SONOMA SERVICES, INC. v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City SECOND DIVISION SONOMA SERVICES, CTA Case No. 9026 INC ., Members: Petitioner, CASTAN EDA, JR., Chairperson, CASAN OVA, and -versus- MANAHAN, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, r?" }: APR 05 Z017 / /S' ,. ... Respondent. x----------------------------------------------------------------------------------x DECISION CASANOVA, J.: This is a Petition for Review, filed on April 10, 2015 by petitioner Sonoma Services, Inc., involving petitioner's claim for refund in the amount of �>4,880,190.40 allegedly representing petitioner's excess and unutilized creditable withholding taxes (CWT) for calendar year (CY) ended December 31, 2012. Petitioner is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office at the 35th Floor, Tower One & Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. 1 Petitioner is a registered taxpayer of the Bureau of Internal Revenue (BIR), Revenue Region No. 8, Revenue District Office (RDO) No. 50, with Taxpayer Identification Number 220-868-954- 000.~ 1 Par. 1, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket (Vol. I), p. 208 . 2 Par. 3, Admitted Facts, JSFI, Ibid, p. 209.

DECISION CTA Case No. 9026 Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue vested with authority to carry out all the functions, duties and responsibilities of said office, including, inter alia, the power to decide, approve, and grant refunds and/or tax credits of overpaid and erroneously paid or collected internal revenue taxes. Petitioner filed its Annual Income Tax Return (ITR) for CY 2012 with the BIR, through the Electronic Filing and Payment System (EFPS), on April 13, 2013,3 indicating therein its option to claim for refund its excess and unutilized CWT for CY 2012.4 On September 11, 2014, petitioner filed with the BIR, RDO No. 50 an administrative claim for refund of excess and unutilized CWT for CY 2012 in the amount of P4,880,190.40. 5 To date, respondent has neither approved nor denied petitioner's administrative claim for refund of excess and unutilized CWT for CY 2012.6 Hence, the instant Petition for Review filed on April 10, 2015. In his Answer7, filed on June 11, 2015 by registered mail, respondent raised the following special and affirmative defenses: "3. Respondent reiterates and repleads the preceding paragraphs of the answer as part of her Special and Affirmative Defenses; 4. Petitioner's claim for refund is still subject to investigation by the Bureau of Internal Revenue; 5. Petitioner failed to demonstrate that the tax, which is the subject of this case, was erroneously or illegally collected; 6. It is explicitly stated under Section 76 of the NIRC of 1007 (sic), as amended, that once a taxpayer chooses the option to carry-over, it shall be irrevocable fo1., 3 Par. 5, Admitted Facts, JSFI, Id., p. 209. 4 Par. 6, Admitted Facts, JSFI, Id., p. 209. 5 Par. 7, Admitted Facts, JSFI, Id., p. 209. 6 Par. 8, Admitted Facts, JSFI, Id., p. 209. 7 Docket (Vol. I), pp. 65-67.

DECISION CTA Case No. 9026 that taxable period and no application for a tax refund or tax credit certificate shall then be allowed (Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, December 14, 2005). Petitioner, therefore, must proved that it did not carry-over its 2012 alleged unutilized creditable withholding taxes to the succeeding taxable quarters/years, otherwise, petitioner is precluded from claiming a cash refund or for issuance of tax credit certificate its excess tax credit for taxable year 2012. 7. Taxes paid and collected are presumed to be made in accordance with the laws and regulations, hence, not refundable; 8. In an action for tax credit or refund, the burden is upon the taxpayer to prove that he is entitled thereto, and failure to discharge the said burden is fatal to the claim (Emmanuel & Zenaida Aguilar v. Commissioner, CA-G.R. No. Sp. 16432, March 30, 1990 cited in Aban, Law of Basic Taxation in the Philippines, 1st Edition, p. 206); 9. It is incumbent upon petitioner to show that it has complied with the provision of Section 76 in relation to Section 204 and 229 of the 1997 Tax Code, as amended, including Revenue Regulations No. 2-98, as amended. 10. Claims for refund are construed strictly against the claimant, the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor. (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121).~

DECISION CTA Case No. 9026 A Notice of Pre-Trial Conference was issued by the Court on June 29, 2015, setting the case for pre-trial conference on August 6, 2015.8 Accordingly, Petitioner's Pre-Trial Brief9 was filed on July 31, 2015, while Respondent's Pre-Trial Brief10was filed on August 4, 2015. The parties submitted their Joint Stipulation of Facts and Issues11 on August 26, 2015. Thereafter, on September 2, 2015, the Court issued a Pre-Trial Order12 approving the same and the pre-trial was deemed terminated. On September 21, 2015, upon petitioner's motion, this Court commissioned Madonna Mia S. Dayego, as Independent Certified Public Accountant (ICPA). 13 During trial, petitioner presented Ms. Vanessa Maturana-Besas14, petitioner's Financial Accountant and Madonna Mia S. Dayego15, the Independent CPA, as its witnesses. Petitioner formally offered Exhibits "P-1" to "P-31", inclusive of sub-markings, 16 which were all admitted in evidence. 17 On the other hand, respondent manifested that he will no longer present evidence in this case. 18 The case was submitted for decision on July 20, 201619 taking into consideration petitioner's Memorandum,20 filed on June 20, 2016, and respondent's Manifestation (in Lieu of Submission of Memorandum)/1 filed on June 29, 2016 by registered mail, stating that he is adopting all the pleadings filed in relation to this case as his memorandum.~ 8 Docket (Vol. I), pp. 69-70. 9 Ibid, pp. 85-95. 10 Id., pp. 203-206. 11 Id., pp. 208-214. 12 Id., pp. 226-230. 13 Minutes of Hearing dated September 21, 2015, Id., p. 237. 14 Minutes of the Hearing dated September 21, 2015, Id., p. 237; Exhibit "P-31". 15 Minutes of Hearing dated November 4, 2015, Id., p. 324; Exhibit "P-29". 16 Formal Offer of Evidence filed on November 23, 2015; Docket (Vol. II), pp. 325-345. 17 Resolutions dated February 4, 2016 and April 25, 2016, Ibid, pp. 760-761 and pp. 773-774, respectively. 18 Minutes of Hearing dated November 4, 2015, Docket (Vol. 1), p. 324. 19 Resolution dated July 20, 2016, Docket (Vol. II), p. 805. 20 Ibid, pp. 783-801. 21 Id., pp. 802-803.

DECISION CTA Case No. 9026 "The parties agreed that the main issue22 to be resolved in this case is: 'WHETHER OR NOT PETITIONER IS ENTITLED TO ITS CLAIM FOR REFUND OF OR ISSUANCE OF TAX CREDIT CERTIFICATE FOR ITS EXCESS AND UNUTILIZED CWT FOR CY 2012 IN THE AMOUNT OF P 4,880,190.40.' This issue may be broken down into the following sub-issues: 1. Whether or not petitioner's excess and unutilized CWT for CY 2012 in the amount of P4,880,190.40 are duly substantiated by documentary evidence. 2. Whether or not the income from which the CWTs being claimed for refund were withheld was reported as part of the revenues declared in petitioner's Annual ITR. 3. Whether or not petitioner exercised the option to carry- over its excess and unutilized CWT for CY 2012 to the succeeding taxable periods. 4. Whether or not petitioner filed its administrative and judicial claims for refund of excess and unutilized CWT for CY 2012 within the two-year prescriptive period provided under Sections 204(C) and 229, National Internal Revenue Code of 1997." Petitioner anchors its claim for refund of its excess and unutilized CWT on Sections 58( D) and 76 of the National Internal Revenue Code (NIRC) of 1997, as amended, which provide: SEC. 58. Returns and Payment of Taxes Withheld at Source. -1111-- XXX XXX XXX 22 Issues, JSFI, Docket (Vol. I), pp. 209-210.

DECISION erA Case No. 9026 (D) Income of Recipient- Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; xxx XXX XXX XXX 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 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 may be 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 therefor." (Emphasis supplied) 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

DECISION CTA Case No. 9026 be irrevocable for that taxable period and no application for cash refund or issuance of tax credit certificate shall be allowed therefor. 23 In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, either to carry over the excess credit or to claim a refund. To ease the administration of tax collection, these remedies are in the alternative and the choice of one precludes the other. 24 Since petitioner marked the box corresponding to the option "To be Refunded'125 in its Annual Income Tax Return (ITR) for CY 2012, the CWTs for CY 2012 in the amount of P4,880,190.40 may be a proper subject of a claim for refund pursuant to Section 76 of the NIRC of 1997, as amended. In its Annual ITR for CY 201226, petitioner had total tax credits of P8,874J56.55 which consisted of prior year's excess tax credits in the amount of P3,994,566.15 and creditable taxes withheld during the year 2012 in the amount of P4,880,190.40 (P4,535,190.40 plus P345,000.00). Petitioner claims that its regular corporate income tax (RCIT) due for CY 2012 in the amount of P1,479,209.10 was paid by applying a portion of its prior year's excess credits of P3,994,566.15. This leaves the prior year's excess tax credits in the amount of P2,515,357.05 and creditable taxes withheld during the CY 2012 in the amount of P4,880,190.40 totaling P7,395,547.45 unutilized as of December 31, 2012, as shown below: Prior Year's Excess Credits other than MCIT p 3,994,566.15 Less: Tax Due (RCIT) Balance of Prior Year's Excess Credits 1,479,209.10 Add: Creditable Taxes Withheld- CY 2012 Excess Creditable Taxes Withheld as of December 31, 2012 p 2,515,357.05 4,880,190.40 p 7,395,547.45 23 Systra Philippines, Inc. vs. Commissioner ofInternal Revenue, G.R. No. 176290, September 21, 2007. 24 Ibid. citing Philippine Bank ofCommunications vs. Commissioner ofInternal Revenue, eta/., G.R. No. 112024, January 28, 1999. 25 Exhibit "P-1", below Line 37. 26 Exhibit "P-1".

DECISION CTA Case No. 9026 In support of its prior year's excess tax credits of P3,994,566.15, petitioner presented various Certificates of Creditable Taxes Withheld at Source (SIR Form 2307) for the CY 2011 duly issued by its withholding agents, sufficient to cover petitioner's RCIT due for CY 2012 in the amount of P1,479,209.10. However, in addition to the requisites provided under Section 76 of the NIRC of 1997, as amended, jurisprudence and pertinent SIR Revenue Regulations27 provide that the following requisites must be further complied with in order that the subject claim may be granted: 1. The claim for refund must be filed within the two-year prescriptive period as provided under Sections 204 (C) and 229 of the NIRC of 1997, as amended; 2. The fact of withholding must be 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. The income upon which the taxes were withheld must be included in the return of the recipient. Anent the first requisite, the pertinent provisions are Sections 204(C) and 229 of the NIRC of 1997, as amended, which provide: "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner may- XXX XXX XXX (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion,., 27 CitibankN.A. vs. CourtofAppeals, eta!., G.R. No. 107434, October 10, 1997; ACCRA Investments Corporation vs. The Honorable Court of Appeals, eta!., G.R. No. 96322, December 20, 1991; UnitedInternational Pictures AB vs. Commissioner ofInternal Revenue, G.R. No. 168331, October 11, 2012; Republic of the Philippines, represented by the Commissioner ofInternal Revenue vs. Team (Phils.) Energy Corporation (formerly Mirant (Pht~s.) Energy Corporation), G.R. No. 188016, January 14, 2015; Section 2.58, Revenue Regulations No. 2-98, as amended.

DECISION CTA Case No. 9026 redeem or change unused stamped that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provide~ however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund. XXX XXX XXX SEC. 229. Recovery of Tax Erroneously or Illegally Collected- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provide~ however, That the Commissioner may, even without a written claim therefore, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid." (Emphasis supplied) It is well settled that the reckoning of the two-year prescriptive period for the filing of a claim for refund/tax credit of excess income tax paid/withheld, both in the administrative and judicial levels, commences from the date of filing of the Final Adjustment Return (or the Annual Income Tax Return)28. It is only when the Final Adjustment Return covering the whole year is filed that the taxpayer would knowe- 28 ACCRA Investments Corporation vs. The Honorable Court of Appeals/ eta!., G.R. No. 96322, December 20, 1991; Commissioner ofInternal Revenue vs. TMX Sales/ Inc. and the Court of Tax Appeals, G.R. No. 83736, January 15, 1992; Commissioner ofInternal Revenue vs. The Philippine American Life Insurance Co./eta/., G.R. No. 105208, May 29, 1995.

DECISION CTA Case No. 9026 whether a tax is still due or a refund can be claimed based on the adjusted and audited figures. 29 In the instant case, records show that petitioner electronically filed its CY 2012 Annual ITR on April 13, 201330� Counting from this date, petitioner had until April 13, 2015 within which to file its administrative claim as well as its judicial claim for refund. Thus, petitioner's administrative claim for refund filed on September 11, 201431 and the subsequent appeal via a Petition for Review filed before this Court on April 10, 2015 are well within the two-year prescriptive period provided by law. Clearly, the first requisite has been complied with. Petitioner likewise complied with the second requisite. It presented the Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307)32 duly issued to it by various withholding agents for CY 2012, reflecting CWTs in the total amount P4,880,190.40, detailed as follows: Exhibit Withholding Agent Period Covered Income Taxes Payments Withheld Management Fees P-16-1 Corullon Holdings Inc. Jan to Mar 2012 p 1_L850 000.00 p 277 500.00 July to Sept 2012 1,650 000.00 247,500.00 P-16-2 Corullon Holdings Inc. Jan to Mar 2012 1,850 000.00 277 500.00 July to Sept 2012 1 650 000.00 247 500.00 P-16-3 Elija Holdings Inc. Jan to Mar 2012 11850 000.00 277/500.00 July to Sept 2012 1,650 000.00 247,500.00 P-16-4 Eliia Holdinqs Inc. Jan to Mar 2012 1,850 000.00 277 500.00 July to Sept 2012 1 650 000.00 247 500.00 P-16-5 FBC Holdings Inc. March 2012 100 000.00 10,000.00 P-16-6 FBC Holdings Inc. October 2012 200 000.00 20 000.00 December 2012 100 000.00 10 000.00 P-16-7 Fercat Holdings Inc. Jan to Mar 2012 1 850,000.00 277 500.00 July to Sept 2012 1 650 000.00 247 500.00 P-16-8 Fercat Holdinqs, Inc. Jan to Mar 2012 2 150 000.00 322 500.00 July to Sept 2012 2 230 000.00 334 500.00 P-16-9 Francisco R. Elizalde Jr. Jan to Mar 2012 1 850,000.00 277 500.00 July to Sept 2012 1 650,000.00 247 500.00 P-16-10 Francisco R. Elizalde Jr. Jan to Mar 2012 1 850,000.00 277 500.00 P-16-11 Francisco R. Elizalde Jr. P-16-12 Gilman Holdings Inc. P-16-13 Gilman Holdings Inc. P-16-14 Mermac Inc. P-16-15 Mermac Inc. P-16-16 Reinosa Holdings Inc. P-16-17 Reinosa Holdings Inc. P-16-18 San Puente Holdinqs Inc. 29 Commissioner ofInternal Revenue vs. TMX Sales/ Inc. and the Court of Tax Appeals, G.R. No. 83736, January 15, 1992. 30 Exhibit "P-1". 31 Par. 7, JSFI, Admitted Facts, Docket (Vol. I), p. 209; Exhibit "P-6". 32 Exhibits "P-16-1" to "P-16-30".

DECISION CTA Case No. 9026 P-16-19 San Puente Holdings Inc. July to Sept 2012 1 650_L_OOO.OO 247 500.00 P-16-20 Jaime Zobel de Ayala Oct to Dec 2012 1 500,000.00 225 000.00 Sub-total Apr to June 2012 Sale ofReal Property Oct to Dec 2012 1'30,780,000.00 1'4,597. 000.00 P-16-21 Vanessa M. Besas Apr to June 2012 P-16-22 Vanessa M. Besas Oct to Dec 2012 p 1 073 280.00 p 64 396.80 P-16-23 Krvstal E. Gamit Oct to Dec 2012 P-16-24 Krystal E. Gamit Oct to Dec 2012 180 000.00 10 800.00 P-16-25 Henry M. Orifia and Lykieng Orifia Oct to Dec 2012 P-16-26 Eileen May V. Jocson Oct to Dec 2012 1 073_L_280.00 64 396.80 P-16-27 Maria Socorro A. Ligon Apr to June 2012 P-16-28 Roselle Sharon R. Mendoza Oct to Dec 2012 180 000.00 10 800.00 P-16-29 Marilyn S. Ocampo P-16-30 Marilyn S. Ocampo 210 000.00 12 600.00 Sub-total 180 000.00 10 800.00 TOTAL 180 000.00 10 800.00 210 000.00 12 600.00 1_073 280.00 64 396.80 360 000.00 21 600.00 , 4,719,840.00 , 283,190.40 P4,880,190.40 We now proceed to the determination of whether petitioner complied with the third requisite. The certificates show that the CWTs of P4,597,000.00 were withheld on management fees received by petitioner amounting to P30,780,000.00, which formed part of the income declared by petitioner in its Annual ITR and Audited Financial Statements (AFS) for CY 2012 amounting to PSO,OOO,OOO.OO, as evidenced by its official receipts33, cash receipts book34 and general ledger35� On the other hand, the CWTs of P283,190.40 were withheld on the income payments of P4,719,840.00 pertaining to the sale of properties and equipment. Upon verification of petitioner's official receipts36, general journaP7, cash receipts book38 and general ledger39, the Court finds that the gain realized from the said sale amounting to P1,703,234.65, as shown below, was included in the return of the petitioner as part of the "Other Taxable Income Not Subjected to Final Tax" amounting to P2,653,070.2540 ~ 33 Exhibits "P-17-1-1" to "P-17-1-20". 34 Exhibit "P-17-2". 35 Exhibit "P-19-1". 36 Exhibits "P-18-1" to "P-18-10". 37 Exhibit "P-20-1". 38 Exhibit "P-17-2". 39 Exhibit "P-20-2". 40 Line 19, Exhibit "P-1".

DECISION CTA Case No. 9026 Exhibit Withholding Agent Period Covered Selling Cost of Gain on Sale Taxes P-16-21 Vanessa M. Besas Apr to June 2012 Price/Income Property p 276 845.18 Withheld P-16-22 Vanessa M. Besas Oct to Dec 2012 p 796 434.82 p 64 396.80 P-16-23 Krystal E. Gamit Apr to June 2012 Payments 104 723.89 P-16-24 Krystal E. Gamit Oct to Dec 2012 p 1073 280.00 75 276.11 276 845.18 10 800.00 P-16-25 Henrv M. Orifia and Lvkienq Orifia Oct to Dec 2012 796 434.82 104 723.89 64 396.80 P-16-26 Eileen May V. Jocson Oct to Dec 2012 180 000.00 122 177.88 10 800.00 P-16-27 Maria Socorro A. Ligon Oct to Dec 2012 1 073 280.00 75 276.11 104 723.89 12 600.00 P-16-28 Roselle Sharon R. Mendoza Oct to Dec 2012 87 822.12 104 723.89 10 800.00 P-16-29 Marilyn S. Ocampo Apr to June 2012 180 000.00 75 276.11 122 177.88 10 800.00 P-16-30 Marilyn S. Ocampo Oct to Dec 2012 210 000.00 75 276.11 276 845.18 12 600.00 Total 180 000.00 87 822.12 209 447.79 64 396.80 180 000.00 796 434.82 P1 703,234.65 21 600.00 210 000.00 150 552.21 P283 190.40 1 073 280.00 P3 016,605.35 360 000.00 P4,719 840.00 As such, petitioner was able to establish that the income related to the CWTs being claimed for refund was declared as part of the income in its 2012 Annual ITR, in compliance with the third requisite. In sum, petitioner has sufficiently proven its entitlement to a cash refund representing unutilized excess creditable withholding taxes for CY 2012 in the amount of P4,880,190.40. WHEREFORE, premises considered, the instant Petition for Review is GRANTED. Accordingly, respondent is ORDERED to REFUND in favor of petitioner the amount of P4,880,190.40 representing its excess and unutilized creditable withholding taxes for the CY ended December 31, 2012. SO ORDERED. CAESAR~ASANOVA Associate Justice WE CONCUR: ~~c~~,_~. ~'~-~ iffANITO C. CASTANED~, JR. CATHERINET.MANAHAN Associate Justice Associate Justice

DECISION CTA Case No. 9026 ATTESTATION I attest 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. ltJ~ ANI~ TOC c. C- AS~ TAN~ EDA~, JR~ Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, 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. Presiding Justice