Advanced World Systems, Inc. vs. Commissioner of Internal Revenue

DECIS I ON

MINDARO-GRULLA, J.:

This resolves the Petition for Review filed by Advanced World Systems, Inc., against the Commissioner of Internal Revenue, pursuant to Section 7(a)(1)1 of Republic Act (RA) No. 11252, as amended, as well as Section 3(a)(1)3 of Rule 4 and Section 4(a)4 of Rule 8 of the Revised Rules of the Court of Tax Appeals, as amended. 1 Sec. 7. Jurisdiction.- The CTA shall exercise:

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

(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; xxx.

2 Act Creating the Court of Tax Appeals. 3 Sec. 3. Cases within the jurisdiction of the Court in Division. -The Court in Division shall exercise:

(a) Exclusive original over 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.

4 Sec. 4. Where to appea~· mode of appeal. -

(a) An appeal from a decision or ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claim for refund of internal revenue taxes erroneously or illegally collected, the decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade & Industry, the Secretary of Agriculture, and the Regional Trial Court in the exercise of their original jurisdiction, shall be taken to the Court by filing before it a petition for review as provided in Rule 42 of the Rules of Court. The Court in Division shall act on the appeal.

L

Advanced World Systems, Inc. vs. CIR

Petitioner seeks to cancel and set aside the issued Final Assessment Notice (FAN) and the Final Decision on Disputed Assessment (FDDA) that found petitioner liable for alleged deficiency income tax for taxable year (TY) 2006.5 Petitioner Advanced World Systems, Inc. is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office address at the 3rd Floor Yupangco Building, 1606 Trade Street corner Investment Drive, Madrigal Business Park, Ayala Alabang, Muntinlupa City.6 It is registered with the Bureau of Internal Revenue (BIR), with Taxpayer Identification No. 002-601-495-000, as evidenced by its Certificate of Registration No. 9RC0000397293.7 Petitioner is also duly registered with the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA).8 Pursuant to its Articles of Incorporation, petitioner's primary purpose is:

"To engage in, operate, conduct, and carry on the business of developing, manufacturing, buying, selling (without engaging in the retail business), distributing and marketing software, computers, peripherals and other related products and parts. "9 On the other hand, respondent is the duly appointed Commissioner of the BIR who has the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto or other matters arising under the National Internal Revenue Code (NIRC) or other laws or portions thereof administered by the BIR. He holds office at 5th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City.

Petitioner filed its Annual Income Tax Return (ITR) on April 16, 2007.10

Advanced World Systems, Inc. vs. CIR

On May 9, 2008, Letter of Authority (LOA) No. LOA 2001 00062870 was issued by respondent for the purpose of authorizing revenue officers to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for the period covering January to December 2006.11 After conducting the tax investigation, respondent issued the Preliminary Assessment Notice (PAN) on January 8, 2010, assessing petitioner for alleged deficiency value-added tax (VAT) in the amount of P42,965,054.25 and deficiency income tax in the amount of P31,278,411.51.12 As a result, petitioner disputed the said PAN on January 14, 2010.13 Respondent subsequently issued the Final Assessment Notice (FAN) against petitioner on January 25, 2010, assessing petitioner for purported deficiency VAT and deficiency income tax in the amounts of P43,312,586.32 and P31,619,830.79, respectively. 14 Consequently, petitioner protested the said FAN via its protest letter filed on January 29, 2010.15 Petitioner received a Letter from the BIR Revenue Region No. 8- Makati on March 1, 2010, advising petitioner that the FAN was returned to BIR Revenue District Office (RDO) No. 538-Muntinlupa for further verification, evaluation and action.16 In the Letter dated October 1, 2012, petitioner was informed that its 2006 tax case was re-assigned to Group Supervisor Ms. Rosalie M. Panuda. 17 On December 29, 2014, petitioner received the Final Decision on Disputed Assessment dated December 23, 2014, upholding the 11 Par. 4, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-13", Docket, vol. I, p. 520 12 Par. 5, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-14", Docket, vol. I, pp. 521 to 522 13 Par. 6, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-15", Docket, vol. I, p. 526 14 Par. 7, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-16", Docket, vol. I, pp. 540 to 541 and pp. 544 to 545 15 Par. 8, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-17", Docket, vol. I, p. 550 16 Par. 9, Admitted Facts, JFSI, Docket, vol. I, p. 224 17 Par. 10, Admitted Facts, JSFI, Docket, vol. I, p. 225; Exhibit "R-3", BIR records, p. 424

L

Advanced World Systems, Inc. vs. CIR deficiency income tax assessment in the amount of P51,444,176.11, but cancelling the deficiency VAT assessment.18 As a consequence, petitioner filed the instant Petition for Review19 before this Court on January 28, 2015. Respondent filed his Answer20 through registered mail on March 26, 2015 and received by this Court on April 8, 2015, interposing the following special and affirmative defenses: "1. Respondent reiterates and repleads the preceding paragraphs of the answer as part of his Special and Affirmative Defenses;

2. Petitioner cannot avail the Income Tax Holiday both from the PEZA under Republic Act 7616 and the Board of Investment (BOI) under Republic Act 7918 simultaneously.

3. Pursuant to Section 23 of Republic Act No. 7616, two different fiscal incentives are granted to an Ecozone Enterprise to wit:

Sec. 23. Fiscal Incentives. -

Business

establishments operating within the Ecozones shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987.

Furthermore, Section 24 of Republic Act No. 7916, states that:

Section 24. Exemption from National and Local Taxes. - Except for real property taxes on land owned by developers, no taxes, local and

Advanced World Systems, Inc. vs. CIR national, shall be imposed on business establishments operating within the Ecozone. In lieu thereof, five percent (5°/o) of the gross income earned by all business enterprises within the Ecozone shall be paid and remitted as follows:

a. Three Percent (3°/o) to the National Government.

b. Two Percent (2°/o) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located.

Page 5 of 19

4. Assessments are prima facie presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. (Aban, Law of Basic Taxation in the Philippine~ 1st Edition, p. 109);

5. Finally, Petitioner should be reminded that taxes are important because it is the lifeblood of the government and so should be calculated without unnecessary hindrance (Commissioner vs. Algue, Inc. L-28896, 17 February 1988). Taxes are enforced proportional contribution from persons and property levied by the state, thus, no one is considered entitled to recover that which he must give up to another - Non videtur quisquam id capere quod ei necesse est alii restitutere."

Petitioner filed its Reply21 to the Answer on April 10, 2015. The case was scheduled for a pre-trial conference on June 18, 2015.

Thus, respondent's Pre-Trial Brief22 and petitioner's Pre-Trial Brief23 were both filed on June 15, 2015.

Advanced World Systems, Inc. vs. CIR

Thereafter, the parties submitted their Joint Stipulation of Facts and Issues24 and Supplemental Joint Stipulation of Facts and Issues25 on July 3, 2015 and August 7, 2015, respectively, which were approved by this Court via Resolution26 dated August 18, 2015. In the same Resolution, the Court declared the termination of the pre-trial. The Court then issued a Pre-Trial Order27 on October 5, 2015. Upon motion of petitioner,28 the Court appointed Ms. Myra Celeste

0. Dabalos as the Independent Certified Public Accountant (CPA) for the case on August 13, 2015.29 To prove its claim, petitioner presented Ms. Myra Celeste 0. Dabalos and Ms. Cherry R. Catarata as witnesses. Thereafter, petitioner formally offered its documentary and testimonial evidence, consisting of Exhibits "P-1" to "P-969", inclusive of sub-markings. In the Resolution30 issued on July 1, 2016, the Court admitted all the formally offered exhibits as petitioner's evidence.

The documentary evidence formally offered by the petitioner and admitted by the Court are as follows:

Exhibit:

P-1

P-2

P-3

P-4

P-5

P-6

P-7

P-8

Description:

Petitioner's

Securities

and

Exchange

Commission

Certificate of Registration No. AS093-03837

Petitioner's Amended Articles of Incorporation

Petitioner's BIR Certificate of Registration with TIN No. 002-601-495-000

Petitioner's

Board

of

Investments'

Certificate

of Registration No. 2001-14 7

Petitioner's Philippine Economic Zone Authority (PEZA)

Certificate of Registration No. 05-06-IT Certificate of Board Resolution No. 03-324 PEZA Letter dated 22 February 2006 [addressed to Mr.

Akira Konishi]

PEZA Letter dated 26 June 2006 [addressed to Mr. Akira

Konishi]

24 Docket, vol. I, pp. 223 to 225 25 Docket, vol. I, pp. 257 to 260 26 Resolution, Docket, vol. I, p. 276 27 Docket, vol. I, pp. 293 to 301 28 Motion for Commissioning of Independent Certified Public Accountant, Docket, vol. I, pp. 234 to 236 29 Resolution, Docket, vol. I, pp. 270 to 271; Oath of Commission, Docket, vol. I, p. 268

Advanced World Systems, Inc. vs. CIR

P-9

P-10

P-11

P-12

P-13

P-14

P-15

P-16

P-17

P-18

P-19

P-20

P-21

P-965

P-965-A

P-966

P-966-A

P-967

P-968

P-968-A

P-969

P-969-A

P-22

P-22-A

P-23

P-24

P-25

P-26

P-27

P-28

P-29

P-29-1

Certificate of Incorporation of Advanced World Solutions, Inc. with Certificate No. CS200611878

Statement of Income per Registration

Annual Income Tax Return for taxable year 2006 of Advanced World Systems, Inc.

Independent Auditor's Report accompanying Petitioner's Annual Income Tax Return for taxable year ending 31

December 2006

Letter of Authority with No. LOA 2001 00062870 dated 9

May 2008

Preliminary Assessment Notice

Petitioner's Protest to Preliminary Assessment Notice

Final Assessment Notice/Formal Letter of Demand

Petitioner's Protest to Formal Assessment Notice

Final Decision on Disputed Assessment

Registration Agreement between PEZA and Advanced World Solutions, Inc.

PEZA Certificate of Board Resolution No. 06-398 PEZA Certificate of Board Resolution No. 06-399

Judicial Affidavit of Cherry Catarata

Signature of Ms. Cherry Catarata Judicial Affidavit of Ms. Myra Celeste Dabalos Signature of Ms. Myra Celeste Dabalos Judicial Affidavit of Ms. Myra Celeste Dabalos

Supplemental Judicial Affidavit of Cherry Catarata

Signature of Ms. Cherry Catarata Supplemental Judicial Affidavit of Cherry Catarata [dated

4 May 2016]

Signature of Ms. Cherry Catarata Report on the Results of the Procedures Performed on the

Verification of Documents and Schedules Relative to the

Deficiency Income Tax Assessmednt for Calendar Year

Ended December 31, 2006 Name and Signature of Myra Celeste 0. Dabalos Letters from the Board of Investment dated October 25, 2007 on the approval of Petitioner's application for Income Tax Holiday for calendar year ended December 31, 2006 Letters from the Philippine Economic Zone Authority dated July 25, 2007 on the approval of Petitioner's application for Income Tax Holiday for calendar years ended December 31, 2005 and 2006

Petitioner's General Ledger for Income and Expense

Accounts for January to March 2006

Petitioner's General Ledger for Income and Expense

Accounts for April to June 2006

Petitioner's General Ledger for Income and Expense

Accounts for July to September 2006

Petitioner's General Ledger for Income and Expense

Accounts for October to December 2006

Petitioner's Profit and Loss Schedule

Schedule of Salaries & Wages - Basic Pay - PEZA c

Advanced World Systems, Inc. vs. CIR

P-29-2

P-29-3

P-29-4

P-29-5

P-29-6

P-29-7

P-29-8

P-29-9

P-29-10

P-29-11

P-29-12

P-29-13

P-29-14

P-29-15

P-29-16

P-29-17

P-29-18

P-29-19

P-29-20

P-29-21

P-29-22

P-29-23

P-29-24

P-29-25

P-29-26

P-29-27

P-29-28

P-29-29

P-29-30

P-29-31

P-29-32

P-29-33

P-29-34

P-29-35

P-29-36

P-29-37

P-29-38

P-29-39

P-29-40

P-29-41

P-29-42

P-29-43

P-29-44

P-29-45

P-29-46

P-29-47

P-29-48

P-29-49

P-29-50

Schedule of Salaries & Wages - Allowances - PEZA Schedule of Salaries & Wages - OT Pay - PEZA Schedule of Salaries & Wages - VL Convert - PEZA Schedule of Salaries & Wages - Nth Month - PEZA

Schedule of Development Expenses- Trips- PEZA

Schedule of Development Expenses- Staff- PEZA

Schedule of Development Expenses -

Supplies &

Peripherals - PEZA

Schedule of Development Expenses - Postage and Freight

- PEZA

Schedule of Depreciation- F&F- PEZA

Schedule of Depreciation- OE- PEZA

Schedule of Depreciation - PE - PEZA

Schedule of Depreciation - LI - PEZA

Schedule of DEVOH - Rent - PEZA

Schedule of DEVOH- Light & Water- PEZA

Schedule of DEVOH- Basic Pay- PEZA

Schedule of DEVOH - Nth Month - PEZA

Schedule of DEVOH- Allowances- PEZA

Schedule of DEVOH - Benefits - PEZA

Schedule of DEVOH - Bonus - PEZA

Schedule of DEVOH- Communications- PEZA

Schedule of DEVOH- Trips- PEZA

Schedule of DEVOH -Training - PEZA

Schedule of DEVOH - Others - PEZA

Schedule of DEVOH- Fringe Benefits- PEZA

Schedule of DEVOH- Fringe Benefits Tax- PEZA

Schedule of DEVOH - Staff- PEZA

Schedule of DEVOH - Action - PEZA

Schedule of DEVOH- Others- PEZA

Schedule of Benefits- Bonus- PEZA

Schedule of Benefits - Meal Allowance - PEZA

Schedule of Benefits- SSS & Pag-ibig- PEZA

Schedule of Benefits - Other Benefits - PEZA

Schedule of Communications- PEZA

Schedule of Adm- Basic Pay- PEZA

Schedule of Adm - Allowances - PEZA

Schedule of Adm- OT Pay- PEZA

Schedule of Adm- Nth Month- PEZA

Schedule of Administrative Services - PEZA

Schedule of Contracted Services- PEZA

Schedule of Adm Benefits- Outing- PEZA

Schedule of Adm Benefits - Christmas - PEZA

Schedule of Other Adm Benefits - PEZA

Schedule of Adm Bonus - PEZA

Schedule of Recruitment Expense- PEZA

Schedule of Professional Fee- PEZA

Schedule of EAR- BOD- PEZA

Schedule of EAR - OFFICER - PEZA

Schedule of Anniversary/Others- PEZA

Schedule of Rent - PEZA

~

Advanced World Systems, Inc. vs. CIR

P-29-51

P-29-52

P-29-53

P-29-54

P-29-55

P-29-56

P-29-57

P-29-58

P-29-59

P-29-60

P-29-61

P-29-62

P-29-63

P-29-64

P-29-65

P-29-66

P-29-67

P-29-68

P-29-69

P-29-70

P-29-71

P-29-72

P-29-73

P-29-74

P-29-75

P-29-76

P-29-77

P-29-78

P-29-79

P-29-80

P-29-81

P-29-82

P-29-83

P-29-84

P-29-85

P-29-86

P-29-87

P-29-88

P-29-89

P-29-90

P-29-91

P-29-92

P-29-93

P-29-94

P-29-95

P-29-96

P-29-97

P-29-98

P-29-99

Schedule of Light & Water - PEZA

Schedule of Office Supplies - PEZA

Schedule of Adm - Communications - PEZA

Schedule of Insurance - PEZA

Schedule of Adm - Trips - PEZA

Schedule of Adm -Training - PEZA

Schedule of Taxes & Licenses - PEZA

Schedule of Repairs and Maintenance - PEZA

Schedule of Office Upkeep- PEZA

Schedule of Adm - Depreciation - PEZA

Schedule of Interest and Bank Charges - PEZA

Schedule of Printing and Reproduction- PEZA

Schedule of Association & Club Dues - PEZA

Schedule of Subscription and Periodicals- PEZA

Schedule of Gas & Oil - PEZA

Schedule of Fringe Benefits - PEZA

Schedule of Fringe Benefits Tax- PEZA

Schedule of Documentary Stamp Tax - PEZA

Schedule of Miscellaneous - PEZA

Schedule of Realized Forex Gain/Loss - PEZA

Schedule of Salaries & Wages - Basic Pay - BOI Schedule of Salaries & Wages - Allowances - BOI Schedule of Salaries & Wages - OT Pay - BOI Schedule of Salaries & Wages - VL Convert - BOI Schedule of Salaries & Wages - Nth Month - BOI

Schedule of Development Expenses -Trips - BOI

Schedule of Development Expenses - Staff - BOI

Schedule of Development Expenses - Supplies &

Peripherals - BOI

Schedule of Development Expenses - Duties - BOI

Schedule of Development Expenses - Postage and

Freight - BOI

Schedule of Depreciation - F&F - BOI

Schedule of Depreciation - OE - BOI

Schedule of Depreciation- PE- BOI

Schedule of Depreciation - LI - BOI

Schedule of DEVOH - Rent - BOI

Schedule of DEVOH - Light & Water - BOI

Schedule of DEVOH - Basic Pay - BOI

Schedule of DEVOH - Nth Month - BOI

Schedule of DEVOH- Allowances- BOI

Schedule of DEVOH- Benefits- BOI

Schedule of DEVOH- Bonus- BOI

Schedule of DEVOH - Communications - BOI

Schedule of DEVOH- Trips- BOI

Schedule of DEVOH -Training - BOI

Schedule of DEVOH- Others- BOI

Schedule of DEVOH - Depreciation - BOI

Schedule of DEVOH- Fringe Benefits- BOI

Schedule of DEVOH - Fringe Benefits Tax - BOI

Schedule of DEVOH- Staff- BOI

C-

Advanced World Systems, Inc. vs. CIR

P-29-100

P-29-101

P-29-102

P-29-103

P-29-104

P-29-105

P-29-106

P-29-107

P-29-108

P-29-109

P-29-110

P-29-111

P-29-112

P-29-113

P-29-114

P-29-115

P-29-116

P-29-117

P-29-118

P-29-119

P-29-120

P-29-121

P-29-122

P-29-123

P-29-124

P-29-125

P-29-126

P-29-127

P-29-128

P-29-129

P-29-130

P-29-131

P-29-132

P-29-133

P-29-134

P-29-135

P-29-136

P-29-137

P-29-138

P-29-139

P-29-140

P-29-141

P-29-142

P-29-143

P-29-144

P-29-145

P-30

P-31

P-32

P-33

Schedule of DEVOH- Action- BOI

Schedule of DEVOH - BU - Others - BOI

Schedule of Benefits - Bonus - BOI

Schedule of Benefits - Meal Allowance - BOI

Schedule of Benefits- SSS & Pag-ibig- BOI

Schedule of Benefits- Other Benefits- BOI

Schedule of Communications - BOI

Schedule of Adm - Basic Pay - BOI

Schedule of Adm - Allowances - BOI

Schedule of Adm - OT Pay - BOI

Schedule of Adm - VL Convert - BOI

Schedule of Adm - Nth Month - BOI

Schedule of Administrtive Services - BOI

Schedule of Contracted Services- BOI

Schedule of Adm Benefits - Outing - BOI

Schedule of Adm Benefits - Christmas - BOI

Schedule of Other Adm Benefits - BOI

Schedule of Adm Bonus - BOI

Schedule of Recruitment Expense - BOI

Schedule of Professional Fee - BOI

Schedule of EAR - BOD - BOlD

Schedule of EAR - OFFICER - BOI

Schedule of Anniversary/Others- BOI

Schedule of Rent - BOI

Schedule of Light & Water - BOI

Schedule of Office Supplies - BOI

Schedule of Adm - Communications - BOI

Schedule of Insurance - BOI

Schedule of Adm - Trips - BOI

Schedule of Adm -Training - BOI

Schedule of Taxes & Licenses - BOI

Schedule of Advertising and Promotions- BOI

Schedule of Repairs and Maintenance - BOI

Schedule of Office Upkeep - BOI

Schedule of Adm - Depreciation - BOI

Schedule of Interest and Bank Charges - BOI

Schedule of Printing and Reproduction- BOI

Schedule of Association & Club Dues - BOI

Schedule of Subscription and Periodicals - BOI

Schedule of Gas & Oil- BOI

Schedule of Fringe Benefits- BOI

Schedule of Fringe Benefits Tax - BOI

Schedule of Documentary Stamp Tax - BOI

Schedule of Doubtful Accounts Expense - BOI

Schedule of Miscellaneous- BOI

Schedule of Realized Forex Gain/Loss - BOI

Petitioner's Summary of Sales for 2006

Schedule of Sales per Registered Activity Against Invoices

and Contracts

Petitioner's Summary of Sales for 2005

Petitioner's Summary of Sales for 2007

t.

Advanced World Systems, Inc. vs. CIR

P-34

P-35 to

P-744

P-745 to

P-963

P-964

Independent Auditor's Report accompanying Petitioner's

Annual Income Tax Return for Taxable Year Ending

March 31, 2007 Petitioner's Invoices for the year ended December 31, 2006 Petitioner's Contracts with Clients for the year ended December 31, 2006

Short-Period Annual Income Tax Return for Taxable Year

Ending March 31, 2007 of ADVANCED WORLD SYSTEMS, INC.

On the other hand, respondent presented his sole witness, Ms. Rosalie M. Panuda, to disprove petitioner's claim. Subsequently, respondent formally offered his documentary and testimonial evidence, consisting of Exhibits "R-1" to "R-13-a", inclusive of sub-markings; which were all admitted by the Court. 31 Respondent's documentary evidence are as follows:

Exhibit:

R-1

R-1-a

R-2

R-2-b

R-3

R-3-a

R-3-b

R-4

R-4-a

R-4-b

R-5

R-6

R-7

R-7-a

R-7-b

R-8

R-8-a

R-9

R-10

R-10-a

R-11

R-12

Description:

Tax Verification Notice No. 00167658 dated April27, 2010 Name and signature of Artemio d. Aquino Memorandum of Assignment dated October 4, 2012 Name and signature of Rosalie M. Panuda Letter dated October 1, 2012 Name and signature of Danilo G. Uno Name and signature of Lizabeth Ong-Coro dated October 1, 2012 Letter dated October 3, 2012 Name and signature of Danilo G. Uno Name and signature of Lizabeth Ong-Coro Letter dated October 16, 2012 First page of the Memorandum Report dated October 19, 2012 Second page of the Memorandum Report dated October 19, 2012 Name and signature of Rosalie M. Panuda Name and signature of Sulpicio M. Adapon Letter dated September 30, 2013 Name and signature of Christina C. Barroga Letter-reply dated October 10, 2013 Letter dated November 12, 2013 Name and signature of Christina C. Barroga Letter dated November 20, 2013 Memorandum Report dated November 22, 2013

Advanced World Systems, Inc. vs. CIR

R-12-a

R-13

R-13-a

Name and signature of Rosalie M. Panuda Judicial Affidavit of Rosalie M. Panuda Name and signature of Rosalie M. Panuda

Page 12 of 19

Petitioner submitted its Memorandum32 on February 8, 2017; while respondent filed his Memorandum33 via registered mail on February 24, 2017 and received by the Court on March 8, 2017.

Petitioner

subsequently submitted a Reply-Memorandum34 on March 8, 2017. Considering the filing of the parties' respective memoranda, the Court declared the instant case submitted for decision on March 27, 2017.35 The parties submitted the following issue for this Court's resolution:

Whether or not petitioner is liable for deficiency income tax in the aggregate amount of P51,444,176.11, inclusive of interest, for the taxable year 2006.36 Before addressing the stipulated issue, the Court shall determine first whether it has jurisdiction over the present case. Section 228 of the National Internal Revenue Code of 1997, as amended, provides:

"SEC. 228. Protesting of Assessment -

When the

Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases:

XXX

32 Docket, vol. II, pp. 622 to 647 33 Docket, vol. II, pp. 653 to 659 34 Docket, vol. II, pp. 664 to 667 35 Resolution, Docket, vol. II, p. 669 36 Issues, JSFI, Docket, vol. I, p. 225

XXX

XXX

L

Advanced World Systems, Inc. vs. CIR

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice.

If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)- day period; otherwise, the decision shall become final, executory and demandable."

It is clear from the foregoing provision that the taxpayer has thirty

(30) days from receipt of respondent's decision denying the protest, in whole or in part, to appeal to the Court of Tax Appeals. Records indicate that petitioner received the FDDA dated December 23, 2014 on December 29, 2014; hence, petitioner had thirty (30) days from December 29, 2014 or until January 28, 2015 within which to appeal the said decision to this Court.

Since petitioner filed the instant Petition for Review on January 28, 2015, the same was seasonably filed. The Court shall now proceed to determine whether petitioner is liable for deficiency income tax for TY 2006 in the amount of P51,444, 176.11.

t

Advanced World Systems, Inc. vs. CIR

On January 25, 2010, respondent issued a FAN assessing petitioner for alleged deficiency income tax amounting to P31,619,830.79 and value-added tax in the amount of P43,312,586.32, or in the aggregate amount of P74,932,417.11.37 As such, petitioner filed its letter of protest on January 29, 2010.38 Subsequently, petitioner received the FDDA on December 29, 2014, cancelling the deficiency VAT assessment, but upholding the deficiency income tax assessment in the amount of P51,444,176.11.39 Respondent computed the assessed deficiency income tax of P51,444,176.11 as follows:

Taxable Income (Lossl per return

Add: Adjustment/Disallowance per

investigation

Undeclared Income

Taxable Income per audit Tax Due thereon

Less: Tax Credits/Payments

Prior Year's Excess Credits

Tax Paid

Creditable Tax Withheld

Total

Less: Excess Credit Carried Over to

Succeeding Year

Basic Tax Due

Add: Interest (04.16.07 to 01.30.15)

TOTAL AMOUNT DUE

Income Not Subject to

Income Tax Holiday

P57,427,667.00 p 330,812.00 57,427,667.00 p 57 758,479.00 p 20,215,467.65 p 45,379.06 29,790.05 142,625.96 p 2171795.07 102,010.87 115 784.20 p 20,099 683.45 31 344,492.66 p 51,444,176.11 Finding that petitioner's declared exempt income amounting to P57,427,667.00, as computed below, was not allegedly covered by Income Tax Holiday based on the certifications submitted, respondent 37 Par. 7, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-16", Docket, vol. I, pp. 540 to 545 38 Par. 8, Admitted Facts, JSFI, Docket, vol. I, p. 224; Exhibit "P-17", Docket, vol. I, p. 550 39 Par. 11, Admitted Facts, JSFI, Docket, vol. I, p. 225; Exhibit "P-18", Docket, vol. I, pp. 552 to 555

L

Advanced World Systems, Inc. vs. CIR assessed petitioner of deficiency income tax pursuant to Section 32(A) of the NIRC of 1997, as amended:40

Total Sales - PEZA

p 219,189,280.00

Less: Cost of Sales/Services

122,041,469.00 i

Gross Income

p 97_L147_L811.00

Add: Other Income

-

Total Gross Income

p 97 147,811.00

Less: Deductions

24,893,658.00

Taxable Income

p 72,254,153.00

Less: Taxable Income Subject to Income Tax Holiday

14,826,486.00

Income Not Subject to Income Tax Holiday

p 57,427,667.00 A reading of the Details of Discrepancies discloses that the assessment is based on the premise that petitioner, as opined by the

Legal

Division of Revenue Region

No.

8-Makati, cannot avail simultaneously of the Income Tax Holiday both from the PEZA under Republic Act No. 7916 and from the BOI under RA No. 7918. The Court finds the assessment unwarranted. Pursuant to Sections 23 and 24 of RA No. 791641 otherwise known as "The Special Economic Zone Act of 1995", business enterprises registered with the PEZA may choose between two fiscal incentive schemes: (a) to pay a five percent (5°/o) preferential tax rate on its gross income under the said law; or (b) an Income Tax Holiday provided under Executive Order (EO) No. 226, or the Omnibus Investments Code of 1987, as amended, to wit:

"SECTION 23.

Fiscal

Incentives.

-

Business

establishments operating within the ECOZONES shall be entitled to the fiscal incentives as provided for under the Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987."

40 Exhibit "P-18", Annex A, Details of Discrepancies, Docket, val. I, p. 554 41 An Act Providing for the Legal Framework and Mechanisms for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes.

L

Advanced World Systems, Inc. vs. CIR

"SECTION 24.

Exemption from National and Local Taxes. - Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5°/o) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows:

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

(b) Two percent (2°/o) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located." Likewise, EO No. 226, as amended by RA No. 7918, grants Income Tax Holiday to BOI -registered entities, the pertinent parts of which are quoted hereunder:

"ARTICLE 39. Incentives to Registered Enterprises.- All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment:

(a) Income Tax Holiday.-

(1) For six (6) years from commercial operation for pioneer firms and four ( 4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases:

i.

The project meets the prescribed ratio of capital equipment to number of workers set by the Board;

ii.

Utilization of indigenous raw materials at rates set by the Board;

L

Advanced World Systems, Inc. vs. CIR iii. The net foreign exchange savings or earnings amount to at least US$500,000 annually during the first three (3) years of operation.

Page 17 of 19

The preceding paragraph notwithstanding, no registered pioneer firm may avail of this incentive for a period exceeding eight (8) years."

Stated differently, both the PEZA and the BOI may grant Income Tax Holiday to enterprises registered with them. On September 18, 2001, petitioner registered with the BOI its service activities in its Muntinlupa and Cebu offices as a pioneer enterprise on certain research and development and a new service firm in the field of software development. Under such registration, petitioner enjoys, among other incentives, a six (6)-year Income Tax Holiday from the start of commercial operations in September 2001 until September 2007.42 On March 14, 2005, petitioner registered with the PEZA its activities in its Makati office, and was granted one (1) year to enjoy the incentives thereon with a condition, which reads as follows: 43 "Within one (1) year from the date of signing of (the Registration Agreement), the REGISTRANT shall file an application with PEZA for registration of a new/separate entity to exclusively handle its PEZA-registered project at the Multinational Bancorporation Centre (MBC) subject to PEZA- approval; unless prior to or upon the end of the one-year period, the Citibank-Frabelle Building in Alabang and the PDI Condominium at Cebu City, where its other SOl-registered operations are located are proclaimed as PEZA IT Buildings and the REGISTRANT's projects in the said buildings are likewise registered with PEZA, or if a PEZA policy is issued allowing PEZA-registered enterprises to maintain their non- PEZA registered projects under the same entity registered with PEZA."

42 Exhibits "P-4" and "P-12", Docket, val. I, pp. 462-467 and 500; Docket, val. I, p. 489. 43 Exhibits "P-5", "P-7", and "P-12", Docket, val. I, pp. 468, 472, and 501.

L

Advanced World Systems, Inc. vs. OR

Through the Letters dated February 22, 200644 and June 26, 200645, the PEZA granted petitioner's request for an extension in the registration of a new/separate entity until June 30, 2006 and August 1, 2006, respectively.

On July 31, 2006, the new entity as required by PEZA was registered under the name of "Advanced World Solutions, Inc.".46 Accordingly, the registered activity undertaken by petitioner in its Makati office was taken over by the newly-registered entity. On August 25, 2006, PEZA cancelled petitioner's registration as an Ecozone IT Enterprise at the Multinational Bancorporation Centre.47 Clearly, petitioner is not only SOl-registered, but was also PEZA- registered. Accordingly, petitioner can avail of the Income Tax Holiday on the activities registered with the BOI, and on those registered with the PEZA. Petitioner's entitlement to the incentive arose from projects/activities in different locations duly registered with different authorities. Also, the incentive was granted pursuant to different laws. Thus, contrary to respondent's allegation, there was no simultaneous availment of the Income Tax Holiday incentive for the same project/activity in the same site/location.

Excess Tax Credit Carried

Over to Succeeding Years-

P102,010.87 Respondent disallowed the excess tax credit because the same would be allegedly credited against the income tax due for the taxable quarters/years immediately succeeding the taxable quarters/years in which the excess credit arose, pursuant to Section 2.58.3 of Revenue Regulations No. 2-98.

Any tax benefit derived by petitioner from such carry-over redounds to the succeeding period; at most, petitioner may only be 44 Exhibit "P-7", Docket, vol. I, p. 472 45 Exhibit "P-8", Docket, vol. I, p. 473 46 Exhibit "P-9", Docket, vol. I, p. 474 47 Exhibit "P-21", Docket, vol. I, p. 565; Exhibit "P-5", Docket, vol. I, p. 468 t.

erA Case No. 8977 Advanced World Systems, Inc. vs. CIR assessed in the succeeding period.

Therefore, the disallowance of the carry-over is not proper.

In fine, petitioner is not liable for any deficiency income tax.

WHEREFORE, premises considered, the instant Petition for Review is GRANTED.

Accordingly, the Final Decision on Disputed Assessment and the Formal Assessment Notice issued by respondent against petitioner for taxable year 2006 covering deficiency income tax are hereby CANCELLED and SET ASIDE.

WE CONCUR:

Presiding Justice

~ fJ, M~,Lw- 6'~ CIELITO N. MINDARO-GRULLA

Associate Justice

...

ER~P.UY

Associate Justice

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, 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

Chairperson, 1st Division