Commissioner of Internal Revenue v. Alltel International Resource Management, Inc.

TENTH DIVISION [CA-G.R. SP No. 65875. April 16, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ALLTEL INTERNATIONAL RESOURCE MANAGEMENT, INC., (PHILIPPINE BRANCH) , respondent . D E C I S I O N REYES, JR., A. , J p : Before the Court is a Petition for Review under Rule 43 of the 1997 Rules of Civil Procedure assailing the 09 July 2001 Decision 1 of the Court of Tax Appeals in C.T.A. Case No. 5811, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing premises, the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is ORDERED TO REFUND the amount of FOUR MILLION ONE HUNDRED TWENTY ONE THOUSAND THREE HUNDRED SEVENTY TWO PESOS (P4,121,372.00) in favor of Petitioner representing unutilized tax credits/payments for taxable year 1996. SO ORDERED. As correctly culled by the Court of Tax Appeals, the antecedent facts of the case are, as follows: "Petitioner is a foreign corporation duly organized and existing under the laws of the United States of America, duly registered with the Philippine Securities and Exchange Commission (SEC) and authorized to transact business in the Philippines as a branch office. Petitioner is engaged in the business of rendering consultancy services for various types of software programs and applications, with office address at the 16th Floor, Citibank Tower, Valero Street, Salcedo Village, Makati City, Metro Manila. (Admitted fact, CTA records, page 32). On April 15, 1997, Petitioner filed its 1996 annual income tax return (Exhibit "A") reflecting thereon a net loss of P1,026,761.00 and a refundable amount of P10,538,837.00, the latter representing the sum of the 1996 second quarterly income tax payment of P4,347,081.00 (Exhibit A-6-1) and creditable taxes withheld during 1996 of P6,191,756.00 (Exhibit A-6-2). Petitioner opted to carry-over the refundable amount of P10,538,837.00 to the succeeding year 1997 (Exhibit A-1). However, in its 1997 ITR filed on April 15, 1998 (Exhibit B), Petitioner failed to fully utilize its 1996 excess tax credits/payments of P10,538,837.00 as its reported income tax due for 1997 amounted only to P5,968,174.00 (Exhibit B-6). Consequently, Petitioner was still left with a balance of P4,570,663.00 unutilized 1996 excess tax credits/payments as of December 31, 1997 (Exhibit B-3). On April 15, 1999, Petitioner filed an administrative claim for refund in the amount of P4,570,663.00 corresponding to the alleged unapplied 1996 excess creditable income taxes (Exhibit H). Petitioner cited the following provisions of Section 69 [now 76] in relation to Section 204(3) [now 204 (c)] of the Tax Code as legal bases of its claim, thus: 'Sec. 69. Final Adjustment Return . Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total 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 to the entire taxable income of that year the corporation shall either: SDTcAH a) Pay the excess tax still due, or b) Be refunded the excess amount paid, as the case may be. In case the corporation is 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.' SEC. 204. Authority of the Commissioner to compromise, abate and refund/credit taxes . The Commissioner may . . . '(3) Credit or refund taxes erroneously or illegally received, penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and in this discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: . . .' On the same date or on April 15, 1999, Petitioner filed with this Court the instant Petition for Review pursuant to Section 230 [now 229] of the Tax Code which provides, thus: 'SEC. 230. 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 . . .' In his Answer to the Petition, Respondent admitted the existence as well as the filing of Petitioner's 1996 & 1997 income tax returns and administrative claim for refund but denied the truth and the veracity of the contents thereof. As Special and Affirmative Defenses, Respondent averred that: 1) Petitioner's claim for refund is still undergoing administrative routinary investigation/examination by the Respondent's Bureau: 2) Petitioner failed to demonstrate that the tax subject of the case at bar comes within the scope of claims for refund. Well-entrenched in this jurisdiction is the rule that tax recovery or refunds may encompass the following payments: (a) erroneously or illegally received or collected internal revenue taxes; (b) penalties imposed without authority (Sec. 204 (c), Tax Code); 3) Petitioner must prove that it is indeed entitled to a refund under Section 229 of the 1997 Tax Code and its implementing rules and regulations. Moreover, the same must be supported by evidence; (4) Claims for tax refund are construed strictly against the claimant as they partake of the nature of an exemption from tax and it is incumbent upon the Petitioner to prove that it is entitled thereto under the law. Failure to prove the same is fatal to its claim for tax refund. Exemptions from taxation are highly disfavored in law and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague implications. (Asiatic Petroleum Co. vs. Llamas, 49 Phil. 466) (5) Moreover, Petitioner must prove that it has complied with the governing rules with reference to tax recovery or refund, which are found in Section 204 and 229 of the Tax Code as amended. xxx xxx xxx." On 09 July 2001, the Court of Tax Appeals issued the herein assailed Decision, the decretal portion of which was quoted at the outset. Aggrieved, petitioner Commissioner of the Internal Revenue elevated the case before this Court, theorizing: "THE TAX COURT ERRED IN GRANTING THE REFUND TO RESPONDENT INSPITE OF THE EXISTENCE OF A DEFICIENCY INCOME TAX ASSESSMENT FOR TAXABLE YEAR 1996, ISSUED AGAINST RESPONDENT." The pivot of inquiry here is: whether or not respondent is entitled to the refund in the amount of P4,121,372.00 as alleged unutilized tax credits/payments for taxable year 1996. We find the Petition meritorious. In granting tax refund to private respondent, the Court of Tax Appeals ratiocinated: "xxx xxx xxx. In sum, this Court finds Petitioner to have sufficiently proven its entitlement to the refund of the 1996 excess tax credits/payments but in a reduced amount of P4,121,372.00 computed as follows: For Calendar Year: 1996 Net Loss P(1,026,761.00) Income Tax Due (Exh. A) Less: Tax Credits/Payment 1) 1996 2nd qtr. income tax payment (Exh. C-4) P4,347,081.00 2) 1996 creditable taxes withheld (Exh. D to G, inclusive) 5,742,485.00 10,089,546.00 Income Tax Refundable (carried Over to CY 1997) P(10,089,546.00) =========== For Calendar Year: 1997 Taxable Income (Exh. B) P17,051,925.00 =========== Income Tax Due P5,968,174.00 Less: Tax Credits/Payment 1) Prior year's (1996) excess credits 10,089,546.00 Income Tax Refundable P(4,121,372.00) =========== Contrary to Respondent's allegation, petitioner's pending income tax deficiency assessment for 1996 does not operate as a bar to its entitlement to a refund as this Court had already ruled in previous cases, thus: 1. Philtread Tire & Rubber Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5598, dated January 18, 2000; 2. Golden Arches Development Corporation vs. The Commissioner of Internal Revenue, CTA Case No. 5348, dated March 26, 1999; 3. Citicenter Building Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5244, dated December 9, 1997; 4. Benguet Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5045, dated April 23, 1996. The issue relating to the assessment is completely separate from the claim for refund subject of the instant Petition. This Court is not in a position to decide as to whether or not the assessment was proper as it is not the issue in the present case. As correctly pointed out by Petitioner in his memorandum, this Court acquires no jurisdiction over the assessment unless the same is elevated before this Court by way of a petitioner for Review. Moreover, taxes cannot be the subject of a set-off or compensation. In the case of Citicenter Building Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5244, dated December 9, 1997, this Court ruled that: 'The argument advanced by Respondent cannot serve as an obstacle to grant the instant claim for refund because Petitioner's alleged tax deficiencies for the taxable year 1992 is not the issue presented before us in this petition for review. By bringing up the issue of petitioner's alleged tax deficiencies, respondent seeks to block the grant of the refund by presenting the argument that no refund of taxes is possible because after all the petitioner has an outstanding debt due the government, suggesting the possibility of legal compensation or set-off taxes. It is already well-settled that internal revenue taxes cannot be the subject of set-off or compensation (Republic vs. Mambulao Lumber Company, 4 SCRA 622). The reason is that the government and taxpayer are not mutually creditors and debtors of each other under Article 1278 of the Civil Code as a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off (Cordero bs. ( sic ) Gonda, 18 SCRA 331). In the instances where the Supreme Court allowed legal compensation or set-off of taxes, such taxes were already due and demandable, thus compensation under Article 1279 of the Civil Code, took place by operation of law. xxx xxx xxx." We are not persuaded. The question whether or not income tax deficiency assessment operates as a bar to a tax refund was already a settled issue squarely faced by the Highest Magistrate in Commissioner of Internal Revenue vs. Court of Appeals, 234 SCRA 348 (1994), wherein it held: "Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner's supplemental motion for reconsideration alleging and bringing to said court's attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year. xxx xxx xxx. The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund. ISHaCD xxx xxx xxx. Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that '(w)hen an assessment is made in case of any list, statement or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines. xxx xxx xxx." The rationale of the aforequoted rule is also provided in the same case, thus: "Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would necessarily required and entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations. Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable. In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other's claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would be necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved therein" (Emphasis ours) WHEREFORE, premises considered, the Petition is GRANTED; and the assailed 09 July 2001 Decision of the Court of Tax Appeals in CTA Case No. 5811 is hereby SET ASIDE and declared as NULL and VOID. SO ORDERED. Vasquez, Jr . and Tolentino, JJ . , concur. Footnotes 1. Rollo , p. 16.