Servicewide Specialists, Inc. v. Commissioner of Internal Revenue

[CA-G.R. SP No. 25893. February 14, 1992.] (C.T.A. Case No. 4255) SERVICEWIDE SPECIALISTS, INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS , respondents . D E C I S I O N ABAD SANTOS , JR ., J p : This is a petition for review of the decision dated October 10, 1990 of the Court of Tax Appeals (CTA for brevity) the dispositive portion of which read as follows: "WHEREFORE, the judicial claim for refund/tax credit of the amount of P56,808.89 should be, as it is hereby, DISMISSED. With costs against petitioner." (p. 30, CTA Decision) THE FACTS: For the calendar year 1985, petitioner Servicewide filed its Income Tax Return (ITR for brevity) showing a net loss of P69,677.00 and therefore no income tax was due. In said ITR, it was stated that Servicewide had: (1) an excess tax payment of 30,829.89 for the prior year 91984); and, (2) taxes withheld at source (effected by its various clients/payees) in the amount of P25,979.00 for the year 1982 and 1985. Total amount claimed as refundable is P56,808.89. By letter of October 9, 1986, Servicewide wrote the Commissioner of Internal Revenue requesting refund of taxes withheld amounting to P32,697.89. (Note: the amount stated in the 1985 ITR was P25,979.00). The respondent Commissioner of Internal Revenue failed to act on Servicewide's claim. Hence, Servicewide filed on April 15, 1988 a petition for review with the CTA for the refund of P56,808.89. On October 17, 1990, the CTA rendered the assailed decision dismissing Servicewide's petition for review on the ground that the petition for review was filed out of time and that the claim for refund/credit had prescribed. Servicewide disagrees with the CTA, claiming that Sec. 230 of the Tax Code, which was the basis of the CTA's decision, does not apply in this case because the taxes sought to be refunded were not erroneously or illegally collected. Hence this petition. The first issue for resolution is what does the phrase "illegally or erroneously collected" cover. This issue was first brought to fore in a case entitled CIR vs. Insular Lumber Co., 21 SCRA 1239, (Dec. 11, 1967). Here, Insular Lumber Co. sought to refund specific tax paid by the seller of its refined and manufactured oils. The claim for refund was predicated on the following proviso found in Sec. 5 RA 1435: ". . . Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in sub-paragraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code: . . ." The appellant Commissioner of Internal Revenue claims that the two (2) years period within which to file a claim for refund had prescribed pursuant to then Sec. 306 (now Sec. 230) and Sec. 309 of the Tax Code, the former reading as follows: "Sec. 306. Recovery of tax erroneously or illegally collected . No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty." On the other hand, appellee Insular Lumber subscribed to the view that Sections 306 and 309 apply to refund of taxes erroneously or illegally collected; and that since in this case the collection of the tax was not erroneous or illegal, said sections should not be applied. Appellee Insular Lumber relied on the case of Muller & Phipps (Manila) Ltd. vs. Collector of Internal Revenue, 103 Phil. 145. The Supreme Court ruled that "Sec. 306 and 309 of the Tax Code were intended to govern all kinds of refunds of internal revenue taxes those taxes imposed and collected pursuant to the National Internal Revenue Code. Section 306, which is mandatory, is not subject to qualification, and, hence, it applies regardless of the conditions under which payment has been made. And to hold that the instant claim for refund of a specific tax, an internal revenue tax imposed in Section 142 of the National Internal Revenue Code, is beyond the scope of Sections 306 and 309 is to thwart the aforesaid intention and spirit underlying said provisions:" In a subsequent case of CIR vs. Napocor, 31 SCRA 112 (Jan. 30. 1970), however, it would seem from the ruling of the Supreme Court that Sec. 306 (now Sec. 230) of the Tax Code applies only to taxes illegally or erroneously collected. In this case Phil. Engineers Syndicate Inc. paid on May 5, 1955 the BIR advance sales tax of P2,582.96 for its importation of equipment. The equipment turned out to be owned by Napocor which claimed to be the real importer of the shipments. Napocor, after being denied the refund of the same pursuant to a law which gives it exemption from the payment of said taxes, filed an action with the CTA on July 11, 1958. The CIR countered that the same had already prescribed pursuant to Sec. 306 of the Tax Code. But the Supreme Court ruled that: "It is clear in the provisions of Section 306 of the National Internal Revenue Code that the suit for the recovery of taxes which must be filed within two years from the date of payment refers to taxes that have been erroneously or illegally assessed or collected. In applying the provisions of this section, therefore, it must be shown that the tax was erroneously or illegally collected, and that the tax was paid, or considered paid, as of a certain date in order to determine when the prescriptive period of two years had commenced to run." This was however clarified in the subsequent case of CIR vs. Central Azucarera Don Pedro, 49 SCRA 474 (Feb. 28, 1973). In this case, the respondent paid compensating tax for its importation of equipment. But the respondent was later granted exemption to pay these taxes pursuant to Sec. 7 of RA No. 3127 which exemption is retroactive. Hence, respondent filed its claim for refund of the compensating tax paid on July 22, 1965, or more than two (2) years after it was paid and therefore had prescribed under Sec. 309. The Supreme Court clarified the doctrine laid down in Muller & Phipps (Manila), Ltd., vs. Coll. of Int. Revenue, 103 Phil. 145 [March 20, 1958]) which was the basis of the CTA in declaring in this case that Sec. 306 of the Tax Code applies to taxes erroneously or illegally or in any manner wrongfully collected or penalties collected without authority. The Supreme Court said: "The case of Muller & Phipps, supra, was relied upon by the Court of Tax Appeals in reversing the action of the herein petitioner. In that case advance sales taxes were paid on imported raw materials upon their withdrawal from customs custody. Subsequently, since not all of said materials could be used, the importer shipped back a portion of them to its supplier in the United States and then filed a claim for the refund of the corresponding amount of advance sales taxes which it had paid. The Collector of Internal Revenue denied the claim and the importer went to the Court of Tax Appeals. The petition for review however, was filed beyond the two-year prescriptive period fixed in Section 306 of the TaxCode and the Court of Tax Appeals dismissed the same upon motion by the Collector. The case was thereafter brought before this Court for review on appeal, and We held that the prescriptive period of two (2) years from payment, fixed by Section 306 of the TaxCode, cannot apply to the present case, on the ground that the advance sales tax in question was not erroneously or illegally collected but that although it was legitimately due when paid the tax payer subsequently became entitled to a partial refund by reason of a supervening circumstance, namely, the re-exportation of the imported materials. The ruling was subsequently clarified by this Court in a later case, Commissioner of Internal Revenuevs. InsularLumberCo., Dec. 11, 1967, 21 SCRA 1237. It was there held that Sections 306 and 309 of the InternalRevenueCode were intended to govern all kinds of refunds of internal revenue taxes those taxes imposed and collected pursuant to the National InternalRevenueCode. In other words the prescriptive period of two (2) years therein provided is the one which should govern and not any other prescriptive period, such as that of ten (10) years provided for in Article 1144, paragraph (2), of the CivilCode. But at the same time this Court ruled: since in those cases the tax sought to be refunded was collected legally, the running of the two-year prescriptive period provided for in Section 306 should commence, not from the date the tax was paid, but from the happening of the supervening cause which entitled the taxpayer to a tax refund. And the claim for refund should be filed with the Commissioner of Internal Revenue, and the subsequent appeal to the Court of Tax Appeals must be instituted within the said two-year period. Clarifying the point further, this Court added: In fine, when the tax sought to be refunded is illegally or erroneously collected, the period of prescription starts from the date the tax was paid; but when the tax is legally collected, the prescriptive period commences to run from the date of occurrence of the supervening cause which gave rise to the right of refund. The ruling in Muller& Phipps is accordingly modified." From the foregoing there is therefore no doubt that Sec. 306 (now Sec. 230) of the Tax Code providing for a two (2) year prescriptive period governs all kinds of refunds of internal revenue taxes. The purpose of which is evidently to settle at the earliest possible time claims for refunds of taxpayers because: "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 wealth." (see Napocor vs. Province of Albay, 180 SCRA 198). Moreover, Sec. 306, and its amendment, Sec. 230 quoted hereunder, cover not only taxes erroneously or illegally assessed or collected but also "of any sum alleged to have been excessive." The taxes paid and sought to be refunded by Servicewide in this case, as will be explained later in the resolution of the second issue, falls under the latter phrase. The next point of inquiry is when does this two-year prescriptive period starts running. Sec. 230 of the NIRC, which amended Sec. 306 of the Tax Code reads: " Recovery of tax erroneously or illegally collected . No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously for illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue: but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. xxx xxx xxx" The immediately aforequoted provision of law is clear that the two year prescriptive period commences to run from the date of payment of tax regardless of any supervening cause that may arise after payment. Therefore the ruling of the Supreme Court in the aforequoted cases, only insofar as to its declaration that the prescriptive period commences to run from the date of occurrence of the supervening cause which gave rise to the right of refund, is not anymore applicable. I. REGARDING SERVICEWIDE'S EXCESS CREDITABLE WITHHELD TAXES OF P25,970.00 FOR 1992 AND 1985: It is undisputed that the amount of P25,979.00 (tax withheld for 1982 and 1985) constitutes creditable tax withheld by Servicewide's various clients/payors pursuant to Sec. 50 (b) of the NIRC, reading thus: "(b) Withholding of creditable tax at source . The Secretary of Finance may upon the recommendation of the Commissioner of Internal Revenue, require also the withholding of a tax on the items of income payable to persons (natural or juridical) residing in the Philippines by payor-corporations/persons as provided for by law at the rate of not less than 2-1/2% but not more than 35% thereof which shall be credited against the income tax liability of the taxpayer for the taxable year." Income of a taxpayer which has been subjected to creditable withholding taxes must still be included in computing the total income of the taxpayer for the year it was withheld which is then subjected to the usual rate of income tax provided by law. The creditable withheld taxes are then deducted to the tax due of the taxpayer for all his income for the said taxable year. If the total creditable withheld taxes for a taxable year is less than the taxpayer's tax due for the said year, the taxpayer must still pay the deficit. If the said total creditable withheld taxes is more than the taxpayer's tax due for his income for the said taxable year, the taxpayer should claim for the refund. This is explicit from the provision of Sec. 51 (f) of the National Internal Revenue Code, reading thus: "(f) Income of recipient . Income upon which any creditable tax is required to be withheld at the source under Section 50 shall be included in the return of its recipient but any excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204. If the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 50, (as amended by B.P. Blg. 41.)" The CTA relied on the case of Gibbs vs. CTA 15 SCRA 319 [Nov. 29, 1965] on the reckoning period to start the two (2) year prescriptive period to claim refund for withheld taxes: ". . . A taxpayer, resident or non-resident, who contributes to the withholding tax system, does so not really deposit an amount to the Commissioner of Internal Revenue, but, in truth, to perform and extinguish his tax obligation for the year concerned. In other words, he is paying his tax liabilities for that year. Consequently, a taxpayer whose income is withheld at the source will be deemed to have paid his tax liability when the same falls due at the end of the tax year. It is from this latter date then, or when the tax liability falls due, that the two-year prescriptive period under Section 306 of the RevenueCode starts to run with respect to payments effected through the withholding tax system. . . ." If We will apply the principle laid down in the above case, Servicewide was deemed to have paid its tax liability at the end of these years (i.e., 1982 and 1985). Such being the case, Servicewide should have asked a refund for the excess creditable withheld taxes: a) before the end of 1984 for taxes withheld in 1982; and. b) before the end of 1987 for taxes withheld in 1985. Corporate taxpayer like Servicewide pay their income taxes quarterly: "Sec. 68. Declaration of corporate quarterly income tax . Every corporations shall file in duplicate a quarterly summary declarations on a cumulative basis for the preceding quarters upon which the income tax, as provided in Title II of this Code shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. (as amended by Pres. Decree No. 1705)" (p. 233, NIRC) A final adjustment return covering the total taxable income for the preceding calendar or fiscal year is to be filed pursuant to: "Sec. 69. Final Adjustment return . Every corporation liable to tax under Section 24 shall liable to tax under Section 24 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year the corporation shall either: (a) Pay the excess tax still due; or (b) Be refunded the excess amount paid, as the case may be. In case the corporation entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. (as amended by Pres. Decree No, 1705)." This final adjustment return is required to be filed on or before 15th day of April or on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be (see Sec. 70[b] of the NIRC). It is clear that Servicewide by that time knew already if it was entitled to refund of the creditable taxes withheld from it for the preceding taxable year which exceeds its tax due for the said year considering that it knew how much creditable taxes were withheld from it pursuant to Sec. 51 (c) of the NIRC: (c) Statement of income payments made and taxes withheld . Every withholding agent required to deduct and withhold taxes under Section 50 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not later than 20th day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee or before January 31 of the succeeding year. (as amended by Pres. Decree No. 1773)." Under the aforequoted Sec. 51(f) "any excess of the amount of tax so withheld over the tax due on his return shall be refunded to him." It must be emphasized however that the running of the two year prescriptive period to claim for this refund commences to run from the date of payment, which accordingly to the Gibbs case, supra , is at the end of the taxable year. As can be gleaned from the records, Servicewide's claim for refund of these taxes, among others, was filed by Servicewide on April 5, 1988, long after the two (2) year prescriptive period had expired. Admittedly, Servicewide sent a letter to the Commissioner of Internal Revenue requesting a refund for withheld taxes for 1982 and 1985 (Petition, Annex A). However, by that time, the taxes withheld in 1982 had prescribed. Although taxes withheld for 1985 had not prescribed at that time, it was nonetheless imperative for Servicewide to file a petition with the CTA for refund of taxes within the statutory two (2) year period. Servicewide did not have to wait for respondent Commissioner's response to its letter if the two (2) year period was about to expire. Thus, in Tax Appeals, 107 Phil. 232, i was held: "A taxpayer who has paid the tax, whether under protest or not, and who is claiming a refund of the same, must comply with the requirements of both Section 306 and Section 11 of Republic Act No. 1125; that is he must file a claim for refund with the Collector (now Commissioner) of Internal Revenue within two years from the date of his payment of the tax, as required by said Section 306 of the NationalRevenueCode, and appeal to the Court of Tax Appeals within 30 days from receipt of the Collector's decision or ruling denying his claim for refund, as required by said Section 11 of Republic Act No. 1125. If, however, the Collector takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector. This is so because the positive requirement of Section 306 and the doctrine that delay of the Collector in rendering decision does not extend the peremptory period fixed by the statute," (Emphasis for emphasis) Since respondent Commissioner failed to act on Servicewide's letter-request aforesaid, then the latter should have instituted this case with the CTA before the end of 1987 to claim refund for taxes withheld in 1985. This, it failed to do. II. REGARDING SERVICEWIDE'S EXCESS TAX PAYMENT OF P30,829.89 FOR 1984: As have been discussed, corporate taxpayers are required to file a final adjustment return on or before 15th day of April or on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be (see Sec. 70[b] of the NIRC. This "final adjustment return" covers the total net income f the corporate taxpayer for a taxable year, as in this case, total net income of Servicewide for the year 1984, such that if the quarterly tax payment is not equal to the total tax due on the entire taxable net income for that year (1984), then Servicewide should have applied for the refund of the excess or asked that it be credited against the estimated quarterly income tax liabilities for the taxable for the taxable quarters of the succeeding taxable year. Servicewide should have signified in its annual corporate adjustment return for the year 1984 its intention whether to request for the refund of the overpaid income tax or claim for automatic tax credit to be applied against its income tax liabilities for the quarter of the succeeding taxable year by filling up the appropriate box on the corporate tax return (BIR Form No. 1702, see Rev. Mem. Circular No. 7-85). However, in this case, it was not shown whether Servicewide indicated in its corporate tax return for the year 1984 (BIR Form No. 1702) if it chose to be refunded of the excess tax payment or sought for automatic tax credit to be applied against its income tax liabilities for the quarter of the succeeding taxable year. Since there was no evidence that it was not utilized as automatic tax credit for the succeeding year, We are thus assuming that Servicewide had indicated in the said corporate return that it had chosen to be refunded of the excess. Thus, the two-year prescriptive period which We have discussed as applying to all kinds of taxes, commenced to run from the filing of the final adjustment return in April 15, 1985 for the taxable year 1984. Since the Commissioner of Internal Revenue took time in deciding Servicewide's claim for return as indicated in its 1984 final adjustment return, and the two-year prescriptive period is about to end, the suit or proceeding should have been started in the CTA before the end of the two-year period, which is April 15, 1987, without awaiting the decision of the Commissioner (see Gibbs vs. CIR & CTA , supra). This was not done to foreclose the running of the two-year prescriptive period because the petition for review filed by Servicewide with the CTA was filed only on April 15, 1988. To recapitulate, in both cases, the two year prescriptive period to claim the refund/credit had lapsed. WHEREFORE, premises considered, the herein petition for review is DISMISSED and the Decision of the Court of Tax Appeals is AFFIRMED. SO ORDERED. Buena and Gonzaga-Reyes, JJ ., concur.