Sonoma Services, Inc. vs. Commissioner of Internal Revenue

DECISION

FASON-VICTORINO, J.:

This Petition for Review involves a claim for refund in the amount of P3,911,850.00, of allegedly excess and unutilized creditable withholding taxes

(CWT)

for the calendar year (CY) ended December 31, 2010 filed by petitioner Sonoma Services, Inc. Petitioner is a duly organized domestic corporation, with principal office located at 35th Floor, Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. It was incorporated for the primary purpose of carrying on and conducting general services business with any party, including the rendering of management and allied services within the limits allowed by law, including office and clerical support services of any kind, or otherwise, to engage in any preservation, maintenance or repair work upon any and / every kind of property, to enter into and execute contracts or relating thereto 1• Petitioner is a registered taxpayer of Bureau of Internal Revenue (BIR) Revenue Region No. 8, Revenue District Office (RDO) No. 50 with Taxpayer Identification No. 220- 868-954-000. 2 On the other hand, respondent is the Commissioner of the Bureau of Internal Revenue (BIR), with authority, among others, to decide, approve and grant refunds or tax credits of overpaid and erroneously paid or collected internal revenue taxes, with office at the BIR National Office Building, Diliman, Quezon City.

On April 15, 2011, petitioner filed its Annual Income Tax Return (ITR) for CY 20103 with the BIR though the Electronic Filing and Payment System (EFPS), indicating therein its choice for refund of its excess and unutilized CWT

for CY 20104 •

On December 6, 2011, petitioner filed with the BIR RDO No. 50 an administrative claim for refund of the excess and unutilized CWT for CY 2010 in the amount of P3,911,850.005• On April 12, 2013, petitioner filed the instant Petition for Review anchored on alleged inaction of respondent. On June 11, 2013, respondent filed her Answer6 , praying for the dismissal of the instant Petition for lack of basis. As special and affirmative defenses, respondent avers that petitioner's administrative claim for refund is still pending with BIR which should be given the opportunity to investigate and confirm the veracity of subject claim, before it grants the refund . Moreover, it does not appear from petitioner's documents that the tax subject of refund was /

erroneously or illegally collected. Likewise, petitioner must establish that it did not carry-over its 2010 alleged unutilized creditable withholding taxes to the succeeding taxable quarters/years, lest it is precluded from claiming a cash refund/tax credit of its alleged excess tax credit for taxable year 2010.

Respondent

also invokes the presumption that taxes paid and collected are made in accordance with the law and regulations, and that claim for refund partakes the nature of an exemption, hence, must be construed strictly against the claimant. Finally, the burden of proof rest upon petitioner to establish its entitlement to the relief sought.

After the pre-trial conference, the parties submitted their Joint Stipulation of Facts and Issues7 on August 28, 2013.

During the trial, petitioner presented two witnesses, namely, its Financial Accountant Vanessa Maturana-Besas and

Independent

Certified

Public

Accountant

(ICPA)

Katherine 0. Constantino.

In her Judicial Affidavit8, Vanessa Maturana- Besas declared that as petitioner's Financial Accountant, she handles petitioner's tax compliance, including the preparation of its tax returns and other financial reports since 2003.

She confirmed that petitioner was incorporated for the primary purpose of carrying on and conducting general services business with any party, including the rendering of management and allied services within the limits allowed by law, including office and clerical support services of any kind, or otherwise, to engage in any preservation, maintenance or repair work upon any and every kind of property, to enter into and execute contracts or relating thereto.

For CY 2010, petitioner had gross revenues of P45,500,000.00 and non-operating and taxable other j income of P¹,865, 163.15, or a total gross income of

P47 ,365, 163.15, as shown in its electronically-filed Annual ITR9 .

In view thereof, petitioner is liable for Minimum Corporate Income Tax (MCIT) of P178,931.38. However, since petitioner had total tax credits in the sum of P5,178,381.50 in 2010, even after petitioner deducted its MCIT of P178, 931.38, there were still excess income tax credits of P4,999,450.12 as of December 31, 2010. The excess tax credits consisted of creditable taxes withheld during the four (4) quarters of 2010 amounting to P3,911,850.00 and the remainder of prior year's excess credits in the amount of P1,087,600.12. She added that petitioner opted to claim for refund of its accumulated CWTs for the four quarters of CY 2010 in the amount of P3,911,850.00, while the remainder of prior year's excess credits that were carried over from CY 2009 amounting to P1,087 ,600.12, were carried over to the succeeding taxable year 2011. To signify its intention to claim for refund, petitioner placed a tick mark on the box next to the words "to be refunded" in its Annual ITR for CY 2010. To pursue the chosen option, petitioner filed a letter

with the BIR ROO

No.

50, requesting for refund of P3,911,850.00, representing its excess and unutilized CWT

for CY 201010•

As for petitioner's "prior years credits", she explained that the same can be traced back as early as 2003 and have been carried over and used to pay for petitioner's income tax liability from CY 2003 up to CY 2010. Thus, petitioner's prior years excess credits as of December 31, 2010 amounted to P1,087 ,600.12, which was then carried over in petitioner's Annual 11 and Quarterly ITRs12 for CY 2011. She further testified that the accumulated CWTs in the total amount of P3,911,850.00 were duly supported by Certificates of Creditable Tax Withheld at Source (BIR Form 2307) issued to petitioner by its income payers/withholding agents for the four quarters of CY 2010. 9 Exhibit " P-1".

10 Exhibit P-18".

11 Exhibit " P-6".

12 Exhibits " P-7" to "P- 10".

j

On cross-examination, the witness clarified that petitioner has more or less 20 clients, to which it has management contracts to provide accounting services and property maintenance services, which includes payment of real property taxes and payment of association dues. ICPA Katherine 0. Constantino, also executed a

Judicial

Affidavit, 13 stating that based on her audit, petitioner's total excess and unutilized CWT for CY 2010 amounted to P3,911,850.00.

She explained that based on the Annual ITR for CY 2010, petitioner's MCIT amounted to P178,931.38, its prior years excess credits amounted to P1,266,531.50 and the Creditable Tax Withheld for the four quarters of CY 2010 amounted to P3,911,850.00. In fine, petitioner's prior years excess credits were sufficient to cover its income tax due, resulting to an overpayment of P4,999,450.12. She corroborated the testimony of petitioner's lone witness that petitioner chose the option to be refunded for its excess creditable withholding taxes for CY 2010 in the amount of P3,911,850.00 and that it did not carry over and applied to the succeeding taxable year 2011 the said amount.

Based on her audit, all the expanded withholding taxes claimed by petitioner in the amount of P3,911,850.00 were properly documented and represent revenues that were claimed, reported in the ITRs for 2010 and were not carried over in the succeeding periods now was used in the income tax payments for said year.

On December 3, 2013, 14 petitioner formally offered its evidence and rested.

On March 13, 2014, 15 respondent opted not to present any evidence in support of its defense. On May 19, 2014, the case was considered submitted / for Decision after petitioner filed its Memorandum 16 on May

2, 2014 and respondent filed her Memorandum 17 on May 9, 2014.

THE ISSUES

The issues18 for the Court's resolution are as follows: 1.

Whether or not petitioner's excess and unutilized CWT for CY 2010 in the amount of P3,911,850.00 are duly substantiated by documentary evidence.

2.

Whether or not the income from which the CWTs being claimed for refund were withheld and was reported as part of the revenues declared in petitioner's Annual ITR. 3.

Whether or not petitioner carried over its excess and unutilized CWT for CY 2010 to the succeeding taxable periods.

4.

Whether

or not petitioner filed its administrative and judicial claims for refund of excess and unutilized CWT for CY 2010 within the two-year prescription period provided under Sections 204(C) and 229, National Internal Revenue Code of 1997. The foregoing issues may however be simplified into one main issue of whether petitioner is entitled to its claim for refund or issuance of tax credit certificate for its alleged excess and unutilized CWT for CY 2010 in the total amount of P3,911,850.00.

THE COURT'S RULING

Pertinent to the resolution of the case is Section 76 of the National Internal Revenue Code (NIRC) of 1997, which provides, as follows:

/

"SEC. 76. Final Adjustment Return. -

Every

corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. 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."

Pursuant to Section 76 of the NIRC, as amended, there are only two alternative options available to a corporate taxpayer whose quarterly income tax payments exceed its tax liability - it may either apply for a refund/tax credit within the prescribed period, or carry over and apply the same to its tax liabilities for the succeeding quarters of the succeeding taxable years.

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 ei.t,her to carry over the excess credit or to claim a refund. These remedies are in the alternative and the choice of one precludes the other. This is known as the irrevocability rule embodied in the last sentence of Section 76 of the Tax Code. ~

In Phi/am Asset Management, Inc. v. Commissioner of Internal Revenue, 19 the Supreme Court elucidates on these two mutually exclusive options, in this wise: "The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be refunded, provided that a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on the FAR of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of one precludes the other.

Indeed, in

Philippine

Bank

of

Communications

v.

Commissioner of Internal Revenue, the Court ruled that a corporation must signify its intention - whether to request a tax refund or claim a tax credit - by marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection."

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid ... (Emphases supplied) It is thus clear that a corporate taxpayer is not legally allowed a change of heart once it has chosen an option from the two alternative remedies for the choice of one precludes the other.

This is evident in the Annual Income Tax Return (BIR / Form 1702) under line 31, which states, thus: 19 514 Phil. 147,157 (2005).

"If overpayment, mark one box only: (once the choice is made, the same is irrevocable)" In the instant case, petitioner unequivocally indicated its intention to be refunded by placing a tick mark on the box next to the words "to be refunded", in its Annual ITR for CY 2010.

An examination of Petitioner's Annual ITR20 for the year 2010 shows that petitioner had income tax credits in the total amount of P5,178,381.5021, computed as follows: Prior Year's Excess Credits other than MCIT22 p 1 266,531.50 Add: Creditable Taxes Withheld for the first P3,896,850.00 three quarters23 Creditable Taxes Withheld for the fourth 15,000.00 3,911,850.00 . quarter24

Total Tax Credits

P5,178,381.50 Petitioner's prior year's excess credits of P1,266,531.50 indicated in its 2010 Annual ITR were duly supported by Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) 25 after deducting therefrom the income tax due for years 2007, 2008, and 2009, as shown below:

Exhibit

Taxable

Year

Income Tax

Due

(a)

P-828

2003 p 289 502.00

"P-829"

2004 550 220.00

"P-830"

2005 1 029 302.00

"P-831"

2006 434 043.00

"P-832"

2007 756,740.00

"P-833"

2008 827 408.00

"P-834"

2009 995 903.10 20 Exhibit "P-820".

21 Exhibit "P-820", box 30H.

22 Exhibit "P-820", box 30A.

23 Exhibit "P-820", box 30C.

24 Exhibit "P-820", box 300.

(Income Tax

Still Due) I

Prior Year's

Balance of

CWT for the

Excess

Prior Year's

Year

Credits

Excess Credits

(b)

(c) = (b) - (a) p - (P 289 502.00) P² 506 600.00 2 217 098.00 1 666 878.00 5 188 970.00 1 666 878.00 637 576.00 5,070 932.00 637 576.00 203 533.00 3 991 800.00 203 533.00 (553 207.00) 3 643 050.00 3 089 843.00 2 262 435.00 3 683 100.00 2 262 434.60 1 266 531.90 4 045 410.00 25 Exhibits " P-246" to "P-268", as summarized in Exhibit "P-245".

Excess CWT at the End of the Year

P2 217 098.00 6 855 848.00 5 708 508.00 4 195 333.00 3 089 843.00 5 945 535.00 5 311 941.50

Petitioner's MCIT due for the year 2010 amounting to P178, 931.3826 was offset against the prior year's excess credits of P1,266,531.50, leaving a balance of P1,087 ,600.12 for prior year's excess credits and creditable taxes withheld in the amount of P³,911,850.00, or a total amount of P⁴,999,450.1227 unutilized as of December 31, 2010, detailed as follows:

Prior Year's Excess Credits

p 1,266,531.50

Less: Income Tax Due

178 931.38

Balance of Prior Year's Excess Credits

p 1 087 600.12

Add : Creditable Taxes Withheld During the Year

3 911 850.00 Unutilized Excess Tax Credits as of December 31, P4,999,450.12 2010 However, to be entitled to the refund sought in the amount of P3,911,850.00, petitioner must prove compliance with requirements of the law. Petitioner must satisfy the following requisites:

1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax;

2) The fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld; and 3) It must be shown on the return that the income received was declared as part of the gross income. 28 Anent the first requisite, Sections 204(C) and 229 of the NIRC of 1997, as amended, relevantly provide: "SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - / The Commissioner may - 26 Exhibit "P-820", box 29.

27 Exhibit " P-820", box 33 .

28 Commissioner of Internal Revenue vs. Mirant (Philippines) Operations Corporation , G.R. No. 171742, June 15, 2011 and Mirant (Philippines) Operations Corporation (Formerly: Southern Energy Asia-Pacific Operations (Phils.), Inc.) vs. Commissioner of Internal Revenue, G.R. No. 176165.

XXX

XXX

XXX

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two {2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund." "SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two {2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment :

Provided, however, That the Commissioner may, even without claim therefor, refund or credit any tax, where on the face of the return upon which j payment was made, such payment appears clearly to have been erroneously paid."

(Emphasis

supplied)

Pursuant to the

above prov1s1ons, the two-year prescriptive period for claiming a refund commences to run from the date of filing of the Final Adjustment Return (FAR). 29 It is only when the FAR covering the whole year is filed that the taxpayer would know whether a tax is still due or a refund can be claimed based on the adjusted and audited figures. 30 Petitioner filed its Annual ITR for CY 2010 through EFPS on April 15, 2011. 31 Petitioner has two years from the filing of the FAR within which to file a claim for refund of excess CWT, both in the administrative and judicial levels. Counting from April 15, 2011, petitioner had until April 15, 2013 within which to file both its administrative and judicial claims. Hence, the administrative claim filed on December 6, 2011 32 and the Petition for Review filed on April 12, 2013, were seasonably filed.

Anent

the second and third requisites,

Section

2.58.3(B) of Revenue Regulations (RR) No. 02-98, as amended, states:

"SECTION 2.58.3.

Claim for Tax Credit or

Refund.-

XXX

XXX

XXX

(B) Claims for tax credit or refund of any creditable income tax which was deducted and withheld on income payments shall be given due course only when it is shown that the income payment has been declared as part of the gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. "(Emphasis supplied) j 29 ACCRA Investments Corporation vs. The Honorable Court of Appeals, et at., G.R. No. 96322, December 20, 1991.

3° Commissioner of Internal Revenue vs. TMX Sales, Inc., et at., G.R. No. 83736, January 15, 1992.

Petitioner submitted Certificates of Creditable Tax Withheld at Source duly issued to it by various withholding agents showing that creditable taxes in the aggregate amount of P3,911,850.00 were withheld on professional fees it received in the year 2010, detailed as follows:

Withholding Agent

Income

Income Tax

Exhibit

Payments

Withheld

January to March 2010

Corullon Holdings, Inc.

f> 1,570,800.00 f> 235,620.00

"P-23"

Elija Holdings Inc.

1 570,800.00 235,620.00

"P-24"

FBC Holdings, Inc.

1,570,800.00 235,620.00

"P-25"

Fercat Holdings, Inc.

1,570,800.00 235,620.00

"P-26"

Gilmon Holidngs, Inc.

1 570,800.00 235,620.00

"P-27"

Mermac, Inc.

1,842,588.00 276,388.20

"P-28"

Reinosa Holdings, Inc.

1 570,800.00 235,620.00

"P-29"

San Puente Holdings, Inc.

1 570,800.00 235,620.00

"P-30"

Steps Dance Studio

150,000.00 15,000.00

"P-31"

April to June 2010

Steps Dance Studio

150,000.00 15,000.00

"P-32"

July to September 2010

Corullon Holdings, Inc.

1 571,200.00 235,680.00

"P-33"

Elija Holdings, Inc.

1,571,200.00 235,680.00

"P-34"

FBC Holdings Inc.

1 571,200.00 235,680.00

"P-35"

Fercat Holdings, Inc.

1 571,200.00 235,680.00

"P-36"

Gilmon Holidngs, Inc.

1/571,200.00 235,680.00

"P-37"

Mermac, Inc.

1 842,412.00 276,361.80

"P-38"

Reinosa Holdings, Inc.

1,571,200.00 235,680.00

"P-39"

San Puente Holdings, Inc.

1,571,200.00 235,680.00

"P-40"

Steps Dance Studio

150,000.00 15,000.00

"P-41"

October to December 2010

Steps Dance Studio

150,000.00 15,000.00

"P-42"

Total

P26,279,000.00 P3,911,850.00 It is worth to note that the creditable taxes of P3,911,850.00 were withheld on income payments for professional fees of P26,279,000.00. However, petitioner's reported sales of services in its Annual ITR for 2010 amounted to P45,500,000.0033, which is higher by P19,221,000.00 as compared with the income payments per j certificates of P26,279,000.00.

Petitioner presented a breakdown of revenues34 for the year 2010, as follows:

PER BIR FORM

PER ITR

NO. 2307

Administration Fee

Withholding Agents

p 25,451,000.00 p 25,451,000.00

Non-withholding Agents

- 19,221,000.00

(Individuals)

Recovery on Cost

828,000.00 828,000.00 26,279,000.00 45,500,000.00 Interest Income (Not subjected to - 1,496, 723.00 final tax)

Gain

on

Sale of Property

and - 180,773.00

Equipment

Miscellaneous

- 187,667.00

Total

p 26,279,000.00 p 47,365,163.00 The difference, as explained by the ICPA, represented administration fee generated from clients who were individuals and whose remittances were not subjected to withholding taxes. 35 Various official receipts issued by petitioner to individual clients showed that no tax was withheld on the income payments of P19,221,000.00. The said individual clients and the income generated from them are enumerated below:

CLIENT

Sofia Zobel Eliza lde

Georgina Padilla MacCrohon

Alejandro Zobel Padilla

Jaime Augusto Zobel de

Ayala II

Alfonso Zobel de Ayala Jr.

Beatriz Zobel de Ayala

Cristina Zobel de Ayala

Fernando Zobel de Ayala

Jaime Zobel de Ayala

Monica Zobel de Ayala

34 Exhibit " P-43".

35 Exhibit " P-21".

O.R. NO.

AMOUNT

EXHIBIT

648 p 500,000.00

"P-65"

678 1,000,000.00

"P-94"

649 1 124,000.00

"P-66"

679 1 124,000.00

"P-95"

655 862,500.00

"P-72"

676 862,500.00

"P-92"

653 1 250,000.00

"P-70"

671 850,000.00 "P-87'' 681 1,986,000.00

"P-97"

646 1,200,000.00

"P-63"

673 600,000.00

"P-89"

650 450,000.00

"P-67"

674 450,000.00

"P-90"

654 1 250,000.00

"P-71"

672 450,000.00

"P-88"

647 1 774,000.00

"P-64"

680 1 638,000.00

"P-96"

651 450,000.00

"P-68"

Patricia Zobel de Ayala

Total administration fees to individuals 675 450,000.00

"P-91"

652 450,000.00

"P-69"

677 500,000.00

"P-93"

P19,221,000.00 In fine, petitioner likewise satisfied the second and third requisites for entitlement for refund in the amount of P3,911,850.00.

WHEREFORE, the instant Petition for Review filed by petitioner Sonoma Services, Inc. on April 12, 2013, is hereby GRANTED.

Accordingly, respondent is hereby DIRECTED TO REFUND in favor of petitioner the amount of P3,911,850.00, representing its excess and unutilized creditable withholding taxes for the calendar year ended December 31, 2010.

We Concur:

A

. il . .

-4,...-~ ~- "r~ MA. BELEN M. RINGPIS-LIBAN

Associate Justice

ATTESTATION

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

LOVELL

. BAUTISTA Associ te Justice

Chairperson

CERTIFICATION

Pursuant to

Section

13

of Article

VIII of the

Constitution, and the Division's Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

Presiding Justice