G.R. No. 175410 November 12, 2014
SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.

FACTS

Petitioner SMI-Ed Philippines Technology, Inc. is a Philippine Economic Zone Authority (PEZA)-registered corporation authorized to engage in manufacturing. After registration, it constructed buildings and purchased machineries but failed to commence operations. It temporarily closed its factory and later sold its properties to another PEZA-registered enterprise. Petitioner was subsequently dissolved. In its quarterly income tax return for the year 2000, petitioner subjected the entire gross sales from the property sale to the 5% preferential tax rate for PEZA-registered corporations and paid taxes amounting to ₱44,677,500.00. It then filed an administrative claim for refund of this amount with the Bureau of Internal Revenue (BIR), alleging erroneous payment. The BIR did not act on the claim, prompting petitioner to file a petition for review before the Court of Tax Appeals (CTA).
The CTA Second Division denied the claim for refund. It found that petitioner, having never commenced operations, was not entitled to PEZA tax incentives, making the 5% tax payment erroneous. The CTA further determined that the sold properties were capital assets and, in resolving the refund claim, held that the sale was subject to the 6% capital gains tax under the National Internal Revenue Code, resulting in a higher tax liability. The CTA En Banc affirmed this decision. Petitioner appealed to the Supreme Court, arguing that the CTA acted beyond its jurisdiction by making a tax assessment in the first instance and that it erred in applying the 6% capital gains tax to the sale of machineries and equipment.

ISSUE

1. Whether the Court of Tax Appeals acted beyond its jurisdiction by determining petitioner’s liability for capital gains tax in the context of a refund claim.
2. Whether the machineries and equipment sold by petitioner are subject to the 6% capital gains tax under Section 27(D)(5) of the National Internal Revenue Code.

RULING

1. On Jurisdiction: The Supreme Court ruled that the CTA did not act beyond its jurisdiction. The determination of the proper tax liability was not an assessment but was incidental to the resolution of the claim for refund. In an action for refund of taxes allegedly erroneously paid, the CTA may determine the correct tax due to ascertain whether the taxpayer is entitled to a refund or is still liable for a deficiency. This is within the CTA’s appellate jurisdiction to review decisions involving refunds of internal revenue taxes.
2. On Tax Liability: The Supreme Court ruled that a PEZA-registered corporation that has never commenced operations is not entitled to the tax incentives and preferential rates granted to PEZA-registered enterprises. Such a corporation is subject to ordinary tax rates under the National Internal Revenue Code. Furthermore, the Court held that the 6% capital gains tax under Section 27(D)(5) applies only to the sale of lands and/or buildings by domestic corporations, and not to the sale of machineries and equipment. Therefore, only the portion of the sale attributable to buildings was correctly subject to the 6% capital gains tax. The case was remanded to the CTA for the proper computation of petitioner’s tax liability and the corresponding refund, if any.