Commissioner of Internal Revenue v. Asian Transmission Corp.

TWELFTH DIVISION [CA-G.R. SP No. 69844. June 9, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ASIAN TRANSMISSION CORPORATION , respondent . D E C I S I O N BARRIOS , J p : By this Petition for Review , the petitioner Commissioner of Internal Revenue (or Commissioner for brevity) seeks to nullify and set aside the Decision in CTA Case No. 6056 of the Court of Tax Appeals (or CTA) granting an income tax refund of P8,809,309.00 in favor of the respondent Asian Transmission Corporation (or Asian) as well as the concomitant Resolution denying its Motion for Reconsideration. Quoted below are the undisputed facts as found by the CTA and adopted both by the Commissioner in his petition and Asian in its comment: Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office at Carmelray Industrial Park, Canlubang, Calamba, Laguna. It is primarily engaged in the business of manufacturing auto parts and engines from which it derives income that are subject to the 1% creditable or expanded withholding tax under BIR Revenue Regulations No. 12-94. On April 15, 1998 Petitioner filed its Corporate Annual Income Tax Return for the calendar year ended December 31, 1997 and reported a net loss of P249,746,759.00. It likewise declared an excess or unutilized tax credit of P17,960,332.00, consisting of the following: Excess Income/withholding tax credits carried over from 1996 P7,514,977.00 Withholding tax credits for 1997 10,445,355.00 P17,960,332.00 =========== Petitioner's intention to carry-over and apply the said excess income tax credit to the succeeding taxable year of 1998 was indicated in its 1997 Annual Income Tax Return. (Exhibit A). On April 15, 1999, Petitioner filed its Corporate Annual Income Tax Return for the calendar year ended December 31, 1998. It was, however, amended to show an income tax due of P1,636,046.00 and a net overpayment of P29,018,988.00 on account of the income/withholding tax credits of P30,655,034.00, consisting of the following: Prior Year's Excess Credits P17,960,332.00 Tax Credits/Withheld/Payments for the first three quarters 5,213,010.00 Tax Withheld for the fourth quarter 7,481,692.00 Total Tax Credits P30,655,034.00 (Exhibits B and C) =========== The reported excess tax credits for the year 1997 which was carried-over to its 1998 annual income tax return, included the excess withholding tax credit from the previous year of 1996, in the sum of P7,514,977.00 and the amount of P1,636,046.00 representing income tax due for the year 1998. Hence, the amount due for refund is P8,809,309.00 computed as follows: Excess tax credit for 1997 (and carried over to 1998) P17,960,332.00 Less: Excess tax credits from 1996 (7,514,977.00) Income tax due in 1998 (1,636,046.00) P8,809,309.00 ========== On April 3, 2000, Petitioner filed with the BIR a written claim for refund in the amount of P8,809,309.00 and shortly thereafter filed a Petition for Review with this Court on April 10, 2000 without waiting for the action of the Respondent. In answer to the Petition for Review, Respondent interposed the following Special and Affirmative Defenses, to wit: 4. The alleged claim for refund is subject to administrative investigation/examination by the Respondent. 5. Petitioner failed to show that the taxes subject of the case at bar were erroneously or illegally collected. 6. Taxes paid and collected are presumed to have been made in accordance with law and regulations, hence, not refundable. 7. In an action for tax credit/refund, the burden of proof on the taxpayer to establish its right to refund and failure to adduce sufficient proof is fatal to the action for tax refund/credit. 8. It is incumbent upon the petitioner to show that it has complied with the provisions of Sections 204(c) and 229 of the National Internal Revenue Code, as amended. 9. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation ( Commissioner of Internal Revenue vs. Ledesma , G.R. No. L13509, January 30, 1970, 31 SCRA 95) and as such, they are looked upon with disfavor ( Western Minolco Corp. vs. Commissioner of Internal Revenue , 124, SCRA 121). (pp. 2426, rollo ) On November 16, 2001, the CTA rendered judgment in favor of Asian, the fallo of which reads: WHEREFORE, Respondent Commission is hereby ORDERED to REFUND in favor of Petitioner the amount of EIGHT MILLION EIGHT HUNDRED NINE THOUSAND THREE HUNDRED NINE PESOS (P8,809,309.00) representing creditable taxes withheld for the taxable year 1997. SO ORDERED (p. 31, rollo ). Both parties filed a Motion for Reconsideration of the above ruling, with Asian filing an Opposition to the Commissioner's motion. On March 14, 2002, the CTA issued a Resolution disposing: WHEREFORE, Respondent's Motion for Reconsideration is hereby DENIED for lack of merit while Petitioner's Motion for Partial Consideration is hereby GRANTED. The Court's Decision in the case of Asian Transmission Corporation vs. Commissioner of Internal Revenue , CTA Case No. 6056 dated November 16, 2001, is hereby MODIFIED as follows: WHEREFORE, Respondent Commission is hereby ORDERED to REFUND OR ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of EIGHT MILLION EIGHT HUNDRED NINE THOUSAND THREE HUNDRED NINE PESOS (P8,809,309.00) representing creditable taxes withheld for the taxable year 1997. SO ORDERED (p. 35, rollo ). Hence, this Petition for Review where the Commissioner raises the lone issue of: I WHETHER OR NOT RESPONDENT IS ENTITLED TO A REFUND/TAX CREDIT IN THE AMOUNT OF PHP8,809,309.00 REPRESENTING THE ALLEGED CREDITABLE TAXES WITHHELD FOR TAXABLE YEAR 1997 (p. 13, rollo ). while the ground he relies upon is stated as follows: THE TAX COURT ERRED IN HOLDING THAT SECTION 76 OF THE 1997 TAX CODE, PROVIDING THAT IF A CORPORATION EXERCISES THE OPTION TO CARRYOVER ITS EXCESS TAX CREDITS TO THE SUCCEEDING TAXABLE YEARS, THE OPTION BECOMES 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. (p. 13, rollo ). The petition is meritorious. In justifying its decision to grant the tax refund, the CTA cited that Asian was able to comply with the conditions required by Section 10, Revenue Regulation No. 6-85, to wit: (1) that the claim for refund was filed within the two-year prescriptive period provided under Section 230 of the Tax Code; (2) that the fact of withholding is established by a copy of a statement duly issued by the payer (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom; (3) that the income upon which the taxes were withheld were included in the return of the recipient. This did not convince the Commissioner who filed a motion for its reconsideration. He invoked the provision of Section 76 of the National Internal Revenue Code of 1997 (or NIRC of 1997), viz : SEC. 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 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 therefore . Based on this provision, the Commissioner explained that Asian is not entitled to a tax refund inasmuch as it opted to carry-over and apply the 1997 excess credits against the 1998 tax liability and this option once taken is irrevocable. However, the Commissioner suffered a further setback when the CTA struck down its motion asseverating that it is not the aforecited Section 76 but Section 69 of the old Tax Code which is applicable in the instant case, to wit: Section 69. Final Adjustment Return Every corporation liable to pay tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar year 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 shall either: (a) Pay the tax still due; (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. Applying this provision, the CTA disposed that Asian is entitled to the tax refund. It added that the provisions of 1997 NIRC apply only to transactions commencing on January 1, 1998. It cannot be given retroactive effect for to do so would impair the rights of the taxpayer available under the old Code, citing its previous rulings in DBS Saving Bank (CTA Case No. 5805, February 13, 2001) and Wise Investment and Trust Company (CTA Case No. 5790, July 29, 1999). In defending the decision of the CTA, Asian interposed the following issues in its Comment: First, it avers that the Commissioner committed a fatal error when it served the copy of the petition to its former counsel notwithstanding the fact that its new counsel already entered his appearance with copy furnished to the Commissioner. It opined that his appeal deserves outright dismissal for failure to comply with the requirements of Rule 43 of the 1997 Rules on Civil Procedure. A perusal of the petition and its corresponding affidavit of service reveals that the Commissioner really intended to furnish the copy to the new counsel of record, to wit: COPY FURNISHED: ATTY. ROMMEL S. AGAN, Counsel for Respondent 6760 Ayala Avenue, Makati . The only thing is that the address written was that of the former counsel. We hold that it is not a deleterious error and should not affect the disposition of the case based on merits, considering that Asian after all was able to file its comment and memorandum. Procedural rules are required to be followed as a general rule, but they may be relaxed to relieve a litigant of an injustice not commensurate with the degree of his noncompliance with the procedure required ( Rodil Enterprises, Inc. vs. Court of Appeals , 371 SCRA 79). Second, Asian states that the ground (Section 76 of the 1997 NIRC) relied upon by the CIR in this petition was not raised during the trial in the CTA. It asserts that questions which were never raised a quo cannot be allowed for the first time on appeal without offending basic rules of fair play, justice and due process as held in Ysmael vs. Court of Appeals , 318 SCRA 215. But Asian failed to mention that the Commissioner was able to raise the said point in his Motion for Reconsideration. A careful reading of the CTA Resolution dated March 14, 2002 discloses that Asian filed an Opposition thereto. This only means that Asian indeed had been afforded the opportunity to confront and rebut the said issue and this satisfies the requirement of due process. Due process is satisfied when the parties are afforded fair and reasonable opportunity to explain their side of the controversy or an opportunity to move for a reconsideration of the action or ruling complained of ( Roxas vs. Vasquez , 358 SCRA 636). Due process simply demands an opportunity to be heard and this was not denied (petitioner) respondent ( Ginete vs. Sunrise Manning Agency , 359 SCRA 404). Coming now to the third and main issue of whether or not the CTA was correct in its determination that the 1997 NIRC is not the applicable law in the case at bar. The CTA concluded that it is not Section 76 of 1997 NIRC but Section 69 of the old Tax Code which is applicable in this case since the transactions occurred in 1997. The new law applies only to business dealings commencing on January 1, 1998, the date of its effectivity. It cannot be given retroactive effect, for to do so would impair the vested rights of Asian under the old Tax Code. This is not correct. In Commissioner of Internal Revenue vs. TMX Sales, Inc. (205 SCRA 184) it was held that: Since the audit, as required by Section 321 (now 232) of the Tax Code is to be conducted yearly, then, it is the Final Adjustment Return, where the figures of the gross receipts and deductions shall have been audited and adjusted, that is truly reflective of the results of the operations of a business enterprise . Thus, it is only when the Adjustment Return covering the whole period is filed that the taxpayer would know whether a tax is still due or a refund can be claimed based on the adjusted and audited figures . And in Commissioner of Internal Revenue vs. Court of Appeals (301 SCRA 435) it was therein held that: Finally, in Commissioner of Internal Revenue v. American Life Insurance Co. (244 SCRA 446) we held: Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished . . . . . Section 49(a) of the NIRC provides that SEC. 49 Payment and assessment of income tax for individuals and corporations Return (a) Payment of tax (1) In general The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed . . . On the other hand, Sec 70 of the same Code provides: SEC 70 (B) time of filing the income return The corporate quarterly declaration shall be filed within sixty (60) days following of each of the first three quarters of the taxable year. The final adjustment return shall be filed on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be. Thus, it can be deduced from the foregoing that, in the context of Sec. 230, which provides for the a two-year period of prescription from the date of payment of the tax for actions for refund of a corporate income tax, the two year-period should be computed from the time of the actual filing of the Adjusted Return or Annual Income Tax Return. This is so because at that point, it can already be determined whether there has been overpayment by the taxpayer . . . . . It is crystal clear that a tax refund can be ascertained only upon the filing by the taxpayer of his Final Adjustment Return or Annual Income Tax Return (ITR). Here, Asian was able to determine its excess tax credits only on April 15, 1998, the date of the filing of ITR and not of the commencement of its transactions in 1997. On said date of filing, the law already enforced was the 1997 NIRC and its provision, particularly Section 76, by then governed the application for tax refund of Asian. When Asian filed its 1997 ITR on April 15, 1998, it signified its intention to carry-over the excess tax credits. Pursuant to Section 76, such choice once made is irrevocable, hence it cannot claim for tax refund at the same time. 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 ( Philippine Bank of Communications vs. Commissioner of Internal Revenue , 302 SCRA 241). Indeed, it bears stressing that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority to and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law ( Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. , 309 SCRA 87). Any tax claim for refund of (custom duties) income tax, therefore, take the nature of tax exemptions that must be construed strictissimi juris against the claimants and liberally in favor of the taxing authority. This power of taxation being a high prerogative of sovereignty, its relinquishment is never presumed. Any reduction or diminution thereof with respect to its mode or its rate must be strictly construed, and the same must be couched in clear and unmistakable terms in order that it may be applied ( Nestle Philippines, Inc. vs. Court of Appeals , 360 SCRA 575). Here, Asian failed to clearly and unmistakably prove and show that it is really entitled to its claim for tax refund under the existing tax law. EcSCHD WHEREFORE, finding merit in it, the petition is GIVEN DUE COURSE and accordingly GRANTED. The decision dated November 16, 2001 and the Resolution dated March 14, 2002 of the Court of Tax Appeals are hereby REVERSED and SET ASIDE, and Asian's petition for review before the said Court is DISMISSED. SO ORDERED. Del Castillo and De Leon, JJ ., concur.