REPUBLIC OF THE PHILIPPINES Court of Tax Appeals QUEZON CITY SPECIAL FIRST DIVISION VALLE VERDE COUNTRY CTA Case No. 10306 CLUB, INC., Petitioner, Members: DEL ROSARIO, P.J., Chairperson, ~ versus - MANAHAN, and REYES-FAJARDO, JJ. COMMISSIONER OF Promulgated: INTERNAL REVENUE, Respondent. x DEL ROSARIO, P.J.: Before this Court is a Petition for Review’ filed on July 22, 2020 by petitioner Valle Verde Country Club, Inc. against respondent Commissioner of Internal Revenue, praying that judgment be rendered ordering respondent to refund or issue tax credit certificate (TCC) in favor of petitioner in the amount of P7,449,368.98 representing output value-added tax (VAT) remitted on membership fees, assessment dues and similar charges for the period covering April 2018 to July 2019. THE PARTIES Petitioner Valle Verde Country Club, Inc. is a non-stock, non- profit corporation duly registered with the Securities and Exchange Commission (SEC) with Registration No. 61790 and with a registered address at Capt. Henry Javier St., Bo Ugong, Pasig City, 1604.” It was established primarily “to foster, promote, conduct legitimate athletic exercises, sports, recreational and social activities as well as * Docket, pp. 6-20. Par. 1, Petition for Review, Docket, p. 6; Exhibit “P-3", Docket, p. 35.DECISION Valle Verde Country Club, Inc. vs. Commissioner of Intemal Revenue CTA Case No. 10306 Page 2 of 29 entertainments of all sorts.”° Petitioner is a VAT-registered entity with Bureau of Internal Revenue (BIR) Certificate of Registration No. 3RC0000789880 and Tax Identification Number (TIN) No. 000-903- 152-000.* Respondent, on the other hand, is the Commissioner of Internal Revenue (CIR) duly appointed to perform the duties of his office, including, inter alia, the power to decide claims for tax refund or tax credit subject to the exclusive appellate jurisdiction of this Court, pursuant to Section 4 of the Tax Code and Section 7 of Republic Act (RA) No. 1125, as amended by RA No. 9282. He holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City.> THE FACTS On August 3, 2012, the BIR issued Revenue Memorandum Circular (RMC) No. 35-2012,° clarifying the taxability of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes. It subjected to VAT the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and service fees. Thereafter, petitioner complied with RMC No. 35-2012 and started to subject to VAT the membership fees and assessment dues charged to its members which were remitted to the BIR through Monthly VAT Declarations (BIR Form No. 2550-M) and Quarterly VAT Returns (BIR Form No. 2550-Q).” Petitioner filed its Monthly VAT Declarations and Quarterly VAT Returns on the following dates: Monthly VAT Declaration/ = Quarterly VAT Return Date of Filing April 2018 May 19, 20188 May 2018 June 20, 2018 June 2018 (3% Quarter of FY ending July 24, 20187 | September 2018 [FY 2018]) 3 Exhibit Docket, p. 26. + Exhibit "P-", Docket, p. 36. 5 Par. 1, |. Admitted Facts, Joint Stipulation of Facts and Issues (JSF), Docket, p. 252 ® SUBJECT: Clarifying the Taxabilty of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-Profit Purposes. 7 Par. 8, Petition for Review, Docket, p. 8; No. 20 Q&A, Judicial Affidavit of Ana Lize L. Regaspi, jocket, pp. 163-164, , Docket, pp. 444-445. 1", Docket, pp. 447-448, 7-1", Docket, pp. 450-451DECISION Valle Verde Country Club, Inc. vs. Commissioner of Intemal Revenue CTA Case No. 10306 Page 3 of 29 July 2018 ‘August 20, 2018" August 2018 September 20, 20187 September 2018 (4" Quarter of FY| October 25, 2018" 2018) eseuaa ac October 2018 ace _|- November 20, 2018 November 2018 December 20, 2018" December 2018 (1* Quarter of FY| January 24, 2019 ending September 2019 [FY 2019]) [ January 2019 February 20, 20197 February 2019 ___| March 19, 2019'° March 2019 (24 Quarter of FY 2019) April 24, 2019°° April 2019 May 15, 201977 May 2019 June 20, 20197 June 2019 (3% Quarter of FY 2019) July 22, 20197 July 2019 August 20, 20197 On September 17, 2014, the Association of Non-Profit Clubs, Inc. (ANPC), a group of recreational clubs wherein petitioner is a member, filed a petition for declaratory relief before the Regional Trial Court of Makati City, Branch 134 (RTC Makati) in Special Civil Case No. 14- 985 seeking to declare RMC No. 35-2012 invalid, unjust, oppressive, confiscatory and in violation of the due process clause of the Constitution. RTC Makati denied the petition as well as the request for reconsideration.” ANPC elevated the case to the Supreme Court. The Supreme Court in Association of Non-Profit Clubs, Inc. vs. Bureau of Internal Revenue®> (ANPC case) granted ANPC’s petition and set aside the decision of RTC Makati, viz.: “WHEREFORE, the petition is GRANTED. The Decision dated July 1, 2016 and the Order dated November 7, 2016 of the Regional Trial Court of Makati City, Branch 134, in Special Civil Case No. 14-985, are hereby SET ASIDE. The Court DECLARES that Exhibit 'P-8-1", Docket, pp. 453-454, "2 Exhibit P-9-1", Docket, pp. 456-457. "9 Exhibit ‘P-10-1", Docket, pp. 459-460. * Exhibit Docket, pp. 462-463. Docket, pp. 465-466. Docket, pp. 468-469. Docket, pp. 471-472. Docket, pp. 474-475. Docket, pp. 477-478. Docket, pp. 480-481 Docket, pp. 483-484. 2 Exhibit "P-19-1", Docket, pp. 486-487. 2 Exnibit *P-20-1", Docket, pp. 489-490. 24 Par. 8, Petition for Review, Docket, p. 8; Association of Non-Profit Clubs, Inc. (ANPC), herein represented by its authorized representative, Ms. Felicidad M. Del Rosario, vs. Bureau of Internal Revenue (BIR), herein represented by Hon. Commissioner Kim S. Jacinto-Henares, G.R. No. 228539, June 28, 2019. 21 Exhibit "P-18- 25 G.R, No. 228539, June 26, 2019,DECISION Valle Verde Country Club, Inc. vs. Commissioner of Intemal Revenue CTA Case No. 10306 Page 4 of 29 membership fees, assessment dues, and fees of similar nature collected by clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofit purposes do not constitute as: (a) ‘the income of recreational clubs from whatever source’ that are ‘subject to income tax’; and (b) part of the ‘gross receipts of recreational clubs’ that are ‘subject to [Value Added Tax)’ Accordingly, Revenue Memorandum Circular No. 35-2012 should be interpreted in accordance with this Decision SO ORDERED.” With the declaration of the Supreme Court that membership fees, assessment dues, and other fees collected by clubs are not subject to VAT, petitioner ceased to subject to VAT the membership fees and association dues it collected from its members. The last time petitioner remitted VAT on those charges was on July 2019.28 On July 20, 2020,’ petitioner filed an administrative claim for refund or issuance of TCC with BIR Revenue District Office (RDO) No. 43 — Pasig City in the amount of P7,449,368.98 representing the VAT paid on membership fees, assessment dues and other charges for the period April 2018 to July 2019.28 On July 22, 2020, petitioner filed the present Petition for Review,”° claiming to protect its interest considering the two (2)-year prescriptive period under Section 229 of the National Internal Revenue Code (NIRC) of 1997, as amended. On December 15, 2020, within the extended period,°° respondent filed his Answer.*" Respondent's Pre-Trial Brief** was filed on March 9, 2021 while petitioner's Pre-Trial Brief was filed on March 16, 2021. The Pre-Trial Conference was held on July 1, 2021.54 2 Par. 11, Petition for Review, Docket, p. 8; No. 23 Q&A, Judicial Affidavit of Ana Liza L. Regaspi, Exhibit "P-23", Docket, pp. 184. ® Exhibit"P-21-1", Docket, p. 85. 2 Exhibits "P-21" and "P-22", Docket, pp. 85-91 and 92 2 Docket, pp. 6-20. 3° Resolution dated December 21, 2020, Docket, p. 191 % Docket, pp. 182-188. ® Docket, pp. 206-210, % Docket, pp. 225-229, %* Minutes of Hearing and Order dated July 1, 2021, Docket, pp. 241-244 and 245-246. 7]DECISION Valle Verde Country Club, Inc. vs. Commissioner of Internal Revenue CTA Case No. 10306 Page 5 of 29 On July 13, 2021, the parties filed their Joint Stipulation of Facts and Issues®® which was approved by the Court in the Resolution dated July 27, 2021 thereby terminating the Pre-Trial.2° On November 18, 2021, the Court issued the Pre-Trial Order.°” Upon motion® of petitioner, the Court commissioned Atty. Clifford E. Chua, as Independent Certified Public Accountant (ICPA), on December 7, 2021.°° During trial, petitioner presented testimonial and documentary evidence. It presented the following witnesses: Ms. Ana Liza L. Regaspi,“° petitioners Accounting Manager; and, Atty. Clifford E. Chua,*' the Court-commissioned ICPA. On April 6, 2022, petitioner filed its Formal Offer of Evidence.‘ In the Resolution dated June 13, 2022,** the Court admitted most of petitioner's exhibits in evidence, but a number of Exhibits were denied admission for not being found in the records of the case and for being blurred or not properly scanned. In the same Resolution, petitioner was deemed to have rested its case. Thereafter, respondent presented his lone witness, Revenue Officer Wilfredo M. Pantino.* On June 30, 2022, Respondent's Formal Offer of Evidence was filed.*° In the Resolution dated August 11, 2022, the Court admitted all of respondent's formally offered evidence, and respondent was deemed to have rested his case.*® 85 Docket, pp. 252-256 ® Docket, p. 268. ® Docket, pp. 307-321 % Docket, pp. 256-258, * Minutes of Hearing and Order dated December 7, 2021, Docket, pp. 326-328 and 329-331 © Exhibit ‘P-23", Judicial Affidavit of Ana Liza L. Regaspi, Docket, pp. 156-168; and Minutes of Hearing and Order dated December 7, 2021, Docket, pp. 326-328 and 329-334 ** Exhibit "P-42", Judicial AMfidavit of Atty. Clifford E. Chua, Docket, pp. 338-344; and Minutes of Hearing and Order dated March 29, 2022, Docket, pp. 424-826 and 427-428 #8 Docket, pp. 431-442 Docket, pp. 496-499. «+ Exhibit’R-8", Judicial Affidavit, Docket, pp. 217-216; and Minutes of the Hearing and Order dated June 28, 2022, Docket, pp. 500-502 and 503-504. * Docket, pp. 507-509, “© Docket, pp. 517-518. )DECISION Valle Verde Country Club, Inc. vs. Commissioner of Internal Revenue CTA Case No. 10306 Page 6 of 29 Petitioner filed its Memorandum*’ on September 27, 2022, while respondent failed to file his memorandum as per Records Verification dated October 11, 2022.*° On October 24, 2022, the case was submitted for decision.° ISSUE The parties stipulated the following issue for the Court's resolution: Whether or not petitioner is entitled to tax refund in the amount of P7,449,368.98 representing its VAT for the period of April 2018 to July 2019.5 PARTIES’ ARGUMENTS Petitioner argues that: (i) RMC No. 35-2012 is contrary to the long-standing position of all the recreational clubs that the membership fees, association dues and fees of similar nature are not subject to VAT since these collections are used to defray the expenses of the club, thus, there is no VATable sales, exchange or barter to speak of, (ii) the Supreme Court has resolved that membership fees, association dues and fees of similar nature are not subject to VAT; (iii) VAT imposed and remitted to the BIR on membership fees, assessment dues and fees of similar nature were “erroneously or illegally assessed or collected”, thus those payments may be the proper subject of tax refund or issuance of TCC as provided under Sections 204(C) and 229 of the NIRC of 1997, as amended; (iv) the doctrine of solutio indebiti is applicable in this case as the government received something it is not entitled to; and, (v) petitioner was able to comply with the requirements to claim tax refund under Section 229 of the NIRC of 1997, as amended.*! On the other hand, respondent counter-argues that: (i) taxes collected are presumed to be in accordance with laws and regulations; (ii) petitioner’s alleged claim for refund is subject to administrative routinary investigation by the BIR; (iii) petitioner must prove compliance with the requirements in claiming for refund as provided in #7 Docket, pp. 519-536. * Docket, p. 536. 4 Docket, p. 537. ® IV. Issues to be Tried or Resolved, Pre-Trial Order, Docket, p. 316 & Memorandum, Docket, pp. 519-536.DECISION Valle Verde Country Club, Inc. vs. Commissioner of Internal Revenue CTA Case No. 10306 Page 7 of 29 Sections 204 and 229 of the NIRC of 1997, as amended; and, (iv) the burden of proof is upon petitioner to establish its right to the claimed refund.® THE COURT’S RULING The principle of solutio indebiti cannot supplant the mandatory application of Section 229 of the NIRC of 1997, as amended, in tax refund cases Petitioner argues that the principle of solutio indebitiis applicable in this case as the government received something it is not entitled to in the form of VAT remittances on membership dues and other similar charges. It contends that it is rightful, just and reasonable to refund the VAT collected based on interpretation of law that was invalidated by the Supreme Court. In Commissioner of Internal Revenue vs. Manila Electric Company (MERALCO),® the Supreme Court ruled on the non- applicability of the principle of solutio indebiti with regard to filing of internal revenue tax refund claims, viz.: “In this regard, petitioner is misguided when it relied upon the six (8)-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 NORDILB 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 s 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 8 Answer, Docket, pp. 182-188 5°G.R. No, 181459, June 9, arDECISION Valle Verde Country Club, Inc. vs. Commissioner of Intemal Revenue CTA Case No. 10306 Page 8 of 29 compliance with the procedural due process as_non- observance of the prescriptive periods within which to file the administrative and the judicial claims would result in the denial of his claim.” (Boldfacing supplied) The ruling in MERALCO was reiterated in Metropolitan Bank & Trust Company vs. The Commissioner of Internal Revenue™ and more recently in Commissioner of Internal Revenue vs. San Miguel Corporation®> where the Supreme Court further held that there can be no exception from the application of the two (2)-year prescriptive period based on equity considerations because equity cannot be applied when there is clear statutory law governing the matter. Thus, to be entitled to a refund of erroneously paid taxes, petitioner must comply with the requisites provided for under Sections. 204(C) and 229 of the NIRC of 1997, as amended, which read: “SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. - The Commissioner may - Xxx, Xxx, Xxx (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of intemal 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.” (Boldfacing supplied) 20x xxx. Xxx “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. GR. No. 182582, April 17, 2017. ®G.R. Nos, 180740 & 180910, November 11, 2019.