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UNIVERSITY PHYSICIANS SERVICES INC.-MANAGEMENT v. CIR

FACTS:

University Physicians Services Inc.-Management, Inc. (UPSI-MI) filed its Annual Income Tax Return (ITR) for the year 2006, reflecting an income tax overpayment of P5,159,341.00. Subsequently, it filed an amended Annual ITR for the short period fiscal year ended March 31, 2007, reflecting the removal of the amount of the excess credit. On October 10, 2008, UPSI-MI filed a claim for refund and/or issuance of a Tax Credit Certificate (TCC) in the amount of P2,927,834.00 representing the excess and unutilized creditable withholding taxes for 2006. The claim was not acted upon, prompting UPSI-MI to file a Petition for Review before the Court of Tax Appeals (CTA) Division. The CTA Division denied the petition, ruling that UPSI-MI effectively exercised the carry-over option under Section 76 of the National Internal Revenue Code (NIRC) of 1997. UPSI-MI argued that the irrevocability rule under Section 76 is not applicable because it did not carry over the excess income tax credit to the succeeding taxable period and that the inclusion of the said amount in the 2007 original ITR was a mistake, which was rectified in the amended 2007 ITR. The CTA En Banc affirmed the decision of the CTA Division, holding that UPSI-MI is barred by the irrevocability rule of Section 76 from claiming a refund of its excess tax credits.

The factual background of this case involves UPSI-MI, a corporation that claimed a refund of its excess tax credits for the taxable year 2006. UPSI-MI had an outstanding amount of P2,331,102.00 in excess and unutilized creditable withholding taxes as of December 31, 2005. For the year 2006, UPSI-MI had P2,927,834.00 of creditable taxes withheld on its management fees, and its income tax due amounted to P99,105.00. UPSI-MI applied its 2005 excess credits of P2,331,102.00 as a tax credit against its 2006 income tax due, leaving a balance of P2,231,507.00 of still unutilized excess creditable tax. In its 2006 Annual Income Tax Return (ITR), UPSI-MI chose the option to be issued a tax credit certificate for the amount of P2,927,834.00, representing its unutilized excess creditable taxes for 2006. UPSI-MI later changed its taxable period to a fiscal year ending on March 31 and filed an Annual ITR for the short period from January 1 to March 31, 2007. In the original 2007 Annual ITR, UPSI-MI opted to carry over the total amount of P5,159,341.00, which included the 2006 unutilized creditable withholding tax. The Court of Tax Appeals (CTA) held that UPSI-MI is barred by Section 76 of the National Internal Revenue Code from claiming a refund of its excess tax credits for 2006 after it carried over the credits to the succeeding quarters of 2007. UPSI-MI appealed this decision to the Supreme Court.

The case involves Universal Power Systems, Inc. - Manila International Container Terminal Corporation (UPSI-MICT), a corporation engaged in the business of power generation and distribution. UPSI-MICT filed its corporate income tax return for the year 2006, reflecting an overpayment of P5,159,341.00, which included an excess creditable withholding tax of P2,927,834.00. UPSI-MICT later amended its return, excluding the sum of P2,927,834.00 under the line "Prior Year's Excess Credits," which was the subject of its refund claim. The issue to be resolved pertains to whether UPSI-MICT is entitled to a refund of its 2006 excess tax credits amounting to P2,927,834.00, considering that it subsequently filed an income tax return for the short period ending on March 31, 2007, indicating the option of carry-over. The Court affirmed the ruling of the Court of Tax Appeals (CTA) and held that the irrevocability rule, as stated in Section 76 of the National Internal Revenue Code (NIRC), only applies to the option of carry-over. It was established that once a taxpayer has chosen to carry over an excess creditable tax, the carry-over option becomes irrevocable, and the previous choice of a claim for refund may no longer be granted.

ISSUES:

  1. Whether the irrevocability rule in Section 76 of the National Internal Revenue Code (NIRC) applies only to the carry-over option or also applies to the option of cash refund or issuance of a tax credit certificate.

  2. Whether the government can issue a Formal Assessment Notice (FAN) to assess a taxpayer for double recovery of an overpaid income tax.

  3. Whether the government can deny a pending claim for refund if the taxpayer has automatically carried over the excess creditable tax.

  4. Whether the taxpayer is precluded from asking for a refund of the excess creditable withholding tax (CWT).

  5. Whether the choice of refund or tax credit certificate (TCC) is irrevocable.

  6. Whether the irrevocability rule applies to the option of refund or tax credit certificate.

  7. Whether the petitioner is barred from recovering its 2006 excess creditable tax through refund or TCC.

RULING:

  1. The Supreme Court ruled that the irrevocability rule in Section 76 of the NIRC only applies to the carry-over option. The last sentence of Section 76 clearly states that once the option to carry over has been made, it shall be irrevocable. There is nothing in the law to suggest that the option of cash refund or tax credit certificate is also irrevocable. Therefore, a taxpayer who originally opted for a refund or tax credit certificate may shift to the carry-over option, but once the option to carry over has been chosen, it becomes irrevocable.

  2. Yes, the government can issue a FAN to assess a taxpayer for double recovery of an overpaid income tax. Paragraph (c) of Section 228 of the National Internal Revenue Code (NIRC) contemplates a double recovery by the taxpayer of an overpaid income tax that arose from an over-withholding of creditable taxes. If the taxpayer had previously asked for and successfully recovered its excess creditable withholding tax through refund or tax credit certificate, the government can assess the taxpayer for the double recovery.

  3. No, the government cannot deny a pending claim for refund if the taxpayer has automatically carried over the excess creditable tax. If the carry-over is to be sustained, there is no reason for the government to assess the taxpayer for the amount that has already been refunded or returned to the taxpayer. If the carry-over is to be disallowed, it would be inefficient and costly for the government to first grant the refund claim and then assess the taxpayer for the disallowed automatic tax credit. In this case, the only course of action for the government is to deny the pending claim for refund.

  4. The taxpayer is precluded from asking for a refund of the excess CWT. The court determined that the taxpayer is bound by its initial choice and that the carry-over option is irrevocable. The court held that the taxpayer cannot recover twice for its overpayment of tax and cannot avail of both refund and automatic tax credit at the same time.

  5. The choice of refund or TCC is irrevocable. The court cited the Philippine Bank of Communications case and stated that the choice of one option precludes the other. The court also noted that under the NIRC of 1997, the irrevocability rule was already applicable. The rationale of the rule is to avoid confusion and complication that could be brought about by flip-flopping on the options.

  6. The irrevocability rule does not apply to the option of refund or tax credit certificate.

  7. The petitioner is barred from recovering its 2006 excess creditable tax through refund or TCC, as it constructively chose the option of carry-over.

PRINCIPLES:

  • The irrevocability rule in Section 76 of the NIRC applies only to the carry-over option. (Section 76, NIRC)

  • A taxpayer who originally opted for a refund or tax credit certificate may shift to the carry-over option. However, once the option to carry over has been chosen, it becomes irrevocable. (Section 76, NIRC)

  • Section 228 of the NIRC recognizes the freedom of a taxpayer to change its option from refund to carry-over. (Section 228, NIRC)

  • An assessment can be issued by the government to assess a taxpayer for double recovery of an overpaid income tax that arose from an over-withholding of creditable taxes. (Paragraph (c) of Section 228 of the NIRC)

  • If the carry-over of excess creditable tax is to be sustained, the government cannot assess the taxpayer for the amount that has already been refunded or returned to the taxpayer. (Paragraph (c) of Section 228 of the NIRC)

  • If the carry-over of excess creditable tax is to be disallowed, the government cannot first grant the refund claim and then assess the taxpayer for the disallowed automatic tax credit. (Paragraph (c) of Section 228 of the NIRC)

  • The options under Section 76 of the NIRC are alternative in nature.

  • The choice of one option precludes the other.

  • The irrevocability rule was added to Section 76 to avoid confusion and double recovery of excess creditable tax.

  • The interpretation placed upon a statute by executive officers is entitled to great respect but is not conclusive and will be ignored if found to be erroneous.

  • The irrevocability of the option for refund, even if the taxpayer subsequently changes its mind and resorts to automatic tax credit, is contrary to the intent of the law and the principle of administrative feasibility.

  • The irrevocability rule admits of no qualifications or conditions.

  • The option of carry-over under Section 76 is not subject to any prescriptive period.