Sabre Travel Network, Inc. vs. Commissioner of Internal Revenue

DECISION

CASTANEDA, JR., J.:

THE CASE

In this Petition for Review, petitioner Abacus Distribution Systems Phils., Inc. seeks the cancellation of respondent's Final Decision on Disputed Assessment (FDDA) dated May 2, 2013, assessing petitioner of deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), withholding tax on compensation (WTC), final withholding tax (FWT), final withholding VAT (FWVAT) and documentary stamp tax (DST) for the taxable year 2009 in the aggregate amount of P94,405,463.27, inclusive of surcharges and interests, broken down as follows: Tax Type Basic Surcharge Interest Total Income Tax p 28,324,809.39 - p 15,132,432.42 p 43,457,241.81

VAT EWT WTC FWT FWVAT DST 21,576,991.51 509,731.84 102,575.34 6,213,282.86 2,485,313.15 2,407.00 Total PS9,215,111.08 - 12,473,274.55 34,050,266.06 - 296,063.42 805,795.26 - 59,578.00 162,153.34 p 1,553,320.72 3,608,810.87 11,375,414.45 621,328.29 1,443,524.35 4,550,165.78 601.75 1,417.82 4,426.57 P2,175,250.76 P33,015, 101.43 P94,405,463.27

THE FACTS

Petitioner is a corporation duly organized and existing under and by virtue of Philippine laws, with principal office address at 3F Trafalgar Plaza Building, H.V. Dela Costa Street, Salcedo Village, Makati City 1227. It is duly registered with the Bureau of Internal Revenue (SIR) under Revenue District No. 50 with Tax Identification Number 000103491000.¹ Respondent is the duly appointed Commissioner of Internal Revenue who holds office at the BIR National Office Building located at Diliman, Quezon City. 2 On May 31, 2010, petitioner received a Letter of Authority (LOA) dated May, 14, 2010 from the SIR authorizing the examination of its books of accounts and other financial records for the year ending December 31, 2009.3 On March 9, 2012, petitioner received a Notice of Informal Conference dated February 21, 2012 with attached Summary Findings from the Large Taxpayers Service of the BIR.4 On March 27, 2012, petitioner through its president, Demetrio C. Silverio, executed a Waiver of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code (NIRC) and agreed to extend the period to conduct audit/investigation until December 31, 2012.5 On September 20, 2012, petitioner received a Preliminary Assessment Notice (PAN) dated July 31, 2012, for deficiency Income Tax, VAT, EWT, WTC, FWT, FWT-VAT and DST for the year ending jtc-

December 31, 2009.6 Petitioner protested the PAN in a letter dated October 3, 2012, which was received by the BIRon October 4, 2012? On November 29, 2012, petitioner received the Formal Letter of Demand (FLD) with Details of Discrepancies and Final Assessment Notice (FAN) Nos. LTEAD 11-IT-09-0003, LTEAD 11-VT-09-0002, LTEAD 11-WG-09-0004, LTEAD II-WC-09-0004, LTEAD 11-WE-09- 0004, LTEAD II-WF-09-0001 and LTEAD II-DS-09-0001 dated November 12, 2012.8 On December 20, 2012, petitioner filed a protest against the FAN through a letter dated December 19, 2012.9 On June 27, 2013, petitioner received the Final Decision on Disputed Assessment (FDDA) dated May 2, 2013 which denied its protest for lack of factual and legal basis. 10 On July 26, 2013, petitioner filed a Petition for Review with the Court of Tax Appeals under Section 228 of the NIRC of 1997 to appeal the FDDA.11 On October, 3, 2013, respondent filed his Answer12 with the following pertinent Special and Affirmative Defenses: "SPECIAL & AFFIRMATIVE DEFENSES XXX XXX XXX Income Tax XXX XXX XXX

11. In the instant case, petitioner's deduction for Forex Loss in the amount of Php²,431,607 was not shown to have been actually sustained and no considerable proof was introduced to buttress its claim.

12. Moreover, records bear that the sales figures derived from creditable taxes withheld by petitioner's customers when reconciled with the sales per Summary Jt-

erA case No. 8678

List of Sales reveal a discrepancy amounting to Php570,130.98. Hence, petitioner's gross income based on Section 32 of the Tax Code was found to be understated.

13. Also, the computerized audit technique that reconciled petitioner's purchases as sources of input tax credits against the income payment subjected to expanded withholding tax unveil an understatement in purchases amounting to Php16,764,878.70, which is indicative of unaccounted source of cash. XXX XXX XXX

15. Upon further examination of the records, it was also revealed that, reconciliations to determine compliance with the additional requirements of deductibility required under section 34(K) of the Tax Code indicate that petitioner's deductions, in the amount of Php20,710,942.88, did not fully cover the required withholding on deductions subject to final withholding tax. Likewise, the Php2,989,649.32 which was subjected to expanded withholding tax and Php410,746.03 on deductions subject to withholding tax on compensation, did not as well comply with the required deductibility as provided for in Section 34(K). XXX XXX XXX 17.

Records also disclose that there were unaccounted remittances. Petitioner's principal source of revenue was commissions from Abacus International Pte. Ltd. (AIPL), and related to the commissions earned by petitioner are expenses for communication and marketing. Under an offsetting agreement, only the net amount shall be remitted inwardly. The reconciliation of the net amount due against the inward remittances reveal that there were unaccounted remittances by the petitioner in the amount of Php50,538,076.40. Value-Added Tax

18. Petitioner was assessed by the Bureau for deficiency VAT on its alleged zero rated sales in the amount of Php111,154,286.12. Petitioner contends that its purported zero rated sales represent revenues arising;- from services rendered to AIPL, a non-resident foreign corporation, and that the consideration for which is paid for in foreign currency so much so that the said sales were supposedly subject to VAT at zero percent (0°/o).

19. However, the findings of no less than three examiners indicate otherwise. The revenues generated by petitioner consisting of rentals of equipment by the subscribers (travel agencies) and the fees paid through AIPL is subject to VAT at the rate of twelve percent (12°/o).

XXX XXX XXX

22. In the instant case, however, there was no service(s) rendered to a non-resident. The fees were paid on bookings by the subscribers. Essentially, petitioner did not render any service to AIPL, since the fees were payable based on the number of access made by the travel agencies in the Philippines using the abacus system. Seeing that the transaction in this particular case does not comply with the requirement for zero-rating, therefore, the income of Php111,154,286.12 is subject to VAT.

Expanded Withholding Tax XXX XXX XXX 24.

Respondent respectfully submits that the deficiency withholding tax was the result of reconciling the deductions claimed subject to EWT against the income payments per alpha list supporting 1604-E using the provisions of Revenue Regulations No. 2-98, and further amplified by Revenue Memorandum Circular 72-04 as well as the provisions of Revenue Regulations No. 12- 01.

Withholding Tax on Compensation XXX XXX XXX

27. Accordingly, records reveal that the above- mentioned audit procedure yielded a deficiency in withholding tax on compensation since the withheld taxes) on salaries and wages claimed by petitioner as deduction~

CfA Case No. 8678 are higher compared to the total based on the alpha list, then it is safe to conclude that, there were deductions made by petitioner which were not subjected to the required withholding tax. Final Withholding VAT XXX XXX XXX

29. Petitioner in this case provides a computerized reservation in the Philippines, the Abacus System, a system that performs various functions, including real time airline seat reservations, schedule displays, booking for a variety of air, car and hotel services, automated ticketing and fare quote displays. The abacus system is an intellectual property owned by a non-resident foreign corporation (AIPL).

30. In connection with the use of the Abacus System in the Philippines, marketing fees and communication expenses are being charged by AIPL. Since the charges are income of a non-resident in connection with the use of its property and property rights in the country, the same is subject to final withholding of VAT as required under RR 16-05 as amended by Revenue Regulations No. 4-2007. Final Withholding Tax XXX XXX XXX

32. Records disclose that the petitioner did not introduce any iota of evidence to prove that the foregoing services were rendered abroad. On the contrary, review of the documents supporting the communication expense showed that AIPL billed petitioner based on the bookings and number of access by travel agencies in the Philippines. Given that the source of income where the deductions were derived are from the database access by subscribing travel agencies in the Philippines, the same is therefore within the taxing authority of the BIR based on the situs of taxation theory. Thus, such income is subject to final withholding tax. Documentary Stamp Tax ~

XXX XXX XXX

35. Records disclose that, petitioner was properly assessed for deficiency documentary stamp tax, the same being derived from deductions made by petitioner for the lease of real property as found under Mktg-Rent and Mktg-Purchased Services account in the total amount of Php4,286. 77, inclusive of penalties. XXX XXX xxx" 13 On September 29, 2014, the parties filed their Joint Stipulation of Facts and Issues. 14 On October 2, 2014, the Court issued a Pre- Trial Order. 15 During the hearing, petitioner16 and respondent17 presented their pieces of evidence and their witnesses. On March 18, 2016,18 the Court required the parties to submit their memoranda. On June 6, 2016, petitioner filed its Memorandum for the Petitioner19 while on June 27, 2016, respondent filed through registered mail his Memorandum. 20 On July 19, 2016/1 the case was deemed submitted for decision. Hence, this Decision.

THE ISSUES

The issues to be resolved by the Court are: (1) Whether the FAN sufficiently informed the taxpayer of the assessments' factual and legal bases; and (2) Whether petitioner is liable for the subject deficiency assessments.

THE RULING

The Court partially grants the instant Petition. Jlc-

erA case No. 8678

Petitioner was sufficiently informed of the bases of the subject assessments Petitioner contends that the subject FANs violated their right to be informed of the facts and the law from which the deficiency assessments were based. However, the Court observes that the questioned FAN with attached Details of Discrepancies22 contained the necessary bases from which the assessments were based. Hence, the Court finds petitioner's contention untenable. The Court shall now proceed to determine the correctness of the subject assessments. For an orderly discussion, the following subject assessments shall be discussed in this sequence: ---- Def ici _ency Tax Total Amount I.

EWT p 805,795.25 ---- II.

WTC 162,153.34 -·-- III. FWVAT 4,550,165.79 IV.

FWT 11,375,414.45 v.

Income T ax 43,457,241.81 ------- VI.

VAT 34,050,266.06 ----- - VII. DST 4,426.57 -- P94,405,463. 27 -- I.

DEFICIENCY EWT- P805,795.25 Respondent assessed petitioner of deficiency EWT for taxable year 2009 in the amount of P805,795.25, computed as follows: 23 ----- Per Withholding Particular PerFS Tax Return -- Services p 7 ~98,787.96 p 8 022 767.56 Goods 16 ~~-~f).88 11 604 087.00 Rental 23 007 769.62 14 526 206.31 Professional Fees 1 998 400.00 1 773 648.87 Total P49,503,144.46 P35,926,709.74 Add: Interest ------ ---- Total amount due ----- ------ 22 Exhibit "P-10", Docket, Vol. I, pp. 466-483. 23 Exhibit "P-10", Docket, Voi.I, pp. 471-472. Deficiency Discr~anc;y Rate EWT p (323 979.60) - - 5 194 099.88 1% p 51 941.00 8 481 563.31 5% 424 078.17 224 751.13 15% 33 712.67 P13,576,434.72 p 509,731.83 296 063.42 p 805,795.25

The assessment resulted from respondent's finding that there were income payments made by petitioner in the year 2009 comprising of purchases of goods in the amount of P5,194,099.88, rental payments in the amount of P8,481,563.31 and professional fees in the amount of ¥>224,751.13 that were not subjected to 1 °/o, 5°/o and 15°/o EWT, respectively, as required under Revenue Regulations (RR) No. 02-98, as amended. A. Purchases of Goods The deficiency EWTon purchases of goods of P51,941.00 was derived by respondent as follows: - ~~- -- - ·- -· Per Withholding Deficiency Particular PerFS Tax Return Discrepancy Rate EWT ----- Petrol/Oil & Car Registration p 740,834.85 Stationery & Supplies 574 318.68 Magazines/periodicals 23,5p.01 Social Activities 406,?9~A1 Repairs & Maintenance 3,203 989.38 Entertainment & Representation __ _2}~454.55 Acquisition of PPE 10 910 765.00 Total P16,798,186.88 P11,604,087 .00 p 5,194,099.88 1°/o p 51,941.00 The Court-commissioned Independent CPA (!CPA), Navarro Amper & Co., through its Partner, Atty. Fredieric B. Landicho, ascertained that out the amount of P16,798,186.88 classified by the BIR as income payment for goods purchases, the amounts of P8,782,945.30 and ¥>1,628,357. 73 were subjected to 1 °/o and 2°/o EWT, respectively, in the year 2009. However, with regard to the amount of P³,829,804.77, the !CPA was not able to determine whether the same was subjected to or exempted from EWT, while the remaining amount of ¥>2,577,079.08 could not be accounted for due to lack of supporting documents. The details of the ICPA findings are shown below: 24 ---~--.----- Pure hases sub'ected to EWT Purchases not ---~-- subjected to Particular Per FAN 2°/o Total EWT Unaccounted Petrol/Oil & Car Registration p 740 834.85 Stationery & Supplies 574 318.68 Magazines/Periodicals 23 527.01 Social Activities 406 297.41 p -· 2 --~--- ----- ~~~OQ.

1510.

·-- p 70 00 ..

24 Exhibit "P-64", p. 21, Docket, Vol. II, p. 998. - p - p 708 728.03 p 32 106.82 - 286 200.70 26 252.64 261865.34 - 3 510.00 11,000.00 9 017.01 39 658.50 39 658.50 301800.00 64 838.91 Repairs & Maintenance Entertainment & Representation Acauisition of PPE Total

3 203 989.38 965 523.05 430 159.23 1 395 682.28 575 191.83

1233 115.27

938 454.55 13 749.57 - 13 749.57 20 000.00 904 704.98 10 910 765.00 7 513 961.98

1158 540.00

8 672 501.98 2 186 832.27 51430.75 P16,798 186.88 P8,782,945.30 P1,628,357. 73 P10_L41J..t303.03 P3_L829,804.77 P2,557 ,079.08 RR No. 02-98, as amended by RR No. 17-03, mandates the withholding of 1 °/o and 2°/o EWT on purchases of goods and services as follows:

"Sec. 2.57 .2.

Income payments subject to creditable withholding tax and rates prescribed thereon. - Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines:

XXX XXX XXX (M) Income payments made by the top ten thousand (10,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. - Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines Supplier of goods - One percent ( 1 °/o) Supplier of services- Two percent (2°/o)" Based on the Court's examination of the reconciliation schedule25 detailing the individual transactions covering the above purchases/income payments and the related check vouchers, journal vouchers, statements of accounts, invoices and official receipts26 as well as petitioner's Summary List of Purchases (SLP)27 and EWT Alphalist28 for taxable year 2009, only the EWT corresponding to the following income payments totaling P8,349,080.00 was verified to J-

have been actually withheld and remitted to the BIR in accordance with Section 2.57.2(M) of RR No. 02-98, as amended:

Income CV No. ____Date Account Code Payment STATIONERY AND SUPPLIES Po | Minerva Printing Corporation, | 5984 30-Jan-09 1740464 P 893.00 1% 6062 19-Feb-09 1% 1740064 1% 1740264 1% 6179 _ 23-Mar-09 | _:1740664 6182 24-Mar-09 1740464 1740364 6349 _21-May-09 1740864 1740064 1740164 37.00 1740264 9,185.00 1740464 1740564 1740664 1740764 1740864 6488 | _ 26-Jun-09 1740964 6553 _ 24-Jul-09 1740864 6565 | 24-Jul-09 __ 1740464 1740064 ___1740364 1740464 ___ 1740564 __ 1740664 1740764 506.00 1740864 1,012.00 6570 | 29-Jul-09 1740964 169.00 1740364 17,500.00 1740464 8,500.00 6669 28-Aug-09 1740664 6,500.00 30-Sep-09 | 1740264 2,400.00 6797 30-Sep-09 1740464 37,500.00 Ie

1740064 156.00| 1% 1740264 520.00 1740364 468.00 6870 22-Oct-09 1740864 312.00 6896 30-Oct-09 1740464 7,969.00 6892 _ 20-Nov-09 1740664 | 17,875.00 6940 12-Nov-09 1740264 9,000.00 1740064 800.00 1740264 1740564 1740664 6992 20-Nov-09 1740964 800.00 1740064 284.00 | 1740164 189.00 1740264 946.00 1740364 2,994.00 1740464 284.00 1740564 1740664 1740864 7138 ___29-Dec-09 1740964 - g TT 6667 ___ 28-Aug-09 1740064 1,558.00 360 System Solutions, Inc._ oo ee ee 6211 __ 31-Mar-09 | 1740264 1% Dan Daryl Phils., Inc. 7 a ee 6568 29-Jul-09 | 1740664 6695 14-Sep-09 | 1740664 6885 28-Oct-09 1740664 6996 24-Nov-09 1740264 Minuteman Printers, Inc. —__ | 6184 __ 25-Mar-09 1740664 13,393.00 P&L Gifts, Inc. ee ee 6928 [11-Nov-09 | 174066 10,714.00 PC Planet Corp. ee [| 6352 __21-May-09 1740664 3,280.00] 1% HP Philippines Corp, P| 6269 24-Apr-09 1740764 Zenshin Systems Corp. | 6495 | 02-Jun-09 1740664 SUBTOTAL (1%) . 273,211,00| | | ee ee Copyhigh-V Digital System _ f 6579 [31-Jul-09 | 1740464 6,250.00 Lacercom Business Machine Trading + | 28-May-09 1740464 3,482.00 Microcore System Technology - | [ Je

| 1740064 156.00 | 1% | 1740264 | 520.00 |___1740364 | 468.00 6870 22-Oct-09 1740864. 312.00 6896 | 30-Oct-09 \ 1740464 | 7,969.00 6892 20-Nov-09 1740664 17,875.00 6940 12-Nov-09 1740264 | 9,000.00 | 1740064 | 800.00 1740264 | 800.00 1740564 400.00 1740664 800.00 6992 20-Nov-09 1740964. | 800.00 1740064 1740164 1740264 1740464 284.00 1740564 1740664 _ 1740864 1,282.00 7138 «| _~—-29-Dec-09 1740964 95.00 Compucare ; | 6667 __ 28-Aug-09 _1740064 1,558.00 360 System Solutions, Inc. i= | 6211 __31-Mar-09 _ 1740264 2,754.00 Dan Daryl Phils., Inc. | 6568 29-Jul-09 1740664 | 1,188.00 6695 14-Sep-09 __1740664 | 1,781.00 6885 28-Oct-09 1740664 5,938.00 6996 | 24-Nov-09 | 1740264 _—i 5,938.00 Minuteman Printers, Inc. |_ 6184 __ 25-Mar-09 1740664 13,393.00 | 1% P&L Gifts, Inc. a ; _| | 6928 11-Nov-09 1740664 10,714.00 1% PC Planet Corp. T 6352 _ 21-May-09 1740664 | 3,280.00 | 1% HP Philippines Corp, oo Fo 6269 24-Apr-09 | _—-1740764 773.00 Zenshin Systems Corp. —__ P| 6495 | 02-Jun-09 1740664 1,875.00 SUBTOTAL (1%) / 273,211.00| | po _| | Copyhigh-V Digital System | 6579 31-Jul-09 1740464. | «6,250.00 Lacercom Business Machine Trading 7 | 6410 28-May-09 1740464 | 3,482.00 Microcore System Technology - | | >

6461 | 17-Jun-09 =| —«1740664 2,420.00 | 2% SUBTOTAL(2%) ee 12152.00| | TOTAL - STATIONERY AND SUPPLIES 285,363.00; _—s_i| |

MAGAZINES AND PERIODICALS |

People's Independent Media, Inc. - | 7045. «| ~—sO1-Dec-09. | ~—=—:1740141 3,510.00 TOTAL - MAGAZINES AND PERIODICALS 3,510.00| _—sif

SOCIAL ACTIVITIES _ |

Gold Venture Lease Management & Services _ ;

6999 25-Nov-09 | 1740465 33,036.00 TOTAL - SOCIAL ACTIVITIES 33,036.00; —s_—

REPAIRS AND MAINTENANCE |

360 System Solutions, Inc.___ oo | 30-Jan-09 1710150 10,192.00 6059 _ 19-Feb-09 1710150 13,196.00 6067 _ 24-Feb-09 1710150 12,196.00 6118 27-Feb-09 1710150 ___ 4,674.00 6202 27-Mar-09 1710150 7,527.00 | 1% __ 24-Apr-09 1710150 29,241.00 6285 29-Apr-09 1710150 17,093.00 6273 __ 24-Apr-09 1710150 | 25,446.00 _ 21-May-09 _1710150 45,384.00 24-Jul-09 __ 1710150 16,714.00 6556 24-Jul-09 1710150 24,174.00 | 1% Casa De Moda, Inc. a | 6521 | 13-May-09 _ 1710150 1,786.00 | 1% Checon Industries 7 oe 6311 12-May-09 1710150 | 28,571.00 | 1% Columbia Technologies, Inc. — —— 6942 12-Nov-09 1710150 8,196.00 | 1% Compucare a c tay 7 6562 24-Jul-09 1710150 13,594.00 | 1% 6661 - 28-Aug-09 | —_—si1710150 9,629.00 | 1% Compumedics a 7] | 6061 __19-Feb-09 1710150 15,379.00 6286 ~ 29-Apr-09 1710150 2,009.00 6561 —s|_—s24-Jul-09 1710150 1,764.00 7136 | 29-Dec-09 1710150 2,009.00 DCTech Mircro Service, Inc. [— [| 6054 18-Feb-09 | 1710150 3,348.00 DTYH Enterprises | 6580 — 31-Jul-09 | 1710150 5,848.00 7130 _29-Dec-09 | _1710150 18,214.00 7137 29-Dec-09_ | ~—_—:1710150 29,777.00 ge

Emerson Network Power Phils., Inc. oo 6663 _ 28-Aug-09 1710150 14,068.00 Gigahertz Computer System _ | 30-Jan-09 1710150 10,179.00 Ironfront, Inc. a oe | 6943 12-Nov-09 1710150 3,571.00 6990 — 20-Nov-09 1710150 30,357.00 7128 29-Dec-09 | 1710150 59,241.00 Joir Enterprises : _ | 6166 _ 18-Mar-09 1710150 10,714.00 Maximum Solutions Corp oo | 6177 ~ 23-Mar-09 1710150 6952 14-Nov-09 1710150 __ 7,411.00 Micro Pacific Technologies and Systems | 24-Jul-09 1710150 26,339.00 | 1% 6871 22-Oct-09 | 1710150 12,500.00 | 1% 6937 12-Nov-09 1710150 6,696.00 Microbase, Inc. oe | 7132 _29-Dec-09 1710150 24,107.00 Netmarks Philippines, Inc. _ | 6339 20-May-09 1710150 69,196.00 PC Planet Corporation —__ I 6203 27-Mar-09 1710150 9,576.00 6271 24-Apr-09 1710150 2,232.00 6275 _ 24-Apr-09 1710150 9,723.00 6350 _ 21-May-09 1710150 9,300.00 Power Shield Technologies, Inc.__ oo | 6309 07-May-09 | _ 1710150 5,964.00 Thinking Tools __ | 6301 _ 04-May-09 1710150 3,214.00 29-Jul-09 1710150 11,116.00 6728 23-Sep-09 1710150 4,911.00 19-Nov-09 1710150 3,214.00 7076 -18-Dec-09 1710150 3,920.00 Unisource Marketing oo | 6056 —-19-Feb-09 1710150 5,357.00 6872 22-Oct-09 1710150 13,527.00 Whole Works Enterprises _ oe | 6405 26-May-09 1710150 4,686.00 Zenshin Systems Corporation — — 5989 — 30-Jan-09 1710150 1,786.00 | 1% 6069 24-Feb-09 1710150 8,036.00 6348 21-May-09 | 1710150 37,500.00 6563 - 24-Jul-09 1710150 27,679.00 6577 | 30-Jul-09 1710150 7,813.00 6662 | 28-Aug-09 1710150 78,839.00 6666 _ 28-Aug-09 1710150 16,741.00 _ 30-Sep-09 1710150 56,429.00 6865 22-Oct-09 1710150 9,152.00{| 1% %

7,143.00 1% 6998 |. 24-Nov-09 1710150 SUBTOTAL (1%) | 967,305.00| | 128 Tech Consulting, Inc. oe | 5947 r 22-Jan-09 1710150 54,000.00 Matco Computer Center —__ : | 6859 21-Oct-09 1710150 8,840.00 6959 18-Nov-09 1710150 5,357.00 7115 28-Dec-09 1710150 8,929.00 MGE UPS Systems Philippines, Inc. _ | 7077, —s«|_—s«16-Dec-09_ | —_—-1710150 2,946.00 Trends & Technologies, Inc__ | 13-May-09 ! 1710150 60,000.00 6687 09-Sep-09 1710150 30,000.00 Edgardo C. Garcia | 6539 ~ 17-Jul-09 1710150 12,500.00 - 22-Dec-09 1710150 11,000.00 Emerson Network Power Phils., Inc. oo | 5906 07-Jan-09 1710150 6,667.00 6235 _ 15-Apr-09 1710150 10,003.00 6493 ~ 30-Jun-09 1710150 10,003.00 Microbase, Inc. ee oe | 6936 12-Nov-09 1710150 3,571.00 Microcore System Technology a | 12-Feb-09 1710150 22,589.00 _ 18-Feb-09 1710150 4,241.00 6139 _ 04-Mar-09 1710150 _ 18-Mar-09 1710150 1,964.00 22-Apr-09 1710150 _ 10-Jun-09 1710150 19,643.00 6610 12-Aug-09 1710150 9,924.00 _ 09-Sep-09 1710150 11,652.00 6961 18-Nov-09 1710150 25,980.00 7000 _ 25-Nov-09 1710150 3,670.00 Mystic Electronics Repair Center | 6342 20-May-09 1710150 1,786.00 6691 09-Sep-09 | 1710150 3,125.00 Nelsen System, Inc. — 7 | | 6408 27-May-09 1710150 7,098.00 29-Jul-09 1710150 13,839.00 26-Aug-09 1710150 10,000.00 6703 15-Sep-09 1710150 4,286.00 28-Oct-09 1710150 7,098.00 7081 -16-Dec-09 1710150 2,902.00 | 2% SUBTOTAL (2%) = _ 428,372.00| | TOTAL - REPAIRS AND MAINTENANCE 1,395,677.00|

EQUIPMENT & REPRESENTATION

Casa Flores, Inc.

6099 26-Feb-09 6448 10-Jun-09 6690 _ 09-Sep-09 6854 21-Oct-09 1740123 1740123 1740123 5,179.00 1% 2,366.00 1% 2,232.00 1% 1740123 3,973.00 | 1% TOTAL - ENTERTAINMENT AND REPRESENTATION 13,750.00; si : | | ACQUISITION OF PPE ; | ACW Distribution Phils., Inc. . T | 31-Mar-09. | 1120138 21,786.00 Alpha Steel Office . P| 30-Jun-09 1120160 25,357.00 Columbia Technologies, Inc. a | 20-Nov-09 1120110 7133 29-Dec-09 1120110 114,286.00 7134 29-Dec-09 1120110 142,857.00 Compucare oe 7 | 6661 28-Aug-09 | 1120110 6,853.00 Cosmotech Philippines, Inc. | fs 6799 30-Sep-09 1120110 [_ 12,946.00 6868 22-Oct-09 1120170 2,031.00 24-Jul-09 1120170 26,777.00 DTYH Enterprises ; 7 7 PF _ 19-Feb-09 1120120 3,839.00 _ 24-Apr-09 1120110 3,839.00 _ 29-Apr-09 1120110 1,920.00 _ 06-Jun-09 1120110 3,839.00 Gigahertz Computer System a 1 pa aera} 1170110 6,652.00 17-Jun-09 1120170 HP Philippines Corp. - a ee ee 30-Jan-09 1120110 _27-Feb-09 1120110 _ 24-Apr-09 1120110 _ 22-Jul-09 1120110 29-Jul-09 1120110 133,500.00 PO . | 28-Aug-09 1120110 44,500.00 30-Sep-09 1120110 89,286.00 PO fe ~ 29-Dec-09 1120110 __ | 192,396.00 _ 24-Apr-09 1120170 39,950.00 Maximum Solutions Corp. P| 22-Oct-09 | 1120110 14,107.00 _ 27-Oct-09 1120110 | 28,214.00 fe

Micro Pacific Technolo. gies and § stems -19-Feb-09 24-Feb-09 _ 29-Dec-09 30-Oct-09 Pp Microbase, Inc.

6557 Office Republic Multi-Ventures, Inc.

SUBTOTAL (1% ;

Ana Luzzette lL. Lareza 6149 Jupiter Systems, Inc.

6335 20-May-09 7053 03-Dec-09 Millenium Carpets and Interiors 6037 _ 18-Feb-09 26-Feb-09 6036 18-Feb-09 26-Feb-09 6035 18-Feb-09 _ 26-Feb-09

SUBTOTAL (2%) _ -

TOTAL - ACQUISITION OF PPE

GRAND TOTAL

1120170 1120170 1120170 1120180 71,429.00 1% 71,429.00 1% 59,415.00 1% 156,250.00 1% 24-jul-09 | 1120110 TE 125,446.00 | 1% 7,923.00| 1% _2,732.00| 1% 217,054.00 1% 6,384.00 1% sl 6,964.00| 1% 6,964.00 | 1% 261,607.00 1% im 252,679.00 1% 28,571.00| 1% 9,911.00 1% 29,107.00 1% 09-Mar-09 | 1120141 25-Mar-09 1120141 PC Chain Superstore _ _ an _ 30-Jan-09 1120120 6058 _ 19-Feb-09 1120120 _ 21-Mar-09 1120110 6270 _ 24-Apr-09 1120110 Phil-Data Business Systems, Inc. a 6615 12-Aug-09 1120110 27-Nov-09 | 1120131 Precept Commercial Corporation a 6343 20-May-09 1120141 Technicom Electronics Trading ; 6901 05-Nov-09 1120180 Ultra Modular Concepts, Inc. _ a 6316 13-May-09 1120160 Zenshin Systems Corporation _ 6796 30-Sep-09 1120110 4,223.00 1% 5,452,581.00 -20-Feb-09 1112130 41-Mar-09 1112130 50,000.00 2% 50,000.00 2% 1120138 6,600.00 | 2% 1120138 = 44,000.00 1112130 15,402.00 1132130 15,402.00 1112130 111,607.00 1112130 111,607.00 1112130 | 376,961.00 1112130 376,961.00 ; 1,158,540.00| | ; 6,611,121.00; —si|f P8,349,080.00| _—i| Hence, out of the amount of P16,798,186.88 classified by the BIR as income payments for goods purchases, petitioner failed to prove that the amount of P8,449,106.88, detailed below, was subjected to or is exempted from EWT: ye erA Case No. 8678

Particular Purchas_es subjected to EWT Per FAN 1°/o 2°/o Total Income Total Income Payments Payments Not Subjected to Subjected to EWT EWT Petrol/Oil & Car Registration fl 740,834.85 - p 740,834.85 -·· Stationery & Supplies 57(1,318.68 p 273,211.00 p 12 152.00 p 285 363.00 288 955.68 Magazines/Periodicals 23,527.01 3,51 O.QO - 3 510.00 20 017.01 -- Social Activities 4QCJ,2~7.41 - 39L659.00 39 659.00 3661638.41 - Repairs & Maintenance 3,2_Q3,9~9.38 967,30~).00 428,372.00 1 395 677.00 1,808 312.38 Entertainment & Representation 938,454.55 13,750.00 - 13 750.00 924 704.55 Acquisition of PPE 10,910,765.00 5 452,5H 1.00

1158 540.00

6 611121.00 4 299 644.00 Total P16, 798,186.88 P6,710,357 .00 P1,638,723.00 P8,349,080.00 P8,449,106.88 Thus, the income payments of P8,449,106.88 shall be considered as subject to 1 °/o EWT as prescribed under Section 2.57.2(M) of RR 2-98, as amended by RR 17-03. However, the amount of P84,491.07 representing 1 °/o EWf due on the above income payments of P8,449,106.88 is higher than the EWf of P51,941.00 assessed by respondent. In the consolidated cases of Commissioner of Internal Revenue vs. Transnational Plans, Inc. and Transnational Plans, Inc. vs. Commissioner of Internal Revenuti-9, the CTA En Bane held that the Court cannot go beyond the contested assessment per FDDA, to wit: "In as much as this Court's jurisdiction is appellate in nature, it is essential that matters taken up in the appeal should be included in th'2 contested assessment. It must be realized that with respect to the deficiency VAT of TPI, the appealed amount before this Court's jurisdiction is only with respect to the P67,446,873.00, as what is indicated in the FDDA. As stated in the case of Commissioner of Internal Revenue vs. Guerrero, eta/.: 'Although these charges and taxes are not included in the ori~Jinal and revised assessments made in this case, petitioner herein maintains thc~t Guerrero may nevertheless be held liable therefor xxx Petitioner's contention i~; untenable. xxx In short, it refers to a point in issue. In the case at bar, the addition<- I [amount] under consideration were not included in the ~ 29 erA EB Nos. 1337 and 1339 (CTI\ Case No. 8291), Mar'. 11 27, 2017.

contested assessments. Since the jurisdiction of the Court of Tax Appeals is purely appellate, said Court correctly declined to make an award thereon, for lack of jurisdiction over the same.' Section 228 of the Tax Code clearly states that 'the taxpayer shall be informed in writing of the facts and the law on which the assessment is made; otherwise, the assessment shall be void.' As thus worded, the respondent has the bounden duty to inform the taxpayer not only of the law but more importantly, the surrounding circumstances supporting the assessment, for it is only through a detailed appraisal of its basis that the taxpayer may be able to dispute the imposition or agree with it.30 The underlying reason of the law is the basic constitutional requirement that 'no person shall be deprived of his property without due process of law.'31 Thus, the amount to be collected from TPI should not go beyond what is stated in the assessment. In excess of such stated therein, TPI was not informed in writing of the facts and law on which the amount is made, thus, the taxpayer has no opportunity to dispute the said amount, in violation of due process. Furthermore, as the saic excess amount was not indicated in the FAN, it should be considered as not assessed by the CIR, hence, already beyond the prescriptive period for it to be i1Kiuded only at this time of judicial trial.

Consequently, the findings of the BIR as that stated in the assessment should be the basis for the deficiency VAT, i.e., only the amount of PG7,446,873.00." Considering that the power to assess is lodged in the respondent and is not witt<n the province of this Court, the Court is constrained to limit its fin t:ngs based on respondent's assessment. Hence, petitioner is liable only to the extent of the assessment in the amount of P51,94l.OO. Jv

B. Rental Section 2.S7.2(C)(l) and (2) of RR No. 02-98, as amended by RR No. 14-02, prescribes the withholding of S0/o tax on rentals as follows: "Sec. 2.57.2.

Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: XXX XXX XXX (C) Rentals

(1) Real properties. - On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity- Five percent (S 0A1);

(2) Personnl propeities. - On gross rental or lease in excess of Ten Thousand Pesos (PlO,OOO.OO) per payment for the continued use or possession of k:rsonal property used in business which the payor or obligor has not taken or is not taking title, or rn whid, he has no equity which include, but n l limited to the following: land transport equir 1 1ent, wJter transport equipment, air transport · _·quipment, industrial equipment, commercial e 1uipmen~, scientific equipment, agricultural ·1achi: ·,c. y and equipment, construction/civ· ens;:j(2ering machinery and equipment, te:

ommunication equipment, office furniture/rnachi, _sjequipinent, main frame computer <' .d .111 other computer machines/equip' cnt, r:ntcrials handling equipment and auxiliary ecuipmci .'._ -- ~ive percent (S0/o); However, the Ten Thousand Pesos (PlO,OOO.OO) t rcsholrl shall not apply when the accumulated gr ' rr."

:11 cr lease paid by the lessee to the same .t'SSvi e:,,~,:cds or is reasonably expected to ex:-·'· :d P 10,000.00 within the year. In ~ which case, the lessee shall withhold the five percent {S01o) withholding tax on the entire amount."

Respondent assessed petitioner of S01o deficiency EWT in the amount of P424,078.17 on the following accounts: Per Withholding Deficiency Particular PerFS Tax Return Discrepancy Rate EWT Communication Exp-Rentals of Equip p 39 579 622.90 Less: Comm. Exp. Subj to

FWT (AIPL -SINGAPORE)

(18 976 877.84) Other-Rent 201,600.00 Storage Rental 2 203 424.56 Total P23 007 769.62 P14 526,206.31 P8,481,563.31 5°/o P424,078.17

1. Communication Expense, Rentals of Equipment - P20,602,745.06 (P39,579,622.90 less P18,976,877.84) Out of the assessed Communication Expense of P20,602,74S.06, only the amount of P16,301,831.19 which pertains to service charges for leased lines and telephone lines was verified by the ICPA to have been subjected to S0lo and 2°1o EWT, respectively. Further, the ICPA, found that the input VAT of P1,968,11S.46 related to said transactions were also charged to the same expense account. Hence, it resulted to a discrepancy in the tax base reflected per EWT Alphalist and the purchased cost lodged in the Communication Expense account. Since petitioner was not able to provide proof for the remaining Communication Expense of P2,332,798.41, the ICPA was not able to verify whether the said amount was properly subjected to EWT, as summarized below: 32 Per ICPA's Per EWT Alphalist Income Communication Amount Amount Payment Not Cost Account subjected to subjected to Subjected to Analysis 5°/o 2°/o Total Input VAT EWT Supplier fAl [Bl rc1 D=fB+Cl [El F=lA-D-E] Bayantel p 3 01~309.55 p 2 718 292.61 - p 2 718 292.61 p 338 233.22 P( 45 216.28) Eastern Telecom 3 339 088.57 2 981,329.09 - 2 981 329.09 357 758.57 0.91 Innove Comm., Inc.

1 806,026.85 1 613 388.16 - 1 613 388.16 193 606.60 (967.91) PLDT 11164,784.18 7 942 173.66 - 7 942 173.66 953 060.90 2 269 549.62 PLDT 889 217.89 - p 776,864.92 776 864.92 93 223.79 19 129.18 Bell Telecom Phils.

18 373.02 - 16,389.17 16 389.17 1966.70 17.15 Mozcom, Inc.

283,800.00 - 253 393.58 253 393.58 30 265.68 140.74 32 Exhibit "P-64", pp. 22-23, Docket, Vol. II, pp. 999-1000 and Exhibit "P-64-h".

Smart Broadband

90 145.00 - - - - 90 145.00 Total P20L602_L745.06 P15,255,183.52 P1,046 647.67 P16 301,831.19 P1,968,115.46 P2,332,798.41 The Court finds the ICPA findings in order. Without the related invoices and/or official receipts, the actual nature of the income payments of P2,332,798.41 and their appropriate tax implications cannot be ascertained. Consequently, these income payments of P2,332,798.41 shall be considered as rentals of communication equipment as found by respondent which are subject to S0/o EWT as prescribed under Section 2.S7 .2(C)(2) of RR No. 02-98, as amended by RR No. 14-02. 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. 33 Hence, respondent's deficiency S0/o EWT assessment in the amount of P116,639.92 on the Communication Exp-Rentals of Equip in the amount of P2,332,798.41 is upheld.

2. Other Rent- 1'201,600.00 As aptly noted by the ICPA, the amount of P201,600.00 charged under the account "DVO-Rent" relates to payments made by petitioner to Plaza De Luisa Development, Inc. for the lease34 of premises designated as Commercial B11 of the Plaza de Luisa Complex, which payments were verified to have been properly subjected to S0/o EWT per alphalis~ 5 pursuant to Section 2.S7.2(C)(1) of RR No. 02-98, as amended by RR No. 14-02. Below is the breakdown of the rental amount of P201,600.00: Exhibit CVNo.

Date Particular P-74 5910 07-Jan-09 Rental Fee- Jan. 2009 33 Marcos II vs. Court of Appeals, et at, G.R. No. 120880, June 5, 1997. 34 Exhibits "P-87" to "P-87.12". 35 Exhibit "P-64", p. 23, Docket, Vol. II, p. 1000. Income Payment Subjected to EWTper Check Voucher and traced to EWT Alphalist p 16,000.00

P-74.3 P-74.6 P-74.9 P-74.12 P-74.15 P-74.18 P-74.22 P-74.25 P-74.28 P-74.29 P-74.32 5998 6131 6222 6300 6434 6524 6601 6671 6819 6902 7048 02-Feb-09 Rental Fee- Feb. 2009 16,000.00 04-Mar-09 Rental Fee- Mar. 2009 16,000.00 01-Apr-09 Rental Fee- Apr. 2009 16,000.00 04-May-09 Rental Fee- May 2009 16,000.00 03-Jun-09 Rental Fee- June 2009 16,000.00 15-Jul-09 Rental Fee- July 2009 17/600.00 06-Aug-09 Rental Fee- Aug. 2009 17,600.00 02-Sep-09 Rental Fee- Sep. 2009 17,600.00 08-0ct-09 Rental Fee- Oct. 2009 17,600.00 05-Nov-09 Rental Fee- Nov. 2009 17,600.00 01-Dec-09 Rental Fee- Dec. 2009 17,600.00 Total p 201,600.00 Considering that petitioner's "Other-Rent" of P201,600.00 were properly subjected to EWT, the relevant assessment must be stricken down for lack of factual basis.

3. Storage Rental- P2,203,424.56 Based on the Court's validation and review of the !CPA's Supplemental Report36 and petitioner's supporting documents37, the assessed storage rental of P2,203,424.56 pertains to the transactions lodged under Outside Purchased Services, of which the amount of P1,118,823.94 refers to income payments for advertisement and to agencies on account of the agency fees and salaries of personnel for the janitorial services and liaison personnel. Considering that the income payments were made to contractors, the services amounting to P1,118,823.94 were properly subjected to 2°/o EWT pursuant to Section 2.57.2(E)(⁴) and (M) of RR No. 02-98, as amended by RR No. 30-03.

The said income payments of P1,118,823.94 and the remittance of the related 2°/o EWT can be traced to the petitioner's EWT returns and alphalist, as follows: Supplier Particulars Acct. Code: 1740354 - TSO- Purchase Services Services Nobility Collection Agency, Inc. Rendered Services Superior Maintenance Services, Inc. Rendered Services Nobility Collection Agency, Inc. Rendered 36 Exhibit "P-64", pp. 23-24, Docket, Vol. II, pp. 1000-1001. 37 Exhibits "P-59", "P-63", "P-75", and "P-76". CV No./ Reference Ref A 6264 Ref K Amount subjected to 20/o EWT per Return and Exhibit Alpha list P-63.52 to P-63.88 p 4 478.40 P-63.24 1190.43 P-63.312 to P-63.349.13 299 096.29

Subtotal Acct. Code: 1740454- FAD- Purchase Services Star Special Corporate Security Mgt., Inc.

Superior Maintenance Services Inc. Nobility Collection Agency, Inc. Nobility Collection Agency, Inc. Star Special Corporate Security Mgt., Inc.

Superior Maintenance Services, Inc. Subtotal Acct. Code: 1740554- CEBU- Purchase Services Pacubas General Services Inc. Pacubas General Services, Inc. Subtotal Acct. Code: 1740654- CST- Purchase Services Manila Bulletin Subtotal Total Security Guard Salaries RefG Janitorial Services RefC Messenger and Drivers Ref B Driver's Fee RefM Security Guard Salaries Ref N Janitorial Services RefO Janitorial Services Ref H Janitorial Services Ref P Classified Advertisement 5918 p 304_765.12 P-63.218 to P-63.244;

P-63.517 to P-63.535 p (7 493.08) P-63.100 to P-63.117 9 509.42 P-63.89 to P-63.99 (2 247.62) P-63.368 to P-63.405.13 126 350.19 P-63.406 to P-63.441.9 301 010.27 P-63.442 to P-63.447.12 321490.74 p 748,619.92 P-63.245 to P-63.260;

P-63.536 to P-63.550 p 109.42 P-63.478 to P-63.513.3 56 819.48 p 56928.90 P-63.30 p 8 510.00 p 8510.00 P1,118,823.94 The rema1mng amount of Pl,084,600.62 (P2,203,424.56 less P1,118,823.94), consisted of the following: (1) payments to Trafalgar Plaza Condominium Corporation (TPCC) for storage rental in the amount of P21,696.48; (2) payments to Alternative Network Resources Unlimited Multi-Purpose Cooperative (ANR Unlimited) for customer /technical support services rendered in the amount of Pl,057,294.89; and (3) payment to Manila Bulletin in the amount of P6,129.30; 4) payment to Allied Banking Corporation for safety deposit box rental in the amount of Pl,SOO.OO and 5) unaccounted difference of P(2,020.05), detailed as follows: Amount not CV No./ subjected to Supplier Particulars Reference Exhibit EWT Acct. Code: 1740354- TSO- Purchase Services Trafalgar Plaza Condominium Corp. Storage Rentai-Jan.'09 5902 P-63.118 p 1808.04 Storage Rental- Trafalgar Plaza Condominium Corp. Feb.'09 5995 P-63.121 1 808.04 Storage Rental- Trafalgar Plaza Condominium Corp. Mar.'09 6130 P-63.124 1,808.04

CfA Case No. 8678

Trafalgar Plaza Condominium Corp. Trafalgar Plaza Condominium Corp. Trafalg_ar Plaza Condominium Corp. Trafalgar Plaza Condominium Col]). Trafalgar Plaza Condominium Corp. Trafalgar Plaza Condominium Corp. Trafalgar Plaza Condominium Corp. Trafalgar Plaza Condominium Corp. Trafalgar Plaza Condominium Corp. Subtotal Acct. Code: 1740254- SALES- Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-Purpose Cooperative Acct. Code: 1740354 - TSO- Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Unlimited Multi-PurQ_ose CooR_erative Acct. Code: 1740454- FAD- Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Alternative Network Resources Storage Rentai-Apr.'09 Storage Rental-May '09 Storage Rentai-Jun.'09 StoraQe Rentai-Jui.'09 Storage Rental- Aug.'09 Storage Rental- Sep.'09 Storage Rentai-Oct.'09 Storage Rental- Nov.'09 Storage Rental- Dec.'09 Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and technical support services rendered Customer and 6221 P-63.127 1,808.04 6299 P-63.130 1,808.04 6423 P-63.133 1,808.04 6497 P-63.136 1808.04 6602 P-63.140 1 808.04 6672 P-63.144 1808.04 6802 P-63.147 1 808.04 6900 P-63.150 1 808.04 7049 P-63.153 1808.04 p 21/696.48 6658 P-63 p 5 249.46 6708 P-63.3 (1 604.68) 6636 P-63.6 (1,416.00) 6572 P-63.9 2,108.85 6958 P-63.12 (11.96) 7119 P-63.15 (1,063.13) 6839 P-63.18 (2 158.17) 6932 P-63.21 1531.561 Ref I P-63.261 34,907.74 P-63.156 to P-63.202;

Ref E P-63.200 253 201.91 P-63.276 to RefJ P-63.111 593 346.90 P-63.203 to Ref F P-63.217 10 900.48 Ref L P-63.350 to 154 235.85

Unlimited Multi-Purpose Cooperative Acct. Code: 1740654- CST- Purchase Services Alternative Network Resources technical support P-63.367 services rendered Customer and technical support Unlimited Multi-Purpose Cooperative services rendered 5972 P-63.46 6 337.51 Customer and Alternative Network Resources technical support Unlimited Multi-Purpose Cooperative services rendered 5491 P-63.49 (15.69) Customer and Alternative Network Resources technical support Unlimited Multi-Purpose Cooperative services rendered 6123 P-63.37 3 807.38 Subtotal p 1,057.294.89 Acct. Code: 1740654- CST- Purchase Services Trial P-63.34 to Manila Bulletin - Balance P-63.36.6 p (15.69) Trial P-63.40 to Manila Bulletin - Balance P-63.42.6 6,611.28 Trial P-63.43 to Manila Bulletin - Balance P63.45 (466.29) Subtotal p 6129.30 Acct. Code: 1740454- FAD- Purchase Services Safety deposit box P-63.27 to Allied Banking Corporation rental 6126 P-63.29 p 1 500.00 Subtotal p 1,500.00 Unaccounted Difference 38 p ( 2,020.05) Total p 1,084,600.62 With regard to the payments for customer and technical support services rendered by ANR Unlimited in the total amount of P1,057,294.89, the same were validly not subjected to EWT. ANR Unlimited, being an entity registered with the Cooperative Development Authority,39 is exempt from income tax and consequently from EWT pursuant to Republic Act No. 9520.40 fk- 38 Exhibit "P-64-e".

39 Exhibit "P-75".

40 "ART. 61. Tax and Other Exemptions.- Cooperatives transacting business with both members and non- members shall not be subject to tax on their transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members' deposits and documentary tax. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions: "{1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos {PlO,OOO,OOO.OO) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry (DTI). All tax-free importations shall not be sold nor the beneficial ownership thereof be transferred to any person until

With regard to the storage rental fees paid to TPCC in the amount of P21,696.48, petitioner is liable to pay 5°/o deficiency EWT in accordance with Section 2.57.2(C)(1) of RR No. 02-98, as amended by RR No. 14-02. As to the income payments made by petitioner to Manila Bulletin in the amount of P6,129.30 and Allied Banking Corporation in the amount of P1,500.00, petitioner is liable to pay 2°/o deficiency EWT thereon pursuant to Section 2.57.2(M) of RR No. 02-98, as amended by RR No. 17-03. Thus, the deficiency tax assessment on Outside Purchased Services is upheld but in the reduced amount of P1,237.41, computed as follows:

Outside Purchased Services p 2,203,424.56 Less:

(1) Purchase of Services subjected to EWT 1,118,823.94

(2) Purchase of Services exempt from EWT 1,057,294.89 (3) Unaccounted Difference (2,020.05) Income Payments not subjected to EWT p 29,325.78 With Breakdown as follows: Deficiency Rate EWT

(1) Storage rental fees paid to TPCC p 21 696.48 5% p 1,084.82

(2) Purchase of Services from a.) Manila Bulletin 6,129.30 2% 122.59 b.) Allied Banking Corporation 1 500.00 2% 30.00 Income Payments not subjected to EWT p 29,325.78 p 1,237.41 C. PROFESSIONAL FEES Relative to the withholding EWT on professional fees, Section 2.57.2 of RR No. 2-98, as amended by RR No. 30-03, provides as follows: tz- after five (⁵) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the imposed tax and/or duties. "(2) Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos (PlO,OOO,OOO.OO) shall pay the following taxes at the full rate: "(a) Income Tax- On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members: Provided, further, That cooperatives, regardless of classification, are exempt from income tax from the date of registration with the Authority;

erA case No. 8678

"Sec. 2.57 .2. Income payments subject to creditable withholding tax and rates prescribed thereon. - xxx.

A) Professional fees, talent fees, etc., for services rendered by individuals. - On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals - Fifteen percent (15°/o), if the gross income for the current year exceeds P720,000; and Ten percent (10°/o), if otherwise;

XXX XXX XXX

(9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors.

XXX XXX XXX (B) Professional fees, talent fees, etc., for services of taxable juridical persons. - On the gross professional, promotional and talent fees, or any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons - Fifteen percent (15°/o), if the gross income for the current year exceeds P720,000; and Ten percent (10°/o), if otherwise;

Furthermore, in order to determine the applicable tax rate {10°/o or 15°/o) to be applied/withheld by the withholding agent, every individual professional/talent/corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration attached as Annex "A" hereof in three (3) copies (two (2) copies for the BIR and one (1) copy for the taxpayer), copy furnished all the current payors of the declaration duly stamped received by the BIR (Collection Division of the Regional Office having jurisdiction over the place where the income earner is registered/Large Taxpayers Collection Division for large taxpayers in Metro Manila/LTDO for large taxpayers outside Metro-Manila). Sworn declaration may likewise be filed by the income payor on behalf of the professionals/talents/directors <;;;- whose services were being rendered exclusively to the aforesaid payor. The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/talent/director's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen

(15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payee - professional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor 1 s a copy thereof, the payor shall withhold the tax at the rate of 15°/o." (Emphasis supplied) Respondent's deficiency EWT assessment on professional fees was based on the following accounts: Per Withholding Deficiency Particular PerFS Tax Return Discrepancy Rate EWT Joint Marketing fee p 1100 000.00 Board Honorarium 556 000.00 Mktg-Professional fees 342 400.00 Director's Fees p 746 203.87 Professional Fees 1 027,445.00 Total p 1,998,400.00 P1 773 648.87 p 224,751.13 15% p 33,712.67 In light of Section 2.57 .2(A) and (B) of RR No. 02-98, as amended, we shall now determine whether the above expenses are subject to EWT.

1. Joint Marketing Fee - P1,100,000.00 The ICPA's verification of the check voucher and supporting documents41 and general ledger of the Joint Marketing Agreement account42 showed that the entire amount of P1,100,000.00 pertains only to a single transaction with Philippine Airlines, Inc. (PAL) representing the extension of the Joint Marketing Agreement43 dated~

November 5, 2004 entered into by both entities. Pursuant to the said agreement, PAL agreed, among others, to promote the Abacus System to travel agencies. In consideration thereof, petitioner paid PAL a marketing fee of P1,000,000.00, net of all applicable taxes, charges, withholdings and other fees. Petitioner remitted to the BIR an amount of P100,000.00 EWT on the said transaction as can be traced to the petitioner's EWT return44 and alphalist.45 However, considering that petitioner claimed the entire amount of P1,100,000.00 as deductible expense, petitioner should have withheld and remitted the corresponding 15°/o EWT in the amount of P165,000.00 instead of P100,000.00 as required under Section 2.57.2 of RR No. 02-98, as amended by RR No. 30-03. Thus, petitioner is liable to pay deficiency EWT in the amount of P65,000.00 on the Joint Marketing Fees of P1,100,000.00.

2. Board Honorarium - P556,000.00 The ICPA found that out of the assessed amount of P556,000.00 board honorarium, the amount of P486,000.00 was subjected to 15°/o EWT, while the remaining P70,000.00 was paid to John Lim Cheng Chua, a non-resident alien representing AIPL Singapore, hence not subjected to EWT. The assessment is partially upheld. Indeed, the 15°/o EWT due on the amount of P486,000.00 board honorarium was withheld and remitted to the BIR as can be traced to the supporting check vouchers46 and EWT alphalist of petitioner for the year 2009, detailed as follows: Payee Lucio C. Tan Henry So Uy Harry_ C. Tan Jose P. Magno Mariano Tanenglian Enrique Antonio J.

44 Exhibit "P-61".

45 Exhibit "P-59".

Particular Honorarium-Jan.'09 Honorarium-Jan.'09 Honorarium-Jan.'09 Honorarium-Jan.'09 Honorarium-Jan.'09 Honorarium-Jan.'09 46 Exhibits P-82 to P-82.100. C.V. No.

5922 5923 5924 5925 5926 2957 Amount Subjected to EWT Tax EWT Rate Withheld p 5 000.00 15% 750.00 5 000.00 15% 750.00 5 000.00 15% 750.00 5 000.00 15% 750.00 5 000.00 15% 750.00 3 000.00 15% 450.00

Esquivel III Henry So Uy Harry C. Tan Mariano Tanenglian Jose P. Macmo Enrique Antonio J.

Esquivel III Lucio C. Tan Henry So Uy Lucio C. Tan Henry So Uy Harry C. Tan Jose P. Magno Mariano Tanenglian Enrique Antonio J.

Esquivel III Henry So Uy Harry C. Tan Jose P. Magno Lucio C. Tan Henry So Uy Harry C. Tan Mariano Tanenqlian Jose P. Magno Enrique Antonio J.

Esquivel III Lucio K. Tan Jr.

Michael G. Tan Lucio C. Tan Henry So Uy Harry C. Tan Mariano Tanenqlian Jose P. Maqno Enrique Antonio J.

Esquivel III Lucio K. Tan Jr.

Michael G. Tan Lucio C. Tan Henry So Uy Harry C. Tan Jose P. Maqno Honorarium-Feb.'09 Honorarium-Feb.'09 Honorarium-Feb.'09 Honorarium-Feb.'09 Honorarium-Feb.'09 Honorarium-Feb.'09 Honorarium Excom Meeting-Feb.'09 Honorarium-Mar.'09 Honorarium-Mar.'09 Honorarium-Mar .'09 Honorarium-Mar.'09 Honorarium-Mar.'09 Honorarium-Mar.'09 Honorarium-Joint Regular BOD/ Annual Stockholders MeetingMar.'09 Honorarium-Joint Regular BOD/Annual Stockholders MeetinqMar.'09 Honorarium-Joint Regular BOD/ Annual Stockholders MeetingMar.'09 Honorarium-Aor.'09 Honorarium-Apr.'09 Honorarium-Apr.'09 Honorarium-Aor.'09 Honorarium-Apr.'09 Honorarium-Aor.'09 Honorarium-Apr.'09 Honorarium-Apr.'09 Honorarium-May'09 Honorarium-May'09 Honorarium-Mav'09 Honorarium-Mav'09 Honorarium-May'09 Honorarium-May'09 Honorarium-May'09 Honorarium-May'09 Honorarium-Jun.'09 Honorarium-Jun.'09 Honorarium-Jun.'09 Honorarium-Jun.'09 6005 5 000.00 15% 750.00 6006 5 000.00 15% 750.00 6007 5 000.00 15% 750.00 6008 5,000.00 15% 750.00 6009 3,000.00 15% 450.00 6010 5 000.00 15% 750.00 6109 5,000.00 15% 750.00 6132 5,000.00 15% 750.00 6133 5,000.00 15% 750.00 6134 5 000.00 15% 750.00 6135 5 000.00 15% 750.00 6136 5 000.00 15% 750.00 6137 3 000.00 15% 450.00 6189 10 000.00 15% 1,500.00 6190 10 000.00 15% 1 500.00 6192 10 000.00 15% 1 500.00 6215 5 000.00 15% 750.00 6216 5 000.00 15% 750.00 6217 5,000.00 15% 750.00 6218 5,000.00 15% 750.00 6219 5 000.00 15% 750.00 6220 3 000.00 15% 450.00 6225 5,000.00 15% 750.00 6226 5 000.00 15% 750.00 6291 5,000.00 15% 750.00 6292 5,000.00 15% 750.00 6293 5 000.00 15% 750.00 6294 5,000.00 15% 750.00 6295 5 000.00 15% 750.00 6296 3 000.00 15% 450.00 6297 5 000.00 15% 750.00 6298 5 000.00 15% 750.00 6426 5,000.00 15% 750.00 6427 5 000.00 15% 750.00 6428 5 000.00 15% 750.00 6429 5 000.00 15% 750.00

Mariano Tanenglian Lucio K. Tan Jr.

Michael G. Tan Enrique Antonio J.

Esquivel III Harl)t' C. Tan Mariano Tanenglian Jose P. Magno Enrique Antonio J.

E~uivel Ill Lucio K. Tan Jr.

Michael G. Tan Lucio C. Tan Henry So Uy Lucio C. Tan Henry So Uy Michael G. Tan Lucio K. Tan Jr.

Jose P. Magno Enrique Antonio J.

Esquivel III Mariano Tanenglian Harry C. Tan Lucio C. Tan Michael G. Tan Lucio K. Tan Jr.

Jose P. Magno Enrique Antonio J.

Esquivel III Mariano Tanenglian Harry C. Tan Henry So Uy Lucio C. Tan Henry So Uy Michael G. Tan Lucio K. Tan Jr.

Jose P. Magno Enrique Antonio J.

Esquivel III Mariano Tanenglian Harry C. Tan Lucio C. Tan Henry So Uv Michael G. Tan Lucio K. Tan Jr.

Jose P. Maqno Enrique Antonio J.

Esquivel III Mariano Tanenglian Honorarium-Jun.'09 Honorarium-Jun.'09 Honorarium-Jun.'09 Honorarium-Jun.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Jui.'09 Honorarium-Auq .'09 Honorarium-Aug.'09 Honorarium-Auq.'09 Honorarium-Aug .'09 Honorarium-Aug.'09 Honorarium-Auq.'09 Honorarium-Aug.'09 Honorarium-Aug.'09 Honorarium-Seo.'09 Honorarium-Sep.'09 Honorarium-Sep.'09 Honorarium-Seo.'09 Honorarium-Seo.'09 Honorarium-Seo.'09 Honorarium-Sep.'09 Honorarium-Sep.'09 Honorarium-Oct.'09 Honorarium-Oct.'09 Honorarium-Oct.'09 Honorarium-Oct.'09 Honorarium-Oct.'09 Honorarium-Oct.'09 Honorarium-Oct.'09 Honorari um-Oct.'09 Honorarium-Nov.'09 Honorarium-Nov .'09 Honorarium-Nov.'09 Honorarium-Nov .'09 Honorarium-Nov.'09 Honorarium-Nov.'09 Honorarium-Nov.'09 6430 5,000.00 15% 750.00 6431 5,000.00 15% 750.00 6432 5,000.00 15% 750.00 6433 3,000.00 15% 450.00 6499 5 000.00 15% 750.00 6500 5,000.00 15% 750.00 6503 5 000.00 15% 750.00 6504 3,000.00 15% 450.00 6505 5 000.00 15% 750.00 6506 5 000.00 15% 750.00 6507 5,000.00 15% 750.00 6508 5 000.00 15% 750.00 6587 5,000.00 15% 750.00 6588 5 000.00 15% 750.00 6589 5 000.00 15% 750.00 6590 5 000.00 15% 750.00 6591 5 000.00 15% 750.00 6592 3 000.00 15% 450.00 6593 5 000.00 15% 750.00 6594 5 000.00 15% 750.00 6675 5 000.00 15% 750.00 6677 5 000.00 15% 750.00 6678 5 000.00 15% 750.00 6679 5,000.00 15% 750.00 6680 3,000.00 15% 450.00 6681 5 000.00 15% 750.00 6682 5 000.00 15% 750.00 6683 5 000.00 15% 750.00 6807 5 000.00 15% 750.00 6808 5 000.00 15% 750.00 6819 5,000.00 15% 750.00 6811 5 000.00 15% 750.00 6812 5,000.00 15% 750.00 6813 3 000.00 15% 450.00 6814 5,000.00 15% 750.00 6815 5,000.00 15% 750.00 6907 5.000.00 15% 750.00 6908 5,000.00 15% 750.00 6909 5,000.00 15% 750.00 6910 5 000.00 15% 750.00 6911 5,000.00 15% 750.00 6912 3,000.00 15% 450.00 6913 5,000.00 15% 750.00

Harry C. Tan Henrv So Uy Jose P. Magno Henry_So Uy Harry C. Tan Michael G. Tan Lucio C. Tan Henry So Uy Michael G. Tan Lucio K. Tan Jr.

Jose P. Magno Enrique Antonio J.

Esquivel III Mariano Tanenglian Harry C. Tan Honorarium-Nov.'09 Honorarium Execom Meeting-Nov .'09 Honorarium BOD Meeting-Nov.'09 Honorarium BOD Meeting-Nov .'09 Honorarium BOD Meeting-Nov .'09 Honorarium BOD Meeting-Nov.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Honorarium-Dec.'09 Total 6914 5,000.00 15% 750.00 6934 5,000.00 15% 750.00 6981 5,000.00 15% 750.00 6982 5 000.00 15% 750.00 6983 5,000.00 15% 750.00 6985 5 000.00 15% 750.00 7036 5 000.00 15% 750.00 7037 5 000.00 15% 750.00 7038 5looo.oo 15% 750.00 7039 5 000.00 15% 750.00 7040 5 000.00 15% 750.00 7041 3 000.00 15% 450.00 7042 5 000.00 15% 750.00 7043 5 000.00 15% 750.00 P486,000.00 P72,900.00 With regard to the remammg honorarium of P70,000.00 allegedly paid to a non-resident alien, petitioner submitted the related Credit Notes which show the following details: Credit Note No.

Date Particular Amount Exhibit Q1 2009 Honorarium (Jan -Mar 20091 p 15 000.00 1351 25-Mar-09 Honorarium - Joint Regular Board of Directors & Annual Stockholders' MeetiQg 10,000.00 P-82.102 1359 30-Jun-09 Q2 2009 Honorarium (April to June 2009) 15 000.00 P-82.103 1362 09-0ct-09 Q3 2009 Honorarium (July to September 2009) 15 000.00 P-82.104 1365 Q4 2009 Honorarium (October- December 16-Dec-09 2009) 15 000.00 P-82.105 Total p 70,000.00 While the EWT mandated under Section 2.57 .2 in relation to Section 2.57 .2(A)(9) of RR No. 02-98, as amended by RR No. 30-03, applies only to income payments to persons residing in the Philippines, the Court cannot ascertain whether the honorarium of P70,000.00 was actually paid to an alleged non-resident alien named John Lim Cheng Chua, notwithstanding that the Credit Notes supporting the said payment were addressed to AIPL, Singapore. For lack of sufficient evidence, the deficiency 15°/o EWT assessment on the amount of P70,000.00 is sustained. J<..

3. Mktg-Professional Fees- P342,400.00 Per the !CPA's verification, the assessed amount of P342,400.00 consisted of professional fees paid to the following:47 Professional Professional Fees subjected Supplier Fees toEWT E.M. Zalamea Actuarial Services p 50,000.00 p 27,445.00 SGV &Co.

292,400.00 Total p 342,400.00 An examination of the supporting check vouchers and related official receipts, statements of account and billing statements48 shows that the professional fees of P292,400.00 were paid for auditing services rendered by SGV & Co., a general professional partnership, as indicated in its Articles of Incorporation.49 The remaining professional fees of P50,000.00 were paid to E.M. Zalamea Actuarial Services, Inc. for the actuarial valuation of petitioner's retirement plan.

Section 22(8) of the NIRC of 1997, as amended, defines general professional partnerships (GPPs) as partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Corollary thereto, Section 26 of the same NIRC provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax.

Pertinent hereto is Section 2.57 .5 of RR No. 2-98, as amended by RR No. 14-02, which states: "Sec. 2.57 .5. Exemption from Withholding. - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following:

XXX 47 Exhibit "P-64", p. 25, Docket, Vol. II, p. 1002. 48 Exhibits "P-84", "P-84.1" to "P-84.9". 49 Exhibit "P-85".

XXX

XXX 7L

(B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following:

( 4) General professional partnerships XXX XXX xxx" Petitioner has satisfactorily shown that it made payments to a GPP in the amount of P292,400.00. Hence, the deficiency EWT assessment on this item must be cancelled. As to the PSO,OOO.OO professional fees which were paid to E.M. Zalamea Actuarial Services, Inc., it was verified that the amount of P27,445.000 was subjected to 10°/o EWT. However, absent of proof that E.M. Zalamea's gross income for the year 2009 did not exceed P720,000.00, the said income payment of P27,445.00 shall be subjected to 15°/o EWT pursuant to Section 2.57 .2(8) of RR No. 02- 98, as amended by RR No. 17-03. Thus, petitioner is liable for the under-withholding of 5°/o EWT in the amount of P1,372.25 on its income payments to E.M. Zalamea of P27,445.00. As to the remaining income payments to E.M. Zalamea of P22,555.00, petitioner shall likewise be liable to pay the corresponding 15°/o deficiency EWT in the amount of P3,383.25. To recapitulate, petitioner is liable for basic deficiency EWT for taxable year 2009 in the amount of P250,073.83, computed as follows:

Amount not subjected to Deficiency Particulars EWT Rate EWT Purchases of Goods p 5,194,099.88 1% p 51,941.00 Rent Communication Exp-Rentals of Eauio 2,332, 798.41 5% 116 639.92 Storage Rental 21,696.48 5% 1,084.82 Outside Purchased Services Manila Bulletin 6,129.30 2% 122.59 Allied Banking Corporation 1 500.00 2% 30.00 Professional Fees

Joint Marketing Fees Board Honorarium Mktg-Professional Fees Underwitholding of 5% EWT on the P27,445.00 prof. fees paid to E.M. Zalamea Non-withholding of 15% on the P22,555.00 prof. fees paid to E.M. Zalamea Total 433 333.3350 70L000.00 9,148.3351 22,555.00 p 8,091,260.73 II.

DEFICIENCY WTC- P162,153.3452 15% 65 000.00 15% 10 500.00 15% 1,372.25 15% 3,383.25 p 250,073.83 Respondent assessed petitioner of deficiency WTC for taxable year 2009 in the amount of P162,153.34, computed as follows: A-Under Remittance Total Per Alphalist p 4,871,438.91 Less: Tax Remitted Per 1604-CF 4,871,438.91 Under Remittance p - B-Under Withholding Acct Code Description 1740006

MKTG-BOARD HONORARIUM

p 556,000.00 1740007

MKTG-BONUS/13TH MO PAY

3,443 284.24 1740011

MKTG-CAR LEASE

- 1740012 MKTG-CONFERENCE - 1740022

MKTG-EMERGENCY /BENEFITS

406 085.00 1740026 MKTG-GROUP HOSPITAliZATION 980 698.29 1740031 MKTG-INCENTIVES

1480 212.29

1740042 MKTG-MEDICAL 102_L856.77 1740047 MKTG-OVERTIME 303/634.83 1740050

MKTG-PAG-IBIG FUND CONTRI

64,600.00 1740051

MKTG-PERSONNEL RECRUITMENT

18,000.00 1740058 MKTG-RETIREMENT 1 865,110.00 so Claimed Joint Marketing_ Fees P1 100 000.00 Less: Amount subjected to P100 000.00 EWT (P100 000.00 + 15%) 666 666.67 Joint Marketing Fees not subjected to 15% EWT P433,333.33 51 Professional fees paid to E.M. Zalamea p 50,000.00 Less: Amount subjected to 10% EWT (P2,744.50 + 15%) 18 296.67 Professional fees paid to E.M. Zalamea not subjected to 15% EWT p 9,148.33

erA case No. 8678

1740059 1740061 1740062 1740063 1740081 1740086

MKTG-RICE ALLOCATION

MKTG-SALARIES & WAGES

MKTG-SICK LEAVE

MKTG-SSS/MEDICARE PREMIUMS

MKTG-UNIFORMS

MKTG-VACATION LEAVE

Total Deductions per Books Less: Non Taxable Items 1740022

MKTG-EMERGENCY /BENEFITS

1740026

MKTG-GROUP HOSPITALIZATION

1740031 MKTG-INCENTIVES 1740042 MKTG-MEDICAL 1740050

MKTG-PAG-IBIG FUND CONTRI

1740051

MKTG-PERSONNEL RECRUITMENT

1740058 MKTG-RETIREMENT 1740059

MKTG-RICE ALLOCATION

1740063

MKTG-SSS/MEDICARE PREMIUMS

1740081 MKTG-UNIFORMS 1740086

MKTG-VACATION LEAVE

Total Non Taxable Items Deductions Subject to WTC Less: Gross Payments per Alphalist Deductions Not subjected to WTC Tax Rate:

Tax Due/alohalist Taxable Compensation Less Exemption Deficiency WTC Add: Interest12010-01-20 to 2012-12-15)

TOTAL AMOUNT DUE

763,200.00 20,575 917.55 1,016 846.92 852 292.20 44 229.33 5561846.70 p 33 029 814.12 p 406,085.00 980,698.29 1 480,212.29 102,856.77 64,600.00 18 000.00 1 865,110.00 763,200.00 8521292.20 44/229.33 556,846.70 p 7,134 130.58 p 25_L895_L683.54 25,484,937.51 p 410 746.03 4 871.438.91 19 506,874.08 0.2497 p 102 575.34 0.58082 59,578.00 p 162,153.34 In arriving at the deficiency withholding tax on compensation, respondent identified petitioner's claimed deductions for salaries and wages which are subject to WTC and then matched the figure total with the amount declared per alphalist. The total deductions not subjected to WTC as found by respondent amounted to P410,746.03. The Court cancels the assessment. As correctly observed by the ICPA53, respondent's computation included the Mkltg - Board Honorarium amounting to P556,000.00 as compensation income subject to WTC. As earlier discussed under the deficiency EWT assessment, the amount of P486,000.00 of the transactions lodged under the Board Honorarium account was already subjected to EWT, while the remaining P70,000.00 was not 9t-

subjected to EWT as the same was allegedly paid to a non-resident alien named John Lim Cheng Chuan. Considering that the members of the board of directors of petitioner who were paid the honorarium of P486,000.00 were not, at the same time, employees of petitioner as can be seen from the Alphalist of Employees54 supporting its Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF)55 for the year 2009, the 15°/o EWT was properly withheld thereon by petitioner as provided for under Section 2.57.2(A)(9) of RR No. 02-98, as amended by RR No. 30-03, to wit:

"Sec.

2.57.2.

Income payments subject to creditable withholding tax and rates prescribed thereon. -XXX (A) Professional fees, talent fees, etc., for services rendered by individuals. - Fifteen percent ( 15°/o), if the gross income for the current year exceeds P720,000; and Ten percent (10°/o), if otherwise; XXX XXX XXX (9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors."

Obviously, the amount of P486,000.00 representing Board Honorarium will offset the alleged P410,746.03 deductions not subjected to WTC and will not result to any deficiency WTC, as shown below:

Deductions not subjected to WTC as found by respondent p 410,746.03 Less: Deductions subjected to EWT Board Honorarium 486,000.00 Amount Not Subjected to WTC {P 75,253.97) Clearly, the subject assessment, being a mere result of respondent's erroneous computation, must be cancelled. 9r-

erA case No. 8678

III. DEFICIENCY FWVAT- P4,550,165.78 IV.

DEFICIENCY FWT- P11,375,414.45 Respondent assessed petitioner of deficiency FWVAT and FWT on the amounts of P18,976,877.84 and P1,734,065.04 representing communication expense and marketing fees paid to the non- resident/Singapore-based AIPL. Respondent's computations of the assessments for deficiency FWVAT of P4,550,165.78 and deficiency FWT of P11,375,414.45 are reproduced as follows: III. DEFICIENCY FWVAT Communication Expense payable to AIPL (Singapore) p 18,976,877.84 Marketing Fees 1,734,065.04 Total Deductions Pa_yable to AIPL (Singapore) p 20_1710/942.88 Tax Rate 0.12 Deficiency Final VAT Withheld p 2,485,313.15 Add: Surcharge 621,328.29 Interest (1/20/2010 to 12/15/2012) 1,443,524.35

TOTAL AMOUNT DUE

p 4,550,165. 79 IV. DEFICIENCY FWT Communication Expense payable to AIPL (Singapore) p 18 976,877.84 Marketing Fees 1,734,065.04 Total Deductions Payable to AIPL (Singapore) p 20,710,942.88 Tax Rate 0.30 FWT Due p 6,213,282.86 FWT Paid - Deficiency FWT p 6,213,282.86 Add: Surcharg_e 1,553,320.72 Interest _(_2010-01-20 to 2012-12-15) 3,608,810.87

TOTAL AMOUNT DUE

p 11,375,414.45 According to respondent, petitioner provides computerized reservation system in the Philippines, the Abacus System, a system that performs various functions, including real time airline seat reservations, schedule displays, booking for a variety of air, car and hotel services, automated ticketing and fare quote displays. The Abacus System is an intellectual property owned by AIPL, a non- resident foreign corporation. Respondent further states that in connection with the use of the Abacus System in the Philippines, marketing fees and communication expenses are being charged by AIPL. Respondent jt- posits that since the charges are income of a non-resident in connection with the use of its property and property rights in the country, the same are subject to final withholding VAT as required under RR No. 16-05 as amended by RR No. 04-07. Respondent likewise argues that in the absence of an !TAD Ruling, such income is subject to 30°/o FWT pursuant to Section 28(8)(1) of the NIRC of 1997, as amended.

Petitioner counter-argues that the payments are mere reimbursement of expenses incurred by AIPL, which in turn were charged by Sabre Holdings, a foreign corporation based in the USA and the licensor of the Abacus System. As such, the payments it made to AIPL did not arise from an activity, the income of which is derived from the operation of the Abacus System, hence, is not subject to FWVAT and FWT. The Court rules in favor of respondent. To determine whether the payments are subject to FWVAT, Section 114(C) of the NIRC of 1997, as amended, provides: "SEC. 114. Return and Payment of Value- Added Tax.- XXX XXX XXX (C) Withholding of Value-added Tax. - The Government or any of its political subdivisions, instrumentalities or agencies, including government- owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, , deduct and withhold a final value-added tax at the rate of five percent (5°/o) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10°/o) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent." ~ erA case No. 8678

In relation thereto, Section 4.114-2 of RR No. 16-05 prescribes the withholding of 12°/o final VAT on the lease or use of properties or property rights owned by non-residents. Verily, before subjecting the subject payments to FWVAT, the source of such payments must proceed from a VATable transaction. In this regard, Section 105 of the same Code provides: "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.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the 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, nonprofit 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. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Corollary thereto, Section 108(A)(l) states: SEC.

108. Value-added Tax on Sale of Services and Use or Lease of Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax Jt- equivalent to ten percent (10°/o) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,raise the value-added tax to twelve percent (12°/o), after any of the following conditions has been satisfied: XXX XXX XXX xxx The phrase "sale or exchange of services" shall likewise include:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right;" The Court finds, however, that petitioner failed to adduce sufficient evidence to overturn the presumption of correctness of respondent's treatment of the subject payments as income on the part of AIPL.

While the amounts of P18,976,877.84 and P1,734,065.04 representing communication expense and marketing fees were traced to the Tax Invoices56 issued by AIPL to petitioner, there were no indications even in the schedules attached to the said invoices that the said expenses were initially billed by Sabre Holdings and paid by AIPL in behalf of the petitioner. In other words, petitioner failed to convince the Court through sufficient evidence that the subject expenses were mere reimbursements. Verily, the Court is constrained to uphold respondent's assessment in treating the subject payments remitted to AIPL as income pertaining to the operation of Abacus System in the Philippines.

Since it is an income arising from the privilege to use the computer system in the Philippines, it necessarily follows that there is a sale of service by AIPL in the course of trade or business, hence, subject to VAT under Section 105 in relation to Section 108(A)(1) of the NIRC of 1997, as amended. Consequently, the supposed withholding of the VAT is in order pursuant to Section 114(C) of the same Code. ~ 56 Exhibit "P-50".

DEOSION

Also, considering that the subject payments represent income derived by AIPL in the Philippines, the same are subject to 30°/o FWT pursuant to Section 28(8)(1) of the NIRC of 1997, as amended. Therefore, petitioner is liable for the basic deficiency FWVAT in the amount of P2,485,313.15 and deficiency FWT in the amount of P⁶,213,282.86 for taxable year 2009. V. DEFICIENCY INCOME TAX- P43,457,241.81 Respondent found petitioner liable for deficiency income tax for taxable year 2009 in the amount of P43,457,241.81, computed as follows: 57 Taxable Income per return p 11194 801.00 Adiustments:

(1) Unaccounted AIPL remittances: Due from AIPL -Beg p

1148 664.00

Add[Deduct Transactions for theyear Bookii}Q Commission p 111 154 286.00 Communication Expense ( 18 976 877.84) Marketing Fee {l 734 085.04) Net Transactions for the year p 90 443,323.12 Total Due from AIPL p 91 591 987.12 Less: Due from AIPL -End 3481_856.00 Remittances per FS p 91 243,131.12 Actual Remittances per Bank Certification 141 781 207.52 p so 538 076.40

(2) Forex Loss claimed/ITR-Substantiation Requirement Forex loss/Trial Balance p 3 064,340.00 Unrealized Forex Loss 2009 (896,963.00) Forex Loss in 2008 realized in 2009 264,230.00 2,431,607.00

(3) Undeclared income (SLS<SAWTl- RMO 14-2011 570 130.98 (4) Unaccounted Source (SLP<EWT)- RMO 14-2011 16,764,878.70

(5) Expenses Failing Additional Requirement of Deductibility_ Final Withholding Tax p 20 710,942.88 Expanded Withholding Tax (Less Capital Goods-

P10 910 765)

2,989 649.32 Withholding Tax on Compensation 410 746.03 24 111 338.23 Total Adjustments p 94 416 031.31

Taxable Income per Audit Computation of Tax Due (A) Regular-30%

(B) MCIT

Gross Income per ITR Add: Adjustments Unaccounted Remittance Undeclared Income Unaccounted Source Gross Income per Audit p 105,610,832.31 p 31 683,249.69 p 23 765 248.00 50 538 076.40 570 130.98 16 764 878.70 p 91 638 334.08 Tax Rate 0.02 p

1832 766.68

Income Tax Due per Audit p 31 683 249.69 Less: Unexpired MCIT p 974 575.00 Tax Payments - 1st three qtrs. 254 004.00 Tax Credits - 4th qtr 59 310.00 Tax Payment- Final Return 2 070 551.30 3 358/440.30 Deficiency Income Tax p 28 324,809.39 Add: Interest (4/15/2010 to 12/15/2012) 15 132,432.42

TOTAL AMOUNT DUE

P43,457,241.81 In order to determine whether or not the assessment is correct, we shall look into the propriety of each of the following items: A.

Unaccounted Remittances P50 538 076.40 B.

Forex Loss Claimed 2 431 607.00 c.

Undeclared Income 570 130.98 D.

Unaccounted Source of Cash 16 764 878.70 E.

Disallowed Expenses Due to Non-withholding of FWT P20 710 942.88 Disallowed Expenses Due to Non-withholding of EWT 2 989 649.32 Disallowed Expenses Due to Non-withholdig of WTC 410,746.03 24 111 338.23 A. UNACCOUNTED REMITTANCES- PS0,538,076.40 Respondent imputed against petitioner an alleged amount of P50,538,076.40 unaccounted foreign currency inward remittances received from AIPL, Singapore, computed as follows: 58 Due from AIPL -Beg p 1 148/664.00 Add/Deduct Transaction for the year Booking Commission p 111,154,286.00 Communication Expense (18,976,877.84) Marketing Fee (1,734,085.04) Net Transaction for the year p 90 443/323.12

Total Due from AIPL Less: Due from AIPL-End Remittances per FS p 91,591,987.12 348,856.00 p 91,243 131.12 Actual Remittances per Bank Certification 141,781,207.52 Unaccounted Remittances p 50,538,076.40 As can be seen from the above computation, respondent compared the movement of petitioner's "Due from AIPL" accounts receivable account, together with the amount of "Booking Commission", net of related expenses, against the actual remittances made by AIPL to petitioner. The resulting difference was treated by respondent as unaccounted remittances of AIPL to petitioner. Petitioner posits that based on the ICPA's reports, there were several inaccuracies in the figures picked-up by the respondent and that the actual remittances received by petitioner per Bank Certification were fully accounted for. A perusal of petitioner's Audited Financial Statements (AFS)59 as of and for the year ended December 31, 2009 and 2008 Lead Schedule,60 shows that petitioner's Receivables comprised of the following:

Receivables Trade p 13,324 773.42 AR Trade - Domestic p 754 208.03 AR Trade- AIPL (1112120) 12,570,565.39 Due from Abacus International Pte. Ltd. 348,855.99 Claims- AIPL (1112150) 348,855.99 Others 222,609.80 Total Receivables P13,896,239.21 Note 761 of the Notes to FS reveals that petitioner earned booking commissions from AIPL in the amount of P111,154,286.00 in 2009 and that Commission receivables were included as part of "Receivables-Trade" account in the balance sheet, which amounted to P12,570,565.00 and P9,962,099.00 as of December 31, 2009 and 2008, respectively while the amounts lodged in the "Due from AIPL" account were reimbursements due from AI PL. J'l'

The findings of the Court-commissioned ICPA™ confirmed that the transactions lodged in the “Due from AIPL/Claims-AIPL” account pertain to reimbursements due from AIPL such as fares guarantee and promotional and advertising activities. Fares guarantee pertains to payment made to travel agencies due to system errors on the use of the Abacus System while promotional and advertising expenses™ pertain to expenses incurred by petitioner, being the marketing arm or national marketing company (NMC) of AIPL in the Philippines. The amounts in this account, being mere reimbursements, are not subject to income tax.

The Court agrees with the ICPA.

Based on_ petitioner’s commissions it received from AIPL during the P108,545,820.00, as computed below:

“AR Trade-AIPL”, the booking year amounted to AR Trade-AIPL, be 9,962,099.00 Add: Booking Commissions during the year 111,154,286.00 121,116,385.00 Less: AR Trade-AIPL, end 12,570,565.00 Booking Commissions collected /received from AIPL during the year per review On the other hand, actual foreign currency received by petitioner per P141,781,207.52, broken down as follows:

Bank Certification® P 108,545,820.00 inward remittances amounted to me | Service BSP Amount charge Net amount | Exchange (in USD) | in USD) (in USD) | Rate Peso equivalent 133,359.78 20.00 133,339.78 47.363 6,315,372.00 195,351.00 20.00 195,331.00 9,421,204.79 224,121.27 20.00 224,101.27 203,237.28 | 20.00 203,217.28 48.559 9,868,027.90 503,505.04 20.00 503,485.04 47.054 23,690,985.07 159,124.66 20.00 159,104.66 48.421 7,704,006.74 127,691.15 [- 20.00 127,671.15 48.095 6,140,343.96 148,805.31 20.00 148,785.31 48.486 7,214,004.54 481,061.92 + 20.00 481,041.92 47,393 22,798,019.71 147,599.95 | __20.00 147,579.95 46,967 6,931,387.51 409,828.62 | _20.00 409,808.62 47.132 19,315,099.88 | g¢_ 82 Exhibit “P-37”, Docket, Vol.II, pp. 941-942. 83 Exhibits “P-38” to “P-38.1”, “P-40” to “P-40.329”, “P-40.337” to “P-40.483”, * Exhibits “P-41.1” to “P-41.241”. © Exhibits “P-43.1” to “P-43.25”.

12/23/2009 248,620.85 20.00 248 600.85 46.576 11,578_L833.19 Total 2,982,306.83 240.00 2,982,066.83 141,781L207 .52 The gross remittances (in USD) per Bank Certificate tally with the remittances (in USD) per the monthly electronic mail advice prepared and sent by AIPL to petitioner, as follows: Booking Fares Exhibit66 Commission NMC1DN) Guarantee Incentive

AIPL INV

Total P-13 140 866.76 2 799.87 609.30 31 000.00 (41 916.15) 133 359.78 P-14 68 773.36 3 042.68 280.00 154 778.45 (31 523.49) 195 351.00 P-15 248 245.72 12 765.44 1 369.50 - (38 259.39) 224 121.27 P-16 244 041.11 257.76 - - (41 061.59) 203 237.28 P-17 239,692.08 8 887.55 215.50 301 386.05 _(_46 676.14) 503 505.04 P-18 197 928.70 2 032.15 1,445.16 - (42 281.35) 159 124.66 P-19 164,963.65 - 697.00 - (37 969.50) 127 691.15 P-20 180,550.09 - 536.35 86.36 (32,367 .49) 148 805.31 P-21 199,216.97 18 620.56 129.90 296 744.92 (33,650.43) 481 061.92 P-22 179,426.16 600.00 2,283.73 _(34J09.94}_ 147_L599.95 P-23 196 829.64 2,188.03 3,670.40 241,662.00 (34L521.45l 409 828.62 P-24 197 347.41 762.99 625.80 85,909.10 (36L024.45l 248,620.85 2,257,881.65 51,957.03 11,862.64 1,111,566.88 ( 450,961.37) 2,982,306.83 Exhibit P-42.487 to P-42.488 P-42.489 to P-42.490 P-42.491 to P-42.494 P-42.495 to P-42.498 P-42.499 to P-42.501 P-42.502 to P-42.504 P-42.505 to P-42.507 P-42.508 to P-42.510 P-42.511 to P-42.514 P-42.515 The peso equivalent of the above amounts as booked by petitioner is shown hereunder: Booking Fares Commission NMC Guarantee Incentive

AIPL INV

Forex G(L) Net Amount 6 675 675.76 133 049.82 28 874.72

1469 090.00

(1 991 855.45) 5 085.12 6 319 919.97 3 259 169.53 144 192.61 13 664.00 7 553 188.36 (1 538 346.31) 100 284.62 9 532 152.81 11 796 638.62 622 395.70 66 187.94 - (1 849 076.32) 194 659.04 10 830 804.98 11 794 506.85 12 457.34 - - (1 985 327.87) 3 919.18 9 825 555.50 11 589 112.07 429 713.04 10 203.93 14,270 629.47 (2 210 115.23) (249 526.63) 23 840 016.65 9 371923.94 96 222.30 69 555.56 - (2 035 001.38) 155 006.87 7 657 707.29 7 811028.82 - 33,547.58 - (1,825 953.26) 121111.31

6139 734.45

8 689 875.83 - 26 173.88 - (1 575 319.141 119 992.56 7 260 723.13 9 580 344.09 908 683.33 6 155.96 14 062 741.76 (1 594 693.88) (165 706.87) 22 797 524.39 8 503 005.72 28 434.00 108 774.06 - (1 653 234.44) 66 Docket, Voi.I, pp. 1174-1224.

to P-42.518 P-42.521 to P-42.523 P-42.521, P-42.524 to P-42.525

9 295 308.71 9 315 784.49 107,682 374.43 101 086.99 169,572.48 35 250.14 28 911.96 2 511,485.27 561622.07 42,230.28 7,029,209.62 11,164,784.40 (1 594 890.99) (202 703.34) 18 933 158.25 3,969 000.42 (1 664 329.59) (199 258.15) 11 485 359.27 52,489,434.41 (21 518 143.86) (74 906.01} 141,651 866.31 A comparison between the net amount of P141,651,866.31 per petitioner's books and the net amount of P141,781,207.52 per Certificate of Inward Remittances reveals a difference of P129,341.21, which is due to the difference in rates used in converting the dollar remittances, particularly, BSP exchange rate per inward remittance as against the Philippine Dealing and Exchange (PDEX) closing rate67 per books. From the foregoing, the remittances received by petitioner from AIPL represent not only booking commissions but also other items, namely, promotional and advertising expenses or NMC expenses, fares guarantee, and incentives which are not income payments subject to income tax.

With regard to the booking comm1ss1ons, there appears a difference of P863,445.5768 between commission remittances per review of P108,545,820.00 and the remitted amount of P107,682,374.43. This difference pertains to the amount of restatement/revaluation of the "AR Trade-AIPL" as per the Journal Vouchers examined by the ICPA.69 As explained by the ICPA, the NMC and fare guarantees are in the nature of reimbursements due from AIPL. The incentives70 or pass-through costs are, likewise, not income payments but advances payable to travel agencies either as quarterly bonus for reaching a certain quota on the use of the Abacus System or sign-on bonuses for first time users of the Abacus System.

All of these reimbursements were accounted for by petitioner using the Claims AIPL account and no disbursements relating to the transactions were accounted using a nominal/expense account. 71 Je.- 67 Exhibits "P-44" to "P-44.16". 68 With a discrepancy of P1.35 as against the !CPA's amount per report (P863,444.22), this may be due to rounding-off.

The !CPA's examination also revealed that the remittances made by AIPL were net of the Intercompany Payables (AIPL INV) lodged under the "ABACUS-AIPL"72 account. The Tax Invoices73 issued by AIPL disclosed that the latter billed petitioner for communication expenses and marketing fees. Moreover, the foreign exchange gain/loss recognized was due to the change in the recognized peso valuation of the commission receivables, NMC and AIPL charges for communication expenses and marketing fees recorded in petitioner's books against the peso valuation of said transactions upon receipt of remittance.74 Thus, among the amounts remitted, only the booking commissions are subject to income tax. However, respondent cannot assess petitioner of income tax based merely upon the receipt of remittances.

Based on its Notes to FS75, petitioner employs the accrual method of accounting wherein its commission income is recognized upon acceptance of bookings through the reservation system and not when cash is received. Thus, the remitted commissions, being part of its Trade Receivables, were already recorded as part of its income during or prior to the year 2009 but were only received in 2009. Petitioner's commission income that should be subjected to income tax is that which was earned or recognized during the year 2009 in the amount of P111,154,286.00, and not the amount received as payment for receivables. Accordingly, petitioner reported its commission income of P111,154,286.00 in its Annual Income Tax Return for 200976, and, thus, was properly subjected to income tax. In sum, the deficiency income tax assessment on the alleged unaccounted remittances of P50,538,076.40 is cancelled for lack of merit.

B. FOREX LOSS CLAIMED- P2,43l,607.00 ~

Respondent alleged that petitioner's foreign exchange (forex) loss in the amount of P2,431,607.00, as computed below, was not shown to have been actually sustained, thus, was disallowed as deduction from gross income. 2009 Forex Loss, net of gain p 3,064,340.00 2009 Unrealized Forex Loss, net of gain (896 963.00) 2008 Unrealized Forex Loss realized in 2009 264,230.00 Realized Forex Loss, net of gain P2,431,607.00 Pursuant to Section 34(D) of the NIRC of 1997, as amended, losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deduction from gross income. What is needed to be entitled to a loss deduction is for the taxpayer to prove that a closed and completed transaction sets the loss in the taxable year or in the year claimed and it is not compensated by insurance or otherwise. A closed and completed transaction is one in which the facts indicate the transaction sufficiently final to ascertain that a loss has occurred.77 To prove its claimed forex loss, petitioner submitted its General Ledgers78, journal vouchers79, and other related source documents, such as, NMC Debit Notes80, bank books81 and bank statements82, which were all examined by the ICPA. Based on the !CPA's examination, it was found that the total forex loss actually sustained by petitioner was P474,353.24, broken down as follows: 83 2009 Forex Loss, net of gain p 3,081 548.37 2009 Unrealized Forex Loss, net of gain (2,810,043.27) 2008 Unrealized Forex Loss realized in 2009 202 848.13 Realized Forex Loss, net of gain p 474,353.23 According to the ICPA84, the said realized forex gain or loss pertains to the change in peso valuation of the dollar denominated inter-company transactions from the time the cost was billed or )k.. 77 MERTENS Law of Federal Income Taxation, Chapter 28, Page 3, as cited in CTA Case No. 5238, The Coca-Cola Export Corporation vs Commissioner of Internal Revenue, December 19, 1997.

CfA Case No. 8678 recognized in the books, to the time the actual cash was received or paid. Realized forex gain or loss also includes change in peso valuation of dollar investments subsequently converted to peso and bank charges on remittances charged to forex loss. On the other hand, the unrealized forex loss relates to monthly revaluations of time deposits, Foreign Currency Deposit Units (FCDUs) or revaluation of accrued inter-company dollar denominated transactions. The details of the ICPA's findings are summarized below: Forex (Gain) Realized Forex Realized Unrealized Unrealized Loss Gain Forex Loss Forex Gain Forex Loss Exhibit Commissions from AIPL p 899 285.62 p (532 150.60) p 1 272,390.30 p 159 045.92 P-64-a.1 P-64-a.4;

P-42.487 to Disbursements (44 357.51) (44 357.53) 0.02 P-42.525 P-64-a.2;

P-64-a.5 to NMC 31401.28 31 401.28 P-64-a.6 Bank Charges 11 542.40 11 542.40 P-64-a.3 P-64-a.⁷; P-52 Other Bank to P-52.18;

Transactions (5,451.89) p (5 451.89) P-53 to P-53.6 Money P-64-a.⁸ to Placements 2 189 128.47 (467 320.77) 2 656 449.24 P-64-a.10 Total P3,081,548.37 P(l 043 828.90) P1,315 334.00 P(S,451.89) P21815L495.16 Net Loss 27t505.10 2,810,043.27 2008 unrealized forex Loss realized in 2009 202 848.13 P-64-a.1 Realized Forex Loss, net of gain p 474,353.23 In the present case, petitioner's foreign exchange loss was actually sustained, ascertained and determined in the subject taxable year 2009 when the transaction was closed and terminated by the payment/remittance of its receivables, net of disbursements (payable) and conversion of its dollar -denominated time deposits to Philippine Peso. Said loss was incurred due to the exchange rate differential of US dollar to Philippine Peso from booking to actual remittance or conversion thereof. Meanwhile, further verification of the ICPA's report, together with the supporting documents, shows that the P474,353.23 forex loss found by the ICPA as actually sustained for the year 2009 should be increased by P42,180.20 for the reasons stated hereunder: Reason for adjustment Amount Exhibit Disbursements No loss incurred since amount booked per supporting JV is equal to the amount disbursed p (0.01) P-64-a.4· P-42.490 No loss incurred since amount booked per supporting JV is equal to the amount disbursed (0.01) P-64-a.4· P-42.503 No loss incurred since amount booked per supporting JV is equal to the amount disbursed (0.01) P-64-a.4· P-42.509 crA case No. 8678

No resulting gain since amount booked is equal to amount disbursed per supporting JV No resulting gain since the amount booked using 46.2 forex rate per supporting JV is equal to the amount disbursed No resulting gain since the amount booked using 46.2 forex rate per supporting JV is equal to the amount disbursed No resulting gain since the amount booked using 46.2 forex rate per supporting JV is equal to the amount disbursed Bank Charges Difference of bank charge booked at 947.80 as against 976.00 as used qy ICPA Money Placements Loss incurred by petitioner in the amount of P1,650.00 from conversion of USD to PHP was considered as gain by the ICPA, thus, should be added twice Total 4,214.37 P-64-a.4; P-42.509 1,210.02 P-64-a.4~ P-42.522 33,333.29 P-64-a.4; P-42.522 150.75 P-64-a.4; P-42.522 P-64-a.7; P-42.526 (28.20) to P-42.527 P-64-a.; P-420.706 3,300.00 to P-42.710 p 42,180.20 Considering the foregoing, petitioner's net forex loss actually realized and sustained in taxable year 2009 that is to be allowed as deduction from gross income amounts to P516,533.43 (P474,353.23 plus P42,180.20).

Consequently, for petitioner's failure to prove otherwise, the disallowance on the remaining forex loss claim of P1,915,073.57 (P2,431,607.00 less P516,533.43) shall remain. C. UNDECLARED INCOME - P570,130.98 Respondent's reconciliation of petitioner's Summary List of Sales (SLS) and Summary Alphalist of Withholding Taxes (SAWT) disclosed a variance of P570,130.98, thus, was assessed by respondent as understatement of petitioner's gross income pursuant to Section 32 of the NIRC of 1997, as amended.85 Per BIR Records,86 the variance of P570,130.98 was determined by respondent in this manner: SLS SAWT Registered Name Taxable Sales Registered Name Income SLS<SAWT Legendary Tours p 24,000.00 85 Exhibit "P-12", Docket, Vol. I, p.SOO. 86 p. 517.

Legend Hotel Int'l Corp. p 25 000.00 p 1,000.00 ~ I" AT Phil., Inc Refund DAB Class Friendship tours and Resorts Corp Tourlandia Inc.

La Consolacion College Manila Smartravel and Tour Exchang_e Inc ITEX Integrated Solutions Inc Hasslefree Philippines ITEX Inte_grates Solutions Mobilair Travel Inc Universal Travel Corporation Voyager Travel & Tours 24,000.00 (5,803.57) 15,000.00 16_1000.00 _(18,000.00) 24 000.00 29,500.00 24,000.00 24,000.00 41,580.00 42,000.00 AT Phil., Inc 26,000.00 2,000.00 - 5,803.57 Friendship Tours and Resorts Corp 21,000.00 6,000.00 Tourlandia Inc 30,000.00 14 000.00 - 18 000.00 Smartravel and Tour Exchange Inc 55,000.00 31,000.00 ITEX Integrated Solutions Inc 62,500.00 33 000.00 Hasslefree Philippines ITEX Integrated Solutions 60,000.00 36,000.00 Mobilair Travel Inc 60,000.00 36,000.00 Universal Travel Corporation 103 950.00 62 370.00 Voyager Travel & Tours 105_1000.00 63 000.00 Far Eastern Travel Agency 106,085.09 Far Eastern Travel Agency 234,114.00 128,028.91 La Sallian Educational Innovators Foundation 133,928.50 133,928.50 Total Variance P570,130.98 Based on the !CPA's reconciliation87, some of the sales per SLS are higher or equal to the amount of sales per SAwr while the remaining discrepancy amounts to only PSS,SOO.OO, which consisted of the following:

Income payment Gross Sales Difference Registered Name TIN perSAWT per SLS SLS<SAWT Blue Horizons Travel 211-996-533 p 430,500.00 P426 000.00 p 4,500.00 Friendship Tours 000-120-082 21 000.00 15,000.00 6,000.00 Itex Integrated Solutions Inc 251-976-833 25 000.00 - 25,000.00 People Support Philippines Inc 205-394-448 20 000.00 - 20,000.00 Total p 55,500.00 However, except for the discrepancies of P6,000.00 and P25,000.00 pertaining to sales to Friendship Tours and Itex Integrated Solutions, Inc., the other amounts shall be excluded in the reconciliation since these pertain to sales to clients, which were not included in respondent's basis of computation. A review of the documents submitted by petitioner shows that there exists a discrepancy of P139,928.50 from its sales to certain clients per Certificates of Withholding Taxes (CWT) as against per SLS. The details of comparison are presented hereunder: jv

CfA Case No. 8678

Per CWT Certificates Income PerSLS88 Income Payor's Name Payments Exhibit Name Payments SLS>SAWT SLS<SAWT Asia P-55 to International AT Phil. Inc p 24 000.00 P-55.11 Corp p 65 700.00 p 41 700.00 La Sallian Educational Innovators Foundation (DLS- CSB1 Inc 133 928.50 P-55.52 not found in SLS p (133 928.50) Far Eastern Travel P-55.53 to Agency 93 645.80 P-55.64 FETA Travel 106,085.09 12 439.29 Friendship Tours P-55.76 to Friendship and Resorts Corp 21 000.00 P-55.81 Tours 15,000.00 (6 000.00) Hasslefree P-55.82 to Hasslefree Philippines Inc 24 000.00 P-55.83 Philippines 24,000.00 - ITEX Integrated P-55.84 to Inti Travel Solutions Inc 25 000.00 P-55.93 Exchange 29,500.00 4 500.00 Legend Hotel Int'l P-55.106 Legendary Corporate 20 000.00 to P-55.109 Tours 24 000.00 4,000.00 P-55.126 Mobilair Travel Inc 24 000.00 to P-55.129 Mobilair Travel 24 000.00 - Smartravel and Tours Exchange Smartravel and Inc 22 000.00 P-55.157 Tours 24 000.00 2_LOOO.OO P-55.163 Tourlandia Inc 12 000.00 to P-55.168 Tourlandia Inc 16 000.00 4,000.00 Universal Travel P-55.176 Universal Travel Corporation 41 580.00 to P-55.179 Corporation 41 580.00 - Voyager Travel & P-55.180 Tours Inc 42,000.00 to P-55.183 Voyager Travel 42 000.00 - Total P483,154.30 P411,865.09 P68,639.29 P(139,928.50) Based on the table above, only the sales to La Sallian Educational Innovators Foundation and Friendship Tours resulted to a higher amount per SAwr than per SLS, while all the other sales per cwr Certificates were declared per petitioner's SLS. According to the ICPA89, the amount of P133,928.50, was included in the amended SLS for the 4th quarter lumped amount of P234,000.00 under the registered name "Training Fees as of December 2009". The breakdown schedule90 of and official receipts (0Rs)91 on training fees were presented in support thereof. Although the ORs prove the existence of the P234,000.00 (inclusive of VAT) training fees, the said documents were not under the name of La Sallian Educational Innovators Foundation.

Moreover, petitioner failed to prove that the entire amount was ?t-

CfA case No. 8678 indeed included in its SLS. Per the SLS, only the amount of '84,000.00 (inclusive of VAT) was declared under the registered name "Training Fees as of December 2009".92 Also, no amended SLS was provided indicating the alleged lumped amount of ,234,000.00. Thus, the undeclared amount of ,133,928.5093 (exclusive of VAT) shall also be considered as part of the remaining discrepancy, together with the P6,000.00 difference pertaining to sales to Friendship Tours as properly found by the ICPA. Since petitioner failed to reconcile the remaining discrepancy of P139,928.50, the same shall be treated as petitioner's undeclared income for 2009. Consequently, petitioner shall be held liable to pay the corresponding deficiency income tax. D. UNACCOUNTED SOURCE OF CASH - P16,764,878.70 Respondent's reconciliation of petitioner's domestic purchases as sources of input tax credits (Summary List of Purchases "SLP") against the income payments which the petitioner subjected to expanded withholding tax (EWT Alphalist), disclosed an understatement in purchases amounting to ,16,764,878.70, indicative of unaccounted source of cash. The breakdown of the said amount can be found in the BIR records94 remarked as "ordinary and necessary expenses paid during the taxable year in carrying on and directly attributable in the operation or conduct of the business not subject to VAT", to wit: Income Payment Total (PerEWT Purchases Registered Name Alphalist) (Per SLP) Bayantel 2, 725 781.80 - Bell Telecom Phils.

16 389.00 - Eastern Telecom 2,981 329.60 - Great Union Travel Services, Inc. 39,000.00 - In nove 1,624,165.20 - Mozcom, Inc.

253,394.00 - PLOT 9 082,819.10 - Shroff International Travel Care, Inc. 42,000.00 - Total P16,764,878. 70 - 92 Exhibit "P-57.102".

93 P133,928.50 = P150,000.00 I 1.12; P150,000.00 = P234,000.00- P84,000. 94 Page 1211.

Discrepancy 2_L725_L781.80 16,389.00 2,981,329.60 39 000.00 1,624,165.20 253 394.00 9,082,819.10 421000.00 P16,764,878.70 erA case No. 8678

Based on the !CPA's comparison of the EWT Alphalist and SLP, the ICPA was able to account for a discrepancy of P16,765,543.08, that is, the difference between the amount reflected per EWT Alphalist of P17,380,786.39 and the taxable amount under the SLP of P615,243.31, detailed as follows: PerEWT Registered Name Alphalist Per SLP Difference Ana Luzzette L. Lareza p 50,000.00 Lareza Ana Luzzette L.

50,000.00 - p 100,000.00 Bayantel 483,780.23 Bayantel 2 242,001.50 2 725,781.73 Bell Telecom Phils.

13,810.50 Bell Telecom Phils.

2 578.67 - 16L389.17 Copyhigh V. Digital System 6,250.00 - 6,250.00 Crown Executive Travel 42,800.00 p 38 978.57 3,821.43 DHL Express Philippines Corp. 490.00 30.00 460.00 Eastern Telecom 510,516.43 Eastern Telecom 2_1470,813.10 - 2,981,329.53 Financial Executives Institute of the Phils.

2_1500.00 - 2/500.00 Garcia Edgardo C.

23,500.00 - 23,500.00 Great Union Travel Services, Inc. 33,000.00 Great Union Travel Services Inc. 6 000.00 - 39 000.00 In nove 326 802.01 In nove 1/297,363.20 - 1/624/165.21 Nobility Collection Agency, Inc. 241,991.00 Nobility Collection Agency, Inc. 79 640.13 Nobility Services, Inc. 111,747.29 359,357.21 74,021.21 Pacubas General Services 17,649.87 Pacubas General Services, Inc. 32,377.50 Pacubas General Services1 Inc. 9,330.59 50,375.50 8,982.46 Peoples Independent Media, Inc. 3,510.00 - 3 510.00 PLOT 7 513 442.73 PLOT 1 569 376.50 - 9 082 819.23 Shroff International Travel Care, Inc. 42 000.00 - 42,000.00 Star Special Watchman 15,476.50 Star Special Watchman & Detective Agency 51,962.66 Star Special Watchman & Detective Agency 33,296.50 75,447.07 25,288.59 U-Bix Corporation 56,788.50 U-Bix Corporation 12,196.65 U-Bix Corporation 23,108.33 91 054.96 1,038.52 Wholeworks Enterprises 4,686.00 - 4,686.00 Total P17 ,380,786.39 p 615,243.31 P16,765,543.08 As represented by petitioner to the ICPA, said discrepancies were due to unreported purchases in the VAT returns on purchases directly related to its zero-rated sales and non-VATable purchases per ?-

SLP, understated purchases per SLP and erroneous tax base used per SLP.

Although the ICPA made a full comparison of the income payments per EWT Alphalist and SLP per individual payee, the Court, however, deemed it proper to focus on the amounts picked up by the respondent and exclude all other income payments despite having a discrepancy. Hence, only the amount of P16,764,878.70 should be the subject of examination on whether or not this is related to an unaccounted source of funds. Upon examination of the ICPA report and the related documents submitted by the petitioner, the Court found that all of the purchases were reported as assets or expenses in the petitioner's AFS by tracing the specific transactions from the Check Vouchers to the Disbursement by Account - Suppliers95, which indicated the account title under which it was recorded. From the monthly disbursement schedule, the amount of purchases can be traced to the specific GL Account for the year 200996• Since the total amount of P16,764,878.70 can be accounted in the records of the petitioner, it is established that the latter has no unaccounted source of cash. Hence, the respondent's assessment on the said amount should be cancelled.

E. EXPENSES FAILING ADDITIONAL

REQUIREMENT OF DEDUCTIBILITY -

P24,111,338.23 Pursuant to Section 34(K) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed deductions totaling P24,111,338.23 due to non-withholding of the corresponding taxes. Said provision provides: "(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 ?t...--

paid to the Bureau of Internal Revenue in accordance with this Section, sections 58 and 81 of this Code."

1. Disallowed expenses due to non-withholding of FWT - /#20,710,942.88 As discussed under the deficiency FWT assessment, petitioner failed to withhold the corresponding 30°/o FWT on the income payments it made to AIPL Singapore, in the amounts of P18,976,877.84 and P1,734,065.04 representing communication expense and marketing fees, respectively, totaling P20,710,942.88. Thus, the same cannot be validly deducted by petitioner against its taxable gross income for the year 2009.

2. Disallowed expenses due to non-withholding of EWT - 1#2,989,649.32 Based on the same finding under the deficiency EWT assessment that were certain income payments per petitioner's AFS which were not subjected to EWT as required under RR No. 02-98, respondent disallowed the sum of P2,989,649.32 as petitioner's deductible expenses, computed as follows: Per Withholding Particular Per AFS Tax Return Discrepancy Goods p 16,798,186.88 p 11,604,087.00 p 5,194,099.88 Rental 23,007,769.62 14,526,206.31 8,481,563.31 Professional Fees 1,998,400.00 1,773,648.87 224,751.13 Total p 41,804,356.50 p 27,903,942.18 p 13,900,414.32 Less: Capital Goods 10,910,765.00 Disallowed Expenses due to non-withholding of EWT p 2,989,649.32 Note that in arnv1ng at the disallowed expenses of P2,989,649.32, respondent deducted the amount of P10,910,765.00 pertaining to capital goods purchases from the total amount of P13,900,414.32 discrepancies relating to petitioner's goods purchases, payments for rental and professional fees. If we are to adopt respondent's computation and deduct the amount of P10,910,765.00 pertaining to capital goods purchases from the valid discrepancies we have found earlier under the deficiency EWT assessment amounting to P8,091,260.73, there Pt.- would be no more expenses left that would be the subject for disallowance from petitioner's taxable gross income, as follows: Amount not Deficiency Particulars subiected to EWT Rate EWT Purchases of Goods p 5,194,099.88 1% p 51,941.00 Rent Communication E~-Rentals of Equip 2 332,798.41 5% 116,639.92 Storage Rental 21,696.48 5% 1084.82 Outside Purchased Services Manila Bulletin 6,129.30 2% 122.59 Allied Banking CorQoration 1,500.00 2% 30.00 Professional Fees Joint Marketing Fees 433,333.33 15% 65,000.00 Board Honorarium 70,000.00 15% 10,500.00 Mktg-Professional Fees Underwitholding of 5% Ewr on the P27,445.00 prof. fees paid to E.M. Zalamea 9,148.33 15% 1_1372.25 Non-withholding of 15% on the P22,555.00 prof. fees paid to E.M. Zalamea 22 555.00 15% 3_1383.25 Total p 8,091,260.73 p 250l_073.83 Less: Capital Goods Purchases 10,910,765.00 p (2,819,504.27)

3. Disallowed expenses due to non-withholding of WTC - P410,746.03 This assessment item shall be cancelled for lack of factual basis as we have discussed under the deficiency wrc assessment. In sum, petitioner is liable to pay basic deficiency income tax for taxable year 2009 in the amount of P6,829,783.49, computed as follows:

Taxable Income per Return p 11 194 801.00 Adjustments:

(1) Forex Loss claimed/ITR p 1 915 073.57 (2) Undeclared Income (SLS<SAWT) 139 928.50 (3) Disallowed Communication Expense and Marketing Fees due to non-withholding of corresponding FWT 20 710 942.88 Total Adiustments p 22 765,944.95 Taxable Income per Audit P33,960,745.95 Com!)utation of Tax Due (A) Regular - 30% P10,188 223.79

(B) MCIT

Gross Income per ITR Add: Adjustments Undeclared Income Gross Income ~er Audit Tax Rate Income Tax Due per Audit Less:

Unexpired MCIT Tax Payments - 1st Three Qtrs. Tax Credits -4th Qtr.

Tax Payment- Final Return Deficief!cy_ Income Tax P23 765 248.00 139,928.50 P23 905,176.50 0.02 VI. DEFICIENCY VAT- P34,050,266.06 p 478 103.53 p 10 188 223.79 974,575.00 254 004.00 59,310.00 2 070,551.30 3 358,440.30 P6,829,783.49 Respondent found petitioner liable for deficiency VAT for taxable year 2009 in the amount of P34,050,266.06, computed as follows:97 Taxable Sales/VAT Return p 17,546,815.08 Adjustments:

(1) Discrepancy in Taxable Sales E_guipment Rental p 13,037,315.00 Others 4,433,299.00 Total Revenues p 17,470,614.00 Otherincome/ITR 684,955.00 Proceeds from Disposal of Assets (P107,447) 95,934.82 Total Taxable Sales per Audit p 18 251,503.82 Taxable Sales per Return 17,546,815.08 p 704 688.74 (2) Unaccounted Remittances 50,538 076.40

(3) Zero-rated Sales subject to VAT 111,154 286.12 (4) Undeclared Income_{SLS<SAffi)_- RMO 14-2011 570 130.98 _(5) Unaccounted Sourceof funds (SLP<EWT)- RMO 14-2011 16,764 878.70 Total Adjustments p 179_1732,060.94 Taxable Sales/ Audit p 197,278 876.02 Output Tax p 23,673 465.12 Creditable Input Tax/VAT Return p 6 073 492.20 Less: Adjustments - Creditable Input Tax/ Audit p 6 073 492.20 VAT Payable per Audit p 17 599,972.92 Less: VAT Qaid p_er return - Total Less: Excess Credit Carried Forward (3,977 018.59) (3,977,018.59)

Deficiency VAT p 21 576 991.51 Add: Interest (25 Jan 10 to 15 Dec 2012) 0.578082 12 473 274.55

TOTAL AMOUNT DUE

p 34,050,266.06

(1) Discrepancy in taxable sales-P704,688.74 The discrepancy is computed by comparing the amount of taxable sales as declared in petitioner's VAT returns with the taxable sales per audit, to wit: 98 Taxable sales per return P17,546,815.08 Taxable sales per audit: Equipment rental P13,037,315.00 Others 4,433 299.00 Other Income per ITR 684 955.00 Proceeds from disposal of assets (P107,447) 95,934.82 p 18,251,503.82 Discrepancy p 704,688.74 Other Income per ITR Examination of petitioner's Other Income per ITR shows that it is in the amount of P684,455.00/9 not P684,955.00. This allegedly represents its reversal of accrued expenses incurred in prior years. Consequently, the same is not subject to VAT because it did not arise from the sale, barter, exchange or lease of goods or properties and services or importation of goods into the Philippines. 100 The ICPA reported that the Other Income in petitioner's ITR indeed pertains to expenses incurred in the years 2005 to 2008 but were only recognized as expenses and accrued in the books of petitioner in the year 2008 based on billings received on July 25, 2008. These charges were contested by petitioner with the supplier and were subsequently written-off from the books in 2009, resulting in a reversal of the accrued expenses which appeared as a negative amount under the Communication Expense account. 101 As proof, petitioner submitted the Statements of Account from Mozcom Inc. 102, and petitioner's Journal Voucher (JV) 12/19103 that shows the reversal of the accrued expenses. f-

erA case No. 8678

Petitioner has satisfactorily proven that its Other Income in the amount of P684,455.00 is a mere reversal of accrued expenses, thus respondent's assessment should be cancelled. Proceeds from disposal of assets Respondent's examiner picked up from petitioner's Statement of Cash Flows the proceeds from disposal of property and equipmentl04 amounting to P107,447.00, then computed the tax base subject to VAT, thus:

Proceeds from disposal of property and equipment p 107,447.00 Divided by 1.12 Assessed proceeds from disposal p 95,934.82 Petitioner argues that the actual proceeds on sale/disposal of assets for the year 2009 amount to P76,201.00, the breakdown of which is listed below with petitioner's official receipts as supporting documents: 105 Particulars Exhibit Amount Proceeds from sale of used carpet P-71 p 4,000.00 Proceeds from sale of defective power supply UPS P-71.1 3,500.00 Proceeds from sale of used cellphone #10 units 3,000.00 p 10,500.00 Disposal of fixed assets: 2009-04-01 P-71.2 p 3[470.00 2009-06-02 P-71.3 35,500.00 2009-09-03 P-71.4 13,500.00 2009-12-04 P-71.5 12,631.00 HP Monitor # 1 P-71.6 600.00 65,701.00 Balance ~er book p 76,201.00 The rema1n1ng amount of P31,246.00 pertains to the book value of the disposed and retired assets in the year 2009 as shown in Note 5 of petitioner's audited financial statements: 106 I Cost of Disposals & retirements for the year 2009 104 Exhibit "P-27".

105 Exhibit "P-64-g".

106 Exhibit "P-27", Note 5. I P17,118,864.00

Less: Accumulated depreciation Book value of disposals & retirement for the year 2009 17,087,618.00 p 31,246.00 Nonetheless, the ICPA reported that the total proceeds from disposal of assets of P107,447.00 were not subjected to 12°/o VAT.107 The Court finds that petitioner recognized a gain on sale of property in its ITR for the taxable year 2009 in the amount of P76,201.00108• Taking into consideration the book value of the assets disposed and retired of P31,246.00, the proceeds from disposal of property and equipment reported in its Statement of Cash Flows in the amount of P107,447.00 is correct. It should be reiterated that VAT is imposed on the gross selling price or gross receipts derived from the sale or exchange of goods or services, including importation of goods and the use or lease of properties. 109 Hence, respondent's VAT assessment is in order.

(2) Unaccounted remittances-P50,538,076.40 As previously found in the discussion of petitioner's deficiency income tax assessment, petitioner has no unaccounted remittances.

(3) Zero-rated sales subject to VAT-P111,154,286.12 Respondent alleged that petitioner's booking comm1ss1ons received from AIPL, a Singapore-based entity, cannot be classified as zero-rated sales but subject to VAT at the rate of 12°/o for the reason that there is no service rendered to AIPL, as the fees were payable based on the number of access made by the travel agencies in the Philippines using the Abacus System.110 Petitioner countered that it executed a Sub-Distribution Agreement with AIPL 111 wherein petitioner was engaged to be the national marketing company or NMC of the Abacus System in the Philippines. As such, petitioner became the exclusive distributor and marketer of the said system. In consideration for the air and non-air ~ 107 Exhibit "P-64", p. 19. 108 Exhibit "P-56.3", Schedule 4. 109 Sections 106(A) and 108(A) of the NIRC of 1997, as amended.

CfA Case No. 8678 bookings made by the subscribers through the Abacus System, AIPL pays to petitioner a monthly sum equivalent to 25°/o of the net bookings fees received by AIPL and recorded by petitioner as booking commissions.

Petitioner further explains that the Sub-Distribution Agreement provides that AIPL grants exclusive sub-license to operate the Business in the Territory under the Tradename, "business" meaning the marketing and distribution of the Abacus Services to Subscribers within the Territory. Corollary thereto, petitioner shall formulate and carry out marketing strategies to secure a wide distribution network in the Philippines. Furthermore, petitioner shall provide AIPL all the necessary services and support infrastructure to ensure that the utilization levels of the Abacus System and Abacus Services are optimized in the Territory.112 Thus, petitioner is correct in stating that the booking commissions are in consideration for the marketing and distribution services rendered by petitioner to AIPL. Pursuant to Section 108(B)(2) of the NIRC of 1997, as amended, the subject services are subject to VAT at zero percent (0°/o) rate: 112 Ibid.

"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.- XXX XXX XXX (B) Transactions Subject to Zero Percent (0%) Rate.-=rhe following services performed in the Philippines by VAT -registered persons shall be subject to zero percent (0°/o) rate:

XXX XXX XXX

(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);" f't-- Nevertheless, petitioner must comply with the requisites set forth by the Supreme Court in the case of CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., 113 to wit: 1) the services must be other than processing, manufacturing or repacking of goods;

2) payment for such services must be in acceptable foreign currency accounted for in accordance with the BSP rules and regulations; and 3) the recipient of such services is doing business outside the Philippines.

Petitioner submitted the following documents as evidence, among others:

• Sub-Distribution Agreement with AIPL114 • Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC)115 • Memorandum and Articles of Association of Abacus International Pte. Ltd. (AIPL)116 • Certificate of Inward Remittances117 • VAT Zero-rated receipts118 As petitioner provides marketing and distribution services to AIPL, it complied with the first requisite. Further, the third requisite is complied with by the Memorandum and Articles of Association of AIPL, Certification of Non-Registration of Company issued by the SEC and petitioner's Sub-Distribution Agreement with AIPL. The ICPA found that per official receipts issued to AIPL, petitioner had zero-rated sales in the aggregate amount of US$2,529,971.81.119 The same are reported in petitioner's VAT returns in the total amount of ~111,154,286.12, as follows: Exhibit P-58.2 113 G.R. No. 153205. January 22, 2007. 114 Exhibit "P-3".

115 Exhibit "P-29".

116 Exhibit "P-2".

117 Exhibits "P-43" to "P-43.25". 118 Exhibits "P-65" to "P-65.56." 119 Exhibit "P-64-k".

Quarter Zero-rated Sales 1st p 33 309,054.46

P-58.5 P-58.8 P-58.11 2nd 26,433/014.89 3rd 28,492,282.66 4th 22,919,934.11 TOTAL P111,154,286.12 Scrutiny of the official receipts issued by petitioner shows that zero-rated sales amounting to US$719,552.85 are supported by undated official receipts or dated outside of the year 2009: Exhibit OR No.

OR Date USD 1.) Undated official receipts P-65.8 50035 - 248,245.72 P-65.33 52812 - 199,216.97 Subtotal 447,462.69 2.) Dated outside the taxable period P-65.49 54949 1/27/2010 158,254.65 P-65.53 55262 3/1/2010 113L835.51 Subtotal 272,090.16 TOTAL 719,552.85 In addition, petitioner failed to reconcile the inward remittances it received from AIPL with the corresponding official receipts it issued for the marketing and distribution services performed. The certification of inward remittances received by the Philippine National Bank (PNB) only shows a list of fund wire transfers from AIPL to petitioner's USD bank account in the total amount of US$2,982,306.83.120 Thus, petitioner failed to prove that its sales to AIPL qualify as zero-rated sales. Consequently, the assessment must be upheld.

(4) Undeclared income (SLS<SAWf)-P570,130.98 Per discussion of petitioner's deficiency income tax assessment regarding petitioner's undeclared income of P570,130.98, petitioner failed to reconcile the remaining discrepancy of P139,928.50. Accordingly, petitioner shall be liable to pay the corresponding deficiency VAT.

(5) Unaccounted source of funds (SLP<EWf)-P16,764,878.70 ?t-

Respondent's examiner compared petitioner's Summary List of Purchases (SLP) with the income payments made which are subjected to expanded withholding tax (EWT) and found a discrepancy of P16,764,878.70. Respondent considered it as an understatement in purchases indicative of unaccounted source of cash subject to income tax. Petitioner protested that the breakdown of the discrepancy were not provided with the Formal Letter of Demand (FLD).121 The Court finds this assessment bereft of factual basis. Aside from respondent's failure to provide the details of the alleged undeclared purchases, it appears that respondent merely relied on the assumption that the discrepancy on purchases automatically means unaccounted source of income without obtaining any factual basis corroborating such findings. The Supreme Court has ruled that for income tax to be imposed, the following elements must be present: 122

1. There must be gain or profit;

2. That the gain or profit is realized or received, actually or constructively; and

3. It is not exempted by law or treaty from income tax. Presumption of the foregoing is contrary to the doctrine laid down in the case of Collector of Internal Revenue vs. Benipayo/23 wherein it was held that: "xxx An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be xxx. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a Jz-

mere presumption cannot be made to rest on another presumption xxx" (Emphasis supplied) Thus, the deficiency income tax assessment arising from the discrepancy on purchases should be cancelled.

(6) Excess input tax carried forward The Court notes that in its VAT assessment, respondent added back petitioner's excess input taxes for the year 2009 amounting to P3,977,018.59 which were carried forward to the succeeding taxable period. This is not proper as the application of the said excess credits in the subsequent taxable periods is beyond the scope of the present assessment. The same can only be the subject of assessment on the taxable year when they are offset from the output tax due. In fine, petitioner is liable for basic deficiency VAT for taxable year 2009 in the amount of P⁹,389,799.41, as computed hereafter: Taxable sales per VAT Return P17[546,815.08 Adjustments:

(1) Equipment rental P13,037,315.00 Others 4,433,299.00 Total Revenues P17,470,614.00 Proceeds from disposal of assets 95,934.82 Total taxable sales per audit P17 ,566,548.82 Taxable sales per return (17,546,815.08) p 19,733.74

(2) Unaccounted remittances -

(3) Zero-rated sales subject to VAT 111,154,286.12

(4) Undeclared income (SLS<SAWT) 139,928.50

(5) Unaccounted source of funds (SLP<EWT) - Total adjustments P111,313,948.36 Taxable sales _Qer audit P128,860L763.44 Output tax p 15,463,_291.61 Less: Creditable input tax (6,073,492.20} Deficiency VAT P9,389,799.41 VII. DEFICIENCY DST - P4,426.57124 Invoking Section 194125 of the NIRC of 1997, as amended, respondent imposed DST on the alleged deductions claimed by ~ 124 Exhibit "P-10", Docket, Vol.!, p. 472. 125 "SEC. 194.

Stamp Tax on Leases and Other Hiring Agreements. - On each lease, agreement, memorandum, or contract for hire, use or rent of any lands or tenements, or portions thereof, there shall be petitioner for lease of real properties under the "Rent Exp-Mktg" and "Storage Rentals" accounts amounting to P201,600.00 and P2,203,424.56.

Below is the computation of the deficiency DST assessment of P4,426.57: Rent Exp-Mktg , 201/600.00 Storage Rentals 21203A24.56 Total Rental pertaining to Real Prop , 2/405/024.56 Tax Base , 2/406,000.00 Tax Rate (Sec. 1941 NIRC) .001+1 DST Due , 2,407.00 DST Paid - Deficiency DST , 2,407.00 Add: Surcharge 601.75 Interest (1/5/2010 to 12/15/2012) 1A17.82

TOTAL AMOUNT DUE

p 4,426.57 The Court partially upholds the assessment. A. Rent Exp-Mktg. - P201,600.00 As earlier discussed under the deficiency EWT assessment, this pertains to the Contract126 of Lease entered into by the petitioner and Plaza De Luisa Development, Inc. for the period July 1 2009 to June 30, 2012. Since petitioner did not provide proof that the related documentary stamp tax was remitted to the BIR, the assessment on this item shall remain. B. Storage Rental- P2,203,424.56 Likewise, as discussed under the deficiency EWT assessment, the Storage Rental of P2,203,424.56 pertains to the transactions lodged under Outside Purchased Services. It was ascertained that out of the said amount, only the amount of P21,624.48 actually pertains to Storage Rental, as shown below: Outside Purchase Services , 21203A24.56 Less:

(1) Purchase of Services subjected to EWT 1/118/823.94 collected a documentary stamp tax of Three pesos (P3.00) for the first Two thousand pesos (P2,000), or fractional part thereof, and an additional One peso {Pl.OO) for every One thousand pesos (Pl,OOO) or fractional part thereof, in excess of the first Two thousand pesos (P2,000) for each year of the term of said contract or agreement.

(2) Purchase of Services exempt from EWT (3) Unaccounted Difference Income Payments not subjected to EWT With Breakdown as follows:

(1) Storage rental fees paid to TPCC

(2) Purchase of Services from a.) Manila Bulletin b.) Allied Banking Corporation Income Payments not subjected to EWT 1,057,294.89 (2,020.05) p 29,325.78 p 21,696.48 6,129.30 1,500.00 p 29,325.78 Hence, for petitioner's failure to prove that the DST due on the storage rental of P21,696.48 had been paid to the BIR, the Court sustains the deficiency DST assessment thereon. In sum, petitioner is liable for basic deficiency DST only in the amount of P225.00, computed as follows: p Rent Exp-Mktg 201,600.00 Storage Rentals 21,696.48 p Total Rental Pertainin_g_ to Real Proj)e_ffit 223L296.48 DST Due P3.00 for the first P2,000.00 or fractional part p thereof 3.00 Additional P1.00 for every P1,000.00 or fractional part thereof, in excess of the first P2,000.00 per year 222.00 p Total Basic Deficiency DST Due 225.00

WHEREFORE, the assessment issued by respondent against petitioner for taxable year 2009 covering deficiency WTC in the amount of P162,153.34 is CANCELLED AND WITHDRAWN. However, the assessments for deficiency EWT, FWVAT, FWT, income tax, VAT and DST are PARTIALLY UPHELD. Accordingly, petitioner is ordered to pay respondent the amount of THIRTY ONE MILLION

FOUR HUNDRED SIXTY THOUSAND FIVE HUNDRED NINETY-

SEVEN PESOS AND 17/100 (P31,460,597.17) representing basic deficiency EWT, FWVAT, FWT, Income Tax, VAT and DST and the 25°/o surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: yr

Tax Type EWT FWVAT FWT

INCOME TAX

VAT DST Total Basic Deficiency p 250,073.83 2,485,313.15 6,213,282.86 6,829,783.49 9,389,799.41 225.00 p 25,168,477.73 250/o Surcharge Total p 62,518.46 p 312,592.29 621,328.29 3,106,641.43 1,553,320.72 7,766,603.58 1,707,445.87 8,537,229.36 2,347,449.85 11,737,249.26 56.25 281.25 p 6,292,119.43 p 31,460,597.17 In addition, petitioner is liable to pay: a) Deficiency interest at the rate of twenty percent (20°/o) per annum on the basic deficiency EWT, FWVAT, FWT, Income Tax, VAT and DST computed from the dates indicated below until full payment thereof pursuant to Section 249(8) of the NIRC of 1997, as amended:

20°/o Deficiency Interest Tax Type Basic Tax Due Computed from:

EWT p 250,073.83 15-Jan-10 FWVAT 2,485,313.15 10-Jan-10 FWT 6,213,282.86 15-Jan-10

INCOME TAX

6,829,783.49 15-Apr-10 VAT 9,389,799.41 25-Jan-10 DST 225.00 5-Jan-10 Total p 25,168,477.73 b) Delinquency interest at the rate of twenty percent (20°/o) per annum on the total amount of P31,460,597.17 and on the deficiency interest which have accrued as afore-stated in (a) computed from June 27, 2013 until full payment thereof pursuant to Section 249( C) of the NIRC of 1997, as amended.

WE CONCUR:

CAESAR A. CASANOVA Associate Justice />~";,/#~~ ~THERINE T. MANAHAN Associate Justice 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. ~c.~~ g, .fuANITO c. CASTANEOJt', JR. CERTIFICATION Associate Justice Chairperson Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court.

Presiding Justice