You are on page 1of 152

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.

MANILA ELECTRIC
COMPANY (MERALCO), Respondent. G.R. No. 181459 June 9, 2014
PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court which seeks to annul and set aside the Decision1 of the Court of Tax Appeals, dated
October 15, 2007, and its Resolution2 dated January 9, 2008 denying petitioner's Motion for
Reconsideration in the case entitled Commissioner of Internal Revenue v. Manila Electric
Company (MERALCO), docketed as C.T.A EB No. 262.

The facts of this case are uncontroverted.

On July 6, 1998, respondent Manila Electric Company (MERALCO) obtained a loan from
Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch in the amount of
USD120,000,000.00 with ING Barings South East Asia Limited (ING Barings) as the
Arranger.3 On September 4, 2000, respondent MERALCO executed another loan agreement
with NORD/LB Singapore Branch for a loan facility in the amount of USD100,000,000.00
with Citicorp International Limited as Agent.4

Under the foregoing loan agreements, the income received by NORD/LB, by way of
respondent MERALCO’s interest payments, shall be paid in full without deductions, as
respondent MERALCO shall bear the obligation of paying/remitting to the BIR the
corresponding ten percent (10%) final withholding tax.5 Pursuant thereto, respondent
MERALCO paid/remitted to the Bureau of Internal Revenue (BIR) the said withholding tax on
its interest payments to NORD/LB Singapore Branch, covering the period from January 1999
to September 2003 in the aggregate sum of ₱264,120,181.44.6

However, sometime in 2001, respondent MERALCO discovered that NORD/LB Singapore


Branch is a foreign government-owned financing institution of Germany.7 Thus, on
December 20, 2001, respondent MERALCO filed a request for a BIR Ruling with petitioner
Commissioner of Internal Revenue (CIR) with regard to the tax exempt status of NORD/LB
Singapore Branch, in accordance with Section 32(B)(7)(a) of the 1997 National Internal
Revenue Code (Tax Code), as amended.8

On October 7, 2003, the BIR issued Ruling No. DA-342-2003 declaring that the interest
payments made to NORD/LB Singapore Branch are exempt from the ten percent (10%) final
withholding tax, since it is a financing institution owned and controlled by the foreign
government of Germany.9

Consequently, on July 13, 2004, relying on the aforesaid BIR Ruling, respondent MERALCO
filed with petitioner a claim for tax refund or issuance of tax credit certificate in the aggregate
amount of ₱264,120,181.44, representing the erroneously paid or overpaid final withholding
tax on interest payments made to NORD/LB Singapore Branch.10

On November 5, 2004, respondent MERALCO received a letter from petitioner denying its
claim for tax refund on the basis that the same had already prescribed under Section 204 of
the Tax Code, which gives a taxpayer/claimant a period of two (2) years from the date of
payment of tax to file a claim for refund before the BIR.11

Aggrieved, respondent MERALCO filed a Petition for Review with the Court of Tax Appeals
(CTA) on December 6, 2004.12 After trial on the merits, the CTA-First Division rendered a
Decision partially granting respondent MERALCO’s Petition for Review in the following wise:

IN VIEW OF THE FOREGOING, petitioner’s claim in the amount of TWO HUNDRED


TWENTY-FOUR MILLION SEVEN HUNDRED SIXTY THOUSAND NINE HUNDRED
TWENTY-SIX PESOS & SIXTY-FIVE CENTAVOS (₱224,760,926.65) representing
erroneously paid and remitted final income taxes for the period January 1999 to July 2002 is
hereby DENIED on the ground of prescription. However, petitioner’s claim in the amount of
THIRTY-NINE MILLION THREE HUNDRED FIFTY NINETHOUSAND TWO HUNDRED
FIFTY-FOUR PESOS & SEVENTY-NINE CENTAVOS (₱39,359,254.79) is hereby
GRANTED. Accordingly, respondent is ORDERED TO REFUND or ISSUE A TAX CREDIT
CERTIFICATE to petitioner in the amount of THIRTYNINE MILLION THREE HUNDRED
FIFTY-NINE THOUSAND TWO HUNDRED FIFTY-FOUR PESOS & SEVENTY-NINE
CENTAVOS (₱39,359,254.79) representing the final withholding taxes erroneously paid and
remitted for the period December 2002 to September 2003. SO ORDERED.13

On November 2, 2006, petitioner filed its Motion for Reconsideration with the CTA-First
Division, while on November 7, 2006, respondent MERALCO filed its Partial Motion for
Reconsideration.14 Finding no justifiable reason to overturn its Decision, the CTA-First
Division denied both the petitioner’s Motion for Reconsideration and respondent
MERALCO’s Partial Motion for Reconsideration in a Resolution dated January 11, 2007.15

Unyielding to the Decision of the CTA, both petitioner and respondent MERALCO filed their
respective Petitions for Review before the Court of Tax Appeals En Banc (CTA En Banc)
docketed as C.T.A. EB Nos. 264 and 262, respectively.16 In a Resolution dated May 9, 2007,
the CTA En Banc ordered the consolidation of both cases in accordance with Section 1,
Rule 31 of the Revised Rules of Court and gave due course thereto, requiring both parties to
submit their respective consolidated memoranda.17 Only petitioner filed its Consolidated
Memorandum on July 2, 2007.18

In its Decision19 dated October 15, 2007, the CTA En Banc denied both petitions and upheld
in toto the Decision of the CTA-First Division, the dispositive portion of which states:

In the light of the laws and jurisprudence on the matter, We see no reason to reverse the
assailed Decision dated October 16, 2006 and Resolution dated January 11, 2007 of the
First Division. WHEREFORE, premises considered, both petitions are hereby DISMISSED.
SO ORDERED.20

In the same vein, the motions for reconsideration filed by the respective parties were also
denied in a Resolution21dated January 9, 2008.

Hence, the instant petition.

The sole issue presented before us is whether or not respondent MERALCO is entitled to a
tax refund/credit relative to its payment of final withholding taxes on interest payments made
to NORD/LB from January 1999 to September 2003.

Petitioner maintains that respondent MERALCO is not entitled to a tax refund/credit,


considering that its testimonial and documentary evidence failed to categorically establish
that NORD/LB is owned and controlled by the Federal Republic of Germany; hence,
exempted from final withholding taxes on income derived from investments in the
Philippines.22

On the other hand, respondent MERALCO claims that the evidence it presented in trial,
consisting of the testimony of Mr. German F. Martinez, Jr., Vice-President and Head of Tax
and Tariff of MERALCO, which was affirmed by a certification issued by the Embassy of the
Federal Republic of Germany, dated March 27, 2002, through its Mr. Lars Leymann, clearly
defined the status of NORD/LB as one being owned by various German
States.23 Respondent MERALCO further argues that in the Joint Stipulation of Facts,
petitioner admitted the fact that NORD/LB is a financial institution owned and controlled by a
foreign government.24

Petitioner’s argument fails to persuade.

After a careful scrutiny of the records and evidence presented before us, we find that
respondent MERALCO has discharged the requisite burden of proof in establishing the
factual basis for its claim for tax refund.

First, as correctly decided by the CTA En Banc, the certification issued by the Embassy of
the Federal Republic of Germany, dated March 27, 2002, explicitly states that NORD/LB is
owned by the State of Lower Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania,
and serves as a regional bank for the said states which offers support in the public sector
financing, to wit:

Regarding your letter dated March 1, 2002, I can confirm the following:

NORD/LB is owned by the State (Land)of Lower Saxony to the extent of 40%, by the States
of [Saxony-]Anhalt and Mecklenburg-Western Pomerania to the extent of 10% each. The
Lower Saxony Savings Bank and Central Savings Bank Association have a share of
[26.66%]. The Savings Bank Association Saxony-Anhalt and the Savings Bank Association
Mecklenburg-Western Pomerania have a share of [6.66%] each.

As the regional bank for Lower Saxony, Saxony-Anhalt and MecklenburgWestern


Pomerania, NORD/LB offers support in public sector financing. It fulfills as Girozentrale the
function of a central bank for the savings bank in these three states (Lander).

Given that the same was issued by the Embassy of the Federal Republic of Germany in the
regular performance of their official functions, and the due execution and authenticity thereof
was not disputed when it was presented in trial, the same may be admitted as proof of the
facts stated therein. Further, it is worthy to note that the Embassy of the Federal Republic of
Germany was in the best position to confirm such information, being the representative of
the Federal Republic of Germany here in the Philippines.

To bolster this, respondent MERALCO presented as witness its Vice-President and Head of
Tax and Tariff, German F. Martinez, Jr., who testified on and identified the existence of such
certification. In this regard, we concur with the CTA En Banc that absent any strong
evidence to disprove the truthfulness of such certification, there is no basis to controvert the
findings of the CTA-First Division, to wit:

The foregoing documentary and testimonial evidence were given probative value as the First
Division ruled that there was no strong evidence to disprove the truthfulness of the said
pieces of evidence, considering that the CIR did not present any rebuttal evidence to prove
otherwise. The weight of evidence is not a question of mathematics, but depends on its
effects in inducing belief, under all of the facts and circumstances proved. The probative
weight of any document or any testimonial evidence must be evaluated not in isolation but in
conjunction with other evidence, testimonial, admissions, judicial notice, and presumptions,
adduced or given judicial cognizance of, and if the totality of the evidence presented by both
parties supports the claimant’s claim, then he is entitled to a favorable judgment. (Donato C.
Cruz Trading Corp. v. Court of Appeals, 347 SCRA 13).26

Consequently, such certification was used by petitioner as basis in issuing BIR Ruling No.
DA-342-2003, which categorically declared that the interest income remitted by respondent
MERALCO to NORD/LB Singapore Branch is not subject to Philippine income tax, and
accordingly, not subject to ten percent (10%) withholding tax.1âwphi1 Contrary to petitioner’s
view, therefore, the same constitutes a compelling basis for establishing the tax exempt
status of NORD/LB, as was held in Miguel J. Ossorio Pension Foundation, Incorporated v.
Court of Appeals,27which may be applied by analogy to the present case, to wit:

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling
exempting it from the payment of withholding tax on the sale of the land by various BIR-
approved trustees and tax-exempt private employees' retirement benefit trust funds
represented by Citytrust. The BIR ruled that the private employees’ benefit trust funds, which
included petitioner, have met the requirements of the law and the regulations and, therefore,
qualify as reasonable retirement benefit plans within the contemplation of Republic Act No.
4917 (now Sec. 28 [b] [7] [A], Tax Code). The income from the trust fund investments is,
therefore, exempt from the payment of income tax and, consequently, from the payment of
the creditable withholding tax on the sale of their real property.

Thus, the documents issued and certified by Citytrust showing that money from the
Employees' Trust Fund was invested in the MBP lot cannot simply be brushed aside by the
BIR as self-serving, in the light of previous cases holding that Citytrust was indeed handling
the money of the Employees' Trust Fund. These documents, together with the notarized
Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees'
Trust Fund, indeed invested in the purchase of the MBP lot. Thus, the Employees' Trust
Fund owns 49.59% of the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came from an
investment by the Employees' Trust Fund, petitioner, as trustee of the Employees' Trust
Fund, is entitled to claim the tax refund of ₱3,037,500 which was erroneously paid in the
sale of the MBP lot.28

Second, in the parties’ Joint Stipulation of Facts, petitioner admitted the issuance of the
aforesaid BIR Ruling and did not contest it as one of the admitted documentary evidence in
Court. A judicial admission binds the person who makes the same, and absent any showing
that this was made thru palpable mistake, no amount of rationalization can offset it.29 In
Camitan v. Fidelity Investment Corporation,30 we sustained the judicial admission of
petitioner’s counsel for failure to prove the existence of palpable mistake, thus:

x x x. A judicial admission is an admission, verbal or written, made by a party in the course


of the proceedings in the same case, which dispenses with the need for proof with respect to
the matter or fact admitted. It may be contradicted only by a showing that it was made
through palpable mistake or that no such admission was made.

Upon examination of the said exhibits on record, it appears that the alleged discrepancies
are more imagined than real. Had these purported discrepancies been that evident during
the preliminary conference, it would have been easy for petitioners' counsel to object to the
authenticity of the owner's duplicate copy of the TCT presented by Fidelity. As shown in the
transcript of the proceedings, there was ample opportunity for petitioners' counsel to
examine the document, retract his admission, and point out the alleged discrepancies. But
he chose not to contest the document. Thus, it cannot be said that the admission of the
petitioners' counsel was made through palpable mistake.31

Based on the foregoing, we are of the considered view that respondent MERALCO has
shown clear and convincing evidence that NORD/LB is owned, controlled or enjoying
refinancing from the Federal Republic of Germany, a foreign government, pursuant to
Section 32(B)(7)(a) of the Tax Code, as amended, which provides that:

Section 32. Gross Income. –


(B) Exclusions from Gross Income. −The following items shall not be included in gross
income and shall be exempt from taxation under this title:

(7) Miscellaneous Items. −

(a) Income Derived by Foreign Government. − Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits
in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign governments, and (iii) international or
regional financial institutions established by foreign governments.

Notwithstanding the foregoing, however, we uphold the ruling of the CTA En Banc that the
claim for tax refund in the aggregate amount of Thirty-Nine Million Three Hundred Fifty-Nine
Thousand Two Hundred Fifty-Four Pesos and Seventy-Nine Centavos (₱39,359,254.79)
pertaining to the period from January 1999 to July2002 must fail since the same has already
prescribed under Section 229 of the Tax Code, to wit:

Section 229. 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, of any sum alleged to have been
excessively or in any manner wrongfully collected without authority, or of any sum alleged to
have been excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner may, even without a written
claim therefor, refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid.33

As can be gleaned from the foregoing, the prescriptive period provided is mandatory
regardless of any supervening cause that may arise after payment. It should be pointed out
further that while the prescriptive period of two (2) years commences to run from the time
that the refund is ascertained, the propriety thereof is determined by law (in this case, from
the date of payment of tax), and not upon the discovery by the taxpayer of the erroneous or
excessive payment of taxes. The issuance by the BIR of the Ruling declaring the tax-exempt
status of NORD/LB, if at all, is merely confirmatory in nature. As aptly held by the CTA-First
Division, there is no basis that the subject exemption was provided and ascertained only
through BIR Ruling No. DA-342-2003, since said ruling is not the operative act from which
an entitlement of refund is determined.34 In other words, the BIR is tasked only to confirm
what is provided under the Tax Code on the matter of tax exemptions as well as the period
within which to file a claim for refund.

In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive period
for initiating an action on the ground of quasi contract or solutio indebiti under Article 1145 of
the New Civil Code. There is solutio indebiti where: (1) payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the person who received
the payment; and (2) the payment is made through mistake, and not through liberality or
some other cause.35 Here, there is a binding relation between petitioner as the taxing
authority in this jurisdiction and respondent MERALCO which is bound under the law to act
as a withholding agent of NORD/LB Singapore Branch, the taxpayer. Hence, the first
element of solutio indebitiis lacking. Moreover, such legal precept is inapplicable to the
present case since the Tax Code, a special law, explicitly provides for a mandatory period
for claiming a refund for taxes erroneously paid.
Tax refunds are based on the general premise that taxes have either been erroneously or
excessively paid. Though the Tax Code recognizes the right of taxpayers to request the
return of such excess/erroneous payments from the government, they must do so within a
prescribed period. Further, "a taxpayer must prove not only his entitlement to a refund, but
also his compliance with the procedural due process as non-observance of the prescriptive
periods within which to file the administrative and the judicial claims would result in the
denial of his claim."36 In the case at bar, respondent MERALCO had ample opportunity to
verify on the tax-exempt status of NORD/LB for purposes of claiming tax refund. Even
assuming that respondent MERALCO could not have emphatically known the status of
NORD/LB, its supposition of the same was already confirmed by the BIR Ruling which was
issued on October 7, 2003. Nevertheless, it only filed its claim for tax refund on July 13,
2004, or ten (10) months from the issuance of the aforesaid Ruling. We agree with the CTA-
First Division, therefore, that respondent MERALCO's claim for refund in the amount of Two
Hundred Twenty-Four Million Seven Hundred Sixty Thousand Nine Hundred Twenty-Six
Pesos and Sixty-Five Centavos (₱224,760,926.65) representing erroneously paid and
remitted final income taxes for the period January 1999 to July 2002 should be denied on the
ground of prescription.

Finally, we ought to remind petitioner that the arguments it raised in support of its position
have already been thoroughly discussed both by the CTA-First Division and the CTA En
Banc. Oft repeated is the rule that the Court will not lightly set aside the conclusions reached
by the CT A which, by the very nature of its function of being dedicated exclusively to the
resolution of tax problems, has accordingly developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority.37 This Court recognizes that
the CTA's findings can only be disturbed on appeal if they are not supported by substantial
evidence, or there is a showing of gross error or abuse on the part of the Tax Court.38 In the
absence of any clear and convincing proof to the contrary, this Court must presume that the
CT A rendered a decision which is valid in every respect.39 It has been a long-standing policy
and practice of the Court to respect the conclusions of quasi-judicial agencies such as the
CT A, a highly specialized body specifically created for the purpose of reviewing tax cases.40

WHEREFORE, the petition is DENIED. The October 15, 2007 Decision and January 9, 2008
Resolution of the Court of Tax Appeals in C.T.A. EB No. 262 are hereby AFFIRMED. SO
ORDERED.

DIGEST:

FACTS

On July 6, 1998, respondent Manila Electric Company (MERALCO) obtained a loan from
Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch in the amount of
USD120,000,000.00 with ING Barings South East Asia Limited (ING Barings) as the Arrange On
September 4, 2000, respondent MERALCO executed another loan agreement with NORD/LB
Singapore Branch for a loan facility in the amount of USD100,000,000.00 with Citicorp
International Limited as Agentcralawred

Under the foregoing loan agreements, the income received by NORD/LB, by way of respondent
MERALCO’s interest payments, shall be paid in full without deductions, as respondent MERALCO
shall bear the obligation of paying/remitting to the BIR the corresponding ten percent (10%) final
withholding tax. Pursuant thereto, respondent MERALCO paid/remitted to the Bureau of Internal
Revenue (BIR) the said withholding tax on its interest payments to NORD/LB Singapore Branch,
covering the period from January 1999 to September 2003.

However, sometime in 2001, respondent MERALCO discovered that NORD/LB Singapore Branch is
a foreign government-owned financing institution of Germany. Thus, on December 20, 2001,
respondent MERALCO filed a request for a BIR Ruling with petitioner Commissioner of Internal
Revenue (CIR) with regard to the tax exempt status of NORD/LB Singapore Branch, in accordance
with Section 32(B)(7)(a) of the 1997 National Internal Revenue Code (Tax Code), as amended

On October 7, 2003, the BIR issued Ruling No. DA-342-2003 declaring that the interest payments
made to NORD/LB Singapore Branch are exempt from the ten percent (10%) final withholding tax,
since it is a financing institution owned and controlled by the foreign government of Germany.

On November 5, 2004, respondent MERALCO received a letter from petitioner denying its claim for
tax refund on the basis that the same had already prescribed under Section 204 of the Tax Code,
which gives a taxpayer/claimant a period of two (2) years from the date of payment of tax to file a
claim for refund before the BIR

Aggrieved, respondent MERALCO filed a Petition for Review with the Court of Tax Appeals (CTA) on
December 6, 2004.12 After trial on the merits, the CTA-First Division rendered a Decision partially
granting respondent MERALCO’s Petition for Review . In the same vein, the motions for
reconsideration filed by the respective parties were also denied in a Resolution dated January 9,
2008, Hence, the instant petition.

ISSUE:
1. Whether or not respondent MERALCO is entitled to a tax refund/credit relative to its payment of
final withholding taxes on interest payments made to NORD/LB from January 1999 to September
2003.

RULING

After a careful scrutiny of the records and evidence presented before us, we find that respondent
MERALCO has discharged the requisite burden of proof in establishing the factual basis for its claim
for tax refund.

Tax refunds are based on the general premise that taxes have either been erroneously or
excessively paid. Though the Tax Code recognizes the right of taxpayers to request the return of
such excess/erroneous payments from the government, they must do so within a prescribed
period. Further, “a taxpayer must prove not only his entitlement to a refund, but also his
compliance with the procedural due process as non-observance of the prescriptive periods within
which to file the administrative and the judicial claims would result in the denial of his claim.”
red

In the case at bar, respondent MERALCO had ample opportunity to verify on the tax-exempt status
of NORD/LB for purposes of claiming tax refund. Even assuming that respondent MERALCO could
not have emphatically known the status of NORD/LB, its supposition of the same was already
confirmed by the BIR Ruling which was issued on October 7, 2003. Nevertheless, it only filed its
claim for tax refund on July 13, 2004, or ten (10) months from the issuance of the aforesaid
Ruling. We agree with the CTA-First Division, therefore, that respondent MERALCO’s claim for
refund in the amount of Two Hundred Twenty-Four Million Seven Hundred Sixty Thousand Nine
Hundred Twenty-Six Pesos and Sixty-Five Centavos (P224,760,926.65) representing erroneously
paid and remitted final income taxes for the period January 1999 to July 2002 should be denied on
the ground of prescription.

Finally, we ought to remind petitioner that the arguments it raised in support of its position have
already been thoroughly discussed both by the CTA-First Division and the CTA En Banc. Oft-
repeated is the rule that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its function of being dedicated exclusively to the resolution of tax
problems, has accordingly developed an expertise on the subject, unless there has been an abuse
or improvident exercise of authority. This Court recognizes that the CTA’s findings can only be
disturbed on appeal if they are not supported by substantial evidence, or there is a showing of
gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect. It has been a long-standing policy and practice of the Court to respect the
conclusions of quasi-judicial agencies such as the CTA, a highly specialized body specifically
created for the purpose of reviewing tax cases.
ANDREA R. VDA. DE AGUINALDO, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE and the COURT OF TAX APPEALS, respondents. G.R. No. L-
19927 February 26, 1965 BENGZON, J.P., J.:

Leopoldo R. Aguinaldo and his wife received in 1952 cash dividends in the sum of
P10,000.00 from Aguinaldo Brothers, Inc. The spouses did not declare said dividends in
their joint income tax return for 1952, but declared P5,000.00 thereof in their income tax
return for 1953. On August 14, 1954, they paid the tax due on their declared income for
1953.

One year after or in August 1955 agents of the Bureau of Internal Revenue re-examined the
1952 and 1953 joint income tax returns of Leopoldo R. Aguinaldo and his wife and
discovered the same. Whereupon, they readjusted the returns, increasing the declared
income for 1952 by P10,000.00 and eliminating from the 1953 income tax return the reported
dividends of P5,000.00. The result was a deficiency income tax of P3,840.00 for 1952 and
an overpayment of tax in the amount of P1,600.00 for 1953.

The examination report, dated August 29, 1955, stated that it was a "mere adjustment of
1952 and 1953 returns", and recommended that the overpayment for 1953 in the amount of
P1,600.00 be credited against the deficiency tax for 1952. The Collector of Internal Revenue,
however, by his letter dated October 28, 1957, assessed against Leopoldo R. Aguinaldo the
amount of P3,840.00 as deficiency income tax for 1952, without crediting in his favor the
overpayment in 1953.

Aguinaldo's counsel, in a letter dated January 10, 1958, protested against the assessment,
and requested that the overpayment for 1953 be credited in favor of the taxpayer. The
request was denied and the taxpayer asked for reconsideration. Finally, the Commissioner
of Internal Revenue informed him that the amount of P1,600.00 cannot be credited against
the tax for 1952 inasmuch as the claim for tax credit was filed beyond the two-year period
provided for in Section 309 of the National Internal Revenue Code. Subsequently, Leopoldo
R. Aguinaldo died, but Andrea Vda. de Aguinaldo, his surviving spouse and administratrix,
appealed to the Court of Tax Appeals. After hearing, the Tax Court dismissed the appeal for
"lack of cause of action". Petitioner thereupon elevated the case to this Court.

The single issue is whether or not petitioner is entitled to tax credit for the year 1953
pursuant to Section 309 of the Tax Code. Petitioner contends that Section 309 does not
require the filing of a claim within two years from the payment of the tax before tax credit
could be given.

On the other hand, respondent Commissioner maintains that the authority of the
Commissioner of Internal Revenue under Section 309 can only be exercised if a claim f or
credit is made in writing and filed with him within two years from the payment of the tax.

Section 309 of the Tax Code states:

SEC. 309. Authority of Collector to make compromises and refund taxes.—The


Collector of Internal Revenue may compromise any civil or other cases arising under
this Code or other law or part of law administered by the Bureau of Internal Revenue,
may credit or refund taxes erroneously or illegally received, or penalties imposed
without authority, and may remit before payment any tax that appears to be unjustly
assessed or excessive.

He shall refund the value of internal-revenue stamps when the same are returned in
good condition by the purchaser, and may, in his discretion, redeem or exchange
unused stamps that have been rendered unfit for use, and may refund their value
upon proof of destruction.

The authority of the Collector of Internal Revenue to credit or refund taxes or


penalties under this section can only be exercised if the claim for credit or refund is
made in writing and filed with him within two years after the payment of the tax or
penalty.1äwphï1.ñët

The third paragraph of Section 309, afore-quoted, clearly requires the filing by the taxpayer
of a written claim for credit or refund within two years after payment of the tax, before the
Commissioner of Internal Revenue can exercise his authority to grant the credit or refund.
Such requirement is therefore a condition precedent and non-compliance therewith
precludes the Commissioner of Internal Revenue from exercising the authority thereunder
given. As noted, the Aguinaldos paid the income tax for 1953 on August 14, 1954 although
the adjustment took place on August 29, 1955. From both dates to January 13, 1958, when
the claim for tax credit was filed, more than two years have elapsed. Evidently, petitioner's
claim for tax credit was filed beyond the period stated in Section 309. WHEREFORE, the
judgment appealed from is hereby affirmed, with costs. It is so ordered.

DIGEST:

66. ANDREA R. VDA. DE AGUINALDO vs. CIR

G.R. No. L-19927 February 26, 1965

FACTS
In 1952, Leopoldo R. Aguinaldo and his wife received cash
dividends in the sum of P10,000.00. The spouses did not declare said
dividends in their joint income tax return for 1952, but declared
P5,000.00 thereof in their income tax return for 1953.

One year after, the BIR re-examined the 1952 and 1953 their
joint income tax returns and readjusted the returns, increasing the
declared income for 1952 by P10,000.00 and eliminating from the 1953
income tax return P5,000.00. The result was a deficiency income tax of
P3,840.00 for 1952 and an overpayment of tax in the amount of
P1,600.00 for 1953. The BIR then recommended that the overpayment
for 1953 in the amount of P1,600.00 be credited against the deficiency
tax for 1952. The Collector of Internal Revenue, however assessed
against Leopoldo the amount of P3,840.00 as deficiency income tax for
1952, without crediting the overpayment in 1953.

Aguinaldo's counsel protested against the assessment and


requested that the overpayment for 1953 be credited. However, it was
denied stating that the amount of P1,600.00 cannot be credited against
the tax for 1952 since the claim for tax credit was filed beyond the two-
year period provided for in Section 309 of the NIRC.

Subsequently, Leopoldo R. Aguinaldo died, but petitioner Andrea Vda.


de Aguinaldo, his surviving spouse and administratrix appealed to the CTA
which was denied for lack of cause of action. Thus, the appeal to the SC.

ISSUE

W/N the period for filing the petition for tax credit has prescribed.

RULING

Yes. The authority of the Commissioner of Internal Revenue under


Section 309 can only be exercised if a claim for credit is made in writing
and filed with him within two years from the payment of the tax.

The third paragraph of Section 309, clearly requires the filing by


the taxpayer of a written claim for credit or refund within two years
after payment of the tax, before the Commissioner of Internal Revenue
can exercise his authority to grant the credit or refund. Such
requirement is therefore a condition precedent and non-compliance
precludes the Commissioner of Internal Revenue from exercising the
authority given.
As noted, the Aguinaldos paid the income tax for 1953 on 1952.
From both dates to January 13, 1958, the claim for tax credit was filed
beyond the two years required period. Evidently, petitioner's claim for tax
credit has prescribed.

DR. FELISA L. VDA. DE SAN AGUSTIN, in substitution of JOSE Y. FERIA, in his


capacity as Executor of the Estate of JOSE SAN AGUSTIN, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent. . G.R. No.
138485 September 10, 2001 VITUG,, J.:

Before the Court is a petition for review seeking to set aside the decision of 24 February
1999 of the Court of Appeals, as well as its resolution of 27 Apri11999, in CA-G.R. SP No.
34156, which has reversed that of the Court of Tax Appeals in CTA Case No.4956, entitled
"Jose V. Feria, in his capacity as Executor of the Estate of Jose San Agustin versus
Commissioner of Internal Revenue." The tax court's decision has modified the deficiency
assessment of the Commission of Internal Revenue for surcharge, interests and other
penalties imposed against the estate of the late Jose San Agustin.

The facts of the case narrated by the appellate court would appear, by and large, to be
uncontroverted; thus viz:

"Atty. Jose San Agustin of 2904 Kakarong St., Olympia, Makati died on June 27,
1990 leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic
will executed on April 21, 1980 giving all his estate to his widow, and naming retired
Justice Jose Y. Feria as Executor thereof.

"Probate proceedings were instituted on August 22, 1990, in the Regional Trial Court
(RTC) of Makati, Branch 139, docketed as Sp. Proc. No. M-2554. Pursuantly, notice
of decedent's death was sent to the Commissioner of Internal Revenue on August
30, 1990.1âwphi1.nêt

"On September 3, 1990, an estate tax return reporting an estate tax due of
P1,676,432.00 was filed on behalf of the estate, with a request for an extension of
two years for the payment of the tax, inasmuch as the decedent's widow ( did) not
personally have sufficient funds, and that the payment (would) have to come from the
estate.

"In his letter/answer, dated September 4, 1990, BIR Deputy Commissioner Victor A.
Deoferio, Jr., granted the heirs an extension of only six (6) months, subject to the
imposition of penalties and interests under Sections 248 and 249 of the National
Internal Revenue Code, as amended.

"In the probate proceedings, on October 11, 1990 the RTC allowed the will and
appointed Jose Feria as Executor of the estate. On December 5, 1990, the executor
submitted to the probate court an inventory of the estate with a motion for authority to
withdraw funds for the payment of the estate tax.

Such authority was granted by the probate court on March 5, 1991 .Thereafter, on
March 8, 1991 , the executor paid the estate tax in the amount of P1,676,432 as
reported in the Tax Return filed with the BIR. This was well within the six (6) months
extension period granted by the BIR.
"On September 23, 1991, the widow of the deceased, Felisa L. San Agustin, received
a Pre-Assessment Notice from the BIR, dated August 29, 1991, showing a deficiency
estate tax of P538,509.50, which, including surcharge, interest and penalties,
amounted to P976,540.00.

"On October 1, 1991, within the ten-day period given in the pre-assessment notice,
the executor filed a letter with the petitioner Commissioner expressing readiness to
pay the basic deficiency estate tax of P538,509.50 as soon as the Regional Trial
Court approves withdrawal thereof, but, requesting that the surcharge, interest, and
other penalties, amounting to P438,040.38 be waived, considering that the assessed
deficiency arose only on account of the difference in zonal valuation used by the
Estate and the BIR, and that the estate tax due per return of P1,676,432.00 was
already paid in due time within the extension period.

"On October 4, 1991, the Commissioner issued an Assessment Notice reiterating the
demand in the pre- assessment notice and requesting payment on or before thirty
(30) days upon receipt thereof.

"In a letter, dated October 31, 1991, the executor requested the Commissioner a
reconsideration of the assessment of P976,549.00 and waiver of the surcharge,
interest, etc.

"On December 18, 1991, the Commissioner accepted payment of the basic
deficiency tax in the amount of P538,509.50 through its Receivable Accounts Billing
Division.

"The request for reconsideration was not acted upon until January 21, 1993, when
the executor received a letter, dated September 21, 1992, signed by the
Commissioner, stating that there is no legal justification for the waiver of the
interests, surcharge and compromise penalty in this case, and requiring full payment
of P438,040.38 representing such charges within ten (10) days from receipt thereof.

"In view thereof, the respondent estate paid the amount of P438,040.38 under protest
on January 25, 1993.

"On February 18, 1993, a Petition for Review was filed by the executor with the CT A
with the prayer that the Commissioner's letter/decision, dated September 21, 1992 be
reversed and that a refund of the amount of P438,040.38 be ordered .

"The Commissioner opposed the said petition, alleging that the CTA's jurisdiction was
not properly invoked inasmuch as no claim for a tax refund of the deficiency tax
collected was filed with the Bureau of Internal Revenue before the petition was filed,
in violation of Sections 204 and 230 of the National Internal Revenue Code.
Moreover, there is no statutory basis for the refund of the deficiency surcharges,
interests and penalties charged by the Commissioner upon the estate of the
decedent.

"Upholding its jurisdiction over the dispute, the CTA rendered its Decision, dated April
21, 1994, modifying the CIR's assessment for surcharge, interests and other
penalties from P438,040.38 to P13,462.74, representing interest on the deficiency
estate tax, for which reason the CTA ordered the reimbursement to the respondent
estate the balance of P423,577.64, to wit:

"WHEREFORE, respondent's deficiency assessment for surcharge, interests,


and other penalties is hereby modified and since petitioner has clearly paid
the full amount of P438,040.38, respondent is hereby ordered to refund to the
Estate of Jose San Agustin the overpayment amounting to P423,577.64."1

On 30 May 1994, the decision of the Court of Tax Appeals was appealed by the
Commissioner of Internal Revenue to the Court of Appeals. There, the petition for review
raised the following issues:

"1. Whether respondent Tax Court has jurisdiction to take cognizance of the case
considering the failure of private respondent to comply with the mandatory
requirements of Sections 204 and 230 of the National Internal Revenue Code.

"2. Whether or not respondent Tax Court was correct in ordering the refund to the
Estate of Jose San Agustin the reduced amount of P423,577.64 as alleged overpaid
surcharge, interests and compromise penalty imposed on the basic deficiency estate
tax of P538,509.50 due on the transmission of the said Estate to the sole heir in
1990."2

In its decision of 24 February 1999, the Court of Appeals granted the petition of the
Commissioner of Internal Revenue and held that the Court of Tax Appeals did not acquire
jurisdiction over the subject matter and that, accordingly, its decision was null and void.

Hence, the instant petition where petitioner submits that -

"1. The filing of a claim for refund [is] not essential before the filing of the petition for
review.

"2. The imposition by the respondent of surcharge, interest and penalties on the
deficiency estate tax is not in accord with the law and therefore illegal."3

The Court finds the petition partly meritorious.

The case has a striking resemblance to the controversy in Roman Catholic Archbishop of
Cebu vs. Collector of Internal Revenue.4

The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax,
surcharge and interest and, forthwith, filed a petition for review before the Court of Tax
Appeals. Then respondent Collector (now Commissioner) of Internal Revenue set up several
defenses, one of which was that petitioner had failed to first file a written claim for refund,
pursuant to Section 306 of the Tax Code, of the amounts paid. Convinced that the lack of a
written claim for refund was fatal to petitioner's recourse to it, the Court of Tax Appeals
dismissed the petition for lack of jurisdiction. On appeal to this Court, the tax court's ruling
was reversed; the Court held:

"We agree with petitioner that Section 7 of Republic Act No.1125, creating the Court
of Tax Appeals, in providing for appeals from -

'(1) Decisions of the Collector of Internal Revenue in cases involving disputed


assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under the
National Internal Revenue Code or other law or part of the law administered
by the Bureau of Internal Revenue -

allows an appeal from a decision of the Collector in cases involving' disputed


assessments' as distinguished from cases involving' refunds of internal revenue
taxes, fees or other charges, x x'; that the present action involves a disputed
assessment'; because from the time petitioner received assessments Nos. 17-EC-
00301-55 and 17-AC-600107-56 disallowing certain deductions claimed by him in his
income tax returns for the years 1955 and 1956, he already protested and refused to
pay the same, questioning the correctness and legality of such assessments; and
that the petitioner paid the disputed assessments under protest before filing his
petition for review with the Court a quo, only to forestall the sale of his properties that
had been placed under distraint by the respondent Collector since December 4,
1957. To hold that the taxpayer has now lost the right to appeal from the ruling on,
the disputed assessment but must prosecute his appeal under section 306 of the Tax
Code, which requires a taxpayer to file a claim for refund of the taxes paid as a
condition precedent to his right to appeal, would in effect require of him to go through
a useless and needless ceremony that would only delay the ! disposition of the case,
for the Collector (now Commissioner) would cer1ainly disallow the claim for refund in
the same way as he disallowed the protest against the assessment. The law, should
not be interpreted as to result in absurdities."5

The Court sees no cogent reason to abandon the above dictum and to require a useless
formality that can serve the interest of neither the government nor the taxpayer. The tax
court has aptly acted in taking cognizance of the taxpayer's appeal to it.

On the second issue, the National Internal Revenue Code, relative to the imposition of
surcharges, interests, and penalties, provides thusly:

"Sec. 248. Civil Penalties. -

"(a) There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (25% ) of the amount due, in the following cases:

"(1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or

"(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or

"(3) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or

"(4) Failure to pay the full or part of the amount of tax shown on any return required
to be filed under the provisions of this Code or rules and regulations, or the full
amount of tax due for which no return is required to be filed, on or before the date
prescribed for its payment."

"Sec.249. Interest. -

"(A) In General. -There shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by rules and regulations, from the date prescribed for payment until the
amount is fully paid.

"(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this
Code, shall be subject to the interest prescribed in Subsection (A) hereof, which
interest shall be assessed and collected from the date prescribed for its payment until
the full payment thereof.

"(C) Delinquency Interest. -In case of failure to pay:


"(1) The amount of the tax due on any return to be filed, or

"(2) The amount of the tax due for which no return is required, or

"(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing
in the notice and demand of the Commissioner, there shall be assessed and
collected on the unpaid amount, interest at the rate prescribed in Subsection (A)
hereof until the amount is fully paid, which interest shall form part of the tax.

"(D) Interest on Extended Payment. -If any person required to pay the tax is qualified
and elects to pay the tax on installment under the provisions of this Code, but fails to
pay the tax or any installment hereof, or any part of such amount or installment on or
before the date prescribed for its payment, or where the Commissioner has
authorized an extension of time within which to pay a tax or a deficiency tax or any
part thereof, there shall be assessed and collected interest at the rate hereinabove
prescribed on the tax or deficiency tax or any part thereof unpaid from the date of
notice and demand until it is paid."

It would appear that, as early as 23 September 1991, the estate already received a pre-
assessment notice indicating a deficiency estate tax of P538,509.50. Within the ten-day
period given in the pre-assessment notice, respondent Commissioner received a letter from
petitioner expressing the latter's readiness to pay the basic deficiency estate tax of
P538,509.50 as soon as the trial court would have approved the withdrawal of that sum from
the estate but requesting that the surcharge, interests and penalties be waived. On 04
October 1991, however, petitioner received from the Commissioner notice insisting payment
of the tax due on or before the lapse of thirty (30) days from receipt thereof. The deficiency
estate tax of P538,509.50 was not paid until 19 December 1991.6

The delay in the payment of the deficiency tax within the time prescribed for its payment in
the notice of assessment justifies the imposition of a 25% surcharge in consonance with
Section 248A(3) of the Tax Code. The basic deficiency tax in this case being P538,509.50,
the twenty-five percent thereof comes to P134,627.37. Section 249 of the Tax Code states
that any deficiency in the tax due would be subject to interest at the rate of twenty percent
(20%) per annum, which interest shall be assessed and collected from the date prescribed
for its payment until full payment is made. The computation of interest by the Court of Tax
Appeals -

"Deficiency estate x Interest Rate x Terms


tax 20% per annum 11/2 mo./12 mos
P538,509.50 (11/04/91 to 12/19/91)

= P13,462.74"7

conforms with the law, i.e., computed on the deficiency tax from the date prescribed for its
payment until it is paid.

The Court of Tax Appeals correctly held that the compromise penalty of P20,000.00 could
not be imposed on petitioner, a compromise being, by its nature, mutual in essence. The
payment made under protest by petitioner could only signify that there was no agreement
that had effectively been reached between the parties.

Regrettably for petitioner, the need for an authority from the probate court in the payment of
the deficiency estate tax, over which respondent Commissioner has hardly any control, is not
one that can negate the application of the Tax Code provisions aforequoted. Taxes, the
lifeblood of the government, are meant to be paid without delay and often oblivious to
contingencies or conditions. In. sum, the tax liability of the estate includes a surcharge of
P134,627.37 and interest of P13,462.74 or a total of P148,090.00. WHEREFORE, the
instant petition is partly GRANTED. The deficiency assessment for surcharge, interest and
penalties is modified and recomputed to be in the amount of P148,090.00 surcharge of
P134,627.37 and interest of P13,462.74. Petitioner estate having since paid the sum of
P438,040.38, respondent Commissioner is hereby ordered to refund to the Estate of Jose
San Agustin the overpaid amount of P289,950.38. No costs. SO ORDERED.1âwphi1.nêt

DIGEST:

FACTS: (as narrated by CA)


1. June 27, 1990 - Atty. Jose San Agustin of 2904 Kakarong St., Olympia, Makati died
a. leaving his wife Dra. Felisa L. San Agustin as sole heir.
b. He left a holographic will executed on April 21, 1980 giving all his estate to his widow (Felisa L. San Agustin),
and naming retired Justice Jose Y. Feria as Executor thereof.
2. Aug 22 - Probate proceedings were instituted in RTC Makati, Branch 139.
3. Aug 30 - Notice of decedent's death was sent to the Commissioner of Internal Revenue.
4. Sept 3 - an estate tax return reporting estate tax due of P1,676,432.00 was filed on behalf of the estate, with a request
for an extension of 2 years for the payment of the tax because the payment had to come from the estate since the
widow did not have enough money.
5. Letter/answer - BIR Deputy Commissioner Victor A. Deoferio, Jr., granted the heirs an extension of only 6 months,
subject to the imposition of penalties and interests (Sections 248 and 249 NIRC).
6. Probate proceedings - RTC allowed the will and appointed Jose Feria as Executor of the estate.
7. Dec 5 - executor submitted an inventory of the estate with a motion for authority to withdraw funds for the payment
of the estate tax.  this was granted.
8. Mar 8, 1991 – (within the 6 mo. extension) the executor paid the estate tax of P1,676,432 as reported in the Tax
Return filed with the BIR.
9. Sept 23 -the widow of the deceased, Felisa L. San Agustin, received a Pre-Assessment Notice from the BIR (dated
August 29, 1991), showing a deficiency estate tax of P538,509.50, which, including surcharge, interest and penalties,
amounted to P976,540.00.
10. Oct 1 (within the ten-day period given in the pre-assessment notice) - executor filed a letter with the Commissioner
expressing readiness to pay the basic deficiency estate tax of P538,509.50 as soon as the RTC approves withdrawal
thereof,
a. --- but, requesting that the surcharge, interest, and other penalties, amounting to P438,040.38 be waived,
considering that the assessed deficiency arose only on account of the difference in zonal valuation used by
the Estate and the BIR, and that the estate tax due per return of P1,676,432.00 was already paid in due time
within the extension period.
11. Oct 4 - Commissioner issued an Assessment Notice reiterating the demand in the pre- assessment notice and
requesting payment on or before 30 days upon receipt thereof.
12. Oct 31 letter - executor requested the Commissioner a reconsideration of the assessment of P976,549.00 and waiver
of the surcharge, interest, etc.
13. Dec 18 - Commissioner accepted payment of the basic deficiency tax in the amount of P538,509.50 through its
Receivable Accounts Billing Division.
14. Request was only acted upon on Jan 21, 1993 - when the executor received a letter (dated September 21, 1992),
signed by the Commissioner, stating that there is no legal justification for the waiver of the interests, surcharge and
compromise penalty in this case, and requiring full payment of P438,040.38 representing such charges within 10 days
from receipt thereof.
15. Jan 25 - Estate paid P438,040.38 under protest.
16. Feb18 - Petition for Review was filed by the executor with the CTA with the prayer that Commissioner's decision be
reversed and for a refund of P438,040.38.
17. Commissioner opposed, alleging that the CTA's jurisdiction was not properly invoked as no claim for a tax refund of
the deficiency tax collected was filed with the BIR before the petition was filed, violating of Sections 204 and 230 NIRC.
Moreover, there is no statutory basis for the refund of the deficiency surcharges, interests and penalties charged by
the Commissioner upon the estate of the decedent.
18. CTA – decision modifying the CIR's assessment for surcharge, interests and other penalties from P438,040.38 to
P13,462.74, representing interest on the deficiency estate tax, for which reason the CTA ordered the reimbursement
to the respondent estate the balance of P423,577.64 (as overpayment).
19. CA - granted the petition of the Commissioner of Internal Revenue and held that the Court of Tax Appeals did not
acquire jurisdiction over the subject matter and that, accordingly, its decision was null and void.

ISSUE:
(1) WON filing of a claim for refund is essential before filing a petition for review;
(2) WON imposition by the respondent of surcharge, interest and penalties on the deficiency estate tax is illegal.
HELD: (1) NO (ratio 1-2); (2) NO.
RATIO:
1. The case has a striking resemblance to the controversy in Roman Catholic Archbishop of Cebu vs. Collector of Internal
Revenue.
2. The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax, surcharge and interest and,
forthwith, filed a petition for review before the CTA. Then respondent Collector (now Commissioner) of Internal
Revenue set up several defenses, one of which was that petitioner had failed to first file a written claim for refund,
pursuant to Section 306 of the Tax Code, of the amounts paid. Convinced that the lack of a written claim for refund
was fatal to petitioner's recourse to it, the Court of Tax Appeals dismissed the petition for lack of jurisdiction. On
appeal to this Court, the tax court's ruling was reversed; the Court held:
"We agree with petitioner that Section 7 of Republic Act No.1125, creating the Court of Tax Appeals, in providing for
appeals from -
'(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other law or part of the law administered by the Bureau of
Internal Revenue -
allows an appeal from a decision of the Collector in cases involving' disputed assessments' as distinguished from cases
involving' refunds of internal revenue taxes, fees or other charges, x x'; that the present action involves a disputed
assessment'; because from the time petitioner received assessments Nos. 17-EC-00301-55 and 17-AC-600107-56
disallowing certain deductions claimed by him in his income tax returns for the years 1955 and 1956, he already protested
and refused to pay the same, questioning the correctness and legality of such assessments; and that the petitioner paid
the disputed assessments under protest before filing his petition for review with the Court a quo, only to forestall the sale
of his properties that had been placed under distraint by the respondent Collector since December 4, 1957. To hold that
the taxpayer has now lost the right to appeal from the ruling on, the disputed assessment but must prosecute his appeal
under section 306 of the Tax Code, which requires a taxpayer to file a claim for refund of the taxes paid as a condition
precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would
only delay the ! disposition of the case, for the Collector (now Commissioner) would certainly disallow the claim for
refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to
result in absurdities."
3. It would appear that, as early as 23 September 1991, the estate already received a pre-assessment notice indicating a
deficiency estate tax of P538,509.50. Within the ten-day period given in the pre-assessment notice, respondent
Commissioner received a letter from petitioner expressing the latter's readiness to pay the basic deficiency estate tax
of P538,509.50 as soon as the trial court would have approved the withdrawal of that sum from the estate but
requesting that the surcharge, interests and penalties be waived. On 04 October 1991, however, petitioner received
from the Commissioner notice insisting payment of the tax due on or before the lapse of thirty (30) days from receipt
thereof. The deficiency estate tax of P538,509.50 was not paid until 19 December 1991.
4. The delay in the payment of the deficiency tax within the time prescribed for its payment in the notice of assessment
justifies the imposition of a 25% surcharge in consonance with Section 248A(3) of the Tax Code. The basic deficiency
tax in this case being P538,509.50, the twenty-five percent thereof comes to P134,627.37.
5. Section 249 of the Tax Code states that any deficiency in the tax due would be subject to interest at the rate of twenty
percent (20%) per annum, which interest shall be assessed and collected from the date prescribed for its payment
until full payment is made. The computation of interest by the Court of Tax Appeals – (P13,462.74)
"Deficiency estate tax x Interest Rate x Terms
P538,509.50 20% per annum 11/2 mo./12 mos
(11/04/91 to 12/19/91)

conforms with the law, i.e., computed on the deficiency tax from the date prescribed for its payment until it is paid.
6. The Court of Tax Appeals correctly held that the compromise penalty of P20,000.00 could not be imposed on
petitioner, a compromise being, by its nature, mutual in essence. The payment made under protest by petitioner
could only signify that there was no agreement that had effectively been reached between the parties.
7. Regrettably for petitioner, the need for an authority from the probate court in the payment of the deficiency estate
tax, over which respondent Commissioner has hardly any control, is not one that can negate the application of the Tax
Code provisions aforequoted.
8. Taxes, the lifeblood of the government, are meant to be paid without delay and often oblivious to contingencies or
conditions.
9. In sum, the tax liability of the estate includes a surcharge of P134,627.37 and interest of P13,462.74 or a total of
P148,090.00.
DISPOSITIVE: WHEREFORE, the instant petition is partly GRANTED. The deficiency assessment for surcharge, interest and
penalties is modified and recomputed to be in the amount of P148,090.00 surcharge of P134,627.37 and interest of
P13,462.74. Petitioner estate having since paid the sum of P438,040.38, respondent Commissioner is hereby ordered to
refund to the Estate of Jose San Agustin the overpaid amount of P289,950.38. No costs.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. AICHI FORGING COMPANY
OF ASIA, INC., Respondent. G.R. No. 184823 October 6, 2010 DEL
CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such


right, privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the
return of taxes erroneously or illegally collected. In both cases, a taxpayer must prove not
only his entitlement to a refund but also his compliance with the procedural due process as
non-observance of the prescriptive periods within which to file the administrative and the
judicial claims would result in the denial of his claim.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside
the July 30, 2008 Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals
(CTA) En Banc.

Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing
under the laws of the Republic of the Philippines, is engaged in the manufacturing,
producing, and processing of steel and its by-products.3 It is registered with the Bureau of
Internal Revenue (BIR) as a Value-Added Tax (VAT) entity4 and its products, "close
impression die steel forgings" and "tool and dies," are registered with the Board of
Investments (BOI) as a pioneer status.5

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period
July 1, 2002 to September 30, 2002 in the total amount of ₱3,891,123.82 with the petitioner
Commissioner of Internal Revenue (CIR), through the Department of Finance (DOF) One-
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center.6

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of
the same input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the
Second Division of the CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September
30, 2002, it generated and recorded zero-rated sales in the amount of
₱131,791,399.00,8 which was paid pursuant to Section 106(A) (2) (a) (1), (2) and (3) of the
National Internal Revenue Code of 1997 (NIRC);9 that for the said period, it incurred and
paid input VAT amounting to ₱3,912,088.14 from purchases and importation attributable to
its zero-rated sales;10and that in its application for refund/credit filed with the DOF One-Stop
Shop Inter-Agency Tax Credit and Duty Drawback Center, it only claimed the amount of
₱3,891,123.82.11

In response, petitioner filed his Answer12 raising the following special and affirmative
defenses, to wit:

4. Petitioner’s alleged claim for refund is subject to administrative investigation by the


Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections
106(A) (2) (a), and 108(B) (1) of the Tax Code of 1997;
7. Petitioner must prove that the claim was filed within the two (2) year period
prescribed in Section 229 of the Tax Code;

8. 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; and

9. Claims for refund are construed strictly against the claimant for the same partake
of the nature of exemption from taxation.13

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a
Decision partially granting respondent’s claim for refund/credit. Pertinent portions of the
Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section
112 (A) of the NIRC of 1997, as amended, provides:

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate
or refund of creditable input tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied against output tax: x x x

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the
taxpayer is engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer
is VAT-registered; (3) the claim must be filed within two years after the close of the taxable
quarter when such sales were made; and (4) the creditable input tax due or paid must be
attributable to such sales, except the transitional input tax, to the extent that such input tax
has not been applied against the output tax.

The Court finds that the first three requirements have been complied [with] by petitioner.

With regard to the first requisite, the evidence presented by petitioner, such as the Sales
Invoices (Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is
engaged in sales which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration with
OCN 1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT
taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund on
September 30, 2004 (Exhibit "N") and the present Petition for Review on September 30,
2004, both within the two (2) year prescriptive period from the close of the taxable quarter
when the sales were made, which is from September 30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and
claims of petitioner that are baseless and have not been satisfactorily substantiated.

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax
credit certificate representing unutilized excess input VAT payments for the period July 1,
2002 to September 30, 2002, which are attributable to its zero-rated sales for the same
period, but in the reduced amount of ₱3,239,119.25, computed as follows:
Amount of Claimed Input VAT ₱ 3,891,123.82

Less:

Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT ₱ 3,850,103.45

Less:

Output VAT Due 610,984.20

Excess Creditable Input VAT ₱ 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY


GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX
CREDIT CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION
TWO HUNDRED THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100
PESOS (₱3,239,119.25), representing the unutilized input VAT incurred for the months of
July to September 2002. SO ORDERED.14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,15 insisting that the administrative and the judicial claims were filed beyond
the two-year period to claim a tax refund/credit provided for under Sections 112(A) and 229
of the NIRC. He reasoned that since the year 2004 was a leap year, the filing of the claim for
tax refund/credit on September 30, 2004 was beyond the two-year period, which expired on
September 29, 2004.16 He cited as basis Article 13 of the Civil Code,17 which provides that
when the law speaks of a year, it is equivalent to 365 days. In addition, petitioner argued that
the simultaneous filing of the administrative and the judicial claims contravenes Sections 112
and 229 of the NIRC.18 According to the petitioner, a prior filing of an administrative claim is
a "condition precedent"19 before a judicial claim can be filed. He explained that the rationale
of such requirement rests not only on the doctrine of exhaustion of administrative remedies
but also on the fact that the CTA is an appellate body which exercises the power of judicial
review over administrative actions of the BIR. 20

The Second Division of the CTA, however, denied petitioner’s Motion for Partial
Reconsideration for lack of merit. Petitioner thus elevated the matter to the CTA En Banc via
a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Division’s Decision allowing the
partial tax refund/credit in favor of respondent. However, as to the reckoning point for
counting the two-year period, the CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period
allowed by law and hence, the honorable Court has no jurisdiction over the same. In
addition, petitioner further contends that respondent's filing of the administrative and judicial
[claims] effectively eliminates the authority of the honorable Court to exercise jurisdiction
over the judicial claim.
We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title
shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25)
days following the close of each taxable quarter prescribed for each taxpayer: Provided,
however, That VAT-registered persons shall pay the value-added tax on a monthly basis.

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of
each taxable quarter within which to file a quarterly return of the amount of his gross sales or
receipts. In the case at bar, the taxable quarter involved was for the period of July 1, 2002 to
September 30, 2002. Applying Section 114 of the 1997 NIRC, respondent has until October
25, 2002 within which to file its quarterly return for its gross sales or receipts [with] which it
complied when it filed its VAT Quarterly Return on October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229 of the
1997 NIRC should start from the payment of tax subject claim for refund. As stated above,
respondent filed its VAT Return for the taxable third quarter of 2002 on October 20, 2002.
Thus, respondent's administrative and judicial claims for refund filed on September 30, 2004
were filed on time because AICHI has until October 20, 2004 within which to file its claim for
refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the
previous filing of an administrative claim for refund prior to the judicial claim. This should not
be the case as the law does not prohibit the simultaneous filing of the administrative and
judicial claims for refund. What is controlling is that both claims for refund must be filed
within the two-year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion
spelled out in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the
CTA Second Division. What the instant petition seeks is for the Court En Banc to view and
appreciate the evidence in their own perspective of things, which unfortunately had already
been considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008
Resolution of the CTA Second Division in CTA Case No. 7065 entitled, "AICHI Forging
Company of Asia, Inc. petitioner vs. Commissioner of Internal Revenue, respondent" are
hereby AFFIRMED in toto. SO ORDERED.22

Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for
Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondent’s
judicial and administrative claims for tax refund/credit were filed within the two-year
prescriptive period provided in Sections 112(A) and 229 of the NIRC.24

Petitioner’s Arguments
Petitioner maintains that respondent’s administrative and judicial claims for tax refund/credit
were filed in violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to
Article 13 of the Civil Code,26 since the year 2004 was a leap year, the filing of the claim for
tax refund/credit on September 30, 2004 was beyond the two-year period, which expired on
September 29, 2004.27 Petitioner further argues that the CTA En Banc erred in applying
Section 114(A) of the NIRC in determining the start of the two-year period as the said
provision pertains to the compliance requirements in the payment of VAT.28 He asserts that it
is Section 112, paragraph (A), of the same Code that should apply because it specifically
provides for the period within which a claim for tax refund/ credit should be made.29
Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the
judicial claim with the CTA were filed on the same day.30 He opines that the simultaneous
filing of the administrative and the judicial claims contravenes Section 229 of the NIRC,
which requires the prior filing of an administrative claim.31 He insists that such procedural
requirement is based on the doctrine of exhaustion of administrative remedies and the fact
that the CTA is an appellate body exercising judicial review over administrative actions of the
CIR.32

Respondent’s Arguments

For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT
for the period July 1, 2002 to September 30, 2002 as a matter of right because it has
substantially complied with all the requirements provided by law.33 Respondent likewise
defends the CTA En Banc in applying Section 114(A) of the NIRC in computing the
prescriptive period for the claim for tax refund/credit. Respondent believes that Section
112(A) of the NIRC must be read together with Section 114(A) of the same Code.34

As to the alleged simultaneous filing of its administrative and judicial claims, respondent
contends that it first filed an administrative claim with the One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center of the DOF before it filed a judicial claim with the
CTA.35 To prove this, respondent points out that its Claimant Information Sheet No.
4970236 and BIR Form No. 1914 for the third quarter of 2002,37 which were filed with the
DOF, were attached as Annexes "M" and "N," respectively, to the Petition for Review filed
with the CTA.38 Respondent further contends that the non-observance of the 120-day period
given to the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal
because what is important is that both claims are filed within the two-year prescriptive
period.39 In support thereof, respondent cites Commissioner of Internal Revenue v. Victorias
Milling Co., Inc.40 where it was ruled that "[i]f, however, the [CIR] takes time in deciding the
claim, and the period of two years is about to end, the suit or proceeding must be started in
the [CTA] before the end of the two-year period without awaiting the decision of the
[CIR]."41 Lastly, respondent argues that even if the period had already lapsed, it may be
suspended for reasons of equity considering that it is not a jurisdictional requirement. 42

Our Ruling

The petition has merit. Unutilized input VAT must be claimed within two years after the close
of the taxable quarter when the sales were made In computing the two-year prescriptive
period for claiming a refund/credit of unutilized input VAT, the Second Division of the CTA
applied Section 112(A) of the NIRC, which states:

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales – Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such sales, except transitional input tax, to
the extent that such input tax has not been applied against output tax: Provided, however,
That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section
108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on the basis of
the volume of sales. (Emphasis supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the
NIRC, which read:

SEC. 114. Return and Payment of Value-Added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title
shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25)
days following the close of each taxable quarter prescribed for each taxpayer: Provided,
however, That VAT-registered persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file
a return and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration: Provided, That only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office and all branches.

SEC. 229. 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 excessively or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty or sum has been paid under protest or
duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner may, even without written
claim therefor, refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid. (Emphasis
supplied.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not
from the close of the taxable quarter when the sales were made.43

The pivotal question of when to reckon the running of the two-year prescriptive period,
however, has already been resolved in Commissioner of Internal Revenue v. Mirant
Pagbilao Corporation,44 where we ruled that Section 112(A) of the NIRC is the applicable
provision in determining the start of the two-year period for claiming a refund/credit of
unutilized input VAT, and that Sections 204(C) and 229 of the NIRC are inapplicable as
"both provisions apply only to instances of erroneous payment or illegal collection of internal
revenue taxes."45 We explained that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms
that unutilized input VAT payments not otherwise used for any internal revenue tax
due the taxpayer must be claimed within two years reckoned from the close of the
taxable quarter when the relevant sales were made pertaining to the input VAT
regardless of whether said tax was paid or not. As the CA aptly puts it, albeit it
erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences from
the close of the taxable quarter when the sales were made and not from the time the input
VAT was paid nor from the time the official receipt was issued." Thus, when a zero-rated
VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer only
has a year to file a claim for refund or tax credit of the unutilized creditable input VAT. The
reckoning frame would always be the end of the quarter when the pertinent sales or
transaction was made, regardless when the input VAT was paid. Be that as it may, and
given that the last creditable input VAT due for the period covering the progress billing of
September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after
September 30, 1996 or, to be precise, on September 30, 1998. Consequently, MPC’s claim
for refund or tax credit filed on December 10, 1999 had already prescribed.

Reckoning for prescriptive period under Secs. 204(C) and 229 of the NIRC
inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the
NIRC which, for the purpose of refund, prescribes a different starting point for the two-year
prescriptive limit for the filing of a claim therefor. Secs. 204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.
– The Commissioner may –

(c) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his 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: Provided, however, That a return filed showing an overpayment shall be considered
as a written claim for credit or refund.

Sec. 229. 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, of any sum alleged to have been
excessively or in any manner wrongfully collected without authority, or of any sum alleged to
have been excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner may, even without a written
claim therefor, refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid.

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of
payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably
too, both provisions apply only to instances of erroneous payment or illegal collection
of internal revenue taxes.
MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which
can be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or
services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-
tax exempt client, resulting in a zero-rated or effectively zero-rated transaction, does not,
standing alone, deprive the taxpayer of its right to a refund for any unutilized creditable input
VAT, albeit the erroneous, illegal, or wrongful payment angle does not enter the equation.

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a
two-year prescriptive period reckoned from the close of the taxable quarter when the
relevant sales or transactions were made pertaining to the creditable input VAT,
applies to the instant case, and not to the other actions which refer to erroneous
payment of taxes.46 (Emphasis supplied.)

In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A)
and 229 of the NIRC in computing the two-year prescriptive period for claiming refund/credit
of unutilized input VAT. To be clear, Section 112 of the NIRC is the pertinent provision for
the refund/credit of input VAT. Thus, the two-year period should be reckoned from the close
of the taxable quarter when the sales were made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim
was timely filed.

Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365
days, and taking into account the fact that the year 2004 was a leap year, petitioner submits
that the two-year period to file a claim for tax refund/ credit for the period July 1, 2002 to
September 30, 2002 expired on September 29, 2004.48

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as


between the Civil Code, which provides that a year is equivalent to 365 days, and the
Administrative Code of 1987, which states that a year is composed of 12 calendar months, it
is the latter that must prevail following the legal maxim, Lex posteriori derogat priori.50 Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative
Code of 1987 deal with the same subject matter – the computation of legal periods. Under
the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year.
Under the Administrative Code of 1987, however, a year is composed of 12 calendar
months. Needless to state, under the Administrative Code of 1987, the number of days is
irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this
reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987,
being the more recent law, governs the computation of legal periods. Lex posteriori derogat
priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the
two-year prescriptive period (reckoned from the time respondent filed its final adjusted return
on April 14, 1998) consisted of 24 calendar months, computed as follows:
Year 1 1st calendar month April 15, 1998 to May 14, 1998

2nd calendar month May 15, 1998 to June 14, 1998

3rd calendar month June 15, 1998 to July 14, 1998

4th calendar month July 15, 1998 to August 14, 1998

5th calendar month August 15, 1998 to September 14, 1998

6th calendar month September 15, 1998 to October 14, 1998

7th calendar month October 15, 1998 to November 14, 1998

8th calendar month November 15, 1998 to December 14, 1998

9th calendar month December 15, 1998 to January 14, 1999

10th calendar month January 15, 1999 to February 14, 1999

11th calendar month February 15, 1999 to March 14, 1999

12th calendar month March 15, 1999 to April 14, 1999

Year 2 13th calendar month April 15, 1999 to May 14, 1999

14th calendar month May 15, 1999 to June 14, 1999

15th calendar month June 15, 1999 to July 14, 1999

16th calendar month July 15, 1999 to August 14, 1999

17th calendar month August 15, 1999 to September 14, 1999

18th calendar month September 15, 1999 to October 14, 1999

19th calendar month October 15, 1999 to November 14, 1999

20th calendar month November 15, 1999 to December 14, 1999

21st calendar month December 15, 1999 to January 14, 2000

22nd calendar month January 15, 2000 to February 14, 2000


23rd calendar month February 15, 2000 to March 14, 2000

24th calendar month March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day
of the 24th calendar month from the day respondent filed its final adjusted return. Hence, it
was filed within the reglementary period.51

Applying this to the present case, the two-year period to file a claim for tax refund/credit for
the period July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence,
respondent’s administrative claim was timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondent’s claim for tax refund/credit for having been filed in
violation of Section 112(D) of the NIRC, which provides that:

SEC. 112. Refunds or Tax Credits of Input Tax. –

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the
submission of the complete documents in support of the application [for tax refund/credit],"
within which to grant or deny the claim. In case of full or partial denial by the CIR, the
taxpayer’s recourse is to file an appeal before the CTA within 30 days from receipt of the
decision of the CIR. However, if after the 120-day period the CIR fails to act on the
application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the
CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on
September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or the
lapse of the 120-day period. For this reason, we find the filing of the judicial claim with the
CTA premature.

Respondent’s assertion that the non-observance of the 120-day period is not fatal to the
filing of a judicial claim as long as both the administrative and the judicial claims are filed
within the two-year prescriptive period52 has no legal basis.

There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of
the said provision states that "any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales." The phrase "within two (2) years x x x apply
for the issuance of a tax credit certificate or refund" refers to applications for refund/credit
filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph
of subsection (D) of the same provision, which states that the CIR has "120 days from the
submission of complete documents in support of the application filed in accordance with
Subsections (A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D)
of the NIRC, which already provides for a specific period within which a taxpayer should
appeal the decision or inaction of the CIR. The second paragraph of Section 112(D) of the
NIRC envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of
the 120-day period; and (2) when no decision is made after the 120-day period. In both
instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it
then, the 120-day period is crucial in filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon
by respondent, we find the same inapplicable as the tax provision involved in that case is
Section 306, now Section 229 of the NIRC. And as already discussed, Section 229 does not
apply to refunds/credits of input VAT, such as the instant case.

In fine, the premature filing of respondent’s claim for refund/credit of input VAT before the
CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and
the October 6, 2008 Resolution of the Court of Tax Appeals are
hereby REVERSED and SET ASIDE. The Court of Tax Appeals Second Division is
DIRECTED to dismiss CTA Case No. 7065 for having been prematurely filed. SO
ORDERED.

DIGEST:

FACTS:

 Aichi forging, a VAT entity filed a claim for refund of input VAT for its zero-rated
sales with the Dept. of Finance One-Stop Inter-Agency Tax Credit and Duty
Drawback Center on Sept 30, 2004.
 On the same date, it filed a Petition for Review with the CTA.
 CTA partially granted the refund by reducing the leaseless claims.
 CIR filed a Motion for Reconsideration insisting that they were filed beyond the
prescriptive period in accordance to Art. 13 that: 1 year = 365 days and that filing an
administrative claim is a condition precedent before a judicial claim can be filed with
the CTA.
 CTA and CTA En Banc denied petition.

ISSUE:
1. W/N the claim was filed with the prescriptive period of 2 year provided under Sec. 112 (A)
NIRC
2. W/N filing an administrative claim is a condition precedent to a judicial claim for refund.

HELD:
1. Yes. Sec. 204 (c) and 229 are applied only in instances of erroneous payment and illegal
collection. Sec. 112 (A) of NIRC applies here. Sec. 31 Chapter VIII Book I of the
Administrative Code of 1987 being the more recent law governing legal period applies
making 1 year = 12 months. The principle of Lex Posterioni Derogati Priori applies. Thus,
since it is filed on exactly Sept. 30, 2004 filing is timely.

2. Yes. Sec. 112 (D) of the NIRC clearly provides that the CIR has 120 days from date of the
submission of the complete documents in support of the application within which to grant or
deny the claim. In case of full or partial denial by the CIR, the recourse is to appeal before
the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-
day period the CIR fails to act on the application for tax refund, the remedy is to appeal the
inaction of the CIR to the CTA within 30 days.

HEDCOR, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.


G.R. No. 207575 July 15, 2015 SERENO, CJ:

This is a Petition for Review filed by Hedcor, Inc. (petitioner) assailing the Court of Tax
Appeals (CTA) en bane Decision 1dated 1 October 2012 and Resolution 2dated 28 May 2013
in C.T.A.EB No. 785. The CT A en bane affirmed the CT A Second Division Resolutions
dated 19 January 2011 3and 12 May 2011 4of the in C.T.A. Case No. 8129. The latter
granted the Motion to Dismiss filed by the Commissioner of Internal Revenue (CIR) and
dismissed the Petition for being filed out of time.

THE FACTS

The facts, as culled from the records, are as follows:

Petitioner is a domestic corporation primarily engaged in the operation of hydro-electric


power plants and the generation of hydro-electric Power. It is a value-added tax (VAT) payer
duly registered with the Bureau of Internal Revenue (BIR). Petitioner alleged that in the
course of operating its business, it purchased domestic goods and services, as well as
capital goods, and paid the corresponding VAT as part of the purchase price. For the period
covering taxable year 2008, its purchases amounted to ?35,467,773.00 on which the
corresponding input VAT was ₱4,256, 132.80. However, after deductions of output tax due
from the accumulated input tax, petitioner still had an unused or excess input VAT in the
total amount of ₱4,217,955.84.

Being in the business of generating of renewable sources of energy through hydro power,
petitioner maintained that it was entitled to zero-percent (0%) VAT, as the sales of electric
power to National Power Corporation (NPC) qualified as zero-rated sales pursuant to
Section 108(B) (7) of the National Internal Revenue Code (NIRC). Thus, on 28 December
2009, petitioner filed with the BIR an administrative claim for the refund of excess and
unused input VAT in the amount of ?4,217,955.84 for the second quarter of taxable year
2008. On 23 March 2010, it admittedly received from the BIR a Letter of Authority or request
for the presentation of records.5Nevertheless, petitioner filed on 6 July 2010 a Petition for
Review docketed as CT A Case No. 8129 because of its apprehension that the two (2) years
provided by law to file a judicial claim would lapse on 21 July 2010 in view of Atlas. 6
Petitioner filed on 29 October 2010 a Motion for Leave to File Supplemental Petition for
Review. In its motion, it manifested that it had submitted to the BIR on 20 September 2010
the last set of supporting documents related to its administrative claim for a refund. The
motion was granted by the CT A Division, which then required petitioner to file the
Supplemental Petition for Review and respondent, a Supplemental Answer. 7
Meanwhile, respondent CIR filed a Motion to Dismiss on 8 November 2010 on the ground of
lack of jurisdiction. The CTA Second Division granted the motion and dismissed the Petition
for being filed out of time. On appeal, following this Court's disposition in Aichi,8 the CTA en
bane denied the Petition and ruled that the judicial claim had been filed out of time. It held
that, under Section 112( C) of the NIRC, the 120-day period for the BIR to act on the claim
should be reckoned from 28 December 2009 or the date of filing of petitioner's administrative
claim with the tax agency. Counting 120 days from 28 December 2009, the BIR had until 27
April 2010 to decide the administrative claim. Thereafter, petitioner had until 27 May 2010 or
30 days to appeal to the CTA either the decision or the Inaction of the BIR. Thus, the filing of
the Petition for Review with the CTA Division on 6 July 2010 was clearly beyond the period
allowed by law.9 The Motion for Reconsideration filed by petitioner was also denied by the
CTA en bane for lack of merit. 10 Hence, this Petition.

THE ISSUES

Petitioner's appeal is anchored on the following grounds:

1. That the CT A gravely erred and has no authority to deviate from the clear and
literal meaning of Section 112 (D) of the NIRC by counting the 120-day period from
the filing of the administrative claim and not from the last submission of complete
documents in the administrative proceedings with the BIR;
2. That the CTA gravely erred when it dismissed CTA Case No. 8129/CTA EB No.
785 and granted respondent's motion to dismiss on ground of insufficiency of
evidence although trial proceedings have not even started; and
3. That the CT A gravely erred when it dismissed its petition for insufficiency of
evidence and on ground of prescription when there is no such allegation in the
pleading which would support such conclusion. 11

THE COURT'S RULING

The Petition lacks merit.

The requirements for a taxpayer be able to claim a refund or credit of its input tax are found
in Section 112 of the NIRC, as amended, the relevant portions of which read:

Sec. 112. Refunds or Tax Credits of Input Tax.-

(C) Period within which Refund or Tax Credit of Input Taxes shall be made. – In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsection (A) hereof. In
case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part
of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day period, appeal the decision or the
unacted claim with the Court of Tax Appeals.

Pursuant to Section 112(C) of the NIRC, respondent had 120 days from the date of
submission of complete documents in support of the application within which to decide on
the administrative claim. Thereafter, the taxpayer affected by the CIR' s decision or inaction
may appeal to the CTA within 30 days from the receipt of the decision or from the expiration
of the 120-day period. Compliance with both periods is jurisdictional, considering that the 30-
day period to appeal to the CTA is dependent on the 120-day period. The period of 120 days
is a prerequisite for the commencement of the 30-day period to appeal. Strict compliance
with the 120+30 day period is necessary for a claim for a refund or credit of input VAT to
prosper. An exception to that mandatory period was, however, recognized in San
Roque 12 during the period between 10 December 2003, when BIR Ruling No. DA-489-03
was issued, and 6 October 2010, when the Court promulgated Aichi declaring the 120+ 30
day period mandatory and jurisdictional, thus reversing BIR Ruling No.DA-489-03.

Since the claim of petitioner fell within the exception period, it did not have to observe the
120+30 day mandatory period under the San Roquedoctrine. The present case, though, is
not a case of premature filing.

The CTA here found that the judicial claim was filed beyond the mandatory 120+30 d.ay
prescriptive period; hence, it did not acquire jurisdiction over the case. Petitioner is similarly
situated as Philex, which is also a case of late filing:

Unlike San Roque and Taganito, Philex's case is not one of premature filing but of late filing.
Philex did not file any petition with the CTA within the 120-day period. Philex did not also file
any petition with the CTA within 30 days after the expiration of the 120-day period. Philex
filed its judicial claim long after the expiration of the 120-day period, in fact 426 days after the
lapse of the 120-day period. In any event, whether governed by jurisprudence before, during,
or after the Atlas case, Philex's judicial claim will have to be rejected because of late filing.
Whether the two-year prescriptive period is counted from the date of payment of the output
VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales
attributable to the input VAT were made following the Mirant and Aichi doctrines, Philex's
judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of
the Commissioner on Philex's claim during

The 120-day period is, by express provision of law, "deemed a denial" of Philex's claim.
Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the
CTA. Philex's failure to do so rendered the "deemed a denial" decision of the Commissioner
final and inappealable.The right to appeal to the CT A from a decision or "deemed a denial"
decision of the Commissioner is merely a statutory privilege, not a constitutional right. The
exercise of such statutory privilege requires strict compliance with the conditions attached by
the statute for its exercise. Philex failed to comply with the statutory conditions and must
thus bear the consequences.

Philex's situation is not a case of premature filing of its judicial claim but of late filing, indeed
very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which
means non exhaustion of the 120-day period for the Commissioner to act on an
administrative claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because
Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day
period following the expiration of the 120-day period. In fact, Philex filed its judicial claim 426
days after the lapse of the 30-day period. 13 (Emphasis in the original)

Considering that the administrative claim was filed on 28 December 2009, petitioner had
only until 27 May 2010 (counting 120+30 days) to appeal to the CTA the decision or inaction
of the BIR. Petitioner belatedly filed its judicial claim with the CTA on 6 July 2010.

Petitioner insists, though, that it filed on 20 September 2010 the complete documents
supporting its administrative claim; the 120-day period should then be counted from that
date. To prove its assertion, it attached to the Supplemental Petition for Review a
Transmittal Letter marked as Annex "A." 14 Based on this letter, petitioner contends that its
judicial claim was filed within the allowable period set by law.

We do not agree.
The Court finds that the Transmittal Letter submitted by petitioner is not a substantial
submission that would warrant a change in the reckoning date for the 120-day period for the
BIR to act on the claim for refund. As aptly found by the CT A, the letter does not even bear
any stamp marking that would show that it was legitimately received by the BIR.15 The only
proof of receipt was a signature, which was not even identified by petitioner.

To allow petitioner's allegations to prevail would set a dangerous precedent, as the


reckoning period for the 120 days would be at the mercy of taxpayers.1âwphi1 They will then
submit complete supporting documents even after the two-year prescriptive period for filing
an administrative claim has lapsed. This is obviously not the intention of the law.

It is worth emphasizing at this point that the burden of proving entitlement to a tax refund is
on the taxpayer. It is logical to assume that in order to discharge this burden, the law intends
the filing of an application for a refund to necessarily include the filing of complete supporting
documents to prove entitlement for the refund. Otherwise, the mere filing of an application
without any supporting document would be as good as filing a mere scrap of paper. Besides,
the taxpayer was already given two (2) years to determine its refundable taxes and complete
the documents necessary to prove its claim. The alleged completion of supporting
documents after the filing of an application for an administrative claim - and worse, after the
filing of a judicial claim - is tantamount to legal maneuvering, which this Court will not
tolerate.

What is peculiar to this case is that prior to the alleged completion of its supporting
documents, petitioner had already filed its judicial claim with the CTA.

Petitioner contends that pursuant to Revenue Memorandum Circular (RMC) No. 49-2003,
the 120 day period must be counted from receipt of the complete documents.

Granting arguendo that the 120-day period should commence to run only upon receipt of the
Transmittal Letter, petitioner's judicial claim must still fail. RMC No. 49-2003 provides:

A-18 xxx

For claims to be filed by claimants with the respective investigating/processing office of the
administrative agency, the same shall be officially received only upon submission of
complete documents.

If we follow the assumptions of petitioner, its administrative claim would only be considered
as officially received on 20 September 2010, when it allegedly filed its complete supporting
documents. By that time, the period for filing an administrative application for a refund would
have already prescribed on 30 June 2010, or two (2) years from the close of the taxable
quarter when the relevant sales were made.

To reiterate, the right to appeal is a mere statutory privilege that requires strict compliance
with the conditions attached by the statute for its exercise. Like Phi/ex, petitioner failed to
comply with the statutory conditions and must therefore bear- the consequences. It has
already lost its right to claim a refund or credit of its alleged excess input VAT attributable to
zero-rated or effectively zero-rated sales for the second quarter of taxable year 2008 by
virtue of its own failure to observe the prescriptive period.

WHEREFORE, premises considered, the instant Petition is DENIED. SO ORDERED.

NO DIGEST
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. AIR LIQUIDE PHILIPPINES,
INC., Respondent. G.R. No. 210646 July 29, 2015
MENDOZA, J.:

This is a petition for review on certiorari seeking to reverse and set aside the July 29, 2013
Decision1 and the December 17, 2013 Resolution2 of the Court of Tax Appeals En
Banc (CTA En Banc), in CTA EB Case No. 943, which reversed and set aside the July 3,
2012 Decision3 and the September 24, 2012 Resolution of the Court of Tax Appeals Second
Division (CTA Division), in a case involving an application for issuance of a tax credit
certificate for unutilized input VAT.

Respondent Air Liquide Philippines, Inc. (ALPI) is a domestic corporation registered with the
Bureau of Internal Revenue (BIR) as a Value- Added Tax (VAT) entity. It sells chemical
products and renders certain related services to the Philippine Economic Zone
Authority (PEZA) enterprises. On January 22, 2008, ALPI filed with the BIR its Quarterly VAT
Return for the 4th quarter of 2007.

Subsequently, on December 23, 2009, ALPI filed with petitioner Commissioner of Internal
Revenue (CIR), through BIR Revenue District Office (RDO) No. 121, an application for
issuance of a tax credit certificate for its unutilized input VAT in the amount of
P23,254,465.64 attributable to its transactions with PEZA-registered enterprises for the
4th quarter of 2007.

On December 29, 2009, or only six (6) days later, ALPI filed its petition for review with the
CTA Division, without awaiting the resolution of its application for tax credit certificate or the
expiration of the 120-day period under Section 112(C) of the National Internal Revenue
Code (NIRC).

CTA Division Ruling

In its July 3, 2012 decision, the CTA Division, instead of ruling on the merits, dismissed the
judicial claim for VAT refund for lack of jurisdiction. The CTA Division noted that the CIR was
given a period of one hundred twenty (120) days within which to either grant or deny the
claim for VAT refund or credit. ALPI, however, filed its judicial claim before the CTA only 6
days after the filing of the administrative claim for tax credit with the CIR. The failure of ALPI
to observe the compulsory 120-day period warranted the dismissal of its petition. The
decretal portion of the decision declared:

WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED
for lack of jurisdiction.

SO ORDERED.

ALPI moved for reconsideration, but the motion was denied by the CTA Division in its
September 24, 2012 Resolution. Aggrieved, ALPI filed a petition for review with the CTA En
Banc.

CTA En Banc Ruling

On July 29, 2013, the CTA En Banc rendered the assailed decision and reversed the ruling
of the CTA Division, citing the consolidated cases of tax credit certificate for unutilized input
VAT. CIR v. San Roque, CIR v. Taganito and CIR v. Philex4 (San Roque). In these cases,
the Court recognized the legal effects of BIR Ruling No. DA-489-03, which stated that the
"taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek
judicial relief with the CTA by way of Petition for Review." Thus, all taxpayers could rely on
BIR Ruling No. DA-489-03 from the time of its issuance on December 10, 2003 up to its
reversal by this Court in CIR v. Aichi5 (Aichi) on October 6, 2010, where it ruled that the
120+30-day period was mandatory and jurisdictional.

Consequently, as ALPI filed its judicial claim for VAT credit on December 29, 2009, then it
was covered by BIR Ruling No. DA-489-03. ALPI need not wait for the lapse of the 120-day
period before it could seek judicial relief. The CTA En Banc remanded the case to the CTA
Division for the determination of the propriety of the VAT refund or credit claim. The
dispositive portion of the assailed decision stated:

WHEREFORE, premises considered, the instant Petition for Review filed on October 25,
2012 is hereby GRANTED. The assailed Decision dated July 3, 2012 and the assailed
Resolution dated September 24, 2012 promulgated by CTA-Second Division, which
dismissed the Petition for Review docketed as CTA Case No. 8017, are hereby REVERSED
and SET ASIDE.

Accordingly, CTA Case No. 8017 is hereby REMANDED to the CTA-Second Division for the
proper and immediate determination of the propriety of the claim for refund or tax credit
certificate. Thereafter, the CTA-Second Division shall make a declaration of the specific
amount of refund or tax credit certificate to which petitioner is entitled to, if any. SO
ORDERED.

The CIR filed its motion for reconsideration, but it was denied by the CTA En Banc in its
December 17, 2013 Resolution. Hence, this present petition.

ISSUE

WHETHER OR NOT THE CTA DIVISION ACQUIRED JURISDICTION OVER ALPI’S


PETITION FOR REVIEW.

The CIR contends that the CTA Division did not acquire jurisdiction over ALPI’s petition
because of its failure to observe the 120+30 day rule in filing a judicial claim for refund or tax
credit certificate. Moreover, ALPI could not benefit from the consolidated cases of San
Roque. In those cases, the taxpayers relied in good faith on BIR Ruling No. DA-489-03
which allowed the seeking of judicial relief without waiting for the lapse of the 120-day
period. In the present case, ALPI did not assert and invoke BIR Ruling No. DA-489-03 in its
petitions before the CTA Division and the CTA En Banc. Hence, it cannot be said that ALPI
was misled in relying on BIR Ruling No. DA-489-03 in its premature filing before the CTA
Division.

In its Comment,6 filed on July 28, 2014, ALPI made a survey of recent Court decisions that
applied the San Roque case. It argued that in Republic v. GST Philippines,7 CIR v. Visayas
Geothermal,8 Team Energy Corp. v. CIR,9Proctor & Gamble v. CIR,10 and Visayas
Geothermal v. CIR,11 the Court applied BIR Ruling No. DA-489-03 because the judicial
claims for VAT refund in these cases were filed within the interim period from December 10,
2003 to October 6, 2010; and yet, the taxpayer claimants did not expressly state that they
relied or claimed to be misled by the said BIR Ruling. Thus, ALPI concluded there was no
need to specifically invoke BIR Ruling No. DA-489-03 before a taxpayer could benefit from it.

In its Reply,12 filed on December 3, 2014, the CIR asserted that from the start, a taxpayer
must expressly allege and prove that it was indeed misled by the provision of BIR Ruling No.
DA-489-03; and that it could not be invoked as a mere afterthought. This was in keeping with
the well-settled rule that tax credit or refund is strictly construed against the taxpayer.

The Court’s Ruling


The petition is bereft of merit.

BIR Ruling No. DA-489-03, issued on December 10, 2003, stated that the taxpayer-claimant
need not wait for the lapse of the 120-day period before it could seek judicial relief with the
CTA by way of a petition for review. This rule, however, was nullified in Aichi, promulgated
on October 6, 2010. Aichi emphasized that the failure to await the decision of the
Commissioner or the lapse of 120-day period prescribed in Section 112(C) amounted to a
premature filing.

To elucidate on the seemingly conflicting doctrines, San Roque clarified, once and for all,
that BIR Ruling No. DA-489-03 was a general interpretative rule. Thus, all taxpayers can rely
on the said BIR ruling from the time of its issuance on December 10, 2003 up to its reversal
by this Court in Aichi on October 6, 2010, where it was held that the 120+30-day periods are
mandatory and jurisdictional. In other words, the Aichi ruling was prospective in application.

In the present case, ALPI can benefit from BIR Ruling No. DA-489-03. It filed its judicial
claim for VAT credit certificate on December 29, 2009, well within the interim period from
December 10, 2003 to October 6, 2010, so there was no need to wait for the lapse of 120
days prescribed in Section 112 (c) of the NIRC.

The CIR asserted, however, that ALPI cannot invoke the exception from the San
Roque Ruling as it did not particularly allege BIR Ruling No. D-489-03 in its petition before
the CTA. Thus, it poses a valid question: Is there a need for a taxpayer to specifically invoke
BIR Ruling No. DA-489-03 to benefit from the same?

The Court answers in the negative. To reiterate, San Roque, held that BIR Ruling No. DA-
489-03 was a general interpretative rule because it was a response to a query made, not by
a particular taxpayer, but by a government agency tasked with processing tax refunds and
credits. Thus, it applies to all taxpayers alike, and not only to one particular taxpayer.

The Court agrees with ALPI in its survey of cases which shows that BIR Ruling No. DA-489-
03 was applied even though the taxpayer did not specifically invoke the same. As long as
the judicial claim was filed between December 10, 2003 and October 6, 2010, then the
taxpayer would not be required to wait for the lapse of 120-day period. This doctrine has
been consistently upheld in the recent decisions of the Court.13 On the other hand, in Nippon
Express v. CIR,14 Applied Food Ingredients v. CIR15 and Silicon Philippines v. CIR, 16 the
taxpayer did not benefit from BIR Ruling No. DA-489-03 because they filed their precipitate
judicial claim before December 10, 2003.

Indeed, BIR Ruling No. DA-489-03 is a general interpretative law and it applies to each and
every taxpayer.1âwphi1 To subscribe to the contention of the CIR would alter the Court's
ruling in San Roque. It will lead to an unreasonable classification of the beneficiaries of BIR
Ruling No. DA-489-03 and further complicate the doctrine. ALPI cannot be faulted for not
specifically invoking BIR Ruling No. DA-489-03 as the rules for its application were not
definite until the San Roque case was promulgated.

In the furtherance of the doctrinal pronouncements in San Roque, the better approach would
be to apply BIR Ruling No. DA-489-03 to all taxpayers who filed their judicial claim for VAT
refund within the period of exception from December 10, 2003 to October 6, 2010.
Consequently, this case must be remanded to the CT A Division for the proper determination
of the refundable or creditable amount due to ALPI, if any.

WHEREFORE, the petition is DENIED. The July 29, 2013 Decision and the December 17,
2013 Resolution of the Court of Tax Appeals En Banc in CTA EB Case No. 943
are AFFIRMED in toto. Accordingly, the case is REMANDED to the CT A Second Division
for the proper determination of the refundable or creditable amount due to the respondent, if
any. SO ORDERED.

DIGEST:

FACTS:

 Respondent Air Liquide Philippines, Inc. (ALPI) is a domestic corporation registered with
the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) entity. It sells
chemical products and renders certain related services to the Philippine Economic Zone
Authority (PEZA) enterprises. On January 22, 2008, ALPI filed with the BIR its
Quarterly VAT Return for the 4th quarter of 2007.

 On December 23, 2009, ALPI filed with petitioner Commissioner of Internal Revenue
(CIR), through BIR Revenue District Office (RDO) No. 121, an application for
issuance of a tax credit certificate for its unutilized input VAT in the amount of
P23,254,465.64 attributable to its transactions with PEZA-registered enterprises for
the 4th quarter of 2007.

 Only six (6) days later, ALPI filed its petition for review with the CTA Division,
without awaiting the resolution of its application for tax credit certificate or the
expiration of the 120-day period under Section 112(C) of the National Internal
Revenue Code.

 The CTA Division, instead of ruling on the merits, dismissed the judicial claim for VAT
notedthe
either
claim
with refund
that
grantthe
before
dismissal CIR.
of or for
CIR
the
itsThe lack
deny
CTA theof
was
failure jurisdiction.
given
claim
only
petition. afor
of6ALPI
days to The
period
VAT
after CTA
ofrefund
one
observe
the Division
hundred
or
filing
the of thetwenty
credit. ALPI,(120)
compulsory days
however,
administrative
120-day withinitswhich
filedfor
period
claim tothe
judicial
warranted
tax credit

 ALPI moved for reconsideration, but the motion was denied by the CTA Division.
Aggrieved, ALPI filed a petition for review with the CTA En Banc.

 The CTA En Banc rendered the assailed decision and reversed the ruling of the CTA
Division, citing the consolidated cases of CIR v. San Roque, CIR v. Taganito and CIR v.
Philex (San Roque). In these cases, the Court recognized the legal effects of BIR Ruling
No. DA-489-03, which stated that the "taxpayer-claimant need not wait for the lapse of
the 120-day period before it could seek judicial relief with the CTA by way of Petition for
Review." CTA Case No. 8017 is hereby REMANDED to the CTA-Second Division for
the proper and immediate determination of the propriety of the claim for refund or tax
credit certificate. Thereafter, the CTA-Second Division shall make a declaration of the
specific amount of refund or tax credit certificate to which petitioner is entitled to, if any.
ISSUE:
Whether or not the CTA Division acquired jurisdiction over Respondent’s Petition for
Review?

RULING:

Petition is denied, the case is remanded to the CTA Second Division for the proper
determination of the refundable or creditable amount due to the respondent, if any.

To elucidate on the seemingly conflicting doctrines, San Roque clarified, once and for
all, that BIR Ruling No. DA-489-03 was a general interpretative rule. Thus, all taxpayers can
rely on the said BIR ruling from the time of its issuance on December 10, 2003 up to its
reversal by this Court in Aichi on October 6, 2010, where it was held that the 120+30-day
periods are mandatory and jurisdictional. In other words, the Aichi ruling was prospective in
application.

In the present case, ALPI can benefit from BIR Ruling No. DA-489-03. It filed its
judicial claim for VAT credit certificate on December 29, 2009, well within the interim
period from December 10, 2003 to October 6, 2010, so there was no need to wait for the lapse
of 120 days prescribed in Section 112 (c) of the NIRC.

To reiterate, San Roque, held that BIR Ruling No. DA-489-03 was a general
interpretative rule because it was a response to a query made, not by a particular taxpayer, but
by a government agency tasked with processing tax refunds and credits. Thus, it applies to all
taxpayers alike, and not only to one particular taxpayer.

In the furtherance of the doctrinal pronouncements in San Roque, the better approach
would be to apply BIR Ruling No. DA-489-03 to all taxpayers who filed their judicial claim for
VAT refund within the period of exception from December 10, 2003 to October 6, 2010.
Consequently, this case must be remanded to the CTA Division for the proper determination of
the
refundable or creditable amount due to ALPI, if any
MIRAMAR FISH COMPANY, INC., Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent. G.R. No. 185432 June 4, 2014
PEREZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to reverse and set aside the 18 November 2008 Decision1 of the Court of Tax Appeals
(CTA) En Banc in C.T.A. EB No. 375 affirming in toto the 22 October 2007 Decision and the 19
February 2008 Resolution of the Second Division of the CTA (CTA in Division) in C.T.A. Case
No." 6905, which denied due course and dismissed petitioner's claim for the issuance of a tax
credit certificate (TCC) in its favor representing the alleged unutilized and/or unapplied input
Value Added Tax (VAT) on purchases of goods and services attributable to zero-rated sales in
the amount of ₱12,741,136.81 for taxable years 2002 and 2003.

The Facts

The undisputed factual antecedents of the case, as stipulated by the parties,2 are as follows:
Petitioner is a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, with principal office located at Brgy. Recodo, Zamboanga City. It is
registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer in accordance with
Section 236 of the National Internal Revenue Code (NIRC) of 1997, as amended, with VAT
Registration No. 01-930-001570-V and Tax Identification No. (TIN) 005-847-661. On the other
hand, respondent is the duly appointed Commissioner of Internal Revenue empowered to
perform the duties of said office including, among others, the power to decide, approve and
grant refunds or tax credits of erroneously or excessively paid taxes. On 4 June 2002, petitioner
was registered with the Board of Investments (BOI) as a new export producer of canned tuna
and canned pet food with non-pioneer status, having been issued BOI Certificate of Registration
No. EP 2002-077. Petitioner filed its Quarterly VAT Returns (BIR Form No. 2550Q) for taxable
year 2002 with the BIR on the following dates:

Date of Filing of Quarterly VAT


Particular Quarter
Return

First Quarter 25 April 2002

Second Quarter 8 July 2002

Third Quarter 22 October 2002

Fourth Quarter 27 January 2003

The administrative claim for refund in the form of a TCC of petitioner’s alleged unutilized input
VAT in the amount of ₱6,751,751.65 for taxable year 2002 was filed with the BIR on 24
February 2003.3 Petitioner filed its Quarterly VAT Returns (BIR Form No. 2550Q) for taxable
year 2003 with the BIR on the following dates:
Date of Filing of Quarterly VAT
Particular Quarter
Return

First Quarter 10 April 2003

Second Quarter 16 July 2003

Third Quarter 17 October 2003

Fourth Quarter 26 January 2004

Its administrative claim for refund in the form of a TCC of the alleged unutilized input VAT in the
amount of ₱5,895,912.38 for taxable year 2003 was thereafter filed on 15 March 2004.4

Subsequently, an administrative claim for the refund or issuance of a TCC in the aggregate
amount of ₱12,741,136.81 allegedly representing unutilized or unapplied VAT input taxes
attributable to petitioner’s zero rated transactions or its export sales for taxable years 2002 and
2003, was filed on 25 March 2004.5

Consequently, since no final action has been taken by respondent on petitioner’s various
administrative claims, the latter filed a Petition for Review before the CTA on 30 March 2004
docketed as C.T.A. Case No. 6905.

The Ruling of the CTA in Division

In a Decision dated 22 October 2007,6 the CTA in Division denied due course and dismissed
petitioner’s claim for the issuance of a TCC on the sole ground that the sales invoices presented
in support thereof did not comply with the invoicing requirements provided for under Section
1137 of the NIRC of 1997, as amended, and Section 4.108-1 of Revenue Regulations (RR) No.
7-95.8 The court a quo explained that petitioner’s failure to indicate that it is a VAT-registered
entity and/or to imprint the word "zero rated" on the subject invoices or receipts were fatal to its
claim; hence, it was left with no other recourse but to deny petitioner’s claim. Having rendered
such ruling, the CTA in Division decided not to pass upon other incidental issues raised before it
for being moot.9

On 19 February 2008, the CTA in Division denied petitioner’s Motion for Reconsideration for
lack of merit.

Aggrieved, respondent appealed to the CTA En Banc by filing a Petition for Review under
Section 18 of Republic Act (RA) No. 1125, as amended by RA No. 9282, on 2 April 2008,
docketed as C.T.A. EB No. 375.

The Ruling of the CTA En Banc

The CTA En Banc ruled in its 18 November 2008 Decision,10 that the contentions raised by
petitioner are mere reiterations of its arguments contained in its Motion for Reconsideration of
the 22 October 2007 Decision in C.T.A. Case No. 6905. Simply put, it dismissed the petition and
affirmed in its entirety the subject Decision and Resolution of the CTA in Division considering
that it found no cogent reason and justification to disturb the findings and conclusion spelled out
therein.

Consequently, this Petition for Review wherein petitioner seeks the reversal of the
aforementioned Decision for being not in accord with the law and the applicable Decisions of
this Court, constituting a departure from the accepted and usual course of judicial proceedings
as to call for an exercise of the power of supervision, based on the following grounds:

A. PETITIONER HAS COMPLIEDWITH THE STATUTORY REQUIREMENTS FOR


CLAIMING A REFUND OF EXCESS AND UNUTILIZED INPUT VAT UNDER SECTION
112(A), IN RELATION TO SECTION 106(A)(2)(A)(1), TAX CODE. COMPLIANCE WITH
THE INVOICING REQUIREMENTS UNDER THE TAX CODE AND RR NO. 7-95 IS
NOT A CONDITION PRECEDENT FOR CLAIMING A REFUND OF EXCESS AND
UNUTULIZED INPUT VAT UNDER SECTION 106(A)(2)(A)(1), IN RELATION TO
SECTION 112(A) OF THE TAX CODE.

B. THERE IS NOTHING IN THE TAX CODE AND IN RR NO. 7-95 WHICH STATES
THAT FAILURE TO COMPLY WITH THE BIR’S INVOICING REQUIREMENTS WILL
NULLIFY THE VAT ZERO-RATING OF AN EXPORT SALE UNDER SECTION
106(A)(2)(A)(1) OF THE TAX CODE.

C. BASED ON THE SUPREME COURT’S RULING IN INTEL CASE, FAILURE TO


INDICATE THE WORDS "TIN-V" AND "ZERORATED" ON THE INVOICES COVERING
EXPORT SALES IS NOT FATAL TO A TAXPAYER’S CLAIM FOR REFUND OF
EXCESS INPUT VAT UNDER SECTION 112(A), IN RELATION TO SECTION
106(A)(2)(A)(1) OF THE TAX CODE.

D. REVENUE MEMORANDUM CIRCULAR NO. 42-03 IS INVALID BECAUSE IT


OVERRIDES THE CLEAR PROVISION OF THE TAX CODE.11

The Issue

The issue for this Court’s consideration is whether or not petitioner is entitled to a TCC in the
amount of ₱12,741,136.81 allegedly representing its excess and unutilized input VAT for the
taxable years 2002 and 2003, in accordance with the provisions of the NIRC of 1997, as
amended, other pertinent laws, and applicable jurisprudential proclamations.

Our Ruling

In view of the recent pronouncements made in the consolidated cases of Commissioner of


Internal Revenue v. San Roque Power Corporation,12 which has finally settled the issue on
proper observance of the prescriptive periods in claiming for refund of creditable input tax due or
paid attributable to any zero-rated or effectively zero-rated sales, we find a need for this Court to
review the factual findings of the CTA in order to attain a complete determination of the issue
presented.

At the outset, this Court is not unaware that in a petition for review on certiorari under Rule 45 of
the Rules of Court, only questions of law may be raised.13 The Court is not a trier of facts and
does not normally undertake the re-examination of the evidence presented by the contending
parties during the trial of the case considering that the findings of facts of the [CTA] are
conclusive and binding on the Court14 – and they carry even more weight when the [CTA En
Banc] affirms the factual findings of the trial court.15 However, this Court had recognized several
exceptions to this rule,16 including instances when the appellate court manifestly overlooked
relevant facts not disputed by the parties, which, if properly considered, would justify a different
conclusion.

Records of this case reveal that the CTA in Division in C.T.A. Case No. 6905 merely focused on
the strict compliance with the invoicing and accounting requirements set forth under Sections
113 and 237 of the NIRC of 1997, as amended, in relation to Section 4.108-1 of Revenue
Regulations (RR) No. 7-95. These same findings were adopted and affirmed in toto by the CTA
En Banc in the assailed 18 November 2008 Decision.17

While the invoicing requirements is a valid issue, we find it imperative to first and foremost
determine whether or not the CTA properly acquired jurisdiction over petitioner’s claim covering
taxable years 2002 and 2003, taking into consideration the timeliness of the filing of its judicial
claim pursuant to Section 112 of the NIRC of 1997, as amended, and consistent with the
pronouncements made in the San Roque case. Clearly, the claim of petitioner for the TCC can
proceed only upon compliance with the jurisdictional requirement.

Section 7 of RA No. 1125,18 which was thereafter amended by RA No. 9282,19 clearly defined
the appellate jurisdiction of the CTA:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction
to review by appeal, as herein provided.

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,
or other matters arising under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue;20(Emphasis supplied)

Relative thereto, Section 11 of the same law prescribes how the said appeal should be taken, to
wit:

Section 11. Who may appeal; effect of appeal. – Any person, association or corporation
adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of
Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court
of Tax Appeals within thirty days after the receipt of such decision or ruling.21 (Emphasis and
underscoring supplied)

The timeliness in the administrative and judicial claims can be found in Section 112 of the NIRC
of 1997, as amended. It reads:

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-rated or Effectively Zero-rated Sales.– Any VAT registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid at tributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: x x x

(D)22 Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases,
the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsections (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty-day period, appeal the decision or the unacted claim
with the Court of Tax Appeals.

As earlier stated, the proper interpretation of the above-quoted provision was finally settled in
the San Roque case23 by this Court sitting En Banc. The relevant portions of the discussion
pertinent to the focal issue in the present case are quoted hereunder as follows:

To repeat, a claim for tax refund or credit, like a claim for tax refund exemption, is construed
strictly against the taxpayer. One of the conditions for a judicial claim of refund or credit under
the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus,
strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether
before, during, or after the effectivity of the Atlas doctrine, except for the period from the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi
doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and
jurisdictional.24(Emphasis supplied)

In Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue,25 the Second


Division of this Court, in applying therein the ruling in the San Roque case, provided a Summary
of Rules on Prescriptive Periods Involving VAT as a guide for all parties concerned, to wit:

We summarize the rules on the determination of the prescriptive period for filing a tax refund or
credit of unutilized input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of
the taxable quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in
support of the administrative claim within which to decide whether to grant a refund or
issue a tax credit certificate. The 120-day period may extend beyond the two-year period
from the filing of the administrative claim if the claim is filed in the later part of the two
year period. If the 120-day period expires without any decision from the CIR, then the
administrative claim may be considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the
CIR’s decision denying the administrative claim or from the expiration of the 120-day
period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, as an exception to the mandatory and jurisdictional 120+30 day
periods.26 (Emphasis supplied)

Certainly, it is evident from the foregoing jurisprudential pronouncements that a taxpayer-


claimant only had a limited period of thirty (30) days from the expiration of the 120-day period of
inaction of the Commissioner of Internal Revenue (CIR) to file its judicial claim with the CTA,
with the exception of claims made during the effectivity of BIR Ruling No. DA-489-03 (from 10
December 2003 to 5 October 2010).27 Failure to do so, the judicial claim shall prescribe or be
considered as filed out of time.

Applying the foregoing discussion in the case at bench, although it appears that petitioner has
indeed complied with the required two-year period within which to file a refund/tax credit claim
with the BIR by filing its administrative claims on 24 February 2003 and 25 March 2004 (within
the period from the close of the taxable quarters for the years 2002 and 2003, respectively,
when the relevant sales or purchases were made), this Court finds that petitioner’s
corresponding judicial claim insofar as to the four quarters of taxable year 2002 was filed
beyond the 30-day period, detailed hereunder as follows:

Last day of the 120-day period Last day of


Filing
Filing date of the under the
Taxable year date of
administrative Section 112(D) from 30-day period
(close the
claim the date of submission to
of taxable Petition
(within the 2-year of complete documents judicially
quarters) for
period) in support of its appeal
Review
application said inaction

Taxable year
2002
1st Quarter
(31 March 2002)
2nd Quarter
30
(30 June 2002) 24 February
24 June 2003 24 July 2003 March
3rd Quarter 200328
2004
(30 September
2002)
4th Quarter
(31 December
2002)

Taxable year
2003 30
1st Quarter 22 August
23 July 2004 March
(31 March 2003) 25 March 200429 2004
2004
2nd Quarter
(30 June 2003)
3rd Quarter
(30 September
2003)
4th Quarter
(31 December
2003)

Section 112(D) specifically states that in case of failure on the part of the respondent to act on
the application within the 120-day period prescribed by law, petitioner only has thirty (30) days
after the expiration of the 120-day period to appeal the unacted claim with the CTA. Since
petitioner’s judicial claim for the aforementioned quarters for taxable year 2002 was filed before
the CTA only on 30 March 2004,30 which was way beyond the mandatory 120+30 days to seek
judicial recourse, such non-compliance with the mandatory period of thirty (30) days is fatal to
its refund claim on the ground of prescription.

Distinctly, in its attempt to justify the timeliness of its judicial claim covering taxable year 2002,
petitioner made it appear in its Letter dated 25 March 2004 that there has been an amendment
on its administrative claim covering taxable year 2002. It explained:

We wish to make it clear that this letter, insofar as the 2002 claim is concerned, amends the
original claim for refund or issuance of TCC filed on February 24, 2003. Please note that the
difference between the amount claimed in the original administrative claim filed (₱6,751,751.65)
and that claimed in this letter (₱6,845,224.42) is in view of the fact that the original claim merely
took into consideration the amount which, at that time, could be supported by the "Summary
Name of Suppliers, Invoices and Official Receipts". As abovementioned, the amount for 2002
subject of the instant claim is based on the figures reflected in the VAT returns filed for 2002. 31

However, we are not persuaded by such allegation considering that while there was a supposed
difference in the amounts being claimed for refund in the Letter of Request for VAT Claim dated
24 February 2003 and in the Letter dated 25 March 2004, a scrutiny of the subject letters
reveals that both rely on the figures reflected in the VAT returns filed for 2002. Contrary to
petitioner’s assertion, the Transmittal Receipt attached to the 24 February 2003 Letter visibly
shows that it has simultaneously submitted various documents in support of its 2002 claim,
including a copy of the VAT return for 2002.32 Thus, this Court cannot consider the subsequent
Letter dated 25 March 2004 to have amended the previous one covering its refund claim for
taxable year 2002. For this reason, failure of petitioner to observe the 30-day period under
Section 112 of the NIRC of 1997, as amended, through its belated filing of the Petition for
Review before the CTA warrants a dismissal with prejudice for lack of jurisdiction.

On the other hand, this Court has allowed the amendment of petitioner’s refund claim covering
taxable year 2003 contained in the 25 March 2004 Letter since there was a statement therein
that there were amended quarterly VAT returns filed on 12 March 2004.33 Such undisputed
factual allegation is considered a valid justification in amending its earlier administrative letter
dated 15 March 2004. The aforesaid rationalization is not without any legal basis as can be
gleaned from the declaration in the San Roque case, wherein the High Court considered the
administrative claims for refund of San Roque properly amended by reason of the amended
quarterly VAT returns.34 As a result, the 120+30 day prescriptive periods to seek judicial
recourse for petitioner’s refund claim involving taxable year 2003 shall commence only on 25
March 2004, and not on 15 March 2004.

Parenthetically, even if it is shown that petitioner did not strictly comply with the mandatory
120+30 day prescriptive periods35 under Section 112 of the NIRC of 1997, as amended, its
administrative claim covering taxable year 2003 falls within the effectivity of BIR Ruling No. DA-
489-03 (10 December 2003 to 5 October 2010), being an exception thereto. Hence, there is no
more need for petitioner to wait for the 120-day period to expire before it can file its appropriate
judicial claim before the CTA. Accordingly, the CTA indeed acquired jurisdiction over petitioner’s
refund claim for taxable year 2003.

It must be emphasized that jurisdiction over the subject matter or nature of an action is
fundamental for a court to act on a given controversy,36 and is conferred only by law and not by
the consent or waiver upon a court which, otherwise, would have no jurisdiction over the subject
matter or nature of an action. Lack of jurisdiction of the court over an action or the subject
matter of an action cannot be cured by the silence, acquiescence, or even by express consent
of the parties.37 If the court has no jurisdiction over the nature of an action, its only jurisdiction is
to dismiss the case. The court could not decide the case on the merits.38

Having ruled on the jurisdictional aspect of this case, we next discuss the significance of strict
compliance with the invoicing requirements under existing laws and prevailing jurisprudence in
order to be entitled to a refund claim of excess and/or unutilized input VAT.

This is not novel.

It is worth mentioning that the High Court already ruled on the significance of imprinting the
word "zero-rated" for zero-rated sales covered by its receipts or invoices, pursuant to Section
4.108-1 of Revenue Regulations No. 7-95.39 Thus, in Panasonic Communications Imaging
Corporation of the Philippines v. Commissioner of Internal Revenue,40 the Second Division of
this Court enunciated:

But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998
to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the
Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on
December 9, 1995 and took effect on January 1, 1996. It already required the printing of the
word "zero-rated" on the invoices covering zero-rated sales.1âwphi1 When R.A. 9337 amended
the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax
code. This conversion from regulation to law did not diminish the binding force of such
regulation with respect to acts committed prior to the enactment of that law.

Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of
Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for the efficient
enforcement of the tax code and of course its amendments. The requirement is reasonable and
is in accord with the efficient collection of VAT from the covered sales of goods and services. As
aptly explained by the CTA’s First Division, the appearance of the word "zero-rated" on the face
of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their
purchases when no VAT was actually paid. If, absent such word, a successful claim for input
VAT is made, the government would be refunding money it did not collect.
Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are
subject to 10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the
proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund.

This Court held that, since the "BIR authority to print" is not one of the items required to be
indicated on the invoices or receipts, the BIR erred in denying the claim for refund. Here,
however, the ground for denial of petitioner Panasonic’s claim for tax refund—the absence of
the word ‘zero-rated’ on its invoices—is one which is specifically and precisely included in the
above enumeration. Consequently, the BIR correctly denied Panasonic’s claim for tax
refund.41 (Emphasis supplied)

For emphasis, the settled rule is that absence or non-printing of the word "zero-rated" in
petitioner’s invoices is fatal to its claim for the refund and/or tax credit representing its unutilized
input VAT attributable to its zero-rated sales.

Equally essential herein, Section 113 of the NIRC of 1997, as amended, categorically provides
that a VAT-registered entity, like petitioner, shall issue a duly registered VAT invoice or official
receipt, which must contain "a statement that the seller is a VAT-registered person." Therefore,
as correctly articulated by the CTA En Banc, compliance with the aforesaid invoicing
requirements is mandatory. Thus:

It bears stressing that the law and regulations are explicit in emphasizing strict compliance with
the invoicing requirements because for the same transactions the output VAT of the seller
becomes the input VAT of the purchaser. Pursuant to Sections 106(D)(1) and 108(C) of the
NIRC of 1997, as amended, in relation to Section 110 of the same Code, the output or input tax
on the sale or purchase of goods is determined by the total amount indicated in the invoice,
while the output or input tax on the sale or purchases of services is determined by the total
amount indicated in the official receipt. Since petitioner is engaged in the sale of goods,
specifically, canned tuna and canned pet food (Joint Stipulation of Facts and Issues, par. 3), its
output tax, if any, will be determined by the total amount indicated in the invoices. Thus, as
required by Section 113 of the NIRC of 1997, as amended, petitioner’s sales invoices must
indicate that it is a VAT-registered person, which in this case was not complied with by
petitioner.42 (Emphasis supplied)

At this juncture, and to settle strictness in compliance, we go to the textbook lesson that if the
language of the law is clear, explicit and unequivocal, it admits no room for interpretation but
merely application. A statute clear and unambiguous on its face need not be interpreted; stated
otherwise, the rule is that only statutes with an ambiguous or doubtful meaning may be the
subject of statutory construction.43 The provisions of Sections 113 and 237 of the NIRC of 1997,
as amended, and Section 4.108-1 of RR No. 7-95, are clear in enumerating the invoicing
requirements necessary to be shown in order to qualify as duly registered receipts or sales or
commercial invoices issued by VAT-registered entities, such as petitioner herein, for the
purpose of claiming for refund of creditable input tax due or paid attributable to any zero-rated or
effectively zero-rates sales. Absent compliance, the unavoidable result is immediate denial of
the claim.

By way of reiteration, the CTA has no jurisdiction over petitioner's judicial appeal covering its
refund claim for taxable year 2002 on the ground of prescription, consistent with the ruling in the
San Roque case. While as to its refund claim for taxable year 2003, the same shall likewise be
denied for failure of petitioner to comply with the mandatory invoicing requirements provided for
under Section 113 of the NIRC of 1997, as amended, and Section 4.108-1 of RR No. 7-95.

WHEREFORE, the petition is DENIED. No costs. SO ORDERED.

NO DIGEST

ALLISON J. GIBBS and ESTHER K. GIBBS, petitioners, vs. COLLECTOR OF INTERNAL


REVENUE and COURT of TAX APPEALS, respondents. G.R. No. L-13453 February
29, 1960 BARRERA, J.:

From the resolution of respondent Court of Tax Appeals (in C.T.A. Case No. 418) dismissing,
for lack of jurisdiction, their petition for review and refund of income taxes paid, petitioners
Allison J. Gibbs and Esther K. Gibbs, interposed the present petition for review.

On March 14, 1956, petitioners protested the deficiency income tax assessment in the amount
of P12,284.00, exclusive of surcharge and interest, for the year 1950, issued against them by
the respondent Collector of Internal Revenue, on the ground that said deficiency assessment
was based on a disallowance of bad debts and losses claimed in their income tax return for
1950. On August 28, 1956, respondent Collector rejected petitioners' protest and reiterated his
demand. On October 3, 1956, petitioners sent a check in the amount of P12,284.00 (Check No.
C-643963) to respondent Collector as payment of said deficiency assessment, at the same time
demanding the immediate refund of the amount paid. On October 26, 1956, respondent
Collector denied the request for refund, and required petitioners to pay the amounts of
P1,469.04 and P1,997.26 as surcharge, interest, and compromise penalty. Notice of said denial
was received by petitioners on November 14, 1956.

On September 27, 1957, petitioners filed with respondent Court a petition for review and refund,
with a motion for suspension of collection of penalties. On October 7, 1957, respondent
Collector filed a motion to dismiss, on the ground that the petition was filed beyond the 30-day
period provided under Section 11, in relation to Section 7, of Republic Act No. 1125, which
motion, was opposed by petitioners on October 24, 1957.

On December 2, 1957, respondent court dismissed the petition, in a resolution which, in part,
reads:

Petitioners paid the tax in question on October 3, 1956, at the same time asking for the
refund of the same. He received the letter of respondent denying said request for refund
on November 14, 1956. Pursuant to Section 11 of Republic Act No. 1125, petitioners
had only 30 days from November 14, 1956, or up to December 15, 1956, within which to
file their appeal to this Court. However, petitioners appealed from the aforesaid decision
of respondent only on September 27, 1957, more than ten (10) months from November
14, 1956. Obviously, the appeal has been filed beyond the 30-day period set by law.

Petitioners contend that Section 306 of the Revenue Code provides that judicial
proceedings may be instituted for recovery of an internal revenue tax within two years
from the date of payment. This was so before the enactment of Republic Act No. 1125 . .
.petitioners should have appealed to this Court within 30 days from November 14, 1956,
that is, not later than December 15, 1956, pursuant to Section 11 of Republic Act No.
1125. As the appeal was filed on September 27, 1957, we have no jurisdiction to
entertain the same.

On December 11, 1957, petitioners filed a motion for reconsideration of said order, but the same
was denied by respondent court on January 31, 1958. Hence, this petition for review.

The only issue to be resolved in this case is whether or not petitioners' appeal (petition for
review and refund) from the decision of respondent Collector of Internal Revenue, was filed with
respondent Court of Tax Appeals within the statutory period.

Section 7 of Republic Act No. 1125,1 in part, provides:

SEC. 7. Jurisdiction.—The Court of Tax Appeals shall exercise exclusive appellate


jurisdiction to review by appeal, as herein provided:
(1) Decisions of the Collector of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal Revenue
Code or other law or part of law administered by the Bureau of Internal Revenue; . . .
(Emphasis supplied.)

And Section 11 of the same Act, in part, states that:

SEC. 11. Who may appeal; effect of appeal.—Any person, association or corporation
adversely affected by a decision or ruling of the Collector of Internal Revenue, the
Collector of Customs or any provincial or city Board of Assessment Appeals may file an
appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or
ruling. . . . (Emphasis supplied.)

It is not disputed that petitioners received on November 14, 1956, notice of respondent
Collector's decision denying their request for a refund of the deficiency assessment paid by
them. Pursuant to the above-quoted provision of Section 11 of Republic Act 1125, they had 30
days from said date within which to file their appeal (petition for review and refund) with
respondent court. However, they filed said appeal only on September 27, 1957, or more than
ten (10) months thereafter, much beyond the aforementioned 30-day period within which to file
the same. Consequently, respondent court had acquired no jurisdiction to entertain said appeal
and the dismissal of the same was proper. Petitioners, however, contend that although their
appeal was filed beyond said 30-day period, respondent court still had jurisdiction over the
same, by virtue of the provision of Section 306 of the National Internal Revenue Code,2 which
reads:

SEC. 306. 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 Collector of Internal Revenue; but such suit or proceeding
may be maintained, whether or not such tax penalty, or sum has been paid under protest
or duress. It any case, no such suit or proceeding shall be begun after the expiration of
two years from the date of payment of the tax or penalty. (Emphasis supplied.)
The contention is devoid of any merit. In the case of Johnston Lumber Co., Inc. vs. Court of Tax
Appeals, et al. 101 Phil., 654; 54 Off. Gaz. [16] 5226, we held:

It is the contention of petitioner that the aforequoted provisions cannot stand side by side
because, whereas Section 306 of the Tax Code required the filing of a claim before an
action in court may be maintained, Republic Act No. 1125 which confers jurisdiction
upon the Court of Tax Appeals to take cognizance of appeals from the decisions of the
Collector of Internal Revenue does not require any more the filing of said claim but
merely provides that said appeal may be filed within 30 days from receipt of such
decision or ruling.

A careful analysis of the provisions of both enactments would negative the assertion of
petitioner. The specific provision of Republic Act No. 1125 regarding appeal (Section 11)
was intended to cope with a situation where the taxpayer, upon receipt of a decision or
ruling of the Collector of Internal Revenue, elects to appeal to the Court of Tax
Appeals instead of paying the tax. For this reason, the latter part of said Section 11,
provides that no such appeal would suspend the payment of the tax demanded by the
Government, unless for special reasons, the Court of Tax Appeals would deem it fit to
restrain said collection. Section 306, of the Tax Code, on the other hand, contemplates
of a case wherein the taxpayer paid the tax, whether under protest or not, and later on
decides to go to court for its recovery. We can, therefore, conclude that where payment
has already been made and the taxpayer is merely asking for its refund, he must first file
with the Collector of Internal Revenue a claim for refund before taking the matter to the
Court, as required by Section 306 of the National Internal Revenue Code and
that appeals from decisions or rulings of the Collector of Internal Revenue to the Court of
Tax Appeals must always be perfected within 30 days after the receipt of the decision or
ruling that is being appealed, as required by Section 11 of Republic Act No. 1125. We
see no conflict between the aforementioned sections of said laws. (Emphasis supplied.)

Under the above ruling, it is clear that Section 306 of the National Internal Revenue Code
should be construed together with Section 11 of Republic Act No. 1125. In fine, a taxpayer who
has paid the tax, whether under protest or not, and who is claiming a refund of the same, must
comply with the requirements of both sections, that is, he must file a claim for refund with the
Collector of Internal Revenue within 2 years from the date of his payment of the tax, as required
by said Section 306 of the National Internal Revenue Code, and appeal to the Court of Tax
Appeals within 30 days from receipt of the Collector's decision or ruling denying his claim for
refund, as required by said Section 11 of Republic Act No. 1125. If, however, the Collector takes
time in deciding the claim, and the period of two years is about to end, the suit or proceeding
must be started in the Court of Tax Appeals before the end of the two-year period without
awaiting the decision of the Collector. This is so because of the positive requirement of Section
306 and the doctrine that delay of the Collector in rendering decision does not extend the
peremptory period fixed by the statute.3

In the case of a taxpayer who has not yet paid the tax and who is protesting the assessment
made by the Collector of Internal Revenue, he must file his appeal with the Court of Tax
Appeals within 30 days from his receipt of the Collector's assessment, as required by said
Section 11 of Republic Act No. 1125. Otherwise, his failure to comply with said statutory
requirement would bar his appeal and deprive the Court of Tax Appeals of its jurisdiction to
entertain or determine the same.
We do not find the cases of Collector of Internal Revenue vs. Avelino, et al. (100 Phil., 327; 53
Off. Gaz. 645) and Collector of Internal Revenue vs. Zulueta, et al. (100 Phil., 872; 53 Off. Gaz.
[19] 6532) invoked by petitioners applicable to the instant case. The issue presented in both
cited cases was whether or not the Court of Tax Appeals may enjoin the Collector of Internal
Revenue from collecting through summary administrative methods, the income tax liabilities of
Messrs. Avelino and Zulueta, 3 years after the filing of their income tax returns, and not whether
their petition for review was seasonably filed with said court, in accordance with Section 11 of
Republic Act No. 1125, or Section 306 of the National Internal Revenue Code. Furthermore, the
instant case involves a refund of taxes paid, while the cited cases involved the legality of the
collection of taxes by summary administrative methods.

Appellants, in their supplemental brief, urge two additional grounds for the revocation of
respondent court's decision. It is claimed that since the letter-decision dated October 26, 1956
denying their request for refund of the deficiency income tax paid by them, was signed not by
the Collector, but merely by the Deputy Collector of Internal Revenue, it could not be considered
as a final decision on their said request. They cite as authority, Section 309 of the National
Internal Revenue Code reading partly:

SEC. 309. Authority of Collector to make compromise and to refund taxes.— The
Collector of Internal Revenue may compromise any civil or other case arising under this
Code or other law or part of law administered by the Bureau of Internal Revenue, may
credit or refund taxes erroneously or illegally received, or penalties imposed without
authority, and may remit before payment any tax that appears to be unjustly assessed or
excessive. The authority of the Collector of Internal Revenue to credit or
refund taxes or penalties, under this section can only be exercised if the claim for credit
or refund is made in writing and filed with him within two years after the payment of the
tax or penalty. (Emphasis supplied.)

and No. 9 of Paragraph 4, Section 7, as amended, of the Internal Revenue Manual on Audit and
Investigation Procedure and General Circular No. V-182, providing:

9. The authority to remit before payment any tax that appears to be unjustly assessed or
excessive, or credit or refund taxes erroneously or illegally received under Section 309
of the National Internal Revenue Code shall be exercised exclusively by the Collector of
Internal Revenue. (Emphasis supplied.)

Appellants contend that under the above-quoted provisions, only the Collector has the authority
to deal in refund cases. This is fallacious. In the first place, the cited provisions refer to the
authority of the Collector of Internal Revenue to compromise, or to credit or refund taxes
erroneously or illegally received, that is, when the action, in a manner of speaking, is against the
Government. In such case, the authority is vested exclusively in the Collector himself. The
purpose is to assure that no improper compromise, credit, or refund is made to the prejudice of
the Government. But in the case before us, the action taken by the Deputy Collector in his letter
of October 26, 1956, was precisely to deny the request for refund and demand the payment of
the deficiency tax from petitioners. Certainly, this is well within the authority of the Deputy
Collector and is final and binding unless revoked by the Collector.

The other point raised that the letter of October 26 is not final because in addition to denying the
refund it demanded payment of surcharges and interests is, likewise, without merit. The ruling in
the case of St. Stephen's Association, et al. vs. Collector of Internal Revenue (104 Phil., 314; 55
Off. Gaz. [13] 2243) cited by petitioners, is inapplicable to the instant case, for there the
Collector wrote two letters to the taxpayers, one on April 6, 1955, denying their first request for
the withdrawal and cancellation of the assessment, and another on July 11, 1955, denying their
second request and stating in its last paragraph: "This decision becomes final thirty days after
your receipt hereof unless an appeal is taken to the Court of Tax Appeals within the same
period, in accordance with the provisions of Republic Act No. 1125." Undoubtedly, this second
letter, and not the first was the final decision of the Collector in that case, because it finally
resolved the then pending petition for reconsideration filed by the taxpayers. In the instant case,
after the letter of October 26, 1956 denying petitioners' request for refund, no further action was
taken either by petitioners or the Collector, both parties treating the letter-decision as final. In
fact, petitioner's next move was to file their petition for review and refund with respondent court.
The Collector, on the other hand, consequent to his understanding that said letter-decision was
final, filed his motion to dismiss with respondent court, on the ground that petitioners' petition
was filed out of time and, therefore, the court acquired no jurisdiction to entertain the same.
Wherefore, finding no error in the decision of the court a quo, the same is hereby affirmed, with
costs against the petitioners. So ordered.

NO DIGEST

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CARLOS PALANCA,


JR., respondent. G.R. No. L-16626 October 29, 1966
REGALA, J.:

This is an appeal by the Government from the decision of the Court of Tax Appeals in CTA
Case No. 571 ordering the petitioner to refund to the respondent the amount of P20,624.01
representing alleged over-payment of income taxes for the calendar year 1955. The facts are:

Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the
petitioner, herein shares of stock in La Tondeña, Inc. amounting to 12,500 shares. For
failure to file a return on the donation within the statutory period, the petitioner was
assessed the sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25%
surcharge and interest, respectively, which he paid on June 22, 1955.

On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income
tax return for the calendar year 1955, claiming, among others, a deduction for interest
amounting to P9,706.45 and reporting a taxable income of P65,982.12. On the basis of
this return, he was assessed the sum of P21,052.91, as income tax, which he paid, as
follows:

Taxes withheld by La Tondeña Inc. from Mr.


Palanca's wages P13,172.41

Payment under Income Tax Receipt No. 677395


dated May 11, 1956 3,939.80

Payment under Income Tax Receipt dated August


14, 1956 3,939.80
P21,052.01

Subsequently, on November 10, 1956, the petitioner filed an amended return for the
calendar year 1955, claiming therein an additional deduction in the amount of
P47,868.70 representing interest paid on the donee's gift tax, thereby reporting a taxable
net income of P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for
deduction was based on the provisions of Section 30(b) (1) of the Tax Code, which
authorizes the deduction from gross income of interest paid within the taxable year on
indebtedness. A claim for the refund of alleged overpaid income taxes for the year 1955
amounting to P17,885.01, which is the difference between the amount of P21,052.01 he
paid as income taxes under his original return and of P3,167.00, was filed together with
this amended return. In a communication dated June 20, 1957, the respondent (BIR)
denied the claim for refund.

On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time
requested that the case be elevated to the Appellate Division of the Bureau of Internal
Revenue for decision. The reiterated claim was denied on October 14, 1957.

On November 2, 1957, the petitioner requested that the case be referred to the
Conference Staff of the Bureau of Internal Revenue for review. Later, on November 6,
1957, he requested the respondent to hold his action on the case in abeyance until after
the Court of Tax Appeals renders its division on a similar case. And on November 7,
1957, the respondent denied the claim for the refund of the sum of P17,885.01.

Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of
stock of La Tondeña Inc. to be a transfer in contemplation of death pursuant to Section
88(b) of the National Internal Revenue Code. Consequently, the respondent assessed
against the petitioner the sum of P191,591.62 as estate and inheritance taxes on the
transfer of said 12,500 shares of stock. The amount of P17,002.74 paid on June 22,
1955 by the petitioner as gift tax, including interest and surcharge, under Official Receipt
No. 2855 was applied to his estate and inheritance tax liability. On the tax liability of
P191,591.62, the petitioner paid the amount of P60,581.80 as interest for delinquency as
follows:

1% monthly interest on P76,724.38 P22,633.69


September 2, 1952 to February 16,
1955

1% monthly interest on P71,264.77 1,068.97


February 16, 1955 to March 31, 1955

1% monthly interest on P114,867.24 4,287.99


September 2, 1952 to April 16, 1953

1% monthly interest on P50,832.77 1,372.48


March 31, 1955 to June 22, 1955
1% monthly interest on P119,155.23 31,218.67
April 16, 1953 to June 22, 1955

Total P60,581.80

On August 12, 1958, the petitioner once more filed an amended income tax return for
the calendar year 1955, claiming, in addition to the interest deduction of P9,076.45
appearing in his original return, a deduction in the amount of P60,581.80, representing
interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby
reporting a net taxable income for 1955 in the amount of P5,400.32 and an income tax
due thereon in the sum of P428.00. Attached to this amended return was a letter of the
petitioner, dated August 11, 1958, wherein he requested the refund of P20,624.01 which
is the difference between the amounts of P21,052.01 he paid as income tax under his
original return and of P428.00.

Without waiting for the respondent's decision on this claim for refund, the petitioner filed
his petition for review before this Court on August 13, 1958. On July 24, 1959, the
respondent denied the petitioner's request for the refund of the sum of P20,624.01.

The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal's
ruling on the aforementioned petition for review. Specifically, he takes issue with the said court's
determination that the amount paid by respondent Palanca for interest on his delinquent estate
and inheritance tax is deductible from the gross income for that year under Section 30 (b) (1) of
the Revenue Code, and, that said respondent's claim for refund therefor has not prescribed.

On the first point, the Commissioner urges that a tax is not an indebtedness. Citing American
cases, he argues that there is a material and fundamental distinction between a "tax" and a
"debt." (Meriwether v. Garrett, 102 U.S. 427; Liberty Mutual Ins. Co. v. Johnson Shipyards
Corporation, 5 AFTR pp. 5504, 5507; City of Camden v. Allen, 26 N.J. Law, p. 398). He adopts
the view that "debts are due to the government in its corporate capacity, while taxes are due to
the government in its sovereign capacity. A debt is a sum of money due upon contract express
or implied or one which is evidenced by a judgment. Taxes are imposts levied by government
for its support or some special purpose which the government has recognized." In view of the
distinction, then, the Commissioner submits that the deductibility of "interest on indebtedness"
from a person's income tax under Section 30(b) (1) cannot extend to "interest on taxes."

We find for the respondent. While "taxes" and "debts" are distinguishable legal concepts, in
certain cases as in the suit at bar, on account of their nature, the distinction becomes
inconsequential. This qualification is recognized even in the United States. Thus,

The term "debt" is properly used in a comprehensive sense as embracing not merely
money due by contract, but whatever one is bound to render to another, either for
contract or the requirements of the law. (Camden vs. Fink Coule and Coke Co., 61 ALR
584).

Where statutes impose a personal liability for a tax, the tax becomes at least in a broad
sense, a debt. (Idem.)
Some American authorities hold that, especially for remedial purposes, Federal taxes
are debts. (Tax Commission vs. National Malleable Castings Co., 35 ALR 1448)

In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking,
the same concept as debts, they are, however obligations that may be considered as such.
(Sambrano vs. Court of Tax Appeals, G.R. no. L-8652, March 30, 1957). In a more recent
case Commissioner of Internal Revenue vs. Prieto, G.R. No. L-13912, September 30, 1960, we
explicitly announced that while the distinction between "taxes" and "debts" was recognized in
this jurisdiction, the variance in their legal conception does not extend to the interests paid on
them, at least insofar as Section 30 (b) (1) of the National Internal Revenue Code is concerned.
Thus,

Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year. It is here conceded
that the interest paid by respondent was in consequence of the late payment of her
donor's tax, and the same was paid within the year it is sought to be deducted. The only
question to be determined, as stated by the parties, is whether or not such interest was
paid upon an indebtedness within the contemplation of Section 30(b) (1) of the Tax
Code, the pertinent part of which reads:

Sec. 30. Deductions from gross income — In computing net income there shall
be allowed as deductions —

"Interest:

(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or carry
obligations the interest upon which is exempt from taxation as income under this
Title.

The term "indebtedness" as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as the
unconditional and legally enforceable obligation for the payment of money.
(Federal Taxes Vol. 2, p. 13, 019, Prentice Hall, Inc.; Mertens' Law of Federal
Income Taxation, Vol. 4, p. 542.) Within the meaning of that definition, it is
apparent that a tax may be considered an indebtedness. . . . (Emphasis supplied)

"It follows that the interest paid by herein respondent for the late payment of her
donor's tax is deductible from her gross income under section 30 (b) of the Tax
Code above-quoted."

We do not see any element in this case which can justify a departure from or abandonment of
the doctrine in the Prieto case above. In both this and the said case, the taxpayer sought the
allowance as deductible items from the gross income of the amounts paid by them as interests
on delinquent tax liabilities. Of course, what was involved in the cited case was the donor's tax
while the present suit pertains to interest paid on the estate and inheritance tax. This difference,
however, submits no appreciable consequence to the rationale of this Court's previous
determination that interests on taxes should be considered as interests on indebtedness within
the meaning of Section 30(b) (1) of the Tax Code. The interpretation we have placed upon the
said section was predicated on the congressional intent, not on the nature of the tax for which
the interest was paid.

On the issue of prescription: There were actually two claims for refund filed by the herein
respondent, Carlos Palanca, Jr., anent the case at bar. The first one was on November 10,
1956, when he filed a claim for refund on the interest paid by him on the donee's gift tax of
P17,885.10, as originally demanded by the Bureau of Internal Revenue. The second one was
the one filed by him on August 12, 1958, which was a claim for refund on the interest paid by
him on the estate and inheritance tax assessed by the same Bureau in the amount of
P20,624.01. Actually, this second assessment by the Bureau was for the same transaction as
that for which they assessed respondent Palanca the above donee's gift tax. The Bureau,
however, on further consideration, decided that the donation of the stocks in question was made
in contemplation of death, and hence, should be assessed as an inheritance. Thus the second
assessment. The first claim was denied by the petitioner for the first time on June 20, 1957.
Thereafter, the said denial was twice reiterated, on October 14, 1957 and November 7, 1957,
upon respondent Palanca's plea for the reconsideration of the ruling of June 20, 1957. The
second claim was filed with the Court of Tax Appeals on August 13, 1958, or even before the
same had been denied by the petitioner. Respondent Palanca's second claim was denied by
the latter on July 24, 1959.

The petitioner contends that under Section 11 of Republic Act 1124,1 the herein claimant's claim
for refund has prescribed since the same was filed outside the thirty-day period provided for
therein. According to the petitioner, the said prescriptive period commenced to run on October
14, 1947 when the denial by the Bureau of Internal Revenue of the respondent Palanca's claim
for refund, under his letter of November 10, 1956, became final. Considering that the case was
filed with the Court of Tax Appeals only on August 13, 1958, then it is urged that the same had
prescribed.

The petitioner also invokes prescription, at least with respect to the sum of P17,112.21, under
Section 306 of the Tax Code.2 He claims that for the calendar year 1955, respondent Palanca
paid his income tax as follows:

Taxes withheld by La Tondeña Inc. from Mr.


Palanca's wages P13,172.41

Payment under Income Tax Receipt No. 677395


dated May 11, 1956 3,939.89

Payment under Income Tax Receipt No. 742334


dated August 14, 1956 3,939.89

P21,952.01

Therefore, the petitioner contends, the amounts paid by claimant Palanca under his withheld tax
and under Receipt No. 677395 dated May 11, 1956 may no longer be refunded since the claim
therefor was filed in court only on August 13, 1958, or beyond two years of their payment.

We find the petitioner's contention on prescription untenable.


In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even
commence to run in this incident. It should be recalled that while the herein petitioner originally
assessed the respondent-claimant for alleged gift tax liabilities, the said assessment was
subsequently abandoned and in its lieu, a new one was prepared and served on the
respondent-taxpayer. In this new assessment, the petitioner charged the said respondent with
an entirely new liability and for a substantially different amount from the first. While initially the
petitioner assessed the respondent for donee's gift tax in the amount of P170,002.74, in the
subsequent assessment the latter was asked to pay P191,591.62 for delinquent estate and
inheritance tax. Considering that it is the interest paid on this latter-assessed estate and
inheritance tax that respondent Palanca is claiming refund for, then the thirty-day period under
the abovementioned section of Republic Act 1125 should be computed from the receipt of the
final denial by the Bureau of Internal Revenue of the said claim. As has earlier been recited,
respondent Palanca's claim in this incident was filed with the Court of Tax Appeals even before
it had been denied by the herein petitioner or the Bureau of Internal Revenue. The case was
filed with the said court on August 13, 1958 while the petitioner denied the claim subject of the
said case only on July 24, 1959.

In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca
of his 1955 income tax. Inasmuch as the said account was paid by him by installment, then the
computation of the two-year prescriptive period, under Section 306 of the National Internal
Revenue Code, should be from the date of the last installment. (Antonio Prieto, et al. vs.
Collector of Internal Revenue, G.R. No. L-11976, August 29, 1961) Respondent Palanca paid
the last installment on his 1955 income tax account on August 14, 1956. His claim for refund of
the alleged overpayment on it was filed with the court on August 13, 1958. It was, therefore, still
timely instituted.

WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.

FACTS

In July, 1950, Don Carlos Palanca, Sr. donated in favor of his son,
the respondent, shares of stock in La Tondeña, Inc. amounting to 12,500.
For failure to file a return on the donation within the statutory period, the
petitioner was assessed the gift tax, 25% surcharge and interest, which he
paid on June 22, 1955.

The respondent filed with the BIR his income tax return for 1955,
which was subsequently amended claiming an additional deduction
representing interest paid on the donee's gift tax. The claim for deduction
was denied. Meanwhile, the BIR considered the transfer of 12,500 shares of
stock to be a transfer in contemplation of death, the gift tax was applied to
his estate and inheritance tax liability.

The petitioner contends that the claim for refund has prescribed
since the same was filed outside the 30-day period. The prescriptive period
commenced to run on October 14, 1947 when the denial by the BIR of the
respondent Palanca's claim for refund in 1956. The case was filed with the
CTA only on August 13, 1958, then it had prescribed.

ISSUE

W/N the respondent’s claim for tax refund has prescribed.

RULING

No. The 30-day period under Sec. 11 of RA 1125 did not commence to
run in this incident. The original assessment for alleged gift tax liabilities was
subsequently abandoned and a new one was prepared and served on the
respondent. Considering that it is the interest paid on the estate and
inheritance tax that Palanca is claiming refund for, then the 30-day period
should be computed from the receipt of the final denial by the BIR of the
said claim. Palanca's claim was filed with the CTA even before it had been
denied by the petitioner or the BIR. The case was filed with the said court on
August 13, 1958 while the petitioner denied the claim subject of the said
case only on July 24, 1959.

FINLEY J. GIBBS and DIANE P. GIBBS, petitioners, vs. COMMISSIONER OF INTERNAL


REVENUE and COURT OF TAX APPEALS, respondents. G.R. No. L-17406 November
29, 1965 REGALA, J.:

This is a petition for review of two resolutions of the Court of Tax Appeals dated June 18, 1960
and August 23, 1960 in CTA Case No. 584, dismissing for lack of jurisdiction the petitioners'
claims for refund and tax credit against the respondent Commissioner of Internal Revenue.

The facts upon which the respondent court entered the aforementioned resolutions are:
On February 6, 1965, the respondent Commissioner of Internal Revenue issued against the
petitioners, "Finley J. Gibbs and Diane P. Gibbs, c/o Francisco Collantes, Rm. 301, Cepoc
Bldg., Dasmariñas, Manila" Deficiency Income Tax Assessment Notice No. AR-5416-55/50 for
P16,873.00 for the tax year 1950 with the demand that the said amount should be paid on or
before March 15, 1956. On March 14, 1956, Allison J. Gibbs, signing as attorney-in-fact for
Finley J. Gibbs, his brother, acknowledged receipt of the above assessment notice and notified
the respondent Commissioner that Finley J. Gibbs was then living in Atherton, California, with
office at 200 Bush Street, San Francisco 4 and that the latter was notified by him of the said
deficiency assessment. In the same letter, Allison J. Gibbs questioned the disallowance of the
items which gave rise to the deficiency assessment and requested for a correction of it. On
August 26, 1956, however, the respondent Commissioner denied the request.

As regards the tax liability of your brother, Mr. Finley J. Gibbs, in the sum of P16,873.00,
exclusive of surcharge and interest for the year 1951, please be informed that inasmuch
as the facts obtaining in his case are similar in all fours with that of your case, the
arguments above are applicable to the case of your said brother. In
view of the foregoing, you are hereby requested for the last time to pay the said amount
of P12,284.00 exclusive of surcharge and interest, to the City Treasurer, Manila, within
ten (10) days from your receipt hereof in order that this case may be closed. You are
further requested to urge your brother to pay the abovementioned amount immediately
upon your receipt hereof in order that his case may also be closed.

Having deemed the above reply of August 28, 1956, as the "final decision" of the respondent
Commissioner on the matter, Allison J. Gibbs wrote on October 3, 1956, the following
correspondence to the latter:

I consider your final decision, dated August 28, 1956, to be contrary to law but to
demonstrate my good faith I herewith send you my Check No. 213082 drawn on the
Chartered Bank of India, Australia & China payable to you in the sum of P16,873.00 in
full payment of your original deficiency assessment No. AR-5416-55-50. Kindly
acknowledge receipt.

At the same time, Allison J. Gibbs, demanded refund of the above payment:

I demand the immediate refund of this payment for the reasons heretofore given you.
Unless refunded on or before the fourth of October I will file a Petition for Review with
the Court of Tax Appeals and charge you with my damages of six percent (6%) interest
per annum plus attorney's fees of twenty five percent (25%) of the amount
involved. (Emphasis supplied, Letter of October 3, 1956.)

On October 26, 1956, the respondent Commissioner denied the above demand for refund.

With reference to your letters both dated October 3, 1956, requesting the refund of the
sums of P12,284.00 and P16,873.00, as alleged erroneous payments of your income tax
liability and that of your brother, Finley J. Gibbs, respectively, both for the year 1950, I
regret to have to inform you that for reasons stated in our letter dated August 28, 1956,
this Office finds no justifiable basis to grant your said request.

The above letter of October 26, 1956, denying the petitioners' claim for refund was admittedly
received by the office of Allison J. Gibbs on November 14, 1956.
On September 29, 1958, Allison J. Gibbs, signing as counsel for Finley J. Gibbs, wrote another
letter addressed to the respondent Commissioner to "reiterate our client's demand for refund of
the P16,873.00 he paid on October 3, 1956 on the ground that your deficiency Assessment No.
AR-5416-55/50 was illegal ... ." This letter also opined that the previous letter of October 26,
1956, of the respondent Commissioner was not "a ruling on our client's claim for refund of
P16,873.00." Finally, this letter likewise asserted certain claims for tax credits arising allegedly
from some previous overpayment made by the petitioner to the respondent Commissioner of
Internal Revenue. The correspondence closed with the notice that should the demand for refund
be uneffected on or before October 1, 1958, a petition for that purpose would be filed with the
Court of Tax Appeals. The respondent Commissioner never replied to this letter of September
29, 1958.

On October 1, 1958, the petitioners filed with the respondent court a "Petition for Review and
Refund of Income Tax with Motion for Suspension of Collection of Additional Taxes," alleging, in
the main, its claims for refund and tax credit discussed above. To this petition, the respondent
Commissioner filed an Answer on November 10, 1956 to claim, among others, the following
special and affirmative defenses:

A. That this Honorable Court has no jurisdiction to take judicial cognizance of the petition
for review on the ground that the petition for review was filed beyond thirty (30) days
from the date of receipt of respondent's decision, dated October 26, 1956, denying the
claim for refund as prescribed by Section 11 of Republic Act No. 1125;
B. That this Honorable Court has no jurisdiction over the cause of action with respect to
the credit of the amounts stated in the petition for review for the reason that the request
for credit and the petition for review praying for the credit of said amounts have been
filed beyond two (2) years from the dates of payment of the amounts sought to be
credited in the petition for review.

Acting on a motion dated November 17, 1958 filed by the respondent Commissioner for a
preliminary hearing on the question of the lower court's jurisdiction as above contested, the
respondent court, after due hearing and reception of evidence, sustained the above objection to
its jurisdiction and upheld the respondent Commissioner's claim that the two causes of action
asserted by the petitioner were barred by prescription. To this end, the respondent court
promulgated two orders: the Resolution of June 18, 1960 dismissing CTA Case No. 584 for lack
of jurisdiction and the Resolution of August 23, 1960 dismissing for lack of merit the petitioners'
motion for reconsideration filed therefor. These are the two orders sought to be reviewed in the
instant petition for review.

The petitioners contend that the respondent court erred in ruling that their petition for review
was filed outside the 30-day period prescribed by Section 8 of Republic Act No. 1125 because
(a) there is neither evidence nor record that the petitioners received a copy of the letter of
October 26, 1956 denying their claim for refund, and (b) the aforesaid letter of October 26, 1956
is not a denial of their claim for refund.

Anent the insistence of the petitioners that they never received a copy of the letter of October
26, 1956 denying their claim for refund, suffice it to say that while they themselves personally
might not have received a copy of it, Allison J. Gibbs, as their attorney-in-fact and actually as
their counsel, received a copy of the same.
Of course, the petitioners maintain that Allison J. Gibbs, at least until September 30, 1957,
acted merely as agent or attorney-in-fact of the petitioners and never as their legal counsel. In
support of this, it is argued that prior to October 26, 1956, Allison J. Gibbs had explicitly qualified
his signature to all his correspondences regarding the disputed assessment as "attorney-in-
fact." Furthermore, it is urged that as might be seen on the face of the assessment notice itself,
the real legal counsel of the petitioners in the matter of the said assessment was Atty. Francisco
Collantes.

That Allison J. Gibbs was not merely the agent of the petitioners in the matter under litigation,
contrary to all that is alleged above, is demonstrated, however, by the following circumstances
obtaining in this case:

1. Allison J. Gibbs acknowledged for the petitioners receipt of the deficiency income tax
assessment, formally protested the same in writing, paid the assessment and likewise formally
demanded in writing its refund. 2. As far back as 1952, Allison
J. Gibbs' Law office had been representing the petitioners as the latter's counsel.
3. Atty. Francisco Collantes, to whom the assessment notice was admittedly addressed, at the
time of the said assessment, was a staff lawyer in the firm of Gibbs and Chuidian, of which
Allison J. Gibbs was a principal partner.

We find all the above as ample evidence of the lawyer-client-relationship of the petitioners
herein and Allison J, Gibbs. Besides, it should be recalled that among the charges which Allison
J. Gibbs claimed he would collect if his demand for refund for the petitioners were not effected
by the respondent Commissioner was "attorney's fees of twenty five percent (25%) of the
amount involved." (Letter of October 3, 1956.) How, then, may this statement be reconciled with
the present denial that Allison was indeed the petitioners' counsel when he wrote the said letter
of October 3, 1956?

There can be no question, therefore, that the receipt of the October 26, 1956 letter-decision of
the respondent Commissioner by Allison J. Gibbs was receipt of the same by the petitioners, the
former being then the latter's legal counsel. In the premises, the respondent court cannot be
considered to have erred, therefore, in computing the 30-day prescriptive period in question
from the date the said letter was received by Allison J. Gibbs.

On the other hand, the petitioners' claim that the letter of October 26, 1956 was not a denial of
their claim for refund is patently unmeritorious. The letter in question clearly stated that "for
reasons stated in our letter dated August 28, 1956, this Office finds no justifiable basis to grant
your said request." Considering that even Allison J. Gibbs deemed the August 28, 1956
correspondence as the Commissioner's "final decision" on the controversy, it is difficult to see
how the petitioners can now argue that the said letter of October 26, 1956, was not a denial of
their claim for refund.

Parenthetically, it may be observed, that in view of our finding that the respondent court had no
jurisdiction over the petition for review because it was filed beyond the 30-day period, hence,
there is no need for extensive discussion of the second issue, namely: Whether the withholding
tax credits amount to payment for the purpose of determining the two-year period as provided
for by Section 306 of the Internal Revenue Code.

The petitioners maintain that the respondent court erred in ruling that their claim for tax credit
had already expired since it pertained to tax payments made in 1951 and the protest and claim
for demand therefor was made only in 1958. The petitioners insist that they could not be
deemed to have paid their 1951 tax obligation until February 19, 1957, because they merely
contributed to the withholding tax system in 1951 and claimed certain refunds against their
contribution at the end of the said tax year and they received notice of the resolution on their
claim for such refund only on February 19, 1957. In other words, the petitioners' thesis is to the
effect that income tax assessments against which claims for refund have been lodged and
which are covered by taxes withheld at the source shall be considered paid, not at the time such
tax obligations fall due, but, only when the claims for refund against the assessments are finally
resolved by the authorities. By the petitioners' own formulation of their argument —

Petitioners also respectfully contend that the statute of limitation of two years prescribed
in Section 306 of the NIRC does not start to run until respondent Commissioner has
acted on the claim for refund or credit by the non-resident taxpayer and so notified the
taxpayer because until then the withholding tax cannot be treated as a payment by the
alien-resident taxpayer; until then it is a mere deposit held by respondent Commissioner
for the account of the non-resident alien taxpayer.

This Court cannot subscribe to the petitioners' view.

Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means not only the
delivery of money but also the performance, in any other manner, of an obligation (id., Art.
1231). A taxpayer, resident or non-resident, who contributes to the withholding tax system, does
so not really to deposit an amount to the Commissioner of Internal Revenue, but, in truth, to
perform and extinguish his tax obligation for the year concerned. In other words, he is paying his
tax liabilities for that year. Consequently, a taxpayer whose income is withheld at the source will
be deemed to have paid his tax liability when the same falls due at the end of the tax year. It is
from this latter date then, or when the tax liability falls due, that the two-year prescriptive period
under Section 306 of the Revenue Code starts to run with respect to payments effected through
the withholding tax system. It is of no consequence whatever that a claim for refund or credit
against the amount withheld at the source may have been presented and may have remained
unresolved since, as this Court has previously explained in the case of Gibbs vs. Collector of
Internal Revenue, G.R. No. L-13453, February 29, 1960 —

... Section 306 of the National Internal Revenue Code should be construed together with
Section 11 of Republic Act No. 1125. In fine, a taxpayer who has paid the tax, whether
under protest or not, and who is claiming a refund of the same, must comply with the
requirement of both sections, that is, he must file a claim for refund with the Collector of
Internal Revenue within 2 years from the date of his payment of the tax, as required by
Section 306 of the National Internal Revenue Code, and appeal to the Court of Tax
Appeals within 30 days from receipt of the Collector's decision or ruling denying his claim
for refund, as required by Section 11 of Republic Act No. 1125. If, however, the Collector
takes time in deciding the claim, and the period of two years is about to end, the suit or
proceeding must be started in the Court of Tax Appeals before the end of the two-year
period without awaiting the decision of the Collector. This is so because of the positive
requirement of Section 306 and the doctrine that delay of the Collector in rendering
decision does not extend the peremptory period fixed by the statute. (U.S. v. Michel 282
U.S. 656, 51 S. Ct. 284; P. J. Kiener & Co., Ltd., v. David, L-5163, April 22, 1953;
College of Oral and Dental Surgery vs. CTA, G.R. No. L-10446, Jan. 28, 1958.
Emphasis supplied). WHEREFORE, the instant petition for review is hereby dismissed,
with costs against the petitioners.
DIGEST:

FACTS

In 1965, respondent CIR issued against the petitioners Finley and Diane
Gibbs a Deficiency Income Tax Assessment for tax year 1950 with the demand
that the said amount should be paid on or before March 15, 1956.

On March 14, 1956, Allison J. Gibbs, attorney-in-fact of Finley J. Gibbs,


his brother, acknowledged receipt of the assessment notice and notified the
respondent that Finley J. Gibbs was then living in California. Allison also
questioned the disallowance of the items which gave rise to the deficiency
assessment and requested for a correction of it, which was denied.

Having deemed the denial to be a final decision, Allison paid


the deficiency taxes under protest which later demanded refund.

The first demand for refund having denied, Allison filed another
demand with claims for tax credits from previous overpayment by
the petitioner. However, respondent never replied to this letter.

In 1958, the petitioners filed with the respondent court a petition for
review alleging its claims for refund and tax credit which it ruled that the
collection of the taxes were barred by prescription.

ISSUE

W/N the statute of limitation of two years under Sec. 306 of the
NIRC has prescribed.

RULING

No. Sec. 306 of the NIRC should be construed together with Sec. 11 of
RA 1125. A taxpayer who has paid the tax, whether under protest or not,
and who is claiming a refund of the same, must comply with the requirement
of both sections, that is, he must file a claim for refund with the Collector of
Internal Revenue within 2 years from the date of his payment of the tax, as
required by Sec. 306 of the NIRC, and appeal to the CTA within 30 days
from receipt of the Collector's decision or ruling denying his claim for refund,
as required by Sec. 11 of RA 1125. If, however, the Collector takes time in
deciding the claim, and the period of two years is about to end, the suit or
proceeding must be started in the CTA before the end of the two-year period
without awaiting the decision of the Collector. This is so because of the
positive requirement of Sec. 306 and the doctrine that delay of the Collector
in rendering decision does not extend the peremptory period fixed by the
statute.

FAR EAST BANK AND TRUST COMPANY as Trustee of Various Retirement


Funds, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and THE COURT OF
APPEALS, Respondents. G.R. No. 138919 May 2,
2006 TINGA, J.:

The present petition evokes some degree of natural sympathy for the petitioner, as it seeks the
refund of taxes wrongfully paid on the income earned by several retirement funds of private
employees held by petitioner in their behalf. The steps undertaken by petitioner to seek the
refund were woefully error-laden, yet their claims still received due solicitation from this Court.
But in the end, the errors committed are just too multiple as well as consequential, and the claim
for refund not sufficiently proven. Impulses may suggest that we reverse and grant, but logic
and the law dictate that the Court affirm the assailed rulings of the Court of Appeals and the
Court of Tax Appeals.

Before us is a Petition for Review on Certiorari filed by petitioner Far East Bank & Trust
Company, assailing the Resolutions of the Court of Appeals Fifth Division dated 12 January
1999 and 3 June 1999.1 The Resolution of 12 January 1999 dismissed outright, on procedural
grounds, a petition for review filed by petitioner questioning a Decision of the Court of Tax
Appeals dated 11 September 1998.2

While the petition before us primarily seeks the review of the procedural grounds on which the
petition before the Court of Appeals was denied, it stems from a claim for refund lodged by
petitioner against the Commissioner of Internal Revenue (CIR) on taxes on interest income
withheld and paid to the CIR for the four (4) quarters of 1993, arising from investments derived
from money market placements, bank deposits, deposit substitute instruments and government
securities made by petitioner as the trustee of various retirement funds.

Petitioner is the trustee of various retirement plans established by several companies for its
employees. As trustee of the retirement plans, petitioner was authorized to hold, manage, invest
and reinvest the assets of these plans.3 Petitioner utilized such authority to invest these
retirement funds in various money market placements, bank deposits, deposit substitute
instruments and government securities. These investments necessarily earned interest income.
Petitioner’s claim for refund centers on the tax withheld by the various withholding agents, and
paid to the CIR for the four (4) quarters of 1993, on the aforementioned interest income. It is
alleged that the total final withholding tax on interest income paid for that year amounted
to P6,049,971.83.1avvphil.net4
On four dates, 12 May 1993, 16 August 1993, 31 January 1994, and 29 April 1994, petitioner
filed its written claim for refund with the Bureau of Internal Revenue (BIR) for the first, second,
third and fourth quarters of 1993, respectively. Petitioner cited this Court’s "precedent setting"
decision in Commissioner of Internal Revenue v. Court of Appeals,5 promulgated on 23 March
1992, said case holding that employees’ trusts are exempted by specific mandate of law from
income taxation. Nonetheless, the claims for refund were denied.

By this time, petitioner already had a pending petition before the Court of Tax Appeals (CTA),
docketed as CTA Case No. 4848, and apparently involving the same legal issue but a previous
taxable period. Hoping to comply with the two (2)-year period within which to file an action for
refund under Section 230 of the then Tax Code, petitioner filed a Motion to Admit Supplemental
Petition6 in CTA Case No. 4848 on 28 April 1995, seeking to include in that case the tax refund
claimed for the year 1993. However, the CTA denied the admission of the Supplemental Petition
in a Resolution dated 25 August 1995.7 The CTA reasoned then that CTA Case No. 4848 had
already been pending for more than two and a half (2 ½) years, and the admission of the
supplemental petition, with a substantial enlargement of petitioner’s original claim for refund,
would further delay the proceedings, causing as it would, an effective change in the cause of
action. Nonetheless, the CTA advised that petitioner could instead file a separate petition for
review for the refund of the withholding taxes paid in 1993.8

Petitioner decided to follow the CTA’s advice, and on 9 October 1995, it filed another petition for
review with the CTA, docketed as CTA Case No. 5292, concerning its claim for refund for the
year 1993. The CIR posed various defenses, among them, that the claim for refund had already
prescribed.9 Trial ensued.

On 11 September 1998, the CTA promulgated its decision in CTA Case No. 5292, denying the
claim for refund for the year 1993. While the CTA noted that the income from employees’ trust
funds were exempt from income taxes, the claims for refund had already prescribed insofar as
they covered the first, second and third quarters of 1993, as well as from the period of 1 October
to 8 October 1993. The CTA so ruled considering that the petition before it was filed only on 9
October 1995, and thus, only those claims that arose after 9 October 1993 could be considered
in light of the two (2)-year prescriptive period for the filing of a judicial claim for refund from the
date of payment of the tax, as provided in Section 230 of the Tax Code.10

As to the claim for refund covering the period 9 October 1993 up to 31 December 1993, the
CTA likewise ruled that such could not be granted, the evidence being insufficient to establish
the fact "that the money or assets of the funds were indeed used or placed in money market
placements, bank deposits, other deposit substitute instruments and government securities,
more particularly treasury bills." The CTA noted that petitioner merely submitted as its evidence
copies of the following documents: the list of the various funds; the schedule of taxes withheld
on a quarterly basis in 1993; the written claims for refund; the BIR Rulings on the various
Retirement Plans; the trust agreements of the various retirement plans; and certifications of the
Accounting Department of petitioner, Citibank, and the Bangko Sentral ng Pilipinas as to the
taxes that they respectively withheld.11

The CTA faulted petitioner for failing to submit such necessary documentary proof of
transactions, such as confirmation receipts and purchase orders that would ordinarily show the
fact of purchase of treasury bills or money market placements by the various funds, together
with their individual bank account numbers. These various documents which petitioner failed to
submit were characterized as "the best evidence on the participation of the funds, and without
them, there is no way for this Court to verify the actual involvement of the funds in the alleged
investment in treasury bills and money market placements."12 The CTA also held as insufficient
for such purposes the certifications issued by Citibank, BSP, and petitioner’s own Accounting
Department, considering that the aggregate amount of the final withholding taxes to which they
attest totalled more than P40,000,000.00, in comparison to the present claims of only
around P6,000,000.00. The CTA thus concluded that such certifications included non-tax
exempt or otherwise taxable transactions, the sums of which were conglomerated with the
amount that may have actually been refundable.

Petitioner filed a Motion for Reconsideration and/or New Trial, which the CTA denied in a
Resolution dated 4 December 1998.13 Petitioner then filed a Petition for Review under Rule 43
with the Court of Appeals. However, this petition was denied outright by the appellate court in its
Resolution dated 12 January 1999. The Court of Appeals held that petitioner had failed to
observe the requirement, under Section 2, Rule 42 of the 1997 Rules of Civil Procedure that the
petition should be accompanied by other material portions of the record as would support the
allegations of the petition. The Court of Appeals particularly mentioned the following documents
omitted by the petitioner in its petition: the Supplemental Petition, the CTA Resolution denying
the admission of the Supplemental Petition, the new Petition filed with the CTA, and the Motion
for Reconsideration and/or New Trial.14

Petitioner moved for reconsideration of the adverse decision of the Court of Appeals, attaching
to its motion the required certified copies of the cited documents. Nonetheless, the Court of
Appeals denied the motion for reconsideration through a Resolution dated 3 June 1999, holding
that the belated compliance did not cure the defect of the petition. Moreover, the Court of
Appeals also noted that it had taken a "closer look at the petition" and on that basis concluded
that the CTA Decision contained no reversible error.15

Hence, the present petition, which we deny.

Petitioner argues that it was error on the part of the Court of Appeals to have dismissed its
petition "on a mere technicality."16 Yet the dismissal engaged in by the Court of Appeals on
procedural grounds is wholly sanctioned by the relevant provisions of the Rules of Court.
Section 6 of Rule 43, 1997 Rules of Civil Procedure, then governing the procedure of appeals
from decisions of the CTA to the Court of Appeals,17 explicitly provides that the petition for
review be accompanied by "certified true copies of such material portions of the record referred
to [in the petition] and other supporting papers". Under Section 7, Rule 43, the failure to attach
such documents which should accompany the petition is sufficient ground for the dismissal of
the petition.

It should be remembered that it is only when the petition has been given due course, after
a prima facie finding that the CTA had committed errors of fact or law that would warrant
reversal18, that the case record would be transmitted from the court of origin to the Court of
Appeals.19 Clearly, upon the filing of the petition, the appellate court would have no
documentary basis to discern whether the required prima facie standard has been met except
the petition itself and the documents that accompany it. While the submissions in the petition
may refer to other documents in the record, or may even quote at length from those documents,
the Court of Appeals would have no way to ascertain the veracity of the submissions unless the
certified true copies of these documents are attached to the petition itself.
Thus, the requirement that certified true copies of such portions of the record referred to in the
petition be attached is not a mere technicality that can be overlooked with ease, but an essential
requisite for the determination of prima facie basis for giving due course to the petition. Thus, it
does not constitute error in law when the Court of Appeals dismissed the petition on such
ground. Moreover, while the court a quo is capacitated to give cognizance to the belated
compliance attempted by petitioner, acquiescence to such belated compliance is a matter of
sound discretion on the part of the lower court, and one not ordinarily disturbed by the Court.

Even assuming that the procedural errors may be overlooked, we still agree with the Court of
Appeals in holding in the Resolution of 3 June 1999 that the CTA committed no reversible error
in its assailed decision.

We hold, as the CTA did, that the exemption from income tax of income from employees’ trusts
still stands. The Court had first recognized such exemption in the aforementioned CIR v. Court
of Appeals20 case, arising as it did from the enactment of Republic Act No. 4917 which granted
exemption from income tax to employees’ trusts.21The same exemption was provided in
Republic Act No. 8424, the Tax Reform Act of 1997, and may now be found under Section
60(B) of the present National Internal Revenue Code. Admittedly, such interest income of the
petitioner for 1993 was not subject to income tax.

Still, petitioner did pay the income tax it was not liable for when it withheld such tax on interest
income for the year 1993. Such taxes were erroneously assessed or collected, and thus,
Section 230 of the National Internal Revenue Code then in effect comes into full application.
The provision reads:

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;
but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously paid. (emphasis
supplied)

The CTA noted that since the petition for review was only filed on 9 October 1995, petitioner
could no longer claim the refund of such tax withheld for the period of January to 8 October
1995, the two (2)-year prescriptive period having elapsed. Petitioner submits that the two (2)-
year prescriptive period should be reckoned from the date of its filing of the Supplemental
Petition on 28 April 1995, not from the filing of its new petition for review after the Supplemental
Petition was denied.22 Even granting that this should be the case, such argument would still
preclude the refund of taxes wrongfully paid from January to 27 April 1993, the two (2)-year
prescriptive period for those taxes paid then having already become operative.
Yet could the two (2)-year prescriptive period for the refund of erroneously paid taxes be
deemed tolled by the filing of the Supplemental Petition? Petitioner argues that Section 230 of
the then Tax Code does not specify the form in which the judicial claim should be made. That
may be so, but it does not follow that the two (2)-year period may be suspended by the filing of
just any judicial claim with any court. For example, the prescriptive period to claim for the refund
of corporate income tax paid by a Makati-based corporation cannot be suspended by the filing
of a complaint with the Municipal Circuit Trial Court of Sorsogon. At the very least, such judicial
claim should be filed with a court which would properly have jurisdiction over the action for the
refund.

In this case, there is no doubt that the CTA has jurisdiction over actions seeking the refund of
income taxes erroneously paid. But it should be borne in mind that petitioner initially sought to
bring its claim for refund for the taxes paid in 1993 through a supplemental petition in another
case pending before the CTA, and not through an original action. The admission of
supplemental pleadings, including supplemental complaints, does not arise as a matter of right
on the petitioner, but remains in the sound discretion of the court, which is well within its right to
deny the admission of the pleading. Section 6, Rule 10 of the 1997 Rules of Civil Procedure,
governing supplemental pleadings, is clear that the court only "may" admit the supplemental
pleading, and is thus not obliged to do so.

It is only upon the admission by the court of the supplemental complaint that it may be deem to
augment the original complaint. Until such time, the court acquires no jurisdiction over such new
claims as may be raised in the supplemental complaint. Assuming that the CTA erred in
refusing to admit the Supplemental Petition, such action is now beyond the review of this Court,
the order denying the same having long lapsed into finality, and it appearing that petitioner did
not attempt to elevate such denial for judicial review with the proper appellate court.

We thus cannot treat the Supplemental Petition as having any judicial effect. It cannot even be
deemed as having been filed, the CTA refusing to admit the same. Moreover, the CTA could not
have acquired jurisdiction over the causes of action stated in the Supplemental Petition by virtue
of the same pleading owing to that court’s non-admission of that complaint. The CTA acquired
jurisdiction over the claim for refund for taxes paid by petitioner in 1993 only upon the filing of
the new Petition for Review on 9 October 1995.

Yet, let us assume again, this time, that the filing of the Supplemental Petition could have tolled
the two (2)-year prescriptive period insofar as the 1993 taxes paid after 28 April 1993 were
concerned. There may even be cause to entertain this assumption, considering that this two (2)-
year prescriptive period is not jurisdictional and may be suspended under exceptional
circumstances.23 Yet a closer look at the case does not indicate the presence of such
exceptional circumstances, but instead affirm that the petition is still bereft of merit.

The CTA evinced palpable discomfort over the sufficiency of the evidence presented by
petitioner to establish its claim for refund. It noted as follows:

As regards the third issue, this Court is convinced that the evidence of the petitioner for the
remaining portion of the claim for the fourth quarter of 1993 is insufficient to establish the fact
that the money or assets of the funds were indeed used or placed in money market placements,
bank deposits, other deposit substitute instruments and government securities, more particularly
treasury bills.
To prove its case, petitioner merely submitted copies of the following documents, namely:

Exhibit

1. List of the various funds A

2. Schedule of taxes withheld on B

a quarterly basis in 1993

3. Written claims for refund C-C4

D-D4

E-E4

F-F4

4. BIR Rulings on the various G-Y

Retirement Plans at bar

5. Trust agreements of the Z-RR

various Retirement Plans

6. Certifications of the Accounting SS-UU49,

Department of petitioner, Citibank, inclusive and Bangko Sentral ng Pilipinas on the


taxes they respectively withheld

It is to be noted from the above listed exhibits that documentary proof of transactions, such as
confirmation receipts and purchase orders which would ordinarily show the fact of purchase of
treasury bills or money market placements by the various funds, together with their individual
bank account numbers, were not submitted in evidence by the petitioner. They represent the
best evidence on the participation of the funds and without them, there is no way for this Court
to verify the actual involvement of the funds in the alleged investment in the treasury bills and
money market placements.24

Clarifications are in order. The cited passage may seem to implicitly assume that only such
income earned by the employees’ trusts from money market placements, bank deposits, other
deposit substitute instruments and government securities are exempted from income taxation.
This is contrary to the provisions in Republic Act No. 4917, which then stood as the governing
provision on income tax exemption of employees’ trusts:

SECTION 1. Any provision of law to the contrary notwithstanding, the retirement benefits
received by official and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer shall be exempt
from all taxes and shall not be liable to attachment, levy or seizure by or under any legal or
equitable process whatsoever except to pay a debt of the official or employee concerned to the
private benefit plan or that arising from liability imposed in a criminal action; xxx

The tax exemption enjoyed by employees’ trusts was absolute, irrespective of the nature of the
tax. There was no need for the petitioner to particularly show that the tax withheld was derived
from interest income from money market placements, bank deposits, other deposit substitute
instruments and government securities, since the source of the interest income does not have
any effect on the exemption enjoyed by employees’ trusts.

What has to be established though, as a matter of evidence, is that the amount sought to be
refunded to petitioner actually corresponds to the tax withheld on the interest income earned
from the exempt employees’ trusts. The need to be determinate on this point especially
militates, considering that petitioner, in the ordinary course of its banking business, earns
interest income not only from its investments of employees’ trusts, but on a whole range of
accounts which do not enjoy the same broad exemption as employees’ trusts.

It clearly bothered the CTA that the submitted certifications from Citibank, the BSP, and
petitioner’s own Accounting Department attest only to the total amount of final withholding taxes
remitted to the BIR. Evidently, the sum includes not only such taxes withheld from the interest
income of the exempt employees’ trusts, but also from other transactions between petitioner
and the BSP or Citibank which are not similarly exempt from taxation. For these certifications to
hold value, there is particular need for them to segregate such taxes withheld from the interest
income of employees’ trusts, and those withheld from other income sources. Otherwise, these
certifications are ineffectual to establish the present claim for refund.

The weak evidentiary value of these certifications proved especially fatal, as no other
documentary evidence was submitted to establish that the withholding agents actually withheld
interest income earned from the employees’ trusts administered by petitioner. The other
evidence submitted by petitioner merely establishes the fact that it administered various named
employees trusts, the particular trust agreements between petitioner and these trusts, its
requests for refund from the BIR and their consequent denials. Petitioner did submit a schedule
of taxes withheld on a quarterly basis for the year 1993, but this document was apparently
prepared by petitioner itself, and its self-serving nature precludes from according it any
authoritative value.

We agree with the CIR that petitioner should have instead submitted documentary proof of
transactions, such as confirmation receipts and purchase orders, as the best evidence on the
participation of the funds from these employees trusts. The appreciation of facts made by the
CTA, which exercises particular expertise on the subject of tax, generally binds this Court.25 It
may not be so, as the CIR contends, that the proper purpose for presenting such documents is
to establish that the funds were actually invested "in treasury bills and money market
placements", since the character of the investments does not detract from the fact that all
income earned by the employees’ trusts is exempt from taxation. Instead, these documents are
vital insofar as they establish the extent of the investments made by petitioner from the
employees’ trusts, as distinguished from those made from other account sources, and
correspondingly, the amount of taxes withheld from the interest income derived from these
employees’ trusts alone.

Petitioner argues that the testimony of its witnesses establishes that it would be next to
impossible to single out the particular transactions involving exempt employees’ trusts, in view
of the manner of lumping all the data in the reporting procedures of the withholding agents,
particularly concerning treasury bills. While that may be so, a necessary consequence of the
special exemption enjoyed alone by employees’ trusts would be a necessary segregation in the
accounting of such income, interest or otherwise, earned from those trusts from that earned by
the other clients of petitioner. The Court has no desire to impose unnecessarily pernickety
documentary requirements in obtaining a valid tax refund. Yet it cannot be escaped that the
taxpayer needs to establish not only that the refund is justified under the law, but also the
correct amount that should be refunded. If the latter requisite cannot be ascertained with
particularity, there is cause to deny the refund, or allow it only to the extent of the sum that is
actually proven as due. Tax refunds partake the nature of tax exemptions and are thus
construed strictissimi juris against the person or entity claiming the exemption.26 The burden in
proving the claim for refund necessarily falls on the taxpayer, and petitioner in this case failed to
discharge the necessary burden of proof.

One argument remains. It can be dispensed with briefly. Petitioner argues that the CTA should
have granted its motion for a new trial, which was premised on the claim that certain documents
had been misplaced during the relocation of petitioner’s headquarters, and were located only
after the case was submitted for resolution.27Section 1, Rule 37 of the 1997 Rules of Civil
Procedure does allow for a new trial on the ground that "newly discovered evidence, which
[movant] could not, with reasonable diligence, have discovered and produced at the trial, and
which if presented would probably alter the result". However, as the CTA pointed out in its 4
December 1998 Resolution, the case was submitted for resolution with the CTA only in May of
1998, or more than two (2) years since the alleged transfer of headquarters by the petitioner.
The CTA also noted that during that time, petitioner "made no visible attempt to retrieve the
documents or at the very least, inform this Court of such problem".28 These observations
sufficiently rebut the claim that the alleged newly discovered evidence could not have been
located with reasonable diligence.

It is tragic that the ultimate loss to be borne by the tardy claim for the refund would be not by the
petitioner-bank, but the hundreds of private employees whose retirement funds were reposed in
petitioner’s trust. However, the damage was sustained due to multiple levels of incompetence
on the part of the petitioner which this Court cannot simply give sanction to. Many of the so-
called procedural hurdles could have been overlooked, even by this Court, but in the end, the
claim for tax refund was simply not proven with the particularity demanded of an action seeking
to siphon off the nation’s "lifeblood."

WHEREFORE, the petition is DENIED. Costs against petitioner. SO ORDERED.

DIGEST:

FACTS

Petitioner is the trustee of various retirement plans established by


several companies for its employees. It reinvested these retirement funds in
various money market placements, bank deposits, etc. which earned
interest income. Petitioner then claimed for refund on the tax withheld and
paid to the CIR for the four (4) quarters of 1993 on the interest income on
the ground that employees’ trusts are exempted by specific mandate of law
from income taxation. However, these claims for refund were denied.
By this time, petitioner already had a pending petition before the CTA
involving the same legal issue but a previous taxable period. Petitioner then
filed a Motion to Admit Supplemental Petition seeking to include in that case the
tax refund claimed for 1993. However, the CTA denied such petition and
advised petitioner to file a separate petition for review for the refund of the
withholding taxes paid in 1993. Petitioner then filed another petition for review
on its claim for refund for 1993 which was denied due to prescription.

ISSUE

W/N the period for filing an action for tax refund has prescribed.

RULING

Yes. The Court ruled that the income from employees’ trusts is
exempted from income tax. However, period for filing an action for tax
refund had prescribed.

Since the petition for review was only filed on 9 October 1995,
petitioner could no longer claim the refund of tax withheld for the period of
January to 8 October 1995, the 2-year prescriptive period having elapsed.

The two-year prescriptive period for the refund of erroneously paid


taxes cannot be suspended by filing of the Supplemental Petition because
it did not give CTA jurisdiction over the new claim.

The admission of supplemental pleadings does not arise as a matter


of right on the petitioner, but remains in the sound discretion of the court.
It is only upon the admission by the court of the supplemental complaint
that it may be deem to augment the original complaint. Until such time, the
court acquires no jurisdiction over such new claims as may be raised in the
supplemental complaint.

In this case, the Court did not treat the Supplemental Petition as
having any judicial effect. The CTA acquired jurisdiction over the claim for
refund for taxes paid by petitioner in 1993 only upon the filing of the new
Petition for Review on 9 October 1995. Thus, the two-year period for
filing an action for tax refund had already prescribed.
COLLECTOR OF INTERNAL REVENUE, petitioner, vs. J. N. SWEENEY, A. O. BAIGRIE, and
RAMON BURGAS, respondents. G.R. No. L-12178 August 21, 1959
MONTEMAYOR, J.:

Petitioner Collector of Internal Revenue is appealing the decision of the Court of Tax Appeals
dated February 8, 1957, the dispositive part of which reads as follows:

IN VIEW OF THE FOREGOING, respondent Collector of Internal Revenue is hereby to


refund to petitioners, J. N. Sweeney, A. O. Baigrie and Ramon Burgas the sums of
P1,150.18, P701.15 and P1,197.50, respectively, with interest from August 3, 1955,
without pronouncement a to costs.

The facts issues involved in this case are correctly stated in the appealed decision, the pertinent
portion of which we reproduce below:

This is a claim for refund of the amounts representing fixed and percentage taxes
supposedly due from the International Club of Iloilo, Inc. (hereinafter referred to as the
"Club") , as operator of a bar, which were allegedly collected illegally from its past
presidents, petitioners, J. N. Sweeney, A. O. Baigrie and R. Burgas in the sums of
P1,200.18, P751.15 and P1,247.70, respectively.

The International Club of Iloilo, Inc. is a non-profit, non-stock corporation organized


under Philippine laws sometime in January 1948, in order to promote 'athletic and social
relations among its members, and to that end, to establish and maintain one or more
club houses having a library, reading room and such other athletic and social
appurtenances and belongings are as usual in social clubs and clubhouses (Exh. "A",
articles of Incorporation; Exh. "P", deposition-Baigrie, p. 2). In consonance with this
avowed purpose, the club from its corporation in 1949 to its dissolution sometime in
August 1951, maintained and operated a clubhouse with a bar, wherein liquor and light
refreshments were sold exclusively to its members and their guest with a light overprice
to cover operational expenses. The Club was operated with funds derived from
membership fees, monthly dues and the income of its bar (Exh. "P", deposition-Baigrie,
p. 3).

During its brief existense, the Club had four (4) presidents whose terms were as follows
(Exh. 17-A, p. 62, BIR record):

A.O. Baigrie, January 13, 1949-December 4, 1940.

N.A. Ramon Sinclair, December 5, 1949-March 13, 1950 .

Ramon Burgas, March 14, 1950-November 27, 1950.

J. N. Sweeney, November 28, 1950-August 9, 1951.


It is admitted that the Club never paid fixed or percentage taxes as operator of a bar
during its brief lifespan (Exh. "P", Deposition Baigrie, Sweeney and Burgas, pp. 4, 9 and
16).

On November 11, 1950, respondent Collector of Internal Revenue addressed and


demanded from the Club payment of the sum of P1,987.01 as fixed and percentage tax
and surcharge as operator of a bar for the period covering August 1949 to September
1950, plus P50.00 as penalty in extra-judicial settlement of violations of sections 182,
183 and 191 of the tax Code (Exhs. "1" and "2", summary collection of the alleged tax
deficiency, no positive steps was taken to effect the same. On March 12, 1951, J. N.
Sweeney, then president of the Club, wrote the City Treasurer of Iloilo (Exh. "J", pp. 72-
73, CTA record), protesting the aforementioned assessment against the Club and asking
that it can be withdrawn for the reason that the Club was a private one, not organized for
profit, which like the Manila Polo Club should not be held liable for the taxes sought to be
collected. This protest remained unanswered for about ten months . In The meantime,
the Club was dissolved sometime in September, 1951 (Exh. "c", "C-1" and "C-2" pp. 62-
65, CTA record). On January 15, 1952 (exh. "4", p. 13, BIR request for withdrawal of the
assessment against the Club and this time demanded from the latter payment of the
sum of P3,526.55., representing fixed and percentage taxes and surcharge, as operator
of a bar for the period covering August 1949 to August 1951. Although no payment was
made, respondent did not take positive steps to enforce collection of the alleged tax
deficiency. However, on August 15, 1953 (Exhibit "5", p. 23, BIR record) and October 15,
1953 (Exh. "7", p. 30, BIR record 0, respondent urged the City Fiscal of Iloilo to
prosecute criminally the past presidents of the Club for violation of sections 182, 183 and
191 of the tax Code. Meanwhile, petitioners respondents for the reconsideration of their
cases (Exhs. "11" and "12", pp. 46,45, BIR record). In view of the instructions of
respondent, the City Fiscal conducted a preliminary investigation of the case. However,
the projected information against petitioners were withdrawn on August 3, 1955 (exh.
"18", p. 64, BIR record) as they paid under protests to the City Treasurer of Iloilo their
alleged tax liabilities thus:

A. O. Baigrie, P751.15,-under O.R. No. A-631197


(Exh. "D", p. 66, CTA record)

J.N. Sweeney, P1,200.18,-under O.R. No. A-631197


(Exh. "C", p. 69, CTA record)

R. Burgos, P1,247.70,-under O.R. No. A-631197


(Exh. "M", p. 77, CTA record)

On the same date, August 3, 1955 (Exh. "F") the petitioners thru counsel filed their
written claim for refund with respondent of the aforesaid amounts paid by them under
protests. Not having received any reply from respondent regarding said claim for refund,
petitioners for review which was received by the Court on August 27, 1955.

The principal issues which are called upon to resolve may be summarized thus: (1) Has
the Court jurisdiction to order the refund of the amounts paid by petitioners herein? (2) Is
the International Club of Iloilo liable for payment of the fixed and percentage taxes
sought to be collected from it? (3) in the affirmative, are petitioners herein liable for the
payment of the aforesaid tax liability?
The petitioner contends that the Court of tax Appeals has no jurisdiction to order of the taxes
involved, first, because said amounts had been paid by respondents in extra-judicial settlement
of the case against them, and second because respondents have no cause of action in as much
as petitioner has not yet ruled upon their requests for refund. We agree with the tax Court that
respondents had not entered into a compromise as to the payment of the taxes whose refund is
now being sought. Respondents paid the same under protests and reserved the right to
question the legality of the same. On the same day that they made payment under protest, they
liked the corresponding petition for refund. The Compromise entered into by respondents was
only in regard to the payment of P50.00 by each of them in order to avoid criminal prosecution
which might affect their standing as businessmen in their community. In fact upon payment of
said amount of P50,00 by each of them, the City Fiscal desisted from continuing the
prosecution. But that was entirely apart from continuing the prosecution. But that was entirely
apart from and independent of the payment of the taxes which, as already, was made under
protests and on the same day, a petition demanding refund was filed with the same court.

As to the propriety of taking the case to the Court of tax Appeals before respondents received
any advice as to the action taken, if any, on their petition for refund, this question has already
been ruled upon by Us to the effect that taxpayers need not wait for the action of the Collector of
Internal Revenue on the request for refund before taking the matter to court. In the case of P.J.
Kiener Co. vs. David, 92 Phil., 945, (49 Off. Gaz., 1852), we said:

. . Nowhere and in no wise does the law imply that the Collector of Internal Revenue
must act upon claim or that in the Taxpayer shall not go to court before he is notified of
the Collectors' action. Having filed his claim and the Collector's action. Having filed his
claim and the Collector of Internal Revenue having had ample time to study it, the
claimant may, indeed should, within the statutory period of the two years proceed with
his suit without waiting for the Collector's decision. . . . (Emphasis supplied)

And in the case of College of Oral and Dental Surgery vs. Court of Tax Appeals and Collector of
Interval Revenue, (1032 Phil., 912; 54 Off. Gaz., 7055), we ruled:

This Court, construing the aforequoted provisions of law (referring to section 306 of the
National Internal Revenue Code) in an identical case, made the pronouncement that
although the filing of the claim with the Collector of Internal Revenue is intended as a
notice to said official that unless the tax or penalty alleged to have been erroneously or
illegally collected is refunded court action will follow, this does not imply that the taxpayer
must wait for the action of the Collector before bringing the matter to court (P. J. Kiener
Co., Ltd. vs. David, L-5163, April 22, 2953, penned by Mr. Justice Pedro Tuason).
Indeed, it must be observed that under said provisions, the taxpayer's failure to comply
with the requirement regarding the institution of the action or proceeding in court within 2
years after the payment of the taxes bars him from the recovery of the same,
irrespective of whether a claim for the refund of such taxes filed with the Collector or
Internal Revenue is still pending action of the latter." (Emphasis supplied)

The remaining important question for determination is the liability of respondent for the payment
of the taxes. We find an extensive discussion of this point unnecessary, in view of our decision
in the case of Collector of Internal Revenue vs. Manila Lodge No. 761 of BPOE, and the Court
of Tax Appeals * G.R. No. L-11176, June 29, 1959, wherein the same question or issue was
involved, namely, whether a civic, fraternal or social entity, organized for profit, which dispenses
liquors, cigars, etc. to its members and their guests comes within the provisions of the National
Internal Revenue Code regarding the payment fixed, privileged and percentage taxes. There we
held that the Tax Code referred to persons and entities engaged in business, that is to say for
livelihood or profit, and we gave several definitions of the word "Business." And that inasmuch
as the respondent Elks Club was not engaged in business or for profit, it was not liable for the
payment of the tax imposed for selling and retailing liquors and cigars to its members and their
guest. The same thing is true in the present case with regard to the International Club of Iloilo,
Inc. It was not engaged in the business of selling liquor. Its bar dispensed liquor only to
members, their families and their guest. It is true that for a time it made a little profit in such sale,
that is to say, the little overprice put on the liquor dispensed, presumably intended to cover
expenses in the maintenance of the bar, exceeded said expenses but said profits never went to
the members of the Club but were used in the operation of the Club, which as a matter of fact
incurred a loss, so that it may not be said that the operation of the bar and in dispensing liquor
to its members or families and their guest the International Club of Iloilo, Inc. was engaged in
business and that it was organized for profit.

Lastly, there is the question of the legality of the payment of interest awarded by the Tax Court
to respondents. In ordering said payment, the Tax Court committed error. In the case
of Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, G.R. No. L-12127, decided by
Us as late as May 25, 1959, we held that:

We agree, however, with the Solicitor General that the Court of Tax Appeals erred in
ordering the payment of interest on the amount to be refunded to respondent herein. In
the absence of a statutory provision clearly or expressly directing or authorizing such
payment, and none has been cited by respondent. The National Government cannot be
required to pay interest (H. RE. Headcock vs. Collector of Customs, 37 Phil. 970, Marine
Trading Co. vs. Gov't. of the P.I., 39 Phil., 29; Sarasola vs. Trinidad, Phil. 252). So much
of the decision appealed from as requires the payment of interest should therefore, be
eliminated.

In view of the foregoing and with the modification already stated as to the non-payment of
interests, the appealed decision is hereby affirmed. No costs.

DIGEST:

FACTS:

The International Club of Iloilo, Inc. from 1949 to its dissolution


in August 1951, maintained and operated a clubhouse with a bar to
cover operational expenses. It is admitted that the Club never paid
fixed or percentage taxes as operator of a bar during its brief lifespan.

In 1950, petitioner Collector of Internal Revenue demanded from the


Club payment of tax due as operator of a bar but the respondents
protested and argued that the Club was a private one, not organized for
profit, thus, should not be held liable for the taxes sought to be collected.
However, the protest remained unanswered for about 10 months.
In 1953, petitioner urged the City Fiscal of Iloilo to prosecute
criminally the past presidents of the Club for violation of the Tax Code which
was later withdrawn as they paid under protests to the City Treasurer of
Iloilo their alleged tax liabilities. On the same date, the respondents sent
ther claim for refund of the amounts paid by them under protests. Not
having received any reply from respondent regarding said claim for refund,
petitioners for review which was received by the Court on August 27, 1955.

ISSUE

W/N the respondents are correct in taking the case to the CTA
before received any advice to the petition to refund.

RULING

No. The taxpayers need not wait for the action of the Collector
of Internal Revenue on the request for refund before taking the matter
to court.

According to jurisprudence, the law does not imply that the Collector
of Internal Revenue must act upon claim or that in the Taxpayer shall not
go to court before he is notified of the Collectors' action. Having filed his
claim and the Collector of Internal Revenue having had ample time to study
it, the claimant may, indeed should, within the statutory period of the two
years proceed with his suit without waiting for the Collector's decision.

Under said provisions, the taxpayer's failure to comply with the


requirement regarding the institution of the action or proceeding in court
within 2 years after the payment of the taxes bars him from the recovery of
the same, irrespective of whether a claim for the refund of such taxes filed
with the Collector or Internal Revenue is still pending action of the latter.
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, AND THE COURT OF
APPEALS, respondents. G.R. No. 120324 April 21, 1999 QUISUMBING,

This petition for certiorari pursuant to Rule 45 of the Rules of Court seeks to set aside the May 18, 1995 Decision 1 of
the Court of Appeals in CA-GR. SP No. 34988, which affirmed the Decision of the Court of Tax Appeals in CTA Case
No. 3547. The Court of Tax Appeals disposed of the case as follows:

WHEREFORE, the respondent, COMMISSIONER OF INTERNAL REVENUE is hereby ordered to


REFUND in favor of petitioner, PHILEX MINING CORP., the sum of P16,747.36 without interest,
equivalent to 25% partial refund of specific taxes paid on its purchases of gasoline, oils and lubricants,
diesel and fuel oils pursuant to the provision of Section 5 of Republic Act No. 1435, in relation to Section
132 (b) and (c) of the National Internal Revenue Code and Section 145 as prescribed under Sections 1
and 2 of R.A. No. 1435. No pronouncement as to costs .SO ORDERED." 2

As set forth in the decision of the Court of Appeals, the following relevant incidents took place:

Petitioner as a domestic mining corporation had entered into a Mining License Agreement with the then Ministry of
National Resources (now the Department of Environment and Natural Resources). From the period July 1, 1980 to
December 31, 1981, petitioner purchased from several oil companies, refined and manufactured mineral oils, motor
fuels, and diesel fuel oils. The specific taxes passed on to the petitioner amounted to two million, four hundred ninety-
two thousand, six hundred seventy-seven pesos and twenty-two centavos (P2,492,677.22).1âwphi1.nêt

On October 22 1982, pursuant to Republic Act No. 1435, petitioner filed a claim for refund with the Commissioner of
Internal Revenue (CIR) for six hundred twenty-three thousand, one hundred sixty-nine pesos and thirty centavos
(P623,169.30), representing the twenty-five (25%) percent of the specific taxes paid. The petitioner presented as
evidence the affidavits of its president, purchasing manager, and two disinterested representatives of another licensed
mining corporation. They averred that for the period July 1980 to December 1981, petitioner used refined and
manufactured mineral oils, motor fuels and diesel fuel oils in their business operation and paid the corresponding
specific taxes.

Pending CIR action, on November 16, 1982, the petitioner filed a case for tax refund with the Court of Tax Appeals
(CTA). The petitioner sought judgment ordering the CIR to pay as refund the amount of P623,169.30, with a twenty
(20%) percent interest per annum, plus the costs of suit.

On August 4, 1994, the CTA rendered its decision, quoted at the outset, granting the petitioner's claim, but only to the
extent of sixteen thousand, seven hundred forty-seven pesos and thirty-six centavos (P16,747.36).

The Court of Appeals affirmed the decision of the CTA. Before us, the petitioner now cites the following alleged errors of
the Court of Appeals:

I. BASING THE REFUND ON THE AMOUNTS DEEMED PAID UNDER SECTIONS 1


AND 2 OF R.A NO. 1435 IS CONTRARY TO THE SUPREME COURT'S EN
BANC DECISION IN INSULAR LUMBER V. COURT OF TAX APPEALS WHICH
GRANTED THE CLAIM FOR PARTIAL REFUND ON THE BASIS OF SPECIFIC TAXES
ACTUALLY PAID BY THE CLAIMANT WITHOUT QUALIFICATION OR LIMITATION.

II. THE SAID RULING OF THE RESPONDENT COURT IGNORES THE INCREASE IN
RATES IMPOSED BY SUCCEEDING AMENDATORY LAWS, UNDER WHICH THE
PETITIONER PAID THE SPECIFIC TAXES ON MANUFACTURED AND DIESEL FUELS.

III. IN MAKING THE RULING, THE RESPONDENT COURT WENT AGAINST THE
ESTABLISHED RULES OF CONSTRUCTION IN THAT IT LENT ITSELF TO

78
INTERPRETING SECTION 5 OF R.A. NO. 1435, WHEN THE CONSTRUCTION OF
SAID LAW IS NOT NECESSARY.

IV SECTIONS 1 AND 2 OF R.A. NO. 1435 ARE NOT THE OPERATIVE PROVISIONS
TO BE APPLIED BUT RATHER, SECTIONS 142 AND 145 (WHICH WOULD BECOME
SECTIONS 153 AND 156) OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED.

V BASING THE COMPUTATION OF THE PARTIAL TAX REFUND ON SECTIONS 1


AND 2 OF R.A. NO. 1435, RATHER THAN ON SECTIONS 153 AND 156 OF THE
NATIONAL INTERNAL REVENUE CODE, IS UNFAIR, ERRONEOUS, ARBITRARY,
INEQUITABLE AND OPPRESSIVE. 3

There are two clear-cut issues now raised before the Court:

1) Whether respondent court erred in basing the tax refund under Sections 1 and 2 of R.A. 1435, instead of the
increased rates imposed by Sections 142 and 145 (which became Sections 153 and 156) of the National Internal
Revenue Code, as amended.

2) Whether the respondent court erred in relying on the Supreme Court's decision in Commissioner of Internal Revenue
vs. Rio Tuba Nickel Mining Corp. 4 which allegedly runs counter to the Court's decision in Insular Lumber Co. vs. Court
of Tax Appeals. 5

R.A. 1435, "An Act to Provide Means for Increasing the Highway Special Fund," states that the specific taxes collected
on gasoline and fuel which accrue to the Fund shall be used for the construction and maintenance of the highway
system. Mining and lumber companies seldom use national highways. Since the gasoline and fuel purchased by mining
and lumber companies are used within their own compounds and roads, and they do not benefit directly from the Fund
the government granted to these companies a 25% partial refund of specific taxes paid on purchases of manufactured
diesel and fuel oils. This tax relief was embodied in Section 5 of R.A. No. 1435, which states:

Sec. 5 of R.A. 1435 — The proceeds of the additional tax on manufactured oils shall accrue to the road
and bridge funds of the political subdivision for whose benefit the tax is collected. Provided, however,
That whenever any oils mentioned above are used by miners or forest concessionaires in their
operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of
Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated
in sub-paragraphs one and two of section one hereof, amending section one hundred forty-two of the
Internal Revenue Code: Provided, further, That no new road shall be constructed unless the routes or
location thereof shall have been approved by the Commissioner of Public Highways after a determination
that such road can be made part of an integral and articulated route in the Philippine Highway System,
as required in section twenty-six of the Philippine Highway Act of 1953.

In 1977, P.D. 1158 codified all existing laws. Sections 142 and 145 of the Tax Code, as amended by Sections 1 and 2
of R.A. 1435 were re-numbered to Sections 153 and 156. 6 Later, these sections were amended by P.D. No. 1672 and
subsequently by E.O. 672 increasing the tax rates for certain oil and fuel products. 7 When the Highway Special Fund
was abolished in 1985, the reason for the refund ceased to exist.

This Court, in a string of decisions, repeatedly held that the tax refund under R.A. 1435 is computed on the basis of the
specific tax deemed paid under Sections 1 and 2, and not on the increased rates actually paid under the 1977 NIRC.
Among these cases, are CIR vs. Rio Tuba Nickel Mining Corporation, 8 CIR vs. CA and Atlas Consolidated Mining and
Development Corp., 9 en banc's ruling in Davao Gulf Lumber Corporation vs. CIR and CA, 10 Atlas Consolidated Mining
and Development Corp. vs. CIR et. al. 11 and the recently decided consolidated cases of CIR vs. C.A. and CDCP Mining
Corporation 12 and Sirawai Plywood & Lumber Co., Inc. vs. CA and CIR. 13

The fundamental issues raised herein appear to be the very issues settled in the case of Davao Gulf Lumber
Corporation vs. CIR and CA. 14 We are guided and constrained by this precedent in now reaching a similar resolution of
the issues, adverse to herein petitioner.
79
In Davao Gulf, the Court en banc held:

. . . Since the partial refund authorized under Section 5, R.A. 1435, is in the nature of a tax exemption, it
must be construed strictissimi juris against the grantee. Hence, petitioner's claim of refund on the basis
of the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear
to be mistaken.

We have carefully scrutinized R.A. 1435 and the subsequent pertinent statutes and found no expression
of a legislative will authorizing a refund based on the higher rates claimed by petitioner. . . . When the law
itself does not explicitly provide that a refund under R.A 1435 may be based on higher rates which were
non-existent at the time of its enactment, this Court cannot presume otherwise. A legislative lacuna
cannot be filled by judicial fiat. (citations omitted) 15

In Davao Gulf, the Court also laid to rest the alleged conflict between the Insular Lumber and the Rio Tuba decisions, in
this manner:

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products purchased in
the year 1963, when the increased rates under the NIRC of 1977 were not yet in effect. Thus, the issue
now before us did not exist at the time, since the applicable rates were still those prescribes under
Sections 1 and 2 of R.A. 1435.

Clearly it is impossible for these two decisions to clash with our pronouncements in Rio Tuba and second
Atlas case, in which we ruled that the refund granted be computed on the basis of the amounts deemed
paid under Sections 1 and 2 of R.A 1435. In the light, we find no basis for petitioner's invocation of the
constitutional proscription that "no doctrine or principle of law laid down by the Court in a decision
rendered en banc or in division may be modified or reversed except by the Court sitting en banc."

Finally, petitioner asserts that equity and justice demand that the computation of the tax refunds be
based on actual amounts paid under Sections 153 and 156 of the NIRC we disagree. According to an
eminent authority on taxation, "there is no tax exemption solely on the ground of equit." (citations
omitted) 16

The subsequent codification of tax laws under the 1977 NIRC, Sections 153 and 156, mandated the increased rates of
specific taxes levied on manufactured oils, other fuels and diesel fuel oils. Although Philex Mining Corporation paid the
taxes on their oil and fuel purchases based on the increased rates, the latter law did not specifically provide for a refund
based on the increased rates. Since the grant of refund privileges must be strictly construed against the taxpayer, the
basis for the refund remains to be the amounts deemed paid under Sections 1 and 2 of R.A. 1435. 17 Furthermore, the
claims for refund which were not filed with the CIR and those that prescribed must be deemed excluded, for being
outside the ambit of the legislative enactment.

As to the 20% interest per annum prayed by the petitioner, we reiterate our pronouncement in Rio Tuba, where no
interest was awarded although the claim for refund was granted. As aptly stated by the CTA, viz.:

. . . [T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the
collection of the tax was attended by arbitrariness. An action is not arbitrary when exercised honestly and
upon due consideration where there is room for two opinions, however much it may be believed that an
erroneous conclusion was reached. Arbitrariness presupposes inexcusable or obstinate disregard of
legal provisions. None of the exceptions are present in the case at bar. Respondent's decision denying
petitioner's claim for refund was based on an honest interpretation of law. We, therefore see no reason
why petitioner should be entitled to the payment of interest. (citations omitted)" 18

WHEREFORE, the instant petition is hereby DENIED, and the assailed decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioner.1âwphi1.nêt SO ORDERED.

80
DIGEST:

FACTS:

On August 5, 1992, the BIR sent a letter to Philex asking it to settle its excise tax liabilities amounting to
P123,821,982.52. Philex protested the demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of
P119,977,037.02 plus interest. Therefore, these claims for tax credit/refund should be applied against the tax
liabilities.

In reply, the BIR held that since these pending claims have not yet been established or determined with
certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that
Philex settle the amount plus interest within 30 days from the receipt of the letter.

Philex raised the issue to the Court of Tax Appeals and in the course of the proceedings, the BIR issued a
Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of
Philex of P123,821,982.52; effectively lowered the latter’s tax obligation of P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of
P110,677,688.52 plus interest, elucidating its reason that “taxes cannot be subject to set-off on compensation
since claim for taxes is not a debt or contract.

Philex appealed the case before the Court of Appeals. Nonetheless, the Court of Appeals affirmed the Court
of Tax Appeals observation. Philex filed a motion for reconsideration which was again denied. However, a few
days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not
only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed amounting to 205,595,289.20.

In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set
its excise tax liabilities since both had already become “due and demandable, as well as fully liquidated;”
hence, legal compensation can properly take place.

ISSUE: Whether or not the petitioner is correct in its contention that tax liability and VAT input credit/refund
can be subjected to legal compensation.

HELD:

The Supreme Court has already made the pronouncement that taxes cannot be subject to compensation for
the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is
a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign capacity.

Philex’s claim is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the
government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex’s
whimsical reason would render ineffective our tax collection system.

Philex is not allowed to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been granted. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not
depend upon the consent of the taxpayer.If any payer can defer the payment of taxes by raising the defense
that it still has a pending claim for refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against
the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the
81
government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its
tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.

"The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the 'hen that lays the golden egg.' And, in the order to maintain the general
public's trust and confidence in the Government this power must be used justly and not treacherously."

The petition is hereby dismissed.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOKYO SHIPPING CO. LTD., represented by
SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX APPEALS, respondents.
G.R. No. L-68252 May 26, 1995 PUNO, J.:

For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or tax credit for
amounts representing pre-payment of income and common carrier's taxes under the National Internal Revenue Code,
section 24 (b) (2), as amended.1

Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship Agencies,
Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980, NASUTRA2 chartered M/V
Gardenia to load 16,500 metric tons of raw sugar in the Philippines.3 On December 23, 1980, Mr. Edilberto Lising, the
operations supervisor of Soriamont Agency,4 paid the required income and common carrier's taxes in the respective
sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS
(P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE
HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS
(P107,142.75) based on the expected gross receipts of the vessel.5 Upon arriving, however, at Guimaras Port of Iloilo,
the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private respondent's agent mutually agreed
to have the vessel sail for Japan without any cargo.

Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was realized from the
charter agreement, private respondent instituted a claim for tax credit or refund of the sum ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner
Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14,
1981, private respondent filed a petition for review6 before public respondent Court of Tax Appeals.

Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that taxes are presumed
to have been collected in accordance with law; that in an action for refund, the burden of proof is upon the taxpayer to
show that taxes are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal to the
action for refund; and that claims for refund are construed strictly against tax claimants. 7

After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the mentioned statutory
requirement by having filed a written claim for refund within the two-year period from date of payment; 2)
the respondent has not issued any deficiency assessment nor disputed the correctness of the tax returns
and the corresponding amounts of prepaid income and percentage taxes; and 3) the chartered vessel
sailed out of the Philippine port with absolutely no cargo laden on board as cleared and certified by the
Customs authorities; nonetheless 4) respondent's apparent bit of reluctance in validating the legal merit
of the claim, by and large, is tacked upon the "examiner who is investigating petitioner's claim for refund
which is the subject matter of this case has not yet submitted his report. Whether or not respondent will
present his evidence will depend on the said report of the examiner." (Respondent's Manifestation and
Motion dated September 7, 1982). Be that as it may the case was submitted for decision by respondent
82
on the basis of the pleadings and records and by petitioner on the evidence presented by
counsel sans the respective memorandum.

An examination of the records satisfies us that the case presents no dispute as to relatively simple
material facts. The circumstances obtaining amply justify petitioner's righteous indignation to a more
expeditious action. Respondent has offered no reason nor made effort to submit any controverting
documents to bash that patina of legitimacy over the claim. But as might well be, towards the end of
some two and a half years of seeming impotent anguish over the pendency, the respondent
Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution by manifesting that
"it is now his turn to present evidence, however, the Appellate Division of the BIR has already
recommended the approval of petitioner's claim for refund subject matter of this petition. The examiner
who examined this case has also recommended the refund of petitioner's claim. Without prejudice to
withdrawing this case after the final approval of petitioner's claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not fashion any further
issue into an apparently settled legal situation as far be it from a comedy of errors it would be too much
of a stretch to hold and deny the refund of the amount of prepaid income and common carrier's taxes for
which petitioner could no longer be made accountable.

On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this petition for review
on certiorari.

Petitioner now contends: (1) private respondent has the burden of proof to support its claim of refund; (2) it failed to
prove that it did not realize any receipt from its charter agreement; and (3) it suppressed evidence when it did not
present its charter agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue Code which at that
time provides as follows:

A corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade
or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the
total net income derived in the preceding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on their gross
Philippine billings: "Gross Philippine Billings" include gross revenue realized from uplifts anywhere in the
world by any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the cargo or mail originates from the
Philippines. The gross revenue realized from the said cargo or mail include the gross freight charge up to
final destination. Gross revenue from chartered flights originating from the Philippines shall likewise form
part of "Gross Philippine Billings" regardless of the place or payment of the passage documents . . . . .

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable for taxes depending
on the amount of income it derives from sources within the Philippines. Thus, before such a tax liability can be enforced
the taxpayer must be shown to have earned income sourced from the Philippines.

We agree with petitioner that a claim for refund is in the nature of a claim for exemption8 and should be construed
in strictissimi juris against the taxpayer.9 Likewise, there can be no disagreement with petitioner's stance that private
respondent has the burden of proof to establish the factual basis of its claim for tax refund.

The pivotal issue involves a question of fact — whether or not the private respondent was able to prove that it derived
no receipts from its charter agreement, and hence is entitled to a refund of the taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private respondent proving that it derived
no receipt from its charter agreement with NASUTRA. This finding of fact rests on a rational basis, and hence must be
sustained. Exhibits "E", "F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January
10, 1981 but found no raw sugar to load and returned to Japan without any cargo laden on board. Exhibit "E" is the
83
Clearance Vessel to a Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the
Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents
of these documents regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have not
been contested by the petitioner. The records also reveal that in the course of the proceedings in the court a quo,
petitioner hedged and hawed when its turn came to present evidence. At one point, its counsel manifested that the BIR
examiner and the appellate division of the BIR have both recommended the approval of private respondent's claim for
refund. The same counsel even represented that the government would withdraw its opposition to the petition after final
approval of private respondents' claim. The case dragged on but petitioner never withdrew its opposition to the petition
even if it did not present evidence at all. The insincerity of petitioner's stance drew the sharp rebuke of respondent court
in its Decision and for good reason. Taxpayers owe honesty to government just as government owes fairness to
taxpayers.

In its last effort to retain the money erroneously prepaid by the private respondent, petitioner contends that private
respondent suppressed evidence when it did not present its charter agreement with NASUTRA. The contention cannot
succeed. It presupposes without any basis that the charter agreement is prejudicial evidence against the private
respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or without transporting its
supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no court of justice will regard it
as truth. Moreover, the charter agreement could have been presented by petitioner itself thru the proper use of
a subpoena duces tecum. It never did either because of neglect or because it knew it would be of no help to bolster its
position. 11 For whatever reason, the petitioner cannot take to task the private respondent for not presenting what it
mistakenly calls "suppressed evidence."

We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum of ONE HUNDRED
SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY FIVE CENTAVOS (P107,142.75)
erroneously prepaid by private respondent. The tax was paid way back in 1980 and despite the clear showing that it
was erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15) long
years and the expenses of litigation, the money that will be finally refunded to the private respondent is just worth a
damaged nickel. This is not, however, the kind of success the government, especially the BIR, needs to increase its
collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that BIR should refund
without any unreasonable delay what it has erroneously collected. Our ruling in Roxas v. Court of Tax Appeals 12 is
apropos to recall:

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in order to maintain the
general public's trust and confidence in the Government this power must be used justly and not
treacherously.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15, 1983, is
AFFIRMED in toto. No costs. SO ORDERED.

DIGEST:

Facts: Private respondent is a foreign corporation represented in the


Philippines by Soriamont Steamship Agencies, Inc. It owns and operates
tramper vessel M/V Gardenia. In December 1980, NASUTRA chartered
M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines.
On December 23, 1980 Mr. Edilberto Lising, the operations supervisor of
Soriamont Agency, paid the required income and common carrier’s taxes
in the sum total of P107,142.75 based on the expected gross receipts of

84
the vessel. Upon arriving, however, at Guimaras Port of Iloilo, the vessel
found no sugar for loading. On January 10, 1981, NASUTRA and private
respondent’s agent mutually agreed to have the vessel sail for Japan
without any cargo.

Claiming the pre-payment of income and common carrier’s taxes as


erroneous since no receipt was realized from the charter agreement
private respondent instituted a claim for tax credit or refund of the sum of
P107,142,75 before petitioner commissioner of Internal Revenue on
March 23, 1981. Petitioner failed to act promptly on the claim, hence, on
May 14, 1981, private respondent filed a petition for review before public
respondent CTA.

Petitioner contested the petition. As special and affirmative defenses, it


alleged the following: that taxes are presumed to have been collected in
accordance with law; that in an action for refund, the burden of proof is
upon the taxpayer to show that taxes are erroneously or illegally collected
and the taxpayer’s failure to sustain said burden is fatal to the action for
refund; and that claims for refund are construed strictly against tax
claimants.

After trial, respondent tax court decided in favor of the private


respondent.

Issue: Whether or not tax claimants has the burden of proof to support
its claim of refund.

Held: A claim for refund is in the nature of a claim for exemption and
should be construed in strictissimi juris against the taxpayer. Likewise,
there can be no disagreement with petitioner’s stance that private

85
respondent has the burden of proof to establish the factual basis of its
claim for tax refund.

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF


TAX APPEALS and COURT OF APPEALS, respondent. G.R. No. 112024 January 28, 1999 QUISUMBING, J.:

This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the
Decision2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and
tax credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The
Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are
hereby AFFIRMED in toto. SO ORDERED.4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of
P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim
for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The petition for review is dismissed for lack of
merit. SO ORDERED.5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid
the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for
the year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to
the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner
requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the
overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for
refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for
P234,077.69. Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA
Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986,
filed before the Court of Tax Appeals, are as follows:

1985 1986

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

86
Quarterly tax.

Payments Made 5,016,954.00 —

Tax Withheld at Source 282,795.50 234,077.69

Excess Tax Payments P5,299,749.50* P234,077.69

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo
difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax
refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on
the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. On June
22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for
lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals.
However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence
this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the formal assurances of BIR
in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for
the refund/tax credit of its 1985-86 excess quarterly income tax payments — can be
prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC
No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income
tax payments is not two years but ten (10).7
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which
denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the
mere speculation, without proof, that there were taxes due in 1987 and that PBCom
availed of tax-crediting that year.8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax
credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability
of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are
not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits
for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent
portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS


CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE
FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

87
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which
provide;

It has been observed, however, that because of the excess tax payments, corporations file claims for
recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date
of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is
obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the
refund or tax credit. It should he noted, however, that this is not a case of erroneously or illegally paid tax
under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund of the overpaid
income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax
returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has
promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in
processing said returns. Under these procedures, the returns are merely pre-audited which consist
mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax
credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this. In this
regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to
preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by
the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer
may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of
Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation
created by law (Article 1144 of the Civil Code).9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would
result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10petitioner claims
that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position
inconsistent with one previously taken where injustice would result therefrom or where there has been a
misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal
Revenue;
b). where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling is
based;
c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period
for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As
precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs.
Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent
Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985
was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further,
respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the
same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.

88
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's
contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year
prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State
to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution
does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the
government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes
adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the
BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by
incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the
prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

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; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceedings shall begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after
payment; Provided however, That the Commissioner may, even without a written claim therefor, refund
or credit any tax, where on the face of the return upon which payment was made, such payment appears
clearly to have been erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within
two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided,
should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application
of Sec. 230 of 1977 NIRC, as follows:

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. In the present
case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have
earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax
Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to
ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute
by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they
seek to apply and implement. 21

In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a
law cannot go beyond the terms and provisions of the latter.

89
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is
contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition
prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO
No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of
Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the
reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions
of the
latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who
draft rules and regulation is called to the importance and necessity of closely following the terms and
provisions of the law which they intended to implement, this to avoid any possible misunderstanding or
confusion as in the present case.23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or
agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977
NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to
do so would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is
estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum
Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of
payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or
tax credit and corresponding petition fro review within the
two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten
years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, -
was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the
case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of
refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in
effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative
interpretation which is out of harmony with or contrary to the express provision of a statute (specifically
Sec. 230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute.25

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of
the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau
head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of
respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the same. 27 Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held
by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi
juris against the taxpayer.28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying
its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom
availed of the automatic tax credit in 1987. Sec. 69 of the 1977 NIRC 29 (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.

As stated by respondent Court of Appeals:

90
Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax Appeals, after
examining the adjusted final corporate annual income tax return for taxable year 1986, found out that
petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987
annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can
no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its
1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual
corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the
findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance
thereon. 31 WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.1âwphi1.nêt SO ORDERED.

DIGEST:

FACTS

Petitioner PBCom filed its quarterly income tax returns for the first and second quarters
of 1985, reported profits, and paid its income tax. Subsequently, however, PBCom suffered
losses so that when it filed its Annual Income Tax Returns for the years 1985 and 1986, it
declared a net loss, thereby showing no income tax liability.

But during these two years, PBCom earned rental income from leased properties. The
lessees withheld and remitted to the BIR withholding creditable taxes.

In 1987, petitioner requested the CIR for a tax credit representing the overpayment of
taxes in the first and second quarters of 1985. Thereafter, petitioner filed a claim for refund of
creditable taxes withheld by their lessees from property rentals.

Pending the investigation of the respondent CIR, petitioner instituted a Petition for
Review before the CTA, which was denied on the ground that it was filed beyond the two-year
reglementary period provided for by law.

ISSUE

W/N the period for filing a petition for review has prescribed.

RULING

Yes. Section 230 of the NIRC provides for the 2-year prescriptive period for filing a
court proceeding for the recovery of tax erroneously or illegally collected and should be
computed from the time of filing the Adjustment Return and final payment of the tax for
the year.

However, the CTA after examining the adjusted final corporate annual income tax return
for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This
91
was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered
by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of
and applied the automatic tax credit to the succeeding year, hence it can no longer ask for
refund, as to the two remedies of refund and tax credit are alternative.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and
BANK OF THE PHILIPPINE ISLANDS as LIQUIDATOR OF PARAMOUNT ACCEPTANCE
CORPORATION, respondent. G.R. No. 117254 January 21, 1999 MENDOZA, J.:

This is a petition for review on certiorari of the decision, dated September 19, 1994, of the Court of Appeals affirming
the decision of the Court of Tax Appeals which ordered petitioner to refund P65,259.00 as overpaid income tax.

The facts are stated in the following portion of the decision of the CTA which the Court of Appeals quoted with approval:

Petitioner, Bank of the Philippine Islands (BPI for short) is a bank and trust corporation duly organized
and existing under Philippine laws. It acts as the liquidator of Paramount Acceptance Corporation after its
dissolution on March 31, 1986.

On April 2, 1986, Paramount Acceptance Corporation (Paramount for brevity) filed its Corporate Annual
Income Tax Return, for calendar year ending December 31, 1985, declaring a Net Income of
P3,324,802.00 (Exh. A). The income tax due thereon is P1,153,681.00. However, Paramount paid the
BIR its quarterly income tax, to wit:

Qtr. CR/ROR Date Bank Amount Exh.


1st 6817293 5/30/85 DBP P308,779.00 C
2nd 5613316 8/29/85 DBP 626,000.00 C-1
3rd 7720471 11/29/85 DBP 284,161.00 C-2
——————
TOTAL P1,218,940.00
==========

After deducting Paramount's total quarterly income tax payments of P1,218,940.00 from its income tax of
P1,153,681.00, the return showed a refundable amount of P65,259.00. The appropriate box in the return
was marked with a cross (x) indicating "To be refunded" he amount of P65,29,00.

n April 14, 1988, petitioner BPI, as liquidator of Paramount, through counsel filed a letter dated April 12,
1988 reiterating its claim for refund of P65,259.00 as overpaid income tax for the calendar year 1985.
The following day or on April 15, 1988. BPI filed the instant petition with this Court in order to toll the
running of the prescriptive period for filing a claim for refund of overpaid income taxes.

The question is whether the two-year period of prescription for filing a claim for refund, as provided in §230 of the
National Internal Revenue Code, is to be counted from April 2, 1986 when the corporate income tax return was actually
filed or from April l5, 1986 when, according to §70(b) of the NIRC, the final adjustment return could still be filed without
incurring any penalty. The aforesaid §230 of the NLRC1 provides that such period must be counted "from the date of
payment of the tax." But, given the facts as stated above, when was the corporate income tax paid in this case?

The Court of Tax Appeals rendered a decision decision the considering the two year period of prescription to have
commenced to run from April 15, 1986, the last day for filing the corporate income tax return, and, since the claim for
refund was filed on April 14, 1988 and the action was brought on April 15, 1988, it held that prescription had not set in.
Accordingly, the CTA ordered as follows:

92
WHEREFORE, the respondent [petitioner herein] is hereby ordered to REFUND in favor of petitioner, the
sum of P65,259.00, representing overpaid income tax of Paramount Acceptance Corporation for the
calendar year 1985. No pronouncement as to costs. SO ORDERED.2

On appeal, its decision was affirmed by the Court of Appeals. Said the appellate court:3

We agree with the respondent court's ruling that the date of payment of the tax as prescribed under the
Tax Code is the date when the corporate income tax return is required to be filed. . . .

The Supreme Court has laid down the rule regarding the computation of the prescriptive period that the
two-year period should be computed from the time of filing of the Adjustment Returns or Annual Income
Tax Return and final payment of income tax: it is only when the Adjustment Return covering the whole
year 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 (Commissioner of Internal Revenue vs. TMX Sales Inc., 205 SCRA
184). The two-year prescriptive period within which to claim a refund commences to run, at the earliest,
on the date of the filing of the adjusted final tax return (Commissioner of Internal Revenue vs. Asia
Australia Express Ltd., G.R. No. 85956). The "date of payment" from which to reckon the two-year
period, in the case of a corporation whose taxable year is on a calendar basis, is the 15th day of the
fourth month (April 15th) following the close of the fiscal year, and the filing of the final adjustment return
on April 15th, following the close of the preceding taxable year, is such "date of payment" (ACCRA
Investments Corp. vs. Court of Appeals, 204 SCRA 957).

In this case, BPI filed its final adjustment return on April 2, 1985. No taxes were paid then because the
returns showed that the quarterly taxes already paid exceeded the income tax due by P65,259.00. As
correctly put by BPI, it is only on April 15 that the previous year's income tax becomes due and payable
and the taxpayer is still free to make amendments or adjustments on its return, without penalty, until April
15, 1986 (See Section 80, N.I.R.C.). Thus the final payment of income tax should be deemed to be on
April 15, 1986, when the previous year's income tax became due and payable and when the quarterly
corporate income taxes may be considered paid. Accordingly the administrative claim and court
proceeding for tax refund were timely filed.

Petitioner disagrees with the foregoing decision of the Court of Appeals. He contends that the two-year prescriptive
period should be computed from April 2, 1984, when the final adjustment return was actually filed, because that is the
time of payment of the tax, within the meaning of §230 of the NIRC.

We agree.

The conclusions reached by the appellate court are contrary to the very rulings cited by it. In Commissioner of Internal
Revenue v. TMX Sales, Inc.,4 this Court, in rejecting the contention that the period of prescription should be counted
from the date of payment of the quarterly tax, held:

. . . [T]he filing of a quarterly income tax return required in Section 85 [now Section 68] and implemented
per BIR Form 1702-Q and payment of quarterly income tax should only be considered mere installments
of the annual tax due. These quarterly tax payment which are computed based on the cumulative figures
of gross receipts and deductions in order to arrive at a net taxable income, should be treated as
advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal
year. This is reinforced by Section 87 [now Section 69] which provides for the filing of adjustment returns
and final payment of income tax. Consequently, the two-year prescriptive period provided in Section 292
[now Section 230 of the Tax Code] should be computed from the time of filing the Adjustment Return or
Annual Income Tax Return and final payment of income tax.

On the other hand, in ACCRA Invesments Corporation v. Court of Appeals,5 where the question was whether the two-
year period of prescription should be reckoned from the end of the taxable year (in that case December 31, 1981), we
explained why the period should be counted from the filing of the final adjustment return, thus:6

93
Clearly, there is the need to file a return first before a claim for refund can proper inasmuch as the
respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer opting
to ask for a refund must show in its final adjustment return the income it received from all sources and
the amount of withholding taxes remitted by its withholding agents to the Bureau of Internal Revenue.
The petitioner corporation filed its final adjustment return for its 1981 taxable year on April 15, 1982. In
our Resolution dated April 10, 1989 in the case of Commissioner of Internal Revenue v. Asia Australia
Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a
refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. Hence,
the petitioner corporation had until April 15, 1984 within which to file its claim for refund.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with
respect to the petitioner corporation's claim for refund from the time it filed is final adjustment return is the
fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its
business operations. The "date of payments", therefore, in ACCRAIN's case was when its tax liability, if
any, fell due upon its filing of its final adjustment return on April 15, 1982.

Finally, in Commissioner of Internal Revenue v. Philippine American Life Insurance Co.,7 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. In the present
case, this date is April 16, 1984, and two years from this date would be April 16, 1986. The record shows
that the claim for refund was filed on December 10, 1985 and the petition for review was brought before
the CTA on January 2, 1986. Both dates are within the two-year reglementary period. Private respondent
being a corporation, Section 292 [now Section 230] cannot serve as the sole basis for determining the
two-year prescriptive period for refunds. As we have earlier stated in the TMX Sales case. Sections 68,
69, and 70 on Quarterly Corporate Income Tax Payment and Sectibn 321 should be construed in
conjunction with it.

Sec. 49(a) of the NIRC provides that —

§9. Payment and assessment of income tax for individuals and corporations.

(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, §70(b) of the same Code provides that —

§70 (b) Title of filing the income return — The corporate quarterly declaration shall be filed within sisty
(60) days following the close 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 contest of §230, which provides for a two-year period of
prescription counted "from the date of payment of the tax" for actions for refund of corporate income tax, the two-year
period should be computed from the time of actual filing of the Adjustment Return or Annual Income Tax Return. This is
so because at that point, it can already be determined whether there has been an overpayment by the taxpayer.
Moreover, under §49(a) of the NIRC, payment is made at the time the return is filed.

In the case at bar, Paramount filed its corporate annual income tax return on April 2, 1986. However, private respondent
BPI, as liquidator of Paramount, filed a written claim for refund only on April 14, 1988 and a petition for refund only on
April 15, 1988. Both claim and action for refund were thus barred by prescription.

The foregoing conclusion makes it unnecessary for us to pass on the other issues raised in this case by petitioner.

WHEREFORE, the decision of the Court of Appeals is REVERSED and the petition for refund filed by private
respondent is DISMISSED on the ground that it is barred by prescription.1âwphi1.nêt SO ORDERED.
94
NO DIGEST

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE PHILIPPINE AMERICAN LIFE INSURANCE CO.,
THE COURT OF TAX APPEALS and THE COURT OF APPEALS, respondents. G.R. No. 105208 May 29, 1995
ROMERO, J.:

This is a petition for review on certiorari filed by petitioner, Commissioner of Internal Revenue, of the Decision1dated
March 26, 1992 of the Court of Appeals in CA-GR No. 26598, entitled "Commissioner of Internal Revenue v. The
Philippine American Life Insurance Co. & the Court of Tax Appeals" affirming the decision of respondent Court of Tax
Appeals which ordered the refund to the Philippine American Life Insurance Co. (Philamlife) of the amount of
P3,643,015.00 representing excess corporate income taxes for the first and second quarters of 1983.

Private respondent filed a case before the Court of Tax Appeals (CTA) docketed as CTA Case No. 4018 entitled "The
Philippine American Life Insurance Company versus Commissioner of Internal Revenue."

On September 16, 1991, the CTA rendered a decision in the above-entitled case, the dispositive portion of which
states:

WHEREFORE, petitioner's claim for refund for P3,246,141.00 and P396,874.00 representing excess
corporated income tax payments for the first and second quarters of 1983, respectively, or a total of
P3,643,015.00 is hereby GRANTED. Accordingly, respondent Commissioner of Internal Revenue, is
hereby ordered to refund to petitioner Philippine American Life Insurance Company the total amount of
P3,643,015.00.

With respect to petitioner's claim for refund of P215,742.00 representing 1983 withholding taxes on rental
income the same is hereby DENIED for failure to present proof of actual-withholding and payment with
the Bureau of Internal Revenue. No costs.

The facts, uncontroverted by petitioner, are:

On May 30, 1983, private respondent Philamlife paid to the Bureau of Internal Revenue (BIR) its first quarterly
corporate income tax for Calendar Year (CY) 1983 amounting to P3,246,141.00.

On August 29, 1983, it paid P396,874.00 for the Second Quarter of 1983.

For the Third Quarter of 1983, private respondent declared a net taxable income of P2,515,671.00 and a tax due of
P708,464.00. After crediting the amount of P3,899,525.00 it declared a refundable amount of P3,158,061.00.

For its Fourth and final quarter ending December 31, private respondent suffered a loss and thereby had no income tax
liability. In the return for that quarter, it declared a refund of P3,991,841.00 representing the first and second quarterly
payments: P215,742.00 as withholding taxes on rental income for 1983 and P133,084.00 representing 1982 income tax
refund applied as 1983 tax credit.

In 1984, private respondent again suffered a loss and declared no income tax liability. However, it applied as tax credit
for 1984, the amount of P3,991,841.00 representing its 1982 and 1983 overpaid income taxes and the amount of
P250,867.00 as withholding tax on rental income for 1984.

On September 26, 1984, private respondent filed a claim for its 1982 income tax refund of P133,084.00. On November
22, 1984, it filed a petition for review with the Court of Tax Appeals (C.T.A. Case No. 3868) with respect to its 1982
claim for refund of P133,084.00.

95
On December 16, 1985, it filed another claim for refund with petitioners appellate division in the aggregate amount of
P4,109,624.00, computed as follows:

1982 income tax refundable


applied as tax credit P 133,084
1983 income tax refundable
applied as tax credit P 3,858,757
1984 tax credit on rental P 250,867

T o t a l P 4,242,708

Less: 1983 claim for


refund already
filed with the
BIR and the
CTA
(Case No. P 133,084
3868)
——————
Net Amount Refundable — P 4,109,624
===========

On January 2, 1986, private respondent filed a petition for review with the CTA, docketed as CTA Case No. 4018
regarding its 1983 and 1984 claims for refund in the above-stated amount.

Later, it amended its petition by limiting its claim for refund to only P3,858,757.00 computed as follows:

Calendar Year
Ending 12-31-83
Date Paid O.R. No. Amount Paid
First Quarter 5/30/83 B2269337 P3,246,141.00
Second Quarter 8/29/83 B1938178 396,874.00
1983 Withholding Tax on rental income 215,742.00
1983 Income Tax Refundable P3,858,757.00

The issue in this case is the reckoning date of the two-year prescriptive period provided in Section 230 of the National
Internal Revenue Code (formerly Section 292) which states that:

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; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund

96
or credit any tax, where on the face of the return upon which payment was made, such payment appears
clearly to have been erroneously paid.

Forfeiture of refund. — A refund check or warrant issued in accordance with the pertinent provisions of
this Code which shall remain unclaimed or uncashed within five (5) years from the date the said warrant
or check was mailed or delivered shall be forfeited in favor of the government and the amount thereof
shall revert to the General Fund.

Petitioner poses the following question: In a case such as this, where a corporate taxpayer remits/pays to the BIR tax
withheld on income for the first quarter but whose business operations actually resulted in a loss for that year, as
reflected in the Corporate Final Adjustment Return subsequently filed with the BIR, should not the running of the
prescriptive period commence from the remittance/payment at the end of the first quarter of the tax withheld instead of
from the filing of the Final Adjustment Return?

In support of its contention, petitioner cites the case of Pacific Procon Ltd. v. Court of Tax Appeals, et a1.2 wherein the
CTA denied therein petitioner's claim for refund after it construed Section 292 (now Section 230) of the NIRC to be
mandatory and "not subject to any qualification," hence it applies regardless of the conditions under which payment
may have been made. The Tax Court ruled:

Under Section 292 (formerly Section 306) of the National Internal Revenue Code, a claim for refund of a
tax alleged to have been erroneously or illegally collected shall be filed with the Commissioner of Internal
Revenue within two years from the date of payment of the tax, and that no suit or proceeding for refund
shall be begun after the expiration of the said two-year period (Citation omitted). As a matter of fact, the
said section further provides that: . . . In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment.

Petitioner states that the phrase "regardless of supervening cause that may arise after payment" is an amendatory
phrase under the said Section 292 which did not appear in Section 306 of the old Tax Code before it was amended by
Presidential Decree No. 69, which became effective January 1, 1973. Petitioner argues that the incorporation of the
said phrase did away with any other interpretation and, therefore, the reckoning period of prescription under Section
292 (now section 230) is from the date of payment of tax regardless of financial loss (the "supervening cause"). Thus,
the claim for refund of the amounts of P3,246,141.00 and P396,874.00 paid on May 30, 1983 and August 29, 1983,
respectively, has prescribed.

We find petitioner's contentions to be unmeritorious.

It is true that in the Pacific Procon case, we held that the right to bring an action for refund had prescribed, the tax
having been found to have been paid at the end of the first quarter when the withholding tax corresponding thereto was
remitted to the Bureau of Internal Revenue, not at the time of filing of the Final Adjustment Return in April of the
following year.

However, this case was overturned by the Court in Commissioner of Internal Revenue v. TMX Sales Incorporated and
the Court of Tax Appeals,3 wherein we said:

. . . in resolving the instant case, it is necessary that we consider not only Section 292 (now Section 230)
of the National Internal Revenue Code but also the other provisions of the Tax Code, particularly
Sections 84, 85 (now both incorporated as Section 68), Section 86 (now Section 70) and Section 87
(now Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on
keeping of books of accounts. All these provisions of the Tax Code should be harmonized with each
other.

Section 292 (now Section 230) stipulates that the two-year prescriptive period to claim refunds should be counted from
date of payment of the tax sought to be refunded. When applied to tax payers filing income tax returns on a quarterly
basis, the date of payment mentioned in Section 292 (now Section 230) must be deemed to be qualified by Sections 68
and 69 of the present Tax Code which respectively provide:
97
Sec. 68 Declaration of Quarterly Income Tax. — Every corporation shall file in duplicate a quarterly
summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter
or quarters upon which the income tax, as provided in Title II of this Code shall be levied, collected and
paid. The Tax so computed shall be decreased by the amount of tax previously paid or assessed during
the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first
three (3) quarters of the taxable year.

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 shall either:

(a) Pay the excess 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.

It may be observed that although quarterly taxes due are required to be paid within sixty days from the close of each
quarter, the fact that the amount shall be deducted from the tax due for the succeeding quarter shows that until a final
adjustment return shall have been filed, the taxes paid in the preceding quarters are merely partial taxes due from a
corporation. Neither amount can serve as the final figure to quantity what is due the government nor what should be
refunded to the corporation.

This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides that the
refundable amount, in case a refund is due a corporation, is that amount which is shown on its final adjustment return
and not on its quarterly returns.

Therefore, when private respondent paid P3,246,141.00 on May 30, 1983, it would not have been able to ascertain on
that date, that the said amount was refundable. The same applies with cogency to the payment of P396,874.00 on
August 29, 1983.

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. In the present case, this date is April 16,
1984, and two years from this date would be April 16, 1986. The record shows that the claim for refund was filed on
December 10, 1985 and the petition for review was brought before the CTA on January 2, 1986. Both dates are within
the two-year reglementary period. Private respondent being a corporation, Section 292 (now Section 230) cannot serve
as the sole basis for determining the two-year prescriptive period for refunds. As we have earlier said in the TMX
Sales case, Sections 68, 69, and 70 on Quarterly Corporate Income Tax Payment and Section 321 should be
considered in conjunction with it.

Moreover, even if the two-year period had already lapsed, the same is not jurisdictional4 and may be suspended for
reasons of equity and other special circumstances.5

Petitioner also raises the issue of whether or not private respondent has satisfactorily shown by competent evidence
that it is entitled to the amount sought to be refunded. This being a question of fact, this Court is bound by the findings
of the Court of Tax Appeals which has clearly established the propriety of private respondent's claim for refund for
excess 1983 quarterly income tax payments. On the other hand, petitioner Commissioner of Internal Revenue has
failed to present any documentary or testimonial evidence in support of his case. Instead, he opted to postpone the
hearings several times and later chose to submit the case for decision on the basis of the records and pleadings of
instant case.

98
To repeat, we find that private respondent has presented sufficient evidence in support of its claim for refund, whereas
petitioner has failed to controvert the same adequately. WHEREFORE, the instant petition is DISMISSED and the
decision of the Court of Appeals is hereby AFFIRMED in toto. No costs. SO ORDERED.

Separate Opinion VITUG, J., concurring:

Domestic corporations, as well as foreign corporations engaged in trade or business in the Philippines, are required to
render within sixty days following the close of each quarter income tax returns on a cumulative basis for the preceding
quarter or quarters, upon which their income tax is paid, and a final adjustment return on or before the 15th day of April
or of the fourth month following the close of the fiscal year covering the entire taxable income of the preceding calendar
or fiscal year. The tax thus computed, adjusted and thereupon paid each time for any of the quarters preceding the last
quarter of the taxable year is provisional in nature. The income tax liability of taxpayers is determined on the basis of a
full taxable period.

Section 230 of the National Internal Revenue Code precludes any suit or proceeding from being maintained in any court
for the recovery of any national internal revenue tax 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 said to have been excessive or in any
manner wrongfully collected unless (a) a written claim for the refund or credit thereof has been duly filed with the
Commissioner and (b) the suit or proceeding shall have been instituted within two years from the date of payment of the
tax or penalty regardless of any supervening cause that might arise after such payment (revoking the rule announced
in Commissioner vs. National Power Corporation, 31 SCRA 112 and Commissioner vs. Victorias Milling Company, 22
SCRA 13). The two-year period, it may be observed, is a limitation of action not only in submitting the written claim for
the refund of the tax to the Commissioner but likewise in filing the case (appeal) with the Court of Tax Appeals (which
has jurisdiction thereover exclusive of the regular courts). This two-year period, unlike the thirty-day period of appeal
from the decision of the Commissioner, is not jurisdictional1 and it may thereby be suspended under exceptional
circumstances.2 It may also be well to point out, parenthetically, that this two-year prescriptive period is intended to
apply to suits or proceedings for the recovery of taxes, penalties or sums erroneously, excessively, illegally or
wrongfully collected, accordingly, an availment of a tax credit granted by law may have a different prescriptive period.
Absent any specific provision in the Tax Code or special laws, that period would be ten years under Article 1144 of the
Civil Code.3

Whenever applicable, the two-year prescriptive period starts from the full and final payment of the tax sought to be
recovered.4 In Collector of Internal Revenue vs. Prieto,5 The Court quoted with approval the disquisition of the Court of
Tax Appeals thusly:

The defunct Board of Tax Appeals in the case of RCA Communications, Inc. vs. David (B.T.A. Case No.
116, Resolution, June 18, 1953) held that when the tax is paid in installments, the prescriptive period of
two years provided in section 306 of the Revenue Code should be counted from the date of the final
payment. We agree with this view as being reasonable and which appears to be the uniform doctrine in
American jurisdiction. This rule proceeds from the theory that, in contemplation of tax laws, there is no
payment until the whole or entire tax liability is completely paid. Thus, a payment of a part or portion
thereof, can not operate to start the commencement of the statute of limitations. In this regard the word
"tax," or words "the tax" in statutory provisions comparable to section 306 of our Revenue Code have
been uniformly held to refer to the entire tax and not a portion thereof (Clark vs. U.S. 69 F. 2d 748; A.S.
Kriedner Co. vs. U.S. 30 F Supp. 724; Hills vs. U.S. 50 F 2d 302, 55 F 2d 1001), and the vocables
"payment of tax" within statutes requiring refund claim, refer to the date when all the tax was paid, not
when a portion was paid (Braun vs. U.S. 8 F Supp. 860, 863).

The two-year period, in the case of the quarterly income tax payment system for corporations, should be deemed to
start only from the time the final adjustment tax is due and payable. In Gibbs vs. Commissioner,6 the Court said that if
the tax is withheld at source, a concept similar to, albeit not on all fours with, the corporate quarterly tax payment
scheme, the two year period starts when the tax falls due at the end of the taxable year. In fine, corporate income tax
payments for the first three quarters of the taxable year should, for purposes of the two-year prescriptive period, be
deemed to have been paid on the 15th day of April or of the fourth month following the close of the fiscal year covering
the entire taxable income of the preceding calendar or fiscal year.7

99
I subscribe, therefore, to the ponencia of my esteemed colleague, Mme. Justice Flerida Ruth P. Romero, affirming the
decision of the Court of Appeals that sustained the judgment of the Court of Tax Appeals.

NO DIGEST

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PHILIPPINE NATIONAL BANK, Respondent.


G.R. No. 161997 October 25, 2005 GARCIA, J.:

Thru this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue seeks to set aside the Decision dated October 14, 20031 of the Court of Appeals
(CA) in CA-G.R. SP No. 76488 and its Resolution dated January 26, 20042 denying petitioner’s motion for
reconsideration.

The petition is cast against the following factual setting:

In early April 1991, respondent Philippine National Bank (PNB) issued to the Bureau of Internal Revenue (BIR) PNB
Cashier’s Check No. 109435 for P180,000,000.00. The check represented PNB’s advance income tax payment for the
bank’s 1991 operations and was remitted in response to then President Corazon C. Aquino’s call to generate more
revenues for national development. The BIR acknowledged receipt of the amount by issuing Payment Order No. C-
10151465 and BIR Confirmation Receipt No. 22063553, both dated April 15, 1991. 3

Via separate letters dated April 19 and 29, 1991 and May 14, 19914 to then BIR Commissioner Jose C. Ong, PNB
requested the issuance of a tax credit certificate (TCC) to be utilized against future tax obligations of the bank.

For the first and second quarters of 1991, PNB also paid additional taxes amounting to P6,096,150.00 and
P26,854,505.80, respectively, as shown in its corporate quarterly income tax return filed on May 30, 1991. 5Inclusive of
the P180 Million aforementioned, PNB paid and BIR received in 1991 the aggregate amount of P212, 950,656.79. 6 This
final figure, if tacked to PNB’s prior year’s excess tax credit (P1,385,198.30) and the creditable tax withheld for 1991
(P3,216,267.29), adds up to P217,552,122.38.

By the end of CY 1991, PNB’s annual income tax liability, per its 1992 annual income tax return,7 amounted to
P144,253,229.78, which, when compared to its claimed total credits and tax payments of P217,552,122.38, resulted to
a credit balance in its favor in the amount of P73,298,892.60.8 This credit balance was carried-over to cover tax liability
for the years 1992 to 1996, but, as PNB alleged, was never applied owing to the bank’s negative tax position for the
said inclusive years, having incurred losses during the 4-year period.

On July 28, 1997, PNB wrote then BIR Commissioner Liwayway Vinzons-Chato, Attention: Appellate Division, to inform
her about the above developments and to reiterate its request for the issuance of a TCC, this time for the "unutilized
balance of its advance payment made in 1991 amounting to P73,298,892.60".9 This request was forwarded for review
and further processing to the Office of the Deputy Commissioner for Legal and Inspection Group, Lilian B. Hefti, and
then to the BIR’s Large Taxpayers Service.

In a letter dated July 26, 2000, PNB sought reconsideration of the decision of Deputy Commissioner Hefti not to take
cognizance of the bank’s claim for tax credit certificate on the ground that the jurisdiction of the Appellate Division is
limited to claims for tax refund and credit "involving erroneous or illegal collection of taxes whenever there are questions
of law and/or facts and does not include claims for refund of advance payment, pursuant to Revenue Administrative
Order [RAO] No. 7-95 dated October 10, 1995."10 In her letter-reply dated August 8, 2008,11 Deputy Commissioner Hefti
denied PNB’s request for reconsideration with the following explanations:

In reply, please be advised that upon review . . . of your case, this Office finds that the same presents no legal question
for resolution. Rather, what is involved is the verification of factual matters, i.e., the existence of material facts to
establish your entitlement to refund. Such facts were initially verified through the proper audit of your refund case by the
investigating unit under the functional control and supervision of the Deputy Commissioner, Operations Group of this

100
Bureau. It is therefore right and proper for the Operations Group to review, confirm and/or pass judgment upon the
findings of the unit under it.

At any rate, sound management practices demand that issues as crucial as refund cases be subjected to complete staff
work. There might be a little delay in the transition of cases but expect the new procedures to be well-established in no
time. Allow us, however, to allay your concern about delayed processing of your claim. In fact, the undersigned has
made representations with the Operations Group about your case and if you would check the status of your case again,
you will find that the same has been duly acted upon." (Emphasis supplied)

On August 14, 2001, PNB again wrote the BIR requesting that it be allowed to apply its unutilized advance tax payment
of P73,298,892.60 to the bank’s future gross receipts tax liability.12

Replying, the BIR Commissioner denied PNB’s claim for tax credit for the following reasons stated in his letter of May
21, 2002, to wit:13

1. The amount subject of claim for [TCC] is being carried over from your 1991 to 1996 Annual Income Tax Returns. xxx.
To grant your claim would result into granting it twice – first for tax carry over as shown in your 1991 amended Income
Tax Return and second for granting a tax credit.

2. When you requested for a refund on April 19, 1991, reiterated on April 29, 1991 and again on May 14, 1991 on
alleged excess income taxes, the same was considered premature since the determination . . . of your income tax
liability can only be ascertained upon filing of your Final or Adjusted Income Tax Return for 1991 on or before April 15,
1992.

3. When you carried over the excess tax payments from 1991 to 1996 Annual Income Tax Return, you had already
abandoned your original intention of claiming for a [TCC]. Furthermore, the 1991 amended Income Tax Return you filed
on April 14, 1994 clearly showed that the amount being claimed has already been applied as tax credit against your
1992 income tax liability.

4. Although there was already a recommendation for the issuance of a [TCC] by the Chief, Appellate Division and
concurred in by the Assistant Commissioner, Legal Service, the recommendation was for . . . year 1992 and not for the
taxable year 1991, which is the taxable year involved in this case.

5. Even if you reiterated your claim for tax credit certificate when you filed your claim on July 28, 1997, the same has
already prescribed on the ground that it was filed beyond the two (2) year prescriptive period as provided for under
Section 204 of NIRC. [Words in bracket and emphasis added]

On June 20, 2002, PNB, via a petition for review, appealed the denial action of the BIR Commissioner to the Court of
Tax Appeals (CTA). There, its appellate recourse was docketed as C.T.A. Case No. 6487.

The Revenue Commissioner filed a motion to dismiss PNB’s aforementioned petition on ground of prescription under
the 1977 National Internal Revenue Code (NIRC)14. To this motion, PNB interposed an opposition, citing Commissioner
of Internal Revenue vs. Philippine American Life Insurance Co.15

In its Resolution of October 10, 2002,16 the CTA granted the Commissioner’s motion to dismiss and, accordingly, denied
PNB’s petition for review, pertinently stating as follows:

To reiterate, both the claim for refund and the subsequent appeal to this court must be filed within the same two (2)-
year period [provided in Sec. 230 of the NIRC]. This is not subject to qualification. The court is bereft of any jurisdiction
or authority to hear the instant Petition for Review, considering that the above stated action for refund was filed beyond
the two (2)-year prescriptive period as allowed under the Tax Code. (Words in bracket added)

PNB’s motion for reconsideration was denied by the tax court in its subsequent Resolution of March 20, 2003.17

101
In time, PNB filed a petition for review with the Court of Appeals (CA), thereat docketed as CA-G.R. SP No. 76488,
arguing that the applicability of the two (2)-year prescriptive period is not jurisdictional and that said rule admits of
certain exceptions.18 Following the filing by the Commissioner Internal Revenue of his Comment to PNB’s petition in
CA-G.R. in SP No. 76488, respondent PNB filed a Supplement to its Petition for Review.19

In the herein assailed Decision dated October 14, 2003,20 the appellate court reversed the ruling of the CTA, disposing
as follows:

WHEREFORE, premises considered, the present petition is hereby GIVEN DUE COURSE. Consequently, the assailed
Resolutions dated October 10, 2002 and March 30, 2003 of the Court of Tax Appeals in C.T.A. Case No. 6487 are
hereby ANNULLED and SET ASIDE. The case is hereby REMANDED to the respondent Commissioner for issuance
with deliberate dispatch of the tax credit certificate after completion of processing of petitioner’s claim/request by the
concerned BIR officer/s as to the correct amount of tax credit to which petitioner is entitled. No pronouncements as to
costs. SO ORDERED.

In gist, the appellate court predicated its disposition on the following main premises:

1. Considering the "special circumstance" that the tax credit PNB has been seeking is to be sourced not from any tax
erroneously or illegally collected but from advance income tax payment voluntarily made in response to then President
Aquino’s call to generate more revenues for the government, in no way can the amount of P180 million advanced by
PNB in 1991 be considered as erroneously or illegally paid tax.21

2. The BIR is deemed to have waived the two (2)-year prescriptive period when its officials led the PNB to believe that
its request for tax credit had not yet prescribed since the matter was not being treated as an ordinary claim for tax
refund/credit or a simple case of excess payment.

3. Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.22 instructs that even if the two (2)-year
prescriptive period under the Tax Code had already lapsed, the same is not jurisdictional, and may be suspended for
reasons of equity and other special circumstances. PNB’s failure to apply the advance income tax payment due to its
negative tax liability in the succeeding taxable years i.e., 1992-1996, should not be subject to the two (2)-year limitation
as to bar its claim for tax credit. The advance income tax payment, made as it were under special circumstances,
warrants a suspension of the two (2)-year limitation, underscoring the fact that PNB’s claim is not even a simple case
of excess payment.

In time, the BIR Commissioner moved for a reconsideration, but its motion was denied by the appellate court in its
equally challenged Resolution of January 26, 2004.23

Hence, the Commissioner’s present recourse on the following substantive submissions:

1. A prior tax assessment before respondent PNB can apply for tax credit is unnecessary;

2. PNB’s letter dated April 19, 29 and May 14, 1991 cannot be legally interpreted as claims for refund or tax credit as
required by the NIRC;

3. PNB’s claim for tax credit is barred by prescription; and

4. The equitable principle of estoppel does bar the BIR petitioner from collecting taxes due. 24

Petitioner first scores the CA for concluding that "the amount of advance income tax payment voluntarily remitted to the
BIR by the [respondent] was not a consequence of a prior tax assessment or computation by the taxpayer based on
business income" and, therefore, it cannot "be treated as similar to those national revenue taxes erroneously, illegally or
wrongfully paid as to be automatically covered by the two (2)-year limitation under Sec. 230 [of the NIRC] for the right to
its recovery." Petitioner invokes the all too-familiar principle that the collection of taxes, being the lifeblood of the
nation,25 should be summary and with the least interference from the courts.

102
Pressing its point, petitioner asserts that what transpired under the premises is a case of excessive collection not
arising from an erroneous, illegal of wrongful assessment and collection. According to petitioner, respondent PNB, after
making a prepayment of taxes in 1991, had realized, upon filing, in 1992, of its 1991 final annual income tax return, the
excess payment by simple process of mathematical computation; hence, it was unnecessary to make any assessment
of overpaid taxes. Moreover, petitioner points out that the tenor of PNB’s letters of April 19, 29, and May 14,
199126 indicated a mere request for an issuance of a TCC covering the advance payments of taxes, not a claim for
refund or tax credit of overpaid national internal revenue taxes.

Citing Revenue Regulation No. 10-77, petitioner likewise argues that any excess or overpaid income tax for a given
taxable year may be carried to the succeeding taxable year only. It cannot, petitioner expounds, go beyond, as what
respondent PNB attempted to do in 1997, when, after realizing the inapplicability of the excess carry-forward scheme
for its 1992 income tax liabilities owing to its negative tax position for the 1992 to 1996 tax period, it belatedly requested
for a TCC issuance.

Lastly, petitioner urges the Court to make short shrift of the invocation of equity and estoppel, on the postulate that the
erroneous application and enforcement of tax laws by public officers does not preclude the subsequent correct
application of such laws.27

In its Comment, respondent PNB contends that its claim for tax credit did not arise from overpayment resulting from
erroneous, illegal or wrongful collection of tax. And obviously having in mind the holding of this Court in Juan Luna
Subdivision Inc. vs. Sarmiento,28 respondent stresses that its P180 Million advance income tax payment for 1991
partakes of the nature of a deposit made in anticipation of taxes not yet due or levied. Accordingly, respondent adds,
the P180 Million was strictly not a payment of a valid and existing tax liability, let alone an erroneous payment, the
refund of which is governed by Section 230 of the NIRC.

Taking a different tack, respondent PNB would also argue that, even assuming, in gratia argumenti that the two (2)-year
limitation in Section 230 of the NIRC is of governing application, still the prescriptive period set forth therein is not
jurisdictional. The suspension of the statutory limitation in this case, PNB adds, is justified under exceptional
circumstance.

We rule for respondent PNB.

As may be recalled, both the CTA’s and the BIR’s refusal to grant PNB’s claim for refund or credit was based on the
proposition that such claim was time-barred. On the other hand, the CA rejected both the CTA’s and BIR’s stance for
reasons as shall be explained shortly.

As we see it then, the core issue in this case pivots on the applicability hereto of the two (2)-year prescriptive period
under in Section 230 (now Sec. 229) of the NIRC, reading:

"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 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; but such suit or proceeding may be maintained, whether or
not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two [(2)] years from the date of payment of
the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid. (Underscoring added.)

Here, respondent PNB requested the BIR to issue a TCC on the remaining balance of the advance income tax payment
it made in 1991. It should be noted that the request was made considering that, while PNB carried over such credit
balance to the succeeding taxable years, i.e., 1992 to 1996, its negative tax position during said tax period prevented it
from actually applying the credit balance of P73, 298,892.60. It is fairly correct to say then that the claim for tax credit
was specifically pursued to enable the respondent bank to utilize the same for future tax liabilities. However, petitioner
ruled that the claim in question is time-barred, the bank having filed such claim only in 1997, or more than two (2) years
103
from 1992 when the overpayment of annual income tax for 1991 was realized by the bank and the amount of excess
payment ascertained with the filing of its final 1991 income tax return.

In rejecting petitioner’s ruling, as seconded by the CTA, the CA stated that PNB’s request for issuance of a tax credit
certificate on the balance of its advance income tax payment cannot be treated as a simple case of excess payment as
to be automatically covered by the two (2)-year limitation in Section 230, supra of the NIRC.

We agree with the Court of Appeals.

Section 230 of the Tax Code, as couched, particularly its statute of limitations component, is, in context, intended to
apply to suits for the recovery of internal revenue taxes or sums erroneously, excessively, illegally or wrongfully
collected.

Black defines the term erroneous or illegal tax as one levied without statutory authority.29 In the strict legal viewpoint,
therefore, PNB’s claim for tax credit did not proceed from, or is a consequence of overpayment of tax erroneously or
illegally collected. It is beyond cavil that respondent PNB issued to the BIR the check for P180 Million in the concept of
tax payment in advance, thus eschewing the notion that there was error or illegality in the payment. What in effect
transpired when PNB wrote its July 28, 1997 letter30 was that respondent sought the application of amounts advanced
to the BIR to future annual income tax liabilities, in view of its inability to carry-over the remaining amount of such
advance payment to the four (4) succeeding taxable years, not having incurred income tax liability during that period.

The instant case ought to be distinguished from a situation where, owing to net losses suffered during a taxable year, a
corporation was also unable to apply to its income tax liability taxes which the law requires to be withheld and remitted.
In the latter instance, such creditable withholding taxes, albeit also legally collected, are in the nature of "erroneously
collected taxes" which entitled the corporate taxpayer to a refund under Section 230 of the Tax Code. So it is that
in Citibank, N.A. vs. Court of Appeals31, we held:

The taxes thus withheld and remitted are provisional in nature. We repeat: five percent of the rental income withheld
and remitted to the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the withholding of final taxes on passive incomes, a
creditable withholding tax; that is, creditable against income tax liability if any, for that taxable year.

In Commissioner of Internal Revenue vs. TMX Sales, Inc., this Court ruled that the payments of quarterly income taxes
(per Section 68, NIRC) should be considered mere installments on the annual tax due. These quarterly tax payments . .
. should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or
fiscal year. The same holds true in the case of the withholding of creditable tax at source. Withholding taxes are
"deposits" which are subject to adjustments at the proper time when the complete tax liability is determined.

In this case, the payments of the withholding taxes for 1979 and 1980 were creditable to the income tax liability, if any,
of petitioner-bank, determined after the filing of the corporate income tax returns on April 15, 1980 and April 15,
1981. As petitioner posted net losses in its 1979 and 1980 returns, it was not liable for any income taxes. Consequently
and clearly, the taxes withheld during the course of the taxable year, while collected legally under the aforecited
revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable
year. (Underscoring added)

Analyzing the underlying reason behind the advance payment made by respondent PNB in 1991, the CA held that it
would be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Section 230
of the Tax Code. So that even if the respondent’s inability to carry-over the remaining amount of its advance payment to
taxable years 1992 to 1996 resulted in excess credit, it would be inequitable to impose the two (2)-year prescriptive
period in Section 230 as to bar PNB’s claim for tax credit to utilize the same for future tax liabilities. We quote with
approval the CA’s disquisition on this point:

Thus, in no sense can the subject amount of advance income tax voluntarily remitted to the BIR by the [respondent], not
as a consequence of prior tax assessment or computation by the taxpayer based on business income, be treated as
similar to those national revenue taxes erroneously, illegally or wrongfully paid as to be automatically covered by the
two (2)-year limitation under Sec. 230 for the right to its recovery. When the P180 million advance income tax payment
was tendered by [respondent], no tax had been assessed or due, or actually imposed and collected by the BIR. Neither
104
can such payment be considered as illegal having been made in response to a call of patriotic duty to help the national
government …. We therefore hold that the tax credit sought by [respondent] is not simply a case of excess payment,
but rather for the application of the balance of advance income tax payment for subsequent taxable years after failure or
impossibility to make such application or carry over the preceding four (4)-year period when no tax liability was incurred
by petitioner due to losses in its operations. It is truly inequitable to strictly impose the two (2)-year prescriptive period
as to legally bar any request for such tax credit certificate considering the special circumstances under which the
advance income tax payment was made and the unexpected event (four years of business losses) which prevented
such application or carry over. Ironically, both the [petitioner] and CTA would fault the [respondent] for electing to credit
or carry over the excess amount of tax payment advanced instead of choosing to refund any such excess amount,
holding that such decision on the part of petitioner caused the two (2)-year period to lapse without the petitioner filing
such a request for the issuance of a tax credit certificate. They emphasized that the advance tax payment was made
with the understanding that any excess amount will be either carried over to the next taxable year or refunded. It
appears then that the request for issuance of a tax credit certificate was arbitrarily interpreted by respondent as a
simple claim for refund instead of a request for application of the balance (excess amount) to tax liability for the
succeeding taxable years, as was the original intention of [respondent] when it tendered the advance payment in
1991."32 (Emphasis in the original; words in bracket added)

Petitioner insists that a prior tax assessment in this case was unnecessary, the excess tax payment having already
been ascertained by the end of 1992 upon the filing by respondent of its adjusted final return. Thus, petitioner adds, the
two (2)-year prescriptive period to recover said excess credit balance had begun to run from the accomplishment of the
said final return and, ergo, PNB’s claim for tax credit asserted in 1997 is definitely belated. Additionally, petitioner, citing
Revenue Regulation No. 10-77, contends that the carrying forward of any excess or overpaid income tax for a given
taxable year is limited to the succeeding taxable year only.

We do not agree.

Revenue Regulation No. 10-7733 governs the method of computing corporate quarterly income tax on a cumulative
basis. Section 7 thereof provides:

SEC. 7. Filing of final or adjustment return and final payment of income tax. -- A final or an adjustment return . . .
covering the total taxable income of the corporation for the preceding calendar or fiscal year shall be filed on or before
the 15th day of the fourth month following the close of the calendar or fiscal year. xxxx. The amount of income tax to be
paid shall be the balance of the total income tax shown on the final or adjustment return after deducting therefrom the
total quarterly income taxes paid during the preceding first three quarters of the same calendar or fiscal year.

"Any excess of the total quarterly payments over the actual income tax computed and shown 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 its intention whether to request for the refund of the overpaid
income or claim for automatic tax credit to be applied against its income tax liabilities for the quarters of the succeeding
taxable year by filling the appropriate box on the corporate tax return. (B.I.R. Form No. 1702) [Emphasis added]

As can be gleaned from the above, the mandate of Rev. Reg. No. 10-77 is hardly of any application to PNB’s advance
payment which, needless to stress, are not "quarterly payments" reflected in the adjusted final return, but a lump sum
payment to cover future tax obligations. Neither can such advance lump sum payment be considered overpaid income
tax for a given taxable year, so that the carrying forward of any excess or overpaid income tax for a given taxable year
is limited to the succeeding taxable year only.34 Clearly, limiting the right to carry-over the balance of respondent’s
advance payment only to the immediately succeeding taxable year would be unfair and improper considering that, at
the time payment was made, BIR was put on due notice of PNB’s intention to apply the entire amount to its future tax
obligations.

In Commissioner vs. Phi-am Life35, the Court ruled that an availment of a tax credit due for reasons other than the
erroneous or wrongful collection of taxes may have a different prescriptive period. Absent any specific provision in
the Tax Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code.
Significantly, Commissioner vs. Phil-Am is partly a reiteration of a previous holding that even if the two (2)-year

105
prescriptive period, if applicable, had already lapsed, the same is not jurisdictional36 and may be suspended for reasons
of equity and other special circumstances.37

While perhaps not in all fours because it involved the refund of overpayment due to misinterpretation of the law on
franchise, our ruling in Panay Electric Co. vs. Collector of Internal Revenue38, is apropos. There, the Court stated:

"xxx(L)egally speaking, the decision of the Tax Court [on the two-year prescriptive period for tax refund] is therefore
correct, being in accordance with law. However, one’s conscience does not and cannot rest easy on this strict
application of the law, considering the special circumstances that surround this case. Because of his erroneous
interpretation of the law on franchise taxes, the Collector, from the year 1947 had illegally collected from petitioner the
respectable sum of . . . . From a moral standpoint, the Government would be enriching itself of this amount at the
expense of the taxpayer. (Words in bracket added and underscoring added.)

Like the CA, this Court perceives no compelling reason why the principle enunciated in Panay
Electric and Commissioner vs. Phil-Am Life should not be applied in this case, more so since the amount over which tax
credit is claimed was theoretically booked as advance income tax payment. It bears stressing that respondent PNB
remitted the P180 Million in question as a measure of goodwill and patriotism, a gesture noblesse oblige, so to speak,
to help the cash-strapped national government. It would thus indeed, be unfair, as the CA correctly observed, to leave
respondent PNB to suffer losing millions of pesos advanced by it for future tax liabilities. The cut becomes all the more
painful when it is considered that PNB’s failure to apply the balance of such advance income tax payment from 1992 to
1996 was, to repeat, due to business downturn experienced by the bank so that it incurred no tax liability for the period.

The rule of long standing is that the Court will not set aside lightly the conclusions reached by the CTA which, by the
very nature of its functions, is dedicated exclusively to the resolution of tax problems and has, accordingly, developed
an expertise on the subject, unless there has been an abuse or improvident exercise of authority. 39 It is likewise settled
that to a claimant rests the onus to establish the factual basis of his or her claim for tax credit or refund. 40 In this case,
however, petitioner does not dispute that a portion of the P180 Million PNB remitted to the BIR in 1991 as advance
payment remains unutilized for the purpose for which it was intended in the first place. But petitioner asserts that
respondent’s right to recover the same is already time-barred. The CTA upheld the position of petitioner. The CA ruled
otherwise. We find the CA’s position more in accord with the facts on record and is consistent with applicable laws and
jurisprudence.

Verily, the suspension of the two (2)-year prescriptive period is warranted not solely by the objective or purpose
pursuant to which respondent PNB made the advance income tax payment in 1991. Records show that petitioner’s very
own conduct led the bank to believe all along that its original intention to apply the advance payment to its future
income tax obligations will be respected by the BIR. Notwithstanding respondent PNB’s failure to request for tax credit
after incurring negative tax position in 1992, up to taxable year 1996, there appears to be a valid reason to assume that
the agreed carrying forward of the balance of the advance payment extended to succeeding taxable years, and not only
in 1992. Thus, upon posting a net income in 1997 and regaining a profitable business operation, respondent bank
promptly sought the issuance of a TCC for the reason that its credit balance of P73, 298,892.60 remained unutilized. If
ever, petitioner’s pose about respondent PNB never having made a written claim for refund only serves to buttress the
latter’s position that it was not out to secure a refund or recover the aforesaid amount, but for the BIR to issue a TCC so
it can apply the same to its future tax obligations.

Lest it be overlooked, petitioner peremptorily denied the request for tax credit on the ground of its having been filed
beyond the two (2)-year prescriptive period. In the same breath, however, petitioner appears to have glossed over an
incident which amounts to an earlier BIR ruling that "there is no legal question to be resolved but only a factual
investigation" in the processing of PNB’s claim. Even as petitioner concluded such administrative investigation, it did not
deny the request for issuance of a tax credit certificate on any factual finding, such as the veracity of alleged business
losses in the taxable years 1992 to 1996, during which the respondent bank alleged the credit balance was not applied.
Lastly, there is no indication that petitioner considered respondent’s request as an ordinary claim for refund, the very
reason why the same was referred by the BIR for processing to the Operations Group of the Bureau.

Hence, no reversible error was committed by the CA in holding that, upon basic considerations of equity and fairness,
respondent’s request for issuance of a tax credit certificate should not be subject to the two (2)-year limitation in Section
230 of the NIRC.
106
With the foregoing disquisitions, the Court finds it unnecessary to delve on the question of whether or not mistakes of
tax officers constitute a bar to collection of taxes by the BIR Commissioner.

The procedural issue presently raised by petitioner, i.e., respondent PNB’s alleged non-compliance with the forum
shopping rule when its petition for review filed with the CTA did not contain the requisite authority of PNB Vice President
Ligaya R. Gagolinan to sign the certification, need not detain us long.

Petitioner presently faults the CA for not having taken notice that PNB’s initiatory pleading before the CTA suffers from
an infirmity that justifies the dismissal thereof. But it is evident that the issue of forum shopping is being raised for the
first time in this appellate proceedings. Accordingly, the Court loathes to accommodate petitioner’s urging for the
dismissal of respondent’s basic claim on the forum-shopping angle. As earlier ruled by this Court, a party ought to
invoke the issue of forum shopping, assuming its presence, at the first opportunity in his motion to dismiss or similar
pleading filed in the trial court. Else, he is barred from raising the ground of forum shopping in the Court of Appeals and
in this Court.41 So it must be here.

WHEREFORE, the petition is DENIED for lack of merit and the assailed decision and resolution of the Court of Appeals
in CA-G.R. SP No. 76488 AFFIRMED.

No pronouncement as to costs. SO ORDERED.

DIGEST:

CIR v. PNB

Facts:

- PNB issued to the BIR a check worth P180M as an advance income tax payment for the bank’s 1991 operations in response to then Pres.
Aquino’s call to generate more revenues for national development.

- By the end of 1991 PNB had a credit balance amounting to P73M. This amount was suppose to be carried over to cover tax liability for 1992-
1996 but was never applied because it did not incur tax liability during those yrs due to losses in its operations for the said inclusive years.

- In 1997 PNB wrote the BIR to request for the issuance of tax credit certificate (TCC) for the unutilized balance of its advance payment made in
1991 amounting to P73M

- BIR denied PNB’s claim for tax credit alleging that the claim in question is has prescribed on the ground that it was filed beyond the two (2)
year prescriptive period as provided for under Section 229 of NIRC , the bank having filed such claim only in 1997, or more than two (2) years
from 1992 when the overpayment of annual income tax for 1991 was realized by the bank.

- PNB filed a petition for review with the CTA which affirmed the commissioner’s decision

- In its appeal to the CA, PNB contends that that even if the two (2)-year prescriptive period under the Tax Code had already lapsed, the same is
not jurisdictional, and may be suspended for reasons of equity and other special circumstances.

Issue: W/N PNB’s claim for tax credit is barred by prescription?

Ruling: NO. Sec. 229 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 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; but such
suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit
or proceeding shall be begun after the expiration of two [(2)] years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund
or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.

Sec 229 is intended to apply to suits for the recovery of internal revenue taxes or sums erroneously, illegally or wrongfully collected. The term
erroneous or illegal tax is one that is levied without statutory authority.
107
In the present case PNB’s request for issuance of a tax credit certificate (TCC) on the balance of its advance income tax payment cannot be
treated as a simple case of excess payment as to be automatically covered by the two (2)-year limitation in Sec 229. It’s claim for tax credit did
not proceed from an overpayment of tax erroneously or illegally collected, on the contrary PNB made an advance income tax payment made
in response to a call of patriotic duty to help the national government.

Therefore the tax credit sought by [respondent] is not simply a case of excess payment, but rather for the application of the balance of advance
income tax payment for subsequent taxable years hence PNB’s claim for tax credit is NOT barred by the 2 yr prescriptive period.

PHILAM ASSET MANAGEMENT, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. Nos. 156637/162004 December 14, 2005 PANGANIBAN, J.:

Under Section 76 of the National Internal Revenue Code, a taxable corporation with excess quarterly income tax
payments may apply for either a tax refund or a tax credit, but not both. The choice of one precludes the other. Failure
to indicate a choice, however, will not bar a valid request for a refund, should this option be chosen by the taxpayer later
on.

The Case

Before us are two consolidated Petitions for Review1 under Rule 45 of the Rules of Court, seeking to review and reverse
the December 19, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 69197 and its January 30, 2004
Decision3 in CA-GR SP No. 70882.

The dispositive portion of the assailed December 19, 2002 Decision, on the one hand, reads as follows:

"WHEREFORE, the petition is hereby DENIED. The assailed decision and resolution of the Court of Tax Appeals
are AFFIRMED."4

That of the assailed January 30, 2004 Decision, on the other hand, was similarly worded, except that it referred to the
May 2, 2002 Decision of the Court of Tax Appeals (CTA).5

The Facts

In GR No. 156637, the CA adopted the CTA’s narration of the facts as follows:

"Petitioner, formerly Philam Fund Management, Inc., is a domestic corporation duly organized and existing under the
laws of the Republic of the Philippines. It acts as the investment manager of both Philippine Fund, Inc. (PFI) and Philam
Bond Fund, Inc. (PBFI), which are open-end investment companies[,] in the sale of their shares of stocks and in the
investment of the proceeds of these sales into a diversified portfolio of debt and equity securities. Being an investment
manager, [p]etitioner provides management and technical services to PFI and PBFI. Petitioner is, likewise, PFI’s and
PBFI’s principal distributor which takes charge of the sales of said companies’ shares to prospective investors.
Pursuant to the separate [m]anagement and [d]istribution agreements between the [p]etitioner and PFI and PBFI, both
PFI and PBFI [agree] to pay the [p]etitioner, by way of compensation for the latter’s services and facilities, a monthly
management fee from which PFI and PBFI withhold the amount equivalent to [a] five percent (5%) creditable tax[,]
pursuant to the Expanded Withholding Tax Regulations.

"On April 3, 1998, [p]etitioner filed its [a]nnual [c]orporate [i]ncome [t]ax [r]eturn for the taxable year 1997 representing a
net loss of ₱2,689,242.00. Consequently, it failed to utilize the creditable tax withheld in the amount of Five Hundred
Twenty-Two Thousand Ninety-Two Pesos (₱522,092.00) representing [the] tax withheld by [p]etitioner’s withholding
agents, PFI and PBFI[,] on professional fees.

"The creditable tax withheld by PFI and PBFI in the amount of ₱522,092.00 is broken down as follows:

PFI ₱496,702.05
108
PBFI 25,389.66_

Total ₱522,091.71

"On September 11, 1998, [p]etitioner filed an administrative claim for refund with the [Bureau of Internal Revenue (BIR)]
-- Appellate Division in the amount of ₱522,092.00 representing unutilized excess tax credits for calendar year 1997.
Thereafter, on July 28, 1999, a written request was filed with the same division for the early resolution of [p]etitioner’s
claim for refund.

"Respondent did not act on [p]etitioner’s claim for refund[;] hence, a Petition for Review was filed with this Court 6on
November 29, 1999 to toll the running of the two-year prescriptive period."7

On October 9, 2001, the CTA rendered a Decision denying petitioner’s Petition for Review. Its Motion for
Reconsideration was likewise denied in a Resolution dated January 29, 2002.

In GR No. 162004, the antecedents are narrated by the CA in this wise:

"On April 13, 1999, [petitioner] filed its Annual Income Tax Return with the [BIR] for the taxable year 1998 declaring a
net loss of ₱1,504,951.00. Thus, there was no tax due against [petitioner] for the taxable year 1998. Likewise,
[petitioner] had an unapplied creditable withholding tax in the amount of ₱459,756.07, which amount had been
previously withheld in that year by petitioner’s withholding agents[,] namely x x x [PFI], x x x [PBFI], and Philam
Strategic Growth Fund, Inc. (PSGFI).

"In the next succeeding year, [petitioner] had a tax due in the amount of ₱80,042.00, and a creditable withholding tax in
the amount of ₱915,995.00. [Petitioner] likewise declared in its 1999 tax return the amount of ₱459,756.07, which
represents its prior excess credit for taxable year 1998.

"Thereafter, on November 14, 2000, [petitioner] filed with the Revenue District Office No. 50, Revenue Region No. 8, a
written administrative claim for refund with respect to the unapplied creditable withholding tax of ₱459,756.07.
According to [petitioner,] the amount of ₱80,042.00, representing the tax due for the taxable year 1999 has been
credited from its ₱915,995.00 creditable withholding tax for taxable year 1999, thus leaving its 1998 creditable
withholding tax in the amount of ₱459,756.07 still unapplied.

"The claim for refund yielded no action on the part of the BIR. [Petitioner] then filed a Petition for Review before the CTA
on December 26, 2000, asserting that it is entitled [to] the refund [of ₱459,756.07,] since said amount has not been
applied against its tax liabilities in the taxable year 1998.

"On May 2, 2002, the CTA rendered [a] x x x decision denying [petitioner’s] Petition for Review. x x x." 8

Ruling of the Court of Appeals

The CA denied the claim of petitioner for a refund of the latter’s excess creditable taxes withheld for the years 1997 and
1998, despite compliance with the basic requirements of Revenue Regulations (RR) No. 12-94. The appellate court
pointed out that, in the respective Income Tax Returns (ITRs) for both years, petitioner did not indicate its option to have
the amounts either refunded or carried over and applied to the succeeding year. It was held that to request for either a
refund or a credit of income tax paid, a corporation must signify its intention by marking the corresponding option box on
its annual corporate adjustment return.

The CA further held in GR No. 156637 that the failure to present the 1998 ITR was fatal to the claim for a refund,
because there was no way to verify if the tax credit for 1997 could not have been applied against the 1998 tax liabilities
of petitioner.

In GR No. 162004, however, the subsequent acts of petitioner demonstrated its option to carry over its tax credit for
1998, even if it again failed to tick the appropriate box for that option in its 1998 ITR. Under RR 12-94, its failure to
indicate that option resulted in the automatic carry-over of any excess tax credit for the prior year. The appellate court

109
said that the government would not be unjustly enriched by denying a refund, because there would be no forfeiture of
the amount in its favor. The amount claimed as a refund would remain in the account of the taxpayer until utilized in
succeeding taxable years.

Hence, these Petitions.9

The Issues

Petitioner raises two issues in GR No. 156637 for the Court’s consideration:

"A.

"Whether or not the failure of the [p]etitioner to indicate in its [a]nnual [i]ncome [t]ax [r]eturn the option to refund its
creditable withholding tax is fatal to its claim for refund.

"B.

"Whether or not the presentation in evidence of the [p]etitioner’s [a]nnual [i]ncome [t]ax [r]eturn for the succeeding
calendar year is a legal requisite in a claim for refund of unapplied creditable withholding tax." 10

In GR No. 162004, petitioner raises one question only:

"Whether or not the petitioner is entitled to the refund of its unutilized creditable withholding tax in the taxable year 1998
in the amount of ₱459,756.07."11

In both cases, a simple issue needs to be resolved: whether petitioner is entitled to a refund of its creditable taxes
withheld for taxable years 1997 and 1998.

The Court’s Ruling

The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not.

Main Issue:

Entitlement to Refund

The provision on the final adjustment return (FAR) was originally found in Section 69 of Presidential Decree (PD) No.
1158, otherwise known as the "National Internal Revenue Code of 1977."12 On August 1, 1980, this provision was
restated as Section 8613 in PD 1705.14

On November 5, 1985, all prior amendments and those introduced by PD 199415 were codified16 into the National
Internal Revenue Code (NIRC) of 1985, as a result of which Section 86 was renumbered17 as Section 79.18
On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all "net income" phrases appearing in Title II of
the NIRC of 1977 to "taxable income." Section 79 of the NIRC of 1985,19 however, was not amended.
On July 25, 1987, EO 27320 renumbered21 Section 86 of the NIRC22 as Section 76,23 which was also rearranged24to fall
under Chapter 10 of Title II of the NIRC. Section 79, which had earlier been renumbered by PD 1994, remained
unchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section 79 under PD
1994;25 then, as Section 76 under EO 273.26 Finally, after being renumbered and reduced to the chaff of a grain, Section
69 was repealed by EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads:

110
"Section 76. Final Adjustment Return. -- Every corporation liable to tax under Section 24 shall file a final adjustment
return covering the total net income27 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 income28 of that year the
corporation shall 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."

GR No. 156637

This section applies to the first case before the Court. Differently numbered in 1977 but similarly worded 20 years later
(1997), Section 76 offers two options to a taxable corporation whose total quarterly income tax payments in a given
taxable year exceeds its
total income tax due. These options are (1) filing for a tax refund or (2) availing of a tax credit.

The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be
refunded, provided that a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on the FAR of a given taxable year, against the
estimated quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature.29 The choice of one precludes the other. Indeed,
in Philippine Bank of Communications v. Commissioner of Internal Revenue,30 the Court ruled that a corporation must
signify its intention -- whether to request a tax refund or claim a tax credit -- by marking the corresponding option box
provided in the FAR.31 While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement
is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify
one’s intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this
option later on. A tax credit should be construed merely as an alternative remedy to a tax refund under Section 76,
subject to prior verification and approval by respondent.32

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration, 33particularly the
self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus
demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference
and hence shows simple negligence or plain oversight.

In the present case, respondent denied the claim of petitioner for a refund of excess taxes withheld in 1997, because
the latter
(1) had not indicated in its ITR for that year whether it was opting for a credit or a refund; and (2) had not submitted as
evidence its 1998 ITR, which could have been the basis for determining whether its claimed 1997 tax credit had not
been applied against its 1998 tax liabilities.

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no
basis in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the preceding --
not the succeeding -- taxable year. Indeed, any refundable amount indicated in the FAR of the preceding taxable year
may be credited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year.
However, nowhere is there even a tinge of a hint in any of the provisions of the Tax Code that the FAR of the taxable
year following the period to which the tax credits are originally being applied should also be presented to the BIR.

111
Second, Section 534 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for the refund of
income taxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the
ITR that the income payment received is being declared part of the taxpayer’s gross income; and (2) when the fact of
withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing
the amount paid and the income tax withheld from that amount.35

Undisputedly, the records do not show that the income payments received by petitioner have not been declared as part
of its gross income, or that the fact of withholding has not been established. According to the CTA, "[p]etitioner
substantially complied with the x x x requirements" of RR 12-94 "[t]hat the fact of withholding is established by a copy of
a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax
withheld therefrom; and x x x [t]hat the income upon which the taxes were withheld were included in the return of the
recipient."36

The established procedure is that a taxpayer that wants a cash refund shall make a written request for it, and the ITR
showing the excess expanded withholding tax credits shall then be examined by the BIR. For the grant of refund, RRs
12-94 and 6-85 state that all
pertinent accounting records should be submitted by the taxpayer. These records, however, actually refer only to (1) the
withholding tax statements; (2) the ITR of the present quarter to which the excess withholding tax credits are being
applied; and (3) the ITR of the quarter for the previous taxable year in which the excess credits arose. 37To stress, these
regulations implementing the law do not require the proffer of the FAR for the taxable year following the period to which
the tax credits are being applied.

Third, there is no automatic grant of a tax refund. As a matter of procedure, the BIR should be given the opportunity "to
investigate and confirm the veracity"38 of a taxpayer’s claim, before it grants the refund. Exercising the option for a tax
refund or a tax credit does not ipso facto confer upon a taxpayer the right to an immediate availment of the choice
made. Neither does it impose a duty on the government to allow tax collection to be at the sole control of a taxpayer. 39

Fourth, the BIR ought to have on file its own copies of petitioner’s FAR for the succeeding year, on the basis of which it
could rebut the assertion that there was a subsequent credit of the excess income tax payments for the previous year.
Its failure to present this vital document to support its contention against the grant of a tax refund to petitioner is
certainly fatal.

Fifth, the CTA should have taken judicial notice40 of the fact of filing and the pendency of petitioner’s subsequent claim
for a refund of excess creditable taxes withheld for 1998. The existence of the claim ought to be known by reason of its
judicial functions. Furthermore, it is decisive to and will easily resolve the material issue in this case. If only judicial
notice were taken earlier, the fact that there was no carry-over of the excess creditable taxes withheld for 1997 would
have already been crystal clear.

Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in writing within two years after payment of
the taxes erroneously received by the BIR.41 Despite the failure of petitioner
to make the appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression of its
choice to request a tax refund, instead of a tax credit. To assert that any future claim for a tax refund will be instantly
hindered by a failure to signify one’s intention in the FAR is to render nugatory the clear provision that allows for a two-
year prescriptive period.

In fact, in BPI-Family Savings Bank v. CA,42 this Court even ordered the refund of a taxpayer’s excess creditable taxes,
despite the express declaration in the FAR to apply the excess to the succeeding year.43 When circumstances show
that a choice of tax credit has been made, it should be respected. But when indubitable circumstances clearly show that
another choice -- a tax refund -- is in order, it should be granted. "Technicalities and legalisms, however exalted, should
not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-
abiding citizens."44

In the present case, although petitioner did not mark the refund box in its 1997 FAR, neither did it perform any act
indicating that it chose a tax credit. On the contrary, it filed on September 11, 1998, an administrative claim for the
refund of its excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it apply the excess creditable

112
taxes. Under these circumstances, petitioner is entitled to a tax refund of its 1997 excess tax credits in the amount of
₱522,092.

GR No. 162004

As to the second case, Section 76 also applies. Amended by Republic Act (RA) No. 8424, otherwise known as the "Tax
Reform Act of 1997," it now states:

"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 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."

The carry-over option under Section 76 is permissive. A corporation that is entitled to a tax refund or a tax credit for
excess payment of quarterly income taxes may carry over and credit the excess income taxes paid in a given taxable
year against the estimated income tax liabilities of the succeeding quarters. Once chosen, the carry-over option shall be
considered irrevocable45 for that taxable period, and no application for a tax refund or issuance of a tax credit
certificate shall then be allowed.

According to petitioner, it neither chose nor marked the carry-over option box in its 1998 FAR.46 As this option was not
chosen, it seems that there is nothing that can be considered irrevocable. In other words, petitioner argues that it is still
entitled to a refund of its 1998 excess income tax payments.

This argument does not hold water. The subsequent acts of petitioner reveal that it has effectively chosen the carry-
over option.

First, the fact that it filled out the portion "Prior Year’s Excess Credits" in its 1999 FAR means that it categorically
availed itself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states "Less: Tax
Credits/Payments." The contention that it merely filled out that portion because it was a requirement -- and that to have
done otherwise would have been tantamount to falsifying the FAR -- is a long shot.

The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are found the
itemization and summary of additions to and deductions from income taxes due. These entries are not without rhyme or
reason. They are required, because they facilitate the tax administration process.

Failure to indicate the amount of "prior year’s excess credits" does not mean falsification by a taxpayer of its current
year’s FAR. On the contrary, if an application for a tax refund has been -- or will be -- filed, then that portion of the BIR
form should necessarily be blank, even if the FAR of the previous taxable year already shows an overpayment in taxes.

Second, the resulting redundancy in the claim of petitioner for a refund of its 1998 excess tax credits on November 14,
200047 cannot be countenanced. It cannot be allowed to avail itself of a tax refund and a tax credit at the same time for
the same excess income taxes paid. Besides, disallowing it from getting a tax refund of those excess tax credits will not

113
enervate the two-year prescriptive period under the Tax Code. That period will apply if the carry-over option has not
been chosen.

Besides, "tax refunds x x x are construed strictly against the taxpayer."48 Petitioner has failed to meet the burden of
proof required in order to establish the factual basis of its claim for a tax refund.

Third, the "first-in first-out" (FIFO) principle enunciated by the CTA49 does not apply.50 Money is fungible property.51 The
amount to be applied against the ₱80,042 income tax due in the 1998 FAR52 of petitioner may be taken from its excess
credits in 1997 or from those withheld in 1998 or from both. Whichever of these the amount will be taken from will not
make a difference.

Even if the FIFO principle were to be applied, the tax credits would have to be in consonance with the usual and normal
course of events. In fact, the FAR is cumulative in nature.53 Following a natural sequence, the prior year’s excess tax
credits will have to be reduced first to answer for any current tax liabilities before the current year’s withheld amounts
can be applied. Otherwise, there will be no sense in requiring a taxpayer to fill out the line items in the FAR to segregate
its sources of tax credits.

Whether the FIFO principle is applied or not, Section 76 remains clear and unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditable
withholding taxes. Thus, it is no longer entitled to a tax refund of ₱459,756.07, which corresponds to its 1998 excess tax
credit. Nonetheless, the amount will not be forfeited in the government’s favor, because it may be claimed by petitioner
as tax credits in the succeeding taxable years.

WHEREFORE, the Petition in GR No. 156637 is GRANTED and the assailed December 19, 2002
Decision REVERSED and SET ASIDE. No pronouncement as to costs.

The Petition in GR No. 162004 is, however, DENIED and the assailed January 30, 2004 Decision AFFIRMED. Costs
against petitioner. SO ORDERED.

DIGEST:

Facts: Petitioner acts as investment manager of PFI &PBFI. It provides management &technical services and thus respectively paid for it’s
services. PFI & PBFI withhold the amount of equivalent to 5% creditable tax regulation. On April 3, 1998, filed ITR with a net loss thus incurred
withholding tax. Petitioner filed for refund from BIR but was unanswered . CTA denied the petition for review. CA held that to request for
either a refund or credit of income tax paid, a corporation must signify it’s intention by marking the corresponding box on it’s annual corporate
adjustment return.

Issue: Whether or not petitioner is entitled to a refund of it’s creditible taxes.

Ruling: Any tax income that is paid in excess of it’s amount due to the government may be refunded, provided that a taxpayer properly applies
for the refund. One can not get a tax refund and a tax credit at the same time for the same excess to income taxes paid. Failure to signify one’s
intention in Final Assessment Return (FAR) does not mean outright barring of a valid request for a refund

Requiring that the ITR on the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis in law and
jurisprudence. The Tax Code likewise allows the refund of taxes to taxpayer that claims it in writing within 2 years after payment of the taxes.
Technicalities and legalism should not be misused by the government to keep money not belonging to it, and thereby enriched itself at the
expense of it’s law-abiding citizens.

114
ASIAWORLD PROPERTIES PHILIPPINE CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent. G.R. No. 171766 July 29, 2010 CARPIO, J.:

The Case

This petition for review1 assails the 24 August 2005 Decision2 and the 31 January 2006 Resolution3 of the Court of
Appeals in CA-G.R. SP No. 82027.

The Facts

Petitioner Asiaworld Properties Philippine Corporation (petitioner) is a domestic corporation with principal office at
Asiaworld City, Aguinaldo Boulevard, Parañaque, Metro Manila. Petitioner is engaged in the business of real estate
development.

For the calendar year ending 31 December 2001, petitioner filed its Annual Income Tax Return (ITR) on 5 April 2002.
Petitioner declared a minimum corporate income tax (MCIT) due in the amount of ₱1,222,066.00, but with a refundable
income tax payment in the sum of ₱6,473,959.00 computed as follows:

Income:

Realized Gross Profit ₱49,234,453.00

Add: Other Income 11,868,847.00

Gross Income ₱61,103,300.00

Less: Deductions 58,148,630.00

Taxable Income ₱ 2,954,670.00

Tax Due (MCIT) ₱ 1,222,066.00

Less: Tax Credit/Payments

a. Prior Year’s Excess Credit ₱7,468,061.00

b. Tax Payments For the

First Three Quarters -

115
c. Creditable Tax Withheld

For the First Three Quarters 160,000.00

d. Creditable Tax Withheld

For the Fourth Quarter 67,964.00 7,696,025.00

Total Amount of Overpayment ₱6,473,959.00

In its 2001 ITR,4 petitioner stated that the amount of ₱7,468,061.00 representing Prior Year’s Excess Credits was net of
year 1999 excess creditable withholding tax to be refunded in the amount of ₱18,477,144.00. Petitioner also indicated
in its 2001 ITR its option to carry-over as tax credit next year/quarter the overpayment of ₱6,473,959.00.
On 9 April 2002, petitioner filed with the Revenue District Office No. 52, BIR Region VIII, a request for refund in the
amount of ₱18,477,144.00, allegedly representing partial excess creditable tax withheld for the year 2001. Petitioner
claimed that it is entitled to the refund of its unapplied creditable withholding taxes.
On 12 April 2002, before the BIR Revenue District Office could act on petitioner’s claim for refund, petitioner filed a
Petition for Review with the Court of Tax Appeals to toll the running of the two-year prescriptive period provided under
Section 2295 of the National Internal Revenue Code (NIRC) of 1997.
In its Decision dated 11 September 2003, the Court of Tax Appeals denied the petition for lack of merit. Petitioner
moved for reconsideration, which the Court of Tax Appeals denied in its Resolution dated 17 December 2003. In
denying the petition, the Court of Tax Appeals explained:

While we agree with the findings of the commissioned independent CPA that petitioner has unapplied creditable
withholding taxes at source as of December 31, 2001, still the excess income tax payment cannot be refunded.

Upon scrutiny of the records of the case, this court noted that the amount sought to be refunded of ₱18,477,144.00
actually represents petitioner’s excess creditable withholding taxes for the year 1999 which petitioner opted to apply as
tax credit to the succeeding taxable year as evidenced by its 1999 income tax return (Exhibit K). Under Section 76 of
the Tax Code, petitioner is precluded to claim the refund or credit of the excess income tax payment once it has chosen
the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of
the succeeding years.6

Petitioner appealed to the Court of Appeals, which affirmed the Decision and Resolution of the Court of Tax Appeals.

The Ruling of the Court of Appeals

The Court of Appeals held that under Section 76 of the NIRC of 1997, when the income tax payment is in excess of the
total tax due for the entire taxable income of the year, a corporate taxpayer may either carry-over the excess credit to
the succeeding taxable years or ask for tax credit or refund of the excess income taxes paid. Section 76 explicitly
provides that once the option to carry-over is chosen, such option is irrevocable for that taxable period and the taxpayer
is no longer allowed to apply for cash refund or tax credit. In this case, petitioner chose to carry-over the excess tax
payment it had made in the taxable year 1999 to be applied to the taxes due for the succeeding taxable years. The
Court of Appeals ruled that petitioner’s choice to carry-over its tax credits for the taxable year 1999 to be applied to its
tax liabilities for the succeeding taxable years is irrevocable and petitioner is not allowed to change its choice in the
following year. The carry-over of petitioner’s tax credits is not limited only to the following year of 2000 but should be
carried-over to the succeeding years until the whole amount has been fully applied.

On 27 April 2006, petitioner filed a petition for review with this Court.
116
The Issue

The primary issue in this case is whether the exercise of the option to carry-over the excess income tax credit, which
shall be applied against the tax due in the succeeding taxable years, prohibits a claim for refund in the subsequent
taxable years for the unused portion of the excess tax credits carried over.

The Ruling of the Court

The petition has no merit.

The resolution of the case involves the interpretation of Section 76 of the NIRC of 1997, which reads:

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 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 therefore. (Emphasis
supplied)

The confusion lies in the interpretation of the last sentence of the provision which imposes the irrevocability rule.

Petitioner maintains that the option to carry-over and apply the excess quarterly income tax against the income tax due
in the succeeding taxable years is irrevocable only for the next taxable period when the excess payment was carried
over. Thus, petitioner posits that the option to carry-over its 1999 excess income tax payment is irrevocable only for the
succeeding taxable year 2000 and that for the taxable year 2001, petitioner is not barred from seeking a refund of the
unused tax credits carried over from year 1999.1awphi1

The Court cannot subscribe to petitioner’s view. Section 76 of the NIRC of 1997 clearly states: "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 therefore." Section 76
expressly states that "the option shall be considered irrevocable for that taxable period" – referring to the period
comprising the "succeeding taxable years." Section 76 further states that "no application for cash refund or issuance
of a tax credit certificate shall be allowed therefore" – referring to "that taxable period" comprising the "succeeding
taxable years."

Section 76 of the NIRC of 1997 is different from the old provision, Section 69 of the 1977 NIRC, which 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

117
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 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. (Emphasis supplied)

Under this old provision, the option to carry-over the excess or overpaid income tax for a given taxable year is limited to
the immediately succeeding taxable year only.7 In contrast, under Section 76 of the NIRC of 1997, the application of the
option to carry-over the excess creditable tax is not limited only to the immediately following taxable year but extends to
the next succeeding taxable years. The clear intent in the amendment under Section 76 is to make the option, once
exercised, irrevocable for the "succeeding taxable years."

Thus, once the taxpayer opts to carry-over the excess income tax against the taxes due for the succeeding taxable
years, such option is irrevocable for the whole amount of the excess income tax, thus, prohibiting the taxpayer from
applying for a refund for that same excess income tax in the next succeeding taxable years.8 The unutilized excess tax
credits will remain in the taxpayer’s account and will be carried over and applied against the taxpayer’s income tax
liabilities in the succeeding taxable years until fully utilized.9

In this case, petitioner opted to carry-over its 1999 excess income tax as tax credit for the succeeding taxable years. As
correctly held by the Court of Appeals, such option to carry-over is not limited to the following taxable year 2000, but
should apply to the succeeding taxable years until the whole amount of the 1999 creditable withholding tax would be
fully utilized.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24 August 2005 and the Resolution dated 31
January 2006 of the Court of Appeals in CA-G.R. SP No. 82027. SO ORDERED.

NO DIGEST

118
COMMISSIONER OF INTERNAL REVENUE, vs. FAR EAST BANK & TRUST COMPANY (NOW BANK OF THE
PHILIPPINE ISLANDS), Respondent. G.R. No. 173854 March 15, 2010 DEL CASTILLO, J.:

Entitlement to a tax refund is for the taxpayer to prove and not for the government to disprove.

This Petition for Review on Certiorari assails the January 31, 2006 Decision1 of the Court of Appeals (CA) in CA-G.R.
SP No. 56773 which reversed and set aside the October 4, 1999 Decision2 of the Court of Tax Appeals (CTA) in CTA
Case No. 5487. Also assailed is the July 19, 2006 Resolution3 of the CA denying the motion for reconsideration.

The CTA found that respondent Far East Bank & Trust Company failed to prove that the income derived from rentals
and sale of real property from which the taxes were withheld were reflected in its 1994 Annual Income Tax Return. The
CA found otherwise.

Factual Antecedents

On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR) two Corporate Annual Income Tax
Returns, one for its Corporate Banking Unit (CBU)4 and another for its Foreign Currency Deposit Unit (FCDU),5for the
taxable year ending December 31, 1994. The return for the CBU consolidated the respondent’s overall income tax
liability for 1994, which reflected a refundable income tax of ₱12,682,864.00, computed as follows:

FCDU CBU

Gross Income ₱13,319,068 5,348,080,630

Less: Deductions 1,397,157 5,432,828,719

Net Income 11,921,911 [84,748,089]

Tax Rate 35% 35%

Income Tax Due Thereon 4,172,669 NIL

Consolidated Tax Due for

Both CBU and FCDU Operations ₱ 4,172,669

119
Less:

Quarterly Income Tax Payments

CBU -1st Quarter 633,085

-2nd Quarter 11,844,333

FCDU -1st Quarter 955, 280

-2nd Quarter 1,104,942

Less:

Creditable Taxes 2,317,893

Withheld at Source

Refundable Income Tax [₱12,682,864]6

Pursuant to Section 697 of the old National Internal Revenue Code (NIRC),

the amount of ₱12,682,864.00 was carried over and applied against respondent’s income tax liability for the taxable
year ending December 31, 1995. On April 15, 1996, respondent filed its 1995 Annual Income Tax Return, which
showed a total overpaid income tax in the amount of ₱17,443,133.00, detailed as follows:

FCDU CBU

Gross Income ₱16,531,038 7,076,497,628

Less: Deductions 1,327,549 7,086,821,354

Net Income 15,203,539 [10,423,728]

Tax Rate 35% 35%

120
Income Tax Due Thereon 5,321,239 NIL

Consolidated Tax Due for

Both CBU and FCDU Operations ₱ 5,321,239

Less:

Prior year’s (1994) excess 12,682,864


income tax credit

Additional prior year’s excess 6,283,484


income tax credit

Creditable Taxes

Withheld at Source 3,798,024

Refundable Income Tax [₱17,443,133]8

Out of the ₱17,433,133.00 refundable income tax, only ₱13,645,109.00 was sought to be refunded by respondent. As
to the remaining ₱3,798,024.00, respondent opted to carry it over to the next taxable year.

On May 17, 1996, respondent filed a claim for refund of the amount of ₱13,645,109.00 with the BIR. Due to the failure
of petitioner Commissioner of Internal Revenue (CIR) to act on the claim for refund, respondent was compelled to bring
the matter to the CTA on April 8, 1997 via a Petition for Review docketed as CTA Case No. 5487.

After the filing of petitioner’s Answer, trial ensued.

To prove its entitlement to a refund, respondent presented the following documents:

Exhibits Nature and Description

A Corporate Annual Income Tax Return covering income of respondent’s CBU for the year ended December 31,
1994 together with attachments

B Corporate Annual Income Tax Return covering income of respondent’s FCDU for the year ended December
31, 1994 together with attachments

C Corporate Annual Income Tax Return covering income of respondent’s CBU for the year ended December 31,
1995 together with attachments
121
D Corporate Annual Income Tax Return covering income of respondent’s FCDU for the year ended December
31, 1995 together with attachments

N to Z; Certificates of Creditable

AA to UU Withholding Tax and Monthly Remittance Returns of Income Taxes Withheld issued by various
withholding agents for the year ended December 31, 1994

VV Letter claim for refund dated May 8, 1996 filed with the Revenue District Office No. 33 on May 17, 19969

Petitioner, on the other hand, did not present any evidence.

Ruling of the Court of Tax Appeals

On October 4, 1999, the CTA rendered a Decision denying respondent’s claim for refund on the ground that respondent
failed to show that the income derived from rentals and sale of real property from which the taxes were withheld were
reflected in its 1994 Annual Income Tax Return.

On October 20, 1999, respondent filed a Motion for New Trial based on excusable negligence. It prayed that it be
allowed to present additional evidence to support its claim for refund.

However, the motion was denied on December 16, 1999 by the CTA. It reasoned, thus:

[Respondent] is reminded that this case was originally submitted for decision as early as September 22, 1998 (p. 497,
CTA Records). In view, however, of the Urgent Motion to Admit Memorandum filed on April 27, 1999 by Atty. Louella
Martinez, who entered her appearance as collaborating counsel of Atty. Manuel Salvador allegedly due to the latter
counsel’s absences, this Court set aside its resolution of September 22, 1998 and considered this case submitted for
decision as of May 7, 1999. Nonetheless, it took [respondent] another five months after it was represented by a new
counsel and after a decision unfavorable to it was rendered before [respondent] realized that an additional material
documentary evidence has to be presented by way of a new trial, this time initiated by a third counsel coming from the
same law firm. x x x

Furthermore, in ascertaining whether or not the income upon which the taxes were withheld were included in the returns
of the [respondent], this Court based its findings on the income tax returns and their supporting schedules prepared and
reviewed by the [respondent] itself and which, to Us, are enough to support the conclusion reached.1avvphi1

WHEREFORE, in view of the foregoing, [respondent’s] Motion for New Trial is hereby DENIED for lack of merit.

SO ORDERED.10

Ruling of the Court of Appeals

On appeal, the CA reversed the Decision of the CTA. The CA found that respondent has duly proven that the income
derived from rentals and sale of real property upon which the taxes were withheld were included in the return as part of
the gross income.

Hence, this present recourse.

Issue

The lone issue presented in this petition is whether respondent has proven its entitlement to the refund.11

Our Ruling

122
We find that the respondent miserably failed to prove its entitlement to the refund. Therefore, we grant the petition filed
by the petitioner CIR for being meritorious.

A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply with the following requisites:

1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax;

2) It must be shown on the return that the income received was declared as part of the gross income; and

3) The fact of withholding must be established by a copy of a statement duly issued by the payor to the payee
showing the amount paid and the amount of the tax withheld.12

The two-year period requirement is based on Section 229 of the NIRC of 1997 which provides that:

SECTION 229. 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; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of
the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid. (Formerly Section 230 of the
old NIRC)

While the second and third requirements are found under Section 10 of Revenue Regulation No. 6-85, as amended,
which reads:

Section 10. Claims for tax credit or refund. — Claims for tax credit or refund of income tax deducted and withheld on
income payments shall be given due course only when it is shown on the return that the income payment received was
declared as part of the gross income and the fact of withholding is established by a copy of the statement duly issued
by the payer to the payee (BIR Form No. 1743.1) showing the amount paid and the amount of tax withheld therefrom.

Respondent timely filed its claim for refund.

There is no dispute that respondent complied with the first requirement. The filing of respondent’s administrative claim
for refund on May 17, 1996 and judicial claim for refund on April 8, 1997 were well within the two-year period from the
date of the filing of the return on April 10, 1995.13

Respondent failed to prove that the income derived from rentals and sale of real property were included in the gross
income as reflected in its return.

However, as to the second and third requirements, the tax court and the appellate court arrived at different factual
findings.

The CTA ruled that the income derived from rentals and sales of real property were not included in respondent’s gross
income. It noted that in respondent’s 1994 Annual Income Tax Return, the phrase "NOT APPLICABLE" was printed on
the space provided for rent, sale of real property and trust income. The CTA also declared that the certifications issued
by respondent cannot be considered in the absence of the Certificates of Creditable Tax Withheld at Source. The CTA
ruled that:

x x x the Certificates of Creditable Tax Withheld at Source submitted by [respondent] pertain to rentals of real property
while the Monthly Remittance Returns of Income Taxes Withheld refer to sales of real property. But, if we are to look at

123
Schedules 3, 4, and 5 of the Annual Income Tax Return of [respondent] for 1994 (Exhibit "A"), there was no showing
that the Rental Income and Income from Sale of Real Property were included as part of the gross income appearing in
Section A of the said return. In fact, under the said schedules, the phrase "NOT APPLICABLE" was printed by
[respondent]. Verily, the income of [respondent] coming from rent and sale of real property upon which the creditable
taxes withheld were based were not duly reflected. As to the certifications issued by the [respondent] (Exh. UU), the
same cannot be considered in the absence of the requisite Certificates of Creditable Tax Withheld at Source.

Based on the foregoing, [respondent] has failed to comply with two essential requirements for a valid claim for refund.
Consequently, the same cannot be given due course. 14 (Emphasis supplied)

On the other hand, the CA found thus:

We disagree with x x x CTA’s findings. In the case of Citibank, N.A. vs. Court of Appeals (280 SCRA 459), the Supreme
Court held that:

"a refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding
taxes and the fact of withholding. However, a detailed proof of the truthfulness of each and every item in the income tax
return is not required. x x x

x x x 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. x x x"

In the case at bench, the BIR examined [respondent] Bank’s Corporate Annual Income Tax Returns for the years 1994
and 1995 when they were filed on April 10, 1995 and April 15, 1996, respectively. Presumably, the BIR found no false
declaration in them because it did not allege any false declaration thereof in its Answer (to the petition for review) filed
before x x x CTA. Nowhere in the Answer, did the BIR dispute the amount of tax refund being claimed by [respondent]
Bank as inaccurate or erroneous. In fact, the reason given by the BIR (in its Answer to the petition for review) why the
claimed tax refund should be denied was that "x x x the amount of ₱13,645,109.00 was not illegally or erroneously
collected, hence, the petition for review has no basis" [see Record, p. 32]. The amount of ₱17,433,133.00 reflected as
refundable income tax in [respondent] Bank’s Corporate Annual Income Tax Return for the year 1995 was not disputed
by the BIR to be inaccurate because there were certain income not included in the return of the [respondent]. Verily, this
leads Us to a conclusion that [respondent] Bank’s Corporate Annual Income Tax Returns submitted were accepted as
regular and even accurate by the BIR.

Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR is tasked to make an examination of returns and
assess the correct amount of tax, to wit:

"Sec. 16. Power of the Commissioner to make assessment and prescribe additional requirements for tax administration
and enforcement.

(a) After a return is filed as required under the provision of this Code, the Commissioner shall examine it and assess the
correct amount of tax. x x x"

which the [petitioner] Commissioner undeniably failed to do. Moreover, noteworthy is the fact that during the hearing of
the petition for review before the CTA, [petitioner] Commissioner of the BIR submitted the case for decision "in view of
the fact that he has no evidence to present nor records to submit relative to the case" x x x

Thus, although it is a fact that [respondent] failed to indicate said income payments under the appropriate Schedules 3,
4, and 5 of Section C of its 1994 Annual Income Tax Return (Exhibit "A"), however, We give credence to [respondent]
Bank’s assertion that it reported the said income payments as part of its gross income when it included the same as
part of the "Other Income," "Trust Income," and "Interest Income" stated in the Schedule of Income (referred to as an
attachment in Section C of Exhibit "A", x x x and in the 1994 audited Financial Statements (FS) supporting
[respondent’s] 1994 Annual Corporate Income Tax Return. The reason why the phrase "NOT APPLICABLE" was
indicated in schedules 3, 4, and 5 of Section C of [respondent’s] 1994 Annual Income Tax Return is due to the fact that
[respondent] Bank already reported the subject rental income and income from sale of real property in the Schedule of
Income under the headings "Other Income/Earnings," "Trust Income" and "Interest Income." Therefore, [respondent]
124
Bank still complied with the second requirement that the income upon which the taxes were withheld are included in the
return as part of the gross income.

[Respondent] Bank’s various documentary evidence showing that it had satisfied all requirements under the Tax Code
vis-à-vis the Bureau of Internal Revenue’s failure to adduce any evidence in support of their denial of the claim,
[respondent] Bank should, therefore, be granted the present claim for refund.15 (Emphasis supplied)

Between the decision of the CTA and the CA, it is the former’s that is based on the evidence and in accordance with the
applicable law and jurisprudence.

To establish the fact of withholding, respondent submitted Certificates of Creditable Tax Withheld at Source and
Monthly Remittance Returns of Income Taxes Withheld, which pertain to rentals and sales of real property,
respectively. However, a perusal of respondent’s 1994 Annual Income Tax Return shows that the gross income was
derived solely from sales of services. In fact, the phrase "NOT APPLICABLE" was printed on the schedules pertaining
to rent, sale of real property, and trust income.16 Thus, based on the entries in the return, the income derived from
rentals and sales of real property upon which the creditable taxes were withheld were not included in respondent’s
gross income as reflected in its return. Since no income was reported, it follows that no tax was withheld. To reiterate, it
is incumbent upon the taxpayer to reflect in his return the income upon which any creditable tax is required to be
withheld at the source.17

Respondent’s explanation that its income derived from rentals and sales of real properties were included in the gross
income but were classified as "Other Earnings" in its Schedule of Income18 attached to the return is not supported by
the evidence. There is nothing in the Schedule of Income to show that the income under the heading "Other Earnings"
includes income from rentals and sales of real property. No documentary or testimonial evidence was presented by
respondent to prove this. In fact, respondent, upon realizing its omission, filed a motion for new trial on the ground of
excusable negligence with the CTA. Respondent knew that it had to present additional evidence showing the
breakdown of the "Other Earnings" reported in its Schedule of Income attached to the return to prove that the income
from rentals and sales of real property were actually included under the heading "Other Earnings."19 Unfortunately, the
CTA was not convinced that there was excusable negligence to justify the granting of a new trial.

Accordingly, the CA erred in ruling that respondent complied with the second requirement.

Respondent failed to present all the Certificates of Creditable Tax Withheld at Source.

The CA likewise failed to consider in its Decision the absence of several Certificates of Creditable Tax Withheld at
Source. It immediately granted the refund without first verifying whether the fact of withholding was established by the
Certificates of Creditable Tax Withheld at Source as required under Section 10 of Revenue Regulation No. 6-85. As
correctly pointed out by the CTA, the certifications (Exhibit UU) issued by respondent cannot be considered in the
absence of the required Certificates of Creditable Tax Withheld at Source.

The burden is on the taxpayer to prove its entitlement to the refund.

Moreover, the fact that the petitioner failed to present any evidence or to

refute the evidence presented by respondent does not ipso facto entitle the respondent to a tax refund. It is not the duty
of the government to disprove a taxpayer’s claim for refund. Rather, the burden of establishing the factual basis of a
claim for a refund rests on the taxpayer.20

And while the petitioner has the power to make an examination of the returns and to assess the correct amount of tax,
his failure to exercise such powers does not create a presumption in favor of the correctness of the returns. The
taxpayer must still present substantial evidence to prove his claim for refund. As we have said, there is no automatic
grant of a tax refund.21

Hence, for failing to prove its entitlement to a tax refund, respondent’s claim must be denied. Since tax refunds partake
of the nature of tax exemptions, which are construed strictissimi juris against the taxpayer, evidence in support of a
claim must likewise be strictissimi scrutinized and duly proven.22
125
WHEREFORE, the petition is GRANTED. The assailed January 31, 2006 Decision of the Court of Appeals in CA-G.R.
SP No. 56773 and its July 19, 2006 Resolution are REVERSED and SET ASIDE. The October 4, 1999 Decision of the
Court of Tax Appeals denying respondent’s claim for tax refund for failure to prove that the income derived from rentals
and sale of real property from which the taxes were withheld were reflected in its 1994 Annual Income Tax Return, is
REINSTATED and AFFIRMED. SO ORDERED.

DIGEST:

On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR) two Corporate Annual Income Tax Returns, one
for its Corporate Banking Unit (CBU) and another for its Foreign Currency Deposit Unit (FCDU) for the taxable year ending
December 31, 1994. The return for the CBU consolidated the respondent's overall income tax liability for 1994, which reflected
a refundable income tax of P12,682,864.00. Petitioner, on the other hand, did not present any evidence.

On October 4, 1999, the CTA rendered a Decision denying respondent's claim for refund on the ground that respondent failed to
show that the income derived from rentals and sale of real property from which the taxes were withheld were reflected in its
1994 Annual Income Tax Return. On October 20, 1999, respondent filed a Motion for New Trial based on excusable negligence.
It prayed that it be allowed to present additional evidence to support its claim for refund. However, the motion was denied on
December 16, 1999 by the CTA. On appeal, the CA reversed the Decision of the CTA. The CA found that respondent has duly
proven that the income derived from rentals and sale of real property upon which the taxes were withheld were included in the
return as part of the gross income.
Hence, this present recourse.

ISSUE

1. Whether or not the respondent has proven its entitlement to the refund

RULING

The respondent miserably failed to prove its entitlement to the refund. A taxpayer claiming for a tax credit or refund of
creditable withholding tax must comply. The two-year period requirement is based on Section 229 of the NIRC of 1997.
Respondent timely filed its claim for refund. There is no dispute that respondent complied with the first requirement. The
filing of respondent's administrative claim for refund on May 17, 1996 and judicial claim for refund on April 8, 1997 were well
within the two-year period from the date of the filing of the return on April 10, 1995.Respondent failed to prove that the
income derived from rentals and sale of real property were included
in the gross income as reflected in its return.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SMART COMMUNICATION, INC.,⃰ Respondent.


G.R. Nos. 179045-46 August 25, 2010 DEL CASTILLO, J.:

The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the responsibility
to return the same to the principal taxpayer.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision1 dated June
28, 2007 and the Resolution2 dated July 31, 2007 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Smart Communications, Inc. is a corporation organized and existing under Philippine law. It is an
enterprise duly registered with the Board of Investments.

On May 25, 2001, respondent entered into three Agreements for Programming and Consultancy Services3 with Prism
Transactive (M) Sdn. Bhd. (Prism), a non-resident corporation duly organized and existing under the laws of Malaysia.
Under the agreements, Prism was to provide programming and consultancy services for the installation of the Service
Download Manager (SDM) and the Channel Manager (CM), and for the installation and implementation of Smart Money
and Mobile Banking Service SIM Applications (SIM Applications) and Private Text Platform (SIM Application).

126
On June 25, 2001, Prism billed respondent in the amount of US$547,822.45, broken down as follows:

SDM Agreement US$236,000.0


0

CM Agreement 296,000.00

SIM Application Agreement 15,822.45

4
Total US$547,822.45

Thinking that these payments constitute royalties, respondent withheld the amount of US$136,955.61 or
₱7,008,840.43,5 representing the 25% royalty tax under the RP-Malaysia Tax Treaty.6

On September 25, 2001, respondent filed its Monthly Remittance Return of Final Income Taxes Withheld (BIR Form
No. 1601-F)7 for the month of August 2001.

On September 24, 2003, or within the two-year period to claim a refund, respondent filed with the Bureau of Internal
Revenue (BIR), through the International Tax Affairs Division (ITAD), an administrative claim for refund 8of the amount of
₱7,008,840.43.

Proceedings before the CTA Second Division

Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act on the claim for refund, respondent
filed a Petition for Review9 with the CTA, docketed as CTA Case No. 6782 which was raffled to its Second Division.

In its Petition for Review, respondent claimed that it is entitled to a refund because the payments made to Prism are not
royalties10 but "business profits,"11 pursuant to the definition of royalties under the RP-Malaysia Tax Treaty,12 and in
view of the pertinent Commentaries of the Organization for Economic Cooperation and Development (OECD)
Committee on Fiscal Affairs through the Technical Advisory Group on Treaty Characterization of Electronic Commerce
Payments.13 Respondent further averred that since under Article 7 of the RP-Malaysia Tax Treaty, "business profits" are
taxable in the Philippines "only if attributable to a permanent establishment in the Philippines, the payments made to
Prism, a Malaysian company with no permanent establishment in the Philippines,"14 should not be taxed.15

On December 1, 2003, petitioner filed his Answer16 arguing that respondent, as withholding agent, is not a party-in-
interest to file the claim for refund,17 and that assuming for the sake of argument that it is the proper party, there is no
showing that the payments made to Prism constitute "business profits."18

Ruling of the CTA Second Division

In a Decision19 dated February 23, 2006, the Second Division of the CTA upheld respondent’s right, as a withholding
agent, to file the claim for refund citing the cases of Commissioner of Internal Revenue v. Wander Philippines,
Inc.,20 Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation21 and Commissioner of Internal Revenue v. The Court of Tax Appeals.22

However, as to the claim for refund, the Second Division found respondent entitled only to a partial refund. Although it
agreed with respondent that the payments for the CM and SIM Application Agreements are "business profits," 23 and
therefore, not subject to tax24 under the RP-Malaysia Tax Treaty, the Second Division found the payment for the SDM
Agreement a royalty subject to withholding tax.25 Accordingly, respondent was granted refund in the amount of
₱3,989,456.43, computed as follows:26
127
Particulars Amount (in US$)

1. CM 296,000.00

2. SIM Application 15,822.45

Total US$311,822.45

Particulars Amount

Tax Base US$311,822.45

25%
Multiply by: Withholding Tax Rate

Final Withholding Tax US$ 77,955.61

Multiply by: Prevailing Exchange Rate 51.176

Tax Refund Due ₱3,989,456.43

The dispositive portion of the Decision of the CTA Second Division reads:

WHEREFORE, premises considered, the instant petition is partially GRANTED. Accordingly, respondent Commissioner
of Internal Revenue is hereby ORDERED to REFUND or ISSUE a TAX CREDIT CERTIFICATE to petitioner Smart
Communications, Inc. in the amount of P3,989,456.43, representing overpaid final withholding taxes for the month of
August 2001. SO ORDERED.27

Both parties moved for partial reconsideration28 but the CTA Second Division denied the motions in a
Resolution29 dated July 18, 2006.

Ruling of the CTA En Banc

Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions for Review,30 which were
consolidated per Resolution31 dated February 8, 2007.

On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial refund granted to respondent. In
sustaining respondent’s right to file the claim for refund, the CTA En Banc said that although respondent "and Prism are
unrelated entities, such circumstance does not affect the status of [respondent] as a party-in-interest [as its legal
interest] is based on its direct and independent liability under the withholding tax system."32 The CTA En Banc also
concurred with the Second Division’s characterization of the payments made to Prism, specifically that the payments for
the CM and SIM Application Agreements constitute "business profits,"33 while the payment for the SDM Agreement is a
royalty.34

The dispositive portion of the CTA En Banc Decision reads: WHEREFORE, the instant petition is hereby DISMISSED.
Accordingly, the assailed Decision and Resolution are hereby AFFIRMED. SO ORDERED.35

Only petitioner sought reconsideration36 of the Decision. The CTA En Banc, however, found no cogent reason to
reverse its Decision, and thus, denied petitioner’s motion for reconsideration in a Resolution37 dated July 31, 2007.
128
Unfazed, petitioner availed of the present recourse.

Issues

The two issues to be resolved are: (1) whether respondent has the right to file the claim for refund; and (2) if respondent
has the right, whether the payments made to Prism constitute "business profits" or royalties.

Petitioner’s Arguments

Petitioner contends that the cases relied upon by the CTA in upholding respondent’s right to claim the refund are
inapplicable since the withholding agents therein are wholly owned subsidiaries of the principal taxpayers, unlike in the
instant case where the withholding agent and the taxpayer are unrelated entities. Petitioner further claims that since
respondent did not file the claim on behalf of Prism, it has no legal standing to claim the refund. To rule otherwise would
result to the unjust enrichment of respondent, who never shelled-out any amount to pay the royalty taxes. Petitioner,
thus, posits that the real party-in-interest to file a claim for refund of the erroneously withheld taxes is Prism. He cites as
basis the case of Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue,38 where it was ruled that the proper
party to file a refund is the statutory taxpayer.39 Finally, assuming that respondent is the proper party, petitioner
counters that it is still not entitled to any refund because the payments made to Prism are taxable as royalties, having
been made in consideration for the use of the programs owned by Prism.

Respondent’s Arguments

Respondent, on the other hand, maintains that it is the proper party to file a claim for refund as it has the statutory and
primary responsibility and liability to withhold and remit the taxes to the BIR. It points out that under the withholding tax
system, the agent-payor becomes a payee by fiction of law because the law makes the agent personally liable for the
tax arising from the breach of its duty to withhold. Thus, the fact that respondent is not in any way related to Prism is
immaterial.

Moreover, respondent asserts that the payments made to Prism do not fall under the definition of royalties since the
agreements are for programming and consultancy services only, wherein Prism undertakes to perform services for the
creation, development or the bringing into existence of software applications solely for the satisfaction of the peculiar
needs and requirements of respondent.

Our Ruling

The petition is bereft of merit.

Withholding agent may file a claim for refund

Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. – The Commissioner may

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good condition by the purchaser, and, in his 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: Provided, however, That a return filed
showing an overpayment shall be considered as a written claim for credit or refund.

Sec. 229. 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
excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the

129
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of
the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)

Pursuant to the foregoing, the person entitled to claim a tax refund is the taxpayer. However, in case the taxpayer does
not file a claim for refund, the withholding agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 40 a withholding agent
was considered a proper party to file a claim for refund of the withheld taxes of its foreign parent company. Pertinent
portions of the Decision read:

The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." It thus becomes important to note that under Section 53(c)41 of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms
"liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding
agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:

"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as
well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return
and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas the Commissioner and his deputies are not made liable by law."

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends
with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the
government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where, as in the instant case, the
withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer"
within the meaning of Section 309,42 NIRC, and as impliedly authorized to file the claim for refund and the suit to
recover such claim. (Emphasis supplied.)

130
Petitioner, however, submits that this ruling applies only when the withholding agent and the taxpayer are related
parties, i.e., where the withholding agent is a wholly owned subsidiary of the taxpayer.

We do not agree.

Although such relation between the taxpayer and the withholding agent is a factor that increases the latter’s legal
interest to file a claim for refund, there is nothing in the decision to suggest that such relationship is required or that the
lack of such relation deprives the withholding agent of the right to file a claim for refund. Rather, what is clear in the
decision is that a withholding agent has a legal right to file a claim for refund for two reasons. First, he is considered a
"taxpayer" under the NIRC as he is personally liable for the withholding tax as well as for deficiency assessments,
surcharges, and penalties, should the amount of the tax withheld be finally found to be less than the amount that should
have been withheld under law. Second, as an agent of the taxpayer, his authority to file the necessary income tax return
and to remit the tax withheld to the government impliedly includes the authority to file a claim for refund and to bring an
action for recovery of such claim.

In this connection, it is however significant to add that while the withholding agent has the right to recover the taxes
erroneously or illegally collected, he nevertheless has the obligation to remit the same to the principal taxpayer. As an
agent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly enriching himself at
the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right to
file a claim for refund.

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue43 cited by the petitioner, we find the same
inapplicable as it involves excise taxes, not withholding taxes. In that case, it was ruled that the proper party to
question, or seek a refund of, an indirect tax "is the statutory taxpayer, the person on whom the tax is imposed by law
and who paid the same even if he shifts the burden thereof to another."

In view of the foregoing, we find no error on the part of the CTA in upholding respondent’s right as a withholding agent
to file a claim for refund.

The payments for the CM and the SIM Application Agreements constitute

"business profits"

Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kind received as consideration for:
"(i) the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, any
copyright of literary, artistic or scientific work, or for the use of, or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial or scientific experience; (ii) the use of, or the right to
use, cinematograph films, or tapes for radio or television broadcasting."44 These are taxed at the rate of 25% of the
gross amount.45

Under the same Treaty, the "business profits" of an enterprise of a Contracting State is taxable only in that State, unless
the enterprise carries on business in the other Contracting State through a permanent establishment.46The term
"permanent establishment" is defined as a fixed place of business where the enterprise is wholly or partly carried
on.47 However, even if there is no fixed place of business, an enterprise of a Contracting State is deemed to have a
permanent establishment in the other Contracting State if it carries on supervisory activities in that other State for more
than six months in connection with a construction, installation or assembly project which is being undertaken in that
other State.48

In the instant case, it was established during the trial that Prism does not have a permanent establishment in the
Philippines. Hence, "business profits" derived from Prism’s dealings with respondent are not taxable. The question is
whether the payments made to Prism under the SDM, CM, and SIM Application agreements are "business profits" and
not royalties.

Paragraph 1.3 of the Programming Services (Schedule A) of the SDM Agreement,49 reads:

1.3 Intellectual Property Rights (IPR)


131
The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of which shall be retained by PRISM.
PRISM, however, shall provide the Client the APIs for the SDM at no cost to the Client. The Client shall be permitted to
develop programs to interface with the SDM or the SDM Libraries, using the related APIs as appropriate. 50 (Emphasis
supplied.)

Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM Agreement and paragraph 1.3 of the
Programming Services (Schedule A) of the SIM Agreement provide:

1.4 Intellectual Property Rights (IPR)

The IPR of all components of the CM belong to the Client with the exception of the following components, which are
provided, without technical or commercial restraints or obligations:

• ConfigurationException.java

• DataStructures (DblLinkedListjava, DbIListNodejava, List

EmptyException.java, ListFullException.java, ListNodeNotFoundException.java,

QueueEmptyException.java, QueueFullException.java, QueueList.java, QueuListEx.java, and


QueueNodeNotFoundException.java)

• FieldMappedObjeet.java

• LogFileEx.java

• Logging (BaseLogger.java and Logger.java)

• PrismGeneric Exception.java

• PrismGenericObject.java

• ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.


java, DeliverMessage.java, Login.java, Logout.java, Nack.java, SubmitMessage.java,

• TemplateManagement (FileTemplateDataBag.java, Template


DataBag.java, TemplateManagerExBag.java, and TemplateParserExBag.java)

• TemplateManager.class

• TemplateServer.class

• TemplateServer$RequestThread.class

• Template Server_skel.class

• TemplateServer_stub.class

• TemplateService.class

• Prism Crypto Server module for PHP451

1.3 Intellectual Property Rights (IPR)

132
The Client shall own the IPR for the Specifications and the Source Code for the SIM Applications. PRISM shall develop
an executable compiled code (the "Executable Version") of the SIM Applications for use on the aSIMetric card which,
however, shall only be for the Client’s use. The Executable Version may not be provided by PRISM to any third [party]
without the prior written consent of the Client. It is further recognized that the Client anticipates licensing the use of the
SIM Applications, but it is agreed that no license fee will be charged to PRISM or to a licensee of the aSIMetrix card
from PRISM when SIMs are supplied to the Client.52 (Emphases supplied.)

The provisions in the agreements are clear. Prism has intellectual property right over the SDM program, but not over
the CM and SIM Application programs as the proprietary rights of these programs belong to respondent. In other words,
out of the payments made to Prism, only the payment for the SDM program is a royalty subject to a 25% withholding
tax. A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application
Agreements is therefore in order.

Indeed, the government has no right to retain what does not belong to it.1âwphi1 "No one, not even the State, should
enrich oneself at the expense of another."53

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007 and the Resolution dated July 31,
2007 of the Court of Tax Appeals En Banc are hereby AFFIRMED. The Bureau of Internal Revenue is
hereby ordered to issue a Tax Credit Certificate to Prism Transactive (M) Sdn. Bhd. in the amount of ₱3,989,456.43
representing the overpaid final withholding taxes for the month of August 2001. SO ORDERED.

DIGEST:

FACTS:

Smart entered into an Agreement with Prism, a nonresident foreign corporation domiciled in Malaysia, whereby Prism
will provide programming and consultancy services to Smart. Thinking that the payments to Prism were royalties, Smart
withheld 25% under the RP-Malaysia Tax Treaty. Smart then filed a refund with the BIR alleging that the payments were
not subject to Philippine withholding taxes given that they constituted business profits paid to an entity without a
permanent establishment in the Philippines.

ISSUE:

Does Smart have the right to file the claim for refund?

HELD:

YES. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal
interest to bring a suit for refund of taxes he believes were illegally collected from him. Since the withholding agent is an
agent of the beneficial owner of the payments (i.e., nonresident), the authority as agent is held to include the filing of a
claim for refund. The Silkair case was held inapplicable as it involved excise taxes and not withholding taxes.

Smart was granted a refund given that only a portion of its payments represented royalties since it is only that portion
over which Prism maintained intellectual property rights and the rest involved full transfer of proprietary rights to Smart
and were thus treated as business profits of Prism.

133
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PETRON CORPORATION, Respondent.
G.R. No. 185568 March 21, 2012 SERENO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure filed by the Commissioner
of Internal Revenue (CIR) assailing the Decision1 dated 03 December 2008 of the Court of Tax Appeals En Banc (CTA
En Banc) in CTA EB No. 311. The assailed Decision reversed and set aside the Decision2dated 04 May 2007 of the
Court of Tax Appeals Second Division (CTA Second Division) in CTA Case No. 6423, which ordered respondent Petron
Corporation (Petron) to pay deficiency excise taxes for the taxable years 1995 to 1998, together with surcharges and
delinquency interests imposed thereon.

Respondent Petron is a corporation engaged in the production of petroleum products and is a Board of Investment
(BOI) – registered enterprise in accordance with the provisions of the Omnibus Investments Code of 1987 (E.O. 226)
under Certificate of Registration Nos. 89-1037 and D95-136.3

The Facts

The CTA En Banc in CTA EB Case No. 311 adopted the findings of fact by the CTA Second Division in CTA Case No.
6423. Considering that there are no factual issues in this case, we likewise adopt the findings of fact by the CTA En
Banc, as follows:

As culled from the records and as agreed upon by the parties in their Joint Stipulation of Facts and Issues, these are
the facts of the case.

During the period covering the taxable years 1995 to 1998, petitioner (herein respondent Petron) had been an assignee
of several Tax Credit Certificates (TCCs) from various BOI-registered entities for which petitioner utilized in the payment
of its excise tax liabilities for the taxable years 1995 to 1998. The transfers and assignments of the said TCCs were
approved by the Department of Finance’s One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF
Center), composed of representatives from the appropriate government agencies, namely, the Department of Finance
(DOF), the Board of Investments (BOI), the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR).

Taking ground on a BOI letter issued on 15 May 1998 which states that ‘hydraulic oil, penetrating oil, diesel fuels and
industrial gases are classified as supplies and considered the suppliers thereof as qualified transferees of tax credit,’
petitioner acknowledged and accepted the transfers of the TCCs from the various BOI-registered entities.

Petitioner’s acceptance and use of the TCCs as payment of its excise tax liabilities for the taxable years 1995 to 1998,
had been continuously approved by the DOF as well as the BIR’s Collection Program Division through its surrender and
subsequent issuance by the Assistant Commissioner of the Collection Service of the BIR of the Tax Debit Memos
(TDMs).

On January 30, 2002, respondent [herein petitioner CIR] issued the assailed Assessment against petitioner for
deficiency excise taxes for the taxable years 1995 to 1998, in the total amount of ₱ 739,003,036.32, inclusive of
surcharges and interests, based on the ground that the TCCs utilized by petitioner in its payment of excise taxes have
been cancelled by the DOF for having been fraudulently issued and transferred, pursuant to its EXCOM Resolution No.
03-05-99. Thus, petitioner, through letters dated August 31, 1999 and September 1, 1999, was required by the DOF
Center to submit copies of its sales invoices and delivery receipts showing the consummation of the sale transaction to
certain TCC transferors.

Instead of submitting the documents required by the respondent, on February 27, 2002, petitioner filed its protest letter
to the ‘Assessment’ on the grounds, among others, that:

a. The BIR did not comply with the requirements of Revenue Regulations 12-99 in issuing the "assessment"
letter dated January 30, 2002, hence, the assessment made against it is void;

b. The assignment/transfer of the TCCs to petitioner by the TCC holders was submitted to, examined and
approved by the concerned government agencies which processed the assignment in accordance with law and
revenue regulations;
134
c. There is no basis for the imposition of the 50% surcharge in the amount of ₱ 159,460,900.00 and interest
penalties in the amount of ₱ 260,620,335.32 against it;

d. Some of the items included in the ‘assessment’ are already pending litigation and are subject of the case
entitled ‘Commissioner of Internal Revenue vs. Petron Corporation,’ C.A. GR SP No. 55330 (CTA Case No.
5657) and hence, should no longer be included in the ‘assessment’; and

e. The assessment and collection of alleged excise tax deficiencies sought to be collected by the BIR against
petitioner through the January 30, 2002 letter are already barred by prescription under Section 203 of the
National Internal Revenue Code.

On 27 March 2002, respondent, through Assistant Commissioner Edwin R. Abella served a Warrant of Distraint and/or
Levy on petitioner to enforce payment of the ₱ 739,003,036.32 tax deficiencies.

Respondent allegedly served the Warrant of Distraint and/or Levy against petitioner without first acting on its letter-
protest. Thus, construing the Warrant of Distraint and/or Levy as the final adverse decision of the BIR on its protest of
the assessment, petitioner filed the instant petition before this Honorable Court [referring to the CTA Second Division]
on April 2, 2002.

On April 30, 2002, respondent filed his Answer, raising the following as his Special Affirmative Defenses:

6. In a post-audit conducted by the One-Stop Inter-Agency Tax Credit and Duty Drawback Center (Center) of
the Department of Finance (DOF), pursuant to the Center’s Excom Resolution No. 03-05-99, it was found that
TCCs issued to Alliance Thread Co., Inc., Allstar Spinning, Inc., Diamond Knitting Corp., Fiber Technology
Corp., Filstar Textile Industrial Corp., FLB International Fiber Corp., Jantex Philippines, Inc., Jibtex Industrial
Corp., Master Colour System Corp. and Spintex International, Inc. were fraudulently obtained and were
fraudulently transferred to petitioner. As a result of said findings, the TCCs and the Tax Debit Memos (TDMs)
issued by the Center to petitioner against said TCCs were cancelled by the DOF;

7. Prior to the cancellation of the aforesaid TCCs and TDMs, petitioner had utilized the same in the payment of
its excise tax liabilities. With such cancellation, the TCCs and TDMs have no value in money or money’s worth
and, therefore, the excise taxes for which they were used as payment are now deemed unpaid;

8. The cancellation by the DOF of the aforesaid TCCs and TDMs has the presumption of regularity upon which
respondent may validly rely;

9. Petitioner was informed by the DOF of the post-audit conducted on the TCCs and was given the opportunity
to submit documents showing that the TCCs were transferred to it in payment of petroleum products allegedly
delivered by it to the TCC transferors upon which the TCC transfers were approved, with the admonition that
failure to submit the required documents would result in the cancellation of the transfers. Petitioner was also
informed of the cancellation of the TCCs and TDMs and the reason for their cancellation;

10. Since petitioner is deemed not to have paid its excise tax liabilities, a pre-assessment notice is not required
under Section 228 of the Tax Code;

11. The letter dated January 20, 2002 (should be January 30, 2002), demanding payment of petitioner’s excise
tax liabilities explicitly states the basis for said demand, i.e., the cancellation of the TCCs and TDMs;

12. The government is never estopped from collecting legitimate taxes due to the error committed by its agents
(Visayas Cebu Terminal Inc., vs. Commissioner of Internal Revenue, 13 SCRA 257; Atlas Consolidated Mining
and Development Corporation vs. Commissioner of Internal Revenue, 102 SCRA 246). The acceptance by the
Bureau of Internal Revenue of the TCCs fraudulently obtained and fraudulently transferred to petitioner as
payment of its excise tax liabilities turned out to be a mistake after the post-audit was conducted. Hence, said
payments were void and the excise taxes may be validly collected from petitioner.

135
13. As found in the post-audit, petitioner and the TCC transferors committed fraud in the transfer of the TCCs
when they made appear (sic) that the transfers were in consideration for the delivery of petroleum products by
petitioner to the TCCs transferors, for which reason said transfers were approved by the Center, when in fact
there were no such deliveries;

14. Petitioner used the TCCs fraudulently obtained and fraudulently transferred in the payment of excise taxes
declared in its excise tax returns with intent to evade tax to the extent of the value represented by the TCCs,
thereby rendering the returns fraudulent;

15. Since petitioner wilfully filed fraudulent returns, it is liable for the 50% surcharge and 20% annual interest
imposed under Sections 248 and 249 of the Tax Code;

16. Since petitioner wilfully filed fraudulent returns with intent to evade tax, the prescriptive period to collect the
tax is ten (10) years from the discovery of the fraud pursuant to Section 222 of the Tax Code; and

17. The case pending in the Court of Appeals (CA-G.R. Sp. No. 55330 [CTA Case No. 5657]), and the case at
bar have distinct causes of action. The former involves the invalid transfers of the TCCs to petitioner on the
theory that it is not a qualified transferee thereof, while the latter involves the fraudulent procurement of said
TCCs and the fraudulent transfers thereof to petitioner.

However, on November 12, 2002, respondent filed a Manifestation informing this Court that on May 29, 2002, it had
reduced the amount of deficiency excise taxes to ₱ 720,923,224.74 as a result of its verification that some of the TCCs
which formed part of the original "Assessment" were already included in a case previously filed with this Court. In effect,
the amount of deficiency excise taxes is recomputed as follows:

Transferor Basic Tax Surcharge Interest Total

Alliance Thread Co. Inc. ₱ 12,078,823.00 ₱ 6,039,411.50 ₱ 16,147,293.21 ₱ 34,265,527.21

Allstar Spinning, Inc. 37,265,310.00 18,632,655.00 49,781,486.95 105,679,451.95

Diamond Knitting 36,764,587.00 18,382,293.50 49,264,758.35 104,411,638.85


Corporation

Fiber Technology Corp. 25,300,911.00 12,650,455.50 34,295,655.90 72,247,022.40

Filstar Textile Corp. 40,767,783.00 20,383,891.50 54,802,550.16 115,954,224.66

FLB International Fiber 25,934,695.00 12,967,347.50 34,977,257.14 73,879,299.64


Corp.

Jantex Philippines, Inc. 12,036,192.00 6,018,096.00 15,812,547.24 33,866,835.24

Jibtex Industrial Corp. 15,506,302.00 7,753,151.00 20,610,319.52 43,869,772.52

Master Colour system Corp. 33,333,536.00 16,666,768.00 44,822,167.06 94,822,471.06

Spintex International Inc. 14,912,408.00 7,456,204.00 19,558,368.71 41,926,980.71

136
Total ₱ ₱ ₱ ₱
253,900,547.00 126,950,273.50 340,072,404.24 720,923,224.74

During the pendency of the case, but after respondent had already submitted his Formal Offer of Evidence for this
Court’s consideration, he filed an ‘Urgent Motion to Reopen Case’ on August 24, 2004 on the ground that additional
evidence consisting of documents presented to the Center in support of the TCC transferor’s claims for tax credit as
well as document supporting the applications for approval of the transfer of the TCCs to petitioner, must be presented to
prove the fraudulent issuance and transfer of the subject TCCs. Respondent submits that it is imperative on his part to
do so considering that, without necessarily admitting that the evidence presented in the case of Pilipinas Shell
Petroleum Corporation vs. Commissioner of Internal Revenue, to prove fraud is not clear and convincing, he may suffer
the same fate that had befallen upon therein respondent when this Court held, among others, that ‘there is no clear and
convincing evidence that the Tax Credit Certificates (TCCs) transferred to Shell (for brevity) and used by it in the
payment of excise taxes, were fraudulently issued to the TCC transferors and were fraudulently transferred to Shell.’

An ‘Opposition to Urgent Motion to Reopen Case’ was filed by petitioner on September 3, 2004 contending that to
sustain respondent’s motion would ‘smack of procedural disorder and spawn a reversion of the proceedings. While
litigation is not a game of technicalities, it is a truism that every case must be presented in accordance with the
prescribed procedure to insure an orderly administration of justice.’

On October 4, 2004, this Court resolved to grant respondent’s Motion and allowed respondent to present additional
evidence in support of his arguments, but deferred the resolution of respondent’s original Formal Offer of Evidence until
after the respondent has terminated his presentation of evidence. Subsequent to this Court’s Resolution, respondent
then filed on October 20, 2004, a Request for the Issuance of Subpoena Duces Tecum to the Executive Director of the
Center or his duly authorized representative, and on October 21, 2004, a Subpoena Ad Testificandum to Ms. Elizabeth
R. Cruz, also of the Center.

Petitioner filed a ‘Motion for Reconsideration (Re: Resolution dated October 4, 2004)’ on October 27, 2004, with
respondent filing his ‘Opposition’ on November 4, 2004, and petitioner subsequently filing its ‘Reply to Opposition’ on
December 20, 2004. Petitioner’s motion was denied by this Court in a Resolution dated February 28, 2005 for lack of
merit.

On March 18, 2005, petitioner filed an ‘Urgent Motion to Revert Case to the First Division’ with respondent’s
‘Manifestation’ filed on April 6, 2005 stating that ‘the question of which Division of this Honorable Court shall hear the
instant case is an internal matter which is better left to the sound discretion of this Honorable Court without interference
by a party litigant’. On April 28, 2005, this Court denied the Motion of petitioner for lack of merit.

On November 7, 2005, the Court finally resolved respondent’s ‘Formal Offer of Evidence’ filed on May 7, 2004 and
‘Supplemental Formal Offer of Evidence’ filed on August 25, 2005. On November 22, 2005, respondent filed a ‘Motion
for Partial Reconsideration’ of the Court’s Resolution to admit Exhibits 31 and 31-A on the ground that he already
submitted and offered certified true copies of said exhibits, which the Court granted in its Resolution on January 19,
2006.

However, on February 10, 2006, respondent filed a ‘Motion to Amend Formal Offer of Evidence’ praying that he be
allowed to amend his formal offer since some exhibits although attached thereto were inadvertently not mentioned in
the Formal Offer of Evidence. Petitioner’s ‘Opposition’ was filed on March 14, 2006. This Court granted respondent’s
motion in the Resolution dated April 24, 2006 and considering that the parties already filed their respective Memoranda,
this case was then considered submitted for decision.

On May 16, 2006, however, respondent filed an ‘Omnibus Motion’ praying that this Court take judicial notice of the fact
that the TCCs issued by the Center, including the TCCs in this instant case, contained the standard ‘Liability Clause’
and that the case be consolidated with CTA Case No. 6136, on the ground that both cases involve the same parties
and common questions of law or fact. An ‘Opposition/Comment on Omnibus Motion’ was filed by petitioner on June 26,
2006, and ‘Reply to Opposition/Comment’ was filed by respondent on July 17, 2006.

137
In a Resolution promulgated on September 1, 2006, this Court granted respondent’s motion only insofar as taking
judicial notice of the fact that each of the dorsal side of the TCCs contains the subject ‘liability clause’, but denied
respondent’s motion to consolidate considering that C.T.A. Case No. 6136 was already submitted for decision on April
24, 2006.4

The Ruling of the Court of Tax Appeals–Second Division

(CTA Case No. 6423)

On 04 May 2007, the CTA Second Division promulgated a Decision in CTA Case No. 6423, the dispositive portion of
which reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED for lack of merit. Accordingly,
petitioner is ORDERED TO PAY the respondent the reduced amount of SIX HUNDRED MILLION SEVEN HUNDRED
SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE AND 95/100 PESOS (P600,769,353.95), representing
petitioner’s deficiency excise taxes for the taxable years 1995 to 1998, recomputed as follows:

Transferor Basic Tax 25% Surcharge 20% Interest Total

Alliance Thread Co. Inc. ₱ 12,078,823.00 ₱ 3,019,705.75 ₱ 13,456,077.68 ₱ 28,554,606.43

Allstar Spinning, Inc. 37,265,310.00 9,316,327.50 41,484,572.46 88,066,209.96

Diamond Knitting Corporation 36,764,587.00 9,191,146.75 41,053,965.29 87,009,699.04

Fiber Technology Corp. 25,300,911.00 6,325,227.75 28,579,713.25 60,205,852.00

Filstar Textile Corp. 40,767,783.00 10,191,945.75 45,668,791.80 96,628,520.55

FLB International Fiber Corp. 25,934,695.00 6,483,673.75 29,147,714.28 61,566,083.03

Jantex Philippines, Inc. 12,036,192.00 3,009,048.00 13,177,122.70 28,222,362.70

Jibtex Industrial Corp. 15,506,302.00 3,876,575.50 17,175,266.27 36,558,143.77

Master Colour system Corp. 33,333,536.00 8,333,384.00 37,351,805.88 79,018,725.88

Spintex International Inc. 14,912,408.00 3,728,102.00 16,298,640.59 34,939,150.59

Total ₱ 253,900,547.00 ₱ 63,475,136.75 ₱ 283,393,670.20 ₱ 600,769,353.95

In addition, petitioner is ORDERED TO PAY the respondent TWENTY FIVE PERCENT (25%) LATE PAYMENT
SURCHARGE AND TWENTY PERCENT (20%) DELIQUENCY INTEREST per annum on the amount of SIX
HUNDRED MILLION SEVEN HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE & 95/100
PESOS (₱ 600,769,353.95), computed from June 27, 2002 until the amount is fully paid.

SO ORDERED.5

138
The CTA Second Division held Petron liable for deficiency excise taxes on the ground that the cancellation by the DOF
of the TCCs previously issued to and utilized by respondent to settle its tax liabilities had the effect of nonpayment of
the latter’s excise taxes. These taxes corresponded to the value of the TCCs Petron used for payment. The CTA
Second Division ruled that payment can only occur if the instrument used to discharge an obligation represents its
stated value.6 It further ruled that Petron’s acceptance of the TCCs was considered a contract entered into by
respondent with the CIR and subject to post-audit,7 which was considered a suspensive condition governed by Article
1181 of the Civil Code.8

Further, the CTA Second Division found that the circumstances pertaining to the issuance of the subject TCCs and their
transfer to Petron "brim with fraud."9 Hence, the said court concluded that since the TCCs used by Petron were found to
be spurious, respondent was deemed to have not paid its excise taxes and ought to be liable to the CIR in the amount
of ₱ 600,769,353.95 plus 25% interests and 20% surcharges.10

Petron filed a Motion for Reconsideration11 of the Decision of the CTA Second Division, which denied the motion in a
Resolution dated 14 August 2007.12 The court reiterated its conclusion that the TCCs utilized by Petron to pay the
latter’s excise tax liabilities did not result in payment after these TCCs were found to be fraudulent in the post-audit by
the DOF. The CTA Second Division also affirmed its ruling that Petron was liable for a 25% late payment surcharge and
20% surcharges under Section 24813 of the National Internal Revenue Code (NIRC) of 1997.14

Aggrieved, Petron appealed the Decision to the CTA En Banc through a Petition for Review, which was docketed as
CTA EB No. 311. In its Petition, Petron alleged that the Second Division erred in holding respondent liable to pay the
amount of ₱ 600,769,353.95 in deficiency excise taxes with penalties and interests covering the taxable years 1995-
1998. Petron prayed that the said Decision be reversed and set aside, and that CIR be enjoined from collecting the
contested excise tax deficiency assessment.15

The CTA En Banc summed up into one issue the grounds relied upon by Petron in its Petition for Review, as follows:

Whether or not the Second Division erred in holding petitioner liable for the amount of ₱ 600,769,353.95 as deficiency
excise taxes for the years 1995-1998, including surcharges and interest, plus 25% surcharge and 20% delinquency
interest per annum from June 27, 2002 until the amount is fully paid.16

The Ruling of the Court of Tax Appeals En Banc

(CTA EB Case No. 311)

On 03 December 2008, the CTA En Banc promulgated a Decision, which reversed and set aside the CTA Second
Division on 04 May 2007. The former absolved Petron from any deficiency excise tax liability for taxable years 1995 to
1998. Its ruling in favor of Petron was anchored on this Court’s pronouncements in Pilipinas Shell Petroleum Corp. v.
Commissioner of Internal Revenue (Shell),17 which found that the factual background and legal issues therein were
similar to those in the present case.

In resolving the issues, the CTA En Banc adopted the main points in Shell, which it quoted at length as basis for
deciding the appeal in favor of Petron. The gist of the main points of Shell cited by the said court is as follows:

a) The issued TCCs are immediately valid and effective and are not subject to a post-audit as a suspensive
condition18

b) A TCC is subject only to the following conditions:

i) Post-audit in the event of a computational discrepancy

ii) A reduction for any outstanding account with the BIR and/or BOC

iii) A revalidation of the TCC if not utilized within one year from issuance or date of utilization19

139
c) A transferee of a TCC should only be a BOI-registered firm under the Implementing Rules and Regulations of
Executive Order (E.O.) No. 226.20

d) The liability clause in the TCCs provides only for the solidary liability of the transferee relative to its transfer in
the event it is a party to the fraud.21

e) A transferee can rely on the Center’s approval of the TCCs’ transfer and subsequent acceptance as payment
of the transferee’s excise tax liability.22

f) A TCC cannot be cancelled by the Center, as it was already cancelled after the transferee had applied it as
payment for the latter’s excise tax liabilities.23

The CTA En Banc also found that Petron had no participation in or knowledge of the fraudulent issuance and transfer of
the subject TCCs. In fact, the parties made a joint stipulation on this matter in CTA Case No. 6423 before the CTA
Second Division.24

In resolving the issue of whether the government is estopped from collecting taxes due to the fault of its agents, the
CTA En Banc quoted Shell as follows:

While we agree with respondent that the State in the performance of government function is not estopped by the
neglect or omission of its agents, and nowhere is this truer than in the field of taxation, yet this principle cannot be
applied to work injustice against an innocent party.25 (Emphasis supplied.) Finally, the CTA En Banc ruled that Petron
was considered an innocent transferee of the subject TCCs and may not be prejudiced by a re-assessment of excise
tax liabilities that respondent has already settled, when due, with the use of the TCCs.26 Petron is thus considered to
have not fraudulently filed its excise tax returns. Consequently, the assessment issued by the CIR against it had no
legal basis.27 The dispositive portion of the assailed 03 December 2008 Decision of the CTA En Banc reads:

WHEREFORE, the instant petition for Review is hereby GRANTED. Accordingly, the May 4, 2007 Decision and August
14, 2007 Resolution of the CTA Second Division in CTA Case No. 6423 entitled, "Petron Corporation, petitioner vs.
Commissioner of Internal Revenue, respondent", are hereby REVERSED and SET ASIDE. In addition, the demand and
collection of the deficiency excise taxes of PETRON in the amount of ₱ 600,769,353.95 excluding penalties and interest
covering the taxable years 1995 to 1998 are hereby CANCELLED and SET ASIDE, and respondent-Commissioner of
Internal Revenue is hereby ENJOINED from collecting the said amount from PETRON. SO ORDERED.28

The CIR moved for the reconsideration of the CTA En Banc Decision, but the motion was denied in a Resolution dated
14 August 2007.29

The Issues

The CIR appealed the Decision of the CTA En Banc by filing a Petition for Review on Certiorari under Rule 45 of the
Rules of Court.30 Petitioner assails the Decision by raising the following issues:

The court of tax appeals committed reversible error in holding that respondent petron is not liable for its excise tax
liabilities from 1995 to 1998.

Arguments

The cta en banc erred in finding that respondent petron was not shown to have participated in the fraudulent
acts. The finding of the cta second division that the tax credit certificates were fraudulently transferred by the
transferor-companies to respondent is supported by substantial evidence. Respondent was involved in the
perpetration of fraud in the tccs’ transfer and utilization.

II

140
Respondent cannot validly claim the right of innocent transferee for value. As assignee/transferee of the tccs,
respondent merely succeeded to the rights of the tcc assignors/transferors. Accordingly, if the tccs assigned to
respondent were void, it did not acquire any valid title over the tccs.

III

The government is not Estopped from collecting taxes due to the mistakes of its agents.

IV

Respondent is liable for 25% surcharge and 20% interest per annum pursuant to the provisions of sections 248
and 249 of the NIRC. Moreover, since respondent’s returns were false, the assessment prescribes in ten (10)
years from the discovery of the falsity thereof pursuant to section 22 of the same code.31

The Court’s Ruling

We DENY the CIR’s Petition for lack of merit.

Article 21 of E.O. 226 defines a tax credit as follows:

ARTICLE 21. "Tax credit" shall mean any of the credits against taxes and/or duties equal to those actually paid or would
have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his
representative, or the Board, if so delegated by the Secretary of Finance. The tax credit certificates including those
issued by the Board pursuant to laws repealed by this Code but without in any way diminishing the scope of
negotiability under their laws of issue are transferable under such conditions as may be determined by the Board after
consultation with the Department of Finance. The tax credit certificate shall be used to pay taxes, duties, charges and
fees due to the National Government; Provided, That the tax credits issued under this Code shall not form part of the
gross income of the grantee/transferee for income tax purposes under Section 29 of the National Internal Revenue
Code and are therefore not taxable: Provided, further, That such tax credits shall be valid only for a period of ten (10)
years from date of issuance.

Under Article 39 (j) of the Omnibus Investment Code of 1987,32 tax credits are granted to entities registered with the
Bureau of Investment (BOI) and are given for taxes and duties paid on raw materials used for the manufacture of their
export products.

A TCC is defined under Section 1 of Revenue Regulation (RR) No. 5-2000, issued by the BIR on 15 August 2000, as
follows:

B. Tax Credit Certificate — means 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 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 as 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 the provisions of these Regulations.

RR 5-2000 prescribes the regulations governing the manner of issuance of TCCs and the conditions for their use,
revalidation and transfer. Under the said regulation, a TCC may be used by the grantee or its assignee in the payment
of its direct internal revenue tax liability.33 It may be transferred in favor of an assignee subject to the following
conditions: 1) the TCC transfer must be with prior approval of the Commissioner or the duly authorized representative;
2) the transfer of a TCC should be limited to one transfer only; and 3) the transferee shall strictly use the TCC for the
payment of the assignee’s direct internal revenue tax liability and shall not be convertible to cash. 34 A TCC is valid only
for 10 years subject to the following rules: (1) it must be utilized within five (5) years from the date of issue; and (2) it
must be revalidated thereafter or be otherwise considered invalid.35

141
The processing of a TCC is entrusted to a specialized agency called the "One-Stop-Shop Inter-Agency Tax Credit and
Duty Drawback Center" ("Center"), created on 07 February 1992 under Administrative Order (A.O.) No. 226. Its purpose
is to expedite the processing and approval of tax credits and duty drawbacks.36 The Center is composed of a
representative from the DOF as its chairperson; and the members thereof are representatives of the Bureau of
Investment (BOI), Bureau of Customs (BOC) and Bureau of Internal Revenue (BIR), who are tasked to process the
TCC and approve its application as payment of an assignee’s tax liability.37

A TCC may be assigned through a Deed of Assignment, which the assignee submits to the Center for its approval.
Upon approval of the deed, the Center will issue a DOF Tax Debit Memo (DOF-TDM),38 which will be utilized by the
assignee to pay the latter’s tax liabilities for a specified period. Upon surrender of the TCC and the DOF-TDM, the
corresponding Authority to Accept Payment of Excise Taxes (ATAPET) will be issued by the BIR Collection Program
Division and will be submitted to the issuing office of the BIR for acceptance by the Assistant Commissioner of
Collection Service. This act of the BIR signifies its acceptance of the TCC as payment of the assignee’s excise taxes.

Thus, it is apparent that a TCC undergoes a stringent process of verification by various specialized government
agencies before it is accepted as payment of an assignee’s tax liability.

In the case at bar, the CIR disputes the ruling of the CTA En Banc, which found Petron to have had no participation in
the fraudulent procurement and transfer of the TCCs. Petitioner believes that there was substantial evidence to support
its allegation of a fraudulent transfer of the TCCs to Petron.39 The CIR further contends that respondent was not a
qualified transferee of the TCCs, because the latter did not supply petroleum products to the companies that were the
assignors of the subject TCCs.40

The CIR bases its contentions on the DOF’s post-audit findings stating that, for the periods covering 1995 to 1998,
Petron did not deliver fuel and other petroleum products to the companies (the transferor companies) that had assigned
the subject TCCs to respondent. Petitioner further alleges that the findings indicate that the transferor companies could
not have had such a high volume of export sales declared to the Center and made the basis for the issuance of the
TCCs assigned to Petron.41 Thus, the CIR impugns the CTA En Banc ruling that respondent was a transferee in good
faith and for value of the subject TCCs.42

Not finding merit in the CIR’s contention, we affirm the ruling of the CTA En Banc finding that Petron is a transferee in
good faith and for value of the subject TCCs.

From the records, we observe that the CIR had no allegation that there was a deviation from the process for the
approval of the TCCs, which Petron used as payment to settle its excise tax liabilities for the years 1995 to 1998.

The CIR quotes the CTA Second Division and urges us to affirm the latter’s Decision, which found Petron to have
participated in the fraudulent issuance and transfer of the TCCs. However, any merit in the position of petitioner on this
issue is negated by the Joint Stipulation it entered into with Petron in the proceedings before the said Division. As
correctly noted by the CTA En Banc, herein parties jointly stipulated before the Second Division in CTA Case No. 6423
as follows:

13. That petitioner (Petron) did not participate in the procurement and issuance of the TCCs, which TCCs were
transferred to Petron and later utilized by Petron in payment of its excise taxes.43

This stipulation of fact by the CIR amounts to an admission and, having been made by the parties in a stipulation of
facts at pretrial, is treated as a judicial admission. Under Section 4, Rule 129 of the Rules of Court, a judicial admission
requires no proof.44 The Court cannot lightly set it aside, especially when the opposing party relies upon it and
accordingly dispenses with further proof of the fact already admitted. The exception provided in Rule 129, Section 4 is
that an admission may be contradicted only by a showing that it was made through a palpable mistake, or that no such
admission was made. In this case, however, exception to the rule does not exist.

We agree with the pronouncement of the CTA En Banc that Petron has not been shown or proven to have participated
in the alleged fraudulent acts involved in the transfer and utilization of the subject TCCs. Petron had the right to rely on
the joint stipulation that absolved it from any participation in the alleged fraud pertaining to the issuance and
procurement of the subject TCCs. The joint stipulation made by the parties consequently obviated the opportunity of the
142
CIR to present evidence on this matter, as no proof is required for an admission made by a party in the course of the
proceedings.45 Thus, the CIR cannot now be allowed to change its stand and renege on that admission.

Moreover, a close examination of the arguments proffered by the CIR in their Petition calls for a reevaluation of the
sufficiency of evidence in the case. The CIR seeks to persuade this Court to believe that there is substantial evidence to
prove that Petron committed a misrepresentation, because the petroleum products were delivered not to the transferor
but to other companies.46 Thus, the TCCs assigned by the transferor companies to Petron were fraudulent. Clearly, a
recalibration of the sufficiency of evidence presented by the CIR is needed for a different conclusion to be reached.

The fundamental rule is that the scope of our judicial review under Rule 45 of the Rules of Court is confined only to
errors of law and does not extend to questions of fact.47 It is basic that where it is the sufficiency of evidence that is
being questioned, there is a question of fact.48 Evidently, the CIR does not point out any specific provision of law that
was wrongly interpreted by the CTA En Banc in the latter’s assailed Decision. Petitioner anchors it contention on the
alleged existence of the sufficiency of evidence it had proffered to prove that Petron was involved in the perpetration of
fraud in the transfer and utilization of the subject TCCs, an allegation that the CTA En Banc failed to consider. We have
consistently held that it is not the function of this Court to analyze or weigh the evidence all over again, unless there is a
showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute
palpable error or grave abuse of discretion.49 Such an exception does not obtain in the circumstances of this case.

The CIR claims that Petron was not an innocent transferee for value, because the TCCs assigned to respondent were
void. Petitioner based its allegations on the post-audit report of the DOF, which declared that the subject TCCs were
obtained through fraud and, thus, had no monetary value.50 The CIR adds that the TCCs were subject to a post-audit by
the Center to complete the payment of the excise tax liability to which they were applied. Petitioner further contends that
the Liability Clause of the TCCs makes the transferee or assignee solidarily liable with the original grantee for any
fraudulent act pertinent to their procurement and transfer. The CIR assails the contrary ruling of the CTA En Banc,
which confined the solidary liability only to the original grantee of the TCCs. Thus, petitioner believes that the correct
interpretation of the Liability Clause in the TCCs makes Petron and the transferor companies or the original grantee
solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfers of the TCCs. 51

We are not persuaded by the CIR’s position on this matter.

The Liability Clause of the TCCs reads:

Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of
the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE.

The scope of this solidary liability, as stated in the TCCs, was clarified by this Court in Shell, as follows:

The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the
original grantee to a transferee. There is nothing in the above clause that provides for the liability of the transferee in the
event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared
to have been fraudulently procured by the said original grantee. Thus, the solidary liability, if any, applies only to the
sale of the TCC to the transferee by the original grantee. Any fraud or breach of law or rule relating to the issuance of
the TCC by the Center to the transferor or the original grantee is the latter's responsibility and liability. The transferee in
good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the
procurement or issuance of the TCC from the Center. It is not only unjust but well-nigh violative of the constitutional
right not to be deprived of one's property without due process of law. Thus, a re-assessment of tax liabilities previously
paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and
interests are likewise assessed.

A transferee in good faith and for value of a TCC who has relied on the Center's representation of the genuineness and
validity of the TCC transferred to it may not be legally required to pay again the tax covered by the TCC which has been
belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue
tax liabilities. Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a
party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed
as provided for by law.52 (Emphasis supplied.)
143
We also find that the post-audit report, on which the CIR based its allegations, does not have the effect of a suspensive
condition that would determine the validity of the TCCs.

We held in Petron v. CIR (Petron),53 which is on all fours with the instant case, that TCCs are valid and effective from
their issuance and are not subject to a post-audit as a suspensive condition for their validity. Our ruling in Petron finds
guidance from our earlier ruling in Shell, which categorically states that a TCC is valid and effective upon its issuance
and is not subject to a post-audit. The implication on the instant case of the said earlier ruling is that Petron has the right
to rely on the validity and effectivity of the TCCs that were assigned to it. In finally determining their effectivity in the
settlement of respondent’s excise tax liabilities, the validity of those TCCs should not depend on the results of the
DOF’s post-audit findings. We held thus in Petron:

As correctly pointed out by Petron, however, the issue about the immediate validity of TCCs and the use thereof in
payment of tax liabilities and duties are not matters of first impression for this Court. Taking into consideration the
definition and nature of tax credits and TCCs, this Court's Second Division definitively ruled in the aforesaid Pilipinas
Shell case that the post audit is not a suspensive condition for the validity of TCCs, thus:

Art. 1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must
await the occurrence of the condition. However, Art. 1181 does not apply to the present case since the parties did NOT
agree to a suspensive condition. Rather, specific laws, rules, and regulations govern the subject TCCs, not the general
provisions of the Civil Code. Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments
Code, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of the Tariff and Customs Code,
Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned laws does the
post-audit become necessary for the validity or effectivity of the TCCs. Nowhere in the aforementioned laws is it
provided that a TCC is issued subject to a suspensive condition.

. . . (T)he TCCs are immediately valid and effective after their issuance. As aptly pointed out in the dissent of Justice
Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and instructions found at the back of each TCC,
which provide:

1. This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until
the amount is fully utilized, in accordance with the pertinent tax and customs laws, rules and regulations.

4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding
Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the
Application of Tax Credit at the back of the certificate and affix his signature on the column provided."

The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the
grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-
audit. In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a
TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit. Does the
payment made become effective if no post-audit is conducted? Or does the so-called suspensive condition still apply as
no law, rule, or regulation specifies a period when a post-audit should or could be conducted with a prescriptive period?
Clearly, a tax payment through a TCC cannot be both effective when made and dependent on a future event for its
effectivity. Our system of laws and procedures abhors ambiguity.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very purpose of the
TCC would be defeated as there would be no guarantee that the TCC would be honored by the government as
payment for taxes. No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may
invalidate them, without prescribed grounds or limits as to the exercise of said post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition, and are thus valid
and effective from their issuance.54

144
In addition, Shell and Petron recognized an exception that holds the transferee/assignee liable if proven to have been a
party to the fraud or to have had knowledge of the fraudulent issuance of the subject TCCs. As earlier mentioned, the
parties entered into a joint stipulation of facts stating that Petron did not participate in the procurement or issuance of
those TCCs. Thus, we affirm the CTA En Banc’s ruling that respondent was an innocent transferee for value thereof.

On the issue of estoppel, petitioner contends that the TCCs, which the Center had continually approved as payment for
respondent’s excise tax liabilities, were subsequently found to be void. Thus, the CIR insists that the government is not
estopped from collecting from Petron the excise tax liabilities that had accrued to the latter as a result of the voidance of
these TCCs. Petitioner argues that the State should not be prejudiced by the neglect or omission of government
employees entrusted with the collection of taxes.55

We are not persuaded by the CIR’s argument.

We recognize the well-entrenched principle that estoppel does not apply to the government, especially on matters of
taxation.1âwphi1 Taxes are the nation’s lifeblood through which government agencies continue to operate and with
which the State discharges its functions for the welfare of its constituents.56 As an exception, however, this general rule
cannot be applied if it would work injustice against an innocent party.57

Petron, in this case, was not proven to have had any participation in or knowledge of the CIR’s allegation of the
fraudulent transfer and utilization of the subject TCCs. Respondent’s status as a transferee in good faith and for value
of these TCCs has been established and even stipulated upon by petitioner.58 Respondent was thereby provided ample
protection from the adverse findings subsequently made by the Center.59 Given the circumstances, the CIR’s invocation
of the non-applicability of estoppel in this case is misplaced.

On the final issue it raised, the CIR contends that a 25% surcharge and a 20% interest per annum must be imposed
upon Petron for respondent’s excise tax liabilities as mandated under Sections 248 and 249 of the National Internal
Revenue Code (NIRC).60 Petitioner considers the tax returns filed by respondent for the years 1995 to 1998 as
fraudulent on the basis of the post-audit finding that the TCCs were void. It argues that the prescriptive period within
which to lawfully assess Petron for its tax liabilities has not prescribed under Section 222 (a)61 of the Tax Code. The CIR
explains that respondent’s assessment on 30 January 2002 of respondent’s deficiency excise tax for the years 1995 to
1998 was well within the ten-year prescription period.62

In the light of the main ruling in this case, we affirm the CTA En Banc Decision finding Petron to be an innocent
transferee for value of the subject TCCs. Consequently, the Tax Returns it filed for the years 1995 to 1998 are not
considered fraudulent. Hence, the CIR had no legal basis to assess the excise taxes or any penalty surcharge or
interest thereon, as respondent had already paid the appropriate excise taxes using the subject TCCs.

WHEREFORE, the CIR’s Petition is DENIED for lack of merit. The CTA En Banc Decision dated 03 December 2008 in
CTA EB No. 311 is hereby AFFIRMED in toto. No pronouncement as to costs. SO ORDERED.

145
UNITED AIRLINES, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
G.R. No. 178788 September 29, 2010 VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of the
Decision1 dated July 5, 2007 of the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying
petitioner’s claim for tax refund of ₱5.03 million.

The undisputed facts are as follows:

Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the laws of the State of Delaware,
U.S.A., engaged in the international airline business.

Petitioner used to be an online international carrier of passenger and cargo, i.e., it used to operate passenger and cargo
flights originating in the Philippines. Upon cessation of its passenger flights in and out of the Philippines beginning
February 21, 1998, petitioner appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent general
sales agent acting as such for several international airline companies.2 Petitioner continued operating cargo flights from
the Philippines until January 31, 2001.3

On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax refund, pursuant to Section
28(A)(3)(a)4 of the National Internal Revenue Code of 1997 (NIRC) in relation to Article 4(7)5 of the Convention between
the Government of the Republic of the Philippines and the Government of the United States of America with respect to
Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total amount of ₱15,916,680.69 pertaining to income
taxes paid on gross passenger and cargo revenues for the taxable years 1999 to 2001, which included the amount of
₱5,028,813.23 allegedly representing income taxes paid in 1999 on passenger revenue from tickets sold in the
Philippines, the uplifts of which did not originate in the Philippines. Citing the change in definition of Gross Philippine
Billings (GPB) in the NIRC, petitioner argued that since it no longer operated passenger flights originating from the
Philippines beginning February 21, 1998, its passenger revenue for 1999, 2000 and 2001 cannot be considered as
income from sources within the Philippines, and hence should not be subject to Philippine income tax under Article 96 of
the RP-US Tax Treaty.7

As no resolution on its claim for refund had yet been made by the respondent and in view of the two (2)-year
prescriptive period (from the time of filing the Final Adjustment Return for the taxable year 1999) which was about to
expire on April 15, 2002, petitioner filed on said date a petition for review with the Court of Tax Appeals (CTA).8

Petitioner asserted that under the new definition of GPB under the 1997 NIRC and Article 4(7) of the RP-US Tax Treaty,
Philippine tax authorities have jurisdiction to tax only the gross revenue derived by US air and shipping carriers from
outgoing traffic in the Philippines. Since the Bureau of Internal Revenue (BIR) erroneously imposed and collected
income tax in 1999 based on petitioner’s gross passenger revenue, as beginning 1998 petitioner no longer flew
passenger flights to and from the Philippines, petitioner is entitled to a refund of such erroneously collected income tax
in the amount of ₱5,028,813.23.9

In its Decision10 dated May 18, 2006, the CTA’s First Division11 ruled that no excess or erroneously paid tax may be
refunded to petitioner because the income tax on GPB under Section 28(A)(3)(a) of the NIRC applies as well to gross
revenue from carriage of cargoes originating from the Philippines. It agreed that petitioner cannot be taxed on its 1999
passenger revenue from flights originating outside the Philippines. However, in reporting a cargo revenue of ₱740.33
million in 1999, it was found that petitioner deducted two (2) items from its gross cargo revenue of ₱2.84 billion:
₱141.79 million as commission and ₱1.98 billion as other incentives of its agent. These deductions were erroneous
because the gross revenue referred to in Section 28(A)(3)(a) of the NIRC was total revenue before any deduction of
commission and incentives. Petitioner’s gross cargo revenue in 1999, being ₱2.84 billion, the GPB tax thereon was
₱42.54 million and not ₱11.1 million, the amount petitioner paid for the reported net cargo revenue of ₱740.33 million.
The CTA First Division further noted that petitioner even underpaid its taxes on cargo revenue by ₱31.43 million, which
amount was much higher than the ₱5.03 million it asked to be refunded.

146
A motion for reconsideration was filed by petitioner but the First Division denied the same. It held that petitioner’s claim
for tax refund was not offset with its tax liability; that petitioner’s tax deficiency was due to erroneous deductions from its
gross cargo revenue; that it did not make an assessment against petitioner; and that it merely determined if petitioner
was entitled to a refund based on the undisputed facts and whether petitioner had paid the correct amount of tax. 12

Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First Division.

Hence, this petition anchored on the following grounds:

I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE PETITIONER’S CLAIM FOR REFUND OF
ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS [GPB] BASED ON ITS FINDING
THAT PETITIONER’S UNDERPAYMENT OF [₱31.43 MILLION] GPB TAX ON CARGO REVENUES IS A LOT
HIGHER THAN THE GPB TAX OF [₱5.03 MILLION] ON PASSENGER REVENUES, WHICH IS THE SUBJECT
OF THE INSTANT CLAIM FOR REFUND. THE DENIAL OF PETITIONER’S CLAIM ON SUCH GROUND
CLEARLY AMOUNTS TO AN OFF-SETTING OF TAX LIABILITIES, CONTRARY TO WELL-SETTLED
JURISPRUDENCE.

II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONER’S RIGHT TO DUE PROCESS.

III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY DENYING PETITIONER’S CLAIM
FOR REFUND OF ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS BASED ON ITS
FINDING THAT PETITIONER UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT OF [₱31.43
MILLION] FOR THE TAXABLE YEAR 1999.

IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE ANY ASSESSMENTS FOR
DEFICIENCY TAXES. THE AUTHORITY TO MAKE ASSESSMENTS FOR DEFICIENCY NATIONAL
INTERNAL REVENUE TAXES IS VESTED BY THE 1997 NIRC UPON RESPONDENT.

V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME TAX FOR THE TAXABLE YEAR
1999 IS ALREADY BARRED BY PRESCRIPTION.13

The main issue to be resolved is whether the petitioner is entitled to a refund of the amount of ₱5,028,813.23 it paid as
income tax on its passenger revenues in 1999.

Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line passenger revenues cannot be denied
based on the finding of the CTA that petitioner allegedly underpaid the GPB tax on cargo revenues by ₱31,431,171.09,
which underpayment is allegedly higher than the GPB tax of ₱5,028,813.23 on passenger revenues, the amount of the
instant claim. The denial of petitioner’s claim for refund on such ground is tantamount to an offsetting of petitioner’s
claim for refund of erroneously paid GPB against its alleged tax liability. Petitioner thus cites the well-entrenched rule in
taxation cases that internal revenue taxes cannot be the subject of set-off or compensation.14

According to petitioner, the offsetting of the liabilities is very clear in the instant case because the amount of petitioner’s
claim for refund of erroneously paid GPB tax of ₱5,028,813.23 for the taxable year 1999 is being offset against
petitioner’s alleged deficiency GPB tax liability on cargo revenues for the same year, which was not even the subject of
an investigation nor any valid assessment issued by respondent against the petitioner. Under Section 22815 of the
NIRC, the "taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise,
the assessment shall be void." This administrative process of issuing an assessment is part of procedural due process
enshrined in the 1987 Constitution. Records do not show that petitioner has been assessed by the BIR for any
deficiency GBP tax for 1999, nor was there any finding or investigation being conducted by respondent of any liability of
petitioner for GPB tax for the said taxable period. Clearly, petitioner’s right to due process was violated.16

Petitioner further argues that the CTA acted in excess of its jurisdiction because the exclusive appellate jurisdiction of
the CTA covers only decisions or inactions of the respondent in cases involving disputed assessments. The CTA has
effectively assessed petitioner with a ₱31.43 million tax deficiency when it concluded that petitioner underpaid its GPB
tax on cargo revenue. Since respondent did not issue an assessment for any deficiency tax, the alleged deficiency tax
on its cargo revenue in 1999 cannot be considered a disputed assessment that may be passed upon by the CTA.
147
Petitioner stresses that the authority to issue an assessment for deficiency internal revenue taxes is vested by law on
respondent, not with the CTA.17

Lastly, petitioner argues that any assessment against it for deficiency income tax for taxable year 1999 is barred by
prescription. Petitioner claims that the prescriptive period within which an assessment for deficiency income tax may be
made has prescribed on April 17, 2003, three (3) years after it filed its 1999 tax return.18

Respondent Commissioner maintains that the CTA acted within its jurisdiction in denying petitioner’s claim for tax
refund. It points out that the objective of the CTA’s determination of whether petitioner correctly paid its GPB tax for the
taxable year 1999 was to ascertain the latter’s entitlement to the claimed refund and not for the purpose of imposing
any deficiency tax. Hence, petitioner’s arguments regarding the propriety of the CTA’s determination of its deficiency tax
on its GPB for gross cargo revenues for 1999 are clearly misplaced.19

The petition has no merit.

As correctly pointed out by petitioner, inasmuch as it ceased operating passenger flights to or from the Philippines in
1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues. This much was also found
by the CTA. In South African Airways v. Commissioner of Internal Revenue,20 we ruled that the correct interpretation of
the said provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at
the rate of 2½% of its GPB, while international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income.

Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable year 1999 at the time when
petitioner was still operating cargo flights originating from the Philippines although it had ceased passenger flight
operations. The CTA found that petitioner had underpaid its GPB tax for 1999 because petitioner had made deductions
from its gross cargo revenues in the income tax return it filed for the taxable year 1999, the amount of underpayment
even greater than the refund sought for erroneously paid GPB tax on passenger revenues for the same taxable period.
Hence, the CTA ruled petitioner is not entitled to a tax refund.

Petitioner’s arguments regarding the propriety of such determination by the CTA are misplaced.

Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made erroneous deductions on its gross
cargo revenue; that because of the erroneous deductions, petitioner reported a lower cargo revenue and paid a lower
income tax thereon; and that petitioner's underpayment of the income tax on cargo revenue is even higher than the
income tax it paid on passenger revenue subject of the claim for refund, such that the refund cannot be granted.

Section 72 of the NIRC reads:

SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is made in case of any
list, statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit, 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.

In the afore-cited case of South African Airways, this Court rejected similar arguments on the denial of claim for tax
refund, as follows:

Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under
Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

148
Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other.
There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the
aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be
subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit,
which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the
subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax
deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental motion for
reconsideration alleging 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.1avvphi1

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

149
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.

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."

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 require 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 supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements
are, therefore, still applicable today.

Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec.
28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.21 (Additional emphasis supplied.)

In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to a refund based on the
facts. On the assumption that petitioner filed a correct return, it had the right to file a claim for refund of GPB tax on
passenger revenues it paid in 1999 when it was not operating passenger flights to and from the Philippines. However,
upon examination by the CTA, petitioner’s return was found erroneous as it understated its gross cargo revenue for the
same taxable year due to deductions of two (2) items consisting of commission and other incentives of its agent. Having
underpaid the GPB tax due on its cargo revenues for 1999, petitioner is not entitled to a refund of its GPB tax on its
passenger revenue, the amount of the former being even much higher (₱31.43 million) than the tax refund sought (₱5.2
million). The CTA therefore correctly denied the claim for tax refund after determining the proper assessment and the
tax due. Obviously, the matter of prescription raised by petitioner is a non-issue. The prescriptive periods under
Sections 20322 and 22223 of the NIRC find no application in this case.

We must emphasize that tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in
favor of the taxing authority.24 In any event, petitioner has not discharged its burden of proof in establishing the factual
basis for its claim for a refund and we find no reason to disturb the ruling of the CTA. It has been a long-standing policy
and practice of the Court to respect the conclusions of quasi-judicial agencies such as the CTA, a highly specialized
body specifically created for the purpose of reviewing tax cases.25

150
WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated July 5, 2007 of the Court of Tax
Appeals En Banc in C.T.A. EB No. 227.

With costs against the petitioner. SO ORDERED.

DIGEST:

DOCTRINE: The matter of prescription raised by petitioner is a NON-ISSUE; thus, the prescriptive periods under Sections 203 and 222 (NIRC) find no application
in this case.

FACTS:
 United Airlines, Inc. (UA) is a foreign corporation organized and existing under the laws of the State of Delaware, U.S.A., engaged in the international
airline business. UA used to be an online international carrier of passenger and cargo (i.e. it used to operate passenger and cargo flights originating in
the Philippines). Upon cessation of its passenger flights in and out of the Philippines beginning February 21, 1998, UA appointed a sales agent in the
Philippines (Aerotel Ltd. Corp. - an independent general sales agent acting as such for several international airlinecompanies). UA continued
operating cargo flights from the Philippines until January 31, 2001.
 April 12, 2002 - UA filed with the CIR a claim for income tax refund, pursuant to Sec. 28(A)(3)(a) of NIRC 1997 in relation to Article 4(7) of the RP-US
Tax Treaty.
o Citing the change in definition of Gross Philippine Billings (GPB) in the NIRC, UA argued that since it no longer operated passenger flights
originating from the Philippines beginning February 21, 1998, its passenger revenue for 1999, 2000 and 2001 cannot be considered as
income from sources within the Philippines, and hence should not be subject to Philippine income tax under Article 9 of the RP-US Tax
Treaty.
o Under the new definition of GPB, Philippine tax authorities have jurisdiction to tax only the gross revenue derived by US air and shipping
carriers from outgoing traffic in the Philippines. Since the BIR erroneously imposed and collected income tax in 1999 based on UA’s gross
passenger revenue, as beginning 1998 UA no longer flew passenger flights to and from the Philippines, UA is entitled to a refund of such
erroneously collected income tax.
 As no resolution on its claim for refund had yet been made by the respondent and in view of the 2-year prescriptive period (from the time of filing
the Final Adjustment Return for the taxable year 1999) which was about to expire on April 15, 2002, UA filed on said date a petition for review with
the CTA.
 CTA 1st Division ruled that no excess or erroneously paid tax may be refunded to UA because the income tax on GPB under Section 28(A)(3)(a) of the NIRC
applies as well to gross revenue from carriage of cargoes originating from the Philippines. It agreed that UA cannot be taxed on its 1999 passenger revenue
from flights originating outside the Philippines. However, it was found that UA erroneously deducted 2 items from its gross cargo revenue in 1999
(commissions and incentives of its agent). These deductions were erroneous because the gross revenue referred to in Section 28(A)(3)(a) of the NIRC was
total revenue before any deduction of commission and incentives. UA even underpaid its taxes on cargo revenue by P31.43 million, which amount was
much higher than the P5.03 million it asked to be refunded. UA’s MR DENIED. CTA En Banc AFFIRMED CTA 1D.
 UA argues that the denial of its claim for refund is tantamount to an offsetting of its claim for refund of erroneously paid GPB against its alleged tax
liability. The well-entrenched rule is that internal revenue taxes cannot be the subject of set-off or compensation. Further, since CIR did not issue an
assessment for any deficiency tax, the alleged deficiency tax on its cargo revenue in 1999 cannot be considered a disputed assessment that may be
passed upon by the CTA. The authority to issue an assessment for deficiency internal revenue taxes is vested by law with the CIR, not with the CTA.
Finally, UA argues that any assessment against it for deficiency income tax for taxable year 1999 is barred by prescription. The prescriptive period
within which an assessment for deficiency income tax may be made has prescribed on April 17, 2003, 3 years after it filed its 1999 tax return.
 CIR maintains that the CTA acted within its jurisdiction in denying petitioner’s claim for tax refund. It points out that the objective of the CTA’s
determination of whether UA correctly paid its GPB tax for the taxable year 1999 was to ascertain the latter’s entitlement to the claimed refund and
not for the purpose of imposing any deficiency tax. Hence, UA’s arguments regarding the propriety of the CTA’s determination of its deficiency tax
on its GPB for gross cargo revenues for 1999 are clearly misplaced.

ISSUE & HELD: WON UA is entitled to a refund of the amount it paid as income tax on its passenger revenues in 1999 (NO)

RATIO:
 Under Section 72 of the NIRC (Suit to Recover Tax Based on False or Fraudulent Returns), the CTA can make a valid finding that UA made erroneous
deductions on its gross cargo revenue; that because of the erroneous deductions, UA reported a lower cargo revenue and paid a lower income tax thereon;
and that UA’s underpayment of the income tax on cargo revenue is even higher than the income tax it paid on passenger revenue subject of the claim for
refund, such that the refund cannot be granted.
 The CTA explained that it merely determined whether UA is entitled to a refund based on the facts. On the assumption that UA filed a correct return,
it had the right to file a claim for refund of GPB tax on passenger revenues it paid in 1999 when it was not operating passenger flights to and from the
Philippines. However, upon examination by the CTA, UA’s return was found erroneous as it understated its gross cargo revenue for the same taxable
year due to deductions of 2 items consisting of commission and other incentives of its agent. Having underpaid the GPB tax due on its cargo revenues for
1999, UA is not entitled to a refund of its GPB tax on its passenger revenue. The CTA therefore correctly denied the claim for tax refund after determining
the proper assessment and the tax due. The matter of prescription raised by UA is a non-issue. The prescriptive periods under Sections 203and 222of
the NIRC find no application in this case.
 Tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in favor of the taxing authority.

151
152

You might also like