Commissioner of Internal Revenue v. Court of Tax Appeals

[CA-G.R. SP No. 25767. May 30, 1994.] (C.T.A. Case No. 4333) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HON. COURT OF TAX APPEALS and DCCD ENGINEERING CORPORATION , respondents . D E C I S I O N GUTIERREZ , J p : Petition for review of the decision of the Court of Tax Appeals, in C.T.A. Case No. 4333, "DCCD Engineering Corporation vs. Commissioner of Internal Revenue" involving a claim for tax credit. Pursuant to Letter of Instruction No. 1030 dated May 27, 1980, the Economic Support Fund Secretariat (ESFS) was created as the implementing machinery for the utilization of economic assistance proceeds from the military bases agreement. DCCD Engineering Corporation, a consulting engineering firm, entered into an agreement with ESFS for engineering consultancy services. For the period from October 15, 1986 to July 7, 1988, DCCD paid the Bureau of Internal Revenue (BIR) directly or through ESFS, its withholding agent, the sum of P393,803.36 representing the contractor's tax and the value-added tax (VAT). Subsequently, pursuant to BIR Ruling No. 101-000-00513-88 dated October 21, 1988, DCCD filed with the BIR a claim for tax refund alleging that the contractor's tax and the VAT refund alleging that the contractor's tax and the VAT were either erroneously withheld by the ESFS or erroneously paid directly to the BIR. The above mentioned BIR Ruling is quoted as follows: "In reply, please be informed that pursuant to the RP-US Military Bases Agreement and the bilateral agreement between the two governments exempting the Economic Support Fund (ESF) proceeds from the Philippine government tax and other impositions, the use of the fund to finance government projects which are paid directly from said fund are within the purview of effectively zero-rated transactions contemplated under Section 100 (a) (2) and 102 (a) (3) of the Tax Code. In other words, billings by the seller of goods or services who executed the projects funded by ESF shall not include the value-added tax, Provided, however , that the seller of said goods or services shall first apply for zero rating in accordance with Section 8 (d) of Revenue Regulation No. 5-87." Instead of waiting for the BIR action on its claim, DCCD filed with the Court of Tax Appeals a petition seeking the same tax credit from the BIR. On July 16, 1991, the Court of Tax Appeals rendered a decision, the dispositive portion of which reads: "WHEREFORE, respondent Commissioner of Internal Revenue is hereby ordered to grant a tax credit in favor of petitioner in the amount of P14,265.00, representing erroneously paid value-added tax. However, this court denies the claim for tax credit involving alleged erroneously paid contractor's tax in the amount of P379,538.36, as well as the P75,000.00 attorney's fees. No pronouncement as to costs. SO ORDERED." Hence, this petition for review by the BIR. Petitioner contends that the Court of Tax Appeals erred in exempting DCCD from paying the VAT. The fundamental issue before Us is whether or not DCCD is exempt from paying both the contractor's tax and the VAT. In holding that DCCD is not entitled to the refund of its contractor's tax, respondent Court of Tax Appeals declares that there is no provision in the National Internal Revenue Code exempting DCCD from paying contractor's tax. With respect to DCCD's claim for refund of the VAT, the same court ruled that it is entitled thereto by virtue of BIR Ruling No. 101-000-00513-88 quoted earlier. We cannot go along with the Court of Tax Appeals when it held that DCCD is not exempt paying contractor's tax on the gross receipts it realized from the proceeds of the Economic Support Fund (ESF). It is not disputed that pursuant to the "RP-US Military Agreement and the bilateral agreement between the two governments," the ESF proceeds are exempt from the Philippine Government tax and other impositions. Petitioner contends, however, that the contractor's tax is a tax due primarily and directly on the contractor, the DCCD, and not on the ESF. In other words, the contractor's tax falls directly on DCCD and cannot be shifted to the ESF who is exempt from paying any tax in this country. While the contractor's tax is payable by DCCD, however, it is ESF, the source of funding , which actually pays the taxes. Clearly, if DCCD's claim for refund of contractor's tax will not be granted, the effect is that ESF is not exempt from taxation in violation of the RP-US Military Bases Agreement and the bilateral agreement between the two governments embodied in the said BIR Ruling. Pertinent is the ruling of the Supreme Court in Commissioner of Internal Revenue vs. John Gotamco and Sons, Inc. (Gotamco) (148 SCRA 36 [1987]) exempting Gotamco from paying contractor's tax on the gross receipts it realized from the construction of the World Health Organization (WHO) office building in Manila, thus: ". . . the Host Agreement entered into between the Philippines and the said organization on July 22, 1951. Section 11 of that Agreement provides, inter alia , that the Organization, its assets, income and other properties shall; (a) exempt from all direct and indirect taxes. . . ." xxx xxx xxx "Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the WHO is valid and enforceable, the 3% contractor's tax assessed by Gotamco is not an 'indirect tax' within its purview, petitioner's position is that the contractor's tax is in the nature of an excise tax which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. It is a tax due primarily and directly on the contractor, not on the owner of the building. Since this tax has no bearing upon the WHO, it cannot be deemed an indirect taxation upon it. We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court: 'In content, direct taxes are those that are demanded from the very person, who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else (Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759). The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that this tax has no bearing upon the World Health Organization.' xxx xxx xxx "The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from any taxes in connection with the construction of the WHO office building. The 3% contractor's tax would be within this category and should be viewed as a form of an 'indirect tax' on the organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building." Relative to DCCD's claim for exemption from paying the VAT, the petitioner contends that before DCCD could avail of such exemption, it should first comply with the requirement that it should apply for a zero rating ; and that the time to file such application was on January 1, 1988 when the VAT law took effect or thereafter. Since DCCD did not apply for zero rating and instead paid its VAT on September 30, 1988, then it is not entitled to a tax refund. Parenthetically, the BIR Ruling requiring the application for zero rating was issued only October 21, 1988. Suffice it to state that we find no error in the ruling of the Court of Tax Appeals when it held that: "Petitioner cannot therefore be faulted for not having first applied for the abovementioned zero rating since its payment of the value added tax then indicates that petitioner was not aware that it was subject to zero rate until after the issuance of the BIR Ruling. Accordingly, the claim for the erroneously paid value-added tax must be granted." WHEREFORE, the appealed decision is hereby AFFIRMED with modification in the sense that DCCD's claim for refund of contractor's tax in the sum of P379,538.36 is hereby GRANTED. No pronouncement as to costs. SO ORDERED. Lantin and Morales, JJ ., concur.