Equitable PCI Bank v. Commissioner of Internal Revenue

SPECIAL TENTH DIVISION [CA-G.R. SP No. 62396. May 20, 2003.] EQUITABLE PCI BANK (formerly known as EQUITABLE BANKING CORPORATION) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N TIJAM , J p : Should the 20% final withholding tax on certain passive income of a bank be excluded from its gross receipts for the purpose of computing its gross receipts tax? This issue is at the core of the instant Petition for Review 1 which assails the Decision 2 of the Court of Tax Appeals in C.T.A. Case No. 5823 denying for insufficiency of evidence, petitioner's claim for refund of alleged overpaid gross receipts tax, and the said Court's Resolution 3 denying petitioner's Motion for Reconsideration. The facts, as found by the Court of Tax Appeals, are as follows: "Records of the case show that on April 21, 1997, Petitioner reasonably filed with the Bureau of Internal Revenue (BIR) its various quarterly percentage returns, covering those of its Head Office and branches, and paid the BIR a total amount of P57,804,954.75 as gross receipts tax. Of the said amount, the Gross Receipts Tax (GRT) paid by EBC Head Office was P32,334,361.88 as shown by the Transmittal Sheet of Quarterly Withholding Tax Returns for the quarter ended March 31, 1997 (Exh. A-1). The GRT was computed based on the accumulated total gross receipts of P769,902,611.00 (Exh. C-3). On the strength of the ruling of this Court in the case of Asian Bank Corporation vs. CIR, CTA Case No. 4720 dated January 30, 1996 , where we held that the 20% final withholding tax on a bank as financial institution's passive income should not form part of its gross receipts tax base, Petitioner filed with the BIR on March 25, 1999 an administrative claim for refund or issuance of a tax credit certificate for, among other sums, P2,266,391.36 corresponding to the difference between the Gross Receipts Tax paid of P32,334,361.88 pertaining to EBC Head Office and the Adjusted Gross Receipts Tax in the amount of P30,067,970.52, computed as follows: Gross Receipts Subjected to Tax P769,902,611.98 Less: 20% Portion of Tax Paid Income (Annex B1 of 2) 5,037,709.09 Investment Income subject to 20% final tax booked at gross (Annex B2 of 2) 40,290,118.10 Adjusted Gross Receipts Tax Base P724,574,784.79 Computation of Adjusted Gross Receipt Tax: Gross Receipts Tax Due 0% P104,229,864.45 P0.00 1% 9,919,192.26 99,191.92 3% 27,625,390.10 828,761.70 5% 582,800,337.98 29,140,016.90 P724,574,784.79 P30,067,970.52 ============ =========== Gross Receipts Tax Paid P32,334,361.88 Adjusted Gross Receipts Tax 30,067,970.52 Tax Refund P2,266,391.36 =========== Petitioner alleged that in arriving at the adjusted gross receipts tax base of P724,574,784.79, it deducted from the original gross receipts of P769,902,611.98 the amount of P5,037,709.09 representing the 20% tax withheld on income received and booked net of final tax and P40,290,118.10 representing the 20% final tax withheld on tax paid income booked at gross. Petitioner is now claiming the excess GRT paid amounting to P2,266,391.36 As there was no action on the part of herein Respondent, the instant Petition was filed on April 21, 1999 to toll the running of the two-year prescriptive period." 4 In its Answer, respondent opposed petitioner's claim for tax refund, contending that reliance on the aforesaid Asian Bank case is premature as it is still pending appeal; that there is no provision in the Tax Code or any special law excluding the 20% final withholding tax from the gross receipts tax base; that petitioner has no cause of action as there was no allegation that the tax sought to be refunded was actually paid to the Bureau of Internal Revenue (BIR) and the 20% final withholding tax was actually remitted; that the claim for refund is pending administrative investigation; that taxes are presumed to have been collected in accordance with law; and that tax refunds, being in the nature of tax exemption, should be construed strictly against the claimants. 5 While upholding the aforesaid Asian Bank ruling which excluded the 20% final withholding tax on a bank's passive income from the gross receipts tax base, the Court of Tax Appeals 6 , in its Decision dated September 8, 2000, nonetheless denied petitioner's claim for tax refund for insufficiency of evidence because petitioner failed to prove: (a) that the 20% final withholding tax was actually remitted; (b) that the 20% final withholding tax was included in its gross receipts subjected to the gross receipts tax; and (c) that it actually paid the gross receipts tax due on its gross receipts inclusive of the 20% final withholding tax. Dissenting from the majority view, Associate Judge Amancio Q. Saga voted for the denial of the claim for tax refund for lack of legal basis. 7 Petitioner's Motion for Reconsideration was denied in the Court of Appeals' Resolution dated November 29, 2000. Thus, petitioner filed this Petition for Review, on the following ground: "THE CTA ERRED IN HOLDING THAT EPCIB'S EVIDENCE TO PROVE ITS CLAIM FOR REFUND OF EXCESS GROSS RECEIPTS TAX IS INSUFFICIENT." 8 and asks Us "to determine two things: (a) the correctness of its legal basis in claiming this refund; and (b) the sufficiency, so far, of the evidence the bank has presented to prove its claim, in the light of the underlying principles involved." 9 The petition is denied. The assailed Decision presupposed that the 20% final withholding tax on a bank's passive income should be excluded from the tax base in computing the gross receipts tax. We are of the view, however, that the exclusion of the 20% final withholding tax from the gross receipts tax base is without legal basis. Thus, while We affirm the Court of Tax Appeals' denial of petitioner's claim for tax refund, We do so not for insufficiency of evidence but because the claim has no legal basis in the first place. In ruling that petitioner could exclude the 20% final withholding tax from its gross receipts, the Court of Tax Appeals relied on its previous ruling in Asian Bank Corporation vs. CIR, CTA Case No. 4720 dated January 30, 1996, which in turn relied on the ruling of the Supreme Court in Commissioner of Internal Revenue vs. Manila Jockey Club, 108 Phil. 821 (1960) and on Section 4(e) of Revenue Regulations No. 12-80 which based gross receipts only on income " actually received ", thus: "SECTION 4. Manner of Computation of Tax Base. For purposes of Section 3 above, tax bases of the following taxes shall be computed in the following manner: (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.) The Court of Tax Appeals' reliance on both the Manila Jockey Club case and Section 4(e) of Revenue Regulations No. 12-80 was, however, misplaced. In the Manila Jockey Club case, the total amount of bets from the said club's sale of tickets to the public, called "wager funds", was distributed, pursuant to Executive Order 320 and Republic Act 309, as follows: 87-1/2 as dividends to holders of winning tickets 12-1/2 as "commission" of the Manila Jockey Club, of which % was assigned to the Board on Races and 5% was distributed as prizes for owners of winning horses and authorized bonuses for jockeys. When the Manila Jockey Club paid amusement tax on its commission which, under the then Internal Revenue Law, should be based on its "gross receipts", it did so without including the 5% that went to the Board on Races and owners of winning horses and jockeys. The Collector of Internal Revenue demanded payment of amusement tax on the entire 12% commission, saying that the 5% formed part of the club's "gross receipts". The Supreme Court held that the club's gross receipts should not include any money which, although delivered thereto, had been earmarked by law or regulation for some person other than the proprietor. On November 22, 1999, this Court ruled in CA-G.R. S.P. Case No. 51248 entitled "Commissioner of Internal Revenue vs. Asian Bank Corporation" that the Manila Jockey Club case could not be made the basis for the exclusion of the 20% final withholding tax on a bank's passive income from its gross receipts. In that case, We said: "The case of Collector of Internal Revenue vs. Manila Jockey Club, supra , is inapplicable. In that case, a percentage of the gross receipts to be collected by the Manila Jockey Club was earmarked by law to be turned over to the Board of Races and distributed as prizes among owners of winning horses and authorized bonus for jockeys. The Manila Jockey Club itself derives no benefit at all from earmarked percentage. That is why it cannot be considered as part of its gross receipts. " (Emphasis supplied.) This court, in the same case, also said: "It is true that Revenue Regulation No. 12-80 provides that the gross receipts tax on banks and other financial institutions should be based on all items of income actually received. Actual receipt here is used in opposition to mere accrual. Accrued income refers to income already earned but not yet received ( Rep. v. Lim Tian Teng Sons & Co. , 16 SCRA 584). But receipt may be actual or constructive. Article 531 of the Civil Code provides that possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action of one's will, or by the proper acts and legal formalities established for acquiring such right. Moreover, taxation-income may be received by the taxpayer himself or by someone authorized to receive it for him (Art. 532, Civil Code). The 20% final tax withheld from interest income of banks and other similar institutions is not income that they have not received, it is simply withheld from them and paid to the government, for their benefit. Thus the 20% income tax withheld from the interest income is, in fact, money of the taxpayer bank but paid by the payor to the government in satisfaction of the bank's obligation to pay the tax on interest earned. It is the bank's obligation to pay the tax. Hence, the withholding of the said tax and its payment to the government is for its benefit." (Emphasis supplied.) Thus, as correctly observed by Associate Judge Saga in his dissent, Section 4(e) of Revenue Regulations No. 12-80 is not a computation determinative of the amount to be used as basis of the 5% gross receipts tax, it is merely reflective of the accounting method that may be adopted by the taxpayer in arriving at its "gross receipts" the cash receipts and disbursement method, or the accrual method of accounting. 10 On January 28, 2003, the Special Eleventh Division of this Court, faced with the same issue in CA-G.R. S.P. No. 59402 entitled "Commissioner of Internal Revenue vs. Philippine National Bank'' , consistently ruled that the Manila Jockey Club case is inapplicable because unlike the 5% commission, the 20% final withholding tax on the bank's passive income was not earmarked by law for other persons. Furthermore, the money that went into paying the 20% withholding tax actually belonged to and became the property of respondent bank. Hence, it formed part of the bank's gross receipts. Thus, this Court said: "Contrary to the view of the respondent bank and the majority opinion of the Court of Tax Appeals, however, we cannot see how the ruling in the Manila Jockey Club case can be applied to the instant suit. The 5% commission, although received by the racing club, never for a moment became the club's property since the same was earmarked by law for the Board on Races, the owners of the winning horses, and their respective jockeys . This being the case, said commission did not form part of the club's gross receipts and hence, not subject to the amusement tax of 20%. As held in the later case of Commissioner of Internal Revenue vs. Tours Specialists, Inc. , gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to the latter 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 and receipts within the meaning of gross receipts under the Tax Code. Unlike the 5% commission in the Manila Jockey Club case, the 20% withholding tax on PNB's interest income is money which actually belongs to respondent bank but paid to the government to satisfy the bank's obligation. The withholding of the tax and its payment to the government redounds to the benefit of PNB. Clearly, the money which went into paying the 20% withholding tax forms part of PNB's gross receipts. This is in accord with the Supreme Court's pronouncement in Bank of America NT & SA vs. Court of Appeals , to wit: 'In the operation of the withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, the amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. Since the payee, not the payor, is the real taxpayer, the rule on constructive remittance (or receipt) can be easily rationalized, if indeed, made clearly manifest.' We cannot give credence to PNB's argument that `since the 20% final tax on respondent's income has been earmarked in favor (of) the government, the 20% final tax should be excluded from respondent's gross receipts in the computation of the gross receipts tax. Taxes are, by late, always "earmarked in favour of the government". Taxes are the lifeblood of the nation . . ." (Emphasis supplied.) In fine, the 20% final withholding tax on a bank's passive income should be included in its gross receipts tax base for the purpose of computing its gross receipts tax. This is so because the money that went into paying the 20% final withholding tax, in fact, formed part of the bank's passive income, and was, thus, received by, belonged to, and became property of, the bank prior to payment of the withholding tax. Furthermore, the 20% final withholding tax was not earmarked by any law or regulation for other persons. Thus, it should form part of the bank's gross receipts. Also, "gross receipts" has been interpreted to mean "as the whole amount received without deductions, " otherwise, it will be considered as "net receipts". 11 Deducting the 20% final withholding tax from the gross receipts makes "net receipts", not "gross receipts", as tax base in computing what should be the "gross receipts tax". Moreover, We find no provision in our tax laws or any revenue regulation that expressly excludes the 20% final withholding tax from "gross receipts". On the contrary, as aptly observed by Associate Judge Saga of the Court of Tax Appeals in his dissent 12 , Section 7(c) of Revenue Regulations No. 17-84 categorically provides that the basis of the gross receipts tax shall include the final withholding tax, thus: "SECTION 7. Nature and Treatment of Interest on deposits and Yield on Deposit Substitutes. (a) The interest earned on Philippine Currency bank deposits yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositor's/investor's income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended. (b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing taxable net income of the payor. (c) 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 receipt tax is imposed. " (Emphasis supplied.) while Section 2.57 of Revenue Regulations No. 2-98 specifically states that the 5% gross receipts tax shall include the 20% final withholding income tax, to wit: "Sec. 2.57. Withholding of Tax at Source (A) Final Withholding Tax Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for the particular income. The finality of the withholding tax is limited only to the payee's income tax liability on the particular income. It does not extend to the payee's other tax liability on said income, such as when the said income is further subject to a percentage tax. For example, if a bank receives income subject to final withholding tax, the same shall be subject to a percentage tax. " (Emphasis supplied.) Tax refunds are in the nature of tax exemption. As such., they shall be construed strictissimi juris against the claimant as they are in derogation of sovereign authority. 13 Tax exemption can only be given effect when the grant is clear and categorical 14 inasmuch as taxation is the rule and exemption is the exception. 15 All doubts, therefore, must be resolved in favor of the taxing authority. 16 It bears emphasis that the inclusion of the 20% final withholding tax from the gross receipts would not result in double taxation, contrary to the tax court's ruling in the 1996 Asian Bank case invoked by petitioner in claiming the refund. Double taxation in the prohibited sense is taxing the same person or property twice by the same jurisdiction for the same purpose during the same period and covering the same kind or character of tax. 17 This is not the case here. The 20% final withholding tax is tax on income, interest being one of the items of gross income under Section 32, Chapter VI, Title II Tax on Income of the Tax Reform Act of 1997. On the other hand, gross receipts tax is not a tax on income but a percentage tax covered by Section 121, Title V of the Tax Code on "Other Percentage Taxes"; the 5% gross receipts tax is an excise tax levied upon licenses to pursue certain occupations or upon certain corporate privileges. 18 Finally, it bears noting that in recent decisions of the Court of Tax Appeals, it has already reversed its 1996 Asian Bank ruling. 19 Most recently, or on March 10, 2003, the Court of Tax Appeals, in C.T.A. Case No. 6096 entitled "Solidbank Corporation vs. Commissioner of Internal Revenue" , by a unanimous vote, citing the Court of Appeals' ruling in Commissioner of Internal Revenue vs. Philippine National Bank, supra, maintained that the 20% final withholding tax on certain passive income of a bank should be included in its "gross receipts" for the purpose of computing its gross receipts tax. Inasmuch as petitioner's claim for tax refund has no basis in law, We find it no longer necessary to delve into the factual and evidentiary issues raised. WHEREFORE, the instant petition is hereby DENIED and the assailed Decision is hereby AFFIRMED but MODIFIED to the effect that petitioner's claim for tax refund is DENIED for LACK OF LEGAL BASIS. SO ORDERED. Alio-Hormachuelos and Reyes, * Jr . , JJ . , concur. Footnotes 1. Filed under Rule 43 of the 1997 Rules of Civil Procedure. 2. Annex "A", Petition for Review; Rollo , pp. 2030. 3. Annex "B", Petition for Review; Rollo , pp. 4143. 4. CTA Decision, pp. 2-4, Rollo , pp. 2123. 5. Rollo , p. 23. 6. Thru Presiding Judge Ernesto D. Acosta and Associate Judge Ramon O. De Veyra. 7. Dissenting Opinion dated September 8, 2000; Rollo , pp. 3140. 8. Petition for Review, p. 6, Rollo , p. 10. 9. Petitioner's Memorandum, p. 1; Rollo , p. 283. 10. Associate Judge Amancio Saga's Dissenting Opinion, pp. 23; Rollo , pp. 3233. 11. Solidbank Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6096 dated March 10, 2003, citing Section 260 of the Tax Code and National City Bank of New York vs. CIR, BTA Case No. 52, July 12, 1952. 12. Associate Judge Amancio Saga's Dissenting Opinion, pp. 2 & 4; Rollo , pp. 32 & 34. 13. Commissioner of Internal Revenue vs. Court of Appeals , 204 SCRA 182, 190 (1991), Commissioner of Internal Revenue vs. Tokyo Shipping Co. Ltd., et al. , G.R. No. 68252, March 26, 1996. 14. Cyanamide Philippines, Inc. vs. Court of Appeals, et al. , G.R. No. 108067, January 20, 2000; Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, et al. , G.R. No. 83583-84 September 30, 1991. 15. Cyanamide Philippines, Inc. vs. Court of Appeals, et al., supra, citing Commissioner of Internal Revenue vs. Mitsubishi Metal Corp. , 181 SCRA 214, 223-224 (1990). 16. Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, et al., supra. 17. Villanueva vs. City of Iloilo, L-26521, December 28, 1968, cited on p. 72, Law on Basic Taxation, Aban, 1994 ed.; Commissioner of Internal Revenue vs. Philippine National Bank, C.A.-G.R. S.P. No. 59402, January 29, 2003, citing Afisco Insurance Corporation vs. Province of Albay, 186 SCRA 198, 207 (1990) which, in turn, cited Victoria Milling Co., Inc. vs. Municipality of Victorias, Negros Occidental, 25 SCRA 192, 209 (1968). 18. Commissioner of Internal Revenue vs. Philippine National Bank, supra. 19. The Court of Tax Appeals cites these cases in Solidbank Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6096, pp. 78. * Vice Justice Cruz, who is on leave, Per Office Order No. 106.