Philippine National Bank vs. Commissioner of Internal Revenue

DECISION

This is a judicial claim for tax refund or credit in the aggregate amount of P-17,504,775.48 allegedly representing excess payments of gross receipts tax ("GRT" for brevity) for taxable quarters beginning June 30, 1994 up to March 31, 1996. Petitioner is a private financial institution organized and existing under the laws of the Republic of the Philippines with office address at PNB Financial Center, Roxas Boulevard, Pasay City, Metro Manila. The facts are simple. For the eight (8) taxable quarters covering the period June 30, 1994 up to March 31, 1996, Petitioner filed its quarterly percentage tax returns on gross receipts or earnings, inclusive of the 20% final withholding tax on interest income derived from investments, deposits and loans and paid correspondingly the GRT due thereon. On July 19, 1996, Petitioner filed amended quarterly percentage tax returns for the period involved herein with the 20% final withholding tax duly excluded from its gross receipts on account of the decision of this Court in Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720, promulgated on anuary 10o

- 2- 30, 1996, wherein it was ruled that the 20% final withholding tax on interest income should not form part of a bank's taxable gross receipts for GRT purposes. Such amendment thus reflected a reduced amount of taxable gross receipts and GRT liabilities with resulting overpayment ofGRT when compared with previous returns, as follows: Period Covered (Quarter - End) June 30, 1994 September 30, 1994 December 31, 1994 March 31, 1995 June 30, 1995 September 30, 1995 December 31, 1995 March 31, 1996

TO TAL

Tax Due Per Original Return 107,483,285.27 114,292,729.36 118,443,383.42 127,781,909.47 105,615,948.79 136,977,975.85 137,565,078.91 133,260,982.62 !29812421!293.62 Tax Due Per Overpayment Amended Return For Refund 105,127,122.33 2,356,162.94 111,817,191.57 2,475,537.79 116,573,108.77 1,870,274.65 125,733,423.93 2,048,485.54 102,932,534.56 2,683,414.23 134,253,099.12 2,724,876.73 135,893,668.65 1,671,410.26 131,586,369.28 1,674,613.34 !22632916!518.21 P172504J75.48 Simultaneous with the submission of such amended quarterly percentage returns, Petitioner filed with the Respondent at 2:34 p.m. of the same day, the corresponding written claim for tax refund or credit of the above mentioned overpaid GR T in the aggregate amount ofP.17,504,775.48. Later at 4:35 p.m. of even date, it likewise filed the instant petition for review before this Court allegedly on the ground that the recovery of the portions of its claim for refund for the period covering quarters ending June 30, 1994 and September 30, 1994 were about to be barred judicially when reckoned with the two-year prescriptive period for claiming such refund from date of payment of the tax, as provided under Section 230 of the old Tax Code, as amended. At bar, Petitioner reasserts its stance a quo. On the other hand, Respondent avers, inter alia, the following special and affirmative defense, to wit:

- 3 - 7.

Petitioner's allegation that it erroneously and excessively paid its gross receipts taxes during the quarters under review does not ipso facto warrant refund/credit. Petitioner must prove that the exclusions claimed by it from its gross receipts are allowable exclusions under the Tax Code and its pertinent implementing rules and regulations. Moreover, the san1e must be supported by evidence. Records show that both parties filed their respective memorandum. Petitioner merely reiterated its assertions while Respondent asseverated a new line of reasoning. He contends, inter alia, that the case of Collector of Internal Revenue vs. Manila Jockey Club, 1 08 Phil. 821, cited in the Asian Bank Corporation case, supra, is not applicable because it dealt on gross receipts of a proprietor of an amusement place and not to a banking institution such as the Petitioner in the instant case; and that, the term 'gross earnings' which is synonymous to the term 'gross receipts' is defined as 'the entire earnings, receipts, or the like, under consideration, without any deduction', citing Words & Phrases, 1956 Ed., p. 482. Respondent further contends as bereft of factual and legal basis the reliance of the Asian Bank Corporation case, supra, upon the provisions of Section 4( e) of Revenue Regulations No. 12-80 which declares in part that the rates of taxes to be imposed on the gross receipts of banking institutions shall be based only on all items of income actually received. He argues that it is erroneous to infer that the questioned items of income (20% final taxes) were not actually received by the petitioner because in the first place, no final tax can be withheld therefrom if such items of income were not actually received by it. Moreover, Respondent observes that under the clear language of Section 7(b) of the same Revenue Regulations No. 12-80, the 20% final withholding tax paid by the withholding agent on the interest income received by the Petitioner cannot be deducted or credited against the latter's income or any other taxes, including its gross receipts tax liabilities.

lGO

-4- The sole issue to be adjudicated in this case is whether or not Petitioner is legally and factually entitled to its claim at bar for tax refund or credit of overpaid gross receipts taxes.

After a painstaking scrutiny of the attending facts, the disquisition of the parties and the laws and jurisprudence in point, this Court rules in favor of the Petitioner, albeit on a reduced amount.

The legal aspect of petitioner's claim for refund is not a case of first impression. As adverted to above, the case of Asian Bank Corporation vs. Commissioner of Internal Revenue, CTA Case No. 4720 promulgated on January 30, 1996\ has already enunciated the rule that the 20% final taxes already withheld by various withholding agents on the passive income of banks and non-banking intermediaries are to be excluded in the computation of the latter's obligation on the payment of gross receipts tax. We do not intend to depart from the wisdom of said case which is hereunder quoted, to wit: "The assessment for GRT is based on Section 119 of the Tax Code, quoted hereunder thus: SEC. 119.

Tax on banks and non-bank financial intermediaries.

- There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: As well as in the later cases of Equitable Banking Corporation vs.

Commissioner of Internal Revenue, CTA Case No. 4720, January 20, 1996; China Banking Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5433, October 7, 1998; AB Leasing and Finance Corpor tion vs. Commissioner of Internal Revenue, CTA Case No. 5432, April 7, 1999; AB Capital Investment Corporation vs. Commissioner of Internal Revenue, CT A Case No.

5436, April 7, 1999;

BPI Family Savings Bank, Inc.

vs.

Commissioner of Internal Revenue, CTA Case No. 5456, April 7, 1999; Standard Chartered Bank - Manila Branch vs. Commissioner of Internal Revenue, CTA Case No. 5435, July 12, 1999; Equitable Banking Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5460, August 6, 1999 etc.

161

- 5- (a) On interest, commiSSions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived. Short-term maturity not in excess of two m 5% Medium-term maturity-over two years but not exceeding four (4) years 3% Long-term maturity:

(i) Over four (4) years but not exceeding seven (7) years 1% (ii) Over seven (7) years 0% (b) On dividends 0% (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 28 of this Code 5% Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be applied accordingly. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities. The aforequoted provision of the law speaks of gross receipts as the basis of the 5% bank tax or GRT, and it is petitioner's contention that the interest income included as part of such gross receipts should be computed minus the final tax already withheld by various withholding agents for the reason that such amount did not actually go to its funds, hence was not actually received by them. We agree with the petitioner that the 20% final withholding tax on its interest income should not form part of its taxable gross receipts. XXX XXX 1 ,.:· f' u XXX

- 6- This conclusion is in accord with the interpretation of the Supreme Court in the case entitled Collector of Internal Revenue vs. Manila Jockey Club, 108 Phil. 821, as quoted by this Court in disposing of a similar issuk in the case entitled Campania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated November 14, 1996, thus: I.n the second place, the highest tribunal of the land interpreted the term: "gross receipts" to mean all receipts of a taxpayer excluding those which have been especially earmarked by law or regulation for the government or some person other than the taxpayer. Thus, it was held: "xx xx. The Goverrunent could not have meant to tax as gross receipt of the Manila Jockey Club the l% which it directs same Club to tum over to the Board of Races.

The latter being a Government institution, there would be double taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the Government could not have intended to consider as gross receipt the portion of the funds which it directed the Club to give, or know the Club would give, to winning horses and Jockeys- admitted 5%. It is true that the law says that out of the total wager funds 12 l% shall be set aside as the 'commission' of the track owners but the law itself takes official notice, and virtually approves or directs payment of the portion that goes to owners of horses as prized and bonuses of jockeys, which portion is admittedly 5% out of the 12l% commission. As it did not at that time contemplate the application of 'gross receipts' revenue principle, the law in making a distribution of the total wager funds, took no trouble of separating one item from the other; and for convenience, grouped three items under one common denomination. "Needless to say, gross receipts of the proprietor of the amusement place should not include any money which although delivered to the amusement place has been especially earmarked by law or regulation for some person other than the proprietor." (The Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. G.R. Nos. L-13890 and L-13887, June 30, 1960) It is to be noted that, under Section 260 of the Tax Code, a race-track is subject to an amusement tax of 20% of its gross receipts and the term 'gross receipts' embraces all the receipts of the proprietor, lessee, or operator of the

- 7- amusement place." Notwithstanding the broad and all-embracing definition of the term "gross receipts" found in our amusement tax law, our Supreme Court did not adopt a literal interpretation of the said term in the case of the Manila Jockey Club, Inc., supra." In fact this aforequoted ruling was affirmed by the Court of Appeals in the case entitled Commissioner of Internal Revenue vs. Citytrust Investment Philippines, Inc., CA- G.R. SP No. 52707, dated August 17, 1999 when it ruled, thus: "Accordingly, the 20% final tax withheld against the Respondent's passive income was already remitted to the Bureau of Internal Revenue for the corresponding year that the same was actually withheld and considered final withholding taxes under Section 50 of the same code. Indubitably, to include the same to the Respondent's gross receipts for the year 1994 would be to tax twice the passive income derived by the Respondent for the said year, which would constitute double taxation anathema to our taxation laws. With the legal milieu of this case having been settled already, We now go into the examination of the exhibits adduced in evidence by the petitioner. Pursuant to CTA Circular No. 1-95, as amended, Petitioner availed of the independent audit services of Sycip, Gorres, Velayo & Co. (SGV), an accounting finn, through the person of Mr. Ruben R. Rubio, who was thereupon commissioned by this Court to submit a special audit report on Petitioner's evidence on its passive interest income for the quarters involved, namely: Floating Rate Treasury Notes (FRTN), Passive Securities & Commercial Papers (PSCP), Landbank/MWSS Bonds, Long Term Commercial Papers (L TCP), Finman Capital, Treasury Bonds, Central Bank Bills & Treasury Bills.

Per audit, SGV reduced the amount of claim for tax refund or credit from the original amount of !217,504,775.48 to only ¥14,177,273.74. The difference was attributed to lack of supporting documents and discrepancy with regard to the amount of interest income.

- 8- Based on its own examination, this Court readily concurs with the report of SGV, except for some adverse findings which necessitate disallowance. For the quarters ended June 30, 1994, September 30, 1994, December 31, 1994 and March 31, 1996, Petitioner failed to present the Certificates of Final Tax Withheld in order to prove the fact that the 20% final tax on its passive income from Landbank Bonds, PSCP, and Central Bank Bills and Treasury Bills were included in its quarterly percentage tax returns. It likewise failed to submit any kind of evidence at all for its passive income from L TCP for the quarter ended March 31, 1996. Due to these insufficiency or lack of evidence, the portions of Petitioner's claim for refund or tax credit corresponding to said commercial papers and taxable quruters were disallowed corresponding! y.

Overall, the total disallowance as found by this Court amounts to !2391,860.362, as follows:

PERIOD COVERED

PER SGV

(Quarter Ended) VERIFICATION June 30, 1994 September 30, 1994 December 31, 1994 March 3 1 , 199 5 June 30, 1995 September 30, 1995 December 31, 1995 March 31, 1996 p 1,656,358.01 1,690,454.4 7 1,533,480.21 1,770,291.04 2,252,406.94 2,358,688.55 1,410,149.87 1,505,444.65 !214.177.273.74

PER COURT'S

VERIFICATION l2 1,525,606.94 1,679,702.34 1,460,839.74 1,770,291.04 2,252,406.94 2,358,688.55 1,410,149.87 1,327,727.96 !!13.785.413.38 DIFFERENCES/ EXCEPTION !!130,751.07 10,752.13 72,640.47 177,716.69 !2391.860.36 Hence, Petitioner is only entitled to the amount of P13,785,413.38, after deducting therefrom the said amount of disallowance from !!14,177,273.74, the amount arrived at by SGV.

Please see annex A for details.

- 9-

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, Respondent is hereby ORDERED to ISSUE a TAX CREDIT CERTIFICATE in the amount of ¥13,785,413.38 to the Petitioner immediately.

/12 L

MON O.DEV Associate J ud (Dissenting) AMANCIO Q. SAGA Associate Judge CERTIFICATION  . ERNESTO D. ACOSTA Presiding Judge I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in a-cordance with Section 13, Article VIII of the Constitution.

lQ  ERNESTO D. ACOSTA Presiding Judge PHILIPPINE NATIONAL BANK VS. CIR

SCHEDULE OF FINAL AND GROSS RECEIPTS TAXES

FOR THE PERIOD APRIL 01, 1994 TO MARCH 31, 1996 A. SECOND QUARTER ENDED JUNE 30, 1994 SECURITIES FINMAN LANDBANK PSCP/LTCP TREASURY BONDS FRTN

CB BILLS

T BILLS

TOTALS

PER SGV VERIFICATION

20% Final Tax 891,193.27 354,723.23 2,313,319.32 17,576.71 2,720,396.32 278,127.61 26,551 823.78 33,127,160.24

5% GRT

44,559.66 17,736.16 115,665.97 878.84 136,019.82 13,906.38 1,327,591.18 1,656,358.01 B. THIRD QUARTER ENDED SEPTEMBER 30, 1994 SECURITIES FINMAN LANDBANK TREASURY BONDS FRTN

CB BILLS

T BILLS

TOTALS

PER SGV VERIFICATION

20% Final Tax 880,816.83 324,726.27 18,059.59 1,068,962.95 215,042.52 31,301,481.21 33,809,089.37

5% GRT

44,040.84 16,236.31 902.98 53,448.15 10,752.13 1,565,074.06 1,690,454.47 880,816.83 324,726.27 18,059.59 1,068,962.95 31,301,481.21 33,594,046.85 9 }

A&G 1

PER COURT'S VERIFICATION

20% Final Tax 5% GRT 891,193.27 44,559.66 354,723.23 17,736.16 17,576.71 878.84 2,720,396.32 136,019.82 254,553.21 12,727.66 26,426,480.23 1,321,324.00 30,664,922.97 1,533,246.14

PER COURT'S VERIFICATION

20% Final Tax

5% GRT

44,040.84 16,236.31 902.98 53,448.15 1,565,074.06 1,679, 702.34

ANNEX A

DIFFERENCE/ EXCEPTION

20% Final Tax 5% GRT 2,313,319.32 115,665.97 23,574.40 1,178.72 125,343.55 6,267.18 2,462,237.27 123,111.87

DIFFERENCE/ EXCEPTION

20% Final Tax 5% GRT 215,042.52 10,752.13 215,042.52 10,752.13 C. FOURTH QUARTER ENDED DECEMBER 31, 1994 SECURITIES

PER SGV VERIFICATION

PER COURT'S VERIFICATION

DIFFERENCE/ EXCEPTION

20% Final Tax

5% GRT

20% Final Tax

5% GRT

20% Final Tax

5% GRT

FIN MAN

685,125.88 34,256.29 685,125.88 34,256.29

LAND BANK

295,896.52 14,794.83 295,896.52 14,794.83 TREASURY BONDS 17,769.86 888.49 17,769.86 888.49 PSCP 726,072.50 36,303.63 726,072.50 36,303.63 LTCP 846,178.27 42,308.91 846,178.27 42,308.91 FRTN 712,249.13 35,612.46 712,249.13 35,612.46

CB BILLS

726,736.83 36,336.84 726,736.83 36,336.84

T BILLS

26,659,575.16 1,332,978.76 26,659,575.16 1,332,978.76 TOTALS 30,669,604.15 1 ,533,480.21 29,216,794.82 1,460,839.74 1,452,809.33 72,640.47 D. FIRST QUARTER ENDED MARCH 31, 1995 SECURITIES

PER SGV VERIFICATION

PER COURT'S VERIFICATION

DIFFERENCE/ EXCEPTION

20% Final Tax

5% GRT

20% Final Tax 5%GRT 20% Final Tax

5% GRT

FIN MAN

791,872.76 39,593.64 791,872.76 39,593.64 LANDBANK 339,320.07 16,966.00 339,320.07 16,966.00 TREASURY BONDS 17,093.84 854.69 17,093.84 854.69 PSCP 2,392,484.43 119,624.22 2,392,484.43 119,624.22 LTCP 1 ,491,418.28 74,570.91 1,491,418.28 74,570.91 FRTN 2,661 ,405.13 133,070.26 2,661,405.13 133,070.26

CB BILLS

175,125.91 8,756.30 175,125.91 8,756.30

T BILLS

27,537,100.37 1 ,376,855.02 27,537,100.37 1 ,376,855.02 TOTALS 35,405,820.79 1,770,291.04 35,405,820.79 1,770,291.04 J.t,u E. SECOND QUARTER ENDED JUNE 30, 1995 SECURITIES LANDBANK TREASURY BONDS PSCP LTCP FRTN

CB/T BILLS

TOTALS

PER SGV VERIFICATION

20% Final Tax 385,407.19 17,576.71 3,816,607.01 1,824,162.46 5,103,000.43 33,901,385.05 45,048, 138.85

5% GRT

19,270.36 878.84 190,830.35 91,208.12 255,150.02 1,695,069.25 2,252,406.94 385,407.19 17,576.71 3,816,607.01 1,824,162.46 5,103,000.43 33,901,385.05 45,048, 138.85 F. THIRD QUARTER ENDED SEPTEMBER 30, 1995 SECURITIES LANDBANK TREASURY BONDS PSCP LTCP FRTN

CB BILLS

T BILLS

TOTALS

PER SGV VERIFICATION

20% Final Tax 466,141.22 18,059.59 2,303,415.05 1,060,588.62 13,280,937.49 169,242.60 29,875,386.49 47,173,771.06

5% GRT

23,307.06 902.98 115,170.75 53,029.43 664,046.87 8,462.13 1,493, 769.33 2,358,688.55 466,141.22 18,059.59 2,303,415.05 1,060,588.62 13,280,937.49 169,242.60 29,875 ,386.49 47,173,771.06 Loy

PER COURT'S VERIFICATION

20% Final Tax

5% GRT

19,270.36 878.84 190,830.35 91,208.12 255,150.02 1,695,069.25 2,252,406.94

PER COURT'S VERIFICATION

20% Final Tax

5% GRT

23,307.06 902.98 115,170.75 53,029.43 664,046.87 8,462.13 1,493,769.33 2,358,688.55

DIFFERENCE/ EXCEPTION

20% Final Tax 5% GRT

DIFFERENCE/ EXCEPTION

20% Final Tax 5% GRT G. FOURTH QUARTER ENDED DECEMBER 31, 1995 SECURITIES

PER SGV VERIFICATION

PER COURT'S VERIFICATION

DIFFERENCE/ EXCEPTION

20% Final Tax 5%GRT 20% Final Tax 5%GRT 20% Final Tax 5%GRT

LAND BANK

684,048.24 34,202.41 684,048.24 34,202.41 TREASURY BONDS 17,769.85 888.49 17,769.85 888.49 PSCP 2,862,509.83 ..

143,125.49 2,862,509.83 143,125.49 LTCP 1,061,878.14 53,093.91 1,061,878.14 53,093.91 FRTN 6,886,611.63 344,330.58 6,886,611.63 344,330.58

CB BILLS

136,622.01 6,831.10 136,622.01 6,831.10

T BILLS

16,553,557.73 827,677.89 16,553,557.73 827,677.89 TOTALS 28,202,997.43 1,410,149.87 28,202,997.43 1,410,149.87 H. FIRST QUARTER ENDED MARCH 31, 1996 SECURITIES

PER SGV VERIFICATION

PER COURT'S VERIFICATION

DIFFERENCE/ EXCEPTION

20% Final Tax 5%GRT 20% Final Tax 5%GRT 20% Final Tax 5%GRT

LAND BANK

794,217.66 39,710.88 794,217.66 39,710.88 TREASURY BONDS 17,286.99 864.35 17,286.99 864.35 PSCP 3,959,912.44 197,995.62 1, 7 48,536.24 87,426.81 2,211,376.20 110,568.81 LTCP 446,794.33 22,339.72 446,794.33 22,339.72 FRTN 8,142,900.19 407,145.01 8,142,900.19 407,145.01

CB BILLS

168,552.94 8,427.65 66,607.35 3,330.37 101,945.59 5,097.28

T BILLS

16,579,228.39 828,961.42 16,579,228.39 828,961.42 TOTALS 30,108,892.94 1,505,444.65 18,411,658.97 1,327,727.96 3,554,333.78 177,716.69 170