Epu I Op ·Th Phiuj> Court of Tax App-·~ Quezo C T11' / Tours Sp Ecialists, Inc. vs. Commissioner of Internal re Venue

DECISION -

- 3 - ti ves to registered tourism enter- prises, you e~ e hereby allowed to dedu ct from your net ta xabl e in come for the yea rs specified hereunder the following amount s:

1974 1975 1976 ~1,147,346.00 ~1,261,559.00 ~1,476,8 8 3.00 The deductible amounts represent 50 ,6 o f y o u r F or e i g n E x c h a n g e E a r n i n g s of P-2,294,692, ~2,523,118 a nd ~2,95),767 for the years 1974, 1975 a nd 19 76 res- pect i vely .

This certificate is subiect to the provisions of Sect ion 8(a) P.D. 535 and Section 10 of R.A . 6135 .

We trust that you will be guide d accordingly.

Very truly yours, (SGD.) RODOLFO A. CACDAC Ac t ing General Manager cc:

Department of Finance.

Bure a u of Inte rnal Revenue Under Letter of Authority No. 04348 NA dated December 4, 1977, respondent's examiners of the Investme nt I ncentives Division conducted an exam- ination of peti tioner's income tax liabilitie s for the years 1~74 to 1976.

(Exh . "6", p . 136, BIR records.)

After investigation, said examiners reco rn:1e nded the disallowan ce of the reduced income tax incentives availed of by petitioner for these years and the dis- allowance of claimed expenses in the respective amounts WO. 3530 OF B22. ,G76.75, Fi0,910.39 and P20,539,214 ror the yo L274, 1975 and 1976, tin the basis of the Fiot.cce and recemmendatians of tho oxaminets, lespoeoadvent issued against petitioner the following deficiency income tax assessments dated November 29,

Se]

~J

\O

os ral c.

a ry ch 42, 198i for the years 1974 and ]

Na

owe - \, to iota, respeetively: (Exh. "10", p, a2, BIR feas3 Exh, "12", p. 179 PIR records.)

,

LIT

income ecy return . . (fl, 475,657,6 lowable deductions;

ned inc. tax - B2,471,800.143 Irecady assessec oe ee “ e e « » * Fr. 4/16/75 ~ 4&/1356/78 DUE AND COLLECTIBLE. .

L973

Net loss per return coe ew ew ww CC BLL 821,571. 2 jac: Unallowabie expenses:

Reduced income tax B2,125,784,44 Prior year's un- suppotted expenses. . 9,918.39 OUTS @xpenses - un- euopoarted cae _ 1,000.08 \3 _

G3

Net inecne per investigation .. , Tax due thereon co 8 8 ee Add: 14% int. fr. 4-16-76 to 4~16-79 a TOEAL AMOUNT BUE & COLLECTIBLE . .

pes tre \

Pane

DECISI01

- 5 - 1 9 7 6 Net loss per retur n ••• •• (81,077,341.03) Ad d : Unal l owable de duc tions Red uc ed income t ax el,341 , 993.00 Disall owed expenses • 20~883 . 21 Net income per investiga~ion •• • Tax due t hereon ••• ••• .•• Add: 14% i nt . f r. 4- 16-77 to 4-16 - 80 TOT AL AMOUN T DU E & COLLEC TI BLE 1 , 362,826.21 e 285,485.18 e 89 , 919 . 80 37 ,766.31 g __ 1f1!. §~§!.!± - --- - --- - ----- In its letters dated December 11, 1979 and March 24 , 1981, petiti oner pr otested t h ~ foregoing defic i ency in - come tax assessments.

( Exh. "14", pp . 145-148, BIR r e cords; Exh. "15" , pp . 182-183, BIR recor ds.) The said prote s ts we re however denied by r es pondent in a letter dated August 18, 1982.

(Exh. " 16" , 196

BIR

d ) p.

, recor s.

Hence the instant appeal.

The issue po s ed for res ol ution is whether petitioner is entitled to the reduced incom e tax incentiv e s for the years 1974, 1975 and 19 76 under Pre si dential Decree No. 535.

The app l icable pr ovisions of Pre s idential Decree No. 535 read:

nsEC. 8 .

Incentives Available to a

Registe~d Tourism Ente rp rise - (a) Fifty per c e nt (50%) of fo r eign exchange ea r ned in t he first five years from the start of operatio ns shall be deductible fr om net taxable income, s ub- j ec t to other provisions of Section 10 of Re public Act No . 6135 and r ules and regu- lations t o be promulgated by the Authority.

XXX

XXX

xxx".

1 r· ;

U

f-..,

- 6 - "SEC . 6.

Conditions for Av o.il ment

of Tourism Incentives -

XXX

XXX

XXX

(c) In the case of re gistered tourism e nterprises located in or who se sphere of activity is in Greater Manila, an aver a ge of se ve nty percent (70%) of its revenues must be in foreign currency, never falling below fifty percent (50%) in any given year within the period for which the incentive s ar e granted and in the case of regist e r e d tourism enterprises located outside Greate r Manil a: or whose s ph e r e o f activity is out - side t i e same, a n overage of fifty percent (50%) of revenues shall be in foreig n cur- renc y , never falling below th i rty-five perc e nt (35%) in any given ye a r with i n the pe riod for which inc entives ar e granted~

XXX

XXX

xx x".

The i ncentiv es availed of by petitioner we re disallowed by responder t on the gro un d that pe ti- tioner failed to meet the conditions for avail ment of tourism incentives under Section 6(c) ab ove. Based on respondent's computation , petitioner ' s a verag e fo r eign exchange earnings for the three year s wa s only 49.02% of its gross reven ues, which is way below th e mini mum of 70% r e quired under Sec t ion 6(c), and in 1974 and 1975 its percentag e s of fo r ei gi1 exchange earnings t o gross :r evenues o f 40.2 2% ond 46 .70 %, r espectively, fell be l ow 50% of j_ts re venues.

Respond e nt arrived at the above figure s as follows:

(Exh . "5", p. 119, BIR r ecords.) 1 r· l.Jt.~

DECISION -

CYA CASE NG. 3530 1974

Totai Revenue per

Income Statement P5,704,616.08 50% FX Minimum require- ment per P.D. 535 B2,852,308.04

FX CLarnings per PTA

Certificate B2,294,692.06

Short/Over of Mini-

"mum requirement PB 557,616.04 Rate of FX earnings te Gross Revenue 40.22% Average FR foi 3 yrs. 49.02% Petitioner, ascailing al 197 P5,402,561.74 50% P2,701,280.87 respondent's computatian, e__498,350,00 sub- mitted the fellowing computation showing that the percent- ages of 1ts 3 for the years 1974 to 1976 were 71%, 77t and 87%, Foreign exchange earnings to its griuss revenues respect- ively, or an average of 78.33% of its revenues, never falling below 50% in any of the years in question:

"ji", p. 190, BIR records.)

L974

Gross Revenue

inclusive)

Cali

P5,704,616.C00 Less tour costs (hoteis, restau- tants, transport- ation, etc.) _2,462,254.09 Gross Revenue, TST setvices P3,242,362.00 NET farecign exchange earnings (after deducting receipts which were for hotels, restaurants, etc.)E2,274,692.00 Percentage of foreign exchange earnings 71%

Cr

pes P5,150,562.00 1,888, 350.9 F4,262,212.00 (Exh.

1976 £4,910,835.00 _1,507, 901,06 P3,402,93"%.00 22,953,766 .00 87%

DECISIO N -

GA CASE NO. 3530 - 8 - Thus t he controversy centers on which, one of the tw~ co mputations correctly represents the per- centages of petitioner's foreign exchange earnings to i t s gr oss revenues for purposes of a vailment of the reduced income tax incentives . To ob tai n th e pe rcentage required in Secti on 6(c), re s pondent applied the formula- f oreign e x- change earnings over gross re venues. For th e f'oreign exchange e a r nings in his com- putati on, respondent adopted the figures certified by the Authority as petitioner 's foreign exch a nge earnings for the years 1974 to 1976 (see Exhibit "J" ) and for t he gross revenues, the gross income from operations declared by petitioner in its income tax returns f or the s a me years.

Applying the above formula , petitioner took up as its foreign exchange earnings , the same foreign ex chan ge earning s as cer t ified by the Authority but for its gross revenues, petitioner deducted tour costs, such as hotel room charges, transportation and restau- rant cost s , from its gross income from operations for these years.

Evidently, the point of di sagreement betwee n the contending parties is whether or not in the computation of gross revenues, tour costs should be exclude d from gross income from operations .

15u

- 9 - Petiti6ner claims that the Philippine Tourism Authority in the course of its examination conducted in October or November 1977, excluded tour costs in the determinati on of petitioner's foreign exchan gG earnings as per the Authority's certification, al- though it subs equently provi ded petitioner with th e figures for the tour costs.

It is contend ed by peti - tioner that if tour costs were excluded from its foreign cxch3 :1ge earnings, the same s hould like wise be excluded from its gros s revenues so as not to distort the proportion of its foreign exchange earn- ings to gross rev e nues.

Thus in its computation , petitioner subt racted the tour costs from its gross income from operations.

Respondent mai ntains , however, that assuming that petitioner's contention is correct, petitioner nonetheless can not deduct the alleged tour costs for lack of sufficient evidence that the figures f ~ r the tour costs we re determined by the Authority itself, and i n the certification, were excluded from peti- tioner's foreign exchange ear~ings .

Other than the self-s erving testimony of petiti oner' s lone witness, there is no evidence, documentary or otherwise, showing that portion of the gross income from oper- ati ons allegedly intended for tour costs. As a . g~ed

- 10 - by respondent, there is no way of determining how much sh oul d be deducted from the gross income fr om operations in order to arr ive at what petitione r claims as its true revenue .

We agree with resp ondent .

Pet i tione r 's sole wi tness , its accoun t ing manager, testified before the Court that the figures in petitioner's computati o:1 i;:cluding those of the to4r costs , we re actu ally supplied by the Authority by telephone call only, because the Authority could not furnish the actual records as there should be a formal require ment from the Bureau of Internal R ~ v enue. (t.s.n~, pp. 31-33, June 13, 19B5. ) The testi mony of petitioner's witness on t he figures for the tour costs alleged l y deducte d from its f orei gn exchan ge earnirigs by the Authority is, at best, no more than hearsay and therefore has no probative va lue . No official of the Authority wa s presented to corroborat e her stat~men t.

Nei the r was there a ny doc umentary ev i dence offered by petiti one r t o est abli sh t he correctness of said fig " r es. · In availi ng of the reduc ed in come tax incentives, petitioner made its own computation of its tota l fore i gn exchange earnings, and in its income tax re- turns, deducted 50 % of these from its net taxable income for the yea rs in questio n. 1 t' .

' --1 -' ' Annex "A", attached hereto, is a compa rative an alysis of the total foreign exchang e earnings of pe t itione r as ascer t ained by it and as dete rm ine d by the Aut hority in its certification. I~ will be noted that for the years 1974 to 1975 the total foreign exchange earnings of petitioner as fou nd by it, compared to tho se determined by th e Authority, were much mo .e by ~2,648,988.26 and ~1,72 8,450 .88, respec ti vely.

I n its memorandum, pet itioner, t o bolster its claim, attributed thes e differences to it s having computed its total for e ign exchange earn- ing s without any deduc t i on for tour costs . ( p •. 54' CTA re . ords.)

As shown for 1976, however , t he determination by petit ioner of its for ei gn exchange earni ng s wa s less by e269,781.00 than the finding s of the. Au th ority . If as petitioner contends, the fore ign e xcha nge ear n- ings certified by the Authority were net of tour costs , then on the basis of petitioner's computat i on of its 197 4 and 1975 foreign ex change earnings which include tour costs , petitioner's tot a l f ore ig n exchange earnings could not be les s but should be much mar~ than those found by th e Authority, c onsideri ng that the all~ged tou r ·cos ts for 19 7 6 amounted t o E 1 , 50 7 , 9 0 1 " 0 0 •

I

·• I

-I

- 12 - Clearly, petitioner's claim that its foreign exchan~e earnings as certified by the Authority were net of tour costs, is not amply s upported by the evidence on r ec ord.

Since petitioner's computation, showing th at its foreign exchange earnings exc ee ded an average of 70% of its gross revenues for the years in question, is premised.on the above claim, we find said computation to be err c ne ous. Petitioner insists that lacking contr ary evi- dence adduced by respondent, the certification by the Authority should be given full weight and ere- dence since the Authority is the agency called upon to implement President i al Decree No. 535. As correctly pointed out by respondent, the 11 Certificate of Reduced Income Taxn issued by the Philippine Tourism Authority is conditional in c h a r a c t e r • I n fa c t , i t i s s t a t e d the r e i n t h a t, 11 This certificate is subject to the provisions of Sec t i o n 8 ( a ) P • D • 5 3 5 -an d Sec t i o n 1 Q. o f R • A • 6 13 5 " • As aforequoted, Section B(a) in turn provides that the deductibility of the 50 % foreign exchange earn- ings from net taxable income is "subject to other provisions of Section 10 of Republic Act No. 6135 and rules and regulatio~s to be promulgated by the Authority".

Briefly stated, the certificatio n is subject to petitioner 1 s compliance with the rules

15J

- 13 - and regulations prom ulga t ed by the Authority to implement the provisions of Presidential Decree No. 535, among which rules are the conditions for availment of incentives (Exh . "I", pp. 36-37, CTA records), thus the certificati on is not conclusive.

As to Annex

11 A" of petitioner's memorC\ndum (p. 52, CTA records) which was issued by the Philippine Tourism Authori Ly, certifying that petitioner has satisfactorily complied with the conditi ons of its registrati on and "has attained foreign exchange earnings of 70.8, 77.3 and 84.4 as percentages of its gross revenues for the y e a ~ s 1974, 1975 and 1976, respectively", this certifi- cation was not presen t ed as evide nce, hc\; ing been allegedly received by peti t ioner after it rested its case.

Then it does not even state the manner of how the percentages shown therein was . arrived at, the basis thereof and the figu r es taken into account in .the computation of such percentages. Moreover, the alleged certifi cation was not pro- perly iden t ified and it does not bear the seal of the Philippine Tourism Authority. If petitioner received this certification, which is dated 6 September 1983, after it had rested its cas e on Jun e 13, 1983 (p. 43, CTA records), why did not lCO '

- I

•

- 14 - petiti oner file a motion to present it as evidence when r~spondent produced his evidence only on March 14, 1984 (p. 50, CTA records)?

Undoubtedly, the Bureau of Internal Revenue has 'the authority to ascertain whether pe titioner has complied with the conditions for availment of the incentive, by vi r.tue of Socti on I of President! al Decree No. 308 promulgated on October 9, 1973, amend- ing the approved staffing pattern of the Bureau of Internal Revenue, which reads:

"SECTION 1.

An Investment Incentives

Divisi on is hereby created under the Enforr.e- ment Service which shall handle and proces c all applications for tax exemptions of industries operating under the Board of Inve stments or such other special laws granting incentives to taxpayers, and tax prob le ms aris i ng out of the operations of the Export Processing Zone Authority." and the pertinent portion of Section 324 of the National Internal Revenue Code of 1977 as amended by Presidential Decree No. 1457, which provides : " SEC. 324.

Preservation of books . of accountg, and other accounting records. -

XXX

XXX

XXX

Any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent: record s of tax-exempt organizations or entities shall be subject to examination

by the Bureau of Internal Revenue for the

purpose of ascertai~ing whether such organizations or entities are complying

I

l G

-I

- 15 - with the conditions under which they have been granted tax exemptions and their tax liability, if any."

It was on the strength of this authority that respondent's examiners of the Investment Incentives Division investigated the accounting records of peti- tioner and ascertained that its foreign exchange earnings fell below the average mini mum requirement of 70% provided by law as ~ hc ~ n in respondent's computation.

The burden rested on petitioner to prove otherwise, bu t petitioner failed to do so. The Court recognizes that in accordance with settled principles respondent's determination is presu mptively correct and casts upon petitioner the burden of offer- ing adequate and competent evidence that i t is entitled to the reduced inco me tax in~entive for t he years 1974, 1975 and 1976 pursuant to Presidential Decree No . · 535 • .

It is to be conceded, as arg ued by respondent, that tax incen t ives are in the nature of tax ex emptio . s, they being limitation& on the power of the state to tax.

Since it has been the constant uniform holdino that exemption from taxation is not favored and is never presumed, if granted, it must be strictly cons- trued against the taxpayer and liberally in favor of the ·taxing authority.

(Jai-Alai Corpora t ion vs.

Collector,. 106, Phil., 345; Esso Standard Eastern

I

• I I

- 16 - .....

vs. Commissione r of Customs, L-~1841, Oct. 28 1 1966, 18 SC~A 488; Phil. Acetylene vs. Commissioner of Internal Revenue, L-19707, August 17, 1967, 20 SCRA 1056_; Commissi oner of Internal Revenue vs. Guerrero, L-20942, Sept. 22, 1967 , 21 SCRA 180.) Having reached the conclusion that petitioner's computation is erroneous, it is thus cleat that peti- tioner failed to meet the ~o n rlitions for availment of the t ourism incentives.

It follows that petitioner Tours Specialists, Inc. is not entitled to the reduced income tax incentives for the years 1974 to 1976. With respect to the claimed expenses in tl e amounts of e29,076.75, el0,918.39 and ezo,833.21 for 1974 to 1976, respectively, these were disallowed by respondent on the g~ound that they were incurred in prior periods or were not properly supported.

Peti-

tioner was given a~ple opportunity to present its objection to the assessment in an informal conference on August 10, 1979 called for that purpose by respon- dent.

No protest, however, was interposed by peti- tioner on ~:: t : e3e disallowed expenses.

(p. 139, BIR records.)

Nor was there any attempt to substantiate them.

The regulati ons require that any clai m for ·deduction must be substantiated by record showing in detail . the amount and nature of the expenses -

DECISION -

GA CASE NO. 3530 - 17 - incurred .

(See Sec. 66, Rev. Regs. ,lo. 2.) In view of the foregoing, respondent's decision will have to be sustained.

Accordingly, petitioner Tours Specialists, Inc. is hereby ordered to pny to respondent Commissioner of Internal Revenu e the sum of ~765,440.40 as deficiency income tax for taxabl e years 1974 to 1976, inclusive, plus surcharge and i n t e r e s t i n c i d e n t to d e 1 i r ··: !J f. ;; c y p u r s u a n t t o t h e p r o - visions of Secti on 5l(e) of the applicable National Internal Revenue Code, as amendej.

WH ~ REFORE

, the decision nppealed from is hereby affirmed al petitioner's costs.

SO or.DERED.

Quezo n City, Metro Manila, August 30 ~ 1985.

WE CONCUR:

?~t?£"""'.~ . \.. · ~/ "

CO STANT L Cft ROl\QUIN

Associate Judge

~~

Atv1ANTE F

Presidi n

I

Petitianer

rR SO A rer Incomes Tax Returas on

JO

1974 B2,471,800.13

1975 B2,125,784.44

1976 =F1,341,993.00 re ersten cat Ba .

* ae oe 9e .

180% Ae 699.26 B4,043,69 Be. 251,568.83 22,683,986 .00 ee yaa OOO ee

ANNEX "AN

PHANGE EARNINGS

RAL RA Se AI RR EE a RAE HEC i RIA ICR Rt RN RR FREE! ee tena ENA "RRR RP ne PERRET er 9 3 ate te ee

* Philippine * :

: Tourism 7 :

Authority per > Difference Tour Casts

* Certification ° "Exh, ek" " (Exh. "3 : :

° 100% ° j .

* 37 004 £07 99 a9 : B2,523,119.09 2? ,953,767.00

Ps

fae aa é 164-4