Far East Bank and Trust Co. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5763. November 16, 2001.] FAR EAST BANK AND TRUST COMPANY , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N The instant petition seeks the refund or issuance of a tax credit certificate in the amount of P19,480,920.90 allegedly representing overpaid gross receipts tax for the taxable year 1997. The antecedent facts follow. Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines. It is engaged in banking activities with office address located at Far East Bank Center, Sen. Gil J. Puyat Avenue, Makati City (No. 1, Joint Stipulation of Facts and Issues). In 1997, Petitioner filed its Quarterly Percentage Tax Returns and paid its gross receipts tax (GRT, for brevity) for each quarter as follows: Exhibit Date Filed Period Covered GRT Paid A April 21, 1997 1st Quarter P135,550,526.07 B July 21, 1997 2nd Quarter 125,937,002.57 C October 20, 1997 3rd Quarter 123,580,773.58 D January 20, 1998 4th Quarter 132,044,696.60 For the four quarters of 1997, Petitioner alleged that it reported and included as part of its gross receipts tax base its total interest income subject to 20% and paid the corresponding GRT thereon totaling P19,480,920.90, computed as follows: Interest Income Period Covered Subject to 20% GRT January to March P124,269,002.52 P6,213,450.13 April to June 95,278,713.61 4,763,935.68 July to September 78,116,999.44 3,905,849.97 October to December 91,953,702.46 4,597,685.12 TOTAL P389,618,418.03 P19,480,920.90 ============ ============ On January 11, 1999, Petitioner filed with the Office of the Respondent a letter-claim for the refund of the amount of P19,480,920.90 pursuant to Section 230 of the National Internal Revenue Code (Annex E, Petition for Review). As there was no action on the part of herein Respondent and the two-year prescriptive period was about to expire. Petitioner filed the present case on March 31, 1999 on the strength of this Court's decision in CTA Case No . 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue promulgated last January 30, 1996 , where We held that the twenty percent (20%) final withholding tax on a bank's passive income should not form part of the bank's taxable gross receipts for the purpose of computing the Gross Receipts Tax. In his Answer filed through registered mail on May 26, 1999, Respondent raised the following Special and Affirmative Defenses: "5. The Verification accompanying the Petition for Review filed thru its First Vice President Ms. Emily M. Calanog is defective as the same is not duly notarized before a notary public as required by law so that failure to do so is tantamount to the filing of the Petition for review sans Verification and therefore should be dismissed forthwith; 6. In an action for tax refund, petitioner must show that taxes were paid erroneously or collected illegally. Failure to sustain this burden is fatal to the action for refund; 7. Claims for refund are construed strictly against the claimants since they are in the nature of exemptions from taxation ( Manila Electric Co. vs. Commissioner of Internal Revenue, 67 SCRA 351 ); 8. Taxes are presumed to have been paid and collected in accordance with law." The alleged unnotarized verification accompanying the Petition for Review was cured with the submission on April 8, 1999 of a duly notarized verification before Respondent could file his Answer on May 26, 1999. Hence, in their "Joint Stipulation of Facts and Issues" filed before this Court on November 4, 1999, the parties submitted only the following issues for resolution: 1. Whether or not Petitioner has earned interest income subject to the 20% final withholding tax for the first to the fourth quarter of 1997; 2. Whether or not the 20% final withholding tax on said interest income earned by Petitioner from the first to the fourth quarter of 1997 was withheld at source; DHacTC 3. Whether or not the said 20% final withholding tax was reported as part of the gross receipts of Petitioner for 1997; and 4. Whether or not the 5% gross receipts tax (GRT) due was paid by Petitioner on its reported gross receipts for 1997. Petitioner, to support its case, presented its Quarterly Percentage Tax Returns for the year 1997, the Quarterly breakdown of its excess GRT payments, the letter-certification prepared by the duly commissioned independent CPA with supporting schedules, Summaries of Trading Gain from Sale of its securities, Detailed Schedules of its Monthly Interest Accrual, Summaries of Interest Income from its securities, Confirmations of Sale, Schedule of Outstanding Sales, Confirmations of Purchase, Schedules of Accrued Interest Income and Interest Income from its securities, Certificates of Taxes Withheld and its Subsidiary Ledgers for the year 1997. Respondent on his part, after stipulating on the issues mentioned earlier which delved mostly on evidentiary matters, challenged the legal basis of the claim for refund in the Memorandum submitted on January 8, 2001 (see pages 198 to 205). In said Memorandum, Respondent echoed the Dissenting Opinion of Judge Amancio Q. Saga in the case of China Banking Corporation vs. Commissioner of Internal Revenue, CTA Case No . 5405 promulgated on September 30, 1998 , excerpts of which are quoted hereunder, thus: "There is no provision in the TaxCode or any special laws which excludes the 20% final income tax withholding under Section 50(a), as no longer forming part of the gross receipts for purpose of the 5% gross receipts tax. On the other hand, Section 8(c) of Revenue RegulationsNo.12-80, dated November 7, 1980, as amended by Section 7(c) of Revenue RegulationsNo.17-84, dated October 12, 1984 have the same provisions, thus: 'If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed.' Clearly, there is no doubt that the 20% final withholding tax is legally includible as part of the gross receipts for purposes of computing the gross receipts tax." After analyzing the arguments of both parties, We are inclined to find in favor of Respondent. Petitioner postulates that Section 4(e) of Revenue Regulations No. 12-80 dated November 7, 1980 clearly provides that the amount representing the final tax, not having been received by the Petitioner but instead went to the coffers of the government, should no longer form part of its gross receipts for purposes of computing the gross receipts tax. We find the foregoing argument of the Petitioner which incidentally is based on the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No . 4720 dated January 30, 1996 , legally objectionable for two (2) reasons, to wit: (1) Section 4(e) of Revenue RegulationsNo.12-80 is not a computation determinative of the amount of gross receipts as basis of the gross receipts tax under Section 119 of the lax Code. Said revenue regulations merely authorize the determination of the amount of gross receipts on the basis of the method of accounting being used by the taxpayer under Section 37 of the TaxCode. Such accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions ( Consolidated Mines, Inc. vs. CTA, L-18846, August 29, 1974 ). The two principal accounting methods expressly and impliedly recognized by the TaxCode and the IncomeTaxRegulations are: (a) Cash receipts and disbursement method or cash basis. Income earned by the taxpayer is not included in gross income until received and expenses are not deducted until paid within the taxable year; and (b) Accrual basis. Income is included in gross income when earned, whether received or not, and expenses are allowed as deductions when incurred although not yet paid within the year. (2) That the non-inclusion of the 20% final withholding income tax from the gross interest income for purposes of gross receipts tax operates as an exemption from tax. Being an exemption from tax, the same must be construed strictly not against the government but against the one who asserts the claim of exemption. Tax exemption can only be given effect when the grant is clear and categorical inasmuch as taxation is the rule and exemption is the exception, Section 26, TaxCode. The holding therefore in the Asian Bank Corporation to the effect that the non-inclusion of the 20% final withholding income tax from the gross receipts can logically be inferred from the wordings of said Section 4(e) of Revenue RegulationsNo.12-80, is misplaced. Tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent (51 Am Jur 361). It should not be construed as to permit the taxpayer to easily evade the payment of the tax ( Cabon Steel Co . vs . Lewelyn, 251 U . S . 501 ). Thus, the good faith of the taxpayer is not sufficient justification for exemption from the payment of surcharges imposed by law ( Commissioner vs. Royal Interocean Lines and CTA, L-26506, July 30, 1970 ). A tax statute should be construed to avoid the possibilities of tax evasion ( Lorenzo vs. Posadas, 64 Phils . 353 )." It bears stressing that the aforecited Section 4(e) of Revenue Regulations No. 12-80, relied upon by Petitioner has already been superseded by Revenue Regulations No. 17-84 dated October 12, 1984. Section 7(c) of Revenue Regulations No. 17-84 provides, thus: Section 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. By quoting a superseded revenue regulation, the Petitioner in the Asian Bank case, led this Court to believe that indeed the basis of the gross receipts 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 conclusion finds support in the ruling 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 , excerpts of which are quoted hereunder: "It is true that Revenue RegulationsNo.12-80 provides that the gross receipts tax on banks and other financial institutions should be based on all items of income actually received. Actual receipt here is used in opposition to mere accrual ( Rep. v. Lim Tian Teng sons & Co . , 16 SCRA 584 ). But receipt may be actual or constructive. Article 531 of the CivilCode provides that possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action of one will, or by the proper acts and legal formalities established for acquiring such right. Moreover, taxation income may be received by the taxpayer himself or by someone authorized to received it for him (Art. 532, Civil Code). The 20% final tax withheld from interest income of banks and other similar institutions is not income that they have not received, it is simply withheld from them and paid to the government, for their benefit. Thus, the 20% income tax withheld from the interest income is, in fact, money of the taxpayer bank but paid by the payor to the government in satisfaction of the bank's obligation to pay the tax on interest earned. It is the bank's obligation to pay the tax. Hence the withholding of the said tax and its payment to the government is for its benefit." In his Annotations and Jurisprudence on the NationalInternal RevenueCode 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. In his Commentaries and Jurisprudence on the NationalInternal Revenue Code 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 F 2d 621 (CA9 1957) and Brown-Forman Corp. v. Comm., 94 TC 419 (1990). In the aforecited Lucky Lager Brewing Co . vs . 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 . vs . Commissioner of Internal Revenue, United States Court of Appeals, Ninth Circuit, June 24, 1957, 246 F2d 621 (CA9 1957) . aHECST 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. (SGD.) AMANCIO Q. SAGA Associate Judge WE CONCUR: (SGD.) JUANITO C. CASTAEDA , JR. Associate Judge ANNEX B SCHEDULE OF DISALLOWANCES FOR TAXABLE YEAR 1997 Separate Opinions ACOSTA , J ., dissenting : The majority opinion denied the Petition for Review and in effect reversed this Court's ruling in the case entitled AsianbankCorporation vs . Commissioner of Internal Revenue, CTA Case No . 4720 promulgated on January 30, 1996 , where it was held that the twenty percent (20%) final withholding tax on a bank's passive income should not form part of the bank's taxable gross receipts for the purpose of computing the Gross Receipts Tax. In concluding otherwise, my esteemed colleagues share the view that the 20% Final Withholding Tax should not be excluded for purposes of Gross Receipts Tax computation. I humbly disagree with the conclusion of the majority and submit that our ruling in the aforementioned Asianbank case should be the one followed in cases involving issues of this nature. It is worthy to note that the legal basis of the claim for refund in the instant case was never put in issue by both parties as can be gleaned from the Joint Stipulation of Facts and Issues found on pages 45 to 47 of the records, and as a court of law we are only tasked to resolve the issues presented to us by the parties. Be that as it may, I register my objection to the conclusion that the basis of the gross receipts tax should include the final withholding tax. The Court of Appeals has already ruled on this issue in the case entitled Commissioner of InternalRevenue vs . China Banking Corporation CA-G . R . SP No . 50790 promulgated on October 16, 2000 where it categorically stated, thus: The imposition of the 5% gross receipts tax is based on the following provision of the NationalInternal RevenueCode: "Section 119. Tax on banks and non-bank financial intermediaries . There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discount from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived. Short-term maturity Not in excess of two (2) years 5% Medium-term maturity over two (2) years But not exceeding Four (4) years 3% Long-term maturity (i) over four (4) years but not exceeding seven (7) years 1% (b) On dividends 0% (c) On royalties rentals of property real or personal profits from exchange and all other items treated as gross income under Section 28 of this Code 5%: Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short medium or long-term and the correct rate of tax shall be applied accordingly. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar financial activities." The tax imposed on the aforequoted provision of law is based on the gross receipts whether derived from banking or non-banking operations. "Gross receipts" is not the same as "gross earnings". " Receipts " means amount actually received . . . As aptly observed by the CTA, considering that the questioned 20% final tax was not actually received by the Respondent but went to the coffers of the government, the same should not form part of the taxable base of the Respondent's gross receipts for the purpose of computing the 5% gross receipts tax (GRT). Additionally, the case entitled Commissionerof Internal Revenue vs . Citytrust Philippines, CA G . R . SP No . 52707, August 17, 1999, ruled: "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 sameCode. 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 ." This conclusion was arrived at by the Court of Appeals in consonance with the ruling of the Supreme Court in the case of Commissioner of InternalRevenue vs . Tours Specialists, Inc . , 183 SCRA 402 . WHEREFORE, in view of the foregoing, I hereby vote to grant the claim for refund in favor of Petitioner in the amount of P11,007,471.74 computed as follows: SAcCIH Amount of Claim P19,480,920.90 Less: Disallowances (a) Per SGV's Verification (Exhibit F) P7,746,063.47 (b) Per Court's Verification (Annex B) (1) Floating Rate T-Notes P313.46 (2) Treasury Bills (Annex A) 238,295.57 (3) Interbank Call Loans 488,776.66 727,385.69 8,473,449.16 Amount Refundable P11,007,471.74 ============