Clark Water Corporation vs. Commissioner of Internal Revenue

DECISION

BAUTISTA, J:

The Case

This is a Petition for Review1 filed on August 11, 2014, pursuant to Section 7(a)(2)2 of Republic Act ("RA") No. 11253, as amended by RA No. 92824 and RA No. 95035, and Section 3(a)(2)6, Rule IV of the Revised 1 Records, CTA Case No. 8865, Vol. 1, Petition for Review, pp. 17-150, with annexes. 2 "Sec. 7. Jurisdiction. - The Court of Tax Appeals shall exercise:

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

XXX

XXX

XXX

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial; xxx" 3 "An Act Creating the Court of Tax Appeals." 4 "An Act Expanding the Jurisdiction of the Court of Tax Appeals (CT A), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes."

s "An Act Enlarging the Organizational Structure of the Court of Tax Appeals, Amending for the Purpose Certain Sections of the Law Creating the Court of Tax Appeals, and for Other Purposes." 6 "SECTION 3. Cases Within the Jurisdiction of the Court in Divisions. - The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

XXX

XXX

XXX~

I

CIA CASE NO. 8865

Rules of the Court of Tax Appeals ('RRCTA"), seeks for the Court to render judgment ordering the cancellation and withdrawal of respondent Commissioner of Internal Revenue (" CIR")' s assessment against petitioner for alleged deficiency income tax and value-added tax ("VAT") for calendar year ("CY") 2010 in the total amount of Five

Million Four Hundred Ninety-Five Thousand Three Hundred

Fourteen and 9/100 Pesos (Php5,495,314.09).7 The P artiess Petitioner Clark Water Corporation ("CWC"), formerly "Clark Vivendi Water Corporation,"9 is a domestic corporation duly organized and existing under Philippine laws,1o with registered principal office address at Depot 1901, Bicentennial Hill, Clark Freeport Zone, Clark Field, Pampanga.11 It is authorized by the Securities and Exchange Commission ("SEC") to transact business in the Philippines under SEC Registration No. A19991567412 dated October 1, 1999; is registered with the Bureau of Internal Revenue

("BIR") -

Revenue District Office ("RDO") No. 21A, with Tax Identification No. 205-334-965-000;13 and is registered as a Clark Special Economic Zone (" CSEZ") enterprise, engaged in the operation and maintenance of water and sewerage system within the CSEZ.14

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the National Internal Revenue Code; xxx" 7 Records, Vol. 1, Petition for Review, p. 27. 8 Id., Joint Stipulation of Facts and Issues ("JSFI"), pp. 350-351. 9 Id., Exhibit "P-1," Certificate of Filing of Amended Articles of Incorporation ("AOI"), p. 399. 10 Id.

u I d. at 403.

12 Id. at 399.

13 Records, Vol. 1, Exhibit "P-3," BIR Certificate of Registration, p. 409. 14 Id., Exhibits "P-15" and "P-15.1," CSEZ Certificate of Registration and Tax Exemption, Permit To Operate, pp. 457-459.

(§ (

Respondent is the duly appointed CIR vested under the appropriate laws with authority to carry out the functions, duties and responsibilities of his Office, including inter alia, the power to decide disputed assessments, cancel and abate tax liabilities pursuant to the provisions of the 1997 National Internal Revenue Code, as amended (1997 NIRC"), and other tax laws, rules and regulations.

The Facts

On April12, 2011, petitioner filed its Annual Income Tax Return ("ITR") for CY 2010.15 On September 14, 2011, petitioner received16 Letter of Authority ("LOA") No. 21A-2011-00000199/eLA201000057633 from the BIR- RDO No. 21A, authorizing Revenue Officer ("RO") Rachael Liwanag and Group Supervisor ("GS") Noel Miranda to examine petitioner's books of accounts and other accounting records of all internal revenue taxes for the period January 1, 2010 to December 31, 2010.17 Attached to the LOA is a list of business records and documents to be submitted to facilitate the early termination of the case.18 On July 23, 2012, petitioner received a letter from the BIR-RDO No. 21A, requesting the reproduction of petitioner's master and transaction files in electronic form.19 On May 29, 2013, petitioner received a copy of respondent's Notice for Informal Conference ("NIC"),2o with the following computation of deficiency taxes:21

Income Tax

VAT

EWT

Administrative Penalties

TOTAL

Php

PHP

121,020.84 4,033,763.88 16,906.41 38,000.00 4,209,691.13 1s Records, Vol. 1, Exhibit "P-17," 2010 Income Tax Return ("ITR"), pp. 502-504; BIR Records, Exhibit "R-2, II 2010 ITR, pp. 506-510.

16 Through Daisy Lacad.

17 Records, Vol. 1, JSFI, p. 351; see Exhibit "P-4," Letter of Authority ("LOA"), p. 410. 18 Id., Exhibit "P-4," Attachment to LOA, p. 411. 19 I d., Exhibit "P-5," Letter Request for Electronic Files, p. 412. 2o Id., Exhibit "P-6," Notice for Informal Conference ("NIC"), p. 413. 21 Id. at 414.

® (

Petitioner replied to the NIC on June 11, 2013, stating that it deems reasonable to settle only the amount of Php175,927.84, broken down as follows:22

Income Tax

EWT

Administrative Penalties

TOTAL

Php

PHP

121,020.84 16,906.41 38,000.00 175,927.8423 Hence, it questioned only the alleged deficiency VAT, claiming that the assessment lacked legal and factual basis.24 Consequently, on June 18, 2013, petitioner filed Payment Forms or BIR Form No. 0605, and paid25 the following deficiency taxes:26

KIND OF TAX

BASIC

INTEREST

SURCHARGE

COMPROMISE

TOTAL

Income Tax

Php

75,186.78

Php

33,834.06

Php

-

Php

12,000.00

Php

121,020.84

EWT

11,823.67 7,094.20 - 3,000.00 21,917.87

Administrative Penalties

- - - 38,000.00 38,000.00

TOTAL

PHP 87,010.45

PHP

40,928.26

PHP

-

PHP

53,000.00

PHP

180,938.71 On September 17, 2013, petitioner received a copy of respondent's Amended NIC27, stating that the computation as to deficiency income tax was adjusted, as follows:28

KINDOFTAX

BASIC

INTEREST

SURCHARGE

COMPROMISE

TOTAL

Amendment per Review

Php

1,019,893.44

Php

514,059.95

Php

-

Php

25,000.00

Php

1,558,953.39 Income Tax- Paid on June 19, 2013 75,186.78 33,834.06 - 12,000.00 121,020.84

INCOME TAX- ADJUSTED NIC

PHP

944,706.66

PHP

480,225.89

PHP

-

PHP

13,000.00

PHP

1,437,932.55 On September 27, 2013, petitioner filed its reply to the Amended NIC.29 On November 22, 2013, petitioner received a copy of the Preliminary Assessment Notice ("PAN") assessing it for deficiency income tax and VAT for CY 2010 in the total amount of Php5,479,568.98, inclusive of interest, penalties and surcharge:30 22 Records, Vol. 1, JSFI, p. 351.

23 Correct total amount is Php175,927.25, hence, the difference of Php0.59. 24 Records, Vol. 1, Exhibit "P-7," Reply to the NIC, pp. 417-418. 25 Id., Exhibits "P-8.2," "P-8.5," and "P-8.8," pp. 421,424 and 427; payment date is June 19,2013. 26 Id., Exhibits "P-8" to "P-8.8," BIR Form No. 0605, pp. 419-427. 27 Id., Exhibits "P-9" and "P-9.1," Amended NIC, pp. 428-430. 2B Id., JSFI, p. 351; see Exhibit "P-9.1," Amended NIC, p. 429. 29 Id., JSFI, p. 351; see Exhibit "P-10," Reply to Amended NIC, pp. 431-434. 30 Records, Vol. 1, JSFI, p. 351; see Exhibit "P-11," Preliminary Assessment Notice ("PAN"), pp. 435-437. @) (

KIND OF TAX

Income Tax

VAT

Php

PHP

BASIC

INTEREST

SURCHARGE

COMPROMISE

944,706.66

Php

488,098.44

Php

-

Php

13,000.00

Php

2,166,899.39 1,300,139.64 541,724.85 25,000.00

TOTAL

1,445,805.10 4,033,763.88 5,479,568.98

TOTAL

3,111,606.05

PHP

1,788,238.08

PHP

541,724.85

PHP

38,000.00

PHP

On December 6, 2013, petitioner filed its protest to the PAN.31 On December 27,2013, petitioner received a copy of the Formal Letter of Demand ("FLD")32 and Final Assessment Notices ("FAN")33 for alleged deficiency income tax and VAT in the total amount of Php5,495,314.09, broken down as follows:

BASIC

SURCHARGE

COMPROMISE

TOTAL

KIND OF TAX

Income Tax

VAT

Php

944,706.66

Php

-

Php

13,000.00

Php

957,706.66 2,166,899.39 541,724.85 25,000.00 2,733,624.24

TOTAL

PHP 3,111,606.05 PHP 541,724.85

PHP

38,000.00 PHP 3,691,330.90 On January 13,2014, petitioner filed its Protest to the FAN.34 Due to the inaction of respondent on its Protest, petitioner was left with no recourse but to seek redress from the Court on August 11, 2014, through the present Petition for Review.35 On September 12, 2014, respondent filed a Motion for Extension to File Answer36, which was granted by the Court in its Order37 dated September 16, 2014.

On October 13,2014, respondent filed her Answer38, interposing the following Special and Affirmative Defenses, as summarized: (1) that the sales of petitioner to enterprises within customs territory are considered technical importations, hence, subject to the twelve percent (12%) VAT; (2) that petitioner is liable for deficiency income tax for failure to pay customs duties and taxes due on sales made within customs territory; (3) that petitioner is liable for surcharge and interest imposed on the deficiency income tax and VAT; and (4) that 31 Records, Vol. 1, JSFI, p. 352; see Exhibit "P-12," Protest to the PAN, pp. 438-442. 32 Id., JSFI, p. 352; see Exhibit "P-13," Fonnal Letter of Demand ("FLD"), pp. 443-447. 33 Id., JSFI, p. 352; see Exhibit "P-13," Final Assessment Notices ("FAN"), pp. 448-450. 34 Id., JSFI, p. 352; see Exhibit "P-14," Protest to the FAN, pp. 451-456. 35 Id., Petition for Review, pp. 17-150, with annexes. 36 Id at 153-156.

37 Records, Vol. 1, p. 157.

38 Id., Answer, pp. 158-170.

8 ( compromise penalty was included only as a suggestion so that petitioner may avoid criminal prosecution.39 Respondent and petitioner filed their respective Pre-trial Briefs on November 14, 201440 and November 24, 201441. On December 19,2014, the parties filed their Joint Stipulation of Facts and Issues ("JSFI")42, thus, a Pre-Trial Order43 was issued on January 14, 2015.

On March 6, 2015, petitioner filed its Formal Offer of Evidence ("FOE")44 offering Exhibits "P-1" to "P-17'' and "P-19," with sub- markings; which was resolved by the Court in its Resolution45 dated March 31, 2015, admitting Exhibits "P-1," "P-2," "P-3," "P-4," "P-5," "P- 6," "P-7," "P-8," "P-8.1," "P-8.2," "P-8.3," "P-8.4," "P-8.5," "P-8.6," "P- 8.7," "P-8.8," "P-9," "P-9.1," "P-10," "P-11," "P-12," "P-13," "P-14," "P- 15," "P-15.1," "P-16," "P-17," "P-19," and "P-19.1," and denying Exhibit "P-6-1," for not being marked.

On May 29, 2015, respondent filed her F0£46, offering Exhibits "R-1" to "R-9" and "R-9-a," which was resolved by the Court in its June 23, 201547 Resolution admitting Exhibits "R-1" to "R-8," and denying Exhibits "R-19" and "R-19-a" for not being marked. In compliance to the October 12, 2015 Resolution48 of the Court granting the parties a period of thirty (30) days from notice to file their respective memoranda, petitioner and respondent then filed their Memoranda on November 14, 201549 and November 16, 201550, respectively.

39 Records, Vol. 1, Answer, pp. 158-157.

40 Id., Respondent's Pre-Trial Brief, pp. 173-179. 41 I d. at 320-332.

42 Id., JSFI, pp. 350-359.

43 Id., Pre-Trial Order ("PTO"), pp. 362-369. 44 Id., Formal Offer of Evidence ("FOE"), pp. 388-398. 45 Records, Vol. 1, p. 509.

46 Id., Respondent's FOE, pp. 516-522.

47 Records, Vol. 2, pp. 527-528; as confirmed in the Court's August 13, 2015 and October 12, 2015 Resolutions, pp. 553-554 and 577-579.

48 Id. at 579.

49 Id., Petitioner's Memorandum, pp. 599-615. so Id., Respondent's Memorandum, pp. 584-596. @

I

On January 6, 2016, the Court promulgated a Resolutionsl submitting the case for Decision; hence, this Decision.

The Issue52

WHETHER OR NOT PETITIONER IS LIABLE FOR THE

AMOUNT OF PHP5,495,314.09 REPRESENTING DEFICIENCY INCOME TAX AND VAT, INCLUSIVE OF INTEREST, PENALTIES AND SURCHARGE FOR CY 2010.

Petitioner's Arguments53

Petitioner avers that it is subject to a preferential tax rate of five percent (5%) on its gross income in lieu of all national and local taxes under Republic Act No. 7227 and applicable regulations; and that it is not liable for interest, surcharge and compromise penalty.

Respondent's Counter-Arguments54

Respondent counters that the sales of petitioner within the customs territory are technical importations subject to 12% VAT; that petitioner is liable for deficiency income tax for its failure to pay customs duties and taxes due on its sale of services within customs territory; and that petitioner is liable for interest, surcharges and penalties attributable to the deficiency taxes.

The Ruling of the Court

The three (3)- and ten (10)-year periods to assess income tax and VAT have not yet prescribed.

Sections 203 and 222(a) of the 1997 NIRC mandates that respondent should issue an assessment for deficiency taxes within 3 years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later; and any 51 Records, Vol. 2, p. 618.

52 Records, Vol. 1, PTO, p. 364.

53 Records, Vol. 2, Petitioner's Memorandum, pp. 615-612. 54 Id., Respondent's Memorandum, pp. 587-593. (§) (

PageS of16

assessment notice issued beyond this 3-year prescriptive period shall not be valid; save in cases wherein no return was filed, hence, assessment may be made within 10 years from discovery of the omission, to wit:

SECTION 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.

XXX

XXX

XXX

SECTION 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.55 Since the instant case involves deficiency income tax and VAT, the prescribed due dates for the filing of the returns, to be used as bases for the prescriptive periods, vary accordingly. 1.

Income Tax

Section 77(B) of the 1997 NIRC provides that the filing of the Income Tax Return ("ITR") shall be on or before the fifteenth (15th) day of April, or the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be, to wit: 55 Underscoring ours.

(§) (

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

XXX

XXX

XXX

(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.s6 2.

Value-Added Tax

The filing of the Quarterly VAT Returns must be made within twenty-five (25) days after the close of each taxable quarter. Section 114(A) of the 1997 NIRC provides, as follows: SEC. 114. Return and Payment of Value-added Tax.- (A) In General. - Every person liable to pay the value- added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five

(25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT -registered persons shall pay the value-added tax on a monthly basis. 57 Based on the records, petitioner's ITR was actually filed on April 12, 2011. As to VAT, petitioner did not file any but records reveal that discovery was made on or around May 29, 2013, when petitioner received a copy of the Niess with the finding of deficiency VAT. The table below will shed light into the reckoning dates of the 3- and 10- year periods to assess:s9

TAX RETURNS

Income Tax -Annual filing 56 Underscoring ours.

57 Id.

ACTUAL DATE OF

FILING

LAST DATE TO

FILE RETURN

ss Records, Vol. 1, Exhibit "P-6," Notice for Informal Conference ("NIC"), p. 413.

LAST DAY TO

ASSESS

59 In bold are the bases for the running of the prescriptive period; underscored are the last dates to assess.

@) (

Annual Income Tax Return

April12,201160 AprillS, 2011 AprillS, 2014

TAX RETURNS

VAT - Quarterly filing l•tQuarter VAT Return 2nd Quarter VAT Return 3rd Quarter VAT Return 4th Quarter VAT Return

DATE OF

DISCOVERY

May29,2013 May29,2013 May29,2013 May29,2013

LASTDAYTO

ASSESS

May29, 2023 May29,2023 May 29,2023 May 29,2023 The FLD61 and the FAN62 issued by respondent on December 13, 2013, were received by petitioner on December 27, 2013. Since assessment is deemed made when notice to this effect is released, mailed or sent to the taxpayer,63 the periods within which to assess petitioner shall be based on December 27, 2013. Looking into the last dates to assess on the table above, respondent properly assessed petitioner within the periods provided by law. Petitioner is liable to pay both deficiency income tax and VAT assessments.

Accordingly, the Court shall determine whether petitioner can overturn the presumption of correctness of respondent's assessment and prove that the same is without foundation and merit. Such determination shall likewise address the issue on whether petitioner is liable for deficiency tax liabilities representing income tax and VAT, with increments, for CY 2010.

1.

Income Tax- Php944,706.66 The detailed deficiency income tax assessment was computed by respondent in the following manner:

DETAILS

PER RETURN

ADJUSTMENTS

PER AUDIT

SPECIAL RATE (5%)

REGULAR RATE

Revenues

Cost of Services:

Fuel, Oil, Lubricants and Chemical

Rents

Salaries, Wages and Employee Benefits Depreciation/ Amort. - Operating Asset

Other Costs

Total Cost of Services

Php

31,866,225.38 5,591,112.00 12,500,984.19 38,473,994.97 12,914,694.51

Php

-

Php

(15,079.37) (249,329.70) - (303,587.84)

Php

92.35%

Php

217,867,923.21

Php

31,866,225.38

Php

29,428,459.14 5,576,032.63 5,149,466.13 12,251,654.49 11,314,402.92 38,473,994.97 35,530,734.35 12,611,106.67 11,646,357.01 100,779,014.14

Ph£

93,069,419.56

Ph£

60 Records, Vol. 1, Exhibit "P-17," 2010 ITR, pp. 502-504; BIR Records, Exhibit "R-2," 2010 ITR, pp. 506- 510.

61 Id., JSFI, p. 352; see Exhibit "P-13," FLD, pp. 443-447. 62 Id, JSFI, p. 352; see Exhibit "P-13," FAN, pp. 448-450. 63 Basilan Estates, Inc. v. Commissioner of Internal Revenue, et. al., G.R. No. L-22492, September 5, 1967, 21 SCRA 17.

@ !

(30%)7.65% 18,057,494.94 8,316,729.24

Gross Profit

Less:

Php

124,798,503.65

Php

Gen. Admin Expenses

Selling Expenses

Taxable Income Per Audit

Tax Due

Ph£

Php

-

Php

- 124,798,503.65

Ph£

6,239,925.18

Ph£

Total Tax Due

Less: Tax Due to LGU

Tax Due

Php

Php

Less: Tax paid/withheld per return & paid per investigation

Ph£

4,112,538.9364

Ph£

(46,786.74)

Ph£

Tax Still Due

Add: Interest

Php

Compromise Penalty

TOTAL DEFICIENCY INCOME TAX

PHP

The entire assessment flows from respondent's finding that a portion of petitioner's revenue in the amount of Php18,057,494.9465 is subject to a regular tax rate of 30%.

Petitioner maintains that as a registered CSEZ enterprise, hence, it enjoys the preferential tax rate of 5% in lieu of all local and national taxes under Republic Act No. 7227 and applicable regulations, unless the enterprise breaches the 30% threshold on its sales within customs territory; and that its sales of services within the customs territory amounted to Php18,057,494.94 or only 7.65% of the total sales. According to respondent, he did not assess petitioner for breach of the 30% threshold of income within the customs territory but for failure to pay the corresponding customs duties and taxes for the sale of services made outside the CSEZ.

Respondent's argument is meritorious.

Petitioner did not provide any official receipt or invoice in relation to its sales amounting to Php18,057,494.94 to refute respondent's finding that these service transactions were made outside the CSEZ, so that it will not be subjected to customs duties and taxes. In fact, it was admitted by petitioner through its Memorandum66 that its gross receipts from its sales to enterprises outside the CSEZ is in the total amount of Php18,057,494.94.

Likewise, petitioner did not refute the adjustments made by the respondent on the cost of services such as "Rents" in the amount of Php15,079.37, "Salaries, Wages and

Employee

Benefits"

of 64 Php4,037,352.35 (see Exhibit "P-17," line 29) plus Php75,186.78 (see Exhibit "P-8.4," line 19). 65 BIR Records, pp. 5-7.

66 Records, Vol. 1, Petitioner's Memorandum, par. 4, p. 601. @ ( 9,740,765.70 4,648,677.97 218,415.49 4,873,672.24 1,462,101.67 7,702,026.85 2,691,568.00 5,010,458.85 4,065,752.19 944,706.66 503,843.55 13,000.00 1,461,550.21

Php249,329.70 and Other Costs of Php303,587,.84. Neither did it submit any documentary evidence to disprove such assessment. Additionally, an examination of the BIR Records reveal that the deduction made by respondent on the "Tax paid I Withheld per return and Paid per investigation" in the amount of Php46,786.7467 is proper. This amount represents withholding tax payments (BIR Form No. 2307)68 covering the taxable year 2009 which is outside CY 2010. Clearly, petitioner failed to overcome, by sufficient evidence, the presumption of correctness of the deficiency income tax assessment. Thus, respondent's assessment on deficiency basic income tax in the amount of Php944,706.66 is upheld.

2.

Value-Added Tax- Php2,166,899.39 The FLD69 shows the assessment of deficiency VAT, including compromise penalty, in the amount of Php4,033,763.88 on petitioner's sales of services within the customs territory pursuant to the provisions of Section 108 of the 1997 NIRC and Revenue Regulations No. 1-95 as clarified in Q & A No. 7 of Revenue Memorandum Circular No. 50- 2007 which provides, that in any case, customs duties and taxes must be paid with respect to transactions, receipts, income and sales to customs terri tory.

DETAILS

Sales subject to VAT

Output Tax Due

Basic VAT Due

Add: 25% Surcharge

Php

Interest

Compromise Penalty

TOTAL VAT DEFICIENCY

AMOUNT

Php 18,057,494.94 2,166,899.39 2,166,899.39 541,724.85 1,300,139.64 25,000.00 Ph£

PHP

1,866,864.49 4,033,763.88 As discussed earlier, petitioner admitted that it generated sales of services within customs territory in the amount of Php18,057,494.94. If the services are performed or rendered outside the freeport zone or within the custom's territory, such sale of services are considered as technical importations, thus subject to 12% VAT. 67 Rounding off difference of Php0.18.

68 BIR Records, pp. 382-395.

69 Records, Vol. 1, Exhibit "P-13," FLD, pp. 443-447. ® ,

I

Page 13 o£16 It is undisputed that petitioner did not present any documentary evidence in support of its VAT transactions. Neither did it file any VAT return to overthrow respondent's assessment. What is only clear from the records70 is that VAT was assessed on petitioner's sale of services to individuals/enterprises with an address different from the CSEZ wherein the petitioner's business address71 is located. Let it be stressed that in the determination of the tax liability of petitioner, the Court is guided by the rule that tax assessments are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularity in the performance of duties, an assessment duly made by the BIR examiner and approved by his superior officers will not be disturbed.72 Since petitioner failed to present and offer evidence to prove that it is not liable to pay the assessed deficiency VAT, the presumption of correctness of the subject tax assessment remains. Petitioner is not liable to pay compromise penalty.

Respondent's imposition of compromise penalty amounting to Php38,000.00, with Php13,000.00 attributable to income tax and Php25,000.00 to V AT,73 cannot be sustained. Under RMO No. 01-90, as amended by RMO No. 19-07, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that the latter refuses to pay the same.

It is well-settled that the Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because, by its very nature, it implies a mutual agreement between the parties with respect to the thing or subject matter that is so compromised, and the choice of paying or not paying the penalty distinctly belongs to the taxpayer?4 70 BIR Records, pp. 5-7.

71 Records, Vol. 1, JSFI, par. 1, p. 341.

n Commissioner of Internal Revenue v. Bank of the Philippine Islands, G.R. No. 134062, April17, 2007, 521 SCRA 373, citing Sy Po vs. Court of Tax Appeals, G.R. No. L-81446, August 18, 1988,164 SCRA 524.

73 Records, Vol. 1, JSFI, p. 352; see Exhibit "P-13," FLD and FAN, pp. 443-450. 74 The Philippines International Fair, Inc. v. Collector of Internal Revenue, et. al., G.R. Nos. L-12928 and L-12932, March 31,1962,4 SCRA 774.

@ (

The imposition of the same without the conformity of the taxpayer is illegal and unauthorized.7S Absent any clear showing that petitioner consented to the compromise penalty, its imposition should be deleted.

Petitioner

is liable to pay surcharge on both deficiency income tax and VAT assessments.

Section 248(A) of the 1997 NIRC imposes a twenty-five percent (25%) for certain cases, viz.:76 SECTION 248. Civil Penalties. -

(A)

There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: (1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or (2)

Unless

otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or (4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment.77 75 Commissioner of Internal Revenue v. Lianga Bay Logging Co., Inc., et. al., G.R. No. L-35266, January 21,1991,193 SCRA 86.

76 Underscoring ours.

77 Id.

® (

Based on evidence gathered and the foregoing provisions, petitioner failed to pay both deficiency income tax and VAT within the time prescribed for its payment in the FAN, and to file any VAT return and pay the tax due thereon on the dates prescribed by law. Consequently, the 25% surcharge applies to both deficiency income tax and VAT of petitioner for CY 2010.

In view of the foregoing, the present Petition for Review is hereby DENIED. The assessment issued by respondent against petitioner for taxable year 2010 covering deficiency income tax and VAT is UPHELD. Accordingly, petitioner is hereby ORDERED TO PAY deficiency income tax and VAT in the total amount of Three Million Eight Hundred Eighty Nine Thousand Five Hundred Seven and 56/100 Pesos (Php3,889,507.56), inclusive of the 25% surcharge imposed under Section 248(A)(1)(3) of the 1997 NIRC, computed as follows:

BASIC

TOTAL

TYPE OF TAX

Income Tax

Value Added Tax

TOTAL

Php

944,706.66

25% SURCHARGE

Php

236,176.67 541,724.85

Php

1,180,883.33 2,166,899.39 2,708,624.24 PHP 3,111,606.05 PHP 777,901.51 PHP 3,889,507.56 In addition, petitioner is also ORDERED TO PAY: 1.

Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency income tax and VAT computed from the dates indicated below until full payment thereof pursuant to Section

249(B) of the 1997 NIRC:

TYPEOFTAX

Income Tax

Value Added Tax

BASIC TAX

Php

944,706.66 2,166,899.39

DEFICIENCY INTEREST

COMPUTED FROM

April16, 2011 January 26,2011 2.

Delinquency interest at the rate of twenty percent (20%) per annum on the amount of Php3,889,507.56, representing the basic deficiency income tax and VAT and the corresponding 25% surcharge; and on the twenty percent (20%) deficiency interest which have accrued as aforestated in Item (1), computed from December 13,201378 until full payment thereof pursuant to Section 249(C) of the 1997 NIRC. 78 Records, Vol. 1, Exhibit "P-13," FLD, pp. 443-447. 8 t

WE CONCUR:

LOVELL ~AUTISTA

Associate Justice

~ .. ~ 5 '- MA. BELEN M. RINGPIS-LIBAN

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.

LOVELL (sAUTISTA

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Section 13 of Article VIII of the Constitution and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

Presiding Justice

@