| Ane Planters Products Inc., et al. vs. Commissioner of Internal Revenue

DECISION

- 2 - As borne out by the pleadings and evidences presented~ petitioner is a duly registered domestic corporation and is engaged in the business of importing~ manufacturing~ and selling fertilizer~ agricultural chemicals~ and industrial produ c ts~ with prin c ipal office at the PPI building~ Esteban Street Legaspi Village~ Makati~ Metro Manila. The case at bar has been submitted for decision based on the pleadings and the records of the Bureau of In ter-·na 1 Revenue~ sans the par-ties filing their respective memoranda. F'eti tioner as such manufacturer~ importer and s eller of ferti 1 i zer products has been receiving subsidy from the FPA in the form of reimbursement of all losses incurred by petitioner in its fertilizer business.

In other words~ the ./ ferti 1 i zer operation of herein petitioner was subsidized by the government on a full cost basis under the "no- loss no- gain" scheme~ F'ursuan t.:

to this cash subsidy scheme the financial statement of petitioner reflected no income ta x due and payable to the government.

Petitioner under this cash subsidy scheme filed its quarterly income tax returns for the first~ second and third quarters of 1980 in the total amount of F'4~574~128.00 for· its net ta:-:able income on agricultural chemicals and 50'(

- 3 - industrial products operations (petitior,- for IV pp.

1-2 .• admitted in par.

answer~ p.

4~ CTA recs.).

During the last quarter of 1980 the FPA adopted a new fertilizer cash subsidy scheme thereby allowing petitioner a 5% mark - up on locally produced fertilizer grades and 2% mark-up on imported grades~ enabling petitioner to generate income in its ferti 1 i zer operations (Ann ex "A- .J" .•

p. 8 .• CTA recs.). ::)LUnder this new subsidy scheme~ petitioner f i 1 e its subsidy c 1 aim with FPA on a quarterly basis wherein FPA pays 80% of the claims upon completion of all the necessary papers while t .he remaining 20% is withheld until after the termination of the books of accounts of petitioner and a favor-able endorsement by the Commission on Audit.

According 1 y ~ petitioner obtained on Apr-i 1 3 ~ 1981 ..an au thor i ty from the FPA in accordance with the new cash subsidy scheme~ subsequently petitioner on Mar ch ~ 1981 requested for an authority to defer the recognition of income of 20% of its subsidy claim in the year of receipt effective January 1, 1981 and not in the year the claim for such amount was filed~ respondent granted said request in a 1 et ter dated Apr i 1 3 ~ 1981 we 50d DECISION CTA CASE NO. ·3469 - 4 - quote at length which we consider as authority in support of this decision (Annex "8" .• p.

9 .• CTA rec:s.).

REPUBLIKA NG PILIPINAS

MINISTRI NG PANANALAPI

KAWANIHAN NG RENTAS INTERNAS

QUEZON CITY

April 3~ 1981 Mr. Rosmo A. Pleyto Partner~ Carlos J. Valdes & Co. 1130 Perez St.~ Manila S i r:

This refer to your letter of,, March 10~ 1981 relative to your request that your client~ Planters Products Inc., herein after referred to as

11 PPI

11 ~ be permitted to change its accounting method in recognizing as income its subsidy from the Ferti 1 i zer and Pes tic ide Authority, herein after referred to as

11 FPA

11 in the year of ac tua 1 receipt and not in the year it files its claim for subsidy. You represented that present 1 y your c 1 ien t, the "PP I 11 recognizes for income ta:-:

purposes 1001. of the

11 FPA

11 subsidy upon filing of their request for subsidy although what is . immediately given as subsidy corresponds on 1 y to 801. of the tota 1 subsidy.

The remaining 201. of its annual subsidy is withheld by

11 FPA

11 pending the completion of the audit conducted by the Commission on Audit.

You now request that to effectuate the reality of the transaction as discussed above~ your client be permitted to Befer the recognition of income of the remaining 201. in the year of the receipt of such subsidy beginning January 1, 1980.

sou

- 5 - In reply, please be informed that your request is hereby granted.

Accordingly your client, "PPI", may declare the subsidy it receives from the "FPA" as part of gross income in the year of actual receipt.

Very truly yours, TOMAS C. TOLEDO Deputy Commissioner

TAN T4338-J2227-A-9

On April 15, 1981, on the basis of the Authority granted to petitioner, final adjustment of income ta>: return was filed reflecting already the deferral of the recognition, as income the remaining 20% of petitioner's subsidy claim (Annex "C" .• p.

1tJ~ CTA re<::s • .J. Because of the deferral, petitioners claimed an alleged overpayment in the amount of P4,501,980.00 for the 1980 corporation income tax to wit:

1st qtr.

2nd qtr.

3rd qtr.

4th qtr.

P3 ~ 2..)4, 970.00 1,369,158.00 Incane Tax D...te/(Credit) HX>t P4, 574, !28.(X) after deferral • • • • • • • • • • • • ---'~~ ·)4.1.9.1-..i!..!,~ Over/(Under) Payment Add: Withholding Taxes P4,369,217 .0() 51 0

- 6 - Inter··est c:n Savings deposit ... Rerltal Ir1c:c:oe .. " .......•....

Dividend Inccllne ...........•.. Ta:·: Cn~:h.t: C'.-ert:. 1\b. 01.699 Total Prnc:unt Refundable 1.1. 9 ~ ~'(X) • 00 3 ~ 2~'(). 00 42.1.00 --·---·_9_,_~5.7::.! .. ~~~~ On J anuar·y 8 ~ 1982 petitioner filed with respondent's claimed for refund and/or ta:·: credit o ·f the alleged overpayment of the 1980 corporate income ta x (Annex "K"~ p. 37, CTA re cs .J. It must be stated and emphasized in this connection that only the fertilizer operation of petitioner was being subsid .i. zed~ concerning its agr·.icul tur-al chemicals included in the financial reports of petitioner as other products are not subsidized. Taking res pondent's failure to make a definite r·uJ..ing on its claim for· refund and/or ta:·: credit ·filed on ~Jam .l ar .. y 8~ 1982, petitioner filed into this court .its petition for review on May 2, .1982. ~ The sole e <SUP.:/ posed on this appea l is whet her or not petitioner is entitled to the refund and/or tax credit of the alleged overpaymen t of corporate income tax on the total sum of P4,501,980.00 representing the first, second , and third quarters of 1980.

Petitioner strictly maintained that on the basis of the authority granted by respondent, ( An n e .'X.· " B " .• Ex h • " B " .• p • :-:J _.

C T A r e c :.=: • J i t had a resultant overpayment to the govern ment in t he 511

- 7 - amount of P4,501,980.00 for the first, second, and third quarters of 1980. It basically arose from the fact that 20/.

subsidy retained by the Fertilizer and Pesticide Authority should be declared for taxation purposes in the year as it is received and not to be entered in the books in the year it is earned or the claim for subsidy is filed.

A close scrutiny of the records will show that this claim of petitioner was never contested by respondent, furthermore, the records will show that e:·:aminer Conrado A. Agustin prepared a memorandum on November 30, 1985, addressed to the Commissioner of Internal Revenue, recommending that the said amount P4,492, 387.00 be refunded to, or a tax credit issued in favor of the herein petitioner. However, the said recommendation was not acted upon by respondent.

Salient portion of the said memorandum (pp.

56-57~ BIR recs.J is hereby quoted below:

,_, ,, '·' ,, ,, ,, It is the practice of the Fertilizer and Pesticide Authority to withhold twenty percent (20/.)

of the fertilizer subsidy until the Commission on Audit have completed its audit of PPI books of accounts and have tendered its recommendation on the subsidy. Planters 512

)' J

f J f l (

J )

- 8 - Products Inc. being on the accrual basis of accounting accrued in its book of twenty percent ( 20/.) subsidy retained by FPA.

In 1 ine with the above-men t.ioned situation PPI requests our office that it be allowed to declare as income the twenty percent (20/.)

retention in the year it is received.

Our off ice~ on April 3 ~ 1981 granted the reques t of PPI~ hence the request for ta >: credit dated January 7~ 1982 .

It s hould be noted that only the fertili zer business is subsidized by FDA. Agr- icu 1 tura 1 chemic a 1 s presented in the financial statements as other products is not subsidized.

\ The f inane ia 1 statement of the compan for the year 1980 disclosed a net loss of P15~496~225.00 on the fertilizer business after considering the retention of P35~060~878.00 equivalent to 20/. of the subsidy while other products revea 1 ed a net income of P13,940~754.00.

The net loss of P15,496~225.00 on the fertilizer business and the net income of P13~940,754.00 taken together will reflect a net loss of P1~555~471.00.

This factor is definitely the basis of the request for ta:-: credit in the amount of P4~501,980.00. This examiner see that the claim for ta:·: credit is the aftermath of a ruling that the ( 20/.)

twenty per cent subsidy retained by the Fertilizer and Pesticide Authority should be declared for- taxation purposes in the year it is received and not to be accrued in the books in the year it is earned.

The application of the subsidy is true not only to the fertilizer business but also to the non- subsidized products.

Having in this view~ this examiner is 1 eft no alternative save to recommend the approval of the tax credit in the amount of P4~492~388.00 presented as follows: 513

Total Faymentss BO ne eee ewe PS 204,970.00 UBL BO Lawrence 1,749,158.00 W/Tax ~- Rental W/Tax-Interest.

Savings Deposit «2. LIP .921.00 TOT AL. www ena eee P4697, 299,00 Leas: Income tax due per returm 2 a4 «912 OO 45 Refundable s.sccunnece To sustain petitioner's posttion that it is entitled to a refund and/or tax credit of FP4,501,990.00 is the very actuatian of respondent's counsel which perhaps would indicate that petitioner’s action is legally tenable, that even during the pendency of this case, particularly the hearing of December 19, 1986 (minutes af the hearing, p.81, CTA recsz.) wherein the gavernment counsel has manifested | that a favorable recommendation is now pending approval hy the Commissioner of Internal Revenue.

We are fully convinced of the position of the petitianer that ait should be entitled to refund and/or tax credit for the overpayment of its corporate income tax covering the first, secand, and third quarters of 1°80, Thus, tax correctly stated by petitianer in paragraph «IX of its petition for review, "as ai natural consequence af such deferral petitioner had a resultant ola - 10 - overpayment to the respondent in the total sum of F'4 ~ 501 ~ 980.00 for its corporate income ta>:."

Consequently~ since petitioner paid its corpor .. ate incr.Jme ta>:

under the old cash subsidy scheme then being implemented by the FF'A, up to the first, second, and third quarters of 1980~ instead of under the new cash subsidy scheme which took effect at about the last quarter of 1980~ wherein pet.i tioner· had obtained the au thor i ty a 11 owing it to dec 1 are as income the twenty per cent ( 20/. )

retention in the year it is received which is from January 1~ .1980.

The app 1 ica tion of the subsidy~ however~ is applied also to the non - subsidized products.

It should be noted that only the fertilizer business of petitioner is subsidized by FF'A. Other products reflected in its financial statements like agricultural products are not subsidized.

The financial statements of Planters Products Inc.

showed a net loss of F'.15~496~225.00 on its fertilizer operation after taking into account the amount retained equivalent to twenty per cent (20/.) the subsidy in the sum of P35~000~878.00.

However~ other products showed a net income of 513

- 11 - P1 3 ~940~754.00 which taken together will reflec t a net loss of P1~555~471.00. This arrangement i s the basis of petitioner for tax refund and/or tax credit in t he amount of P4~501~980.00 (par.

4 .~ Exa miner · s re port, pp. 57 BIR re cs .).

WHEREFORE, respondent Commissioner of Interna l Revenue is hereby o rdered to refund to petitioner, Planters Products Inc., the sum of P4,492,387.00 representing its overpaid corporate income tax paid by it for the peri od from the first, second, and third quarters of 1980. Without pronouncement as to costs.

WE CONCUR:

,...____ C. ROAQUIN ,Judge ~z.

REV 516

- 12 -

CERTIFI C ATION

I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. AMANTE Presidi g Judge Court of Tax Appeals