Equitable Banking Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5721. June 8, 2000.] EQUITABLE BANKING CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This is a judicial claim for refund of the amount of TWO MILLION NINE HUNDRED SEVENTEEN THOUSAND ONE HUNDRED SIXTY SIX AND 20/100 PESOS (P2,917,166.20) filed by the Petitioner on January 20, 1999, representing allegedly overpaid gross receipts tax for the last quarter of taxable year 1996. The facts are simple. Petitioner is a banking corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office at 262 Juan Luna Street, Binondo, Manila. Records reveal that Petitioner filed with the Respondent Bureau of Internal Revenue its various quarterly percentage tax returns, covering those of its Head Office and branches, for the period ending December 31, 1996, and allegedly paid its Gross Receipts Tax due in the amount of P53,096,548.39, as evidenced by a "Transmittal Sheet of Percentage Tax of the Head Office and Branches/Units of Large Taxpayers for the Quarter ended December 31, 1996". (Exhibit A). Petitioner alleges that, of the said amount of P53,096,548.39, P31,068,242.67 pertains to the percentage tax paid by its Head Office as shown in its Quarterly Percentage Tax Return for the quarter ended December 31, 1996. (Exhibit B, B-1, B-2). On the strength of the decision of this Court in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, January 3, 1996, where We ruled that the 20% final tax on passive income should not form part of the taxable gross receipts for Gross Receipts Tax purposes, Petitioner filed an administrative claim for refund of its alleged overpaid gross receipts tax with the Respondent on April 24, 1997, computed as follows: Gross Receipts Subject to Tax P711,475,266.54 Less: 20% Portion of Tax Paid Income (Annex B1 of 2) 1,597,837.45 Investment Income subject to 20% final tax booked at gross (Annex B2 of 2) 56,745,486.54 Adjusted Gross Receipts Tax Base P653,131,942.55 Computation of Adjusted Gross Receipt Tax: Gross Receipts Tax Due 0% P69,452,096.18 P0.00 1% 10,729,421.40 107,294.21 3% 30,186,949.33 905,608.48 4% 542,763,475.64 27,138,173.78 P653,131,942.55 P28,151,076.47 Gross Receipts Tax Paid P31,068,242.67 Adjusted Gross Receipts Tax 28,151,076.47 Tax Refund P2,917,166.20 ============= Unable to secure an affirmative response from the Respondent and fearing that its cause might prescribe, Petitioner elevated its grievance to this Court on January 20, 1999, via Petition for Review. In opposition thereto, Respondent filed its Answer to the Petition for Review on March 24, 1999, and interposed the following Special and Affirmative Defenses, to wit: "SPECIAL AND AFFIRMATIVE DEFENSE 11. The decision in Asian Bank Corporation vs. Commissioner of Internal Revenue (CTA Case No. 4720) is pending appeal with the Court of Tax Appeals. (should be Court of Appeals). Hence, invocation thereof at this point in time is premature. 12. There is no provision in the Tax Code or any Special Law which excludes the 20% final income tax withholding under Section 50 (a) of the Tax Code, as no longer forming part of the gross receipts for the purpose of the computation of gross receipt tax under Section 119 of the Tax Code. 13. 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 corporation. 14. The petition does not state a case of action as there is no allegation that the tax sought to be refunded was actually paid to the Bureau of Internal Revenue and that the 20% final withholding tax on income was actually remitted by its withholding tax agents in accordance with the provision of the Tax Code. 15. The claim for refund is pending administrative investigation. 16. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that taxes sought to be refunded were erroneously or illegally collected. 17. The non inclusion of the 20% final withholding tax on income from the gross income for purposes of the gross receipts tax operates as an exemption from tax. Hence, the same must be construed strictly against the one who asserts the claim for exemption, considering that 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. 18. Claims for refund of taxes are to be 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). 19. Petitioner must show that it has complied with the provisions of Section 204(3) and Section 230 of the Tax Code, as amended." To prove its stance, Petitioner presented in evidence, among others, the following documentary exhibits, to wit: 1. EBC's Transmittal Sheet of Quarterly withholding Tax Returns filed by Banks and other Financial Institutions classified as Large Taxpayers with Branch Offices for the Quarter Ended December 31, 1996. (Exh. A); 2. Written claim for refund (Exh. C); and 3. EBC Head Office Income and Expense Statement (Exh. D). On March 3, 2000, after the parties have submitted their respective memoranda, this case was considered submitted for decision. Forming the crux of the controversy, legal and factual posed for consideration by this Court are: 1) Whether or not the 20% final withholding tax on bank's passive income form part of the gross receipts of a taxpayer for GRT purposes; and 2) Whether or not, on the basis of the evidence presented and submitted to this Court, Petitioner is entitled to a refund in the amount of P2,917,166.20 representing alleged overpaid gross receipts tax. With regard to the first issue, We consistently hold that the 20% final withholding tax should not form part of the gross receipts of the taxpayer for purposes of the 5% gross receipts tax (China Banking Corporation vs. Commissioner of Internal Revenue,CTA Case No. 5433, October 7, 1998; Equitable Banking Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, January 20, 1996). This is in accord with the thrust of Our decision in the Asian Bank Case, supra, where this Court emphatically ruled, thus: "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, 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 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, 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 direct payment of the portion that goes to the 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 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 & 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 Manila Jockey, Club, Inc. supra ." Parallel to this, the Court of Appeals, in this case of Commissioner of Internal Revenue vs. Citytrust Investment Philippines Inc., CA-GR SP. NO. 52707, promulgated on August 17, 1999, ruled on the same subject matter in this wise: "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 the Respondent's 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." Tested by these pronouncements, it would appear that the Petitioner is entitled to a refund. However, a sedulous review of the evidence on record does not sustain Petitioner's stance, accordingly, the claim for refund must be denied, not on legal grounds, but for insufficiency of evidence. In a litany of cases, this Court has invariably held that in a refund of overpaid gross receipts tax, the taxpayer must prove that it has complied with the following requisites: 1) That it actually paid the 20% final withholding taxes on its gross receipts from passive income; 2) That the 20% final withholding tax on passive income formed part of its gross receipts subject to the gross receipts tax; and 3) That it actually paid the GRT due on its gross receipts from passive income inclusive of the 20% final withholding taxes. Concededly, Petitioner was able to prove that indeed, it paid its gross receipts tax amounting to P53,096,548.39. However, this Court finds it ineluctable to deny the refund of the amount of P2,917,166.20, 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 We would be able to decipher with accuracy the fact of actual withholding of the 20% final tax on its passive income in the amount of P2,917,166.20. Petitioner should have presented, in evidence the certificates of final tax 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 breath, Petitioner failed to substantiate that the 20% final withholding taxes formed part of its gross receipts subjected to the gross receipts tax. While it is true that Petitioner's 1996 last quarter taxable gross receipts and the corresponding gross receipts tax appearing on its last quarter percentage tax return tally with those appearing on its general ledger, this Court, however, cannot ascertain whether the passive income reflected thereon were recorded at gross or net of the 20% final withholding taxes. In this respect, the source documents such as the detailed transaction records, confirmation of purchase, confirmation of sale trading sheets, credit/debit advises, accounting tickets, certificates of final taxes withheld could serve as the best evidence that would merit a weightier probative value. Absence f these documents, therefore, is fatal to the taxpayers cause. With these circumstances in mind and considering that refunds of taxes are in the nature of an exemption and must be construed in strictissimi juris against the taxpayer and in favor of the taxing authority, the instant claim for refund must be denied. WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED for insufficiency of evidence. SO ORDERED. (SGD.) ERNESTO D. ACOSTA Presiding Judge I CONCUR: (SGD.) RAMON O. DE VEYRA Associate Judg e 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 for purposes of computing the gross receipts tax. I humbly disagree with the aforementioned ruling primarily because this is based on the 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. cdlex " 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 for 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 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. 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. 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 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 Compaia 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). 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 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 1/2% which the law directs the club to deliver to the Board of Races. The High Court therefore agrees with the stand of the Court of 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 the 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) cdll 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. For purposes of the amusement tax under Section 260 of the Tax Code. the term 'gross receipts' embraces 'all the receipts' or 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