Rhombus Energy, Inc. vs. Commissioner of Internal Revenue

The irrevocability rule under Section 76 of the NIRC of 1997 operates against whichever option the corporate taxpayer actually exercises; where the taxpayer marks "To be refunded" in its final adjustment return, that constitutes an irrevocable exercise of the refund option, and its subsequent reporting of the same excess credits as prior year's excess credits in its quarterly returns does not convert the choice into a carry-over. The taxpayer is thereby precluded from carrying over the excess creditable withholding tax and may claim the refund, provided the requisites for entitlement are met.

Rhombus Energy, Inc. is a domestic corporation registered with the Bureau of Internal Revenue and, from October 1998 to July 2007, was under the jurisdiction of Revenue Region No. 8, Revenue District Office No. 50 (South Makati), before its transfer to RDO No. 47 following a change of business address. Its sole customer was Distileria Bago, Inc., a wholly owned subsidiary of La Tondeña, Inc. (now Ginebra San Miguel, Inc.), which withheld creditable taxes at source on payments of energy service fees and on the sale of Rhombus' generation facility. Section 76 of the National Internal Revenue Code of 1997 requires every corporation liable to tax under Section 27 to file a final adjustment return and, where the sum of quarterly tax payments is not equal to the total tax due, permits it either to pay the balance, to carry over the excess credit, or to be credited or refunded the excess amount, with the carry-over option expressly made irrevocable once chosen.

Rhombus Energy, Inc. was a corporation registered with the Bureau of Internal Revenue and, from October 1998 to July 2007, was under the jurisdiction of Revenue Region No. 8, Revenue District Office (RDO) No. 50 (South Makati), with Taxpayer Identification No. 005-650-790-000. Its sole customer was Distileria Bago, Inc., a wholly owned subsidiary of La Tondeña, Inc. (now Ginebra San Miguel, Inc.). Having changed its address from Suite 1402, BDO Plaza, 8737 Paseo de Roxas, Salcedo Village, Makati City to Suite 208, 2nd Floor, Manila Bank Corporation Condominium Building, 6772 Ayala Avenue, Makati City, Rhombus applied for a change of home RDO and, on July 18, 2007, was transferred to the jurisdiction of RDO No. 47 under Certificate of Registration No. OCN9RC0000211342.

On April 17, 2006, Rhombus filed its Annual Income Tax Return for taxable year 2005, reporting sales/revenues/receipts/fees of ₱59,551,116.00, cost of sales of ₱22,351,923.00, gross income from operations of ₱37,199,193.00, non-operating and other income of ₱209,320,181.00, gross income of ₱246,519,374.00, deductions of ₱144,421,350.00, taxable income of ₱102,098,024.00, and income tax of ₱33,181,858.00. Against that liability it set prior year's excess credits of ₱0.00, tax payments for the first three quarters of ₱6,159,215.00, and creditable tax withheld for the first three quarters of ₱28,523,296.00, for total tax credits and payments of ₱34,682,511.00, yielding a tax overpayment of ₱1,500,653.00. In that return, Rhombus indicated that its excess creditable withholding tax for 2005 was "To be refunded."

Thereafter, on May 29, 2006, August 25, 2006, and November 27, 2006, Rhombus filed its Quarterly Income Tax Returns for the first, second, and third quarters of taxable year 2006, each showing prior year's excess credits of ₱1,500,653.00. On December 29, 2006, it filed with Revenue Region No. 8 an administrative claim for refund of its alleged excess and/or unutilized creditable withholding tax for 2005 in the amount of ₱1,500,653.00. On April 2, 2007, it filed its Annual Income Tax Return for taxable year 2006, showing prior year's excess credits of ₱0.00. On December 7, 2007, while the Commissioner's action on the claim for refund or issuance of a tax credit certificate remained pending and before the lapse of the period for filing an appeal, Rhombus filed a Petition for Review.

The CTA First Division found that Rhombus had clearly signified its intention to be refunded by marking the box "To be refunded" under Line 31 of its 2005 annual ITR, and that its 2006 and 2007 annual ITRs contained no entries under Line 28A, "Prior Year's Excess Credits." It further found that the certificates of creditable tax withheld at source issued by Distileria Bago, Inc. showed creditable income taxes of ₱28,523,295.45 withheld from Rhombus' energy service fees of ₱9,313,272.54 and from the sale of its generation facility amounting to ₱472,283,838.00; that the energy fees of ₱9,313,272.54, from which ₱186,265.45 had been withheld, were reported as part of the "Sales/Revenues/Receipts/Fees" of ₱59,551,116.00 under Item No. 15A of the 2005 annual ITR; and that the gain of ₱209,320,181.00 from the sale of the generation facility was reported under Item 18B (Non-Operating and Other Income), the book value of the asset having been deducted from the selling price. The CTA En Banc, for its part, found that the 2005 excess creditable withholding tax had been included in the prior year's excess credits reported in the 2006 quarterly ITRs, and that the 2006 annual ITR did not reflect the 2005 excess creditable withholding tax in the prior year's excess credits.

• Investigation and Burden of Proof: The Commissioner alleged that, assuming the filing of a claim for refund, the same was subject to investigation by the Bureau of Internal Revenue, and that Rhombus failed to demonstrate that the tax was erroneously or illegally collected.
• Presumption of Regularity: The Commissioner maintained that taxes paid and collected are presumed to have been made in accordance with laws and regulations and are therefore not refundable.
• Compliance with Sections 204(C) and 229: The Commissioner argued that it was incumbent upon Rhombus to show compliance with the provisions of Section 204(C), in relation to Section 229, of the Tax Code, as amended, upon which its claim for refund was premised.
• Strict Construction of Refund Claims: The Commissioner contended that in an action for tax refund the burden is upon the taxpayer to prove entitlement, that failure to discharge that burden is fatal to the claim, and that claims for refund are construed strictly against the claimant, as they partake of the nature of an exemption from taxation.

• Irrevocability Rule: Whether the taxpayer is barred by the irrevocability rule under Section 76 of the National Internal Revenue Code of 1997 from claiming a refund of its excess and/or unutilized creditable withholding tax.
• Entitlement to Refund: Whether Rhombus proved its entitlement to the refund of its excess and/or unutilized creditable withholding tax for taxable year 2005.

• Irrevocability Rule: No. The irrevocability rule did not bar the refund, because Rhombus exercised the option to be refunded when it marked "To be refunded" in its 2005 annual ITR, and its subsequent reporting of the same credits in its 2006 quarterly ITRs did not reverse that option.
• Entitlement to Refund: Yes. Rhombus satisfied the requisites for entitlement to the refund — the claim was filed within the two-year reglementary period under Section 229 of the NIRC, the income from which the taxes were withheld was declared in its return, and the fact of withholding was established by certificates of creditable tax withheld at source.

• Irrevocability Rule: Section 76 of the NIRC of 1997 provides that once the option to carry over and apply the excess quarterly income tax against income tax due for the succeeding taxable years has been made, the option is irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. As explained in Republic vs. Team (Phils.) Energy Corporation, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option, and once it has done so it can no longer make another; whether or not the taxpayer actually gets to apply the tax credit is irrelevant. The phrase "for that taxable period" merely identifies the excess income tax subject of the option by referring to the taxable period when it was acquired, and is not a prescriptive period for the irrevocability rule; a contrary reading would render the rule nugatory. The evident intent of the legislature in adding the last sentence to Section 76 was to keep the taxpayer from flip-flopping on its options and to avoid confusion and complication as regards its excess tax credit. The CTA En Banc misappreciated the fact that Rhombus had already exercised the option to be refunded when it filed its annual ITR for the taxable year ending December 31, 2005. The irrevocability rule took effect when the option was exercised; Rhombus' marking of the box "To be refunded" in its 2005 annual ITR constituted that exercise, and from then onwards it became precluded from carrying over the excess creditable withholding tax. The reporting of the prior year's excess credits in its 2006 quarterly ITRs did not reverse the option to be refunded, and the CTA En Banc therefore erred in applying the irrevocability rule against Rhombus.
• Entitlement to Refund: Republic vs. Team (Phils.) Energy Corporation lists the requisites for entitlement to the refund: (1) that the claim for refund was filed within the two-year reglementary period pursuant to Section 229 of the NIRC; (2) when it is shown on the ITR that the income payment received is being declared part of the taxpayer's gross income; and (3) 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 income tax withheld from that amount. The CTA First Division found that Rhombus met these requisites based on its examination of the documents submitted. Rhombus filed its 2005 annual ITR on April 17, 2006, giving it until April 17, 2008 to file both its administrative and judicial claims; its administrative claim filed on December 29, 2006 and its judicial claim filed on December 7, 2007 were therefore within the two-year prescriptive limit. To comply with the second requisite, Rhombus presented certificates of creditable tax withheld at source issued by its sole customer, Distileria Bago, Inc., and to show that it had declared in its return the income related to the creditable withholding taxes of ₱28,523,295.45, it presented its 2005 annual ITR with attached audited financial statements and Account Information Form, the certificates of creditable tax withheld at source for the first three quarters of 2005, a summary of invoices issued for 2005, and the corresponding sales invoices. The withholding tax certificates revealed that the creditable income taxes of ₱28,523,295.45 were withheld from energy service fees of ₱9,313,272.54 and from the sale of the generation facility amounting to ₱472,283,838.00; the energy fees were reported as part of "Sales/Revenues/Receipts/Fees" of ₱59,551,116.00 under Item No. 15A of the 2005 annual ITR, while the gain of ₱209,320,181.00 from the sale of the generation facility was reported under Item 18B (Non-Operating and Other Income), there being nothing fallacious in deducting the book value of the asset from the selling price. The members of the CTA First Division were in the best position as trial judges to examine the documents submitted and to make the proper findings thereon, and given their expertise on the matter, their finding that Rhombus had satisfied the requirements for its claim for refund was accorded weight and respect.

• Irrevocability rule under Section 76 of the NIRC of 1997 — Where the sum of the quarterly tax payments of a corporation liable to tax under Section 27 is not equal to the total tax due on its entire taxable income for the year, the corporation may either pay the balance of the tax still due, carry over the excess credit, or be credited or refunded the excess amount paid. Once the option to carry over and apply the excess quarterly income tax against income tax due for the succeeding taxable years has been made, the option is irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. The controlling factor is that the taxpayer chose an option; once it has done so, it can no longer make another, and whether it actually gets to apply the tax credit is irrelevant. In this case, the option actually exercised by Rhombus was the refund option, signified by its marking of the box "To be refunded" in its 2005 annual ITR; the irrevocability rule therefore precluded the carry-over, not the refund.
• Requisites for refund of excess creditable withholding tax — Entitlement to a refund requires: (1) that the claim for refund was filed within the two-year reglementary period pursuant to Section 229 of the NIRC; (2) that it is shown on the ITR that the income payment received is being declared part of the taxpayer's gross income; and (3) that 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 income tax withheld from that amount. All three requisites were satisfied by Rhombus.
• Construction of the phrase "for that taxable period" — The phrase merely identifies the excess income tax subject of the option by referring to the taxable period when it was acquired by the taxpayer; it is not a prescriptive period for the irrevocability rule. To construe it as a prescriptive period would render nugatory the irrevocability rule and would merely delay the taxpayer's flip-flopping to the end of each succeeding taxable period.
• No unjust enrichment from denial of refund under the irrevocability rule — Denial of a claim for refund under the irrevocability rule does not amount to unjust enrichment on the part of the government, because there is no forfeiture of any amount in favor of the government; the amount claimed as a refund remains in the taxpayer's account until utilized in succeeding taxable years. Unlike the option for refund of excess income tax, which prescribes after two years from the filing of the final adjustment return, there is no prescriptive period for carrying over the same, so the excess income tax credit may be repeatedly carried over to succeeding taxable years until actually applied or credited to a tax liability.
• Deference to the factual findings of the CTA — The members of the CTA First Division are in the best position as trial judges to examine the documents submitted and to make the proper findings thereon; given their expertise on the matter, their findings are accorded weight and respect.

• "Once the option to carry over and apply the excess quarterly income tax against income tax due for the taxable years 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." — This is the last sentence of Section 76 of the NIRC of 1997 as quoted by the Court; it supplies the statutory text on which the entire controversy turns and fixes the consequence of a taxpayer's choice of option.
• "Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant." — Quoted from Commissioner of Internal Revenue vs. Bank of the Philippine Islands as reproduced in Republic vs. Team (Phils.) Energy Corporation; it states the ratio of the irrevocability rule and is the formulation commonly cited in subsequent refund cases.
• "The fact that the prior year's excess credits were reported in its 2006 quarterly ITRs did not reverse the option to be refunded exercised in its 2005 annual ITR. As such, the CTA En Banc erred in applying the irrevocability rule against Rhombus." — This is the Court's own application of the rule to the facts, and it is the dispositive reasoning distinguishing the present case from the CTA En Banc's holding.
• "The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and complication as regards said taxpayer's excess tax credit." — This passage articulates the legislative purpose behind the irrevocability rule and is the policy anchor for construing the rule against the taxpayer who attempts to change options.

• Republic vs. Team (Phils.) Energy Corporation (formerly Mirant [Phils.] Energy Corporation), G.R. No. 188016, January 14, 2015, 746 SCRA 41 — The controlling precedent relied upon by the Court; it supplied both the explanation of the irrevocability rule and the three requisites for entitlement to a refund of excess creditable withholding tax that the Court applied to Rhombus.
• Commissioner of Internal Revenue vs. Bank of the Philippine Islands, 592 SCRA 231 — Followed; cited for the proposition that Section 76 of the NIRC of 1997 is clear and unequivocal that the carry-over option, once actually or constructively chosen, becomes irrevocable, and for the construction of the phrase "for that taxable period."
• Philam Asset Management, Inc. — Cited within the Bank of the Philippine Islands discussion for the rulings that there is no unjust enrichment in denying a refund under the irrevocability rule and that the excess income tax credit may be repeatedly carried over until actually applied or credited.
• Commissioner of Internal Revenue vs. Mirant (Philippines) Operations, Corporation, G.R. Nos. 171742 & 176165, June 15, 2011, 652 SCRA 80 — The authority relied upon by the CTA En Banc in reversing the First Division and applying the irrevocability rule against Rhombus; the Supreme Court's ruling effectively rejected that application on the facts.
• Sea-Land Service, Inc. vs. Court of Appeals, G.R. No. 122605, April 30, 2001, 357 SCRA 441, 445-46 — Cited to support the deference accorded to the factual findings of the CTA First Division as the tribunal in the best position to examine the documentary evidence.

• Section 76, National Internal Revenue Code of 1997 — Requires every corporation liable to tax under Section 27 to file a final adjustment return covering its total taxable income for the preceding calendar or fiscal year and, where the sum of quarterly tax payments is not equal to the total tax due, allows it either to pay the balance, to carry over the excess credit, or to be credited or refunded the excess amount paid. Its last sentence makes the carry-over option irrevocable once made and bars any application for cash refund or issuance of a tax credit certificate for that taxable period. The Court applied the provision by holding that Rhombus had exercised the refund option, so that the irrevocability rule barred the carry-over rather than the refund.
• Section 229, National Internal Revenue Code of 1997 — Governs the two-year prescriptive period for filing a claim for refund or tax credit. It was cited by the Commissioner as a provision with which Rhombus had to show compliance, and was applied by the CTA First Division in finding that the administrative claim filed on December 29, 2006 and the judicial claim filed on December 7, 2007 were both within the two-year limit counted from the filing of the 2005 annual ITR on April 17, 2006.
• Section 204(C), National Internal Revenue Code of 1997 — Cited by the Commissioner as the provision, in relation to Section 229, upon which Rhombus' claim for refund was premised and with which Rhombus allegedly failed to comply. The Court did not discuss the provision further, resolving the case on the irrevocability rule and on the requisites for entitlement to the refund.

• Presbitero J. Velasco, Jr. (Chairperson, Third Division)
• Marvic M.V.F. Leonen
• Samuel R. Martires
• Alexander G. Gesmundo

The signature block carries an "(On Leave)" notation and a footnote reading "On leave," without further explanation in the text. The decision was attested to by Justice Velasco as Chairperson of the Third Division and certified by Antonio T. Carpio as Acting Chief Justice.

• No dissent in the Supreme Court — The decision records no dissenting opinion among the members of the Third Division. The text's footnotes, however, record dissents in the Court of Tax Appeals.
• Justice Esperanza R. Fabon-Victorino (CTA En Banc) — The footnotes record that she dissented from the CTA En Banc decision in CTA EB Case No. 803; the text does not state the grounds of her dissent. She had earlier penned the CTA First Division decision granting the refund.
• Presiding Justice Ernesto D. Acosta (CTA First Division) — The footnotes record that he dissented from the CTA First Division decision in CTA Case No. 7711; the text does not state the grounds of his dissent.