Orient Pacific Capital Investment Corporation, et al. vs. The Commissioner of Internal Revenue, et al.

DECISION

CTA CASE NO. 411 3 - 2 - Sornet irne i .,.., 1 '384, as art~ar.ged by petit ior.er, Philippine American Life Insurance Company <Philarn, for shot' t) extended two

(2) credit facilities to:;. Mercury Dt~ug Corpot~at icon <MDC, for shot~ t) in the a mco•Jrtts o:_.f P22. 3 Mi 11 ior• artd P3. 1 Mi 11 ior, whereby payments by MDC of the amortizations and interests due were directly made to . petitioner for the account of and subsequent remittance to Philam. It appeat~s that on the P22.3 Millicon ct~edit facility petitionet~ withheld P138,'358.04 as firtal withholding tax from the total interest income from deposit substitute in the amount of P6'34,7'30. 10 for the pet~ieod ft~o:orn Septernbet~ 27, 1'384 to Decembet~ 27 , 1984.

On the P3. 1 Millieon credit facilitiy petiticor•et~ withheld as firtal withheolding taxes it"• the amounts of P3,600.17; P3,724.32 and P3, 178.08, all remitted teo the Bureau eof Internal Revenue>freofu the total irttet~est inceorne ft~om depeosit substitute ir• the artlOtmt of P18, 000.86, as o:_.f Ncovember 27, 1984;

P18,62 1.58 as of December 2 7, 1 '384 ar.d P15, 8'30. 41 as o:of January 28, 1 '385, respectively. On Ncovembet~ 18, 1985, believing that it inadvertently and erroneously over withheld and remitted the final withholding taxes or, ir.terest i rtcorne depo:;,si t substitute of Phi lam, petitioner filed with the Bureau of 3 6 ~

- 3 - Revenue a reques t for the refund in the amount of P30,92 8.00.

No action having been taken on the claim for refund and to obviate the tolling of the statute of limitatior•, petitionet' filed with this Cotn't the instant petitioner for r e view. Responder•t ir• ; his ar.swet', denied r.1ost of the allegations of the petitior.er and as special ar.d affirmative defenses alleges, among others, that: "6.

its XXX Pet it i onet' case i s Dect'ee Nc• • . 195 9; XXX XXX XXX must clearly show th a t covered by Presidential XXX XXX "10. Ir. an actior• f o t' tax refur.d, the taxpayet' must show that the taxes paid were ert'or.eousl.y Crt' illegally collected ~nd f ailur e to sustain said burden i s fatal t o the actior• fc•t' t'efur.d; " XXX XXX XXX Tha issue raised is whether or not petitioner is entitled to the refund of the amount of P30,928. 10 as alleged excess of final withholding tax on the interest incoma it paid from October 15, 1984 to January 1985, derived from the loan arrangement between Philam and MDC. Petitioner contends that the amount claimed is refundable on the ground that the final withholding t a x on the ir.tet' est income paid frcorn Octobet' 15, 3bt )

- 4 - 1984 was allegedly erroneously computed at t he straight 20'1- thet' eof, ptwsuar.t t o Section 53(e) (1) of the National Ir-.tet'Y•al Revenue Code, instead of the amended and reduced t' ate of 15'1- ft'orn October 15, 1984, pursuant to Presidential . Decree No. 1959, effective on said date. We disagree with petitioner. Petitioner clearly misappreciated the facts and the applicable provisions of the statutes. The pht' ase "deposit substitutes" is defir-1ed ur.det' Section 20(y) the Nati onal Revenue Code, as amended by Presidential Decree Nc•.

1959, effective Oct obet' 15, 1984, as fc•ll c•ws : "(y) Depc•sit substitutes shall rnear• ar• altet'r•ative fot'm of c•btainir•g ftmds from the public, other than deposits, through the issuance, endorsement, or acceptar.ce of debt ir.struments fot' the bot't'c•wer' s own accour.t , for the put' pose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealet'.

These pt'ornissot' Y notes, repurchase agreements, certificates of assigr.mer-.t ot' pat'ticipation ar.d i nst rumer.t ar.d simi 1 at' ins 1ent recourse as may be authorized by Cemtt"ai Bar•k.

of the Philippines, for banks and non- bank.

financial i r•t et"med i at~ies ot' by the Sectwi ties ar-.d Exchange Commi s sion of the Philippines fot' commet"cial, industrial, finar.ce companies and other non-financial comparlies :

Pt'•::ovided, however, that or.ly debt instruments issued for inter-bank., call lc•aY1S to covet' deficiency ir• reserves against deposit liabilitie~ including those between or among banks ') -. ~ u bO

- s - . and quasibanks s hall not be considered as deposit substitute debt instt~uments."

It is expt~ essly admitted by petitioY",et~ that the subject taxable income is "intet~est i l'"ICC•me det~i ved by Phi 1 am by <see Rollo, p.

'31>.

Such i r.t et~est i ncoroe from a loan paid MDC shall be distinguished from interest OY"• "depc•sit substitutes" which conr.ote a diffet~ent The d i st i net ion is essey,t i a 1 because of the tax given to each.

Interest inc ome from an ordinary loan forms part of the gros s income of the corporation and is subject to corporate income tax of 35~ thereon, pursuant to Sectiol'"• ;:=:t+ of the NatiOY"1al IY",terr,al Revenue Code, while interest on deposit sub~ti tut es is s ubject to a final 15~ withholding tax thereof, effective~ October 15, 1984.

Thus, although pet it i c•net~ is i Yl alleging that iY"•tet~ est income falling due and paid from Octc.bet~ 15 , 1'384 or• dep•:•sit substitutes sha ll be computed at 15~ thereof, a recomputation on that basis, as prayed for, is not warranted, consideri ng the conclusion reached that the subject intrest income was earned from an ordinary loan transaction subject to 3 5 ~ corporate income tax . J - 6 - It must also be stt~es s ed that t' espc•nder.t ir• hi s ar.swet' ar.d by way of special and affit' mative defer.ses, raised several issues, ir,dicat e d earlier. Therefot' e, petitior•er must clearly show that its case is covered by Presidential Decree No. 1959 and to show that the taxes paid were errc•neously ot' illegally collected, but pet it i onet' failed to sust a i y, its burden. And, althcrugh h i s case has been submitted for decision based on the pleadings, respondent could not be deemed to have admitted all the allegations of petitioner for there is no thing to indicate such admission <Please see Commissioner of Internal Revenue v.

Mitsubishi Metal Corporation, Et.

al., G.R.

Nos.

54908 & 80041~ , I February 2, 1990>.

WHEREFORE, that patition for review in tha above-entitled cas• is heraby DISMISSED without prajudica to a reassessment of tha 35" corporate / income tax due on the subject interest incoma received by Philam, if tha same has not yet With costs against petitionar.

WE CONCUR:

~...,."fa: Q, Q~ ERNESTO D. ACOSTA Presid i r•g .htdge ~~ALES Acting Associate J ~ge CERTIFIFATION I hereby certify that the decisi o n was reached aftet" due consul tat ion amc•r•g the members of the Court of Tax Appeal s i n accordance with Section 13, Article VIII of the Constitution. :.r71 ~~aaQ~ ERNESTO D. ACOSTA Pt"esid i ng Judge Co~ rt of Tax Appeals _, )