Commissioner of Internal Revenue v. Honda Philippines, Inc.

FIRST DIVISION [CA-G.R. SP No. 68141. October 25, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .HONDA PHILIPPINES, INC. , respondent . D E C I S I O N PESTAO , J p : This petition for review under Rule 43 of the 1997 Rules on Civil Procedure seeks to reverse and set aside the Decision dated September 6, 2001 (pp. 19-26, Rollo ) and the Resolution dated November 29, 2001 (pp. 27-30, Rollo ) denying the motion for reconsideration, of the Court of Tax Appeals in C.T.A. Case No. 5904 entitled "Honda Philippines, Incorporated, petitioner, versus Commissioner of Internal Revenue, respondent," for refund of excess or overpaid income taxes. The dispositive portion of the assailed Decision reads: "WHEREFORE, in view of the foregoing, Respondent is hereby ORDERED to REFUND the amount of P35,753,811.15 in favor of Petitioner representing unutilized tax credits for the year 1997. "SO ORDERED." This case was raffled and assigned to this Ponente on December 14, 2001. As stated in the assailed Decision, the facts of the case are: "Petitioner (herein respondent) is a domestic corporation duly registered and organized under Philippine laws with principal office located at the 6th and 7th floors, Centro Building, 180 Salcedo Street, Legaspi Village, Makati City. It is licensed to do business in the Philippines and is principally engaged in the manufacture of motorcycles and parts. "On April 15, 1998, Petitioner filed its Annual Corporate Income Tax Return for the calendar year ended December 31, 1997. (Exhibit A) Thereafter, on April 30, 1998, Petitioner filed an Amended Income Tax Return declaring a net loss of P76,163,929.00 and reflecting an excess or refundable income tax of P36,423,566.00. It has, likewise, indicated on the same return its option to apply the said refundable income tax as tax credit to the succeeding taxable year, 1998. (Exhibit B) "For the calendar year ended December 31, 1998, Petitioner's Corporate Annual Income Tax Return was filed with the Bureau of Internal Revenue (BIR) on April 15, 1999 reflecting a net loss of P283,728,064.00. Petitioner, thus, paid the minimum corporate income tax due in the amount of P8,305,066.00 (Exhibit C).Furthermore, it appears that the 1997 excess tax credit was neither carried over nor credited in the 1998 Income Tax Return. "On May 26, 1999, Petitioner filed with the BIR an application for the refund of its excess or overpaid income tax for the year ended December 31, 1997 in the amount of P36,423,566.00. "Unable to receive an answer from the BIR, Petitioner filed on July 6, 1999, the instant Petition for Review with the prayer that Respondent be ordered to refund to Petitioner the sum of P36,423,566.00 representing excess income tax payments and unutilized creditable withholding tax at source for the calendar year 1997. "In his Answer, Respondent advanced the following Special and Affirmative Defenses, to wit" "7. Petitioner's alleged claim for refund is subject to administrative routinary investigation/examination by the Bureau; "8. The amount of P36,423,566.00 being claimed by Petitioner as alleged overpayment or excessive (sic) payment of income tax for the year ended December 31, 1997 was not properly documented; "9. In an action for refund the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund/credit; "10. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the Tax Code of the prescriptive period of claiming tax refund/credit; "11. Claims for refund are construed strictly against the claimant for the same partakes the nature of exemption from taxation." "Moreover, in his Memorandum dated March 30, 2001, Respondent asserted that the Statements and Certificates of Tax Withheld presented and offered by the Petitioner as proof of withholding are not conclusive evidence of payment and remittance to the Bureau of Internal Revenue and further added that Petitioner did not present sufficient proof that the tax withheld went into the government coffers. "On the other hand, Petitioner submitted the following documents to support its claim for refund, thus: "1. Corporation Annual Income Tax Return for the calendar year ended December 31, 1997, Tentative and Final (Exhibits A and B) "2. Corporation Annual Income Tax Return for the calendar year ended December 31, 1998 (Exhibit C) "3. Quarterly Income Tax Returns for the 1st, 2nd and 3rd Quarters of 1997 (Exhibits D, E and F) "4. Report of Independent CPA dated May 3, 2000 (Exhibit G) "5. Various Certificates of Creditable Tax Withheld at Source (Exhibits H-1 to H-31) "6. Certification issued by BPI Legaspi-Salcedo Branch (Exhibit I) "xxx xxx xxx." On September 6, 2001, the Court of Tax Appeals rendered its assailed Decision in favor of respondent Honda Philippines, Inc. Petitioner's Motion for Reconsideration of the assailed Decision was denied in a Resolution dated November 29, 2001. Hence, petitioner filed the instant appeal and attributed to the Court of Tax Appeals the sole error that: THE TAX COURT ERRED IN HOLDING THAT SECTION 76 OF THE 1997 TAX CODE, PROVIDING THAT IF A CORPORATION EXERCISES THE OPTION TO CARRY-OVER THE EXCESS TAX CREDIT TO THE SUCCEEDING TAXABLE YEARS, SUCH OPTION SHALL BE CONSIDERED IRREVOCABLE FOR THE TAXABLE PERIOD AND NO APPLICATION FOR CASH REFUND OR ISSUANCE OF A TAX CREDIT CERTIFICATE SHALL BE ALLOWED, IS NOT APPLICABLE TO THE CASE AT BENCH. Petitioner contends that respondent's invocation of Section 76 of the 1997 Tax Code in its Petition for Review before the Tax Court was contrary to its claim for refund since once the option to carry-over and apply excess creditable withholding tax is availed by the taxpayer, such option becomes irrevocable for the taxable period and no application for cash refund or issuance of tax credit shall be allowed; that Section 76 of the 1997 Tax Code was applicable to respondent since it filed its 1997 income tax return on April 15, 1998 when Section 76 of the 1997 Tax Code was already in effect; and, tax refunds being in the nature of tax exemptions, must be strictly construed against the taxpayer. Required to comment on the instant petition, respondent contends that the subject matter of the instant case pertains to its excess tax credits for the taxable year ended December 31, 1997 for which Section 69 of the old Tax Code is applicable; that the Tax Reform Act of 1997 took effect only on January 1, 1998, which provides under Section 8, Title XIV that all transactions prior to January 1, 1998 are still governed by the old Tax Code; that while the option to carry-over the excess tax credit to the succeeding taxable year, once availed of, was considered irrevocable, it did not prevent respondent from claiming for a refund of unutilized overpaid taxes in the next succeeding years within the prescribed period to claim for refund; that its 1998 Annual Income Tax Return was silent on the application of the excess withholding tax credits; and, that its auditor's letter dated May 21, 1999 to the BIR, Revenue Region 8, RDO No. 47 claiming for refund of the overpaid taxes for December 31, 1997 was an indication that it did not carry-over any overpaid taxes for the taxable year 1999. It is well-settled 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 ( Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 ).Thus, it is incumbent upon the taxpayer to present substantial evidence to justify its claim for a cash refund of alleged excess income tax payments. Failing to do so, the claim for cash refund or tax credit shall be denied. In this case, one of the issues for resolution is whether Section 76 of the Tax Reform Act of 1997, or Section 69 of the National Internal Revenue Code of 1977 is the applicable law on tax refunds or tax credits. The pertinent provision of Republic Act No. 8424 (otherwise known as the Tax Reform Act of 1997) which amended the National Internal Revenue Code of 1977, as amended, states: "SECTION 3. Presidential Decree No. 1158, as amended by, among others, Presidential Decree No. 1994 and Executive Order No. 273, otherwise known as the National Internal Revenue Code, is hereby further amended to read as follows: "xxx xxx xxx. "SECTION 76. Final Adjustment Return. Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable 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 on the entire taxable income of that year, the corporation shall either: "(A) Pay the balance of tax still due; or "(B) Carry-over the excess credit; or "(C) Be credited or refunded with the excess amount paid, as the case may be. "In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor." Respondent contends that under Section 8, Title XIV of RA 8424, Section 76 of said Act should not apply to transactions pending as of January 1, 1998 and instead Section 69 of the National Internal Revenue Code of 1977, as amended, should be applied. Section 69 of the National Internal Revenue Code of 1977 reads: "SEC. 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net 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 on the entire taxable net income of that year the corporation may either: "(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." We find to be bereft of merit respondent's contention that Section 76 of the Tax Reform Act of 1997 does not apply to this case. The Court of Tax Appeals committed an error in citing Section 8 as part of Title XIV of the National Internal Revenue Code (NIRC), as amended. It must be pointed out that RA 8424, which further amended the NIRC of 1977, contained eight (8) Sections only, namely: Section 1, Short Title; Section 2, State Policy; Section 3, which contained the entire amended NIRC provisions; Section 4, which refers to the authority of the Secretary of Finance to issue the implementing rules and regulations; Section 5, Transitory Provisions; Section 6, Separability Clause; Section 7, Repealing Clause; and, Section 8, Effectivity Clause. We have thoroughly reviewed the provisions of RA 8424 and We have found that there is no specific provision therein which declares that the provisions of the National Internal Revenue Code (NIRC) of 1977 shall govern transactions prior to January 1, 1998. As stated earlier, Section 8 cited by the Court of Tax Appeals refers to the date of effectivity of RA 8424. On the other hand, the cited Title XIV refers to "Final Provisions" which contained Sec. 292 (Separability Clause) of the amended Tax Code. It may be emphasized that the provision of Section 69 of the NIRC of 1977 was reenacted with amendments in what is now Section 76 of the Tax Reform Act of 1997. We find no irreconcilable conflict between the said laws, as the latter is essentially a reenacted version of the former. Further, it is worth noting that respondent filed its claim for cash refund with petitioner on May 1999 on the basis of Section 76 of the Tax Reform Act of 1997. Respondent may not be permitted to deny the applicability of said provision considering that it was the very basis of its claim for cash refund. Thus, contrary to the contentions of respondent Section 76 of the Tax Reform Act of 1997 applies in this case. Now we go to the issue of whether or not respondent may still claim for a cash refund of alleged excess tax payment even though it had already availed of the option to carry-over and apply the same to tax credit for the succeeding taxable year. We rule in the negative. Under the Tax Reform Act of 1997, when after filing the Annual Income Tax Return for a particular taxable year there appears to be an excess in the amount of withheld taxes vis--vis income taxes actually paid, the corporate taxpayer may either ask for a cash refund or claim the excess as a tax credit to be applied to the succeeding taxable quarters ( Sec. 76 NIRC, as amended by RA 8424 ).In such a case, however, the taxpayer may only avail of one of these two remedies, as they are only alternative, not cumulative remedies. In Philippine Bank of Communication vs. Commissioner of Internal Revenue, 302 SCRA 241 ,the Supreme Court had occasion to discuss the remedies afforded to a corporate taxpayer in case of excess payment of taxes, thus: "Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. "The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other " (Emphasis supplied). Clearly, the ruling in the case of Philippine Bank of Communication vs. Commissioner of Internal Revenue, supra , is applicable in this case. Respondent's choice of automatic carry-over of the alleged tax credit precludes it from claiming for a cash refund during the succeeding taxable years. Even under Section 69 of the 1977 NIRC, the option to claim for cash refund or tax credit was recognized as an alternative remedy, the availment of one precludes the other. The exercise of the option to avail of these alternative remedies was further made stricter under the Tax Reform Act of 1997 wherein it was declared that once the option to claim for cash refund or tax credit carry-over is exercised, the choice becomes irrevocable for the succeeding taxable year. It bears noting that the Guidelines and Instructions reflected in BIR Form No. 1702 [Corporation/Partnership Annual Income Tax Return] (p. 41, Rollo ) states that if a taxpayer is entitled to a tax refund or credit, the taxpayer shall exercise said option by checking the appropriate (option) box and that in case the taxpayer failed to signify its choice, the excess payment shall be automatically credited against its estimated income tax liabilities for the quarters of the next succeeding taxable year. In this case, while it was not possible to automatically credit respondent's alleged tax credit when it filed its 1998 Income Tax Return, considering that it declared a net taxable loss for calendar year 1998 and for which reason it was not liable for income tax, respondent's alleged tax credit may still be carried-over and applied to succeeding taxable years subject to the issuance of a Tax Credit Certificate. A Tax Credit Certificate is a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled to a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded),or may be converted to a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by regulations ( Section 1 B, BIR Revenue Regulations No. 5-2000 ). Since there appears to be no evidence that a Tax Credit Certificate was issued in favor of respondent by reason of its right to the alleged tax credit, which fact should not be taken against the respondent to the point of denying its right to claim for a tax credit or refund, it bears stressing that an income tax return filed showing an overpayment shall be considered as a written claim for credit or refund ( Section 204 [c], 1997 NIRC ). In this case, on April 30, 1998, respondent filed its Adjusted Annual Income Tax Return for calendar year ended 1997 clearly showing an overpayment of income taxes. Such duly filed income tax return constitutes a written claim for the issuance of a Tax Credit Certificate. In any event, filing of the income tax return constitutes the written claim for a tax credit or refund, which written claim was filed within the two-year prescriptive period prescribed by the Tax Code. Thus, it becomes the duty of petitioner Commissioner of Internal Revenue to issue the corresponding Tax Credit Certificate to the taxpayer once it is established after an investigation that the taxpayer is legally entitled thereto. The Tax Credit Certificate (TCC) once issued shall be valid for five (5) years from the date of issue, unless revalidated before the end of the fifth year. Any request for conversion into cash refund of unutilized tax credits may be allowed only within the validity period of the TCC ( Section 5, BIR Revenue Regulation No. 5-2000 ). Since the rule of irrevocability of the option to carry-over the tax credit applies to respondent, it can not file a claim for cash refund for its unutilized tax credit. However, while respondent may not claim for a cash refund for its unutilized tax credit, it is clear that it was entitled to the issuance of a Tax Credit Certificate covering the overpayment or excess withheld taxes in 1997. This overpayment was shown in its Adjusted Annual Corporation Income Tax Return filed on April 30, 1999. The Court of Tax Appeals found the excess or overpaid taxes as amounting to P35,753,811.15 only. Absent any gross error or grave abuse of discretion on the part of the Court of Tax Appeals in arriving at such figure, the factual finding of the Tax Court is entitled to great weight and must be respected. Factual findings of the Court of Tax Appeals are generally not disturbed on appeal when supported by substantial evidence and in the absence of gross error or grave abuse of discretion ( Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., 303 SCRA 546 ). Lastly, it must be stressed herein that disposition of this case is without prejudice to the usual investigation, examination and verification to be conducted by the Bureau of Internal Revenue for the purpose of determining the exact tax credit which respondent is entitled to prior to the issuance of a tax credit certificate. WHEREFORE, in view of the foregoing, and finding the appeal partly meritorious, the Decision of the Court of Tax Appeals dated September 6, 2001 in C.T.A. Case No. 5904 is hereby MODIFIED, ordering petitioner Commissioner of Internal Revenue is ISSUE the corresponding Tax Credit Certificate in favor of respondent Honda Philippines, Inc. covering the overpayment or excess tax credit amounting to P35,753,811.15 only, subject to the usual investigation, examination and verification to be conducted by the Bureau of Internal Revenue to determine the exact tax credit earned by respondent. No costs. SO ORDERED. Garcia and Bello, Jr . ,JJ . , concur.