Equitable Banking Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5686. July 3, 2000.] EQUITABLE BANKING CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This is a Petition for Review filed by Petitioner EQUITABLE BANKING CORPORATION against Respondent COMMISSIONER OF INTERNAL REVENUE for the latter's failure to act on the former's claim for refund/tax credit in the amount of P1,770,274.60, allegedly representing Petitioner's overpaid gross receipts tax for the quarter ended September 30, 1996. As represented, Petitioner is a banking institution organized and existing under the laws of the Philippines with head office address located at 262 Juan Luna St., Binondo, Manila. On October 21, 1996, Petitioner filed with Respondent its Quarterly Percentage Tax Return for the quarter ended September 30, 1996 and paid the corresponding gross receipts tax (GRT) for the said quarter in the total amount of P46,064,040.46, the tax base of which includes the passive income which was subjected to twenty percent (20%) final taxes. Of the aforementioned GRT payments, P20,712,606.35 represents the GRT paid by the Petitioner's Head Office (Exhibits A-1 & B). After taking into account the decision of this Court, dated January 30, 1996, in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, which held that the 20% final withholding tax on interest income should not form part of the taxable gross receipts for purposes of computing the gross receipts tax, Petitioner filed with Respondent on April 24, 1997 a claim for refund or issuance of a tax credit certificate of the alleged overpaid GRT of its Head Office for the quarter ended September 30, 1996 in the total amount of P1,770,274.60 (Exh D-1), computed as follows: Gross Receipts Subjected to Tax P653,406,067.60 Less: 20% Portion of Tax Paid Income 2,458,653.33 Investment Income Subject to 20% Final Tax Booked at Gross 32,946.838.83 Adjusted Gross Receipts Tax Base P618,000,575.44 ============= Computation of Adjusted Gross Receipt Tax: Gross Receipts Tax Due 0% P215,606,555.76 P0.00 1% 10,316,445.62 103,164.46 3% 38,235,570.67 1,147,067.12 5% 353,842,003.39 17,692,100.17 P618,000,575.44 P18,942,331.76 ============= ============= Gross Receipts Tax Paid P20,712,606.35 Adjusted Gross Receipts Tax 18,942,331.76 Tax Refund P1,770,274.60 ============= On October 21, 1998, Petitioner filed with this Court the instant Petition for Review in order to toll the running of the two-year prescriptive period to judicially claim for the refund of overpaid internal revenue tax, pursuant to Section 230 (now 229) of the Tax Code. aCASEH Petitioner presents the proposition that the gross receipts tax paid by it for the third quarter of 1996 were based on the total gross receipts inclusive of the passive income, which were subjected to the 20% final withholding tax at source thus, it argued, that in the light of this Court's ruling in the Asian Bank case, supra , which states that the 20% final withholding tax on interest income should not form part of the taxable gross receipts, Petitioner had actually overpaid the amount legally due from it, insofar as its GRT obligations are concerned, hence, a refund is, therefore, in order. Respondent in his Answer, specifically in his "Special and Affirmative Defense", pointed out that Petitioner's claim for refund of alleged overpaid gross receipts taxes for the third quarter of 1996 should be denied on the following grounds: xxx xxx xxx 11. The decision in Asian Bank Corporation vs. Commissioner of Internal Revenue (CTA Case No. 4720) is pending appeal with the Court of Appeals. Hence, invocation thereof at this point in time is premature; 12. Revenue Regulations No. 13-80 dated November 7, 1980 governs the taxation of minerals and mineral products and, therefore, it is irrelevant to this case since petitioner is a banking institution; 13. The petition does not state a cause of action as there is no allegation that the tax sought to be refunded was actually paid to the Bureau of Internal Revenue in accordance with the provisions of the Tax Code; 14. The claim for refund is pending administrative investigation; 15. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that the taxes sought to be refunded were erroneously or illegally collected; 16. Petitioner must show that it has complied with the provisions of Sections 204(3) and 230 of the 1993 Tax Code; and 17. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an exemption from taxation (Manila Electric Co. vs. Commissioner of Internal Revenue, 67 SCRA 351). In order to support its claim for refund, Petitioner submitted the following evidence: 1. EBC's Transmittal Sheet of Percentage Tax of the Head Office and Branches/Units of Large Taxpayers for the Quarter Ended September 30, 1996, consisting of four pages (Exhs. A, A-1 to A-4); 2. Quarterly Percentage Tax Return for the quarter ended September 30, 1996 (Exhs. B, B-1 to B-5); 3. EBC Head Office Income & Expense Statement for the quarter ending September 30, 1996 (Exh. C & C-1); and 4. Written claim for refund dated April 21, 1997 with the Bureau of Internal Revenue (Exhs. D, D-1 to D-8). Respondent, on the other hand, submitted his case for decision based on the pleadings. Eventually this case was submitted for decision after both parties submitted their respective memorandum. The legal issue to be resolved by the Court is whether or not the 20% final withholding tax on certain passive income of the Petitioner should be excluded in the total gross receipts of said Petitioner for GRT purposes, and the factual issue is whether or not Petitioner has adduced sufficient evidence to be entitled to the amount sought to be refunded. With respect to the legal issue, We rule the same in the affirmative. This is not a case of first impression. As correctly stated by the Petitioner, this Court has resolved the same issue in favor of the Petitioner in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue , supra , which anchored on similar factual circumstances and on all fours with the case at bar. Said decision states in part: "We agree with the Petitioner that the 20% final withholding tax on its interest income should not form part of its taxable gross receipts. xxx xxx xxx 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 Compaia Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1996, 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 receipts 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 winning 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 prized 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 one 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, Inc. G.R. Nos. L-13890 and L-13887, June 30, 1960) HTcADC 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 ." Moreover, the Court of Appeals in the case of Commissioner of Internal Revenue vs. Citytrust Investment Philippines, Inc., CA G.R. Sp No. 52707, August 17, 1999 , affirmed our stand that the 20% final withholding tax on interest income should not form part of the taxable gross receipts, and we quote: "Accordingly the 20% final tax withheld against the Respondent's 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 the Respondent for the said year, which would constitute double taxation anathema to our taxation laws . (Emphasis supplied). The legal issue having been settled, what remains to be resolved by the Court is the factual issue, that is, whether or not Petitioner has established by evidence its claim for refund. This Court has ruled time and again that to be entitled to a refund of excess/overpaid GRT, Petitioner taxpayer must show compliance with the following requisites: 1. That its claim for refund was filed within the two (2) year period prescribed under Section 230 (now 229) of the Tax Code; 2. That it paid the gross receipts tax; 3. 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 4. That the withholding agent certifies that the 20% final withholding tax was paid on such passive income. ( Bank of the Philippine Islands vs. Commissioner of Internal Revenue, CTA Case No. 5458, February 15, 1999 ; and BPI Capital vs. Commissioner of Internal Revenue , CTA Case No. 5457, March 1, 1999 ; cited in Solid Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5408, April 14, 1999 ). Evidence on record clearly show that the administrative claim for refund and the filing of the instant petition are within the two year period from the date of payment of the tax, hence, there is no question as to the timeliness of the instant petition. Petitioner has complied with the first requirement aforestated. Likewise, Petitioner was able to prove that it complied with the number two requirement that indeed its Head Office paid its gross receipts tax amounting to P20,712.606.35. This Court finds that Petitioner failed to comply with the third and fourth requirements thus, the Court is constrained to deny the refund of the amount of P1,770,274.60, allegedly representing the difference between its gross receipts tax paid pertaining to EBC Head Office and the Adjusted Gross Receipts Tax, since there is no way by which the Court would be able to verify the accuracy and the fact of actual withholding of the 20% final tax on its passive income in the amount of P1,770,274.60. Petitioner should have presented in evidence the certificates of final taxes withheld issued by its withholding agents or issuers of the investment securities showing the amount of interest income payment and the corresponding 20% final withholding taxes. In the same token, Petitioner failed to substantiate its allegation may the 20% final withholding taxes formed part of its gross receipts subjected to the gross receipts tax. Moreover, the Court could not ascertain whether the passive income reflected thereon were recorded at gross or net of the 20% final withholding taxes. In this regard, the source documents such as the detailed transaction records, confirmation of purchase, confirmation of sale, trading sheets, credit/debit advises, accounting tickets, and certificates of final taxes withheld could serve as the best evidence that would clearly establish its entitlement to the claimed refund. Absence of these documents therefore, is fatal to the taxpayers cause. Thus, applying the settled rule in this jurisdiction that tax refunds partake of the nature of tax exemptions and as such are regarded as in derogation of sovereign authority and is to be construed strictly against the person or entity claiming the refund, the burden of proof men is upon the claimant to establish its claimed refund, and since in the case at bar, Petitioner failed to discharge this burden, the Court has no other recourse but to deny the instant claim for refund. IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is DENIED due to insufficiency of evidence. SO ORDERED. (SGD.) RAMON O. DE VEYRA Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge Separate Opinions The majority opinion denied the claim for refund due to insufficiency of evidence but upheld the ruling that the final withholding tax on certain passive income of a bank should be excluded from its gross receipts for purposes of computing the gross receipts tax. DAEaTS I humbly disagree with the aforementioned ruling primarily because this is based on this Court's decision in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue , CTA Case No. 4720 promulgated on January 30, 1996 . The decision in the Asian Bank case which established a precedent for cases having a similar issue, has as its legal basis Section 4(e) of Revenue Regulations No. 12-80 dated November 7, 1980 which states, thus: "Section 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. 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." (Emphasis supplied) Note that in the Asian Bank case, said bank was being assessed for deficiency gross receipts tax of 5% for taxable year 1986 which at that time the aforequoted Section 4(e) of Revenue Regulations No. 12-80 had already been amended, superseded and omitted in the amendatory Revenue Regulations No. 17-84 dated October 12, 1984. In other words, the citation of Section 4(e) of Revenue Regulations No. 12-80 by Petitioner's counsel was erroneous in the sense that it misled this Court to adopt Petitioner's legal basis. The legal basis that should have been cited is Section 8(c) of Revenue Regulations 12-80 which became Section 7(c) of Revenue Regulations No. 17-84 which provides, thus: "Section 8. . . . (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." Petitioner's counsel purposely did not cite said section because certainly it won't be able to get a refund or tax credit for the alleged overpaid gross receipts tax for obvious reasons. 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 ( Consolidated Mines, Inc . vs . Court of Tax Appeals , L-18843, August 29, 1974 ). Thus, under the cash receipts and disbursements method, 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 in the case of the accrual method, income is included in gross income when earned, whether received or not, and expenses are allowed as deductions when incurred although not paid (BIR Ruling No. 35-98, April 13, 1998). The 5% gross receipts tax under Section 120 of the Tax Code 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. The fact that it has been subjected to the 20% final withholding 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). The fact that the same income is subjected to two (2) different kinds of taxes would not make such payments a case of double taxation. CDcaSA By quoting a superseded revenue regulation, Petitioner in the Asian Bank case, led this Court to believe that indeed the basis of the gross receipts tax is total gross receipts exclusive of the 20% final withholding tax deducted and withheld under Section 50(a) of the Tax Code. Section 7(c) of Revenue Regulations No. 17-84 clearly and categorically provides that the basis of such tax is inclusive of the final withholding tax. Section 2.57 of Revenue Regulations No. 2-98 implementing Republic Act No. 8424 also provides that the bases of the 5% gross receipts tax includes the 20% final withholding income tax deducted at source, to wit: Sec. 2.57. Withholding of Tax at Source (A) Final Withholding Tax . Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. The finality of the withholding tax is limited only to the payee's income tax liability on the particular income. It does not extend to the payee's other tax liability on said income, such as when the said income is further subject to a percentage tax. For example, if a bank receives income subject to final withholding tax, the same shall be subject to a percentage tax. 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: 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 % was assigned to the Board on Races and 5% was distributed as prizes 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). CSHDTE 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 and regulations for some persons other than the proprietor. Undeniably, they are money received by the racing club but they are money earmarked by law or regulations for winning horse owners and societies 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 is unquestionably unjust and not contemplated by Section 191 of the Tax Code." 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 distribution of the total wager fund to 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 percent (20%) 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 regulation 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 Compaia 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 regulation. 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 taxing 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 fall withholding income tax under Section 50(a) as part of the gross income subject to gross receipts tax, this dissenting opinion will stand. 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 . 205, 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 ). WHEREFORE, in view of the foregoing, I hereby register my dissent to the majority opinion and vote for the denial of the claim for refund for lack of legal basis. (SGD.) AMANCIO Q. SAGA Associate Judge