Goodyear Steel Pipe Corporation vs. Commissioner of Internal Revenue

DECISION

REYES-FAJARDO, J.:

This Petition for Review, 1 filed by Goodyear Steel Pipe Corporation on July 1, 2021, assails the Final Decision on Disputed Assessment (FDDA) dated May 24, 2021, issued by respondent Commissioner of Internal Revenue, which found petitioner liable for deficiency income tax (IT), withholding tax on compensation (WTC), expanded withholding tax (EWT), and documentary stamp tax (DST) in the amount of P90,704,310.14,2 inclusive of surcharges, interest, and penalties for taxable year (TY) 2014.

PARTIES

Petitioner Goodyear Steel Pipe Corporation is a domestic corporation duly organized under Philippine law, with principal office address at 128 Quirino Highway, Baesa, Quezon City.3 2 3 Docket- Vol. I, pp. 8 to 46.

Prayer, Petition for Review, Docket- Vol. I, p. 40. Total deficiency taxes per Final Decision on Disputed Assessment is actually P90,704,810.14 (sum of P85,557,855.88, P436,007.47, ~4,099,989.25, ~494,957.54, and P116,000.00); Refer to Exhibit " P-10," Docket - Vol. IV, pp. 1749 to 1756; Exhibit "R-11," BIR Records (Exhibit "R-12"), pp. 763 to 778. Par. 1, Facts Stipulated by Both Parties, Joint Stipulation of Facts and Issues (JSFI), Docket -Vol. 3, p. 1378; Exhibit "P-1," Docket- Vol. IV, pp. 1670 to 1680.

Respondent is the duly appointed Commissioner of Internal Revenue empowered to perform the duties of his office, including, among others, acting on disputed assessments as provided by law.4

FACTS

On January 8, 2016, respondent issued Letter of Authority

(LOA)

No.

AUDM50/005014/2015/SN:

eLA201200042232, authorizing Revenue Officers Riza Budano, Tito Monforte, and Group Supervisor (GS) Allan Maniego of Revenue District Office (RDO) No. 116 - Regular L T Audit Division I of the Bureau of Internal Revenue (BIR), to examine petitioner's books of accounts and other accounting records for all internal revenue taxes except value- added tax (VAT) of petitioner for the period from January 1, 2014 to December 31, 2014.5 During the course of the examination, petitioner executed five

(5) Waivers of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code, 6 with the following details:

Date of Acceptance

Expiry Date of

Date of Execution

Extension

1st Waiver7 Feb.23,2017 Mar. 6, 2017 Dec. 31, 2017 2nd Waivers Dec. 15, 2017 Dec. 21, 2017 Dec. 31, 2018 3rd Waiver9 Nov. 16, 2018 Nov. 22, 2018 June 30, 2019 4th Waiverlo May 20,2019 (undated) Dec. 31, 2019 5th Waiverll Dec. 27, 2019 Dec. 27, 2019 Feb.29,2020 On March 18, 2019, the BIR issued a Notice for Informal Conference .12 4 s 6 7 8 9 10 11 Par. 2, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1378. Par. 3, Facts Stipulated by Both Parties, JSFI, Docket - Vol. 3, p. 1378; Exhibit "P-3," Docket- Vol. IV, p. 1721; Exhibit "R-2," BIR Records (Exhibit "R-12"), p. 182. Pars. 5 to 9, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1379. Exhibit "R-3," BIR Records (Exhibit "R-12"), p. 174. Exhibit "R-4," BIR Records (Exhibit "R-12"), p. 179. Exhibit "P-4," Docket- Vol. IV, p. 1722; Exhibit "R-5," BIR Records (Exhibit "R-12"), p. 180.

Exhibit "R-6," BIR Records (Exhibit "R-12"), p. 321. Exhibit "P-5," Docket- Vol. IV, p. 1723; Exhibit "R-7," BIR Records (Exhibit "R-12"), p. 607.

Subsequently, respondent issued an undated Preliminary Assessment Notice (PAN).13 On February 29, 2020, respondent issued a Formal Letter of Demand (FLD) and Final Assessment Notices (FANs).14 On June 15, 2020, petitioner filed a protest letter dated June 1, 2020,15 requesting a reinvestigation of the deficiency assessment and attaching thereto transmittals of documents submitted to the examiner.

On July 8, 2020, respondent issued another LOA No. LOA-116- 2020-00000169/SN: eLA201200049409,16 authorizing Revenue Officer (RO) Anna Marie Manlutac, and GS Efren Clemente of L T Regular Audit Division 1 of the BIR, to examine petitioner's books of accounts and other accounting records for all internal revenue taxes including documentary stamp tax, and other taxes (miscellaneous tax), covering the period from January 1, 2014 to December 31, 2014. On June 1, 2021,17 petitioner received the FDDA dated May 24, 2021.18 On July 1, 2021, petitioner filed its Petition for Review, docketed as CTA Case No. 10568.19 The case was initially raffled to the Court's First Division.

On October 19, 2021, petitioner filed through electronic mail an Urgent Motion (for Suspension of Collection of Tax).20 12 13 14 15 16 17 18 19 Exhibit "R-8," BIR Records (Exhibit "R-12"), p. 317. Par. 10, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1379; Exhibit "P-6," Docket- Vol. IV, pp. 1724 to 1733; Exhibit "R-9," BIR Records (Exhibit "R-12"), pp. 392 to 396.

Par. 11, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1379; Exhibit "P-7," Docket- Vol. IV, pp. 1734 to 1747; Exhibit "R-10," BIR Records (Exhibit "R-12"), pp. 673 to 682.

Exhibit "P-8," BIR Records (Exhibit "R-12"), pp. 697 to 698. Par. 4, Facts Stipulated by Both Parties, JSFI, Docket - Vol. 3, p. 1378; Exhibit "P-9," Docket- Vol. IV, p. 1748; Exhibit "R-1," BIR Records (Exhibit "R-12"), p. 747. Par. 13, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1379. Par. 12, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1379; Exhibit "P-10," Docket- Vol. IV, pp. 1749 to 1756; Exhibit "R-11," BIR Records (Exhibit "R-12"), pp. 763 to 778.

Docket- Vol. I, pp. 8 to 46.

On October 27, 2021, respondent filed his Answer.21 On November 11, 2021, respondent transmitted the BIR Records of the present case, consisting of 801 pages in one (1) folder. 22 At the November 11, 2021 hearing on petitioner's Urgent Motion for Suspension of Collection of Tax, petitioner presented the testimony of its External Auditor, Mr. Alfredo C. Danac.23 The parties were directed to appear before the Philippine Mediation Center- Court of Tax Appeals (PMC-CTA) on November 29, 2021, but a No Agreement to Mediate was issued on December 21, 2021.24 On November 16, 2021, petitioner filed its Formal Offer of Evidence, 25 to which respondent submitted his Comment (On Petitioner's Formal Offer of Evidence on the Urgent Motion for Suspension of Collection) on November 23, 2021.26 In the Resolution dated April 7, 2022,27 the Court admitted petitioner's exhibits, except Exhibits "P-2," "P-2-a," "P-3," "P-3-a," "P-4," and "P-9," and denied the Urgent Motion for Suspension of Collection of Tax for lack of merit.

On May 5, 2022, petitioner filed a Motion for Reconsideration (of the Resolution dated 07 April 2022),28 followed by a Motion to Admit (Supplement to the Motion for Reconsideration dated 05 May 2022) on July 19, 202229 with attached Supplement (to the Motion for Reconsideration dated 05 May 2022). 30 In its Resolution dated September 20, 2022,31 the Court granted petitioner's Motion to Admit, partially granted petitioner's Motion for Reconsideration (of the Resolution dated 07 April 2022) and Supplement (to the Motion for Reconsideration dated 05 May 2022), and granted the Urgent Motion 20 21 22 23 24 25 26 27 29 30 31 Docket- Vol. I, pp. 689 to 708.

Docket- Vol. II, pp. 1001 to 1014.

Compliance dated November 11,2021, Docket- Vol. II, pp. 1037 to 1039. Exhibit "P-1," Docket- Vol. I, pp. 877 to 885; Order dated November 11, 2021, Docket- Vol. II, pp. 1031 to 1032.

Docket- Vol. II, p. 1140.

Docket- Vol. II, pp. 1044 to 1052.

Docket- Vol. II, pp. 1107 to 1109.

Docket- Vol. II, pp. 1144 to 1154.

Docket- Vol. II, pp. 1166 to 1173.

Docket- Vol. II, pp. 1199 to 1201.

Docket- Vol. II, pp. 1203 to 1245.

Docket- Vol. 3, pp. 1251 to 1261.

for Suspension of Collection of Tax subject to posting a cash or surety bond.

On October 12, 2022, petitioner filed an Omnibus Motion (Re: Resolution dated 20 September 2022),32 seeking reconsideration of the bond requirement or an extension of the period to comply. In the Resolution dated January 12, 2023,33 the Court granted an additional non-extendible thirty (30) days to post the bond. Due to petitioner's failure to comply,34 the Court, in its Resolution dated April27, 2023,35 recalled the Resolution dated September 20, 2022, insofar as it granted petitioner's Urgent Motion (for Suspension of Collection of Tax).

On March 16, 2023, the Pre-Trial Conference was held.36 On April 17, 2023, the parties filed their Joint Stipulation of Facts and Issues,37 which the Court approved through its Resolution dated May 9, 2023.38 Based on this, the Court issued a Pre-Trial Order on June 29, 2023.39 During trial, petitioner presented as witness its External Auditor, Mr. Alfredo C. Danac.40 On October 25, 2023, petitioner filed its Formal Offer of Evidence,41 to which respondent filed his Comment (Re: Formal Offer of Evidence) on November 9, 2023.42 By Resolution dated July 12, 2024,43 the Court admitted petitioner's offered exhibits, except Exhibit "P-13-7-2," for failure of the document offered and identified to 32 33 34 35 36 37 38 39 40 41 42 43 Docket- Vol. 3, pp. 1265 to 1274.

Docket- Vol. 3, pp. 1349 to 1351.

Records Verification dated March 20, 2023 issued by the Judicial Records Division of this Court, Docket- Vol. 3, p. 1372.

Docket- Vol. 3, pp. 1388 to 1389.

Resolution dated November 24,2022, Docket- Vol. 3, p. 1333; Resolution dated January 12, 2023, Docket- Vol. 3, pp. 1349 to 1351; Minutes of the hearing held on, and Order dated, March 16, 2023, Docket- Vol. 3, pp. 1358 to 1363. Docket- Vol. 3, pp. 1378 to 1384.

Docket- Vol. 3, p. 1406.

Docket- Vol. 3, pp. 1450 to 1488.

Exhibit "P-25," Docket- Vol. 3, pp. 1534 to 1555; Minutes of the hearing held on, and Order dated, October 10, 2023, Docket- Vol. 3, pp. 1551 to 1553. Docket- Vol. 3, pp. 1585 to 1654.

Docket- Vol. 3, pp. 1657 to 1659.

Docket- Vol. V, pp. 2655 to 2660.

correspond with the document actually marked; and several exhibits for failure to submit the originals for comparison. For his part, respondent presented ROAnna Marie Manlutac.44 On October 16, 2024, respondent filed his Formal Offer of Evidence,45 to which petitioner filed its Comment (to Respondent's Formal Offer of Evidence) on October 28,2024.46 By Resolution dated February 3, 2025,47 the Court admitted respondent's offered exhibits. In its Resolution dated April2, 2025, the case was submitted for decision,48 taking into account, petitioner's Memorandum filed on March 7, 2025. 49 Respondent, however, failed to file his memorandum. so

ISSUE

Is petitioner liable to pay the amount of P90,704,310.14, representing deficiency

Income

Tax,

Withholding

Tax

on Compensation, Documentary Stamp Tax, Expanded Withholding Tax, and compromise penalty inclusive of surcharge and interest, for TY 2014, plus 25% surcharge and 20% deficiency and delinquency interest for late payment under Section 249(C) of the National Internal Revenue Code of 1997 (NIRC), as amended; and delinquency interest at the rate of 12% per annum from 1 January 2018 until full payment pursuant to Section 249(C) of the NIRC, as amended, in relation to Section 249(A) of the same Code, as amended by the TRAIN Law?51 45 46 47 4ll 49 50 Exhibit "R-13," Docket- VoL II, pp. 1020 to 1025; Minutes of the hearing held on, and Order dated, October 1, 2024, Docket- VoL V, pp. 2661 to 2663. Docket- VoL V, pp. 2664 to 2670.

Docket- VoL V, pp. 2674 to 2677.

Docket- VoL V, pp. 2690 to 2692.

Minute Resolution dated April2, 2025, Docket- VoL V, p. 2740. Docket- Vol. V, pp. 2693 to 2731.

Records Verification dated March 19, 2025 issued by the Judicial Records Division of this Court, Docket- VoL V, p. 2739.

Issue to be Resolved, JSFI, Docket- VoL 3, p. 1379.

ARGUMENTS

Petitioner argues that the FLD, the FANs, and the FDDA are void for violating its right to due process. It asserts that respondent erroneously assessed deficiency taxes, specifically IT, WTC, EWT, and DST and that the imposition of compromise penalties was unwarranted.

Respondent counters that judicial review over decisions of respondent on its disputed assessment is exclusive and appellate in nature, thereby precluding petitioner from raising new issues for the first time on appeal. He asserts that the deficiency assessments for IT, WTC, EWT and DST were validly issued in accordance with law.

RULING

The Petition for Review is partly granted. The Court has jurisdiction over

Section 7(a)(1), in relation to Section 11 of Republic Act (RA) No. 1125,52 as amended by RA No. 928253 confers upon the Court of Tax Appeals (CTA) exclusive appellate jurisdiction to review respondent's decisions in cases involving disputed assessments. Any party adversely affected must appeal respondent's decision with the CTA, within thirty (30) days from receipt thereof. These provisions respectively read:

52 53 Sec. 7. Jurisdiction.- The CTA shall exercise:

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

An Act Creating the Court of Tax Appeals. An Act Expanding the jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of A Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, As Amended, Otherwise Known as The Law Creating The Court of Tax Appeals, and For Other Purposes.

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

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, ... 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. 54 On June 1, 2021, petitioner received respondent's FDDA dated May 24, 2021, directing payment of 2014 deficiency taxes amounting to 1"90,704,810.14 (comprising 1"85,557,855.88, 1"436,007.47, 1"4,099,989.25, 1"494,957.54, and 1"116,000.00, inclusive of interest and penalties). Counting thirty (30) days from June 1, 2021, petitioner had until July 1, 2021, to seek judicial relief. Petitioner filed its Petition for Review on July 1, 2021, thereby vesting the CIA with jurisdiction over CTA Case No. 10568.

FLD and FANs

Petitioner insists that the tax assessments forTY 2014 are void because of the supposed failure of the FLD and FANs to state a definite amount of tax liabilities and a definitive demand for payment within a prescribed period, allegedly required under the Supreme Court's ruling Relying on Commissioner of Internal Revenue v. Fitness by Design, Inc. (FDI).55 54 55 This assertion does not hold.

Boldfacing supplied.

G.R. No. 215957, November 9, 2016.

While the language of the FAN in FDJ56 and the FLD in this case may appear similar, they differ in substance: FAN dated March 17,2004 in FDI FLD dated February 29, 2020(CTA Case No. 1056~)1 ... Please note, however, that the Please note that the interest and the total interest and the total amount due amount due will have to be adjusted if will have to be adjusted if paid paid beyond February 29, 2020. prior or beyond April 15, 2004.

The FLD dated February 29, 2020 contains a definite tax liability, as it expressly states the due date of payment, i.e., February 29, 2020. The subsequent adjustments merely reflect the accrual of interest after the due date pursuant to Section 249(B) and (C) of the NIRC, as amended, without altering the basic tax liability. Hence, the assessments cannot be considered indefinite or void. In contrast, the language of the tax assessment in FDJ,57 stated that the liability "will have to be adjusted if paid prior or beyond April 15, 2004." The inclusion of the word "prior" makes the tax liability indefinite because if the assessment is definite it cannot be subject to modification prior to the prescribed due date of payment.

FDDA

The Court agrees with petitioner that the FDDA is defective and must be cancelled. The Court observes that the attached Assessment Notices reflected a due date of "April 15, 2021,"58 despite being issued only on May 24, 202159 and received by petitioner on June 1, 2021.6° Clearly, the prescribed period for payment had already lapsed when the FDDA and the corresponding Assessment Notices were issued, making compliance impossible. Accordingly, the due date stated therein is invalid, and fails to satisfy the requirement that an assessment must contain a demand for payment within a prescribed period.

57 58 59 60 G.R. No. 215957, November 9, 2016.

G.R. No. 215957, November 9, 2016.

Exhibit "P-10," Docket - Vol. IV, at pp. 1752 to 1756; Exhibit "R-11," BIR Records (Exhibit "R-12"), at pp. 771 to 775.

However, the "DATE ISSUED" of the Assessment Notices found in the BIR Records were left blank, Exhibit "R-11," BIR Records (Exhibit "R-12"), at pp. 771 to 775. Par. 13, Facts Stipulated by Both Parties, JSFI, Docket- Vol. 3, p. 1379.

Still, a void FDDA does not ipso facto render the assessment void. Despite the defects in the FDDA and Assessment Notices, the FLD dated February 29, 2020 remains valid absent any other ground for nullification.

In Commissioner of Internal Revenue v. Liquigaz Philippines Corporation, et seq.,61 the Supreme Court clarified that a void FDDA does not automatically invalidate the assessment. The Supreme Court distinguished between an assessment and a decision: An assessment becomes a disputed assessment after a taxpayer has filed its protest to the assessment in the administrative level. Thereafter, respondent either issues a decision on the disputed assessment or fails to act on it and is, therefore, deemed a denial. The taxpayer may then appeal either the decision or the inaction. Thus, the invalidity of one does not necessarily affect the other, unless expressly provided by law. Accordingly, while the FDDA indicated an invalid date of payment, this did not affect the validity of the FLD. In this case, the FLD dated February 29, 2020 directed petitioner to pay the alleged deficiency tax liabilities "within the time shown in the enclosed assessment notice," and the attached Assessment Notices clearly indicated February 29,2020 as the date of payment. Liability for deficiency IT, WTC, EWT, AND DST forTY 2014.

Considering that the FDDA is void for failure to state a definite due date for payment, the Court now turns into the correctness of the deficiency tax assessments under the FLD dated February 29, 2020. In the FLD, respondent assessed petitioner for deficiency IT, WTC, EWT, DST, and compromise penalties forTY 2014, in the total amount of P85,961,960.14, inclusive of interest, broken down as follows:62 61 62 G.R. Nos. 215534 and 215557, April18, 2016. Exhibit "P-7," Docket- Vol. IV, at pp. 1734 to 1735.

Tax Type

IT

WTC

EWT

DST

Compromise

Penalty

Total

Basic

Interest

1'44,170,604.5363 1'35,418,774.06 1'219,507.21 1'186,839.73 1'2,064,132.52 1'1,756,944.36 1'1,092,909.00 1'936,248.73 1'47,547,153.26 1'38,298,806.88 I. Deficiency EWT - P3,821,076.88

Compromise

penalty

Total

I'

- 1'79,589,378.59 - 1'406,346. 94 - 1'3,821,076.88 - 1'2,029,157.73 1'116,000.00 1'116,000.00 1'116,000.00 1'85,961,960.14 Respondent assessed petitioner for deficiency EWT forTY 2014 in the total amount of '!'3,821,076.88, computed as follows: 64 Basic EWT deficiency 1'2,064, 132.52

Add: Increments

Interest- at 20% (from 1/16/2015 to 12/31/2017) 1'1,221,514.04 Interest- at 12% (from 1/1/2018 to 2/29/2020) 1'535,430.32 1'1,756,944.36

Total Amount Due

1"3,821,076.88 The assessment arose from respondent's comparison of petitioner's reported purchases reported in its Audited Financial Statements (AFS) and Annual Income Tax Return (Annual ITR) for TY 2014 against those subjected to EWT per Alphalist of Payees Subject to Expanded Withholding Tax for the same year. The comparison revealed that certain purchases were not subjected to EWT.

Accordingly, pursuant to Section 57 of the NIRC, as amended, and Section 2.57.2 of Revenue Regulations (RR) No. 2-98, as amended by RR Nos. 17-2003 and 30-2003, respondent assessed petitioner for basic deficiency EWT in the amount of '!'2,064,132.52, computed as follows:65

Goods (1 %)

64 65 Purchases Subject to E\tVT

Purchases Subjected to E\Vf Per

Per AFS

BIR Form 1604E

Amount

EWf

Amount

EWf

p 147,948,555.93 p 1,479,485.56 p 59,823,725.43 p 598,237.25 Amount shown in the FLD is etctually P44,170,604.52. Exhibit"P-7," Docket- Vol. IV, at p. 1734.

Purchases Not

Subjected to BNT

EWT Still Due

p 88,124,830.50 p 881,248.31 Details of Discrepancies, Exhibit "P-7," Docket- Vol. IV, at p. 1737, BIR Records (Exhibit "R-12"), pp. 367 to 369.

Services/

Contractors

Brokerage

10% Prof. Fees- 10% Prof. Fees- 15%

Commission

10% 2,226,560.00 2,297,846.00 333,984.00 2% 137,193,722.00 2,743,874.44 108,845,711.83 2,176,914,.24 2,861,408.58 286,140.86 2,861,408,58 286,140.86 1,160,891.00 116,089.10 639,336.89 63,933.69 321,354.11 - fd 2,226,560.00 333,984.00 229,784.60 £293,688,983.51 P5,189,358.56 P172,170,182.73 28,348,010.17 566,960.20 P3,125,226.04 P121,518,800.78 52,155.41 229,784.60 P2,064,132.52 Upon review of petitioner’s BIR Forms No. 1601-E, the Court notes that petitioner withheld and remitted a total EWT of P3,125,226.04, corresponding to the total income amounting to P172,170,182.73, as detailed below:

Services /

Contractors

Nature of Tax

Income Payment ATC Rate

P108,845,711.83 P2,176,914.24

WC120

WI1160/WC160

Income Payment Tax Withheld

P59,823,725.43 P598,237,25

Brokers and 6

Agents WI140/WC140_ | 10% P2,861,408.58 P286,140.86 Professional Fees | WI010 P639,336.89 P63,933.69 Total ee ee P172,170,182.73 P3,125,226.04 payments However, upon further review of the Alphalist of Payees® submitted as an attachment to BIR Form No. 1604-E® for TY 2014, the Court notes a discrepancy of P30,172.86 between the total income payments subjected to EWT per BIR Forms No. 1601-E (January to December 2014) amounting to P172,170,182.73 and the total income payments per Alphalist of Payees amounting to P172,140,009.87. Notably, there is no discrepancy in the total tax withheld, which remained at P3,125,226.04, to wit:

Nature of Income | Income Payment per BIR Income Payments per Payment Forms No. 1601E Alphalist Difference Services 108,845,711.83 108,813,286.78 32,425.05 Brokers and Agents 2,861,408.58 2,855,465.02 3,943.56 P172,140,009.87 P30,172.86

Respondent deducted the total income payments reflected in BIR Forms No. 1601-E amounting to 1"172,170,182.73 in computing the subject EWT assessment. However, since that the Alphalist of Payees provides a detailed breakdown identifying the names of the payees and the corresponding income payments from which taxes were withheld and remitted, it is more appropriate to deduct instead the total income payments of P172,140,009.87, as shown in the Alphalist of Payees, in determining petitioner's 2014 deficiency EWT liability.

The Court shall now proceed to determine the propriety of the deficiency EWT assessment for each category of income payments, which consists of the following items:

EWT-1

Purchases of Goods

.!"881,248.31

Purchases of Services and Income Payments to

EWT-2

Contractors

.!"566,960.20

EWT-3

Commission

.!"229,784.60

EWT-4

Professional fees (1 0%) .!"52,155.41

EWT-5

Professional fees (15%) .!"333,984.00 EWT -1. Purchases of Goods - P881,248.31 Section 2.57.2(M) of RR No. 2-98, as amended by RR No. 6- 2009,69 requires the withholding of 1% EWT on local purchases of goods made by the top twenty thousand (20,000) private corporations, as follows:

69 Sec.

2.57.2.

Income

payments subject to creditable withholding tax and rates prescribed thereon. - Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items on income payments to persons residing in the

Philippines:

SUBJECT:

Amending Further Pertinent Provisions of Revenue Regulations (RR) No. 2-98, as Amended, Providing for an Additional Criteria in the Determination of Top 20,000 Private Corporations, Including the Threshold on Their Purchases of Agricultural Products, and Additional Transactions Subject to Creditable Withholding Tax on Income Payments Made by the Top Five Thousand (5,000) Individual Taxpayers Engaged in Trade/Business or Practice of Profession.

(M) Income payments made by the top twenty thousand (20,000) private corporations to their local/resident supplier of goods and local/ resident supplier of services other than those covered by other rates of withholding tax. - Income payments made by any of the top 20,000 private corporations, as determined by the Commissioner, to their local/ resident supplier of goods and local/resident supplier of services, including non-resident aliens engaged in trade or business in the Philippines. xxx Supplier of goods - Supplier of services - 70 One percent (1%) Two percent (2%) Respondent found that petitioner's purchases of goods subject to 1% EWT amounted to P147,948,555.93. Of this, only P59,823,725.43 of such purchases were actually subjected to 1% EWT by petitioner, resulting in a discrepancy of P88,124,830.50.

Consequently, respondent assessed petitioner for deficiency 1% EWT of P881,248.31 on the P88,124,830.50 difference,71 to wit: 70 71

PPE - Additions

Machinery & Equipment

Factory Fixtures

Office Furniture & Fixture

Warehouse

Power System Equipment

Computer

Cost of Sales

Purchases

Mfg. Overhead

Factory Supplies

Machinery Supplies

Machinery Spare Parts Supplies

Tools Supplies

Power, Fuel & oil Gen & Admin expenses

Christmas Compliments

Office supplies Total purchases of goods subject to 1% EWT per respondent's audit Less: Purchases of goods subjected to 1% EWT per

BIR Forms 1601E

Boldfacing supplied.

BIR Records (Exhibit "R-12"), pp. 367 to 369. l"3,668,664.00 110,714.00 42,676.00 96,429.00 582,713.00 46,741.00 82,402,854.93 6,618,344.00 6,414,045.00 7,084,913.00 717,964.00 39,435,843.00 507,198.00 219,457.00 l"147,948,555.93 59,823,725.43

Purchases of goods not subjected to 1% EWT _ P88,124,830.50 Deficiency 1% EWT P881,248.31 Petitioner contends that the assessment erroneously subjected the entire amounts of certain items to EWT, when only a part of these should have been covered.”

The Court’s discussion on each item shall proceed in seriatim.

Machinery and Equipment (P3,668,664.00) Purchases account under Cost of Sales (P85,264,263.51) Petitioner alleges that of the assessed P3,668,664.00, the amount of P1,284,156.10 was purchased through importation.”

Petitioner also asserts that the FLD incorrectly treated P85,264,263.51 as subject to EWT, comprising of P82,402,854.93 for goods and P2,861,408.58 for brokerage fees. Petitioner maintains that only P26,654,728.52 represented local purchases, while the remaining amount pertains to importations.”4 To support its importations, petitioner presented various documents such as Vouchers, Commercial Invoices, Bills of Lading, Packing Lists, bank Debit Memos, Bureau of Customs (BOC) Import Entry & Internal Revenue Declarations (IEIRDS) and Assessment Notices.7> However, the Court finds these documents insufficient.

72 73 74 75 Par, 121, petitioner’s Mentorandum, Docket - Vol. V, p. 2724.

Par. 121.1, petitioner's Memorandum, Docket - Vol. V, p. 2724.

Par. 121.2, petitioner's Memorandum, Docket ~ Vol. V, p. 2724.

Exhibits “P-16-1-4,” “P-6-2-1,” “P-16-3,” “P-16-3-1” to “P-16-3-1” to “P-16-3-4,” “P-16-4- 1,” “P-16-4-2,””P-16-5-2” to “P-16-5-4,” “P-16-6-3," “P-16-8,” “P-16-8-1,” “P-16-8-2,” “P- 16-9," “P-16-9-1," “P-16-9-3,” “P-16-10,” “P-16-10-1,” “P-16-11-2,” “P-16-12,” “P-16-12- 2,” “P-16-12-3," “P-16-13-2," “P-16-14,” “P-16-14-1,” “P-16-14-4,” “P-16-15-2,” “P-16-15- 4,” “P-16-16-3,” “P-16-17-2,” “P-16-17-4,” “P-16-17-5," “P-16-18-3,” “P-16-19,” “P-16-19- 1,” “P-16-19-3,""P-16-19-4,", “ P-16-19-6,”” P-16-20-1,”” P-16-20-3,””" P-16-21,”” P-16-21- 1,’" P-16-21-5,”" P-16-21-6,"” P-16-21-7,” “P-16-22-2,” “P-16-23,” “P-16-23-1,” “P-16-23-2,” “P-16-24-5,” “P-16-25-3,” “P-16-25-4,” “P-16-25-5,” “P-16-26,” “P-16-26-1,” “P-16-26-2,” “P-16-27," “P-16-27-1," “P-16-27-4,"” “P-16-27-7,” “P-16-28,” “P-16-28-1,” “P-16-28-2,” “P-16-29,” “P-16-29-1,” “P-16-29-2,” “P-16-29-5,” “P-16-29-6” “P-16-30-2,” “P-16-32-2,” “P-16-32-4,” “P-16-33,” “P-16-33-1,” “P-16-33-2,” “P-16-34,” “P-16-34-1,” and “P-16-34- 2,” Docket - Vol. IV, pp. 1909, 1914, 1917 to 1926, 1932 to 1934, 1940, 1945 to 1951, 1953, 1955 to 1956, 1961 to 1962, 1968, 1971, 1976, 1980 to 1981, 1984, 1991, 1993, 1999, 2007, 2009 to 2010, 2018, 2021 to 2022, 2024 to 2025, 2027, 2030, 2033, 2035 to 2036, 2040 to 2042, 2046, 2049 to 2051, 2058, 2063 to 2065, 2067 to 2069, 2072 to 2073, 2076, 2079 to

Specifically, absent petitioner's detailed general ledger, the Court cannot ascertain which importations formed part of its "Machinery & Equipment" account and "Purchases" account under Cost of Sales.

Hence, respondent's imposition of 1% EWT on petitioner's purchases per AFS under its "Machinery & Equipment" account in the amount of !>3,668,664.00 and "Purchases" under its Cost of Sales in the amount of !>82,402,854.93 is sustained. Power, Fuel and Oil (?39,435,843.00) Petitioner contends that out of the !>39,435,843.00 recorded under "Power, Fuel and Oil," !>30,791,458.95 pertains to income payments made to MERALCO. 76 To support this, petitioner submitted the corresponding schedule, vouchers, electric bills, and official receipts issued by MERALCO for TY 2014, showing total payments of !>30,791,458.95, from which EWT of !>619,364.36 was withheld?7 Considering that the !>30,791,458.95 income payments to MERALCO constitutes purchases of services, the same should be excluded from the !>147,948,555.93 total purchases of goods subject to 1% EWT, as determined by respondent. Instead, the P30,791,458.95 should be reclassified as purchases of services subject to 2% EWT. Given petitioner's failure to refute respondent's findings by sufficient evidence, respondent's imposition of 1% EWT on the remaining purchases covered by the subject assessment is upheld. It bears emphasizing that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment?S 76 77 78 2082, 2086 to 2088, 2092 to 2093, 2096, 2107, 2110, 2112 to 2114, and 2118 to 2120, respectively.

Par. 121.6, petitioner's Memorandum, Docket- Vol. V, p. 2725. Exhibit "P-20" to "P-20-24-2," Docket- Vol. V, pp. 2333 to 2407. Marcos II v. Court of Appeals, eta/., G.R. No. 120880, June 5, 1997.

EWT-2. Purchases of Services and Income Payments to Contractors - 1"566,960.20 The withholding of 2% EWT on local purchases of services by top 20,000 private corporations is mandated under Section 2.57.2(M) of RR No. 2-98, as amended by RR No. 6-2009, which states: Sec. 2.57.2.

Income

payments subject to creditable withholding tax and rates prescribed thereon. - Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items on income payments to persons residing in the

Philippines:

(M) Income payments made by the top twenty thousand (20,000) private corporations to their local/resident supplier of goods and local/ resident supplier of services other than those covered by other rates of withholding tax. - Income payments made by any of the top 20,000 private corporations, as determined by the Commissioner, to their local/ resident supplier of goods and local/resident supplier of services, including non-resident aliens engaged in trade or business in the Philippines. xxx Supplier of goods Supplier of services- 79 One percent (1%) Two percent (2%) Respondent determined that petitioner's purchases of services subject to 2% EWT amounted to !'137,193,722.00. Of this, only !'108,845,711.83 was actually subjected to 2% EWT. Accordingly, respondent assessed petitioner for deficiency 2% EWT of !'566,960.20 corresponding to the discrepancy of !'28,348,010.17, so as detailed below:

79 80

Other Current Assets

Prepaid Insurance

Prepaid Import Charges

PPE- Additions

Office Building

Boldfacing supplied.

BIR Records (Exhibit "R-12"), pp. 367 to 369.

I"

839,894.00 56,365,839.00 250,714.00

Office Equipment

Delivery & Transportation

Mfg. Overhead

Guard Fees

Insurance & Bond Premium

Factory Maintenance

Selling Expenses

Advertising

Delivery & Trucking

Hotel Accommodation

Travelling & Transpo

Gen. & Admin Expenses

Communication Expense

Light & Water

Guard Fee

Insurance & Bond Premium

Miscellaneous

Repairs & Maintenance

Representation

Research & Development Cost

Seminar and Service Fee

Interest & Bank Charges

Total purchases of services and income payments to contractors subject to 2% EWT per respondent's audit

Less:

Amount subjected to 2% EWT per BIR Forms 1601E Purchases of services and income payments to contractors not subjected to 2% EWT Deficiency 2'\'o EWT 1,655,266.00 2,704,754.00 4,163,968.00 1,091,224.00 1,630,364.00 244,068.00 14,455,336.00 46,570.00 1,287,708.00 678,858.00 257,698.00 2,081,984.00 758,377.00 575,443.00 686,722.00 1,451,049.00 130,437.00 73,600.00 45,763,829.00 1'137,193,722.00 108,845,711.83 I' 28,348,010.17 p 566,960.20 Petitioner counters that the assessment should be cancelled on the ground that several of the foregoing items are exempt from EWT. The Court shall proceed to discuss each item in seriatim. Prepaid Insurance (?839,894.00) Petitioner argues that the 'P839,894.00 represents the unexpired or unaccrued portion of its prepaid insurance and, therefore, should not be subjected to EWT anew. It argues that the EWT was already withheld at the time the insurance premium was paid, as allegedly reflected from its Alphalist of Payees Subject to Expanded Withholding Tax.sl

Section 2.57.4 of RR No. 2-98, as amended by RR No. 12-2001,82 provides for the timing of withholding, to wit: Sec. 2.57.4. Time ofwithlwlding. -The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term 'payable' refers to the date the obligation becomes due, demandable or legally enforceable. Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes83 INC Bank N. V. v. Commissioner of Internal Revenue84 underscores that the obligation of the payor/ employer to deduct and withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor' sf employer's books, whichever comes first.

In the absence of sufficient evidence to the contrary, the "Prepaid Insurance" in the amount of !'839,894.00 is deemed to have been paid and recorded as an asset at year-end of 2014. Following Section 2.57.4 of RR No. 2-98, as amended by RR No. 12-2001 and lNG Bank, petitioner was obligated to withhold the corresponding 2% EWT in December 2014, when the amount was recorded as an asset in its books. For this reason, respondent's imposition of 2% EWTon the amount of !'839,894.00 is likewise sustained. 82 83 "' Insurance and Bond Premium (?1,091,224.00) SUBJECT: Amendment to the Pertinent Provisions of Revenue Regulations No. 1-98, as Amended,

Revenue

Regulations

No.

2-98, as Amended, and

Revenue

Regulations No. 6-2001, Relative to the Revision of Withholding Tax Rates on Certain Income Payments Subject to Withholding Tax, the Deferment of the New Deadline Dates For Filing Selected Tax Returns, the Reporting Requirements for Recipients of Talent Fees, and for Other Purposes.

Boldfacing supplied.

G.R. No. 167679, July 22, 2015.

L_ _________ ---

Petitioner claims that the !"1,091,224.00 covers not the insurance or bond premiums, but also other expenses, such as local taxes, which are included in the premium price. Petitioner further states that EWT is imposed only on the amount representing the premium paid, and that it has already complied with this requirement.ss However, aside from these bare assertions, petitioner failed to present any documentary evidence to substantiate its claim that the subject account includes components other than insurance or bond premiums. It is a basic rule of evidence that bare allegations, unsubstantiated by evidence, are not equivalent to proof. 86 Considering that the entire amount of !"1,091,224.00 was claimed as expense in 2014 and absent proof that the same represents amortization of payments already made in prior years, respondent's imposition of 2% EWT thereon is sustained. Prepaid Import Charges (?56,365,839.00) Petitioner contends that the !"56,365,839.00 pertains to importations rather than local purchases and, should not be subject to EWT. Petitioner explains that the amount arose from payments for importations not yet released from the custody of the BOC as payments represented by letters of credit and trust receipts had not been completed. Once completed, these amounts will be transferred to the "Purchases" account.B7 Yet, in the absence of supporting documentary evidence, the true nature of the account "Prepaid Import Charges" and its proper tax treatment cannot be determined. Consequently, respondent's imposition of 2% EWT on the amount of !"56,365,839.00 is likewise sustained.

Guard Fees (?6,245,952.00) Petitioner contends that the !"6,245,952.00, consisting of N,163,968.00 under Manufacturing Overhead and !"2,081,984.00 85 86 87 Par. 120.3, petitioner's Memorandum, Docket- Vol. V, p. 2724. Cagatin v. Magsaysay Maritime Corporation, et al., G.R. No. 175795, June 22, 2015. Par. 120.2, petitioner's Memorandum, Docket- Vol. V, p. 2724.

under General and Administrative Expenses, represents payments for guard services. Of this amount, only the agency fees are subject to 2% EWT, while the portion corresponding to the security guards' salaries is exempt.ss Petitioner is partly correct.

Pursuant to Revenue Memorandum Circular (RMC) No. 39- 2007,89 citing Section 1, Rule XIV of the 1994 Revised Rules and Regulations implementing Republic Act (RA) No. 5487, 90 as amended, "the monies received by a Security Agency representing salaries shall be earmarked and segregated for the said guards. The amount paid by the Client representing the salaries of the security guards will not form part of the Security Agency's gross income, and neither will it form part of its taxable gross receipts when actually or constructively received." Thus, not all payments to the security agency are subject to EWT as the salaries of the security guards are to be earmarked and segregated.

An examination of petitioner's supporting documents, including the schedule of guard fees, Vouchers, Service Invoices, and Official Receipts, shows that the account "Guard Fees" consists of both the salaries of security guards and the agency fees paid to the security agency. 91 The documents further disclose that Cougar Integrated Services, Inc. rendered security services to petitioner. It was likewise determined that the "Guard Fees" reported in petitioner's 2014 AFS is lower by !>5,086.98 compared to the total amount indicated per schedule and ORs, as shown below: 88 89 90 91

Per AFS

Guard Fees under

Manufacturing Overhead

1"4,163,968.00 Gen & Admin expenses p 2,081,984.00

Total Guard Fees per AFS

1'6,245,952.00 Par. 121.3, petitioner's Memorandum, Docket- Vol. V, p. 2724. SUBJECT: Clarifying the Income Tax and VAT Treatment of Agency Fees/Gross Receipts of Security Agencies Including the Withholding of Taxes Due thereon. AN ACT TO REGULATE THE ORGANIZATION AND OPERATION OF PRIVATE DETECTIVE, WATCIIMEN OR SECURITY GUARDS AGENCIES, known as "The Private Security Agency Law."

Exhibits "P-17" to "P-17-12-5," Docket- Vol. IV, pp. 2124 to 2164; Docket- Vol. V, pp. 2165 to 2254.

Per schedule and ORs

Agency Fee

1"710,491.46

Guards' Salaries

l' 5,540,547.52 Total Guard Fees per schedule 1"6,251,038.98

Difference

p 5,086.98 Considering that respondent's assessment was based on the amount indicated in petitioner's 2014 AFS/ Annual ITR, the amount of P5,540,547.52 representing the security guards' salaries per schedule and ORs should be reduced by the unaccounted discrepancy of P5,086.98. Thus, only the net amount of P5,535,460.54 shall be excluded from the imposition of 2% EWT. On the other hand, the agency fees amounting to P710,491.46 shall be subject to the corresponding 2% EWT.

Traveling and Transportation (?1,287,708.00) Miscellaneous Expenses (?575,443.00) Representation Expenses (?1,451,049.00) Light and Water (?257,698.00) Petitioner contends that the P1,287,708.00 represents traveling and transportation expenses consisting of parking fees, toll fees, and other similar charge and should not be subject to EWT.92 Petitioner further argues that the P575,443.00 represents miscellaneous expenses such as photocopying expenses, parking fees, and other minor expenditures which, according to petitioner, are not subject to withholding tax. 93 Petitioner likewise asserts that the P1,451,049.00 incurred as representation expenses pertains to meals at restaurants, and that such payments are not ordinarily subject to EWT.94 Petitioner as well maintains that the P257,698.00 reported as "Light and Water" was erroneously subjected to EWT, arguing that a portion of the amount represents payments made to Maynilad. Petitioner claims that Maynilad is exempt from income tax under 92 93 94 Par. 121.5, petitioner's Memorandum, Docket- Vol. V, p. 2725. Par. 124, petitioner's Memorandum, Docket- Vol. V, p. 2726. Par. 126, petitioner's Memorandum, Docket- Vol. V, p. 2726

Section 2.57.5(B)(2) of Revenue Regulations No. 2-98, being an entity registered with the Board of Investments.95 The Court sustains these items of disallowance. In the absence of supporting documentary evidence, the nature and proper tax treatment of the Traveling and Transportation, Miscellaneous, Representation, and Light and Water expenses cannot be ascertained. Accordingly, respondent's imposition of 2% EWTon these expenses is sustained.

Moreover, the 2% EWT imposed on the remammg items covered by the subject assessment, which petitioner did not contest, is likewise sustained, consistent with the well-settled rule that tax assessments are presumed correct and issued in good faith. EWT-3. Commission- P229,784.60 Petitioner raised no objection to the assessment for deficiency 10% EWT amounting to P229,784.60 on sales commission of P2,297,846.00; hence, the same is sustained. EWT-4. Professional fees (10%)- P52,155.41 EWT-5. Professional fees (15%)- P333,984.00 Respondent identified the following accounts as subject to either 10% or 15% EWTon professional fees,96 to wit: 95 96

Expense Account

Amount

Subject to 10% EWT

Management Fees

I' 251,289.00

Litigation Expense

I' 44,581.00 Medical and dental I' 865,021.00

Sub-total

I' 1,160,891.00

Subject to 15% EWT

Professional Fees

I' 2,226,560.00

TOTAL

P3,387,451.00 Par. 121.7, petitioner's Memorandum, Docket- Vol. V, p. 2725 BIR Records (Exhibit "R-12"), pp. 367 to 369.

The Court again proceeds to discuss these items in seriatim. Management Fees (?251,289.00)

Petitioner

contends that the f>251,289.00 reported as "Management Fees" which respondent erroneously subjected to 10% EWT on professional fees, pertains to payments made to manpower service providers, namely Fame Acers Manpower Experts and People Serve Multi-Purpose Cooperative. Similar to "Guard Fees," petitioner argues that only the agency or administrative fees may be subject to EWT, and that such fees should not be subjected to the 10% rate applicable to professional fees.97 Indeed, income payments to manpower service providers are subject to 2% EWT imposed on business agencies under Section 2.57.2(E)(4)(g) of RR No. 2-98, as amended, which states: 97 Sec. 2.57.2

Income

payments subject to creditable withholding tax and rates prescribed thereon - Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the

Philippines:

(E)

Income payments to certain contractors. - On gross payments to the following contractors, whether individual or corporate- Two percent (2%)

(4) Other contractors.- (g) Messengerial, janitorial, private detective and/ or security agencies, credit and/ or collection agencies and other business agencies;"

Par. 121.4, petitioner's Memorandum, Docket- Vol. V, pp. 2724 to 2725.

The 2% EWT is calculated based on gross payments, which include agency commission/ fee, salaries of the personnel and mandatory contributions (SSS, Philhealth, Pag-Ibig). Contrary to petitioner's claim, the rule under RMC No. 39-2007 that limits the coverage of the 2% EWT to the agency fee, excluding the salaries of security guards, does not apply to manpower service companies. Nothing in said RMC indicates its applicability to general manpower agencies.

In fact, a review of petitioner's supporting documents shows that petitioner computed and remitted 2% EWTon the total charges before VAT of Fame Acers Manpower Experts, which includes wages.98 Accordingly, the assessed "Management Fees" amounting to P251,289.00 should be subject to 2% EWT instead of 10% EWT as imposed by respondent.

With regard to petitioner's alleged payments to People Serve Multi-Purpose Cooperative, petitioner claims that the latter is a cooperative registered with the Cooperative Development Authority and is exempt from payment of income taxes. Consequently, income payments made to it are allegedly exempt from EWT.99 To support this claim, petitioner submitted copies of BIR Ruling No. RR7-003-607 dated August 15, 2005 / BIR Ruling No. UN-ECCP- 002-2002 dated May 22, 2022 and Certificate of Tax Exemption No. COOP-00020-12-RR-07-RD0-040.1°0 However, the Court cannot take cognizance of these documents, as they were denied admission due to petitioner's failure to submit the originals for comparison.101 Thus, respondent's imposition of 10% EWT on petitioner's alleged payments to People Serve Multi-Purpose Cooperative is sustained. 98 99 100 101 Exhibits "P-18," "P-18-1" to "P-18-5-3," Docket- Vol. V, pp. 2256 to 2330; and Exhibit "P-15," Docket- Vol. IV, at p. 1894.

Par. 121.4, petitioner's MemoraHdum, Docket- Vol. V, at p. 2725. Exhibits "P-19" and "P-19-1," Docket - Vol. V, pp. 2331 to 2332 and BIR Records (Exhibit "R-12"), pp. 493 to 494, respectively. Resolution dated July 12, 2024, Docket- Vol. V, at p. 2659.

Litigation expense (?44,581.00) Medical and dental expenses (?865,021.00) Petitioner contends that the amount of .1"44,581.00 represents payments for docket fees and other legal expenses remitted to courts and quasi-judicial tribunals, together with photocopying expenses for litigation-related documents, which are allegedly not subject to EWT.1oz Petitioner further contends that the amount of 1'865,021.00 is not subject to EWT. It explains that these represent reimbursements to its employees pursuant to Sections 1 and 2, Article XX of the Collective Bargaining Agreement between petitioner and the employees' union.

As such, petitioner maintains that the these constitute reimbursements made in accordance with the said agreement and should not be subject to EWT.1°3 Again, petitioner's bare assertions, unsupported by competent evidence, are bereft of merit. In the absence of supporting documents, the Court cannot ascertain the true nature of the subject expenses and their proper tax treatment. Hence, respondent's imposition of 10% EWT on the "Litigation expenses" of 1'44,581.00 and "Medical and dental expenses" of !'865,021.00, is sustained. Professional fees (?2,226,560.00) Petitioner argues that the amount of :1"2,226,560.00 reported as "Professional fees" include payments to general professional partnerships (GPPs), which are not subject to EWT.1D4 Section 22(B) of the NIRC, as amended, defines GPPs as "partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." Corollary, Section 26 of the same Code provides that a general professional partnership shall not be subject to income tax, with its partners being liable in their individual capacity for the payment of income tax. 102 103 104 Par. 122, petitioner's Memorandum, Docket- Vol. V, p. 2725. Par. 123, petitioner's Memorandum, Docket- Vol. V, pp. 2725 to 2726. Par. 125, petitioner's Memorandum, Docket- Vol. V, p. 2726.

Consequently, GPPs are exempt from EWT as provided for under Section 2.57.5 of RR No. 2-98, as amended by RR No. 14-2002, to wit:

Sec. 2.57.5.

Exemption

from Withholding.

The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:

(B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

(4) General professional partnerships; Petitioner has satisfactorily shown that it made payments to GPPs in the amount of P1,134,425.00; hence, this amount must be excluded from the professional fees subject to 15% EWT. The breakdown of the amount of P1,134,425.00 is as follows:

Exhibits1D5

GPP

Amount

"P-21-1" to "P-21-20-1"

Danae & Associates

1"528,000.00

"P-21-21" to "P-21-36-2"106

Jimeno Cope & David Law Office

1"472,700.00

"P-21-37" to "P-21-48-2"

Tan Acut Lopez & Pison Law Office

1"60,000.00

"P-21-49" to "P-21-61-2"

Tan Venturanza Valdez

1"73,725.00

TOTAL

1"1,134,425.00 In sum, petitioner is liable for basic deficiency EWT m the amount of P2,070,477.27 forTY 2014, computed as follows: Purchases subject

to EVVT per

respondent's audit 105 106

Purchases of

Purchases of

Senrices &

Professional

Professional

Commission

Goods (1(~~)

Income Payments

Fees (lOn,q

Fees (JSlYo)

(10'~1)

Total to Contractors

(2'XJ)

fJ147,948,555.93 P137,193,722.00 P1,160,891.00 P2,226,560.00 P2,297,846.00 r290,827,574.93 Docket- Vol. V, PP· 2414 to 2591.

Except for Exhibits "P-21-26" and "P-21-28," which were denied admission for failure to submit the originals for comparison; Resolution dated July 12, 2024, Docket- Vol. V, at

p. 2659.

Add/ (Less):

Adjustments per

this Court's verification Income payments

to MERALCO

reclassified from purchases of goods to purchases of services Guards' salaries Management fees

to Fame Acers

Manpower Experts

Income Payments

made to GPPs

Adjusted Purchases

subject to EWT

Income Payments per Alphalist

Purchases not subjected to EWT

Deficiency EWT

30,791,458.95 30,791,458.95 —_ Fo 3,535,460.54 (5,535,460.54) po 251,289.00 (251,289.00) - (P1,134,425.00) (P1,134,425.00) P117,157,096.98 P162,701,009.41 | P 909,602.00 P1,092,135.00 | _P2,297,846.00 | _ P284,157,689.39 59,819,028.94 108,813,286.78 652,229.13 169,284,544.85 P 57,338,068.04 P 53,887,722.63 | P 257,372.87 P1,092,135.00 | P2,297,846.00 | P114,873,144.54 P 573,380.68 P1,077,754.45 | 25,737.29 P 163,820.25 229,784.60 P2,070,477.27 II. Deficiency IT - P79,589,378.59 Respondent assessed petitioner for deficiency income tax for taxable year 2014 in the amount of P79,589,378.59, inclusive of interest, computed as follows:10 Taxable income per return

Add: Findings per Investigation:

IT-1

IT-2

IT-3

IT-4

IT-5

Undeclared sales per matching of SLS, SAWT & TPI data Income from undeclared importation (SLI vs BOC) Non-deductible interest expense Disallowed expense (input attributable ta sales to gov't) Disallowed due to non-withholding (RR 12-13) Total Adjustments per audit Taxable Income per audit

Multiplied by: I

ncome tax rate Income tax due per audit

Less:

IT-6

Allowable Credits / Payments:

Prior years excess credits Difference in prior period’s excess credits Creditable withholding tax claimed per ITR Excess MCIT over normal Excess credits carried over to succeeding period

Basic Income Tax Deficiency

107 108 109 Exhibit “P-7,” Docket - Vol. IV, at p. 1734. Amount shown on the FLD is actually P45,993,478.08. Amount shown on the FLD is actually P44,170,604.52.

P6,077,004.00 P22,205,673.76 96,965.63 7,908.04 3,405,241.41 121,518,800.78 147,234,589.62 P 153,311,593.62 0.30 £45,993,478,09108 P23,513,148.00 (228.00) 2,627,696.00 (501,294.44) (23,816,448.00) 1,822,873.56 P 44,170,604.53109

Add: Increments

Interest- at 20% (from 4/16/2015 to 12/31/2017) Interest- at 12% (from 1/1/2018 to 2/29/2020)

Total Income Tax Due

r23,961,040.26 11,457,733.80 ___ -:_:35""',4"'18"',7-'-7.0:.4.0""6'-- P79 ,589,378.59 Based on the foregoing, the income tax assessment is composed of the following items:

IT-1

Undeclared sales per matching of SLS, SA WT & TPI data f'22,205,673.76

IT-2

Income from undeclared importation (SLI vs BOC) 96,965.63

IT-3

Non-deductible interest expense 7,908.04

IT-4

Disallowed expense (input attributable to sales to gov't) 3,405,241.41

IT-S

Disallowed due to non-withholding (RR 12-13) 121,518,800.78

IT-6

Difference in prior period's excess credits 228.00 The Court will discuss each of the aforesaid items m said sequence.

IT-1. Undeclared sales per matching of SLS, SAWT & TPI data- P22,205,673.76 As stated in the Details of Discrepancies attached to the FLD, the assessment resulted from the following finding: no 110

A

discrepancy on sales was noted after line-by-line matching/ analysis of Summary List of Sales (SLS) and third-party information from BIR AITIED (TPI Data). The resulting discrepancy in sales reflects the amount of revenue/income which you failed to declare, hence assessed pursuant to Section 32 of the Tax Code which states that 'all income derived from whatever source' should be included in the computation of gross income subject to income tax. Excess of TPI data over SLS Excess of SA WT data over SLS Undeclared sales

[Sched 1]

The Court partially upholds the assessment. Exhibit "P-7," Docket- Vol. IV, at p. 1736. 14,311,025.39 7 894 648.37 22.205.673.76

TPI data over SLS (?14,311,025.39) With regard to the assessed excess of TPI data over SLS amounting to :P14,311,025.39, pertinent portions of Revenue Memorandum Order (RMO) No. 46-2004, 111 on the Additional Supplement and Guidelines in Handling Letter Notices with Discrepancies Arising from Data Matching Processes, provide that: III. PROCEDURES Action on Protested LNs due to TPI discrepancy 3.

Obtain Sworn Statements from TPI sources (Annexes 'B' and 'C') attesting to the veracity of the data provided.

4.

Provide the taxpayer a brief 'grace period' (no more than ten [10] days) to reconcile the figures in his Sworn Statement against those of the TPI source." (Emphasis added) The above provision confirms that the BIR is required to verify the amounts it obtained from its computerized/third-party matching by securing confirmation or certification from the third-party information source.

However, during the cross examination of RO Manlutac, she admitted that although Confirmation Requests112 were issued to the third parties, no confirmations or replies from third-parties were received by the BIR to support its findings of alleged undeclared sales amounting to :P22,205,673.76.113 l1l 1!2 113 SUBJECT: 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. BIR Records, pp. 350 to 357.

Transcript of Stenographic Notes dated October 1, 2024, pp. 7 to 8.

Without obtaining sworn statements from TPI sources, the data gathered from the computerized/third party matching are left unverified, thus, lack credibility. 114 Consequently, the resulting assessment is void for lack of factual and legal bases. The Supreme Court has consistently ruled that in order to be valid, an assessment must be based on actual facts supported by credible evidence.115 Undeclared sales (?7,894,648.37) To recall, this item arose from the discrepancy in sales per petitioner's SLS and SA WT.l16 In this regard, petitioner argues that it had submitted supporting documents to explain the variance. Petitioner further argues that the best evidence to substantiate its position are the official receipts, invoices and ledgers that show that the collections it made in 2014 partly or wholly included payments of the customer's account balance as of 2013.117 However, of the assessed undeclared sales amounting to P7,894,648.37, only the amount of P62,562.50 representing petitioner's sales to customer Conde, Mary Jane Adona under the business name, Status Builders Supply, was duly supported by a Sales Invoice showing that the sales was made in the year 2013.118 Petitioner failed to substantiate the remaining assessed amount of P7,832,085.87. Hence, the deficiency income tax assessment thereon is sustained. IT-2. Income from undeclared importation (SLI vs BOC) - P96,965.63 Respondent imputed against petitioner an undeclared income amounting to P96,965.63 based on the following finding:119 114 115 116 117 118 119 See Commissioner of Internal Revenue v. MCC Transport Singapore PTE. LTD., G.R. No. 255382, June 28, 2021.

Commissioner of Internal Revenue v. Hmztex Trading Co., Inc., G.R. No. 136975, March 31, 2005.

Exhibit "P-7," Docket- Vol. IV, at p. 1744. Pars. 81 and 82, petitioner's Menzormzdzmz, Docket- Vol. V, p. 2716. Exhibit "P-13-5-1," Docket- Vol. IV, p. 1816. Exhibit "P-7," Docket- Vol. IV, at p. 1736.

A discrepancy on importation was noted after the matching of Summary List of Importation (SLI) and third-party information from BOC data. The discrepancy noted were considered undeclared revenue pursuant to the doctrine that was held in the case of CIA v. Perez and CIR L-10507 dated May 30, 1958 which states that reflected sources of funds not accounted for in the taxpayer's returns led to the inference that part of his income has not been reported. The additional gross income were computed using the formula as prescribed in Annex C1/C2 of RMO 13-2012. Undeclared imported goods -excess of BOC data over SLI

[Sched 2]

Divided by: COS ratio Additional taxable sales Multiplied by: GP ratio Undeclared income The Court cancels the assessment.

432,034.00 81.67% 528,999.63 18.33% 96,965.63 The three (3) elements on the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. Income tax is assessed on income received from any property, activity or service. 120 As such, income tax is imposed only when there is an income, and such income was received by the taxpayer and not when there is an under declaration of purchases.

In this case, said elements are not present. Respondent's assessment was apparently based on a mere presumption that the alleged undeclared purchases/ expenses constitute undeclared Income.

For income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized thereinJ21 120 121 Commissiouer of Interllal Revenue v. The Court of Appeals, et al., G.R. No. 108576, January 20, 1999.

The Commissioner of Internal Revwne v. Phoenix Assurance Co., Ltd., G.R. Nos. L-19727 and L-19903, May 20, 1965.

IT-3. Non-deductible interest expense- P7,908.04 Invoking Section 4(b) of RR No. 13-2000, respondent applied the limitation of deductibility of interest expense and disallowed the amount of P7,908.04, as computed below, from petitioner's claimed interest expense deduction:122 Interest subject to final tax

Rate Net of Final Tax

Grossed Up Interest Income subjected to final tax Rate of reduction Amount to reduce interest expense

Less: Recon Item

Unallowable Interest Expense

The disallowance is in order.

1"19,171.00 80.00% 1"23,963.75 33.00% I' 7,908.04 I' 7,908.04 Section 34 of the NIRC, as amended by RA No. 9337, 123 provides that the amount of interest a taxpayer may deduct from gross income shall be reduced by an amount equal to thirty-three percent (33%) of the interest income subjected to final tax, effective January 1, 2009, thus:

122 123 124 SEC. 34. Deductions from Gross Income. - ... (B) Interest. -

(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax: Provided, That effective January 1, 2009, the percentage shall be thirty-three percent (33%).124 Details of Discrepancies, Exhibit "P-7," Docket- Vol. IV, at p. 1736 AN ACT AMENDING SECTIONS 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 AND 288 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES. Boldfacing supplied.

----------------------------------------------------------------- An examination of petitioner's AFS for TY 2014 shows that petitioner incurred "Interest & Bank Charges" amounting to '1"45,763,829.00, 12s which it claimed in full as "Interest" deduction from its gross income in its 2014 amended Annual ITR. 126 Considering that petitioner had interest income of P19,171.00 (net of final tax), 127 respondent correctly reduced petitioner's claimed interest deduction by an amount of P7,908.04, representing 33% of petitioner's gross interest income of P23,963.75, pursuant to Section 34(B)(l) of the NIRC, as amended by RA No. 9337. IT-4.

Disallowed expense (input attributable to sales to government) - P3,405,241.41 125 126 127 128 Respondent's assessment was based on the following finding:128 Recomputation of input tax attributable to the sales to government transaction showed that the input tax closed to expense (or claimed as an expense) was in excess of :1'3,405,241.41. In accordance with Sec. 4.114-2 of RR 16-2005, 'should actual input VAT is less/more than 7% of the standard input, the difference must be closed to income and expense summary account.' Accordingly, to reflect the correct amount of input tax closed to expense, said excess must be adjusted to the income account.

a. Sales to Government

b. Total Sales

c. Input Tax -Current

Standard Input (7%)

Actual Input [a/b x c] Should be closed to expense Closed to expense per

VATR

Disallowed expense

Total

1Q

P3,244,070.03 232,811,364.66 11,412,564.19 227,084.90 159,026.42 (68,058.48) 159,472.01 227,530.49 P3,405,241.41 "

2Q

P18,284,464.18 175,617,415.97 18,069,051.38 1,279,912.49 1,881,265.14 601,352.65 2,067,951.32 1,466,598.67

3Q

P7,474,855.30 69,686,575.41 1,978,640.96 523,239.87 212,236.79 (311,003.08) 270,426.70 581,429.78

4Q

P15,404,551.66 150,185,087.89 27,366,168.54 1,078,318.62 2,806,960.15 1,728,641.53 2,858,323.99 1,129,682.46 Note 25, Notes to the Financial Statement, Exhibit "P-2," Docket- Vol. IV, p. 1717. Line 15, Schedule 4- Ordinary Allowable Itemized Deductions, Exhibit "P-23/' Docket -Vol. V, p. 2646.

Note 21, Notes to the Financial Statement, Exhibit "P-2," Docket- Vol. IV, p. 1715. Details of Discrepancies, Exhibit "P-7," Docket- Vol. IV, at p. 1736.

Petitioner argues that the assessment specifically cites RR No. 16-2005 but a perusal of the same does not yield the portion quoted by the BIR, nor the alleged rates it claims to apply.

Petitioner

contends that it should not be left guessing or confused as to the legal basis hurled against it; thus, the assessment must be cancelled.129 Moreover, petitioner argues that the revenue officers lacked authority to examine petitioner's VAT liability, as the original LOA explicitly excluded VAT. Although a subsequent LOA expanded the scope to all internal revenue taxes, including VAT, the subject assessment was already present as early as the PAN, when the scope of the revenue officers' authority expressly excluded VAT. Since the disallowed input tax assessment required examining VAT records- an act beyond the revenue officers' authority- petitioner asserts that such finding must be cancelled.13o The Court upholds the disallowance, but only in the reduced amount of P3,390,840.06.

Contrary to petitioner's assertion, the disallowed input tax expense falls within the scope of the original LOA, as it pertains to petitioner's claimed deduction from its 2014 gross income. A review of petitioner's 2014 Annual ITR shows that its reported total gross income of Pl16,219,782.00 was reduced by P110,142,777.00 in ordinary allowable itemized deductions, resulting in a net taxable income of P6,077,005.00.131 Included in these claimed deductions is P5,356,174.00 representing "Input Tax" expense. 132 Accordingly, respondent's examiner had the authority to examine petitioner's VAT returns insofar as they relate to the claimed input tax expense.

The legal prov1s10n quoted by respondent as basis for the subject disallowance actually pertains to the amended provision of 129 130 131 132 Pars. 98 to 99, petitioner's Memoraudum, Docket- Vol. V, p. 2720. Pars. 100 to 101,105 to 106, petitioner's Memorandum, Docket- Vol. V, pp. 2720 to 2721. Part IV- Computation of Tax, Exhibit "P-23," Docket- Vol. V, p. 2644. Note 25, Notes to the Financial Statement, Exhibit "P-2," Docket- Vol. IV, p. 1717.

Section 4.114-2 (a) of RR No. 16-2005 under RR No. 4-2007,133 which provides for the proper treatment of the input tax on sale to government, as follows:

SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents.-

(a) The government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/ or of services taxed at twelve percent (12%) VAT pursuant to Sees. 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment thereof. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller. The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT attributable to sale to government exceeds seven percent (7%) of gross payments, the excess may form part of seller's expense or cost. On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost."

Based on the foregoing provision, the allowable input tax on sales to the government shall not exceed 7% (previously 5%) of gross sales or receipts, representing the standard input VAT in lieu of the actual input VAT attributable to such sales. If the actual input VAT exceeds the 7% standard of gross sales or receipts, the excess may be treated as part of the seller's cost or expense. Conversely, if the actual input VAT is less than the 7% standard, there is no excess which may be treated as part of the seller's cost or expense. An examination of petitioner's amended Quarterly Value- Added Tax Returns (BIR Forms No. 2550-Q) for calendar year (CY) 2014 shows that petitioner overclaimed input tax expenses in the 133

SUBJECT:

Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005.

amount of 1'3,390,840.06, and not 1'3,405,241.41 as found by respondent, computed as follows:

1st Quarter134 znd Quarter 135

3'' Quarter 136

a. Sales to

Government

p 3,244,070.03 p 18,284,464.18 I' 7,474,855.30

b. Total Sales 232,811,364.66 175,617,415.97 69,686,575.41

c. Total Current Input Tax (see breakdown be lou;)

11,412,564.18 18,123,277.11 2,020,367.24

Standard Input (7%)

227,084.90 1,279,912.49 523,239.87 Actual input [a/b x c] 159,026.42 1,886,910.87 216,712.51 Should be closed to expense

I'

(68,058.48)

I'

606,998.38 I' (306,527.36) Closed to expense per VAT return 159,472.01 2,067, 951.32 270,426.70 Disallowed expense p (227,530.49) P(l,460,952.94) P(576,954.06)

Breakdown of Total Current Input Tax:

Input Tax Deferred on

Capital Goods

exceeding P1 Million from Previous

Quarter

l' 596,718.70

I'

596,718.70 l' 542,492.88

Add: Current

Purchases of goods exceeding P1M 321,428.57 Less: Input tax on purchases of capital goods exceeding PlM deferred for the succeeding period 596,718.70 542,492.88 500,766.51 Amortized Input tax from purchases of goods exceeding P1M p 321,428.57

I'

54,225.82 p 41,726.37

Add: Current Input

tax from

Purchases of Capital

Goods not exceeding

P1M

286,744.78 77,829.72 138,214.54 Purchases of goods other than capital goods 2,146,444.10 1,680,814.39 960,240.03 Importation of goods other than capital goods 6,995,333.04 14,807,124.00 42,193.00 Domestic purchases of services 1,662,613.69 1,503,283.18 837,993.30

Total Current Input

Tax

Pll,412,564.18 P18,123,277.11 P2,020,367.24 134 135 136 137 BIR Records (Exhibit "R-12"), pp. 149 to 150. BIR Records (Exhibit "R-12"), pp. 135 to 136. BIR Records (Exhibit "R-12"), pp. 120 to 121. BIR Records (Exhibit "R-12"), pp. 108 to 109.

4" Quarter137

CY2014

I' 15,404,551.66 150,185,087.89 27,407,894.91 1,078,318.62 2,811,240.04

I'

1,732,921.43

I'

1,965,333.96 2,858,323. 99 5,356,174.02 P(l,l25,402.56) P(3,390,840.06)

I'

500,766.51

I'

596,718.70 321.428.57 459,040.14 459,040.14 p 41,726.37

I'

459,107.13 110,317.41 613,106.45 1,563,753.48 6,351,252.00 22,583,188.08 ,427,838.12 3,108,909.57 7,112,799.74 1'27,407,894.91 P58,964,103.44

IT-5. Disallowed due to non-withholding- Pl21,518,800.78 As discussed earlier, out of !'121,518,800.78 worth of costs and expenses initially disallowed by the BIR as deduction from petitioner's gross and taxable income,13s the Court finds that only !'114,873,144.54 thereof was not subjected to EWT, the details of which are as follows:

Income Payment

Purchases of Goods

I'

57,338,068.04

Purchases of Services/Income

Payments to Contractors

53,887,722.63

Professional Fees (10%)

257,372.87

Professional Fees (15%)

1,092,135.00

Commission

2,297,846.00

Total

p 114,873,144.54 Then, out of !'114,873,144.54 worth of disallowed costs and expenses not subjected to EWT as claimed by petitioner, the Court finds that the extent of such disallowance due to non-withholding of

EWT

should be !'54,044,201.08, based on the following considerations:

One. !'66,364,404.00 should be removed from the disallowed cost and expenses not subjected to EWT in the amount of !'114,873,144.54 because this pertains to petitioner's purchases or income payments which were booked or recorded under its asset accounts.

Additionally, respondent erred in disallowing the portion of allowances for depreciation not claimed by petitioner as deductions. The particulars of this figure are as follows:

Purchases of

Services/Income

Purchases of

Payments to

Account N arne

Goods (1%)

Contractors (2%)

Total

Other Current Assets

Prepaid Insurance

I'

839,894.00 p 839,894.00

Prepaid Import

Charges

56,365,839.00 56,365,839.00

PPE- Additions

Machinery &

Equipment

Factory Fixtures

Office Building

Office Equipment

Office Furniture &

Fixture

Delivery &

Tran~ortation

Warehouse

Power System

EquiPment

Computer

Total

p 3,668,664.00 3,668,664.00 110,714.00 110,714.00 250,714.00 250,714.00 1,655,266.00 1,655,266.00 42,676.00 42,676.00 2,704,754.00 2,704,754.00 96,429.00 96,429.00 582,713.00 582,713.00 46,741.00 46,741.00 P4,547,937.00 p 61,816,467.00 p 66,364,404.00 Two. '1'5,535,460.54 representing the salaries of security guards employed by Cougar Security Services, Inc. (CISI) should be added as a component of disallowed cost and expenses not subjected to EWT in the amount of Pl14,873,144.54. Specifically, RMC No. 39-2007 requires the presentation of notarized certification from the security agency, attesting that the WTC of the latter's security guards was withheld from their compensation income:

IV. MANNER OF ISSUING RECEIPT FOR THE ENTIRE CONTRACT PRICE. - With respect to the security guards' salaries which are mandated by law to be paid by the Client through the Security Agency, the amount so paid representing salaries must be covered by a Non-VAT Acknowledgement Receipt. This document, coupled with the notarized certification of the expanded withholding taxes prescribed in Paragraph V hereunder, shall be a sufficient substantiation for the expense that will be claimed as a deduction from gross income by the Client. V. WITHHOLDING TAX COMPLIANCE.- Insofar as the Agency Fee is concerned, the Client is constituted as the withholding agent of the EWT following the rule above-mentioned. However, with respect to the portion of the

Contract Price

representing the amount segregated and earmarked as salaries of the security guards, the Security Agency shall be the one responsible for the withholding of the tax on compensation income. This is so because while it is the Client who claims the payment as an expense, it is the Security Agency who physically controls the payment to the salaries of the Security Guards. However, in order to comply with the requirement for deductibility under Section 34(K), in relation to Section 58 and 81, all of the National Internal Revenue Code, as amended, the Security Agency must furnish its Client, on or before January 31 of the year following the year of withholding, a Notarized Certification (see Annex 'A') indicating the names of the guards employed by the Client, their respective TINs, the amount of their salaries and the amount of tax withheld from each. This certification together with the covering Non-VAT Acknowledgment Receipt must be kept on file by the Client as substantiation for the claim of the expense."139 No such certification from CISI was provided by petitioner; hence, P5,535,460.54 worth of the salaries of security guards shall form part of petitioner's disallowed cost and expense not subjected to EWT. Therefore, and to reiterate, out of Pl14,873,144.54 worth of disallowed costs and expenses not subjected to EWT as claimed by petitioner, the extent of such disallowance due to non-withholding of EWT should be P54,044,201.08, as shown below: Purchases/income payments not subjected to EWT I' 114,873,144.54

Add (Less): Adjustments

1) Purchases/income payments booked/recorded under petitioner's Asset accounts (66,364,404.00) 2) Salaries of security guards for which no notarized certification from the security agency was submitted, attesting that the proper WTC was withheld from the security guards' salaries 5,535,460.54 Disallowed cost/expenses due to non-withholding of EWT I' 54,044,201.08 IT-6. Difference in prior year's excess credits- P228.00 Respondent's comparison of petitioner's prior year's excess credits, as reflected in its 2014 Annual ITR, with those reported in its 2013 Annual ITR revealed a discrepancy of P228.00, which resulted in the assessment_140 139 140 Boldfacing supplied.

Details of Discrepancies, Exhibit "P-7," Docket- Vol. IV, at p. 1737.

Petitioner counters that the finding was based on a review of its 2013 ITR while the LOA covers only 2014; under the Lancaster case,141 an LOA cannot be extended to examine matters or taxable years not specified .142 The Court upholds the assessment.

In its 2014 Annual ITR, petitioner reported an income tax due of !'2,324,396.00. This amount was offset against total tax credits of !'26,140,844.00, resulting in an mcome tax overpayment of !'23,816,448.00,143 as shown below:

Total Income Tax Due

1"2,324,396.00

Less: Tax Credits

Prior Year's Excess Credits

p 23,513,148.00 Creditable Taxes Withheld during_ the year 2014 2,627,696.00 26,140,844.00

Total Overpayment

P23,816,448.00 The total tax credits of !'26,140,844.00 consist of prior year (2013) excess credits amounting to f'23,513,148.00 and creditable taxes withheld during 2014 in the amount of !'2,627,696.00. Clearly, the prior year's excess credits of !'23,513,148.00 form part of the P23,816,448.00 income tax overpayment reflected in petitioner's 2014 Annual ITR.

Section 2.58.3(C) of RR No. 2-98 requires the submission of the previous year's Annual ITR to prove the "Prior Year's Excess Credits" as a precondition for their allowance as credit against the tax due for the succeeding the taxable quarters or years, viz.: 141 142 143 Sec. 2.58.3. Claim for Tax Credit or Refund. -

XXX

XXX

XXX

Commissioner of Internal Revenue v. Lancaster Philippines, Inc., G.R. No. 183408, July 12, 2017.

Par. 116, petitioner's Menwrandlllll, Docket- Vol. V, p. 2722. Part II - Total Tax Payable, Part IV - Computation of Tax, Schedule 7 - Tax Credits/Payments, Exhibit "P-23," Docket - Vol. V, pp. 2643, 2644 and 2648, respectively.

(C) Excess Credits. - An individual or corporate taxpayer's excess expanded withholding tax credits for the taxable quarter/ year shall automatically be allowed as a credit against his income tax due for the taxable quarters/years irrunediately succeeding the taxable quarters/ years in which the excess credit arose, provided he submits with his income tax return, a copy of the first page of his income tax return for the previous taxable period showing the amount of his excess withholding tax credits, and on which return he has not opted for a cash refund or tax credit certificate."144 Accordingly, contrary to petitioner's claim, respondent has the authority to determine the veracity of the prior year's (2013) excess credits of P23,513,148.00 declared in its 2014 Annual ITR, by comparing the said amount with that declared in the 2013 Annual ITR, as these form part of the P23,816,448.00 income tax overpayment reported in the 2014 Annual ITR.

As correctly found by respondent, petitioner's amended 2013 Annual ITR disclosed excess tax credits of P23,512,920.00 as of December 31, 2013,145 which is P228.00 less than the P23,513,148.00 claimed as prior year excess credits in its 2014 Annual ITR. Thus, petitioner overclaimed its prior year (2013) excess tax credits by P228.00.

Summary-IT

In sum, petitioner is liable for basic deficiency income tax for TY 2014 in the amount of P19,582,738.16, computed as follows: Taxable income per return

Add: Findings per Investigation:

IT-1

Undeclared sales per matching of SLS and SAWT

IT-3

Non-deductible interest expense

IT-4

Disallowed expense (input attributable to sales to gov't)

IT-5

Disallowed due to non-withholding Taxable Income per audit Multiplied bv: Income tax rate Income tax due per audit

Less:

1-14 145

Allowable Credits/Payments:

Prior vears excess credits Boldfacing supplied.

BIR Records (Exhibit "R-12"), p. 202.

r 6,077,004.00 1'7,832,085.87 7,908.04 3,390,840.06 54,044,201.08 65,275,035.05 I' 71,352,039.05 0.30 1'21,405,611.72 1'23,513,148.00

IT-6

Difference in prior period's excess credits Creditable withholding tax claimed per ITR Exccess MCIT over normal Excess credits carried over to succeeding period

Basic Income Tax Deficiency

III. Deficiency WTC- P406,346.94 (228 00) 2,627,696.00 (501,294.44) (23,816,448.00) 1,822,873.56 1'19,582,738.16 Respondent assessed petitioner for deficiency WTC forTY 2014 in the total amount of P406,346.94, computed as follows:146

Basic WC Deficiency

p 219,507.21

Add: Increments

Interest- at 20% (from 1/16/2015 to 12/31/2017) p 129,900.16 Interest- at 12% (from 1/1/2018 to 2/29/2020) 56,939.57 186,839.73

Total Amount Due

P406,346. 94 The basic deficiency WTC in the amount of P219,507.21 was based on the following finding:147 Reconciliation of withholding tax due per Alphalist of Employees as against tax remittance per Form 1601-C revealed discrepancy, hence, assessed pursuant to Revenue Regulation 2-98 and Section 80(A) of the Tax Code which states that .. , "The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld. If the employer fails to withhold and remit the correct amount of tax as required to be withheld, such tax shall be collected from the employer together with the penalties."

Withholding tax due per Alphalists:

Sched 7.1 Sched 7.3 Sched 7.5 Less: Withholding tax remitted per Form 1601C we deficiency- basic The Court upholds the assessment.

Exhibit "P-7," Docket- Vol. IV, at p. 1734. p 106,821.15 6,133,537.51 146 147 Details of Discrepancies, Exhibit "P-7," Docket- Vol. IV, at p. 1737. p 6,240,358.66 6,020,851.45 p 219,507.21

An examination of petitioner's Alphalist of Employees, 148

Annual Information Return of Income Taxes Withheld on

Compensation and Final Withholding Taxes (BIR Form No. 1604- CF)149 and Monthly Remittance Returns of Income Taxes Withheld on Compensation (BIR Forms No. 1601-C),150 for TY 2014, shows that petitioner indeed uncured under-remittance of WTC in the amount of P219,507.21. No countervailing evidence was adduced by petitioner to prove otherwise. Hence, the 2014 WTC assessment is wholly sustained.

IV. Documentary Stamp Tax- 1"2,029,157.73 Respondent assessed petitioner for deficiency DST forTY 2014 in the total amount of P2,029,157.73, computed as follows:rsr

Basic DS Deficiency

l"1 ,092, 909.00

Add: Increments

Interest- at 20% (from 1/6/2015 to 12/31/2017) I" 652,751.13 Interest- at 12% (from 1/1/2018 to 2/29/2020) I" 283,497.60 !"936,248. 73

Total Amount Due

p 2,029,157.73 Pursuant to Section 179 of the NIRC, as amended, respondent assessed petitioner for deficiency

DST

on the following transactions: rsz

Particulars

Amount

DST

Debt Instruments:

Advances from Shareholders I" 23,700,000.00

I"

118,500.00 Advances from JTKC Equities 194,881,750.00 974,409.00

TOTAL

Pl,092,909.00 DST-1. Advances from Shareholders Petitioner pointed out that the "Advances from Shareholders" amounting to P23,700,000.00 represents the year-end balance for 2013 148 149 150 151 152 BIR Records (Exhibit "R-12"), pp. 214 to 219 BIR Records (Exhibit "R-12"), pp. 50 to 51. BIR Records (Exhibit "R-12"), pp. 26 to 49. Exhibit "P-7," Docket- Vol. IV, at p. 1735. Details of Discrepancies, Exhibit "P-7," Docket- Vol. IV, at p. 1737.

and 2014, as reflected in its AFS for those years.153 However, this does not necessarily mean that no new advances were made during the period. While it is possible that the account remained dormant, there are two common scenarios where the ending balance stays the same despite underlying activity:

1. Equal Additions and Collections - New advances may have been granted during the year, but an equivalent amount was collected or liquidated by year-end (e.g., 'P20,000 was advanced and 'P20,000 was subsequently repaid); and

2. Rolling Advances - Existing advances may have been settled and replaced with new advances of the same aggregate amount.

Thus, to support its claim that the amount of 'P23,700,000.00 came from advances made prior to 2014, i.e., TY 2013, petitioner should have submitted its 2014 general ledger (GL) or a summary of movements for the "Advances from Shareholders" account. These documents would have aided the Court in ascertaining that there were no debits (representing new advances) and credits (representing collections or liquidations) in TY 2014. No such documents were presented by petitioner; Hence, the amount of P23,700,000.00 shall be considered as having been advanced during the TY 2014. Accordingly, the DST imposed thereon is wholly sustained. DST -2. Advances from JTKC Equities Petitioner's AFS for 2013 and 2014 reflected the following balances:154 153 154 Advances from JTKC Equities:

As of December 31, 2013 P176,800,000.00 As of December 31, 2014 194,881,750.00 Statement of Financial Position, Exhibit "P-2," Docket- Vol. IV, p. 1692. I d.

Petitioner explains that the P18,081,750.00 difference between the above figures does not necessarily accurately represent the advances made during the year. While it shows the net change in the account balance, it may not reflect the actual total of advances made for several reasons:

1. Gross v. Net Activity: The '1'18,081,750.00 is a net figure. If JTKC Equities advanced '1'30,000,000.00 during the year but petitioner repaid '1'11,918,250.00, the "advances made" were actually P30,000,000.00.

2. Repayments: Any payments made by petitioner back to JTKC Equities during the year 2014 reduce the ending balance, masking the true total of new advances.

3. Non-Cash Transactions: The balance could change due to non-cash events, such as converting a portion of the debt into shareholder equity (capital stock) or offsetting the balance against other receivables/ payables.

Yet again, petitioner failed to provide its 2014 GL, where all the credit entries (increases to the liability) made to the account "Advances from JTKC Equities" during that year are reflected. In view thereof, the amount of '1'194,881,750.00 is deemed to have been advanced during the year 2014. Therefore, respondent correctly subjected said amount to DST.

DST under Section 179 of the NIRC, as amended by RA No. 9243, provides:

SEC. 179. Stamp Tax on All Debt Instruments. - On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five

(365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan.

Exh. No.

"P-22"156

"P-22-1"157

shall be imposed on either loan agreement, or promissory notes issued to secure such loan.

Meanwhile, petitioner paid 2014 DST corresponding to the following advances, amounting to a total of P94,409.00, as summarized below:

Date of

Nature of

Transaction

ATC155

Transaction

Party

Tax Base

DST Paid

Bonds, Loan

JTKC Equities

May 9, 2014

DS106

agreements Inc.

1'11,081,750.00 I' 55,409.00 Bonds, Loan

JTKC Equities

Oct. 9, 2014

DS106

~eements Inc.

7,800,000.00 39,000.00 TOTAL 1'18,881,750.00 1'94,409.00 After reducing its DST liability by P94,409.00, petitioner remains liable for 2014 DST, to the extent of P998,500.00, computed as follows:

Particulars

Debt Instruments:

Advances from Shareholders Advances from JTKC Equities Less: DST paid in 2014 on advances made during the same xear

Basic Deficiency DST Due

Petitioner is not liable to pay the compromise penalty.

!' !'

Amount

DST

23,700,000.00

I'

118,500.00 194,881,750.00 974,409.00 218,581,750.00 l' 1,092,909.00 18,881,750.00 94,409.00 1'199,700,000.00 I' 998,500.00 Respondent imposed a compromise penalty in the amount of P116,000.00 against petitioner for failure to pay internal revenue tax at the time or times required by law or regulation, pursuant to Section 255 of the NIRC, as amended. The imposition was based on the schedule of suggested compromise penalties prescribed under RMO No. 19-2007, as amended by RMO No. 7-2015:158 Failure to pay the correct amount of income tax I' 50,000.00 155 156 157 158 Alphanumeric Tax Code of DS106 refers to "Original Issue of All Debt Instruments" (Refer to Revenue Memorandum Order No. 36-2007). BJR Records (Exhibit "R-12"), pp. 470 to 473. BIR Records (Exhibit "R-12"), pp. 484 to 486. Exhibit "P-7," Docket- Vol. IV, at pp. 1735 and 1738; Exhibit "R-10," BIR Records (Exhibit "R-12"), at pp. 678 and 681.

Failure to pay the correct amount of withholding tax on compensation Failure to pay the correct amount of expanded withholding tax Failure to pay the correct amount of documentary stamp tax 16,000.00 25,0000.00 25,0000.00 P116,000.00 The imposition of the compromise penalty without the conformity of the taxpayer is illegal and unauthorized. 159 Accordingly, the Court wholly cancels the compromise penalty because petitioner never consented to its imposition.

WHEREFORE, the present Petition for Review filed by Goodyear Steel Pipe Corporation is PARTIALLY GRANTED. The imposition of the compromise penalty in the amount of !"116,000.00 for taxable year 2014 is CANCELLED. On the other hand, the respondent's assessments against petitioner covering deficiency for income tax, EWT, WTC and DST forTY 2014 are UPHELD IN PART.

Hence, petitioner is ORDERED TO PAY respondent the aggregate amount of P47,116,310.39, inclusive of the 25% surcharge, deficiency and delinquency interests imposed under Sections 248(A)(3), 249(B) and (C) of the NIRC of 1997, as amended by RA No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN), as implemented by RR No. 21-2018, computed as follows: Income tax

EWT

WTC

DST

TOTAL

Basic Tax Due

~ 19,582,738.16 ~ 2,070,477.27 p 219,507.21 p 998,500.00 ~ 22,871,222.64

Surcharge (25%)

4,895,684.54 517,619.32 54,876.80 249,625.00 5,717,805.66

Deficiency Interest {20%)

from Apr. 16, 2015 to Dec. 31,2017 (P19,582,738.16 x 20% x 991/365 days) 10,633,695.08 10,633,695.08 from Jan. 16,2015 to Dec. 31,2017 (?2,070,477.27 x 20% x 1,081/365 dmts) 1,226,403.25 1,226,403.25 from jan. 16,2015 to Dec. 31,2017 (?219,507.21 x 20% x 1,081/365 days) 130,020.44 130,020.44 from Jan. 6, 2015 to Dec. 31, 2017 (?998,500.00 X 20% X 1,091/365 days) 596,911.51 596,911.51

Deficiency Interest (12%)

from Jan. 1, 2018 to Feb. 29,2020 (Pl9,582,738.16 x 12% x 790/365 days) 5,086,146.79 5,086,146.79 (1'2,070,477.27 x 12% x 790;365 davs) 537,756.84 537,756.84 (1'219,507.21 x 12% x 790;365 days) 57,011.74 57,011.74 !59 Commissioner of Internal Revenue v. Liangga Bay Logging Co., Inc.,G.R. No. 35266, January 21, 1999.

(P998,500.00 x 12% x 790/365 davs) Total Amount Due as of Feb. 29~ 2020 P40,198,264.57 259,336.44 259,336.44 P4,352,256.68 P461,416.19 P2,104,372.95 P47,116,310.39 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of twelve percent (12%) per annum on the P47,116,310.39 total amount due as of February 29, 2020, or an amount equivalent to P15,490.29 per day,160 from February 29, 2020 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended by RA No. 10963 and implemented by RR No. 21- 2018.

Lastly, pursuant to Section 13 of RA No. 9282, considering that this decision is partly favorable to the national government, the BIR, through respondent, is hereby authorized to seize and distraint any goods, chattels, or effects, and the personal property, including stocks and other securities, debts, credits, bank accounts, and interests in and rights to personal property and/ or levy the real property of petitioner in sufficient quantity to satisfy the tax or charge with any increment thereto incident to delinquency.

I CONCUR:

~ 9;.u,v f. ~ ·faj~ MARIAN I~ F. REYES-FAJARDO

Associate Justice

!/OL HENRY S. ANGELES

Associate Justice

160 1'47,116,310.39 x 12%/365 days.

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.

~S&.f~-f~ MARIAN lVYtf. REYEg-FAJARDO

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, 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.

~.~1- MA. BELEN M. RINGPIS-LIBAN

Presiding Justice