BIR Ruling No. 015-06

November 15, 2006 BIR RULING NO. 015-06 Mr. Orlando A. Broola 14 Salambao St., Gtr., Lagro Novaliches, Quezon City S i r : This refers to your request for the payment of interest due on your claim for tax refund pursuant to Section 72 (c) of the 1977 Tax Code, as amended (now Section 79 (C) of the 1997 Tax Code, as amended). Documents attached show that in 1993, you filed a claim for refund in the amount of P175,594.00 for erroneously collected or withheld taxes from your retirement pay on April 11, 1992. The claim was granted only on July 27, 2001. Much to your consternation, only the amount of P158,526.36 was granted and no interest was added thereto considering the delay in the release of the claim for refund. In a letter dated August 25, 2003, you were informed by the Office of the Commissioner, through the Technical Assistant, that there is a pending recommendation by the Appellate Division to the Commissioner for the denial of your claim for refund considering that you were born on July 16, 1942 and retired on April 11, 1992, thus, you are short of 96 days to the 50-year retirement age requirement. The above recommendation was made in the basis of the documents you submitted to the said Division. In your request for the payment of interest earned for the delay in the release of your claim for refund submitted to the Assessment Division, you included therewith as part of the attachments your letter to your employer, the Mercury Drug Corporation, with the date August 6, 1992 encircled, requesting that you be allowed to avail of the optional retirement program offered by the company. Based thereon, it is your contention that you actually retired from service in the month of August 1992 and not on April 11, 1992, the date that you were considered by Mercury Drug Corporation to be separated from service. Further, it is your allegation that you were forced to fix the date April 11, 1992 as your retirement date just to come up with a compromise with your employer, hence, the encircling of the date August 6, 1992 in your letter. In view thereof and in the interest of fairness and equity, this Office hereby rules that the refund in the amount of P158,526.36 is correct. Thus, this Office agrees with your contention that your retirement should take effect on the date you wrote your employer for the availment of its optional retirement program and not on the retroactive date wherein the company considered you to be separated from the service. On the other hand, although there was delay in the payment of the claim for refund, this Office rules that your claim for payment of interest accruing from the amount of P158,528.36, counting from the period July 15, 1993, the date of the expiration of the three-month period within which to make the payment of the claim for refund pursuant to Section 72 (c) of the 1977 Tax Code, as amended (now Section 79 (C) of the 1997 Tax Code, as amended), up to July 16, 2001, the actual date you received the amount refunded, is of no moment. Section 72 which was made as the basis of your request for payment of interest earned for the delay in the release of your claim for refund applies to excess withholding of income tax on compensation. Section 72 of the 1977 Tax Code, as amended, provides viz. : DHITCc "Sec. 72. Income tax collected at source. (a) Requirement of withholding. Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with regulations to be prepared by the secretary of Finance. ( As amended by E.O. 37 ) xxx xxx xxx (c) Refunds or credits. (1) Employer. When there has been an overpayment of tax under this section, refund or credit shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld hereunder by the employer. (2) Employees. The amount deducted and withheld under this Chapter during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 21(a) of this Title. Refunds and credits in cases of excessive withholding shall be granted under rules and regulations promulgated by the Secretary of Finance. TIcAaH Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited within three (3) months from the fifteenth (15th) day of April . Refunds or credits made after such time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the three-month period to the date the refund of credit is made." (Emphasis Supplied). Your case involves erroneous withholding of income tax from your retirement pay (Paragraph 5 of your letter dated August 7, 2001). Therefore, Section 72 of the 1977 Tax Code, as amended, does not apply. The rule is that no interest on refund of tax can be awarded, unless authorized by law or the collection of the tax was attended by arbitrariness ( Collector vs. Prieto , 112 Phil. 907; Commissioner vs. Asturias Sugar Central , 2 SCRA 1140; Commissioner of Internal Revenue v. American Rubber Co ., 18 SCRA 842; Atlas Fertilizer Corporation vs. Bank of the Philippine Islands , 162 SCRA 628). An action is not arbitrary when exercised honestly and upon due consideration where there is room for two opinions, and however much it may be believed that an erroneous conclusion was reached (F.B. Moreno, Philippine Law Dictionary [3rd Ed.] p. 69, citing Imperial Development Corporation vs. Anover, 08473-AP, August 23, 1979). Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions ( Victorias Milling Co., Inc. vs. Commissioner of Internal Revenue, et al ., 19 SCRA 430). A delay of eight (8) years in refunding the amount of erroneously withheld tax may be construed to be an arbitrary action in the absence of a justifiable circumstance. In your case, be it noted that the delay was caused by an issue, particularly on your entitlement of the refund. In fact, the recommendation of the Appellate Division to this Office was for the denial of your claim for refund considering that you were born on July 16, 1942 and retired on April 11, 1992, thus, you are short of 96 days to the 50-year retirement age requirement. The said finding is in contrast with the resolution made by the Legal Division of Revenue Region No. 7, Quezon City, allowing your claim for refund. Be that as it may, this Office, in the interest of fairness and equity, affirmed the correctness of the refund. On that note, it is the view of this Office that the delay in granting the refund is justified. Hence, presence of arbitrariness is wanting. The presence of an issue, especially on your entitlement of the refund, negates arbitrariness. Please be guided accordingly. (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue