Standard Chartered Bank v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5679. November 16, 2001.] STANDARD CHARTERED BANK , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This petition for review is seeking for the refund or issuance of a tax credit certificate in the amount of P6,177,457.21, allegedly representing overpaid gross receipts tax for the third and fourth quarters of 1996 and for the four calendar quarters of 1997. The facts can be briefly stated as follows: Petitioner is a resident foreign banking institution organized and registered under the laws of England. It is authorized by the Securities and Exchange Commission to engage in business in the Philippines with principal office address at 6756 Ayala Avenue, Makati City. For the third and fourth quarters of 1996 and the four calendar quarters of 1997, Petitioner seasonably filed its Quarterly Percentage Tax Returns reflecting gross receipts tax payments in the sum of P107,998,781.00, detailed as follows: Quarter Ended Exh. Gross Receipts Gross Receipts Tax September 30, 1996 A, A-1 P262,444,904.00 P13,107,622.00 December 31, 1996 B, B-1 313,446,768.00 15,610,163.00 March 31, 1997 C, C-1 318,649,480.00 15,829,048.00 June 30, 1997 D, D-1 328,875,122.00 16,336,175.00 September 30, 1997 E, E-1 432,035,770.00 21,446,693.00 December 31, 1997 F, F-1 524,642,785.00 25,669,080.00 Total P2,180,094,829.00 P107,998,781.00 ============== ============= In arriving at the computation of the gross receipts tax, Petitioner alleged that it erroneously included in the taxable gross receipts the final withholding taxes of P123,549,144.20 derived from its passive income in the total amount of P617,745,720.99, broken down as follows: Period Covered Passive Income 20% Final Tax April to December 1996 P226,399,661.35 P45,279,932.27 January to December 1997 391,346,059.64 78,269,211.93 Total P617,745,720.99 P123,549,144.20 ============ ============ On the strength of this Court's ruling in the case entitled Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, promulgated on January 30, 1996 , Petitioner filed with the Bureau of Internal Revenue a letter-request for the refund of its overpaid gross receipts tax on October 7, 1998, covering the third quarter of 1996 to the fourth quarter of 1997 in the aggregate amount of P6,177,457.21, computed as follows: 20% Final Tax Withheld At Source on Passive Income P123,549,144.20 Multiply by GRT Rate 5% Overpaid GRT P6,177,457.21 ============ Without waiting for an action from the Respondent, Petitioner lodged an appeal with this Court on October 9, 1998 in order to toll the running of the two-year prescriptive period. Respondent, in his Answer, raised the following Special and Affirmative defenses: 5. Petitioner's claim for refund is yet subject to and still is under administrative investigation; 6. In an action for tax refund, the taxpayer has the burden of showing that the taxes paid were erroneously collected and failure to sustain the burden is fatal to the action; 7. Claims for refund are construed strictly against claimants since they are in the nature of exemption. They cannot be allowed unless granted in the most explicit and categorical language. ( Manila Electric Co. vs. Commissioner of Internal Revenue, 47 SCRA 351 ) In order to support its claim for refund, Petitioner presented the following evidence: 1. The Quarterly Percentage Tax Returns for the third calendar quarter of 1996 to the fourth calendar quarter of 1997 together with their corresponding attachments of computation of gross receipts tax (Exhibits A, A-1, B, B-1, C, C-1, D, D-1, E, E-1, F, and F-1); 2. Report of SGV and Co. signed by its Partner, Ms. Feliza A. Peralta (with the signature of concurring Partner Ruben Rubio), the commissioned independent CPA, who conducted the examination on Petitioner's documents .relative to the instant claim for refund (Exhibit G); 3. Various supporting documents of treasury bills, government securities for reserve requirements, interbank call loans, and BSP call loan transactions (Exhibits H-1 to H-550, I-1 to I-21, J-1 to J-89, and K-1 to K-32); 4. Petitioner's various schedules verified by the independent CPA against the supporting documents (Exhibits L-1 to L-60); 5. Schedules of income subjected to 20% final withholding tax and 5% gross receipts tax (Exhibits M and N); 6. Certifications of withholding of final tax issued by different banks pertaining to Petitioner's interbank loan transactions (Exhibits O-1 to 0-22); and 7. Certification issued by the Bangko Sentral ng Pilipinas with respect to BSP loans (reverse repurchase transactions) (Exhibit P). Respondent, on the other hand, was not able to present his evidence because the BIR records of the case cannot be located and the special team which examined the present claim was dissolved. (Minutes of February 19, 2001 session, CTA records, p. 111). Respondent also failed to file his memorandum. The Court is now tasked to resolve the following issues jointly stipulated by the parties, thus: 1. Whether the case is within the scope of the Asian Bank case or decision; and 2. Whether or not the amount being claimed as refundable has actually been remitted to the Bureau of Internal Revenue. We rule in favor of the Respondent. The Petitioner anchored its claim on the ruling of this Court in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720 promulgated on January 30, 1996 where this Court stated that the interest income included as part of the gross receipts should be computed minus the 20% final tax already withheld and deducted by various withholding agents. We are however in total agreement with the decision of the Court of Appeals in the case entitled Commissioner of Internal Revenue vs. AsianBank Corporation CA-G.R. SP No. 51248 promulgated on November 22, 1999 which reversed earlier rulings by this Court and categorically maintained that the 20% final withholding tax (FWT) on interest income should form part of the gross receipts subject to the gross receipts tax (GRT). In making such a conclusion, the Court of Appeals put it simply, thus: "If the 20% final withholding tax on interest income is part of the gross receipts by the respondent bank, then it should be subject to the 5% gross receipts tax. Otherwise, it is not subject to said tax." More importantly, it is worth stressing that Section 4(c) of Revenue Regulations No. 12-80 relied upon by the Petitioner has already been superseded and omitted in the amendatory Revenue Regulations No. 17-84 dated October 12, 1984 particularly 7(c) which provides: 7. (c) 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." Besides Section 4(e) of Revenue Regulations No. 12-80, as worded, is not a computation which is determinative of the amount to be used as basis of the 5% gross receipts tax. Rather said Section is reflective of the method of accounting being adopted by the taxpayer, such as the cash receipts and disbursement method or the accrual method of accounting. Said methods of accounting comprise a set of rules for determining when and how to report income and deduction. The 5% gross receipts tax under Section 119 of the Tax Code (now Section 121) is collectible from all finance companies doing business in the Philippines from interests, discounts and all other items treated as gross income under the Tax Code. Accordingly, its income derived from investing the excess funds in short term market placements through commercial banks constitute income, hence, subject to the 5% gross receipts tax under said section. Additionally, the following jurisprudence should be taken into account: In his Annotations and Jurisprudence on the National Internal Revenue Code as amended, former Commissioner of Internal Revenue Jose Araas defined gross receipts under then Section 260 (previously Section 249 and now Section 121) of the Tax Code as follows : 260(3) Meaning of "gross receipts . The term " gross receipts " provided for in Section 249 of the TaxCode should be interpreted to mean "as the whole amount received without deductions ," otherwise, it will be considered as "net receipts." ( National City Bank of New York vs. CIR, BTA Case No. 52, July 12, 1952 ). Profits derived from the sale of miscellaneous accounts, whether it is in connection with the banking business of the banking institution or not, so long as they were earned or derived from its fund, as a banking institution, should be included in gross receipts. (Ibid.). Araas, Annotations and Jurisprudence on the NationalInternal RevenueCode as amended, 6th ed. (1983), Vol. II, p. 479 . [Emphasis supplied] In his Commentaries and Jurisprudence on the NationalInternal RevenueCode of the Philippines, Jose N. Nolledo draws the same conclusion: No deductions are allowed from gross income before the 5% tax is imposed as otherwise, the tax is based on net receipts. (See National City Bank of New York vs. CIR, BTA Case No. 52, July 12, 1952). Nolledo, Commentaries and Jurisprudence on the NationalInternal RevenueCode of the Philippines, 1976 Revised Edition, p. 1127 . In the United States, whose jurisprudence has persuasive effect in this jurisdiction, the term "gross receipts" has long had this established meaning: " Gross income," "gross proceeds " and " gross receipts " all mean the same, it has been held, although "gross earnings" are sometimes distinguished from "gross receipts." Gross receipts ordinarily mean the total receipts before anything is deducted for the expenses of management." Cooley, The Law on Taxation , 4th ed. (1924), Vol. II, pp. 1789-1790, citing State v. Illinois Cent. R. Co., 246 Ill. 188, 92. N.E. 814. Gross earnings means entire earnings from all operations and not earnings less operating expenses, taxes and bad debts. State v. United Electric Light & Water Co., 90 Conn. 452, 97 Atl. 857" Cooley, The Law on Taxation , 4th ed. (1924), Vol. II, p. 1790. Excise tax has not been allowed as a deduction for purposes of determining gross receipts. In interpreting the term "gross receipts", Mertens, Law of Federal Income Taxation , has this to say: & 3.37. Construction of Specific Words xxx xxx xxx Gross Receipts In determining "gross receipts" such descriptions as "the total amount received or accrued" have been applied. That gross receipts represent the total amount received or accrued is plain; with respect to inventory, it is the amount the customer paid and not such amount reduced by any excise tax for which the seller is responsible. This definition of gross receipts not subtracting the excise payments has been applied in formulas for DISCs. Mertens, Law of Federal Income Taxation , 1995 edition, Chapter 3, page 54, Section 3.37, citing Lucky Lager Brewing Co. v. Comm ., 26 TC 836 (1956), affd. 246 F2d 621 (CA9 1957) and Brown-Forman Corp. v. Comm. , 94 TC 419 (1990). In the aforecited Lucky Lager Brewing Co. v. Commissioner of Internal Revenue , 246 F2d 621 (CA9 1957), the United States Court of Appeals ruled: The contention of petitioner is that the word "gross" in the term "gross receipts" means what the buyer paid for the beer less what the manufacturer paid to the government prior to its sale under the excise tax, enacted in 1939. . . . We do not agree. The language of paragraph (5) of Section 435 (e) that "gross receipts" are "the total amount received or accrued . . . from the sale . . . of stock in trade" [emphasis supplied] is irrefutably plain. It is a logical absurdity to contend that the "total amount received" from the sales is not what the customer paid but a lesser amount determined by a deduction of a particular tax paid, here required to be paid and in fact paid by the seller, before the delivery of the beer. Lucky Lager Brewing Co. v. Commissioner of Internal Revenue , United States Court of Appeals, Ninth Circuit, June 24, 1957, 246 F2d 621 (CA9 1957). The exclusion of 20% FWT would seriously erode the GRT base. In effect it would reduce by 20% the tax on gross receipts under Sections 121 (Tax on Banks and Non-bank Financial Intermediaries and 122 (Tax on Finance Companies). Tax exemptions are strictly construed against the taxpayer. In the absence of any clear provision of law excluding the 20% FWT from the tax base for GRT purposes, we cannot conclude that such 20% FWT should be excluded for purposes of GRT computation. WHEREFORE, in view of the foregoing, the Petition for Review is hereby DENIED for lack of merit. SO ORDERED. (SGD.) AMANCIO Q. SAGA Associate Judge WE CONCUR: (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge Separate Opinions The majority opinion denied the instant claim for refund on the ground that the 20% final taxes should form part of the taxable gross receipts subject to the gross receipts tax (GRT) thereby reversing our decision in the case of AsianbankCorporation vs.Commissioner of Internal Revenue, CTA Case No. 4720 promulgated on January 30, 1996 . I am constrained to dissent from the majority opinion and solidly maintain that the decision in the aforementioned Asianbank case stands on firm legal grounds. In fact said decision has already been affirmed by the Court of Appeals in the cases entitled Commissionerof Internal Revenue vs.China Banking Corporation, CA G.R. SP No. 50790, promulgated on October 16, 2000 and Commissioner of InternalRevenue vs.CityTrust Philippines, CA G.R. SP No. 52707 promulgated on August 17, 1999 in this manner: "Accordingly the 20% final tax withheld against the Respondent as passive income was already remitted to the Bureau of Internal Revenue, for the corresponding year that the same was actually withheld and considered final withholding taxes under Section 50 of the same code. Indubitably, to include the same to Respondent's (Citytrust) gross receipts for the year 1994 would be to tax twice the passive income derived by Respondent for the said year, which would constitute double taxation anathema to our taxation laws." Worthy of mention is the fact that the issues jointly stipulated by both parties no longer included the legal merit of the claim for refund because the same was already settled in the aforementioned Asianbank and Citytrust cases. What should be left for us to determine is whether or not the Petition for Review was timely filed within the reglementary period and whether or not Petitioner has successfully proven its compliance with the following requisites: 1. That it paid the gross receipts tax; 2. That it erroneously overpaid its gross receipts tax by including the 20% final withholding tax derived on its passive income as part of the gross receipts declared in the quarterly percentage tax returns for the period involved; and 3. That the withholding agent certifies that the 20% final withholding tax was paid on such passive income. ( Bankof the Philippine Islands vs.Commissioner of Internal Revenue, CTA Case No. 5458, February 15, 1999; and BPICapital vs.Commissioner of Internal Revenue, CTA Case No. 5457, March 1, 1999 ; cited in SolidBank Corporation vs.Commissioner of Internal Revenue, CTA Case No. 5408, April 14, 1999 .) Section 230 of the TaxCode, as amended, provides that a claim for refund, both with the Bureau of Internal Revenue and with this Court, must be filed within two years from the date of payment of the tax. In counting the two-year prescriptive period, the filing of the quarterly percentage tax return should be considered as the "date of payment of the tax" ( SolidBank Corporation vs.Commissioner of Internal Revenue, CTA Case No. 5408, April 14, 1999; and CitytrustInvestment Philippines, Inc. vs.Commissioner of Internal Revenue, CTA Case No. 5403, April 19, 1999 ). In the instant case Petitioner was able to file its claim for refund with the Bureau of Internal Revenue on October 7, 1998, and the Petition for Review with this Court on October 9, 1998, both within the two-year reglementary period, reckoned, at the earliest, from October 21, 1996, the date when Petitioner filed its 1996 third Quarterly Percentage Tax Return. With respect to the issue of compliance with the three (3) aforementioned requisites Petitioner was able to prove that it paid gross receipts tax for the period July 1, 1996 to December 31, 1997 as evidenced by the machine validations appearing on the lower portion of the quarterly percentage tax returns (Exhibits. A, B, C, D, E, and F). It was also established that the alleged final withholding taxes were included as part of the gross receipts that were subjected to the 5% gross receipts tax. This was verified by examining the various computations attached to the returns together with the schedules of income subjected to the 5% gross receipts tax prepared by the Petitioner (Exhibits A-1, B-1, C-1, D-1, E-1, F-1, M and N). However, from among the passive income transactions of Petitioner, only the interbank and BSP loans have certifications of withholding of final taxes. The income earned by Petitioner on treasury bills have none, hence, the corresponding claim for refund in treasury bills cannot be granted for failure of Petitioner to comply with the afore-quoted third requirement. With respect to the interbank and BSP loans, the Court noted the following discrepancies: 1. Some interbank call loans listed in the Summary of Interbank Loans for 1996 have no certification of withholding from the borrowing banks (Exhibits L-57 and L-58); 2. There are discrepancies in the amounts of interest income computed based on the aforementioned summary (Exhibits L-57, L-58, and L-59) when compared with the amounts reflected in the schedule of income subjected to 20% final withholding tax and 5% gross receipts tax (Exhibits M and N); and 3. Based on the certification issued by the Bangko Sentral ng Pilipinas, only the amount of P30,864,671.17 final taxes were withheld from Petitioner's interest income on reverse repurchase transactions (Exhibit P) and not the amount of P31,330,537.15 as claimed by Petitioner (Exhibit N). Accordingly, the Court deemed it proper to recompute the overpaid gross receipts tax of Petitioner based on the certification of interest income and withholding of final taxes issued by the withholding agents and which were properly supported by source documents (Exhibits K-1 to K-32, I-1 to I-21, J-1 to J-89, and O-1 to O-22, and P), to wit: Interest income on interbank call loans with certification from the borrowing banks 1996 P83,432,248.27 1997 12,875,694.22 P96,307,942.49 Interest income on reverse repurchase transactions/ BSP loans - 1997 154,323,355.91 Total P250,631,298.40 Multiply by FWT rate 20% Final Withholding Tax Paid P50,126,259.68 Multiply by GRT rate 5% Overpaid GRT P2,506,312.98 =========== WHEREFORE, in view of the foregoing, I vote to grant the claim for refund in favor of Petitioner in the amount of P2,506,312.98. (SGD.) ERNESTO D. ACOSTA Associate Judge