SUMMARY OF SIGNIFICANT CTA DECISIONS (December 2010)

1. The two-year prescriptive period for filing claims for refund of input taxes refers only to administrative claim and not to judicial claim. Taxpayer applied for a claim for refund with the BIR on its unutilized input VAT for the fourth quarter of 2005 on June 20, 2007 and filed its judicial claim with the CTA on January 17, 2008. The Court ruled that the taxpayer had until December 31, 2007 to file its administrative claim. Thus, the claim filed on June 20, 2007 was well within the prescriptive period provided by law. However, citing the case of CIR vs. Aichi Forging Company Asia, Inc. (G.R. No. 184823, October 6, 2010), Section 112(C) of the NIRC applies to the judicial claim. Said section provides that the Commissioner of Internal Revenue (CIR) has 120 days from the submission of complete documents in support of the application within which to deny or grant the claim. If after the 120-day period, the Commissioner fails to act on the application, the remedy of the taxpayer is to appeal the inaction to the CTA within 30 days. Thus, the judicial claim filed on June 20, 2007 was belatedly filed and the Court cannot acquire jurisdiction. (Philex Mining Corporation vs. Commissioner of Internal Revenue, CTA Case No. 7720, December 01, 20101) 2. Petition for review filed with the CTA (refund of input tax) is premature if made before the lapse of 120 days from the filing of the administrative claim. Taxpayer filed the administrative claim for refund of input taxes for the year 2005 on November 14, 2006. It later filed the petition for review with the CTA on February 14, 2007. The CTA ruled that the administrative claim was filed on time since the filing is within the period provided in Sections 112(A) & (B) of the 1997 NIRC. However, the taxpayer judicially filed its claim after only 92 days from its filing of its administrative claim, thus, in violation of the 120 days required to await the action by the CIR as prescribed in Section 112(D) of the 1997 NIRC. The judicial filing is premature, which is a violation of the doctrine of exhaustion of administrative remedies. (CIR vs.Taganito Mining Corporation, EB Case No. 624, December 08, 20102) 3. Income derived from the operation of a hospital by a religious, non-stock and nonprofit hospital is exempt from income tax. The Bureau of Internal Revenue (BIR) assessed Perpetual Succor Hospital, Inc. for 10% income tax under Section 27(B) of the National Internal Revenue Code (NIRC) of 1997. Taxpayer contends that as a religious, non-stock and non-profit hospital, it is exempt from income tax under Section 30(E) of the NIRC of 1997. The Court ruled that to fall within the ambit
The same decision was made in Toledo Power Company vs CIR, CTA Case Nos. 7233 and 7294, December 01, 2010; CE Casecnan Water and Energy Company, Inc. vs. CIR, CTA Case No. 7739, December 02, 2010; Philex Mining Corporation vs. CIR, CTA EB No. 569, December 3, 2010; STEAG State Power, Inc. vs. CIR, CTA Case No. 7458, December 06, 2010; Visayas Geothermal Power vs. CIR, CTA EB No. 520, December 10, 2010 2 The same decision was made in Visayas Geothermal Power vs. CIR, CTA EB No. 520, December 10, 2010; Takasago Philippines, Inc. vs. CIR, CTA Case No. 7689, December 10, 2010; Daicor Philippines, Inc. vs. CIR, CTA Case No. 7759, December 16, 2010 (in this case, the Court said it had no jurisdiction)
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of Section 27(B), the hospital must be: (1) non-profit; and (2) its gross income from unrelated trade, business or other activity must not exceed 50% of their total gross income from all sources. On the other hand, to be exempt from income tax under Section 30, it must be: (1) non-stock corporation; (2) operated exclusively for religious or charitable purpose; and (3) no part of the net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person. The Court found that the hospital is a non-stock and non-profit operated exclusively for charitable purpose, and therefore exempt from income tax under section 30 of the NIR. (Perpetual Succor Hospital, Inc. and the Sisters of St. Paul de Charters vs. CIR, CTA Case No. 7304, December 1, 2010) 4. Medical, dental, hospital and veterinary services (except those rendered by professionals), including sales of drugs to inpatients, are exempt from VAT. Taxpayers engaged in hospital services are exempt from VAT. Hospital services includes not only the services of the doctors, nurses and allied medical personnel, but also the necessary laboratory services, and making available the medicines, drugs and pharmaceutical items that are necessary in the diagnosis, treatment and care of patients. Sale of drugs or pharmaceutical items to in-patients are considered part of the hospital services. Sales to out-patients are subject to VAT. (Perpetual Succor Hospital, Inc. and the Sisters of St. Paul de Charters vs. CIR, CTA Case No. 7304, December 1, 2010) 5. Revenues of a non-stock, non-profit educational institution, howsoever, generated are covered by the constitutional exemption provided they will be used for educational purposes. De La Salle University, Inc. (DLSU) was assessed income tax on income derived from rental of restaurants and bookstores, VAT on business income and DST on loan transactions and lease contracts. The BIR argues that DLSUs use of its assets for non-educational or commercial purposes removes such assets from the exemption coverage under Article XIV, Section 4(3) of the 1987 Philippine Constitution, which provides that all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. She further argues that it is no longer necessary to examine the use of revenues. Citing the case of Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 124043, October 14, 1998, the Court ruled that the elements for an educational institution to be exempt from tax under the Constitution are: (1) it is non-stock, non-profit educational institution; and (2) the income it seeks to be exempt from tax is used actually, directly and exclusively for educational purposes. Thus, it is essential to ascertain how the taxpayer utilizes its income sought to be exempted. Having shown that the rental revenue from canteens and bookstores are specifically used to pay the loan used in the construction of sports complex and the repairs and renovations of physical assets, the Court concluded that said revenue is exempt from tax. (CIR vs. De La Salle University, CTA EB No. 622, December 10, 2010)

6.

Four situations punishable under Section 255 of the NIRC and the elements

The four different situations punishable under Section 255 of the NIRC are: 1) Failure to pay any tax; 2) Failure to make a return; 3) Failure to keep any record; and 4) Failure to supply correct and accurate information. The elements of failure to make or file a return are: a) The accused is a person required to make or file a return; 2) The accused failed to make or file the return at the time required by law; and 3) That failure to make or file the return was willful. (People of the Philippines vs. Gloria V. Kintanar, CTA EB Crim. No. 006, December 03, 2010) 7. The two-year period to claim refund of income taxes pertaining to the refund of excessive electric charges by MERALCO should be reckoned from the time the Supreme Court decision became final and executory. In Republic of the Philippines, et. Al. vs. Manila Electric Company, G.R. No. 141314 and Lawyers Against Monopoly, etc. vs. Manila Electric Company, G.R. No. 141369, which became final and executory on May 5, 2003, the Supreme Court mandated MERALCO to refund the amount equivalent to P0.167 per kilowatt-hour of overbilled electric charges to its customers for their electric consumption made from February 1994 up to December 2003. MERALCO then filed a claim for refund or credit of excess income tax payments with the BIR on November 27, 2003 and with the CTA on May 4, 2005. MERALCO principally anchored its claim for a refund or credit of excess income tax payments under the principle of solutio indebiti with prescriptive period of six (6) years, pursuant to Art. 1145 of the New Civil Code or within two (2) years as provided under Section 229 of the 1997 Tax Code. One of the issues resolved by the Court was whether or not MERACLCOs right to recover excess income tax for the taxable years 19941998 and 2000 had prescribed. The Court ruled that a taxpayer suing for refund of taxes collected under the Tax Code and which has already prescribed under the Tax Code may not anchor its claim under Article 22 and Article 2154 in relation to Article 1145 of the New Civil Code, citing the principle of solutio indebiti as justification and basis of the prescription. But the Court ruled that owing to special circumstance in the case, the two-year prescriptive period under Section 229 of the 1997 NIRC should commence to run on May 5, 2003, the date the Supreme Court decision became final and executory. It is only at that time that the right to claim for a tax refund or credit becomes determinable and the basis for the excessive or erroneous payment arises. (Manila Electric Company vs. CIR, CTA Case No. 72423)

Note that Justice Castaneda, Jr. registered a dissenting opinion holding among others that the relief available to MERALCO pursuant to the NIRC of 1997 is to claim repayments as deduction from income in the year the obligation to pay or accrue arises. A taxpayer who previously claimed as income the amount he subsequently repays is to claim is as deduction from income in the year of repayment.

8. Actual carry-over of excess income tax payments in the quarters of the following year negates the option to be issued a tax credit certificate made in the income tax return. Even though taxpayer elected the option To be Issued a Tax Credit Certificate in so far as the excess income tax credit is concerned, taxpayer nevertheless carried over the said amount in the 1st, 2nd and 3rd quarters of the succeeding year. Thus, the taxpayers original option to be issued a TCC is actually negated by its very act of carrying over said amount to the succeeding taxable quarters. Hence, it is bound by the irrevocability rule under Section 76 of the NIRC. (Stablewood Philippines, Inc. vs. CIR, CTA Case No. 7705, December 10, 2010) 9. The use of presumptive income level approach in local tax assessment is allowed only if provided in the local tax ordinance and taxpayer is not able to produce records.

The taxpayer applied for renewal of its mayors permit and business license. And as required, it declared its gross sales for the preceding year. But instead of computing the tax on the amount of sales declared by the taxpayer, the city treasurer increased the sales and accordingly imposed the corresponding tax on the increased amount. The city treasurer articulated that it was using the presumptive income level assessment approach (PILAA). In ruling in favor of the taxpayer, the Court of Tax Appeals held that the PILAA is indeed a tax collection tool which enables the local government units to set certain income level standard for various business entities based on industry factors. However, the PILAA does not give the local government unit a carte blanche authority to increase the gross sales/receipts of the taxpayers. The PILAA may be used only if the taxpayer is unable to provide proof of its income. (First Planters Pawnshop, Inc. vs. City Treasure of Pasay City, CTA EB No. 501, December 10, 2010)

10. The prescriptive period for the issuance of assessment for withholding tax is counted from the filing of the monthly withholding tax return, not from the filing of annual information return. On July 2, 2001, taxpayer (Philippine Airlines, Inc.) received formal letter of demand, dated June 7, 2001, from the BIR assessing the taxpayer for, among others, deficiency withholding tax for the year ended March 31, 1998. One of the issues resolved by the court is whether or not the assessment for deficiency expanded withholding tax was issued within the prescriptive period. In holding that the assessment was not issued within the prescriptive period, the Court noted that there are two types of returns that need to be filed by a withholding agent: (1) the monthly return, which is immediately filed after and near the date when taxes are deducted and withheld, and (2) an annual information return, which is filed at the end of the year (March 1 of the following year). While the law is silent as to which of the returns should be used in computing the three-year prescriptive period, to give protection to the taxpayer against unreasonable investigations, the prescriptive period shall be counted from the return earlier filed, which is the monthly return. (Commissioner of Internal Revenue vs. Philippine Airlines, Inc., CTA EB No. 648, December 15, 2010)

11. Examination of books, to be lawful, must be based on a valid Letter of Authority empowering the assigned revenue officer to examine and scrutinize taxpayers books and other records. Taxpayer was assessed excise tax for deliveries of denatured alcohol to consignees not qualified to purchase exempt denatured alcohol allegedly based on Section 44(a) of Revenue Regulations No. 3 and Section 136 of the NIRC. It was shown that taxpayer was not served with the required Letter of Authority (LOA) or Mission Order (MO) to conduct the inventory verification, the result of which was the basis of the assessment. Under paragraph 2 on the item Policies of Revenue Memorandum Order No. 3-2003, inventory verification shall be authorized through: (1) Mission Order; and (2) letter to the taxpayer. An inventory verification can only be deemed valid if the requirements of the relevant rules are complied with, which are: 1) informing taxpayer (through a letter) of the intended stocktaking prior to the actual procedure; and 2) issuance of LOA or MO in favor of the specifically assigned office. (International Pharmaceuticals, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 7752, December 21, 2010)