Commissioner of Internal Revenue v. Philippine National Bank

SPECIAL ELEVENTH DIVISION [CA-G.R. S.P. No. 59402. January 28, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PHILIPPINE NATIONAL BANK , respondent . D E C I S I O N VALDEZ, JR. , J p : An appeal from the March 3, 2000 Decision 1 of the Court of Tax Appeals in CTA Case No. 5647, entitled "Philippine National Bank, Petitioner vs. Commissioner of Internal Revenue, Respondent", ordering the Commissioner of Internal Revenue to refund to the Philippine National Bank the amount of P25,201,701.15 representing gross receipts tax on interest income from treasury bonds, for the third quarter of 1996, and from the June 13, 2000 Resolution 2 denying herein petitioner's motion for reconsideration. The following facts, as found by the Court of Tax Appeals, remain undisputed: "Petitioner, Philippine National Bank (PNB), is a private financial institution organized and existing under the laws of the Philippines with office address located at PNB Financial Center, Roxas Blvd., Pasay City. "For the following calendar quarters, petitioner seasonably filed its Quarterly Tax Returns reflecting gross receipts in the total amount of P9,712,670,769.86 with corresponding gross receipts tax payments in the sum of P442,619,126.10, to wit: "Quarter Ended Exh. Gross Receipts Gross Receipts Tax June 20, 1996 A-6 P2,637,487,724.88 120,877,204.63 September 30, 1996 B-3 9,506,521,828.87 461,936,933.75 December 31, 1996 C-3 3,118,759,317.74 141,049,001.50 March 31, 1996 D-3 3,438,241,754.26 456,965,167.40 June 30, 1997 E-3 3,155,669,797.86 144,604,957.20 Total P9,712,670,769.86 P442,619,126.10 ============ =========== "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 on interest income and trading gain derived from passive investments and deposits in the total sum of P635,257,769.46, broken down as follows: "Quarter Ended Final Withholding Taxes June 30, 1996 P22,055,202.83 September 30, 1996 531,999,540.34 December 31, 1996 12,692,894.73 March 31, 1997 65,361,237.25 June 30, 1997 3,145,894.31 P635,257,769.46 "On January 30, 1996, this Court rendered a decision in C.T.A. Case No. 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue wherein it was held that the 20% final withholding tax on bank's interest income should not form part of its taxable gross receipts for purposes of computing the gross receipts tax. "As a consequence, petitioner, on December 5, 1997, simultaneously amended its percentage tax returns for the calendar quarters involved (Exhs. A-3, B, C, D and E). It also filed on December 9, 1997, a letter-request for refund or issuance of a tax credit certificate with the Bureau of Internal Revenue in the amount of P31,899,605.57 anchoring its stand on the aforementioned decision (Exh. A), to wit: Quarter Ended GRT Per Original GRT Per Claim Percentage Tax Amended for Refund Return Return June 30, 1996 P120,877,204.63 P119,774,444.48 P1,102,760.15 Sep. 30, 1996 461,936,933.75 435,336,956.73 26,599,977.02 Dec. 31, 1996 141,049,001.50 140,414,356.76 634,644.74 March 31, 1997 156,965,167.40 153,696,105.54 3,268,061.86 June 30, 1997 144,604,957.20 144,310,795.40 294,161.80 Total P1,025,432,264.48 P993,532,658.91 P31,899,605.57 ============ =========== ========== "On June 24, 1998, petitioner lodged its appeal to this Court 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 of the Tax Code, as amended. "Respondent, in his Answer, raised the following Special and Affirmative defenses: Petitioner's claim for refund is still undergoing administrative routinary investigation/examination by respondent; Petitioner miserably failed to demonstrate that the tax subject of the case at bar was erroneously or illegally collected; Taxes paid and collected are presumed to have been made in accordance with law and regulations, hence, not refundable; In an action for tax refund/credit, the burden of proof is on the taxpayer to establish its right to refund and failure to adduce sufficient proof is fatal to the action for tax refund/credit; It is incumbent upon the petitioner to show that it has complied with the provisions of Section 204 in relation to Section 229 of the Tax Code, as amended; and Claims for refund are construed strictly against the claimant for the same partakes the nature of exemption from taxation ( Commissioner of Internal Revenue vs. Ledesma, G.R. No. L-17509, January 30, 1970, 31 SCRA 95) and as such, they are looked upon with disfavor ( Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 121). 3 In a decision dated March 3, 2000, the Court of Tax Appeals' Presiding Judge Ernesto D. Acosta and Associate Judge Ramon O. De Vera rendered a decision partially granting PNB's claim for tax refund and ordered the Commissioner of Internal Revenue to pay it P25,201,701.15. Associate Judge Amancio Q. Saga dissented 4 from the majority view and voted for the denial of the claim for refund for lack of legal basis. Both parties sought a modification of the Tax Court's decision but these were denied in a resolution dated June 13, 2000. IcaHCS The Commissioner of Internal Revenue, herein petitioner, is now before us via a petition for review, grounded on the following: " GROUNDS FOR PETITION "1. The Tax Court erred in holding that the 20% final withholding: tax on bank's interest income should not form part of the taxable gross receipts in computing the 5% GRT. "2. The Tax Court erred in holding that the inclusion of the 20% final withholding tax on bank's interest income in the taxable gross receipts in computing the 5% GRT, constitutes double taxation in the prohibited sense." 5 Section 119 6 of the National Internal Revenue Code of the Philippines as amended provides: "SEC. 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, commission and discounts 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 years but not exceeding four (4) years 3% "Long-term maturity: (i) Over four (4) years but not exceeding seven (7) Years 1% (ii) Over seven (7) years 0% "(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 referred to in paragraph (a) 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 banking activities." In other words, banks are imposed a tax on gross receipts from interest, commissions and discounts at the rate of 5%, 3%, 1% or 0% as the case may be. Section 24(e) 7 on the other hand, prescribes a 20% income tax on domestic corporations such as banks, in the following manner, to wit: "SECTION 24. Rates of tax on domestic corporations. xxx xxx xxx "(e) Tax on certain incomes derived by domestic corporations. (1) Interest from deposits and yield or any other monetary benefits from deposit substitutes and from trust fund and similar arrangements, and royalties. Interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements received by domestic corporations; and royalties, derived from sources within the Philippines, shall be subject to a 20% tax." xxx xxx xxx Citing Collector of Internal Revenue vs. Manila Jockey Club , 8 the Court of Tax Appeals, in its assailed decision, held that the 20% final withholding tax on the interest income of herein respondent Philippine National Bank (PNB) should not form part of the bank's taxable gross receipts. Petitioner Commissioner of Internal Revenue, for its part, claims that the 20% final withholding tax was constructively received by PNB, and, as such, should be included in the computation of the bank's 5% gross receipts tax. Before we can resolve the instant suit, a review of the Manila Jockey Club case is in order. The Manila Jockey 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 funds, were distributed, pursuant to Executive Order 320 and Republic Act 309, as follows: 87-1/2 as dividends to holders of winning tickets 12-1/2 as "commission" 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 bonuses for jockeys. Under the then Internal Revenue Law, an amusement tax was payable by the operator of the Manila Jockey Club based on its "gross receipts". The club, however, paid amusement tax on its commission without including the 5% which went to the Board on Races and to the owners of the horses and jockeys, claiming that this did not form part of its gross receipts. The Collector of Internal Revenue had a different view and demanded payment of amusement taxes on the whole amount. The club's position was upheld by the Court of Tax Appeals, and later, the Supreme Court, which opined that "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". With the Manila Jockey Club case as its authority, PNB maintains that the 20% final withholding tax on its income does not form part of its gross receipts since it is earmarked by law and regulation in favor of the government, as provided by Section 51 [d] (should be Section 51 [g]) of the National Internal Revenue Code, wit: "SEC 51. Returns and payment of taxes withheld at source. xxx xxx xxx "(g) All taxes withheld pursuant to the provisions of this Code and its implementing regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent." and Section 7 of Revenue Regulation No. 12-80, which states: "Section 7. Nature and treatment of taxes imposed under these regulations. "(a) All withholding taxes deducted and withheld by the withholding agent in accordance with these regulations shall be held as a special fund in trust for the government until paid to the collecting officer." Contrary to the view of respondent bank and the majority opinion of the Court of Tax Appeals, however, we cannot see how the ruling in the Manila Jockey Club case can be applied to the instant suit. The 5% commission, although received by the racing club, never for a moment became the club's property since the same was earmarked by law for the Board on Races, the owners of winning horses, and their respective jockeys. This being the case, said commission did not form part of the club's gross receipts and hence, not subject to the amusement tax of 20%. As held in the later case of Commissioner of Internal Revenue vs. Tours Specialists, Inc. 9 , gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to the latter and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. Unlike the 5% commission in the Manila Jockey Club case, the 20% withholding tax on PNB's interest income is money which actually belongs to respondent bank but paid to the government to satisfy the bank's obligation. The withholding of the tax and its payment to the government redounds to the benefit of PNB. Clearly, the money which went into paying the 20% withholding tax forms part of PNB's gross receipts. This is in accord with the Supreme Court's pronouncement in Bank of America NT & SA vs. Court of Appeals , to wit: "In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. Since the payee, not the payor, is the real taxpayer, the rule on constructive remittance (or receipt) can be easily rationalized, if indeed, made clearly manifest." 10 We cannot give credence to PNB's argument that "since the 20% final tax on respondent's income has been earmarked in favor the government , the 20% final tax should be excluded from respondent's gross receipts in the computation of the gross receipts tax". 11 Taxes are, by law, always "ear-marked in favour of the government". Taxes are the lifeblood of the nation. Their primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 12 Section 51 [g] of the National Internal Revenue Code and Section 7 of Revenue Regulation No. 12-80, both cited by respondent bank, simply explain what the government intends to do with the 20% final withholding tax paid by the taxpayer. Neither can we adopt the Tax Court's view that the imposition of the 20% final withholding tax and the 5% gross receipts tax on respondent bank's income constitutes double taxation. Double taxation means taxing the same property twice when it should be taxed only once. That is, ". . . taxing the same person twice by the same jurisdiction for the same thing." 13 This is not the case here. As aptly explained by petitioner, "to distinguish, the 20% final withholding tax is a tax on income withheld at the source, while the 5% GRT is an excise tax levied upon licenses to pursue certain occupations or upon certain corporate privileges". 14 We must stress, at this point, that tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law 15 . Respondent bank, in this case, has not discharged the burden. On a final note, we are not unmindful of the fact that the Court of Tax Appeals is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there is an abuse or improvident exercise of its authority. 16 We note, however, that the decision of the Tax Court in this case is not unanimous. In instances such as these, a judicious review of its ruling is but proper. WHEREFORE, the assailed March 3, 2000 decision and June 13, 2000 resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE and respondent Philippine National Bank's claim for a tax refund is hereby DENIED for lack of merit. SO ORDERED. * Salazar-Fernando and Guarina III, JJ . , concur. Footnotes * Per Office Order No. 13-03-CG dated January 27, 2003. 1. Annex "A", Petition for Review, Rollo , pp. 22-30. 2. Annex "B", Ibid. , pp. 40-42. 3. Annex "A", Ibid. , Rollo , pp. 22-24. 4. Dissenting Opinion, Ibid. , pp. 31-39. 5. Petition for Review, Ibid. , p. 11. 6. Now Section 121 of the Tax Reform Act of 1997. 7. Now Section 27 (D) (1) of the Tax Reform Act of 1997. 8. 108 Phil. 821 (1960). 9. 183 SCRA 402, 412 (1990). 10. 234 SCRA 302, 310 (1994). 11. Comment, Rollo , p. 94 (emphasis supplied). 12. National Power Corporation vs. Province of Albay , 186 SCRA 198, 207 (1990). 13. Afisco Insurance Corporation vs. Court of Appeals , 302 SCRA 1, 16 (1999), citing Victoria Milling Co., Inc. vs. Municipality of Victorias, Negros Occidental , 25 SCRA 192, 209 (1968). 14. Petition, Supra, p. 16. 15. Commissioner of Internal Revenue vs. S. C. Johnson and Son, Inc. , 309 SCRA 87, 108-109 (1999). 16. Commissioner of Internal Revenue vs. Court of Appeals , 204 SCRA 182, 190 (1991).