Commissioner of Internal Revenue vs. Sonoma Services, Inc.

A claim for refund or tax credit of excess and unutilized creditable withholding tax based on solutio indebiti is not defeated by the payee-claimant's non-submission of the SAWT and MAP, which the governing regulation requires only as attachments to tax returns and whose MAP obligation rests on the payor-withholding agent; the claim need only be proved by preponderance of evidence, and the fact of withholding may be established by BIR Form No. 2307. The CTA's factual finding that prior year's excess tax credits were substantiated is entitled to the highest respect and is not reviewable under Rule 45 absent exceptions.

Sonoma Services, Inc. (SSI) is a taxpayer that earned management fees subject to creditable withholding tax and claimed a refund or tax credit for excess and unutilized CWT for CY 2015. The Commissioner of Internal Revenue (CIR) administers the tax system and opposed the claim. Under Revenue Regulation No. 2-98, as amended by Revenue Regulation No. 2-2006, the SAWT is to be submitted by the payee/income recipient and the MAP by the withholding agent/income payor as attachments to their respective tax returns. The Tax Code permits refunds or tax credits for erroneously or illegally collected taxes and sums alleged to have been excessive or wrongfully collected.

Sonoma Services, Inc. (SSI) filed its original Annual Income Tax Return for calendar year 2015 through the Electronic Filing and Payment System of the Bureau of Internal Revenue on April 13, 2016. On April 25, 2016, SSI filed an Amended AITR, likewise through the EFPS. The Amended AITR reported an overpayment of PHP 4,993,000.00, for which SSI indicated its option to be refunded. SSI subsequently filed an administrative claim for refund of that amount with BIR Revenue District Office No. 50. Because the CIR did not act on the administrative claim, SSI filed a Petition for Review with the CTA on April 11, 2018, docketed as CTA Case No. 9808.

Before the CTA Third Division, SSI presented Krystal E. Gamit as witness and submitted the Judicial Affidavit of Ma. Milagros F. Padernal in support of its motion to commission an independent certified public accountant, which the CTA granted. The parties submitted a Joint Stipulation of Facts and Issues, which the CTA approved. Trial commenced on October 16, 2018, with SSI presenting Gamit. On October 18, 2018, SSI submitted the ICPA Report with a USB thumb drive containing supporting schedules and exhibits, which the CTA admitted. On November 20, 2018, SSI presented ICPA Padernal, who testified on the contents of her report. SSI filed its Formal Offer of Evidence on December 20, 2018, and the CTA admitted SSI's documentary evidence. During the August 6, 2019 hearing, the CIR manifested that he would not present evidence; the parties agreed to submit memoranda, and the CIR adopted his Answer as his Memorandum. SSI filed its Memorandum on October 15, 2019.

On the merits, the CTA Third Division found that SSI's administrative claim was filed on September 7, 2017, and its judicial claim on April 11, 2018, both within the two-year prescriptive period reckoned from the filing of the Amended AITR on April 25, 2016. It found that SSI properly exercised its option for a refund in its AITR and did not carry over the amount to succeeding taxable periods. SSI's claim was substantiated by BIR Forms No. 2307 reflecting a total CWT of PHP 4,993,000.00 from management fees amounting to PHP 33,420,000.00. This income was traced to SSI's official receipts, books of account, and general ledger and was reported in its CY 2015 Audited Financial Statements and Amended AITR.

The CTA Third Division also found that SSI's prior year's excess tax credits amounting to PHP 9,061,123.00 were fully accounted for. Based on the ICPA Report, the amount was composed of (a) CY 2011 CWT of PHP 219,355.05; (b) CY 2004 CWT reinstated in 2013 of PHP 4,357,499.04; (c) a CY 2013 adjustment to reduce CY 2010 tax credits of negative PHP 380,481.09; and (d) CY 2014 CWT of PHP 4,864,750.00. ICPA Padernal verified that the schedules of CWT prepared by SSI (Exhibits P-35, P-37, and P-39) were fully supported by the original BIR Forms No. 2307 for CYs 2004, 2011, and 2014 (Exhibits P-36, P-38, and P-40, respectively). These BIR Forms No. 2307 were formally offered by SSI and admitted into evidence by the CTA in a Resolution dated February 21, 2019. The CTA Third Division denied the CIR's Motion for Reconsideration, rejecting the argument that the BIR Forms No. 2307 were inadmissible hearsay and ruling that they are competent proof of withholding.

• SAWT and MAP: The CIR contended that SSI failed to comply with the mandatory requirements under RR No. 2-98, as amended by RR No. 2-2006. He insisted that SSI's failure to present the SAWT and MAP should result in the outright denial of the claim, and that their submission is a condition precedent for a refund claim which is not cured by the mere payment of a penalty.
• Prior Year's Excess Tax Credits: The CIR averred that SSI failed to present the BIR Forms No. 2307 to substantiate its prior year's excess tax credits of PHP 9,061,123.00. He argued that the CTA Third Division erred in relying solely on the findings of ICPA Padernal without requiring the presentation of the corresponding certificates themselves.
• Strict Construction of Tax Refunds: The CIR invoked the doctrine that tax refunds are in the nature of tax exemptions and, as such, must be strictly construed against the taxpayer, who bears the burden of proving entitlement thereto.
• Prescription: In his Motion for Reconsideration, the CIR argued that SSI's administrative and judicial claims for refund were filed out of time because the two-year prescriptive period should be reckoned from the monthly remittance of the CWTs.

• SAWT and MAP: SSI argued that there is no basis for the CIR's assertion that presentation of the SAWT and MAP is an indispensable requirement for a refund claim. It maintained that it met the three established evidentiary requirements for CWT refunds: (1) the claim was filed within the two-year prescriptive period; (2) the fact of withholding was established by BIR Forms No. 2307; and (3) the income upon which the taxes were withheld was included in its ITR. Based on RR No. 2-98 and prevailing jurisprudence, such as Commissioner of Internal Revenue vs. Asian Transmission Corporation, SSI asserted that BIR Form No. 2307 is sufficient proof of withholding, and proof of actual remittance by the withholding agent is not required; nothing in RR No. 2-2006 mandates denial for failure to submit the SAWT and MAP.
• Prior Year's Excess Credits: SSI submitted that it sufficiently proved the existence of its prior year's excess credits. ICPA Padernal examined the relevant documentary evidence and confirmed that the prior year's excess credits were duly substantiated; the schedules of CWT (Exhibits P-35, P-37, and P-39) were fully supported by the original BIR Forms No. 2307 for CYs 2004, 2011, and 2014 (Exhibits P-36, P-38, and P-40, respectively). The CIR's reliance on Zuellig Pharma Corporation vs. CIR in CTA EB Case No. 1793 was misplaced because, unlike in Zuellig, the BIR Forms No. 2307 in this case were formally offered as evidence and verified by ICPA Padernal.
• Meritless Petition: SSI contended that the Petition is devoid of merit and that the arguments raised are mere reiterations of those already considered and correctly resolved by the CTA En Banc.

• SAWT and MAP: Whether the CTA En Banc erred in ruling that the non-submission of the SAWT and MAP is not fatal to a claim for refund of excess and unutilized creditable withholding tax.
• Prior Year's Excess Tax Credits: Whether the CTA En Banc erred in ruling that respondent sufficiently proved its entitlement to its prior year's excess tax credits.

• SAWT and MAP: No. The non-submission of the SAWT and MAP is not fatal. RR No. 2-2006 requires the SAWT by the payee and the MAP by the payor as attachments to their respective tax returns, not to administrative or judicial refund claims; the MAP obligation rests on the payor-withholding agent, and the regulation's penalty provision does not prescribe outright denial.
• Prior Year's Excess Tax Credits: No. The CTA's finding that SSI sufficiently substantiated its prior year's excess tax credits is a factual finding entitled to the highest respect and is not reviewable under Rule 45 absent exceptions. The BIR Forms No. 2307 were formally offered and admitted, shifting the burden of evidence to the CIR.

• SAWT and MAP: Not all claims for tax refund are in the nature of tax exemptions. In Commissioner of Internal Revenue vs. Fortune Tobacco Corp., a distinction was drawn between claims based on a tax exemption or refund statute and those based on the quasi-contract of solutio indebiti. A claim based on a statutory grant partakes of a tax exemption and is strictly construed against the taxpayer; a claim based on erroneous payment or illegal exaction is founded on solutio indebiti and requires only preponderance of evidence. SSI's claim for refund of excess and unutilized CWT was not based on a specific statutory grant of exemption or refund but on the Tax Code's provision on erroneously paid or illegally collected taxes and was governed by solutio indebiti; hence, preponderance of evidence applied. In Commissioner of Internal Revenue vs. Philippine Bank of Communications, the requisites for claiming a tax credit or refund of CWT were laid down: (a) the claim must be filed with the CIR within the two-year period from the date of payment of the tax; (b) it must be shown on the return that the income received was declared as part of gross income; and (c) 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 tax withheld. The CIR assailed SSI's compliance with the third requisite and its substantiation of prior year's excess credits. On the SAWT and MAP, RR No. 2-2006 mandates the submission of the SAWT by the payee-claimant and the MAP by the payor-withholding agent as attachments to their respective tax returns filed with the BIR. Nowhere does the regulation require payee-claimants to attach the SAWT or the MAP of their payor-withholding agents to their administrative or judicial claim for refund. Section 5 of RR No. 2-2006 establishes an escalating penalty system for non-compliance, beginning with administrative fines and progressing to criminal prosecution for willful or repeated violations, but it does not prescribe outright denial of a refund claim. The evidence also failed to establish SSI's alleged non-compliance; SSI's failure to present its SAWT as evidence at trial is not proof of its failure to attach it to the pertinent tax returns. The obligation to submit the MAP rests squarely with the payor-withholding agent, not the payee-claimant. In Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, the duty to remit the tax was held to lie with the payor-withholding agent and should not prejudice the claim of the payee-claimant; in case of failure of the withholding agent to remit, the BIR's cause of action is against the payor-withholding agent. The government should not misuse technicalities to keep money it is not entitled to, and the BIR should not impose a burden on the taxpayer absent from the law and practically impossible to meet. Thus, the failure of the payor-withholding agents to submit their MAP is not a valid ground to deny the payee's tax credit or refund claim; to hold otherwise would punish the payee for the omission of another party over whom it has no control. Requiring SSI to produce the MAPs was also untenable because RR No. 2-2006 does not require payor-withholding agents to furnish copies of their MAPs to payees, and it would raise serious data privacy concerns under Republic Act No. 10173, or the Data Privacy Act of 2012; the BIR, as central repository, can cross-reference a payee's claim against a payor's remittance data, and BIR Form No. 2307 serves the verification purpose without violating third-party privacy. The CIR's reliance on Section 2.58.3(B) of RR No. 2-98 was misplaced: the "withholding tax statement" referred to therein is BIR Form No. 2307, a certificate issued by the payor-withholding agent to the payee-claimant, not the SAWT or MAP, which are defined under Section 2(A) of RR No. 2-2006 as documents prepared by the payee and the payor, respectively, for submission to the BIR with their own tax returns. Neither qualifies as a statement duly issued by the payor to the payee. Accordingly, SSI's failure to present and formally offer its SAWT and the MAPs of its payor-withholding agents as evidence was not fatal to its claim.
• Prior Year's Excess Tax Credits: A petition for review on certiorari under Rule 45 is limited to questions of law because the Court is not a trier of facts. A question of law involves a dispute as to what the law is on a certain state of facts, while a question of fact concerns the truth or falsity of the alleged facts; the key test is whether the issue can be resolved without reviewing the evidence presented. The findings of the CTA, a highly specialized court created to review tax cases and conduct trial de novo, are entitled to the highest respect. The CIR's argument that SSI failed to prove its prior year's excess tax credits is a question of fact and beyond the scope of review under Rule 45; none of the recognized exceptions was present. The CTA, with the aid of the court-commissioned ICPA, made a factual finding that the prior year's excess credits were fully substantiated. ICPA Padernal traced SSI's prior year's excess tax credits of PHP 9,061,123.00 back to CYs 2004, 2011, and 2014; thus, only the BIR Forms No. 2307 corresponding to these years were material. The schedules of CWT (Exhibits P-35, P-37, and P-39) were fully supported by the original BIR Forms No. 2307 for CYs 2004, 2011, and 2014 (Exhibits P-36, P-38, and P-40, respectively). These BIR Forms No. 2307 were not merely reviewed by ICPA Padernal and included in her report; they were formally offered by SSI and duly admitted into evidence by the CTA in a Resolution dated February 21, 2019. Upon SSI's presentation of the BIR Forms No. 2307, the burden of evidence shifted to the CIR to prove that (1) the certificate is not complete; (2) it is false; or (3) it was not issued regularly. The CIR had every opportunity to inspect and contest this evidence during trial but failed to do so. The factual findings of the CTA therefore stand. In sum, SSI successfully discharged its burden of proving entitlement to the claimed refund by preponderance of evidence, and the CTA En Banc committed no reversible error in affirming the grant of PHP 4,993,000.00.

• Tax refund: strictissimi juris versus solutio indebiti — A claim for tax refund based on a specific statute granting tax exemption or refund partakes of a tax exemption and is strictly construed against the taxpayer; a claim based on erroneous payment or illegal exaction is founded on solutio indebiti and requires only preponderance of evidence. The Court applied this distinction to SSI's CWT refund, holding it was based on solutio indebiti and needed only preponderance of evidence.
• Requisites for CWT refund or tax credit — The claim must be filed with the CIR within two years from payment; the income must be shown on the return as part of gross income; and 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 tax withheld. The Court applied these requisites and found SSI satisfied them.
• SAWT and MAP are not conditions precedent to a refund claim — RR No. 2-2006 requires the SAWT by the payee and the MAP by the payor as attachments to their respective tax returns, not to refund claims; non-submission is penalized but does not authorize outright denial. The Court applied this to reject the CIR's argument.
• MAP obligation rests on the payor-withholding agent — The duty to submit the MAP and remit withheld taxes lies with the payor-withholding agent; the payee-claimant should not be prejudiced by the withholding agent's omission. The Court applied this to hold that SSI could not be denied its refund for its payors' failure to submit MAPs.
• BIR Form No. 2307 as sufficient proof of withholding — A BIR Form No. 2307, complete and executed under penalties of perjury, is sufficient proof of withholding and is admissible without the testimony of the payor; proof of actual remittance is not required. The Court applied this to uphold SSI's proof.
• Burden of evidence on BIR Form No. 2307 — Once the taxpayer presents BIR Forms No. 2307, the burden of evidence shifts to the CIR to prove that the certificate is incomplete, false, or not regularly issued. The Court applied this to the prior year's excess credits.
• Rule 45 limited to questions of law; CTA factual findings respected — A petition for review under Rule 45 is limited to questions of law, and the factual findings of the CTA, a specialized court, are entitled to the highest respect absent recognized exceptions. The Court applied this to the prior year's excess credits issue.
• Data privacy in tax refund verification — Requiring a payee-claimant to produce the MAPs of its payor-withholding agents would violate the proportionality and purpose limitation principles under the Data Privacy Act of 2012; the BIR can cross-reference its own data, and BIR Form No. 2307 is a less intrusive verification mechanism. The Court applied this as an additional reason against the CIR's position.

• "Nowhere in the regulation are payee-claimants required to attach the SAWT or the MAP of their payor-withholding agents to their administrative or judicial claim for refund." — This states the core textual basis for rejecting the CIR's argument that the SAWT and MAP are mandatory attachments to a refund claim.
• "Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts abhorring a person's unjust enrichment at the expense of another." — This defines the solutio indebiti foundation of SSI's refund claim and explains why strict construction against the taxpayer did not apply.
• "Upon SSI's presentation of the BIR Forms No. 2307 in support of its prior year's excess tax credits from CYs 2004, 2011, and 2014, the burden of evidence shifts to the CIR to prove that (1) the certificate is not complete; (2) it is false; or (3) it was not issued regularly." — This states the burden-shifting rule that disposed of the CIR's challenge to the prior year's excess tax credits.
• "A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language." — This is the canonical formulation of the strictissimi juris rule for statutory tax refund claims, distinguished from solutio indebiti claims.

• Commissioner of Internal Revenue vs. Fortune Tobacco Corp., 581 Phil. 146 (2008) — The Court relied on this precedent to distinguish claims for tax refund based on a tax exemption or refund statute, which are strictly construed against the taxpayer, from claims based on solutio indebiti, which require only preponderance of evidence.
• Commissioner of Internal Revenue vs. Philippine Bank of Communications, 920 Phil. 93 (2022) — The Court cited this case for the requisites of a claim for tax credit or refund of creditable withholding tax.
• Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, 823 Phil. 1043 (2018) — The Court followed this precedent in holding that the duty to remit withheld taxes lies with the payor-withholding agent and should not prejudice the payee-claimant; the government should not misuse technicalities to retain funds it is not entitled to.
• Commissioner of Internal Revenue vs. Philippine National Bank, 744 Phil. 299 (2014) — The Court cited this case for the rule that upon presentation of BIR Forms No. 2307, the burden of evidence shifts to the CIR to prove that the certificate is incomplete, false, or not regularly issued.
• Commissioner of Internal Revenue vs. Toledo Power Company, 940 Phil. 201 (2023) — The Court cited this case for the exceptions to the rule that factual findings of the CTA are not reviewable under Rule 45.
• Commissioner of Internal Revenue vs. Asian Transmission Corporation, 655 Phil. 186 (2011) — SSI cited this case for the proposition that BIR Form No. 2307 is sufficient proof of withholding and proof of actual remittance by the withholding agent is not required.
• Tullett Prebon (Philippines), Inc. vs. Commissioner of Internal Revenue, 956 Phil. 78 (2024), citing Commissioner of Internal Revenue vs. Univation Motor Phils., Inc., 851 Phil. 1078 (2019) — The Court cited these cases in relation to the solutio indebiti characterization of tax refund claims.
• Commissioner of Internal Revenue vs. Philippine Airlines, Inc., 806 Phil. 358 (2017) — The Court cited this case for the rule that the findings of the CTA, a specialized court, are entitled to the highest respect.

• Section 2, Revenue Regulation No. 2-2006 — Mandates the submission of the SAWT by the payee/income recipient and the MAP by the withholding agent/income payor as attachments to their respective tax returns filed with the BIR. The Court applied it to hold that neither document is required to be attached to a refund claim.
• Section 5, Revenue Regulation No. 2-2006 — Establishes an escalating penalty system for non-compliance, from administrative fines to criminal prosecution for willful or repeated violations, but does not prescribe outright denial of a refund claim. The Court applied it to reject the CIR's condition-precedent argument.
• Section 2.58.3(B), Revenue Regulation No. 2-98 — Provides that a claim for tax credit or refund of creditable income tax deducted and withheld shall be given due course when the income is declared as part of gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor to the payee; proof of remittance is the responsibility of the withholding agent. The Court applied it by holding that the withholding tax statement is BIR Form No. 2307, not the SAWT or MAP.
• Rule 45, Section 1, Rules of Court — Limits a petition for review on certiorari to questions of law. The Court applied it to hold that the CIR's challenge to the prior year's excess credits was a question of fact.
• Republic Act No. 10173 (Data Privacy Act of 2012) — The Court invoked the principles of proportionality and purpose limitation in holding that requiring a payee-claimant to produce the MAPs of its payor-withholding agents would violate data privacy; the BIR can cross-reference its own data, and BIR Form No. 2307 is a less intrusive mechanism.
• Tax Code provision on erroneously or illegally assessed or collected internal revenue taxes; penalties imposed without authority; and any sum alleged to have been excessive or in any manner wrongfully collected — The Court cited this provision, through Fortune Tobacco, to classify SSI's claim as based on solutio indebiti rather than a specific statutory grant of exemption or refund.

Caguioa (Chairperson), Gaerlan, and Dimaampao, JJ., concurred. Singh, J., was on leave.