The Supreme Court added:

“The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable other than that paid.” 

     Briefly, the taxpayer in this case SMI-ED Technology, Inc. (SMI-ED) is a PEZA registered corporation under R.A. 7916. It constructed a building and purchased machineries and equipment. The total cost of these properties amounted to ¥3,150,925,917.00 as December 31, 1999. Because of the Asian financial crisis, SMI-ED did not operate but sold its properties on  August 1, 2000 to another PEZA registered corporation for ¥2,100,000.00 and paid the amount of P44,677,500.00 as 5% tax on gross income as PEZA registered enterprise.

     After requesting for cancellation of its PEZA Registration and amending its Articles of Incorporation, it filed claim for refund of P44,644,500.00 with the BIR for alleged erroneously paid tax. It also alleged that it incurred a net loss P2,233,464,538.00. The BIR did not act on the claim so SMI-ED filed Petition for Review with the CTA.

     The CTA Second Division ruled that SMI-ED paid the wrong tax because while it was PEZA registered it did not commerce operations. It Should have paid 6% capital gains tax of P53,613,000.00 on the sale of building, machineries and equipment. Therefore, it must still pay the balance of P8,935,500.00 as deficiency tax instead of getting a tax refund. Its appeal to the CTA-En banc was denied, hence, it appealed to the Supreme Court claiming that the CTA En Banc acted beyond its jurisdiction when it assessed for deficiency tax in the first instance and that machineries and equipment are not subject to capital gains tax under Section 27 (D) (5) of the Tax Code. It added that the power to make assessment had prescribed under Section 203 of the NIRC of 1997.

Supreme Court Ruling

“WHEREFORE , the Court of Tax Appeals’ November 3, 2006 decision is SET ASIDE. The Bureau of Internal Revenue is ordered to refund petitioner SMI-Ed Philippines technology, Inc. the amount of 5 % final tax paid to the BIR, less the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines Technology, Inc’s land and building. In view of the lapse of the prescriptive period for assessment, any capital gains tax accrued from the sale of its land and building that is in excess of the 5% final tax paid to the Bureau of Internal Revenue may no longer be recovered from petitioner SMI-Ed Philippines Technology, Inc.”

Writer’s Comment

     SMI-ED was lucky because the power to make assessment and collect the deficiency tax had prescribed. In effect, the claim for refund was granted.

                                                                     Atty. Antonio L. Cardiño