Bank of the Philippine Islands v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5450. April 12, 1999.] BANK OF THE PHILIPPINE ISLANDS (in its capacity as Trustee of various employee retirement funds) , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This is a petition for review filed by petitioner, BANK OF THE PHILIPPINE ISLANDS (BPI), successor-in-interest of Citytrust Banking Corporation (Citytrust), trustee of the various employee retirement funds, infra , against respondent COMMISSIONER OF INTERNAL REVENUE, for the latter's inaction on petitioner's claim for refund in the amount of P7,066,426.32, allegedly representing the 20% final withholding tax erroneously withheld from the interest income of the Retirement Funds for the year 1995. Petitioner is a banking corporation duly organized and existing under Philippine laws and is authorized to perform trust functions and other activities by the Bangko Sentral ng Pilipinas (BSP). It is the surviving corporation in a merger between BPI and Citytrust, who was the duly appointed trustee and investment manager of various retirement funds ("Funds") and provident plans ("Plans") subject of this case, on October 4, 1996. Thus, petitioner BPI succeeds to all the rights and obligations of Citytrust, including those pertaining to the trust accounts involved in the instant case, in accordance with Section 80(5) of the Corporation Code of the Philippines, to wit: "Sec. 80. Effects of Merger or Consolidation . The merger or consolidation, as provided in the preceding sections, shall have the following effects:" dctai xxx xxx xxx "5. The Surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporation in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any claim, action or proceeding pending by or against any such constituent corporations may be prosecuted by or against the surviving or consolidated corporation, as the case may be . Neither the rights of creditors nor any lien upon the property of any of each constituent corporations shall be impaired by such merger or consolidation." (Emphasis supplied) During the year 1995, Citytrust, as trustee and investment manager of the various retirement plans, infra , invested the retirement funds in government securities and similar investments, from which the funds realized an aggregate interest income of P34,482,517.77. The said income was subjected by the BSP to the 20% final withholding taxes under Section 21 (c)(1) in relation to Section 50(a) of the Tax Code; allegedly in the total amount of P7,066,426.32. On September 18, 1996, Citytrust, filed with respondent a claim for refund or tax credit of the aforesaid amount of P7,066,426.32, on the ground that the withholding and collection of the 20% final tax from the income of the retirement funds was erroneous and/or illegal as the Funds are exempt from income tax pursuant to Republic Act No. 4917 in relation to Section 53(b) of the Tax Code and Supreme Court decision in the case of Commissioner of Internal Revenue vs . Court of Appeals, The Court of Tax Appeals, GCL Retirement Plan, 207 SCRA 487, March 23, 1992, which upheld the exemption from income tax of income derived by qualified (tax exempt) retirement funds from bank deposits, money market placements or purchase of treasury bills and/or government securities. The claim for refund in the amount of P7,066,426.32 is broken down as follows: T/A No. Account Name Income Withholding Tax 1B-004 Ateneo Eagle Fund P44,952.04 P8,994.57 1B-005 Ateneo Scholarship Fund 131,499.88 25,778.95 1B-007 Ateneo University Fund 216,909.24 47,943.90 1B-017 Misocom 23,221.31 4,789.51 5C-001 Citibank Retirement Fund 132,273.60 26,690.91 5C-001B Citibank Retirement Fund 385,970.85 80,107.06 5C-002 Citytrust Retirement and Provident Fund 386,459.59 78,116.77 5C-003 Alcatel Trade Int'l. Phils. 24,793.16 4,971.64 5C-004 Singapore Airlines Ltd. 577,826.06 115,671.85 5C-007 Int'l. Flavors & Fragrances 518.95 103.79 5C-008 Atlas Copco (Phils., Inc.) Pneumatic 17,942.65 3,597.29 5C-011 American President Lines 58,213.17 11,847.48 5C-013 The Goodyear Tire & Rubber Co. 190,712.68 38,142.54 5C-015 Philtread Tire & Rubber Co. 24,646.39 4,929.28 5C-017 Mercury Drug Corporation 115,232.30 23,474.90 5C-018A Singer Sewing Machine Co. 147,574.01 29,608.56 5C-018B Singer Sewing Machine Co. 36,090.29 7,243.44 5C-019A MJO 0.00 0.00 5C-019B North Negros Marketing 0.00 0.00 5C-020 Del Monte Phils., Inc. 438,629.44 89,621.40 5C-021B Del Monte Phils., Inc. 179,568.74 35,913.72 5C-025 Nestle Phils., Inc. 1,436,208.97 35,913.72 5C-028 Caltex Phils., Inc. 272,997.19 54,639.86 5C-029 Assoc. of Int'l. Shipping Lines 10,709.28 2,194.70 5C-030 Dow Chemicals Pacific Ltd. 55,015.28 11,003.32 5C-032 Catholic Educational Association of the Phils. 236,749.40 48,675.53 5C-033 Royal Insurance Int'l. Ltd. 14,445.26 2,951.06 5C-035 Sime Darby Int'l. Tire Co., Inc. 41,408.01 8,283.84 5C-036 Boehringer Ingelheim 103,797.31 20,764.23 5C-037 J. Walter Thompson Co. 54,269.39 10,926.46 5C-038 Cagayan Electric Power & Light Co., Inc. (CEPALCO) 78,275.44 16,172.40 5C-041 Pfizer, Inc. 87,860.37 17,818.65 5C-042 Pacific Enamel & Glass Mfg. Corp. 32,660.72 6,568.69 5C-043 Petron Corporation 7,151,046.66 1,630,772.71 5C-043A PNOC Energy Dev't. Corp. 1,754,531.44 363,249.07 5C-043F Phil. Nat'l. Oil Co. Shipping & Transport Corp. 16,767,742.73 3,285,701.15 5C-044 GST Philippines, Inc. (Armco Marsteel) 29,123.69 5,826.65 5C-050 Abb Stal Refrige, Inc. 21,913.12 4,422.06 5C-051A Manila Golf - Caddy Welfare 7,121.19 1,440.40 5C-051B Manila Golf & Country Club, Inc. Death or Permanent 1,674.02 334.82 5C-052 Cyanamid 62,023.43 12,404.69 5C-053 Hemisphere Leo Burnett, Inc. 55,585.31 11,122.06 5C-054 BASF 40,934.42 8,249.53 5C-060 Admiral Realty Co., Inc. 17,838.03 3,637.53 5C-061 INTEL Phils. 312,095.01 63,934.07 5C-062 ECCP 8,383.91 1,677.66 5C-066 MIT Retirement Fund, Inc. 50,588.78 10,254.11 5C-068 Henkel Phils. 10,136.24 2,091.15 5C-069 Coca-Cola 156,850.78 34,414.01 5C-070 Amkor/Anaw Pilipinas, Inc. 303,590.42 63,895.60 5C-072 Sharp, Phils. 88,655.63 17,986.64 5C-073 Colgate Palmolive Phils., Inc. 93,833.38 18,158.22 5C-073C Colgate Palmolive Phils., Inc. 60,150.65 12,119.35 5C-073D Colgate Palmolive Phils., Inc. 2,245.11 442.41 5C-074 FOSECO Phils., Inc. 236,949.04 47,412.82 5C-075 Malaysian Airlines 18,091.60 3,658.59 5C-076 Victory Liner 37,493.20 7,570.20 5C-081 Ault and Wiborg 184,828.18 37,273.49 5C-082 Wellcome Phils., Inc. 35,269.60 7,344.44 5C-083 Japan Airlines 12,666.56 2,533.32 5C-085 Poblador, Azada & Associates Retirement Plan 30,153.22 6,043.94 5C-086 Phil. Belt Mfg. Corp. 35,362.96 7,108.84 5C-089 United Airlines Phils. Ret. Plan 5,824.40 1,164.88 5C-091 Blue Bell Commodities 3,716.62 747.11 5C-092 Drug Makers Laboratory, Inc. 1,802.88 362.35 5C-093 BP South East Asia Ltd. 3,662.32 732.46 5C-094 Asian Finance IC Ret. Plan 12,959.71 2,605.30 5C-095 British Airways Ret. Plan 7,949.10 1,624.48 5C-096 US Embassy FSN Employees Ret. Plan 204,036.99 40,935.21 5C-097 Vitacolor Industrial Ret. Plan 2,384.46 476.88 5C-098 Phil. Bus. for Social Progress 47,447.51 9,568.73 5C-100 ASEC Int'l. Inc. 4,950.08 1,027.31 5C-100B ASEC Info System 2,431.16 486.46 5C-100B ASEC Info System 2,431.16 486.46 5C-102 Emirates 4,829.16 967.51 5C-103 Zilog 10,104.80 2,030.64 5C-106 Urdaneta Villa Ass. Ret. 3,347.18 691.23 5C-108 Ateneo de Davao 28,615.23 5,742.91 5C-110 Cyanamid Agricultural Research Foundation, Inc. 35,801.51 7,160.30 5C-111 Xavier University 56,293.43 11,346.24 5C-111C Xavier University 0.00 0.00 5C-114A Wyatt Co. 10,380.81 2,076.16 5C-114B Wyatt Co. 29,058.07 5,811.62 5C-114C Wyatt Co. 12,132.14 2,426.42 5C-115 The German Club 1,122.14 234.41 5C-116 Mfrs. Life Insurance Corp. 17,158.46 3,440.84 5C-117 Reftractories Corp. of the Phils. 73,476.59 14,920.32 5C-118 Bristol-Myers Squibb (Phils.), Inc. 71,317.63 14,263.52 5C-121 AT & T 6,631.89 1,352.06 5C-122 Sacred Heart School 14,823.68 2,970.11 5C-124 C.C. Unson Co., Inc. Ret. Plan 17,949.44 3,593.27 5C-125 Golay Buchel Phils., Inc. 12,923.78 2,587.79 5C-127 IATA Agency Services 10,426.02 2,143.61 5C-129 Sunlife of Canada 181,413.11 36,394.67 5C-130 Yasaki-Torres Mfg. 15,900.14 3,252.08 5C-135 Akerlund 37,476.98 7,525.23 5C-137 Food Industries 17,712.05 3,578.33 5C-138 University Physicians Services 12,128.08 2,425.61 5C-142 Transfarm Auto Sales 2,331.19 466.23 5C-142B Transfarm and Co., Inc. 756.62 151.32 5C-143 Ateneo de Naga 36,680.94 7,344.50 5C-147 Phil. Waterworks Corp. 7,731.45 1,550.31 5C-148 Computer Prof., Inc. 4,011.62 802.31 5C-149 Prov. Fortune Ins. Corp. 8,766.92 1,753.36 5C-150 ING Bank 8,301.50 1,060.30 5C-151 Philex Retirement Trust 31,470.83 6,294.17 5C-155 Philex Retirement Trust 31,470.83 6,294.17 5C-156 FMC Marine Colloids 19,688.88 3,945.59 5C-157 H.B. Fuller (Phils.) Inc. 0.00 0.00 5C-161 Eveready Battery Co. 153,597.47 30,747.37 5C-162 Eastern Telecoms 48,948.94 9,890.83 5C-164 Ramon Magsaysay 11,062.82 2,569.21 5C-165 The Asia Foundation 3,722.89 788.15 5C-175A Claret School 0.00 0.00 5C-175B Claret School 0.00 0.00 TOTAL P34,482.517.77 P7,066,426.32 =========== ========== The aforesaid claim for refund was not acted upon by respondent, hence, on December 23, 1996, petitioner, as successor-in-interest of Citytrust, filed with this Court the instant petition for review. Petitioner repleads its stance a quo in the instant petition and further pointed out that since each of the aforementioned trusts created by the retirement plans is registered with the BIR as a reasonable private benefit plan pursuant to Section 28(b)(7)(A) of the 1995 Tax Code, as amended by Republic Act No. 4917, they clearly enjoy exemption from income tax, including the 20% final withholding tax aforecited, thus, petitioner stressed that it is entitled to the refund of the 20% final withholding tax erroneously deducted and withheld from the income of the above-mentioned retirement plans in the total amount of P7,066,426.32. On the other hand, respondent in his answer interposed, inter alia , that (1) the petition states no cause of action as it does not allege the date(s) when the tax sought to be refunded were actually paid, (2) Presidential Decree No. 1959 which took effect on October 15, 1984 withdrew the exemption from withholding taxes on interest income from bank deposits and yield from deposit substitutes and money market placements, and (3) it is incumbent upon petitioner to show that it is entitled to the refund demanded under Section 230 of the Tax Code. The issue to be resolved by the Court is whether or not the interest income of the retirement funds, supra , are exempt from withholding taxes, thus, petitioner as trustee of the various retirement funds abovementioned is entitled to the refund of the amount representing the 20% final withholding tax erroneously withheld and collected by respondent from the interest income earned by the funds from its investments in government securities and similar undertakings. This is not the first time that we have been confronted with such an issue at hand. As correctly stated by petitioner, the matter was already settled by the Supreme Court in the case of Commissioner of Internal Revenue vs . The Honorable Court of Appeals, et al . , G . R . No . 95022, March 23, 1992 . The Highest Court ruled in that case that an employees' trust maintained by an employer to provide retirement, pension, disability and death benefits to its employees and which has been approved and qualified as exempt from income tax by the Commissioner of Internal Revenue in accordance with RA No. 4917, is exempt from income tax, including the 20% final withholding tax imposed on interest earned on Philippine currency bank deposits and yield from deposit substitutes, thus: "There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are declared exempt (Sec. 56[b], now 53[b], Tax Code).The application of the withholding system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in withholding a certain percentage of that income which it is not supposed to pay in the first place ." (Emphasis supplied). Ergo , in accordance with the above ruling of the Honorable Supreme Court which is in conformity with the provisions of RA 4917 (Section 1) and Section 53(b) of the Tax Code, quoted hereunder, this Court finds that the withholding of the 20% final withholding tax from the income of the Funds was without legal basis, and hence, was illegally and/or erroneously collected. "SECTION 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a "reasonable private benefit plan" maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizures by or under any legal or equitable process whatsoever . . ." (Emphasis supplied) "SECTION 53. Imposition of Tax . ( a ) Application of tax . The tax imposed by this Title upon individuals shall apply to income of estates or of any kind of property held in trusty, including xxx xxx xxx (b) Exception . The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profitable sharing plan of an employer for the benefit of some or all of his employees . . ." (Emphasis supplied) The legal issue having been settled, what remains to be resolved by the Court as of the moment involves factual matters, that is whether or not petitioner has established by evidence its claim for refund. LLjur In substantiating its claimed refundable amount, petitioner formally offered exhibits A to G-329, inclusive of submarkings, and the testimonies of its witnesses. Respondent did not object to the admission of petitioner's exhibits neither did he submit any documentary evidence to support his case. Thus, considering the uncontroverted evidence of the petitioner, the Court was persuaded to extend the relief sought by the petitioner but only to the amount of P5,559,574.35, as the Court after a minutiose scrutiny of the evidence presented including those which the Court took judicial notice of, finds that some of the retirement funds (enumerated below) were not specifically qualified and certified as tax exempt by the BIR and one of them failed to offer proof of withholding tax payments. Accordingly, the Court excluded the following from the computation of the allowable refund, thus: a) Those with retirement plans which have not been specifically qualified and certified as tax-exempt by the BIR in accordance with RA 4917. T/A No. Account Name Income Withholding Tax 1B-004 Ateneo Eagle Fund P44,952.04 P8,994.57 1B-005 Ateneo Scholarship Fund 131,499.88 25,778.95 1B-007 Ateneo University Fund 216,909.24 47,943.90 1B-017 Misocom 23,221.31 4,789.51 5C-094 Asian Finance IC Ret. Plan 12,959.71 2,605.30 5C-102 Emirates 4,829.16 967.51 5C-111 Xavier University 56,293.43 11, 346.24 5C-114A Wyatt Co. 10,380.81 2,076.16 5C-114B Wyatt Co. 29,058.07 5,811.62 5C-114C Wyatt Co. 12,132.14 2,426.42 5C-115 The German Club 1,122.14 234.41 5C-116 Mfrs. Life Insurance Corp. 17,158.46 3,440.84 5C-117 Reftractories Corp. of the Phils. 73,476.59 14,920.32 5C-118 Bristol-Myers Squibb (Phils.), Inc. 71,317.63 14,263.52 5C-121 AT & T 6,631.89 1,352.06 5C-137 Food Industries 17,712.05 3,578.33 5C-138 University Physicians Services 12,128.08 2,425.61 5C-142 Transfarm Auto Sales 2,331.19 466.23 5C-142B Transfarm and Co., Inc. 756.62 151.32 5C-143 Ateneo de Naga 36,680.94 7,344.50 5C-150 ING Bank 8,301.50 1,060.30 5C-164 Ramon Magsaysay 11,062.82 2,569.21 5C-165 The Asia Foundation 3,722.89 788.15 5C-170 Ciba Geigy Phils. 11,588.91 2,363.47 b) Those with retirement plans which were previously disqualified in CTA cases 4807 and 5083 involving the same petitioner and same legal issues: T/A No. Account Name Income Withholding Tax 5C-044 Armco Marsteel P29,123.69 P5,826.65 5C-050 Abb Stal Refrige, Inc. 21,913.12 4,422.06 5C-089 United Airlines 5,824.40 1,164.88 5C-098 Phil. Bus. for Social Progress 47,447.51 9,568.73 5C-108 Ateneo de Davao 28,615.23 5,742.91 C) Retirement fund which did not offer proof of withholding tax payments. T/A No. Account Name Income Withholding Tax 5C-151 Philex Retirement Trust P31,470.83 P6,294.17 With respect to the remaining retirement funds of other companies which were not excluded, a close scrutiny of the evidence presented by petitioner reveals that not all of the withholding tax payments mentioned in the summary were properly substantiated by source documents such as Confirmation of Sale and Fixed Income Securities Placements. In conclusion, only the amount of P5,559,574.35 should be granted to petitioner. WHEREFORE, the instant petition for review is partially GRANTED . Respondent is hereby ordered to refund or issue a tax credit certificate to petitioner, as trustee of the various retirement funds, the sum of P5,559,574.35, representing the 20% final withholding tax proven to be erroneously withheld from the interest income of said retirement funds for the year 1995. No costs. SO ORDERED. (SGD.) AMANCIO Q. SAGA Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge (SGD.) RAMON O. DE VEYRA Associate Judge