Systra Philippines, Inc. vs. Commissioner of Internal Revenue

Once a corporation exercises the option to carry over its excess income tax credits to succeeding taxable years under Section 76 of the National Internal Revenue Code of 1997, that option is irrevocable for the taxable period, and no application for a cash refund or issuance of a tax credit certificate may thereafter be allowed, regardless of whether the excess credits are actually or fully utilized. The unutilized credits are not forfeited to the government but remain in the taxpayer's account, creditable against future income tax liabilities until fully utilized.

Systra Philippines, Inc. is a corporation rendering management consultancy services to the Philippine Branch of Group Systra SA, France, and is therefore liable to corporate income tax under Section 27 of the National Internal Revenue Code, with its final adjustment return governed by Section 76 of that Code. Section 76 confers on a corporation entitled to a tax credit or refund of excess estimated quarterly income taxes the choice either to carry the excess credit over to succeeding taxable years or to be credited or refunded the excess amount paid, and it expressly makes the carry-over option irrevocable for that taxable period. The provision marked a departure from Section 69 of the 1977 Tax Code, which contained no irrevocability rule and permitted the refundable amount shown on the final adjustment return to be credited only against the estimated quarterly income tax liabilities for the immediately following taxable year.

Systra Philippines, Inc., a corporation rendering management consultancy services to the Philippine Branch of Group Systra SA, France, filed with the Bureau of Internal Revenue its Annual Income Tax Return for the taxable year ended December 31, 2000 on April 16, 2001. The return declared revenues of ₱18,252,719, the bulk of which consisted of income from management consultancy services rendered to the Philippine branch of Group Systra SA, France, and subjected that income to the 5% creditable withholding tax, with ₱4,703,019 declared as creditable taxes withheld for the taxable year 2000. For the same period, the corporation reflected a total gross income of ₱3,752,129, a net loss of ₱17,930, and a minimum corporate income tax of ₱75,043. The MCIT of ₱75,043 was offset against total tax credits of ₱4,703,019, leaving total unutilized tax credits of ₱4,627,976, and petitioner opted to carry over that excess tax credit to the succeeding taxable year 2001.

On April 12, 2002, petitioner filed its Annual Income Tax Return for the taxable year ended December 31, 2001, reflecting a total gross income of ₱4,771,419 and total creditable taxes withheld of ₱1,111,587 for consultancy services. It declared a taxable income of ₱1,936,851 with a corresponding normal income tax due of ₱619,792. After deducting the unexpired excess of the previous year's MCIT for 1999 and 2000 in the amount of ₱222,475 from the normal income tax due, petitioner's net tax due of ₱397,317 was applied against accumulated tax credits of ₱5,739,563, consisting of prior year's excess tax credits of ₱4,627,976 and creditable taxes withheld during 2001 of ₱1,111,587. Those excess tax credits were thus utilized to pay off the income tax still due of ₱397,317, resulting in an overpayment of ₱5,342,246. In the 2001 return, petitioner indicated the option "To be issued a Tax Credit Certificate" relative to its tax overpayments.

On August 9, 2002, petitioner instituted with the Bureau of Internal Revenue a claim for refund or issuance of a tax credit certificate for its unutilized creditable withholding taxes in the amount of ₱5,342,246 as of December 31, 2001. Because the Bureau took no action on the claim, and to preserve its right to claim the refund of its unutilized creditable withholding taxes for calendar years 2000 and 2001 by judicial action, petitioner filed a petition for review with the Court of Tax Appeals in Division on April 14, 2003.

In its decision of August 3, 2005, the First Division of the Court of Tax Appeals partially granted the petition and ordered the issuance of a tax credit certificate to petitioner in the amount of ₱1,111,587, representing the excess or unutilized creditable withholding taxes for taxable year 2001. The claim for refund of the excess tax credits for the year 2000 in the amount of ₱4,627,976 was denied, the court finding that petitioner was precluded from claiming a refund thereof or requesting a tax credit certificate therefor because, once made for a particular taxable period, the option to carry over became irrevocable. That finding — that petitioner had elected to carry over its 2000 excess credits to the succeeding taxable year and that those credits remained unutilized — is the factual premise on which the Supreme Court's disposition of the substantive issue rests.

• Relaxation of Procedural Rules: Petitioner claimed that the Court has granted second and even third motions for reconsideration for "extraordinarily persuasive reasons," and maintained that the Court should look into the importance of the issues involved in deciding whether leave to file a second motion for reconsideration should be granted; it prayed that its petition not be denied on the basis of procedural lapses alone and pointed out that the substantial amount involved justified relaxation of technical rules.
• Important Legal Issue Involved: Petitioner asserted that the case presents an important legal issue, namely, whether the exercise of the option to carry over excess income tax credits under Section 76 of the National Internal Revenue Code of 1997, as amended, bars a taxpayer from claiming the excess tax credits for refund even if the amount remains unutilized in the succeeding taxable year.
• Conflict with Court of Appeals Decisions: Petitioner contended that the assailed Court of Tax Appeals decision was contradictory to the decisions of the Court of Appeals in Bank of the Philippine Islands vs. Commissioner of Internal Revenue and Raytheon Ebasco Overseas Ltd. Philippine Branch vs. Commissioner of Internal Revenue, which involved the same issue, and that in view of those decisions it would be unjust to deprive it of the right to claim a refund.

• Prohibition on a Second Motion for Reconsideration: Whether a second motion for reconsideration may be entertained after the denial of a prior motion for reconsideration has become final.
• Relaxation of Procedural Rules: Whether the procedural lapses that caused the dismissal of the petition may be excused on the ground of the substantial amount involved and the importance of the legal issue raised.
• Reliance on Court of Appeals Decisions: Whether petitioner may rely on the Court of Appeals decisions in Bank of the Philippine Islands vs. Commissioner of Internal Revenue and Raytheon Ebasco Overseas Ltd. Philippine Branch vs. Commissioner of Internal Revenue to support its claim for refund.
• Irrevocability of the Carry-Over Option: Whether the exercise of the option to carry over excess income tax credits under Section 76 of the National Internal Revenue Code of 1997 bars a taxpayer from claiming the excess tax credits for refund even if the amount remains unutilized in the succeeding taxable year.

• Prohibition on a Second Motion for Reconsideration: No. A second motion for reconsideration is a prohibited pleading under Section 2, Rule 52 in relation to Section 4, Rule 56 of the Rules of Court, and is forbidden except for extraordinarily persuasive reasons and only upon express leave first obtained.
• Relaxation of Procedural Rules: No. The substantial amount involved is neither a compelling nor an extraordinarily persuasive reason, being a subjective standard; procedural rules may be relaxed only for the most persuasive of reasons.
• Reliance on Court of Appeals Decisions: No. Under Republic Act No. 9282 the Court of Appeals and the Court of Tax Appeals are of the same level, a Court of Appeals decision in an action in personam binds only the parties thereto, and all rulings of the Supreme Court on questions of law are conclusive and binding on all courts.
• Irrevocability of the Carry-Over Option: No. Once the option to carry over and apply the excess quarterly income tax against income tax due for the taxable quarters of succeeding taxable years has been made, it is irrevocable for that taxable period, and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

• Prohibition on a Second Motion for Reconsideration: The denial of a motion for reconsideration is final, meaning that the Court will no longer entertain and consider further arguments or submissions from the parties respecting the correctness of its decision or resolution. It signifies that, in the Court's considered view, nothing more is left to be discussed, clarified, or done in the case since all issues raised have been passed upon and definitely resolved; any other issue which could and should have been raised is deemed waived and is no longer available as a ground for a second motion, and a denial with finality underscores that the case is considered closed. As a rule, therefore, a second motion for reconsideration is a prohibited pleading under Section 2, Rule 52 in relation to Section 4, Rule 56 of the Rules of Court. Ortigas and Company Limited Partnership vs. Velasco laid down the governing standard: a second motion for reconsideration is forbidden except for extraordinarily persuasive reasons, and only upon express leave first obtained. In this case, contrary to petitioner's claim, there was no compelling reason to excuse non-compliance with the rules, nor were the grounds raised extraordinarily persuasive.

• Relaxation of Procedural Rules: It is true that procedural rules may be relaxed in the interest of substantial justice, but they are not to be disdained as mere technicalities that may be ignored at will to suit the convenience of a party. They are intended to ensure the orderly administration of justice and the protection of substantive rights in judicial proceedings, and thus are not to be belittled or dismissed simply because their non-observance may have resulted in prejudicing a party's substantive rights. Like all rules, they are required to be followed except only when, for the most persuasive of reasons, they may be relaxed to relieve a litigant of negative consequences commensurate with the degree of thoughtlessness in not complying with the prescribed procedure. The fact that the amount involved is claimed to be substantial is neither a compelling nor an extraordinarily persuasive reason; it is a subjective standard, for what may be a pittance for one may be a fortune for another, and all properties, substantial or not, deserve protection under the laws.

• Reliance on Court of Appeals Decisions: Petitioner could neither properly nor successfully rely on the decisions of the Court of Appeals in the Bank of the Philippine Islands and Raytheon Ebasco Overseas Ltd. Philippine Branch cases. First, the Court of Appeals and the Court of Tax Appeals are now of the same level pursuant to Republic Act No. 9282, so that decisions of the Court of Appeals are no longer superior to nor reversive of those of the Court of Tax Appeals. Second, a decision of the Court of Appeals in an action in personam binds only the parties in that case, and a third party in such an action cannot claim any right arising from a decision therein. Finally and most importantly, while a ruling of the Court of Appeals on any question of law is not conclusive on the Supreme Court, all rulings of the Supreme Court on questions of law are conclusive and binding on all courts including the Court of Appeals; all courts must take their bearings from the decisions of the Supreme Court.

• Irrevocability of the Carry-Over Option: Section 76 of the Tax Code provides that if the sum of the quarterly tax payments made during the taxable year is not equal to the total tax due on the entire taxable net income of that year, the corporation shall either pay the balance of tax still due, carry over the excess credit, or be credited or refunded with the excess amount paid. A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid thus has two options: to carry over the excess credit, or to apply for the issuance of a tax credit certificate or to claim a cash refund; if the option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period. In exercising its option, the corporation must signify in its annual corporate adjustment return, by marking the option box provided in the BIR form, its intention either to carry over the excess credit or to claim a refund; to facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other. This is the irrevocability rule embodied in the last sentence of Section 76, and the phrase "such option shall be considered irrevocable for that taxable period" means that the option to carry over the excess tax credits of a particular taxable year can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: first, as automatic credit against taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued; and second, as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund. In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the irrevocable option to carry them over as tax credits for the next taxable year; under Section 76, a claim for refund of such excess credits can no longer be made, and the excess credits will only be applied against income tax due for the taxable quarters of the succeeding taxable years. The legislative intent to make the option irrevocable becomes clearer when Section 76 is viewed in comparison with Section 69 of the old 1977 Tax Code, under which there was no irrevocability rule and the excess tax credits could be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year, that is, the immediately following year only; in contrast, Section 76 formulates an irrevocability rule which stresses and fortifies the nature of the remedies or options as alternative, not cumulative, and provides that the excess tax credits may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years until fully utilized. The case is closely similar to Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, where the taxpayer had an unapplied creditable withholding tax of ₱459,756.07 for 1998 which it carried over to 1999; in the next succeeding year it had a tax due of ₱80,042 and a creditable withholding tax of ₱915,995, so that the amount due for 1999 was credited against its 1999 creditable withholding tax and its 1998 creditable withholding tax of ₱459,756.07 remained unutilized, after which it filed a claim for refund of that unapplied amount. The claim was denied on the ground that once the carry-over option is taken, actually or constructively, it becomes irrevocable, although the amount is not forfeited in the government's favor because it may be claimed as tax credits in the succeeding taxable years. Applying that ruling, since petitioner elected to carry over its excess credits for the year 2000 in the amount of ₱4,627,976 as tax credits for the following year, it could no longer claim a refund; once the carry-over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized. Nevertheless, the amount will not be forfeited in favor of the government but will remain in the taxpayer's account, and petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. Where, however, the corporation permanently ceases its operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits, since in such a case the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply — cessante ratione legis, cessat ipse lex.

• Irrevocability Rule under Section 76 of the National Internal Revenue Code of 1997 — A corporation entitled to a tax credit or refund of excess estimated quarterly income taxes paid has two alternative remedies: (1) to carry over the excess credit, or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. The corporation signifies its choice in its annual corporate adjustment return by marking the option box in the BIR form. Once the option to carry over and apply the excess quarterly income tax against income tax due for the taxable quarters of succeeding taxable years has been made, it is irrevocable for that taxable period, and no application for cash refund or issuance of a tax credit certificate shall be allowed. The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid — once as automatic credit against taxes for succeeding taxable quarters for which no tax credit certificate has been issued, and again as a tax credit for which a certificate will be issued or which will be claimed for cash refund. In this case, petitioner's election in 2000 to carry over its ₱4,627,976 excess credits barred its later claim for a refund of that amount notwithstanding that the credits remained unutilized.
• Non-Forfeiture of Unutilized Carried-Over Credits — The irrevocability of the carry-over option does not operate to forfeit the unutilized credits in favor of the government. The amount remains in the taxpayer's account and may be claimed and carried over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized. The Court applied this qualification in petitioner's favor even as it denied the refund.
• Cessante Ratione Legis, Cessat Ipse Lex (Exception to Irrevocability) — Where the corporation permanently ceases its operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits, because in such a case the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply. The Court stated this exception in a footnote as the rationale-based limit on the irrevocability rule.
• Prohibition on a Second Motion for Reconsideration — The denial of a motion for reconsideration is final; the Court will no longer entertain further arguments or submissions respecting the correctness of its decision or resolution. Any other issue which could and should have been raised is deemed waived and is no longer available as a ground for a second motion, and a denial with finality underscores that the case is considered closed. As a rule, a second motion for reconsideration is a prohibited pleading under Section 2, Rule 52 in relation to Section 4, Rule 56 of the Rules of Court, and is forbidden except for extraordinarily persuasive reasons and only upon express leave first obtained.
• Relaxation of Procedural Rules Requires the Most Persuasive of Reasons — Procedural rules may be relaxed in the interest of substantial justice, but they are not mere technicalities to be ignored at will; they ensure the orderly administration of justice and the protection of substantive rights. They must be followed except only when, for the most persuasive of reasons, they may be relaxed to relieve a litigant of negative consequences commensurate with the degree of thoughtlessness in not complying with the prescribed procedure. The substantial amount involved in a case is neither a compelling nor an extraordinarily persuasive reason, being a subjective standard.
• Hierarchy of Courts and the Binding Effect of Supreme Court Rulings — Under Republic Act No. 9282, the Court of Appeals and the Court of Tax Appeals are of the same level, so that decisions of the Court of Appeals are no longer superior to nor reversive of those of the Court of Tax Appeals. A decision of the Court of Appeals in an action in personam binds only the parties in that case, and a third party cannot claim any right arising therefrom. While a ruling of the Court of Appeals on any question of law is not conclusive on the Supreme Court, all rulings of the Supreme Court on questions of law are conclusive and binding on all courts, including the Court of Appeals.

• "A second motion for reconsideration is forbidden except for extraordinarily persuasive reasons, and only upon express leave first obtained." — Quoted from Ortigas and Company Limited Partnership vs. Velasco and adopted as the governing standard, this passage states the threshold that petitioner failed to meet and is the formulation routinely cited for the prohibition on second motions for reconsideration.
• "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." — This is the statutory text of the last sentence of Section 76 of the National Internal Revenue Code of 1997, quoted by the Court as the source of the irrevocability rule and the basis for denying petitioner's refund claim for the ₱4,627,976 carried over from taxable year 2000.
• "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." — Quoted from Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, this passage supplies both the controlling application of the irrevocability rule to unutilized carried-over credits and the non-forfeiture qualification that the Court expressly adopted in the present case.
• "The fact that the amount involved is claimed to be substantial is neither a compelling nor an extraordinarily persuasive reason. It is a subjective standard. What may be a pittance for one may be a fortune for another. And all properties, substantial or not, deserve protection under the laws." — This passage disposes of petitioner's principal argument for relaxing the procedural rules and is the Court's canonical statement that the magnitude of the amount in controversy does not, by itself, justify excusing non-compliance with the Rules of Court.

• Ortigas and Company Limited Partnership vs. Velasco, 324 Phil. 483 (1996) — Controlling precedent on the prohibition against a second motion for reconsideration; the Court quoted its holding that such a motion is forbidden except for extraordinarily persuasive reasons and only upon express leave first obtained, and applied it to deny petitioner's motions.
• Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004, 14 December 2005, 477 SCRA 761 — The Court found this case "closely similar" and followed it; it involved a taxpayer that carried over unutilized creditable withholding taxes and was later denied a refund, and it furnished both the irrevocability ruling and the non-forfeiture qualification applied to petitioner's 2000 excess credits.
• Philippine Bank of Communications vs. Commissioner of Internal Revenue, 361 Phil. 916 (1999) — Cited for the proposition that the remedies of carrying over the excess credit and of claiming a refund or tax credit certificate are alternative, so that the choice of one precludes the other.
• Republic of the Philippines vs. Maj. Gen. Garcia, G.R. No. 167741, 17 July 2007 — Cited for the principle that all rulings of the Supreme Court on questions of law are conclusive and binding on all courts, including the Court of Appeals, and that all courts must take their bearings from the decisions of the Supreme Court.
• Santos vs. Court of Appeals, G.R. No. 92862, 04 July 1991, 198 SCRA 806 — Cited for the rule that procedural rules may be relaxed in the interest of substantial justice but are not to be disdained as mere technicalities that may be ignored at will.
• Spouses Galang vs. Court of Appeals, G.R. No. 76221, 29 July 1991, 199 SCRA 683 — Cited, together with Santos, for the propositions that procedural rules ensure the orderly administration of justice and the protection of substantive rights, and that they must be followed except for the most persuasive of reasons.
• Bank of the Philippine Islands vs. Commissioner of Internal Revenue, CA-G.R. SP No. 77655, 29 April 2005 — A Court of Appeals decision relied upon by petitioner; the Court held it could not be invoked because the Court of Appeals and the Court of Tax Appeals are now of the same level under Republic Act No. 9282, a Court of Appeals decision in an action in personam binds only the parties, and such a ruling is not conclusive on the Supreme Court.
• Raytheon Ebasco Overseas Ltd. Philippine Branch vs. Commissioner of Internal Revenue, CA-G.R. SP No. 80296, 11 April 2005 — The second Court of Appeals decision relied upon by petitioner and rejected on the same grounds as the Bank of the Philippine Islands case.

• Section 76, National Internal Revenue Code of 1997 (as amended) — Governs the final adjustment return of every corporation liable to tax under Section 27 and grants the corporation the options to pay the balance of tax still due, to carry over the excess credit, or to be credited or refunded with the excess amount paid. Its last sentence embodies the irrevocability rule: once the carry-over option is exercised, it is irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. The Court applied this provision to hold that petitioner's 2000 carry-over election barred its refund claim for the ₱4,627,976 excess credits.
• Section 69, 1977 Tax Code — The predecessor provision, quoted by the Court for comparison. It contained no irrevocability rule and allowed the refundable amount shown on the final adjustment return to be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year, that is, the immediately following year only. The contrast was used to demonstrate the legislative intent behind the irrevocability rule in Section 76.
• Section 2, Rule 52 in relation to Section 4, Rule 56, Rules of Court — Cited as the procedural basis for treating a second motion for reconsideration as a prohibited pleading, which grounded the denial of petitioner's motion for leave and second motion for reconsideration.
• Section 11, Rule 13 in relation to Section 3, Rule 45 and Section 5(d), Rule 56, Rules of Court — Require an explanation why service was not done personally; petitioner's failure to give such an explanation was one of the three grounds for the March 28, 2007 resolution denying the petition.
• 2004 Rules on Notarial Practice — Require competent evidence of the affiants' identities; the verification, certification of non-forum shopping, and affidavit of service submitted by petitioner failed to comply, furnishing the second ground for the denial of the petition.
• Republic Act No. 9282 — Expanded the jurisdiction of the Court of Tax Appeals, elevated its rank to that of a collegiate court with special jurisdiction, and enlarged its membership. The Court relied on it to hold that the Court of Appeals and the Court of Tax Appeals are now of the same level, so that Court of Appeals decisions are no longer superior to or reversive of those of the Court of Tax Appeals.
• Section 13, Article VIII, 1987 Constitution — The certification appended to the resolution, signed by Chief Justice Reynato S. Puno, states that the conclusions in the resolution had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

• Chief Justice Reynato S. Puno (Chairperson)
• Associate Justice Angelina Sandoval-Gutierrez
• Associate Justice Adolfo S. Azcuna
• Associate Justice Cancio C. Garcia