Liquigaz Philippines Corporation vs. Commissioner of Internal Revenue

DECISION

COTANGCO-MANALASTAS,J.:

STATEMENT OF THE CASE

This case involves a Petition for Review filed by petitioner Liquigaz Philippines Corporation on August 16, 2010 pursuant to Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, in relation to Section 7(a)(2) of Republic Act (RA) No. 1125, as amended, and Section 3(a)(2) of Rule 4 of the Revised Rules of the Court of Tax Appeals (RRCTA). Petitioner appeals the Formal Letter of Demandl (FLD) dated October 16, 2009 and Assessment Notices (FAN) Nos. IT-

06-000232 IT -06-000243 VT -06-000274 WE-06-000535 and

' ' ' ' WC-06-000336 dated October 16, 2009 issued by the Bureau of Internal Revenue (BIR) Large Taxpayers Service, assessing f

petitioner for alleged deficiency tax liabilities, inclusive of interest and compromise penalties, for the taxable year ending December 31, 2006, consisting of:

Compromise

Tax Type

Basic

Interest

Penalty_

Total

Income Tax

p 189,651 ,383.69 f' 96,540,348.19 f' 50,000.00 f' 286,241 ,731.88 No inventory list 25,000.00 25,000.00

Value-Added Tax

17,986,957.82 9 ,993,849.44 50,000.00 28,030,807.26

WT-Expanded

4,468,074.56 2,494,776.97 25,000.00 6 ,987,851.53

WT -Compensation

6 ,010,12 1.77 3 ,355,788.54 50,000.00 9 ,415,910.31

Total

1'218,116,537.84 Pl12,384,763.14 p 200,000.00 P330, 701,300.98

STATEMENT OF FACTS

Petitioner

Liquigaz

Philippines

Corporation

is a corporation c! uly organized and existing under and by virtue of the laws of Lhe Republic of the Philippines. It is registered with the BIR with Taxpayer Identification No. 004-735-924- 000.

Its prin cipal office is situated in 3/F NOL Tower,

Commerce

/\venue,

Madrigal

Business

Park, Alabang, Muntinlupa City.7 Responden t is the Commissioner of Internal Revenue (CIR) who w;1s duly appointed and is empowered to perform the duties or her o1Iice, including, among others, the power to decide, cancel and abate tax liabilities pursuant to Section 204(B) of the NIRC of 1997, as amended. She holds office at the BIR Nat ional Office Building, Agham Road, Diliman, Quezon Cit_/ .

On April 16, 2007, petitioner filed with the BIR its Annuc11 Corporate Income Tax Return (ITR) (BIR Form No. 1702) for th e taxable year ending December 31 , 2006.8 For tc1x:¹ blc year ending December 31, 2006, petitioner also fi led its Qua rterly VAT Returns (BIR Form No. 2550Q) and Month lv Pem itt.ance Return of Creditable Income Taxes

Withheld

( l~xp an d e d) (BIR Form No. 1601-E), and its Monthly

Remittance

Return

of

Income

Taxes

Withheld

on Compensa t io11 (f3IR Form No. 1601-C) on the following dates:j

Quarter

Date of Filing of BIR Form No. 2550Q

First Quarter of 2006

August 23, 20079

Second Quarter of 2006

July 28, 200510

Third Quarter of 2006

August 23, 200711

Fourth Quarter of 2006

August 22, 200712

Month

Date of Filing of BIR

Date of Filing of BIR

Form No. 1601-E Form No. 1601-C

January 2006

February 13, 200613 February 10, 200614

February 2006

March 10, 200615 March 10, 200616

March 2006

April11, 200617 April 11, 200618

April 2006

May 11, 200619 May 10, 200620

May 2006

June 13, 200621 June 13, 200622

June 2006

July 10, 200623 July 11, 200624

July 2006

August 11, 200625 August 10, 200626

August 2006

September 8, 200627 September 8, 200628

September 2006

October 11, 200629 October 11, 200630

October 2006

November 10, 200631 November 10, 200632

November 2006

December 11, 200633 December 11, 200634

December 2006

January 12, 200735 January 12, 200736 On August 31, 2007, the BIR issued Letter of Authority (LOA) No. 2001-0004097537 , authorizing Revenue Officers Rosario A. Arriola, Ma. Catalina G. Benedicta and Larah N. Vito of the Large Taxpayers Audit and Investigation Division II (LTAID II) to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for the period covering January 1, 2006 to December 31, 2006./--

On August 27, 2009, respondent issued a Notice of Informal Conference and Details of Discrepancies, which were received by petitioner on August 28, 2009.38 On September 28, 2009, respondent issued a Preliminary Assessment Notice (PAN) and Details of Discrepancies, which were received by petitioner on the same date.39 On October 20, 2009, petitioner received the FLD40 dated October 16, 2009 and FAN Nos. IT-06-00023, IT-06-00024, VAT-06-00027, WE-06-00053, and

WC-06-00033

dated October 16, 2009, issued by the BIR Large Taxpayers Service, assessing petitioner for alleged deficiency tax liabilities, inclusive of interest and compromise penalties, for the taxable year ending December 31, 2006.

On November 19, 2009, petitioner filed its protest letter dated November 19, 2009 against the FLD and the FAN with BIR LTAID 11.41 On November 24, 2009, a Tax Verification Notice (TVN) was issued for the reinvestigation of petitioner's deficiency tax liabilities for the taxable year ending December 31, 2006, pursuant to petitioner's protest letter dated November 19, 2009. Petitioner received said TVN on November 27, 2009.42 On January 18, 2010, petitioner submitted to BIR LTAID II documents in support of its protest letter.43 Since no decision was issued by respondent on petitioner's protest letter, petitioner filed the instant Petition for Review docketed as CTA Case No. 8149 on August 16, 2010.44 ~

On September 20 , 2010, respondent filed her Answer45 to th e Petition for Review and raised the following special and affirmative defenses:

"7.

Respondent

adopts the abovementioned admissions and denials as part of her special and affirmative defenses.

Respondent's right to issue the necessa~ assessr.nents against petitioner has not yet prescribed

8. Contrary to petitioner's allegations, respondent's right to assess petitioner has not yet prescribed.

9. Under Section 2.58 (C) of Revenue Regulations (RR) 2-98, as amended by RR 3-2002, a taxpayer is required to file on or before March 0 1 of the following year in which payments were made, an Annual Information Return of

Creditable

Income Taxes

Withheld

(Expanded)/Income

Payments Exempt from Withholding Tax (BIR Form No. 1604-E) and on or before January 31 of the said year, an

Annual Information Return of Income Taxes Withheld on

Compensation and Final Withholding Taxes (BIR Form No. 1604-CF).

10. As part of the Annual Information Returns (BIR Form Nos. 1604-E/ 1604-CF), a taxpayer is also required to submit its manually prepared alphabetical list of employees and list of payees who are recipients of income payments subjected to creditable and final withholding taxes, otherwise known as the Alphalists, on the same due dates mentioned in the foregoing paragraph.

11. A taxpayer shall also be allowed to make its adjustments at the end of the year, which is a process done for the proper determination of its excess credits that will be allowed as deductions against their income tax dues for the taxable quarters/years immediately succeeding the taxable quarters/ years.

12. Further, as provided under Section 77(B) of the National Revenue Code (NIRC) of 1997, as amended, a corporate taxpayer is required to file its Annual Income Tax Return (Final Adjustment Return) on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. ~

13. It must be noted that petitioner's tax deficiencies in its expanded withholding tax and withholding tax on compensation were computed by comparing the amount shown in its Annual Income Tax Return versus the amount reflected in the Alphalists.

14. On the other hand, petitioner's Value-Added Tax (VAT) deficiencies were also computed based on petitioner's taxable sales as reported in its Annual Income Tax Return.

15. In which case, the prescriptive period provided under Section 203 of the National Internal Revenue Code (NIRC) of 1997 should only run from petitioner's actual submission of the foregoing documents, since petitioner's corresponding deficiency taxes were only determined upon respondent's examination of said submitted documents.

Respondent's Formal Letter of

Demand and Final Assessment

Notice (FAN) is valid 16.

Respondent negates petitioner's allegation that the Formal Letter of Demand and FAN are null and void for being arbitrary, erroneous and devoid of factual and legal basis and lack of procedural due process.

17. As shown in respondent's Formal Letter of Demand and FAN, petitioner's deficiency taxes were computed based on the following provisions of the law:

Tax Deficiencies

Basis

Amount

Income Tax

Sections 32, 44(A), 34(K), P286,266, 731.88 34(A)(1)(b) of the NIRC of 1997, as amended

Value-Added Tax

Section 106 of the NIRC of

28,030,807.26 1997, as amended

Expanded

Section 57(B) of the NIRC

6,987,851.53

Withholding Tax

of 1997, as amended

Withholding Tax on

Sections (24)A(1), 79 & 80 9,415,910.31

Compensation

of the NIRC of 1997, as amended

Total

P330,701,300.98

18. In the case of Gerry Sevilla, Et Al us. CIR, the Honorable Court of Tax Appeals (CTA), ruled that: 'The phrase in writing under Section 228 does not exclusively mean written words. Writing consists of letters, words, or numbers, or their equivalent, set down by handwriting, typewriting, printing, photostating, photographing, magnetic impulse, mechanical or electronic recording, or other form of J data compilation (Black's Law Dictionary, Sixth Edition, page 1609). Indubitably, figures are also writings and if the numerical presentation is understandable enough, then there is no reason why we should automatically reject the same as adequate compliance with the law.'

19. Further, the CTA en bane ruled in the case of Oceanic Wireless Network, Inc. us. Commissioner of Internal

Revenue:

'The simple meaning of procedural due process is that a party to a case must be given sufficient opportunity to be heard. Its very essence is to allow all parties the opportunity to present evidence. In administrative cases, the requirement of due process is the right to a hearing, including the right of the party interested or affected to present his own case and submit evidence to support his allegation.' In which case, the requirement of procedural due process has been clearly provided to petitioner as evidenced by respondent's issuance of the

Notice of Informal

Conference and Preliminary Assessment Notice (PAN) before it issued the Formal Letter of Demand and FAN. 20.

Moreover, Annex A was also attached m respondent's assessment to explain how the individual amounts were obtained and arrived at, to wit:

Income Tax

a. Unrecorded Sales on Undeclared Petron Purchases - P1,049, 152.37 The amount represents the gross income on undeclared sales ansmg from the unrecorded purchases from Petron Corp. as a result of the matching of reported purchases per taxpayer's record and the declared sales of Petron Corp., hence, assessed as undeclared income subject to income tax pursuant to the provisions of Section 32 of the National Internal Revenue Code, in relation to Section 44(A) of the same Tax Code, as amended.

b. Overclaimed Purchases from Asian Angle Konstruk - P²,514,322.72 The amount represents discrepancy as a result of matching of data of Asian Angle Konstruk's sale to ~

CfA CASE NO. 8149

Liquigaz per AITEID as compared to the amount of purchases declared by Liquigaz from Asian Angle Konstruk, hence, an overstatement of purchases amounting to P2,514,332.72 was assessed pursuant to Section 32 of the National Internal Revenue Code, as amended.

c. Income Payments not subjected to Expanded Withholding Tax- P344,537 ,452. 75 The above amount represents income payments not subjected to expanded withholding tax, hence, disallowed pursuant to Section 34(K) of the NIRC, as implemented by Revenue Regulations No. 2-98.

d. Salaries and Wages not subjected to Withholding Tax- P18,781,630.53 The above amount represents income payments not subjected to expanded withholding tax, hence disallowed pursuant to Section 34(K) of the NIRC, as implemented by Revenue Regulations No. 2-98.

e. Unsupported Bad Debts Expense- P8,431,934.00 The above amount represents unsupported bad debts, hence, disallowed pursuant to

Section

34(A)(l)(b) of the NIRC, as amended.

f. Unrecorded Sales on Importation- P55,614,853.82 The amount represents the gross income on undeclared sales ansmg from the unrecorded importation as a result of the matching of reported importation per taxpayer's record and the importation data furnished by the Bureau of Customs to the AITEID-BIR, hence, assessed as undeclared income subject to income tax pursuant to the provisions of Section 32 of the National Internal Revenue Code, in relation to Section 44(A) of the same Tax Code, as amended.

g. Overclaimed Importation- P11 ,892,375.63 The amount represents discrepancy as a result of matching of reported importation per taxpayer's record and the importation data furnished by the Bureau of Customs to AITEID-BIR, hence, assessed ~

CfA CASE NO. 8149 pursuant to Section 32 of the National Internal Revenue Code, as amended.

h. Unsupported Creditable Tax Withheld at Source - P4,582,506.19 The above amount represents creditable Withholding Tax which are unsupported and out of period, hence, disallowed and assessed pursuant to Section 58(B) of the NIRC, as amended. i.

Compromise Penalty on Non Submission of

Inventory List- P25,000.00 The taxpayer failed to submit its Inventory List in violation of the provision of Section 244 and 245, in relation to Sections 5 and 6, as implemented by Revenue Memorandum Order 19-2007.

j. Sales to PSPC not subjected to Output Tax - P85,946, 167.89 Verification disclosed that sales to PSPC per creditable withholding tax at source (BIR Form 2307) versus Summary List of Sales was understated by P85,946, 167.89, hence, assessed as undeclared income subject to income tax pursuant to Section 32 of the NIRC, as amended.

Value-Added Tax

a . Unrecorded Sales on Undeclared Petron Purchases - P1,049, 152.37 The amount represents the gross income on undeclared sales ansmg from the unrecorded purchases from Petron Corp. as a result of the matching of reported purchases per taxpayer's record and the declared sales of Petron Corp., hence, subjected to output tax pursuant to Section 106 of the National Internal Revenue Code, as amended.

b. Sales to PSPC not subjected to Output Tax - P85,946,167.89 Verification disclosed that sales to PSPC per creditable withholding tax at source (BIR Form 2307) versus Summary List of Sales was understated by t

P85,946, 167.89, hence, assessed pursuant to Section 106 of the NIRC, as amended.

c.

Income

not subjected to

Output

Tax

P4,418,775.00 The amount represents the discrepancy between your declared taxable sales per income tax return and taxable sales per VAT returns, hence, subjected to output tax pursuant to Section 106 of the National Internal Revenue Code.

d. Unrecorded Sales on Underclaimed Importation - P55,614,853.52 The amount represents the gross income on undeclared sales ansmg from the unrecorded importation as a result of the matching of reported importation per VAT returns and the importation data furnished by the Bureau of Customs to the AITEID- BIR, hence, subject to output tax pursuant to Section 106 of the NIRC, as amended.

e. Disallowed Input Tax on Local Purchases i.

Asian

Angle

Konstruk

Purchases

P339, 149.99 The above amount represents input taxes claimed from overclaimed purchases, hence, disallowed pursuant to Section 110 of the National Internal Revenue Code, as amended.

f. Disallowed Input Tax on Importations- P4,333.83 The above amount represents input tax from overclaimed importation, hence, disallowed pursuant to Section 110 of the National Internal Revenue Code, as amended.

Withholding Tax

a. Expanded- P4,468,074.56

Income

payments subject to creditable withholding tax under Revenue Regulations No. 2-98 and 17-2003 were identified in order to ascertain the correctness of the amount withheld and remitted. The result of such examination and verification revealed / that the subject taxpayer is still liable to pay basic deficiency expanded withholding tax amounting to P4,468,74.56 (exclusive of increments), pursuant to Section 57(B) of the National Internal Revenue Code. b.

Withholding

Tax

on

Compensation

P6,010,121.77 Reconciliation of the claimed salaries and wages as against the submitted alphalist disclosed compensation not subjected to withholding tax. The result of such examination and verification revealed that the taxpayer is still liable to pay basic withholding tax on compensation tax amounting to P6,010,121.77 (exclusive of increments) pursuant to Section 24(A)(1), 79 and 80 of the National Internal Revenue Code.

21. Based on the foregoing, respondent avers that the subject assessment is in accordance with Section 228 of the NIRC of 1997, as amended. Had respondent not complied with this provision, i.e. specifying the law and the facts on which the assessment is made, petitioner could not have exhaustively explained in its protest letter its objections against respondent's Formal Letter of Demand and FAN.

22. The Honorable Supreme Court in the case of Commissioner of Internal Revenue vs. Bank of the Philippine Islands states that:

'Tax assessments by tax exammers are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments."' (Citations omitted) On September 22, 2010, this Court issued a Notice of Pre-Trial Conference46, notifying the parties that the case is set for pre-trial conference on October 22, 2010 and directing the parties and their respective counsels to be present at the pre- trial and to file with this Court their respective Pre-Trial Briefs at least three (³) days before the date of pre-trial. ~

On October 13, 2010, petitioner filed its Pre-Trial Brief47 ; while respondent filed her Pre-Trial Brief48 on October 18, 2010.

During the pre-trial proceedings held on November 19, 2010, this Court gave the counsel for petitioner a period of twenty (20) days from November 19, 2010 or until December 9 , 2010 within which to submit the Joint Stipulation of Facts and Issues. 49 On December 15, 2010, the parties submitted their Joint Stipulation of Facts and Issue. so On January 24, 2011 , this Court issued the Pre-Trial Ordersl , summarizing the facts and issues stipulated by the parties, the evidence to be presented by the parties and the hearing dates, and stating that the pre-trial is deemed terminated.

During trial, the parties presented and formally offered their respective witnesses and documentary evidence in support of their respective claims and contentions. The case was submitted for decision on September 14, 201252, taking into consideration the Memorandum [For the Petitioner)53 filed on August 16, 2012 and respondent's Memorandum 54 filed on September 5, 2012.

STATEMENT OF ISSUES

The parties submitted the following issuesss for this Court's resolution:

1. Whether or not the right of the CIR to issue the FLD and the FAN against petitioner has already prescribed. 1--

2. Whether or not the assailed FLD and FAN issued by respondent against petitioner is valid.

DISCUSSION /RULING

The Court's jurisdiction As stated above, on October 20, 2009, petitioner received the FLD dated October 16, 2009 and FAN Nos. IT-06-00023, IT-06-00024, VAT-06-00027, WE-06-00053, and WC-06- 00033 dated October 16, 2009, issued by the BIR Large Taxpayers Service, assessing petitioner for alleged deficiency tax liabilities, inclusive of interest and compromise penalties, for the taxable year ending December 31, 2006. Within the thirty-day period prescribed under Section 228 of the NIRC of 1997, as amended, petitioner filed its protest letter on November 19, 2009 with the with BIR LTAID 11.56 On January 18, 2010, or within the sixty-day period prescribed under Section 228 of the NIRC of 1997, as amended, to submit relevant supporting documents, petitioner submitted to BIR LTAID II documents in support of its protest letter.57 Pursuant to Section 228 of the NIRC of 1997, as amended, if the protest is not acted upon within 180 days from submission of supporting documents, the taxpayer may appeal the inaction to this Court within thirty (30) days from the lapse of the 180-day period.

In this case, the 180-day period lapsed on July 17, 2010 without any action on the part of respondent. ss Thus, petitioner had thirty (30) days from July 17, 2010 or until August 16, 2010 within which to file an appeal before this Court.

Indeed, petitioner timely filed the instant Petition for Review with this Court on August 16, 2010.

Since the Petition for Review was filed on time, this Court has jurisdiction to take cognizance of the same pursuant to j--

Section 7(a)(2) of RA No. 1125, as amended by Section 7 of RA No. 9282.59

Validity of the FLD and the FAN

both dated October 16, 2009 Petitioner contends that the FLO and the FAN issued by respondent are null and void for being arbitrary and devoid of procedural due process. Petitioner avers that while the PAN and the FLO enumerated provisions of law on which the assessment is supposedly based, respondent allegedly failed to explain to petitioner how the figures were computed. Petitioner also argues that since respondent failed to reply to the FAN, petitioner was not given the opportunity to refute the finding against it. Petitioner claims that respondent did not bother to examine and scrutinize the voluminous documents which were prepared, accounted, and submitted by petitioner in support of its protest.

In petitioner's view, the foregoing acts of respondent make the assessments arbitrary for the latter's failure to comply with the requirements of due process. Petitioner argues that since respondent allegedly violated the procedural requirements prescribed in Section 228 of the NIRC of 1997, as amended, and Revenue Regulations (RR) No. 12- 99, the FAN and the FLO issued against petitioner should be cancelled and declared as null and void. On the other hand, respondent argues that the FLO and the FAN were issued in accordance with Section 228 of the NIRC of 1997, as amended. According to respondent, the FLO and the FAN cited the provisions of law on which the assessments were based, and the details of discrepancies clearly explained how the individual amounts were arrived at and obtained.

Respondent contends that the fact that petitioner was able to exhaustively explain in its protest letter its objections against the FLO and the FAN would prove that the FLO and the FAN contain the factual and legal bases in support of the deficiency tax assessments. Finally, respondent asserts that the requirement of due process has been provided J- 59 SEC. 7. Jurisdiction. -The CT A shall exercise:

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

XXX

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period for action, in which case the inaction shall be deemed a denial;

to petitioner as evidenced by respondent's issuance of the Notice of Informal Conference and the PAN prior to the issuance of the FLD and the FAN.

Section 228 of the NIRC of 1997, as amended, provides that 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. However, it is noteworthy to emphasize that assessment notices need not be a full narration of the facts and laws on which the assessment is based. It is enough that petitioner be substantially informed of the law an d the facts on which the assessment for a tax liability is m ade.6o Thus, so long as the parties are notified and given the opportunity to explain their side, the requiremen ts of due process are satisfactorily complied with.61 In this case, a perusal of the Notice of Informal Conference, the PAN, and the FLD shows that details of discrepancies, computations and schedules62 were attached thereto, showing the factual and legal bases of the deficiency tax assessments. This Court holds that said details of discrepancies, computations, and schedules substantially comply with the prescribed requisite of informing petitioner with the factu al and legal bases on which the deficiency tax assessments were based, pursuant to Section 228 of the NIRC of 1997, as amended.

As aptly pointed out by respondent, petitioner has in telligently and exhaustively made its protest against the FAN and the FLD. This circumstance proves that petitioner was sufficiently informed of the legal and factual bases of the deficiency tax assessments. Hence, petitioner's contention that the FLD and the FAN issued against it failed to disclose th c facts and legal bases upon which the deficiency tax assessrncnts were based is untenable. This Cou rt also finds no merit on petitioner's contention that it was deprived of procedural due process when responden L railed to act on petitioner's protest letter dated November 19, 2009 and examine the voluminous supporting documents submitted by petitioner. {

Pursuant to Section 228 of the NIRC of 1997, as amended, and RR No. 12-99, the procedure in the issuance of deficiency tax assessment shall begin with the conduct of an investigation or examination of the records of a taxpayer for alleged deficiency tax liability. Thereafter, the taxpayer shall be notified in writing of the findings for purposes of an Informal Conference.

If there is a sufficient basis to assess the taxpayer of deficiency tax, a PAN shall be issued and sent to the taxpayer. The taxpayer is then given fifteen (15) days to make a Reply and he is also permitted to examine the records and present his arguments in writing. If the taxpayer fails to respond to the PAN, the taxpayer shall then be sent a FLD and FAN, which shall state the facts and the law on which the assessment was based. The taxpayer may file a protest based on such assessment within thirty (30) days. After filing the protest, the taxpayer must submit the relevant supporting documents within sixty (60) days. If the taxpayer fails to file a valid protest against the FLD and FAN, the assessment shall become final and executory. 63 As stated above, respondent issued a Notice of Informal Conference with Details of Discrepancies on August 27, 2009; which were received by petitioner on August 28, 2009. On September 28, 2009, respondent issued a PAN with Details of Discrepancies; which were received by petitioner on the same date. On October 20, 200964, petitioner received the FLD and the FAN dated October 16, 2009. Petitioner filed its protest letter on November 19, 2009 with the BIR LTAID II.65 On January 18, 2010, petitioner submitted documents in support of its protest letter to BIR LTAID II.66 Based on the foregoing, respondent has substantially complied with the requirement of procedural due process when she issued the Notice of Informal Conference, the PAN, the FLD, and the FAN. Respondent even issued a TVN for the re-investigation of petitioner's deficiency tax assessments pursuant to the protest letter filed by petitioner on November 19, 2009.

Evidently, petitioner was afforded the opportunity to be heard, which is the very essence of due process. Respondent's failure to appreciate the voluminous supporting documents submitted by petitioner in support of its protestt

letter is not tantamount to denial of due process. This is because the essence of due process is found in the reasonable opportunity to be heard and submit any evidence one may have in support of one's defense. What the law proscribes is the lack of opportunity to be heard. As long as the party is given the opportunity to defend his interests in due course, he would have no reason to complain, for it is this opportunity to be heard that makes up the essence of due process. 67 Requirement to issue the FAN within the three-year prescriptive period This Court shall now resolve the issue on whether respondent's right to assess petitioner for the alleged deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), and withholding tax on compensation (WTC) is barred by prescription.

Section 203 of the NIRC of 1997, as amended, specifically provides that respondent has three (3) years to assess and collect an internal revenue tax, to wit: "SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." (Emphasis supplied) Pursuant to Section 203 of the NIRC of 1997, as amended, internal revenue taxes must be assessed within three years counted from the period flXed by law for the filing of the tax return or the actual date of filing, whichever is later. This mandate governs the question of prescription of the government's right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation.

Accordingly, the government must assess£

internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.68 Thus, in determining the last day for respondent to assess petitioner of deficiency income tax, VAT, EWT, and WTC, this Court shall apply the relevant provisions of the NIRC of 1997, as amended, as well as the implementing rules and regulations issued by the BIR, to ascertain the reckoning of the three-year prescriptive period. Section 77(B) of the NIRC of 1997, as amended, provides for the period to file the Quarterly and Annual Corporate Income Tax Returns, to wit:

"SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -

XXX

XXX

XXX

(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty

(60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be."

In this case, petitioner filed its Annual ITR for taxable year ending December 31, 2006 on April 16, 2007.

Applying

Section 203 of the NIRC of 1997, as amended, the BIR had until April 16, 20 10 within which to issue the FLD and the FAN assessing petitioner for deficiency income tax for taxable year ending December 31, 2006.

With regard to VAT, pursuant to Section 114(A) of the NIRC of 199769, as amended, and Section 4. 114-1 (A) of RR t 68 Commissioner of Internal Revenue vs. FMF Development Corporation, G.R. No. 167765, June 30, 2008. 69 SEC. 114. Return and Payment of Value-added Tax.- (A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis.

No. 16-2005, Quarterly VAT Returns shall be filed within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer. This Court summarized the dates of filing of petitioner's Quarterly VAT Returns and the corresponding dates within which respondent should assess petitioner for deficiency VAT for the four (⁴) quarters of calendar year ending December 31, 2006, to wit:

Quarter

Date of Filing of BIR

Last Day of Filing as

Last Day to Assess

Form No. 2550Q

Required by Law

First Quarter of 2006

August 23, 2007 April 25, 2006 August 23, 2010

Second Quarter of 2006

July 28, 2006 July 25, 2006 July 28, 2009

Third Quarter of 2006

August23, 2007 October 25, 2006 August23,2010

Fourth Quarter of 2006

August22, 2007 January 25, 2007 August 23, 201070

Anent

the deficiency withholding taxes,

Sections

2.58(A)(2)71 a nd 2.81 72 of RR No. 02-98, as amended by RR No. 06-01 and Rl~ No. 17-03, require the filing of the withholding tax returns on EWT and WTC within ten (10) days after the end of each month for the months of January until November, while the withholding tax return for the month of December should be filed on or before January 15 of the following year. 73/- 70 August 22, 20 I 0 fell on a Sunday. 71 "SEC. 2.58.

Returus and Payment of Taxes Withheld at Source. - (A) Monthly return and payment of taxes withheld at source.-

(I)

(2) WHEN TO I:ILE-

(a) For both l:1 rge and non-large taxpayers, the withholding tax return, whether creditable or final (including fi n:li withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed :1nd payments should be made, within ten (I 0) days after the end of each month, except for ta.'\cs withheld for the month of December of each year, which shall be filed on or before January 15 of the following year; ...

XXX

.'\XX

XXX

(b) With respvct, however, to taxpayers, whether large or non-large, who availed ofthe electronic filing and payi iiCIIt system (EFPS), the deadline for electronically filing the applicable withholding tax returns <JIHI pilying the taxes due thereon via the EFPS shall be five (⁵) days later than the deadlines set :1 bove, unless the EFPS regulations provide for different deadline dates ... " 72 "SECTION 2.81.

FILING OF RETURN AND PAYMENT OF INCOME TAX WITHHELD ON COMPENSATlON (f-"ORM NO. 1601). - Every person required to deduct and withhold the tax on compensation, includi ng l:1 rge taxpayers as determined by the Commissioner, shall make a return and pay such tax on or before the I Oth day of the month following the month in which withholding was made to any authorized agent bank ll'ith in the Revenue District Office (ROO) or in places where there are no agent banks, to the Revenue l) i ~ tr i c t Officer of the City or Municipality where the withholding agent/employer's legal residence or plilce of business or office is located; provided, however, that taxes withheld from the last compensation (Dcce1nber) for the calendar year shall be paid not later than January 15 of the succeeding year; Pro1·itled however, that with respect to taxpayers, whether large or non-large, who availed of the EFPS, the dead I inc for electronically filing the aforesaid withholding tax return and paying the tax due thereon via the Ef-" I'S ' hall be five (5) days later than the deadlines set above." 73 Pursuant to Secti o1 1~ ::2 .:'\8(A)(2) and 2.81 of RR No. 02-98, as amended, with respect to taxpayers, whether large or non-I :I1·gc, who availed of the electronic filing and payment system (EFPS), the deadline for electronically fil iw: the applicable withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) dilys later than the set deadlines unless the EFPS regulations provide for different deadline dates. In rel :1: i011 thereto, RR No. 26-2002 provides for staggered filing of monthly withholding tax returns (except wit I ll()ld ing of Final VAT and withholding of Percentage Tax) of taxpayers enrolled in the EFPS based on i1 li1St1·y classification. In this case, petitioner files its return and pays the tax due thereon under EFPS, 1, liWvcr, there is nothing in the records that indicates under which industry it was The Court summarized below the dates relevant to the filing of petitioner's tax returns for EWT and WTC:

Month

Date of Filing of

Date of Filing of

BIRForm No.

BIR Form No.

1601-E

1601-C

January 2006

February 13, 2006 February 10, 2006

February 2006

March 10, 2006 March 10, 2006

March 2006

April 11 , 2006 April 11 , 2006

April2006

May 11, 2006 May 10, 2006

May 2006

June 13, 2006 June 13, 2006

June 2006

July 10, 2006 July 11 , 2006

July 2006

August 11 , 2006 August 10, 2006

August2006

September 8 , 2006 September 8, 2006

September

October 11, 2006 October 11 , 2006 2006

October 2006

November 10, 2006 November 10, 2006

November

December 11, 2006 December 11, 2006 2006

December

January 12, 2007 January 12, 2007 2006 ..

*Last day to assess petitJ.Oner for deficiency EWT **Last day to assess petitioner for deficiency WTC

Last Day of Filing

Last Day to as Required by

Assess

Law

February 10, 2006 *February 13,

2009 /**February

10, 2009 March 10, 2006 March 10, 2009 April 10, 2006 April 13, 200974 May 10, 2006 *May 11, 2009 /**May 11 , 200975 June 13, 200676 June 15, 200977 July 10, 2006 *July 10, 2009/**July 13, 200978 August 10,2006 *August 11,

2009/**August

10,2009 September 11 , September 11 , 200679 2009 October 10, 2006 October 12, 200980 November 10, 2006 November 10, 2009 December 11, December 11, 200681 2009 January 15, 2007 January 15, 2010 As aforestated, the FLD and the FAN, dated October 16, 2009, assessing petitioner for alleged deficiency income tax, VAT, EWT, and WTC for the calendar year ending December 31 , 2006, were received by petitioner on October 20, 2009. Based on the foregoing, it is clear that the FLD and th e FAN were issued beyond the last day prescribed under Section 203 of the NIRC of 1997, as amended , to assess petitioner for deficiency VAT for the second quarter of 2006 as well as for deficiency EWT and WTC for the months of January 2006 to September 2006. Thus, respondent's right to assess petitioner for said deficiency taxes has prescribed. ~ classified, hence, for purposes of counting the prescription, the deadlines set under RR No. 2-98 were observed.

74 April 11 , 2009 fell on a Saturday. 75 May 10, 2009 fell on a Sunday.

76 June I 0, 2006 fell on a Saturday and June 13, 2006 was the next business day. 77 June 13, 2009 fell on a Saturday. 78 July I I, 2009 fell on a Saturday. 79 September I 0, 2006 fell on a Sunday. 80 October 11 , 2009 fe ll on a Sunday. 81 December I 0, 2006 fell on a Sunday.

This Court shall now proceed to determine the merits of the subject assessments.

Imposition of Compromise Penalties

This Court notes that respondent imposed compromise penalties on the subject deficiency taxes in the total amount of P200,000.00, broken down as follows:

Compromise

Tax Type

Penalty

Income Tax

p 50,000.00 No inventory list 25,000.00

Value-Added Tax

50,000.00

WT-Expanded

25,000.00

WT -Compensation

50,000.00

Total

p 200,000.00 Pursuant to Revenue Memorandum Order (RMO) No. 01 - 90, as amended by RMO No. 19-07, compromise penalties are only suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. Thus, compromise penalties imply mutual agreement between the taxpayer, on one hand, and the CIR, on the other. Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. Accordingly, this Court holds that respondent's imposition of compromise penalties, without the consent of petitioner, cannot be sustained.

Deficiency Withholding Tax on Compensation

Respondent assessed petitioner for deficiency WTC for taxable year 2006 in the amount of P9,415,910.31, computed as follows:

Per F/S

Cost of Sales

Sala ries & f> 8, 111,441.00

Wages

Operating Expenses

Salaries &

40,577,257.79

Wages

Overtime

893,833.37 13th Month 2,4 17,540.25

Bonus

4,638,250.00

Total

f> 56,638,322.4 1

Per Alphalist

13th Month SSS, Philhealth

Salaries

Totals

Non-Taxable

p 2,154,415.10 728,787.20 784,201.59 p 3,667,403.89 Salaries and Wages still subject to WHT Rate ofTax

Deficiency WHT on Compensation

Add:

20% Interest

1/16/2007-10/31/2009- 1019 days

Compromise Penalty

p p

Deficiency WHT on Compensation Due and Collectible

Taxable

3,557' 704.37 30,631,583.62 34,189,287.99 37,856,691.88 p 18,781,630.53 32% p 6,010, 121.77 3,355,788.54 50,000.00 p 9,415,910.31 In its Memorandum, petitioner claims that respondent, in determining petitioner's deficiency WTC, compared the compensation-related accounts found in petitioner's financial statements (FS) against the alphalist for compensation. However, respondent used a substantially different amount to represent petitioner's total compensation under the alphalist. A perusal of the Monthly Remittance Returns of Creditable Income Tax Withheld on Compensation (BIR Form No.

1601-C)82 filed by petitioner for taxable year 2006 disclosed salaries and wages in the aggregate sum of P51,715,657.03, broken down as follows:

EXHIBIT

MONTH

TOTAL

NON-TAXABLE

TAXABLE

TAXW/HELD

EE-l

January

p 3,658,419.03 p - p 3,658,419.03 p 946,001.30

EE-2

February

4,011,463.10 955,361.70 3,056,101.40 751,640.04 EE-3; EE-13

March

4,274,891.35 78,491.70 4,196,399.65 1,098,857.18

EE-4

April

8,449,681.93 83,658.30 8,366,023.63 2,447,932.77

EE-5

May

3,250,329.78 107,408.69 3,142,921.09 797,504.77

EE-6

June

2,55 1,787.62 105,791.70 2,445,995.92 550,390.15

EE-7

July

4,064,173.11 140,649.60 3,923,523.51 988,964.73

EE-8

August

3,656,738.55 155,016.73 3,501,721.82 841,631.90

EE-9

September

3,620,972.73 211,587.97 3,409,384.76 768,476.63

EE-10

October

3,514,676.01 225,031.99 3,289,644.02 763,185.38

EE-11

November

5, 782,279.61 1,152,433.37 4 ,629,846.24 1,197,230.15

EE-12

December

4,880,244.2 1 483,459.80 4,396, 784.41 818,814.73

Total per BIR Form 1601-C

p 51,715,657.03 p 3,698,891.55 p 48,016,765.48 p 11,970,629.73 A comparison of the total compensation per petitioner's FS as found by respondent and the total of all monthly compensation declared in BIR Forms No. 1601-C revealed a discrepancy of P4,922,665.38, computed as follows: Total salaries & wages per petitioner's FS as found by respondent p 56,638,322.41 Less: Withholding tax on compensation remitted per BIR Forms No. 1601-C 51,715,657.03

Difference

p 4,922,665.38

The

Independent

CPA83

noted that the aforesaid difference pertains to accrued employee costs in the amount of P2,708,475.1384 and pension cost in the amount of P2 ,214, 190.55 paid for by petitioner's home office for the expatriates assigned in the Philippines which were erroneously included in the salaries account. 85 While Section 79(A) of the NIRC of 1997 and Section

2. 79(A) of Revenue Regulations (RR) No. 2-98, as amended, require the withholding of tax upon payment of the compensation, petitioner failed to present documents proving that the compensation ofP2,708,475.13 was merely accrued as of December 31, 2006.

Likewise, petitioner did not present any evidence to support the alleged pension cost paid for by its home office in the amount of P2,214, 190.55. In the absence of proof that the claimed salaries and wages in the total amount of P4,922,665.38 is not subject to withholding tax, this Court finds petitioner liable for the corresponding deficiency withholding tax. In this case, the above difference of P4,922,665.38 should be subjected to withholding tax on compensation based on the graduated tax rates of So/a to 32°/o. However, the employees to whom the compensation pertained to were not individually identified. Hence, We note that the BIR used the highest tax rate of 32°/o, in computing the deficiency withholding tax on compensation. In its protest letter dated November 19, 200986, however, petitioner correctly pointed out that the appropriate tax rate to be used should be the effective rate computed based on the total withholding tax on compensation paid divided by the total amount of taxable compensation reported during the taxable year 2006, as shown below:

Total withholdin 83 Antonio 0 . Maceda, Jr. or Maceda Farnacio & Co. 84 Exhibit "QQQQ", under 8.2 of the Findings, page 9. 85 Exhibit "QQQQ", under 8.2 of the Findings, page 10. 86 Exhibit "F", docket, p.61 2.

p 7,683,415.0387 p 34,755,338.3388 22.11%

Therefore, petitioner's basic deficiency WTC for taxable year 2006 amounts to P1,088,401.32, computed as follows: Total salaries & wages per petitioner's FS as found by respondent r 56,638,322.41 Less: Withholding tax on compensation remitted per BIR Form No. 1601-C 51,715,657.03 Salaries & wages still subject to withholding tax r 4,922,665.38 Tax rate 22.11% Deficiency withholdin~ tax on compensation p 1,088,401.32 As earlier noted by this Court, respondent's right to assess petitioner of deficiency WTC for the months of January to September 2006 had already prescribed. Petitioner was, however, unable to establish that the salaries and wages of P4,922,665.38 pertained to the months of January to September 2006. In the absence of proof to the contrary, this Court shall consider the amount of P4,922,665.38 as pertaining to petitioner's claimed salaries & wages for the months of October to December 2006.

Deficiency Expanded Withholding Tax

Per comparison of petitioner's expense items/income payments as reflected in its financial statements with those shown in its alphalist for the year 2006, respondent found that the amounts of P242,267,449.61 and P102,270,003.14 were not subjected to 1 °/o EWT of P2,422,674.50 and 2o/o EWT of P2,045,400.06, respectively, pursuant to Section 57(B) of the NIRC of 1997, as amended, in relation to RR No. 2-98, as amended by RR No. 17-03. Below is the detailed breakdown of the said amounts:

PerFS

Per Alphalist

Difference

Additions to PPE:

Gas Tanks and Cylinders

72,564,481.00 21,076,4 72.45 51,488,008.55

Machinery & Equipment

5,065,571.00 5,065,571.00 -

Transportation Equipment

25,010,679.00 25,010,679.00 - Furniture, Fixtures & -

Equipment

2,627,939.00 2,627,939.00

Cost of Sales

Purchases

817,707,904.60 635,158,416.71 182,549,487.89

Operating Expenses

Printed Papers, Docs, Books 971,798.35 - 971,798.35

Transportation & Travel:

Cars-Fuel

Small Equipment & Materials

Small Office Equipment

Membership & Subscriptions:

Gifts

Total

1% EWT Due

Additions to PPE:

Buildings & Improvement

Construction in Progress

Cost of Sales

Freight-in

Insurance

Throughput Fees

Filing Costs

Other Overhead

Operating Expenses:

Salaries, Wages & Employee

Benefits-

External Med Care

Rent:

Office Equipment

Forklift Trucks

Cylinder Trucks

Bulk Trucks

Diesel Pumps

Outside Services:

Other Contractor-Security

Software House

Interimpers Employee

Other Fees

Repairs & Maintenance:

Ground & Building

Machine & Equipment

Cars

Cylinders Painting

Cylinders Valves/Regula tors

Computer Equipment

Insurance:

Fire

Trucks

Cars

Others

3,117,919.41 - 3,117,919.41 513,180.42 - 513,180.42 212,479.52 - 212,479.52 786,636.47 - 786,636.47 928,578,588.77 686,311,139.16 242,267,449.61 9,285,785.89 6 ,863,111.39 2,422,674.50 452,143.00 452,143.00 - 29,781 ,287.00 29,781,287.00 - 95,897' 145.00 77,832,304.18 18,064,840.82 2,592,288.00 2,592,288.00 35,625,000.00 35,625,000.00 - 30,853,608.00 30,853,608.00 - 29,143,816.00 29,143,816.00 - 1,894,602.80 1,894,602.80 2,631.57 2,631.57 15,000.00 15,000.00 28,493.96 28,493.96 31 ,250.00 31 ,250.00 10,000.00 10,000.00 2,150,960.58 2,150,960.58 191 ,367.61 191,367.61 3,581,791.28 3,581 ,791.28 1,296,246.01 1,296,246.01 1,34 7,687.00 1,347,687.00 1' 132,024.53 1' 132,024.53 1' 113,993.85 1,113,993.85 3,113,046.98 3,113,046.98 30,357.14 30,357.14 5,377.61 5,377.61 2,241,914.85 2,241 ,914.85 233,568.30 233,568.30 222,586.31 222,586.31 4,765,111.99 4,765,111.99 l

CfA CASE NO. 8149

Transportation & Travel:

Travel Costs

Communication, Light & Power:

Electricity

Water

Truck

Telephone

Portable Telephone

Postal Costs

Fax

Leaseline

Internet

Membership & Subscriptions

Interest Expense

Bank Charges

Total

2% EWT Due

Rent- Ground & Build in g

5% EWTDue

Outside Services

Lawyers

Accountants

Commissions

Total

10% EWT Due

Total Expenses/Income

Payments

Total EWT Due

10,640,779.13 10,640,779.13 1,555,346.09 315,071.31 1,240,274.78 117,459.11 117,459.11 827,688.12 827,688.12 1,497,739.32 1,497,739.32 1,451,⁶ 11.28 1,451,611.28 114,440.07 114,440.07 42,159.19 42,159.19 233,942.93 233,942.93 273,494.89 273,494.89 4,089,504.13 4,089,504.13 35,075,883.00 35,075,883.00 2,599,886.00 2,599,886.00 306,273,232.63 204,003,229.49 102,270,003.14 6 ,125,464.65 4,080,064.59 2,045,400.06 7, 953,509.84 7,953,509.84 - 397,675.49 397,675.49 - 2,657,027.11 2,657,027.11 - 745,454.55 745,454.55 - 2, 170,840.00 2,170,840.00 - 5,573,321.66 5,573,321.66 - 557,332. 17 557,332.17 - 1 ,248,378,652. 90 903,841,200.15 344,537,452.75 16,366,258.20 11,898,183.64 4,468,074.56 In its protest 1clter89, petitioner argues that the starting figure per audit or the BIR as regards its local purchases should be P514,882,1 02.91 and not P817,707,904.60.

Petitioner explain s lhat its total importation amounted to P5,900,612,768.09 a nd not P5,597,786,966.4Q90 as computed by the BIR.

Thu s , after deducting petitioner's total importation of f>5,CJ00 ,6 12 ,768.09 from the total purchases per

FS

of P6,415,LJ91J,87 J.0091, the resulting amount of P514,882,102.9 1 vou ld represent its local purchases that were subjected to the 1 c% withholding tax. j_

This Court agrees with petitioner. As aptly noted by the

Court-commissioned

Independent

CPA, petitioner's importations amounting to P5,900,612,768.09 were duly supported by bills of lading, suppliers' invoices, Bureau of Customs Import Entries and Internal Revenue Declarations (IEIRDs), and official receipts.92 Therefore, petitioner's local purchases for the year 2006 actually amounted to P514, 882, 102.91. Since this figure is lower than the amount of P635,158,416.71 purchases found by respondent to have been subjected to 1 o/o EWT per alphalist, this Court holds that petitioner is not liable for any deficiency 1 °/o EWT on local purchases.

Anent the interest and bank charges in the respective amounts of P35,075,883.00 and P2,599,886.00, upon which a 2°/o deficiency EWT was imposed by respondent, the Independent CPA reported that petitioner's interest expense was not subjected to withholding tax.93 Ms. Maricel A.

Cambe, petitioner's Corporate Accounting Head, corroborated

the Independent CPA's

findings saying that petitioner maintains an account with the creditor bank and the interest payments and bank charges were automatically debited from petitioner's bank account. The bank allegedly did not deduct the applicable withholding taxes from the amount it debited; consequently, petitioner did not issue any creditable withholding tax certificates to the bank. 94 Petitioner submits that the subject interest expense and bank charges are not subject to withholding tax since they are automatically debited from its bank account. However, under RR No. 2-98, as amended, and as clarified by Revenue Memorandum Circular No. 72-0495, interest on loans, service fees, and other charges are considered as payments for services rendered, hence, su bject to 2°/o EWT. Consequently, petitioner is liable to pay th e deficiency 2°/o EWT imposed on interest payments and bank charges paid to the creditor bank. It is petitioner's responsibility, as a withholding agent, to make arrangemen ts with th e creditor bank that the amount which the latter wou1d au I r)matically debit from petitioner's account should be net of the 2c% EWT. ~ 92 Exhibits "DO" to "DD-83" <I S illl <1CI1111C II lS to r xhibit "QQQQ". 93 Exhibit "QQQQ", page 19, docket, p. 1065. 94 Exhibit "RRRR", Item Nos. 79 tv 81 , docket. pp. 1090 to 1091. 95 See Ql8, Al8, Ql9 and A19 of RMC No. 72-04.

With respect to the remrun1ng expenses/ income payments in the amounts of P59, 717,961.7296 and P64,594,234.1497, respondent's deficiency 1 °/o and 2% EWT assessment thereon shall be upheld.

While petitioner presented its Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) [BIR Forms No. 1601-E) with the attached EFPS Payment Details for the years 200598, 200699, and 2007100, Annual Information Return of Creditable

Income Taxes Withheld (Expanded)/Income Payments Exempt

from Withholding Tax [BIR Form No. 1604-E) with attached Alphalist of Payees for the years 2005101, 2005102, and 2007103, entries in the General Ledger for Freight-In104, Insurance Costlo5, External Med-Care106 and Travel Cost107, and Independent CPA report dated May 27, 20111°8 to prove that it withheld and remitted the EWT due on the said expenses, this Court finds these documents insufficient. Petitioner should have presented its detailed general ledger showing the breakdown of the expenses per FS and reconciled these amounts with the income payments reflected per its alphalists for the years 2005, 2006, and 2007.

It bears stressing 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.1°9 As a result, petitioner is liable to pay basic deficiency EWT 1n the amount of P2,642,579.68, computed as follows:

Tax

Amount

Rate

Deficiency EWT

Income payments subject to 1% EWT p 242,267,449.61 Less: Income payments erroneously treated by respondent as pertaining to petitioner's local purchases (182,549,487.89) p 59,717,961.72 1% p 597,179.62 Income payments subject to 2% EWT 102,270,003.14 2% 2,045,400.06

Total

P161,987,964.86 p 2,642,579.68 96 P242,267,449.61 less P182,549,487.89. 97 Pl02,270,003.14less P35,075,883.00 and P2,599,886.00.

It is to be noted that while respondent's right to assess petitioner of deficiency EWT for the months of January to September 2006 had already prescribed, petitioner was unable to establish that the above income payments pertain to the months of January to September 2006. Thus, in the absence of proof, this Court shall consider the total income payments of P161 ,987,964.86 as pertaining to the months of October to December 2006.

Deficiency Income Tax

Respondent assessed petitioner of deficiency income tax for taxable year 2006 in the amount of P286,241 ,73 1.88, computed as follows: 11o Taxable Income per return r 64,702,897.40

Add:

Adjustments

a.

Unrecorded sales on undeclared Petron Purchases (Secs.32 & 44(A) of the NIRC) r 1,049,152.37 b.

Overclaimed Purchases from Asian Angle Kunstruck (Sec. 32 of the NIRC) 2,514,322.72

c. Expenses not subjected to withholding tax (Sec. 34(K) of the NIRC) Income payments not subjected to 1% EWT P242,267 ,449.61 Income payments not subjected to 2% EWT 102,270,003.14 344,537,452.75

d. Salaries & Wages not subjected to Wtax (Sec. 34(K) of the NIRC) 18,781,630.53

e. Unsupported Bad Debts (Sec. 34(A)(1)(b) of

the NIRC)

8,431 ,934.00 f.

Unrecorded

Sales

on

Underclaimed

Importation (Sees. 32 & 44(A) of the NIRC) 55,614,853.82 g.

Overclaimed Importation (Sec. 32 of the

NIRC)

11 ,892,375.63

h. Undeclared sales to PSPC (Sec. 32 of the

NIRC)

85,946,167.89 528,767,889.71 Taxable Incomeper investigation r 593,470,787.11 Income tax rate 35% Tax due per audit/investigation r 207,714,775.49

Less:

Prior year's Excess Credit N2,986,386.59

Creditable Tax Withheld Per 2307

P18,337,632.00

Less: Unsupported/Out-of-Period

4,582,506.19 13,755,125.81

Total

P56,741,512.40

Less: Carry-Over Per Return

38,678,120.60 18,063,391.80

Basic Income Tax Due

r 189,651 ,383.69

Add:

Increments

r

Surcharge

- Interest (04/16/06-10/31/09) 929 days 96,540,348.19

Compromise

50,000.00 96,590,348.19

Total Deficiency Income Tax

p 286,241,731.88 The determination of whether or not the assessment is correct shall depend on the propriety of the income imputed j

as well as the expense deductions and tax credits disallowed by respondent, namely:

a .

Unrecorded sales on undeclared Petron purchases p 1,049,152.37 b.

Overclaimed purchases from Asian Angle Kunstruck 2,514,322.72 c.

Expenses not subjected to EWT 344,537,452.75 d.

Salaries & wages not subjected to Wtax 18,781,630.53 e.

Unsupported bad debts 8,431,934.00 f.

Unrecorded sales on underclaimed importation 55,614,853.82 g.

Overclaimed importation 11,892,375.63 h.

Undeclared sales to PSPC 85,946,167.89 1.

Unsupported I out -of-period CWT 4,582,506.19 j.

CWT Carried -over per return 38,678,120.60

a. Unrecorded Sales on Undeclared Petron Purchases - Pl,049,152.37 Based on the records of Petron, respondent purportedly found sales to petitioner in the amount of P29,361,061.13; which was not recorded as purchases in petitioner's books. Respondent assumed that the said goods were ultimately sold by year-end and the gross profit from the sale of the same was added to petitioner's taxable sales per return.

Respondent

computed the alleged unrecorded sales of Pl,049,152.37 as follows: 111 Undeclared purchases p 29,361,061.13

Divided by Cost of Sales Ratio

96.55% Sales Revenue per audit p 30,410,213.50 Less: Unclaimed purchases 29,361,061.13 Taxable sales per audit p 1,049,152.37 Petitioner disagrees with respondent's findings and submitted a schedule112 reflecting purchases in the total amount of P6,415,494,870.88, which includes purchases from Petron amounting to P28,349,221.41.

A careful examination of petitioner's audited financial statements11 3 and annual income tax return for taxable year 2006 114 disclosed that petitioner's cost of sales amounting to P6,703,710,266.00 consisted of purchases in the amount of P6,415,494,871.00, which is the same figure reflected in t

petitioner's schedule of purchases.

Thus, the subject purchases from Petron were duly reported. The Court-commissioned Independent CPA found in the Alphalist of Payees for taxable year 2006 that petitioner also had purchases amounting to P1,193,813.05 from Petron through its Fleet Card.1 15 It should be noted that the summary116 of Petron sales to petitioner, which was compared to petitioner's purchases, does not specify whether or not the same were made through fleet card.

The Court is thus constrained to consider petitioner's purchases through the use of fleet card.

A fleet card is a credit facility which allows fleet vehicles of a company to fuel up and pay later. Petitioner's purchases through fleet card are not for resale; hence, they are not included in petitioner's cost of sales. As a consequence, respondent's computation using the cost of sales ratio to determine the taxable sales does not apply to petitioner's purchases from Petron through fleet card. Based on the foregoing, this Court finds that petitioner properly reported and fully accounted for its purchases from Petron as shown below: 117 Purchases from Petron per respondent's audit p 29,361 ,061.13 Less: Purchases from Petron reported as part of p 28,349,221.41 petitioner's cost of sales Purchases through Petron's Fleet Card 1,193,813.05 29,543,034.46

Difference

p (181,973.33) Consequently, the deficiency income tax assessment on the alleged unrecorded sales from undeclared

Petron

purchases should be cancelled for lack of factual basis.

b. Overclaimed purchases from Asian Angle Konstruk - P2,514,322. 72 Per respondent's audit information, Konstruk (AAK) recorded sales to petitioner P5, 192,358.85118 but petitioner reported 115 Exhibit "QQQQ", page 8, docket p. I 054. 116 Exhibit "E-1 ", docket, pp. 583. 117 Exhibits "QQQQ", page 8 and "000-1" 118 Exhibit "E-1", docket, p. 586.

Asian

Angle

amounting to purchases of j

P⁷,706,608.47119; hence, the discrepancy representing alleged overclaimed purchases.

Upon examination of the schedules presented, this Court found that the discrepancy amounts to P2,514,249.72 (not P2,514,322.72), computed as follows:

Amount

Asian Angle Konstruk Summary of Sales to Liquigaz

p 5,192,358.85 Petitioner's Summary of purchases from Asian Angle Konstruk 7,706,608.57

Difference

p 2,514,249.72 Petitioner counter-argues that its recorded purchases from AAK are duly substantiated with invoices and official receipts.12o However, petitioner failed to submit the invoices and official receipts for the perusal of the Court. Hence, petitioner's unsupported purchases in the amount of P2,514,249.72 shall be disallowed pursuant to Section 34(A)(l)(b) of the NIRC of 1997, as amended, which states: "SEC. 34.

Deductions from Gross Income. - xxx

(A)

Expenses. - ( 1) Ordinary and Necessary Trade,

Business or

Professional Expenses. -

XXX

XXX

XXX

(b) Substantiation Requirements. -No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records:

(i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the, development, management, operation and/ or conduct of the trade, business or profession of the taxpayer."

c. Expenses not Subjected to Expanded Withholding Tax - P344,537 ,452. 75 Based on the finding that petitioner failed to withhold and remit the EWT on certain expenses in the amount oft

P344,537,452.75 pursuant toRR No. 2-98, as amended by RR No. 17-03, in relation to Section 57(B) of the NIRC of 1997, as amended, as discussed under the deficiency EWT assessment, respondent disallowed the said amount as deduction from petitioner's taxable gross income.

As earlier discussed, petitioner failed to prove that it properly withheld and remitted the EWT due on its income payments of P161,987,964.86.

Consequently, the said amount shall be disallowed from petitioner's claimed deductible expenses pursuant to Section 34(K) of the NIRC of 1997, as amended, which states that: "(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."

d.

Salaries and Wages not subjected to Withholding Tax -P18,781,630.53 Respondent claims that the salaries and wages for the year 2006 in the amount of P18,781,630.53 were not subjected by petitioner to withholding tax pursuant to Sections 24 (A)( 1), 79, and 80 of the NIRC of 1997, as amended. As a consequence of the alleged non-withholding, respondent disallowed said amount from petitioner's claimed deductible expenses.

As earlier stated under the deficiency WTC assessment, petitioner failed to prove that it withheld and remitted the withholding tax due on the salaries and wages of P4,922,665.38.

Hence, the same cannot be deducted by petitioner from its taxable gross income pursuant to Section 34(K) of the NIRC of 1997, as amended. j, e.

Unsupported bad debts- P⁸,431,934.00 Pursuant to Section 34(A)(1)(b) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed deduction for bad debts in the amount of P8,431, 934.00 for being unsupported. On the other hand, petitioner posits that such write-off is lawful and valid and that the same is adequately supported by documents.I21 Section 34(E) of the NIRC of 1997, as amended, allows bad debts written-off as deductions from gross income, thus: "SEC. 34. Deductions from Gross Income. - xxx (E) Bad Debts. -

(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36(B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction." The above prov1s1on is implemented by Section 3 of Revenue Regulations No. 5-99, as amended by RR No. 25-02, which enumerates the requirements for deductibility of bad debts from gross income, to wit:

"Sec. 3. Requisites for valid deduction of bad debts from gross income. - The requisites for deductibility of bad debts are:

(1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;

(2) The same must be connected with the taxpayer's trade, business or practice of profession;

(3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; ?

(4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and

(5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year."

However, other than the testimony122 of its Corporate Accounting Head, stating that the said receivables could no longer be collected despite utmost effort exerted and collection letters sent to customers and that most of the customers are no longer in business, petitioner did not present documents to prove compliance with the requirements for deductibility of the amount of P8,431,934.00 as bad debts. Hence, respondent's disallowance of the said amount from petitioner's claimed deductions from gross income for taxable year 2006 shall remaJ.n.

f.

Unrecorded sales on underclaimed importation P55,614,853.82 and

g. Overclaimed importation - Pll ,892,375.63 Respondent computed the alleged unrecorded sales of P55,614,853.82 on petitioner's underclaimed importation as follows: 123 Excess per BOC vs. per taxpayer's record p 1,556,409,894.65 Cost of sales ratio* 96.55% Sales revenue per audit on excess of importation 1,612,024,748.47 Less: Unclaimed purchases per BOC 1,556,409,894.65 Taxable sales per audit p 55,614,853.82 *Cost of sales ratio com utation:

Cost of sales

P

6,703,710,266.00 Net sales

P

6,942,696,690.00 96.55% At the same time, respondent found and disallowed petitioner's alleged overclaimed importation amounting to Pll ,892,375.63.

Petitioner reiterates that its importations 2006 amounted to P5,900,612,768.09 P5,597,786,966.40 as found by respondent. 122 Exhibit "RRRR", item nos. 83 and 84, docket, p. 1091. 123 Exhibit "E-1 ", docket, p. 593.

for the year and not In addition,?

petitioner asserts that respondent's assessment lack legal and factual bases, depriving it of the right to mount a proper defense. As such, petitioner believes that the said assessment should be considered void.124 A closer examination of the FAN and the Formal Letter of Demand reveals that respondent failed to include the importation data obtained from the Bureau of Customs which was compared to petitioner's records on importation. Neither was it offered to the Court in evidence. Further, respondent cited Section 44(A) of the NIRC of 1997, as amended, as legal basis of its assessment of unrecorded sales on importation of P55,614,853.82.

The said provision is quoted hereunder for easy reference:

"SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period."

Petitioner correctly noted that respondent failed to properly cite the pertinent provision of the law to support her findings. Thus, pursuant to Section 228 of the NIRC of 1997, as amended, respondent's assessment arising from the alleged underclaimed and overclaimed importations for the year 2006 should be cancelled for lack of factual and legal bases.

h. Undeclared sales to PSPC- P85,946,167.89 Upon comparison of petitioner's sales to Pilipinas Shell Petroleum Corporation (PSPC) as reflected in BIR Forms No. 2307 and as shown in petitioner's Summary List of Sales, respondent's examiner found that petitioner's sales to PSPC is understated by P85,946, 167.88, computed as follows:125/

Per Petitioner's Summary Alphalist of Withholding Taxes: 126 p 8,434,539.20 62,814,546.99 82,728,650.70 75,192,969.00 p 229' 170,705.89

Per Summary List of Sales: 127

January

p 29,136,347.00

February

34,311,157.90

March

30,277,999.60

April

7,929,537.04

May

22,796,062.50

June

18,2 14,507.18

July

558,926.79

August

-

September

-

October

-

November

-

December

- 143,224,538.01

Difference

p 85,946,167.88 Petitioner contends that its sales to PSPC in the year 2006 amounted to P153,977,736.89, broken down as follows: 128

Exhibit

Period

Amount

HHHH

1st Quarter p 82,728 ,650.70

HHHH-1

2nd Quarter 62,814,546.99

HHHH-2

3rd Quarter 8,434,539.20

GGGG

TOTAL

p 153,977,736.89 Petitioner argues that the difference should only be P10,753,198.88 (P153,977,736.89 less P143,224,538.01). We note that the remrun1ng unexplained difference of P75,192,969.00 (P85,946,167.88 less P10,753,198.88) can be traced to petitioner's Summary Alphalist of Withholding Taxes (SAWT)129.

Petitioner was not, however, able to fully explain the discrepancy of P85,946,167.88; thus, this Court has to sustain the assessment. Accordingly, petitioner shall be held liable for the corresponding deficiency income tax. { 126 BIR Records, Folder II, pp. 283 to 284. 127 BIR Records, Folder III, pp. 297 to 438. 128 Exhibit "F", page 3 and Annex "C", docket, pp. 596 and 641. 129 Supra, Note 126 (SA WT for the month of December 2006 in the total amount of Pl8,337,919.24).

i. Unsupported/ Out-of-period Taxes - P4,582,506.19

Creditable

Withholding

Respondent found that for taxable year 2006, petitioner had P4,582,506.19 creditable withholding taxes that are unsupported and/ or out-of-period.l30 To refute respondent's findings, petitioner submitted Certificates of Creditable Taxes Withheld (BIR Form No. 2307) issued by its suppliers but the same were not admitted by the Court as evidence for failure by petitioner to present the origina1.131 Consequently, petitioner tendered the same as excluded evidence,132 which was granted by the Court in a Resolutionl33 dated August 29, 2012. On the other hand, the Independent CPA examined several of petitioner's Certificates of Creditable Taxes Withheld for the year 2006 amounting to P8,038, 115.00.134

Upon

examination of the certificates, this Court found that creditable withholding taxes of P2,296,030.51 were properly supported by BIR Forms No. 2307, broken down as follows:

Exhibit

Payor

CWT

UU-85

Barrientos & Co Inc.

p 14,148.32

UU-110

Cardinal Ceramics Mfg.

119,908.75

UU-53

Insulflex Industries

2,585.36

UU-52

Insulflex Industries

3,348.50

UU-49

Insulflex Industries

1,650.63

UU-74

Mariwasa Siam Ceramics

304,569.81

UU-75

Mariwasa Siam Ceramics

443,999.96

UU-76

Mariwasa Siam Ceramics

311,429.08

UU-77

Mariwasa Siam Ceramics

424,870.47

UU-202

Phil Steel Coating Corp.

39,927.00

UU-201

Phil Steel Coating Corp.

43,228.86

UU-200

Phil Steel Coating Corp.

51,789.11

UU-199

Phil Steel Coating Corp.

34,582.83

UU-221

Quality Container Corp.

8,959.62

UU-219

Quality Container Corp.

10,223.84

UU-220

Quality Container Corp.

12,873.21

UU-230

Roberts Automotive & Indtl. Parts 27,461.72

UU-231

Roberts Automotive & Indtl. Parts 27,135.07

UU-232

Roberts Automotive & Indtl. Parts 28,972.28

UU-233

Roberts Automotive & Indtl. Parts 32,316.28

UU-236

Royal Tern Ceramics Phils Inc.

38,868.99

UU-235

Royal Tern Ceramics Phils Inc.

45,131.60

UU-234

UU-233

UU-259

UU-253

UU-252

UU-254

UU-255

UU-256

UU-257

UU-258

UU-266

UU-267

UU-268

UU-269

UU-270

UU-271

UU-272

UU-273

UU-274

UU-275

UU-305

UU-304

UU-306

UU-307

UU-308

UU-309

UU-310

Royal Tern Ceramics Phils Inc.

Royal Tern Ceramics Phils Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Sonic Steel Industries Inc.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

Steel Centre Phils. Corp.

United Perlite Corp.

United Perlite Corp.

United Perlite Corp.

United Perlite Corp.

United Perlite Corp.

United Perlite Corp.

United Perlite Corp.

TOTAL

35,036.31 50,849.36 5,151.56 19,883.95 16,416.96 28,802.00 15,847.39 42,053.77 16,127.46 5,325.88 569.60 1,302.57 1,562.71 601.77 1,022.58 332.84 322.33 891.08 245.97 784.08 3,360.15 4,492.21 8,466.89 1,712.68 1,331.81 3,114.03 2,441.28 p 2,296,030.51 Thus, only the creditable withholding P2,286,4 75.68 (P4,582,506.19 less P2,296,030.51) disallowed from petitioner's claimed total tax credits. taxes of should be

j. CWT carried-over per return - P38,678, 120.60 It was improper for respondent to disallow the excess tax credits of P38,678, 120.60135 reflected in petitioner's 2006 Annual Income Tax Return because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding year 2007. Since the tax benefit will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year.

In summary, petitioner 1s liable to pay basic deficiency income tax for taxable year 2006 1n the amount of P55,939,514.83, computed as follows:

Taxable Income per Return

, 64,702,897.40

Add:

Ad"ustments Overclaimed purchases from Asian a.

Angle Kunstruck

, 2,514,249.72 b.

Expenses not subjected to 1% EWT IP 59,717,961.72

Expenses not subjected to 2% EWT Salaries & wages not subjected to c.

w /holding tax d.

Unsupported bad debts e.

Undeclared sales to PSPC

Taxable Income per Investigation

Income Tax Rate

Income Tax Due per Investigation

Less:

Prior year's excess credits Creditable taxes withheld per BIR

Forms 2307

Less: Unsupported/ out-of-period creditable w /holding taxes

Deficiency Income Tax

Deficiency Value-added Tax

102,270,003.14 161,987' 964.86 4,922,665.38 8,431,934.00 85,946,167.89 263,802,981.85 P328,505,879.25 35% P114,977,057.74 , 42,986,386.59 P18,337,632.00 2,286,475.68 16,051,156.32 59,037,542.91 p 55,939,514.83 Respondent's detailed computation of the deficiency VAT assessment for taxable year 2006 1n the amount of P28,030,807 .26 is reproduced below: 136 Taxable sales per return P6,890, 189,183.00

Add: Adjustments

a. Unrecorded sales on undeclared Petron purchases , 1,049,152.37

b. Sales to PSPC not subjected to output tax 85,946,167.89

c. Income not subjected to output tax 4,418,775.00

d. Unrecorded sales on underclaimed importation 55,614,853.52 147,028,948.78 Adjusted taxable sales per audit p 7,037,218,131.78 Tax rates 10% p 56,426,703.20 12% , 776,754,132.00 Output tax per audit/investigation , 833,180,835.20 Less: Input tax Carry-over from previous quarter p 558,300.00 Per return , 814,102,324.00 Deferred to succeeding period 8,009,192.00

Total

, 806,093,132.00 Less: Disallowed input tax (importation &

Asian Angle Kunstrukt)

343,483.82

Total

p 805,749,648.18 Less: Carry-over to previous quarter 5,059,657.50 800,689,990.68 801,248,290.68 VAT Payable per audit/investigation , 31,932,544.52 Less: VAT payments for the year per VAT return 13,945,586.70 Amount still due and payable , 17,986,957.82

Add: Increments

Surcharge

, - Interest (1.21.07 to 1 0.31.09) 9,993,849.44

Compromise

50,000.00 10,043,849.44

Total Deficiency VAT

p 28,030,807.26

As can be gleaned from the above computation, the deficiency VAT assessment arose from the following items:

a. Unrecorded sales on undeclared Petron purchases p 1,049,152.37 b . Sales to PSPC not subjected to output tax 85,946,167.89

c. Income not subjected to output tax 4,418,775.00

d. Unrecorded sales on underclaimed importation 55,614,853.52

e. Disallowed input tax 343,483.82

f. Input tax carried-over to next quarter 5,059,657.50 This Court shall discuss each item hereafter.

a. Unrecorded sales on undeclared Petron purchases - Pl,049,152.37 This assessment was based on the same examiner's finding under the deficiency income tax assessment that petitioner had undeclared sales in the amount of P1,049,152.37 arising from undeclared purchases from Petron for taxable year 2006. Citing Section 106 of the NIRC of 1997, as amended, respondent imposed 12o/o VAT on the alleged undeclared sales of P1 ,049, 152.37. As discussed earlier, records show that for the year 2006, petitioner's purchases from

Petron

amounted to P29,543,034.46, broken down as follows: Purchase from Petron reported as part of Cost of Sales per p 28,349,221.41

AFS and ITR

Purchases through Petron Fleet Card 1,193,813.05

TOTAL

p 29,543,034.46

Petitioner

properly reported the amount of P28,349,221.41 as part of its cost of sales; while the amount ofP1,193,813.05, by its nature, was not for resale and did not form part of petitioner's cost of sales. It was erroneous on the part of respondent to impute against petitioner an unrecorded sales amounting to P1,049,152.37.

Therefore, the deficiency VAT assessment on this item should be cancelled for lack of factual basis. {- b. Sales to

PSPC

not subjected to output tax P85,946,167.89 As earlier stated, this Court holds that respondent's finding on petitioner's undeclared sales to PSPC is in order. Hence, the corresponding deficiency VAT assessment is likewise in order.

c. Income not subjected to output tax- P4,418,775.00 Invoking Section 106 of the NIRC of 1997, as amended, respondent imposed 12°/o

VAT

on the amount of P4,418,775.00 representing the discrepancy in petitioner's taxable sales per income tax return/FS and per VAT returns, as computed below: 137

Per VAT Returns:

Vatable sales p 6,890, 189,183.00 Zero-rated sales 6 1,615,924.00

Total

p 6 ,951 ,805,107.00

PerFS:

Net sales p 6 ,942,969,690.00 Proceeds on disposal of equipment 7,408,763.00

Trading/Terminal Income

91 ,252.00 Other income 19,246.00 Income from cylinder deposits 5,734,931.00

Total

6,956,223,882.00

Discrepancy

p (4,418, 775.00) Petitioner contends that the difference between its sales per income tax return (P6,942,969,690.00) and taxable sales per VAT returns (P6,890,189,183.00) can be accounted for by taking into consideration the zero-rated sales for 2006 and adding it to the taxable sales per VAT returns.

Petitioner

points out that the combined taxable sales per VAT returns and zero-rated sales account for the entire sales per income tax return.138 This Court disagrees with petitioner. Zero-rated sales amounting to P61,615,924.00 was included by respondent in computing for the P4,418,775.00 sales discrepancy. Moreover, adding the amount of P61,615,924.00 zero-rated sales to the taxable sales per VAT returns of P6,890,189,183.00 wouldt

sum up to P 6,951,805,107.00 and not to the amount of P6,942,969,690.00 sales reported per income tax return. As can be seen from respondent's computation, the discrepancy of P4,418,775.00 originated from petitioner's unreported sales I income from disposal of equipment, trading/terminal income, income from cylinder deposits and other income.

In the absence of contrary evidence, the sales/income of P4,418,775.00 shall be considered to have been generated by petitioner in its ordinary course of business and a 12o/o VAT should be imposed thereon pursuant to Section 105 of the NIRC of 1997, as amended, which states that:

"SEC. 105. Persons Liable. -Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

XXX

XXX

XXX

The phrase 'in the ordinary course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." (Emphasis supplied)

d. Unrecorded sales on underclaimed importation P55,614,853.52 Since respondent's position that petitioner underclaimed its importation for the year 2006 is devoid of legal and factual bases, this Court holds that the corresponding deficiency VAT assessment should be cancelled.{- e. Disallowed input tax on overclaimed importation and on overclaimed purchases from Asian Angle Konstruk - P343,483.82 Respondent disallowed petitioner's input taxes for the year 2006 in the aggregate amount of P343,483.82, broken down as follows: 139

Gross Amount

Input Tax

On overclaimed importation r 11 ,892,375.63 r 4,333.83 On overclaimed purchases from Asian Angle Konstruk 2,514,249.72 339,149.99

TOTAL

p 14,406,625.35 p 343,483.82 The computation of input tax on petitioner's overclaimed purchases from Asian Angle Konstruk is shown hereunder: 140

Amount

Output/Input Tax

Asian Angle Konstruk Summary of Sales to Liquigaz

r 5,192,358.85 r 585,643.04 Petitioner's Summary of purchases from Asian Angle Konstruk 7 ' 706,608.57 924,793.03

Difference

p 2,514,322.72141 p 339,149.99 Since it has been ruled that respondent's assessment on petitioner's overclaimed importation is void, the input tax corresponding thereto should not be disallowed. On the other hand, since respondent's assessment on petitioner's overclaimed purchases from Asian Angle Konstruk has been upheld, the input tax corresponding thereto should be disallowed.

Thus, the disallowed input taxes for the year 2006 should only be P339,149.99.

f. Input tax carried-over to next quarter- P5,059,657.50 It was improper for respondent to disallow petitioner's excess input tax in the amount of P5,059,657.50142 reflected in its Quarterly VAT Return for the fourth quarter of 2006 because any tax benefit derived by petitioner from the carry- over of the said amount redounds to the succeeding quarter/year 2007. Since the tax benefit will be in the succeeding quarter /year, at most, petitioner may only be assessed in the said succeeding quarter I year. j_..

Therefore, petitioner's basic deficiency VAT liability for taxable year 2006 should be reduced to P6, 123,285.76, computed as follows:

Taxable sales per return P6,890,189,183.00

Add: Adjustments

a. Sales to PSPC not subjected to output tax 85,946,167.89

b. Income not subjected to output tax 4,418,775.00 90,364,942.89 Adjusted taxable sales per audit p 6,980,554,125.89 Tax rates p 581,712,843.82143 10% 58,171,284.38 6,398,841,282.07144 12% 767,860,953.85 Output tax per audit/investigation p 826,032,238.23 Less: Input tax Carry-over from previous quarter p 558,300.00 Per return p 814,102,324.00 Deferred to succeeding period 8,009,192.00

Total

p 806,093,132.00 Less: Disallowed input tax (Asian Angle Konstruk) 339,149.99 805,753,982.01 806,312,282.01 VAT Payable per audit/investigation p 19,719,956.22 Less: VAT payments for the year per VAT return 13,945,586.70

Deficiency VAT

p 5, 774,369.52 While respondent's right to assess petitioner of deficiency VAT for the second quarter of 2006 had already prescribed, petitioner was unable to point out which portion of the assessment pertains to the prescribed period which is the second quarter of 2006. Thus, this Court is constrained to consider the en tire assessment as pertaining to the first, third and fourth quarters of 2006.

WHEREFORE, premises considered, the Petition for Review is hereby PARTIALLY GRANTED.

The assessments issued by respondent against petitioner covering deficiency income tax, value-added tax, expanded withholding tax, and withholding tax on compensation for taxable year 2006 are hereby AFFIRMED with MODIFICATIONS.

Accordingly, petitioner is hereby ORDERED to PAY respondent the reduced amount of P81,806,081.69, inclusive of the twenty-five percent (25°/o) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, computed as follows: / 143 VAT rate was increased from I 0% to 12% effective February I, 2006 (RMC No. 7-06). Since it cannot be ascertained to which months the adjusted taxable sales per audit pertained, the same was apportioned as follows: P6,980,554,125.89 x 1/12 x 10% and P6,980,554,125.89 x 11/12 x 12%.

Tax Type

Basic Deficiency

25% Surcharge

Total

Income Tax

p 55,939,514.83 p 13,984,878.71 p 69,924,393.54

Value-added Tax

5,774,369.52 1,443,592.38 7,217,961.90

Expanded Withholding Tax

2,642,579.68 660,644.92 3,303,224.60

Withholding Tax on Compensation

1,088,401.32 272,100.33 1,360,501.65

Total

p 65,444,865.35 p 16,361,216.34 p 81,806,081.69 In addition, petitioner is hereby ORDERED to PAY: a) Deficiency interest at the rate of twenty percent (20o/o) per annum on the basic deficiency income tax, value- added tax, expanded withholding tax, and withholding tax on compensation computed from the dates indicated below until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended:

Deficiency Interest

Tax Type

computed from

Income Tax

April 15, 2007

Value-added Tax

January 25, 2007

Expanded Withholding Tax

Januanr 15, 2007

Withholding Tax on Compensation

January 15, 2007 b) Delinquency interest at the rate of 20o/o per annum on the total amount of P81,806,081.69 and on the 20°/o deficiency interest which have accrued as aforestated in (a), computed from October 31, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended.

Associate Justice

CONCURS:

CfA CASE NO. 8149

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.

LO

CERTIFICATION

Pursuant to Section 13, Article VIII 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.

Presiding Justice