En Ron Subic Power Corporat Ion vs. Comm Issioner of Inti£Rnal Revenue

DECISION

The case at bar seeks the cancellation or Pcliliollcr's alleged 19% defi ciency lax asscss1ncnL as per l;ill<tl /\sscsslll L'Ill No tice (1:/\N) No. 0 I !J-LILI-!J(J-0000.17 1 li<ltcd fvLty 12, 1999. in the amount or P2,880J) 17.25.

As represented, Petitioner is a corporation duly organized and ex isti ng under Phili ppine Laws. It is registered with the Subic Bay Metropolitan Authority (S BMA) as a Subic Bay Freeport (SBF) E nter p ri ~;e entitled to the 5% preferential Lax rate under Republic Act No. 7227, otherwise known as the "Bases Conversion and Development Act or 1992."

On April 15, 1997. Petitioner li led its Annual Income Tax Return (ITR) covering taxable year 1996 showing a net loss or P7.684.948.00 ([x liibits "13'' a11d " 13-1 ''). On May 26, 1999, Petitioner received l'rom Respondent Formal Assessment Notice (" FAN") No. 0 19-44-96-00003 7 1 dated May 12. 1999 lor alleged deliciency income Lax and covering taxable year 1996, computed as fo llows: 1 06 .

..t..

..l

CTA CASE NO. 5993

I.

2.

Tax Due

Add : Surcharge

IIllcrcsl

1.

( 'ollljlJ'!IIlli SL' 1\·I•;ilt y Tot <il i\llHHilll l'ay;thk p 1.852,422.00 463. 105 .50 'i4 0.2X1>.7'i 2 .\ 0()() _()() 1'2/ 1\0,X 17.2') Petitioner had assumed that the alleged deficiency taxes due to the Government was arri ved at in the same manner as discussed carl ier with the revenue examiners during the pre-assessment stage, in the total amount o r P2,880,8 17.25 broken clown as f'o llows:

Revenues:

Standby fees Energy fees

Others- Net

O&M Supervision fee - SPC O&M Supervision fee- BPC

TOTAL REVENUE

Less Direct Costs

Cost of sales

Lease Payments

Salaries & wages Insurance expense Building & grounds Utility expense Depreciation & amortization Employee benefits Maintenance expenses

TOTAL DEDUCTIONS

Taxable Income

Tax Due

Less: Tax Credits

Basic Tax Due

Add: 25% surcharge 20% interest p.a.

Compromise penalty

Total Deficiency Income Taxes

Per ITR

P56,360.422.00 585,753.00 4,144,895.00 P61 091 070.00 Ad justments P1 6,261,031 00 13,750,087.00 P56,360,422.00 585,753.00 4,144,895.00 16,261,031 00 13,750,087.00 P91 102 188.00 P22,054,884.00 P1 5, 116,447.00 P 6,938,437.00 25,210,968.00 25,210,968.00 16,147,327.00 16,147,327.00 1 ,865,67Q.OO 1,865,670.00 709,992.00 379,040.00 188,810.00 148,276.00 40 338.00 709, 992.00 379,040.00 188,810,00 148,276.00 40 338.00 P66, 745.305.00 P49,763. 188.00 P- .5. • .6.M 235.0Ql P41 ,339.000.0Q p 2,066,950.00 356,424 00) 141 896.00 ( 214. 528.00)

1 QC C)

JL

\_;~ p 1,852 ,422.00 463,105.50 540,289.75 25 000.00 p 2.880,81 7.25

DECISION-

C'Tt\ Ct\SI ·: NO. ) <)t)l 1';\( il ·: .l (Paragraph 3 of Petition for Review as admitted in Paragraph I of the Answer; Paragraph 5 . .Joint Stipulation ol' Facts: 1-:xhibit "/\" <tnd "/\- 1 "). On .June 15. 1999, Petitioner, through its external auditors. filed 'Yith the Respondent, through the Regional Director of Revenue Region No. 4 in San Fernando, Pampanga, its protest letter dated .June 14. 1999. pursuant to Section 228 of the Tax Code. as amended. Said protest letter specified the factual and legal basis of the protest against said alleged defi ciency 5% tax assessment, and further requested that the said deficiency tax assessment be withdrawn and cancelled (Paragraph 4 or Petition for Review as admitted in Paragraph I or the Answer; Paragraph 4 .Joint Stipulation of Facts).

As of December 12. 1999. which is the one hundred eightieth ( 180111) day from the date that Petitioner had filed its protest. Respondent had not yet acted upon the protest against the alleged deficiency tax assessment against Petitioner (Paragraph 5 of the Petition for Review as admitted in paragraph I of the Answer: Paragraph 5, .Joint Stipulation or Facts).

On .January I 0. 2000. Petitioner lilccl with this Court the instant Petition lor Revicvv contesting the deficiency tax assessment of' P2.XXO.X 17.25. Petitioner presents the proposition as reason of' the Petition !'or Review that it is not liable for the deficiency income tax assessment for the year 1996 in the amount of P 2 J~ XO . X 17.25 on the following grounds, thus: ( 1) the assessment is null and void under Section 228 of the Tax Code for failure of the Respondent to mention or disclose the factual and legal basis of the assessment:

I>Lt' ISION-

CTt\ Ct\SL NO. 5lJ<.J3

PAGE 4

(2) the payments/operational maintenance supervision ICes received by Petitioner from Subic Power Corporation (SPC) in the total amount or PI (J.2(J I ,0] 1.00, ami l'rom 13atangas Power Corporation (HPC) in the total amount of P 1 3 .7 5 0 . 0~0 . 00 . a' a result of their separate Operation and Maintenance Supervision Agreements (0 & 1\1 Agreements), are reimbursements for its actual expenses incurred for the operation and maintenance of their respective Subic and Batangas power plant l~l c iliti cs without any mark-up or profit, hence. do not constitute inco1ne. allll thcrerore shuuld not he subjected to the 5'Yu tax on gross income earned; (3) the disallowed cost of sales amounting to Pl 5, 11 6,447.00, which is a portion of the restoration costs of the Subic power stations is a d eci~ c tibl e ex pense for 1996 as the Energy Conversion Agreement hctwcc 11 J>ctiliuncr ;ttld Natiutl;tl Power Curpur;ttiott (N/\ J>O('Oiq was valid only until the end or 1997 and that said restoration costs were being incurred by the Petitioner on the asset which it did not even possess actual ownership, hence, there is no basis to capitalize the restoration costs of the power stations and amortize said amount over the plant's estim;1tcd liiC. tmts. it concluded that lo r purposes of matching cost against revenues. it correctly treated restoration costs as expense for the year 1996, the year in which they arc incurred;

( 4) the disallowed insurance expense amounting to P l,S65,6 70.00 is a direct cost, it being a contractual obli gation and an integral part or the power plant's direct expenses without which Pctitiot1cr could not have pursued its S BM !\ registered acti vity, as such. a deductible expense to r purposes of the 5% tax on gross income earned in the same manner that depreciation. linancing charges, rent and util ity charges lo r machineries. equipment and building arc allowed as deductions; ;tnd (5) the disallowance by Respondent or the tax cred its amounting to p 141 ,896.00, on ground that the same i; on interest income or a Subic Bay Freeport Enterprise rrom bank deposits subject to the 5% preferential tax rate, was not supported by evidence, hence, it submitted that there is no legal and/or factual basis to reduce its allowable tax credits, as the same were not tax credits on any tax imposed on interest income but taxes withheld by NAPOCOR creditable to any 5% tax liability of Petitioner. duly supported by withholding tax certificates.

CTA CASE NO. 5993

Respondent disputes the asseverations or Pcti l ioncr and raised the hcrei n S pecia I and i\llirmati vc Defenses, thus:

"J .

Prior to the issuance or the assessment. Petitioner was inl(mned oJ the proposed assessment and the basis thcrcul' which it protested. lienee, the requirement under Section 22:' ol· the lax Code that the taxpayer shall be informed of the law and the l~1ct s on which the assessment is made, is deemed to have been complied with. 4.

The amount or P30,0 I I, 118.00 paid by Subic Power Corporation (SPC) and Batangas Power Corporation (BPC) as reimbursements for the alleged actual costs incurred by Petitioner in the performance of its obligations under the Operation & Maintenance Supervision Agreement (0 & M) is not deductible, as it is a l~1 c t that SPC, BPC and Petitioner arc all operated and/or controlled by Enron Development Corporation, a U.S. based company, which l ~1ct makes tbcsc com panics i ntcr-rclatcd.

It is no secret that "reimbursement" or so-called actual costs is a common practice applied by companies for the purpose of reducing, avoiding, or altogether escaping the payment or taxes. 5.

Contrary to the allegation of Petitioner that the restoration costs of the power plants were charged in full against income as costs of sale, since there is no discernible future benefits which it may derive, the l ~1c t is that Petitioner agreed to the restoration in order to corner a much bigger contract for the construction or another power plant now operated by Subic Power Corporation. Obviously, Petitioner derived the benefit of a bigger contract when it agreed to do the restoration.

l-Ienee, the costs should be capitalized.

6.

While insurance may be a necessary expense, it docs not necessarily mean a direct cost that may be deductible from gross income. i\s a matter of l~1 c t , Revenue Regulations No. 1-95, as amended, explicitly c:-;cludcd as allow;111le deduction !'rom gross income "i nsurancc c:-; pcnsc" other tk111 those i ncurrcd i 11 the importation of goods.

7.

With respect to the tax credit claimed by Petitioner, suffice it to say that it is totally unsupported by documents or other evidence. X.

The assessment was issued in <lccordancc with law and rcgulatio11S.

10S0

CTA CASE NO. 5993

9.

All presumptions arc in l ~tvo r or the correctness or tax assessments." The issues that come to lore lor the consideration or the Court, as stated in the Joi nt -.

Stipulation of f acts and Issues submitted to the Court by the parties on April 19, 2000 (p. 63, docket) arc as ta llows:

" I.

Whether or not l'ctitio11er, as required under Section 22X or the Tax Code, has been inlormed in writing or the law and the f~ 1 c t s on which the assessment was made;

2.

Whether or not the amount Petitioner claimed as reimbursements lor alleged actual costs incurred in the performance of obligations under the 0 & M Agreements with Subic Power Corporation and Batangas Power Corporation, is part of Peti tioner's gross income; 3.

Whether or not the restoration costs or power plants claimed by Petitioner as costs or sale in the amount or I' 15, I 16,447.00 arc deductible expenses;

4.

Whether or not the insurance claimed by Peti tioner in the amount of P 1,865,670.00 is deductible li·01n F::titioncr's gross income earned; and 5.

Whether or not there is basis fo r Petitioner's claim fo r tax cred it in the amount of P 141 ,896.00."

It seemed to the Court that there was no compliance on the part of Respondent of Section 228 of the Tax Code and Section 3. 1.4 of Revenue Regulations No. 12-99. The said provision of law and regulation clearly provides that: "Sec. 228. Protesting of Assessment.- When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first noti fy the taxpayer of his fi ndings: Provided, huwever, That a pre-assessment notice shall not be required in the fo llowing cases. (a) When the finding Jor any dclicicncy tax is the result or mathematical error in the computation of the tax as appearing on the face of the return; or

DECISION-

CT/\ C/\SI: NO. 59t>J

PAGL 7

'· (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent, or (c) When the taxpayer who opted to claim a refund or ta~ . credit of excess creditable withholding tax for a taxable period was clctcrmincd to have carried over ancl automatically appl icd the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on excisable articles has not been paid; or (c) When an article locally purchased or imported by an exempt person,' such as, but not limited to, vehicles, capital equipment, machineries and spa ·e parts, has been sold, traded or transferred to non-exempt persons.

The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. (emphasis supplied).

XXX

XXX

XXX

HEVENUE REGULATIONS NO. 12-99 "Sec. J.1.4 Formal I ,dlt'l' of Demand and Asst·ssmcnl Nolicc. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representati ve. The letter of demand calling for payment of the taxpayer's dcliciency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter 01. demand and assessment notice shall be void.

The same shall be sent to the taxpayer only by registered mail or by personal delivery.

If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof' in the duplicate copy or· the letter or dem;tttd. showing the l(lllowing:

(a) !lis name; (b) signature; (c) designation and authority to act fur and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself, and (d) date of receipt thereof." (underlining supplied)

DECISION-

CTA CASE NO. 5993

PAGES

The law is clear and unambiguous. The Respondent is mandated to inform and disclose to the tax payer i11 writing the f ~1du a l nature <llld the legal basis o r the assessmen t. Failure to compl y with the same will render the assessment null and void. In the case at bar, Respondent merely issued a fo rmal assessment and indicated therein the supposed tax, surcharge, interest and compromise penalty due thereon. The Revenue Officers o f' the Respondent in the issuance o r the Final Assessment Notice did not provide the Petitioner with the written bases of the law and facts on which the subject assessment is based. Respondent did not bother to explain how it arrived at such an assessment. Moreso, he failed to mention the speci lie provision of the Tax Coue or rules and regulations which were not complied with by Peti tioner. Stated otherwise, the Formal Assessment Notice (Exhi bit "/\") onl y itemized the deductions disallowed and included the same in the gross income and imposed the preferential tax rate of 5% on some items categorized by Petitioner as costs, without providing the facts and basis in law of the disallowance and defi ciency tax assessment. The Respondent's witness himself, Mr. Edison del Agua, the BIR Revenue Examiner who conducted the examination on the books of the Petitioner admitted that, he was not aware of the SIR-issued regulation concerning the manner of issuing assessment notices or Revenue Regulations No. 12-99, viz: "Atty. Montero:

Q.

Mr. Witness, arc you aware o r the provision of Revenue Regulations No. 12-99?

Mr. Agua A.

I am not ...

DI ·:C'ISION -

CT/\ ('t\SI ·: NO. )lJlJ.\ I' t\ (II ·: lJ Atty. Montero:

Q.

On the manner or protesting assessment and issuance o r Assessment Notices, Mr. Witness?

Mr. ;\gua:

A.

I have heard of that regulation but I have not read the contents, Sir" (TSN of Mr. Edison del Agua, .January

9. 2001, p. 37) Thus the FAN that was issued could not have complied with Revenue Regulations No. 12-99 as the Revenue Officer who issued the s211e was not even aware of the applicable regulations.

Moreover in

the ease entitled Sun nyvale Development Corporation Y:; .

Commissionu of Intemal Revenue, CTA Case No. 5730, January 4, 2001, the Comt ruled that:

"x x x But it is required that ' the taxpayers shall be info rmed in writing of" the law and the l~1cts on which the assessment IS made, otherwise, the assessment shall be void'(Scc. 228) It is evident from the record in this case, that the assessment notice issued by the Respondent against Petitioner for deficiency donor's tax did not indicate how the tax base of P3,206,230.87 was arrived at and why it was being subjected to donor's tax x x x. The accompanying demand letter also failed to state the law and the f~1 c t s on which the assessment was based x x

x. Hence. the same is void in accordance with Section 228 or the Tax Code, as amended."

It further ruled that:

"It bears stressing that not only the assessment for deficiency donor's tax is round to be void but the assessments for cleiicicncy income x x x. For the income tax assessment, the assessment notice did not indicate the reasons for disallowing the amounts of deductions pertaining to taxes and licenses, depreciation, association clues and miscellaneous expense." (emphasis supplied)

DECISION-

CT/\ CASE NO. 5993

PAG E 10

This Court likewise ruled in the case or Abbott Laboratories, Inc. vs. Commissioner of Internal Revenue CTA Case No. 5718, February 16,2001 that:· "Section 22S or the 1997 Tax Code in part provides thus: 'The taxpayers shall be informed in writing of the laws and the facts on which the assessment is made, otherwise, the assessment shall be void.' Clearly, Section 228 of the National Internal Revenue Code requtres the respondent to inform the taxpayer in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void. As thus worded, the respondent has the bounden duty to inform the taxpayer not only of the law but more importantly, the surrounding circumstances supporting the assessment, lor it is onl y through a detailed appraisal o f its basis that the taxpayer may be able to dispute the imposition or agree with it."

Thus, the Court finds that the Final Assessment Notice (Exhibit "A") and demand letter sent to Petitioner, do not meet the requirements of a written notice provided under Section 228 of the Tax Code, as amended, and the requirements of the form prescribed in Annex "8" ofRevcnue Regulations No. 12-99. Consequently, the assessment against the Petitioner should be considered void as explicitly provided for in Section 22S of the Tax Code, as amended, and Section 3.1.4 of Revenue Regulations No. 12-99. Having thus held that the subject assessment issued by Respondent against Petitioner null and void, the Court find s it unnecessary to del ve into, and pass upon, the other issues presented by the parties.

IN T H E LIGHT OF ALL T HE FOREGOING , the instant Petition for Review is hereby G RANTED. Accordingly, the assessment issued by the Respondent against the Petitioner for the year 1996, particularly Formal Assessment Notice No. 019-44-96-

DECISION -

CT A CASE NO. 5993

PAGE II

00003 71 dated May 12, 1999 lo r dcliciency income tax amounting to P 2,8 ~W,8 17 .25 i:1 hereby ORDERED CANCELLED and WITHDRAWN.

I CONCUR:

L~ LS(~ o~ ERNESTO D. ACOSTA

Presiding Judge

CERTIFICATION

I hereby certify that the above decision was reached after due consultation with the members of the Court or Tax Appeals in accordance with Section 13, Article Vlll of the Constitution.

~·- G>. ~~ ERNESTO D. A COST A

Presiding Judge