Informatics Computer Institute Philippines Inc. vs. Commissioner of Internal Revenue

DECISION

MINDARO-GRULLA, J.:

This is a Petition for Review filed on April 23, 2007 by Informatics Computer Institute Philippines, Inc. as petitioner against the Commissioner of Internal Revenue (CIR) as respondent, for the Court in Division, pursuant to Rule 4, Section 3(a) (2) of the 2005 Revised Rules of the Court of Tax Appeals, as amended.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

The said Petition is an appeal from respondent CIR's inaction on petitioner's letter of protest filed on July 28, 2006, against the Assessment Notices dated June 23, 2006, pertaining to alleged deficiency income tax of P1 ,739,440.91 , and increments on late payment of taxes in the amount of P39,689.54, covering the fiscal year (FY) ending March 31 , 2003. The facts of the case, based on the Joint Stipulation of Facts and Issues plus the evidence on record, are stated hereunder. Petitioner is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office address at 5th Floor, Building A-278B, SM Megamall, EDSA, Mandaluyong City.1 It is also registered with the Bureau of Internal Revenue (BIR) Revenue District Office (ROO) No. 41, bearing the Taxpayer Identification (TIN) No. 201-589-900-000.2 Its primary purpose is to establish and operate an educational institution offering degree courses in Information Technology (I.T.), and non- degree courses in Computer Technology along the fields of computer science, system operation, computer repair, trouble shooting, and computer maintenance; and to engage in such other computer-related business ( 1 Exhibit "A", Docket, p. 253 2 Exhibit "H", Docket, p. 279 IN FORMA TICS COMPUTER INSTITUTE PHILS., INC. v. CIR activities as may be necessary to further the aims and purpose of the corporation.3 Respondent Commissioner of Internal Revenue is the government officer mandated by law to enforce and implement the provisions of the National Internal Revenue Code (NIRC), as well as related tax and internal revenue statutes and their implementing rules and regulations. She has the power, among others, to issue deficiency tax assessments and to decide on the merits of protests filed by taxpayers against such deficiency tax assessments.

Respondent holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City.

On June 28, 2006, petitioner received the Formal Letter of Demand for the payment of its fiscal year ending March 2003 deficiency taxes, with attached Assessment Notices dated June 23, 2006, with the following significant details:4

Tax Type

Amount (inclusive of interest and surcharge)

Income Tax

Pl ,739,440.91 Increments on late payment of taxes 39,689.54

TOTAL

P1 ,779,130.45 3 Exhibit "A-1 ", Docket, p. 254 4 Exhibits "D" and "E"; Pars. 2.6 and 2.7, Admissions, JSFI, Docket, pp. 71-72; Annexes "A" to "C-1 ", Docket, pp. 10-13 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

On July 28, 2006, petitioner filed a letter-protest addressed to respondent,s on the foregoing assessments. Subsequently, on September 26, 2006, petitioner submitted relevant documents in support of the aforesaid letter -protest. 6 However, due to the inaction of respondent on the said protest, petitioner filed the instant Petition for Review on April 23, 2007. Respondent, in her Answer7 filed on July 10, 2007, raised Special and Affirmative Defenses, as follows:

"5.

The assessments in question were made and issued in accordance with law, rules and regulations. 6.

Verification disclosed that certain income payments were not subjected to expanded withholding tax by herein petitioner, hence, disallowed as deductions from petitioner's gross income for fiscal year ending March 31, 2003. 7.

It was discovered that the total creditable withholding tax claimed per Income Tax Return amounting to P58,837.00 were not supported with

BIR

Form 2307, therefore, disallowed pursuant to Section 2.58.3 of Revenue Regulations (RR) No. 2-98, as amended.

8.

Verification revealed petitioner failed to pay the full amount of penalties due on the payment made on the Amended Annual Income Tax Return, therefore, the imposition of increments pursuant to Section 248(A), 249 and 255 of the 1997 Tax Code, with reference to Revenue Memorandum Order (RMO) No. 1- 90.

( 5 Exhibit "E", Docket, pp. 270-275 6 Exhibit "F", Docket, pp. 276-277 7 Docket, pp. 33-35 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

9.

All presumptions are in favor of the correctness of the tax assessment (Interprovincial Autobus vs. Collector of Internal Revenue, 98 Phil. 290)."

During trial, petitioner presented as witnesses Ms. Aurey Bernadette Sebastiana, Mr. Ronalda Hangad9, and Ms. Bernadette C. Urbiztondo 10. Thereafter, petitioner filed its Formal Offer of Evidence 11 on July 13, 2009, submitting Exhibits "A" to "X", "AA", and "BB", inclusive of sub-markings. This Court admitted the said offered exhibits in the Resolution 12 dated September 8, 2009.

During the March 22, 2010 hearing, counsel for respondent manifested that he is submitting the case for decision based on the pleadings. Upon motion of the parties, both parties were given thirty (30) days from March 22, 2010 or until April 21, 2010 to file their respective Memorandum, and upon receipt thereof or expiry of the period granted, the case shall be deemed submitted for decision.l3

L

a Minutes of Hearing dated May 27,2008 and March 12,2009, Docket, pp. 110 and 215 9 Minutes of Hearing dated September 2, 2008 and October 2, 2008, Docket, pp. 131 and 170 w Minutes of Hearing dated February 10, 2009, Docket, p. 206 11 Docket, pp. 224-252 12 Docket, pp. 464-465 13 Minutes of Hearing dated March 22, 2010, Docket, p. 488 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

On April 30, 2010, the instant case was deemed submitted for decision, considering that counsels for both parties failed to file their respective memorandum within the period given by the Court.14 Per joint stipulation of the parties, the issues 15 are:

1. Whether petitioner failed to apply alleged income payments for the fiscal year ending March 31, 2003 amounting to P1 0,249,734.58 to the expanded withholding tax;

2. Whether petitioner is liable for deficiency income tax for the fiscal year ending March 31 , 2003 in the amount of P1 ,739,440.91; and

3. Whether petitioner is liable for increments on late payment of taxes amounting to P39,689.54. The foregoing issues can be summed up as - "Whether petitioner is liable to pay the amount of P1 ,739,440.91, representing deficiency income tax, inclusive of interest and surcharges, and the amount of P39,689.54 as increments on late payment of taxes for the fiscal year ending March 31, 2003."

Respondent assessed petitioner for its deficiency income tax for the fiscal year ending March 31, 2003 in the amount of P1,739,440.91 16,( computed as follows:

14 Resolution dated April 30, 2010, Docket, p. 489 1s Docket, p. 73 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Taxable Income Per Return

Adjustments/Discrepancies per

Add: investigation Income payments not subjected to expanded withholding tax Taxable Income per investigation Income tax due thereon ( 1 0%)

Less:

Allowable tax credits Prior year's excess credits

Payments per ITR

Creditable withholding tax claimed per ITR

Total

Less:

Unsupported creditable withholding tax

Deficiency Income Tax

Add:

20% Interest p.a. from 7.16.03 to 7.24.06

TOTAL AMOUNT DUE

Page 7 of 24

p 5,177,636.00 10,249,734.58 P15,427,370.58 p 1,542,737.06 p 107.263.00 351 ,664.00 58,837.00 517,764.00 58.837.00 458,927.00 p 1.083,810.06 655,630.85 p 1,739,440.91 The assessment arose from respondent's disallowance of petitioner's claimed deductions from gross income in the amount of P 1 0,249 ,734.58, and creditable withholding taxes in the amount of P58,837.00. On the propriety of the aforesaid disallowances, they are discussed hereunder in seriatim .

The income payments not subjected to the expanded withholding tax amount to P 1 0,249 ,734.58.

According to the Details of Discrepancies/ Assessments attached to the Formal Letter of Demand, petitioner failed to subject royalties, professional fees, rentals, and advertising expenses in the total amount of P 10,249,734.58 to the expanded withholding tax (EWT). Since said expenses were not c..

16 Par. 2.6, Admissions, JSFI, Docket. pp. 71-72.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR subjected to EWT as required under Revenue Regulations (RR) No. 2-98, they cannot be claimed as deductions from gross income pursuant to Section 34(K) of the NIRC of 1997, as amended. Below is the computation of the amount of P1 0,249,734.58:17

Per F/ S

Per Returns

Not subjected to EWT

Royalties

p 3,039,889.00 p 1 ,252,614.89 p 1,787,274.11

Professional Fees

1,675,402.00 382,945.00 1,292,457.00

Rentals

8,026,396.00 1 ,808,208.48 6,218,187.52

Advertising Expense

2,718,567.00 1,766,751.05 951,815.95 Total not subjected to expanded withholding tax p 10,249,734.58 Petitioner claims that the apparent discrepancy between the Financial Statements (F/S) for the fiscal year ending March 31, 2003 and the Monthly Remittance Returns for the same period can be explained by the fact that the F/S encompasses not only petitioner's finances but also those of its two branch offices. The BIR registration details of petitioner and its two branch offices are as follows: Ia

Name of Center

TIN

Megamall Center

(Head office - 20 1589900-000

Petitioner)

Makoti Center

201589900-001

(Branch)

Eastwood Center

(Branch)

201589900-002 17 Pars. 2.3 and 2.4, Admissions, JSFI, Docket, pp. 70-71 1s Docket, pp. 5-6

ROO

Code

Registered Address

Level 5, Bldg. A, SM 041 Megamall,

Mandaluyong City

6797 2/F Security

050 Land Bldg., Ayala Ave. cor. Herrera St.,

Makoti City

Formerly Texas

Chicken, St. Francis 041 Square, J. Vargas, Ortigas Ctr.,

Mandaluyong City

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Since the expanded withholding tax returns of the two branch offices were filed separately from petitioner's returns while the finances of all three centers were reflected in petitioner's F/S, a comparison of petitioner's returns vis-a-vis its F/S would necessarily yield a discrepancy. However, this does not indicate that petitioner or its branch offices did not withhold on the expenses reported in petitioner's F/S.

In fact, petitioner and its branch offices filed withholding tax returns on all the expenses reported in petitioner's F/S as the returns of petitioner and its branch offices will bear out. As to the Royalties amounting to P1,787,274.11, Mr. Ronaldo Hangad, Center Accountant of petitioner's Makoti branch, stated In his Judicial Affidavit 19 dated August 27, 2008, that the royalties subject of the assessment were paid to Informatics Holdings Ltd., a Singapore-based company and petitioner's franchisor.

Under Section 2.57.1 (I) ( 1) of RR No. 2-98, said royalty payments are subject to the final withholding tax (FWT) at the rate of thirty-two percent (32%) beginning January 1, 2000 and thereafter, to quote: "SECTION 2.57.1.

Income

Payments

Subject

to

Final

Withholding Tax. - The following forms of income shall be subject to final withholding tax at the rates herein specified:

XXX

XXX

XXX

19 Exhibit "S", Docket, pp. 390-394 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

(I) Income Derived From all Sources Within the Philippines by Non-Resident Foreign Corporation. - The following shall be subject to final withholding tax based on the gross amount of income and at the rate of tax prescribed therefor:

( 1) In general - On gross income derived from all sources within the Philippines such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income and capital gains (except capital gains realized from sale, exchange, disposition of shares of stock in any domestic corporation which is subject to capital gains tax under Sec. 28(8) (5) (c)- at the following rates: 34% - beginning January 1, 1998 33% - beginning January 1, 1999 and 32% - beginning January 1, 2000 and thereafter" (Emphasis supplied) However, the FWT rate of 32% is reduced to twenty-five percent (25%) pursuant to Article 12(2) (c) of the RP-Singapore Tax Treaty, which states: "Article 12

Royalties

1.

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2.

However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed:

(a) in the case of the Philippines, 15 percent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting;

(b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income C Tax) Act of Singapore, the royalties shall be exempt;

FY

2003

Apr

Moy

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jon.

Feb.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

(c) in all other cases, 25 percent of the gross amount of the royalties." (Emphasis supplied) A scrutiny of the Monthly Remittance Returns of Final Income Taxes Withheld (BIR Forms 160 1-F) filed by petitioner and its two branch offices for fiscal year 2003 disclosed the following royalty payments that were subjected to 25% final withholding tax: 20

Megamall (Petitioner)

Makoti

Ortigas

RoyaHy

Royalty

Royalty

Ex h.

Payments

FWT

Ex h.

Payments

FWT

Ex h.

Payments

FWT

L-1

177,375.20 44,343.80

M-1

70,084.14 17,520.79

L-2

157.746.16 39,369.04

M-2

92,273.48 23,068.37

L-3

234,829.24 58,707.31

M-3

- -

L-4

161 ,588.52 40,397.13

M-5

88,276.56 22,069.14

L-5

62,875.84 15.718.96

M-4

94,052.56 23,513.14

N-1

76.418.20 19,104.55

L-6

81 ,272.80 20,318.21

M-6

69,450.48 17,362.62

N-2

86,357.64 21 ,589.41

L-7

87.413.56 21 ,853.39 -

N-3

97,660.40 24.415.10

L-8

42,395.70 10,598.93

M-7

62,134.39 15,533.60

N-4

89,105.85 22,276.60

L-9

29.713.11 7.428.28 -

N-5

71.414.68 17,853.54

L-10

137,847.00 34,461.74

M-8

26,251.20 6,562.80

N-6

29,653.38 7.413.35

L-11

39,329.36 9,832.34

N-7

33.737.60 8.434.40

March

L-12

40,232.40 10,058.10

M-10

40,686.00 10,171.55

N-8

134,585.64 33,646.41 1,252,618.89 313,087.22 543,208.81 135,802.01 618,933.39 154,733.35 A comparison of the foregoing royalty payments with the royalty expense per petitioner's F/S for FY 200321 revealed that the amount of P625, 127.91 was not subjected to the final withholding tax, as shown below:

Center / Branch

Megamall

Makoti

Ortigas

20 Docket. pp. 312-341 21 Docket, p . 357

Royalty Payments Per

Monthly Remittance

Returns of Final Income

Taxes Withheld

p 1 ,252,618.89 543,208.81 618,933.39 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Total Royalties Per Returns

Less: Total Royalties Per F/S

Royalties not subjected to FWT

Page 12 of 24

p 2,414,7 61 .09 3,039,889.00 p 625,1 27.91 For failure to withhold the corresponding final tax, petitioner cannot claim the royalties amounting to P625, 127.91 as deduction from its taxable gross income for FY 2003 as provided for under Section 34(K) of the NIRC of 1997, as amended, to wit:

"SEC. 34. Deductions from Gross Income .- xxx

XXX

XXX

XXX

(K)

Additional Requirements for Deductibility of Certain

Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, Sections 58 and 81 of this Code."

Consequently, petitioner shall be assessed of deficiency income tax for FY 2003 on the royalties of P625, 127.91. The Professional Fees allegedly not subjected to the EWT amount to Pl,292,457.00. As stated earlier, respondent computed said Professional Fees by comparing the professional fees of P1,675,402.00 reflected per petitioner's F/S with the professional fees of P382,945.00 shown per petitioner's monthly ( remittance returns.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Petitioner's Finance Manager, Ms. Bernadette Urbiztondo, in her Judicial Affidavit22 dated February 5, 2009, stated that the professional fees per F/S in the amount of P1 ,675,402.00 was derived by the BIR by adding the "Commissions" expense in the amount P 1,309,110.0023 and the "Professional and Director's fees" in the amount of P366,292.0024. Ms. Urbiztondo pointed out however that it was wrong for the BIR to lump the "Commissions" expense with the "Professional Fees" expense and say that this whole amount of Pl,675,402.00 is subject to EWT because the "Commissions" represent sales commissions given to employees of petitioner and its branch offices. Since the sales commissions were paid to employees, they were taxed as compensation and therefore not subject to the expanded withholding tax.2s Ms. Urbiztondo further explained that the "Professional and Director's Fees" in the amount of P366,292.00 was claimed as deduction in its FY 2003 income tax return and formed part of the total professional fees of P1, 196,122.80 subjected to EWT per the Monthly Remittance Returns of 22 Exhibit "AA", page 4, Docket, p. 450 23 Exhibit "P", Line 86, Docket, p . 353; Exhibit "U", Docket, p . 379 24 Exhibit "P", Line 79, Docket, p . 353; Exhibit "U", Docket, p . 379 25 Exhibit "AA", page 5, Docket, p. 451 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Creditable Income Taxes Withheld (Expanded) [BIR Forms 1601-E] filed by petitioner and its two branch offices for FY 2003.26 Moreover, Ms. Urbiztondo clarified that while the total professional fees of P 1, 196,122.80 was subjected to EWT, only the amount of P366,292.00 was claimed as deduction in its income tax return under the "Director's Fees" account; while the remaining amount of P829,830.80, representing fees paid to professional lecturers who were not part of the regular faculty of petitioner and its branches, formed part of the P18,201 ,453.00 "Salaries, Wages and Benefits" expense per F/S or "Salaries and Allowances" per income tax return. The lecturers' fees of P829,830.80 were not subjected to the income tax on compensation but to the expanded withholding tax since the lecturers were not employees of petitioner and its branches.27 In support of Ms. Urbiztondo's testimony, petitioner offered in evidence its amended Annual Income Tax Return2a, audited FJS29, BIR Forms 1601-E30 filed by petitioner and its two branch offices for FY 2003, Summary of Sales Commission for 200331, and Payroll Summary for 2003 of Robert Esplana32. ( 26 Exhibit "AA", pages 6 to 7, Docket. pp. 452-453 27 Exhibit "AA", page 7, Docket, p . 453; Exhibit "P", line 75, Docket, p. 353; Exhibit "U", page 3, Docket. p . 379 2s Exhibit "P", Docket, pp. 351-353 29 Exhibit "U", Docket, pp. 379-389 30 Exhibits "1-1" to "1-12", "J-1" to "J-10", and "K-1 " to "K-8", Docket, pp. 282-311 31 Exhibit "V", Docket, p. 430-444 32 Exhibit "W", Docket, p. 445 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

This Court agrees with the deficiency income tax assessment on the professional fees of Pl,292,457.00.

Petitioner failed to sufficiently prove that the sales commissions of P 1 ,308,11 0.00 were paid to its employees and that they were taxed as compensation.

Petitioner should have submitted its Annual Information Return of Income Taxes Withheld on Compensation with the Alphalist of Employees from whom taxes were withheld, Monthly Remittance Returns of Income Taxes Withheld on Compensation, and other documents by which the Court can validate that the amount of P1 ,309,110.00 formed part of petitioner's employees' compensation subjected to withholding tax for the FY 2003.

Suffice it to say that as already held in various cases, assessments are prima facie presumed correct and made in good faith. All presumptions are in favor of the correctness of the assessment.33 The burden of proof to rebut the presumption of correctness of the assessment is on the taxpayer. Thus, failure of petitioner to show documents that would substantiate its argumen( renders the assessment valid and correct. 33 Interprovincial Autobus Co., Inc. vs. Commissioner of Internal Revenue, G.R. No. 6741, January 31, 1956 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

The

Rentals

allegedly not subjected to the

EWT

amount to P6,218, 187.52.

Section 2.57.2(C) of RR No. 2-98, as amended, prescribes the withholding of creditable income tax on rentals at the rate of five percent (5%), to wit:

"SECTION 2.57.2. Income Payment 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:

XXX

XXX

XXX

(C) Rentals- On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity- Five percent (5%) ."

In keeping with the above provision, petitioner and its two branch offices filed Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) [BIR Forms 1601-E] for FY 2003, reflecting the following entries:34

FY

Mega mall

Makoti

Ortigas

2003 Ex h.

Rental

EWT

Exh.

Rental

EWT

Ex h.

Rental

EWT

April

1-1 127,796.80 6,389.84

J- 1

193,160.00 9,658.00

May

1-2 127.796.80 6,389.84

J-2

193,160.00 9,658.00

June

1-3 127.796.80 6,389.84

July

1-4 393,562.80 19,678. 14

J-3

196,160.00 9,808.00 Aug.

1-5 127.797.00 6,389.85

J-4

196,160.00 9,808.00

K-1

263,157.80 13,157.89 Sept.

1-6 127,797.00 6,389.85

J-5

196,160.00 9,808.00

K-2

263,157.80 13,157.89 Oct.

1-7 127.797.00 6,389.85

J-6

196,160.00 9,808.00

K-3

263,157.80 13,157.89 34 Docket. pp. 294-311 (.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. C/R

Nov.

1-8 130,701.48 6,535.07

J-7

227,523.64 Dec.

1-9 127,797.00 6,389.85 Jan.

1-10 127,963.00 6,398.15

J-8

196,160.00 Feb.

1- 11 130,701.40 6,535.07

J-9

196,160.00 Mar.

1-12 130,701.40 6,535.07

J- 10

196,160.00 1 ,808,208.48 90,410.42 1, 986,963.64

Page 17 of 24

11,376.18

K-4

263,157.80 13,157.89

K-5

263,157.80 13,157.89 9,808.00

K-6

263,157.80 13,157.89 9,808.00

K-7

263,157.80 13,157.89 9,808.00

K-8

263,157.80 13,157.89 99,348.18 2,105,262.40 105,263.12 Based on the aforesaid returns, a total of P5,900,434.52 in rental expense was subjected to EWT for FY 2003. However, petitioner's claimed business expense deduction for rentals in its 2003 Annual Income Tax Return amounted to P8,026,396.00.35 Clearly, there is a discrepancy of P2, 125,961.48, as shown below:

Rental Payments

Center/Branch

Per Monthly

Remittance Returns

Megamall

p 1 ,808,208.48

Makoti

1,986,963.64

Ortigas

2,105,262.40

Total Rentals Per Monthly

p 5,900,434.52

Remittance Returns

Total Rentals Per FS/ITR

8,026,396.00 Rentals not subjected to EWT p 2,125,961.48 The discrepancy in rentals of P2, 125,961 .48 should be disallowed as deduction from petitioner's taxable gross income for FY 2003 pursuant to Section 34(K) of the NIRC of 1997, in relation to Section 2.57.2(C) of RR No. 2-C. 98, as there was no tax withheld therefrom. 35 Docket. p. 353 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

The Advertising Expense allegedly not subjected to the EWT amounts to P951 ,815.95. This Court disagrees.

Respondent arrived at the disallowed advertising expense of P951 ,815.95 as follows:

Not Subjected to

Per F/S

Per Return

EWT

Advertising Expense

P2,718,567 .00 p 1 ,7 66,7 51.05 p 951,815.95 The computation of P1 ,766,751.05, pertaining to advertising expense per return, was provided by respondent, as shown below: Payments to contractors per returns p 4,811,377.05 Less: Payments to contractors per financial statements Repairs and maintenance- labor p 404,891 .00

Increase in Leasehold Improvement

2,639,735.00 3,044,626.00 Advertising Expense subjected to EWT p 1,766,751.05 Records disclose that the amount of P 4,811,377 .05, indicated as payments to contractors per monthly remittance returns, was derived by adding up the WC 120 items in the BIR Forms 1601-E36. However, this amount pertains only to the expense incurred by petitioner, exclusive of its two (2) branch offices for FY 2003.

The audited F/S on the other hand, reflects expenses incurred by petitioner and its two (2) branch offices. The correct amount of advertising expense per monthly remittance returns filed by petitioner and its two (2) branch offices is computed below: 36 Exhibits "1-1 to 1-12", "J-1 to J-10", and "K-1 to K-8" , Docket, pp. 294-311 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Mega mall

Makoti

Ortigas

Payments to

Payments to

Payments to

prime prime prime

FY

contractors/ contractors/ contractors/ 2003 Ex h.

subcontractors

EWT

Ex h.

subcontractors

EWT

Exh.

subcontractors

EWT

April

1-1 142,113.00 1,945.99

J-1

67,507.13 4.667.92

May

1-2 2,067,870.00 41.357.92

J-2

285,550.61 8,342.53

June

1-3 1,649,455.00 32,989. 10

July

1-4 53 1.991.00 10.639.82

J-3

71 ,773.70 2,429.27 Aug.

1-5 48,483.00 969.66

J-4

119,688.04 2,393.76

K-1

189,868.50 3,338.86 Sept.

1-6 109,210.50 2,184.21

J-5

211.049.43 4,221.05

K-2

68,206.00 1,364.12 Oct.

1-7 91,170.50 1,823.41

J-6

98,498.29 1,969.97

K-3

60,66 1.50 1,213.23 Nov.

1-8 39,222.64 632.06

J-7

44,280.63 885.61

K-4

90,008.9 1 2,334.81 Dec.

1-9 17,279.84 345.60

K-5

233,63 1.26 4,672.63 Jan.

1-10 28,119.57 562.39

J-8

69,562.70 1,351 .26

K-6

67,820.89 1,356.42 Feb.

1-11 31,597.50 631.95

J-9

59,359.50 1,187.19

K-7

127,386.50 2,547.73 Mar.

1-12 54,864.50 1,097.29

J-10

71 ,06 1.00 1 ,421.22

K-8

176,697.1 0 3,539.42 4,811,377.05 95,179.40 1,098,331.03 28,869.78 1,014,280.66 20,367.21

Center

Payments to Contractors per

Monthly Remittance Returns

Mega mall p 4,811,377.05

Makoti

1 ,098,331 .03

Ortigas

1,014,280.66

Total

p 6,923,988.74 The total amount of P6, 923,988.7 4 represents not only advertising expenses but also expenses for repair and maintenance of the building units leased by petitioner.37 The amount attributable to advertising expense alone is computed below, using the same formula used by respondent. Payments to contractors per monthly remittance returns p 6,923,988.74

Less:

Payments to contractors per financial statements

Repairs and Maintenance - Labor

p 404,891 .00

Increase in Leasehold Improvement

2,639.735.00 3,044,626.00 Advertising Expense per monthly remittance returns p 3,879,362.7 4

Advertising Expense Per FS/ITR

2.718,567.00

Excess of Advertising Expense Per Returns

p 1,160,795.74 37 Exhibit "AA", page 10, Docket, p. 456 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

The above computation shows that there is an excess of advertising expense incurred per monthly remittance returns over the amount of advertising expense claimed by petitioner as deduction from gross income in its income tax return.

Hence, the assessment of deficiency income tax on the advertising expense amount of P951,815.95 is untenable and without basis.

The alleged Unsupported Creditable Tax Withheld at Source amounts to P58,837.00. This Court agrees.

Petitioner's claimed creditable withholding tax in the amount of P58,837.00 are not supported with Certificates of Creditable Tax Withheld at Source (BIR Forms 2307), hence, the same shall be disallowed as tax credits against petitioner's income tax due for FY 2003, pursuant to Section 2.58.3(A) and (B) of RR No. 2-98 which provides: "SECTION 2.58.3. Claim for Tax Credit or Refund. - (A) The amount of creditable tax withheld shall be allowed as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which income was earned or received. (B) Claims for tax credit or refund of any creditable income tax which was deducted and withheld on income payments shall be given due course only when it is shown that the income payment has been declared as part of the gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor to the payee showing the amount paid and the amount ( of tax withheld therefrom.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

Proof of remittance is the responsibility of the withholding agent." (Emphasis supplied) In sum, petitioner is liable to pay the basic deficiency income tax for FY 2003 in the amount of P463, 191.24, computed as follows:

Taxable Income Per Return

p 5,177,636.00

Add :

Discrepancies per investiQation Income payments not subjected to EWT

Royalties

p 625,127.91

Professional Fees

1,292.457.00

Rentals

2,125,961.48 4,043,546.39 Taxable Income per investiQation p 9,221.182.39 Income tax due thereon f 1 0%) p 922,118.24

Less:

Allowable tax credits Prior year's excess credits p 107,263.00

Payments per ITR

351 ,664.00

Creditable EWT per ITR

58,837.00

Total

p 517,764.00

Less:

Unsupported creditable EWT 58,837.00 458,927.00

Deficiency Income Tax

p 463,191.24 As to the assessment for increments on late payment of tax, respondent assessed petitioner thereon for FY 2003 in the amount of P39,689.54, computed as follows:

Income Tax Payable- Amended ITR

p 195,220.00

Add: I 25% Surcharge

p 48,805.00 I 20% Interest [07.16.03 to 05.24.04) 33,588.54 82,393.54

Total Amount Payable

p 277,613.54 Less: I Payment made on May 24, 2004 237,924.00

AMOUNT STILL DUE

p 39,689.54 This Court finds the assessment in order.

·.

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. C/R

Pursuant to Sections 248(A) (1) and 249(A) of the NIRC of 1997, as amended, petitioner is liable for the P39,689.54 increments for failure to pay the full amount of penalties due on May 24, 2004, the date when petitioner paid its income tax due for FY 2003.

WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED.

Accordingly, the assessments of deficiency income tax and increments on late payment of tax for FY 2003 are upheld with some modifications.

Petitioner is ORDERED TO PAY respondent deficiency income tax in the amount of P578,989.05 inclusive of the 25% surcharge imposed under Section 248(A) (3) of the NIRC of 1997, as amended, and deficiency increments on late payment of tax in the amount of P39,689.54, totaling P618,678.59, computed as follows:

25%

Basic

Surcharge

Total

DEFICIENCY INCOME TAX

p 463,191.24 Pll5,797.81 p 578,989.05

INCREMENTS ON LATE PAYMENT OF TAX

39,689 .54

TOTAL DEFICIENCY TAXES

p 618,6 78.59 Further, petitioner is ORDERED TO PAY: a) deficiency interest at the rate of 20% per annum on the basic deficiency income tax of P463, 191.24, computed from July 15, 2003 INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR until full payment thereof pursuant to Section 249(B) of the NIRC of 1997; and b) delinquency interest at the rate of 20% per annum computed from July 24, 2006 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, on the following: i.

basic deficiency income tax in the amount of P463, 191.24; ii. 20% deficiency interest which had accrued as aforestated in (a); and iii. increments on late payment of tax in the amount of P39,689.54.

WE CONCUR:

C:L~ .. u~C-~ G.

lfUANiTo c. CASTANEDA; .f[

Associate Justice

~ N. M..:~ -6'~ CIELITO N. MINDARO-GRULLA

Associate Justice

CAESAR A. CASANOVA

Associate Justice

INFORMATICS COMPUTER INSTITUTE PHILS., INC. v. CIR

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.

a. ·/c.~~~ Q ~ C. CASTANED.-{VJR.

CERTIFICATION

Associate Justice

Chairperson

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. t~v- 0-.-L_ ERNESTO D. ACOSTA

Presiding Justice