Symmetry Philippines, Inc. vs. Commissioner of Internal Revenue

AMENDED DECISION

Fabon-Victorino, J.:

In its Motion For Reconsideration dated July 1, 2014, petitioner seeks to reverse the Decision dated June 10, 2014, which affirmed with modifications the assessments issued by respondent for deficiency Income Tax (IT), Value- Added Tax (VAT), Expanded Withholding Tax (EWT), and Final Withholding VAT (FWV) for taxable year 2004 in the total amount of P25,981, 782.71, inclusive of surcharges. According to petitioner the Court should not have disregarded the testimonies of its witnesses Elizabeth Anana, and Lito Chan for being self-serving.

Their testimonies were under oath and given in open court with the opportunity for cross-examination.

Further, as petitioner's General Manager and Chief Accountant, respectively, they had complete knowledge of the business operations and transactions of petitioner, hence, they can testify that petitioner pays royalties to its Licensor, j

Symmetry USA for the use of the latter's marketing and distribution plan. Had their testimonies that petitioner pays commissions to non-residents through Symmetry USA, as evidenced by the License Agreement between petitioner and Symmetry USA been given credence, the same would have established that respondent erred in concluding that petitioner had undeclared sales and in grossing up the amount of commissions to non-residents using the 5°/o rate for royalties as well. Petitioner also insists that the Independent Certified Public Accountant (ICPA) report should be given full credence because contrary to the Court's finding, there were supporting documents presented on January 29, 2013, upon which the ICPA based his conclusions in its favor such as various invoices and receipts. The marked copies of these documents were identified in the ICPA Judicial Affidavit dated November 29, 2012. Scanned copies of the said invoices and receipts were also submitted on November 19, 2012.

Although petitioner admits that these documents were not formally offered, it insists that they should be considered as they were identified by a competent witness and are part of the record of the case. In any event, petitioner resubmitted as part of its Motion the documents examined by the ICPA as well as the disc containing scanned copies of the same for the evaluation of the Court. This incident was deemed submitted for resolution sans any comment/opposition from respondent, who despite notice, failed to file any. 1 It has been held that documents attached to a motion for reconsideration are part of the record of the case and cannot be ignored by the Court. Moreover, technicalities should not be used to defeat substantive rights, especially those that have been held as a matter of right. 2

In the light of the foregoing, having been identified and attested to by the ICPA and forming part of the subject Motion for Reconsideration, the Court may take them into consideration in the resolution of the pending incident. Thus, after careful evaluation and verification of the evidence submitted, the Court arrived at the following findings:

I.

INCOME TAX

1.

Undeclared sales A.

Undeclared sales arising from the alleged royalties paid by petitioner during the year amounting to P6,372,165.79 In the Final Decision on Disputed Assessment (FDDA), respondent declared that the royalty payments per BIR Form No.

1601-F (Other payments to NRFCs) amounted to P6,372, 16S. 79.

The FDDA cited Note 12 of the Financial Statements (FS) which stated: "In consideration thereof, Symmetry Philippines, Inc., shall pay five (S 0/o) per cent of the monthly Philippine net sales of the product". The above amount was grossed up by respondent resulting in the amount of P127,443,316.00 net sales, which served as the basis of royalty payments. The difference between the derived amount was compared by respondent against petitioner's income tax return (ITR), resulting in undeclared sales of P49,167,727.00. Respondent failed to consider that only P3,900,000.00 was claimed as royalty expense in the ITR since payments per BIR Form No. 1601-F (Other payments to NRFCs) reflect P6,300,000.00.

Respondent claimed that the inclusion of the tax base of the P6,300,000.00 remittance as part of royalty payments was anchored on the provision in the / License Agreement that S0/o of net sales was the basis of royalty payments.

There was no mention of additional compensation for Symmetry Corporation in the form of commissions, in any documents submitted to refute the assessment. Hence, it was proper to consider the same as royalty payments, in the absence of any proof to the contrary. 3 On the matter, petitioner explains that respondent erroneously assumed that the amount of P6,372,165. 79 indicated as "Other payments to NRFCs" in BIR Form 1601-F also represented royalty fees paid under the License Agreement between petitioner and Symmetry Corporation (USA).

Consequently, respondent erred in grossing up the said amount, assuming that it was 5°/o of the net sales, as agreed upon in the License Agreement. Said amount, however, represented the commissions billed by Symmetry Corporation (USA) for the sales made by Philippine down lines of its sales people. Further, the royalty fees were in payment for the use of petitioner of Symmetry Corporation (USA)'s Marketing and Distribution Plan, while the commissions were for the sales made in the Philippines of the down lines of Symmetry Corporation (USA) and/or its sales people.

The Court finds for petitioner. As discussed in the assailed Decision, the royalty and commission payments are distinct payments to Symmetry Corporation which are referred to separately in the License Agreement, thus:

Section 3.2 of Article III of the License Agreement between petitioner and Symmetry Corporation4 provides that any commission due to non-resident Filipinos on sales generated in the Philippines as well as all expenses incurred in connection with the training and assistance provided for by Symmetry Corporation, shall be for the account of petitioner in addition to the / ----------------- 3 Exhibit "A- 1", Docket, Vol. 1, p. 29. 4 Exhibit "B-2-b".

Date (2004} 31-Jan 31-Jan 31-Jan 31-Jan 29-Feb 29-Feb 29-Feb 29-Feb 31-Mar 31-Mar 31-Mar 31-Mar 30-Apr 30-Apr 30-Apr 31-Aug 31-Aug 31-May 31-May 31-Mav 31-May consideration referred to in Section 3.¹ of the License Agreement. Section 3.1 of the License Agreement pertains to the royalty fee to be paid by petitioner to Symmetry Corporation for the use of the product plan and rights and privileges granted by virtue of the License Agreement, the sum equivalent to 5°/o of the monthly Philippine net sales of the product. 5 An examination of the Schedule of Foreign Commission 6, credit memo and invoices shows that the alleged royalty payments in the amount of P6,372,165. 79 pertain to the commissions billed by Symmetry Corporation for the sales made by Philippine down lines, as detailed in the table below:

Commission Final SPI Billing Net Exhibits billed by Withholding to USA Billings (Credit Foreign Final Particulars Symmetry Tax (in USD} Memo and Commission Withholding Corp., USA Invoice} (PhP} Tax (PhP} a b=a*32% c d=a-b-c Weekly Commission $ 48.26 $ 15.44 $ 231.80 $ (198.98) "K.l.1-ICPA", p 2 654.30 p 849.38 Monthly Volume "K.l.²-ICPA" Bonus 90.50 28.96 1 364.89 (1 303.35) 4 977.50 1 592.80 Weekly "K.2.1-ICPA", Commission 81.08 25.95 263.21 (208.08) "K.2.2-ICPA" 4 459.40 1427.01 Monthly Volume "K.3.1-ICPA", Bonus 8 374.56 2 679.86 1 928.42 3 766.28 "K.3.2-ICPA" 460 600.80 147 392.26 Weekly Commission 109.89 35.16 378.13 (303.40) "K.4.1-ICPA", 6 043.95 1934.06 Monthly Volume "K.4.2-ICPA" Bonus 58.74 18.80 1 464.79 (1 424.85) 3 230.70 1 033.82 Weekly "K.5.1-ICPA", Commission 37.99 12.16 151.94 (126.11) "K.5.2-ICPA" 2 089.45 668.62 Monthly Volume "K.6.1-ICPA", Bonus 8 646.90 2 767.01 1 926.73 3 953.16 "K.6.2-ICPA" 475 579.50 152 185.44 Weekly Commission 28.99 9.28 248.71 (229.00) "K.7.1-ICPA", 1 594.45 510.22 Monthly Volume "K.7.2-ICPA" Bonus 62.71 20.07 1 259.88 (1 217.24) 3 449.05 1 103.70 Weekly Commission 149.16 47.73 77.98 23.45 "K.8.1-ICPA", 8 203.80 2 625.22 Monthly Volume "K.8.2-ICPA" Bonus 9 109.52 2 915.05 1 802.74 4 391.73 501 023.60 160 327.55 Weekly Commission 54.07 17.30 179.82 (143.05) "K.9.1-ICPA", 2 973.85 951.63 Monthly Volume "K.9.2-ICPA" Bonus 30.44 9.74 1 255.73 (1 235.03) 1 674.20 535.74 Weekly "K.10.1-ICPA", Commission 43.24 13.84 65.40 (36.00) "K.10.2-ICPA" 2 378.20 761.02 Weekly Commission 9.73 3.11 167.15 (160.53) "K.11.1-ICPA", 535.15 171.25 Monthly Volume "K.11.2-ICPA" Bonus 60.53 19.37 902.99 (861.83) 3 329.15 1 065.33 Weekly Commission 16.55 5.30 270.25 (259.00) "K.12.1-ICPA", 910.25 291.28 Monthly Volume "K.12.2-ICPA" Bonus 14.16 4.53 1 257.39 (1 247.76) 778.80 249.22 Weekly Commission 161.93 51.82 82.41 27.70 "K.13.1-ICPA", 8 906.15 2 849.97 Monthly Volume "K.13.2-ICPA" Bonus 10 144.56 3 246.26 2 086.74 4 811.56 557 950.80 178 544.26 5 Docket, Vol. 2, p. 561. 6 Annex "A-ICPA", Docket, Vol. 1, pp. 311-312.

30-Jun 30-Jun 30-Jun 30-Jun 31-Jul 31-Jul 31-Jul 30-Sep 30-Sep 30-Sep 30-Sep 31-0ct 31-0ct 30-Nov 30-Nov 30-Nov 30-Nov 31-Dec 31-Dec 31-Dec 31-Dec 31-Jul 31-0ct 31-0ct 31-Aug 31-Aug 30-Apr

Weekly Commission 24.66 Monthly Volume Bonus 79.12 Weekly Commission 109.31 Monthly Volume Bonus 10 126.74 Weekly Commission 25.39 Monthly Volume Bonus 38.16 Weekly Commission 234.68 Weekly Commission 72.63 Monthly Volume Bonus 9 221.10 Weekly Commission 16.55 Monthly Volume Bonus 49.47 Weekly Commission 75.34 Monthly Volume Bonus 9 777.11 Weekly Commission 16.55 Monthly Volume Bonus 10.28 Weekly Commission 725.84 Monthly Volume Bonus 9 295.90 Weekly Commission 11.75 Monthly Volume Bonus 16.11 Weekly Commission 274.14 Monthly Volume Bonus 8 909.60 Monthly Volume Bonus 9 841.54 Weekly Commission 7.71 Monthly Volume Bonus 26.01 Weekly Commission 54.54 Monthly Volume Bonus 9 514.11 Monthly Volume Bonus 9 656.71 Total $115 544.56 7.89 25.32 34.98 3 240.56 8.12 12.21 75.10 23.24 2 950.75 5.30 15.83 24.11 3 128.68 5.30 3.29 232.27 2 974.69 3.76 5.16 87.72 2 851.07 3 149.29 2.47 8.32 17.45 3 044.52 3 090.15 $36 974.29 *Difference due to conversion. 217.35 1180.04 48.54 2 214.87 264.54 880.06 170.93 42.51 2 156.72 208.20 1 036.68 35.58 2 012.85 245.78 1 092.12 90.00 2 075.42 124.40 1 042.29 57.99 1 940.88 2 159.31 174.60 1 032.65 - 2 315.49 2 029.56 $42 216.46 (200.58) "K.14.1-ICPA", 1 356.30 434.02 "K.14.2-ICPA" (1126.24) 4 351.60 1 392.51 25.79 "K.15.1-ICPA", 6 012.05 1 923.86 "K.15.2-ICPA" 4 671.31 556 970.70 178 23Q.62 (247.27) "K.16.1-ICPA", 1 396.45 446.86 "K.16.2-ICPA" (854.11) 2 098.80 671.62 "K.17.1-ICPA", (11.35) "K.17.2-ICPA" 12 907.40 4130.37 6.88 "K.18.1-ICPA", 3 994.65 1 278.29 "K.18.2-ICPA" 4 113.63 507 160.50 162 291.36 (196.95) "K.19.1-ICPA", 910.25 291.28 "K.19.2-ICPA" (1 003.04) 2 720.85 870.67 15.65 "K.20.1-ICPA", 4 143.70 1 325.98 "K.20.2-ICPA" 4 635.58 537 741.05 172 077.14 (234.53) "K.21.1-ICPA", 910.25 291.28 "K.21.2-ICPA" (1 085.13) 565.40 180.93 403.57 "K.22.1-ICPA", 39 921.20 12 774.78 "K.22.2-ICPA" 4 245.79 511 274.50 163 607.84 (116.41) "K.23.1-ICPA", 646.25 206.80 "K.23.2-ICPA" (1 031.34) 886.05 283.54 128.43 "K.24.1-ICPA", 15 077.70 4 824.86 "K.24.2-ICPA" 4 117.65 490 028.00 156 808.96 "K.17.1-ICPA", 4 532.94 "K.25.2-ICPA" 541 284.70 173 211.10 (169.36) "K.26.1-ICPA", 424.05 135.70 "K.26.2-ICPA" (1 014.96) 1430.55 457.78 37.09 "K.27.1-ICPA", 2 999.70 959.90 "K.27.2-ICPA" 4 154.10 523 276.05 167 448.34 "K.10.1-ICPA", 4 537.00 "K.28.2-ICPA" 531119.05 169 958.10 $36 353.81 P6 354 950.80* P2 033 584.26* These findings are consistent with the Monthly Remittance Returns of Final Income Taxes Withheld (BIR Form No. 1601-F) and Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF), all of which show that petitioner duly remitted a total final tax of P2,039,093.05 equivalent to 32°/o of the income payments of P6,372, 165.79, as shown below: Taxable Month Income Payment Taxes Withheld Exhibit January p 458,760.16 p 146,803.25 "C.2-!CPA" February 474,335.47 151,787.35 "C.3-!CPA" March 486 944.22 155,822.15 "C.4-ICPA" April 515 211.56 164,867.70 "C.5-ICPA"

May June July August September October November December Total 538,145.78 172,206.65 "C.6-!CPA" 568,548.44 181,935.50 "C.7-ICPA" 568,693.13 181,981.80 "C.8-ICPA" 557 687.97 178,460.15 "C. 9-!CPA" 530 141.56 169,645.30 "C.10-ICPA" 514,787.97 164,732.15 "C.ll-ICPA" 543,738.59 173,996.35 "C.12-!CPA" 615,170.94 196,854.70 "C.13-!CPA" p 6,372,165.79 p 2,039,093.05 The foregoing proves that said P6,372, 165.79 income payments were for commissions billed by Symmetry Corporation (USA) for the sales made by Philippine down lines.

On the other hand, to account for claimed royalties, petitioner presented the Schedule Computation of the Royalties7, accompanied by their Monthly and Quarterly VAT Returns, as summarized below: Taxable Payee Net Sales Royalty Tax Remitted Exhibits Month (VAT Returns) January Symmetry Corp. (USA) p 6 511 564.00 p 325 578.20 p 32 557.82

"E"· "E-1"

February Symmetry Corp. (USAl 6 884 760.00 344 238.00 34 423.80

"F"· "F-1"

March Symmetry Corp. (USA) 6 918 318.00 345 915.90 34 591.59

"G"· "G-1"

April Symmetry Corp. (USA) 7 105 132.00 355 256.60 35 525.66

"H"· "H-1"

May Symmetry Corp. (USA) 7 647 758.00 382 387.90 38 238.79

"I"· "1-1"

June Symmetry Corp. (USA) 7 766,768.00 388 338.40 38 833.84

"J"· "J-1"

July Symmetry Corp. (USA) 7 965 760.00 398 288.00 39 828.80

"K"· "K-1"

August Symmetry Corp. (USA) 5 935 114.00 296 755.70 29 675.57

"L"· "L-1"

September Symmetry Corp. (USA) 5 482 418.00 274 120.90 27 412.09

"M"· "M-1"

October Symmetry Corp. (USA) 5 878 400.00 293 920.00 29 392.00

"N"· "N-1"

November Symmetry Corp. (USA) 6 267 204.00 313 360.20 31 336.02 non· "0-1" December Symmetry Corp. (USA) 5 477 308.00 273 865.40 27 386.54 Total P79,840,504.00 P3,992,025.20 P399,202.52 Pertinently, the License Agreement provides that the licensee (herein petitioner) shall pay to the licensor [Symmetry Corporation (USA)], for the use of the product plan and rights and privileges set forth, the sum equivalent to 5°/o of the monthly Philippine net sales of the product which shall be computed as follows: /

Net Sales = Invoice value based on actual sales minus a) trade, quantity or cash discounts, if any;

b) return credits and allowances; c) tax, excise or other government charges;

d) freight, insurance and packaging cost Following petitioner's argument, using respondent's computation but this time the royalty expense of P3,992,025.00 shall be the basis in grossing up to arrive on the sales for the year, the discrepancy is P1,564,915.00, computed as follows:

Royalty expense p 3,992,025.20 Royalty rate 5% Net Sales 79,840,504.00 Sales per audited FS 78,275,589.00 Difference p 1,564,915.00 Per petitioner, the difference represents discounts given to customers which are not deductible for royalty computation. 8 This is evidently contrary to the provision in the License Agreement that the 5°/o royalty fee shall be based on the invoice value less discounts. In other words, the net sales that should have been reported in the ITR and FS should be the amount of P79,840,504.00. Considering that only the amount of P78,275,589 was reported thereon, there was an under declaration of petitioner's sales in the amount of P1,564,915.00. B.

Undeclared sales ans1ng from importations in the amount of P1,650,134.00 /

In the assailed Decision, the Court cancelled the assessment for the alleged undeclared sales arising from importations in the amount of P1,650,134.00 in view of respondent's failure to establish the kind of importation which petitioner purportedly failed to declare in its ITR. 9 2.

Disallowed expenses not subjected to withholding tax Respondent compared the amounts of the following expenses reflected in the ITR vis-a-vis the amount shown in its Alphalist of income payments subject to expanded withholding tax, and a deficiency resulted therefrom: part of commission expense, professional fees, purchases of goods and services were not subjected to the requisite withholding tax, hence, the same were disallowed. 10 The disallowed expenses are as follows: Commission p 410,336.00 Professional fees 60,000.00 Purchases of services 2 200,847.00 Purchases of goods 1,040,153.00 Total p 3,7111336.00 A.

Commission The discrepancy of P410,336.00 was arrived at by respondent as follows: Per 1702 Return p 24,516,744.00 Less: per Alphalist 24,106,407.90 Not subjected to EWT p 410,336.10 The record indicates that the amount of P24, 106,407.90 per alphalist pertains only to Commission Expense reflected in the Monthly Remittance Return of

Creditable Income Taxes Withheld (Expanded) [BIR Form 1601-E].

Respondent failed to consider the Commission Expense of ~6,372, 165.79 that was subjected to final withholding tax as reflected in the Monthly Remittance Return of Final Income Taxes Withheld [BIR Form 1601-F] when it compared the income payments with that of the amount reflected in the Annual ITR and Audited FS for taxable year 2004.

Thus, the total Commission Expense that was subjected to withholding tax actually amounts to ~30,431,126.99, to wit: Taxable Month 1601-E Exhibit 1601-F Exhibit Total January p 1,826 392.10 "6.2-ICPA" p 458 760.16 "C.2-ICPA" p 2,285 152.26 February 1 705 707.80 "6.3-ICPA" 474 335.47 "C.3-ICPA" 2 180 043.27 March 1 943 394.90 "6.4-ICPA" 486 944.22 "C.4-ICPA" 2 430 339.12 April 1,666 148.50 "6.5-ICPA" 515 211.56 "C.5-ICPA" 2,181 360.06 May 2,167 095.60 "6.6-ICPA" 538 145.78 "C.6-ICPA" 2 705 241.38 June 2,642 586.20 "6.7-ICPA" 568 548.44 "C.7-ICPA" 3 211134.64 July 2 662 402.90 "6.8-ICPA" 568 693.13 "C.8-ICPA" 3 231 096.03 August 2,810 600.70 "6.9-ICPA" 557 687.97 "C.9-ICPA" 3 368 288.67 September 1,566 609.50 "6.10-ICPA" 530 141.56 "C.10-ICPA" 2 096 751.06 October 1 606 312.30 "6.11-ICPA" 514 787.97 "C.11-ICPA" 2 121100.27 November 1 735 353.50 "6.12-ICPA" 543 738.59 "C.12-ICPA" 2 279 092.09 December 1,726 357.20 "6.13-ICPA" 615 170.94 "C.13-ICPA" 2 341 528.14 TOTAL p 24,058,961.20 P6,372,165.79 P30,431,126.99 Considering that a higher commission income was actually subjected to proper withholding taxes as compared to the audited FS and per Annual ITR, it is incorrect to say that petitioner failed to withhold part of its commission expense.

B.

Professional fees Record as well shows that professional fees originally assessed at the amount of ~313,364.12 11 , include payments made to the following: Alonso-Antonia and Partners/Lawyers f> 60,000.00 Auditor/VRS & Co. Certified Public Accountant 120 000.00

Professional Payroll Specialist, Inc. (PPSI) Susan Ligeralde Adjustment Total 78,600.00 60,000.00 (5,236.00) p 313,364.00 Of the foregoing, the payments to Alonso-Antonia and Partners and VRS & Co. Certified Public Accountant in the respective amounts of P60,000.00 and P120,000.00 are not subject to withholding tax as they pertain to payments to general professional partnerships which are exempt from income tax, vis-a-vis the expanded withholding tax, pursuant to Section 26 of the NIRC of 1997 and Section 2.57.S(B) of Revenue Regulations No. 2-98, as amended. As to the payments made to PPSI in the amount of P78,600.00, it shall be considered as valid deduction from petitioner's gross income for taxable year 2004 given that the related withholding taxes in the amount of P7,860.00 were duly withheld and remitted by petitioner. On the other hand, of the income payments of P60,000.00 to Susan Ligeralde, record reveals that only the amount of P40,000.00 was subjected to withholding taxes of P4,000, thus, shall be considered as valid deduction from petitioner's gross income for taxable year 2004. The remaining P20,000.00 shall be disallowed as valid deduction. C.

Purchases of goods and services Petitioner avers that the amounts of purchases of goods and services were from non-regular suppliers of goods and services and over-the-counter purchases which are not subject to expanded withholding tax. However, respondent maintains that Revenue Regulations No. 17-2003 dated March 31, 2003 requires the withholding of 1 °/o and 2°/o for every income payment made to local/resident regular suppliers for purchases of goods j and services, respectively.

The term "local/resident supplier" excludes casual purchases of goods or the purchases made from non-regular suppliers and oftentimes involve single purchases, which are exempt from the requisite withholding tax. However, a single purchase which involves ten thousand pesos (PlO,OOO.OO) or more shall be subject to withholding tax. Respondent claims that in this case, petitioner failed to prove that these purchases of goods and services subject of the assessment were made from non-regular suppliers and/or did not involve single purchases of ten thousand pesos (PlO,OOO.OO) or more. 12 Precisely respondent disallowed the following as deductible expense:

Purchases of services p 2,200,847.00 Purchases of goods 1,040,153.00 Total p 3,241,000.00 Per !CPA's verification, the aggregate disallowed amount of P3,241,000.00 is the result of the timing difference and purchases from non-regular suppliers of goods and services. But citing Revenue Regulations No. 2- 98 which provides that the Top 20,0000 Private Corporation/Large Taxpayers are required to withhold a tax of 1 °/o or 2°/o on all its purchases of goods and services that are not covered with specific rates of withholding, the ICPA noted exceptions on the income payments without the corresponding withholding taxes, which include the following: 13 Accounts Amount Annex Income payments by large taxpayers Supplier of services: Janitorial expense p 5,201.10 Annex C-ICPA Insurance 78,661.54 Annex C-ICPA Communication expense 1 084,962.70 Annex C-ICPA Utilities expense 100,352.52 Annex C-ICPA Telephone expense 1,076,180.63 Annex C-ICPA Supplier of goods:

Office supplies 64,829.28 Annex C-ICPA Literature inventory 48,207.27 Annex C-ICPA Property and equipment 133,777.98 Annex C-ICPA Store inventory 56,650.00 Annex C-ICPA Pin inventory 12,336.50 Annex C-ICPA Total P2,661,159.52 12 Exhibit "A-4", Docket Vol. 1, p. 32. 13 Exhibit "Q-2", Docket, Vol. 1, pp. 306-307. J

To reach such conclusion, the ICPA examined various items of (1) goods - office supplies, official receipts, flyers, literature inventory, newsletter, SD-CGS food supplement, property and equipment, store inventory, pin inventory, and warehouse inventory; and (2) services - security services, janitorial services, repairs and maintenance, insurance, communication expense, utilities expense, and telephone expense. 14 To refute respondent's assertion, it is necessary for petitioner to establish first the disallowed amount, however, petitioner failed.

Following the !CPA's analysis, petitioner should have accounted first all the purchases of goods and services and provided the related schedules of expenses which have been claimed per Annual ITR and Audited FS to fully account the same. But the ICPA merely enumerated various expenses mentioned above without classifying them in the same fashion that the expenses were presented in the Annual ITR and Audited FS. Had the ICPA done so, tracing the said amounts in the Annual ITR and Audited FS would have been possible and the determination of expenses that should or should not be subjected to withholding taxes would be easier. On this account, the Court cannot rely on the !CPA's findings on the matter. 3.

Disallowed various expenses amounting to P3,364,471.73 Respondent assessed petitioner for deficiency income tax arising from disallowance of alleged various expenses in the amount of P3,364,471. 73 for petitioner's inability to submit a breakdown of the expenses. Petitioner claims that it was not given an itemized listing of the expenses amounting to P3,364,471. 73, thus, it deemed it best to submit a list of all expenses included j under the account title "Various Expenses", as reflected in its Annual ITR, with a total amount of P11,708,987.00, details of which are as follows:

Appearance Fee - International Appearance Fee Uniforms Dues & Subscription Freight Out Product Registration Fee Postage Bank Charges Outside warehouse facilities Mentor car, Q.S. achievement bonus - SD

BDS- SO

Meeting Rooms - SD Recognition pins - SD Contest Prizes - SD Advertising and promotional - SD Convention - SD Annual trip Distributor health insurance Flyers Newsletter Credit Card fees TOTAL p 4 339 500.00 165,000.00 180 625.00 91,892.09 878 888.69 15,500.00 297,759.34 73,062.58 97 757.39 1 708,384.60 82,106.09 179,992.64 24/071.24 1,065,844.22 116,827.50 267,693.48 (32 648.59) (233 059.46) 71,111.23 469,979.16 1 848,699.86 p 11,708,987.06 However, further verification and examination of the record divulge that petitioner was not able to fully substantiate with valid supporting documents the amount of P3,364,471.73, more so the full amount of P11,708,987.00. Hence, respondent's assessment shall be sustained. 4.

Net Operating Loss Carry Over (NOLCO) As declared in the assailed Decision, adding back the net loss amount of P2,888,813.00 to petitioner's taxable income for the year 2004 is erroneous. After taking into account all the valid disallowances from petitioner's claimed deductions from gross income for / taxable year 2004, petitioner would still be in a net loss position and would not result to any deficiency tax, as shown below:

Net Taxable Income (Loss) per ITR p (2,888,813.00) Add:

Undeclared Sales from Royalties p 1 564,915.00 Expenses not subjected to EWT Professional Fees p 20,000.00 Purchase of Services 2,200,847.00 Purchase of Goods 1 040,153.00 3 261,000.00 Unsupported Various expenses 3,364,471.73 8,190 386.73 Net Taxable Income per Audit p 5,301,573.73 Tax Due thereon p 1,696 503.59 Less:

Tax Credits Prior year's excess credits p 2,520,548.00 Creditable tax withheld for the 4th quarter 297 086.00 2,817,634.00 Total Amount Due p {1,121,130.41) In sum, respondent's deficiency income tax assessment against petitioner for taxable year 2004 should be cancelled and/or withdrawn.

II. VALUE-ADDED TAX 1.

Undeclared sales ans1ng from payment of royalties As earlier discussed, only the assessment on the undeclared sales arising from royalty payments shall be partially sustained but in the reduced amount of P1,564,915.00.15 Consequently, petitioner is liable to pay the corresponding deficiency VAT of P156,491.50. 2.

Disallowed input tax from purchase of capital goods in the amount of P44,345.94 and disallowed input tax from alleged non- VAT suppliers in the amount of P429,779.16 The BIR assessed petitioner for deficiency VAT arising / from disallowed input tax from purchases of capital goods 15 See discussion in item I.l.A.

due to discrepancy per VAT Returns and Statement of Cash Flows. Petitioner was likewise assessed by respondent for deficiency VAT due to alleged input tax claimed from suppliers not registered in the ITS database. On the disallowed input tax claimed on capital goods in the amount of ~44,345.94, the ICPA found that petitioner had erroneously filled up the VAT return which resulted to the said discrepancy. The ICPA likewise found that the input taxes claimed in 2004 were supported by either VAT invoice or VAT official receipt. 16 Be that as it may, the vouchers and VAT official receipts17 are not sufficient proof of its claim of input tax on capital goods. In line with the invoicing requirement under Section 113 of the NIRC of 1997, petitioner should have presented VAT invoices. On the disallowed input tax from alleged non-VAT suppliers in the amount of ~429,779.16, a revisit of the VAT returns 18 and the pertinent schedules19 shows that the input taxes reported in the former do not coincide with that in the latter, as illustrated below: Input Tax Input VAT per Input VAT per Return Schedule Domestic purchases - capital goods p 58 023.74 p 68 636.11 Domestic purchases - goods other capital goods 126,128.28 214,073.60 Domestic purchases - services 1,408, 708.93 777,922.24 Importations - capital goods 1,612 276.34 - Others - 431,657.32 Total P3,205,137.29 P1,492,289.27 3.

Discrepancy between input VAT on importation per return and input VAT per summary of importation / 16 Exhibit "Q-2", Docket, Vol. 1, p. 308. 17 Exhibits "EE.3.1.1-ICPA" to "EE.3.35.1-ICPA". 18 Exhibits "0.1.3-ICPA", "0.1.6-ICPA", "0.1.9-ICPA" and "0.1.12-ICPA". 19 Annexes "D-ICPA" and "D.1-ICPA" to "D.4-ICPA". Difference (P 10,612.37) (87,945.32) 630,786.69 1,612,276.34 (431 657.32)

To reiterate, the assessment with regard to the discrepancy in the amount of ~780.07 was sustained by the Court since petitioner did not dispute the factual and legal bases of the assessed amount. 20 In sum, petitioner is found to be liable for the following basic deficiency VAT: Undeclared sales (P1,564 915.00 x 10%) p 156A91.50 Disallowed excess input tax claimed on capital goods 44,345.94 Disallowed input tax from non-VAT suppliers 429,779.16 Discrepancy between input VAT on importation per return and input VAT per summary of importation 780.07 Deficiency VAT P631,396.67 III. FINAL WITHHOLDING VAT The deficiency final withholding VAT arose from the royalties and commissions allegedly paid by petitioner in the respective amounts of ~3,992,025.00 and ~6,372,166.00. Record shows that petitioner made a timely and appropriate remittance to the BIR of the final withholding VAT on royalty expense in accordance with Section 114(C) of the NIRC of 1997, though using a wrong tax return. 21 Thus, petitioner shall be held liable only for the deficiency withholding VAT on commission payments as fully discussed and explained in the assailed Decision, 22 as computed below:

Income Rate Deficiency Final Non-resident foreign corporations IV. EXPANDED

WITHHOLDING TAX

20 Docket, Vol. 2, p. 575. 21 See discussion in item I.l.A. 22 Docket, Vol. 2, pp. 576-577. Payment Withholding VAT P6,372,166.00 10% P637 ,216.60 I

As held, petitioner failed to withhold and remit the corresponding withholding taxes due on certain income payments during the year23, thus, assessment for the deficiency withholding tax shall be upheld but in the reduced amount of P56,418.48, as computed below: Expenses not subjected Income Payment Rate EWTDue toEWT Professional fees p 20,000.00 10% p 2,000.00 Purchase of services 2,200,847.46 2% 44,016.95 Purchase of goods 1,040,153.00 1% 10,401.53 Deficiency EWT P3,261,000.46 P56,418.48

WHEREFORE, the Motion for Reconsideration dated July 1, 2014 filed by petitioner is hereby PARTIALLY GRANTED.

The assessment issued by respondent against petitioner covering taxable year 2004 for deficiency income tax is hereby CANCELLED and SET ASIDE. On the other hand, respondent's assessments for deficiency VAT, FWVAT and EWT for the same taxable year are UPHELD with modification. Accordingly, petitioner is ordered to pay the amount of P1,656,289.69, inclusive of the twenty-five percent (25°/o) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, computed as follows:

25°/o Tax Type Basic Surcharge TOTAL Value-added Tax p 631,396.67 p 157 849.17 p 789,245.84 Final Withholding VAT 637,216.60 159 304.15 796,520.75 Withholding Tax-Expanded 56,418.48 14 104.62 70,523.10 Total p 1,325,031.75 p 331,257.94 p 1,656,289.69 In addition, petitioner is ordered to pay: (a) Deficiency interest at the rate of twenty percent / (20°/o) per annum on the basic deficiency VAT, final 23 See discussion in item I.2.

withholding VAT and expanded withholding tax computed from the dates indicated below until full payment thereof pursuant to Section 249(8) of the NIRC of 1997, as amended;

Tax Type Deficiency Interest Computed From VAT January 25 2005 Final Withholding VAT January 10 2005 EWT January 13 2005 (b) Delinquency interest at the rate of 20°/o per annum on the total amount of P1,656,289.69 and on the 20°/o deficiency interest which have accrued as afore-stated in (a), computed from July 31, 2011 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended.