China Banking Corp. v. Commissioner of Internal Revenue
MODIFICATIONFacts
The Antecedents: China Banking Corporation (CBC), a universal banking corporation, paid P12,354,933.00 as gross receipts tax on its income for the second quarter of 1994. On January 30, 1996, the Court of Tax Appeals (CTA) in Asian Bank Corporation v. Commissioner of Internal Revenue ruled that the 20% final withholding tax (FWT) on a bank's passive interest income does not form part of its taxable gross receipts. Citing this ruling, CBC filed a formal claim for tax refund or credit of P1,140,623.82 from the Commissioner of Internal Revenue (Commissioner), arguing it was not liable for the gross receipts tax on sums withheld by the Bangko Sentral ng Pilipinas as FWT on its passive interest income in 1994. The Commissioner disputed this, asserting that FWT forms part of gross receipts and that 'gross receipts' means the entire income without deduction. Procedural History: To ensure its claim was filed within the two-year prescriptive period, CBC also filed a petition for review with the CTA on the same day it filed its claim with the Commissioner. The CTA ruled in favor of CBC, holding that the 20% FWT on interest income does not form part of CBC's taxable gross receipts, relying heavily on its earlier ruling in Asian Bank. However, the CTA granted CBC only a partial refund of P123,778.73, finding CBC's evidence sufficient only for gross receipts tax payments on its medium-term investments, denying the remainder for insufficiency of evidence. Associate Judge Amancio Q. Saga dissented, arguing that Revenue Regulations No. 12-80 did not prescribe the manner of computing the tax base, that exclusion was effectively an exemption not clearly granted by law, and that there was no double taxation. Both CBC and the Commissioner filed motions for reconsideration, which the CTA denied. Both parties then filed separate petitions for review under Rule 43 with the Court of Appeals (CA). The CA's 14th Division affirmed the CTA's factual findings, while the CA's 13th Division affirmed the CTA's ruling that the 20% FWT does not form part of CBC's taxable gross receipts. Both divisions subsequently denied motions for reconsideration. The Petition: On February 6, 2001, CBC filed a petition for review (G.R. No. 146749) with the Supreme Court, assailing the CA's decision in CA-G.R. SP No. 50839. CBC prayed for a full refund of P1,140,623.82, arguing that it did not actually receive the FWT, and thus it should not form part of its taxable gross receipts, and that it had presented sufficient evidence to prove its overpayment. On June 25, 2001, the Commissioner filed a separate petition for review (G.R. No. 147938) with the Supreme Court, questioning the CA's decision in CA-G.R. SP No. 50790 and praying for the denial of CBC's claim for refund. The Commissioner pointed out that the CA had already reversed the Asian Bank decision in Commissioner of Internal Revenue v. Asian Bank Corporation (promulgated November 22, 1999) and that the CTA itself had subsequently reversed its Asian Bank ruling in Far East Bank and Trust Co. v. Commissioner of Internal Revenue and Standard Chartered Bank v. Commissioner of Internal Revenue. The Supreme Court ordered the consolidation of both petitions during oral arguments on April 21, 2003.
Issue(s)
Whether the 20% final withholding tax on interest income should form part of CBC's gross receipts in computing the gross receipts tax on banks. Whether CBC has established by sufficient evidence its right to claim the full refund of P1,140,623.82 representing alleged overpayment of the gross receipts tax.
Ruling
The Petition for Review filed by China Banking Corporation in G.R. No. 146749 is DENIED for lack of merit. The Petition for Review filed by the Commissioner of Internal Revenue in G.R. No. 147938 is GRANTED. The assailed decisions and resolutions of the Court of Tax Appeals in CTA Case No. 5405 and those of the Court of Appeals in CA-G.R. SP No. 50839 and CA-G.R. SP No. 50790 are SET ASIDE.
Ratio Decidendi
On Issue 1: The Supreme Court ruled that the amount of interest income withheld in payment of the 20% final withholding tax (FWT) forms part of CBC's gross receipts in computing the gross receipts tax (GRT) on banks. The Court emphasized that the Tax Code does not define 'gross receipts' for GRT purposes, and thus, it must be understood in its plain and ordinary meaning as the entire receipts without any deduction, as supported by cases like Commonwealth of Pennsylvania v. Koppers Company, Inc. and Laclede Gas Co. v. City of St. Louis. Deducting any amount from gross receipts would transform it into net receipts, which is inconsistent with a tax on gross receipts unless specifically allowed by law. The Court noted that the Bureau of Internal Revenue (BIR) has consistently interpreted 'gross receipts' to admit no deduction, and the legislature's re-enactment of Section 121 (formerly 119) of the Tax Code without changes implies legislative approval of this interpretation, following the principle of legislative approval by re-enactment as seen in Inte-provincial Autobus Co., Inc. v. Collector of Internal Revenue. The Court clarified that the FWT, like creditable withholding tax, comes from the bank's income and is money the bank owns, used to extinguish its tax liability, thus forming part of its gross receipts. The Court also rejected CBC's reliance on Collector of Internal Revenue v. Manila Jockey Club, distinguishing it by explaining that the funds excluded in that case were not owned by the Manila Jockey Club but merely held in trust, unlike the interest income in the present case which is originally owned by CBC. Furthermore, the Court found that the CTA erroneously interpreted Section 4(e) of Revenue Regulations No. 12-80, which merely postponed the inclusion of accrued interest income until actual receipt, and that Revenue Regulations No. 17-84, which supplanted RR No. 12-80, explicitly states that interest income received by financial institutions shall be included as part of the tax base for GRT. The Court also dismissed the argument of double taxation, reiterating from City of Baguio v. De Leon that there is no constitutional prohibition against it, and that the GRT and FWT are different taxes imposed on the same income. Finally, the Court stressed that CBC's claim for exclusion amounts to a tax exemption, which must be clearly granted by law and is strictly construed against the taxpayer. On Issue 2: The Supreme Court declared the second issue, regarding whether CBC established by sufficient evidence its right to claim the full refund of P1,140,623.82, as moot. This is because the Court had already ruled that there was no legal basis for CBC's claim for a tax refund or credit in the first place. Since the fundamental legal premise for the refund (i.e., the exclusion of FWT from gross receipts) was rejected, the question of the sufficiency of evidence to prove the amount of the alleged overpayment became irrelevant. The Court's decision on the first issue effectively negated any right to a refund, rendering further inquiry into the evidentiary support for the claimed amount unnecessary.
Main Doctrine
The Supreme Court held that the amount of interest income withheld in payment of the 20% final withholding tax (FWT) forms part of a bank's gross receipts for purposes of computing the gross receipts tax (GRT). The term 'gross receipts' is understood in its plain and ordinary meaning as the entire receipts without any deduction, unless the law itself provides an exception. The FWT, although withheld, originates from the bank's interest income and is used to extinguish its tax liability, thus constituting money owned by the bank and forming part of its gross receipts. This interpretation is supported by the principle of legislative approval by re-enactment and the nature of a gross receipts tax, which aims for simplicity and a stable tax base.