Commissioner of Internal Revenue v. Bank of Commerce

ELEVENTH DIVISION [CA-G.R. SP. No. 52706. August 14, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . BANK OF COMMERCE , respondent . D E C I S I O N VELASCO , JR. , J p : This is a Petition for Review from the Decision, dated April 27, 1999, of the Court of Tax Appeals in CTA Case No. 5415 entitled "Bank of Commerce vs. Commissioner of Internal Revenue," ordering the refund of the amount of P355,258.99 representing gross receipts tax paid for the years 1994 and 1995 in favor of the Bank of Commerce. The facts as found by the Court of Tax Appeals are: "In the years 1994 and 1995, petitioner [Bank of Commerce] allegedly earned/derived passive income in the form of interest or discount from its investments in government securities (such as treasury bills/notes) as well as from private commercial papers. Records show that the petitioner [Bank of Commerce] paid on different occasions from the period 1994 and 1995, the amount representing the 5% gross receipts tax on income earned/derived during the taxable year 1994 and 1995, as evidenced by its Quarterly Percentage Tax Returns (Exhs. "A" to "I", inclusive). For the taxable years covered in this case, petitioner [Bank of Commerce] paid the 5% tax on the reported gross receipts as reflected in the aforementioned Quarterly Percentage Tax Returns which allegedly included its gross receipts from passive investments amounting to P85,384,254.51. This amount according to the petitioner [Bank of Commerce], had already been subjected to 20% final tax. On July 19, 1996, petitioner filed an administrative claim for refund with the respondent Commissioner for its alleged overpaid gross receipts tax covering the years 1994 and 1995 (Exhibit "L") in the aggregate amount of P853,842.00 computed as follows: Gross receipts subjected to Final Tax Derived from Passive Investment P85,384,254.51 x 20% 20% Final Tax Withheld 17,076,850.90 at Source x 5% P853,842.54 On its claim for refund, petitioner [Bank of Commerce] relied heavily on the decision rendered by this Court [Court of Tax Appeals] in the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, January 30, 1996, where We [said Court] categorically ruled that the 20% final tax on interest income withheld from the bank should not form part of its taxable gross receipts for Gross Receipts Tax (GRT) purposes. Without waiting for the decision of the Commissioner of Internal Revenue on the formal claim for refund and/or issuance of tax credit certificates, respondent filed the instant petition for review before this Court lest it be barred by the mandatory two-year prescriptive period under Section 230 of the T ax Co de (now Section 229 of the Ta x Reform A ct of 1997)." On August 26, 1996, the then Commissioner of Internal Revenue Liwayway Vinzons-Chato filed her answer. 1 On April 27, 1999, the Court of Tax Appeals rendered its decision the dispositive portion of which states: "WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND in favor of petitioner Bank of Commerce the amount of P355,258.99 representing validly proven erroneously withheld taxes from interest income derived from its investments in government securities for the years 1994 and 1995." 2 On May 11, 1999, petitioner bank (now herein respondent) filed a Motion For Reconsideration of the aforesaid decision further claiming the amount of P181,153.57 for overpayment for the second quarter of 1994. On June 28, 1999, the Court of Tax Appeals modified its April 27, 1999 Decision as follows: "WHEREFORE, in view of all the foregoing, the assailed decision promulgated on April 27, 1999 is hereby MODIFIED and respondent is hereby ordered to REFUND to petitioner the amount of P536,310.63 representing validity proven erroneously withheld taxes from interest income derived from its investment in government securities for the years 1994 and 1995. SO ORDERED." Unconvinced, the Commissioner of Internal Revenue filed the present recourse raising the lone issue whether or not respondent Bank of Commerce (respondent bank for brevity) is entitled to the refund of gross receipts tax corresponding to 5% of the 20% final withholding tax on its passive income paid for the years 1994 and 1995. More specifically, petitioner Commissioner presents the following grounds to buttress her petition, viz: 1. There is no provision of law which excludes the 20% final income tax withheld under Section 50 (a) of the Tax Code in the computation of the 5% gross receipts tax, hence, the exclusion of the 20% final withholding tax on respondent's passive income subjected to 5% gross receipts tax is erroneous; and 2. The Tax Court erred in applying the ruling in Collector of Internal Revenue vs. Manila Jockey Club, Inc. 3 in the resolution of the legal issues involved in the instant case. Petitioner Commissioner claims that the respondent bank cannot rely on the provisions of Revenue Regulations No. 12-80, particularly Section 4 (e) which declares in part that the rates of taxes to be imposed on the gross receipts of banking institutions shall be based only on all items of income actually received as it is clearly provided in Section 8 (c) of Revenue Regulations No. 17-84 dated October 12, 1984 that: "If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed." To overturn the ruling of the Court of Tax Appeals, petitioner Commissioner argues that the basis of respondent's liability for gross receipts tax is Section 119, (now Section 121) of the National Internal Revenue Code, which provides: "Sec. 121. 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, 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 years) 5% xxx xxx xxx (b) . . . (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 32 of this Code 5% xxx xxx xxx." We are not persuaded. Section 4 (e) of Revenue Regulations 12-80 is clear as day that the gross receipts tax liability of banks should be based on actual receipts. After the withholding of the amount of P17,076,850.90 as final tax of respondent's gross receipts derived from passive investments, said amount is already allotted for the government, and therefore specifically held in trust by respondent bank for the national treasury. "The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the Collecting Officers." 4 Moreover, Section 51 of the National Internal Revenue Code is unequivocal that all taxes withheld pursuant to its provisions 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." 5 Being trust funds, the amount of P17,076,850.90 representing the 20% of the gross receipts derived from passive investments subjected to final tax should not be considered as forming part of the gross receipts of the bank upon which the 5% gross receipts tax should be imposed because its legal ownership has already been vested in the government and the temporary custody of said amount by the bank springs only from the latter's being an agent of the government. Not being the owner of the funds, respondent bank does not reap any benefit from said amount as it is not supposed to utilize the same for its own personal use from the date the funds were withheld. Besides, subjecting said amount to the 5% gross receipts tax would result to double taxation in favor of the government. In disposing of the question of whether or not the amounts received by a local tourist and travel agency included in a package fee from tourists or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3% contractor's tax, the Supreme Court in the case of "Commissioner of Internal Revenue versus Tours Specialists, Inc. and the Court of Tax Appeals" ruled that: "gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them 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 or receipts within the meaning of gross receipts under the Tax Code." 6 This Tours Specialists case applies by analogy to the instant case as respondent bank was a mere trustee of the 20% final tax derived from passive investments and said amount did not in any manner benefit said bank. Petitioner argues that the reliance by Court of Tax Appeals on the ruling in "Collector of Internal Revenue vs. Manila Jockey Club, Inc.", as a precedent is incorrect as the factual milieu in the said case is not identical to the case at bar for what is being taxed here is a banking institution as differentiated from an amusement entity and its application would be violative of the equal protection clause of the Constitution if a banking institution would also be classified as an amusement entity. This contention is bereft of merit. Whether or not the term "gross receipt" refers to the gross receipts of a proprietor of an amusement place or that of a bank like herein respondent is of no moment. The ruling in numerous claims for refunds by banks is to the effect that the 20% final tax should not be subjected to a 5% gross receipts tax. Indeed, only eighty (80%) per cent is actually received as gross receipts by the bank as a tax payer and the other 20% goes to the government as taxes. This is the only conclusion that can be extracted from the fact that "the twenty percent (20%) final tax on the gross receipts (yield or monetary benefits from deposit substitutes) of respondent bank as prescribed by Section 27(D)(1) of the National Internal Revenue Code of 1997 [formerly Section 24(e)(1)], is specifically required to be withheld pursuant to Section 57(A) of the Tax Code and remitted to the government thereafter. It cannot be gainsaid therefore that the twenty percent (20%) final tax is already earmarked or allocated to the government and cannot be considered as gross receipts. This ruling is reinforced by Section 58(A) of the Tax Code provides that: "The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers." 7 On this issue, the Court accords respect to the findings of the tax court, thus: "xxx xxx xxx 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 N o. 1 2-80, dated November 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 or tax on banks, non-bank financial intermediaries not performing quasi-banking activities, the rates 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 payments is received on such accrual or in cases of prepayments, then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder. (Emphasis supplied) 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. This conclusion is in accord with the interpretation of the Supreme Court in the case entitled Collector of Internal Reve nue vs. Manila Joc key Club, 108 Phil. 821, as quoted by this Court if disposing similar issue in the case entitled Compania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426, dated November 14, 1966, 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 that of the taxpayer. (Emphasis Ours) . . . . 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 Investment. The latter being a government institution, there would be double taxation which should be considered unless the statute admits of no other interpretation . . . . Needles 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 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 and L-13887, June 30, 1960)." 8 "This court therefore refuses to overthrow the continued construction of the term "gross receipts" enunciated in the case of Collector of Int ernal Revenue versus Ma nila Jockey Club, 108 Phil. 821, as quoted by the Supreme Court in the case entitled Compania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426, that the term "gross receipts" shall 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." Thus, we reiterate that the 20% final withholding tax no longer form (sic) part of the gross receipts for purposes of the 5% gross receipts tax. (China Banking Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5433, October 7, 1998; Equitable Banking Corporation vs. Commissioner Of Internal Revenue, CTA Case No. 4720, January 20, 1996)." 9 (Emphasis supplied) The Court of Tax Appeals is the body tasked to review the propriety of the Commissioner of Internal Revenue's actions regarding disputed assessments and claims for refunds of internal revenue taxes. Over the years, it has acquired the expertise of determining whether or not certain incomes are exempt or not from taxation. Moreover, well settled is the rule that "the factual findings of the court of Tax Appeals are binding upon this Court and can only be disturbed on appeal if not supported by substantial evidence." 10 A circumspect scrutiny of the pleadings and evidence extant on record reveals that the aforequoted findings of the tax court are amply supported by substantial evidence and must perforce be upheld. WHEREFORE, the Petition for Review is hereby DISMISSED for lack of merit. The Decision of the Court of Tax Appeals dated April 27, 1999 as modified by the resolution dated June 28, 1999 is affirmed in toto. SO ORDERED. Reyes and Enriquez, Jr., JJ ., concur. Footnotes 1. Rollo , p. 52. 2. Rollo , p. 36. 3. 108 Phil. 821. 4. Section 51, the National Internal Revenue Code, annotated by Hector S. de Leon, 5th Ed., p. 259. 5. Section 51 (g) NIRC. 6. 183 SCRA 402-403. 7. Section 58 (A), NIRC of 1997 by Gonzales, 1999 Revised Edition, p. 277. 8. Decision, CTA Case No. 3415, pp. 7-8, Rollo , pp. 30-31. 9. Decision, pp. 10-11, Rollo , pp. 33-34. 10. Sy Po vs. Court of Appeals, 164 SCRA 524.