IV.

DEFENSES OF THE TAXPAYER

A. Non-retroactivity of rulings (Sec. 246)
B. Failure to inform the taxpayer in writing of the law and the facts on which the assessment is made (Sec. 228)
C. Preservation of Books and Accounts and Other Accounting Records (Sec. 235)
D. Cases:

1. G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D.
AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’ Associations, Inc.
is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs) issued
by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes. 3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii)
and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price
or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined.
They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but
not on other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets
under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A). 4 If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax
shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income tax as computed
under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby authorized to suspend
the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or
because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and conditions under which he may suspend the
imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term
‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost
of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to
their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the
goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing
the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic
corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from
such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as computed under Sec. 27(A)
of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3)
immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of taxes. 6 Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in
the Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange
or transfer of. – Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or
pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following
schedule –

Those which are exempt from a Exempt

withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange, as determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the
periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be
paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange
or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid
to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon
the withholding agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(₱500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange shall be considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the
selling price), the tax shall be deducted and withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale,
transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the
original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to
the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and building/improvement
thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be
recorded by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers
and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due
thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a particular
real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions
thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there
must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the
very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling
for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the
payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down
their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue
regulations have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal
issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute.11 On the other
hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the
individual challenging it.12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their operations
as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened
into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or
the law is enough to awaken judicial duty.14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question
once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not
allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer
from the enforcement of [the assailed provisions].15

Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has sustained or will
sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit Homeowners Association, Inc. v.
Defensor,17 we held that the association had legal standing because its members stood to be injured by the enforcement
of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual
members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited
or injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation
to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved. 19 The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance of
this petition.20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came
about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some
minimum contribution to the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss
in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the
Tax Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative convenience. … This will go a long way in ensuring that
corporations will pay their just share in supporting our public life and our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate.
It is therefore fair for the government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or
negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of
income or over-deduction of expenses otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because
from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if the
corporation has been losing for the past five years to ten years, then that corporation has no business to be in business.
It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of tax
shelters, Your Honor.24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect.
For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to
put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures,
the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.25 This grace period allows a new business to stabilize first and make its ventures
viable before it is subjected to the MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately succeeding years. 27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had
their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the
committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration
of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of gross
assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this method. Okay, those
are additional Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of
the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross
income as defined under said provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were
not taken into account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in
the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular
public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be
imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so
that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the
tax) to its constituency who are to pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same
time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or
property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may properly
be invoked to invalidate, in appropriate cases, a revenue measure39 when it amounts to a confiscation of property.40 But
in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being
violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the due
process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of
such persuasive character.43

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time. 45 Income is gain derived and severed from
capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if
the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate.49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions.
Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with
interstate commerce or violates the requirement as to uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax
rate but a broader tax base.51 Since our income tax laws are of American origin, interpretations by American courts of
our parallel tax laws have persuasive effect on the interpretation of these laws. 52 Although our MCIT is not exactly the
same as the AMT, the policy behind them and the procedure of their implementation are comparable. On the question
of the AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum
amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation. 55

American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses to tax. 56 This is because deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes. 58 Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights. 59 The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being
imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis
supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income.
This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.
But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well
be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable
income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected.61 Under Section
57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final
tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is
concerned with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale
of real estate categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that
Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave
abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of law"62 because they ignore such
distinctions. Petitioner’s conclusion is based on the following premises: (a) the revenue regulations use gross selling
price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real
estate classified as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the
end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as Ordinary
Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the
rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply
and implement.64 It is well-settled that an administrative agency cannot amend an act of Congress. 65

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws.66 The withholding tax system was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to
improve the government’s cash flow.67 This results in administrative savings, prompt and efficient collection of taxes,
prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and
remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the
income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’ income tax from
net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year. 70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be
the entity’s net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation
to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income
tax payable by the taxpayer at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate
that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in
trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by
the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall
pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a
refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy
to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding
agent’s knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his
basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with
the performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a payments are intended to equal or at least
full and final payment of the income tax approximate the tax due of the payee on
due from the payee on the said income. said income.
 b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the right
to ask for a refund if the tax withheld is
more than the tax due.

c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of
ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that
ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions
of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary
assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital
gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s
act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence
of the withholding tax method of tax collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According
to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in
Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be
limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B),
25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code
on specified items of income shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%)
 but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of
the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive
income. The BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is
not passive income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or
juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If that were
the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former
covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed
in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-
98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does
not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable
method to carry out its functions.77 Similarly, considering that the law uses the general term "income," the Secretary and
CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules
and regulations ordinarily deserve to be given weight and respect by the courts78 in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members
of their property without due process of law because, in their line of business, gain is never assured by mere receipt of
the selling price. As a result, the government is collecting tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the
taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is
taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process.
More importantly, the due process requirement applies to the power to tax. 79 The CWT does not impose new taxes nor
does it increase taxes.80 It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait
years and may even resort to litigation before they are granted a refund. 81 This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at
least 20 government agencies.82
Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s complaints are
essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the
CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are
taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option but it is not a fundamental right which can be
demanded from the court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being
levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly
imposed a CWT on their sales, even if their manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it
incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."85 Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the same class. 86

The taxing power has the authority to make reasonable classifications for purposes of taxation. 87 Inequalities which
result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. 88 The
real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT,
is not their production processes but the prices of their goods sold and the number of transactions involved. The income
from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the
parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax
system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT.89 As
already discussed, the Secretary may adopt any reasonable method to carry out its functions. 90 Under Section 57(B), it
may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax
has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the
CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording
as Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected
by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfer has
been reported, and the capital gains or [CWT], if any, has been paid: xxxx any violation of this provision by the Register
of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the
income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend not only with
Einstein’s observation but also with the vast and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

2. G.R. No. 150947 July 15, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MICHEL J. LHUILLIER PAWNSHOP, INC., respondent.

Are pawnshops included in the term lending investors for the purpose of imposing the 5% percentage tax under then
Section 116 of the National Internal Revenue Code (NIRC) of 1977, as amended by Executive Order No. 273?

Petitioner Commissioner of Internal Revenue (CIR) filed the instant petition for review to set aside the decision 1 of 20
November 2001 of the Court of Appeals in CA G.R. SP No. 62463, which affirmed the decision of 13 December 2000 of
the Court of Tax Appeals (CTA) in CTA Case No. 5690 cancelling the assessment issued against respondent Michel J.
Lhuillier Pawnshop, Inc. (hereafter Lhuillier) in the amount of P3,360,335.11 as deficiency percentage tax for 1994,
inclusive of interest and surcharges.

The facts are as follows:

On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 imposing a 5%
lending investor’s tax on pawnshops; thus:

A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is lending money at interest and
incidentally accepting a "pawn" of personal property delivered by the pawner to the pawnee as security for the
loan.(Sec. 3, Ibid). Clearly, this makes pawnshop business akin to lending investor’s business activity which is
broad enough to encompass the business of lending money at interest by any person whether natural or
juridical. Such being the case, pawnshops shall be subject to the 5% lending investor’s tax based on their gross
income pursuant to Section 116 of the Tax Code, as amended.

This RMO was clarified by Revenue Memorandum Circular (RMC) No. 43-91 on 27 May 1991, which reads:

1. RM[O] 15-91 dated March 11, 1991.

 This Circular subjects to the 5% lending investor’s tax the gross income of pawnshops pursuant to Section 116 of
the Tax Code, and it thus revokes BIR Ruling No[]. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a
uniform cut-off date, avoid unfairness on the part of tax- payers if they are required to pay the tax on past
transactions, and so as to give meaning to the express provisions of Section 246 of the Tax Code, pawnshop
owners or operators shall become liable to the lending investor’s tax on their gross income beginning January 1,
1991. Since the deadline for the filing of percentage tax return (BIR Form No. 2529A-0) and the payment of the
tax on lending investors covering the first calendar quarter of 1991 has already lapsed, taxpayers are given up to
June 30, 1991 within which to pay the said tax without penalty. If the tax is paid after June 30, 1991, the
corresponding penalties shall be assessed and computed from April 21, 1991.

Since pawnshops are considered as lending investors effective January 1, 1991, they also become subject to
documentary stamp taxes prescribed in Title VII of the Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is hereby
revoked.

On 11 September 1997, pursuant to these issuances, the Bureau of Internal Revenue (BIR) issued Assessment Notice No.
81-PT-13-94-97-9-118 against Lhuillier demanding payment of deficiency percentage tax in the sum of P3,360,335.11 for
1994 inclusive of interest and surcharges.

On 3 October 1997, Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending
that (1) neither the Tax Code nor the VAT Law expressly imposes 5% percentage tax on the gross income of pawnshops;
(2) pawnshops are different from lending investors, which are subject to the 5% percentage tax under the specific
provision of the Tax Code; (3) RMO No. 15-91 is not implementing any provision of the Internal Revenue laws but is a
new and additional tax measure on pawnshops, which only Congress could enact; (4) RMO No. 15-91 impliedly amends
the Tax Code and is therefore taxation by implication, which is proscribed by law; and (5) RMO No. 15-91 is a "class
legislation" because it singles out pawnshops among other lending and financial operations.

On 12 October 1998, Deputy BIR Commissioner Romeo S. Panganiban issued Warrant of Distraint and/or Levy No. 81-
043-98 against Lhuillier’s property for the enforcement and payment of the assessed percentage tax.

Its protest having been unacted upon, Lhuillier, in a letter dated 3 March 1998, elevated the matter to the CIR. Still, the
protest was not acted upon by the CIR. Thus, on 11 November 1998, Lhuillier filed a "Notice and Memorandum on
Appeal" with the Court of Tax Appeals invoking Section 228 of Republic Act No. 8424, otherwise known as the Tax
Reform Act of 1997, which provides:

Section 228. Protesting of Assessment. …

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of
Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and demandable.

The case was docketed as CTA Case No. 5690.

On 19 November 1998, the CIR filed with the CTA a motion to dismiss Lhuillier’s petition on the ground that it
did not state a cause of action, as there was no action yet on the protest.

Lhuillier opposed the motion to dismiss and moved for the issuance of a writ of preliminary injunction praying
that the BIR be enjoined from enforcing the warrant of distraint and levy.

For Lhuillier’s failure to appear on the scheduled date of hearing, the CTA denied the motion for the issuance of
a writ of preliminary injunction. However, on Lhuillier’s motion for reconsideration, said denial was set aside and
a hearing on the motion for the issuance of a writ of preliminary injunction was set.
 On 30 June 1999, after due hearing, the CTA denied the CIR’s motion to dismiss and granted Lhuillier’s motion
for the issuance of a writ of preliminary injunction.

On 13 December 2000, the CTA rendered a decision declaring (1) RMO No. 15-91 and RMC No. 43-91 null and
void insofar as they classify pawnshops as lending investors subject to 5% percentage tax; and (2) Assessment
Notice No. 81-PT-13-94-97-9-118 as cancelled, withdrawn, and with no force and effect.2

Dissatisfied, the CIR filed a petition for review with the Court of Appeals praying that the aforesaid decision be reversed
and set aside and another one be rendered ordering Lhuillier to pay the 5% lending investor’s tax for 1994 with interests
and surcharges.

Upon due consideration of the issues presented by the parties in their respective memoranda, the Court of Appeals
affirmed the CTA decision on 20 November 2001.

The CIR is now before this Court via this petition for review on certiorari, alleging that the Court of Appeals erred in
holding that pawnshops are not subject to the 5% lending investor’s tax. He invokes then Section 116 of the Tax Code,
which imposed a 5% percentage tax on lending investors. He argues that the legal definition of lending investors
provided in Section 157 (u) of the Tax Code is broad enough to include pawnshop operators. Section 3 of Presidential
Decree No. 114 states that the principal business activity of a pawnshop is lending money; thus, a pawnshop easily falls
under the legal definition of lending investors. RMO No. 15-91 and RMC No. 43-91, which subject pawnshops to the 5%
lending investor’s tax based on their gross income, are valid. Being mere interpretations of the NIRC, they need not be
published. Lastly, the CIR invokes the case of Commissioner of Internal Revenue vs. Agencia Exquisite of Bohol,
Inc.,3 where the Court of Appeals’ Special Fourteenth Division ruled that a pawnshop is subject to the 5% lending
investor’s tax.4

Lhuillier, on the other hand, maintains that before and after the amendment of the Tax Code by E.O. No. 273, which
took effect on 1 January 1988, pawnshops and lending investors were subjected to different tax treatments. Pawnshops
were required to pay an annual fixed tax of only P1,000, while lending investors were subject to a 5% percentage tax on
their gross income in addition to their fixed annual taxes. Accordingly, during the period from April 1982 up to December
1990, the CIR consistently ruled that a pawnshop is not a lending investor and should not therefore be required to pay
percentage tax on its gross income.

Lhuillier likewise asserts that RMO No. 15-91 and RMC No. 43-91 are not implementing rules but are new and additional
tax measures, which only Congress is empowered to enact. Besides, they are invalid because they have never been
published in the Official Gazette or any newspaper of general circulation.

Lhuillier further points out that pawnshops are strictly regulated by the Central Bank pursuant to P.D. No. 114, otherwise
known as The Pawnshop Regulation Act. On the other hand, there is no special law governing lending investors. Due to
the wide differences between the two, pawnshops had never been considered as lending investors for tax purposes. In
fact, in 1994, Congress passed House Bill No. 11197,5 which attempted to amend Section 116 of the NIRC, as amended,
to include owners of pawnshops as among those subject to percentage tax. However, the Senate Bill and the
subsequent Bicameral Committee version, which eventually became the E-VAT Law, did not incorporate such proposed
amendment.

Lastly, Lhuillier argues that following the maxim in statutory construction "expressio unius est exclusio alterius," it was
not the intention of the Legislature to impose percentage taxes on pawnshops because if it were so, pawnshops would
have been included as among the businesses subject to the said tax. Inasmuch as revenue laws impose special burdens
upon taxpayers, the enforcement of such laws should not be extended by implication beyond the clear import of the
language used.

We are therefore called upon to resolve the issue of whether pawnshops are subject to the 5% lending investor’s tax.
Corollary to this issue are the following questions: (1) Are RMO No. 15-91 and RMC No. 43-91 valid? (2) Were they
issued to implement Section 116 of the NIRC of 1977, as amended? (3) Are pawnshops considered "lending investors"
for the purpose of the imposition of the lending investor’s tax? (4) Is publication necessary for the validity of RMO No.
15-91 and RMC No. 43-91.

RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR to make rulings and opinions in
connection with the implementation of internal revenue laws, which was bestowed by then Section 245 of the NIRC of
1977, as amended by E.O. No. 273.6 Such power of the CIR cannot be controverted. However, the CIR cannot, in the
exercise of such power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed,
administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they
intend to carry out. Only Congress can repeal or amend the law. 7

The CIR argues that both issuances are mere rules and regulations implementing then Section 116 of the NIRC, as
amended, which provided:

SEC. 116. Percentage tax on dealers in securities; lending investors. - Dealers in securities and lending investors
shall pay a tax equivalent to six (6) per centum of their gross income. Lending investors shall pay a tax equivalent
to five (5%) percent of their gross income.

It is clear from the aforequoted provision that pawnshops are not specifically included. Thus, the question is whether
pawnshops are considered lending investors for the purpose of imposing percentage tax.

We rule in the negative.

Incidentally, we observe that both parties, as well as the Court of Tax Appeals and the Court of Appeals, refer to the
National Internal Revenue Code as the Tax Code. They did not specify whether the provisions they cited were taken from
the NIRC of 1977, as amended, or the NIRC of 1986, as amended. For clarity, it must be pointed out that the NIRC of
1977 as renumbered and rearranged by E.O. No. 273 is a later law than the NIRC of 1986, as amended by P.D. Nos. 1991,
1994, 2006 and 2031. The citation of the specific Code is important for us to determine the intent of the law.

Under Section 157(u) of the NIRC of 1986, as amended, the term lending investor includes "all persons who make a
practice of lending money for themselves or others at interest." A pawnshop, on the other hand, is defined under
Section 3 of P.D. No. 114 as "a person or entity engaged in the business of lending money on personal property
delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn
brokerage."

While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending
investors" for the purpose of imposing the 5% percentage taxes for the following reasons:

First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment
by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986,
pawnshops and lending investors were subjected to different tax treatments; thus:

(3) Other Fixed Taxes. – The following fixed taxes shall be collected as follows, the amount stated being for the
whole year, when not otherwise specified:

….

(dd) Lending investors –

1. In chartered cities and first class municipalities, one thousand pesos;

2. In second and third class municipalities, five hundred pesos;

 3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That lending
investors who do business as such in more than one province shall pay a tax of one thousand pesos.

….

(ff) Pawnshops, one thousand pesos (underscoring ours)

Second. Congress never intended pawnshops to be treated in the same way as lending investors. Section 116 of the
NIRC of 1977, as renumbered and rearranged by E.O. No. 273, was basically lifted from Section 1758 of the NIRC of 1986,
which treated both tax subjects differently. Section 175 of the latter Code read as follows:

Sec. 175. Percentage tax on dealers in securities, lending investors. -- Dealers in securities shall pay a tax
equivalent to six (6%) percent of their gross income. Lending investors shall pay a tax equivalent to five (5%)
percent of their gross income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994).

We note that the definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of
1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found. However, as emphasized earlier, both
the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and lending investors differently. Verily then, it was the
intent of Congress to deal with both subjects differently. Hence, we must likewise interpret the statute to conform with
such legislative intent.

Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and
lending investors only. There is no mention of pawnshops. Under the maxim expressio unius est exclusio alterius, the
mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things
upon which it is to operate, everything else must necessarily and by implication be excluded from its operation and
effect.9 This rule, as a guide to probable legislative intent, is based upon the rules of logic and natural workings of the
human mind.10

Fourth. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were
not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273. This was
even admitted by the CIR in RMO No. 15-91 itself. Considering that Section 116 of the NIRC of 1977, as amended, was
practically lifted from Section 175 of the NIRC of 1986, as amended, and there being no change in the law, the
interpretation thereof should not have been altered.

It may not be amiss to state that, as pointed out by the respondent, pawnshops was sought to be included as among
those subject to 5% percentage tax by House Bill No. 11197 in 1994. Section 13 thereof reads:

Section 13. Section 116 of the National Internal Revenue Code, as amended, is hereby further amended to read
as follows:

"SEC. 116. Percentage tax on dealers in securities; lending investors; OWNERS OF PAWNSHOPS;
FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS. – Dealers in securities shall pay a tax
equivalent to Six (6%) per centum of their gross income. Lending investors, OWNERS OF PAWNSHOPS
AND FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%)
percent of their gross income."

If pawnshops were covered within the term lending investor, there would have been no need to introduce such
amendment to include owners of pawnshops. At any rate, such proposed amendment was not adopted. Instead, the
approved bill which became R.A. No. 771611 repealed Section 116 of NIRC of 1977, as amended, which was the basis of
RMO No. 15-91 and RMC No. 43-91; thus:

SEC. 20. Repealing Clauses. -- The provisions of any special law relative to the rate of franchise taxes are hereby
expressly repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed.
 Section 21 of the same law provides that the law shall take effect fifteen (15) days after its complete publication
in the Official Gazette or in at least two (2) national newspapers of general circulation whichever comes earlier.
R.A. No. 7716 was published in the Official Gazette on 1 August 199412; in the Journal and Malaya newspapers,
on 12 May 1994; and in the Manila Bulletin, on 5 June 1994. Thus, R.A. No. 7716 is deemed effective on 27 May
1994.

Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been
repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even
granting that pawnshops are included within the term lending investors, the assessment from 27 May 1994 onward
would have no leg to stand on.

Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of publication. While the rule-making
authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or
applicable principles in the exercise of quasi-legislative powers.

Let us first distinguish between two kinds of administrative issuances: the legislative rule and the interpretative rule. A
legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the
details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the
administrative agency is in charge of enforcing.13

In Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance Secretary,14 this Tribunal ruled:

… In the same way that laws must have the benefit of public hearing, it is generally required that before a
legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides:

Public Participation. - If not otherwise required by law, an agency shall, as far as practicable, publish or circulate
notices of proposed rules and afford interested parties the opportunity to submit their views prior to the
adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published
in a newspaper of general circulation at least two weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall be observed.

In addition, such rule must be published.

When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare
issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other
hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least
cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the
agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that
new issuance is given the force and effect of law.15

RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in
the process the previous rulings of past Commissioners. Specifically, they would have been amendatory provisions
applicable to pawnshops. Without these disputed CIR issuances, pawnshops would not be liable to pay the 5%
percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In
so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and
publication should not have been ignored.

There is no need for us to discuss the ruling in CA-G.R. SP No. 59282 entitled Commissioner of Internal Revenue v.
Agencia Exquisite of Bohol Inc., which upheld the validity of RMO No. 15-91 and RMC No. 43-91. Suffice it to say that the
judgment in that case cannot be binding upon the Supreme Court because it is only a decision of the Court of Appeals.
The Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is
the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all other courts
should take their bearings.16

In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared null and void. Consequently, Lhuillier is
not liable to pay the 5% lending investor’s tax.

WHEREFORE, the petition is hereby DISMISSED for lack of merit. The decision of the Court of Appeals of 20 November
2001 in CA-G.R. SP No. 62463 is AFFIRMED.

SO ORDERED.

V. COMPROMISE AND ABATEMENT

A. Differentiate Compromise and Abatement (Sec. 204)

B. Compromise v. Compromise Penalty
C. RR No. 7-2001 as amended by RR No. 30-2002

VI. TAX CREDIT AND TAX REFUND

A. Nature

1. Sec. 204( C), 229, 230

2. G.R. No. 149589 September 15, 2006

FAR EAST BANK & TRUST COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Before this Court is a petition for review on certiorari of the decision1 of the Court of Appeals (CA) in CA-G.R. SP No.
49597 dated January 31, 2001 and the resolution dated August 23, 2001 denying the motion for reconsideration.2

Petitioner Far East Bank & Trust Company (FEBTC)3 filed with the Bureau of Internal Revenue an application for a tax
credit/tax refund of alleged excess payments of its gross receipts tax (GRT). FEBTC claimed it

had overpaid its GRT for the 3rd and 4th quarters of 1994 and the entire 1995 amounting to P14,816,373.

Since no action was taken by the Commissioner of Internal Revenue (CIR) on its claim, petitioner filed a case in the Court
of Tax Appeals (CTA) on October 18, 1996 to comply with the two-year reglementary period and avoid the prescription
of its action.4 On July 30, 1998, the CTA rendered a decision denying the claim for lack of evidence. 5

It appears that petitioner failed to file its formal offer of evidence in the CTA, constraining the tax court to rule in favor
of the CIR. As explained by the CTA:

...Its repeated non-appearance and failure to comply with court procedures such as the filing of a formal offer of
evidence and memorandum only serve to weaken, if not put a death knell, to its claim for refund.

The Rules of Court is strict in considering no evidence which has not been formally offered (Section 24, Rule
132). Without any formal offer of evidence, thus, we could only blame the petitioner for its lost cause. Simply
put, it has not proven anything.6
On August 26, 1998, 22 days after its receipt of the decision, petitioner filed a motion for reconsideration. The CTA
denied the motion for being filed out of time and for lack of merit.

Aggrieved, petitioner elevated the case to the CA.7 The appellate court found the petition devoid of merit. Eventually, it
dismissed the petition and affirmed the CTA decision in toto. Petitioner’s motion for reconsideration was also denied.
Thus, this petition.

Petitioner urges this Court to reverse and set aside the ruling of the appellate court. It contends that it appended its
formal offer of evidence to its motion for reconsideration in the CTA. It now asks us to relax procedural rules in the
interest of justice.

We deny the petition and rule against petitioner FEBTC on two points.

First, it is well-settled that the courts cannot consider evidence which has not been formally offered. 8 Parties are
required to inform the courts of the purpose of introducing their respective exhibits to assist the latter in ruling on their
admissibility in case an objection thereto is made.9 Without a formal offer of evidence, courts are constrained to take no
notice of the evidence even if it has been marked and identified.10 Needless to say, the failure of petitioner to make a
formal offer of evidence was detrimental to its cause.

This case does not fall within the exception in Oñate v. Court of Appeals11 where the Court relaxed the foregoing rule
and allowed evidence, not formally offered, to be considered on condition that: (1) evidence must have been identified
by testimony duly recorded and (2) it must have been incorporated in the records of the case. In this case,
"…[petitioner’s] duly marked and identified exhibits [were] not incorporated in the records... They are nowhere to be
found."12

A tax refund is in the nature of a tax exemption which must be construed strictissimi juris against the taxpayer.13 To
stress, the taxpayer must present convincing evidence to substantiate a claim for refund. Without any documentary
evidence on record, petitioner failed to discharge the burden of proving its right to a tax credit/tax refund. Therefore,
the CTA and CA correctly denied its claim.

Second, if no appeal or motion for reconsideration is filed on time, the judgment or final order of the court becomes
final and executory.14 Here, the records of the case confirm that petitioner’s motion for reconsideration in the CTA was
filed out of time. Petitioner received its notice and a copy of the CTA decision on August 4, 1998.15 Under the rules, it
had fifteen days (or until August 19, 1998) to move for reconsideration. By the time it filed its motion for reconsideration
on August 26, 1998,16 the decision of the CTA had already attained finality. As a final judgment, it had by then already
laid the issues to rest and the appellate courts could no longer review it.

Courts are charged with putting an end to controversies. In keeping with this function, judgments must become final at
some definite time fixed by law. 17

WHEREFORE, the petition is hereby DENIED. The January 31, 2001 decision and August 23, 2001 resolution of the Court
of Appeals are AFFIRMED.

Costs against petitioner.

SO ORDERED.

3. G.R. Nos. 167274-75 July 21, 2008

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.
Simple and uncomplicated is the central issue involved, yet whopping is the amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation (Fortune
Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco
products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition.

The following undisputed facts, summarized by the Court of Appeals, are quoted in the assailed Decision 1 dated 28
September 2004:

CAG.R. SP No. 80675

xxxx

Petitioner2 is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the
Philippines, with principal address at Fortune Avenue, Parang, Marikina City.

Petitioner is the manufacturer/producer of, among others, the following cigarette brands, with tax rate classification
based on net retail price prescribed by Annex "D" to R.A. No. 4280, to wit:

Brand Tax Rate

Champion M 100 ₱1.00

Salem M 100 ₱1.00

Salem M King ₱1.00

Camel F King ₱1.00

Camel Lights Box 20’s ₱1.00

Camel Filters Box 20’s ₱1.00

Winston F Kings ₱5.00

Winston Lights ₱5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to ad valorem tax pursuant to
then Section 142 of the Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No. 8240 took effect whereby
a shift from the ad valorem tax (AVT) system to the specific tax system was made and subjecting the aforesaid cigarette
brands to specific tax under [S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent
provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. – There shall be levied, assessed and collected on cigars a tax of One peso (₱1.00) per cigar.

"(B) Cigarettes packed by hand. – There shall be levied, assessesed and collected on cigarettes packed by hand a
tax of Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:
 (1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(₱10.00) per pack, the tax shall be Twelve (₱12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty
centavos (₱6.50) but does not exceed Ten pesos (₱10.00) per pack, the tax shall be Eight Pesos (₱8.00)
per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (₱5.00) but does
not exceed Six Pesos and fifty centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (₱5.00)
per pack, the tax shall be One peso (₱1.00) per pack;

"Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No.
8240 shall be taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not
be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, that in cases were (sic) the
excise tax rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than
seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the
increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in
twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000. (Emphasis supplied)

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover
the applicable excise tax and value-added tax. For brands which are marketed only outside Metro [M]anila, the ‘net
retail price’ shall mean the price at which the cigarette is sold in five (5) major supermarkets in the region excluding the
amount intended to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex
"D," shall remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand
and/or a different brand which carries the same logo or design of the existing brand.

To implement the provisions for a twelve percent (12%) increase of excise tax on, among others, cigars and cigarettes
packed by machines by January 1, 2000, the Secretary of Finance, upon recommendation of the respondent
Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99, dated December 16, 1999, which provides
the increase on the applicable tax rates on cigar and cigarettes as follows:

PRESENT SPECIFIC TAX RATE NEW SPECIFIC TAX RATE

SECTION ARTICLES
PRIOR TO JAN. 1, 2000 EFFECTIVE JAN. 1, 2000
145 (A) P1.00/cigar ₱1.12/cigar
(B)Cigarettes packed by machine
 (1) Net retail price (excluding VAT and ₱12.00/pack ₱13.44/ pack
excise) exceeds ₱10.00 per pack
(2) Exceeds ₱10.00 per pack ₱8.00/pack ₱8.96/pack
(3) Net retail price (excluding VAT and ₱5.00/pack ₱5.60/pack
excise) is ₱5.00 to ₱6.50 per pack
(4) Net Retail Price (excluding VAT and ₱1.00/pack ₱1.12/pack
excise) is below ₱5.00 per pack

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, "(t)hat the new specific tax
rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall
not be lower than the excise tax that is actually being paid prior to January 1, 2000."

For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands manufactured and
removed in the total amounts of ₱585,705,250.00.

On February 7, 2000, petitioner filed with respondent’s Appellate Division a claim for refund or tax credit of its
purportedly overpaid excise tax for the month of January 2000 in the amount of ₱35,651,410.00

On June 21, 2001, petitioner filed with respondent’s Legal Service a letter dated June 20, 2001 reiterating all the claims
for refund/tax credit of its overpaid excise taxes filed on various dates, including the present claim for the month of
January 2000 in the amount of ₱35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant petition for review with this Court on
December 11, 2001, in order to comply with the two-year period for filing a claim for refund.

In his answer filed on January 16, 2002, respondent raised the following Special and Affirmative Defenses;

4. Petitioner’s alleged claim for refund is subject to administrative routinary investigation/examination by the
Bureau;

5. The amount of ₱35,651,410 being claimed by petitioner as alleged overpaid excise tax for the month of
January 2000 was not properly documented.

6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to
sustain the burden is fatal to its claim for refund/credit.

7. Petitioner must show that it has complied with the provisions of Section 204(C) in relation [to] Section 229 of
the Tax Code on the prescriptive period for claiming tax refund/credit;

8. Claims for refund are construed strictly against the claimant for the same partake of tax exemption from
taxation; and

9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid implementing regulation which
has the force and effect of law."

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said case questions the CTA’s December 4, 2003 decision
in CTA Case No. 6612 granting respondent’s3 claim for refund of the amount of ₱355,385,920.00 representing
erroneously or illegally collected specific taxes covering the period January 1, 2002 to December 31, 2002, as well as its
March 17, 2004 Resolution denying a reconsideration thereof.

xxxx

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues to be resolved into
two as stipulated by the parties, to wit: (1) Whether or not the last paragraph of Section 1 of Revenue Regulation[s]
[No.] 17-99 is in accordance with the pertinent provisions of Republic Act [No.] 8240, now incorporated in Section 145 of
the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a refund of ₱35,651,410.00 as alleged overpaid
excise tax for the month of January 2000.

xxxx

Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA Case Nos. 6365 & 6383:

WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious and in accordance with law.
Accordingly, respondent is hereby ORDERED to REFUND to petitioner the amount of ₱35,651.410.00 representing
erroneously paid excise taxes for the period January 1 to January 31, 2000.

SO ORDERED.

Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s] [both] dated July 15,
2003, the Tax Court, in an apparent change of heart, granted the petitioner’s consolidated motions for reconsideration,
thereby denying the respondent’s claim for refund.

However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos. 6363 and 6383, the July
15, 2002 resolution was set aside, and the Tax Court ruled, this time with a semblance of finality, that the respondent is
entitled to the refund claimed. Hence, in a resolution dated November 4, 2003, the tax court reinstated its December 21,
2002 Decision and disposed as follows:

WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby REINSTATED. Accordingly, respondent is hereby
ORDERED to REFUND petitioner the total amount of ₱680,387,025.00 representing erroneously paid excise taxes for the
period January 1, 2000 to January 31, 2000 and February 1, 2000 to December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612 granting the prayer
for the refund of the amount of ₱355,385,920.00 representing overpaid excise tax for the period covering January 1,
2002 to December 31, 2002. The tax court disposed of the case as follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent is hereby ORDERED to
REFUND to petitioner the amount of ₱355,385,920.00 representing overpaid excise tax for the period covering January
1, 2002 to December 31, 2002.

SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied in a Resolution dated March 17,
2004.4 (Emphasis supplied) (Citations omitted)

The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund in the
amount of ₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the
amount of ₱355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were consolidated and eventually
denied by the Court of Appeals. The appellate court also denied reconsideration in its Resolution5 dated 1 March 2005.

In its Memorandum6 22 dated November 2006, filed on behalf of the Commissioner, the Office of the Solicitor General
(OSG) seeks to convince the Court that the literal interpretation given by the CTA and the Court of Appeals of Section
145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax imposable on 1 January 2000 than that imposable
during the transition period. Instead of an increase of 12% in the tax rate effective on 1 January 2000 as allegedly
mandated by the Tax Code, the appellate court’s ruling would result in a significant decrease in the tax rate by as much
as 66%.

The OSG argues that Section 145 of the Tax Code admits of several interpretations, such as:

1. That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under the specific tax
system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by par. 5, Sec. 145
of the Tax Code;

2. The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes listed under Annex
"D" referred to in par. 8, Sec. 145 of the Tax Code;

3. The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-par. (1)-(4), Sec.
145 of the Tax Code even if the resulting figure will be lower than the amount already being paid at the end of
the transition period. This is the interpretation followed by both the CTA and the Court of Appeals. 7

This being so, the interpretation which will give life to the legislative intent to raise revenue should govern, the OSG
stresses.

Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be construed strictly
against the taxpayer, such as Fortune Tobacco.

In its Memorandum8 dated 10 November 2006, Fortune Tobacco argues that the CTA and the Court of Appeals merely
followed the letter of the law when they ruled that the basis for the 12% increase in the tax rate should be the net retail
price of the cigarettes in the market as outlined in paragraph C, sub paragraphs (1)-(4), Section 145 of the Tax Code. The
Commissioner allegedly has gone beyond his delegated rule-making power when he promulgated, enforced and
implemented Revenue Regulation No. 17-99, which effectively created a separate classification for cigarettes based on
the excise tax "actually being paid prior to January 1, 2000."9

It should be mentioned at the outset that there is no dispute between the fact of payment of the taxes sought to be
refunded and the receipt thereof by the Bureau of Internal Revenue (BIR). There is also no question about the
mathematical accuracy of Fortune Tobacco’s claim since the documentary evidence in support of the refund has not
been controverted by the revenue agency. Likewise, the claims have been made and the actions have been filed within
the two (2)-year prescriptive period provided under Section 229 of the Tax Code.

The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a
grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and
where the people have laid the power, there it must remain and be exercised. 10

This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue Regulation 17-
99. The main issue is an inquiry into whether the revenue regulation has exceeded the allowable limits of legislative
delegation.

For ease of reference, Section 145 of the Tax Code is again reproduced in full as follows:

Section 145. Cigars and Cigarettes-

 (A) Cigars.—There shall be levied, assessed and collected on cigars a tax of One peso (₱1.00) per cigar.

(B). Cigarettes packed by hand.—There shall be levied, assessed and collected on cigarettes packed by hand a
tax of Forty centavos (₱0.40) per pack.

(C) Cigarettes packed by machine.—There shall be levied, assessed and collected on cigarettes packed by
machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (₱10.00)
per pack, the tax shall be Twelve pesos (₱12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty
centavos (₱6.50) but does not exceed Ten pesos (₱10.00) per pack, the tax shall be Eight Pesos (₱8.00)
per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (₱5.00) but does
not exceed Six Pesos and fifty centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (₱5.00)
per pack, the tax shall be One peso (₱1.00) per pack;

Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No.
8240 shall be taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not
be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, That in cases where the
excise tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more
than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of
the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in
twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000.

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover
the applicable excise tax and value-added tax. For brands which are marketed only outside Metro Manila, the ‘net retail
price’ shall mean the price at which the cigarette is sold in five (5) major intended to cover the applicable excise tax and
the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex
"D," shall remain in force until revised by Congress.

Variant of a brand’ shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand
and/or a different brand which carries the same logo or design of the existing brand. 11 (Emphasis supplied)
Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective implementation of the Tax Code,12 interprets the above-quoted
provision and reflects the 12% increase in excise taxes in the following manner:

PRESENT SPECIFIC TAX RATES NEW SPECIFIC TAX RATE

SECTION DESCRIPTION OF ARTICLES
PRIOR TO JAN. 1, 2000 Effective Jan.. 1, 2000
145 (A) P1.00/cigar ₱1.12/cigar
(B)Cigarettes packed by Machine
(1) Net Retail Price (excluding VAT and ₱12.00/pack ₱13.44/pack
Excise) exceeds ₱10.00 per pack
(2) Net Retail Price (excluding VAT and ₱8.00/pack ₱8.96/pack
Excise) is ₱6.51 up to ₱10.00 per pack
(3) Net Retail Price (excluding VAT and ₱5.00/pack ₱5.60/pack
excise) is ₱5.00 to ₱6.50 per pack
(4) Net Retail Price (excluding VAT and ₱1.00/pack ₱1.12/pack
excise) is below ₱5.00 per pack)

This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1 January 2000 based
on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99 went further
and added that "[T]he new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled
spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1,
2000."13

Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from the
effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each
brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be
applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and
unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase
effective on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to
be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher
amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax
under paragraph C, sub-paragraph (1)-(4), as increased by 12%—a situation not supported by the plain wording of
Section 145 of the Tax Code.

This is not the first time that national revenue officials had ventured in the area of unauthorized administrative
legislation.

In Commissioner of Internal Revenue v. Reyes,14 respondent was not informed in writing of the law and the facts on
which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic
Act (R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who had simply relied upon the old
provisions of the law and Revenue Regulation No. 12-85 which was based on the old provision of the law. The Court held
that in case of discrepancy between the law as amended and the implementing regulation based on the old law, the
former necessarily prevails. The law must still be followed, even though the existing tax regulation at that time provided
for a different procedure.15
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,16 the tax authorities gave the term "tax credit"
in Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides. Their
interpretation muddled up the intent of Congress to grant a mere discount privilege and not a sales discount. The Court,
striking down the revenue regulation, held that an administrative agency issuing regulations may not enlarge, alter or
restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the
legislature. The Court emphasized that tax administrators are not allowed to expand or contract the legislative mandate
and that the "plain meaning rule" or verba legis in statutory construction should be applied such that where the words
of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted
interpretation.

As we have previously declared, rule-making power must be confined to details for regulating the mode or proceedings
in order to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony
with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the
basic law.17

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,18 Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91,
imposing a 5% lending investor’s tax under the 1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on
pawnshops. The Commissioner anchored the imposition on the definition of lending investors provided in the 1977 Tax
Code which, according to him, was broad enough to include pawnshop operators. However, the Court noted that
pawnshops and lending investors were subjected to different tax treatments under the Tax Code prior to its amendment
by the executive order; that Congress never intended to treat pawnshops in the same way as lending investors; and that
the particularly involved section of the Tax Code explicitly subjected lending investors and dealers in securities only to
percentage tax. And so the Court affirmed the invalidity of the challenged circulars, stressing that "administrative
issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry
out."19

In Philippine Bank of Communications v. Commissioner of Internal Revenue,20 the then acting Commissioner issued RMC
7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly income tax payments,
thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax Code. The Court nullified the
circular, ruling that the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed
by Congress. The Court held:

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be
ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override,
instead of remaining consistent and in harmony with, the law they seek to apply and implement. 21

In Commissioner of Internal Revenue v. CA, et al.,22 the central issue was the validity of RMO 4-87 which had construed
the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the promulgation of
the executive order on 22 August 1986 and not assessments made to that date. Resolving the issue in the negative, the
Court held:

x x x all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply
and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the
law.23

xxx
If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities
already assessed (administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary
clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature
of a general grant of tax amnesty subject only to the cases specifically excepted by it.24

In the case at bar, the OSG’s argument that by 1 January 2000, the excise tax on cigarettes should be the higher tax
imposed under the specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase
imposed by paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify what is clearly an
impermissible incursion into the limits of administrative legislation. Such an interpretation is not supported by the clear
language of the law and is obviously only meant to validate the OSG’s thesis that Section 145 of the Tax Code is
ambiguous and admits of several interpretations.

The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of cigarettes listed
under Annex "D" is likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code simply states that,
"[T]he classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in
Annex ‘D’, shall remain in force until revised by Congress." This declaration certainly does not lend itself to the
interpretation given to it by the OSG. As plainly worded, the average net retail prices of the listed brands under Annex
"D," which classify cigarettes according to their net retail price into low, medium or high, obviously remain the bases for
the application of the increase in excise tax rates effective on 1 January 2000.

The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The Commissioner
cannot seek refuge in his claim that the purpose behind the passage of the Tax Code is to generate additional revenues
for the government. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code.
However, as borne by the legislative record,25 the shift from the ad valorem system to the specific tax system is likewise
meant to promote fair competition among the players in the industries concerned, to ensure an equitable distribution of
the tax burden and to simplify tax administration by classifying cigarettes, among others, into high, medium and low-
priced based on their net retail price and accordingly graduating tax rates.

At any rate, this advertence to the legislative record is merely gratuitous because, as we have held, the meaning of the
law is clear on its face and free from the ambiguities that the Commissioner imputes. We simply cannot disregard the
letter of the law on the pretext of pursuing its spirit.26

Finally, the Commissioner’s contention that a tax refund partakes the nature of a tax exemption does not apply to the
tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the
former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here. Quite
the contrary, Fortune Tobaccos claim for refund is premised on its erroneous payment of the tax, or better still the
government’s exaction in the absence of a law.

Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify
his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. 27 The rule is that tax
exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under
which it is granted clearly and distinctly show that such was the intention.28

A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayer
must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. 29

Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle
which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of another. 30 The dynamic of
erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in
fact but also mistake in law.31
The Government is not exempt from the application of solutio indebiti. 32 Indeed, the taxpayer expects fair dealing from
the Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously
collected.33 If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself
against the same standard in refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich itself
at the expense of taxpayers.34 And so, given its essence, a claim for tax refund necessitates only preponderance of
evidence for its approbation like in any other ordinary civil case.

Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax refund may
be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed
without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected.35

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the
similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without
clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are
to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not
to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.36 As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. 37

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No. 80675, dated 28 September
2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

4. G.R. No. 161997 October 25, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PHILIPPINE NATIONAL BANK, Respondent.

Thru this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue seeks to set aside the Decision dated October 14, 20031 of the Court of Appeals (CA)
in CA-G.R. SP No. 76488 and its Resolution dated January 26, 20042 denying petitioner’s motion for reconsideration.

The petition is cast against the following factual setting:

In early April 1991, respondent Philippine National Bank (PNB) issued to the Bureau of Internal Revenue (BIR) PNB
Cashier’s Check No. 109435 for P180,000,000.00. The check represented PNB’s advance income tax payment for the
bank’s 1991 operations and was remitted in response to then President Corazon C. Aquino’s call to generate more
revenues for national development. The BIR acknowledged receipt of the amount by issuing Payment Order No. C-
10151465 and BIR Confirmation Receipt No. 22063553, both dated April 15, 1991.3

Via separate letters dated April 19 and 29, 1991 and May 14, 19914 to then BIR Commissioner Jose C. Ong, PNB
requested the issuance of a tax credit certificate (TCC) to be utilized against future tax obligations of the bank.

For the first and second quarters of 1991, PNB also paid additional taxes amounting to P6,096,150.00 and
P26,854,505.80, respectively, as shown in its corporate quarterly income tax return filed on May 30, 1991. 5 Inclusive of
the P180 Million aforementioned, PNB paid and BIR received in 1991 the aggregate amount of P212, 950,656.79. 6 This
final figure, if tacked to PNB’s prior year’s excess tax credit (P1,385,198.30) and the creditable tax withheld for 1991
(P3,216,267.29), adds up to P217,552,122.38.
By the end of CY 1991, PNB’s annual income tax liability, per its 1992 annual income tax return,7 amounted to
P144,253,229.78, which, when compared to its claimed total credits and tax payments of P217,552,122.38, resulted to a
credit balance in its favor in the amount of P73,298,892.60.8 This credit balance was carried-over to cover tax liability for
the years 1992 to 1996, but, as PNB alleged, was never applied owing to the bank’s negative tax position for the said
inclusive years, having incurred losses during the 4-year period.

On July 28, 1997, PNB wrote then BIR Commissioner Liwayway Vinzons-Chato, Attention: Appellate Division, to inform
her about the above developments and to reiterate its request for the issuance of a TCC, this time for the "unutilized
balance of its advance payment made in 1991 amounting to P73,298,892.60".9 This request was forwarded for review
and further processing to the Office of the Deputy Commissioner for Legal and Inspection Group, Lilian B. Hefti, and then
to the BIR’s Large Taxpayers Service.

In a letter dated July 26, 2000, PNB sought reconsideration of the decision of Deputy Commissioner Hefti not to take
cognizance of the bank’s claim for tax credit certificate on the ground that the jurisdiction of the Appellate Division is
limited to claims for tax refund and credit "involving erroneous or illegal collection of taxes whenever there are questions
of law and/or facts and does not include claims for refund of advance payment, pursuant to Revenue Administrative
Order [RAO] No. 7-95 dated October 10, 1995."10 In her letter-reply dated August 8, 2008,11 Deputy Commissioner Hefti
denied PNB’s request for reconsideration with the following explanations:

In reply, please be advised that upon review . . . of your case, this Office finds that the same presents no legal question
for resolution. Rather, what is involved is the verification of factual matters, i.e., the existence of material facts to
establish your entitlement to refund. Such facts were initially verified through the proper audit of your refund case by
the investigating unit under the functional control and supervision of the Deputy Commissioner, Operations Group of
this Bureau. It is therefore right and proper for the Operations Group to review, confirm and/or pass judgment upon the
findings of the unit under it.

At any rate, sound management practices demand that issues as crucial as refund cases be subjected to complete staff
work. There might be a little delay in the transition of cases but expect the new procedures to be well-established in no
time. Allow us, however, to allay your concern about delayed processing of your claim. In fact, the undersigned has made
representations with the Operations Group about your case and if you would check the status of your case again, you
will find that the same has been duly acted upon." (Emphasis supplied)

On August 14, 2001, PNB again wrote the BIR requesting that it be allowed to apply its unutilized advance tax payment
of P73,298,892.60 to the bank’s future gross receipts tax liability.12

Replying, the BIR Commissioner denied PNB’s claim for tax credit for the following reasons stated in his letter of May 21,
2002, to wit:13

1. The amount subject of claim for [TCC] is being carried over from your 1991 to 1996 Annual Income Tax Returns. xxx.
To grant your claim would result into granting it twice – first for tax carry over as shown in your 1991 amended Income
Tax Return and second for granting a tax credit.

2. When you requested for a refund on April 19, 1991, reiterated on April 29, 1991 and again on May 14, 1991 on
alleged excess income taxes, the same was considered premature since the determination . . . of your income tax liability
can only be ascertained upon filing of your Final or Adjusted Income Tax Return for 1991 on or before April 15, 1992.

3. When you carried over the excess tax payments from 1991 to 1996 Annual Income Tax Return, you had already
abandoned your original intention of claiming for a [TCC]. Furthermore, the 1991 amended Income Tax Return you filed
on April 14, 1994 clearly showed that the amount being claimed has already been applied as tax credit against your 1992
income tax liability.
4. Although there was already a recommendation for the issuance of a [TCC] by the Chief, Appellate Division and
concurred in by the Assistant Commissioner, Legal Service, the recommendation was for . . . year 1992 and not for the
taxable year 1991, which is the taxable year involved in this case.

5. Even if you reiterated your claim for tax credit certificate when you filed your claim on July 28, 1997, the same has
already prescribed on the ground that it was filed beyond the two (2) year prescriptive period as provided for under
Section 204 of NIRC. [Words in bracket and emphasis added]

On June 20, 2002, PNB, via a petition for review, appealed the denial action of the BIR Commissioner to the Court of Tax
Appeals (CTA). There, its appellate recourse was docketed as C.T.A. Case No. 6487.

The Revenue Commissioner filed a motion to dismiss PNB’s aforementioned petition on ground of prescription under
the 1977 National Internal Revenue Code (NIRC)14. To this motion, PNB interposed an opposition, citing Commissioner of
Internal Revenue vs. Philippine American Life Insurance Co. 15

In its Resolution of October 10, 2002,16 the CTA granted the Commissioner’s motion to dismiss and, accordingly, denied
PNB’s petition for review, pertinently stating as follows:

To reiterate, both the claim for refund and the subsequent appeal to this court must be filed within the same two (2)-
year period [provided in Sec. 230 of the NIRC]. This is not subject to qualification. The court is bereft of any jurisdiction
or authority to hear the instant Petition for Review, considering that the above stated action for refund was filed beyond
the two (2)-year prescriptive period as allowed under the Tax Code. (Words in bracket added)

PNB’s motion for reconsideration was denied by the tax court in its subsequent Resolution of March 20, 2003. 17

In time, PNB filed a petition for review with the Court of Appeals (CA), thereat docketed as CA-G.R. SP No. 76488,
arguing that the applicability of the two (2)-year prescriptive period is not jurisdictional and that said rule admits of
certain exceptions.18 Following the filing by the Commissioner Internal Revenue of his Comment to PNB’s petition in CA-
G.R. in SP No. 76488, respondent PNB filed a Supplement to its Petition for Review. 19

In the herein assailed Decision dated October 14, 2003,20 the appellate court reversed the ruling of the CTA, disposing as
follows:

WHEREFORE, premises considered, the present petition is hereby GIVEN DUE COURSE. Consequently, the assailed
Resolutions dated October 10, 2002 and March 30, 2003 of the Court of Tax Appeals in C.T.A. Case No. 6487 are
hereby ANNULLED and SET ASIDE. The case is hereby REMANDED to the respondent Commissioner for issuance with
deliberate dispatch of the tax credit certificate after completion of processing of petitioner’s claim/request by the
concerned BIR officer/s as to the correct amount of tax credit to which petitioner is entitled.

No pronouncements as to costs.

SO ORDERED.

In gist, the appellate court predicated its disposition on the following main premises:

1. Considering the "special circumstance" that the tax credit PNB has been seeking is to be sourced not from any tax
erroneously or illegally collected but from advance income tax payment voluntarily made in response to then President
Aquino’s call to generate more revenues for the government, in no way can the amount of P180 million advanced by
PNB in 1991 be considered as erroneously or illegally paid tax. 21

2. The BIR is deemed to have waived the two (2)-year prescriptive period when its officials led the PNB to believe that its
request for tax credit had not yet prescribed since the matter was not being treated as an ordinary claim for tax
refund/credit or a simple case of excess payment.
3. Commissioner of Internal Revenue vs. Philippine American Life Insurance Co. 22 instructs that even if the two (2)-year
prescriptive period under the Tax Code had already lapsed, the same is not jurisdictional, and may be suspended for
reasons of equity and other special circumstances. PNB’s failure to apply the advance income tax payment due to its
negative tax liability in the succeeding taxable years i.e., 1992-1996, should not be subject to the two (2)-year limitation
as to bar its claim for tax credit. The advance income tax payment, made as it were under special circumstances,
warrants a suspension of the two (2)-year limitation, underscoring the fact that PNB’s claim is not even a simple case
of excess payment.

In time, the BIR Commissioner moved for a reconsideration, but its motion was denied by the appellate court in its
equally challenged Resolution of January 26, 2004.23

Hence, the Commissioner’s present recourse on the following substantive submissions:

1. A prior tax assessment before respondent PNB can apply for tax credit is unnecessary;

2. PNB’s letter dated April 19, 29 and May 14, 1991 cannot be legally interpreted as claims for refund or tax credit as
required by the NIRC;

3. PNB’s claim for tax credit is barred by prescription; and

4. The equitable principle of estoppel does bar the BIR petitioner from collecting taxes due. 24

Petitioner first scores the CA for concluding that "the amount of advance income tax payment voluntarily remitted to the
BIR by the [respondent] was not a consequence of a prior tax assessment or computation by the taxpayer based on
business income" and, therefore, it cannot "be treated as similar to those national revenue taxes erroneously, illegally or
wrongfully paid as to be automatically covered by the two (2)-year limitation under Sec. 230 [of the NIRC] for the right to
its recovery." Petitioner invokes the all too-familiar principle that the collection of taxes, being the lifeblood of the
nation,25 should be summary and with the least interference from the courts.

Pressing its point, petitioner asserts that what transpired under the premises is a case of excessive collection not arising
from an erroneous, illegal of wrongful assessment and collection. According to petitioner, respondent PNB, after making
a prepayment of taxes in 1991, had realized, upon filing, in 1992, of its 1991 final annual income tax return, the excess
payment by simple process of mathematical computation; hence, it was unnecessary to make any assessment
of overpaid taxes. Moreover, petitioner points out that the tenor of PNB’s letters of April 19, 29, and May 14,
199126 indicated a mere request for an issuance of a TCC covering the advance payments of taxes, not a claim for refund
or tax credit of overpaid national internal revenue taxes.

Citing Revenue Regulation No. 10-77, petitioner likewise argues that any excess or overpaid income tax for a given
taxable year may be carried to the succeeding taxable year only. It cannot, petitioner expounds, go beyond, as what
respondent PNB attempted to do in 1997, when, after realizing the inapplicability of the excess carry-forward scheme
for its 1992 income tax liabilities owing to its negative tax position for the 1992 to 1996 tax period, it belatedly
requested for a TCC issuance.

Lastly, petitioner urges the Court to make short shrift of the invocation of equity and estoppel, on the postulate that the
erroneous application and enforcement of tax laws by public officers does not preclude the subsequent correct
application of such laws.27

In its Comment, respondent PNB contends that its claim for tax credit did not arise from overpayment resulting from
erroneous, illegal or wrongful collection of tax. And obviously having in mind the holding of this Court in Juan Luna
Subdivision Inc. vs. Sarmiento,28 respondent stresses that its P180 Million advance income tax payment for 1991
partakes of the nature of a deposit made in anticipation of taxes not yet due or levied. Accordingly, respondent adds,
the P180 Million was strictly not a payment of a valid and existing tax liability, let alone an erroneous payment, the
refund of which is governed by Section 230 of the NIRC.
Taking a different tack, respondent PNB would also argue that, even assuming, in gratia argumenti that the two (2)-year
limitation in Section 230 of the NIRC is of governing application, still the prescriptive period set forth therein is not
jurisdictional. The suspension of the statutory limitation in this case, PNB adds, is justified under exceptional
circumstance.

We rule for respondent PNB.

As may be recalled, both the CTA’s and the BIR’s refusal to grant PNB’s claim for refund or credit was based on the
proposition that such claim was time-barred. On the other hand, the CA rejected both the CTA’s and BIR’s stance for
reasons as shall be explained shortly.

As we see it then, the core issue in this case pivots on the applicability hereto of the two (2)-year prescriptive period
under in Section 230 (now Sec. 229) of the NIRC, reading:

"SEC. 230. 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 sum, alleged to have been excessive 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 begun 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 a written claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have been erroneously paid. (Underscoring added.)

Here, respondent PNB requested the BIR to issue a TCC on the remaining balance of the advance income tax payment it
made in 1991. It should be noted that the request was made considering that, while PNB carried over such credit
balance to the succeeding taxable years, i.e., 1992 to 1996, its negative tax position during said tax period prevented it
from actually applying the credit balance of P73, 298,892.60. It is fairly correct to say then that the claim for tax credit
was specifically pursued to enable the respondent bank to utilize the same for future tax liabilities. However, petitioner
ruled that the claim in question is time-barred, the bank having filed such claim only in 1997, or more than two (2) years
from 1992 when the overpayment of annual income tax for 1991 was realized by the bank and the amount of excess
payment ascertained with the filing of its final 1991 income tax return.

In rejecting petitioner’s ruling, as seconded by the CTA, the CA stated that PNB’s request for issuance of a tax credit
certificate on the balance of its advance income tax payment cannot be treated as a simple case of excess payment as to
be automatically covered by the two (2)-year limitation in Section 230, supra of the NIRC.

We agree with the Court of Appeals.

Section 230 of the Tax Code, as couched, particularly its statute of limitations component, is, in context, intended to
apply to suits for the recovery of internal revenue taxes or sums erroneously, excessively, illegally or wrongfully
collected.

Black defines the term erroneous or illegal tax as one levied without statutory authority.29 In the strict legal viewpoint,
therefore, PNB’s claim for tax credit did not proceed from, or is a consequence of overpayment of tax erroneously or
illegally collected. It is beyond cavil that respondent PNB issued to the BIR the check for P180 Million in the concept of
tax payment in advance, thus eschewing the notion that there was error or illegality in the payment. What in effect
transpired when PNB wrote its July 28, 1997 letter30 was that respondent sought the application of amounts advanced
to the BIR to future annual income tax liabilities, in view of its inability to carry-over the remaining amount of such
advance payment to the four (4) succeeding taxable years, not having incurred income tax liability during that period.
The instant case ought to be distinguished from a situation where, owing to net losses suffered during a taxable year, a
corporation was also unable to apply to its income tax liability taxes which the law requires to be withheld and remitted.
In the latter instance, such creditable withholding taxes, albeit also legally collected, are in the nature of "erroneously
collected taxes" which entitled the corporate taxpayer to a refund under Section 230 of the Tax Code. So it is that
in Citibank, N.A. vs. Court of Appeals31, we held:

The taxes thus withheld and remitted are provisional in nature. We repeat: five percent of the rental income withheld
and remitted to the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the withholding of final taxes on passive incomes, a
creditable withholding tax; that is, creditable against income tax liability if any, for that taxable year.

In Commissioner of Internal Revenue vs. TMX Sales, Inc., this Court ruled that the payments of quarterly income taxes
(per Section 68, NIRC) should be considered mere installments on the annual tax due. These quarterly tax payments . . .
should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or
fiscal year. The same holds true in the case of the withholding of creditable tax at source. Withholding taxes are
"deposits" which are subject to adjustments at the proper time when the complete tax liability is determined.

In this case, the payments of the withholding taxes for 1979 and 1980 were creditable to the income tax liability, if any,
of petitioner-bank, determined after the filing of the corporate income tax returns on April 15, 1980 and April 15,
1981. As petitioner posted net losses in its 1979 and 1980 returns, it was not liable for any income taxes. Consequently
and clearly, the taxes withheld during the course of the taxable year, while collected legally under the aforecited
revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable
year. (Underscoring added)

Analyzing the underlying reason behind the advance payment made by respondent PNB in 1991, the CA held that it
would be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Section 230
of the Tax Code. So that even if the respondent’s inability to carry-over the remaining amount of its advance payment to
taxable years 1992 to 1996 resulted in excess credit, it would be inequitable to impose the two (2)-year prescriptive
period in Section 230 as to bar PNB’s claim for tax credit to utilize the same for future tax liabilities. We quote with
approval the CA’s disquisition on this point:

Thus, in no sense can the subject amount of advance income tax voluntarily remitted to the BIR by the [respondent], not
as a consequence of prior tax assessment or computation by the taxpayer based on business income, be treated as
similar to those national revenue taxes erroneously, illegally or wrongfully paid as to be automatically covered by the
two (2)-year limitation under Sec. 230 for the right to its recovery. When the P180 million advance income tax payment
was tendered by [respondent], no tax had been assessed or due, or actually imposed and collected by the BIR. Neither
can such payment be considered as illegal having been made in response to a call of patriotic duty to help the national
government …. We therefore hold that the tax credit sought by [respondent] is not simply a case of excess payment, but
rather for the application of the balance of advance income tax payment for subsequent taxable years after failure or
impossibility to make such application or carry over the preceding four (4)-year period when no tax liability was incurred
by petitioner due to losses in its operations. It is truly inequitable to strictly impose the two (2)-year prescriptive period
as to legally bar any request for such tax credit certificate considering the special circumstances under which the
advance income tax payment was made and the unexpected event (four years of business losses) which prevented such
application or carry over. Ironically, both the [petitioner] and CTA would fault the [respondent] for electing to credit or
carry over the excess amount of tax payment advanced instead of choosing to refund any such excess amount, holding
that such decision on the part of petitioner caused the two (2)-year period to lapse without the petitioner filing such a
request for the issuance of a tax credit certificate. They emphasized that the advance tax payment was made with the
understanding that any excess amount will be either carried over to the next taxable year or refunded. It appears then
that the request for issuance of a tax credit certificate was arbitrarily interpreted by respondent as a simple claim for
refund instead of a request for application of the balance (excess amount) to tax liability for the succeeding taxable
years, as was the original intention of [respondent] when it tendered the advance payment in 1991."32 (Emphasis in the
original; words in bracket added)
Petitioner insists that a prior tax assessment in this case was unnecessary, the excess tax payment having already been
ascertained by the end of 1992 upon the filing by respondent of its adjusted final return. Thus, petitioner adds, the two
(2)-year prescriptive period to recover said excess credit balance had begun to run from the accomplishment of the said
final return and, ergo, PNB’s claim for tax credit asserted in 1997 is definitely belated. Additionally, petitioner, citing
Revenue Regulation No. 10-77, contends that the carrying forward of any excess or overpaid income tax for a given
taxable year is limited to the succeeding taxable year only.

We do not agree.

Revenue Regulation No. 10-7733 governs the method of computing corporate quarterly income tax on a cumulative
basis. Section 7 thereof provides:

SEC. 7. Filing of final or adjustment return and final payment of income tax. -- A final or an adjustment return . . .
covering the total taxable income of the corporation for the preceding calendar or fiscal year shall be filed on or before
the 15th day of the fourth month following the close of the calendar or fiscal year. xxxx. The amount of income tax to be
paid shall be the balance of the total income tax shown on the final or adjustment return after deducting therefrom the
total quarterly income taxes paid during the preceding first three quarters of the same calendar or fiscal year.

"Any excess of the total quarterly payments over the actual income tax computed and shown in the adjustment or
final corporate income tax return shall either (a) be refunded to the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify
in its annual corporate adjustment return its intention whether to request for the refund of the overpaid income or
claim for automatic tax credit to be applied against its income tax liabilities for the quarters of the succeeding taxable
year by filling the appropriate box on the corporate tax return. (B.I.R. Form No. 1702) [Emphasis added]

As can be gleaned from the above, the mandate of Rev. Reg. No. 10-77 is hardly of any application to PNB’s advance
payment which, needless to stress, are not "quarterly payments" reflected in the adjusted final return, but a lump sum
payment to cover future tax obligations. Neither can such advance lump sum payment be considered overpaid income
tax for a given taxable year, so that the carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only.34 Clearly, limiting the right to carry-over the balance of respondent’s
advance payment only to the immediately succeeding taxable year would be unfair and improper considering that, at
the time payment was made, BIR was put on due notice of PNB’s intention to apply the entire amount to its future tax
obligations.

In Commissioner vs. Phi-am Life35, the Court ruled that an availment of a tax credit due for reasons other than the
erroneous or wrongful collection of taxes may have a different prescriptive period. Absent any specific provision in
the Tax Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code.
Significantly, Commissioner vs. Phil-Am is partly a reiteration of a previous holding that even if the two (2)-year
prescriptive period, if applicable, had already lapsed, the same is not jurisdictional 36 and may be suspended for reasons
of equity and other special circumstances.37

While perhaps not in all fours because it involved the refund of overpayment due to misinterpretation of the law on
franchise, our ruling in Panay Electric Co. vs. Collector of Internal Revenue38, is apropos. There, the Court stated:

"xxx(L)egally speaking, the decision of the Tax Court [on the two-year prescriptive period for tax refund] is therefore
correct, being in accordance with law. However, one’s conscience does not and cannot rest easy on this strict application
of the law, considering the special circumstances that surround this case. Because of his erroneous interpretation of the
law on franchise taxes, the Collector, from the year 1947 had illegally collected from petitioner the respectable sum of . .
. . From a moral standpoint, the Government would be enriching itself of this amount at the expense of the taxpayer.
(Words in bracket added and underscoring added.)

Like the CA, this Court perceives no compelling reason why the principle enunciated in Panay Electric and Commissioner
vs. Phil-Am Life should not be applied in this case, more so since the amount over which tax credit is claimed was
theoretically booked as advance income tax payment. It bears stressing that respondent PNB remitted the P180 Million
in question as a measure of goodwill and patriotism, a gesture noblesse oblige, so to speak, to help the cash-strapped
national government. It would thus indeed, be unfair, as the CA correctly observed, to leave respondent PNB to suffer
losing millions of pesos advanced by it for future tax liabilities. The cut becomes all the more painful when it is
considered that PNB’s failure to apply the balance of such advance income tax payment from 1992 to 1996 was, to
repeat, due to business downturn experienced by the bank so that it incurred no tax liability for the period.

The rule of long standing is that the Court will not set aside lightly the conclusions reached by the CTA which, by the very
nature of its functions, is dedicated exclusively to the resolution of tax problems and has, accordingly, developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority. 39 It is likewise settled that
to a claimant rests the onus to establish the factual basis of his or her claim for tax credit or refund. 40 In this case,
however, petitioner does not dispute that a portion of the P180 Million PNB remitted to the BIR in 1991 as advance
payment remains unutilized for the purpose for which it was intended in the first place. But petitioner asserts that
respondent’s right to recover the same is already time-barred. The CTA upheld the position of petitioner. The CA ruled
otherwise. We find the CA’s position more in accord with the facts on record and is consistent with applicable laws and
jurisprudence.

Verily, the suspension of the two (2)-year prescriptive period is warranted not solely by the objective or purpose
pursuant to which respondent PNB made the advance income tax payment in 1991. Records show that petitioner’s very
own conduct led the bank to believe all along that its original intention to apply the advance payment to its future
income tax obligations will be respected by the BIR. Notwithstanding respondent PNB’s failure to request for tax credit
after incurring negative tax position in 1992, up to taxable year 1996, there appears to be a valid reason to assume that
the agreed carrying forward of the balance of the advance payment extended to succeeding taxable years, and not only
in 1992. Thus, upon posting a net income in 1997 and regaining a profitable business operation, respondent bank
promptly sought the issuance of a TCC for the reason that its credit balance of P73, 298,892.60 remained unutilized. If
ever, petitioner’s pose about respondent PNB never having made a written claim for refund only serves to buttress the
latter’s position that it was not out to secure a refund or recover the aforesaid amount, but for the BIR to issue a TCC so
it can apply the same to its future tax obligations.

Lest it be overlooked, petitioner peremptorily denied the request for tax credit on the ground of its having been filed
beyond the two (2)-year prescriptive period. In the same breath, however, petitioner appears to have glossed over an
incident which amounts to an earlier BIR ruling that "there is no legal question to be resolved but only a factual
investigation" in the processing of PNB’s claim. Even as petitioner concluded such administrative investigation, it did not
deny the request for issuance of a tax credit certificate on any factual finding, such as the veracity of alleged business
losses in the taxable years 1992 to 1996, during which the respondent bank alleged the credit balance was not applied.
Lastly, there is no indication that petitioner considered respondent’s request as an ordinary claim for refund, the very
reason why the same was referred by the BIR for processing to the Operations Group of the Bureau.

Hence, no reversible error was committed by the CA in holding that, upon basic considerations of equity and fairness,
respondent’s request for issuance of a tax credit certificate should not be subject to the two (2)-year limitation in
Section 230 of the NIRC.

With the foregoing disquisitions, the Court finds it unnecessary to delve on the question of whether or not mistakes of
tax officers constitute a bar to collection of taxes by the BIR Commissioner.

The procedural issue presently raised by petitioner, i.e., respondent PNB’s alleged non-compliance with the forum
shopping rule when its petition for review filed with the CTA did not contain the requisite authority of PNB Vice
President Ligaya R. Gagolinan to sign the certification, need not detain us long.

Petitioner presently faults the CA for not having taken notice that PNB’s initiatory pleading before the CTA suffers from
an infirmity that justifies the dismissal thereof. But it is evident that the issue of forum shopping is being raised for the
first time in this appellate proceedings. Accordingly, the Court loathes to accommodate petitioner’s urging for the
dismissal of respondent’s basic claim on the forum-shopping angle. As earlier ruled by this Court, a party ought to invoke
the issue of forum shopping, assuming its presence, at the first opportunity in his motion to dismiss or similar pleading
filed in the trial court. Else, he is barred from raising the ground of forum shopping in the Court of Appeals and in this
Court.41 So it must be here.

WHEREFORE, the petition is DENIED for lack of merit and the assailed decision and resolution of the Court of Appeals in
CA-G.R. SP No. 76488 AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

5. G.R. No. 141973 June 28, 2005

PHILIPPINE PHOSPHATE FERTILIZER CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Once more, we stand by our ruling that:

If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments. When it is undisputed that a taxpayer is entitled to a refund, the
State should not invoke technicalities to keep money not belonging to it. No one, not even the State, should enrich
oneself at the expense of another.1

The antecedents of this case are as follows:

Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic corporation registered with the Export Processing
Zone Authority (EPZA). It manufactures fertilizers for domestic and international distribution and as such, utilizes fuel, oil
and other petroleum products which it procures locally from Petron Philippines Corporation (Petron). Petron initially
pays the Bureau of Internal Revenue (BIR) and the Bureau of Customs the taxes and duties imposed upon the petroleum
products. Petron is then reimbursed by petitioner when Petron sells such petroleum products to the petitioner. In a
letter dated August 28, 1995, petitioner sought a refund of specific taxes paid on the purchases of petroleum products
from Petron for the period of September 1993 to December 1994 in the total amount of ₱602,349.00 which claim is
pursuant to the incentives it enjoyed by virtue of its EPZA registration. Since the two-year period within which petitioner
could file a case for tax refund before the Court of Tax Appeals (CTA) was about to expire and no action had been taken
by the BIR, petitioner instituted a petition for review before the CTA against the Commissioner of Internal Revenue
(CIR).2 During the trial, to prove that the duties imposed upon the petroleum products delivered to petitioner by Petron
had been duly paid for by petitioner, petitioner presented a Certification from Petron dated August 17, 1995; a schedule
of petroleum products sold and delivered to petitioner detailing the volume of sales and the excise taxes paid thereon;
photocopies of Authority to Accept Payment for Excise Taxes issued by the CIR pertaining to petroleum products
purchased; as well as the testimony of Sylvia Osorio, officer of Petron, to attest to the summary and certification
presented.3 The CIR did not present any evidence to controvert the ones presented by petitioner nor did it file an
opposition to petitioner’s formal offer of evidence.4

On August 11, 1998, the CTA promulgated its Decision finding that while petitioner is exempt from the payment of
excise taxes, it failed to sufficiently prove that it is entitled to refund in this particular case since it did not submit
invoices to support the summary of petroleum products sold and delivered to it by Petron.5 The CTA rationalized thus:

…[P]etitioner, as an EPZA registered enterprise is exempted from the payment of excise taxes, and if said taxes were
passed on by the supplier to EPZA registered enterprise like the petitioner, tax credit shall be granted to the latter.
The fact that it was not the petitioner who had paid the taxes directly to the Bureau of Internal Revenue does not
have an adverse effect on petitioner’s action for refund. The law granting the exemption makes no distinction as to the
circumstances when the law shall apply. Since the law makes no distinction, neither should we. The exemption is so
broad as to cover the present situation. Since an export processing zone is not considered to be covered by Philippine
customs and internal revenue laws, the taxes paid by the petitioner on the petroleum products should be refunded or
credited in its favor. Thus, the only thing left for us to do is to determine whether or not petitioner is entitled to the
amount claimed for refund. After a careful scrutiny of the evidence presented, however, there appears to be a dispute
with respect to the amount claimed. Petitioner submitted in evidence a certification issued by Petron to prove that the
duties imposed upon the petroleum products delivered to petitioner by Petron had been duly paid for by petitioner
(Exhibit "A", p. 71, CTA records). Petitioner likewise presented a schedule of petroleum products sold and delivered to
petitioner detailing the volume of sales and the excise taxes paid thereon (Exhibits "A-1" to "A-1a", pp. 72-73, CTA
records). However, to show that Petron had previously paid the excise taxes on these petroleum products, petitioner
presented photocopies of Authority to Accept Payment for Excise Taxes issued by respondent pertaining to petroleum
products purchased (Exhibits "A-2" to "A-80), pp. 74-152, CTA records).

Although these Authority to Accept Payment for Excise Taxes reflect therein the amount of excise taxes paid by Petron
to respondent, this Court cannot verify the exact amount of excise taxes which correspond to the petroleum products
delivered to petitioner. This Authority to Accept Payment for Excise Taxes only proves the payment of millions of pesos
in excise taxes made by Petron during the period covered by the claim but they fail to show to this Court which part of
this huge amount actually represents the excise taxes paid on the petroleum products actually delivered to herein
petitioner. Petitioner merely presented a summary of petroleum products sold and delivered by Petron during the
period covered by the claim. We cannot, by the summary alone, ascertain the veracity of the amount being claimed
neither can it prove the existence of the invoices being referred to therein. Petitioner should have submitted the
invoices supporting the schedules of petroleum products sold and delivered to it by Petron. These invoices would
reveal whether or not the amount claimed for refund by petitioner is correct….

In an action for refund/credits the taxpayer has the burden of showing that the taxes paid are erroneously collected and
that failure to meet such a burden is fatal to his cause. Tax refunds partake of the nature of the tax exemptions and
therefore cannot be allowed unless granted in the most explicit and categorical language. The grant of refund privileges
must be strictly construed against the taxpayer and liberally in favor of the government. (citations omitted)lawphil.net

Petitioner has the burden to prove the material allegations in its petition as well as the truth of its claim. 6 (Emphasis
supplied) disposing of the case as follows:

WHEREFORE, in view of the foregoing, the claim of refund of petitioner in the amount of ₱602,349.00 is hereby DENIED
for lack of merit.7

On August 31, 1998, petitioner filed a motion for reconsideration alleging that it failed to submit invoices because it
thought that the presentation of said invoices was not necessary to prove the claim for refund, since petitioner’s
previous claims, in CTA Case Nos. 4654, 4993 and 4994,8 involving similar facts, were granted by the CTA even without
the presentation of invoices. It then prayed that the CTA decision be reconsidered and its claim for refund be allowed, or
in the alternative, allow petitioner to present and offer the invoices in evidence to present its claim. 9

The CTA denied the motion for reconsideration on January 6, 1999, explaining as follows:

It is important to note at the outset that Petitioner’s reliance on CTA Case Nos. 4994, 4654 and 4993 is misplaced
because during the hearings of these cases up to the time of formal offer of evidence, CTA Circular No. 1-95 was not yet
in effect. The nature and presentation of evidence involving voluminous documents prior to the effectivity of CTA
Circular No. 1-95 differ from that which is required by this Court from the effectivity of said Circular beginning January
25, 1995. In the instant case, the Petition for Review was filed on September 1, 1995. It is obviously clear that the
provisions of CTA Circular 1-95 already applied to Petitioner’s presentation of evidence. Quoted hereunder are portions
of CTA Circular 1-95:

1. The party who desires to introduce as evidence such voluminous documents must present: (a) Summary
containing the total amount/s of the tax account or tax paid for the period involved and a chronological or
numerical list of the numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of
 an independent Certified Public Accountant attesting to the correctness of the contents of the summary after
making an examination and evaluation of the voluminous receipts and invoices. Such summary and certification
must properly be identified by a competent witness from the accounting firm.

2. The method of individual presentation of each and every receipt or invoice or other documents for marking,
identification and comparison with the originals thereof need not be done before the Court or the
Commissioner anymore after the introduction of the summary and CPA certification. It is enough that the
receipts, invoices and other documents covering the said accounts or payments must be pre-marked by the
party concerned and submitted to the Court in order to be made accessible to the adverse party whenever
she/he desires to check and verify the correctness of the summary and CPA certification. However, the originals
of the said receipts, invoices or documents should be ready for verification and comparison in case doubts on
the authenticity of the particular documents presented is raised during the hearing of the case.

It can be revealed from the evidence presented by the Petitioner that it failed to present a certification of an
independent Certified Public Accountant, as well as the invoices supporting the schedules of petroleum products sold
and delivered to it by Petron. From this perspective alone, the claim for refund was correctly denied. Now that an
unfavorable decision has been rendered by this Court, Petitioner belatedly seeks to present the invoices as additional
evidence.

The prayer to present additional evidence partakes of the nature of a motion for new trial under Section 1 Rule 37 of the
1997 Rules of Civil Procedure. It has already been emphasized in several cases that failure to present evidence already
existing at the time of trial does not warrant the grant of a new trial because said evidence can no longer be considered
newly discovered but is more in the nature of forgotten evidence. Neither can such inadvertence on the part of the
counsel to present said evidence qualify as excusable negligence.10 (Emphasis supplied)

CTA Presiding Judge Ernesto D. Acosta dissented with the view that in the interest of justice, petitioner should be given a
chance to prove its case by allowing it to present the invoices of its purchases.11 He reasoned that:

…A review of the schedule of invoices, Exhibits "A-1" "A-1-a", reveals that there are only about ninety four (94) invoices
which does not need the assistance of an independent CPA. It can easily be presented before this Court or before a Clerk
of Court for markings and comparison.

The reason advanced by the Petitioner was that they thought the presentation by the Manager of Petron Corporation of
a duly notarized certification (supporting the schedules of invoices), coupled with testimonies of witness, Mrs. Sylvia
Osorio of Petron Corporation, are enough to prove their case. Respondent did not even controvert said exhibits and
testimonies.1avvphi1.zw+ It is this Court that raised doubts on the veracity of the claim in view of the absence of the
invoices. This ground could easily fall under the phrase "mistake or excusable negligence" as a ground for new trial
under Sec. 1(a) of Rule 37 and not under the phrase "newly discovered evidence" as stated in our said resolution. The
denial of this motion is too harsh considering that this case is only civil in nature, govern (sic) merely by the rule on
preponderance of evidence.12

On January 25, 1999, petitioner filed another motion for reconsideration with motion for new trial praying that it be
allowed to present an additional witness and to have invoices and receipts pre-marked in accordance with CTA Circular
No. 1-95.13 The CTA denied the same for the reason that it found no convincing reason to reverse its earlier decision and
the motion for new trial was filed beyond the period prescribed by Sec. 1, Rule 37 of the Rules of Court as well as for
appeals as provided under Sec. 4, Rule 43.14

Petitioner then went to the Court of Appeals (CA) which issued the herein assailed Resolution dismissing the petition for
review, to wit:

Considering that the "AFFIDAVIT OF NON-FORUM SHOPPING" was executed by petitioner’s counsel, when under Adm.
Circular No. 04-94, the petitioner should be the one to certify as to the facts and undertakings as required; and since any
violation of the circular "shall be a cause for the dismissal" of the petition, the petition for review is hereby DENIED DUE
COURSE OUTRIGHT, and is DISMISSED.

SO ORDERED.15

The motion for reconsideration was likewise denied.16

Hence the present petition raising the following issues:

1. Whether or not the Court of Tax Appeals should have granted petitioner’s claim for refund.

2. Whether or not the Court of Appeals should have given due course to the Petition for Review. 17

Anent the first issue, petitioner argues that: the CTA erred in denying its claim for refund for its failure to present
invoices and receipts; the evidence it adduced, which the CIR did not controvert nor contest, is sufficient to support
petitioner’s claim for refund or tax credit; as opined by the Presiding Judge of the CTA in his dissenting opinion, the
failure of petitioner to present invoices and receipts is a minor infraction of CTA Circular No. 1-95 which should not
defeat petitioner’s right to refund; there is nothing in said circular which will support the contention of the CTA that the
petitioner is mandated to present the invoices in the present case; the CTA, in its previous decisions involving the
petitioner, one of which was even affirmed by the CA, held that a refund may be granted solely on the basis of
certifications issued by Petron;18 if it is the avowed purpose of CTA Circular No. 1-95 to ensure the speedy administration
of justice, it should not compel petitioner to present additional voluminous evidence which will require the presentation
of a Certified Public Accountant (CPA) for court examination aside from entailing additional costs to petitioner;
petitioner’s counsel was of the honest belief that he was not required to adhere to what is provided in CTA Circular No.
1-95; petitioner should not be burdened by the infraction of its counsel and should be given the fullest opportunity to
establish the merits of its action rather than for it to lose property on mere technicalities; it has also been held that
evidence not offered and formally presented in evidence during the trial may still be considered by a court in the
exercise of its discretion so as not to allow a mere technicality to overcome justice and fairness; petitioner should be
granted its claim for refund, or, in the alternative, be given an opportunity to present the pre-marked invoices in
accordance with CTA Circular No. 1-95.19

As to the second issue, petitioner explains that: its counsel was of the belief that he was authorized to execute the
affidavit of non-forum shopping; in any event, its counsel immediately attached to the motion a copy of the affidavit of
non-forum shopping executed by petitioner’s President, Ramon C. Avecilla as soon as he learned of his error; and
Supreme Court Administrative Circular No. 04-94 should be liberally construed following Maricalum Mining Corp. vs.
NLRC,20 Loyola vs. Court of Appeals,21 and Philippine Fishing Boat Officers and Engineers Union vs. Court of Industrial
Relations.22

It then prayed that: the resolutions of the CA and the Decision of the CTA be reversed; and an order be issued to award
petitioner tax credit certificate/refund in the amount of ₱602,349.00 representing excise taxes paid for the period of
September 1993 to December 1994 or in the alternative to allow petitioner to adduce evidence before the CTA to
support its case.23

The CIR, in his Comment, contends that: the burden of proving entitlement to the refund/credit rests upon petitioner;
the CTA was correct in requiring the submission of the invoices to support the schedules presented especially in this case
where the CTA cannot determine which part of the huge amount paid by Petron actually represents the excise taxes
paid on the petroleum products actually delivered to petitioner; the schedules are self-serving and if not corroborated
by evidence have no evidentiary weight; the CTA is not precluded from requiring other evidence which will once and for
all erase doubts to the claim for refund; claims for refund, partaking of the nature of tax exemptions, are construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; even setting aside the requirements
in CTA Circular No. 1-95, petitioner is still obliged to present the invoices in order to corroborate the entries in the
summary and to reveal whether or not the amount claimed for refund by petitioner is correct; petitioner’s Motion for
Reconsideration and Motion for New Trial filed on January 25, 1999 were properly denied by the CTA for having been
filed out of time; and the CTA’s decision must be respected on appeal since it has developed an expertise on the
subject.24

Anent the second issue, respondent avers that the CA did not err in dismissing the petition for review on the ground that
the affidavit of non-forum shopping was executed by petitioner’s counsel contrary to the requirements in Sec. 5, Rule 7
of the Rules of Court; and that the denial of the motion for reconsideration was also proper since the failure to comply
with the requirements of non-forum shopping shall not be curable by mere amendment to the complaint.25

For clarity, we shall first discuss the issue of whether or not the CA should have given due course to the petition for
review.

The primary question that has to be resolved is whether an Affidavit of Non-Forum Shopping, erroneously signed by
counsel, may be cured by subsequent compliance.

Generally, subsequent compliance with the requirement of affidavit of non-forum shopping does not excuse a party
from failure to comply in the first instance.26

Supreme Court Administrative Circular No. 04-94 of Section 5, Rule 7 of the 1997 Rules of Civil Procedure which requires
the pleader to submit a certificate of non-forum shopping to be executed by the plaintiff or principal party is
mandatory.27 A certification of the plaintiff’s counsel will not suffice for the reason that it is petitioner, and not the
counsel, who is in the best position to know whether he actually filed or caused the filing of a petition. 28 A certification
against forum shopping signed by counsel is a defective certification that is equivalent to non-compliance with the
requirement and constitutes a valid cause for the dismissal of the petition. 29 Hence, strictly speaking, the CA was correct
in dismissing the petition.

There are instances, however, when we treated compliance with the rule with relative liberality, especially when there
are circumstances or compelling reasons making the strict application of the rule clearly unjustified.30

In the case of Far Eastern Shipping Co. vs. Court of Appeals,31 while we said that, strictly, a certification against forum
shopping by counsel is a defective certification, the verification, signed by petitioner’s counsel in said case, is substantial
compliance inasmuch as it served the purpose of the Rules of informing the Court of the pendency of another action or
proceeding involving the same issues.32 We then explained that procedural rules are instruments in the speedy and
efficient administration of justice which should be used to achieve such end and not to derail it.33

In Damasco vs. NLRC,34 the certifications against forum shopping were erroneously signed by petitioners’ lawyers, which,
generally, would warrant the outright dismissal of their actions.35 We resolved however that as a matter of social justice,
technicality should not be allowed to stand in the way of equitably and completely resolving the rights and obligations of
the parties.36 In Cavile vs. Heirs of Clarita Cavile,37 we likewise held that the merits of the substantive aspects of the case
may be deemed as "special circumstance" for the Court to take cognizance of a petition although the certification
against forum shopping was executed and signed by only one of the petitioners. 38 Finally, in Sy Chin vs. Court of
Appeals,39 we categorically stated that while a petition may be flawed as the certificate of non-forum shopping was
signed only by counsel and not by the party, such procedural lapse may be overlooked in the interest of substantial
justice.40

Here, the affidavit of non-forum shopping was signed by petitioner’s counsel. Upon receipt of the resolution of the CA,
however, which dismissed its petition for non-compliance with the rules on affidavit of non-forum shopping, petitioner
submitted, together with its motion for reconsideration, an affidavit signed by petitioner’s president in compliance with
the said rule.41 We deem this to be sufficient especially in view of the merits of the case, which may be considered as a
special circumstance or a compelling reason that would justify tempering the hard consequence of the procedural
requirement on non-forum shopping.42

Which brings us to the other issue of whether or not the CTA should have granted petitioner’s claim for refund.
The general rule is that claimants of tax refunds bear the burden of proving the factual basis of their claims.43 This is
because tax refunds are in the nature of tax exemptions, the statutes of which are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.44 Taxes are the lifeblood of the nation, therefore statutes that
allow exemptions are construed strictly against the grantee and liberally in favor of the government. 45

In this case, there is no dispute that petitioner is entitled to exemption from the payment of excise taxes by virtue of its
being an EPZA registered enterprise.46 As stated by the CTA, the only thing left to be determined is whether or not
petitioner is entitled to the amount claimed for refund.47

Petitioner’s entire claim for refund, however, was denied for petitioner’s failure to present invoices allegedly in violation
of CTA Circular No. 1-95. But nowhere in said Circular is it stated that invoices are required to be presented in claiming
refunds. What the Circular states is that:

1. The party who desires to introduce as evidence such voluminous documents must present: (a) Summary containing
the total amount/s of the tax account or tax paid for the period involved and a chronological or numerical list of the
numbers, dates and amounts covered by the invoices or receipts; and (b) a Certification of an independent Certified
Public Accountant attesting to the correctness of the contents of the summary after making an examination and
evaluation of the voluminous receipts and invoices. Such summary and certification must properly be identified by a
competent witness from the accounting firm. (Emphasis supplied)

The CTA in denying petitioner’s motion for reconsideration, also mentioned for the first time that petitioner’s failure to
present "a certification of an independent CPA" is another ground that justified the denial of its claim for refund.

Again, we find such reasoning to be erroneous. The certification of an independent CPA is not another mandatory
requirement under the Circular which petitioner failed to comply with. It is rather a requirement that must accompany
the invoices should one decide to present invoices under the Circular. Since petitioner did not present invoices, on the
assumption that such were not necessary in this case, it logically did not present a certification because there was
nothing to certify.

The CTA also could not deny that in its previous decisions involving petitioner’s claims for refund, invoices were not
deemed necessary to grant such claims. It merely said that in said decisions, CTA Circular No. 1-95 was not yet in
effect.48 Since CTA Circular No. 1-95 did not make it mandatory to present invoices, coupled with the previous cases of
petitioner where the certifications issued by Petron sufficed, it is understandable that petitioner did not think it
necessary to present invoices and the accompanying certifications when it filed the present case for refund before the
CTA.

Even then, petitioner, in its motion for reconsideration, asked the CTA for an opportunity to present invoices to
substantiate its claims. But this was denied by the CTA explaining that its prayer to present additional evidence partakes
of the nature of a motion for new trial under Section 1, Rule 37 of the Rules of Court. The CTA held that under such rule,
failure to present evidence already existing at the time of trial does not warrant the grant of a new trial because such
evidence is not newly discovered but is more in the nature of forgotten evidence which is not excusable.49

On this point, we agree with the dissenting opinion of CTA Presiding Judge Ernesto D. Acosta who stated that:

The reason advanced by the Petitioner…that they thought the presentation by the Manager of Petron Corporation of a
duly notarized certification (supporting the schedules of invoices), coupled with testimonies of witness, Mrs. Sylvia
Osorio of Petron Corporation, are enough to prove their case… could easily fall under the phrase "mistake or excusable
negligence" as a ground for new trial under Sec. 1(a) of Rule 37 and not under the phrase "newly discovered evidence"
as stated in our said resolution. The denial of this motion is too harsh considering that this case is only civil in nature,
govern (sic) merely by the rule on preponderance of evidence.50

Sec. 1, Rule 37 of the Rules of Court provides as follows:

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration.--- Within the period for taking an
appeal, the aggrieved party may move the trial court to set aside the judgment or final order and grant a new trial for
one or more of the following causes materially affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against
and by reason of which such aggrieved party has probably been impaired in his rights; or

(b) Newly discovered evidence, which could not, with reasonable diligence, have discovered and produced at the
trial, and which if presented would probably alter the result.

It is true that petitioner could not move for new trial on the basis of newly discovered evidence because in order to have
a new trial on the basis of newly discovered evidence, it must be proved that: (a) the evidence was discovered after the
trial; (b) such evidence could not have been discovered and produced at the trial with reasonable diligence; (c) it is
material, not merely cumulative, corroborative or impeaching; and (d) it is of such weight that, if admitted, will probably
change the judgment.51 This does not mean however, that petitioner is altogether barred from having a new trial. As
pointed out by Judge Acosta, the reasons put forth by petitioner could fall under mistake or excusable negligence.

The "mistake" that is allowable in Rule 37 is one which ordinary prudence could not have guarded against. 52 Negligence
to be "excusable" must also be one which ordinary diligence and prudence could not have guarded against and by
reason of which the rights of an aggrieved party have probably been impaired. 53 The test of excusable negligence is
whether a party has acted with ordinary prudence while transacting important business. 54

In this case, it cannot be said that petitioner did not act with ordinary prudence in claiming its refund with the CTA, in
light of its previous cases with the CTA which did not require invoices and the non-mandatory nature of CTA Circular No.
1-95.

Respondent also argues that petitioner’s motion for new trial was filed out of time and should therefore be dismissed in
view of Sec. 1, Rule 37 and Sec. 4, Rule 43 of the Rules of Court.

Sec. 1, Rule 37 provides that:

Section 1. Grounds of and period for filing motion for new trial or reconsideration.--- Within the period for taking an
appeal, the aggrieved party may move the trial court to set aside the judgment or final order and grant a new trial …

and Sec. 4, Rule 43 holds that:

Section 4. Period of appeal. --- The appeal shall be taken within fifteen (15) days from notice of the award, judgment,
final order or resolution, or from the date of its last publication, if publication is required by law for its effectivity, or of
the denial of petitioner’s motion for new trial or reconsideration duly filed in accordance with the governing law of the
court or agency a quo. Only one (1) motion for reconsideration shall be allowed. Upon proper motion and the payment
of the full amount of the docket fee before the expiration of the reglementary period, the Court of Appeals may grant an
additional period of fifteen (15) days only within which to file the petition for review. No further extension shall be
granted except for the most compelling reason and in no case to exceed fifteen (15) days.

It is borne by the records however that in its first motion for reconsideration duly filed on time, petitioner had already
prayed that it be allowed to present and offer the pieces of evidence deemed lacking by the CTA in its Decision dated
August 11, 1998.55 Thus, while it named its pleading as a Motion for New Trial only in its motion dated January 25, 1999,
petitioner should not be deemed to have moved for new trial only at such time.

We reiterate the fundamental principle that technical rules of procedure are not ends in themselves but are primarily
designed to aid in the administration of justice.56 And in cases before tax courts, Rules of Court applies only by analogy
or in a suppletory character and whenever practicable and convenient shall be liberally construed in order to promote
its objective of securing a just, speedy and inexpensive disposition of every action and proceeding. 57 The quest for
orderly presentation of issues is not an absolute.58 It should not bar the courts from considering undisputed facts to
arrive at a just determination of a controversy.59 This is because, after all, the paramount consideration remains the
ascertainment of truth.60 Section 8 of R.A. No. 1125 creating the CTA also expressly provides that it shall not be
governed strictly by technical rules of evidence.61

Since it is not disputed that petitioner is entitled to tax exemption, it should not be precluded from presenting evidence
to substantiate the amount of refund it is claiming on mere technicality especially in this case, where the failure to
present invoices at the first instance was adequately explained by petitioner.

As we pronounced in BPI-Family Savings Bank, Inc. vs. Court of Appeals:62

…Technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging
to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe
fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess
payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness. 63

WHEREFORE, the petition is GRANTED. The assailed resolution is SET ASIDE and the case REMANDED to the Court of Tax
Appeals for the reception of evidence, particularly invoices supporting the schedules of petroleum products sold and
delivered to petitioner by Petron and the corresponding certification of an independent Certified Public Accountant, for
the proper and immediate determination of the amount to be refunded to petitioner.

SO ORDERED.

B. Tax Credit vs. Tax Refund

C. What may be the subject of tax credit and tax refund

1. Taxes erroneously or illegally received

2. Penalties imposed without authority
3. Documentary Stamps

D. When to file request for Tax Credit/Refund:

1. Administrative –Sec. 229

2. Judicial- Sec. 230

E. When to start counting the 2-year prescriptive period

Exceptions:

1. Income Tax
2. Withholding Tax
3. VAT (Sec. 112A)
4. CASES:

a. G.R. Nos. L-13033 and L-13701 May 31, 1960

LU DO AND LU YM CORPORATION, doing business under the trade name of Philippine Corn
Products Company, plaintiff-appellant,
vs.
CENTRAL BANK OF THE PHILIPPINES, defendant-appellee.
 COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PHILIPPINE CORN PRODUCTS, INC. (Lu Do and Lu Ym CORPORATION), respondent.

These two cases, one (G. R. No. L-13033) coming from the Court of First Instance of Manila, and the other (G. R. No. L-
13701), from the Court of Tax Appeals, have, by agreement and request of the parties, been jointly submitted for
deliberation and decision of this Court as they involve the same transaction (importation of empty cotton bags) and
require the interpretation of the same law (Republic Act No. 35, as amended by Republic Act 901). The pertinent facts in
both cases are not disputed.

Lu Do and Lu Ym Corporation, doing business under the trade name of Philippine Corn Products, Inc., is a domestic
corporation engaged in the manufacture, packing, storage, distribution, and sale of corn starch, gluten feed and corn.
Upon prior application for tax exemption under Republic Act 35, its business was certified by the Secretary of Finance as
a new and necessary industry, effective October 1, 1952.

Between January, 1954 and March, 1955, the corporation imported from the United States 212 bales or 211,187 pieces
of empty cotton bags for use in the packing, storage, distribution, and sale of its manufactured corn starch, upon which
importations of Central Bank of the Philippines imposed and the said corporation paid the 17% excise tax on foreign
exchange amounting to P24,498.43, and the sum of P13,654.92 demanded by the Bureau of Customs, in behalf of the
Collector of Internal Revenue, as 7% sales or compensating tax on the articles.

On September 5 and 6, 1955, the Philippine Corn Products, Inc. filed with the Commissioner of Internal Revenue and the
Central Bank of the Philippines, respectively, separate demands for the refund of the aforementioned amounts, both of
which were denied on the ground, among others, that the imported articles were not covered by the tax exemption
certificate issued by the Department of Finance. Hence, on December 6, 1956, the company filed a petition in the Court
of Tax Appeals (CTA Case No. 340), praying for the refund of the sum of P13,654.92 representing the 7% compensating
tax collected by the Collector of Internal Revenue allegedly in violation of Republic Act 35, as amended by Republic Act
901, it being contended that the imported cotton bags were necessary, convenient and indispensable in the
manufacture, packing, storage, and distribution of its manufactured products.

In resisting this clam, respondent Commissioner of Internal Revenue maintained that empty cotton bags were not
among the raw materials allowed by the Secretary of Finance to be imported tax-free, and, consequently, were subject
to the 7% sales or compensating tax.

Deciding for the petitioner, the Court of Tax Appeals, in its decision of December 20, 1957, ordered the refund of the
sum of P13,654.92 collected by the revenue authorities from the Philippine Corn Products, Inc., on the ground that the
imported articles were actually used in the manufacture of its finished products and thus exempted from taxes, and that
the Secretary of Finance had no power to limit the articles which could be imported free of tax. With respect to the
question of prescription, the court, considering the payments made by petitioner, upon clearance of the goods to the
customhouse, as mere deposits, held that under customs law, the same did not become payments until after the
publication of the final liquidation of the port entries in relation thereto. As respondent Commissioner of Internal
Revenue failed to introduce evidence when the publication was made, the filing of the action on January 5, 1957, was
presumed to have been made within the 2-year period prescribed by law. From this decision, this present petition for
review was filed by the Commissioner of Internal Revenue (G. R. No. L-13701).

At about the same time, or on July 24, 1957, the Philippine Corn Products, Inc. instituted in the Court of First Instance of
Manila an action for recovery of the sum of P24,498.43, against the Central Bank of the Philippines, claiming that
defendant's collection of the said amount as 17% excise tax on the foreign exchange used for the importation of the
same empty cotton bags, was made in violation of Republic Act 35, as amended by Republic Act 901.

The Central Bank of the Philippines moved to dismiss the complaint for lack of cause of action and non-joinder of
indispensable parties, for the reason that the empty cotton bags imported by plaintiff were not among those allowed by
the Secretary of Finance to be procured abroad and, consequently, not included in the exemption, and that the suit
should have been instituted against the Auditor General or the Treasurer of the Philippines, because, with the expiration
of the Exchange Tax Law on December 31, 1955, the monies collected by the Central Bank of the Philippines pursuant to
Republic Act 601 were turned over to the Insular Treasurer. Sustaining defendant's contention, the lower court
dismissed the complaint. Now, plaintiff corporation appeals to us (G. R. No. L-13033).

The questions raised by both parties in these cases may be answered with resolution of a single issue, which is
controlling on the others, i.e., whether the Company may be held liable for payment of the 7% compensating or sales tax
and the 17% excise tax on foreign exchange, in connection with its importations of empty cotton bags.

The letter of the Secretary of Finance, granting the Company's application for tax exemption of its business, in full,
reads:

GENTLEMEN:

Referring to your application of September 30, 1952 for tax exemption under the provisions of Republic Act No.
35, I have the honor to advise that in view of the favorable recommendations of the Secretary of Commerce and
Industry and the Administrator of Economic Coordination, the same is hereby approved in respect to the
manufacture of corn starch, corn gluten feed, and corn oil. It is understood that the only raw material to be
imported is sulphur (60 kilos of sulphur for every 30 metric tons of processed corn) and that this raw material
will be procured locally as soon as similar article of domestic origin or manufacture shall have become available.

The exemption herein granted refers to the following internal revenue taxes:

1. The fixed and privilege tax on business;

2. The percentage tax on the sales of manufactured products in respect to which exemption is granted and on
raw materials and supplies to be used exclusively in the manufacture of such products;

3. The compensating tax on machinery and equipment to be exclusively used in the new and necessary industry;

4. The documentary stamp tax; and

5. The income tax in respect to the net income derived from the exempted industry.

The exemption shall cover a period of four (4) years from this date. Attention, in this connection is invited to
paragraphs 2(2), 7 and 8 of Executive Order No. 433, series of 1951, which indicates the requisites for the
continued enjoyment of the privileges herein granted. (Emphasis supplied.)

The Company does not controvert the fact that the Secretary of Finance, in approving its application, allowed only the
importation of sulphur, and this, on a limited scale. In claiming for tax exemption for its importations of empty cotton
bags, however, it maintains — and is sustained by the Court of Tax Appeals1 — that the Secretary of Finance has no
power under Republic Act 901 to limit the articles that may be imported as long as they are used by the Company in its
new and necessary industry and the taxes that may be payable thereon are directly payable in respect to said industry.
In support of this contention, the case of Industrial Textiles Company of the Philippines et al. vs. Collector of Internal
Revenue (103 Phil., 1046) is cited. But respondent Company overlooks the fact that the rulings therein made were
predicated on the provisions of Republic Act 35 which do not grant any authority to the Secretary of Finance except to
recommend to the President for his determination, what qualifications an industry should possess to be entitled to the
benefits of the Act. Contrarily, by express authority of Republic Act 901, the Secretary of Finance is empowered, among
others, (1) himself (not the President) to determine, after availing of the facilities of the Department of Commerce and
Industry, the Central Bank and the Office of Economic Coordination, whether an industry or business is new or necessary
(Sec. 5); (2) to suspend the privileges granted thereunder if the grantee fails to comply with any of the new obligations
imposed by the Act (Sec. 8); and (3) to promulgate rules and regulations necessary for the proper enforcement and to
carry out the intents and purposes of the Act, and to determine the scope and extent of the privileges granted
thereunder (Sec. 11). In empowering the Secretary of Finance, to pass upon applications and determine the
qualifications of applicants to enjoy the privileges granted thereunder, Republic Act 901 did not limit his (the Secretary's)
action relative to the granting or denial of the said applications. The mandate of the law is express and specific; "The
Secretary of Finance shall ... determine the scope and extent of the privileges granted thereunder."2 Thus, he may either
totally approve or disapprove an application, or may limit the privileges to be enjoyed within the scope, and extent
determined by him unless, of course, such limitation is prohibited by law. In the instant case, the restriction on the
importation of raw materials other than sulphur, imposed by the Secretary of Finance, cannot be considered violative of
Republic Act 901. On the contrary, such restriction must have been made in compliance with the intendment of said law,
that is, to boost local production by giving emphasis on the exploitation and utilization of local raw materials and the
consequential conservation of foreign exchange.3 The importations of empty cotton bags, not being covered by the
grant are, therefore, subject to the taxes imposed thereon. The Company, in accepting the grant, is bound by the terms
thereof and its remedy is to ask for its modification by the Secretary of Finance.

Respondent Company additionally claims that if the empty cotton bags do not come within the exempted raw materials,
they, however, fall under the category of equipment covered by Exemption No. 3 of the letter of the Secretary of
Finance. We do not think so.

Equipment has been defined as "materials or articles used in equipping as for an expedition; the articles comprised n an
outfit, as furnishings, or apparatus; equippage; as laboratory equipment. ... In industry, physical facilities available for
production, including buildings, machineries, tools, etc."4 "whatever is needed in equipping; the articles comprised in an
outfit; equippage";5 "synonymous with furnishings".6 Taken together with "machinery", as used in Exemption No. 3,
the equipment referred to therein must relate to furnishings or equippage necessary for the operation of the industry.
Empty cotton bags actually used in the packing or preparation for the market of the finished products can hardly be
considered as falling within the group.

The question raised by the Solicitor-General, in behalf of the Commissioner of Internal Revenue, that the proceeding
here is in effect a review of the action of the Secretary of Finance in respect of the granting of the certificate of
exemption and, therefore, beyond the jurisdiction of the Court of Tax Appeals, is of no substance, the primordial and
immediate question involved being the refund of taxes allegedly collected illegally. In at least two cases,7 this Court has
already upheld inferentially the jurisdiction of the Court of Tax Appeals in this respect.

That the two-year period within which suit for recovery of tax erroneously or illegally collected should be filed is a
prescriptive period and not a jurisdictional fact, has likewise been passed upon by this Tribunal in the cases of College of
Oral and Dental Surgery vs. Court of Tax Appeals et al., (102 Phil., 912; 54 Off. Gaz. [29] 7055) and Panay Electric Co. vs.
Collector of Internal Revenue, et al., (103 Phil., 819; 55 Off. Gaz. [24] 4430).

On the foregoing two procedural points, the decision of the Court of Tax Appeals presently before us is correct.

Coming now to the case appealed from the Court of First Instance of Manila (G. R. No. L-13033), dismissing the
complaint which seeks the refund of the 17% excise tax on the foreign exchange used in the importation of the empty
cotton bags, we agree with the lower court that the refund is not proper in view of our conclusion that such importation
is not within the exemption granted to the Company. If the imported article itself is not exempt from taxation, the
foreign exchange used in the importation of said article cannot logically be exempt from the exchange tax, for
otherwise, the result would be to tax the principal but not in the incidental.

Wherefore, the appealed order of the Court of First Instance (in G. R. No. L-13033) is affirmed, while the questioned
decision of the Court of Tax Appeals (in G. R. No. L-13701) is hereby affirmed, in respect of the questions of jurisdiction
and prescription, and reversed, insofar as it orders the refund of the compensating tax paid by the Philippine Corn
Products, Inc. (Lu Do and Lu Ym Corporation), with costs against the latter in both instances. So ordered.

b. G.R. No. 155682 March 27, 2007

 BANCO FILIPINO SAVINGS and MORTGAGE BANK, Petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,

Herein Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the May 28, 2002 Decision 1 and
October 16, 2002 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 554703 which affirmed the October 5, 1999
Decision4 of the Court of Tax Appeals (CTA) in CTA Case No. 5611.

The facts are as stated by the CTA.5

In its Bureau of Internal Revenue (BIR) Form No. 1702 or Corporation/Partnership Annual Income Tax Return 6 for fiscal
year 1995, Banco Filipino Savings and Mortgage Bank (petitioner) declared a net operating loss of ₱211,476,241.00 and
total tax credit of ₱13,103,918.00, representing the prior year’s excess tax credit of ₱11,481,342.00 and creditable
withholding taxes of ₱1,622,576.00.7

On February 4, 1998, petitioner filed with the Commissioner of Internal Revenue (CIR) an administrative claim 8 for
refund of creditable taxes withheld for the year 1995 in the amount of ₱1,622,576.00.

As the CIR failed to act on its claim, petitioner filed a Petition for Review 9 with the CTA on April 13, 1998. It attached to
its Petition several documents, including: 1) Certificate of Income Tax Withheld on Compensation (BIR Form No. W-2) for
the Year 1995 executed by Oscar Lozano covering ₱720.00 as tax withheld on rental income paid to petitioner (Exhibit
"II");10 and 2) Monthly Remittance Return of Income Taxes Withheld under BIR Form No. 1743W issued by petitioner,
indicating various amounts it withheld and remitted to the BIR (Exhibits "C" through "Z"). 11

In his Answer,12 respondent CIR interposed special and afirmative defenses, specifically that petitioner’s claim is not
properly documented.

The CTA issued the October 5, 1999 Decision granting only a portion of petitioner’s claim for refund, thus:

WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE a Tax
Credit Certificate in the amount of EIGHTEEN THOUSAND EIGHT HUNDRED EIGHTY FOUR PESOS AND FORTY CENTAVOS
(₱18,884.40) in favor of the Petitioner, representing overpaid income tax for the year 1995.

SO ORDERED.13

The CTA allowed the ₱18,884.40-portion of petitioner’s claim for refund as these are covered by Exhibits "AA" through
"HH",14 which are all in BIR Form No. 1743-750 (Certificate of Creditable Tax Withheld at Source) issued by various
payors and reflecting taxes deducted and withheld on petitioner-payee’s income from the rental of its real properties.
On the other hand, the CTA disallowed the ₱1,603,691.60-portion of petitioner’s claim for tax refund on the ground that
its Exhibit "II" and Exhibits "C" through "Z" lack probative value as these are not in BIR Form No. 1743.1, 15 the form
required under Revenue Regulations No. 6-85 (as amended by Revenue Regulation No. 12-94), to support a claim for
refund.16

Petitioner filed a Petition for Review17 with the CA but the CA dismissed the same in the May 28, 2002 Decision assailed
herein. Its Motion for Reconsideration was also denied.18

Hence, herein Petition where the issues may be condensed into one: whether the CA erred in affirming the disallowance
by the CTA of ₱1,603,691.60 of petitioner’s claim for tax refund on the ground that the latter’s Exhibit "II" and Exhibits
"C" through "Z" lack probative value.

The CA committed no error.

There are three conditions for the grant of a claim for refund of creditable withholding tax: 1) the claim is filed with the
CIR within the two-year period from the date of payment of the tax;19 2) it is shown on the return of the recipient that
the income payment received was declared as part of the gross income;20 and, 3) the fact of withholding is 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 therefrom. The third condition is specifically imposed under Section 10 of Revenue Regulation No. 6-85 (as
amended), thus:

Sec. 10. Claim for tax credit or refund. – (a) Claims for Tax Credit or Refund of income tax deducted and withheld on
income payments shall be given due course only when it is shown on the return that the income payment received 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
xxx. (Emphasis supplied)

There is no doubt that petitioner complied with the first two requirements in that the claim it filed on January 30, 1998
was well within the two-year prescriptive period counted from the date of filing of its annual income tax return (Exhibit
"A") on April 12, 1996; and that said return reflects the amount of ₱1,622,576.00 subject of the claim.21

The question is whether it complied with the third condition by presenting merely a Certificate of Income Tax Withheld
on Compensation or BIR Form No. W-2 (Exhibit "II") and Monthly Remittance Return of Income Taxes Withheld under
BIR Form No. 1743W (Exhibits "C" through "Z").

Petititioner argues that its Exhibit "II" and Exhibits "C" through "Z" should be accorded the same probative value as a BIR
Form No. 1743.1, for said documents are also official BIR forms and they reflect the fact that taxes were actually
withheld and remitted. It appeals for liberality considering that its annual return clearly shows that it is entitled to
creditable withholding tax. 22

The Court rejected a similar plea for liberality just recently in Far East Bank and Trust Company v. Court of Appeals. 23 In
that case, Far East Bank and Trust Company (FEBTC), acting as the surviving entity from a merger with Cavite
Development Bank (CDB), filed a claim for refund of creditable taxes withheld by CDB from the sale of its acquired
assets. FEBTC attached to its claim: a) confirmation receipts, payment orders and official receipts issued by the Central
Bank and the BIR; b) Income Tax Returns supported by financial statements filed by FEBTC with the BIR; and c) a
schedule prepared by FEBTC Accounting Department of the creditable withholding taxes of CDB. FEBTC did not,
however, attach any BIR Form No. 1743.1. The CTA and CA disallowed FEBTC’s claim for refund. The Court affirmed the
CTA and CA, thus:

As mentioned, petitioner relies heavily on the confirmation receipts with the corresponding official receipts and
payment orders to support its case. Standing alone, however, these documents only establish that CDB withheld certain
amounts in 1990 and 1991. It does not follow that the payments reflected in the confirmation receipts relate to the
creditable withholding taxes arising from the sale of the acquired properties. The claim that CDB had excess creditable
withholding taxes can only be upheld if it were clearly and positively shown that the amounts on the various
confirmation receipts were the amounts withheld by virtue of the sale of the acquired assets. On this point, the CA
correctly pronounced:

The confirmation receipts alone, by themselves, will not suffice to prove that the taxes reflected in the income tax
returns are the same taxes withheld from CDB’s income payments from the sale of its acquired assets. This is because a
cursory examination of the said Confirmation Receipts, Payment Orders and Official Receipts will show that what are
reflected therein are merely the names of the payors and the amount of tax. The nature of the tax paid, or at the very
least, the income payments from which the taxes paid were withheld are not reflected therein. If these are the only
entries that are found on these proferred documents, We cannot begrudge the Respondent Court from nurturing
veritable doubts on the nature and identity of the taxes withheld, when it declared, in part, in its Decision (Annex "A" of
the Petition) that, "It can not well be said that the amounts paid and remitted to the BIR were for CDB’s account and not
for the other possible payees of withholding taxes which CDB may also be liable to remit as a withholding agent x x
x".24 (Emphasis ours)
As to what evidence would establish the nature of the tax withheld and the income payment from which it was
deducted, the Court held:

Petitioner also asserts that the confusion or difficulty in the implementation of Revenue Memorandum Circular 7-90 was
the reason why CDB took upon itself the task of withholding the taxes arising from the sale, to ensure accuracy.
Assuming this were true, CDB should have, nevertheless, accomplished the necessary returns to clearly identify the
nature of the payments made and file the same with the BIR. Section 2 of the circular clearly provides that the amount
of withholding tax paid by a corporation to the BIR during the quarter on sales or exchanges of property and which are
creditable against the corporation’s tax liability are evidenced by Confirmation/Official Receipts and covered by BIR
Form Nos. 1743W and 1743-B. On the other hand, Revenue Regulation 6-85 states that BIR Form No. 1743.1 establishes
the fact of withholding. Since no competent evidence was adduced by petitioner, the failure to offer these returns as
evidence of the amount of petitioner’s entitlement during the trial phase of this case is fatal to its cause. x x
x.25 (Emphasis supplied)

In fine, the document which may be accepted as evidence of the third condition, that is, the fact of withholding, must
emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income
payment basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes from the sale of acquired assets
can be found in BIR Form No. 1743.1. As described in Section 626 of Revenue Regulations No. 6-85,27 BIR Form No.
1743.1 is a written statement issued by the payor as withholding agent showing the income or other payments made by
the said withholding agent during a quarter or year and the amount of the tax deducted and withheld therefrom. It
readily identifies the payor, the income payment and the tax withheld. It is complete in the relevant details which would
aid the courts in the evaluation of any claim for refund of creditable withholding taxes.

In relation to withholding taxes from rental income, the requisite information can be found in BIR Form No. 1743-750.
Petitioner is well aware of this for its own Exhibits "AA" through "HH" are all in BIR Form No. 1743-750. As earlier stated,
the CTA approved petitioner’s claim for refund to the extent of ₱18,884.40, which is the portion of its claim supported
by its Exhibits "AA" through "HH."

In the present case, the disputed portions of petitioner’s claim for refund is supported merely by Exhibits "C" through
"Z" and Exhibit "II." Exhibits "C" through "Z" were issued by petitioner as payee purportedly acting as withholding agent,
and not by the alleged payors in the transactions covered by the documents. Moreover, the documents do not identify
the payors involved or the nature of their transaction. They do not indicate the amount and nature of the income
payments upon which the tax was computed or the nature of the transactions from which the income payments were
derived, specifically whether it resulted from the sale of petitioner’s acquired assets.

As to petitioner’s Exhibit "II," while it was issued by a payor, the document does not state the amount and nature of the
income payment. Hence, it cannot be verified from the document if the tax withheld is correct.

Perhaps aware of the deficiencies in its evidence, petitioner also presented Exhibit "B"28 which is a list of Miscellaneous
Assets it sold to various persons. However, Exhibit "B" was prepared by petitioner’s own real estate department, and is
therefore of doubtful credence.29 Furthermore, there is nothing in Exhibit "B" which would link the the transactions
described therein to the taxes reflected in Exhibit "II" and Exhibits "C" through "Z".

For all its deficiencies, therefore, petitioner’s Exhibits "C" through "Z" cannot take the place of BIR Form No. 1743.1 and
its Exhibit "II," of BIR Form No. 1743-750. Petitioner cannot fault the CA and CTA for finding said evidence insufficient to
support its claim for tax refund. Such finding of both courts, obviously grounded on evidence, will not be so lightly
discarded by this Court,30 not even on a plea for liberality of which petitioner, by its own negligence, is undeserving. 31

WHEREFORE, the petition is DENIED for lack of merit.

No costs.
SO ORDERED.

c. G.R. No. 173854 March 15, 2010

COMMISSIONER OF INTERNAL REVENUE,

vs.
FAR EAST BANK & TRUST COMPANY (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondent.

Entitlement to a tax refund is for the taxpayer to prove and not for the government to disprove.

This Petition for Review on Certiorari assails the January 31, 2006 Decision1 of the Court of Appeals (CA) in CA-G.R. SP
No. 56773 which reversed and set aside the October 4, 1999 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No.
5487. Also assailed is the July 19, 2006 Resolution3 of the CA denying the motion for reconsideration.

The CTA found that respondent Far East Bank & Trust Company failed to prove that the income derived from rentals and
sale of real property from which the taxes were withheld were reflected in its 1994 Annual Income Tax Return. The CA
found otherwise.

Factual Antecedents

On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR) two Corporate Annual Income Tax
Returns, one for its Corporate Banking Unit (CBU)4 and another for its Foreign Currency Deposit Unit (FCDU),5 for the
taxable year ending December 31, 1994. The return for the CBU consolidated the respondent’s overall income tax
liability for 1994, which reflected a refundable income tax of ₱12,682,864.00, computed as follows:

FCDU CBU
Gross Income ₱13,319,068 5,348,080,630
Less: Deductions 1,397,157 5,432,828,719

Net Income 11,921,911 [84,748,089]

Tax Rate 35% 35%

Income Tax Due Thereon 4,172,669 NIL

Consolidated Tax Due for

Both CBU and FCDU Operations ₱ 4,172,669

Less:

Quarterly Income Tax Payments

CBU -1st Quarter 633,085
 -2nd Quarter 11,844,333
FCDU -1st Quarter 955, 280
-2nd Quarter 1,104,942

Less:
Creditable Taxes 2,317,893
Withheld at Source
Refundable Income Tax [₱12,682,864]6

Pursuant to Section 697 of the old National Internal Revenue Code (NIRC),

the amount of ₱12,682,864.00 was carried over and applied against respondent’s income tax liability for the taxable
year ending December 31, 1995. On April 15, 1996, respondent filed its 1995 Annual Income Tax Return, which showed
a total overpaid income tax in the amount of ₱17,443,133.00, detailed as follows:

FCDU CBU
Gross Income ₱16,531,038 7,076,497,628
Less: Deductions 1,327,549 7,086,821,354

Net Income 15,203,539 [10,423,728]

Tax Rate 35% 35%
Income Tax Due Thereon 5,321,239 NIL

Consolidated Tax Due for

Both CBU and FCDU Operations ₱ 5,321,239

Less:
Prior year’s (1994) excess 12,682,864
income tax credit
Additional prior year’s excess 6,283,484
income tax credit
Creditable Taxes
Withheld at Source 3,798,024
Refundable Income Tax [₱17,443,133]8
Out of the ₱17,433,133.00 refundable income tax, only ₱13,645,109.00 was sought to be refunded by respondent. As to
the remaining ₱3,798,024.00, respondent opted to carry it over to the next taxable year.

On May 17, 1996, respondent filed a claim for refund of the amount of ₱13,645,109.00 with the BIR. Due to the failure
of petitioner Commissioner of Internal Revenue (CIR) to act on the claim for refund, respondent was compelled to bring
the matter to the CTA on April 8, 1997 via a Petition for Review docketed as CTA Case No. 5487.

After the filing of petitioner’s Answer, trial ensued.

To prove its entitlement to a refund, respondent presented the following documents:

Exhibits Nature and Description

A Corporate Annual Income Tax Return covering income of respondent’s CBU for the year ended December 31,
1994 together with attachments

B Corporate Annual Income Tax Return covering income of respondent’s FCDU for the year ended December 31,
1994 together with attachments

C Corporate Annual Income Tax Return covering income of respondent’s CBU for the year ended December 31,
1995 together with attachments

D Corporate Annual Income Tax Return covering income of respondent’s FCDU for the year ended December 31,
1995 together with attachments

N to Z; Certificates of Creditable

AA to UU Withholding Tax and Monthly Remittance Returns of Income Taxes Withheld issued by various
withholding agents for the year ended December 31, 1994

VV Letter claim for refund dated May 8, 1996 filed with the Revenue District Office No. 33 on May 17, 1996 9

Petitioner, on the other hand, did not present any evidence.

Ruling of the Court of Tax Appeals

On October 4, 1999, the CTA rendered a Decision denying respondent’s claim for refund on the ground that respondent
failed to show that the income derived from rentals and sale of real property from which the taxes were withheld were
reflected in its 1994 Annual Income Tax Return.

On October 20, 1999, respondent filed a Motion for New Trial based on excusable negligence. It prayed that it be
allowed to present additional evidence to support its claim for refund.

However, the motion was denied on December 16, 1999 by the CTA. It reasoned, thus:

[Respondent] is reminded that this case was originally submitted for decision as early as September 22, 1998 (p. 497,
CTA Records). In view, however, of the Urgent Motion to Admit Memorandum filed on April 27, 1999 by Atty. Louella
Martinez, who entered her appearance as collaborating counsel of Atty. Manuel Salvador allegedly due to the latter
counsel’s absences, this Court set aside its resolution of September 22, 1998 and considered this case submitted for
decision as of May 7, 1999. Nonetheless, it took [respondent] another five months after it was represented by a new
counsel and after a decision unfavorable to it was rendered before [respondent] realized that an additional material
documentary evidence has to be presented by way of a new trial, this time initiated by a third counsel coming from the
same law firm. x x x

Furthermore, in ascertaining whether or not the income upon which the taxes were withheld were included in the
returns of the [respondent], this Court based its findings on the income tax returns and their supporting schedules
prepared and reviewed by the [respondent] itself and which, to Us, are enough to support the conclusion
reached.1avvphi1

WHEREFORE, in view of the foregoing, [respondent’s] Motion for New Trial is hereby DENIED for lack of merit.

SO ORDERED.10

Ruling of the Court of Appeals

On appeal, the CA reversed the Decision of the CTA. The CA found that respondent has duly proven that the income
derived from rentals and sale of real property upon which the taxes were withheld were included in the return as part of
the gross income.

Hence, this present recourse.

Issue

The lone issue presented in this petition is whether respondent has proven its entitlement to the refund. 11

Our Ruling

We find that the respondent miserably failed to prove its entitlement to the refund. Therefore, we grant the petition
filed by the petitioner CIR for being meritorious.

A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply with 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) It must be shown on the return that the income received was declared as part of the gross income; and

3) 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.12

The two-year period requirement is based on Section 229 of the NIRC of 1997 which provides that:

SECTION 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 excessive 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 a written claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have been erroneously paid. (Formerly Section 230 of
the old NIRC)
While the second and third requirements are found under Section 10 of Revenue Regulation No. 6-85, as amended,
which reads:

Section 10. Claims for tax credit or refund. — Claims for tax credit or refund of income tax deducted and withheld on
income payments shall be given due course only when it is shown on the return that the income payment received was
declared as part of the gross income and the fact of withholding is established by a copy of the statement duly issued by
the payer to the payee (BIR Form No. 1743.1) showing the amount paid and the amount of tax withheld therefrom.

Respondent timely filed its claim for refund.

There is no dispute that respondent complied with the first requirement. The filing of respondent’s administrative claim
for refund on May 17, 1996 and judicial claim for refund on April 8, 1997 were well within the two-year period from the
date of the filing of the return on April 10, 1995.13

Respondent failed to prove that the income derived from rentals and sale of real property were included in the gross
income as reflected in its return.

However, as to the second and third requirements, the tax court and the appellate court arrived at different factual
findings.

The CTA ruled that the income derived from rentals and sales of real property were not included in respondent’s gross
income. It noted that in respondent’s 1994 Annual Income Tax Return, the phrase "NOT APPLICABLE" was printed on the
space provided for rent, sale of real property and trust income. The CTA also declared that the certifications issued by
respondent cannot be considered in the absence of the Certificates of Creditable Tax Withheld at Source. The CTA ruled
that:

x x x the Certificates of Creditable Tax Withheld at Source submitted by [respondent] pertain to rentals of real property
while the Monthly Remittance Returns of Income Taxes Withheld refer to sales of real property. But, if we are to look at
Schedules 3, 4, and 5 of the Annual Income Tax Return of [respondent] for 1994 (Exhibit "A"), there was no showing that
the Rental Income and Income from Sale of Real Property were included as part of the gross income appearing in
Section A of the said return. In fact, under the said schedules, the phrase "NOT APPLICABLE" was printed by
[respondent]. Verily, the income of [respondent] coming from rent and sale of real property upon which the creditable
taxes withheld were based were not duly reflected. As to the certifications issued by the [respondent] (Exh. UU), the
same cannot be considered in the absence of the requisite Certificates of Creditable Tax Withheld at Source.

Based on the foregoing, [respondent] has failed to comply with two essential requirements for a valid claim for refund.
Consequently, the same cannot be given due course. 14 (Emphasis supplied)

On the other hand, the CA found thus:

We disagree with x x x CTA’s findings. In the case of Citibank, N.A. vs. Court of Appeals (280 SCRA 459), the Supreme
Court held that:

"a refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding
taxes and the fact of withholding. However, a detailed proof of the truthfulness of each and every item in the income tax
return is not required. x x x

x x x The grant of a refund is founded on the assumption that the tax return is valid; that is, the facts stated therein are
true and correct. x x x"

In the case at bench, the BIR examined [respondent] Bank’s Corporate Annual Income Tax Returns for the years 1994
and 1995 when they were filed on April 10, 1995 and April 15, 1996, respectively. Presumably, the BIR found no false
declaration in them because it did not allege any false declaration thereof in its Answer (to the petition for review) filed
before x x x CTA. Nowhere in the Answer, did the BIR dispute the amount of tax refund being claimed by [respondent]
Bank as inaccurate or erroneous. In fact, the reason given by the BIR (in its Answer to the petition for review) why the
claimed tax refund should be denied was that "x x x the amount of ₱13,645,109.00 was not illegally or erroneously
collected, hence, the petition for review has no basis" [see Record, p. 32]. The amount of ₱17,433,133.00 reflected as
refundable income tax in [respondent] Bank’s Corporate Annual Income Tax Return for the year 1995 was not disputed
by the BIR to be inaccurate because there were certain income not included in the return of the [respondent]. Verily,
this leads Us to a conclusion that [respondent] Bank’s Corporate Annual Income Tax Returns submitted were accepted
as regular and even accurate by the BIR.

Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR is tasked to make an examination of returns and
assess the correct amount of tax, to wit:

"Sec. 16. Power of the Commissioner to make assessment and prescribe additional requirements for tax administration
and enforcement.

(a) After a return is filed as required under the provision of this Code, the Commissioner shall examine it and assess the
correct amount of tax. x x x"

which the [petitioner] Commissioner undeniably failed to do. Moreover, noteworthy is the fact that during the hearing
of the petition for review before the CTA, [petitioner] Commissioner of the BIR submitted the case for decision "in view
of the fact that he has no evidence to present nor records to submit relative to the case" x x x

Thus, although it is a fact that [respondent] failed to indicate said income payments under the appropriate Schedules 3,
4, and 5 of Section C of its 1994 Annual Income Tax Return (Exhibit "A"), however, We give credence to [respondent]
Bank’s assertion that it reported the said income payments as part of its gross income when it included the same as part
of the "Other Income," "Trust Income," and "Interest Income" stated in the Schedule of Income (referred to as an
attachment in Section C of Exhibit "A", x x x and in the 1994 audited Financial Statements (FS) supporting [respondent’s]
1994 Annual Corporate Income Tax Return. The reason why the phrase "NOT APPLICABLE" was indicated in schedules 3,
4, and 5 of Section C of [respondent’s] 1994 Annual Income Tax Return is due to the fact that [respondent] Bank already
reported the subject rental income and income from sale of real property in the Schedule of Income under the headings
"Other Income/Earnings," "Trust Income" and "Interest Income." Therefore, [respondent] Bank still complied with the
second requirement that the income upon which the taxes were withheld are included in the return as part of the gross
income.

xxxx

[Respondent] Bank’s various documentary evidence showing that it had satisfied all requirements under the Tax Code
vis-à-vis the Bureau of Internal Revenue’s failure to adduce any evidence in support of their denial of the claim,
[respondent] Bank should, therefore, be granted the present claim for refund.15 (Emphasis supplied)

Between the decision of the CTA and the CA, it is the former’s that is based on the evidence and in accordance with the
applicable law and jurisprudence.

To establish the fact of withholding, respondent submitted Certificates of Creditable Tax Withheld at Source and
Monthly Remittance Returns of Income Taxes Withheld, which pertain to rentals and sales of real property,
respectively. However, a perusal of respondent’s 1994 Annual Income Tax Return shows that the gross income was
derived solely from sales of services. In fact, the phrase "NOT APPLICABLE" was printed on the schedules pertaining to
rent, sale of real property, and trust income.16 Thus, based on the entries in the return, the income derived from rentals
and sales of real property upon which the creditable taxes were withheld were not included in respondent’s gross
income as reflected in its return. Since no income was reported, it follows that no tax was withheld. To reiterate, it is
incumbent upon the taxpayer to reflect in his return the income upon which any creditable tax is required to be
withheld at the source.17
Respondent’s explanation that its income derived from rentals and sales of real properties were included in the gross
income but were classified as "Other Earnings" in its Schedule of Income 18 attached to the return is not supported by the
evidence. There is nothing in the Schedule of Income to show that the income under the heading "Other Earnings"
includes income from rentals and sales of real property. No documentary or testimonial evidence was presented by
respondent to prove this. In fact, respondent, upon realizing its omission, filed a motion for new trial on the ground of
excusable negligence with the CTA. Respondent knew that it had to present additional evidence showing the breakdown
of the "Other Earnings" reported in its Schedule of Income attached to the return to prove that the income from rentals
and sales of real property were actually included under the heading "Other Earnings."19 Unfortunately, the CTA was not
convinced that there was excusable negligence to justify the granting of a new trial.

Accordingly, the CA erred in ruling that respondent complied with the second requirement.

Respondent failed to present all the Certificates of Creditable Tax Withheld at Source.

The CA likewise failed to consider in its Decision the absence of several Certificates of Creditable Tax Withheld at Source.
It immediately granted the refund without first verifying whether the fact of withholding was established by the
Certificates of Creditable Tax Withheld at Source as required under Section 10 of Revenue Regulation No. 6-85. As
correctly pointed out by the CTA, the certifications (Exhibit UU) issued by respondent cannot be considered in the
absence of the required Certificates of Creditable Tax Withheld at Source.

The burden is on the taxpayer to prove its entitlement to the refund.

Moreover, the fact that the petitioner failed to present any evidence or to

refute the evidence presented by respondent does not ipso facto entitle the respondent to a tax refund. It is not the
duty of the government to disprove a taxpayer’s claim for refund. Rather, the burden of establishing the factual basis of
a claim for a refund rests on the taxpayer.20

And while the petitioner has the power to make an examination of the returns and to assess the correct amount of tax,
his failure to exercise such powers does not create a presumption in favor of the correctness of the returns. The
taxpayer must still present substantial evidence to prove his claim for refund. As we have said, there is no automatic
grant of a tax refund.21

Hence, for failing to prove its entitlement to a tax refund, respondent’s claim must be denied. Since tax refunds partake
of the nature of tax exemptions, which are construed strictissimi juris against the taxpayer, evidence in support of a
claim must likewise be strictissimi scrutinized and duly proven.22

WHEREFORE, the petition is GRANTED. The assailed January 31, 2006 Decision of the Court of Appeals in CA-G.R. SP No.
56773 and its July 19, 2006 Resolution are REVERSED and SET ASIDE. The October 4, 1999 Decision of the Court of Tax
Appeals denying respondent’s claim for tax refund for failure to prove that the income derived from rentals and sale of
real property from which the taxes were withheld were reflected in its 1994 Annual Income Tax Return, is REINSTATED
and AFFIRMED.

SO ORDERED.

d. G.R. No. 182582 * April 17, 2017

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

Assailed in this petition for review on certiorari 1 is the Decision 2 dated April 21, 2008 of the Court of Tax Appeals
(CTA) En Banc in C.T.A. EB No. 340, which affirmed the Decision3 dated August 13, 2007 and the Resolution4 dated
November 14, 2007 of the CTA First Division (CTA Division) in CTA Case No. 6765, and consequently, dismissed petitioner
Metropolitan Bank & Trust Company's (Metrobank) claim for refund on the ground of prescription.

The Facts

On June 5, 1997, Solidbank Corporation (Solidbank) entered into an agreement with Luzon Hydro Corporation (LHC),
whereby the former extended to the latter a foreign currency denominated loan in the principal amount of
US$123,780,000.00 (Agreement). Pursuant to the Agreement, LHC is bound to shoulder all the corresponding internal
revenue taxes required by law to be deducted or withheld on the said loan, as well as the filing of tax returns and
remittance of the taxes withheld to the Bureau of Internal Revenue (BIR). On September 1, 2000, Metrobank acquired
Solidbank, and consequently, assumed the latter's rights and obligations under the aforesaid Agreement. 5

On March 2, 2001 and October 31, 2001, LHC paid Metro bank the total amounts of US$1,538,122.17

6
and US$1,333,268.31, 7 respectively. Pursuant to the Agreement, LHC withheld, and eventually paid to the BIR, the ten
percent (10%) final tax on the interest portions of the aforesaid payments, on the same months that the respective
payments were made to petitioner. In sum, LHC remitted a total ofUS$106,178.69,8 or its Philippine Peso equivalent of
₱5,296,773.05,9 as evidenced by LHC's Schedules of Final Tax and Monthly Remittance Returns for the said months. 10

According to Metrobank, it mistakenly remitted the aforesaid amounts to the BIR as well when they were inadvertently
included in its own Monthly Remittance Returns of Final Income Taxes Withheld for the months of March 2001 and
October 2001. Thus, on December 27, 2002, it filed a letter to the BIR requesting for the refund thereof. Thereafter and
in view of respondent the Commissioner of Internal Revenue's (CIR) inaction, Metrobank filed its judicial claim for refund
via a petition for review filed before the CTA on September 10, 2003, docketed as CTA Case No. 6765. 11

In defense, the CIR averred that: (a) the claim for refund is subject to administrative investigation; (b) Metro bank must
prove that there was double payment of the tax sought to be refunded; (c) such claim must be filed within the
prescriptive period laid down by law; (d) the burden of proof to establish the right to a refund is on the taxpayer; and
(e) claims for tax refunds are in the nature of tax exemptions, and as such, should be construed strictissimi Juris against
the taxpayer. 12

The CTA Division Ruling

In a Decision 13 dated August 13, 2007, the CTA Division denied Metrobank's claims for refund for lack of merit. 14 It ruled
that Metrobank's claim relative to the March 2001 final tax was filed beyond the two (2)-year prescriptive period. It
pointed out that since Metrobank remitted such payment on April 25, 2001, the latter only had until April 25, 2003 to
file its administrative and judicial claim for refunds. In this regard, while Metro bank filed its administrative claim well
within the afore said period, or on December 27, 2002, the judicial claim was filed only on September 10, 2003. Hence,
the right to claim for such refund has prescribed. 15 On the other hand, the CTA Division also denied Metrobank's claim
for refund relative to the October 2001 tax payment for insufficiency of evidence. 16

Metrobank moved for reconsideration, 17 which was partially granted in a Resolution18 dated November 14, 2007, and
thus, was allowed to present further evidence regarding its claim for refund for the October 2001 final tax. However, the
CTA Division affirmed the denial of the claim relative to its March 2001 final tax on the ground of
prescription. 19 Aggrieved, Metrobank filed a petition for partial review20 before the CTA En Banc, docketed as C.T.A. EB
No. 340.

The CTA En Banc Ruling

In a Decision21 dated April 21, 2008, the CTA En Banc affirmed the CTA Division's ruling. It held that since Metrobank's
March 2001 final tax is in the nature of a final withholding tax, the two (2)-year prescriptive period was correctly
reckoned by the CTA Division from the time the same was paid on April 25, 2001. As such, Metro bank's claim for refund
had already prescribed as it only filed its judicial claim on September 10, 2003. 22
Hence, this petition.

The Issue Before the Court

The issue for the Court's resolution is whether or not the CTA En Banc correctly held that Metrobank's claim for refund
relative to its March 2001 final tax had already prescribed.

The Court's Ruling

The petition is without merit.

Section 204 of the National Internal Revenue Code, as amended, 23 provides the CIR with, inter alia, the authority to
grant tax refunds. Pertinent portions of which read:

Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. -The Commissioner may-

xxxx

(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.1âwphi1 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.
(Emphasis and underscoring supplied)

In this relation, Section 229 of the same Code provides for the proper procedure in order to claim for such refunds, to
wit:

Section 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 a written claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphases and
underscoring supplied)

As may be gleaned from the foregoing provisions, a claimant for refund must first file an administrative claim for refund
before the CIR, prior to filing a judicial claim before the CTA. Notably, both the administrative and judicial claims for
refund should be filed within the two (2)-year prescriptive period indicated therein, and that the claimant is allowed to
file the latter even without waiting for the resolution of the former in order to prevent the forfeiture of its claim through
prescription. In this regard, case law states that "the primary purpose of filing an administrative claim [is] to serve as a
notice of warning to the CIR that court action would follow unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code - then Section 306 of the old Tax Code -
however does not mean that the taxpayer must await the final resolution of its administrative claim for refund, since
doing so would be tantamount to the taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-year
prescriptive period expire without the appropriate judicial claim being filed."24
In this case, Metrobank insists that the filing of its administrative and judicial claims on December 27, 2002 and
September 10, 2003, respectively, were well-within the two (2)-year prescriptive period. Citing ACCRA Investments
Corporation v. Court of Appeals,25 CIR v. TMX Sales, Inc.,26 CIR v. Philippine American Life Insurance, Co., 27 and CIR v.
CDCP Mining Corporation, 28 Metrobank contends that the aforesaid prescriptive period should be reckoned not from
April 25, 2001 when it remitted the tax to the BIR, but rather, from the time it filed its Final Adjustment Return or Annual
Income Tax Return for the taxable year of 2001, or in April 2002, as it was only at that time when its right to a refund
was ascertained. 29

Metrobank's contention cannot be sustained.

As correctly pointed out by the CIR, the cases cited by Metrobank involved corporate income taxes, in which the
corporate taxpayer is required to file and pay income tax on a quarterly basis, with such payments being subject to an
adjustment at the end of the taxable year. As aptly put in CIR v.TMX Sales, Inc., "payment of quarterly income tax should
only be considered [as] mere installments of the annual tax due. These quarterly tax payments which are computed
based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be
treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. x x
x Consequently, the two-year prescriptive period x x x should be computed from the time of filing of the Adjustment
Return or Annual Income Tax Return and final payment of income tax."30 Verily, since quarterly income tax payments are
treated as mere "advance payments" of the annual corporate income tax, there may arise certain situations where such
"advance payments" would cover more than said corporate taxpayer's entire income tax liability for a specific taxable
year. Thus, it is only logical to reckon the two (2)-year prescriptive period from the time the Final Adjustment Return or
the Annual Income Tax Return was filed, since it is only at that time that it would be possible to determine whether the
corporate taxpayer had paid an amount exceeding its annual income tax liability.

On the other hand, the tax involved in this case is a ten percent (10%) final withholding tax on Metrobank's interest
income on its foreign currency denominated loan extended to LHC. In this regard, Section 2.57 (A) of Revenue
Regulations No. 02-9831 explains the characterization of taxes of this nature, to wit:

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. - Under the final withholding tax system[,] the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent.
The payee is not required to file an income tax return for the particular income.

The finality of the withholding tax is limited only to the payee's income tax liability on the particular income. It does not
extend to the payee's other tax liability on said income, such as when the said income is further subject to a percentage
tax. For example, if a bank receives income subject to final withholding tax, the same shall be subject to a percentage
tax. (Emphasis and underscoring supplied)

From the foregoing, it may be gleaned that final withholding taxes are considered as full and final payment of the
income tax due, and thus, are not subject to any adjustments. Thus, the two (2)-year prescriptive period commences to
run from the time the refund is ascertained, i.e., the date such tax was paid, and not upon the discovery by the taxpayer
of the erroneous or excessive payment of taxes. 32

In the case at bar, it is undisputed that Metrobank's final withholding tax liability in March 2001 was remitted to the BIR
on April 25, 2001. As such, it only had until April 25, 2003 to file its administrative and judicial claims for refund.
However, while Metrobank's administrative claim was filed on December 27, 2002, its corresponding judicial claim was
only filed on September 10, 2003. Therefore, Metrobank's claim for refund had clearly prescribed.

Finally, the Court finds untenable Metrobank's resort to the principle of solutio indebiti in support of its position. 33 In CIR
v. Manila Electric Company, 34 the Court rejected the application of said principle to tax refund cases, viz.:
In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive period for initiating an action on
the ground of quasi contract or solutio indebiti under Article 1145 of the New Civil Code. There is solutio indebiti where:
(1) payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person
who received the payment; and (2) the payment is made through mistake, and not through liberality or some other
cause. Here, there is· a binding relation between petitioner as the taxing authority in this jurisdiction and respondent
MERALCO which is bound under the law to act as a withholding agent of NORD/LB Singapore Branch, the taxpayer.
Hence, the first element of solutio indebiti is lacking. Moreover, such legal precept is inapplicable to the present case
since the Tax Code, a special law, explicitly provides for a mandatory period for claiming a refund for taxes
erroneously paid.

Tax refunds are based on the general premise that taxes have either been erroneously or excessively paid. Though the
Tax Code recognizes the right of taxpayers to request the return of such excess/erroneous payments from the
government, they must do so within a prescribed period. Further, "a taxpayer must prove not only his entitlement to a
refund, but also his compliance with the procedural due process as nonobservance of the prescriptive periods within
which to file the administrative and the judicial claims would result in the denial of his claim." 35 (Emphasis and
underscoring supplied)

In sum, the CT A Division and CT A En Banc correctly ruled that Metrobank's claim for refund in connection with its final
withholding tax incurred in March 2001 should be denied on the ground of prescription.

WHEREFORE, the petition is DENIED. The Decision dated April 21, 2008 of the Court of Tax Appeals En Banc in C.T.A. EB
No. 340 is hereby AFFIRMED.

SO ORDERED.

e. See Sec 76
f. G.R. No. 181298 January 10, 2011

BELLE CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Section 69 of the old National Internal Revenue Code (NIRC) allows unutilized tax credits to be refunded as long as the
claim is filed within the prescriptive period. This, however, no longer holds true under Section 76 of the 1997 NIRC as the
option to carry-over excess income tax payments to the succeeding taxable year is now irrevocable.

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeks to set aside the January 25, 2007
Decision2 and the January 21, 2008 Resolution3 of the Court of Appeals (CA).

Factual Antecedents

Petitioner Belle Corporation is a domestic corporation engaged in the real estate and property business.4

On May 30, 1997, petitioner filed with the Bureau of Internal Revenue (BIR) its Income Tax Return (ITR) for the first
quarter of 1997, showing a gross income of ₱741,607,495.00, a deduction of ₱65,381,054.00, a net taxable income of
₱676,226,441.00 and an income tax due of ₱236,679,254.00, which petitioner paid on even date through PCI Bank,
Tektite Tower Branch, an Authorized Agent Bank of the BIR.5

On August 14, 1997, petitioner filed with the BIR its second quarter ITR, declaring an overpayment of income taxes in
the amount of ₱66,634,290.00. The computation of which is reproduced below:

Gross Income ₱ 833,186,319.00

 Less: Deductions 347,343,565.00
Taxable Income ₱ 485,842,754.00
Tax Rate x 35%
Tax Due ₱ 170,044,964.00
Less: Tax Credits/Payments
(a) Prior Year’s Excess Tax Credit -
(b) 1st Quarter Payment ₱236,679,254.00
(c) Creditable Withholding Tax - ________________
(₱ 66,634,290.00)6

In view of the overpayment, no taxes were paid for the second and third quarters of 1997. 7 Petitioner’s ITR for the
taxable year ending December 31, 1997 thereby reflected an overpayment of income taxes in the amount of
₱132,043,528.00, computed as follows:

Gross Income ₱ 1,182,473,910.00

Less: Deductions 879,485,278.00

Taxable Income ₱ 302,988,362.00

Tax Rate x 35%

Tax Due ₱ 106,046,021.00

Less: Tax Credits/Payments
(a) Prior Year’s Excess Tax Credit -
(b) 1st Quarter Payment ₱236,679,254.00
(c) Creditable Withholding Tax (1,410,295.00) (238,089,549.00)

REFUNDABLE AMOUNT (₱ 132,043,528.00)8

Instead of claiming the amount as a tax refund, petitioner decided to apply it as a tax credit to the succeeding taxable
year by marking the tax credit option box in its 1997 ITR.9

For the taxable year 1998, petitioner’s amended ITR showed an overpayment of ₱106,447,318.00, computed as follows:

Gross Income ₱ 1,279,810,489.00

Less: Deduction 1,346,553,546.00

Taxable Income (Loss) (₱ 66,743,057.00)

Tax Rate 34%

 Tax Due (Regular Income Tax) - NIL

Minimum Corporate Income Tax ₱ 25,596,210.00

Tax Due 25,596,210.00

Less: Tax Credits/Payments

(a) Prior year’s excess Tax Credits (₱ 132,041,528.00)

(b) Quarterly payment -

(c) Creditable tax withheld -

Tax Payable/Overpayment (₱ 106,447,318.00)10

On April 12, 2000, petitioner filed with the BIR an administrative claim for refund of its unutilized excess income tax
payments for the taxable year 1997 in the amount of ₱106,447,318.00.11

Notwithstanding the filing of the administrative claim for refund, petitioner carried over the amount of ₱106,447,318.00
to the taxable year 1999 and applied a portion thereof to its 1999 Minimum Corporate Income Tax (MCIT) liability, as
evidenced by its 1999 ITR.12 Thus:

Gross Income ₱ 708,888,638.00

Less: Deduction 1,328,101,776.00

Taxable Income (₱ 619,213,138.00)

Tax Due -

Minimum Corporate Income Tax ₱ 14,185,874.00

Less: Tax Credits/Payments

(a) Prior year’s excess Credit ₱ 106,447,318.00

(b) Tax Payments for the 1st & 3rd Qtrs. 0

(c) Creditable tax withheld 0 ₱ 106,447,318.00

TAX PAYABLE/REFUNDABLE (₱ 92,261,444.00)13

Proceedings before the Court of Tax Appeals (CTA)

On April 14, 2000, due to the inaction of the respondent Commissioner of Internal Revenue (CIR) and in order to toll the
running of the two-year prescriptive period, petitioner appealed its claim for refund of unutilized excess income tax
payments for the taxable year 1997 in the amount of ₱106,447,318.00 with the CTA via a Petition for Review,14 docketed
as CTA Case No. 6070.

In answer thereto, respondent interposed that:

4. Petitioner’s alleged claim for refund/tax credit is subject to administrative routinary

investigation/examination by respondent’s Bureau;
 5. Petitioner failed miserably to show that the total amount of ₱106,447,318.00 claimed as overpaid or excess
income tax is refundable;

6. Taxes paid and collected are presumed to have been paid in accordance with law; hence, not refundable;

7. In an action for tax refund, the burden is on the taxpayer to establish its right to refund, and failure to sustain
the burden is fatal to the claim for refund;

8. It is incumbent upon petitioner to show that it has complied with the provisions of Section 204 (c) in relation
to Section 229 of the tax Code;

9. Well-established is the rule that refunds/tax credits are construed strictly against the taxpayer as they partake
the nature of tax exemptions.15

To prove entitlement to the refund, petitioner submitted, among others, the following documents: its ITR for the first
quarter of taxable year 1997 (Exhibit "B"),16 its tentative ITRs for taxable years 1997 (Exhibit "D")17 and 1998 (Exhibit
"H"),18 its final ITRs for taxable years 1997 (Exhibit "E"), 19 1998 (Exhibit "I")20 and 1999 (Exhibit "J"),21 its Letter Claim for
Refund filed with the BIR (Exhibit "K")22 and the Official Receipt issued by PCI Bank showing the income tax payment
made by petitioner in the amount of ₱236,679,254.00 for the first quarter of 1997 (Exhibit "C"). 23

On April 10, 2001, the CTA rendered a Decision24 denying petitioner’s claim for refund. It found:

[T]hat all the allegations made by the Petitioner as well as the figures accompanying Petitioner’s claim are substantiated
by documentary evidence but noticed some flaws in Petitioner’s application of the pertinent laws involved.

It bears stressing that the applicable provision in the case at bar is Section 69 of the old Tax Code and not Section 76 of
the 1997 Tax Code. Settled is the rule that under Section 69 of the old Tax Code, the carrying forward of any
excess/overpaid income tax for a given taxable year is limited only up to the succeeding taxable year.

A painstaking scrutiny of Petitioner’s income tax returns would show that Petitioner carried over its 1997 refundable tax
of ₱132,043,528.00 to the succeeding year of 1998 yielding an overpayment of ₱106,447,318.00 (Exhibit I-1) after
deducting therefrom the minimum Corporate Income tax of ₱25,596,210.00. However, Petitioner even went further to
the taxable year 1999 and applied the Prior Year’s (1998) Excess Credit of ₱106,447,318.00 to its income tax
liability.1avvphi1

True enough, upon verification of Petitioner’s 1999 Corporate Annual Income Tax Return (Exh. I), this Court found that
the whole amount of ₱106,447,318.00 representing its prior year's excess credit (subject of this claim) was carried
forward to its 1999 income tax liability, details of the 1999 Income Tax Return are shown below as follows:

Gross Income ₱ 708,888,638.00

Less: Deduction 1,328,101,776.00

Taxable Income (₱ 619,213,138.00)

Tax Due -

Minimum Corporate Income Tax ₱ 14,185,874.00

Less: Tax Credits/Payments

(a) Prior year's excess Credit ₱ 106,447,318.00

 (b) Tax Payments for the 1st & 3rd Qtrs. 0

(c) Creditable tax withheld 0 ₱106,447,318.00

TAX PAYABLE/REFUNDABLE (₱ 92,261,444.00)

It is an elementary rule in taxation that an automatic carry over of an excess income tax payment should only be made
for the succeeding year. (Paseo Realty and Dev’t. Corp. vs. CIR, CTA Case No. 4528, April 30, 1993) True enough, implicit
from the provisions of Section 69 of the NIRC, as amended, (supra) is the fact that the refundable amount may be
credited against the income tax liabilities for the taxable quarters of the succeeding taxable year not succeeding years;
and that the carry-over is only limited to the quarters of the succeeding taxable year. (citing ANSCOR Hagedorn
Securities Inc. vs. CIR, CA-GR SP 38177, December 21, 1999) To allow the application of excess taxes paid for two
successive years would run counter to the specific provision of the law above-mentioned.25 (Emphasis supplied.)

Petitioner sought reconsideration26 of the CTA’s denial of its claim for refund, but the same was denied in a
Resolution27 dated June 5, 2001, prompting petitioner to elevate the matter to the CA via a Petition for Review 28 under
Rule 43 of the Rules of Court.

Ruling of the Court of Appeals

On January 25, 2007, the CA, applying Philippine Bank of Communications v. Commissioner of Internal Revenue,29 denied
the petition. The CA explained that the overpayment for taxable year 1997 can no longer be carried over to taxable year
1999 because excess income payments can only be credited against the income tax liabilities of the succeeding taxable
year, in this case up to 1998 only and not beyond.30 Neither can the overpayment be refunded as the remedies of
automatic tax crediting and tax refund are alternative remedies.31 Thus, the CA ruled:

[W]hile BELLE may not have fully enjoyed the complete utilization of its option and the sum of Php106,447,318 still
remained after it opted for a tax carry over of its excess payment for the taxable year 1998, but be that as it may, BELLE
has only itself to blame for making such useless and damaging option, and BELLE may no longer opt to claim for a refund
considering that the remedy of refund is barred after the corporation has previously opted for the tax carry over
remedy. As a matter of fact, the CTA even made the factual findings that BELLE committed an aberration to exhaust its
unutilized overpaid income tax by carrying it over further to the taxable year 1999, which is a blatant transgression of
the "succeeding taxable year limit" provided for under Section 69 of the old NIRC. 32 (Emphasis supplied)

Hence, the fallo of the Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is DENIED, and accordingly, the herein impugned
April 10, 2001 Decision and June 5, 2001 Resolution of the CTA are hereby affirmed.

SO ORDERED.33

Petitioner moved for reconsideration.34 The CA, however, denied the same in a Resolution35 dated January 21, 2008.

Issues

Aggrieved, petitioner availed of the present recourse, raising the following assignment of errors:

A. THE CA COMMITTED SERIOUS ERROR OF LAW IN APPLYING THE PBCOM CASE.

A.1. THE [DECISION IN THE] PBCOM CASE HAS ALREADY BEEN REPEALED.
 A.2. ASSUMING ARGUENDO THAT THE [DECISION IN THE] PBCOM CASE HAS NOT BEEN REPEALED, IT
HAS NO APPLICATION TO BELLE.

B. THE CA COMMITTED SERIOUS ERROR OF LAW IN FINDING THAT BELLE’S REFUND CLAIM IS NOT ON ALL FOURS
WITH THE CASES OF BPI FAMILY AND AB LEASING.

B.1. BELLE’S ‘CARRYING-OVER’ OF ITS EXCESS INCOME TAX PAID FOR 1997 TO 1999 (BEYOND THE
SUBSEQUENT YEAR) IS IMMATERIAL.

B.2. BELLE’S PARTIAL USE OF ITS EXCESS INCOME TAX PAID IN 1998 (THE SUBSEQUENT YEAR) DOES NOT
PRECLUDE BELLE FROM ASKING FOR A REFUND.36

In a nutshell, the issue boils down to whether petitioner is entitled to a refund of its excess income tax payments for the
taxable year 1997 in the amount of ₱106,447,318.00.

Petitioner’s Arguments

Petitioner insists that it is entitled to a refund as the ruling in Philippine Bank of Communications v. Commissioner of
Internal Revenue37 relied upon by the CA in denying its claim has been overturned by BPI-Family Savings Bank, Inc. v.
Court of Appeals,38 AB Leasing and Finance Corporation v. Commissioner of Internal Revenue,39 Calamba Steel Center,
Inc. v. Commissioner of Internal Revenue,40 and State Land Investment Corporation v. Commissioner of Internal
Revenue.41 In these cases, the taxpayers were allowed to claim refund of unutilized tax credits. 42 Similarly, in this case,
petitioner asserts that it may still recover unutilized tax credits via a claim for refund. 43

And while petitioner admits that it has committed a "blatant transgression" of the "succeeding taxable year limit" when
it carried over its 1997 excess income tax payments beyond the taxable year 1998, petitioner believes that this should
not result in the denial of its claim for refund but should only invalidate the application of its 1997 unutilized excess
income tax payments to its 1999 income tax liabilities.44 Hence, petitioner postulates that a claim for refund of its
unutilized tax credits for the taxable year 1997 may still be made because the carry-over thereof to the taxable year
1999 produced no legal effect, and is, therefore, immaterial to the resolution of its claim for refund. 45

Respondent’s Arguments

Respondent, on the other hand, maintains that the cases of BPI-Family Savings Bank46 and AB Leasing47 are inapplicable
as the facts obtaining therein are different from those of the present case.48 What is controlling, therefore, is the ruling
in Philippine Bank of Communications,49 that tax refund and tax credit are alternative remedies; thus, "the choice of one
precludes the other."50 Respondent, therefore, submits that since petitioner has already applied its 1997 excess income
tax payments to its liabilities for taxable year 1998, it is precluded from carrying over the same to taxable year 1999, or
from filing a claim for refund.51

Our Ruling

The petition has no merit.

Both the CTA and the CA erred in applying Section 6952 of the old NIRC. The law applicable is Section 76 of the NIRC.

Unutilized excess income tax payments may be refunded within two years from the date of payment under Section 69 of
the old NIRC

Under Section 69 of the old NIRC, in case of overpayment of income taxes, a corporation may either file a claim for
refund or carry-over the excess payments to the succeeding taxable year. Availment of one remedy, however, precludes
the other.53
Although these remedies are mutually exclusive, we have in several cases allowed corporations, which have previously
availed of the tax credit option, to file a claim for refund of their unutilized excess income tax payments.

In BPI-Family Savings Bank,54 the bank availed of the tax credit option but since it suffered a net loss the succeeding
year, the tax credit could not be applied; thus, the bank filed a claim for refund to recover its excess creditable taxes.
Brushing aside technicalities, we granted the claim for refund.

Likewise, in Calamba Steel Center, Inc.,55 we allowed the refund of excess income taxes paid in 1995 since these could
not be credited to taxable year 1996 due to business losses. In that case, we declared that "a tax refund may be claimed
even beyond the taxable year following that in which the tax credit arises x x x provided that the claim for such a refund
is made within two years after payment of said tax."56

In State Land Investment Corporation,57 we reiterated that "if the excess income taxes paid in a given taxable year have
not been entirely used by a x x x corporation against its quarterly income tax liabilities for the next taxable year, the
unused amount of the excess may still be refunded, provided that the claim for such a refund is made within two years
after payment of the tax."58

Thus, under Section 69 of the old NIRC, unutilized tax credits may be refunded as long as the claim is filed within the
two-year prescriptive period.

The option to carry over excess income tax payments is irrevocable under Section 76 of the 1997 NIRC

This rule, however, no longer applies as Section 76 of the 1997 NIRC now reads:

Section 76. Final Adjustment Return. – Every corporation liable to tax under Section 24 shall file a final adjustment return
covering the total net 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 net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be 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 tax refund or issuance of a tax credit
certificate shall be allowed therefor. (Emphasis supplied)

Under the new law, in case of overpayment of income taxes, the remedies are still the same; and the availment of one
remedy still precludes the other. But unlike Section 69 of the old NIRC, the carry-over of excess income tax payments is
no longer limited to the succeeding taxable year. Unutilized excess income tax payments may now be carried over to the
succeeding taxable years until fully utilized. In addition, the option to carry-over excess income tax payments is now
irrevocable. Hence, unutilized excess income tax payments may no longer be refunded.

In the instant case, both the CTA and the CA applied Section 69 of the old NIRC in denying the claim for refund. We find,
however, that the applicable provision should be Section 76 of the 1997 NIRC because at the time petitioner filed its
1997 final ITR, the old NIRC was no longer in force. In Commissioner of Internal Revenue v. McGeorge Food Industries,
Inc.,59 we explained that:

Section 76 and its companion provisions in Title II, Chapter XII should be applied following the general rule on the
prospective application of laws such that they operate to govern the conduct of corporate taxpayers the moment the
1997 NIRC took effect on 1 January 1998. There is no quarrel that at the time respondent filed its final adjustment
return for 1997 on 15 April 1998, the deadline under Section 77 (B) of the 1997 NIRC (formerly Section 70(b) of the
1977 NIRC), the 1997 NIRC was already in force, having gone into effect a few months earlier on 1 January 1998.
Accordingly, Section 76 is controlling.

The lower courts grounded their contrary conclusion on the fact that respondent’s overpayment in 1997 was based on
transactions occurring before 1 January 1998. This analysis suffers from the twin defects of missing the gist of the
present controversy and misconceiving the nature and purpose of Section 76. None of respondent’s corporate
transactions in 1997 is disputed here. Nor can it be argued that Section 76 determines the taxability of corporate
transactions. To sustain the rulings below is to subscribe to the untenable proposition that, had Congress in the 1997
NIRC moved the deadline for the filing of final adjustment returns from 15 April to 15 March of each year, taxpayers
filing returns after 15 March 1998 can excuse their tardiness by invoking the 1977 NIRC because the transactions subject
of the returns took place before 1 January 1998. A keener appreciation of the nature and purpose of the varied
provisions of the 1997 NIRC cautions against sanctioning this reasoning. 60

Accordingly, since petitioner already carried over its 1997 excess income tax payments to the succeeding taxable year
1998, it may no longer file a claim for refund of unutilized tax credits for taxable year 1997.

To repeat, under the new law, once the option to carry-over excess income tax payments to the succeeding years has
been made, it becomes irrevocable. Thus, applications for refund of the unutilized excess income tax payments may no
longer be allowed.

WHEREFORE, the petition is hereby DENIED. The Decision dated January 25, 2007 and the Resolution dated January 21,
2008 of the Court of Appeals are hereby AFFIRMED only insofar as the denial of petitioner’s claim for refund is
concerned.

SO ORDERED.

g. See also Resolution on the Motion for Clarification dated March 2, 2011 on the same case in
f above
h. G.R. No. 178490 July 7, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

This is a Petition for Review assailing the Decision1 dated 29 April 2005 and the Resolution dated 20 April 2007 of the
Court of Appeals in CA-G.R. SP No. 77655, which annulled and set aside the Decision dated 12 March 2003 of the Court
of Tax Appeals (CTA) in CTA Case No. 6276, wherein the CTA held that respondent Bank of the Philippine Islands (BPI)
already exercised the irrevocable option to carry over its excess tax credits for the year 1998 to the succeeding years
1999 and 2000 and was, therefore, no longer entitled to claim the refund or issuance of a tax credit certificate for the
amount thereof.

On 15 April 1999, BPI filed with the Bureau of Internal Revenue (BIR) its final adjusted Corporate Annual Income Tax
Return (ITR) for the taxable year ending on 31 December 1998, showing a taxable income of ₱1,773,236,745.00 and a
total tax due of ₱602,900,493.00.

For the same taxable year 1998, BPI already made income tax payments for the first three quarters, which amounted to
₱563,547,470.46.2 The bank also received income in 1998 from various third persons, which, were already subjected to
expanded withholding taxes amounting to ₱7,685,887.90. BPI additionally acquired foreign tax credit when it paid the
United States government taxes in the amount of $151,467.00, or the equivalent of ₱6,190,014.46, on the operations of
former’s New York Branch. Finally, respondent BPI had carried over excess tax credit from the prior year, 1997,
amounting to ₱59,424,222.00.
Crediting the aforementioned amounts against the total tax due from it at the end of 1998, BPI computed an
overpayment to the BIR of income taxes in the amount of ₱33,947,101.00. The computation of BPI is reproduced below:

Total Income Taxes Due ₱602,900,493.00

Less: Tax Credits:

Prior year’s tax credits ₱59,424,222.00

Quarterly payments 563,547,470.46

Creditable taxes withheld 7,685,887.90

Foreign tax credit 6,190,014.00 636,847,594.00

Net Tax Payable/(Refundable) ₱(33,947,101.00)

BPI opted to carry over its 1998 excess tax credit, in the amount of ₱33,947,101.00, to the succeeding taxable year
ending 31 December 1999.3 For 1999, however, respondent BPI ended up with (1) a net loss in the amount of
₱615,742,102.00; (2) its still unapplied excess tax credit carried over from 1998, in the amount of ₱33,947,101.00; and
(3) more excess tax credit, acquired in 1999, in the sum of ₱12,975,750.00. So in 1999, the total excess tax credits of BPI
increased to ₱46,922,851.00, which it once more opted to carry over to the following taxable year.

For the taxable year ending 31 December 2000, respondent BPI declared in its Corporate Annual ITR: (1) zero taxable
income; (2) excess tax credit carried over from 1998 and 1999, amounting to ₱46,922,851.00; and (3) even more excess
tax credit, gained in 2000, in the amount of ₱25,207,939.00. This time, BPI failed to indicate in its ITR its choice of
whether to carry over its excess tax credits or to claim the refund of or issuance of a tax credit certificate for the
amounts thereof.

On 3 April 2001, BPI filed with petitioner Commissioner of Internal Revenue (CIR) an administrative claim for refund in
the amount of ₱33,947,101.00, representing its excess creditable income tax for 1998.

The CIR failed to act on the claim for tax refund of BPI. Hence, BPI filed a Petition for Review before the CTA, docketed as
CTA Case No. 6276.

The CTA promulgated its Decision in CTA Case No. 6276 on 12 March 2003, ruling therein that since BPI had opted to
carry over its 1998 excess tax credit to 1999 and 2000, it was barred from filing a claim for the refund of the same.

The CTA relied on the irrevocability rule laid down in Section 76 of the National Internal Revenue Code (NIRC) of 1997,
which states that once the taxpayer opts to carry over and apply its excess income tax to succeeding taxable years, its
option shall be irrevocable for that taxable period and no application for tax refund or issuance of a tax credit shall be
allowed for the same.

The CTA Decision adjudged:

A close scrutiny of the 1998 income tax return of [BPI] reveals that it opted to carry over its excess tax credits, the
amount subject of this claim, to the succeeding taxable year by placing an "x" mark on the corresponding box of said
return (Exhibits A-2 & 3-a). For the year 1999, [BPI] again manifested its intention to carry over to the succeeding taxable
period the subject claim together with the current excess tax credits (Exhibit J). Still unable to apply its prior year’s
excess credits in 1999 as it ended up in a net loss position, petitioner again carried over the said excess credits in the
year 2000 (Exhibit K).
The court already categorically ruled in a number of cases that once the option to carry-over and apply the excess
quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable years has been
made, such option shall be considered irrevocable and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefore (Pilipinas Transport Industries vs. Commissioner of Internal Revenue, CTA Case No.
6073, dated March 1, 2002; Pilipinas Hino, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6074, dated April 19,
2002; Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6210, dated May 2, 2002;
The Philippine Banking Corporation (now known as Global Business Bank, Inc.) vs. Commissioner of Internal Revenue,
CTA Resolution, CTA Case No. 6280, August 16, 2001. Since [BPI] already exercised the irrevocable option to carry over
its excess tax credits for the year 1998 to the succeeding years 1999 and 2000, it is, therefore, no longer entitled to claim
for a refund or issuance of a tax credit certificate.4

In the end, the CTA decreed:

IN VIEW OF ALL THE FOREGOING, the instant petition for review is hereby DENIED for lack of merit. 5

BPI filed a Motion for Reconsideration of the foregoing Decision, but the CTA denied the same in a Resolution dated 3
June 2003.

BPI filed an appeal with the Court of Appeals, docketed as CA-G.R. SP No. 77655. On 29 April 2005, the Court of Appeals
rendered its Decision, reversing that of the CTA and holding that BPI was entitled to a refund of the excess income tax it
paid for 1998.

The Court of Appeals conceded that BPI indeed opted to carry over its excess tax credit in 1998 to 1999 by placing an "x"
mark on the corresponding box of its 1998 ITR. Nonetheless, there was no actual carrying over of the excess tax credit,
given that BPI suffered a net loss in 1999, and was not liable for any income tax for said taxable period, against which
the 1998 excess tax credit could have been applied.

The Court of Appeals added that even if Section 76 was to be construed strictly and literally, the irrevocability rule would
still not bar BPI from seeking a tax refund of its 1998 excess tax credit despite previously opting to carry over the same.
The phrase "for that taxable period" qualified the irrevocability of the option of BIR to carry over its 1998 excess tax
credit to only the 1999 taxable period; such that, when the 1999 taxable period expired, the irrevocability of the option
of BPI to carry over its excess tax credit from 1998 also expired.

The Court of Appeals further reasoned that the government would be unjustly enriched should the appellate court hold
that the irrevocability rule barred the claim for refund of a taxpayer, who previously opted to carry-over its excess tax
credit, but was not able to use the same because it suffered a net loss in the succeeding year.

Finally, the appellate court cited BPI-Family Savings Bank, Inc. v. Court of Appeals6 wherein this Court held that if a
taxpayer suffered a net loss in a year, thus, incurring no tax liability to which the tax credit from the previous year could
be applied, there was no reason for the BIR to withhold the tax refund which rightfully belonged to the taxpayer.7

In a Resolution dated 20 April 2007, the Court of Appeals denied the Motion for Reconsideration of the CIR.8

Hence, the CIR filed the instant Petition for Review, alleging that:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE "IRREVOCABILITY RULE" UNDER
SECTION 76 OF THE TAX CODE DOES NOT OPERATE TO BAR PETITIONER FROM ASKING FOR A TAX REFUND.

II
THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT REVERSED AND SET ASIDE THE DECISION OF THE COURT
OF TAX APPEALS AND HELD THAT RESPONDENT IS ENTITLED TO THE CLAIMED TAX REFUND.

The Court finds merit in the instant Petition.

The Court of Appeals erred in relying on BPI-Family, missing significant details that rendered said case inapplicable to the
one at bar.

In BPI-Family, therein petitioner BPI-Family declared in its Corporate Annual ITR for 1989 excess tax credits of
₱185,001.00 from 1988 and ₱112,491.00 from 1989, totaling ₱297,492.00. BPI-Family clearly indicated in the same ITR
that it was carrying over said excess tax credits to the following year. But on 11 October 1990, BPI-Family filed a claim
for refund of its ₱112,491.00 tax credit from 1989. When no action from the BIR was forthcoming, BPI-Family filed its
claim with the CTA. The CTA denied the claim for refund of BPI-Family on the ground that, since the bank declared in its
1989 ITR that it would carry over its tax credits to the following year, it should be presumed to have done so. In its
Motion for Reconsideration filed with the CTA, BPI-Family submitted its final adjusted ITR for 1989 showing that it
incurred ₱52,480,173.00 net loss in 1990. Still, the CTA denied the Motion for Reconsideration of BPI-Family. The Court
of Appeals likewise denied the appeal of BPI-Family and merely affirmed the judgment of the CTA. The Court, however,
reversed the CTA and the Court of Appeals.

This Court decided to grant the claim for refund of BPI-Family after finding that the bank had presented sufficient
evidence to prove that it incurred a net loss in 1990 and, thus, had no tax liability to which its tax credit from 1989 could
be applied. The Court stressed in BPI Family that "the undisputed fact is that [BPI-Family] suffered a net loss in 1990;
accordingly, it incurred no tax liability to which the tax credit could be applied. Consequently, there is no reason for the
BIR and this Court to withhold the tax refund which rightfully belongs to the [BPI-Family]." It was on the basis of this fact
that the Court granted the appeal of BPI-Family, brushing aside all procedural and technical objections to the same
through the following pronouncements:

Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris
against the claimant. Under the facts of this case, we hold that [BPI-Family] has established its claim. [BPI-Family] may
have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances,
however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990,
and that it could not have applied the amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of [BPI-Family]. Technicalities and legalisms, however exalted,
should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of
its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it
apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its
own example of honor, dignity and uprightness.9

It is necessary for this Court, however, to emphasize that BPI-Family involved tax credit acquired by the bank in 1989,
which it initially opted to carry over to 1990. The prevailing tax law then was the NIRC of 1985, Section 79 10 of which
provided:

Sec. 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final adjustment return
covering the total net 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 net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid, the refundable
amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable year. (Emphases ours.)

By virtue of the afore-quoted provision, the taxpayer with excess income tax was given the option to either (1) refund
the amount; or (2) credit the same to its tax liability for succeeding taxable periods.

Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997,11 with the addition of one important
sentence, which laid down the irrevocability rule:

Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final adjustment return
covering the total net 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 net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be 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 tax refund or issuance of a tax credit
certificate shall be allowed therefor. (Emphases ours.)

When BPI-Family was decided by this Court, it did not yet have the irrevocability rule to consider. Hence, BPI-Family
cannot be cited as a precedent for this case.

The factual background of Philam Asset Management, Inc. v. Commissioner of Internal Revenue,12 cited by the CIR, is
closer to the instant Petition. Both involve tax credits acquired and claims for refund filed more than a decade after
those in BPI-Family, to which Section 76 of the NIRC of 1997 already apply.

The Court, in Philam, recognized the two options offered by Section 76 of the NIRC of 1997 to a taxable corporation
whose total quarterly income tax payments in a given taxable year exceeds its total income tax due. These options are:
(1) filing for a tax refund or (2) availing of a tax credit. The Court further explained:

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 [Final Adjustment Return (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. 13 x x x
The Court categorically declared in Philam that: "Section 76 remains clear and unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes irrevocable." It mentioned no exception or qualification to the irrevocability
rule.

Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it
had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess
tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, "no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "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 tax refund or issuance of a tax credit
certificate shall be allowed therefor." The phrase "for that taxable period" merely identifies the excess income tax,
subject of the option, by referring to the taxable period when it was acquired by the taxpayer. In the present case, the
excess income tax credit, which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The
option of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply for a refund of
the very same 1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive period for the
irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998, and BPI opted to carry it
over to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to again take
another option as regards its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability
rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the
taxpayer from flip-flopping on its options, and avoid confusion and complication as regards said taxpayer’s excess tax
credit. The interpretation of the Court of Appeals only delays the flip-flopping to the end of each succeeding taxable
period.

The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for refund of BPI, because
of the irrevocability rule, would be tantamount to unjust enrichment on the part of the government. The Court
addressed the very same argument in Philam, where it elucidated that there would be no unjust enrichment in the event
of denial of the claim for refund under such circumstances, because there would be no forfeiture of any amount in favor
of the government. The amount being claimed as a refund would remain in the account of the taxpayer until utilized in
succeeding taxable years,14 as provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for
refund of excess income tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period
for the carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to
carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on and so forth,
until actually applied or credited to a tax liability of BPI.

Finally, while the Court, in Philam, was firm in its position that the choice of option as regards the excess income tax
shall be irrevocable, it was less rigid in the determination of which option the taxpayer actually chose. It did not limit
itself to the indication by the taxpayer of its option in the ITR.

Thus, failure of the taxpayer to make an appropriate marking of its option in the ITR does not automatically mean that
the taxpayer has opted for a tax credit. The Court ratiocinated in G.R. No. 15663715 of Philam:

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify
one’s intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this
option later on. A tax credit should be construed merely as an alternative remedy to a tax refund under Section 76,
subject to prior verification and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration, particularly the
self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus
demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference
and hence shows simple negligence or plain oversight.

xxxx

x x x Despite the failure of [Philam] to make the appropriate marking in the BIR form, the filing of its written claim
effectively serves as an expression of its choice to request a tax refund, instead of a tax credit. To assert that any future
claim for a tax refund will be instantly hindered by a failure to signify one’s intention in the FAR is to render nugatory the
clear provision that allows for a two-year prescriptive period.16 (Emphases ours.)

Philam reveals a meticulous consideration by the Court of the evidence submitted by the parties and the circumstances
surrounding the taxpayer’s option to carry over or claim for refund. When circumstances show that a choice has been
made by the taxpayer to carry over the excess income tax as credit, it should be respected; but when indubitable
circumstances clearly show that another choice – a tax refund – is in order, it should be granted. "Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby
enrich itself at the expense of its law-abiding citizens."

Therefore, as to which option the taxpayer chose is generally a matter of evidence. It is axiomatic that a claimant has the
burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions,
are construed strictly against the taxpayer.17

In the Petition at bar, BPI was unable to discharge the burden of proof necessary for the grant of a refund. BPI expressly
indicated in its ITR for 1998 that it was carrying over, instead of refunding, the excess income tax it paid during the said
taxable year. BPI consistently reported the said amount in its ITRs for 1999 and 2000 as credit to be applied to any tax
liability the bank may incur; only, no such opportunity arose because it suffered a net loss in 1999 and incurred zero tax
liability in 2000. In G.R. No. 162004 of Philam, the Court found:

First, the fact that it filled out the portion "Prior Year’s Excess Credits" in its 1999 FAR means that it categorically availed
itself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states "Less: Tax
Credits/Payments." The contention that it merely filled out that portion because it was a requirement – and that to have
done otherwise would have been tantamount to falsifying the FAR – is a long shot.

The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are found the
itemization and summary of additions to and deductions from income taxes due. These entries are not without rhyme or
reason. They are required, because they facilitate the tax administration process. 18

BPI itself never denied that its original intention was to carry over the excess income tax credit it acquired in 1998, and
only chose to refund the said amount when it was unable to apply the same to any tax liability in the succeeding taxable
years. There can be no doubt that BPI opted to carry over its excess income tax credit from 1998; it only subsequently
changed its mind – which it was barred from doing by the irrevocability rule.

The choice by BPI of the option to carry over its 1998 excess income tax credit to succeeding taxable years, which it
explicitly indicated in its 1998 ITR, is irrevocable, regardless of whether it was able to actually apply the said amount to a
tax liability. The reiteration by BPI of the carry over option in its ITR for 1999 was already a superfluity, as far as its 1998
excess income tax credit was concerned, given the irrevocability of the initial choice made by the bank to carry over the
said amount. For the same reason, the failure of BPI to indicate any option in its ITR for 2000 was already immaterial to
its 1998 excess income tax credit.

WHEREFORE, the instant Petition for Review of the Commissioner for Internal Revenue is GRANTED. The Decision dated
29 April 2005 and the Resolution dated 20 April 2007 of the Court of Appeals in CA-G.R. SP No. 77655 are REVERSED and
SET ASIDE. The Decision dated 12 March 2003 of the Court of Tax Appeals in CTA Case No. 6276, denying the claim of
respondent Bank of the Philippine Islands for the refund of its 1998 excess income tax credits, is REINSTATED. No costs.
SO ORDERED.

i. G.R. No. 206526 January 28, 2015

WINEBRENNER & IÑIGO INSURANCE BROKERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

In this petition for review under Rule 45 of the Rules of Court and Rule 16 of the Revised Rules of the Court of Tax
Appeals, Winebrenner & Ifiigo Insurance Brokers, Inc. (petitioner) seeks the review of the March 22, 2013 Decision1 of
the Court of Tax Appeals En Banc (CTA-En Banc). In the said decision, the CTA-En Banc affirmed the denial of petitioner's
judicial claim for refund or issuance of tax credit certificate for excess and unutilized creditable withholding tax (CWT)
for the 1st to 4th quarter of calendar year (CJ} 2003 amounting to ₱4,073,954.00. In denying the refund, the CTA-En
Banc held that petitioner failed to prove that the excess CWT for CY 2003 was not carried over to the succeeding
quarters of the subject taxable year. Under the 1997 National Internal Revenue Code (NJRC), a taxpayer must not have
exercised the option to carryover the excess CWT for a particular taxable year in order to qualify for refund.

The Factual Antecedents

On April 15, 2004, petitioner filed itsAnnual Income Tax Return for CY 2003.

About two years thereafter or on April 7, 2006, petitioner applied for the administrative tax credit/refund claiming
entitlement to the refund of its excess or unutilized CWT for CY 2003, by filing BIR Form No. 1914 with the Revenue
District Office No. 50 of the Bureau of Internal Revenue (BIR).

There being no action taken on the said claim, a petition for review was filed by petitioner before the CTA on April 11,
2006. The case was docketed as CTA Case No. 7440 and was raffled to the Special First Division (CTA Division).

On April 13, 2010, CTA Division partially granted petitioner’s claim for refund of excess and unutilized CWT for CY 2003
in the reduced amount of ₱2,737,903.34 in its April 13, 2010 Decision2 (original decision). The dispositive portion of the
decision reads:

In view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is hereby
ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of
₱2,737,903.34 representing its excess/unutilized creditable withholding taxes for the year 2003.

SO ORDERED.3

Petitioner filed a Motion for Partial Reconsideration with Leave to Submit Supplemental Evidence. It prayed that an
amended decision be issued granting the entirety of its claim for refund, or in the alternative, that it be allowed to
submit and offer relevant documents as supplemental evidence.

Respondent Commissioner of Internal Revenue (CIR) also moved for reconsideration, praying for the denial of the entire
amount of refund because petitioner failed to present the quarterly Income Tax Returns (ITRs) for CY 2004. To the CIR,
the presentation of the 2004 quarterly ITRs was indispensable in proving petitioner’s entitlement to the claimed amount
because it would prove that no carry-over of unutilized and excess CWT for the four (4) quarters of CY 2003 to the
succeeding four (4) quarters of CY 2004 was made. In the absence of said ITRs, no refund could be granted. In the CIR’s
view, this was in accordance with the irrevocability rule under Section 76 of the NIRC which reads:

SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section 27 shall file an 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 credits; 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.

On July 27, 2011, the CTA-Division reversed itself. In an Amended Decision,4 it denied the entire claim of petitioner. It
reasoned out that petitioner should have presented as evidence its first, second and third quarterly ITRs for the year
2004 to prove that the unutilized CWT being claimed had not been carried over to the succeeding quarters. Thus:

WHEREFORE,in view of the foregoing, petitioner’s Motion for Partial Reconsideration is hereby DENIED while
respondent’s Motion for Reconsideration is hereby GRANTED. Accordingly, the Decision dated April 13, 2010 granting
petitioner’s claim in the reduced amount of ₱2,737,903.34 is hereby REVERSED AND SET ASIDE. Consequently, the
instant Petition for Review is hereby DENIEDdue to insufficiency of evidence.

SO ORDERED.5

Aggrieved, petitioner elevated the case to the CTA En Bancpraying for the reversal of the Amended Decision of the CTA
Division.

In its March 22, 2013 Decision,6 the CTA-En Bancaffirmed the Amended Decision of the CTA-Division. It stated that
before a cash refund or an issuance of tax credit certificate for unutilized excess tax credits could be granted, it was
essential for petitioner to establish and prove, by presenting the quarterly ITRs of the succeeding years, that the excess
CWT was not carried over to the succeeding taxable quarters considering that the option to carry over in the succeeding
taxable quarters could not be modified in the final adjustment returns (FAR).Because petitioner did not present the first,
second and third quarterly ITRsfor CY 2004, despite having offered and submitted the Annual ITR/FAR for the same year,
the CTA-En Banc stated that the petitioner failed to discharge its burden, hence, no refund could be granted. In justifying
its conclusions, the CTA-En Banccited its own case of Millennium Business Services, Inc.v. Commissioner of Internal
Revenue (Millennium)7 wherein it held as follows:

Since the burden of proof is upon the claimant to show that the amount claimed was not utilized or carried over to the
succeeding taxable quarters, the presentation of the succeeding quarterly income tax return and final adjustment return
is indispensable to prove that it did not carry over or utilized the claimed excess creditable withholding taxes. Absent
thereof, there will be no basis for a taxpayer’s claim for refund since there will be no evidence that the taxpayer did not
carry over or utilize the claimed excess creditable withholding taxes to the succeeding taxable quarters.

Significantly, a taxpayer may amend its quarterly income tax return or annual income tax return or Final Adjustment
Return, which in any case may modify the previous intention to carry-over, apply as tax credit certificate or refund, as
the case may be. But the option to carry over in the succeeding taxable quarters under the irrevocability rule cannot be
modified in its final adjustment return.

The presentation of the final adjustment return does not shift the burden of proof that the excess creditable withholding
tax was not utilized or carried overto the first three (3) taxable quarters. It remains with the taxpayer claimant. It goes
without saying that final adjustment returns of the preceding and the succeeding taxable years are not sufficient to
prove that the amount claimed was utilized or carried over to the first three (3) taxable quarters.
The importance of the presentation of the succeeding quarterly income tax return and the annual income tax return of
the subsequent taxable year need not be overly emphasized. All corporations subject to income tax, are required to file
quarterly income tax returns, on a cumulative basis for the preceding quarters, upon which payment of their income tax
has been made. In addition to the quarterly income tax returns, corporations are required to file a final or adjustment
return on or before the fifteenth day of April. The quarterly income tax return, like the final adjustment return, is the
most reliable firsthand evidence of corporate acts pertaining to income taxes, as it includes the itemization and
summary of additions to and deductions from the income tax due. These entries are not without rhyme or reason. They
are required, because they facilitate the tax administration process, and guide this Court to the veracity of a petitioner’s
claim for refund without which petitioner could not prove with certainty that the claimed amount was not utilized or
carried over to the succeeding quarters or the option to carry over and apply the excess was effectively chosen despite
the intent to claim a refund.

In the same vein, if the government wants to disprove that the excess creditable withholding tax was not utilized or
carried over to the succeeding taxable quarters, the presentation of the succeeding quarterly income tax return and the
annual income tax return of the subsequent taxable year indicating utilization or carrying over are [sic] indispensible.
However, the claimant must first establish its claim for refund, such that it did not utilize or carry over or that it opted to
utilize and carry over to the 1 st, 2nd, 3rd quarters and final adjustment return of the succeeding taxable year.

Concomitantly, the presentation of the quarterly income tax return and the annual income tax return to prove the fact
that excess creditable withholding tax was not utilized or carried over or opted to be utilized and carried over to the 1st,
2nd, 3rd quarters and final adjustment return of the succeeding taxable quarter is not only for convenience to facilitate
the tax administration process but it is part of the requisites to establish the claim for refund. Section 76 of the NIRC of
1997 provides that if the taxpayer claimant carries over and applies the excess quarterly income tax against the income
tax due for the taxable quarters of the succeeding taxable years, the same is irrevocable and no application for cash
refund or issuance of a tax credit certificate shall be allowed. 8

Hence, this petition.

Noteworthy is the fact that the CTA-En Bancruling was met with two dissents from Associate Justices Juanito C.
Castañeda (Justice Castañeda) and Esperanza R. Fabon-Victorino (Justice Fabon-Victorino).

In his Dissenting Opinion9 which was concurred in by Justice FabonVictorino, Justice Castañeda expressed the view that
the CTA-En Banc should have reinstated the CTA-Division’s original decision because in the cases of Philam Asset
Management Inc. v. Commissioner of Internal Revenue (Philam);10 State Land Investment Corporation v. Commissioner
of Internal Revenue (State Land);11 Commissioner of Internal Revenue v. PERF Realty Corporation (PERF Realty);12 and
Commissioner of Internal Revenue v. Mirant (Philippines) Operations, Corporation (Mirant),13 this Court already ruled
that requiring the ITR or the FAR for the succeeding year in a claim for refund had no basis in law and jurisprudence.
According to him, the submission of the FAR of the succeeding taxable year was not required under the law to prove the
claimant’s entitlement to excess or unutilized CWT, and by following logic, the submission of quarterly income tax
returns for the subsequent taxable period was likewise unnecessary. He found no justifiable reason not to follow the
existing rulings of this Court. Petitioner’s reasoning in this petition echoes the dissenting opinion of Justice Castaneda. It
further submits that despite the non-presentation of the quarterly ITRs, it has sufficiently shown that the excess CWT for
CY 2003 was not carried over or applied to itsincome tax liabilities for CY 2004, as shown in the Annual ITR for 2004 it
submitted. Thus, petitioner insists that its refund should have been granted. Petitioner further avers, in its Reply,14 that
even if Millennium Business case was applicable, such must be given prospective effect considering that this case was
litigated on the basis of the doctrines laid down in Philam, State Landand PERF Realty cases wherein the submission of
quarterly ITRs in a case for tax refund was held by this Court as not mandatory.

In its Comment,15 the CIR counters that even if the taxpayer signifies the option for either tax refund or carry-over as tax
credit, this does not ipso facto confer the right to avail of the option immediately. There is a need, according to the CIR,
for an investigation to ascertain the correctness of the corporate returns and the amount sought to be credited; and
part of which is to look into the quarterly returns so that it may be determined whether or not excess and unutilized
CWT was carried over into the succeeding quarters of the next taxable year. Because the pertinent quarterly ITRs were
not presented, the CIR submits that the petitioner failed to prove its right to a tax refund.

Issue

The sole issue here is whether the submission and presentation of the quarterly ITRs of the succeeding quarters of a
taxable year is indispensable in a claim for refund.

The Court’s Ruling

The Court recognizes, as it always has, that the burden of proof to establish entitlement to refund is on the claimant
taxpayer.16 Being in the nature of a claim for exemption,17 refund is construed in strictissimi juris against the entity
claiming the refund and in favor of the taxing power.18 This is the reason why a claimant must positively show
compliance with the statutory requirements provided for under the NIRC in order to successfully pursue one’s claim. As
implemented by the applicable rules and regulations and as interpreted in a vast array of decisions, a taxpayer who
seeks a refund of excess and unutilized CWT must:

1) File the claim with the CIR within the two year period from the date of payment of the tax;

2) Show on the return that the income received was declared as part of the gross income; and

3) Establish the fact of withholding by a copy of a statement duly issued by the payor to the payee showing the
amount paid and the amount of tax withheld.19

The original decision of the CTA-Division made plain that the petitioner complied with the above requisites in so far as
the reduced amount of ₱2,737,903.34 was concerned. In the amended decision, however, it was pointed out that
because petitioner failed to present the quarterly ITRs of the subsequent year, there was an impossibility of determining
compliance with the irrevocability rule under Section 76 of the NIRC as in those documents could be found evidence of
whether the excess CWT was applied to its income tax liabilities in the quarters of 2004. The irrevocability rule under
Section 76 of the NIRC means that once an option, either for refund or issuance of tax credit certificate or carry-over of
CWT has been exercised, the same can no longer be modified for the succeeding taxable years. 20 For said reason, the
CTA-En Banc affirmed the conclusion in the amended decision that because of the said impossibility, the claim for refund
was not substantiated.

The CIR agrees with the disposition of the CTA-En Banc, stressing that the petitioner failed to carry out the burden of
showing that no carryover was made when it did not present the quarterly ITRs for CY 2004.

Petitioner disagrees, as the dissents did, that the non-submission of quarterly ITRs is fatal to its claim.

Hence, the issue on the indispensability of quarterly ITRs of the succeeding taxable year in a claim for refund.

The Court finds for the petitioner.

There is no question that those who claim must not only prove its entitlement to the excess credits, but likewise must
prove that no carry-over has been made in cases where refund is sought.

In this case, the fact of havingcarried over petitioner’s 2003 excess credits to succeeding taxable year isin issue.
According to the CTA-En Bancand the CIR, the only evidence that can sufficiently show that carrying over has been made
is to present the quarterly ITRs. Some members of this Court adhere to the same view.

The Court however cannot.

Proving that no carry-over has been made does not absolutely require the presentation of the quarterly ITRs.

In Philam, the petitioner therein sought for recognition of its right to the claimed refund of unutilized CWT. The CIR
opposed the claim, on the grounds similar to the caseat hand, that no proof was provided showing the non-carry over of
excess CWT to the subsequent quarters of the subject year. In a categorical manner, the Court ruled that the
presentation of the quarterly ITRs was not necessary. Therein, it was written:

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis
in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the preceding –
not the succeeding – taxable year. Indeed, any refundable amount indicated in the FAR of the preceding taxable year
may be credited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year.
However, nowhere is there even a tinge of a hint in any provisions of the [NIRC] that the FAR of the taxable year
following the period to which the tax credits are originally being applied should also be presented to the BIR.

Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for refund of income
taxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the ITR that
the income payment received is being declared part of the taxpayer’s gross income; and (2) when 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 income tax withheld from that amount.

It has been submitted that Philam cannot be cited as a precedent to hold that the presentation of the quarterly income
tax return is not indispensable as it appears that the quarterly returns for the succeeding year were presented when the
petitioner therein filed an administrative claim for the refund of its excess taxes withheld in 1997.

It appears however that there is misunderstanding in the ruling of the Court in Philam. That factual distinction does not
negate the proposition that subsequent quarterly ITRs are not indispensable. The logic in not requiring quarterly ITRs of
the succeeding taxable years to be presented remains true to this day. What Section 76 requires, just like in all civil
cases, is to prove the prima facie entitlement to a claim, including the fact of not having carried over the excess credits
to the subsequent quarters or taxable year. It does not say that to prove such a fact, succeeding quarterly ITRs are
absolutely needed.

This simply underscores the rulethat any document, other than quarterly ITRs may be used to establish that indeed the
non-carry over clause has been complied with, provided that such is competent, relevant and part of the records. The
Court is thusnot prepared to make a pronouncement as to the indispensability of the quarterly ITRs in a claim for refund
for no court can limit a party to the means of proving a fact for as long as they are consistent with the rules of evidence
and fair play. The means of ascertainment of a fact is best left to the party that alleges the same. The Court’s power is
limited only to the appreciation of that means pursuant to the prevailing rules of evidence. To stress, what the NIRC
merely requires is to sufficiently prove the existence of the non-carry over of excess CWT in a claim for refund.

The implementing rules similarly support this conclusion, particularly Section 2.58.3 of Revenue Regulation No. 2-98
thereof. There, it provides as follows:

SECTION 2.58.3. Claim for Tax Credit or Refund.

(A) The amount of creditable tax withheld shall be allowed as a tax credit against the income tax liability of the
payee in the quarter of the taxable year in which income was earned or received.

(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 bya copy of the withholding tax statement duly
issued by the payer to the payee showing the amount paid and the amount of tax withheld therefrom.
 xxx xxx xxx

Evident from the above is the absence of any categorical pronouncement of requiring the presentation of the
succeeding quarterly ITRs in order to prove the fact of non-carrying over. To say the least, the Court rules that as to the
means of proving it, Ithas no power to unduly restrict it.

In this case, it confounds the Court why the CTA did not recognize and discuss in detail the sufficiency of the annual ITR
for 2004,21 which was submitted by the petitioner. The CTA in fact said:

In the present case, while petitioner did offer its Annual ITR/Final Adjustment Return for taxable year 2004, it appears
that petitioner miserably failed to submit and offer as part of its evidence the first, second, and third Quarterly ITRs for
the year 2004. Consequently, petitioner was not able to prove that it did not exercise its option to carry-over its excess
CWT.22

Petitioner claims that the requirement of proof showing the non-carry over has been established in said document.

Indeed, an annual ITR contains the total taxable income earned for the four (4) quarters of a taxable year, as well as
deductions and tax credits previously reported or carried over in the quarterly income tax returns for the subject period.
A quick look atthe Annual ITR reveals this fact:

Aggregate Income Tax Due

Less Tax Credits/Payments

Prior Year’s excess Credits – Taxes withheld

Tax Payment (s) for the Previous Quarter (s) of the same taxable year other than MCIT

xxx xxx xxx

Creditable Tax Withheld for the Previous Quarter (s)

Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter

xxx xxx x x x23

It goes without saying that the annual ITR (including any other proof that may be sufficient to the Court)can sufficiently
reveal whether carry over has been made in subsequent quarters even if the petitioner has chosen the option of tax
credit or refund inthe immediately 2003 annual ITR. Section 76 of the NIRC requires a corporation to file a Final
Adjustment Return (or Annual ITR) covering the total taxable income for the preceding calendar or fiscal year. The total
taxable income contains the combined income for the four quarters of the taxable year, as well as the deductions and
excess tax credits carried over in the quarterly income tax returns for the same period.

If the excess tax credits of the preceding year were deducted, whether in whole or in part, from the estimated income
tax liabilities of any of the taxable quarters of the succeeding taxable year, the total amount of the tax credits deducted
for the entire taxable year should appear in the Annual ITR under the item "Prior Year’s Excess Credits." Otherwise, or if
the tax credits were carried over to the succeeding quarters and the corporation did not report it in the annual ITR,
there would be a discrepancy in the amounts of combined income and tax credits carried over for all quarters and the
corporation would end up shouldering a bigger tax payable. It must be remembered that taxes computed in the
quarterly returns are mere estimates. It is the annual ITR which shows the aggregate amounts of income, deductions,
and credits for all quarters of the taxable year. It is the final adjustment return which shows whether a corporation
incurred a loss or gained a profit during the taxable quarter.24 Thus, the presentation of the annual ITR would suffice in
proving that prior year’s excess credits were not utilized for the taxable year in order to make a final determination of
the total tax due.

In this case, petitioner reported an overpayment in the amount of ₱7,194,213.00 in its annual ITR for the year ended
December 2003:

Annual ITR 2003

Income Tax Due 1,259,259.00

Less: Prior Year’s Excess Credits (2002 Annual ITR) (4,379,518.00)
Creditable Tax Withheld for the 4th Quarter (4,073,954.00)
Tax Payable / (Overpayment) (7,194,213.00)

For the overpayment, petitioner chose the option "To be issued a Tax Credit Certificate." In its Annual ITR for the year
ended December 2004, petitioner did not report the Creditable Tax Withheld for the 4th quarter of 2003 in the amount
of ₱4,073,954.00 as prior year’s excess credits. As shown in the 2004 ITR:

Annual ITR 2004

Income Tax Due 1,321,409.00

Less: Prior Year’s Excess Credits -
Creditable Tax Withheld for the 4th (3,689,419.00)

Quarter
Tax Payable / (Overpayment) (2,368,010.00)

Verily, the absence of any amount written in the Prior Year excess Credit – Tax Withheld portion of petitioner’s 2004
annual ITR clearly shows that no prior excess credits were carried over in the first four quarters of 2004. And since
petitioner was able to sufficiently prove that excess tax credits in 2003 were not carried over to taxable year 2004 by
leaving the item "Prior Year’s Excess Credits" as blank in its 2004 annual ITR, then petitioner is entitled to a refund.
Unfortunately, the CTA, in denying entirely the claim, merely relied on the absence of the quarterly ITRs despite being
able to verify the truthfulness of the declaration that no carry over was indeed effected by simply looking at the 2004
annual ITR.

At this point, worth mentioning is the fact that subsequent cases affirm the proposition as correctly pointed out by
petitioner. State Land, PERF and Mirantreiterated the rule that the presentation of the quarterly ITRs of the subsequent
year is not mandatory on the part of the claimant to prove its claims.

There are some who challenges the applicability of PERF in the case at bar. It is said that PERFis not in point because the
Annual ITR for the succeeding year had actually been attached to PERF’s motion for reconsideration with the CTA and
had formed part of the records of the case. Clearly, if the Annual ITR has been recognized by this Court in PERF, why
then would the submitted 2004 Annual ITR in this case be insufficient despite the absence of the quarterly ITRs? Why
then would this Court require more than what is enough and deny a claim even if the minimum burden has been
overcome? At best, the existence of quarterly ITRs would have the effect of strengthening a proven fact. And as such,
may only be considered corroborative evidence, obviously not indispensable in character. PERF simply affirms that
quarterly ITRs are not indispensable, provided that there is sufficient proof that carrying over excess CWT was not
effected.
Stateland and Mirantare equally challenged. In all these cases however, the factual distinctions only serve to bolster the
proposition that succeeding quarterly ITRs are not indispensable. Implicit from all these cases is the Court’s recognition
that proving carry-over is an evidentiary matter and that the submission of quarterly ITRs is but a means to prove the
fact of one’s entitlement to a refund and not a condition sine qua non for the success of refund. True, it would have
been better, easier and more efficient for the CTA and the CIR to have as basis the quarterly ITRs, but it is not the only
way considering further that in this case, the Annual ITR for 2004 is sufficient. Courts are here to painstakingly weigh
evidence so that justice and equity in the end will prevail.

It must be emphasized that once the requirements laid down by the NIRC have been met, a claimant should be
considered successful in discharging its burden of proving its right to refund. Thereafter, the burden of going forward
with the evidence, as distinct from the general burden of proof, shifts to the opposing party,25 that is, the CIR. It is then
the turn of the CIR to disprove the claim by presenting contrary evidence which could include the pertinent ITRs easily
obtainable from its own files.

All along, the CIR espouses the viewthat it must be given ample opportunity to investigate the veracity of the claims.
Thus, the Court asks: In the process of investigation at the administrative level to determine the right of the petitioner to
the claimed amount, did the CIR, with all its resources even attempt to verify the quarterly ITRsit had in its files?
Certainly, it did not as the application was met by the inaction of the CIR. And if desirous in its effort to clearly verify
petitioner’s claim, it should have had the time, resources and the liberty to do so. Yet, nothing was produced during trial
to destroy the prima facie right of the petitioner by counterchecking the claims with the quarterly ITRs the CIR has on its
file. To the Court, it seems that the CIR languished on its duties to ascertain the veracity of the claims and just hoped
that the burden would fall on the petitioner’s head once the issue reaches the courts.

This mindset ignores the rule that the CIR has the equally important responsibility of contradicting petitioner’s claim by
presenting proof readily on hand once the burden of evidence shifts to its side. Claims for refund are civil in nature and
as such, petitioner, as claimant, though having a heavy burden of showing entitlement, need only prove preponderance
of evidence in order to recover excess credit in cold cash. To review, "[P]reponderance of evidence is [defined as] the
weight, credit, and value of the aggregate evidence on either sideand is usually considered to be synonymous with the
term ‘greater weight of the evidence’ or ‘greater weight of the credible evidence.’ It is evidence which is more
convincing to the court asworthy of belief than that which is offered in opposition thereto.26

The CIR must then be reminded that in Philam, the CIR’s "failure to present[the quarterly ITRs and AFR] to support its
contention against the grant of a tax refund to [a claimant] is certainly fatal." PERF reinforces this with a sweeping
statement holding that the verification process is not incumbent on PERF[or any claimant for that matter]; [but] is the
duty of the CIR to verify whether xxx excess incometaxes [have been carried over].

And should there be a possibility that a claimant may have violated the irrevocability rule and thereafter claim twice
from its credits, no one is to be blamed but the CIR for not discharging its burden of evidence to destroy a claimant’s
right to a refund. At any rate, a claimant who defrauds the government cannot escape liability be it criminal or civil in
nature.

Verily, with the petitioner having complied with the requirements for refund, and without the CIR showing contrary
evidence other than its bare assertion of the absence of the quarterly ITRs, copies of which are easily verifiable by its
very own records, the burden of proof of establishing the propriety of the claim for refund has been sufficiently
discharged. Hence, the grant of refund is proper.

The Court does not, and cannot, however, grant the entire claimed amount as it finds no error in the original decision of
the CTA Division granting refund to the reduced amount of ₱2,737,903.34. This finding of fact is given respect, if not
finality, as the CTA,27 which by the very nature of its functions of dedicating itself exclusively to the consideration of the
tax problems has necessarily developed an expertise on the subject.28 It being the case, the Court partly grants this
petition to the extent of reinstating the April 23, 2010 original decision of the CTA Division.
The Court reminds the CIR that substantial justice, equity and fair play take precedence over technicalities and
legalisms.1âwphi1 The government must keep in mind that it has no right to keep the rponey not belonging to it,
thereby enriching itself at the expense of the law-abiding citizen29 or entities who have complied with the requirements
of the law in order to forward the claim for refund. Under the principle of solution ihdebiti provided in Article 2154 of
the Civil Code, the CIR must return anythihg it has received.30

Finally, even assuming that the Court reverses itself and pronounces the indispensability of presenting the quarterly ITRs
to prove entitlement to the claimed refund, petitioner should not be Brejudiced for relying on Philam. The CTA En Banc
merely based its pronouncement on a case that does not enjoy the benefit of stare decis et non quieta movere which
means "to adhere to precedents, and not to unsettle things which are established."31 As between a CTA En Banc
Decision (Millennium) and this Court's Decision (Philam), it is elementary that the latter should prevail.

WHEREFORE, the Court partly grants the petition. The March 22, 2013 Decision of the Court of Tax Appeals En Banc is
REVERSED. The April 13, 2010 Decision of the Court of Tax Appeals Special First Division is REINSTATED. Respondent
Commissioner of Internal Revenue is ordered to REFUND to petitioner the amount of ₱2,737,903.34 as excess creditable
withholding tax paid for taxable year 2003.

SO ORDERED.

j. G.R. No. 176290 September 21, 2007

SYSTRA PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

This resolves petitioner Systra Philippines, Inc.’s (1) motion for leave to file a second motion for reconsideration and (2)
second motion for reconsideration of the Court’s March 28, 2007 resolution.

On March 9, 2007, petitioner filed a petition for review on certiorari assailing the January 18, 2007 decision1 of the Court
of Tax Appeals (CTA) in CTA EB Case No. 135. The Court denied the petition in its March 28, 2007 resolution on the
following grounds:

(a) failure of petitioner’s counsel to submit his IBP2 O.R.3 number showing proof of payment of IBP dues for the
current year (the IBP O.R. No. was for 2006, i.e., it was dated November 20, 2006);

(b) submitting a verification of the petition, certification of non-forum shopping and affidavit of service that
failed to comply with the 2004 Rules on Notarial Practice with respect to competent evidence of affiants’
identities and

(c) failure to give an explanation why service was not done personally as required by Section 11, Rule 13 in
relation to Section 3, Rule 45 and Section 5(d), Rule 56 of the Rules of Court.

On July 5, 2007, petitioner’s motion for reconsideration was denied with finality as there was no compelling reason to
warrant a modification of the March 28, 2007 resolution. Thus, the present motions.

Petitioner claims that this Court has granted second and even third motions for reconsideration for "extraordinarily
persuasive reasons." It avers that this Court should look into the importance of the issues involved in deciding whether
leave to file a second motion for reconsideration should be granted or not. It prays that its petition should not be denied
on the basis of procedural lapses alone and points out that the substantial amount involved in the petition justifies
relaxation of technical rules. It asserts that there is an important legal issue involved in this case: whether the exercise of
the option to carry over excess income tax credits under Section 76 of the National Internal Revenue Code of 1997, as
amended (Tax Code) bars a taxpayer from claiming the excess tax credits for refund even if the amount remains
unutilized in the succeeding taxable year. Finally, it contends that the assailed CTA decision was contradictory to the
decisions of the Court of Appeals (CA)4 in Bank of the Philippine Islands v. Commissioner of Internal
Revenue5 and Raytheon Ebasco Overseas Ltd. Philippine Branch v. Commissioner of Internal Revenue6 which involved the
same issue as that in this case. According to petitioner, in view of those CA decisions, it is unjust to deprive it of the right
to claim a refund.

We deny petitioner’s motions.

A Second Motion For

Reconsideration Is
Prohibited

The denial of a motion for reconsideration is final. It means that the Court will no longer entertain and consider further
arguments or submissions from the parties respecting the correctness of its decision or resolution. 7 It signifies that, in
the Court’s considered view, nothing more is left to be discussed, clarified or done in the case since all issues raised have
been passed upon and definitely resolved. Any other issue which could and should have been raised is deemed waived
and is no longer available as ground for a second motion. A denial with finality underscores that the case is considered
closed.8 Thus, as a rule, a second motion for reconsideration is a prohibited pleading.9 The Court stressed in Ortigas and
Company Limited Partnership v. Velasco:10

A second motion for reconsideration is forbidden except for extraordinarily persuasive reasons, and only upon express
leave first obtained.11 (emphasis supplied)

It is true that procedural rules may be relaxed in the interest of substantial justice. They are not, however, to be
disdained as mere technicalities that may be ignored at will to suit the convenience of a party. 12 They are intended to
ensure the orderly administration of justice and the protection of substantive rights in judicial proceedings. 13 Thus,
procedural rules are not to be belittled or dismissed simply because their non-observance may have resulted in
prejudicing a party’s substantive rights.14 Like all rules, they are required to be followed except only when, for the most
persuasive of reasons, they may be relaxed to relieve a litigant of negative consequences commensurate with the
degree of thoughtlessness in not complying with the prescribed procedure.15

In this case, contrary to petitioner’s claim, there was no compelling reason to excuse non-compliance with the rules. Nor
were the grounds raised by it extraordinarily persuasive.16

Moreover, petitioner can neither properly nor successfully rely on the decisions of the CA in the Bank of the Philippine
Islands and Raytheon Ebasco Overseas Ltd. Philippine Branch cases. First, the CA and the CTA are now of the same level
pursuant to RA 9282.17 Decisions of the CA are thus no longer superior to nor reversive of those of the CTA. Second, a
decision of the CA in an action in personam binds only the parties in that case. A third party in an action in
personam cannot claim any right arising from a decision therein. Finally and most importantly, while a ruling of the CA
on any question of law is not conclusive on this Court, all rulings of this Court on questions of law are conclusive and
binding on all courts including the CA. All courts must take their bearings from the decisions of this Court.18

On The Substantive Aspect, The Petition Has No Merit

The antecedents of this case are as follows:

On April 16, 2001, petitioner filed with the [Bureau of Internal Revenue (BIR)] its Annual Income Tax Return ("ITR") for
the taxable year ended December 31, 2000 declaring revenues in the amount of [₱18,252,719] the bulk of which
consists of income from management consultancy services rendered to the Philippine Branch of Group Systra SA,
France. Subjecting said income from consultancy services of petitioner to 5% creditable withholding tax, a total amount
of [₱4,703,019] was declared by petitioner as creditable taxes withheld for the taxable year 2000.
For the same period, petitioner reflected a total gross income of [₱3,752,129], a net loss of [₱17,930] and a minimum
corporate income tax (MCIT) of [₱75,043]. Said MCIT of ₱75,043 was offset against its total tax credits for the year 2000
amounting to [₱4,703,019] thereby leaving a total unutilized tax credits of [₱4,627,976], computed as follows:

Gross Income ₱3,752,129.00

Less: Deductions ₱3,770,059.00

Net loss ₱ 17,930.00

Minimum Corporate Income Tax Due ₱75,043.00

Less: Tax Credits

Prior year’s excess credits ₱ -

Creditable taxes withheld ₱ 4,703,019.00 ₱ 4,703,019.00

during the year

Tax Overpayment ₱ 4,627,976.00

Petitioner opted to carry over the said excess tax credit to the succeeding taxable year 2001.

For the taxable year ended December 31, 2001, petitioner filed with the BIR its Annual ITR on April 12, 2002, reflecting a
total gross income of [₱4,771,419] and a total creditable taxes withheld of [₱1,111,587] for consultancy services. It
likewise declared a taxable income of [₱1,936,851] with corresponding normal income tax due in the amount of
[₱619,792]. After deducting the unexpired excess of the previous year MCIT [1999 and 2000] in the amount of
[₱222,475] from the normal income tax due for the period, petitioner’s net tax due of [₱397,317] was applied against
the accumulated tax credits of [₱5,739,563]. Said reported tax credits comprised of prior year’s excess tax credits in the
amount of [₱4,627,976] and creditable taxes withheld during the year 2001 in the sum of [₱1,111,587]. These excess tax
credits were utilized to pay off the income tax still due of [₱397,317] resulting to an overpayment of [₱5,342,246],
computed as follows:

Gross Income ₱4,771,419.00

Less: Deductions ₱ 2,834,568.00

Taxable Income ₱ 1,936,851.00

Income Tax Due at the Normal Rate of 32% ₱ 619,792.00

Less: Unexpired Excess of Prior Year’s MCIT

Over Normal Income Tax Rate ₱ 222,475.00

₱ 397,317.00

Income Tax Still Due

 Less: Tax Credits

Prior year’s excess credits ₱4,627,976.00

Creditable taxes withheld 1,111,587.00 ₱ 5,739,563.00

during the year

₱ 5,342,246.00
Tax Overpayment

Petitioner indicated in the 2001 ITR the option "To be issued a Tax Credit Certificate" relative to its tax overpayments.

On August 9, 2002, petitioner instituted a claim for refund or issuance of a tax credit certificate with the BIR of its
unutilized creditable withholding taxes in the amount of ₱5,342,246.00 as of December 31, 2001."

Due to the inaction of the BIR on petitioner’s claim for refund and to preserve its right to claim for the refund to its
unutilized CWT for CYs 2000 and 2001 by judicial action, petitioner filed a petition for review with the Court in Division
on April 14, 2003.19

In its August 3, 2005 decision, the First Division of the CTA partially granted the petition and ordered the issuance of a
tax credit certificate to petitioner in the amount of ₱1,111,587 representing the excess or unutilized creditable
withholding taxes for taxable year 2001. The CTA, however, denied petitioner’s claim for refund of the excess tax credits
for the year 2000 in the amount of ₱4,627,976. It ruled that petitioner was precluded from claiming a refund thereof or
requesting a tax credit certificate therefor. Once it was made for a particular taxable period, the option to carry over
became irrevocable.1avvphi1

Petitioner moved for reconsideration but it was denied. Petitioner elevated the case to the CTA en banc which rendered
the assailed decision. Thus, this petition.

As already stated, petitioner formulated the issue in this petition as follows: whether the exercise of the option to carry-
over excess income tax credits under Section 76 of the Tax Code bars a taxpayer from claiming the excess tax credits for
refund even if the amount remains unutilized in the succeeding taxable year. Petitioner contends that it does not.

We disagree.

Section 76 of the Tax Code provides:

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 net 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. (emphasis supplied)

A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two options: (1)
to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a cash refund. If the
option to carry over the excess credit is exercised, the same shall be irrevocable for that taxable period.

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 either to carry over the excess credit or to claim a refund. To facilitate tax
collection, these remedies are in the alternative and the choice of one precludes the other. 20

This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The phrase
"such option shall be considered irrevocable for that taxable period" means that the option to carry over the excess tax
credits of a particular taxable year can no longer be revoked.

The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against taxes
for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2) as a tax credit
either for which a tax credit certificate will be issued or which will be claimed for cash refund. 21

In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the irrevocable option to
carry them over as tax credits for the next taxable year. Under Section 76 of the Tax Code, a claim for refund of such
excess credits can no longer be made. The excess credits will only be applied "against income tax due for the taxable
quarters of the succeeding taxable years."

The legislative intent to make the option irrevocable becomes clearer when Section 76 is viewed in comparison to
Section 69 of the (old) 1977 Tax Code:

SECTION 69. Final Adjustment Return. – Every corporation liable to tax under Section 24 shall file a final adjustment
return covering the total net 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 net income of that year the
corporation shall either:

(A) Pay the excess tax still due; or

(B) Be refunded 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
refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable year.

Under Section 69 of the 1977 Tax Code, there was no irrevocability rule. Instead of claiming a refund, the excess tax
credits could be "credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year," that is, the immediately following year only. In contrast, Section 76 of the present Tax Code
formulates an irrevocability rule which stresses and fortifies the nature of the remedies or options as alternative, not
cumulative. It also provides that the excess tax credits "may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years" until fully utilized.

Furthermore, this case is closely similar to Philam Asset Management, Inc. v. Commissioner of Internal Revenue.22 In that
case, Philam Asset Management, Inc. had an unapplied creditable withholding tax in the amount of ₱459,756.07 for the
year 1998. It carried over the said excess tax to the following taxable year, 1999. In the next succeeding year, it had a tax
due in the amount of ₱80,042 and a creditable withholding tax in the amount of ₱915,995.1âwphi1 As such, the amount
due for the year 1999 (₱80,042) was credited to its ₱915,995 creditable withholding tax for that year. Thus, its 1998
creditable withholding tax in the amount of ₱459,756.07 remained unutilized. Thereafter, it filed a claim for refund with
respect to the unapplied creditable withholding tax of ₱459,756.07 for the year 1998. The Court denied the claim and
ruled:

Section 76 [is] clear and unequivocal. Once the carry-over option is taken, actually or constructively, it
becomes irrevocable. Petitioner has chosen that option for its 1998 creditable withholding taxes. Thus, it is no longer
entitled to a tax refund of ₱459,756.07, which corresponds to its 1998 excess tax credit. Nonetheless, the amount will
not be forfeited in the government’s favor, because it may be claimed by petitioner as tax credits in the succeeding
taxable years. (emphasis supplied)

Since petitioner elected to carry over its excess credits for the year 2000 in the amount of ₱4,627,976 as tax credits for
the following year, it could no longer claim a refund. Again, at the risk of being repetitive, once the carry over option was
made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were
actually or fully utilized. Nevertheless, as held in Philam Asset Management, Inc., the amount will not be forfeited in
favor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in the
succeeding taxable years, creditable against future income tax liabilities until fully utilized.23

WHEREFORE, petitioner’s motion for leave to file a second motion for reconsideration and the second motion for
reconsideration are hereby DENIED.

Costs against petitioner.

No further pleadings shall be entertained. Let entry of judgment be made in due course.

SO ORDERED.

F. Why is the filing of an administrative claim with the BIR necessary?

1. To afford the Commissioner an opportunity to consider the claim and to have a chance to
correct the errors of subordinate officers
2. To notify the Commissioner that such taxes have been questioned and the notice should be
borne in mind in estimating the revenue available for expenditures

G. Person entitled to refund

1. Statutory taxpayer
2. Withholding agent

a. G.R. Nos. 179045-46 August 25, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SMART COMMUNICATION, INC.,⃰ Respondent.

The right of a withholding agent to claim a refund of erroneously or illegally withheld taxes comes with the responsibility
to return the same to the principal taxpayer.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision1 dated June 28,
2007 and the Resolution2 dated July 31, 2007 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents
Respondent Smart Communications, Inc. is a corporation organized and existing under Philippine law. It is an enterprise
duly registered with the Board of Investments.

On May 25, 2001, respondent entered into three Agreements for Programming and Consultancy Services 3 with Prism
Transactive (M) Sdn. Bhd. (Prism), a non-resident corporation duly organized and existing under the laws of Malaysia.
Under the agreements, Prism was to provide programming and consultancy services for the installation of the Service
Download Manager (SDM) and the Channel Manager (CM), and for the installation and implementation of Smart Money
and Mobile Banking Service SIM Applications (SIM Applications) and Private Text Platform (SIM Application).

On June 25, 2001, Prism billed respondent in the amount of US$547,822.45, broken down as follows:

SDM Agreement US$236,000.0

0

CM Agreement 296,000.00

SIM Application Agreement 15,822.45

4
Total US$547,822.45

Thinking that these payments constitute royalties, respondent withheld the amount of US$136,955.61 or
₱7,008,840.43,5 representing the 25% royalty tax under the RP-Malaysia Tax Treaty.6

On September 25, 2001, respondent filed its Monthly Remittance Return of Final Income Taxes Withheld (BIR Form No.
1601-F)7 for the month of August 2001.

On September 24, 2003, or within the two-year period to claim a refund, respondent filed with the Bureau of Internal
Revenue (BIR), through the International Tax Affairs Division (ITAD), an administrative claim for refund 8 of the amount of
₱7,008,840.43.

Proceedings before the CTA Second Division

Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act on the claim for refund, respondent
filed a Petition for Review9 with the CTA, docketed as CTA Case No. 6782 which was raffled to its Second Division.

In its Petition for Review, respondent claimed that it is entitled to a refund because the payments made to Prism are not
royalties10 but "business profits,"11 pursuant to the definition of royalties under the RP-Malaysia Tax Treaty,12 and in
view of the pertinent Commentaries of the Organization for Economic Cooperation and Development (OECD)
Committee on Fiscal Affairs through the Technical Advisory Group on Treaty Characterization of Electronic Commerce
Payments.13 Respondent further averred that since under Article 7 of the RP-Malaysia Tax Treaty, "business profits" are
taxable in the Philippines "only if attributable to a permanent establishment in the Philippines, the payments made to
Prism, a Malaysian company with no permanent establishment in the Philippines,"14 should not be taxed.15

On December 1, 2003, petitioner filed his Answer16 arguing that respondent, as withholding agent, is not a party-in-
interest to file the claim for refund,17 and that assuming for the sake of argument that it is the proper party, there is no
showing that the payments made to Prism constitute "business profits."18

Ruling of the CTA Second Division

In a Decision19 dated February 23, 2006, the Second Division of the CTA upheld respondent’s right, as a withholding
agent, to file the claim for refund citing the cases of Commissioner of Internal Revenue v. Wander Philippines,
Inc.,20 Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation 21 and Commissioner
of Internal Revenue v. The Court of Tax Appeals. 22

However, as to the claim for refund, the Second Division found respondent entitled only to a partial refund. Although it
agreed with respondent that the payments for the CM and SIM Application Agreements are "business profits,"23 and
therefore, not subject to tax24 under the RP-Malaysia Tax Treaty, the Second Division found the payment for the SDM
Agreement a royalty subject to withholding tax.25 Accordingly, respondent was granted refund in the amount of
₱3,989,456.43, computed as follows:26

Particulars Amount (in US$)

1. CM 296,000.00

2. SIM Application 15,822.45

Total US$311,822.45

Particulars Amount

Tax Base US$311,822.45

Multiply by: Withholding Tax Rate 25%

Final Withholding Tax US$ 77,955.61

Multiply by: Prevailing Exchange Rate 51.176

Tax Refund Due ₱3,989,456.43

The dispositive portion of the Decision of the CTA Second Division reads:

WHEREFORE, premises considered, the instant petition is partially GRANTED. Accordingly, respondent Commissioner of
Internal Revenue is hereby ORDERED to REFUND or ISSUE a TAX CREDIT CERTIFICATE to petitioner Smart
Communications, Inc. in the amount of P3,989,456.43, representing overpaid final withholding taxes for the month of
August 2001.

SO ORDERED.27

Both parties moved for partial reconsideration28 but the CTA Second Division denied the motions in a Resolution29 dated
July 18, 2006.

Ruling of the CTA En Banc

Unsatisfied, both parties appealed to the CTA En Banc by filing their respective Petitions for Review,30 which were
consolidated per Resolution31 dated February 8, 2007.

On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial refund granted to respondent. In sustaining
respondent’s right to file the claim for refund, the CTA En Banc said that although respondent "and Prism are unrelated
entities, such circumstance does not affect the status of [respondent] as a party-in-interest [as its legal interest] is based
on its direct and independent liability under the withholding tax system."32 The CTA En Banc also concurred with the
Second Division’s characterization of the payments made to Prism, specifically that the payments for the CM and SIM
Application Agreements constitute "business profits,"33 while the payment for the SDM Agreement is a royalty.34

The dispositive portion of the CTA En Banc Decision reads:

WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are hereby
AFFIRMED.

SO ORDERED.35

Only petitioner sought reconsideration36 of the Decision. The CTA En Banc, however, found no cogent reason to reverse
its Decision, and thus, denied petitioner’s motion for reconsideration in a Resolution37 dated July 31, 2007.

Unfazed, petitioner availed of the present recourse.

Issues

The two issues to be resolved are: (1) whether respondent has the right to file the claim for refund; and (2) if respondent
has the right, whether the payments made to Prism constitute "business profits" or royalties.

Petitioner’s Arguments

Petitioner contends that the cases relied upon by the CTA in upholding respondent’s right to claim the refund are
inapplicable since the withholding agents therein are wholly owned subsidiaries of the principal taxpayers, unlike in the
instant case where the withholding agent and the taxpayer are unrelated entities. Petitioner further claims that since
respondent did not file the claim on behalf of Prism, it has no legal standing to claim the refund. To rule otherwise would
result to the unjust enrichment of respondent, who never shelled-out any amount to pay the royalty taxes. Petitioner,
thus, posits that the real party-in-interest to file a claim for refund of the erroneously withheld taxes is Prism. He cites as
basis the case of Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue,38 where it was ruled that the proper
party to file a refund is the statutory taxpayer.39 Finally, assuming that respondent is the proper party, petitioner
counters that it is still not entitled to any refund because the payments made to Prism are taxable as royalties, having
been made in consideration for the use of the programs owned by Prism.

Respondent’s Arguments

Respondent, on the other hand, maintains that it is the proper party to file a claim for refund as it has the statutory and
primary responsibility and liability to withhold and remit the taxes to the BIR. It points out that under the withholding
tax system, the agent-payor becomes a payee by fiction of law because the law makes the agent personally liable for the
tax arising from the breach of its duty to withhold. Thus, the fact that respondent is not in any way related to Prism is
immaterial.

Moreover, respondent asserts that the payments made to Prism do not fall under the definition of royalties since the
agreements are for programming and consultancy services only, wherein Prism undertakes to perform services for the
creation, development or the bringing into existence of software applications solely for the satisfaction of the peculiar
needs and requirements of respondent.

Our Ruling

The petition is bereft of merit.

Withholding agent may file a claim for refund

Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. – The Commissioner may –

xxxx
(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.

xxxx

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 a written claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied)

Pursuant to the foregoing, the person entitled to claim a tax refund is the taxpayer. However, in case the taxpayer does
not file a claim for refund, the withholding agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 40 a withholding agent
was considered a proper party to file a claim for refund of the withheld taxes of its foreign parent company. Pertinent
portions of the Decision read:

The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." It thus becomes important to note that under Section 53(c)41 of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms
"liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding
agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:

"The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as
well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government’s agent. In regard to the filing of the necessary income tax return
and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas the Commissioner and his deputies are not made liable by law."

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends
with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the
government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where, as in the instant case, the
withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

xxxx

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within
the meaning of Section 309,42 NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such
claim. (Emphasis supplied.)

Petitioner, however, submits that this ruling applies only when the withholding agent and the taxpayer are related
parties, i.e., where the withholding agent is a wholly owned subsidiary of the taxpayer.

We do not agree.

Although such relation between the taxpayer and the withholding agent is a factor that increases the latter’s legal
interest to file a claim for refund, there is nothing in the decision to suggest that such relationship is required or that the
lack of such relation deprives the withholding agent of the right to file a claim for refund. Rather, what is clear in the
decision is that a withholding agent has a legal right to file a claim for refund for two reasons. First, he is considered a
"taxpayer" under the NIRC as he is personally liable for the withholding tax as well as for deficiency assessments,
surcharges, and penalties, should the amount of the tax withheld be finally found to be less than the amount that should
have been withheld under law. Second, as an agent of the taxpayer, his authority to file the necessary income tax return
and to remit the tax withheld to the government impliedly includes the authority to file a claim for refund and to bring
an action for recovery of such claim.

In this connection, it is however significant to add that while the withholding agent has the right to recover the taxes
erroneously or illegally collected, he nevertheless has the obligation to remit the same to the principal taxpayer. As an
agent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly enriching himself
at the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right
to file a claim for refund.

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue43 cited by the petitioner, we find the same
inapplicable as it involves excise taxes, not withholding taxes. In that case, it was ruled that the proper party to question,
or seek a refund of, an indirect tax "is the statutory taxpayer, the person on whom the tax is imposed by law and who
paid the same even if he shifts the burden thereof to another."

In view of the foregoing, we find no error on the part of the CTA in upholding respondent’s right as a withholding agent
to file a claim for refund.

The payments for the CM and the SIM Application Agreements constitute

"business profits"

Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of any kind received as consideration for:
"(i) the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, any
copyright of literary, artistic or scientific work, or for the use of, or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial, commercial or scientific experience; (ii) the use of, or the right to
use, cinematograph films, or tapes for radio or television broadcasting."44 These are taxed at the rate of 25% of the gross
amount.45

Under the same Treaty, the "business profits" of an enterprise of a Contracting State is taxable only in that State, unless
the enterprise carries on business in the other Contracting State through a permanent establishment. 46 The term
"permanent establishment" is defined as a fixed place of business where the enterprise is wholly or partly carried
on.47 However, even if there is no fixed place of business, an enterprise of a Contracting State is deemed to have a
permanent establishment in the other Contracting State if it carries on supervisory activities in that other State for more
than six months in connection with a construction, installation or assembly project which is being undertaken in that
other State.48

In the instant case, it was established during the trial that Prism does not have a permanent establishment in the
Philippines. Hence, "business profits" derived from Prism’s dealings with respondent are not taxable. The question is
whether the payments made to Prism under the SDM, CM, and SIM Application agreements are "business profits" and
not royalties.

Paragraph 1.3 of the Programming Services (Schedule A) of the SDM Agreement,49 reads:

1.3 Intellectual Property Rights (IPR)

The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of which shall be retained by PRISM. PRISM,
however, shall provide the Client the APIs for the SDM at no cost to the Client. The Client shall be permitted to develop
programs to interface with the SDM or the SDM Libraries, using the related APIs as appropriate. 50 (Emphasis supplied.)

Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM Agreement and paragraph 1.3 of the
Programming Services (Schedule A) of the SIM Agreement provide:

1.4 Intellectual Property Rights (IPR)

The IPR of all components of the CM belong to the Client with the exception of the following components, which are
provided, without technical or commercial restraints or obligations:

• ConfigurationException.java

• DataStructures (DblLinkedListjava, DbIListNodejava, List

EmptyException.java, ListFullException.java, ListNodeNotFoundException.java,

QueueEmptyException.java, QueueFullException.java, QueueList.java, QueuListEx.java, and

QueueNodeNotFoundException.java)

• FieldMappedObjeet.java

• LogFileEx.java

• Logging (BaseLogger.java and Logger.java)

• PrismGeneric Exception.java

• PrismGenericObject.java
 • ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.
java, DeliverMessage.java, Login.java, Logout.java, Nack.java, SubmitMessage.java,

• TemplateManagement (FileTemplateDataBag.java, Template

DataBag.java, TemplateManagerExBag.java, and TemplateParserExBag.java)

• TemplateManager.class

• TemplateServer.class

• TemplateServer$RequestThread.class

• Template Server_skel.class

• TemplateServer_stub.class

• TemplateService.class

• Prism Crypto Server module for PHP451

xxxx

1.3 Intellectual Property Rights (IPR)

The Client shall own the IPR for the Specifications and the Source Code for the SIM Applications. PRISM shall develop an
executable compiled code (the "Executable Version") of the SIM Applications for use on the aSIMetric card which,
however, shall only be for the Client’s use. The Executable Version may not be provided by PRISM to any third [party]
without the prior written consent of the Client. It is further recognized that the Client anticipates licensing the use of the
SIM Applications, but it is agreed that no license fee will be charged to PRISM or to a licensee of the aSIMetrix card from
PRISM when SIMs are supplied to the Client.52 (Emphases supplied.)

The provisions in the agreements are clear. Prism has intellectual property right over the SDM program, but not over the
CM and SIM Application programs as the proprietary rights of these programs belong to respondent. In other words, out
of the payments made to Prism, only the payment for the SDM program is a royalty subject to a 25% withholding tax. A
refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM Application
Agreements is therefore in order.

Indeed, the government has no right to retain what does not belong to it.1âwphi1 "No one, not even the State, should
enrich oneself at the expense of another."53

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28, 2007 and the Resolution dated July 31, 2007
of the Court of Tax Appeals En Banc are hereby AFFIRMED. The Bureau of Internal Revenue is hereby ordered to issue a
Tax Credit Certificate to Prism Transactive (M) Sdn. Bhd. in the amount of ₱3,989,456.43 representing the overpaid final
withholding taxes for the month of August 2001.

SO ORDERED.

H. Remedies in case of denial of claim