Davao City Food Industries, Inc. vs. Commissioner of Internal Revenue

DECISION

BAUTISTA, J.:

The Case

This case involves a Petition for Reviewl, which seeks to cancel and withdraw the deficiency income tax, value-added tax ("VAT"), expanded withholding tax ("EWT"), documentary stamp tax ("DST"), and final withholding tax ("FWT") assessments issued by respondent against petitioner for calendar year (" CY") 2011 in the total amount of Php17,236,148.10, inclusive of interests, surcharges, and penalties. 2

The Parties

Petitioner Davao City Food Industries, Inc. is a corporation duly organized and existing under the laws of the Republic of the Philippines, with registered principal office address at Victoria Plaza,

Page 2 o£37 JP Laurel Avenue, Bajada, Davao City.3 It is authorized by the Securities and Exchange Commission to transact business in the Philippines under SEC Registration No. AS92001173 dated January 1, 1992.4 On the other hand, respondent Commissioner of Internal Revenue (" CIR") is the duly appointed Commissioner of the Bureau of Internal Revenue ("BIR") vested under appropriate laws with the authority to carry out the functions, duties, and responsibilities of his office, including, inter alia, the power to decide disputed assessments and cancel and abate tax liabilities pursuant to the provisions of the 1997 National Internal Revenue Code, as amended ("1997 NIRC")5 and other tax laws, rules, and regulations. He holds office at the BIR National Office Building, BIR Road, Diliman, Quezon City.6

The Facts

On June 7, 20137, the BIR issued Letter of Authority ("LOA") No. LOA-123-2013-00000004 authorizing Revenue Officers Bianca Bess Bureros and Vivian Pollisco and Group Supervisor Alicia Socorro Abutazil to examine petitioner's books of accounts and accounting records for all internal revenue taxes for CY 2011.8 Petitioner received the LOA on July 1, 2013.9 On September 2, 201410, the BIR issued a Preliminary Assessment Notice ("PAN") finding petitioner liable for deficiency income tax, VAT, EWT, DST, and FWT for CY 2011 in the aggregate amount of Php16,867,856.60, inclusive of interest and compromise.11 Petitioner received the PAN on September 8, 2014.12 On September 17, 2014, petitioner executed a Waiver of the Defense of Prescription Under the Statute of Limitations of the 3 Records, Vol. 2, Joint Stipulation of Fact (''JSF") 2, par. 1, pp. 776-778. Noted by the Court (see Records, Vol. 2, Resolution, p. 788).

4 Id.

5 Republic Act No. 8424, as amended (1997). 6 Records, Vol. 1, JSF, Statement of Facts, par. 1, p. 445. 7 Bureau of Internal Revenue ("BIR") Records, Letter of Authority ("LOA"), p. 727. 8 Records, Vol. 1, JSF, Statement of Facts, par. 2, pp. 445-446. 9 BIR Records, LOA, p. 727.

lO Id., Exhibit "R-6," Preliminan; Assessment Notice ("PAN"), pp. 882-893. 11 Records, Vol. 1, ]SF, Statement of Facts, par. 3, p. 446. 12 BIR Records, Exhibit "R-6," PAN, p. 893.

I

Page 3 o£37 National Internal Revenue Code (the "Waiver"). On September 29, 201413, the BIR issued a Formal Letter of Demand with attached Details of Discrepancies and Assessment Notices (the "FAN") finding petitioner liable for deficiency income tax, VAT, EWT, DST, and FWT for CY 2011 in the aggregate amount of Php17,236,148.10, inclusive of interest and compromise.14 Petitioner received the FAN on October 8, 2014.15 On November 6, 2014, petitioner filed its protest letter to the FAN and requested for a reinvestigation of the same.16 On February 17, 2015, petitioner received the Final Decision on Disputed Assessment ("FDDA") issued by the BIR finding petitioner liable for deficiency income tax, VAT, EWT, DST, and FWT, with compromise penalties, for CY 2011 in the aggregate amount of Php17,236,148.10.17 Aggrieved, on March 19, 2015, petitioner filed the present Petition for Review1s.

After being granted extensions,19 respondent filed his Answer2o on May 19,2015.

Respondent's Pre-Trial Brief21 was filed on July 10, 2015 while petitioner submitted its Pre-Trial Brief22 on September 17, 2015. Thereafter, a pre-trial conference was held on September 22, 2015.23 Together, the parties filed their Joint Stipulation of Facts24 on October 13 BIR Records, Exhibit "R-8," Formal Letter of Demand with attached Details of Discrepancies and Assessment Notices ("FAN"), pp. 908-924. 14 Records, Vol. 1, JSF, Statement of Facts, par. 4, pp. 446-447. 1s BIR Records, Exhibit "R-8," FAN, p. 924. 16 Petitioner's Formal Offer of Evidence ("FOE"), Box 2, Exhibit "P-84," Protest to the FAN; BIR Records, Protest to the FAN, pp. 939-1062.

17 BIR Records, Exhibit "R-10," Final Decision on Disputed Assessment (" FD DA "), pp. 1225-1233. 18 Records, Vol. 1, PFR, pp. 6-149, with annexes. 19 Records, Vol. 1, Motion for Extension of Time to File Answer, pp. 152-155; Records, Vol. 1, Resolution,

p. 157; Records, Vol. 1, Urgent Motion for Extension ofTime to File Answer, pp. 158-161. 2o Records, Vol. 1, Answer, pp. 162-179. 21 Id., Respondent's Pre-Trial Brief, pp. 206-214. 22 I d., Pre-Trial Brief with Motion for Commissioning of Independent Certified Public Accountant, pp. 233- 245.

23 Id., Minutes of Hearing dated September 22, 2015, p. 443. 24 Id., JSF, pp. 445-455.

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Page4 o£37 2, 2015, which was adopted by the Court in the Pre-Trial Order2s issued on November 16, 2015.

Petitioner proceeded with the presentation of its evidence. To this end, the following witnesses appeared: (¹) Ms. Cristina S. Cafiizares, petitioner's Head of Accounting;26 (²) Ms. Cornelia M. Naguit, Director of Finance- General Accounting of Golden Arches Development Corporation ("GADC");27 and (3) Ms. Madonna Mia S. Dayego, the Court-commissioned Independent Certified Public Accountant ("ICPA").2s Thereafter, petitioner filed its Formal Offer of Evidence29 on June 17, 2016 wherein it offered Exhibits "P-1," "P-1-a," "P-3," "P-3-1," "P- 4," "P-5," "P-6," "P-6-a," "P-7," "P-7-a," "P-8" to "P-79," "P-80," "P- 80-1 " "P-80-2" "P-81 " "P-81-1 " "P-81-2" "P-82" "P-82-1 " "P-82-2" , , , , , , , , "P-83," "P-83-1," "P-83-2," "P-84," "P-85," "P-85-a," "P-86," "P-86-a," "P-87," "P-87-a," "P-92," "P-92-1" to "P-92-4," "P-93," "P-94," "P-95," 11P-95-1" to "P-95-690" "P-96" "P-96-1" to "P-96-728" "P-97" "P-98" , , , , , "P-99," "P-99-1" to "P-99-9," "P-100," "P-101," "P-101-1" to "P-101- 34," "P-102," "P-102-1," "P-103," "P-103-1" to "P-103-4," "P-104," "P- 104-1," "P-104-2," "P-105," "P-105-1" to "P-105-47," "P-106," "P-107," "P-107-1" to "P-107-30 ""P-108 ""P-108-1" to "P-108-33 ""P-109 ""P- , , , , 109-1" to "P-109-86," "P-110," "P-111," "P-111-1" to "P-111-693," "P- 124" "P-125 " "P-125-1" to "P-125-73" "P-126" "P-126-1" to "P-126- , , , , 12," "P-127," "P-127-1" to P-127-7," "P-128," "P-128-1" to "P-128-3," "P-130," "P-131," "P-131-1" to "P-131-50," "P-132," "P-132-1" to "P- 132-79," "P-133," "P-133-1" to "P-133-19," "P-134," "P-134-1" to "P- 134-78," "P-135," "P-135-1" to "P-135-76," "P-136," "P-136-1" to "P- 136-16," "P-137," "P-137-1" to "P-137-49," "P-138," "P-138-1" to "P- 138-204," "P-139," "P-139-1" to "P-139-43," "P-140," "P-140-1" to "P- 140-166," "P-141," "P-142," "P-143," "P-143-1" to "P-143-31," "P-144," "P-144-1," "P-144-2," "P-145," "P-145-1" to "P-145-31," "P-146," and "P-146-1" to "P-146-12." Respondent filed his Comment (Re: Petitioner's Formal Offer of Evidencepo on June 20, 2016. In a 25 Records, Vol. 1, Pre-Trial Order ("PTO"), pp. 476-486. 26 Records, Vol. 1, Minutes of Hearing dated Februan; 22,2016, p. 500; Records, Vol. 2, Minutes of Hearing dated April 18, 2016, p. 661; Records, Vol. 1, Exhibit "P-1," Judicial Affidavit of Witness Cristina S. Caiiizares, pp. 247-398, with annexes.

27 Records, Vol. 2, Minutes of Hearing dated April18, 2016, p. 661; Records, Vol. 1, Exhibit "P-3," Judicial Affidavit ofWitness Cornelia M. Naguit, pp. 416-425. 28 Records, Vol. 2, Minutes of Hearing dated May 16,2016, p. 775; Records, Vol. 2, Exhibit "P-87," Judicial Affidavit of Independent Certified Public Accountant Madonna Mia S. Dayego, pp. 760-774. 29 Records, Vol. 2, Formal Offer of Evidence, pp. 795-820. 30 Id., Comment (Re: Petitioner's Formal Offer of Evidence), pp. 821-824. rl

Page 5 o£37 Resolution31 dated July 12, 2016, the Court admitted all of petitioner's evidence, subject to its final evaluation and/ or appreciation of their probative value to the issues involved in the case. Respondent then proceeded with the presentation of his evidence. In this regard Ms. Alicia Socorro T. Abutazil, the group supervisor authorized to conduct the examination and investigation of petitioner's books of accounts for CY 2011, appeared.32 On November 22, 2016, respondent filed his Formal Offer of Documentary Evidence33 wherein he offered Exhibits "R-1," "R-1-a," "R-1-b," "R-2," "R-3," "R-4," "R-4-a," "R-5," "R-6," "R-7," "R-8," "R- 8-a" to "R-8-e," "R-9," "R-10," "R-11," and "R-11-a." Petitioner submitted its Comment/Opposition (Re: Respondent's Formal Offer of Documentary Evidence)34 on December 12, 2016. In a Resolution35 dated March 23,2017, the Court admitted all of respondent's evidence, likewise subject to its final evaluation and/ or appreciation of their probative value to the issues involved in the case. After being granted an extension,36 petitioner filed its Memorandum37 on June 19, 2017; however, respondent failed to file his memorandum despite notice.38 On June 27, 2017, the Court issued a Resolution39 submitting the case for decision; hence, this Decision.

The Issues40

The issues for consideration of this Court are, as follows:

WHETHER RESPONDENT'S RIGHT TO ASSESS

31 Records, Vol. 2, Resolution, pp. 834-836. 32 Records, Vol. 2, Minutes of Hearing dated November 21,2016, p. 839; Records, Vol. 1, Exhibit "R-11," Judicial Affidavit of Revenue Officer Alicia Socorro T. Abutazil, pp. 220-227. 33 Records, Vol. 2, Formal Offer of Documentan; Evidence, pp. 841-849. 34 Id., Comment/Opposition (Re: Respondent's Formal Offer ofDocumentan; Evidence), pp. 850-853. 35 Id., Resolution, pp. 858-859.

36 Records, Vol. 2, Motion for Extension of Time to File Memorandum, pp. 861-863; Records, Vol. 2, Resolution, p. 866.

37 Records, Vol. 2, Memorandum, pp. 867-911. 38 See Records, Vol. 2, Records Verification Report, p. 860. 39 Records, Vol. 2, Resolution, p. 913.

40 Id., Vol. 1, PTO, Issues, pp. 479-480. r

Page 6 o£37

PETITIONER FOR DEFICIENCY TAXES FOR CY 2011

HAS PRESCRIBED;

WHETHER THE ASSESSMENT FOR DEFICIENCY

INCOME TAX, VAT, EWT, DST, AND FWT SHOULD BE

CANCELLED AND WITHDRAWN FOR BEING DEVOID

OF ANY LEGAL AND/ OR FACTUAL BASIS; AND

WHETHER PETITIONER IS LIABLE TO PAY

DEFICIENCY INCOME TAX, VAT, EWT, DST, AND FWT FOR CY 2011 IN THE AMOUNT OF PHP17,236,148.10, AS

WELL

AS

DEFICIENCY

AND

DELINQUENCY

INTERESTS, AS PROVIDED IN SECTIONS 248 AND 249 OF THE 1997 NIRC.

The main issue to be resolved by this Court is whether the deficiency tax assessments made by respondent against petitioner for CY 2011 are valid.

Petitioner's Arguments41

Petitioner argues that respondent's right to assess petitioner for deficiency taxes for CY 2011 has prescribed, considering the Waiver petitioner executed was defective as the copy thereof in petitioner's possession was not signed by respondent nor any of his authorized representatives; and did not state the date of acceptance, as prescribed under Revenue Memorandum Order ("RMO") No. 20-9042• Petitioner likewise contends that the assessments for deficiency income tax, VAT, EWT, DST, and FWT should be cancelled and withdrawn for being devoid of any legal and/ or factual basis. To this end, petitioner posits that: (1) the FDDA it received was null and void for its failure to state the factual and legal bases for the assessments which therefore constitutes a violation of petitioner's right to due process; (2) the alleged undeclared sales of petitioner was only the result of an erroneous disclosure in petitioner's Audited Financial Statements(" AFS") for CY 2011; (3) the VAT assessment has no legal or factual basis; (4) no DST is due on trade payables for management services; (5) advertising expenses do not constitute royalties for which 41 Records, Vol. 2, Memorandum, Discussion, pp. 873-909. 42 April4, 1990.

1.·

Page 7 o£37 FWT is due; and (6) petitioner is not liable for deficiency or delinquency interests.

Respondent's Counter-Arguments43

Respondent counters that petitioner's contention of prescription and execution of an invalid Waiver is inappropriate; and that petitioner cannot impugn the validity of the Waiver which it executed. Respondent likewise claims that he observed both procedural and substantive due process in the issuance of the assessments against petitioner, in accordance with law, rules, and jurisprudence. Finally, respondent argues that, in fact, petitioner was able to protest the assessment as the PAN, the FAN, and the FDDA sufficiently stated the facts and the law on which the assessments were based.

The Ruling of the Court

The Court holds that the assessments against petitioner for deficiency taxes are partially valid.

The defective Waiver did not toll the running of the three (3)-year period to assess petitioner.

Petitioner argues that the Waiver executed in the present case was defective. Consequently, the assessments issued by respondent for deficiency taxes have already expired. The Court holds that, indeed, the Waiver executed in the present case was infirm; hence, the same did not toll the running of the three (3)-year period to assess petitioner.

Section 203 in relation to Section 222(b) of the 1997 NIRC provides that internal revenue taxes shall be assessed within three (3) years from the last day prescribed by law for the filing of the return or the day the return was filed, whichever comes later, unless the CIR and the taxpayer timely agree in writing to extend the period to assess. The relevant provisions state:

Sec. 203. Period of Limitation Upon Assessment and 43 Records, Vol. 1, Answer, Special and Affirmative Defenses, pp. 165-176. ~

Page 8 o£37 Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where the return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.

XXX

XXX

XXX

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

XXX

XXX

XXX

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.

XXX

XXX

xxx44 The exception to the three (3)-year prescriptive period for assessment of taxes refers to the execution by the CIR and the taxpayer of a valid Waiver of the Statute of Limitations. The Supreme Court, in CIR v. Kudos Metal Corporation4s, provided the guidelines for the execution of a valid Waiver, as follows: Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 lay down the procedure for the proper execution of the waiver, to wit:

1.

The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after 19_", which 44 Underscoring ours.

45 G.R. No. 178087, May 5, 2010, 620 SCRA 232.

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Page 9 o£37 indicates the expiry date of the period agreed upon to assess/ collect the tax after the regular three-year period of prescription, should be filled up.

2.

The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.

3.

The waiver should be duly notarized.

4.

The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative. 5.

Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

6.

The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement. 46 In Philippine Journalists, Inc. v. CJR47, the Supreme Court held that the guidelines for the execution of a Waiver must be strictly complied with as it is a derogation of the taxpayer's right against unreasonable investigation, thus:

The NIRC, under Section 203 and 222, provides for a statute of limitations on the assessment and collection of internal revenue taxes in order to safeguard the interest of the taxpayer against unreasonable investigation. Unreasonable 46 Underscoring ours.

47 G.R. No. 162852, December 16, 2004, 447 SCRA 214. rJ investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subject to further investigation for taxes after the expiration of a reasonable period of time. As was held in Republic of the Phils.

v. Ablaza:

XXX

XXX

XXX

RMO No. 20-90 implements these provisions of the NIRC relating to the period of prescription for the assessment and collection of taxes. A cursory reading of the Order supports petitioner's argument that the RMO must be strictly followed, thus:

XXX

XXX

XXX

A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayers' right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription as erroneously held by the Court of Appeals. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. RMO No. 20-90 explains the rationale of a waiver:

XXX

XXX

xxx48 Accordingly, prevailing jurisprudence mandates the strict observance of the guidelines provided in RMO No. 20-90 and Revenue Delegation Authority Order ("RDAO") No. 05-0149 as regards the execution of Waivers. Care should be taken, however, in the application of the aforementioned general rule (i.e., strict observance 48 Underscoring ours.

49 August 2, 2001.

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Page 11 o£37 of the tax regulations as regards the execution of Waivers) considering that the Supreme Court carved out an exception to the strict application of RMO No. 20-90 and RDAO No. 05-01 in the case of CIR

v. Next Mobile, Inc. so (the "Next Mobile case"). In the Next Mobile case, the Supreme Court held that while faithful compliance with the provisions of RMO No. 20-90 and RDAO No. 05-01 must be observed in order for a Waiver to be valid and binding, the equitable principles of in pari delicto, unclean hands, and estoppel should be applied such that the validity of defective Waivers should be upheld in keeping with the lifeblood theory of taxation. The relevant discussion of the Supreme Court reads: The general rule is that when a waiver does not comply with the requisites for its validity specified under RMO No. 20- 90 and RDAO [No.] 01-05, it is invalid and ineffective to extend the prescriptive period to assess taxes. However, due to its peculiar circumstances, We shall treat this case as an exception to this rule and find the Waivers valid for the reasons discussed below.

First, the parties in this case are in pari delicto or "in equal fault." In pari delicto connotes that the two parties to a controversy are equally culpable or guilty and they shall have no action against each other. However, although the parties are in pari delicto, the Court may interfere and grant relief at the suit of one of them, where public policy requires its intervention, even though the result may be that a benefit will be derived by one party who is in equal guilt with the other. Here, to uphold the validity of the Waivers would be consistent with the public policy embodied in the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need. Taxes are the nation's lifeblood through which government agencies continue to operate and which the State discharges its functions for the welfare of its constituents. As between the parties, it would be more equitable if petitioner's lapses were allowed to pass and consequently uphold the Waivers in order to support this principle and public policy.

Second, the Court has repeatedly pronounced that parties must come to court with clean hands. Parties who do not come to court with clean hands cannot be allowed to benefit from so G.R. No. 212825, December 7, 2015.

t their own wrongdoing. Following the foregoing principle, respondent should not be allowed to benefit from the flaws in its own Waivers and successfully insist on their invalidity in order to evade its responsibility to pay taxes. Third, respondent is estopped from questioning the validity of its Waivers. While it is true that the Court has repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the statute of limitations for assessment of taxes, the Court finds that the application of the doctrine is justified in this case. Verily, the application of estoppel in this case would promote the administration of the law, prevent injustice and avert the accomplishment of a wrong and undue advantage. Respondent executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely on them and did not raise any objection against their validity until petitioner assessed taxes and penalties against it. Moreover, the application of estoppel is necessary to 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 highly suspicious situation. In this case, the taxpayer, on the one hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance with its rules. The BIR's negligence in the performance of its duties was so gross that it amounted to malice and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to the mistakes in the Waivers. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities. It is true that petitioner was also at fault here because it was careless in complying with the requirements of RMO No. 20-90 and RDAO [No.] 01-05. Nevertheless, petitioner's negligence may be addressed by enforcing the provisions imposing administrative liabilities upon the officers responsible for these errors. The BIR' s right to assess and collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers, especially in cases like this where the taxpayer is obviously in bad faith.

In the present case, a review of the evidence presented by the parties reveals that the application of the general rule, insofar as the

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Page 13 o£37 strict observance of the applicable tax regulations is required, should be applied; and not the exception as embodied in the Next Mobile case. In contrast to the Next Mobile case, only one Waiver was executed by the parties in the present case. Further, the parties cannot be considered in pari delicto as the defects in the present case can only be attributable to respondent. Specifically, the Court notes that there are infirmities in the Waiver executed. First, petitioner's copy of the Waiver does not bear the signature of the CIR or his duly authorized representative and the date of such acceptance.s1 However, the Waiver attached to the BIR Records indicates that the same was signed by the CIR' s duly authorized representative and the latter's date of acceptance.52 Second, petitioner's receipt of the duly accepted Waiver was not indicated on the original copy of the Waiver attached to the docket of the case.53 In fact, it would appear that the BIR retained all the copies of the Waiver as the BIR Records show that three (3) original copies of the Waiver were attached therein. Having found the Waiver in the present case defective due to respondent's actions, it follows that the period to assess granted to respondent was not extended. Notwithstanding that the prescriptive period for respondent to assess petitioner for CY 2011 was not extended, however, the Court finds that some of the deficiency tax assessments made against petitioner were timely made. The following assessments against petitioner for CY 2011 have not yet prescribed: income tax, VAT, August to December EWT, DST, and FWT.

The assessments made against petitioner for CY 2011 cover the following taxes: income tax, VAT, EWT, DST, and FWT. Following Section 203 of the 1997 NIRC, the prescribed due dates for filing of the respective returns- which shall be used as bases for the counting of the three (3)-year prescriptive period- shall vary. With regard to the income tax assessment, Section 77(B) of the 1997 NIRC provides that the filing of the Income Tax Return ("ITR") shall be on or before the fifteenth (15th) day of April, or the fifteenth 51 Petitioner's FOE, Box 2, Exhibit "P-5." 52 BIR Records, Waiver, p. 936.

53 Id.

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Page 14 o£37 (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be, to wit:

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

XXX

XXX

XXX

(B) Time of Filing the Income Tax Return. -The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. 54 On the other hand, with regard to the VAT assessment, Section 114(A) of the 1997 NIRC provides that the filing of the Quarterly VAT Returns must be made within twenty-five (25) days after the close of each taxable quarter, as follows:

Sec. 114. Return and Payment of Value-added Tax.- (A) In General. - Every person liable to pay the value- added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five

(25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis. 55 Meanwhile, with regard to the withholding tax assessments, Revenue Regulations ("RR") No. 02-98, as amended56 provides that, as a rule, the filing of withholding tax returns shall be made within ten (10) days after the end of each month except for taxes withheld for December, the return for which must be filed by January 15 of the following year. However, if the taxpayer avails of the electronic filing and payment (" eFPS"), the filing of the withholding tax returns shall be made, as a rule, five (5) days later than the deadlines set for manual filing. The relevant provisions of RR No. 02-98 provide: 54 Underscoring ours.

55 Underscoring ours.

56 April17, 1998.

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Page 15 o£37 Sec. 2.58. Returns and Payment of Taxes Withheld at Source. (A) Monthly return and payment of taxes withheld at source.-

XXX

XXX

XXX

(2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payment should be made, within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before I anuary 15 of the following year.

(b) With respect, however, to taxpayers, whether large or non-large, who availed of the electronic filing and payment (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) days later than the deadlines set above. 57 Finally, with regard to

the DST

assessment, Revenue Memorandum Circular No. 01-98, as amended58 provides that the DST return shall be filed within five (5) days from the close of the month when the taxable document was made, as follows: (19) The documentary stamp tax return shall be filed within five (5) days after the close of the month when the taxable document was made, signed, accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed.

Based on the foregoing prescriptive periods, the relevant dates for the determination of the timeliness of the income tax, VAT, and EWT assessments against petitioner for CY 2011 are summarized in the table below. The Court notes, however, that petitioner failed to present its original returns for the following taxes: second to fourth quarter 57 Underscoring ours.

58 January 2, 1998.

(

VAT and August EWT. In this regard, the Court shall consider the filing of the amended returns as the date of filing of the return for purposes of computing the three (3)-year prescriptive period to assess.

TAX RETURN

MODE OF

DATE OF ACTUAL

LAST DAY TO FILE

LAST DAY TO

FILING

FILING

RETURN

ASSESS

Income Tax- Annual filing

Annual ITRS9

eFPS April12, 2012 AQril15, 2012 April15, 2015 VAT - Quarterly filing 1st Quarte:r60 eFPS January 3, 2012 April26, 2011 January 3, 2015 2nct Quarter (Amended)61 eFPS January 3, 2012 July 25, 2011 January 3,2015 3rct Quarter (Amended)62 eFPS January 3, 2012 October 25, 2011 January 3, 2015 4th Quarter (Amended)63 eFPS Max 2, 2012 January 25, 2012 May2,2015 EWT - Monthly filing64

January65

Manual

February 10, 2011 February 10, 2011 February 10, 2014

February66

Manual

March 10,2011 March 10, 2011 March 10, 2014

March67

Manual

A12ril11, 201168 April10, 2011 April11, 2014

April69

Manual

Max10, 2011 Max10, 2011 May10, 2014 May7o

Manual

June 9, 2011 June 10, 2011 June 10, 2014

June71

Manual

Julx 11, 201F2 July 10, 2011 July 11, 2014

July73

eFPS August 12, 2011 August 13, 2011 August 13, 2014

August (Amended)74

eFPS I anum 30, 2012 September 13, 2011 January 30, 2015

September75

eFPS October 13, 2011 October 13, 2011 October 13, 2014

October76

eFPS November 14,201177 November 13, 2011 November14,2014 November7s eFPS December 14, 2011 December 13,2011 December 14, 2014

December79

eFPS Ianuary 13, 2012 Ianuary 13, 2012 January 13, 201580 Guided by the foregoing dates, it is clear that only the following assessments for CY 2011 were timely made, considering the FAN was issued on September 29, 2014: income tax, first to fourth quarter VAT, and August to December EWT; while the CIR's right to assess EWT for January to July has prescribed.

59 Petitioner's FOE, Box 1, Folder 7, Exhibit "P-103-1." 60 Petitioner's FOE, Box 1, Folder 1, Exhibit "P-92-1;" BIR Records, pp. 645-644. 61 Petitioner's FOE, Box 1, Folder 1, Exhibit "P-92-2;" BIR Records, pp. 643-642. 62 Petitioner's FOE, Box 1, Folder 1, Exhibit "P-92-3;" BIR Records, pp. 641-640. 63 Petitioner's FOE, Box 1, Folder 1, Exhibit "P-92-4;" BIR Records, pp. 639-638. 64 Pursuant toRR No. 26-02 (December 5, 2002), taxpayers engaged in retail sale- such as petitioner in the present case - belong to Group C and should file their returns via eFPS thirteen (13) days following the end of the month.

65 BIR Records, p. 598.

66 Id. at 597.

67 I d. at 596.

68 April10, 2011 fell on a Sunday.

69 BIR Records, p. 595.

7o I d. at 594.

n Id. at 593.

n July 10, 2011 fell on a Sunday.

73 BIR Records, pp. 580-579.

74 Id. at 578-577.

75 Id. at 576-575.

76 Id. at 574-573.

77 November 13, 2011 fell on a Sunday.

78 BIR Records, pp. 572-571.

79 Id. at 570-569.

80 Base dates underscored, prescription dates after the date of issuance of the FAN in bold. (

Insofar, however, as the DST and FWT assessments are concerned, the ten (10)-year prescriptive period under Section 222(a) of the 1997 NIRCB1 applies as there is no showing that petitioner filed any return for the said deficiency tax assessments. Consequently, the DST and FWT assessments were timely made.

Petitioner

is not liable for deficiency EWT and FWT as the same are without basis; however, petitioner is liable for deficiency income tax, VAT, and DST as the same are partially valid.

The Court shall now discuss each item of assessment in seriatim.

INCOME TAX

In arriving at the deficiency income tax assessment of Php968,451.52, respondent included in the computation (1) disallowed expenses not subjected to withholding tax, (2) a discrepancy of sales per ITR against VAT Returns, and (3) disallowed amortization expenses for petitioner's failure to provide supporting documents. Below is respondent's detailed computation of the alleged deficiency income tax:82

INCOME TAX

Taxable Income per Income Tax Return

Adjustment per Audit

Disallowed Expenses not Subjected to Withholding Tax Discrepancy of amount of sales per ITR and VAT Returns Disallowed Amortization Expense (unsupported)

Total

81 The relevant provision states:

Php 6,875,752.00 156,950.50 1,914,850.67 9,166.75 Php 8,956,719.92 Sec. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.- (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten

(10) years after the discovery of the falsity, fraud or omission; Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

82 Records, Vol. I, FDDA, pp. 46-47; Records, Vol. I, Formal Letter of Demand ("FLO"), p. 60. (

Page 18 o£37

Income Tax Due

Income Tax Paid

Tax Deficiency

Add: Interest (Up to October 31, 2014)

Compromise

TOTAL INCOME TAX DEFICIENCY

1. Disallowed Expenses not

Subjected

to

Withholding

Tax

Php156,950.50.

Php 2,687,015.98 2,061,589.53

Php

625,426.45 318,025.07 25,000.00 PHP 968,451.52 A comparison of income payments subject to withholding tax claimed per AFS/ITR as against the Alphalist disclosed that petitioner has not subjected to withholding tax expenses amounting to Php156,950.50; hence, the same is disallowed pursuant to Section 34(K) of the 1997 NIRC.

2. Discrepancy of Amount

of Sales per ITR and VAT

Returns

Php1,914,850.67.

Respondent assessed petitioner for income tax deficiency pertaining to the difference of Php1,914,850.67 resulting from the BIR' s comparison of petitioner's quarterly VAT returns (BIR Form No. 2550Q) for CY 201183 against the annual ITR for CY 201184 and petitioner's disclosure in Note 1985, Supplementary Information Required under RR No. 15-1QB6 of the AFS for CY 2011, details as follows:

PARTICULARS

Vatable Sales per VAT Returns

Inventory Transfers (Transactions Deemed Sale)

Non-Products Sales

Sales for Income Tax Purposes

Add: Exempt Sales per Note 19 of the AFS

Alleged Total Sales per BIR Audit

Net Sales per AFS / ITR

~NDECLARED SALES PERBIR

83 Petitioner's FOE, Box 1, Folder 1, Exhibits "P-92-1" to "P-92-4." 84 Id., Folder 7, Exhibits "P-103-1 (5/20)," 2011 ITR line 16C. 85 Id., Exhibits "P-103-2 (28/29)."

86 November 25, 2010.

AMOUNT

Php 128,421,932.67 (1,7 44,064.00) (3,700,000.00) Php 122,977,868.67 4,860,112.00 Php 127,837,980.67 125,923,130.00

PHP

1,914,850.67

I

Page 19 o£37 Petitioner alleged that the undeclared sales pertain to its sales to senior citizens ("SC") and/ or persons with disability ("PWD"), which are VAT exempt pursuant to RR No. 7-1087• Petitioner also explained that the amount of exempt sales that was disclosed in Note 19 of the AFS for CY 201188 (marked as Exhibit "P-103-2") was only a result of miscalculation. Further, petitioner posits that for CY 2011, it granted the twenty percent (20%) discount to its SC and PWD customers in the total amount of Php583,213.43 based on its Control Account Ledger- Main Store-SC Discount ("SCD") Expense89 and Control Account Ledger-Satellite Store-SC Discount Expense90. In determining the gross amount of exempt sales to be disclosed in petitioner's AFS for CY 2011, petitioner erroneously used the 12% VAT rate as a divisor instead of the discount rate of 20% resulting to the following:

PARTICULARS

EXHIBIT

AMOUNT

Total Discount Granted

P-99-5/P-99-6

Php

583,213.42

Divided by VAT Rate

12%

Total

Php 4,860,111.83 Amount Disclosed in AFS, Note 19

P-103-2

4,860,112.00

ROUNDING OFF DIFFERENCE

PHP

(0.17) - According to petitioner, the amount of exempt sales that should have been disclosed in Note 19 of the CY 2011 AFS is Php2,916,067.10, as computed below:

PARTICULARS

EXHIBIT

AMOUNT

Total Discount Granted

P-99-5/P-99-6

Php

583,213.42

Divided by Discount Rate

20%

CORRECT AMOUNT OF EXEMPT SALES

PHP2,916,067.10 Upon verification of petitioner's Summary of Cash Sheets for CY 2011, the Court found that petitioner incurred SCD expenses of Php402,934.0591 and Php180,279.3792 for main store and satellite store, respectively, broken down as follows: 87 July 20, 2010.

88 Marked as Exhibit "P-103-2."

89 Petitioner's FOE, Box 1, Folder 6, Exhibit "P-99-5." 9o I d., Exhibit "P-99-6."

91 Id., Exhibit "P-99."

92 Id.

(

Page 20 o£37

SUMMARY OF SCD EXPENSE IN DAILY CASH SHEETS

MAIN AND SATELLITE STORES

FOR THE YEAR 2011

PERIOD

MAIN STORE

SATELLITE STORE

Jan-11

Php

33,988.09 Php 12,769.65

Feb-11

32,625.37 12,419.91

Mar-11

37,499.84 16,985.62

Apr-11

34,392.47 13,308.13

May-11

33,203.33 16,611.10

Jun-11

32,341.27 14,990.53

Jul-11

33,311.94 16,363.30

Aug-11

35,346.96 14,535.71

Sep-11

17,237.13 14,418.47

Oct-11

32,184.97 14,826.98

Nov-11

40,494.83 12,139.10

Dec-11

40,307.85 20,910.87

Php

402,934.05 Php 180,279.37

TOTAL

PHP

583,213.42 The said SCD expenses were traced to Summary of Comparison of Daily Sales with SCD Tracking Sheets (Main Store93 and Satellite Store94), Summary of Daily Cash Sheets95, Daily Cash Sheets96, and Control Account Ledger (Main Store97 and Satellite Store98). Upon examination of these documents, the Court holds that petitioner was able to prove that its SCD expenses for the main and satellite stores amounted to Php583,213.42. Consequently, the corresponding exempt sales related to these

SCD

expenses is Php2,916,067.10 (Php583,213.42/20%). However, a difference of Php29,194.23 remains unaccounted; thus, its corresponding income tax due of Php8,758.27 should be enforced, computed as follows:

PARTICULARS

Vatable Sales per VAT Returns

Inventory Transfers (Transactions Deemed Sale)

Non-Products Sales

Sales for Income Tax Purposes

Add: Correct Exempt Sales

Total Sales

Net Sales per AFS/ITR

Undeclared Sales

93 Petitioner's FOE, Box 1, Folder 6, Exhibit "P-97," pp. 1-7. 94 Id., Exhibit "P-98," pp. 1-7.

95 Id., Exhibit "P-99."

96 Id., Folders 3-6, Exhibits "P-96-1" to "P-96-728." 97 Id., Folder 6, Exhibit "P-99-5."

98 I d., Exhibit "P-99-6."

AMOUNT

Php 128,421,932.67 (1,7 44,064.00) (3,700,000.00) Php 122,977,868.67 2,916,067.10 Php 125,893,935.77 125,923,130.00

Php

29,194.23 !

Page 21 o£37

Income Tax Rate

INCOME TAX DUE

3. Disallowed

Amortization

Expense

(Unsupported)

Php9,166.75.

30%

PHP

8,758.27

Unsupported

amortization expense amounting to Php9,166.75 was disallowed by respondent pursuant to Section 34(b) of the 1997 NIRC, which states that: xxx no deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence xxx. Petitioner alleged that it paid the amount of Php7,899.14, as evidenced by a Unionbank e-mail of EFPS payment advice99 and BIR Form No. 0605100 consisting of the following details:

ITEM

AMOUNT

Basic Tax

Php

3,886.09

Interest

3,013.05

Compromise

1,000.00

TOTAL

PHP

7,899.14 Upon examination of the said documents, however, this Court cannot conclude if such payment actually pertains to income tax due on disallowed amortization expense of Php9,166.75. Thus, respondent's assessment on unsupported amortization expenses remains.

From the foregoing, the Court holds that petitioner is still liable for basic deficiency income tax of Php59,729.51, computed as follows:

INCOME TAX

Taxable Income per Income Tax Return

Adjustment per Audit

Disallowed Expenses not Subjected to Withholding Tax 99 Petitioner's FOE, Box 1, Folder 11, Exhibit "P-128-1(2/2)." 1oo Id., Exhibit "P-128-1(1/2)."

Php

6,875,752.00 156,950.50 (

Page 22 o£37 Discrepancy of amount of sales per ITR and VAT Returns Disallowed Amortization Expense (unsupported)

Total

Tax Rate

Income Tax Due

Income Tax Paid

29,194.23 9,166.75

Php

7,071,063.48 30%

Php

2,121,319.04 2,061,589.53

INCOME TAX DEFICIENCY

PHP

59,729.51 -

VALUE-ADDED TAX

Petitioner was assessed by respondent for deficiency VAT for CY 2011 in the amount of Php13,373,090.88, including increments, computed as follows:

VALUE ADDED TAX

Gross Receipts per VAT Returns

Output VAT Due

Input per VAT Returns

Php 11,598,331.51

Less:

Adjustment Per Audit

Purchases

Disallowed inputs on purchases from Havi Food (Result of verification of big ticket items-no sales declared by Havi Food to OCFI) Php 9,688,383.36 1,162,606.00 Wrong invoicing requirements-ORs have no TIN

of Payee

6,087,207.93 730,464.95 Inputs claimed on unregistered invoices issued by Golden Archers on purchases of goods 44,955,264.09 5,394,631.69 Disallowed inputs-non-VAT items/ supported by

JVonly

6,247,131.58 749,655.79

VAT Payable Per Audit

VAT Paid Per Returns

Balance

Interest Gan. 26, 2012 to October 31, 2014) Interest on unpaid VAT due of Php267,397.25)-April26, 2011 to Jan. 25, 2012

Compromise

TOTAL VAT DEFICIENCY

--------

1. Disallowed inputs on purchases from

Havi

Food

Services, Inc.

("Havi")

(result of verification of big ticket items - no sales to petitioner were declared by

Havi)

Php1,162,606.00.

Ph£ 128,421,932.67 15,410,631.92

Ph£

3,560,973.08 11,849,658.84 3,295,892.43

Php

8,553,766.41 4,729,178.25 40,146.22 50,000.00 PHP 13,373,090.88 Respondent disallowed input VAT amounting to Php1,162,606.00 on purchases of petitioner amounting to Php9,688,383.36 from Havi because it was not duly supported with invoices. Allegedly, this is a result of big ticket items inquiry wherein it was revealed that Havi did not declare any sale to f

Page 23 o£37 petitioner, but the latter has purchases from Havi in its Summary List of Purchases ("SLP"). However, even though petitioner has payments to Havi, there were no official receipts ("ORs") presented to support inputs claimed on the said purchases. Petitioner explained that the alleged non-reporting by Havi of its sales to petitioner is irrelevant and is not a basis under the law for a disallowance of input VAT for payment of services from Havi. Petitioner argued further that its input VAT should not be disallowed for Havi's failure to indicate petitioner's Tax Identification Number ("TIN") in the ORs issued by the former to the latter for the following reasons: 1.

The mandatory obligation to indicate the TIN of the buyer is lodged by law to the seller, not the purchaser; and 2.

The rationale for issuance of receipts has been duly satisfied.

Petitioner also argued that based on its books, it only claimed input VAT amounting to Php157,290.90 for the delivery services of Php1,310,762.16 from Havi, which was supported with

Service

Invoiceslm,

Delivery

Receipts102,

Cash

Disbursement Voucher1o3, and 0Rs104. Havi, on the other hand, issued certifications105 on the said service delivery fees charged to petitioner, broken down as follows:

PARTICULARS

EXHIBIT

AMOUNT

INPUT VAT

Service Fees from HA VI per OR:

Main Store

P-105-25 to 36

Php

1,025,614.99 Php 123,073.23

Satellite Store

P-105-37 to 47

285,147.17 34,217.67

TOTAL

PHP 1,310,762.16 PHP 157,290.90 All 0Rs106 presented supporting the input VAT of Php157,290.90 shall be disallowed for non-compliance with the substantiation requirements under Sections 110(A) and 113(A) and (B) of the 1997 NIRC, in relation to Sections 4.110-1, 4.110-8, and 4.113-1 ofRR No. 16-05, as amended, for the following reasons: 101 Petitioner's FOE, Box 2, Exhibits "P-10" to "P-21" and "P-46" to "P-53." 102 Id., Box 1, Folder 8, Exhibits "P-111-70" to "P-111-170." 103 Id., Box 2, Exhibits "P-22" to "P-33." 104 I d., Exhibits "P-34" to "P-45."

ws I d., Exhibits "P-8" and "P-9."

106 Id., Exhibits "P-34" to "P-45."

!

Page 24 o£37 1.

Petitioner's TIN was not indicated in the ORs; and 2.

Input VAT was not separately indicated.

A further examination of the documents presented reveals that petitioner did not present its SLP to refute respondent's assessment on disallowed input

VAT

amounting to Php1,162,606.00 accrued from purchase of services amounting to Php9,688,383.36 from Havi.

Also, the Court notes that Havi made several service delivery transactions to petitioner, as evidenced by delivery receipts1D7• However, petitioner only submitted delivery receipts with delivery dates from December 15,2010 to February 09,2011. For easy reference, the Court will take the data for January 2011. Petitioner alleged that it incurred service fees of Php103,404.00 and Php20,328.00 for a total quantity of 2,946, for Main and Satellite stores, respectively, as supported by service invoiceslos and 0Rs109. The same amounts were reflected in Havi' s certification no, computed as follows:

DETAILS

MAIN STORE

SATELLITE

TOTAL

STORE

Total Quantity

2,462 484 2,946

Cost per Case

Php

42.00

Php

42.00

TOTAL (VAT INCLUSIVE)

PHP 103,404.00 PHP 20,328.00 However, a study of the delivery receiptslll with delivery dates from January 5, 2011 to January 31, 2011 reveals that petitioner incurred a total delivery quantity of 5,280 from Havi. By comparing the delivery quantity of 5,280 per delivery receipts against delivery quantity of 2,946 per petitioner's declaration, petitioner has undeclared service fees. In addition, petitioner did not submit all the delivery receipts covered by the assessment period (i.e., CY 2011). Consequently, petitioner failed to dispute 107 Petitioner's FOE, Box 1, Folder 8, Exhibits "P-111-70" to "P-111-170." 1os Id., Box 2, Exhibits "P-10" and "P-46." 109 I d., Exhibit "P-34."

uo Id., Exhibits "P-8" and "P-9."

111 Id., Box 1, Folder 8, Exhibits "P-111-101" to "P-111-153." !

respondent's allegation, thus, the assessment on disallowed input VAT from Havi purchases amounting to Php1,162,606.00 is sustained.

2. Disallowed input VAT due to wrong invoicing requirements Php730,464.95.

Respondent disallowed input VAT claimed by petitioner amounting to Php730,464.95 on its purchases from its parent company GADC, because the ORs issued by GADC in favor of petitioner did not manually indicate petitioner's TIN. Petitioner explained that its input VAT should not be disallowed for GADC' s failure to indicate petitioner's TIN in the ORs issued by the former to the latter because: (1) the mandatory obligation to indicate the TIN of the buyer is lodged by law to the seller, not the purchaser; and (2) the rationale for issuance of receipts has been duly satisfied.

Petitioner alleged that the BIR erroneously used as basis for the disallowance of input VAT the amount paid by petitioner as reflected in the ORs. The actual cost of purchases and corresponding input VAT are summarized as follows:

EXHIBIT

PARTICULARS

AMOUNT

INPUT VAT

P-107

Purchases of Goods

Php 3,066,784.93 Php 368,014.17

P-109

Purchases of Services

2,224,958.65 266,972.23

Total

Php 5,291,743.58 Php 634,986.40

P-106

PerBIR

6,087,207.93 730,464.95

DIFFERENCE

(PHP 795,464.35) (PHP 95,478.55) An examination of the sales invoicesn2, in support of the purchases of goods with a corresponding input VAT of Php368,014.17, reveals that said sales invoices complied with Section 113 of the 1997 NIRC regarding the invoicing and accounting requirements of a VAT -registered person. 112 Petitioner's FOE, Box 1, Folder 7, Exhibits "P-107-12" to "P-107-30." !

On the other hand, all the 0Rs113 in support of the purchases of services with a corresponding VAT of Php266,972.23 reveal that petitioner's TIN was not indicated and/ or the VA Twas not separately indicated. With regard to the difference of Php795,464.35 with a corresponding

VAT

of Php95,478.55 that respondent erroneously captured in the ORs resulting in the overstatement of the assessment, only the amount of Php39,799.62 with a corresponding VAT of Php4,775.95 was proven to be erroneously taken, computed as follows:

EXHIBIT

DATE

PERBIR

PER OR

DIFFERENCE

P-108-4

3/10/2011 Php 22,343.15 Php 22,543.15

(Php

200.00)

P-108-5

5/13/2011 95,968.53 95,968.93

(Php

0.40)

P-108-8

5/13/2011 95,700.98 35,700.98 Php 60,000.00

P-108-11

5/13/2011 79,879.80 99,879.80 (Php 20,000.00)

P-108-24

10/6/2011 25,186.29 25,186.27 Ph£ 0.02 Php 319,078.75 Php 279,279.13 Php 39,799.62

VAT Rate

12%

TOTAL

PHP

4,775.95 Therefore, respondent's assessment on disallowed input VAT due to wrong invoicing requirements is affirmed but in the reduced amount of Php357,674.83 [Php730,464.95 less (Php368,014.17less Php4,775.95)].

3. Disallowed input VAT due to unregistered invoices, incomplete details on invoices, andfor VAT portion of the invoice merely handwritten Php5,394,631.69.

Respondent alleged that the permit number and/ or

Computerized Accounting System ("CAS")

accreditation number, quantity, unit cost, and description of the merchandise or nature of service purchased were not indicated in the invoices issued by GADC. Respondent further posits that the VAT portion of sales were not originally indicated in the invoice, but 113 Petitioner's FOE, Box 1, Folder 7, Exhibits "P-108-1" to "P-108-33." ~

Page 27 o£37 written only by petitioner's employee upon receipt of the said InVOICe.

Petitioner argued that the indication of the CAS accreditation number was not a required part of the invoice in CY 2011 - it was only made mandatory on May 2, 2013 under RMO No. 12-13. Petitioner also disputes respondent's allegations that the invoices had incomplete details, and that the VAT portion was merely handwritten by its employees. Petitioner also claims that the BIR erroneously used the base amount of Php44,955,264.09114 in computing the disallowed input VAT of Php5,394,631.69115 (Php44,955,264.09 x 12%) because it is already inclusive of VAT.

An examination of the sales invoices116 presented reveals that the majority of the computerized sales invoices presented complied with the invoicing requirements pursuant to Section 113 of the 1997 NIRC. Although the CAS accreditation number was not indicated in the actual invoice, petitioner was able to provide the "Permit to Use Computerized Accounting System or Components Thereof" with Permit No. LTDO-CBA-0510-122- 00054 dated May 7, 2010.117 Thus, petitioner was allowed by respondent to use a computerized accounting system prior to the assessment period.

Upon further scrutiny of the sales invoices, the Court agrees with petitioner that respondent erroneously used the amount of Php44,955,264.09 in computing the disallowed input

VAT

of Php5,394,631.69 because the said amount (Php44,955,264.09) already includes VAT. However, the disallowance on input VAT amounting to Php313,398.7704 is sustained for reasons stated hereunder: 114 Petitioner's FOE, Box 1, Folder 8, Exhibit "P-110." 115 Id.

116 Id., Exhibits "P-111-1" to "P-111-69." 117 Records, Vol. 1, PFR, Annex "I," Permit to Use Computerized Accounting System or Components Thereof, pp. 96-104.

J

INVOICE

DATE

NUMBER

12/21/2010

MV00085512118

12/28/2010

MV00085648119

12/31/2010 MV0008577912o ~·--- ___ TOTAL. __

VAT

REASON

AMOUNT

Php 130,381.5036 Outside the period of Claim 108,285.7305 Outside the period of Claim 74,731.5363 Outside the period of Claim PHP 313,398.7704 -------- -~ ~ ··---·- -- --- Consequently, the assessment on disallowed input VAT remains in the reduced amount of Php313,398.77.

4. Disallowed input VAT on purchases of non-VAT items andfor supported by Journal Vouchers only - Php749,655.79.

Respondent disallowed input VAT amounting to Php706,066.86 on purchases attributed to non-VAT items; however, petitioner has not submitted documents to support its claim. In addition, input VAT amounting to Php43,588.93 was also disallowed because it was only supported by journal entries. Petitioner argued that they have sufficient documents, such as invoices and/ or VAT ORs, in support to VAT-exempt purchases.

The Court notes that petitioner only submitted 0Rs121 to refute the assessment on disallowed input VAT on non-VAT purchases. An examination of these ORs reveals that these transactions do not indicate non-VAT/ exempt purchases; thus, the assessment on disallowed input VAT amounting to Php706,066.86 stays.

With regard to input VAT in the amount of Php43,588.93, the

Court

finds that petitioner sufficiently provided documents122 proving that such tax deficiency has already been paid; therefore, this assessment is cancelled. 118 Petitioner's FOE, Box 1, Folder 8, Exhibit "P-111-1." 119 Id., Exhibit "P-111-2."

12o Id., Exhibit "P-111-3."

121 Id., Box 2, Folder 1, Exhibits "P-132-39" to "P-132-75," "P-133-12" to "P-133-19," and "P-134-50" to "P-134-78."

122 Petitioner's FOE, Box 1, Folder 11, Exhibit "P-128-2 (1/2);" Petitioner's FOE, Box 1, Folder 11, Exhibit "P-128-2 (2/2)."

/

Page 29 o£37 As discussed, the Court holds petitioner liable for basic deficiency VAT in the reduced amount of Php3,056,154.57, computed as follows:

VALUE ADDED TAX

Gross Receipts per VAT Returns

Php 128,421,932.67

Output VAT Due

15,410,631.92

Input per VAT Returns

Php 11,598,331.51

Less:

Adjustment Per Audit

Disallowed inputs on purchases from Havi Food (Result of verification of big ticket items-no sales declared by Havi Food to DCFI) 1,162,606.00 Wrong invoicing requirements-ORs have no TIN

of Payee

357,674.95 Inputs claimed on unregistered invoices issued by Golden Archers on purchases of goods 313,398.77 Disallowed inputs-non-VAT items 706,066.86

Php

9,058,584.92

VAT Payable Per Audit

Php

6,352,047.00

VAT Paid Per Returns

3,295,892.43

DEFICIENCY VAT

PHP 3,056,154.57

EXPAND ED WITHHOLDING TAX

Petitioner was assessed for basic deficiency EWT amounting to Php23,437.72 on purchases not subjected to withholding tax. The Court, however, notes that petitioner settled the basic deficiency EWT due amounting to Php23,437.72 and the equivalent interest and compromise penalty amounting to Php19,340.94 and Php2,000.00, respectively. In support of such payment, petitioner presented BIR Form No. 0605123 and Unionbank EFPS Epayment Advice124. Consequently, the Court shall no longer consider the assessment on deficiency EWT.

DOCUMENTARYSTAMPTAX

DST is assessed on the following, among others: loan agreements, advances from parent company, and rent payable on non- cancellable operating lease due within the year, pursuant to Section 179 of the 1997 NIRC which states that "on every original issue of debt instruments, there shall be collected a documentary stamp tax of One Peso on each Two hundred, or fractional part thereof xxx" and Section 123 Petitioner's FOE, Box 1, Folder 11, Exhibit "P-128-3(1/2)." 124 Id., Exhibit "P-128-3(2/2)."

r

194 of 1997 NIRC which provides that "on lease agreement, memorandum, or contract for hire, use or rent of any lands or tenements, or portion thereof, there shall be collected a documentary stamp tax of three pesos for the first two thousand pesos, of fractional part thereof, and additional one peso for every one thousand pesos or fractional part thereof in excess of the first two thousand pesos for each year of the term of the said contract or agreement." In this regard, respondent assessed petitioner for deficiency DST, as follows:

DOCUMENTARY STAMP TAX

Staff Loan Agreement (Note 13)

in relation to Mgt. labor (Note 11) Php3,302,961.00125 Advances from Parent Co.

per Statement of Cash Flows

900,346.00126

Total

Php 4,203,307.00 DST Due (Php4,203,307.00/200)

Php

21,017.00 Rent payable on non-cancellable operating lease due within the year- Php5.6M (Note 11)127

DSTDue

Php2,000.00 Php3.00 5,598,000. 00 5,598.00 5,601.00

TOTAL DST DUE

PHP

26,618.00 Petitioner argued that respondent's assessment with respect to

(1) staff loan agreement in relation to management labor as discussed in Note 11 of the AFS for CY 2011128 and (2) advances from GADC as disclosed in the petitioner's Statement of Cash Flows for CY 2011129 totaling Php4,203,307.00 do not constitute as loan agreements. Petitioner explained that these consist of expenses for management services pertaining to the operations of the McDonald's store, which are related to salaries and wages for the labor of store managers seconded by GADC during CY 2011.

1. Staff Loan Agreement (Note 13) in relation to ~anagement

Labor

(Note

11) Php3,302,961.00.

A study of petitioner's AFS for CY 2011 shows that Management Labor amounting to Php3,302,961.00130 forms part 12s Petitioner's FOE, Box 1, Folder 7, Exhibit "P-103-2(22/29)." 126 Id., Exhibit "P-103-2(6/29)."

127 Id., Exhibit "P-103-2(21/29)."

12s Marked as Exhibit "P-103-2(20/29)" to "P-103-2(22/29)." 129 Marked as Exhibit "P-103-2(6/29)."

130 Petitioner's FOE, Box 1, Folder 7, Exhibits "P-103-2(21/29)" and "P-103-2(22/29)." tl of the Cost of Sales in the amount of Php79,462,090.0Q131, broken down as follows:

COST OF SALES

Cost of Inventory (see Notes 7 and 11)

Php

55,652,155.00 Personnel Cost (see Notes 11 and 15) 9,843,940.00 Depreciation and Amortization (see Note 8) 7,772,770.00 Management Labor (see Note 11) 3,302,961.00

Utilities

2,890,264.00

TOTAL

PHP

79,462,090.00 In its Notes to the AFS, it is indicated that Management Labor is a staff loan agreement between petitioner and GADC. Under this agreement, petitioner will be charged for the fixed amount of remuneration of the personnel provided by GADC132. Clearly, the management labor is not a form of monetary loan agreement but a staff loan agreement that constitute salaries and wages. Therefore, DST assessment on management labor amounting to Php3,302,961.00 is cancelled.

2. Advances from Parent

Company per Statement

of

Cash

Flows

Php900,346.00.

Per audited Statements of Financial Position for CY 2011, Advances from Parent Company is a current liability, non- interest bearing, and payable on demand133; thus, a form of debt instrument subject to DST. Consequently, the assessment on advances from parent company amounting to Php900,346.00 is sustained.

131 Petitioner's FOE, Box 1, Folder 7, Exhibit "P-103-2(4/2.9);" Petitioner's FOE, Box 1, Folder 7, Exhibit "P-103-2(22/2.9)."

132 Petitioner's FOE, Box 1, Folder 7, Exhibit "P-103-2(21/2.9)." 133 Id., Exhibit "P-103-2(3/29)."

(

3. Rent Payable on Non-

Cancellable

Operating

Lease Due Within the

Year- Php5.6M (Note 11).

An examination of petitioner's AFS shows that the rent payable on non-cancellable operating lease due within the year amounting to Php5.6M already forms part of the rental expense for CY 2011 amounting to Php9,985,591.00134 for which the corresponding DST was already declared/ filed with respondent as evidence by BIR Form No. 2000135. Therefore, this assessment is cancelled.

Consequently, the Court holds that petitioner is still liable for deficiency DST in the amount of Php4,502.00 from Advances from Parent Co. in the amount of Php900,346.00, computed as follows:

DOCUMENTARY STAMP TAX

Advances from Parent Co.

per Statement of Cash Flows

Php

900,346.00 DST DUE (PHP900,346.00/200)

PHP

4,502.00

FINAL WITHHOLDING TAX

Respondent assessed petitioner for deficiency FWT in the amount of Php2,801,801.20, inclusive of increments, for advertising expense without supporting documents and variable rent paid to GADC on top of the fixed rent, computed as follows:

FINAL WITHHOLDING TAX

Royalties Expense

Adjushnents: Advertising expense paid to Golden Archers parent company with no supporting docs hence treated as royalty Variable rent paid to Golden Archers on top of the fixed rent paid

Total

Less: Amount subjected to 20% final tax per return Royalty equivalent to 5% of sales exempt from FWT Total payment subject to FWT

Final Withholding Tax Due on Royalty

Add: Final Withholding Tax on dividends paid to individuals

Total

Less: Final Withholding Tax Remitted

EWT remitted on Ads (2%) and Rent Exp. (5%)

Balance

Add: Interest Oanuary 11, 2012 to October 31, 2014) 134 Petitioner's FOE, Box 1, Folder 7, Exhibit "P-103-2(21/29)." 135 Id., Box 2, Folder 5, Exhibits "P-146" to "P-146-12(2/2)." Php 7,232,834.00 6,450,536.06 5,160,428.91 Php 18,843,798.97 Php 859,362.76 6,296,156.50 7,155,519.26 Phe 11,688,279.71 Php 2,337,655.94 122,500.00 Php 2,460,155.94 Php 294,372.56 387,032.17

Phe

681,404.73 Php 1,778,751.21 998,049.99 ~

Compromise

25,000.00

TOTAL FWT DEFICIENCY

PHP 2,801,801.20 Petitioner argued that the advertising fees paid to GADC should not be treated as royalty payments subject to 20% FWT on the ground that the advertising fees are collected under the License Agreement136 dated December 20,1992.

With regard to variable rent, petitioner explained that respondent has no personality to question the interpretation of the lease agreement between petitioner and GADC. Petitioner explained further that the BIR admitted that the variable rent of 4% of gross sales is stipulated as rental payments under the lease agreement; hence, the BIR cannot insist that these are royalty payments when the parties to the contract clearly agree for such to constitute as rental payments.

1. Advertising expense paid to

GADC

without supporting documents - Php6,450,536.06.

The Schedule of Advertising, Royalty and Rental Payments137 shows that petitioner incurred advertising expenses amounting to Php5,001,625.40 and Php1,448,910.70 for the main and satellite stores, respectively. Advertising expenses are collected under the License Agreement between petitioner and GADC. As argued by respondent, petitioner provided no evidence to prove that such amount was actually spent for advertisement. However, an examination of the documents presented by petitioner, such as the Schedule of Advertising Fees, the Royalty and Rental Payments138, the Summary of Advertising Fees, the Royalty and Rental Payments139, the Customer Billing Statement14D, the Summary of Customer Billing Statements Traced to 0Rs141, the 0Rs142, and the Control Account Ledger143 reveals that the amount of Php6,450,536.06 constitutes a valid advertising expense properly booked by petitioner. 136 Petitioner's FOE, Box 1, Exhibit "P-82." 137 I d., Folder 11, Exhibit "P-124."

138 Jd.

139 Id., Exhibit "P-125."

140 Id., Exhibits "P-125-1" to "P-125-72." 141 Id., Exhibit "P-126."

142 Petitioner's FOE, Box 1, Folder 11, Exhibits "P-126-1," to "P-126-12." 143 Id., Exhibits "P-127-1" to "P-127-2." ~

Page 34 o£37 Accordingly, this assessment is cancelled.

2. Variable rent paid to GADC on top of the fixed rent- Php5,160,428.91.

As stated in the FDDA144, petitioner's explanation on variable rent was found to be meritorious and was given favorable consideration; hence, this assessment is likewise cancelled.

COMPROMISE PENALTY

Respondent imposed compromise penalties on the deficiency income tax, VAT, EWT, DST, and FWT in the aggregate amount of Php108,000.00.

In the case Felisa L. Vda. De San Agustin v. CIR145, the Supreme Court held that a compromise, by its nature, is mutual in essence. Thus, the imposition of a compromise penalty without the conformity of the taxpayer is illegal and unauthorized.146 In the case at bar, no document was presented in Court that would indicate that both parties agreed to enter into a compromise agreement. Accordingly, the imposition of a compromise penalty has no basis and is illegal and unauthorized. Thus, petitioner should not be subjected thereto.

WHEREFORE, premises considered, the instant Petition for Review is PARTIALLY GRANTED. Accordingly, respondent's deficiency EWT and FWT assessments for CY 2011 are hereby CANCELLED and WITHDRAWN. On the other hand, respondent's deficiency income tax, VAT, and DST assessments for CY 2011 is UPHELD IN PART. Consequently, petitioner is ORDERED TO PAY respondent the amount of Php3,900,482.60, representing basic deficiency income tax, VAT, and DST, and the 25% surcharge imposed under Section 248(A)(3) of the 1997 NIRC, computed as follows: 144 Records, Vol. 1, FDDA, p. 53; BIR Records, FDDA, p. 1212. 145 G.R. No. 138485, September 10, 2001, 364 SCRA 802. 146 CIR v. Lianga Bay Logging Co., Inc., G.R. No. L-35266, January 21,1991, 193 SCRA 86. (

TAX TYPE

BASIC TAX DUE

25% SURCHARGE

TOTAL

Income

Php

59,729.51

Php

14,932.38 Php 74,661.89

VAT

3,056,154.57 764,038.64 3,820,193.21

DST

4,502.00 1,125.50 5,627.50

TOTAL

PHP 3,120,386.08 PH~ _ _ _ 7§'1_096_.§2 PHP 3,900,482.60 In addition and in light of Republic Act ("RA") No. 10963147, otherwise known as the "Tax Reform for Acceleration and Inclusion" or the "Train Law" which took effect on January 1, 2018, petitioner is

ORDERED TO PAY:

a.

Deficiency interest amounting to Php3,697,439.52 at the rate of twenty percent (20%) per annum on the basic deficiency taxes computed from April 16, 2012, January 26, 2012, and January 6, 2012 for Income Tax, for VAT and for DST, respectively, until December 31, 2017, pursuant to Section 249(B) of the 1997 NIRC, computed as follows:

DEFICIENCY INTEREST

Basic Income Tax Due

Php

59,729.51

Deficiency Interest Rate

20%

Total

Php

11,945.90

Multiplied by Period

i (5 years and 259 days) 5.709589

I

Total Deficiency Interest on Income

Php

68,206.19:

I

Basic VAT Due

Php3,056, 154.57

I

I

Deficiency Interest Rate

20%

I

Total

Php 611,230.91

I

I

Multiplied by Period

I

(5 years and 339 days) 5.9287671

Total Deficiency Interest on VAT

Php 3,623,845.73

Basic DST Due

Php

4,502.00

Deficiency Interest Rate

20%

Total

Php

900.40

Multiplied by Period

(5 years and 359 days) 5.9835616

Total Deficiency Interest on DST

Php

5,387.60

TOTAL DEFICIENCY INTEREST

PHP3,697,439.52 147 July 24, 2017.

(

Page 36 o£37 b.

Delinquency interest amounting to Php4,358,917.28 at the rate of twenty percent (20%) per annum on the total amount of Php3,900,482.60 and on the deficiency interest which have accrued as aforestated in (a), computed from February 17, 2015148 until December 31, 2017, pursuant to Section 249(C) of the 1997 NIRC, as follows:

DELINQUENCY INTEREST

Basic Tax Due Plus Surcharge

Php 3,900,482.60

Deficiency Interest

3,697,439.52

Total

Php 7,597,922.12

Multiplied by Delinquency Interest Rate

20%

Total

Php 1,519,584.42

Multiplied by Period

(2 years and 317 days) 2.868493

TOTAL DELINQUENCY INTEREST

PHP 4,358,917.28 c.

Delinquency interest at the rate of twelve percent (12%) per annum from January 1, 2018 until full payment on the total amount of Php3,900,482.60 and on the deficiency interest which have accrued as aforestated in (a), pursuant to Section 249 of the 1997 NIRC, as amended by Section 75 ofRA No. 10963.

WE CONCUR:

LOVELL~ BAUTISTA

Associate Justice

~. ~ J "\..

ESPER.A}fJA ·. FABON-VICTORINO MA. BELEN M. RINGPIS-LIBAN J /A ociate Justice

Associate Justice

Page 37 o£37

ATTESTATION

I attest that the conclusions in the above Decision were reached 1n consultation before the case was assigned to the writer of the opinion of the Court's Division.

LOVEL~ R. BAUTISTA

Associate Justice

Chairperson

CERTIFICATION

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

Presiding Justice