Commissioner of Internal Revenue v. Solidbank Corp.

SIXTH DIVISION [CA-G.R. SP No. 54599. July 18, 2000.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . SOLIDBANK CORPORATION , respondent . D E C I S I O N AUSTRIA-MARTINEZ , J p : Should the 20% final withholding tax on the bank's interest income form part of taxable gross receipts for purposes of computing the gross receipts tax of a banking institution? This is the sole principal issue brought before this Court by herein petitioner Commissioner of Internal Revenue assailing the decision of the Court of Tax Appeals granting to private respondent SOLIDBANK Corporation the refund of P1,555,749.65 as overpaid gross receipts tax for the year 1995. The undisputed facts of the case are aptly narrated by petitioner in its petition for review, thus: "For the calendar year 1995, petitioner seasonably filed its Quarterly Percentage Tax Returns reflecting gross receipts (pertaining to 5% GRT rate) in the total amount of P1,474,691,693.44 with corresponding gross receipts tax payments in the sum of P73,734,584.60, broken down as follows: Period Covered Gross Receipts Gross Receipts Tax January to March 1994 P188,406,601.95 P9,420,303.10 April to June 1994 370,913,832.70 18,545,691.63 July to September 1994 481,501,838.98 24,075,091.95 October to December 1994 433,869,959.81 21,693,497.98 Total P1,474,691,693.44 P73,734,584.60 ============== =========== "Petitioner alleges that the total gross receipts in the amount of P1,474,691,693.44 included the sum of P350,807,875.15, representing gross receipts from passive income which was already subjected to 20% final withholding tax. "On January 30, 1996, this Court rendered a decision in C . T . A . Case No . 4720 entitled Asian Bank Corporation vs . Commissioner of Internal Revenue wherein it was held that the 20% final withholding tax on bank's interest income should not form part of its taxable gross receipts for purposes of computing the gross receipts tax. "On June 19, 1997, on the strength of the aforementioned decision, petitioner filed with the Bureau of Internal Revenue a letter-request for the refund or issuance of tax credit certificate in the aggregate amount of P3,508,078.75, representing allegedly overpaid gross receipts tax for the year 1995, computed as follows: Gross Receipts Subjected to the Final Tax Derived from Passive Investment P350,807,875.15 Multiply by Final Tax rate 20% 20% Final Tax Withheld at Source P70,161,575.03 Multiply by GRT rate 5% Overpaid GRT P3,508,078.75 =========== "Without waiting for an action from the respondent petitioner on the same day filed the instant petition for review in order to toll the running of the two-year prescriptive period to judicially claim for the refund of overpaid internal revenue tax pursuant to Section 230 of the Tax Code as amended." "xxx xxx xxx "After trial on the merits, the Tax Court, on August 6, 1999, rendered its decision ordering herein petitioner to refund in favor of herein respondent the reduced amount of P1,555,749.65 as overpaid gross receipts tax for the year 1995. The legal issue involved in the case was resolved by the Tax Court, with Hon. Amancio Q. Saga dissenting, on the strength of its earlier pronouncement in CTA Case No. 4720, entitled 'Asian Bank Corporation vs. Commissioner of Internal Revenue' (January 30, 1996), wherein it was held that the 20% final withholding tax on bank's interest income should not form part of its taxable gross receipts for purposes of computing gross receipts tax." 1 Hence, the present petition for review on the following grounds: 1. "There is no provision of law which excludes from gross receipts the 20% final tax withheld on passive income earned by financial institutions in the computation of the 5% gross receipts tax." 2 2. "The doctrine laid down in the Manila Jockey Club case which was the basis in deciding CTA Case No. 4720 dated January 30, 1996 and relied upon by the respondent is inapplicable to the issues involved in the present case." 3 3. "The 20% final tax imposed upon the passive income cannot be treated as earmarking." 4 In its Comment, respondent bank counters as follows: 1. "Section 4(e) of Revenue Regulations No. 12-80 clearly provides that 'gross receipts' of banks shall be composed of all items of income actually received." 5 2. "The doctrine laid down in the Manila Jockey Club case, which was the basis of the Court of Tax Appeals' decision in CTA Case No. 4720 is applicable to the issues involved in the present case." 6 3. "The Court of Appeals in a decision rendered by its Sixth Division in the case of Commissioner of Internal Revenue vs. Citytrust Investment Philippines, Inc., CA-G.R. No. SP 52707 has upheld the doctrine laid down by the Court of Tax Appeals in CTA Case No. 4720 which was the basis of grant of respondent's claim for refund in the present case." 7 We find the petition without merit. The imposition of gross tax receipts on banks is covered by Section 119 of the National Internal Revenue Code, to wit: "Section 119. 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% Medium-term maturity over two (2) years but not exceeding four (4) years 3% Long-term maturity (i) over four (4) years but not exceeding seven (7) years 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% "Provided, 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 of classifying 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." While said provision of law does not specifically state any exemption, such as, the 20% final withholding tax, the statute must receive a sensible construction such as will give effect to the legislative intention, and so as to avoid an unjust or absurd conclusion. 8 Contrary to petitioner's claim that the non-inclusion of the 20% final withholding income tax from the gross interest income for purposes of the gross receipts tax operates as an exemption from tax, the non-inclusion is not actually an exemption under the law but it is, in effect, an interpretation made by the Court of Tax Appeals that the 20% final withholding income tax is not within the contemplation of the phrase "gross receipts derived from sources within the Philippines" under the statute. In other words, while the law does not provide for any exemption, the Court of Tax Appeals merely interpreted the meaning of "gross receipts". The word receipt is plain enough. It refers to "acquisition", "income," or gain". 9 Evidently, the 20% withholding tax as income of the Government and not that of the bank's, does not fall within the phrase "gross receipts". The above interpretation of "gross receipts" is in consonance with Section 4(e) of Revenue Regulations No. 12-80 which petitioner's office itself had promulgated on November 7, 1980, to wit: "Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other 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 payment is received on such accrual or in cases of overpayment then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder." Thus, we fully agree and hereby adopt the ratiocination of the CTA, as follows: ". . . The final taxes derived by petitioner on its passive income should no longer form part of the gross receipts for purposes of computing the gross receipts tax, as We have already ruled in the case entitled Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, dated January 30, 1996, pertinent portions of which read as follows: "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 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 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) "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 Revenue vs. Manila Jockey Club, 108 Phil. 821, as quoted by this Court in disposing of a 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 the taxpayer. 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 receipts the portion of the funds which is directed the Club to give, or know the Club would give, to winning horses and Jockeys admitted 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 owners 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 these 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' embraces all the receipts of the proprietor, lessee, or operator of all 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." 10 Although the Manila Jockey Club case refers to amusement tax, the principle enunciated therein, to repeat, that "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 for some person other than the proprietor", also applies to the present case for the 20% withholding tax is likewise expressly earmarked for the coffers of the Government. WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax Appeals. TIADCc SO ORDERED. Hormachuelos and Asuncion, JJ . , concur. Footnotes 1. Pages 8-10, Rollo . 2. Page 11, id . 3. Page 19, id . 4. Page 22, id . 5. Page 70, id . 6. Page 72, id . 7. Page 73, id . 8. Commissioner of Internal Revenue vs. Esso Standard Center, Inc., 172 SCRA 364. 9. Roget's Thesaurus. 10. Pages 31-33, Annex "A", Rollo .