Kraft General Foods ~ Inc.~ vs. Commissioner of Internal Revenue~

DECISION

This case in-.:lolves petitioner's appeal on t11e decision of respondent .. da.t.ed February 11, 199 C received by petitioner on February 2 8, 199 C rnodifing the Deficien(y Value-Added Tax (VAT) Assessment issued against petitioner for tlle first semestf:r .

of 198f) from P2,4f.6,.3.30.99 tJ.) P 1..597 .. 711.62. As borne out t:., the pleadings, petitioner is a corporation duly organized and existing un(jer tlw laV·lS of the Republic of the Philippines. It is fl. subsidiary of Kraft Foods .. U.S.A.. Petitioner is engaged in the t)usiness of manufacturing cheese food products subject to t11e value-ach:led tax. It is a VAT registered enterprise witll VAT Regist.rati.:)n No .. 34-2-000024, Class A. 669

DECISIOH-

C_T _A_ CASE HO_ 4590

- 2 - On October 11, 190{), petitioner received from the :E>u.reau of Internal Revenue (BIR) Letter of Authority No. 0021561 NA, dated September 2 1.. 1 90·3, authorizing its representatives to examine petitioner's booli.s of accounts and other accounting records corresponding to its business tax liabilities for tl1e first semester of 1900.

i·~ft.er a thorough examination was made on petitioner's boots of accounts .. the revenue examiners prepared and submitted a copy of tl1eir preliminary findings regarding petitioner's alleged Deficiency VAT for the first semester of 1988 and tile same wa.s received by petitioner's representatives on November 29, 1989. On the basis of tile preliminary findings of the ez;:aminers, it appears tl1at petitioner ¥\las found liable to pay the alleged Deficiency VAT for tile first quarter of 198(:, in the amount of P603/J:d.17, inclusive of 25% surcharge and interest, and Deficiency VAT for the second quarter of 198('3 in the amount of P2, 113,322.34, indusive of 25% surcharge and interest, or a t.o*"~al (>1- p·-, .... , 17 1 '7 ~ ~:: 1 __ J...o:

~ ... , '·· l._J._).

Petitioner, represented by the law office of Romulo, Mabanta, Buenaventura, Sayoe: and De Los Angeles, filed on January .3, 1990 a lvlernorandum, dated December 2 8, 1989, disputing the Preliminary Findings of the Bureau of Internal Revenue,

International

Tax

Affairs

Division

(BIR-ITAD).

However, petitioner admitted that it is only liable to pay the amounts of P93, 7(h3 . .32 and P.:31 . .470.97, for the first and second quarters of 19&8, respectively, or a total of P 175, 179.2 9. The revenue examiners prepared a Memorandum Report, dated J~:uluary 31.. 1990, for the Commissioner of Internal 670

DECJSIOB-

C.I.A. CASE BO. 4j90 - 3 - R ~~T~tltl·~ c·t"tl.!"!i"( tll~ r·~·">l"·•"l!"!C· '-'.Tlly a D"'-fl. •"·1· ~ll(~Y T, ~AT /). C·c-~c·c-t""!~tlt ......

IJ t;' t='} --·-~\ .. - 6 -· .._.

._.c.J..:•\..r --·

Y\

1 v t_. ...

l -y J.i .1. .1.-...J--·~·..J·j ,J.

':.."

in U1e amount of P2,486 . .330.99, should be issued against petitioner for the first semester of 1988. The examiners noted certain discrepancies on petitioner's books of accounts and accounting records thus resulting to U1e disallo~Nance of the ·1. Input. t.a:::-r on importation of ra~..v materials - The arnou.nt of input tax claimed in Uw VAT return V·i'as arrived at by imputing a 10% input tax on the total cost of all importations received during the period covered, for 1st quarter (Jan. to lvlar.) and for 2nd quarter {Apr. - June)_. regardless ot the time -r,qhen U1e tax on importations TNere paid.

It has been as(ertainecl from the l)oots that in 19·~>7, the pnxedure adopted by the company is to record all Advance Sales Taxes CA ... ST) pa.id as a debit to 'Deferred Sales Ta.x Credit' account upon actual payment regardless ot Vllwtller or not the goods have l)een received. Entry upon payment of AST:

Dr. Deferred Sales Tax Credit Cr.

Accts. Pa~.rable /Cash • Subsequently. upon filing its quarterly sales tax return.. the 'DSTC' a<xotmt is credited to ::H1 amount corresponding to the tax credit availed per return.

Entry upon payment of Sales tax return: Dr. Sales tax payable Cr.

Def. Sales Tax Credit

Cash

671

XX

DECISIOB-

C_I_A_ CASE HO_ 4590

- 4 - Since the 'Deferred Sales Tax Credit' account V·lE?re all use-d as tax credit in UH.~ 19o 7 last quarte-r sales ta.x re-turn, it is cle-ar that all the- Advance Sales Taxe-s paid in 19(.)7, -.:,qhetlle-r or not the goods we-re received, V·lere alre-a(iy d::timed as tax cre(1it. Claiming it again as input t3.X against '\lAT output Tax· on tlle- succeeding (1u.arter VvThen the 2·oods are ad.u.allv received '"1 ·-· ,.

11\TOU.ld result to double availment of tax credit. Furthermore.. sir.nply imputing a straight 10% input. tax on the cost of importations

1. ' .. 1. T' - "l 1. - 111- ,., - - - r t~ t· l ~ 'Jt• ·l - r ("A - 11:" -f R £> u ev1 · et ~ _ lc.•.v;e 1.> .d .l e.

...

K~e .)o:;;-(.:.

.J (.)

.. -v v .

Reg. 5-o 7 on substantiation requrement, it states that 'credits for input tax on import.atk:.ns shall be supported vvith import entry or other equivalent document showing actual payment of tile VAT on imported goods'.

The taxpayer, in tlleir protest letter, stated t11at they could not have incurred t11is defh:ienc:y tax claiming their good faitll by simply alleging that they have 'alv·rays adhered to the strictest and highest standards of accounting and does not and will not impair its solid and time-honored reputation for fair dealing·.

They however failed to submit concrete evidences to disput.e the factual bases of tlw aforementioned assessment.

2. Surcharge - The t.ail.l)ayer refused to pay t11e 25·% sun:harge claiming that this can be v-1aived. Hovvever, they failed to sh(J~N an approval from the Cornmissioner 'qaiving said surcharge. 3- Input tax disallowed - This amount represents tlle input tax allocated to t11e ·exempt sales· made to AFP /PC/INP Commissary_- On March .30, 199(\ the BIR issued an Autllc,rity to Issue Payment Order/Accept Payment corresponding to t11e amount of P 175,179.29 to TvVllich petitioner asserts its V·lillingness to pay t.(> 672

DECISIOH-

C.T.A. CASE HO. 4:')90 - 5 - tlw BIR.

On the samE~ date, petitioner pa.id the basic tax of P 166,94(3.72 plus interest of Pe\230.57 or tlle sum of P 175,179.29, as evidenced by BIR Payment Order No. C 7598352 and CB Confirmation Receipt No. B 18977445. On 1vlay 2 9, 1990_. respondent issued Notice of Assessment for alleged 1 988 Deficiency Business Tax - VAT_. in the amount of P2,486 . .330.99, inclusive of increments, computed as follovi/S: I .JAf1" ~-1· Al}f"·T7 lY'> '"'1. ~~ t"' "~ . ....

..... ....

·-· i .. -:~ . .;:.

.......

.. ..t:t6 2 C:.% surcharge

J

•

Balance

Interest

p 1,551,60.3.09 387,902.02 p 1 q ~~(l c:, 10.11 ·' - ·-· .1'}-· TOTAL AMOUNT DUE ;_x COLLECTIBLE 546.320.55 P2,4l){\330.99 Tlle Assessment was \)ased on tlle findings C>f tlle examiners as incorporat.ecl in U1eir Memorandum Report to the CNnmissioner.

For a rnr.::.re detailed presentation, tlle alleged Deficiency VAT for the first and sec~.:;.rKl quarters of 19c•o, inclusive of in(:rements. a.re itemize(! as follows: (see pp. 262-264_. Folder l. BIR reconls) KRAFT FOODS. INC.

Recomputation of Deficiency VAT

1st Semester of 1988

FIRST QUARTER:

Gross Sales:

january febnlo3ry

March

Total Sales

Less: Exempt Sales

p 32 . .357 .. 578.00 2Ci_.020,4")Ci.OO 2Ci.217,E:48.00 673 p 8Ci3~5):i64.00

DECISION -

‘(C.T.4. CASE RO. 4530

AFPCES/PC-INP

1,220,618 .00 62,204.00 frross Tayable Sales occ eeeseecsecssceecsseeseeeseees Add: March tales recorded in April $60,991.62 Faulty fuanurscture 57,666.00 Adjusted taxable seles 10% YAT Due thereon Less: Input tax a) an bee. inventor viG%h) 205,403.13 b? on impertatio 3,512.116.00 c} on local purchase of goods arid services Add: Disallowed input tax on sale

to AFPCES/PcC-INF

62204 786,595,064 x 5.563,716.43 Tax Due thereon Less: Tax already paid DOT CHEN CY TAK eee ceecceeeecceeceecaeeeeseeeceesseseesecatsecateeeaceateaees

Add: 25% Surcharge

Bed Se occ cececcecccccecececesacenseceesesssavsseccaeceseecrececsecsens Add: Interest at 201% pa.

a) on Merch sales recorded in April (3 ming.)

(680,991 82 x 10% x 1.25%} =110,123.97 AMW123.97 x O05 b} on others fup to 1-21-90) C3B5 107 - 110,123.97)

TAS STILL DUE & CULLECTIBLE - -----------------

SECOND QUARTER:

April P 21,587,060.00 May 30,797,981 .00 June 36,404 969.00

Total Sales

Less: Exempt Sales

Aste-Pac ific Exports 1,539,167.00 AFPUCES /PC-INF 33.743 00 Gross Tas rable Sales ooo ccececeeceseseeeeeeee Add: june sales recorded

in July

Faulty manufacture Adjusted taxable sales Less: March sales recorded in April 560,991 G2 674 1,565,797 62 180,251.00 beste P 87,313,042 00 3,306.33 Po 3,216,294 54 2,705 ,008.65 P 310,485.89 77,621.47 weve P -3388,107.36 5506.19 97,394.06 P 490,907.61 P90.789,510.00 L578.910.00 — P 69,210,600 00 1,746,040 62 P 90,956,.646.62

DECISION -

C.T_.A. CASE NO. 45960 Cash INscounts 500 379.75

Net Taxable Sales

10% VAT Due thereon Less: Input tax a) on itaportation b) on local purchase of goods and services 2,679,172.00 2,061,.209.7° B@Lati CO ooo ccccccceccccccccccccecencesecececsnsseeceestiesertecsvaverevesstreeseeesees Add: Disallowed input tax on

AFPCES/FC-INP

39.743 790,789,510 x 4,960,301 .73 Tax Due thereon Less: Tax already paid | OL= § Cos (<3 0 hen ge f) a re

Add: 25% Surcharge

BALer Ce ooo licceccececcceccccccesecccccecseaececeessccecevsesececeesecssaseseveceees Add: Interest at 20% p.a.

a) on June sales recorded in july (1.565, 797 62- 880,991.62 x %&x 1.25% = 85,600.72 85.600 :72 x 20x 3/12 bt) on others bap to 1-21-90) = 30% {1,551.402.75 ~ 85,600.72) x 30%

TAX STILL DUE & COLLECTIBLE - ----~-------------

SUMMART

FIRST QUARTER: Collection Assessment

Deficiency basic tax FP 89,505.56 P 221,180.33 25% Surcharge 77,621.47 Balance P 89,305.56 P 290,601.60 Interest 4.402 76 96,397.49 TOTAL P 93,708.32 P 397,199.29

SECOND QUARTER:

Deficiency basic tax P 77,643.16 P1,163,479.04 25% Surcharge - 310,260 55 Balance P 77,643.16 P1,4753,759.59 Interest 3.827 81 440 192 82 $960,361.73 P 3,997,145 3 2,171.40 P 3,999,317 oe 2.490,195.17 P 1.241,122.20 310,260.55 Po 1551.402.75 4,280.03 439,740.60 P__ 1,995,423.38

Total

P 310,485.89 77,621.47 P 366,107.36 102,600.25 P 490,907.61 PL 241,122.20 310,260.55 PL551 402.75 $94,020.63 ---

DECISION-

C_T _A_ CASE lfO_ 4590 - 8 -

TOTAL

P 8L470.97 PL91 ~3-952.41 P1,995,42'3.)8 G.RAND TOTAL fOF~ 1st Semester - 1988 P 175, 179.29 P2,)11,151.70 P2 .. 486,))0.99 On July 6. 1990 .. petitioner filed a timely protest with respondent. A supplemental letter of protest, dated December 3, 1990 .. was filed tjy petitioner on December 20, 1990. In a letter Decision, clat.e~J February 11. 1991, received t•y petitioner on February 2 6.. 1991, respondent modified the Deficiency VAT Assessment for the first semester of 1 9oo to P CY~7, 711.62, subject t£j adjustment of interest up to the elate of a.ctual payment thereof_ computed as follows:

Defi den cy iJ el ue-Added Tax - 1st Semester 1988 Basic Tax defidency- ot·iginalassessment: fit·st Qu.9.rtet· Se·:::ond Quarter

Tot at

Less: Additional Advance Sales Taxes:

LC# 5358120006/BCOR#1214955

da.ted May~'- 1988 P443,586.00

LC# Y35810300"3/BCOR#1214667

da.ted l•IIa.y 6, 1986 121.502 .00 Balatl<:e Less: Tax already t>aid (CR# 7598352) Deficiency tax per reinv-estigation Add: 25'1~ Sur<:harge

Total

Add: 20'1.,. Interest p.a. (7-20-68 to 2-20-91) Total deficien<:y Add: 25'~ disr;·uted sm·charge on the basi·~ tax already paid TOTAL A1•,riOTJlH DUE AND COLLECTIBLE P 310,48Y89 1,241,122.20 P1,551,606.09 565,088.00 p 986,520.09 166,948.72 p 819,571.37 204,892.84 p 1 ,024, 464.21 529,306.51 P1553,770.72 4},940.90 P1597,711.62 On March 2 7.. 1991, petitioner filed a petition for review with this Court pra;Ting for the cancellation of the Amended Deficiency VAT Assessment for the first setnester of 19e)o or in ~. 676

DECISIOH-

C.T.A. CASE HO. 4590 - 9 - the alternative .. if the Assessment is found to be V·larranted by the Court, petitioner prays for the cancellation of the 25% surcharge and Uw interest already paid be credited in its favor. Respondent failed to ansvv•er the petition ~~~,o·ithin the period granted by the Court.

Upon motion of petitioner to declare respondent in default, the Court granted petitioner's motion. Respondent filed a 11Aotion for Reconsideration but t11e same was denied in Our Res~lution dated October 1, 1992. Hence, petitioner presented its evidence ex parte. After having fonnally offered its evidence, the Court in a Resolution, dated April 4 .. 1994, admitted petitioner's EYJlibit.s A to T, inclusive, "Without prejudice to the evaluation by the Court of their purpose, materiality, relevancy and probative value, ~Nitll the exception of Exhibits D-26, D-27 and D-2&, which ·~Nere denied admission for the reason that tl1ese exhibits cannot be found in tl1e records of this case. Thereafter, on May 2 3, 1994. petitioner filed a Memorandum in support of its case.

The issue is ~Nhet11er or not petitioner is liable to pay the alleged Deficiency Business Tax - VAT Assessment for the first semester of 19&& in the amount of P 1,597, 711.62, as amended. l"le answer in t11e negative.

The Deficiency VAT ... 8 ... ssessment issued against petitioner for the first semester of 19&& ~Nas anchored on the findings of respondent's revenue investigating examiners report stating that cert3.in Advance Sales Tax paid on importations made in 1987 were claimed and at t11e same time have been credited as input VAT for the first semester of 19&&. Thus, entitling petitioner to tvvice claim as a deduction the Advance Sales Tax in 1987 and 677

DECISI011-

C_T _A_ CASE 110_ 4590

- 10 - A perusal of t.lw documents submitted by petitioner as evidence 1Hould show that t.11ere was no double deduction of ~A~dvance Sales Tax. Petitioner recorded in its books of account the Advance Sales Taxes paid only upon arrival of the ra1N materials imported and 'th•hen it receives the Bank's Debit Memo corresponding to the actual duties and taxes due on said importation even though t.11e duties and taxes were initially advanced by the Banl=:: from the proceeds of t11e Letter of Credit. As a consequence of the above position} petitioner maintains that the import3.tions cc)vered by Letters of . Credit opened in 193 7} although paid at the time VIlas recorded only as prepaid t-1xes. It is only upon the arrival of the imported raw tnaterials in 19()() and the actual duties and taxes have been ascertained by the Debit 1vlenw issued by the opening Bank, the Order of Payment issued by the Bureau of Customs and Import Entry Declaration did petitioner record t11e Advance Sales Taxes paid. Obviously, the taxes paid were only availed as tax credits in 19()() when the satne were actually paid and recorded per the advice ·~A the Banlc To illucidate further on the significance of the procedure adopted lJy petitioner} t11e following explanations made by petitioner's witness was adopted by this Court giving credence to t11e contention of petitioner.

In importing raw materials} petitioner opens a Letter of Credit (L/C) witll the opening Banl=::. The Bank charges customs duties} import processing fees} Advance Sales Tax against the L/C. Petitioner record t11is transaction as:

678

DECISIOH-

C.T .A. CASE HO. 4:)90 Dr.

Cr.

- 11 -

Inventory in Transit

Cash in Bank

XXX

XXX

·~'hen the goods :::t.re shipped to petitioner, the invoice amount is paid through L/C indicating t.he value of the materials imported, the same is recorded as:

Dr.

Cr.

Inventorv in Transit

I

Cash in BanK

XXX

Villwn the ra'i...,, materials arrived in tlle Philippines arKl the actual duties and ta.xes are paid through the Debit ~"lemo per advice of tlle Bank, t11e transaction is recorcled as: rL)~l-.

nt-·'-·at· '1 "T'.a .. ~~ 1D-"'f-"'1"1"-"d r· t:.'f-1- ~-.J 1 (. ~'llv=:·/ o;:; o;:;

o;:;

Sales Tax Credit

x x x

Inventory in Transit

(f:.alance <)f Advance Duty)

x x x

Cr.

Cash in Bank

x x x

When the rav·l materials are actually delivered to petitioner's warehouse and are used in its production .. this is recorded as: Dr.

Cr.

Inventory on Hand

Inventory in Transit

XXX

XXX

'iNhen the raw· materials are converted into finished products in 1988, the prepaid Advance Sales Taxes paid are tllen treated as an expense and offsetted against the Sales Taxes on the finished product and recorded as:

Dr.

Sales Taxes Recei-.:lable

x x x

Cr.

Prepaid T(:1.xes/Deterred

Sales Tax Credit

x x x

679

DECISIOR-

C.I.A. CASE RO. 4590 - 12 - Payments for Advance Sales Tax are taken up in the books of petitioner only upon the arrival of the goods and tl1e same have been released from tl1e Customs ""ro.rehouse when the customs duties and taxes have finally been settled and paid in full, that is, upon receipt of the Debit Advice from tl1e Bank, Order (>f Payment frorn the Bureau of Customs and Import Entry Declaration.

Respondent assessed petitioner for

Deficiency

V 1\:T

covering importations made in 1987 ~lhich she claims to have been deducted also in 1988, more particularly described hereunder:

Supplies

Described

Clieese Curd

Cheese Curd

Rochester

Sauce and

Spice lvlix

Stimmilt

Powder

Red f.ell

Pepper

Sliced Dill

Pickles

,.-··-:ore '--·C.J..r-J._.

Letter of

Credit No.

1162 (FEBTC)

114 1 (FEE.JC)

45003 (BPI)

6046 (RCBC)

6045 (RCBC)

5357344005 'r·t·b t) r, ._:1 .1 ~.anf:

680

Advance Sales

Ex:hs.

Tax Paid

A-21

p 59 .. 621.00

B-15

687,262.00

C-19

D-16

E-H)

58,213.00

F-16

G-4

•

DECISIOB-

C_T_A._ CASE BO_ 4j90 - 13 - i·£ scrutiny of the exhibits presented in evidence by petitioner \·v"ill reveal U1at L/C Nos. 1162, 1141, 5968, 4500 3 and 6046 ~Nere all released in 1987. (See Exhs. A-10, B-9, C-10, D-10 and E-9) This is supported by U1e Analysis of Advance Sales Tax for U1e Fourth Quarter of 1967 Importation (Exh. J-6). Therefore, following t11e accounting procedure of petitioner, v'lhen U1e import-J.tion of L/C Nos. 1162, 1141, 5966, 4500 3 and 6046 were released in 19<~ 7 and the same were thus paid, it was only at such time when t11e petitioner recorded the Advance Sales Tax paid. The Advance Sales Taxes on goods released in 1967 v'lere recorded also in 196 7. Nothing in the records will show that U1e same ~"'ere deducted in 1988. The Advance Sales Taxes p~id and recorded in 196 7 are not reflected in the Analysis of Sales Tax Payments for the year 1966 (EYJl. 0, inclusive of its su.bmarkings). Now, \-'lith respect to the two retnaining importations covered by L/C Nc:·s. 6045 and 5357344005 these were released from customs warehouse in 1986 and therefore U1e Advance Sales Taxes on t11ese importations were properly recorded in the bool{S on the same year. The. i\dvance Sales Taxes paid in 1968 were included in the Schedule of Advance Sales Tax Payments for 1966. (See Ex:hs. 0-4 and 0-5) They do not form part of Advance Sales Tax payments for 19t..)7. At J:lle final analysis, nothing was ever claimed as a deduction twice. For taxes paid in 1967 were deducted in 1967. Taxes paid in 1968 were deducted in 1968.

WHEREFORE, in view of the foregoing, Y.le find the petition to be meritorious, the same is hereby GRANTED. Respondent's dedsion dated February 11, 1991 is hereby 681

DECISION-

C.I.A. CASE BO. 4590 - 14 - reversed.

i-\ccordingly, the Deficiency Business Tax - VAT Assessment issued by respondent against petitioner for the first semester of 1988 is cancelled and considered ~litlldrav.m. No pronouncement as to cost.

WH CONCUR:

~~-~ HRNHSTO D. A COST A

Presiding Judge

(On leave) MANUEL K. GRUBA A!'Bociaw Judge / A?"-' t .. Jv. f . RAMON 0. DH ~~A

Associate Judge

CERTIFICATION

I hereby certify that this decision -....vas reached after due cotisultation among the members of the Court of Tax Appeals in accordance ~Nitll Section 13, Article VI I I of the Constitution. 682 <2-zc.~ ERNHSTO D. A COST A

Presiding Judge

Court of Tax Appeals