China Banking Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5405. September 30, 1998.] CHINA BANKING CORPORATION , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This case involves a claim for refund in the amount of P1,140,623.82 representing alleged overpaid gross receipts tax paid for the second quarter of 1994. Petitioner is a universal banking institution duly organized and existing in accordance with the laws of the Philippines. On July 20, 1994, petitioner paid the aggregate amount of P12,354,933.00 as gross receipts tax for its income derived from interest on loans investments, commissions, service and collection charges, foreign exchange profit and other operating earnings for the second quarter of 1994. On January 30, 1996, this Court rendered a Decision in CTA Case NO. 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue wherein it was held that the 20% final withholding tax on a bank's interest income should not form part of its taxable gross receipts. Thus, on the basis of this decision, the petitioner, on July 19, 1996, filed a written claim for refund or tax credit with the respondent in the amount of P1,140,623.82 representing the 5% gross receipts tax on the 20% final withholding tax. Likewise, on the very same day petitioner filed the instant petition for review in order to beat the two-year prescriptive period provided for under Section 230 of the Tax Code. In her Answer, respondent gave her usual defenses such as: the claim for refund is undergoing administrative investigation; that the gross receipts tax were collected and paid pursuant to law and pertinent BIR regulations etc. It was in her Memorandum that respondent challenged this Court's decision in the case of Asian Bank vs. Commissioner of Internal Revenue, CTA Case No. 4720 which served as the basis of petitioner's claim for refund. Respondent opines that this Court's ruling in the Asian Bank case which excluded the 20% final withholding tax from the bank's gross receipts, is erroneous because the term "gross receipts" contemplates all items of income of the petitioner regardless of whether or not the same were allocated for a specific purpose. According to respondent, the term "gross receipts: means whole, entire receipts as opposed to "net receipts". The issues that are presented to this Court for resolution are: 1. Whether or not the gross receipts for purpose of computing the GRT shall be computed net of the 20% final withholding tax; and 2. Whether or not petitioner is entitled to the amount of P1,140,623.82 representing alleged overpaid gross receipts tax paid for the second quarter of 1994. That petitioner is liable for gross receipts tax is not disputed. The question that is now left for our determination is the basis of the said tax which issue has already been settled in the case cited by petitioner, Asian Bank Corporation vs . Commissioner of Internal Revenue , supra . In said case, this Court held: "We agree with the petitioner that the 20% final withholding tax on it's interest income should not form part of its taxable gross receipts. Revenue Regulations No. 12-80 dated Nov. 7, 1980 on Taxation of Certain Income Derived from Banking Activities provides that the rates of tax to be imposed on the gross receipts of such financial institutions; shall be based on all items of income actually received , thus: SEC. 4. . . . (e) Gross receipts tax on banks , non-bank financial intermediaries , financing companies , and other non-bank financial intermediaries not performing quasi-banking activities . The rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received . More accrual shall not be considered, but once payment is received on such accrual or in cases of prepayment, then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder. (Emphasis supplied) From the foregoing, it is but logical to infer that the final tax, not having been received by the petitioner but instead went to the coffers of the government, should no longer form part of its gross receipts for the purpose of computing the GRT. This conclusion is in accord with the interpretation of the Supreme Court in the case entitled Collector of Internal Revenue vs. Manila Jockey Club, 108 Phil. 821, as quoted by this Court in disposing of a similar issue in the case entitled Compania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1966, thus: In the second place, the highest tribunal of the land interpreted the term "gross receipts: to mean all receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayer." Thus, it was held: ". . . The Government could not have meant to tax as gross receipt of the Manila Jockey Club the % which it directs same Club to turn over to the Board of Races. The latter being a Government institution, there would be double taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, or know the Club would give, to give horses and Jockeys admitted 5%. It is true that the law says that out of the total wager funds 12% shall be set aside as the 'commission' of the track owners but the law itself takes official notice, and virtually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of the 12% commission. As it did not at that time contemplate the application of 'gross receipts' revenue principle, the law in making a distribution of the total wager funds, took no trouble of separating item from the other; and for convenience, grouped three items under one common denomination. "Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the proprietor." (The Commissioner of Internal Revenue vs. Manila Jockey Club., G.R. Nos. L-13890 7 L-13887, June 30, 1960) It is to be noted that, under Section 260 of the Tax Code, a race-track is subject to an amusement tax of 20% of its gross receipts and the term 'gross receipts' embraces all the receipts of the proprietor, lessee or operator of the amusement place. Notwithstanding the broad and all-embracing definition of the term "gross receipts" found in our amusement tax law, our Supreme Court did not adopt a literal interpretation of the said term in the case of the Manila Jockey Club, Inc., supra ." Having resolved the legal issue involved in this case, We now dwell on the amount to which petitioner is entitled to refund on the basis of the evidence presented. Based on petitioner's computation of the refundable amount, the gross receipts tax payments for the second quarter of 1994 were divided on the basis of the tax rates of 5% (short term); 3% (medium term) and 1% (long term) depending on the maturity dates of the investment pursuant to Section 119 of the 1994 Tax Code (see Exhibit "F-1"). A careful examination of the records of this case reveal that it is only the GRT payments corresponding to the medium term maturity rate of 3% that were supported by sufficient evidence. Petitioner computed its overpaid gross receipts tax on medium term investment as follows: Gross receipts tax computed at gross P204,592.17 Less: gross receipts tax computed at net 81,313.44 Refundable amount P123,278.73 ========= The evidence offered by the petitioner however shows that the refundable GRT based on medium term investments total P208,711.50, computed as follows: 20% Final Rate Amount Kind of investment Exh. Tax Paid of GRT Refundable 3-yr FRTM SER 11 with TFA- P881.0M per RMIC #94-1117 H-3-a P6,925,605.61 3% P207,768.17 3-yr FRTM SER 11 with TFA- P4M per RMIC #1146 H-4-a 31,444.30 3% 943.33 TOTAL P6,957,049.91 P208,711.50 ========== ========= We are inclined to grant the lesser amount of P123,278.73 as computed by the petitioner because its claim for refund corresponding to GRT on medium term investments is limited to said amount. WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering the respondent to REFUND or ISSUE a tax credit certificate in the reduced amount of P123,778.73 representing overpaid GRT payments for the second quarter of 1994. The remaining amount claimed by petitioner is DENIED for insufficiency of evidence. SO ORDERED. (SGD.) RAMON O. DE VEYRA Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge Separate Opinions With due respect to the Opinion of the Majority, I hereby express my dissent to the exclusion of the 20% final withholding tax on certain passive income as no longer forming part of the taxable base of the bank's gross receipts for purposes of the 5% gross receipts tax under Section 119 of the Tax Code, as bereft of any legal bases. It is true, however, that all passive gross income of corporations which are subject to the final withholding tax at source under Section 50 (a) of the Tax Code, as amended by Executive Order No. 37 on July 31, 1986, should no longer form part of the gross income under Section 28 (a) of the same Code. Inasmuch as the enumeration of gross income under the aforestated Section of the Tax Code is global in concept, the corporate income tax is computed on the basis of its taxable income consisting of pertinent items of gross income specified in the Tax Code less deductions, if any, authorized by such types of income by said Code or other special laws. There is no provision in the Tax Code or any special laws which excludes the 20% final income tax withholding under Section 50 (a), as no longer forming part of the gross receipts for purposes of the 5% gross receipts tax. On the other hand, Section 8 (c) of Revenue Regulations No. 12-80, dated November 7, 1980, as amended by Section 7 (c) of Revenue Regulations No. 17-84, dated October 12, 1984 have the same provisions, thus: " If the recipient of the above-mentioned items of income are financial institutions , the same shall be included as part of the tax base upon which the gross receipts tax is imposed ." (Emphasis supplied) Clearly, there is no doubt that the 20% final withholding tax is legally includible as part of the gross receipts for purposes of computing the gross receipts tax. The petitioner in the instant case cited the Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, dated January 30, 196, where this Court has upheld the petitioner's contention that the interest income included as part of such gross receipts should be computed minus the 20% final tax already withheld and deducted by various withholding agents for the reason that the amount did not go to its funds, hence, was not actually received by them. And the Court approved the petitioner's citation of Section 4 (e) of Revenue Regulations No. 12-80, dated November 7, 1980, thus: "Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities. The rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. Mere accrual shall not be considered, but once payment is received on such accrual or in cases of overpayment then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder." This Court concluded that from the aforestated provisions it can logically be inferred that the amount representing the final tax, not having been by the petitioner but instead went to the coffers of the government, should no longer form part of its gross receipts for purposes of computing the gross receipts tax. Such conclusion in law is legally objectionable for two (2) reasons, to wit: 1) Section 4 (e) of Revenue Regulations No. 12-80 is not a computation determinative of the amount of gross receipts as basis of the gross receipts tax under Section 119 of the Tax Code. Said revenue regulations merely authorize the determination of the amount of gross receipts on the basis of the method of accounting being used by the taxpayer under Section 37 of the Tax Code. Such accounting methods for tax purposes comprise a set of rules determining when and how to report income and deductions (Consolidated Mines, Inc. vs. CTA, L-18843, August 29, 1974). The two principal accounting methods expressly and impliedly recognized by the Tax Code and the Income Tax Regulations are: (a) Cash receipts and disbursements method or cash basis. Income earned by the taxpayer is not included in gross income until received and expenses are not deducted until paid within the taxable year; and (b) Accrual basis. Income is included in gross income when earned, whether received or not, and expenses are allowed as deductions when incurred although not yet paid within the year. 2) That the non-inclusion of the 20% final withholding income tax from the gross interest income for purposes of the gross receipts tax operates as an exemption from tax. Being an exemption from tax, the same must be construed strictly not against the government but against the one who asserts the claim of exemption. Tax exemption can only be given effect when the grant is clear and categorical inasmuch as taxation is the rule and exemption is the exception, Section 26, Tax Code. The withholding therefore in the Asian Bank Corporation to the effect that the non-inclusion of the 20% final withholding income tax from the gross receipts can logically be inferred from the wordings of said Section 4 (e) of Revenue Regulations No. 12-80, is misplaced. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent (51 Am Jur 361) . It should not be construed as to permit the taxpayer to easily evade the payment of the tax (Cabon Steel Co. vs. Lewelyn, 251 U.S. 501) . Thus, the good faith of the taxpayer is not sufficient justification for exemption from the payment of surcharges imposed by law (Commissioner vs. Royal Interocean Lines and CTA, L-26506, July 30, 1970) . A tax statute should be construed to avoid the possibilities of tax evasion (Lorenzo vs. Posadas, 64 Phils. 353) . dctai The High Court's decision in the case of Commissioner of Internal Revenue vs. The Manila Jockey Club, Inc. 108 Phils. 821, June 30, 1960, which was reaffirmed by the said Court in the case of Visayan-Cebu Terminal Co ., Inc . vs . Commissioner of Internal Revenue , 13 SCRA 357 , February 27 , 1965 cannot be considered as precedent cases, hence, inapplicable to the two cases decided by this Honorable Court in the cases of Compania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1966 and Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720 dated January 30, 1996, for the following reasons: 1) In the Manila Jockey Club, Inc. case the Club was authorized to operate horse races in which betting was made through the sale of tickets to the public. The total amount of bets called "wager fund" were distributed pursuant to Executive Order No. 320 and Republic Act No. 309, as follows: 87% as dividends to holders of winning tickets 12% as "commissions" of the Manila Jockey Club, of which 1/2% was assigned to the Board on Races and 5% was distributed as prized for owners of winning horses and authorized bonus for jockeys. According to the above-mentioned distribution of the "wager fund," the then Collector of Internal Revenue assessed the Club on the whole amount of its "commission" of 12%. But since the Club had already paid the amusement tax based on its 7% share of the "commission," the amount assessable pertains only to the 5% for the period from November 1946 to October 1950. On various instances, the Club protested the proposed assessments and was sustained by the opinions of the Secretary of Justice rendered on three different occasions (Opinion No. 345, series of 1941; Opinion No. 249, series of 1952 and Opinion No. 340, series of 1955). Notwithstanding the opinions of the Secretary of Justice to the effect that the amount corresponding to the 5% was held only by the Club in trust for the owners of winning horses and authorized bonuses of jockeys, the then Collector of Internal Revenue demanded payment of amusement taxes for the period November 1946 to October 1950. Said demand letter was timely appealed to the Court of Appeals wherein a unanimous judgment was obtained reversing the Collector's stand on the matter. In the High Court, the position of the Secretary of Justice was sustained thereby upholding the Court of Tax Appeals' decision. Accordingly, gross receipts of the proprietor of the amusement place should not include any money which, although delivered to the amusement place was " especially earmarked " by law or legal rule regulations for some persons other than the proprietor. Undeniably, they are money received by the racing club but they are moneys earmarked by law or regulations for winning horse owners and jockeys and never for a minute become the property of the race track. The same is true in the case of the % which the law directs the club to deliver to the Board on Races. The High Court therefore agrees with the stand of the Court of Tax Appeals that such funds representing 5% of the 12% "commissions" of the race track do not form part of the gross receipts, hence not subject to the amusement tax of 20%. The above-mentioned decision of the High Court was also applied in the case of Visayan Cebu Terminal Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 357, Nos. L-19530 and L--19444, February 27, 1965. The legal issue involved in this case is the interpretation of the management contract entered into by and between the Bureau of Customs and Visayan Cebu Terminal Co., Inc. whereby the latter as contractor was appointed the sole manager of the Arrastre Service at the Port of Cebu City. In the said Management Contract, it was further agreed and understood that in consideration of the rights and privileges granted the Contractor for the management of the Arrastre Service, the Bureau of Customs shall receive twenty eight (28%) percent of the total monthly gross income derived from whatever source in connection with the operations of the Arrastre Service, payable within ten (10) days of the succeeding month. The main legal issue involved in this case is whether or not the gross receipts corresponding to the 28% of the total gross income of the Service Contractor delivered to the Bureau of Customs within ten (10) days of the following month should form part of the gross receipts subject to 3% contractor's tax under Section 191 of the Tax Code. The Court of Tax Appeals ruled in favor of the petitioner, holding the view that the said 28% payment by the Arrastre Contractor based on its monthly gross income should not form part of the gross receipts subject to 3% contractors tax and that paragraph 23 of the said Management Contract can legally be construed as a " regulation ." As the learned trial court has aptly observed: ". . . the government could not have intended to consider as gross receipts the 28% that went to one of its institutions, the Bureau of Customs, and thereby collect percentage tax on it from petitioner. To hold petitioner liable for the payment of percentage tax in unquestionably unjust and not contemplated by Section 191 of the Tax Code." llcd All the above-mentioned decisions of the High Court made specific reference to gross receipts which are especially " earmarked by law or legal rule or regulation " as not forming part of the taxable gross receipts for purposes of the gross receipts tax under the Tax Code. For this purpose, it is pertinent to define the word "earmark" as a mark put upon a thing to distinguish it from another. Originally and literally, a mark upon the ear, a mode of marking sheep and other animals. Property is said to be earmarked when it can be identified or distinguished from other property of the same nature. To set apart from others (Black's Law Dictionary, 6th Edition, p. 508). In the case of the Manila Jockey Club, Inc. Executive Order No. 320 and Republic Act No. 309 made the specific "earmarking" for the distribution of the total wager fund to the different persons other than the proprietor. The same is true in the case of Visayan Cebu Terminal Co., Inc. where the specific earmarking of the 28% of the total monthly gross income to be delivered to the Bureau of Customs by the Contractor was provided in paragraph 23 of the Management Contract. Such specific earmarking of the twenty (20%) percent final income tax as not includible in the gross receipts for purposes of the gross receipts tax was not provided by any law or legal rule or regulations, hence the non-applicability of the above-cited High Court decisions to the Asian Bank Corporation case. This legal observation is also in point in the case of Compania Maritima case where the non-inclusion of the 10% reserve from the total cash collection to avoid claim for refund on freight and passengers tickets not taken is not provided by any law or legal rule or regulations. In the Asian Bank Corporation case, petitioner bank alleges that subjecting the gross receipts to the 20% final withholding income tax and later to the 5% gross receipts tax is not only oppressive and obnoxious but even a confiscatory form of double taxation. Double taxation has been defined "as the taking of the same item or piece of property twice to the same person, or taxing it as the property of one person and again as the property of another, but this does not include the imposition of different taxes concurrently on the same property or income (e.g. federal and state income taxes), nor the taxation of the same piece of property to different persons when they hold different interests in it or when it represents different values in their hands, as when both the mortgagor and mortgagee of property are taxed in respect to their interests in it, or when a tax is laid upon the profits of the corporation and also upon the dividends paid to its stockholders" (Black's Law Dictionary, 6th Edition, p 491). This acceptable form of double taxation is reflected in BIR Ruling No. 223 dated November 2, 1989, thus: "The 5% gross receipts tax under Section 120 of the Tax Code is collectible on all finance companies doing business in the Philippines from interests, discounts, and all other items treated as gross income under the Tax Code. Accordingly, your income derived from investing the excess funds in short-term market placements through commercial banks constitutes income hence, subject to the 5% gross receipts tax under said Section. The fact that it has been subjected to the 20% final withholding income tax under Section 50 (a) is immaterial. Besides, the withholding tax is imposed under Title II of the Tax Code while the finance tax is provided under Title V thereof." (BIR Ruling No. 223, November 2, 1989) For as long as the basis for the claim for refund or tax credit certificate is based on the non-inclusion of the amount representing the final withholding income tax under Section 50 (a) as part of the gross income subject to gross receipts tax, this dissenting opinion will stand. The fact that petitioner-claimant is able to establish by competent documentary and testimonial evidence is of no moment. For purposes of the amusement tax under Section 260 of the Tax Code, the term 'gross receipts' embraces 'all the receipts' of the proprietor, lessee, or operator of the amusement place. The words 'all the receipts' refer to the total amount of cash received which becomes part of the funds of the taxpayer and does not include any money which has been specially earmarked by any law or legal rule or regulation for some other person other than the proprietor, lessee or operator of the amusement place. Receipts means actually received (Philippine Long Distance Telephone Co. vs. Collector of Internal Revenue, G.R. No. L-3222, January 21, 1952) for itself and not for others, for otherwise they would not be receipts (Manila Jockey Club, Inc. vs. Collector of Internal Revenue, CTA Case No. 206, April 15, 1958; Jai Alai Corporation of the Philippines vs. Araneta, CTA Case No. 108, July 31, 1956 (Annotated, NIRC by Commissioner Jose Araas, 1988 Edition, p. 687). LLpr IN VIEW OF THE FOREGOING, I hereby recommend for the total denial of the amount claimed for lack of legal basis. (SGD.) AMANCIO Q. SAGA Associate Judge