Dillingham (Philippines), Inc. v. Commissioner of Internal Revenue

NINTH DIVISION [CA-G.R. SP No. 20425. May 31, 1990.] (C.T.A. Case No. 3139) DILLINGHAM (PHILIPPINES), INC. , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS , respondents . D E C I S I O N PURISIMA , J p : Originally filed with the Honorable Supreme Court on June 25, 1989, but which that High Court's First Division resolved, on March 21, 1990, to refer to this Court for consideration and evaluation on the merits; the instant petition seeks review and reversal of the April 29, 1988 decision of the Court of Tax Appeals in C.T.A. Case No. 3139, ordering petitioner Dillingham (Philippines), Inc. to pay the amount of P4,035,730.87 as deficiency withholding tax-at-source on accrued interest income from 1968 to 1972, due to its foreign creditors, Dillingham International Capital Corporation, Dillingham Overseas Corporation and Dillingham International Corporation. Respondent Court of Tax Appeals included the surcharges and interest on the aforestated amount in accordance with the provisions of Section 51(e) (2) (3) of the National Internal Revenue Code, as amended. In C.T.A. Case No. 3139, petitioner alleged inter alia, in a letter of protest, that it objected to respondent BIR Commissioner's assessment, dated September 22, 1976, for the years 1968 to 1972, in the aggregate amount of P4,035,730.87, representing deficiency withholding tax-at-source inclusive of surcharge, interest and compromise penalty. In seeking to be absolved from such tax liability, petitioner cited the case of Bayer Pharmaceuticals Inc. vs. Commissioner of Internal Revenue, CTA Case No. 2846, wherein it was held that Bayer was under no obligation to withhold and pay income tax on subject royalties since the same could not be paid or remitted to the non-resident foreign corporation due to Central Bank restriction. Relying on such ruling in the Bayer case; petitioner contended that the liability to withhold and pay income tax-at-source on interest due to foreign lenders attaches only at the time of actual remittance of payment , and not at the time of accrual. It further invoked the defense of prescription and challenged the basis for the imposition of the 50% surcharge on the delinquent tax under controversy. On the other hand, the respondent BIR Commissioner placed reliance on BIR Ruling No. 71-003, requiring taxpayers to withhold interest income on foreign loans upon accrual thereof and not at the time of actual remittance of the interest thereon. In justifying the imposition of the 50% surcharge, respondent BIR Commissioner pointed out that the petitioner refused, neglected and failed to file the mandatory withholding tax return and to pay its tax liability notwithstanding demand. On the pivotal issue of whether or not the duty to withhold the tax-at-source on income payable to non-resident corporations, arises upon the remittance or payment of the amounts due to the foreign creditors or upon accrual thereof; the respondent Court of Tax Appeals resolved in favor of respondent BIR's submission that such tax is due upon the accrual of the foreign debt and held that the Bayer decision relied upon by petitioner is inapplicable to the attendant facts and circumstances; presenting the comparative analysis, thus: "In the Bayer case, the income (royalties) could not be remitted to the non-resident foreign corporation due to Central Bank restrictions, while in the present case there is no showing of any restriction on the remittance of the interest income to the foreign lenders." To further buttress its disposition under attack, the respondent court cited the case of Western Palawan Lumber Corporation vs. Commissioner of Internal Revenue (CTA Case No. 3544) where in elucidating the ruling laid down in the Bayer case, ratiocinated as follows: "This Court unequivocally ruled that since the royalties could not be remitted to the non-resident foreign corporation due to Central Bank restrictions, the time of payment of the royalties is the maturation point of the withholding duty. It bears emphasis, therefore, that if the income payable to a non-resident foreign corporation can be paid or remitted because there are no restrictions against its payment or remittance thereof, the liability to withhold and pay the tax thereon attaches at the time of accrual, not at the time of actual remittance." It upheld the validity of the imposition of the 50% surcharge in question; and rejected the defense of prescription in view of petitioner's inability to seasonably raise such defense when it lodged its instant protest before the BIR. Petitioner's failure to raise the said issue of prescription before the Bureau of Internal Revenue is fatal as it is violative of the principle of prior exhaustion of administrative remedies; so held the respondent court. Hence, the present petition for review; petitioner advancing the same arguments below to back up its stand. The petition is not impressed with merit. We discern no reversible error in the judgment under review; the wisdom behind which is beyond cavil and too evident to necessitate much citation of authorities. There can be no debate over the fact that without the taxpayer's taxes, the government cannot exist and function effectively. Therefore, prompt remittance of taxes due is of utmost importance. Payment of taxes should not be placed at the mercy of those deriving income in this jurisdiction, lest the very existence of the State be imperiled. In the case under consideration, the failure of petitioner to remit subject interest income to the foreign creditors is no defense to its inability or failure to withhold the taxes due thereon, considering that subject interest income had long accrued in favor of the aforementioned non-resident foreign corporations. In other words, the said income has been earned from sources within this country, and, therefore, the tax prescribed thereon should be withheld and collected, upon accrual thereof, notwithstanding the failure to send abroad the interest income involved. As aptly opined by respondent BIR in BIR Ruling No. 71-003, dated February 6, 1971, "Withholding tax is not dependent on remittance of the income payable to non-resident foreign corporation but on accrual thereof". And this is but understandable and reasonable. A contrary rule would not only be inequitable and unfair but highly prejudicial to the government considering that there is no Central Bank regulation or restriction prohibiting the remittance of subject interest income which accrued in favor of the non-resident foreign corporations concerned; and petitioner has nobody to blame except itself for the non-remittance thereof. Indeed, why should petitioner be allowed to profit from its own failings and inaction? Especially, at this time, when our government is in dire need of more revenues for the better delivery of essential services to our over increasing population, this ruling of the BIR has become the more vital and justifiable. As regards the validity of the imposition of the 50% surcharge in question upheld below and the rejection of the defense of prescription; after a careful study, We cannot help but quote with approval respondent court's disquisition thereon, to wit: "As to the corollary issue of the propriety of the imposition of the 50% surcharge, respondent alleges that petitioner is liable thereto as it refused, neglected and failed to file the required withholding tax return and pay its tax liability notwithstanding the demand thereof. In case of willful neglect to file the return or list within the time prescribed by law, the Commissioner of Internal Revenue, pursuant to Section 72 of the then applicable National Internal Revenue Code shall add to the tax or to the deficiency tax a surcharge of 50% of the amount of such tax or deficiency tax. Petitioner has not introduced any evidence or testimony that its failure to file the required withholding tax return within the time prescribed by law was due to a reasonable cause. "As a matter of fact, this question of the imposition of the 50% surcharge has not been raised in the administrative level, and petitioner is now apparently estopped from raising the same for the first time in this appeal. (Aguinaldo Industries Corp. vs. Commissioner of Internal Revenue, infra. ) True, petitioner in its protest of November 20, 1976 stated that it reserved the right to question at the proper time the imposition of the 50% surcharge, but this Court is not the proper place to raise this issue for the first time. Then, petitioner merely submitted this case for judgment on the basis of the pleadings without offering proof as to the truth of its allegation in the petition for review that the imposition of 50% surcharge has no basis in law and in fact. Petitioner must therefore be understood to have admitted the truth of the allegation of respondent that petitioner refused, neglected and failed to file the required withholding tax return and pay its tax liability notwithstanding demand thereof. (Bauermann vs. Casas, 10 Phil. 386; Evangelista vs. De la Rosa, et al., 76 Phil. 115.) Error or mistake of law may not constitute fraud but willful neglect, which is the basis of the imposition of the 50% surcharge in this case, is not equivalent to fraud. "Coming to the question of prescription of the right of the government to assess the tax, it will be noted, as argued by respondent, that it is also being raised by petitioner for the first time in this Court. It was never raised at the administrative level. To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby the Court which is supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the administrative forum. Thus, it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the administrative level cannot be raised for the first time on appeal. (Aguinaldo Industries Corporation vs. Commissioner of Internal revenue, L-29790, Feb. 25, 1982, 112 SCRA 136; Commissioner of Internal Revenue vs. Wander Philippines, Inc., and Court of Tax Appeals, G.R. No. 68375, April 15, 1988; Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation and Court of Tax Appeals, G.R. NO. 608, 38, April 15, 1988.) "Even more, no evidence whatsoever was presented by petitioner to the effect that the right of respondent to assess and/or to collect the tax involved herein has prescribed. The defense of prescription is an affirmative allegation and the burden of proof is upon the party laying claim to it. (Bollozos vs. Court of Tax Appeals, L-16441, March 31, 1965, 13 SCRA 469.) Prescription being a matter of defense, the burden is on the petitioner to prove that the full period of limitation has expired, so that they should positively establish the date when the period started to run and when it ended. (Querol vs. collector of Internal Revenue, L-16705, October 20, 1962, 6 SCRA 304.) "In any event, since there was failure on the part of petitioner to file the return, respondent has the right to assess the tax within ten (10) years from discovery of such omission. Section 319(a) of the applicable National Internal Revenue Code provides that in case of failure to file a return, the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the omission. It appears that the omission to file the required returns in this case was discovered, as stated in the examiner's report, on October 23, 1972. (pp. 62-64, BIR records.) Since the assessment herein was issued on September 22, 1976, the same was well within the prescriptive period of ten (10) years. . . ." WHEREFORE, the petition for review at bar is hereby DISMISSED for lack of merit; and finding no reversible error therein, the judgment a quo is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED. Aldecoa, Jr . and Sempio Diy, JJ ., concur.