China Banking Corp. v. Commissioner of Internal Revenue

TWELFTH DIVISION [CA-G.R. SP No. 51637. December 11, 2000.] CHINA BANKING CORPORATION , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N DELOS SANTOS , E.R. , J p : This is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, seeking to annul the decision of the Court of Tax Appeals dated October 07, 1998 in CTA Case No. 5433, as well as its February 18, 1999, resolution, which denied petitioner's claim for refund or tax credit, based on solutio indebiti under Article 2154 of the Civil Code, in the aggregate amount of P8,754,346.16 representing the alleged overpayment of gross receipts taxes for the period from the 3rd quarter of 1994 to the 4th quarter of 1995, plus interest at the legal rate from date of payment until fully paid. CHcTIA Petitioner, a local universal banking institutions, pays gross receipts taxes on income earned from interest on loans, investments, deposits, commissions, service & collection charges, foreign exchange profit and other operating earnings. On October 16, 1996, petitioner filed a claim for refund and/or tax credit of gross receipts taxes (GRT) allegedly paid erroneously. Thereafter, on October 18, 1996, without waiting for the decision of the respondent Commissioner of Internal Revenue on the formal claim for refund and/or tax credit, petitioner bank filed the instant petition for review before the Court of Tax Appeals in view of the mandatory two-year prescriptive period under Section 230 of the Tax Code. Petitioner alleged that on several dates from October 20, 1994 up to January 22, 1996, inclusive, it overpaid various amounts in excess of the correct quarterly 5% gross receipts tax of the 3rd quarter of 1994 up to the 4th quarter of 1995. Petitioner's Quarterly Percentage Tax Returns showed that during the said six-quarter period, it paid a total of P112,638,409.98 representing the 5% Gross Receipts Tax (GRT) on all income receipts, computed as follows: Period Date Filed Gross Receipts Covered and Paid Tax Paid 1994: 3rd Quarter 10-20-94 P14,191,991.00 4th Quarter 01-20-95 21,414,725.47 1995: 1st Quarter 04-20-95 19,674,682.63 2nd Quarter 07-20-95 15,191,735.90 3rd Quarter 10-20-95 22,794,053.96 4th Quarter 01-22-96 19,371,220.36 P112,638,220.36 ============= Petitioner claimed that in the computation of the above tax remittances, the 20% final withholding tax withheld from its interest income earned during the six-quarter period was erroneously added to the total gross receipt subjected to the 5% gross receipts tax. It "grossed up" the amount of net interest income earned subject to the 20% tax to arrive at the gross receipt subject to the 5% gross receipts tax. This naturally resulted in a bigger tax base, and a bigger tax. This was the routine, though mistaken, practice until the tax court's decision in the case of Asian Banking Corporation vs. Commissioner of Internal Revenue , CTA Case No. 4720, promulgated January 30, 1996, where it ruled that the 20% final tax on interest withheld at source does not form part of the bank's taxable gross receipts for GRT purposes. Pursuant thereto, petitioner filed its amended Quarterly Percentage Tax Returns for the six quarters covered, showing a refundable total amount of P8,754,346.16, computed as follows: Corrected GRT GRT Paid Refundable Amount 1994: 3rd Quarter P14,084,351.44 P14,191,991.67 P107,640.23 4th Quarter 19,021,546.55 21,414,725.46 2,393,178.92 1995: 1st Quarter 17,819,477.48 19,674,682.63 1,855,178.92 2nd Quarter 14,550,861.93 15,191,735.90 640,873.97 3rd Quarter 20,445,711.76 22,794,053.96 2,348,342.20 4th Quarter 17,962,114.67 19,371,220.36 1,409,105.69 P8,754,346.69 =========== The evidence presented by the petitioner consisted of the following documents, together with the testimonies of its financial officers who identified them, to wit: 1) Quarterly Percentage Returns for the 3rd quarter of 1994 up to the 4th quarter of 1995 (Exhs. "A" to "A5"); 2) Daily Earnings and Expenses for the period covering the 3rd quarter of 1994 up to the 4th quarter of 1995 (Exhs. "B" to "B5-7"); 3) Computation of Monthly Accrued Gross Receipts Tax of petitioner for the period covering the 3rd quarter of 1994 up to the 4th quarter of 1995 (Exhs. "C", "C1", "C2", "C4", "C4-2", "C5", "C5-2"); 4) Schedule of Gross Earnings for the period covering the 3rd quarter of 1994 up to the 4th quarter of 1995 (exhs. "C-1", "C1-1", "C2-2", "C3", "C4-1", "C5-1"); 5) Schedule of Accrued Interest Receivable for Gross Receipts Tax Computation for the period covering the 3rd quarter of 1994 up to the 4th quarter of 1995 (Exhs. "C-2", "C1-2", "C2-4", "C3-2"); 6) China Banking Corporation's Managers' checks payable to the Commissioner of Internal Revenue (Exhs. "D", to "D5"); 7) Petitioner's Tax Returns/ATAPS Batch Control Sheet (Exhs. "E" to "E5-s"); 8) Amended Percentage Tax Returns for the period covering the 3rd quarter of 1994 up to the 4th quarter of 1995 (Exhs. "F" to "F5"); 9) Comparative computation of Gross Receipts Tax for the period covering the 3rd quarter of 1994 up to the 4th quarter of 1995 (Exhs. "F-1 to "F5-1"); and 10) Letter-request for refund, dated October 16, 1996 (Exh. "G")" HcTSDa The issue now is whether the petitioner has established its right to a refund or tax credit for overpaying P8,754,346.16 in gross receipts taxes for the period from the 3rd quarter of 1994 up to the 4th quarter of 1995. Section 119 of the former tax code provides: "Sec. 119. Tax on banks and on 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 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 4 years but not exceeding 7 year 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% Provide, 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." As provided in the above-quoted provision, gross receipts taxes are computed based on actual receipts of the bank from its lending activities, royalties, rentals, real or personal profits and all other items comprising gross income under Section 28 (now Section 32) of the Tax Code. There is no express requirement to include the 20% final withholding taxes on the bank's interest income as part of its gross receipts. However, this question has been settled in the case of Asian Banking Corporation vs. Commissioner of Internal Revenue , CTA Case No. 4720, January 30, 1996, thus: "We agree with the petitioner that the 20% final withholding tax on its interest income should not form part of its taxable gross receipts. " Revenue Regulations No . 12-80 dated Nov. 7, 1980 on taxation of Certain Income Derived from Banking Activities provides that the rates of tax to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received, thus: 'SEC. 4. . . . (e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities . The rate of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. Mere accrual shall not be considered, but once payment is received on such accrual or in cases of prepayment, then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder. (Emphasis supplied)' HIEAcC From the foregoing, it is but logical to infer that 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 the purpose of computing the GRT (emphasis Ours). This conclusion is in accord with the interpretation of the Supreme Court in the case entitled Collector of Internal Revenue vs. Manila Jockey Club , 108 Phil 821, as quoted by this Court in disposing similar a issue in the case entitled Compania Maritima vs. Acting Commissioner of Internal Revenue , CTA Case No. 1426 dated November 14, 1996, thus: 'In the second place, the highest tribunal of the land interpreted the term "gross receipts" to mean all receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayer (emphasis Ours). Thus, it was held: ". . . The Government could not have meant to tax as gross receipt of the Manila Jockey Club the % which it directs same club to turn over to the Board of Races. The latter being a Government institution, there would be double taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, or know the Club would give, the winning horses and Jockeys admittedly 5%. It is true that the law says that out of the total wager funds 12% shall be set aside as the 'commission' of the track owner but the law itself takes official notice, and virtually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of jockeys, which portion is admittedly 5% out of the 12% commission. As it did not at that time contemplate the application of 'gross receipts' revenue principle, the law in making a distribution of the total wager funds, took no trouble of separating one item from the other; and for convenience, grouped three items under one common denomination. "Needless to say, 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 ." (The Commissioner of Internal Revenue vs. Manila Jockey Club, Inc., G.R. Nos. L-13890 & L-13887, June 30, 1960) "It is to be noted that, under Section 260 of the Tax Code, a race-track is subject to an amusement tax of 20% of its gross receipts and the term 'gross receipts' embraced all the receipts of the proprietor, lessee, or operator of the amusement place." Notwithstanding the broad and all-embracing definition of the term "gross receipts" found in our amusement tax law, our Supreme Court did not adopt a literal interpretation of the said term in the case of the Manila Jockey Club, Inc., supra ." (Emphasis supplied) We agree with the tax court that in computing the gross receipts tax due, the 20% final taxes withheld on the petitioner bank's interest income on government securities should be excluded from the gross receipts, because these have been turned over to the Government by the Bangko Sentral Ng Pilipinas, the withholding agent. Thus, petitioner's actual gross receipts from interest income earned from government securities should already be net of the 20% tax withheld. Otherwise, double taxation would result, and this is not the intendment of the law. DTEIaC The question that now remains is whether proof has been established for the application of the rule of solutio indebiti to warrant the refund or tax credit sought by the petitioner; Has the petitioner indeed erroneously paid to the government P8,754,346.16 in gross receipts taxes during the covered period? The tax court held that it was not enough to show that tax was actually paid based on the inflated gross receipts. It was necessary that the 20% final taxes withheld were actually remitted to the government. The tax court ruled that due to insufficiency of evidence, the petitioner failed to establish proof of the actual remittance to government of the excess amounts. It concluded that since no such amount was shown to have been erroneously withheld and paid to the government, then there is no reason to order its return by applying solutio indebiti . The lower court reasoned thus: "A thorough and careful examination of all the documentary evidence presented by the petitioner reveal that petitioner has failed to substantially prove its entitlement to the refund/credit south. Even though petitioner in the case at bar had satisfactorily proved through various documentary evidence that it actually paid its gross receipts taxes which was computed based on its gross receipts inclusive of the 20% final withholding tax on the bank's interest income, it however failed to prove that the said 20% final withholding taxes were actually paid and remitted to the Bureau of Internal Revenue , thus entitling the same to be excluded in the computation of petitioner's gross receipts tax. Petitioner is reminded that in the case of Asian Banking Corporation ( supra ) from which it based its claim for refund, a disputable presumption exists that the final tax excluded from the computation of gross receipts tax already " went to the coffers of the government ", and therefore, should no longer form part of its gross receipts for the purpose of computing the GRT. This Court in deciding on the Asian Bank case sought to avoid the unfavored existence of double taxation. In the instant case, petitioner showed no convincing proof that it suffered from being erroneously taxes twice thus entitling it to the refund sought. "It is our opinion that for the petitioner to substantially prove its entitlement to the refund/credit sought, it should have presented as evidence copies of Certificates of Final Income Tax Withheld issued by its withholding agents, as what it did in its previous case covering its second quarter of 1994 in CTA Case No. 5405, or any proof whatsoever that would show payment of the 20% final withholding tax and which would necessarily justify its exclusion from petitioner's gross receipts. "In view of the principle that tax refunds are in the nature of tax exemptions and 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 ( Towa Industry, Inc. vs. Commissioner of Internal Revenue , CTA Case No. 52109, May 13, 1997), the taxpayer having the burden of proof to show that it is entitled to the return of the amount claimed as refundable ( Benguet Corp . vs . Commissioner of Internal Revenue , CTA Case No. 4686, 4829, June 27, 1995), this Court has no other recourse but to deny the instant petition." (emphasis supplied) On October 28, 1998, the petitioner moved for reconsideration, arguing that it had presented substantial evidence to justify a refund, or in the alternative, to be given a chance to present further evidence. In denying the said motion the tax court said: "The evidence presented by Petitioner only prove (sic) that the passive income were (sic) grossed up to include the 20% final withholding taxes. What We wanted was for the Petitioner to show if there was indeed actual payment of that 20% final withholding taxes in order to constitute double taxation which will warrant the granting of the claim for refund as elucidated in the Asian Banking case. However, the records do not reveal a single evidence that will show that the 20% final tax was paid by the Petitioner. We agree with the Petitioner that there is a presumption of regularity of government transactions with respect to the remittance of payments of final withholding taxes on government securities and it is precisely because of this We expected that the Central Bank issued Certificates of Final Income Tax Withheld to Petitioner and (these) should have been presented by the latter during the trial." In denying Petitioner's alternative prayer to present further evidence, the tax court treated the same as a motion for new trial under Section 1 of Rule 37 of the Rules of Court, and held that: "The inability of the Petitioner to produce the Certificates of Final Income Tax Withheld) during trial for the reason that locating the same is a very tedious process cannot be considered as excusable negligence which may qualify as a ground under Section 1 of Rule 37. Such reasoning is superfluous and too shallow to comprehend, much less give due consideration. DEHcTI "It is worth stressing that mistakes of attorneys as to the competency of a witness, the sufficiency, relevancy, materiality or immateriality of certain evidence, the proper defense, or the burden of proof are not proper grounds for new trial. . ." "In sum, We find no convincing reason to grant the presentation of further evidence." We disagree with the tax court that it "has no other recourse but to deny the instant petition", or that there is no convincing reason to allow further proceedings for the presentation of additional evidence. The compelling consideration in this case is that, as admitted by said court, money was in fact received by the government when Petitioner had no duty to pay it and the government had no right to demand and keep it. The gross receipts taxes paid by the Petitioner, as indicated in its original and amended quarterly returns, indeed appear to be in excess of the true amount due for the period covered, and that further, petitioner did overpay its taxes based on the overstated "grossed up" gross receipts. Put another way, Petitioner believed that it sufficed for its case: 1) that it proved the error in its computation of its gross receipts upon which it based its grossed receipts taxes, and 2) that it actually paid, as proved by the manager's checks, the overstated amount of taxes based on the erroneous base figure by presenting the said checks. The tax court held that this does not prove that the 20% withholding taxes "grossed up" were actually paid, and yet it also stated that "We agree with the Petitioner that there is a presumption of regularity of government transactions with respect to the remittance of payments of final withholding taxes on government securities. . ." The afore-cited presumption notwithstanding, the tax court did not necessarily act capriciously in demanding the presentation of the certificates of final taxes withheld. These documents will establish the specific net interest earnings which were erroneously grossed up by the petitioner when it filed its quarterly returns, thereby causing the overpayment of its taxes. However, the tax court may have acted arbitrarily in denying the petitioner a new opportunity to present the exact proof it wanted, now that this matter has been clarified and substantial evidence had been proffered on the fact of overpayment. We take note that, as attached to the herein petition, the credit advices and certificates of final taxes withheld issued by the Central Bank appear to be reasonably voluminous and totaled one hundred fifty-nine (159) pages, culled from transactions covering all of six (6) quarters. The compelling reason that urges Us to reconsider the tax court's view is not merely founded on equity but is expressly enjoined by law, in particular, Article 2154 of the New Civil Code: that money was paid to the government in excess of what was due through an error in computation, and that the government has the duty, the duty it would have been mandated to enforce upon every citizen in every other case, to return the same to its source. Article 2155 also provides that "Payment by reason of a mistake in the construction of application of a doubtful or difficult question of law may come within the scope of the preceding article." The "grossing up" by petitioner of the net interest paid by the Bangko Sentral Ng Pilipinas itself on government securities, to explain the error in its computation of its gross receipts, was well-justified, logical, practicable and reasonable, and should be an acceptable mode of recomputing the adjusted gross receipts tax for purposes of the refund. The Bangko Sentral, which issued the subject certificates of final taxes withheld and credit advices to petitioner, is itself vested with supervisory authority over banks to seek that they remit to the government all withheld taxes. The presumption that Bangko Sentral follows the very regulation it enforces is justified, and the tax court should have been more accommodating in granting the petitioner another opportunity to present the very evidence that it now demanded. The evidence was in fact attached to its timely motion for reconsideration. In dismissing petitioner's claimed tediousness in gathering all the 159 attachments, accumulated over six (6) fiscal quarters, as constituting excusable negligence to favorably incline the tax court to allow its eventual reception, the tax court made reference to the earlier case filed by petitioner, CTA Case No. 5405, where it presented certificates of final taxes withheld. We observe that said case encompassed only the second quarter of 1994, and the volume of documents required could have been considerably less. We note too that he promulgation of the Asian Banking Corporation decision on January 30, 1996 made the present claim much more urgent in view of the 2-year prescriptive period for filing with the tax court a petition for review of the Commissioner of Internal Revenue's denial of the taxpayer's claim. AIDcTE The Court of Tax Appeals was specially created so that aggrieved taxpayers could have an expeditious recourse to correct erroneous applications of the tax laws. When an overpayment of tax was established to have been committed by mistake, it is certainly not extravagant to expect said court to incline toward the taxpayer's claim for refund and extend whatever reasonable help he needs to establish his case. The condescension costs the government nothing. A knee-jerk insistence on strictissimi juris compliance with the law without extending such assistance has been so often resorted to justify a flippant rejection of countless legitimate refund claims, thus creating the impression of tax collection as a nothing less than a confiscatory taking by the government. One notes that the two-year prescriptive period to file a petition for review from date of payment of the tax is itself already restrictive. Having thus established payment by mistake, the petitioner should have been accorded ever reasonable opportunity to complete its required modicum of proof. We are not unaware of the countless rulings to the effect that tax refunds are in the nature of tax exemptions. As cited by the tax court in the case Towa Industry, Inc. vs. Commissioner of Internal Revenue , CTA Case No. 52109, May 13, 1997), and as reiterated by the Supreme Court in the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc ., 309 SCRA 87: "It bears stress 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 on 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." Still, We must take an exception in this case. For by no stretch can petitioner's claim for refund or tax credit be viewed as a request for exemption, which requires that the exemption "must be expressly granted in a statute in a language too clear to be mistaken" (Commissioner of Internal Revenue, 298 SCRA 83). Much less is this case about double taxation as to be violative of the equal protection clause ( Punzalan vs. Municipal Board of Manila , 95 Phil. 46). As has been explained, it arose as a result of the Asian Bank ruling on how to correctly compute the gross receipts subject to the gross receipts tax of 5% pursuant to Section 119 of the old tax code. An honest mistake in determining the tax base was involved. We apprehend merit in the invocation of the solutio indebiti rule, which is founded on natural law and equity. To rule otherwise would be to sanction taking of property without due process, which is a pillar of our democratic society and without which government ceases to have the right to exist and to enforce taxation. Shorn of legal sophistry, this case involves simply a mistaken overpayment of tax by reason of an erroneous computation of the tax base. As a result, the Commissioner of Internal Revenue is reduced to the role of a mere trustee who must return the amount upon demand. The tax court itself acknowledged that the petitioner overpaid its gross receipts tax. It claims that it simply wanted proof that the 20% final tax had been remitted to the government, and yet at the same time, it agrees that the Bangko Sentral enjoys the presumption of compliance with its duty to remit the 20% final tax withheld from the petitioner. This being so, it should have given the petitioner an opportunity to present the evidences it required. Its denial of petitioner's motion for reconsideration, to which it attached initially "Exhibits NN" to "EEEE-1", totaling 85 pages, which are copies of the credits advices and certificates of final taxes withheld issued by the Bangko Sentral Ng Pilipinas for the period from March to September 1995, is arbitrary and unjustified. To the instant petition petitioner also attached "Exhibits C" to MM" 1, numbering 73 pages, for a total of 159 pages, representing credits advices and certificates of final taxes from the Bangko Sentral for July through December 1994. These documents show the amount of gross interest earned, the 20% final tax withheld, and the net interest income. STaIHc WHEREFORE, the foregoing premises considered, the decision of the Court of Tax Appeals dated October 07, 1998 in CTA Case No. 5433, as well as its resolution dated February 18, 1999, are hereby REVERSED and SET ASIDE, and the case is remanded to the Court of Tax Appeals for further proceedings for the verification of the genuineness of petitioner's certificates of final taxes withheld and to determine the exact amount of the refund or of the tax credit representing the overpayment of its gross receipts taxes for the period from the 3rd quarter of 1994 to the 4th quarter of 1995. No costs. SO ORDERED. Labitoria and Bello, Jr., JJ., concur.