Golden Donuts, Inc. vs. Commissioner of Internal Revenue

DECISION

MANAHAN,J.:

This is a Petition for Reviewl filed by petitioner Golden Donuts, Inc. (GDI) against respondent on August 28, 2020, praying for the nullity and cancellation of the alleged assessment for deficiency income tax (IT), value-added tax (VAT), final tax (Fl) , expanded withholding tax (EWT) , and documentary stamp tax (DST) for the taxable year (TY) 2010 in the amount of P159,296,703.65.2

THE PARTIES

Petitioner GDI is a corporation duly organized under the laws of the Republic of the Philippines with office address at GDI Building, Reliance corner Sheridan Streets, Mandaluyong City.3 It is registered with the Bureau of Internal Revenue (BIR) with Tax Identification No. (TIN) 000-122-565-00000 under the BIR Large Taxpayers Service, Revenue District Office (RDO) No. 116 - Regular Large Taxpayers (L T) Division 1. 4 1 Docket, CTA Case No. 10336, Vol. I, pp. 6-42. 2 /d., Vol. I, Prayer , Petition for Review, p. 41. 3 Id. , Vol. II, Summary of Admitted Facts, Joint Stipulation of Facts and Issu es (JSFI), p. 754.

Respondent is the duly appointed Commissioner of Internal Revenue (CIR) with office address at BIR Building, Diliman, Quezon City. 5

THE FACTS

On October 10, 2011, petitioner received a Letter of Authority (LOA) No. 116-2011-00000151 (eLA201100003039) dated October 6, 2011,6 signed by then Officer-in-Charge (OIC)- Assistant Commissioner - Large Taxpayers Service Alfredo V. Misajon, designating Revenue Officers Riza Budafto, Aurora Pelayo, Olivia Aviles, Olivia Sison, Rogelio Gonzales and Group Supervisor Marivic Bautista of L T Regular Audit Division 1, to examine petitioner GDI's books of accounts for the period January 1, 2010 to December 31, 2010. 7 On February 14, 2013, petitioner executed a Waiver of Defense of Prescription Under the Statute of Limitations (1st Waiver)8 under the 1997 National Internal Revenue Code (NIRC), as amended, valid until December 31,2014, which was accepted by OIC-Assistant Commissioner Alfredo V. Misajon on March 22, 2013.9 On November 19, 2014, petitioner received the Preliminary Assessment Notice10 (PAN) dated November 19, 2014 for the alleged deficiency IT, VAT, FT, withholding tax on compensation (WTC), EWT, and

DST

in the aggregate amount of P312,088, 978.56, inclusive of interest and penalties. 11 On December 4, 2014, petitioner executed a Waiver of Defense of Prescription Under the Statute of Limitations (2nd Waiver)1 2 under the 1997 NIRC, as amended, which was accepted by OIC-Assistant Commissioner Nestor Valeroso on December 16, 2014.13 Petitioner received the copy of the Formal Letter of

Demand14

(FLD) dated February 2, 2015 and its Audit ' Docket, Vol. II, Summary of Admitted Facts, JSFI, p. 754. 6 !d., Vol. I, Exhibit "P-2", p. 71. 7 Id., Vol. II, Summary of Admitted Facts, JSFI, p. 754. 8 Id., Vol. I, Exhibit "P-4", p. 76; BIR Records, Exhibit "R-4", pp. 1242-1244. 9 Id., Vol. II, Summary of Admitted Facts, JSFI, p. 754. 1o !d., Vol. I, Exhibit "P-12", pp. 87-89.

Result/ Assessment Notices15 on even date in the aggregate amount ofP272,615,710.31, broken down as follows:t6

Kinds

Basic Deficiency

Interest

Total Amount

of

Tax

Tax

IT

!'57' 784,335.40 !'45, 784,191.23 !'103,568,526.63

VAT

90,183,447.10 75,358,770.86 165,542,217.96

FT

83,026.70 68,650.57 151,677.27

WTC

296,689.71 249,544.50 546,234.21

EWT

1,462,662.77 1,230,239.64 2,692, 902.41

DST

61,818.12 52,333.70 114,151.82

Total

1"149,871,979.80 1"122, 743,730.50 1"272,615,710.30 On March 4, 2015, petitioner filed a letter dated March 3, 2015 as its protest on the said FLD.l 7 On July 30, 2020, petitioner received a copy of the Final Decision on Disputed Assessment18 (FDDA) and corresponding Assessment Notices, demanding payment of total deficiency taxes in the amount ofP159,296,703.65 on or before December 31, 2019, broken down as follows:t9

Kinds

Basic Deficiency

Interest

Total Amount

of

Tax

Tax

IT

!'25,680,581.02 !'40,644,268.61 !'66,324,849.63

VAT

32,509,243.18 52,876,952.02 85,386,195.20

FT

522,228.26 852,276.52 1,374,504.78

EWT

2,310,597.50 3,770,895.13 6,081,492.63

DST

49,161.11 80,500.30 129,661.41

Total

1"61,071,811.07 1"98,224,892.58 1"159,296, 703.65 Thus, petitioner filed the instant petition on August 28, 2020.

On September 17, 2020, respondent was directed by the Court to file his Answer to the instant petition.2o 15 BIR Records, Exhibit "R-11", pp. 1663-1668. 16 Docket, VoL II, Summary of Admitted Facts, JSFI, p. 755; Docket, Vol. V, Memorandum for Petitioner, p. 3173.

17 !d., Vol. V, Exhibit "P-16", pp. 3065-3079. 18 !d., Vol. I, Exhibit "P-17'', pp. 152-153. 19 !d., Vol. II, Summary of Admitted Facts, JSFI, p. 755; Docket, Vol. V, Memorandum for Petitioner, p. 3174.

2o Id., Vol. I, Summons dated September 17, 2020, p. 567. dl'o""-

On November 16, 2020, respondent filed his Answer21 after the Court granted22 its Motion for Extension of Time to File Answer,23 raising the following special and affirmative defenses, to wit:

1. The Honorable Court's power of judicial review over decisions of the Commissioner of Internal Revenue on disputed assessment is by nature exclusive and appellate, hence, petitioner should not be allowed to raise issues for the first time on appeal;

2. The FLD is valid and was received by petitioner;

3. The deficiency assessment issued against petitioner is correct; and

4. The assessment issued against petitioner is valid and lawful.

On December 11, 2020, the Court referred the case to the Philippine Mediation Center- Court of Tax Appeals (PMC-CTA) for mediation by the parties. 24 However, the parties decided not to have their case mediated by the PMC-CTA. 25 Thus, the case was set for Pre-Trial Conference and directed the parties to file their respective Pre-Trial Brief. 26 on May 20, 2021, respondent filed his Pre-trial Briej27 while petitioner's Pre-Trial Briej28 was filed on June 25, 2021. On July 16, 2021, the parties submitted their Joint Stipulation of Facts and Issues. 29 Thus, on April 8, 2022, this Court issued the Pre-Trial Order3o of the instant case. 21 Docket, Vol. I, pp. 577-595. 22 Jd., Vol. I, Resolution dated October 28, 2020, p. 576. 23 Jd., Vol. I, pp. 569-572.

24 Id., Vol. I, Resolution dated December 11, 2020, pp. 709-710. 25 Jd., Vol. I, No Agreement to Mediate dated February 11, 2021, p. 711. 26 Jd., Vol. I, Resolution dated February 22, 2021, p. 714; Notice of Pre-Trial Conference, pp. 715-720.

27 Jd., Vol. I, pp. 723-727.

2s Id., Vol. I, pp. 731-739.

Then trial ensued. Petitioner presented first its witnesses and evidence.?! The Formal Offer of Evidence for Petitioner’? was filed on May 5, 2022 On August 18, 2022, this Court admitted petitioner’s Exhibits “P-1”, “P-2”, “P-3”, “P-4”, “P-5”, “P-6”, “P-7”, “P-7-A”, “P_8” “P-8-A”, “P-9”, “P-9-A”, “P-10”, “P-10-A”, “P-11”, “P-11-A’, “P-12”, “P-13”, “P-13-A”, “P-14”, “P-15”, “P-16”, “P-16-A”, “P- 17”, “P-17-A”, “P-17-B’, “P-17-C”, “P-17-D”, “P-17-E’, “P-18”, “P_19”, “P20”, “P-21”, “P-22”, “P-23”, “P-24”, “P-24-1”, “P-24-A”, “P-24-A-1”, “P-25”, “P-25-A”, “P-26”, “P-27”, “P-28”, “P-29”, “P- 30”, “P-30-A”, “P-31”, “P-32”, “P-33”, “P-34”, “P-35”, “P-36”, “P- 37”, “P-37-A”, “P-39”, “P-39-A”, “P-40”, “P-40-A”, “P-41”, “P-41- A”, “P-42”, “P-42-A”, “P-43”, “P-6-A.1 to P-6-L.4-ICPA”, “P-7-A.1 to P-7-M.3-ICPA”’, “P-8-A.1 to P-8-D.9-ICPA”, “P-9-A.1 to P-9- L.3-ICPA”, “P-10-A to P-10-D-ICPA”, “P-11-A to P11-H-ICPA”, “P-12-A to P-12-AP-ICPA”, “P-13-A.1 to P-13-AI.16-ICPA”, “P- 14-A to P-14-X-ICPA”, “P-15-A to P-15-AE-ICPA”, “P-16-A to P- 16-AE-ICPA”, “P-17-B.1-ICPA to P-17-AG.10-ICPA”, “P-18-B.1- ICPA to P-18-Q.7-ICPA”, “P-18-Q.9-ICPA to P-18-Y.2-ICPA”, “P- 18-Y.4-ICPA to P-18-AL.12-ICPA”, “P-19-A to P-19-M-ICPA”, “P- 19-O-ICPA to P-19-AV-ICPA”, “P-19-AX-ICPA to P-19-FN-ICPA”, “P-20-A to P-20-BH-ICPA”, “P-20-BL-ICPA to P-20-FR.5-ICPA”, “P-21.A.1 to P-21-E.38-ICPA’, “P-21-E.41-ICPA to P-21-E.57- ICPA”, “P-22-A to P-22-CG-ICPA”, “P-23-A.1-ICPA to P-23- D.108-ICPA”, “P-23-D.110-ICPA to P-23-D.161-ICPA”, “P-23- D.163-ICPA to P-23-E.62-ICPA”, “P-23-F.1-ICPA to P-23-F.17- ICPA”, “P-23-F.19-ICPA to P-23-F.73-ICPA”, “P-23-F.75-ICPA to P-23-H.4-ICPA”, “P-24-A to P-23-AA-ICPA”, “P-25-A-ICPA to P- 225-F-ICPA”, “P-26-A.1 to P-26-D.38-ICPA”, “P-26-D.40-ICPA to P-26-D.41-ICPA”, “P-26-D.43-ICPA to P-26-D.71-ICPA”, “P- 26-D.73-ICPA to P-26-D.111-ICPA”, “P-26-D.113-ICPA to P-26- D.115-ICPA”, “P-27-A to P-27-EI-ICPA”, “P-27- EK-ICPA to P- 27-UC-ICPA”, “P-29-A to P-29-BX-ICPA”, “P-30-A.1 to P-30-C.2- ICPA”, “P-31-A to P-30-EQ-ICPA”, “P-32-A to P-32-J-ICPA”, “P- 33-A.1 to P-33-L.4-ICPA”, “P-33-L.6-ICPA to P-33-Z.8-ICPA”, “P- 33-BA.1-ICPA to P-33-BI.4-ICPA”, “P-33-BJ.1-ICPA to P-33- BO.4-ICPA”, “P-33-BQ.1-ICPA to P-33-BZ.6-ICPA”, “P-33-DA. 1- ICPA to P-33-FR.2-ICPA”, “P-33-FR.4-ICPA to P-33-MA.4-ICPA”, “P.34-A to P-34-B-ICPA”, “P-35-A to P-35-B-ICPA”, “P-36-A.1 to P-36-B. 121-ICPA”, “P-36-C.31-ICPA to P-36-C.7 1-ICPA”, “P-37- A to P-37-U-ICPA’”, “P-38-A to P-38-H-ICPA”, “P-39-A.1 to P-39- T.8-ICPA”, “P-39-T.10 to P-39-AB.2-ICPA”, “P-40-A to P-40-D- ICPA”, “P-41-A.1 to P-41-K.4-ICPA”, “P-42-A to P-42-F-ICPA”,

"A-ICPA", "B-ICPA", "C-ICPA to C.16-ICPA", "D-ICPA to D.15- ICPA", "E-ICPA to E.35-ICPA", "F-ICPA to F.39-ICPA", "G-ICPA", "H-ICPA" "I-ICPA to I 11-ICPA" "J-ICPA" "K-ICPA" "L-ICPA" ' .

' ' ' ' "M-ICPA to M.5-ICPA", "N-ICPA", and "O-ICPA".33 However, the following were denied to wit: Exhibits "P-1 7- A.1-ICPA to P-17-A.10-ICPA", "P-18-A.1-ICPA to P-18-A.12- ICPA", "P-18-Q.8-ICPA", "P-18-Y.3-ICPA", "P-19-N-ICPA", "P-19-

AW-ICPA"

"P-20-BI-ICPA" "P-20-BJ-ICPA" "P-20-BK-ICPA"

' ' ' ' "P-21-E.39-ICPA to P-21-E.40-ICPA", "P-23-D.162-ICPA", "P- 23-E.63-ICPA to P-23-E.251-ICPA", "P-25-A.1-ICPA", "P-26- D.39-ICPA", "P-26-D.42-ICPA", "P-26-D.72-ICPA", "P-26-D.112- ICPA", "P-27-EJ-ICPA", "P-28-A to P-28-E-ICPA", "P-33-L.S- ICPA", "P-33-AA.1-ICPA to P-33-AZ.5-ICPA", "P-33-BI.5-ICPA to P-33-BI.lO-ICPA", "P-33-BP.l-ICPA to P-33-BP.4-ICPA", "P-33- CA.1 to P-33-CZ.9-ICPA" ,"P-33-FR.3-ICPA", "P-36-C.1-ICPA to P-36-C.30-ICPA", "P-36-D.1-ICPA to P-36-D.9-ICPA", "P-39-T.9- ICPA", "P-39-AB-ICPA", "P-41-L.1-ICPA to P-41-AK.6-ICPA" and "P-43-A-ICPA", for not being found in the records of the case; and Exhibits "P-23-F.18-ICPA" and "P-23-F.74-ICPA", for being totally unreadable/blurred or almost blank. Petitioner moved for the reconsideration of the denied exhibits on September 15, 2022.34 Except for Exhibits "P-23- E.103-ICPA to P-23-E.119-ICPA", "P-23-E.179-ICPA", "P-23- E.228-ICPA", and P-33-AQ.2-ICPA, all other denied exhibits were recon:sidered and admitted. 35 Respondent then presented his witness and other evidence on March 7, 2023. 36 Respondent filed his Formal Offer of Evidence37 on March 17, 2023 where all exhibits offered were admitted by the Court, hence, the parties were directed to submit their respective memoranda. 38 Respondent submitted a Manifestation39 on July 14, 2023 which states that he was adopting all his arguments in his submitted Answer as his Memorandum. On the other hand, a 33 Docket, Vol. V, Resolution dated August 18, 2022, pp. 3108-3118. 34 Jd., Vol. V, Motion for Reconsideration (Re: Resolution dated August 18, 2022, pp. 3124-3127.

Memorandum for Petitioner4° was filed on July 21, 2023. Thus, the case was submitted for decision on July 27, 2023.41

ISSUE

The issue to be resolved by the Court is as follows: "Whether or not petitioner is liable to pay the amount of Php159,296,703.65 representing petitioner's deficiency IT, VAT, FT, EWT, and DST inclusive of surcharge and interest, for taxable year 2021 (sic), plus 25% surcharge and 20% deficiency and delinquency interest at the rate of 12% per annum from 1 January 2018 until the amount is fully paid pursuant to Section 249(C) of the 1997 NIRC, as amended, in relation to Section 249(A) of the same Code, as amended by the TRAIN law."42

Petitioner's Arguments43

Petitioner argues that the assessments issued by respondent were null and void for want of authority of the revenue officers and group supervisors to examine its books of accounts forTY 2010 as the Authorization Letter dated March 27, 2013 signed by Mr. Cesar D. Escalada, Chief, Regular LT Audit Division 1, was not equivalent to an LOA. Petitioner insists that the mandatory requisites for a valid assessment are not present in the instant case as the FLD and the Assessment Notices failed to indicate a definitive amount of tax liabilities and clear and categorical demand for payment as required under Section 228 of the 1997 NIRC, as amended, and Revenue Regulations (RR) No. 12-99, and that the FDDA does not indicate a valid due date for payment. Petitioner insists further that the assessments were invalid for lack of factual and legal bases, and that the portions of the EWT and FT assessments issued against petitioner were barred by prescription.

40 Docket, Vol. V, pp. 3170-3231. 41 Jd., Vol. V, Minute Resolution dated July 27, 2023, p. 3234. 42 Id., Vol. II, Minutes of the Pre-Trial Conference held on July 1, 2021, p. 747; Docket, Vol. II, Order dated July I, 2021, p. 749. 43 Supra, Note 40. ~

Respondent's Arguments44

Respondent argues that the Court's power of judicial review over his decisions on disputed assessment is by nature exclusive and appellate, hence, petitioner should not be allowed to raise issues for the first time on appeal. Respondent further argues that the FLD was validly issued and received by petitioner. Respondent insists that the assessment for the deficiency taxes was correct, valid, and lawful.

RULING OF THE COURT

This Court shall determine first whether the appeal was timely filed, thus, acquiring jurisdiction over the instant petition. Sections 7(a) and 11 of Republic Act (RA) No. 112545, as amended by RA No. 928246 , provide as follows: "SEC. 7. Jurisdiction.- The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;

XXX

XXX

XXX

"SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. -Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue xxx may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.

44 Supra, Note 21.

45 AN ACT CREATING THE COURT OF TAX APPEALS.

Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. xxx." (Emphasis supplied) The instant petition is grounded on respondent's FDDA issued against petitioner GDI. As shown above, petitioner received said FDDA on July 30, 2020. Petitioner, thus, has thirty (30) days from July 30, 2020 or until August 29, 2020 to file the instant petition. Petitioner filed the instant petition on August 28, 2020. Hence, petitioner's Petition for Review was timely filed.

According to the FDDA47, petitioner was assessed of deficiency IT, VAT, FT, EWT and DST, in the aggregate amount of P159,296,703.65 including interest forTY 2010, as shown below:

Tax

Basic

Interest

Total Amount

Deficiency Tax

IT

P25,680,581.02 N0,644,268.61 P66,324,849.63

VAT

32,509,243.18 52,876,952.02 85,386,195.20

FT

522,228.26 852,276.52 1,374,504.78

EWT

2,310,597.50 3,770,895.13 6,081,492.63

DST

49,161.11 80,500.30 129,661.41

TOTAL

P61,071,811.07 P98,224,892.58 P159,296,703.65

INCOME TAX

Details ofiT assessment in the amount ofP25,680,581.02 reflected in the FDDA are as follows:

Assessment

Tax Base

IT (30%)

Details

IT-1

Disallowed Royalty and Management Fee

10,577.33 3,173.20 IT-1.1

Undeclared Rovaltv Income

7,657,672.35 2,297,271.71

IT-2

Discrepancy in Ending Inventory

I ,814,426.81 544,328.04

IT-3

Disallowed Charitable Contributions

1,973,327.65 591,998.30

IT-4

Income Payments not Sub{ected to EWT 71,142,981.01 21,342,894.30

IT-5

Additional Income on Undeclared Sales per SLS, 2,818,172.67 845,451.80

SAWT and LN Data

IT-6

Additional Income on Undeclared Purchases per

184,876.92 55,463.68 SLP, 1604E and LN Data

TOTAL

25,680,581.02 47Docket, Vol. 1, Exhibit "P-17'', pp. 152 to 153. ~

IT-1 - Disallowed Royalty and

Management Fee -?10,577.33.

The Independent Certified Public Accountant (ICPA) noted that petitioner did not present any schedule nor relevant supporting documents. For failure of the petitioner to provide evidence to refute the discrepancy noted by the respondent, the assessment on disallowed royalty and management fee amounting to 1"10,577.33 shall remain. IT-1.1

Undeclared Royalty

Income -?7,657,572.35.

In the Details of Discrepancies attached to the FDDA, respondent found petitioner liable for undeclared royalty income in the amount of 1"7,657,572.35. The respondent computed the difference between the total of the sales subjected to royalty income multiplied by 6.60% royalty rate and the royalty income declared in the ITR/ AFS multiplied by 20% final withholding tax.

Petitioner argues that respondent's finding is erroneous. Petitioner noted that this assessment item only appeared for the first time in the FDDA4 8 stage, and nowhere to be found during the PAN49 and FLDSD stages. Based on the review by the ICPA, the respondent was not able to consider the fact that not all of petitioner's franchisees are subject to a 6.60% royalty rate. Petitioner claims that two

(2) of its franchisees namely Eastway Bakeries, Inc. and North Area Bakeries, Inc., herein referred to as "EBI" and "NABI", respectively, paid royalties to the petitioner at a lower rate of 3.0% in 2010.

However, evaluation and review of the franchise agreements51 of the petitioner's franchisees, reveal that the Franchise Agreement of NABI was not submitted, and the Court 45 Docket, Vol. I, Exhibit "P-17", pp. 152 to 162. 49 !d., Vol. I, Exhibit "P-12", Docket- Vol. I, pp. 87 to 99. 5o !d., Vol. I, Exhibit "P-15", pp. 121 to 136.

confirmed that the royalty rate of EBI is only 3.0%52. Without the Franchise Agreement of NABI, its royalty rate will remain at 6.6%, royalty fee re-computed as follows:

Franchisee's Sales

1'2,351 ,329,428.00

Management Fee

2,871,403.00 1'2,354,200,831.00

Less: Franchise Sales of EBI

68,557,901.0053

Sub- Total

2,285,642,930.00

Royalty Rate

6.60%

Sub- Total

150,852,433.38

Franchise Sales of EBI

1'68,557 ,901.0054

Royalty Rate

3% 2,056,737.03

Royalty Income Per Audit

152,909,170.41

Less: Royalty Income Declared per

ITR/AFS

Royalty Income

1'118,175,746.00

Add: 20% FWT

29,543,936.50 147,719,682.50

Undeclared Royalty Income

1'5,189,487.91 However, the undeclared royalty income ofP5,189,487.91 cannot be assessed against the petitioner because this assessment item was only included in the FDDA55 which was not found in the FLD56 and PANS7_ To allow respondent to incorporate new assessments in the FDDA would deprive the taxpayer of its right to due process and would put the latter at the mercy of the former. Hence, this particular assessment item amounting to P7 ,657,572.35 should be cancelled for being issued contrary to the guidelines of RR No. 12-99, as amended by RR No. 18-2013.

IT-2 -

Discrepancy in Ending

Inventory -?1,814,426.81.

In the Details of Discrepancies attached to the FDDA, respondent assessed petitioner the total amount of P1,814,426.81 for discrepancies in the Filed Inventory Lists for the years 2009 and 20 10 against the ending inventory declared

in the Audited Financial Statements/Income Tax Return

52 Exhibit "P-13-A.4", USB.

53 !CPA Report, p. 10; Annex B-ICPA; Exhibits "P-14-A-ICPA" to "P-14-L-ICPA", USB. 54 !CPA Report, p. 10; Annex B-ICPA; Exhibits "P-14-A-ICPA" to "P-14-L-ICPA", USB. »Docket, Vol. I, Exhibit "P-17", pp. 152 to 162.

(AFS I ITR). This discrepancy allegedly affects the amount of cost of sales and consequently under I overstates gross income a violation of Section 41 of the 1997 NIRC, as amended. Respondent adds that the changes in the amounts of inventories were not properly substantiated with valid documents, hence disallowed pursuant to Section 34(A)(l)(b) of the 1997 NIRC, as amended.

Dec. 31, 2009,

Inventory Lists

Per FS/ITR

Difference

Inventory Lists:

Central Warehouse

1'24,302,850.00

Outlets

1,671,983.93

Production Center

1,576,700.09 27,551,534.02 1'40,308,323.00 1'12,756,788.98 Dec.

31, 2010,

Inventory Lists:

Central Warehouse

1'31 ,845,653.55

Outlets

2,556,649.37

Production Center

1,821,857.91 36,224,160.83 47,166,523.00 (10 942 362.17)

Net Discrepancy

1'1 ,814,426.81 Petitioner argues that the respondent's assessment is erroneous and states that this assessment item must be cancelled for lack of factual and legal basis. Moreover, petitioner asserts that respondent failed to consider the fact that the discrepancy arose because petitioner's external auditor made adjustment entries to account for the errors in the Inventory List prepared by the petitioner's accounting staff.

The accounting staff who prepared the Inventory List inadvertently omitted some items such as boxes and dining supplies. Petitioner's external auditor spotted the error and reflected the correct amount in the AFS and ITR. To support its argument, petltwner presented the following documents as well as schedules for the re- computation of its ending inventory for the TYs 2009 and 2010: a.

2010 AFS·S8

' b.

2009 Filed Inventory List;sg c.

2010 Filed Inventory List;6o ss Exhibits "P- 12- A-I CPA" to "P-12-AP-ICPA", USB. so Exhibits "P-15-A-ICPA" to "P-15-AE- !CPA", USB.

d.

2009 Inventory Count Sheet;61 e.

2010 Inventory Count Sheet;62 f.

2009 Inventory Schedule per type;63 g.

2010 Inventory Schedule per type;64 h.

2009 Schedule of Ending Inventory (Boxes and

Other Dining Suppliers - 201 0);65 1.

2010 Schedule of Ending Inventory (Boxes and

Other Dining Suppliers - 20 1 OJ ;56 J.

2009 Schedule of Purchases (Boxes and Dining

Supplies);67 k.

2010 Schedule of Purchases (Boxes and Dining

Supplies) ;68 1.

2009 Supporting Documents for Boxes and

Other Dining Supplies;69 m.

2010 Supporting Documents for Boxes and

Other Dining Supplies;?o n.

Reconciliation of ITR and Inventory list. Upon review of the voluminous invoices and official receipts of petitioner's suppliers,71 the commissioned ICPA was able to provide reconciliation and re-computation schedules of the ending inventory in taxable years 2009 and 20 10 to account for the alleged discrepancy.

Reconciliation for Calendar Year (CY) 2009:

PER

PARTICULARS

INVENTORY

PERFS/ ITR

LISTINGS

MI·DONUTS

FLOUR MIXES

1,022,429.97 1,022,429.97

FILLINGS

1,369,167.67 1,369,167.67

FLAVORINGS

140,115.79 140,115.79

TOPPINGS

2,045,050.75 2,009,442.79

SUGARS

659,471.48 659,471.48

SHORTENING

2,479,026.41 2,479,026.41

MI·BAKERY

401,103.71 401,103.72

MI-PANCAKE

35,603.34

M1·SAVORY

1,283,892.22 1,110,767.16

M1-SOUP

14,205.03

MI·BREAKFAST/LUNCH/DINNER

.

27,226.98

MI·OMELET

.

12,348.85 61 Exhibits "P-17·AA.1-ICPA" to P-17-AG. 10-ICPA", USB. 62 Exhibits "P- !8-AA.1-ICPA" to P-18-AL. 10-ICPA", USB. 63 Exhibit "P-43-A-ICPA", Annex C- !CPA of the !CPA Report, USB. 6 4 Exhibit "P-43-A-ICPA", Annex D- !CPA of the !CPA Report, USB. 65 Exhibit "P-43-A-ICPA", Annex E- !CPA of the !CPA Report, USB. 66 Exhibit "P-43-A-ICPA", Annex F- !CPA of the !CPA Report, USB. 67 Exhibit "P-43-A-ICPA", Annex G- !CPA of the !CPA Report, USB. 68 Exhibit "P-43-A·ICPA", Annex H- !CPA of the !CPA Report, USB. 69 Exhibits "P·l9-A·ICPA" to "P-19·FN·ICPA", USB. 70 Exhibits "P-20-A -!CPA" to "P-20-FR.S-ICPA", USB.

DIFFERENCE

REFERENCE

.

.

35,607.96 .

(0.01) 135,603.34 173,125.06 (14,205.03 (27,226.98 (12,348.85)

MI-SALAD

MI-GOURMET SANDWICHES

MI-WRAPS

MI-PASTA

12,070.05 57,641.42 7,476.37 12,070.05 (57,641.42 7,476.37 17,583.44 17,583.44 MI-COLD BEVERAGES i sd SOFTDRINKS 91,873.02 91,873.02 PUNCH 1,044 554.66 1,044,554.66 OTHER BEVERAGES 796,237.52 791,081.65

MI-HOT BEVERAGES

| | COFFEE 348,293.75 353,712.95 (5,419.20 [| | CHOCO POWDER 38,803.28 MI-NON-FOODS 15,831,513,67 15,831,261.67 252.00 MI-BOXES & OTHER DINING SUPPLIES 12,590,022.85 12,590,022.85 27,531,533.90 40,116,990.55

ADD (DEDUCT) ADJUSTMENTS

247,259.65 | 3,374,451.99 | 80,513.60 | 1,916,611.88 124,367.04

|__| MI-FIXED ASSETS ORACLE

| | MI-OTHERS ORACLE MIGRATION | ss - “it

UNUSED KITCHEN & DINING

SUPPLIES

MI-OTY DIFFERENCE

MI-CLEARING |

MI-RECEIVING ACCRUAL

MI-QTY DIFFERENCE - FIXED

ASSETS

MI-STAGING

|_| SUB-TOTAL

680,693.68 - 3,344 885.53 TOTAL - 43,461,876.08

Pp

Pp

LESS: ALLOWANCE FOR Exhibit 12-

OBSOLESCENCE 3,153,553.06 3,153,553.06 ICPA NET TOTAL 27,551,533.90 | _40,308,323.02 12,756,789.12)[ (3,344,885.5 Careful examination of the above table shows the inventory difference amounting to -P3,320,319.33 shall remain because it was not supported with documents or reference materials from which the Court can verify the accuracy of the said accounts, to wit:

| MI-DONUTS - TOPPINGS P35,607.96 MI-BAKERY 0.01 MI-PANCAKE - 35,603.34 MI-SAVORY 173,125.06 MI-SOUP - 14,205.03

MI-BREAKFAST/LUNCH/DINNER

MI-OMELET 12,348.85 MI-SALAD - 12,070.05 MI-GOURMET SANDWICHES 57,641.42 27,226.98 MI-WRAPS ~ 7,476.37 MI-PASTA ~ 17,583.44 MI-COLD BEVERAGES - OTHER BEVERAGES 9,155.87 MI-HOT BEVERAGES - COFFEE - 9,419.20 MI-NON-FOODS 202.00 MI-GRMO -247 259.65 MI-FIXED ASSETS ORACLE 2,066,527.75 MI-OTHERS ORACLE MIGRATION -3,374,451.99 UNUSED KITCHEN & DINING SUPPLIES -80,513.60 MI-QTY DIFFERENCE | -1,916,611.88 ;

MI-CLEARING

MI-RECEIVING ACCRUAL

MI-QTY DIFFERENCE - FIXED ASSETS

MI-STAGING

TOTAL

124,367.04 0.07 -680,693.68 263,750.41 -1"3,320,319 .33 Furthermore, scrutiny of the documents supporting the inventory difference account, "MI-Boxes & Other Dining Supplies", amounting to 1'12,590,022.85 such as Schedule of Inventory Count72 as well as the Physical Count Sheet73 reveal that the inventory difference was all accounted for except for Farmers MRT- BODS (1'84.78)74 and SMMM S' Market- BODS (1'7,006.32)75 because they were not supported with Physical Count Sheet.

Petitioner has also set-up an allowance for possible inventory obsolescence amounting to 1'3, 153,553.06 as stated in its AFS. 7 6 The re-computation of the ending inventory of CY 2009 upon consideration of reconciling items with supporting documents shows the following:

Inventory per Inventory Listing77

Inventory per FS/ITR7S

Difference

Less:

Inventory Without Supporting

Documents

1"3 ,320,319.33

Inventory Without Physical Count

Sheet:

Farmers MRT - BODS

SMMM S' Market - BODS

Adjusted, CY 2009 72 Annex E-ICPA to Annex E.35-ICPA, USB. 7,006.32 73 Exhibits "P-17 -A.1-ICPA" to "P-17 -AG.10-ICPA", USB. 74 Annex E.34-ICPA, USB.

1s Annex E.35-ICPA, USB.

-84.78 1"27 ,551,534.03 40,308,323.00 12,756,788.97 3,327,410.43 -1"9,429,378.54 76 Exhibit "P-12-AC-ICPA", Notes to FS No. 17; Exhibit "P-12-AM-ICPA", Notes to FS No. 29; USB.

Reconciliation for CY 2010:

PARTICULARS

MI-DONUTS

FLOUR MIXES

FILLINGS

FLAVORINGS

TOPPINGS

SUGARS

SHORTENING

MISCELLANEOUS

MI-BAKERY

MI-PANCAKE

MI-SAVORY

MI-SOUP

Ml-BREAKFAST /LUNCH/DINNER

MI-OMELET

MI-SALAD

MI-GOURMET SANDWICHES

MI-PIZZA

MI-WRAPS

MI-PASTA

MI-COLD BEVERAGES

SOFTDRINKS

PUNCH

OTHER BEVERAGES

MI-HOT BEVERAGES

COFFEE

CHOCO POWDER

MI-NON-FOODS

Ml-BOXES & OTHER DINING SUPPLIES

TOTAL

LESS: ALLOWANCE FOR

OBSOLESCENCE

NET TOTAL

PER

INVENTORY

PERFS/ ITR

DIFFERENCE

REFERENCE

LISTINGS

785,075.0I 785,075.0I - 706,725.26 706,725.26 - 263,183.64 263,183.64 2,939,558.33 2,939,558.33 - 1,085,879.89 I ,085,879.89 2,403,300.38 2,403,300.38 1,030,083.50 795,643.64 234,439.86 - 270,915.20 (270,915.201 20,444.09 120,444.091 356,875.70 (356,875.701 - 13,014.66 fl3,014.66l - 48,337.I3 148,337. I31 - 186,827.03 (186,827.031 3,I09.25 13,I09.251 - 144,646.23 1144,646.231 - 3,751.89 13,751.891 2,964.44 12,964.441 - 15,228.82 115,228.821 - I31,782.59 I31,782.59 - 259,455.94 259,455.94 305,332.83 305,332.86 10.031 342,724.60 342,724.65 86,443.63 i 86,443.63 25,884,615.15 ' 25,884,6b.20 10.051 - I3,264,240.91 113,264,240.911

Annex F-ICPA

36,224,160.80 50,320,076.37 114,095,915.571 - 3,153,552.06 13,153,552.061 36,224,160.80 47,166,524.31 ll0,942,363.5I I Study and evaluation of the CY 20 10 reconciliation table made by the ICPA also reveals that inventory difference amounting to ('1"831,674.66) shall remain because it was not supported with documents or reference materials from which the Court can verify their accuracy, to wit:

PARTICULARS

DIFFERENCE

MI-DONUTS- Miscellaneous

!'234,439.86

MI-BAKERY

-270,915.20

MI-PANCAKE

-20,444.09

MI-SAVORY

-356,875.70

MI-SOUP

-13,014.66

MI-BREAKFAST /LUNCH/DINNER

-48,337.13

MI-OMELET

-186,827.03

MI-SALAD

-3,109.25

MI-GOURMET SANDWICHES

-144,646.23

MI-PIZZA

-3,751.89

MI-WRAPS

-2,964.44

MI-PASTA

MI-COLD BEVERAGES- Other Beverages

MI-NON-FOODS

TOTAL

-15,228.82 -0.03 -0.05 -!'831 ,674.66 Moreover, scrutiny of the documents supporting the inventory difference account, "MI-Boxes &

Other Dining

Supplies" amounting to Pl3,264,240.91 such as Schedule of Inventory Count79 as well as the Physical Count Sheetso reveal that the inventory difference was all accounted except for Procurement- BODS amounting to (P311.79)81 because it was not supported with Physical Count Sheet. Petitioner has also set-up an allowance for possible inventory obsolescence amounting to P3,153,553.06 as stated in its AFS.s2 The re-computation of the ending inventory upon consideration of reconciling items with documents shows the following:

Inventory per Inventory Listing83

Inventory per FS/ITR84

Difference

Less:

Inventory Without Supporting

Documents

-!'831,674.66

Inventory Without Physical Count

Sheet:

Procurement - BODS

Adjusted, CY 2010 79 Annex F-ICPA to Annex F.39-ICPA, USB. so Exhibits "P-18-A.1-ICPA" to "P-18-AL.12-ICPA", USB. 81 Annex F.39-ICPA, USB.

-311.79

of CY 2010

supporting !'36,224, 160.83 47,166,523.00 10,942,363.51 -831 '986.45 !'10,110,377.06 82 Exhibit "P-12-AC-ICPA", Notes to FS No. 17; Exhibit "P-12-AM-ICPA", Notes to FS No. 29; USB.

From the foregoing, petitioner has a net discrepancy in its ending inventory ofP680,998.52, to wit: Adjusted Inventory, December 31, 2009 -P9,429,378.54 Adjusted Inventory, December 31, 2010 -10,110377.06

Net Discrepancy

P680,998.52

Prepaid Rent

IT-3 -

Disallowed Charitable

Contributions -?1,973,327.65.

Based on !CPA's inquiry, these pertain to petty disbursements of thirty-nine (39) stores in 2010 to external parties e.g., individuals in the community where the store is located. However, petitioner did not present any schedule nor relevant supporting documents to refute the respondent's disallowance.

The Court agrees with the !CPA's conclusion that considering no reconciliation and relevant supporting documents were provided, the disallowed charitable contribution amounting to P1,973,327.65 is proper.

IT-4 -

Income Payments Not

Subjected

to

EWT

?71,142,981.01.

Respondent's analysis of petitioner's income payments per Trial Balance as against the Alphalist of Payees (BIR Form 1604E) disclosed that there were income payments that were not subjected to EWT, which is a violation of RR No. 2-1998, as amended. The total discrepancy amounting to P71,142,981.01 was disallowed for failure to withhold and remit the corresponding withholding tax pursuant to Section 34(K) of the 1997 NIRC, as amended:

Prof/

Prof/

i\lanagemcnt

Oircctor's

Goods

Servicl'S

ncntals

Brokerage

Fee

Fcc

Prepaid Rent- Current

Advanced Rental

Prepaid Insurance

Prepaid Interest

Prepaid Others

1.045.791.14 353.930.70 I H.623. 120.04 125,233.34 539.546.09 4.214.128.63

Building and Improvements

4.288A98.J2

Store and Leasehold Improvements

17.533.729.27

Store/ Office Furniture and Fixtures

7.044,957.44 --------- ·-·· ---·-

TOTAL

18,623,120.04 125.233.34 539546.09 1.045.791.14 353,930.70 4,214.128.63 4288.498.32 17.533.729.27 7.044.957.44 e?tf>p

Store/ Office Equipment

Kitchen Dining Equipment

Transportation Equipment

Software Cost

Deposit — Rentals

Refundable Deposit

Prepaid Rent - Non-Current

Local Purchases

Insurance

Freight and Other Charges

Music and Décor

Production Cost

Rental - Equipment

Rental - Office/ Store

Repairs and Maintenance

Boxes and Other Dining Supplies

Cleaning and Sundry Supplies

Glassware and Kitchen Supplies

Linen and Uniform

Office Supplies

Audit, Legal and Other Fees

Insurance Expense

Medica! Expense

Seminar and Training

ice and Refrigeration Light, power and water Telephone, telex and postage Management fec Transportation expense Travelling expense Bank service charges

Director's Fee

Dues and subscription

Inauguration Cost

Janitorial Expense

QC Research Development Cost

Representation Expense

Security Agency Fee

Collection Fee - Ministop

Misecllaneous Expense

Advertising Expense

Promotions

Local advertising expense Local promo expense 10,642.210.26 13.033,334.86 1.766.266.68 776,224,130.80 141,242.39 3,220.759.7] 11,231,862.16 4,635.555.36 438.028.31 4,126,605.32 6,644,317.70 1,004,307.71 Interest expense Interest expense (PAS 39)

Per Trial Balance

837.153,578,90 4.814.470.04 1,144,425.00 62.029,639.60 941.327 34 1,579.044.13 744,832.83 18,472,665.37 4,418.136.93 32,151.379.94 989,806.38 112,049.07 373,844.78 27,702.19 2.601.257.94 1.219,012.95 3,509,005.31 748,784.49 121.794.92 993,518.84 12,224,499,47 1.463.817.51 1,357,756.13 1,360,627.49 384,866.81 1.496,322.64 178.510.237.583 3,774.277.84 562,631.52 996,415.16 52.408.93 4.944,981.93 33,832,743.48 3,325.866.90 620,000.00 1.243.047.80 10.642.210.26 13,033.334.86 1,766.266.68 4.814,.470.04 3,774,277.84 562.63 1.52 996.415.16 776,224, 130.80 1.144.125.00 2.542,207.00 141,242.39 62,029,639.60 $2.408.93 4.944.981.93 3.220.759.7] 11,231,862.16 4,635,555.36 438,028.51 1,126,605 .32 6.644.317.70 3.570.169.25 941,327.34 1,579,044.13 744,832.83 1,004.307.71 18,472.665.37 4.418,136.93 52.512.343.85 32.151.379.94 989,806.38 112,049.07 620,000.00 373.844.78 27.702.19 2,601 ,257.94 1,219.012.95 4,752.053.1] 748.784.49 121,794.92 993,518.84 12,224.499.47 1,.463.817.51 1,357.756.13 $,360.627.49 384,866.81 1,496 ,322.64 55,298 853.20 1.863,047.80 1.109,984,327.81 Per Alphalist 79} ,540,415,22 144.204.561.68 — 40,523.418.48 783,659.90 — 52,627,314.52 1,863.047.80 1,031,842.417.60 Not subjected to EWT 45,013,163.65 34,305,675,85 (6,090,675.00) 2,542,207.00 2.07 1,538.68 ~ 7BATIYILOZ1 Reconciliation: Protest Letter 2,887,133.71 — (41,925.044.94) — 30,840,172.55 385,333.33 513,482.13 . (7,298.923,22) Not subjected to EWT (FDDA) 48,500,297.39 (7.619,369.09} — 24,149,497.55__2,927,540.33 3.185,020.81 - 71,142,986,99 Petitioner raised three arguments. First, respondent simply assumed that all account titles in the Trial Balance and AFS are subject to EWT and therefore applied the EWT rate for each item. Petitioner maintains that tax assessment must be based on facts and respondent cannot issue an assessment against the taxpayer based on a mere presumption.®> Second, petitioner claims that there was no reference to the particular suppliers or specific transactions that are being assessed with EWT. The FDDA did not provide sufficient verifiable details that would show the legal and factual basis for subjecting the same to EWT. Third, petitioner refers to the finding of the ICPA that there are accounts that should not be subjected to EWT on payments made to (i) exempt entities (general professional partnership); (ii) credit cards; and (iii) non-regular suppliers.

Based on the review of the ICPA, the respondent failed to consider the following items.

PERTBAND

RECONCILING

REMAINING

NCOME PAYMENT

FDDA

PER ALPHALIST

ITEMS

DISCREPANCY

A

B

c

D=A-B-C

1.

Purchase of Goods

840,040.712.61 791,540,415.22 33,172,031.70 15,328,265.69 2.

Services

136,585,192.59 144,204,561.68 12,215,741.04 (19,385,110.13) 3.

Rentals

64,672,916.03 40,523,418.48 33,991,625.71 (9,842, 128.16) 4.

Professional Fee/ Brokerage

3,711,200.23 783,659.90 2,240,315.08 687,225.25 5.

Professional Fee I

Management Fee

55,812,335.33 52,627,314.52 2,717.773.01 467,247.80

TOTAL

1' 100.822,356.791,029,679,369.80 84,337,486.54 (13, 194,499.55 Below is the detailed reconciliation prepared by the ICPA and marked as Annex 1-ICPA.

1. Goods- .P33,172,031.70.

Particulars

Amount

Not Subjected to EWT per FDDA

P48,500,297.39

Reconciliations:

Production Cost (Erroneous Adjustment to

(7,297,214.31)

FDDA)

Production Cost (Transfer)

10,932,168.41

Part of Local Purchases

(17,432,051.35)

PPE Adjustments

(19,367 ,053.62)

Payments to Non-Regular Suppliers

(7,880.83)

Total Reconciling Items

(33, 172,031.70) Not Subjected to EWT per !CPA l"15,328,265.69

a. Production Cost- (.P7,297,214.31). Study of the reconciliation made by the ICPA in

Annex

I-ICPA

reveals that the amount of .P7 ,297,214.31 was erroneously included by the respondent as additional production cost (Goods) in the FDDA.86 The ICPA made an adjustment to properly break down the account to its correct classifications.

b. Production Cost (subject to 1% EWT)- .P10,932, 168.41. The ICPA made the adjustment to correct the balance of "Production Overhead cost at 1 %" amounting to Bu Exhibit "P-2-E-ICPA", USB. ~

P 10,932, 168.41 which was originally included in the account "Production Overhead Cost at 2% to its proper classifications. This is also discussed under 2.h.

c. Local purchases- (1'17,432,051.35). Per petitioner's allegation, there were various purchases of goods which were locally purchased and were considered twice by the respondent amounting to 1'17,432,051.35, broken down as follows: Annex 1.9-ICPA

Account

Amount

Reference

Boxes and Other Dining Supplies

P11,231,862.16

Cleaning and Other Sundnr Suonlies

4,635,555.36

Exhibit P-2-E-to F-ICPA

Glassware and Kitchen Utensils

438,028.51

Glassware and Kitchen

1,126,605.32

TOTAL

Pl7,432,051.35 However, no proof was submitted to determine whether the said accounts were already included in the "Local Purchases" account m the

FDDA

amounting to 1'776,224, 130.80, thus, petitioner's assertion cannot be given credit.

d. PPE Adjustments- (!'19,367,053.62). The ICPA prepared account reconciliationss7 and made adjustments to properly break down the account to its correct classifications which the Court considered.

e. Payments to Non-Regular Suppliers- (1"7,880.83). Petitioner was able to provide sufficient evidence such as summary of non-regular suppliers (Petty cash)Ss, petty cash voucher, invoices and Official 87 Annex !-!CPA, Annex 1.10-ICPA, USB. 88Annexl.l1-ICPA, USB._....-- Receipts (0Rs)89 for the payment of its trivial casual purchases from non-regular suppliers amounting to P7,880.83, thus assessment on this item will be cancelled.

2. Services- Pl2,215,741.04.

Particulars

Amount

Not Subjected to EWT per FDDA

(1:'7,619,369.09)

Reconciliations:

Bank service charges (112,049.07) Interest expense (384,866.81) Interest expense (PAS 39) (1,496,322.64)

Prepaid Interest

_(353,930.70) Insurance expense (double entry) (1,144,125.00) Production Cost (add back adjustment in

FDDA)

30,815,937.75 Production Cost (erroneous adjustment to

FDDA)

(10,448,014.97)

Production Cost (Transfers)

(56,360,702.08) Freight and Other Charges (transfer) 2,542,207.00 Audit. Legal and Other Fees (transfer) 1,233,572.68

PPE Adjustments

23,495,718.34

Payments to Non-Regular Suppliers

(3, 165.54) Total reconciling items:

(12,215,741.04) Not subjected to EWT (!CPA) (1:'19,835, 110.13)

a. Bank service charge- {Pll2,049.07). The Court agrees with the ICPA that bank service charges are not subject to withholding tax, thus the amount ofP112,049.07 will be cancelled.

b. Interest expense- (P384,866.81).

The Court agrees with the ICPA that interest payments of the petitioner to a loan from a local bank which were appropriately disclosed in the AFS90 amounting to 1"384,866.81 is not subject to withholding tax, and thus will be cancelled.

c. Interest expense (PAS 39)- (1"1,496,322.64). Petitioner argued that the accrual of additional interest to payables were also subjected to withholding taxes despite its nature. Unfortunately, petitioner failed to support the foregoing allegations with documentary evidence, thus, the assessment item will remain.

d. Prepaid Interest- (1"353,930.70). Petitioner also asserts that having the same nature as the interest expense, these prepayments were not subjected to withholding taxes. However, petitioner failed to provide documentary evidence, thus, the assessment item will also remain.

e. Insurance Expense- (1"1,144,125.00). In the FDDA, the respondent included two (2) line items for insurance expense in the amounts of 1"1,144,125.00 and 1"941,327.34. However, upon evaluation of petitioner's Trial Balance,91 the Court agrees with the ICPA that the petitioner has only one ( 1) account for insurance which is 900113 - Insurance Expense with the audited balance of 1"941,327.34, thus assessment on insurance expense amounting to 1"1,144,125.00 will be cancelled.

f. Production Cost- P30,815,937.75. The Court agrees with the reconciliation92 of the ICPA that this 1s just an adjustment to reverse 90 Exhibit "P-12-Z·ICPA", Notes to FS No. 12; Exhibit "P·12·AF·ICPA", Notes to FS No. 22, USB.

9t Exhibit "R-14", BIR Records, p. 1333. 9> Annex !-!CPA, USB.~ reclassifications made by the respondent in the FDDA in order to properly distribute the account to its appropriate classifications by adding back the stated amount to the 2% assessment.

g. Production Cost- (I'l0,448,014.97). In relation to 1.a and 2.fhereof, the Court agrees with the ICPA that based on his reconciliation,93 the respondent erroneously included additional production cost in FDDA in excess of the total production cost per GDI's trial balance. The ICPA reversed the adjustment to properly break down the account to its correct classifications.

h. Production Cost (transfers)- (I'56,360,702.08). The total production costs amounting to I'62 ,029,639.60 were all subjected to 2% withholding tax by the respondent. However, upon reconciliation94 of the ICPA, production cost consists of various overheads which payments were clearly subjected to 1%, 2%, 5%, 10% withholding taxes. It also includes income payments not subject to income tax which were redistributed accordingly, broken down as follows:

Production Overhead Cost@ 1%

P10,932, 168.41

Production Overhead Cost@ 2%

5,668,938.65

Production Overhead Cost (a) 5%

1' 161 ,221.40 Production Overhead Cost (ci) 10% 205,997.74

Not Subject to Withholding Tax

44,061,314.53

Total Production Cost

P62,029,640.7395 The ICPA made the adjustment to properly correct the balance of "Production Overhead cost @ 2%" amounting to I'5,668,937.5296 (I'62,029,639.60 less I'56,360,702.08) to its correct classifications. 93 Annex I-I CPA. USB.

94 Annex 1.5-JCPA, USB.

95 Rounding off Difference of 1.13. % Rounding off Difference of 1.13. ~

1. Freight and other charges subject to 2% f'2,542,207.00.

The Court agrees with the reconciliation97 of the ICPA that this is just an adjustment to reverse reclassifications made by the respondent in the FDDA in order to properly distribute the account to its appropriate classifications by adding back the stated amount to the 2% assessment. The same were included in the analysis for 10% withholding tax as brokerage fee. However, upon scrutiny of the invoices and 0Rs9s, only the amount of !'124,539.46 were subjected to 2% withholding tax amounting to f'2,490.80. Thus, the assessment on freight and other charges of !'2,417,667.54 (!'2,542,207.00 less !'124,539.46) shall remmn.

Annex 1.8-ICPA

Payee

Amount

CWT

Reference

DIMENSIONAL SERVICE CORPORATION

1~16,408.30 r328.I7 Exhibit P-23-D.15 to D.17-ICPA

DIMENSIONAL SERVICE CORPORATION

4,673.62 93.47 Exhibit P-23-D.28 to D.30-ICPA

DIMENSIONAL SERVICE CORPORATION

15,909.60 318.20 Exhibit P-23-D.31 to D.34-ICPA

DIMENSIONAL SERVICE CORPORATION

2,756.21 55.12 Exhibit P-23-D.31 to D.34-ICPA

DIMENSIONAL SERVICE CORPORATION

5,612.68 112.25 Exhibit P-23-D.59 to D.61-ICPA

DIMENSIONAL SERVICE CORPORATION

13,674.08 273.48 Exhibit P-23-D.62 to D.65-ICPA

DIMENSIONAL SERVICE CORPORATION

5,151.93 103.04 Exhibit P-23-D.62 to D.65-ICPA

DIMENSIONAL SERVICE CORPORATION

3,125.00 62.50 Exhibit P-23-0.66 to 0.68-ICPA

DIMENSIONAL SERVICE CORPORATION

16,041.03 320.82 Exhibit P-23-D.84 to D.86-ICPA

DIMENSIONAL SERVICE CORPORATION

6,0I2.54 120.25 Exhibit P-23-D.87 to D.89-ICPA

DIMENSIONAL SERVICE CORPORATION

6,528.90 130.58 Exhibit P-23-0.95 to 0.97-ICPA

DIMENSIONAL SERVICE CORPORATION

13,637.01 272.74 Exhibit P-23-0.101 to 0.103-ICPA

DIMENSIONAL SERVICE CORPORATION

9,388.27 187.77 Exhibit P-23-0.157 to 0.159-ICPA

DIMENSIONAL SERVICE CORPORATION

5,620.29 112.41 Exhibit P-23-0.160 to 0.162-ICPA

TOTAL

PI24,539.46 P2.490.80 J. Audit, legal and other fees subject to 2% !'1,233,572.68.

The Court agrees with the ICPA that based on his reconciliation,99 this is an adjustment to properly break down the account to its correct classifications which was originally included in the FDDA amounting to f'2,266,961.42 at 15% withholding tax, to wit: 97 Annex 1-ICPA, Annex 1.8-ICPA, USB. 98 Exhibits "P-23-D.l-ICPA"" to "P-23-D.l79-ICPA", USB. 99 Annex 1-ICPA, USB. ~ Audit, Legal and Other Fees @ 2% Audit, Legal and Other Fees @ 10%

TOTAL

P1 ,233,572.68 1,033,388.74 P2 ,266,961.42

k. PPE Adjustments- 1'23,495,718.34. In relation to 1.d hereof, the ICPA prepared account reconciliations 1oo and made adjustments to properly break down the account to its correct classifications.

1. Payments to Non-Regular Suppliers- (P3, 165.54). In relation to 1.e hereof, petitioner was able to provide sufficient evidence such as summary of non- regular suppliers (Petty cash)lOl, petty cash voucher, invoices and 0Rs102 for the payment of its trivial casual purchases from non-regular suppliers amounting to 1'3,165.54, thus assessment on this item will be cancelled.

3. Rentals- 1'33,991,625.71.

Particulars

Not Subjected to EWT per FDDA

Refundable Deposit (PAS 39)

Deposit Rental

Production Cost (add back adjustment in

FDDA)

Production Cost (Transfers)

Total reconciling items:

Not subjected to EWT per I CPA 10o Annex !-!CPA, Annex !.10-ICPA, USB. 101 Annex !.11-ICPA, USB.

Amount

1"24, 149,497.55 (562,631.52) (3,774,277.84) (30,815,937.75) 1,161,221.40 (33,991,625.71) (1"9,842, 128.16)

a. Refundable deposit - (!'562 ,631. 52). The Court agrees with the ICPA finding that the refundable deposits, due to their nature which is only given to the lessor in compliance with the lease agreement and will be refunded to petitioner at the end of the lease term, do not result to an income payment subject to 5% withholding tax, thus, assessment on refundable deposit amounting to !'562,631.52 will be cancelled.

b. Deposit Rental- (!'3,774,277.84). The Court agrees with the ICPA finding that the Deposit Rentals, due to their nature which is only given to the lessor in compliance with the lease agreement and will be refunded to petitioner at the end of the lease term, do not result to an income payment subject to 5% withholding tax, thus, assessment on Deposit Rentals amounting to !'3,774,277.84 will be cancelled.

c. Production Cost- (!'30,815,937.75). This was already settled in 2.f hereof.

d. Production Cost (subject to 5% EWT)- !'1,161,221.40. This assessment item was already settled in 2.h hereof.

4. Professional Fee/ Brokerage - !'2 ,240,315. 08.

Particulars

Amount

Not subjected to EWTfFDDAl 1"2,927,540.33

Reconciliations:

Payments to General Professional Partnership

(909,994.56) Audit, Legal and Other Fees (subject to WTC) (27,500.00)

Production Cost (Transfers)

205,997.74 Freight and Other Charges (transfer) (2,542,207.00) Audit, Legal and Other Fees (transfer) 1,033,388.74 Total reconciling items:

(2,240,315.08) Not subjected to EWT per !CPA 1"687,225.25 a. Payments to General Professional Partnership (GPP) - (P909, 994.56).

Scrutiny of schedule of payment to GPPI03 which is exempt from withholding tax under Section 26 of the 1997 NIRC, as amended, and its corresponding supporting documents104 reveal that only payments to GPP in the amount of 1'639,210.00 were properly supported with official receipts, while the amount of 1'270,784.56 were only supported with journal entries. Thus, assessment on payment to GPP amounting to 1'270,784.56 shall remain, to wit:

Payee

SGV & CO

SGV & CO

Romulo Mabanta

Buenaventura

Amount

Reference

f'15,034.56 Exhibit "P-23-A.7-ICPA" 75,000.00 Exhibit "P-23-A.S-ICPA" 180,750.00 Exhibit "P-23-A.9-ICPA" f'270,784.56

b. Audit, Legal and Other Fees paid as per diem - (P27 ,500.00).

Scrutiny of schedule of Audit, Legal and Other Fees

(Subject to WTC)1°5

and the computerized journal entries which were also approved by the petitioner's VP- Finance and Administration 106 reveals that the amount of 1'27,500.00 were already subjected to withholding tax. Thus, the assessment item will be cancelled.

c. Production Cost (subject to 5% EWT)- 1'205,997.74. This assessment item was already settled in 2.h hereof.

d. Freight and

Other

Charges

(1'2,542,207.00).

1o3 Annex !.1-!CPA, USB.

104 Exhibits "P-23-A.l-ICPA" to "P-23-A. 9-ICPA", USB. 1os Annex !.3-!CPA, USB.

106 Exhibits "P-23-C.1-ICPA" to "P-23-C.10-ICPA", USB~

(Transfer)

This assessment item was already discussed m 2.j hereof.

e. Audit, Legal and Other Fees (Transfer)- !'1,033,388.74 This assessment item was already settled m 2.i hereof.

5. Professional Fee/ Management Fee- !'2,717,773.01.

Particulars

Amount

Not subjected to EWT (FDDA) I'3, 185,020.81

Reconciliation:

Management fee (timing difference) (450 ,811. 59) Audit,

Legal and Other Fees

(transfer) (2,266,961.42) Total reconciling items:

(2,717,773.01) Not subjected to EWT (!CPA) I'467,247.80

a. Management Fee (timing difference)- (!'450,811.59). Petitioner asserts that this is just a timing difference. However, evaluation of schedule of Management Fee 107 and the computerized journal entries and the computation of Management FeeJos reveal that the payments made in the last quarter of 2009 that were allegedly included in the first quarter return of 2010 amounting to !'13,477,707.60 were not supported with documents, thus, the Court cannot ascertain their accuracy. Hence, the assessment item on management fee amounting to !'450,811.59 will remarn.

b. Audit, legal and other fees subject to 2% (!'2,266, 961.42).

This was already discussed in 2 .i hereof. 107 Annex 1.2-ICPA, USB.

ws Exhibits "P-23-C.l-ICPA" to "P-23-C.lO-ICPA", USB.~

From the foregoing, petitioner has income payments not subjected to withholding tax in the amount of 1"6,684,861.83, broken down as follows:

Particulars

Goods

Services

Rentals

Not sub"ected to EWT {FDDA) 48 500 297.39 (7 619 369.09) 24 149 497.55

Reconciliation:

Pavments to GPP

Mgnt fee____\!imi_ng d1fference) Audit Legal and other Fees Bank service charqes (112 049.07) Interest exoense 1384 866.81) Interest expense (PAS 39)

Preoaid Interest

Insurance expense (double entry).

111114 125.00

Refundable Deposit (PAS 39)

(562 631.52)

Deposit Rental

(3 774 277 .84)

Production Cost

30 815 937.75 (30 815 937.75) (add back adjustment in

FDDA

Production Cost

(7,297 214.31) {10 448,014.97) (e~~-neous adjustment to

FDDA

Production Cost (Transfers)

10 932 168.41 !56 360 702.08) 1 161 221.40

Freight&Other Charges

(transfer) 2 417 667.54 ~udit,L~ai&Other Fees transfer 1 233 572.58

Part of Local

Purchases (double entrv) PPE Ad·ustments (19,367,053.62) 23,495,718.34

Payments to Non

(7 880.83) (3,165.54)

Reaular Suooliers

Total reconciling items:

(15 739 980.35) (10;~90 027.16) (33 991 625.71) Not subjected to EWT 32,760 317.04 (18,109,396.25)

IT-S

Additional

Undeclared

Sales

SAWT

&

LN

?2,818, 172.67.

Income on

per SLS,

Data

(9,842,128.16)

Prof/ Bro Fee

Prof/ MnQi Fee

TOTAL

Reference

2 927 540.33 3 185 020.81 71 142 986.99 1539 210.00) (639 210.00) Annex I.HCPA Annex 1.2-ICPA rz7 500.00) 127 500.00) Annex 1.3-ICPA (112 049.07) Exh P-2-E !CPA (384 866.81)

Exh P-12-Z-ICPA

Exh P-2-E-ICPA

Annex !.4-JCPA (1144 125.00)

Exh P-2-E-ICPA

(562 631.52)

Exh P-2-E-ICPA

(3 774 277 .84)

Exh P-2-E-ICPA

Exh P-2-E-to F.6- !CPA Exh P-2-E-to F.6- (17 745 229.28) !CPA 205 997.74 (44 061314.53)

Annex LS-ICPA

12 542 207 .om (124 539.46) Annex I.8-ICPA 1 033 388.74 12 266 951.42) Annex I.9·ICPA 4,128 664.72.

Annex I.IO-ICPA (11 046.37\ Annex I.ll ICPA (1 959 530.52) (2 266 951.42) (54 458 125.16) 958,009.81 918,059.39 6,684,861.83 In the Details of Discrepancies attached to the FDDA, respondent assessed petitioner for additional income for undeclared sales in the total amount ofP2,818,172.67 after comparing petitioner's Summary of List of Sales (SLS), Summary Alphalist of Withholding Tax (SAWT) and Third Party Information (TPI) from BIR Audit Information Tax Exemption

and Incentives Division

(AITEID)

(LNjRelief Data). The unreconciled discrepancy in sales reflects the amount of revenue/income which petitioner failed to declare in its AFS/ITR. This assessment was made pursuant to Sec. 32 of the 1997 NIRC, as amended, and should be subject to income tax pursuant to Sec. 27 of the same Code, to wit:~

Year 2010

SLS

SAWT

LN/Relief Data

Undeclared Sales

Coca Cola

0.00 8.000.000.00 0.00 8.000,000.00

SLS

LN/Relief Data

Client Certification

Queen City Food Chain

60.903.363.38 68.381.692.69 0.00 7.478.329.3 I

Pridez Foods Services

5~.089.089.60 60.431.845.00 54.1 01.025.95 11,936.35

Golden Frost

48.166.028.~6 53.198.004.90 48.188.464.03 22.435.57

Donutification

29.767.498.63 33.180.597.83 0.00 3.413.099.20

Golden Tribloc

61.514.535.67 64,621.017.48 61.211.251.01 0.00

Rise Shine

17.736.818.95 20.216.884.20 0.00 2.480.065.25

Chaco Hill Food Chain

11.830.398.0 I 12.622,621.55 0.00 792,223.54

Brilliant Bakers

1.639.657.57 2.074.668.83 1.630,382.80 0.00

North Area Bakeries

76.425.628.08 81.936.136.06 77.109.497.05 683,868.97

Metro Bakers Prime Realty

250.315.45 331.826.50 298.972.95 48.657.50

Consolidated Global Imports

- 69.960.59 0.00 0.00 Undeclared sales 22,930,615.69 Multiplied by GP rate 12.29% Additional taxable income on undeclared sales 2,818,172.67 Petitioner argued that in the absence of confirmation requests and third-party certifications, the additional income on undeclared sales based on TPI is unverified and not founded on facts and the resulting assessment is invalid and must be cancelled for lack of factual and legal bases. In the implementation of the BIR's RELIEF system, Revenue Memorandum Order (RMO) No. 04-2003109 states: I.

BACKGROUND

The Bureau of Internal Revenue is reengineering its work processes in order to increase revenue collections and to pursue quality audit by making use of available internal and external information resources. In order to strengthen and enhance its assessment functions, the utilization of information technology has been identified as an effective tool to improve tax administration through the development of

the Reconciliation of Listings for Enforcement (RELIEF)

System.

The RELIEF System was created to support third party information program and voluntary assessment program of the Bureau through the cross-referencing of third party information from the taxpayers' Summary Lists of Sales and Purchases prescribed to be submitted on a quarterly basis pursuant to Revenue Regulations 10o Guidelines and Procedures on the Processing of Quarterly Summary Lists of Sales and Purchases and of the Imposition of Penalties Therefor as Provided under Revenue Regulations No. 8-2002.~

Nos. 7-95, as amended by RR 13-97, RR 7-99 and RR 8-2002.

The RELIEF System shall cover all VAT taxpayers above threshold limits set by RR 8-2002 to submit Summary Lists of Sales and Purchases in magnetic form based on a prescribed electronic format. The consolidation and matching of information with other externally sourced data will detect underdeclaration of revenues/overdeclaration of cost and expenses, thus resulting to greater tax potential.IIO Corollarily, RMO No. 46-2004 111 has laid down the procedures to be followed for TPI discrepancy, as follows:

XXX

Ill.

PROCEDURES

XXX

Action on Protested LNs due to TPI discrepancy The Revenue Officer assigned to handle the Letter Notice shall:

XXX

XXX

XXX

2. Require the taxpayer to execute a Sworn Statement (Annex A) attesting to the veracity of the schedules and authenticity of the documents presented/ submitted. 3· Obtain Sworn Statements from TPI sources (Annexes "B" and "C") attesting to the veracity of the data provided.

3. 1 If the TPI source is registered in the RDO/LTDO/LTAID having jurisdiction over the subject taxpayer, the RO shall: 3 .1.1 Prepare "Confirmation Requests" (using the format prescribed in Annex "C" of RMO No. 30-2003 to be signed by the heads of the concerned RDO/LTDO/LTAID) for purposes of verifying the accuracy of the figures appearing in the DTCS[ .] IIO Emphasis and underscoring supplied. Ill Additional Supplement and Guidelines in Handling Letter Notices with Discrepancies Arising from Data Matching Processes as defined in Revenue Memorandum Order (RMO) Nos. 34-2004 and 30- 2003, as amended by RMO Nos. 42-2003 and 24-2004, which remain Unserved, have been Served but are Without Response, or are Under Protest by Taxpayers. ~

3.1.2 If the TPI source agrees with the figures in the "Confirmation Requests" (CR), secure a Sworn Statement from the TPI source to allow the RO to build a case against the taxpayer.

3.2 If the TPI source is outside the jurisdiction of the RDO/LTDO/LTAID where the taxpayer is registered, the RO shall:

3.2.1

Coordinate

with the RDO/LTDO/LTAID where the TPI source is registered, in order to:

a. Prepare a CR to be transmitted and signed by the RDO/LTDO/LTAID having jurisdiction over TPI source (CRs should be coursed thru the RDO/LTDO/LTAID where the taxpayer is registered);

b. Secure a sworn statement from the TPI source thru the RDO/LTDO/LTAID having jurisdiction over the same; and,

c. Assist the heads of the concerned RDO/LTDO/LTAID in the preparation of

Monthly Status Report on Confirmation

Requests Transmitted (Annex "D") outside the RDO/LTDO/LTAID of the TPI source and submit the same to the SCG, for monitoring purposes.112 Based on the foregoing guidelines, in assessment proceedings, if there arises TPI discrepancies, the taxpayer is required to submit schedules and reconciliations to substantiate its claim. In addition, the taxpayer is required to execute a sworn statement to attest to the veracity and authenticity of the schedules and documents presented or submitted. On the other hand, the BIR is mandated to obtain sworn statements from TPI sources to attest to the veracity of the data provided. To obtain the sworn statements, the BIR must first send confirmation requests to the third-party sources or coordinate with the Revenue District Office (RDO) having jurisdiction over the third-party sources, to course through the confirmation requests to the latter. Upon examination of the records of the case, respondent did not send confirmation requests to TPI sources in relation to 112 Emphasis and underscoring supplied.~ the undeclared sales amounting to 1'14,930,615.69 (1'22,930,615.69 - !'8,000,000.00), thus, no sworn statements were executed by the said third party sources. While it is axiomatic that all presumptions are in favor of the correctness of tax assessments, the assessment itself should not be based on presumptions no matter how logical the presumption might be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of the correctness of an assessment, being a mere presumption, cannot be made to rest on another presumption.113 For lack of factual and legal bases, respondent's findings on undeclared income amounting to 1'1,834,972.67 (!'14,930,615.69 x 12.29%) corresponding to the alleged undeclared sales oft'14,930,615.69 due to TPI matching should thus be cancelled.

Furthermore, the alleged undeclared revenue amounting to 1'8,000,000.00 pertains to a contract between petitioner and Coca Cola Bottlers Philippines, Inc. whereby the latter extended a marketing subsidy to petitioner to be utilized over the course of the seven (7)-year contract. 114 This marketing support fund was not fully utilized. Thus, petitioner recorded the fund as other income at the end of the contract in the year 20 17. Petitioner has declared the other income in its 2017 Annual Income Tax Return (AFIR)1 1S and AFS116 accordingly. Examination of petitioner's 2017 AITR and AFS revealed that petitioner declared an amount of 1'14,452, 198.00117 for the account "Other Income - Rebates". To corroborate, petitioner also presented the breakdown of Other Income for the year 2017:118 113 Collector of Internal Revenue (now Commissioner) v. Alberto D. Benipayo, G.R. No. L· 13656, 31 January 1962.

ll4 Exhibits "P-28-A-ICPA" to "P-28-E-ICPA", USB. 115 CY 2017 AITR, Exhibit "P-29-BN-ICPA", Schedule 3, Line 1, USB. 116 2017 AFS, Exhibit "P-29-AL-ICPA", Notes to FS No. 24, USB. 117 Exhibit "P-29-BN-ICPA", Schedule 3, Line 1, USB. 118 Annex K-ICPA, USB. ~

GOLDEN DONUTS, INC.

OTHER INCOME BREAKDOWN

FOR THE YEAR 2017

Claims from Suppliers

Design Fees

Development Fee

FA Charges on Damaged or Lost Assets

Insurance

Linen & Uniforms

Marketing Suuuort

Other Charges

Penalty Charges

Premium Items

Rebates

Scrap

Service Charge

Traini~ Fees

Unaccounted Variance

OI-Others

OI-Boxes

01-Condiments

OI-Overages

OI-Service Charge

Interest accretion on rental Deoosit

TOTAL

Amount

Reference

398,190.71 58.514.02 1,800,000.00 151,219.35 1,316.27 678,407.60 7,474,022.02 591,839.56 1,040,502.95 558,360.86 282,725.42 72,770.90 13,392.80 1,215,574.48 115,361.49 Exhibit "P-29-BN-ICPA", Schedule 3, 14,452,198.43 Line 1.

Exhibit "P-29-AL-ICPA", Note to FS No. 24.

273,818.80 33,545.99 87,315.86 334,421.95 443,470.00 15,624,771.03 Exhibit "P-29-BL-ICPA", Line 33. It is noted from the above table that the account "Other

Income-Others"

of i' 14,452, 198.43 includes "Marketing Support" of !'7,474,022.02. However, without details of the "Marketing Support" account, the Court cannot ascertain whether the said amount is the unutilized portion of the Marketing Support Fund in the amount of !'8,000,000.00 granted by Coca-Cola Bottlers Philippines, Inc. to the petitioner back in 2010. Thus, the assessment on additional taxable income on undeclared sales amounting to !'983,200.00 shall remmn: c_,..---

Undeclared Sales

Multiply by GP Rate

Additional Taxable Income

IT-6 -

Additional Income on

undeclared Purchases per SLP,

1604E

&

LN

Data

?184,878.92.

P8,000,000.00 12.29% p 983,200.00 In the Details of Discrepancies attached to the FDDA, respondent claimed that petitioner had additional income in the amount of P184,878.92 on undeclared purchases after matching the Summary List of Purchases (SLP), Alphabetical List of Payees, and TPI from BIR AITIED (LN/ Relief Data). Hence, the corresponding income tax due thereon was assessed pursuant to Sections 32 and 27 of the 1997 NIRC, as amended.

SLP

1604E

LN Data

Undeclared

Year 2010

Purchases

Consolidated Prime Development Corp. 0.00 0.00 1 ,319,424. 72 1,319,424.72 Undeclared purchases 1,319,424.72 Divided by COS rate 87.71%

Grossed-up

1,504,303.64 Multiplied by GP rate 12.29% Additional taxable income on undeclared purchases 184,878.92 - - Petitioner adduced that any assessment ansmg from comparison of taxpayer's data with TPI, which is not accompanied by third party certifications as to amounts per TPI under RMO No. 04-03 should be declared void. As discussed earlier, in assessment proceedings, if there arises TPI discrepancies, the BIR is mandated to obtain sworn statements from TPI sources to attest to the veracity of the data provided. To obtain the sworn statements, the BIR must first send confirmation requests to the third-party sources or coordinate with the RDO havingjurisdiction over the third-party sources, to course through the confirmation requests to the latter.

Upon examination of the records of the case, respondent did not send confirmation requests to TPI sources in relation to undeclared purchases amounting to P1,319,424.72, thus, no~..., __ sworn statements were executed by the said third party sources.

Based on the foregoing, the Court can only conclude that respondent failed to comply with its own regulations, thus resulting in an assessment arising from or based on unverified information.

For lack of factual and legal bases, respondent's findings on undeclared income amounting to P184,878.92 corresponding to the alleged undeclared purchases of P1,319,424.72 due to TPI matching should be cancelled. In view of the foregoing, Assessment Notice No. IT-116- LOA-0000 151-10-19-188 is sustained but in the reduced amount of P3,099,889.60, computed as follows:

IT-1

Disallowed Royalty & Management Fee

i'10,577.33 IT-1.1 Undeclared Royalty Income -

IT-2

Discrepancy in Ending Inventory

680,998.52

IT-3

Disallowed Charitable Contributions

1,973,327.65

IT-4

Income Payments Not Subjected to EWT

6,684,861.83

IT-5

Additional Income on Undeclared Sales

983,200.00

IT-6

Additional Income on Undeclared

Purchases

-

Total Adjustments Per Audit

10,332,965.33

Income Tax Rate

30%

Income Tax Due

3,099,889.60

Less: Income Tax Paid

-

Basic Income Tax Deficiency

P3,099,889.60

VALUE-ADDED TAX

The respondent assessed the petitioner for deficiency VAT for TY 2010 in the amount of '1"32,509,243.18. Details of assessment reflected in the FDDA,ll9 are as follows:

Assessment Details

VT-1

Undeclared Sales per Recon of SLS, SAWT and LN

Data

VT-2

Additional Sales on Undeclared Purchases per

SLP, 1604E and LN Data

VT-3

Collections

for

Nationwide

Advertising

and

Promotions Programs

VT-4

Unsupported input per SLP and SLI vs VATR

VT-5

Disallowed

due to violations m invoicing requirements

Less: Final Withholding VAT per 1600

TOTAL

VT-1 -

Undeclared Sales per

Recon of SLS, SA WT & LN Data - ?22,930,615.69.

Tax Base

VAT (12%)

22,930,615.69 2,751,673.88 1,504,303.64 180,516.44 129,323,118.54 15,518,774.22 16,950,527.75 257,533.51 (3,149,782.62) 32,509,243.18 In relation to "IT -5", respondent noted unreconciled discrepancies amounting to '1"22,930,615.69 on the matching of sales per SLS as against SAWT and BIR AITEID Data (LN/Relief) and which were assessed pursuant to Sections 32 and 106 of the Tax Code.

Petitioner, on the other hand, repleads its argument that in the absence of confirmation requests and third-party certifications, the additional income on undeclared sales based on TPI is unverified and not founded on facts and the resulting assessment is invalid and must be cancelled for lack of factual and legal bases.

As already settled in the discussion under IT - IT-5, for failure to provide substantial documents, assessment on undeclared sales amounting to '1"8,000,000.00 shall be cancelled for failure of the respondent to send confirmation requests, consequently, no sworn statements were executed from TPI sources.

VT-2 -

Additional Sales on

undeclared Purchases per SLP,

1604E

&

LN

Data

?1,504,303.64.

In relation to "IT-6", respondent noted a discrepancy on the declared purchases per SLP as against Relief Data and 1604E. As such, these purchases were grossed-up to come up with the taxable sales not declared amounting to !'1,504,303.64. This issue is assessed pursuant to Section 106 of the Tax Code as amended by RR 16-2005 and RR 4-2007. Likewise, petitioner repleads its argument that any assessment arising from comparison of taxpayer's data with TPI, which is not accompanied by third party certifications as to amounts per TPI under RMO No. 04-03 should be declared void.

As discussed earlier under IT - IT-6, assessment on undeclared purchases amounting to !'1,319,424.72 was cancelled for failure of the respondent to provide confirmation requests and sworn statements from

TPI

sources.

Consequently, the grossed-up sales on undeclared purchases amounting to J>l ,504,303.64 (!'1 ,319,424. 72-;- 87.71 %) will also be cancelled.

VT-3

Collections

for

Nationwide

Advertising

and

Promotions

Program

?129,323, 118.54.

Respondent's analysis of the Trial Balance and as disclosed in the Notes to FS reveals that petitioner collects from its various franchisees a certain amount that will be used for nationwide advertisement and promotional programs of the Dunkin Donuts Systems in the Philippines. Petitioner being a trustee of the fund and having sole discretion to facilitate the implementation of the said advertising programs, enjoys the benefit of input taxes derived from said advertising and promotional expenses. Respondent maintains that collections for these funds should be considered as gross receipts subject to VAT pursuant to Sections 105 and 108 of the 1997 NIRC, as amended.~

Franchisee's Net Sales

Rate per Franchise

Collections subject to

Agreement

VAT

Year 2010

Local Advertising Fund (LAFJ

2.351,329.428.00 0_5% 11,756,647.14

Local Promotional Fund (LPF)

2,351,329,428.00 0.5% 11,756,647.14

National Advertising Fund (NAF)

2,351,329,428.00 4.5% 105,809,824.26 Vatable collections 129,323,118.54 Petitioner argues that the following accounts are not collections of the petitioner from its franchisees but represent amounts set aside for the following expenses/purposes:

1. National Advertising Fund (NAF) - these are contributions held in trust by the company and shall be exclusively used in the implementation of the national advertising and promotion program. Petitioner attached BIR Ruling DA-137-97,120 which states that "GDI's receipt of the NAF contributions from its franchisees are merely held in trust and could realize no gain or profit as a result of its receipt but which is to be used solely for national advertising expenses and not includible in GDI's gross income; hence, GDI is not subject to income tax and consequently in the expanded withholding tax".

2. Local Advertising Fund - the credit amount represents set up of local advertising and local promotions. This is done to advertise the brand or support an existing product, new product, store anniversary or local store promotion.

3. Local Store Marketing Fund - the credit amount represents various correcting entries. Petitioner claims that these are not collections but merely set-up/adjusting entries, thus, should not be considered as collections subject to VAT. Upon review of BIR Ruling No. DA-137 -97 dated March 21, 1997, petitioner's NAF was classified as a trust fund not subject to taxes. Since the petitioner's receipt of the NAF contributions from its franchisees are merely held in trust and could realize no gain or profit as a result of its receipt but which is to be used 12o Exhibits "P-34-A-ICPA" to "P-34-B-ICPA", USB~ solely for national advertising and promotions program, and advertising-related expenses for the benefit of the said franchisees are not includible in petitioner's gross income; hence, petitioner is not subject to IT and consequently in the EWT.

It was also reiterated/ stated in petitioner's Notes to Financial Statement Nos. 11 121, 14122, and 26123 that the petitioner acts as a trustee of the fund which shall be used exclusively in the implementation of the national advertising and promotions program. It was presented as "Funds Held in Trust" account in the Statement of Financial Position. Furthermore, as shown in the Journal Entries124 for the account "NAF Head Office - National Advertising Fund", petitioner did not claim input VAT credits arising out of disbursements from National Advertising Fund. This was confirmed by the commissioned ICPA in his report125. Moreover, in the Details of Discrepancies attached to the FDDA, petitioner was assessed the amount of !'129,323, 118.54126 representing VAT on the contributions of its franchisees to the NAF. However, scrutiny of the PAN127 and FLD128 reveals that only the amount of !'12,983,466.20 was being assessed, a substantial amount compared to the FDDA. Petitioner was not given the opportunity to refute and provide supporting documents for the assessed amount in the FDDA during the PAN and FLD stages, thus a violation of petitioner's right to due process.

In Commissioner of Internal Revenue v. First Sumiden Circuits, Inc., 129 this Court ruled that an assessment not included in the PAN or FAN/FLD cannot be added to the FDDA for it is a violation of taxpayer's right to due process, to wit: "We agree with the court a quo that this assessment item is void for violating respondent's right to due process. 121 Exhibit "P-12-Y-ICPA", USB. '"Exhibit "P-12-AA-ICPA", USB. 123 Exhibit "P-12-AI-ICPA", Franchise Agreement, c; USB. 124 Exhibits "P-33-A.1-ICPA" to "P-33-2.8-ICPA", USB. '"Docket, Vol.- IV, Exhibit "P-41", !CPA Report, p. 2172. 126 Exhibit "P-2-G-ICPA", USB. 127 BIR Records, Exhibit "R-14", p. 1511. 128 Exhibit "P-3-L-ICPA", USB. 12o CTA EB No. 1831, February 12, 2020.~ The "realized forex gain not subjected to tax" only appears in the FDDA, and is not found in the PAN and FLD. Section 228 of the NIRC of 1997 provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made, otherwise, the assessment shall be void.

Since an entirely new assessment item in the form of "realized forex gain not subjected to tax" was included in the FDDA, petitioner was not given the chance to refute within the administrative level the said assessment. It should therefore be cancelled."

From the foregoing, assessment on the collections for Nationwide Advertising and Promotions Program amounting to P129,323, 118.54 will be cancelled.

VT-4 -

Unsupported

SLP

&

SLI

vs.

P16,950,527. 75.

Input per

VATR

In the Details of Discrepancy attached to the FDDA, respondent disallowed petitioner's input VAT in the amount of P16,950,527.75 due to alleged discrepancy between the input tax per SLP and SLI as against petitioner's VAT Returns:

Per Summary List of Purchases

Purchases

Input Tax

Goods

904,382,564.33

Services

395,475.49

Capital Goods

4,974,866.12

Total

909,752,905.94 109,170,348.71

Per Summary List of Importation

72,207,032.77 8,664,843.93

Total Purchases per Summary Lists

981,959,938.71 117,835,192.65

Total Purchases per V ATR

1,149,461,994.68 137,935,439.36 Unsupported purchases and input tax per PAN (167 ,502,055.97) (20,100,246.72)

Recon:

Input on payments to NRFC, not reflected in SLP 26,248,188.58 3,149,782.63 Net unsupported input tax (141,253,867.39) (16,950,464.09) .

Petitioner claims that respondent failed to consider the following reconciling items:

a. The amount of P7,764,457.30 pertain to valid various expenses erroneously encoded in petitioner's SLS but should have been in the SLP. c.-- b. The difference of P7 ,857,266.09 pertains to capital goods transaction which was declared in the SLP at the time of purchase but for purposes of VAT return, only the amortized input VAT is reported to compute the total VAT payable since for monthly transactions with P1 Million and above, they must be deferred and amortized over 5 years or estimated useful life whichever is shorter.

c. Other reconciling items. To support its allegations, petitioner submitted the following for review by the ICPA:

a. 2010 Quarterly VAT Returns (2550Q)13D;

b. 2010 Sales Transaction, Reconciliation of Listing

for Enforcementl31· '

c. 2010 Purchase Transaction, Reconciliation of Listing for Enforcement132;

d. Imports Transaction, Reconciliation of Listing for

Enforcement133· '

e. 2010 Unsupported Input VAT Reconciliation Schedulel34; and

f. 2010 Supporting Documents for Unsupported Input VAT in SLS 135.

The ICPA, upon checking the documents presented, noted that the difference pertains to various purchases not encoded in SLP and presented the following corresponding explanations, to wit:

130 Exhibits "P-7-A.1-ICPA" to "P-M.3-ICPA", USB. 13 1 Exhibits "P-24-A-ICPA" to "P-24-AA-ICPA", USB. 132 Exhibits "P-31-A-ICPA" to "P-31-MS-ICPA". USB. 133 Exhibits "P-35-A-ICPA" to "P-35-B-ICPA", USB. 134 Annex M- !CPA, USB.

VAT Base

VAT Amount

Net unsupported input tax Reconciling items:

a. Management fee not encoded in SLP

b. Advertising fee not encoded in SLP

c. Purchase of capital goods not encoded in SLP- 2010

d. Purchase of capital goods not encoded in SLP - 2009 and below

e. Invoices erroneously encoded in SLP

f. Brokera e and other char es 1141,253,867.391 52,505,491.78 12,!98,319.07 30,888,278.00 39,563,275.00 l ,682,334.50 705,953.[7 3,710,215.87

a. Management fee not encoded in SLP - 1'52,505,491. 78.

(16,950,464.09) 6,300,659.01 I ,463,798.29 3,706,591.86 4,747,590.39 2Dl ,880.14 84,718.38 (445,226.021 ICPA noted that this pertains to payments to Antares Management, Inc. which were erroneously not included in the SLP. This is duly supported by the technical service agreement as attached in 2.3.1 and marked as Exhibits "P-11-A-ICPA" to "P- 11-H-ICPA" and further supported with remittance documents 136.

Upon review and study of the documents presented, the Court cannot give evidentiary value

to the Technical and Assistance Agreement137

between Antares Management Inc. and petitioner, as well as the journal entries138 because they are not valid supporting documents for input taxes, thus, management fee amounting to 1'52,505,491.78 and its corresponding input tax of 1'6,300,659.01 remains unsupported.

b. Advertising fee not encoded in SLP- 1'12,198,319.07.

The ICPA confirmed that petitioner was not able to present a schedule nor supporting documents to enable the Court to validate the advertising fee. Without supporting documents, assessment on

VAT

on

Advertising

fee amounting to 1'1,463,798.29 will remain.

c. Purchase of capital goods not encoded in SLP (2010)- P30,888,278.00.

ICPA finds that petitioner was not able to properly declare its purchases of capital goods in its VAT returns for the years 2007 to 2010. Thus, an amended VAT return for the 4th quarter of 2010 was filed to recognize the input VAT from these purchases which is marked as Exhibit "P-7-M.l- ICPA" to "P-7-M.3-ICPA". The total amount of the additional declaration for capital goods amounted to !"70,451,553.00 which includes purchases from 2010.

d. Purchase of capital goods not encoded in SLP (2009) - !"39,563,275.00.

ICPA finds that the capital goods purchased in the previous year (CY 2009) are also included in GDI's reconciliation. However, the Court was not able to establish if these purchases were actually not included in the previous year's declarations. This pertains to letters c and d above. In its amended quarterly VAT return for CY 2010139, petitioner declared purchases of capital goods exceeding one million amounting to P70,451,553.00140 with corresponding input VAT of P8,454, 186.36141 and the input tax on Purchases of Capital Goods exceeding one Million

Deferred

for the

Succeeding

Period

of !"7,053,857.36. The amount of Pl,400,329.00 is the amortization of Capital Goods for CY 2010.

Petitioner

alleged that the capital goods amounting to P70,451,553.00142 are purchases for the years 2009 (P39 ,563,253.25)143 and 2010 (P30,888,265.50)144 as indicated in its summary of purchased capital goods.

139 Exhibits "P-7-M.l-ICPA" to "P-7-M.3-ICPA", USB. !40 Exhibit "P-7-M.2-ICPA", Line 21C, USB. 141 Exhibit "P-7-M.2-ICPA", Line 21D, USB. !42 Difference of 1'34.25.

!43 Annex M.4-ICPA, USB.

144 Annex M.2-ICPA, USB. ~

However, upon scrutiny of the documents presented such as summary of capital goods purchased for years 2010145 and 2009146 and its corresponding invoices and official receipts147, only input VAT amounting to P76,568.67 were supported with proper documents. Consequently, only the input tax of P76,568.67 shall be spread evenly over a period of sixty (60) months or the actual number of months comprising the estimated useful life of a capital good, pursuant to Sec. 4.110-3 of RR No. 16-05. However, petitioner failed to provide a schedule of amortization of capital goods, thus, the amount of P76,568.67 should also be denied:

SUPPLIER

MICROPHASE CORPORATION

SLID INNOVATIVE INFRASTRUCTURE,

INCORPORATED

MICROPHASE CORPORATION

NEW DATCHE PHILIPPINES TRADERS CORPORATION

SLID INNOVATIVE INFRASTRUCTURE,

INCORPORATED

MICROPHASE CORPORATION

SLID INNOVATIVE INFRASTRUCTURE,

INCORPORATED

American Technologies

MECHANICAL HANDLING EQUIPMENT CO., INC.

MICRO IMAGE INTERNATIONAL

DEXTERTON CORPORATION

MICRO IMAGE INTERNATIONAL

MICRO IMAGE INTERNATIONAL

MICRO IMAGE INTERNATIONAL

MICRO IMAGE INTERNATIONAL

MICROPHASE CORPORATION

QUARTZ 8USINES

QUARTZ 8USINES

QUARTZ 8USINES

Scan Livingston Graphics, Inc.

TOTAL

VAT

REFERRENCE

P508.93 Exhibit P-36-B. 14-ICPA I 15.72 Exhibit P-36-8.15-ICPA 508.93 Exhibit P-36-8.19-ICPA 3,208.93 Exhibit P-36-8.20-ICPA 1,904.46 Exhibit P-36-8.21-ICPA 10,500.00 Exhibit P-36-8.32-ICPA 535.72 Exh1bit P-36-8.33-ICPA 1,607.14 Exhibit P-36-8.52-ICPA 2,320.27 Exhibit P-36-8.54-ICPA 3,642.86 Exhibit P-36-8.66-ICPA 717.86 Exhibit P-36-8.76-ICPA 4,861.07 Exhibit P-36-8.84-ICPA 6,428.57 Exhibit P-36-8.90-ICPA 13,125.00 Exhibit P-36-8.94-ICPA 17,314.29 Exhibit P-36-8.95-ICPA 6,578.57 Exhibit P-36-8.96-ICPA 1,232.14 Exhibit P-36-8.104-ICPA 525.00 Exhibit P-36-8.109-ICPA 750.00 Exhibit P-36-8.121-ICPA 76,385.46 183.21 Exhibit P-36-D.3-ICPA P76,568.67 In this regard, assessment on input VAT on purchases of capital goods for CY 2009 and 2010 H5 Annex M.2-ICPA, USB.

146 Annex M.4-ICPA, USB.

is upheld, but only up to the amount of amortization declared in its 4th quarter CY 20 10 of P1,400,329.00.

e. Invoices erroneously encoded in SLP- P1,682,334.50.

ICPA

noted that other mvmces were also erroneously encoded in SLP.

Evaluation and scrutiny of the schedulesl48 and the supporting invoices and official receiptsl49 reveals that the invoices erroneously encoded in the SLP amounting to P1,682,334.50 have a corresponding VAT amount of P201,880.14. However, only input VAT amounting to P5,731.86 was supported with proper documents while the amount of Pl96,148.28 were in violation of accounting and invoicing requirements, thus, the assessment will remain but only as to the amount of P196, 148.28, broken down as follows:

SUPPLIER NAME

VAT

REFERENCE

REASON

Exhibit P-36-C.1-

Without

JOHANS FABR1CON CORPORATION

P1,440.00 !CPA

TIN

Exhibit P-36-C.3-

Without

JOHANS FABRICON CORPORATION

835.71 !CPA

TIN

Exhibit P-36-C.4-

Without

JOHANS FABRJCON CORPORATION

1,585.71 !CPA

TIN

Exhibit P-36-C.S-

Without

wall cro\vn design center 428.57 !CPA

TIN

Exhib1t P-36-C.6-

Without

COMMUNITY COMMERCIAL

338.13 !CPA

TIN

Exhibit P-36-C. 7-

Without

COMMUNITY COMMERCIAL

575.88 !CPA

TIN

Exhibit P-36-C.S-

Without

COMMUNITY COMMERCIAL

324.64 !CPA

TIN

Exhibit P-36-C.9-

Without

COMMUNITY COMMERCIAL

236.20 !CPA

TIN

Exhibit P-36-C.lO-

Without

DQA DESIGN AND PLANNiNG, INC.

10,392.00 !CPA

TIN

Exhibit P 36 C.ll-

Without

DQA DESIGN AND PLANNING, INC.

10,392.00 !CPA

TIN

Exhibit P-36-C.l3-

Without

DONUTS ADS INC.

345.26 !CPA

TIN

Exhibit P-36-C.l4

Without

WORLDINNOX ENTERPRISE

2,410.71 !CPA

TIN

Exhibit P-36-C.15-

Without

DONUTS ADS INC.

230.16 !CPA

TIN

Exhibit P-36-C.16-

Without

BROSS FURNITEK CONTRACTORS

2,121.42 !CPA

TIN

Exhibit P 36-C.l7-

Without

DONUTS ADS INC.

19.42 !CPA

TIN

Exhibit P-36-C.18-

Without

ELEKSIS MARKETING CORPORATION

7,285.71 !CPA

TIN

Exhibit P-36-C.19-

Without

BROSS FURNITEK CONTRACTORS

685.68 !CPA

TIN

148 Annex M-ICPA; Annex M.3-ICPA. USB.

BROSS FURNITEK CONTRACTORS

BROSS FURNITEK CONTRACTORS

wall crown design center DONUTS ADS INC.

DONUTS ADS INC.

AXIS COMPUTER, INC TECHNOFAB STEEL CO.

DONUTS ADS INC.

DONUTS ADS INC.

COMMUNITY COMMERCIAL

COMMUNITY COMMERCIAL

SPECIAL OFFICE CONCEPT

JOHANS FABRICON CORPORATION

JOHANS FABR!CON CORPORATION JOHANS FABR!CON CORPORATION

JOHANS FABRICON CORPORATION

JOHANS FABRICON CORPORATION

JOHANS FABRICON CORPORATION

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

RUEY SHING REFRIGERATION EQUIPMENT PHILIPPINES, CORP.

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

RUEY SHING REFRIGERATION EQUIPMENT PHILIPPINES, CORP.

DONUTS ADS INC.

DONUTS ADS INC.

DONUTS ADS INC.

TECHNOLUX EQUIPMENT AND SUPPLY CORPORATION

DQA DESIGN AND PLANNING, INC.

DONUTS ADS INC.

DONUTS ADS INC.

DONUT5 AD5 INC.

DONUTS ADS INC.

1,885.71 5,785.68 1.514.73 31.82 386.29 18,214.29 50,292.13 231.82 I 1.57 300.00 501.42 304.38 62 I .43 2,455.71 2,571.43 126.43 I ,026.00 14,244.64 46.29 190.92 17.36 637.81 29.15 13.50 39.46 6,868.12 24.81 23.14 78.89 9,689.49 59.17 59.17 26.04 298.93 5,196.00 13.43 43.39 172.62 230.17 Exhibit P-36-C.20-

Without

!CPA

TIN

Exhibit P-36-C.21-

Without

!CPA

TIN

Exhibit P-36-C.22-

Without

!CPA

TIN

Exhibit P-36-C.23-

Without

!CPA

TIN

Exhibit P-36-C.24-

Without

!CPA

TIN

Exhibit P-36-C.25-

Without

!CPA

TIN

Exhibit P-36-C.26-

Without

!CPA

TIN

Exhibit P-36-C.27-

Without

!CPA

TIN

Exhibit P-36-C.28-

Without

!CPA

TIN

Exhibit P 36 C.29-

Without

!CPA

TIN

Exhibit P-36-C.30-

Without

!CPA

TIN

Exhibit P-36-C.31-

Without

!CPA

TIN

Exhibit P-36-C.32-

Without

!CPA

TIN

Exhibit P-36-C.33-

Without

!CPA

TIN

Exhibit P·36-C.34-

Without

!CPA

TIN

Exhibit P-36-C.35-

Without

!CPA

TIN

Exhibit P-36-C.36-

Without

!CPA

TIN

Exhibit P-36-C.37-

Without

!CPA

TIN

Exhibit P-36-C.38-

Without

!CPA

TIN

Exhibit P-36-C.39-

Without

!CPA

TIN

Exhibit P·36-C.40-

Without

!CPA

TIN

Exhibit P-36-C.41-

Without

!CPA

TIN

Exhibit P-36-C.42-

Without

!CPA

TIN

Exhibit P-36-C.43-

Without

!CPA

TIN

Exhibit P 36 C.44-

Without

!CPA

TIN

Exhibit P-36-C.45-

Without

!CPA

TIN

Exhibit P-36-C.46-

Without

!CPA

TIN

Exhibit P-36-C.4 7-

Without

!CPA

TIN

Exhibit P-36-C.48-

Without

!CPA

TIN

Exhibit P-36-C.49-

Without

!CPA

TIN

Exhibit P-36-C.SO-

Without

!CPA

TIN

Exhibit P-36-C.Sl-

Without

!CPA

TIN

Exhibit P-36-C.S2-

Without

!CPA

TIN

Exhibit P-36-C.53-

Without

!CPA

TIN

Exhibit P-36·C.54-

Without

!CPA

TIN

Exhibit P·36-C.55-

Without

!CPA

TIN

Exhibit P-36-C.56-

Without

!CPA

TIN

Exhibit P-36-C.57

Without

ICP/1

TIN

Exh1bit P-36-C.58-

Without

!CPA

TIN

Exhibit P-36-C.59-

Without

SAN PABLO SIN!NG-LAYA CORPORATION 4,200.00 !CPA

TIN

Exhibit P-36-C.60·

Without

DONUTS ADS INC.

19.73 !CPA

TIN

Exhibit P-36-C.61-

Without

DONUTS ADS INC.

230.18 !CPA

TIN

Exhibit P-36-C.62-

Without

DONUTS ADS INC.

230.18 !CPA

TIN

Exhibit P-36-C.63-

Without

PRECIOUS VENTURE

554.46 !CPA

TIN

Exhibit P-36-C.65-

Without

AGB MACBUILD CORP.

3,750.00 !CPA

TIN

Exhibit P-36-C.67-

Without

POST MASTER DEPOT, INC.

713.57 !CPA

TIN

Exhibit P-36-C.68-

Without

BROSS FURN!TEK CONTRACTORS 1,542.86 !CPA

TIN

Exhibit P-36-C.69-

Without

R.D.A. PORTABLE TOILET RENTAL SERVICE 875.16 !CPA

TIN

Exhibit P-36-C.70-

Without

SOMERVILLE REFRIGIRATION INC.

2,604.00 !CPA

TIN

Exhibit P-36-C. 71-

Without

BROSS FURNITEK CONTRACTORS

4,628.56

ICPA

TIN

Unsupported

TOTAL

12,889.00 ri96,148.28

f. Brokerage and other charges - P705, 953.17. ICPA noted that charges for insurance and freight were entered as part of importation for VAT return. It should be part of local purchases (service) but entered in SLP partly in goods. To refute respondent's assessment, petitioner submitted origina11so and amended 151 quarterly VAT Returns for the 4th quarter of CY 20 10 as well as schedule of brokerage and other fees.1s2 With the submission of the original and amended quarterly VAT Returns for the 4th quarter of CY 2010 only, the Court cannot determine the veracity of petitioner's allegation, thus assessment on insurance and freight amounting to P705, 953.17 and its corresponding VAT amount of P84,714.38 shall remain.

From the foregoing, respondent's assessment on the discrepancy between the input tax per SLP and SLI as against petitioner's VAT Returns shall remain but in the reduced amount of P9,890,874.98 broken down as follows: 1so Exhibits "P-7-L.l-ICPA" to "P-7-L.3-ICPA, USB. IS! Exhibits "P-7-M.l-ICPA" to "P-7. 1s2 Annex M-ICPA; Annex M.5-ICPA, USB.~

Management Fee

Advertising Fee

Amortization of Capital Goods

For 2009 & 2010 Invoices Erroneously encoded in SLP

Brokerages and Other Charges

Unsupported Identified by ICPA

TOTAL

VT-5

Disallowed Due to

Violations

in

Invoicing

requirements- ?257,533.51.

r 6,300,659.01 1,463,798.29 1,400,329.00 196,148.28 84,714.38 445,226.02 r 9,890,874.98 Respondent's scrutiny of the supplier's invoices disclosed that there were purchases invoices/receipts which failed to comply with the invoicing requirements as prescribed under Section 113 of the 1997 NIRC, as amended, in relation to Section 4-113-1(8) of the RR No.16-2005, as amended:

Supplier's Name

Disallowed

Violation

Input VAT

DONUT 168 ADS INC

23.14

Without TIN

FLASH MEDIA CORP

1,285.20

Without TIN

GRAND POTENTIAL PRESS

14,035.71 Input VAT not segregated/Without TIN

HAMBURG TRDG CORP

4,955.36

Without TIN

HAW AllAN COFFEE CO

81,401.79

Without TIN

INTEGRATED MFG SERVICES PROVIDER

8,773.78

Without TIN

KUDOS EVENTS MANAGEMENT !NT 12,321.43

Without TIN

MALABON LONG LIFE TRDG CORP

32,268.00

Without TIN

MURPHY DIST!BUTIONS 340.39

Without TIN

NORTHERN GAS COPR

6,152.68

Without TIN

PAPERTECH

14,595.78

Without TIN

PINECREST SALES AND MKTG CORP

626.36

Without TIN

PLASTIMER INDUSTRIAL CORP

9,514.29

Without TIN

PRINT EASY ENTERPRISE

2,597.25

Without TIN

ROBTON INDUSTRIES INC

17,541.43

Without TIN

SCAN LIVINGSTON GRAPHICS

5,035.50

Without TIN

SHAQ PAPER AND PLASTIC CO LTD

3,780.00

Without TIN

TREV!SO CORP 1,800.00

Without TIN

UNICOMM INGREDIENT

437.14

Without TIN

UNITED ASIA JNTL PLASTIC CORP

33,503.57

Without TIN

VARIDEL CORP

6,544.73 Input VAT not segregated/Without TIN

TOTAL DISALLOWED INPUT TAX

257,533.51 The respondent made a wholesale disallowance of input VAT corresponding to purchase invoices/ receipts allegedly on the ground that the invoicing requirements were not complied with.

Petitioner argues that the wholesale disallowance is unwarranted for being confiscatory in nature. Petitioner further argues that the respondent cannot claim that the invoicing requirements were not met when respondent failed to examme each and every VAT invoice~

The Court considered the documents submitted by the petitioner to the respondent. Upon further scrutiny of the BIR Records, invoices, and 0Rs153 the Court agrees with all the findings of the respondent that input VAT amounting to P257 ,533.51 will be disallowed in violation of the invoicing requirements.

In view of the foregoing, Assessment Notice No. VT-116- LOA-0000151-10-19-189 is sustained but in the reduced amount of P7 ,958,625.86, computed as follows:

VA Table Sales per VAT Return

p 1 ,328, 738,441.67

Add: Findings per Investigation

VT-1

Undeclared Sales

8,000,000.00

VT-2 Additional Sales on Undeclared Purchases

-

VT-3 Collections for NAF

- 8,000,000.00

VATable Sales per Audit

1,336,738,441.67

VAT Rate

12%

Output Tax Due per Audit

160,408,613.00

Unutilized Input Tax for the Year

129,724,365.49

Less: Audit Findings

VT-4 Unsupported input per SLP &SLI vs. VATR 9,890,874.98 VT-5 Disallowed due to Violation

in Invoicing Requirements

257,533.51 10,148,408.49

Net Allowable Input Tax per Audit

1!9,575,957.00

Net VAT Due per Audit

40,832,656.00

Less: VAT Credits/Payments

VAT Remittance per 2550M/Q

29,724,24 7.51

Final VAT Withholding per 1600

3,149,782.63 32,874,030.14

Basic VAT Deficiency

I'

7,958,625.86

FINAL TAX

The respondent assessed petitioner for the entries in the dividends payable set-up in the amounts of P316,361.00 and P4,897,939.00, or in the aggregate amount of P5,214,300.00. These income payments are subject to final tax that allegedly

were not properly withheld and remitted, hence, assessed in the amount of P522,228.26 pursuant to Section 57(A) of the 1997 NIRC, as amended, and Section 2.57.1 of RR No. 2-98, as amended:

Franchise Fee, per TB Dividends Payable, credits per TB

Reconciliation

l. Dividends for domestic corp.

2. Cancelled check

3. To reclass double entry

4. To correct set-up of dividend payable

5. To adjust dividends payable to RE

6. To reverse entry made in Sept. Income payments subject to 10% final tax

Multiplied by

Final tax per audit Less: Final tax paid per 1601F Final tax still due - basic (2,528,028.00) (316,361.00) (1,236,418.20) (316,361.00) (4,897,939.00) (1,303,575.00) 13,284,954.20 (2,528,028.00) (316,361.00) (1,236,418.20) II ,303,575.00) 26,256,171.00 7,900,572.00 34,156,743.00 10% 3,415,674.30 2,893,446.04 522,228.26 Petitioner has provided the composition of its final tax due wherein the difference was located in the recorded credits in the Dividends Payable account. Allegedly, respondent did not consider that some of the credits in the account are adjustments made to correct the dividend payable balance m the previous years.

To refute respondent's assessment, petitioner presented

Final Withholding Tax

Returns; 154

General

Information

Sheet; 155 and 2010 AFS. 156 Upon scrutiny of the BIR Form No. 1601-FIS7, petitioner indeed paid a total ofP2,893,446.04 Final Tax for the year 2010. Study of petitioner's AFS 158 reveals that for the years 2009 and 2010, petitioner declared Dividends of P5,214,300.00 as well as in its 2010 Trial Balance. 159 Evidently, the final tax paid by the petitioner on dividends payable is proper except for the amount of P798.26 which is unaccounted, to wit:

Franchise Fee, per TB Dividends Payable, credits per TB

Reconciliation

1. Dividends for domestic corp.

2. Cancelled check

3. To reclass double entry

4. To correct set-up of dividend payable

5. To adjust dividends payable toRE

6. To reverse entry made in Sept. Income payments subject to 10% final tax

Multiplied by

Final tax per audit Less: Final tax paid per 1601F Final tax still due - basic (2,528,028.00) (316,361.00) (1,236,418.20) (316,361.00) (4,897,939.00) (1 ,303,575.00)

EXPANDED WITHHOLDING TAX

13,284,954.20 (2,528,028.00) (316,361.00) (1 ,236,418.20) (316,361.00) (4,897,939.00) (1 ,303,575.00) P26,256,17l.OO 2,686,272.00 28,942,443.00 10% 2,894,244.30 2,893,446.04 P798.26 Income payments recorded under the Trial Balance (TB)/Financial Statements (FS) were matched with the income payments subjected to EWT per Alphalist of Payees. According to respondent, this procedure revealed that petitioner failed to subject all income payments declared on the TB/FS to EWT. Therefore, as required under the provisions of Sec. 57 of the NIRC and Sec. 2.57 .2 of RR 2-1998, as amended by RR 17-2003 and RR 30-2003, deficiency EWT amounting to r2,310,597.50 was assessed with details as follows:

Income

Discrepancy per

Rate

EWT

Payment

FDDA

Goods

f'48,500,297.39 1% r485,002. 97

Services

(7,619,375.07) 2% (152,387.50)

Rentals

24,149,497.55 5% 1,207,474.88

Brokerage Fee

2,927,540.33 10% 292,754.03

Management

3,185,020.81 15% 477,753.12

Fee

TOTAL

r71, 142,981.01 P2,310,597.50 Petitioner repleads its arguments found in the discussion under IT-4 which the Court finds tenable. As already settled in the discussion in IT-4, petitioner has net income payments that were not subjected to withholding tax amounting to r6,684,861.83. However, upon computation of its corresponding EWT, petitioner has a tax effect of -r293,181.27,~.,-- thus, petitioner should not be held responsible for withholding of taxes on the following income payments, to wit:

Income Payment

Discrepancy

Rate

Tax Effect

Goods

P32,760,317.04 1% P327 ,603.1 7

Services

(18,109,396.25) 2% (362,187.93)

Rentals

(9,842, 128.16) 5% (492, 106.41)

Professional

Fee I Brokerage

958,009.81 10% 95,800.98

Professional Fee I Mngt

Fee

918,059.39 15% 137,708.91 -

TOTAL

P6,684,861.83 P293,181.27

DOCUMENTARY STAMP TAX

In the Details of Discrepancies attached to the FDDA, respondent assessed petitioner for deficiency DST in the amount ofP49, 161.11 on debt instruments and lease contracts pursuant to Sections 179 and 194 of the 1997 NIRC, as amended:

Source

Particulars

Amount

DST

Obligations under Finance

AFS Note 25

Lease

Current portion 2,020,470.00 10,102.35 Non-Current portion 814,554.00 4,072.77

PerTB

Lease Contracts:

PerTB

Prepaid Rent

3,268.21 0. 75

PerTB

Advanced rental 357,791.84

PerTB

Deposits Rental

7,330,854.42

PerTB

Prepaid Rent- Non Current

618,349.70

AFS Note 17

Rent Expenses

31,068,770.00

AFS Note 18

Rent Expenses

4,997,391.00 47,643.37

DST Due:

61,818.49 Less: DST payments 12,657.38 DST still due 49,161.11

Petitioner argues that the 1997 NIRC, as amended, does not expressly impose a DST on finance leases. Revenue Memorandum Circular (RMC) No. 46-2014 cited by the respondent was issued only in 20 14 and cannot be given retroactive application to TY 2010. In the case of DST on lease contracts which is due at the time the contract of lease is executed, petitioner asserts that there is no legal and factual basis to support the method employed by simply imposing the rate of DST on the amount of prepaid rent, rent deposits and rent expense appearing in the TB. Petitioner also states that DST paid on debt instruments and lease contracts executed in TY 2010 was fully accounted for.

In response, respondent stated that RMC No. 46-2014 is a clarificatory issuance on the very nature of finance lease being an obligation. The imposition of DST on all debt instruments has long been covered under Section 179 of the 1997 NIRC, as amended. Hence, respondent stands firm in his position that DST on financial lease is assessable under Section 179. DST is imposed on rental expenses on the premise that there is an agreed contract of lease executed by the petitioner and the lessor. There being no detailed reconciliation of an existing and new contract oflease, respondent has no recourse but to impose DST on rental expenses claimed by petitioner. The ICPA stated in his report that respondent was not able to consider payments made by GDI's lessor. Since DST payments could be shouldered by either of the parties, it is not appropriate to subject all of the lease to deficiency. Furthermore, it is not conclusive that all rent accounts are subject to DST since it is imposed upon the execution of the lease contracts. The method used by the BIR to recompute is assuming that the Company executes contract annually and at the beginning of the year which is quite unusual. However, petitioner only submitted schedule of DST paymentslso, statement of account, and official receipts 161 as proof of DST payments amounting to f>14,870.34. Without the related Lease Contract and the detailed reconciliation of an existing and new contract, the Court cannot verify the accuracy 16o Annex 0-ICPA, USB.

of the DST being paid and as to whether the DST will be shouldered by the lessor.

On the other hand, assessment on the non-current portion of the lease contracts amounting to P814,554.00 and P618,349. 70 will be cancelled on the basis that DST was already collected on the original issue of the debt instrument. Hence, DST assessment is upheld but in the reduced amount of P42,256.03, computed as follows:

Source

Particulars

Amount

DST

AFS Note 25

Obligation Under Finance Lease:

Current Portion

2,020,470.00 1'10,102.35

Non-Current Portion

Lease Contract:

PerTB

Prepaid Rent

3,268,210.75

PerTB

Advance Rental

357,791.84

PerTB

Deposit-Rentals

7,330,854.42

Prepaid Rent·

PerTB

NonCurrent

AFS Note 17

Rent Expense

31,068,770.00

AFS Note 18

Rent Expense

4,997,391.00 47,023,018.01 47,024.02

DST Due

57,126.37

DST Payment

14,870.34

DST Still Due

1'42,256.03

WHEREFORE, in light of the foregoing considerations, the present Petition for Review is PARTIALLY GRANTED. The assessments issued by respondent against petitioner covering deficiency IT, VAT, FT, and DST for CY 2010 are to be UPHELD IN PART, while the assessment on EWT shall be CANCELLED. Accordingly, petitioner is ORDERED TO PAY respondent the aggregate amount of

FORTY-ONE

MILLION

EIGHT

HUNDRED

THIRTY-FIVE

THOUSAND

TWO

HUNDRED

THIRTEEN AND 17/100 (P41,835,213.17), inclusive of 25% surcharge, 20% deficiency interest and 20% delinquency interest imposed under Sections 248(A)(3), 249(B) and (C)(3) of the NIRC of 1997, as amended, computed until December 31, 2017, as follows: o----

IT

Basic Tax Due

Add: 25% Surcharge

20% Deficiency Interest

Apr. 16, 2011 to Mar. 31, 2015162 {P3,099,889.60 x 20% x 1446 / 3685,

VAT

FT DST TOTAL

P798.26 P 42,256.03 P11,101,569.75 P3,099,889.60 P7,958,625.86 L 774,972.40 2,456,131.70

20% Deficiency Interest

Jan, 26, 2011 to Mar. 31, 2015 {P7,958,625.86 x 20% x 1526 / 365,

20% Deficiency Interest

Jan. 16, 2011 to Mar. 31, 2015 (P798.26 x 20% x 1536/ 365,

20% Deficiency Interest

Jan. 16, 2011 to Mar, 31, 2015 {(P 42,256.03 x 20% x 1536/3635, Total Amount Due, Mar. 31, 2015

20% Deficiency Interest

Apr. O1, 2015 to Dee. 31, 2017 P6,330,993.70 1,989,656.47 6,654,719.49 P16,603,001.81 2,775,392.44 199.57 10,564.01 2,456,131.70 6,654,719.49 671.85 671.85 35,564.53 35,564.53 P1,669.68 P88,384.56 | P23,024,049.76 (P3,099,889.60 x 20% x 1006 /365 (P7, 958,625.86 x 20% x 1006 / 365, P798,26 x 20% x 1006/365) 1,708,761.06 a 1,708,761.06 4,387 ,056.23 || gss7,056.23 (P42,256.03 x 20% x 1006/365)

20% Delinquency Interest

Apr. 01, 2015 to Dec. 31, 2017 (P6,483, 864.97 x 20% x 1006 / 365, 3,489,851.87 (P16,603,001.81 x 20% x 1006 /365 IP 1,669.68x 20% x 1006/ 365) | 23,292.91 23,292.91

L

3,489,851.87 9,152,120.45 (P88,384,.56 x 20% x 1006/365 Total Amount Due, Dec. 31, 2017 P11,529,606.64 920,38 __ | _9,152,120.45 920.38 48,720.48 48,720.48 P30,142,178.49 P3,030.08 | P160,397.96 | P41,835,213.17 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of twelve percent (12%) per annum on the total unpaid deficiency taxes due as of March 31, 2015, in the amount of P23,024,049.76 or equivalent to P7 ,569.55163 per day, computed from January 1, 2018 until full payment thereof pursuant to Section 249© of the NIRC of 1997, as amended by RA No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN) and as implemented by RR No. 21-2018.

162 BIR Records, Exhibit “R-11”, Due Date per FLD and Assessment Notices, pp. 1663- 1684.

163 P23,024,049.76 x 12% / 365. one

WE CONCUR:

(on leave) ~~7~ CATHERINE T. MANAHAN

Associate Justice

MARIAN IVY F. REYES-FAJARDO

Associate Justice

HENRY f[J;_NGELES

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. c~·r-~ CATHERINE T. MANAHAN

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

Presiding Justice