First Sumiden Circuits, Inc. vs. Commissioner of Internal Revenue

DE C ISION

MANAHAN,J.:

This involves a Petition for Review1 under Section 3(a), Rule 8 2 , in relation to Section 3(a)( 1), Rule 43 of the Revised Rules of the Court of Tax Appeals. The petition is filed by First Sumiden Circuits, Inc. seeking to annul, reverse and set aside the Final Decision on Disputed Assessment (FDDA) dated October 9, 2014, issued by respondent Commissioner of Internal Revenue, which held petitioner liable for deficiency income tax, inclusiye of interest, in the aggregate amount of Php17,655,764.08 for calendar year 2009. 1 Docket, CTA Case No. 8924, Vol. 1, pp. 6-28.

2 Rule 8 Procedure in Civil Cases

Sec. 3. Who may appeal; period to file petition. - (a) A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue taxes, ... may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on disputed assessments.

3 Rule 4 Jurisdiction of the Court

Sec. 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:

(1) Decisions of 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; diWt..-

I

~ACTS

i Petitioner is a corporati9n duly organized under Philippine law, with principal office at !Ampere St. corner Main Avenue, Light Industry Science Park f the Philippines I, Special Export Processing Zone, Bo. Diezm , Cabuyao, Laguna, Philippines.4 Petitioner is a Philippine E port Processing Zone Authority (PEZA)-registered Ecozone xport Enterprise engaged in the manufacture of flexible print d circuits, flip chip on flex, flexible printed circuits for 1.8" HD and car radio, lead-free flexible printed circuits for industri image sensor, and flexible circuit assembly using surface mou t technology.s Respondent is the Comrpissioner of the Bureau of Internal Revenue, the government a~ency charged with, among other powers and duties, the respfnsibility of collecting all national internal revenue taxes.6 • On April 14, 2010, petitioner filed its Annual Income Tax

Return

(ITR)7

for calend<lrr year 2009, and paid the corresponding income tax duje ofPhp6,681,145.85. 8 On May 15, 2013, petitioner received the Preliminary Assessment Notice (PAN)9 da~'ed May 15, 2013.10 Petitioner filed its protestl 1 to the PAN on Ma 30, 2013; supplemental protestl2 to the PAN on June 18, 201 ; and, position paper13 on PAN on October 22, 2013.14 ,

I

I

On June 28, 2013, Betitioner paid15 a portion of the assessed deficiency tax, inchj1sive of interest, in the amount of Php5,667,715.55.16 !

4 Docket, Vol. 2, Joint Stipulation of Facts and Issues (JSFI), p. 638. 5 I d. at 638-639.

6 Id. at 639.

1 7 Docket, Vol. 3, Exhibit "P-4", pp. 946-~51. B Docket, Vol. 2, JSFI, p. 639.

, 9 Docket, Vol. 3, Exhibit "P-5", pp. 952-~76. 10 Docket, Vol. 2, JSFI, p. 639.

i 11 Docket, Vol. 3, Exhibit "P-6", pp. 977-~003. 12 Docket, Vol. 3, Exhibit "P-7", pp. 100~-1040. 13 Docket, Vol. 3, Exhibit "P-8", pp. 10411-1082. 14 Docket, Vol. 2, JSFI, p. 639.

I

Petitioner received the Formal Letter of Demand (FLD)!7 on May 19, 2014.18 The summary of deficiency taxes!? shows:

Compromise

income Tax | 21,533,459.00 | 20,637,241.18 vaT TY [Misc- Others] (|__| ____- | 75,000.00| 75,000.00. ‘Total____| 25,770,867.43 | 25,430,820.18 | 162,000.00 | 51,363,387.61_ Petitioner filed its protest20 on June 18, 2014.?!

On October 9, 2014, petitioner received the Final Decision on Disputed Assessment (F DDA)??.28 The FDDA contained the following assessments: | apo “Special Rate 7 “TP Reguiar Rate Unreported sales/revenue Discrepancy (sales per ITR vs sale per VAT returns) _1,665,752.2 Discrepancy (sales per SLS vs

_SLP/ATTIED)

Discrepancy — Management Fees per

OR register vs Schedule of Other) Macome es he _.813,577.17 | Realized forex gain not subjected to

Disallowed Direct Cost/Deductions

_-9,530,750.17 | »p

Less: Paid to Other Agencies

7916/8748) 6,356,949.00 | 20,428,560.47 ax Due to BIR under Regular Rate 2,859,225.05 | er Less: Tax payments/Credits per return 12,150,574.85 | nici 10,526,821.85 | 12,760,963.6 _Less: Basic Deficiency Tax Paid, on [28/2013 3,458,555.03 |

fAdd:

Interest

- 4/16/2010 to !

!

~~~QL~QJi

[ 9<:>J:J::lP~<?J:J::l!l:;~ ~~~~lty + ~riNTDUE ~~~g~L~~~:ii , 50,000.00 9.~~9~ti9~:?i 17,655,764.08 l Within thirty days fro~ receipt of the FDDA, petitioner filed the subject Petition for ~eview on November 7, 2014. After two extensions of time24 , rbspondent filed an Answer2s on February 4, 2015. On Feb~ary 26, 2015, the Court received petitioner's Reply26, filed vial registered mail on February 20, 2015.

!

I

Thereafter, respondent ~d petitioner filed their Pre-Trial Briefs on March 12, 201527 ahd March 16, 201528, respectively. The parties filed their Join~' Stipulation of Facts and Issues (JSFI)29 on April 16, 2015, hich was approved in the Court's Pre-Trial Order3o dated April 0, 2015. !

Meanwhile, on March 1~, 2015, petitioner filed its Motion for

Commissioning

of

Independent

Certified

Public

Accountant.31 Consequently, Mr. George V. Villaruz was appointed as Independent CFrtified Public Accountant (ICPA), who was granted a period of 4p-days or until May 3, 2015 within which to file the ICPA ReportP2 !

!

Pursuant to

the

Prf-Trial

Order, presentation of petitioner's witnesses commt.nced on May 25, 2015. Petitioner presented the following witn sses: Ms. Ana Liza B. Arciaga33, Ms. Liz M. Fernandez34, M . Mary Lou Cuyo3s, Ms. Arnilda 24 Docket, Vol. 1, pp. 120 and 126.

25 Docket, Vol. 1, pp. 127-143.

.

26 Docket, Vol. 1, pp. 145-156.

i 27 Docket, Vol. 1, Respondent's Pre-Triallsrief, pp. 177-186. 28 Docket, Vol. 1, Petitioner's Pre-Trial B~ief, pp. 218-237. 29 Docket, Vol. 2, pp. 638-647.

· 30 Docket, Vol. 2, pp. 649-656.

31 Docket, Vol. 1, pp. 187-190.

1 32 Docket, Vol. 2, Resolution dated Marcij. 19, 2015, pp. 621-622. 33 Docket, Vol. 1, Judicial Affidavit, pp. 2~2-262. 34 Docket, Vol. 2, Judicial Affidavit, pp. ~62-670; with Supplemental Judicial Affidavit, Vol. 3, pp. 855-859.

I

I

Regarde36, Mr. George V. Vi\laruz37, and Ms. Carol M. Defeo- Javid38.

Petitioner filed its FormW Offer of Documentary Evidence (FOE)39 on November 11, 20~5, with respondent's Comment4o, filed on December 3, 2015. T e Court resolved petitioner's FOE on January 20, 2016, wit several exhibits being denied admission.41 This prompte petitioner's filing of Omnibus Motion42, praying for partial econsideration, re-opening of the presentation of petitioner'4 evidence, and re-marking of evidence, which the Courtl granted43, despite respondent's Comment/ Opposition44. Thu~, petitioner recalled its witnesses: Ms. Liz M. Fernandez, Ms. ~ary Lou M. Cuyo, and Mr. George V. Villaruz45.46

I

Petitioner filed its Ame1ded FOE47 on August 8, 2016, to which respondent failed48 to ¢omment. On September 22, 2016, the

Court

resolved pe~itioner's

Motion

for

Partial

Reconsideration49 and Amen~ed FOE, thereby admitting all of petitioner's exhibits. 5o ' Respondent presented 1 his lone witness, Ms. Josa C.

Gomez51, on October 24, 2016.52 Thereafter, respondent filed his

FOE53

on

November

2, 2016, with petitioner's Comment/Opposition54. On1 December 2, 2016, the Court resolved respondent's FOE I and admitted all of the offered exhibits. 55 i 36 Docket, Vol. 2, Judicial Affidavit, pp. 495-508. 37 Docket, Vol. 2, Judicial Affidavit, pp. 711-752. 38 Docket, Vol. 3, Judicial Affidavit, pp. $44-851. 39 Docket, Vol. 3, pp. 880-923.

· 40 Docket, Vol. 4, pp. 1268-1273.

i 41 Docket, Vol. 4, Resolution, pp. 1285-11307.

I

42 Docket, Vol. 4, pp. 1326-1341.

!

43 Docket, Vol. 4, Resolution dated March 28, 2016, pp. 1359-1360. 44 Docket, Vol. 4, pp. 1352-1357.

I

45 Docket, Vol. 4, Supplemental JudicialiAffidavit, pp. 1370-1378. 46 Docket, Vol. 4, pp. 1363 and 1432.

1 47 Docket, Vol. 4, pp. 1434-1478.

i 48 Docket, Vol. 4, Records Verification d1ted August 31, 2016, p. 1487. 49 Filed on February 11, 2016 · 5o Docket, Vol. 4, Resolution, pp. 1491-~495. 51 Docket, Vol. 1, Exhibit "R-19" Judicia~ Affidavit, pp. 164-176. 52 Docket, Vol. 4, p. 1502.

53 Docket, Vol. 4, pp. 1504-1515.

1 54 Docket, Vol. 4, pp. 1516-1521.

1 55 Docket, Vol. 4, Resolution, pp. 1523-1!524. ~ i Respondent and petit~oner filed their Memoranda on January 4, 201756 and Janukrry 9, 201757, respectively. Hence, the case was deemed submitted for decision on January 16, 2017.58 !

I.

IS~UES59

I

The parties submit the following issues for resolution: Whether petitioner is Iii: ble for deficiency income taxes in the amount of Php17, 55,764.08 for the calendar year ending December 31, 2 09;

!

1. Whether respondept correctly assessed petitioner for "Realized forex gaip not subjected to tax";

I

I

I

2. Whether respondent correctly disallowed direct costs/deductions *sted in Schedule 5.1 of the FDDA;

3. Whether respontlent correctly disallowed as deductions the importations listed in Schedule 6.1.1 ofthe FDDA;

4. Whether petition¢r claimed importations in the amount of Php16~,795,672.00 as deductions from its sales/revenue ~n its ITR for calendar year 2009; and i

5. Whether respondEnt's right to assess deficiency income tax for CY 12009 has already prescribed. Petitioner's Arguments6o Petitioner argues that the assessment for realized foreign

I

exchange (forex) gains is enrirely new, appearing only for the first time on the FDDA and! was not covered by the PAN and FLD. Said assessment is ther~fore void for failure to comply with the due process requirement$. Petitioner further argues that the 56 Docket, Vol. 4, Respondent's Memora~dum, pp. 1525-1542. 57 Docket, Vol. 4, Petitioner's Memorandrm, pp. 1543-1564. 58 Docket, Vol. 4, Resolution, p. 1565.

I

59 Docket, Vol. 2, JSFI, pp. 640-641.

1 60 Docket, Vol. 1, Petition for Review, PP·i 13-24; Id., Petitioner's Reply, pp. 145-152; also, Vol. 4, Petitioner's Memorandum, pp. 1~47-1560.~ assessment for realized fore~ gains has no factual and legal basis.

Petitioner also alleges ~the fact of its payments of the following items of assessmenit which was not considered in the

FDDA:

a) Discrepancy (sales per :income tax return (ITR) vs. sales per VAT returns) in the lamount of Php 1 ,665, 752.28; b) Discrepancy (sales peri Summary List of Sales (SLS) vs.

Summary List of Purchiases (SLP) /Audit Information Tax

Exemption and IncentiJe Division(AITEID)) in the amount of Php20,367.42;

I

c) Discrepancy - Manag~ment Fees per OR register vs.

Schedule

of

Other

! Income in the amount of Php813,577.77; and i d) A portion of the Di~allowed Direct Cost/Deductions equivalent to Php30, 12$,457.58.

Petitioner also conte~ts the disallowance of direct cost/ deductions in the amount of Php7 ,523,555.26. Petitioner argues that these costs I deductions are allowable deductions under Revenue Regulations ~o. (RR) 02-2005, as amended by RR 11-05, and that the list !provided in said RRs are not all- inclusive.

' As to the assessrrient for alleged unsupported importations, petitioner argu~s that the Import Entry & Internal Revenue Declaration (IEIRD) iis not the only document that can substantiate the importation; Petitioner argues that it will prove its importations with othe~ documents. Further, petitioner argues that respondent f*led to show that the alleged unsupported importations ~re reported as cost of goods sold and were claimed as deducti~ns.

Finally, petitioner ar~es that the assessment has prescribed considering the w~vers executed were invalid due to defects on the notarization! and absence of the signatory's notarized authority.CA?\-- '

Respondent's Counter-Argqments61

Respondent argues that the prescriptive period to assess was extended due to the !valid execution of the waivers. Respondent submits that p~titioner's president, Mr. Hisahiro Miyake, has held himself i out as petitioner's authorized representative; that Mr.

~iyake has executed an SPA designating petitioner's authprized representative to deal with the BIR, and therefore, relspondent did not question Mr. Miyake's authority to sign ~he waivers. Respondent further argues that the waivers were ialready notarized when submitted to them, as such, the choice I of the notary public was with the petitioner. Finally, responde~t argues that petitioner should not profit from its misdeeds whejn it caused the defects in its own waivers, and only raised s~d defects when it received an adverse decision on its asses~ments.

Respondent argues tha~ the issuance of the assessment complied with the requiremetjlts of RR 12-9962, in that the LOA, Notices, PAN, FAN and FLD,! and FDDA were properly issued. Respondent further states t~at tax assessments are presumed correct and made in good faitlb.

I

RULING qF THE COURT The petition has partial imerit.

The

Court

jurisdiction over petition for review.

has the It is undisputed that on May 19, 2014, petitioner received the FAN of even date, and thatt petitioner filed its protest thereto on June 18, 2014.63 On October 9, 2014,; petitioner received the FDDA, reiterating the assessment a!p.d requesting the payment of the alleged deficiency taxes stated therein. Pursuant to Rule 8,

I

6 1 Docket, Vol. 1, Answer, pp. 128-140;:Vol. 4, Respondent's Memorandum, pp. 1527- 1539.

62 Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Int~rnal Revenue Taxes, Civil Penalties and Interest and the Extra-judicial Settlement of a Tafpayer's Criminal Violation of the Code through Payment of a Suggested Compromise Pe*alty. 63 Docket, Vol. 2, JSFI, p. 639. ~ 1

Section 3(a)64 of the Revised Rules of the Court of Tax Appeals (RRCTA), it has until NovemlPer 8, 2014 to file its appeal with the Court. Thus, the Petitiod for Review filed on November 7, 201465 was timely filed.

The waivers validly extended the period of prescription.

Under Section 20366 of t~e National Internal Revenue Code of 1997 (NIRC), internal revertue taxes must be assessed within three years counted from the :period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. In relation thereto, Section 77(J3) of the NIRC provides that the final adjustment return shall be filed on or before the 15th day of April, or on or before tHe 15th day of the fourth month following the close of the fisc~ year, as the case may be. The instant case involtes an assessment for deficiency income tax. Petitioner filed i~s Annual Income Tax Return for calendar year ending December 31, 2009 on April 14, 2010.67 Thus, following Section 2031, respondent had until April 15, 2013 to assess petitione~ for deficiency income taxes. Respondent issued the FLD ~d assessment notices on May 19, 201468, clearly beyond the three-year prescriptive period. Section 222(b) of the NI~C provides for an exception to the three-year prescriptive perio4, a provided below:

I

Sec. 222. Exceptioqs as to Period of Limitation of Assessment and Collectioh of Taxes. -

64 Rule 8 Procedure in Civil Cases

Sec. 3. Who may appeal; period to filt petition. - (a) A party adversely affected by a decision, ruling or the inaction of the ~ommissioner of Internal Revenue on disputed assessments or claims for refunds of i:r).ternal revenue taxes, ... may appeal to the Court by petition for review filed within thirt~ days after receipt of a copy of such decision or ruling, or expiration of the period ftxed py law for the Commissioner of Internal Revenue to act on the disputed assessments ... ; 65 Docket, Vol. 1, Petition for Review, p. $. 66 Sec. 203. Period of Limitation Upon A~sessment and Collection.- Except as provided in Section 222, internal revenue taxes f';hall be assessed within three (3) years after the last day prescribed by law for the ftling ~fthe return, and no proceeding in court without assessment for the collection of such t~es shall be begun after the expiration of such period: Provided, That in a case where ~ return is ftled beyond the period prescribed by law, the three (3)-year period shall be !counted from the day the return was ftled. For the purposes of this Section, a return *led before the last day prescribed by law for the ftling thereof shall be considered as ftldd on such last day.

XXX

(b) If before the expitation of the time prescribed in Section 203 for the ass~ssment of the tax, both the Commissioner and the t¥payer have agreed in writing its assessment after such! time, the tax may be assessed within the period agreed ubon. The period so agreed upon may be extended by subs~quent written agreement made before the expiration of 1 the period previously agreed upon.

Petitioner and respond¢nt executed five waivers. For ease

I

of discussion, the waivers ahd pertinent dates are presented below:

' Date jAccepted

Date Accepted

Waiver was

I

b)/" CIR/

Received by

Period

Date Executed

Repn sentative

Taxpayer

Extended Until

1st w aiver69 December 17, Dece ~ber 21, December 27, June 30, 2013 2012

P012

2012 2nd Waiver70 May 17,2013 May p1, 2013 :

June 5, 2013 December 31, 2013 3rd Waiver71 July 30, 20 13 Augu~t 6, 2013 September 13, March 31, 2014

I

2013 4th Waiver72 October 24, Oct~ber 30, November 15, June 30, 2014 2013 ~013 2013 5th Waiver March 13, Marc~ 19, 2014 April 22, 2014 December 31, 2014 ' 2014 Respondent asserts that the prescriptive period was validly extended by virtue of the five waivers73 executed, the last of which extended the peripd up to December 31, 20 14 74 . Petitioner, on the other hand, questions the validity of the waivers on the ground that i1s president, Mr. Hisahiro Miyake, was not authorized by the iBoard of Directors to sign such waivers. Further, petitioner alleges that Mr. Miyake did not personally appear before the! Notaries Public, and that for the 1st and 4th waivers, the Notari~s Public did not have jurisdiction. The execution of the waivers must strictly follow the procedures and guidelines ptovided in Revenue Memorandum Order No. (RMO) 20-90 atid Revenue Delegation Authority !

69 BIR Records, Folder 1, Exhibit "R-6", ~p. 769-771. 70 BIR Records, Folder 1, Exhibit "R-9", ~· 832. 71 BIR Records, Folder 1, Exhibit "R-11 ",! p. 865. 72 BIR Records, Folder 1, Exhibit "R-12",1p. 866. 73 BIR Records, Folder 1, Exhibits "R-6",!"R-9", "R-11", "R-12", and "R-13", pp. 769-771, 832, 865, 866, and 867, respectively.

·

Order No. (RDAO) 05-01, otherwise, the waiver is invalid and does not extend the perioq for assessment.75 However, in Commissioner of Internal R~venue v. Next -Mobile, Inc. (Next Mobile),76 the Supreme Qourt held that while faithful compliance with the provisio~s of RMO 20-90 and RDAO 05-0 1 must be observed in order fot a waiver to be valid and binding, an exception must be made }vhen the circumstances warrant, in keeping with the lifebloodi theory of taxation. The Supreme Court explains:

To be sure, both pcu4ties in this case are at fault. Here, respondent, tbirough Sarmiento, executed five Waivers in favor of petitidner. However, her authority to sign these Waivers wa~ not presented upon their submission to the BIR. Inj fact, later on, her authority to sign was questioned by re$pondent herself, the very same entity that caused her t< sign such in the first place. Thus, it is clear that respondent violated RMO No. 20-90 which states that in cas~ of a corporate taxpayer the waiver must be signed biv its responsible officials and RDAO 01-0S(sic) which equires the presentation of a written and notarized aut ~ority to the BIR. and duly notarized. Furt ermore, it mandates that the waiver should not be acicepted by the concerned BIR office and official unless duly notarized.

I

Vis-a-vis

the five: Waivers it received from respondent, the BIR has ailed for five times to erform its duties in relation the eto: to verif Ms. Sarmiento's authority to execute them1, demand the presentation of a notarized document e idencin the same refuse acce tance of the Waiver when no such document was presented, affix the dat s of its acceptance on each 75 Commissioner of Internal Revenue v. Mudos Metal Corporation, G.R. No. 178087, May 5, 2010, in relation to Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G.R. No. 162852, December 16, 2004.

1 76 G.R. No. 212825, December 7, 2015. ~ waiver, and indicate on ~he Second Waiver the date of respondent's receipt ther~of.

Both arties knew t e infirmities of the Waivers et the continued dealin wi h each other on the stren th of these documents witho t botherin to rectif these infirmities. In fact, in i s Letter Protest to the BIR, respondent did not eveq question the validity of the Waivers or call attention tio their alleged defects. In this case, relspondent, after deliberately executing defective waiyers, raised the very same deficiencies it caused to avoid the tax liability determined by the BIR during the e~tended assessment period. It must be remembered th4=tt by virtue of these Waivers, respondent was given t*e opportunity to gather and submit documents to su~stantiate its claims before the CIR during investigation~ It was able to postpone the payment of taxes, as wel~ as contest and negotiate the assessment against it. Ye~, after enjoying these benefits, respondent challenged thle validity of the Waivers when the consequences thereo~ were not in its favor. In other words res ondent's acto im u nin these Waivers after benefitin therefrom and etitioner to rel on the same is an act of bad fait On the other hand,! the stringent requirements in

I

RMO 20-90 and RDAO 105-01 are in place precisely because the BIR put therh there. Yet, instead of strictly enforcing its provisions, ~he BIR defied the mandates of its very own issuances. i Verily, if the BIR was truly determined to validly a~sess and collect taxes from respondent after the pre~criptive period, it should have been prudent enough Ito make sure that all the requirements for the effectivity of the Waivers were followed not only by its) revenue officers but also by respondent. The BIR sto~d to lose millions of pesos in case the Waivers were ddclared void, as they eventually were by the CTA, but it a~pears that it was too negligent to even comply with its mpst basic requirements. The BIR's negligenc P. in this case is so gross that it amounts to malice and bad faith. Without doubt the BIR knew that waivers should conform strictly to RMO 20-90 and RDAO 05-01 in order to be valid. In fact, the mandatory nature of the 1requirements, as ruled by this Court, has been recog~ized by the BIR itself in its issuances such as Reven e Memorandum Circular No.6- 2005, among others.

evertheless the BIR allowed respondent to submit, anp. it duly received, five defective Waivers when it was its !duty to exact compliance with~ re uire res ondent to re ent an notarized authorit to si n the uestioned W aiv rs. The BIR failed to demand respondent to follow the tequirements for the validity of

I

the Waivers when it had tl}e duty to do so, most especially because it had the high¢st interest at stake. If it was serious in collecting t+xes, the BIR should have meticulously complied with the foregoing orders, leaving no stone unturned.

The general rule is 1 that when a waiver does not comply with the requisite$ for its validity specified under

I

RMO No. 20-90 and RDAIO 01-05 (sic), it is invalid and ineffective to extend the i prescriptive period to assess taxes. However, due to its peculiar circumstances, We shall treat this case as ani exception to this rule and find the waivers valid for the neasons discussed below. First, the parties are in pari delicto or "in equal fault." In pari delicto con~otes that the two parties to a controversy are equally c*lpable or guilty and they shall have no action against eaqh other. However, although the parties are in pari delictq, the Court may interfere and grant relief at the suit of o~e of them, where public policy requires its intervention, bven though the result may be that a benefit will be derivbd by one party who is in equal guilt with the other.

Here, to uphold the yalidity of the Waivers would be consistent with the puplic policy embodied in the principle that taxes are the lifeblood of the government, and their prompt and cer~ain availability is an imperious need. Taxes are the na~ion's lifeblood through which government agencies continue to operate and which the State discharges its fur{ctions for the welfare of its constituents. As betweenj the parties, it would be more e uitable if etitioner's 1 ses were allowed to ass and conse uentl u hold the aivers in order to su ort this principle and public policy.

Second, the Court h(as repeatedly pronounced that parties must come to cou:r1t with clean hands. Parties who do not come to court withjclean hands cannot be allowed to benefit from their ovfn wrongdoing. Following the foregoing principle, respopdent should not be allowed to benefit from the flaws in it~ own Waivers and successfull to evade its

Third, respondent i~ estopped from questioning the validity of its Waivers. While it is true that the Court has repeatedly held that the i doctrine of estoppel must be sparingly applied as ani exception to the statute of limitations for assessmen~ of taxes, the Court finds that the application of the do~trine is justified in this case. Verily, the application of estoppel in this case would promote the administrati~n of the law, prevent injustice and avert the accomplis~ment of a wrong and undue advantage. Respondent I executed five Waivers and delivered them to petiti~ner, one after the other. It taxes and enalties a ain t it. Moreover, the application of estoppel is necessary t prevent the undue injury that the government would suffer because of the cancellation of petitioner's assessment! of respondent's tax liabilities. Finally, the Court: cannot tolerate this hi hl suspicious situation. In t is case, the taxpayer, on the

I

one hand, after voluntaril:y executing waivers, insisted on their invalidity by raising ~he very same defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance 1 i with its rules. The BIR's negligence in the perform~ce of its duties was so gross that it amounted to mali~e and bad faith. Moreover, the BIR was so lax such that 1 it seemed that it consented to the mistakes in the \\faivers. Such a situation is dangerous and open to ab"\lse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by

I

mere expedient of hiding lj>ehind technicalities. ' It is true that petiboner was also at fault here because it was careleiss in complying with the requirements of RMO Nof 20-90 and RDAO 01-0S(sic). Nevertheless, petitioner's I negligence may be addressed by enforcing the provisions imposing administrative liabilities upon the officeris responsible for these errors. The BIR's right to assess ~d collect taxes should not be jeopardized merely because of the mistakes and lapses of

I

its officers, especially irjl cases like this where the taxpayer is obviously in bad faith.

(Underscoring

supplied) ' In the instant case, pe~itioner and respondent executed five waivers. Similar to the N~xt Mobile case, the waivers were executed without a writt~n and notarized authority of petitioner's signatory. Petitio~er failed for five times to submit the written and notarized !authority of its signatory, and respondent also failed for dve times to demand petitioner's ~ compliance with the strict r~quirements for the validity of the waivers. Yet the parties continued to deal with each other. ' Further, petitioner argu~s that the waivers were not validly notarized since Mr. Miyake did not personally appear before the notaries public. 77 On the otlier hand, respondent argues that the waivers were already i notarized when submitted to respondent for acceptance. 7~ Under RDAO 05-01, the waiver should not be accepted by the concerned BIR office and official unless duly notarized. Thus, lthe Court agrees with respondent that when petitioner su~mitted the notarized waivers, respondent cannot be faulte~ for relying in good faith on the validity and due execution of!said notarized waivers. 79 The Court finds petitioner in bad faith when it impugns the due notarization of the w~vers, considering that the alleged defects therein were cau~ed by petitioner. It must be remembered that by virtue of these waivers, petitioner was given the opportunity to gathdr and submit documents to substantiate its claims befor~ the CIR; it was able to postpone the payment of taxes, contdst and negotiate the assessment against it. Petitioner only challlenged the validity of said waivers

I

before this Court. In other w~rds, petitioner's act of impugning these Waivers after ben~fiting therefrom and allowing respondent to rely on the s~e is an act of bad faith. Considering the foregoir(lg, the Court finds that the waiver validly extended the period tq assess. The Court will now look! into the merits of the assessment. The assessment should be partially cancelled.

The FDDA contains the following assessment for deficiency income tax:

·······t·· ................. ,......... . ............ , ..................... , ..... . !

!

Special Rate

.

!

Regular Rate

!

I

5%

I

I

30% !~~g!.!l.~P~EE~~~E~.

!T~~?I ~I?;?4?;4~9.:991:~~~ I ~1?.J?1E3.00 dd: AdJ'ustments . :

:

.. :................................ ......................................................... . ...

························+~"''"" ············+"'"' Unrenorted salesjrevenue :

:

...................................... .t':........................................................................................................... .. ········j··· ............................ . 77 Docket, Vol. 1, Petition for Review, pp.l10 and 23. 78 Docket, Vol. 1, Answer, p. 131.

79Jd. ~

“Discrepancy (sales per ITR vs sales | per VAT returns) _1,665,752.28

Discrepancy — Management Fees per |

OR register vs Schedule of Other’ Realized forex gain not subjected to tax

Unsupported Importations

26,785,509.47

Tax Due Special Rate (5%)

ss: Paid to Other Agencies (RA 6,356,949.00 10,526,821.85 12,760,963.67

: Basic

vm OL 2B[Q20VS / “Tnterest DA 16/010 power ALB 0/2014

Compromise Penalty

(TOTALAMOUNTDUE PRP | 17,655,764.08 The items of assessment and petitioner’s defenses are as follows:

Discrepancy (sales per ITR vs | sales per VAT returns | Php 1,665,752.28

Petitioner’s

arguments The deficiency tax on this item was already paid.

The deficiency tax on this item was

Assessment

Discrepancy (sales per SLS vs | SLP/AITIED) | 20,367.42 Discrepancy-Management The deficiency tax Fees per OR register vs| on this item was Schedule of Other Income already paid. Realized forex gain Lack of due process subjected to tax as this item of 13,728,945.86 | assessment was only presented at the FDDA level.

Disallowed Direct | The deficiency tax Cost/Deductions pertaining to Php30, 128,457.58 was already paid, thereby reducing the disallowed direct 813,577.17 37 ,652,012.84

Unsupported Importations

cost only Php7 503, 555, 26.

The importations are supported by IEIRD, or _ other documents such as 164,795,672.00 | purchase invoices, bank remittances,

PEZA Import

Permits and Pah

Certificates

Delive

Disallowed Income Tax Credit The deficiency tax 1,623,753.00 | on this item was already paid.

Compromise Penalty The deficiency tax 50,000.00 | on this item was already paid.

Alleged Payments of

Deficiency Taxes

It is undisputed that on June 28, 2013 petitioner paid a portion of the assessed deficiency income tax, inclusive of interest, in the amount of Php5, 677,715.55.89 Based on the FDDA, the basic tax paid was Php3,458,555.03, with interest amounting to Php2,219,160.52. As garnered from the BIR Records®!, the payment was computed as follows:

Income Tax Special Rate

5% Unreported sales/revenue Discrepancy (sales per ITR “Vs sales _per VAT returns) Discrepancy (sales “per SLS vs

_SLP/AITIED) _

Discrepancy-Management “Fees” “OR

Register vs Schedule of Mgt Fees

20,367.42 813,577.17 |

Unallowable Deductions/ Cost of |

Sales __30,128,457.58 _ 349,662,016.67 — 9,530,750.17_

Tax Due Special Rate (5%)

2,859,225.05 | 3,985,376.88 |

.

Less: Disallowed Income Tax Crd:lit :

1,623,753.00 I 10,526,821.85 i ~~~~~~J:?~~~{~~~r.•~•~•~9l.i.i.~r~• : · ••••••••••••t ........................................................................................ ! ........ ~ ... 1?.?.t?.?.?.:9~J fi~f.KC:1\M~b~f~~6~~~~~~~=~~<=()~~~ t . ;:~i~: i~~:;; i To cancel the assessmepts due to the alleged payment of the applicable deficiency tax~ the Court must determine if the payment properly included lthe attendant interests thereon. Upon verification, the Coulrt finds that the interest was computed from April 15, 20l0 until its payment on June 28, 2013, or 1,171 days, thus,'the interest of Php2,219,160.52 (Php3,458,555.03 X 20°/o X 1,!171/365). ' Considering that petitiorer already paid the basic income tax deficiency amounting td Php3,458,555.03 and the said interest of Php2,219,160.52! or in the aggregate amount of Php5,677,715.55, the above! items of assessment are hereby cancelled.

Realized forex gain not subjected to tax The FDDA contained an adjustment to taxable income for realized forex gain not subjected to tax, in the amount of Php 13,728, 945.86.

Petitioner argues that this assessment item is void for violating its right to due proc¢ss, since the same did not appear in the PAN nor in the FLDj Respondent did not specifically refute this argument, but metely reiterated that the assessment complied with the requiremethts of RR 12-99. An examination of the PANB2, FLDB3, and FDDAB4, does show that the assessment hem for "realized forex gain not

I

subjected to tax" only appear~ in the FDDA.

I

Section 22885 of the NI~C provides that the taxpayer shall be informed in writing of th¢ law and the facts on which the assessment is made, otherwi$e, the assessment shall be void. In Fluor Daniel Phili:Rpines, Inc. v. Commissioner of Internal Revenue (Fluor Dariiel)86, the Court had occasion to rule that changing the asses$ment from expanded withholding tax (EWT) to final withholding tax (FWT) only in the issuance of the FDDA would certainlj deprive the taxpayer of the reasonable opportunity to b~ heard and submit evidence in support of its defense, whiclh is a clear violation of the due process requirements. The ta1cpayer involved therein was aware that an assessment was! being made on its software maintenance fees for deficienicy EWT, as contained in the FLO.

I

In the FDDA, the asses~ment on the same software

I

maintenance fees was changJed to FWT. The Court found that said change of assessment ~endered the assessment void for failure to comply with due process.

In the instant case, an eptirely new assessment item in the form of "Realized forex gain qot subjected to tax" was included in the FDDA. Thus, with mor¢ reason, the said assessment item should be rendered void. Th~re was a failure of due process as the said assessment item w*s not contained in the FLD, but was only disclosed to the petitioner when the FDDA was issued. Considering that the FDDA constitutes respondent's final decision on the assessment, petitioner was therefore, not given the chance to refute within 1 the administrative level the said assessment for "realized fore~ gain not subjected to tax". Based on the foregoing, !this item of assessment should be cancelled.

Disallowed direct cost/ deductions Per FLD, 87 respondent disallowed various costs and deductions aggregating to' Php40,410,245.58 from being 85 Section 228. Protesting of Assessmient. - When the Commissioner or his duly authorized representative finds that prop~r taxes should be assessed, he shall first notify the taxpayer of his findings: xxx xxx i xxx The taxpayers shall be informed in ~riting of the law and the facts on which the assessment is made; otherwise, the asse~sment shall be void.

XXX

XXX

XXX

included in the Cost of Saleis in computing petitioner's gross income subject to 5°/o specfal income tax rate pursuant to Revenue Regulations Nos. )(RR) 2-2005 and 11-2005 and Section 24 of Republic Act Np. (RA) 7916, otherwise known as "The Special Economic Zone .f\.ct of 1995" (PEZA Law). But in the FDDA,ss, the cost in the amount of Php2,758,232.74 pertaini~· to "Office

Supplies

Total"

erroneously added to "Se inars and Training Total" were deducted from the total disal owed cost as shown in Schedule 5 below:

Schedule 5- Disallowed DirectjCost/Deduction

Disallowed Direct Cost per FLD I

Php

' 40,410,245.58 Less: Office Supplies Total errondously added to

Seminar & Training Total

2, 758,232.74

ADDITIONAL UNALLOWABLE

Php

DEDUCTION/ COST OF SALES - Schedule 5.1 37,652,012.84

I

Petitioner argues that (he disallowed expenses are direct costs incurred in the per(ormance of its PEZA-registered activity. Further, the disallow~d deductions, by their nature, fall under the allowable deducti~ns under Rule XX Section 4(1) of the PEZA Law IRR. Therefor~, the same should be allowed as deductions for purposes of cqmputing its gross income. Respondent notes that ~ven if petitioner was not agreeable on this item of assessment, 't nevertheless paid the deficiency tax pertaining to disalloired costs in the amount of Php30, 128,457.58 on June ~8, 2013.89 The Court notes that respondent recognized said payment, and reduced the amount df disallowed direct cost to only Php7 ,523,555.26 per Detail~ of Discrepancies attached to the FDDA.90 However, it failed to reflect the same on the FDDA itself.9 1 One of the incentives! available to ECOZONE Export Enterprises is the impositiod of the preferential tax rate of five 88 Docket, Vol. 1, Exhibit "P-11 ", pp. 29-1!-5. 89 Docket, Vol. 1, Exhibit "P-11 ",Details )of Discrepancies, pp. 29-45. 9o Docket, Vol. 1, Exhibit "P-11, Details of Discrepancies, p. 32.

percent (So/o) on gross incomel earned as provided under Section 24 of RA 7916, as amended by RA 8748, which states: !

SECTION 24. Exemtption from National and Local Taxes. - Except for real p:Jj"operty taxes on land owned by developers, no taxes, locall and national, shall be imposed on business establishrftents operating within the ECOZONE. In lieu thereof, five percent (5°/o) of the gross income earned by all btisiness enterprises within the ECOZONE shall be paid ajnd remitted as follows: i

(a) Three percent (3°to) to the National Government;

(b) Two percent (~%) which shall be directly remitted by the busiJ1less establishments to the treasurer's office of the tjnunicipality or city where the enterprise is located.

"Gross income" has be~n defined in Section 3 of RR 11- 2005. Likewise, the same regl.Ilation provides for the deductible expenses for PEZA-registeredl entities, to wit: i Section 3. Gross In~ome Earned. - For purposes of implementing the tax i centive of registered Special Economic Zone (ECOZO E) enterprises in Section 24 of Republic Act No. 7916, tljle term "gross income earned" shall refer to gross sales pr gross revenues derived from business activity within i the ECOZONE, net of sales discounts, sales returns $d allowances and minus costs of sales or direct costs bu~ before any deduction is made for administrative, mark~ting, selling and/ or operating expenses or incidental lpsses during a given taxable period.

For purposes of cotnputing the total five percent (5%) tax rate imposed, t);te following direct costs are included in the allowabl~ deductions to arrive at gross income earned for specifid types of enterprises:

1. ECOZONE Ex~ort Enterprises, Free Trade

Enterprises and Domesti~ Market Enterprises

i i -Direct salaries, wa~es or labor expenses -Production supervi~ion salaries -Raw materials u~ed in the manufacture of products

-Decrease

in G~ods in

Process

Account

(Intermediate good~) -Decrease in Finish¢d Goods Account ~

-Supplies and fuels used in production -Depreciation of ma¢hinery and equipment used in production, and o{ that portion of the building owned or constructed that is used exclusively in the production of g<1>ods -Rent and utility ch~ges associated with building, equipment and war~houses used in production -Financing charges I associated with fixed assets used in production I the amount of which were not previously capitaliz~d (Emphasis supplied) In the case of

Eas~ Asia Utilities

Corporation

v.

I

Commissioner of Internal Re~enue,9 2 it has been held that the enumeration of direct costs Ulnder RR 11-05 is not an exclusive or closed list of expenses t~at may be deducted by PEZA- registered enterprises from t~eir gross sales for the purpose of computing the 5°/o gross ~ncome tax (GIT). Instead, the enumeration of direct costs is intended as a guide in determining the items that $ay be considered direct costs or costs of sales. RR 11-05 also fun:ended Section 7 of RR 02-05 by deleting the words "consist pnly" and restating the pertinent phrase to "the following d~rect costs are included in the allowable deductions xxx". the Court further ruled that:

I

It is clear from the almendment made under RR No. 11-05 that the list is no~ meant to be all-inclusive but merely enumerates the e~penses that can be considered as direct costs.

PEZA-r~gistered enterprises may be allowed deduct expenses ~hich are in the nature of direct costs even though the sa.rPe are not included in the list.

I

I

The criteria in deter~ining whether the item of cost or expense should be p~t of direct cost is the direct relation of such item i~ the rendition of the PEZA- registered services. If the ~item of cost or expense can be directly attributed in ~roviding the PEZA-registered services, then it should b¢ treated as direct cost. !

Section 27(A) of the NI~C also defines the terms "gross income" and "costs of goods $old", as follows: For purposes of t~is Section, the term "gross income" derived from bl(lsiness shall be equivalent to gross sales less sales ret"4rns, discounts and allowances and cost of goods sold. "C,st of goods sold" shall include ·

I

all business expenses di:rl-ectly incurred to produce the merchandise to bring theljll to their present location and use.

XXX

XXX

XXX

For a manufacturipg concern, "cost of goods manufactured and sol4" shall include all costs of production of finished goo~s, such as raw materials used, direct labor and manufa~turing overhead, freight cost, insurance premiums, an4 other costs incurred to bring the raw materials to the f~ctory or warehouse. Based on the foregoing, ifor purposes of computing the 5°/o

I

preferential tax, gross sales I tevenues may be reduced only by

I

sales discounts, sales return~ and allowances, cost of sales or direct costs or any of the ~numerated allowable deductions under RR 11-05. Corollary tJi.ereto, in determining whether an expense is part of direct co&t, said expense must be directly attributed to the performanc~ of the taxpayer's PEZA-registered activity, i.e., manufacturing iand exporting of flexible printed circuits.

The Court will now d¢termine whether the disallowed expenses are direct costs ~r costs of sales which can be considered as valid deductioris from petitioner's gross income. !

I

Per the FDDA's DetaiJs of Discrepancies, respondent reduced the amount of ~isallowed direct cost to only Php7 ,523,555.26 consisting ~f the following:93

Remaining Alleged

Disallowed Direct

Reference

Cost/Deduction

Indirect labor - welfare - others Annex B1.1

Php

6,404,096. 75 Indirect labor- welfare- retirement Annex B1.2 3,072,560.87 fund (VERPLVSPl i Office supplies Annex B1.3 2,758,232.74 Repairs & Maintenance- plant- :

Annex B1.4 1,251,545.74 ' non stock Minor equipment :

Annex B1.s 909,406.97 Repairs & maintenance- plant- Annex B1.6 (6,872,287.81) outsourced

Total

Php 7,523,555.26

a.

Indirect

Labor

welfare - others Php6,404,096. 75

According to

petition~r, this expense refers to the international assignment feels paid by petitioner to Sumitomo Electric Industries, Ltd.

(S~I) for the assignment of SEI's engineers at petitioner's plant. The assignment fee is equivalent to the salaries and wages ~f the SEI engineers assigned to petitioner. Without the paym~nt of the assignment fee, the SEI engineers whose skills arej needed to carry out essential production engineering wor!f at petitioner's plant will not be assigned to petitioner. Thus, this direct labor expense is actually a necessary cost • incurred in the production of petitioner's goods. The recordling of this labor expense under the account "indirect labor" is dbne merely to differentiate it from labor expenses incurred fdr the engineers and staff with employment contracts execpted with petitioner. Thus, this direct labor expense should l:J>e allowed as deduction. To support its claim, )petitioner presented in evidence Certifications from SEI inyoicing petitioner for additional personnel expense, petiti~ner's application for foreign remittance and various invdices issued by SEI,94 which were examined by the ICPA, Mr. <feorge Villaruz of Villaruz Villaruz & Co., CPAs.

As ascertained by the 1 ICPA, this account is classified under Cost of Goods Sold flor the year ended December 31, 2009. This pertains to billing~ made by SEI to petitioner for the compensation and allowanc~s of Japanese personnel assigned to petitioner based on the Seicondment Agreement between the said parties.

Allegedly, the parties 1 agreed that SEI shall dispatch Japanese personnel to be as~igned to petitioner for its business needs relative to the conqeption, invention, improvement, discovery formula, method~logy, know how, etc. performed during the dispatch. 95 However, petitioner failed to present the Secondment Agreement that could prove that the Japanese employees were expatriated to the Philippin~s to perform functions that are

directly related to petitioner's

PEZA-registered

activity.

Furthermore, the supporting pocuments did not disclose names or designations or depart~ent of the assigned employees. Instead, the Certifications frobl SEI merely indicated "Executive A, B, C" and so on. Considet!ing the foregoing, the Court finds that petitioner failed to provite adequate proof that these costs are direct costs. As such, the1 assessment for deficiency income tax relating to the amount of!Php6,404,096.75 is upheld. b.

Indirect

Labor

welfare - Retirement fund - Php3,072,560.87 According to petitioner,. this expense refers to the actual payment of retirement beqefits and/or separation pay to production supervisory emp~oyees who voluntarily retired or resigned from the company ~d should be allowed as deduction. Based on the ICPA Report,96 the indirect labor-welfare- retirement fund amounting t<1> Php3,072,560.87 is composed of the following:

i

Amount

a Accrual of retirement benefits, s~pported by JV only

Php

2,216,913.42 b Actual retirement benefits paid t<l> resigned employees 509,291.45 Final pay of resigned employee b"P.t without supporting c documents · 346,356.00

Total

Php 3,072,560.87 As indicated above, the: accrual of retirement benefits in the amount of Php2,216,9113.42 is supported by Journal Voucher (JV) dated March 31 ~ 2009 per SAP document number 10121112797 only.

The amount of Php$09,291.45 pertains to actual retirement benefits paid tol resigned employees which are supported by Final Accoun~ability computations, Employee Clearance Forms, Application! for Voluntary Separation Program (VSP), Quit Claim, and Pa~roll Routing Slip which contain information about the etn~ployee's position, division and department.98 These resigne~ employees were under Facilities

Engineering,

Engineering

.__ IE, and Quality Assurance Department, all of which ar~ under the registered activity of petitioner.

On the other hand, th¢ final pay of resigned employees

I

amounting to Php346,35p.OO are without supporting documents.

Subsequently, petit~oner submitted additional documents99 supporting the Jndirect Labor-Welfare-Retirement Fund which was previously $pported by JV only and the final pay of resigned employee b"lkt without supporting documents amounting to Php2,563,269.42 (Php2,216,913.42 plus Php346,356.00).

' Upon verification of th~ documents, such as the Final Accountability computationi, Employee Clearance Forms, Application for Voluntary $eparation Program (VSP), Quit Claim, Payroll Routing Slip ahd Bank Statement which contain information about the eniployees' position, division and department, the Court finds ~hat out of the retirement fund of Php2,563,269.42, the amourh of Php2,500,098.09 was indeed paid to resigned employebs who were under Facilities Engineering,

Engineering-lE

and

Quality

Assurance

Departments, all of which ale under the registered activity of petitioner.

However, the retiremeqt benefits of Php63,171.33 was paid to resigned emij>loyees whose position or division/department where tpey belong cannot be ascertained from the supporting dofuments provided, thus, the disallowance of the same shoiuld be sustained. Therefore, the retirem~nt fund in the total amount of Php3,009,389.54 should not lbe disallowed as direct cost. c.

Office

Supplies

Php2, 758,232.7 4 According to petitioner, :this expense refers to production supplies including protective I clothing worn by production line workers or technicians, pen$ and papers used to make work

orders, and photocopying dervices to reproduce production supplies such as Work Order Sheets, Certificates of Inspection, and check sheets which are ~iirectly used by the technical and engineering employees in tljl.e production of flexible printed circuit assemblies, flip chip~ on flex and other goods. This account is segregated from the office supplies used for administrative work which alre recorded under "62" series for selling costs and administrat~ve costs. Based on the ICPA Report, this item of assessment consists of the following:

Amount

a Supported by sales invoices, ~illing statement Php 1,535,916.61 and/ or official receiptsloo , b Supported by journal vouchers only1D 1 253,088.43 c Without supporting documeqts 969,227.70

Total

Php 2, 758,232.74 Petitioner submitted aqditional documents 102 supporting the Office Supplies account which was previously unsupported and those supported by JV o$ly amounting to Phpl,222,316.13 (Php969,227.70 plus Php25~,088.43).

Based on the Report, a !fubstantial portion of this account pertains to photocopying c,.arges of work orders and other forms that are being used fqr production planning purposes, while other supplies are use~ for quality control procedures of products being manufactured!.

The ICPA referred to SIR Ruling No. DA (C-056) 192-08

I

dated September 2, 2008, "Which held, ((Consumable supplies and office supplies needed fqr production are deductible under ((Supplies and fuels Used im, Production)) as specified in the

I

Regulations. Other supplies srch as test disc, spare parts, other equipment & tolls which are considered as non-capitalized expenditures used for analy~is, testing and quality control also

I

qualify as supplies under i~ production deductible from gross income.'' Considering that thtt amount of Php2,691 ,421.24 (Php1,535,916.61 plus Php~,155,504.63) was duly supported 100 Exhibits "P-34-19" to "P-34-24", "P-3'1!--26" to "P-34-26" to "P-34-75". 1o1 -Exhibit "P-34-25".

.

1o2 Exhibits "P-34-196" to "P-34-205", ~

' by invoices, billing statement and/ or official receipts, only the said amount shall be incl[Uded in the deductions in the computation of its gross incotne, while the remaining amount of Php66,811.50 shall be disall~wed.

d.

Repairs

and

Maintenance-Plant-

Nonstock

Php 1,251 ,545. 7 4 This expense refers to sljlpplies used in production such as pipes, tubes, bushings, haloten lamps, angle bars, and nickel nodes. These supplies are bo ght only when necessary and are not stocked by petitioner, th. s, the costs for these supplies are expensed outright. This also ~ncludes facility charges and labor expenses incurred for the ihstallation of these supplies and servicing of the machine an~ equipment. Since these supplies and related services under t~is account are used in production, petitioner posits that this 1 expense should be allowed as deduction.

As ascertained by thei ICPA, repairs and maintenance includes mostly supplies iused in the maintenance and machineries in the producti~n department. It also includes the year-end accrual of repairs ajnd maintenance expense incurred for petitioner's annual shutdpwn of machineries. To support, BIR Ruling ..z(>A-(C-191) 486-09 dated September 9, 2009 states: ((2. Repairs a1d Maintenance- Expenses for labor and materials for the mainte1ance of machines and facility used in production are manufact¥ring costs deductible from gross income."

· As such, the office andi maintenance of Php1,250,723.24 (Php309,254.24103 plus Php?41,469.QQI04 ) supported by sales invoices, billing statement I and/ or official receipts, journal voucher, application for for~ign remittance, and airway bill105 shall be allowed as deductibl¢ expense in computing petitioner's gross income. Thus, only t!te amount of Php822.50 shall be disallowed.

103 See Annex Bl.4 of Exhibit "P-36-1". 104 See Annex A3 of Exhibit "P-36-2".

10s Exhibits "P-34-76" to "P-34-89", "P-206". ~ e.

Minor Equipment -

Php909,406.97 This expense refers to 1minor production machines and equipment that are not caphalized such as digital cameras, computers and peripheral d~vices, and control panels used in the production line. These m{nor equipment are fabricated and calibrated to fit the specific~tions of the production unit and which costs are included in this account. The supporting documepts presented by petitioner proved that the account consists' of accessories such as digital cameras, laptops, CPUs, de~ktops and USBs, and that these amounts are supported b~ sales invoices I official receipts, journal vouchers, and payment checks.I06 Of the total Minor !Equipment duly supported by documents amounting to ! Php909,406.97, Php834,386.00 pertains to the purchase of computer, computer parts and laptop used by the Producti~n Managers and Line Supervisors in the monitoring of inventorjr movements, transfer of inventory within the production area, :monitoring of good and defective inventories and preparation [of quality assurance reports. The remaining minor equipment duly supported by documents

I

amounting to Php75,020.4 7 !(including the Php33, 712.00 from the Supplemental ICPA re~ort) pertains to digital cameras, laptops, other equipment and spare parts which are used for

I

the quality control and evaluation of the products.

I

BIR Ruling Da-(C-056) ~ 92-08 states that "Other supplies needed for production consumption like test disc, spare parts, other equipment & tolls whic~ are considered as non-capitalized expenditures used for anal~sis, testing & quality control are considered costs. "

:

Considering that these fr1inor equipment are directly used by employees involved in production of petitioner's PEZA- registered product, the asses$ment pertaining thereto should be cancelled.

I06 Exhibits "P-34-90" to "P-34-116". ~ f.

Repairs

Maintenance

Outsourced-

(Php6,872,287.81) and

Plant

Based on the ICPA Report, this item consists of the following:

1

Per FSCI's Basis in the Payment of

Per Bll~

1 's FLD

Deficiency

Income Tax

Variance

Calibration

Php 4 )5,538.30 Php 495,538.30

Php

Freight

6 )9,103.65 669,103.65

Installation Cost

(4 6,491.50) (46,491.50)

Preventive Maintenance

1,3 9,630.25 1,319,630.25 - - - -

Supplies

- 6,872,287.81 (6,872,287.81)

Supply of Labor &

11,1~7,370.53

Materials

11,167,370.53 -

Uncapitalized PPE

3, 7~5,500.00 3,725,500.00 -

Various Repairs &

I

Services

9$0,003.82 950,003.82 -

Total

Phpl8,2~0,655.05 Php25, 152,942.86 Php(6,872,287 .81) Based on the foregoijng, petitioner has overpaid its deficiency income tax ~ince

Supplies

amounting to Php6,872,287.81 was not ~ncluded in the BIR's FLD, but included in the amounts updn which petitioner's payment was based.

· It is noted that per PAN,irespondent disallowed petitioner's

Repairs

& Maintenance-~ant-Outsourced amounting to Php73,776,450.2Q107 which includes the amount of Php55,495,795.15108 pertaintng to supplies. However, per FLD, the said supplies account 1 was no longer included in the assessment.l09 Nevertheless, petitioner already paid a portion of the assessment on the ) said

Supplies

amounting to Php6,872,287 .81.

Thus, upon initial settl<tment of its deficiency Income Tax on June 28, 2013, it paid in ~xcess of the assessed items in this specific account based on the! FLD issued by respondent on May 107 Docket, Vol. 3, Schedule 2.1 of Exhibtt "P-5", p. 968. 1os BIR Records, p. 884.

I

19, 2014, 110 which may be ai:>plied against the total disallowed direct cost/ deductions as de1ermined by this Court. In fine, petitioner's direct cost should not be subjected to deficiency income tax comsidering that it still had an overpayment of Php337,385.V3, as computed below:

Disallowed Direct

Cost/ Deduction

Indirect labor - welfare - others

I

Php

6,404,096.75 Indirect labor - welfare - retirement fund (VERP /VSP) 63,171.33 Office supplies 66,811.50 Repairs & Maintenance- plant- noqstock 822.50 Repairs & maintenance- plant- out~ourced (6,872,287.81) !

Total

:

Php

(373,385. 73) 1

Unsupported Importations

Based on the Details :of Discrepancies attached to the FLD, 111 claimed importations! amounting to Php375,500,519.53 were not supported by ~mport Entry Internal Revenue Declarations (IEIRD), and th¢refore disallowed. Per petitioner's protest pated June 18, 2014, 112 petitioner manifested that its import~tion for taxable year 2009 were substantiated as it submit~ed its schedule of importations, photocopies of the supportint· IEIRDs, PEZA import permits and related invoices to support s · d importations. However, as per FDDA, respondent claimed t at there were importations in the amount of Php164,795,672.IOO which remained unsupported and still disallowed. The de~ails are shown in Schedule 6, as follows:

Schedule 6 - Unsupported Impprtations113

IMPORTATIONS PER SUMMARY LIST (SLI)

Php 2,317,207,520.10 LESS: SUPPORTED WITH IED/F,EZA IMPORT 2,152,411,848.10

PERMIT

:

DISCREPANCY- Sc!!edule 6.1 L_

Php

164,795,672.00 11o Docket, Vol. 3, Exhibit "P-14", pp. 11~2-1155.

.. -- -- According to Ms. Liz Nt. Fernandez, Senior Accounting Supervisor of petitioner, of the seven (7) duplicate originals, four

(4) copies are given to th~ Bureau of Customs (BOC) for distribution to various government offices. However, despite diligent search for petition¢r's copies of the IEIRDs in its premises, the same could :hot be found. Neither could the broker's copies be found.

' Petitioner then sent ~etter-Requests 11 4 to the BOC,

Philippine

Statistics

Authiority

(PSA), BIR, and

Tariff

Commission (TC) requesting for certified true copies of the IEIRDs to support its importations during taxable year 2009.

I

However, as evidenced by t]le replies11 5 of the PSA and TC to petitioner's request, the IEIRrPs were not made available to them for the purposes of this easel. On the other hand, no response

I

was received from the BOC ~hile the BIR allegedly refused to receive petitioner's request-leltter.

Petitioner claims that c9ntrary to respondent's allegations, it properly substantiated its !importations pursuant to Section 34(A)(l)(b) of the NIRC, whicH. provides: SEC. 34. Deductions frotn Gross Income. - Except for taxpayers earning com p~nsation income arising from personal services rendereki under an employer-employee relationship where no decluctions shall be allowed under this Section other than qnder Subsection (M) hereof, in computing taxable incomle subject to income tax under Sections 24(A); 25(A); 26; /27(A), (B) and (C); and 28(A)(l), there shall be allowed the following deductions from gross

Income:

I

(A) Expenses. -- (1)

Ordinary and

Necessary Trade,

Business or

Professional Expenses. - :

(a) In General. xxx

(b) Substantiation Requitements. - No deduction from gross income shall be allowed under Section (A) hereof

I

unless the taxpayer shajll substantiate with sufficient evidence, such as officicru receipts or other adequate records: (i) the amount qf the expense being deducted, and (ii) the direct connedtion or relation of the expense being deducted to thd development, management, 114 Exhibits "P-27", "P-28", "P-29", and "1?-30". 11s Exhibits "P-28-1", and "P-31". ~ operation and/ or conduict of the trade, business or profession of the taxpayerr. (Underscoring supplied)

I

Believing that the IElRD is not the only document required, petitioner presente<fl other documents to substantiate its importations, such as, but not limited to, purchase invoices, bank remittances and advice~, PEZA Import Permits, and PEZA Certificates of Delivery.

' Here, in lieu of the IE~RD, Authority to Release Goods (ATRIG), or Official Receip~ from the BOC evidencing the importation and payment of the attendant tariffs and taxes, petitioner submitted PEZA ltPport Permits, PEZA Certification, Commercial Invoices, Airway !Bills, Packing List and Application for Foreign Remittances, asi well as General Ledger Entries showing clearing account entries and journal entries reflecting petitioner's payments to s"lljppliers, 116 and which were duly examined by the ICPA.

Based on the ICPA !Report, petitioner was able to substantiate with valid suppqrting documents the importations amounting to Php149,177,9~0.47.117 Consequently, only the remaining amount of Php15J617,731.53 shall be subjected to deficiency tax.

Compromise Penalty

Respondent imposed cqmpromised penalty amounting to P50,000.00 against petitione~ for its failure to file/or an internal revenue tax at the time or titnes required by law or regulation pursuant to Section 255 of tpe NIRC of 1997, as amended, as determined using the sch¢dule of suggested compromise penalties prescribed under Revenue Memorandum Order No. 19-2007.

However, such imposition cannot be sustained. Under Revenue Memorandum Ordet No. 01-90, compromise penalties are only amounts suggested 1in settlement of criminal liability, and may not be imposed or e~acted on the taxpayer in the event that a taxpayer refuses to p~y the same. It is well-settled that the Court has no jurisdictio* to compel a taxpayer to pay the compromise penalty becaus¢ by its very nature, it implies a mutual agreement between tlle parties in respect to the thing or

subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer.us Absent a showing that herein petitioqer consented to the compromise penalty, its imposition shoulcjl be deleted. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized.I19 In view of the foregoing, p~titioner is liable for basic deficiency income tax in the amount of Php780,886.58, computed as follows:

Special Rate

Regular Rate

5% 30% Php 317,847,439.00

Php

8,717,173.00 Taxable income per return '

Add: Adjustment

Unsupported Importations

15,617,731.53 Taxable Income per audit , Php 333,465,170.53 , 8,717,173.00 '

Tax Due Special Rate (5%)

Php

16,673,258.53

Less: Paid to Other Agencies (RA

!

7916/8748) 6,356,949.00 Tax Due to BIR under Special Rate I Php 10,316,309.53 (5%) !

Tax Due to BIR under Regular Rate !

Php

2,615,151.90 (30%) '

Aggregate Income Tax Due

I

Php 12,931,461.43 Less: Tax payments/Credits per !

returns 12,150,574.85

Basic Deficiency Income Tax

_l L__

Php

780,886.58

WHEREFORE, premise~ considered, instant petition for review is PARTIALLY G~TED. The assessment issued by

I

respondent against petitionelr for taxable year 2009 covering deficiency income tax is hereby AFFIRMED but with modifications. Accordingly, petitioner First Sumiden Circuits, Inc. is ORDERED TO PAY I respondent the total amount of P976, 108.23 representing b4sic deficiency Income Tax and the twenty five percent (25°/o) sttrcharge imposed under Section 248(A) (3) of the NIRC of li997, as amended, computed as follows:

Basic Deficiency Income Tax

Due

Add: 25°/o Surchar_ge

Total Tax Due

Php

780,886.58 195,221.65

Php

976,108.23 In addition, petitioner is herelby ORDERED to PAY: a) Deficiency interest at tl(le rate of 20o/o per annum on the basic deficiency lncomd Tax of Php780,886.58 computed from the April 15, 2P10 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended;

b) Delinquency interest at ~the rate of 20°/o per annum on the total amount of Php976~ 108.23 and on the 20°/o deficiency interest which have accr/ued as aforestated in (a) computed from September 30, ~014 until full payment thereof pursuant to Section ~49(C) of the NIRC of 1997, as amended.

WE CONCUR:

~·;-:A~~--­ cATHERINE T. MANAHAN

Associate Justice

~~ c. ~----;L. -~ JUJ\NiTO C. CASTANElfA: JR.

CAES~ASANOVA

Associate Justice

Associate Justice

'

ATT~STATION

I attest that the conclulsions in the above Decision were reached in consultation befdre the case was assigned to the writer of the opinion of the C0urt's Division. ,~ .. ~C-~~"'<1_ ~UANITO C. CASTANEif/:,. JR.

Associate Justice

Chairperson

CERT-FICATION

Pursuant to Article VIII, :section 13 of the Constitution and the Division Chairperson's At~estation, it is hereby certified that the conclusions in the a~ove Decision were reached in consultation before the case: was assigned to the writer of the opinion of the Court's Division.

Presiding Justice