St. Lukes Medical Center, Inc. vs. Commissioner of Internal Revenue

AMENDED DECISION

PALANCA-ENRIQUEZ, J..:

For consideration of this Court are:

l.a) respondent Commissioner of Internal Revenue's

("CIR") "Motion for Partial Reconsideration"

of the Decision dated November 21, 2008 filed on December 11, 2008; and b) petitioner St. Luke's Medical Center, Inc.'s (hereafter "St.

Luke's")

"Opposition to

45J

Respondent's Motion for Reconsideration" filed on January 5, 2009;

2.a) petitioner St.

Luke's "Motion for Partial

Reconsideration"

of the

Decision

dated November 21, 2008 filed on December 11, 2008;and b) respondent CIR's "Opposition [Re: Motion for Reconsideration]" filed on January 16, 2009. 2 On March 19, 2009, we issued a Resolution granting petitioner St. Luke's leave of court to present additional documentary evidence. In the meantime, action on both petitioner St. Luke's "Motion for Partial

Reconsideration"

and respondent

CIR's

"Motion for

Partial

Reconsideration" was held in abeyance.

Petitioner St. Luke's presented Romeo B. Mary, its Accounting Manager, Cleofe A. Tanghal, Senior Assistant Vice President, Financial Control Division of Security Bank Corporation, Theresita S. Cruz, Branch Manager of Banco de Oro - New Manila, E. Rodriquez Branch, Monina J. Delarmente, Business Manager of Security Bank - Ermita Branch, Josephine R. Ramos, Senior Manager of Asiatrust Bank, N~

3 Manila Branch, Analiza C. Oblenida, Business Manager of Security Bank, E. Rodriquez Branch, and Suzette· L. Garcia, Branch Manager of SM Makati Branch, as witnesses, and documentary evidence, marked as Exhibits "E-1 ", "F-1" "KK" "ZZZ", "CCCC-1-MR" to "CCCC-8-MR ", "DDDD-MR" to "0 12-1-MR ", inclusive of their submarkings, which were all admitted in a Resolution dated February 17, 2010. Upon manifestation of respondent's counsel that he will no longer present controverting evidence on petitioner's "Motion for Partial Reconsideration", both parties were granted fifteen days from notice within which to file their simultaneous memoranda, afterwhich both Motions for Partial Reconsideration shall be deemed submitted for resolution.

Both parties having filed their respective "Memorandum" · ' petitioner St. Luke's "Motion for Partial Reconsideration" and respondent CIR' s "Motion for Partial Reconsideration" were deemed submitted for resolution on March 23, 2010.

Respondent CIR's Motion for Partial Reconsideration

and Petitioner St. Luke's

Opposition

45 5

4

A

perusal of respondent CIR' s "Motion for

Partial

Reconsideration" shows that no novel issues were presented by the movant. Considering that the issues raised in respondent CIR' s "Motion for Partial Reconsideration" had already been sufficiently passed upon and threshed out in the decision sought to be reconsidered, we find no justification to compel a modification or reversal of our decision dated November 21, 2008.

Petitioner

St.

Luke's

Motion

for

Partial

Reconsideration

and

Respondent

CIR's

Opposition

In its "Motion for Patiial Reconsideration", petitioner St. Lukes argues that the other income for taxable year 2001 in the amount of P50,269,932.00 is mainly interest income, wherein the corresponding final taxes thereof had been withheld. While the other income for taxable year 2002 in the amount of P41,929,802.00 consists mainly of interest income and foreign exchange gain, wherein the corresponding final taxes on interest income had been withheld, and the foreign exchange gain was reflected merely for financial reporting purposes, pursuant to the financial 45r;

5 accounting standard, and did not anse from any actual conversiOn or foreign exchange transaction.

Other Income for Taxable Year 2000

At the outset, it must be stressed that in petitioner St. Luke's "Motion for Partial Reconsideration", petitioner did not assail this Court's findings as to petitioner's tax liability for taxable year 2000. Hence, as regards our Decision dated November 21, 2008 finding petitioner liable for deficiency income tax in the amount ofP711,996.45, the same stands.

Other Income for Taxable Year 2001

As regards petitioner St. Luke's other income for taxable year 2001, petitioner's witness, Romeo B. Mary, on direct examination testified that petitioner's other income subjected to ordinary income tax in the amount of P50,269,932.00 for taxable year 2001 consists of the following:

Taxable Year 2001

Amount

Interest Income

P53,061,434.00

Income Constructively Received

1,264,310.00

Foreign Exchange Gain (Loss)

( 4,169 ,421.00)

Others-net

113,609.00

Total

P50,269,932.00 (Exhibit "N 12-MR ", Original Docket Vol. III, p. 1520) 45 7

6 Romeo B. Mary further testified that the interest income for taxable .

.

year 2001 in the amount of P53,061,434.00 consists of various deposits from the following banks:

Bank

Source of Interest Income

Amount

Asia Trust

Peso Savings

P48,738.07

Equitable PCI/Banco de Oro

Peso Savings

31,174.96

United Coconut Planters Bank

Various

Savings,

Time

Deposit, Peso and Dollar

Denominated

17,994,777.77

Security Bank Corporation

Various

Savings,

Time

Deposit, Peso and Dollar

Denominated

14,080,509.20

Sub-total

P32,155,200.00

Bank of the Philippine Islands

Peso Savings

526,681 .68 Income from Trust Fund 1,991,893.71

Dollar Time Deposit

1,346,776.27

International

Exchange

Bank/Union Bank

Peso Savings

570,691.46

Peso

Money

Market

Placement

6,705,958.97

Peso

Money

Market

Placement - UN Branch

1,846,783.57

Dollar Time Deposit

2,034,152.31

Banco de Oro - Makati

Peso

Money

Market

Placement

523,670.66

Sub-total

P15,546,608.63

Grand Total

P47,701,808.63 (Exhibit "N 12-MR ", Original Docket Vol. III, pp. 973-975) A perusal of the documentary evidence presented by petitioner St. Luke's, Exhibits "KK' ', "MM", "DDDD-MR ", "X10-MR ", "Qll-MR ", "NNN" to "RRR " "UUU" to "YYY" "K 7-l-MR " "K 7-2-MR " ":f5- , ' ' ' MR " to "W-MR " "N5-MR" to "W5-MR " "CCCC-1-MR " to "CCCC-8- , .• ... "

4J .J

7 MR ",

"FFFF-MR " to

"YYYY-MR" shows that the amount of P4 7, 701,818.63 consists of interest income from various banks deposits. Pursuant to the testimony of petitioner St. Luke's banks witnesses (FSN dated July 15, 2009, pp. 15-57) and the corresponding Certifications issued by Asia Trust Bank, Equitable PCI/Banco de Oro, United Coconut Planters Bank and Security Bank (Exhibits "KK", "DDDD ", "X10-MR ", and "Q11-MR "), and various passbooks and certificates of deposits presented by petitioner, the corresponding final withholding taxes of the interest income of P47,701,818.63 had been withheld by the· dep.ository banks, and remitted to the BIR Hence, out of the alleged interest income of P53,061 ,434.00, petitioner was able to prove that the amount of P47,701,818.63 was indeed interest income from various bank deposits, which had been subjected to final withholding taxes. Under Revenue Regulations 17-84, interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositor's/investor's income tax liability in accordance with Section 32 of the NIRC of 1997, as amended (Section 7(a), thereof) . Accordingly, the amount of P47,701,818.63 is hereby excluded from the gross income of

8 petitioner for purposes of computing the ordinary corporate income tax, pursuant to the last paragraph of Section 30 of the NIRC of 1997, as amended.

As to mcome constructively received, petitioner St. Luke's contends that the same should not be included for purposes of computing the ordinary corporate income tax, pursuant to the last paragraph of Section 30 of the NIRC of 1997, as amended, as said income had already been subjected to final tax in the form of fringe benefit tax. Petitioner's contention is devoid of merit. While a fringe benefit tax is a final tax, it is not petitioner that is being subjected to final withholding tax, but its employees, who are recipients of said fringe benefit. Under the fringe benefit system, petitioner is constituted as a withholding agent of the fringe benefit tax. The fact that petitioner is constituted as a withholding agent of said fringe benefit tax does not make, however, the income constructively realized by petitioner from the grant of fringe benefit not subject to ordinary corporate income tax, as p~titioner failed to prove that said income is exempt from the imposition of ordinary corporate income tax.

9 Records show that the income constructively received by petitioner for the year 2001 in the amount of P 1,264,310.00 consists of interest income earned from loans granted to its executives at less than market rate (Exhibits "X3-3-MR " to "Z3-3-MR ", "A9-3-MR "). Under Section 32 of the NIRC of 1997, as amended, "Gross income means all income derived from whatever source, including (but not limited to) the following items: xxx ( 4) interests". In the case of Commissioner of Internal Revenue vs. Japan Air Lines, Inc. , 202 SCRA 455, the Supreme Comi ruled that the words 'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws. Petitioner having failed to prove that said interest income constructively received from the grant of fringe benefit is not exempt from the taxable income; the same is, therefore, subject to ordinary corporate income tax.

However, as regards the foreign exchange loss of P4,169,421.00, considering that the same was reflected in petitioner's Audited Financial Statement merely for financial reporting purposes, pursuant to the Financial Reporting Standards and no actual loss was incurred by petitioner, then the same cannot be deducted for purposes of computing \J tZ6 !

10 the corporate income tax on petitioner's other income under the last paragraph of Section 30 ofthe NIRC of 1997, as amended. On the basis of the foregoing, petitioner is liable for deficiency income tax on its non-operating activity for taxable year 2001, pursuant to the last paragraph of Section 30 of the NIRC of 1997, as amended, computed, as follows:

Non-operating and other income

Amount

Interest income which petitioner failed to account and failed to prove that had been subjected to final withholding tax (P53,061,434.00- P47,701,818.63) P5,359,625.37

Income Constructively Received

1,264,310.00

Others-net

113~609.00

Total Non-operating and Other Income

P6,737,544.37 Tax rate 32% Tax due P2, 156,014.20 Surcharge (Sec. 248, NIRC) 25% 539,003.55 Deficiency interest (Sec. 249, NIRC) 20% 665,115.62

Tax Due

P3,360,133.37

Other Income for Taxable Year 2002

Petitioner's witness, Romeo B. Mary, on direct examination further testified that petitioner's other income subjected to ordinary income tax in the amount of P41,929,802.00 for taxable year 2002 consists of the following:

462

11

Taxable Year 2002

Amount

Interest Income

P23,249, 174.00

Income Constructively Received

250,306.00

Foreign Exchange Gain (Loss)

16,731,724.00

Others-net

1,698,598.00

Total

P41,929,802.00 (Exhibit "N12-MR ", Original Docket Vol. III, p. 1528) Romeo B. Mary also testified that the interest income for taxable year 2002 in the amount of P23,249,174.00 consists of various deposits from the following banks:

Bank

Source of Interest Income

Amount

Asia Trust

Peso Savings

P21 ,599.25

Equitable PCI/Banco de Oro

Peso Savings

69,705 .53

United Coconut Planters Bank

Various

Savings,

Time

Deposit, Peso and Dollar

Denominated

2,687,477.05

Security Bank Corporation

Various

Savings,

Time

Deposit, Peso and Dollar

Denominated

9,175,353.03

Sub-total

P11,954,134.86

Bank of the Philippine Islands

Peso Savings

98,921.49

Peso

Money

Market

Placement

2,298,887.96 Investment Income from

Government Securities

201,960.90

Dollar Time Deposit

2,027.15

International

Exchange

Bank/Union Bank

Peso Savings .· 275,622.35

Peso

Money

Market

Placement

1,451,575.44

Peso

Money

Market

Placement - UN Branch

3,000,546.53

Dollar Time Deposit

891,990.46

Banco de Oro - Makati

Peso

Money

Market

Placement

299,269.67

Sub-total

Grand Total

12 .

.

P8,520,801.95 P20,474,936.81 (Exhibit "N 12-MR ", Original Docket Vol. III, pp. 1529-1531) A perusal of the documentary evidence presented by petitioner, Exhibits "LL ", "EEEE-MR ", "Q 11-MR ", "X 1 0-MR ", "AAA " to "KKK", "MMM" to "ZZZ ", "MM" to "NN", "00 ", "SS " to "ZZ", "K 7 ", "A6- MR " to "Q6-MR ", "W-1-MR " to "W-4-MR ", "X5-MR " to "Z5-MR ", "B5-MR " to "C5-MR ", "F-MR " to "G5-MR ", "J5-MR " to "K5-MR ", "P-MR " to "Y'-MR ", and "Z-MR " shows that the amount of P20,474,936.81 consists of interest income from various banks deposits. Pursuant to the testimony of petitioner St. Luke's banks witnesses (TSN dated July 15, 2009, pp. 1 5-57) and the corresponding Certifications issued by Asia Trust Bank, Equitable PCI/Banco de Oro, United Coconut Planters Bank and Security Bank (Exhibits "LL ", "EEEE", "X 0-MR ", and "Q11-MR "), and various passbooks and certificates of deposits presented by petitioner, the corresponding final withholding taxes of the interest income of P20,474,936.81 had been withheld by the depository banks, and remitted to the BIR Hence, out ofthe alleged interest income ofP23,249,174.00, petitioner was able to prove that the amount of P20,474,936.81 was indeed interest income from various bank deposits, which had been

13 subjected to final withholding taxes. Under Revenue Regulations 17-84, interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositor's/investor's income tax liability pursuant to Section 32 of the NIRC of 1997, as amended (Section 7(a), thereof). Accordingly, the amount of P47,701,818.63 is hereby excluded from the gross income of petitioner for purposes of computing the ordinary corporate income tax, pursuant to the last paragraph of Section 30 of the NIRC of 1997, as amended.

As regards the income constructively received in the amount of P250,306.00, for the same reason discussed above, petitioner having failed to prove that the interest income constructively received from the grant of fringe benefit is not exempt from taxable income; the same is, therefore, subject to ordinary corporate income tax. As regards the foreign exchange gain of P16,731,724.00, considering that the same was reflected in petitioner's Audited Financial Statement merely for financial reporting purposes, pursuant to the Financial Reporting Standards, and considering that no actual gain was

14 realized by petitioner, and the settled rule that one of the elements in the imposition of income tax is when profit is realized or received actually or constructively (Commissioner of Internal Revenue vs. Court of Appeals, 301 SCRA 181); then the foreign exchange gain of Pl6,731,724.00 shall not be subjected to corporate income tax for purposes of computing the income tax liability on petitioner's other income under the last paragraph of Section 30 of the NIRC of 1997, as amended. For all the foregoing, petitioner, therefore, is liable for deficiency income tax on its non-operating activity for taxable year 2002, pursuant to the last paragraph of Section 30 of the NIRC of 1997, as amended, computed, as follows:

Non-operating and other income Interest income which petitioner failed to account and failed to prove that had been subjected to final withholding tax (P23,249,174.00- P20,474,936.81)

Income Constructively Received

Others-net

Total Non-operating and Other Income

Tax rate Tax due Surcharge (Sec. 248, NIRC) 25% Deficiency interest (Sec. 249, NIRC) 20%

Tax Due

Amount

P2,774,237.19 250,306.00 1,698,598.00 P4,723,141.19 32% P1 ,5 11,405.18 377,851.30 163,977.11 P2,053,233.59 !6r 4 )

15 In sum, petitioner is liable for deficiency income tax from its non- operating activity, pursuant to the last paragraph of Section 30 of the NIRC of 1997, as amended, in the total reduced amount ofP6,125,363.40, broken down as follows:

Taxable Year

Amount

2000 P711,996.45 2001 3,360,133.36 2002 2,053,233.59

Total Deficiency Income Tax

P6,125,363.40

WHEREFORE, premises considered:

1) respondent Commissioner of Internal Revenue's "Motion for Partial Reconsideration" is hereby DENIED for lack of merit; and 2) petitioner St. Luke's "Motion for Partial Reconsideration" is hereby PARTLY GRANTED.

Accordingly, the dispositive portion of our Decision dated November 21, 2008 is hereby amended to read, as follows:

"WHEREFORE, premises considered, the present Petition For Review is PARTIALLY GRANTED. Petitioner St. Luke's Medical Center, Inc. is hereby ORDERED to pay only the amounts of SEVEN HUNDRED ELEVEN

THOUSAND NINE HUNDRED NINETY SIX AND

451100 PESOS (P711 ,996.45) for deficiency income tax for taxable year 2000; THREE MILLION THREE HUNDRED

SIXTY THOUSAND ONE HUNDRED THIRTY THREE

AND 36/100 PESOS (P3;360,133.36) for deficiency income tax for taxable year 2001; and TWO MILLION FIFTY 46 7

THREE THOUSAND TWO HUNDRED THIRTY THREE

AND 59/100 PESOS (P2,053,233.59) for deficiency income tax for taxable year 2002; or the total amount of SIX

MILLION ONE HUNDRED TWENTY FIVE THOUSAND

THREE HUNDRED SIXTY THREE AND 40/100 PESOS

(P6,125,363.40).

In addition, petitioner is hereby ORDERED to pay respondent 20% delinquency interest per annum on the total amount of P6,125,363.40 counted from October 30, 2003 until full payment thereof, pursuant to Section 249 (C) of the NIRC of 1997, as amended.

WE CONCUR:

~~ C. ~d.. Q .

JtJANITO c. CASTANED"A, JR.

Associate Justice

~~-e~

OLGA PALANCA-ENRIQUEZ

Associate Justice

ATTESTATION

16 I attest that the conclusions in the above Amended Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

9u~s- 0 . ~~ Q.

JtfANITO C. CASTANEDA( i:R.

Associate Justice

Chairperson

46 3

CERTIFICATION

17 Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Amended Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~~.~ ERNESTO D. ACOSTA

Presiding Justice

468