 1 985 � ... 294