Benchmark Marketing Corp. vs. Commissioner of Internal Revenue

DECISION

MANAHAN, J .:

This involves a Petition for Review filed on December 28, 2015 by Benchmark Marketing Corp., as petitioner, against the Commissioner of Internal Revenue, as respondent, before the Court in Division.

Petitioner seeks the cancellation and withdrawal of the deficiency income ta)( (IT), valu e-added ta)( (VAT) , E)(panded

Withholding Ta)(

(EWT)

and Fringe

Benefit Ta)(

(FBT)

assessments issued by respondent for ta)(able year 2010.

THE PARTIES

Petitioner is a domestic corporation organized and e)(isting under the laws of the Philippines with Securities and E)(change Commission (SEC) Com pany Registration No.AS-091 - 194060. It holds office at Dona Natividad Bldg., 10 Quezon Avenue, ~

Quezon City. It is duly registered with the Bureau of Internal Revenue (BIR) with Tax Identification No. 000-078-211-000. 1 Respondent is the duly appointed Commissioner of Internal Revenue (CIR), head of the Bureau of Internal Revenue (BIR) who is vested with the powers and duties, among others, to assess and collect all national internal revenue taxes and to decide, approve and grant tax protests. He holds office at the 5th floor, BIR National Office Building, BIR Road, Diliman, Quezon City.

THE FACTS

Petitioner received Letter of Authority (LOA) No. LOA-116- 2011-00000096 with SN: eLA201100003002 with First Notice of Requirements2, both dated September 23, 2011.3 Sometime in February of 2013, petitioner received a letter from respondent dated February 26, 2013 with attached Memorandum of Assignment (MOA) No. LOA-116-2013-0229 dated February 13, 2013.4 On different dates, petitioner executed several Waivers of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code ("waiver" for brevity), with the following details:

WAIVER

Exh.

DATE OF

EXPIRY DATE TO

DATE

DATE RECEIVED

1st 2nd 3rd 4th No.

EXECUTION

ASSESS

ACCEPTED BY

BY TAXPAYER

BIR

R-7 5

July 16, 2013 December 31 , July 25, 2013

August 15

2013

R-86

September 16, June 30, 2014 OCtober 2, 2013 October 22, 2013 2013

R-9 7

March 7, 2014 December 3 1 , March 14, 2014 May6, 2014 2014

R-118

October 8, 2014 June 30, 2015 October 27, December 11 , 2014 2014

R-13 9

March 27, 2015 December 31, 2015 April20, 2015 April 28, 2015 On March 27, 2015, a Preliminary Assessment Notice (PAN) dated March 26, 201510, together with the Details of Discrepancies11 , was received by petitioner from the BIR.12 On April 28, 2015, petitioner received from respondent a Formal Letter of Demand (FLD), with Details of Discrepancies13 and Assessment Notice Nos. IT-116-LOA-00000096-10-15- 1626 14 , VT-116-LOA-00000096-10-15-1627 15 , WE-116-LOA- 00000096-1 0-15-1628 16 and WR -116-LOA -00000096-10-15- 1629 17 , wherein the latter assessed the former deficiency income tax (IT), value-added tax (VAT), expanded withholding tax (EWT), and fringe benefit tax (FBT), in the total amount of P65,382, 168.85, inclusive of surcharges, interests and compromise penalties for calendar year (CY) 2010, 18 detailed as follows:

Compromise

Tax Type

Basic

Surcharge

Interest

Penal~

Total

Income

p - p p

Tax

18,983,815.16 15,353,485.57 p 50,000.00 34,387,300.73

VAT

16,204,904.66 - 13,853,346.96 50,000.00 30 108,251.62

EWT(WE)

357,795.39 - 307,802.06 16,000.00 681,597.45 p

FBT (WR)

93,654.97 23,413.74 75,950.34 12,000.00 205,019.05 p p p

Total

35,640,170.18 23,413.74 29,590,584.93 p 128,000.00 P65,382, 168.85 Petitioner filed its administrative protest (request for reconsideration)19 on May 28, 2015, with list of annexes2o. 9 SIR Records, Folder 1, p. 462.

10 The PAN is actually dated March 20, 2015. 11 Exhibits "P-22" and "P-22-A", docket, vol. I, pp. 421-427; Exhibit "R-12", SIR Records, Folder 1, pp. 423-430.

12 Par. 4, Admitted Facts, JSFI, docket, vol. II, p. 496. 13 Exhibits "P-23" and "P-23-A", docket, vol. I, pp. 428-441; Exhibit "R-15", SIR Records, Folder 1, pp. 468-475.

14 Exhibit "P-23-S", docket, vol. I, p. 442; Exhibit "R-16-c", SIR Records, Folder 1, p. 467. 15 Exhibit "P-23-C", docket, vol. I, p. 443; Exhibit "R-16-b", SIR Records, Folder 1, p. 466. 16 Exhibit "P-23-D", docket, vol. I, p. 444; Exhibit "R-16-a", SIR Records, Folder 1, p. 465. 17 Exhibit "P-23-E", docket, vol. I, p. 445; Exhibit "R-16", SIR Records, Folder 1, p. 464. 1s Par. 5, Admitted Facts, JSFI, docket, vol. II, p. 496.

Respondent failed to act on petitioner's protest within the 180-day period prescribed by law, prompting the petitioner to file the instant Petition for Review. Respondent filed his Answer to the Petition for Review on March 28, 2016.21 A Notice of Pre-Trial Conference22 was issued by the Court, setting the case for pre-trial conference on April 28, 20 16. Accordingly, Respondent's Pre-Trial Brief23 was filed on April 21, 2016; while the Pre-Trial Brief for the Petitioner24 was filed on April 22, 2016.

The pre-trial conference was conducted as scheduled. 25 Thereafter, the parties submitted their Joint Stipulation of Facts and Issues26 on May 12, 20 16. Accordingly, the Court issued a Pre-Trial Order27 on June 7, 2016 and the pre-trial was deemed terminated.

Meanwhile, on May 12, 2016, upon petitioner's motion28, this Court commissioned Mr.

Rendon P.

Gammag as

Independent Certified Public Accountant (ICPA) for the case.29 During trial, petitioner presented ( 1) Ms. Sarah Ecija Lacra 30 , petitioner's accountant; and (2) Mr. Rendon P. Gammag31, the ICPA, as its witnesses. The Formal Offer of Evidence for the Petitioner32 was filed . on August 11, 2016. All exhibits were admitted by this Court, 21 Docket, vol. I, pp. 144-160.

22 Docket, vol. I, pp. 162-163.

23 Docket, vol. I, pp. 183-191.

24 Docket, vol. I, pp. 198-205.

25 Minutes of the Hearing dated April 28, 2016, docket, vol. I, p. 465. 26 Docket, vol. II, pp. 495-504.

27 Docket, vol. II, pp. 517-522.

28 Motion to Allow the Engagement of an Independent Certified Public Accountant filed on April 22, 2016, docket, vol. I, pp. 206-208. 29 Minutes of the Hearing dated May 12, 2016, docket, vol. II, p. 493. 30 Minutes of the Hearing dated June 27, 2016, docket, val. II, p. 536; Exhibit "P-25", docket, val. I, pp. 211-242.

31 Minutes of the Hearing dated July 20, 2016, docket, val. II, p. 566; Exhibit "P-29", docket, vol. II, pp. 540-563.

_.----

except for Exhibits "P-15-A" and "P-15-D", pursuant to the Resolution33 dated October 13, 2016. On the other hand, respondent presented Revenue Officer (RO) Felina B. Guimbao34 as his lone witness. Thereafter, the Respondent's Formal Offer of Evidence35 was filed on November 24, 2016; while Respondent's Amended. Formal Offer of Evidence36 was filed on January 30, 20 17. All exhibits were admitted by this Court, pursuant to the Resolutions dated January 13, 201737 and August 23, 201738 . The case was deemed submitted for decision on November 28, 201739, after the petitioner and respondent submitted their Memorandum on November 10, 2017 and November 16, 2017, respectively.

THE ISSUES

The parties submitted the following issues40 for the Court's resolution:

a. Whether petitioner is liable to pay the total amount of P65,382,168.85 for deficiency IT, VAT, EWT and FBT, including surcharge, interests and comprom1se penalties, for taxable year 201 0;

b. Whether respondent's imposition of deficiency IT against petitioner, amounting to :P34,387 ,300. 73, has factual and legal bases;

c. Whether respondent's imposition of deficiency VAT against petitioner, amounting to P30, 108,251.62, has factual and legal bases;

33 Docket, val. II, pp. 693-695.

34 Minutes of the Hearing dated November 7, 2016, docket, val. II, p. 697; Exhibit "R-18", docket, val. I, pp. 170-182.

35 Docket, val. II, pp. 703-712.

36 Docket, val. II, pp. 732-741.

37 Docket, val. II, pp. 722-723.

38 Docket, val. II, pp. 748-750.

39 Docket, val. II, p. 8:?8.

___-

d. Whether respondent's imposition of deficiency EWT against petitioner, amounting to P681,597.45, has factual and legal bases;

e. Whether respondent's imposition of deficiency FBT against petitioner, amounting to P205,019.05, has factual and legal bases; and

f. Whether respondent's imposition of surcharge, interests and compromise penalties against petitioner, has factual and legal bases.

Petitioner's Arguments

Petitioner initially attacks the validity of the Final Assessment Notices (FANs) for being issued without providing the law and the facts on which said assessments were made, in clear violation of Section 228 of the 1997 National Internal Revenue Code (NIRC). Petitioner asserts that the law as well as its implementing regulations require that the assessment state the facts, the law, rules and regulations and jurisprudence to support the findings of the BIR, otherwise the assessment is void. Further, petitioner maintains that assessments should also be substantiated by sufficient evidence and cannot be based on mere presumptions. Petitioner theorizes that the presumption of validity of assessments is proper only if the assessment is founded on facts and not on mere inferences. With these criteria as a gauge of their validity, petitioner argues that the assessments issued for taxable year 2010 is void for failure of respondent to present the certifications from third party sources for the IT and VAT assessments.

Petitioner

alleges that respondent relied on unverified information, supposedly coming from said third party sources. Petitioner also raises the issue of prescription of respondent's right to assess the VAT and EWT liabilities for taxable year 20 10, as will be discussed in detail later. Finally, petitioner challenges the factual bases of respondent's IT, VAT, EWT and FBT assessments for taxable year 20 10 which will also be discussed in detail in the latter portion of this Decision.~

Respondent's Counter-arguments

In its Answer filed on March 28, 2016, respondent interposed Special and Affirmative defenses, alleging, among others, that the assessment has bases both in fact and in law, to wit:

(1) That petitioner is liable for deficiency IT and VAT in the total amount of P34,387,300.73 and P30,108,251.62, respectively, based on the following findings of the revenue examiners: (a) Undeclared income amounting to P1,992,397.90,

(b) Unsupported sales returns and discounts in the amount of P38,893,4 72.37 and the corresponding deficiency IT for disallowed losses amounting to P340,578.80, (c) Unaccounted income from undeclared purchases from affiliates in the amount of P2,295,600.83 and undeclared domestic purchase of services in the amount of Pl,657,244.46, (d) For the deficiency IT- disallowed cost/ expenses for non-withholding of the proper tax in the amount ofP17,810,519.93, (e) For deficiency IT- prior excess credits carried over to succeeding period in the amount ofP427,028.47, and (f) For deficiency VAT- disallowed input tax for non-compliance with invoicing requirements in the amount of P3,809,409.02;

(2) That petitioner. is liable for deficiency EWT due to income payments not subjected to proper withholding tax in the amount ofP17,810,519.93;

(3) That petitioner is liable for deficiency FBT due to benefits given to petitioner's officer not subjected to FBT in the amount oLP199,016.82; and,

(4) That petitioner is liable for the corresponding surcharge, interests, and compromise penalties. Moreover, respondent alleges that the LOA, the PAN, and the FLD were issued in accordance with law, rules and jurisprudence.

THE RULING OF THE COURT

Jurisdiction of the

Court of Tax Appeals~

Before we delve into the substantive issues raised by both parties in this case, this Court finds it proper to discuss the jurisdiction of this Court to take cognizance of the instant petition.

As a court of special or limited jurisdiction, the CTA can only take cognizance of matters that are within its jurisdiction as provided by Republic Act (R.A.) 1125 as amended by R.A. 9282, thus:

"Section 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

XXX

XXX

It is well-settled that the perfection of an appeal in the manner and within the period pursuant to the relevant provisions of the law is not only mandatory but jurisdictional and non-compliance with these legal requirements is fatal to a party's cause.41 Section 228 of the National Internal Revenue Code (NIRC) 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

XXX

XXX

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." In this case, the FLD with Details of Discrepancies and Assessment Notices was received by petitioner on April28, 2015 and petitioner filed its administrative protest on May 28, 2015 or within the thirty-day period prescribed under Section 228 of the 1997 NIRC, as amended.

Moreover, the same section provides that if the protest is not acted upon within 180 days from submission of supporting documents, the taxpayer may appeal the inaction to this Court within 30 days from the lapse of the 180-day period. In relation thereto, Section 3.1.4 of RR No. 12-99, as amended by RR No. 18-2013, provides, in part: "For requests for reinvestigation, the taxpayer shall submit all relevant supporting documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final. The term "relevant supporting documents" refer to those documents necessary to support the legal and factual bases in disputing a tax assessment as determined by the taxpayer. The sixty (60)-day period for the submission of all relevant supporting~

Page IO of 58

documents shall not apply to requests for reconsideration. Furthermore, the term "the assessment shall become final" shall mean the taxpayer is barred from disputing the correctness of the issued assessment by introduction of newly discovered or additional evidence, and the FDDA shall consequently be denied.

XXX

XXX

XXX

If the protest is not acted upon by the Commissioner's duly authorized representative within one hundred eighty ( 180) days counted from the date of filing of the protest in case of a request reconsideration; or from date of submission by the taxpayer of the required documents within sixty (60) days fr·om the date of filing of the protest in case of a request for reinvestigation, the taxpayer may either: (i) appeal to the CTA within thirty (30) days after the expiration of the one hundred eighty (180)-day period; or (ii) await the final decision of the Commissioner's duly authorized representative on the disputed assessment."(Emphasis supplied)

From

the foregoing, in case of a request for reconsideration, the counting of the 180-day period for respondent to act on the protest is from the date of the filing of the protest. The 60-day period for the submission of all relevant supporting documents shall not apply to requests for reconsideration. On the other hand, in case of a request for reinvestigation, the counting of the 180-day period is from the date of submission of the required documents within the 60- day period. If the taxpayer fails to submit the documents within the 60-day period, the assessment becomes final. In the instant case, petitioner filed an administrative protest in the form of a request for reconsideration 42 and submitted supporting documents43 together with its protest. Hence, counting 180 days from the filing of the administrative protest on May 28, 2015, respondent had until November 24, 20 15 to decide on the protest. There being no action on the protest, petitioner had 30 days from November 24, 2015 or until December 24, 2015 within which to file an appeal before this Court. However, December 24, 20 15 fell on a holiday, thus, petitioner had until December 28, 2015, or the next working day, to file its appeal. Hence, petitioner timely filed the instant Petition for Review with this Court on December 28, 2015.

Apart from the timely filing of the administrative and judicial appeals as discussed above, this Court will also tackle . the issue of prescription on the respondent's right to assess the deficiency VAT and EWT as this was likewise raised by petitioner in its memorandum.

Section 203 of the 1997 NIRC, as amended, mandates that internal revenue taxes must be assessed within three (3) years reckoned from the period fixed by law for filing of the tax return or the actual date of filing, whichever comes later, thus: "SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day."

In relation thereto, Section 114(A)44 of the 1997 NIRC, as amended, and Section 4.114-1 (A) 4 5 of Revenue Regulations (RR) No. 16-2005 provide that Quarterly VAT Returns shall be filed within twenty-five (25) days following the close of each taxable quarter.

On the other hand, Section 2.58(A)(2)(a)46 of RR No. 2-98, as amended by RR No. 17-03, requires the filing of the EWT 44 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-registere~ persons shall pay the value-added tax on a monthly basis. 45 SEC. 4.114-1. Filing of Return and Payment of VAT. - (A) Filing of Return. -Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross sales or receipts within twenty-five (25) days following the close of taxable quarter using the latest version of Quarterly VAT Return. xxx 46 SEC. 2.58. Returns and Payment of Taxes Withheld at Source.- (A) Monthly return and payment of taxes withheld at source. -

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 payments 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 January 15 of the following year; xxx (b./' returns within ten (10) days after the end of each month for the months of January to-November, while the EWT return for the month of December shall be filed on or before January 15 of the following year.

Below is the summary of the dates of filing of petitioner's relevant returns and the corresponding dates within which respondent should assess petitioner for deficiency VAT and EWT for taxable year 2010:

VAT RETURNS (BIR FORM NO. 2550Q)

Quarter

Date Filed

Last Day to File

Return

1st Quarter of April 20, 201047 April 26, 201048 2010 2nd Quarter of July 26, 201049 July 26, 201 05o 2010 3rd Quarter of October 26, October 26, 2010 201051 201052 4th Quarter of January 25, January 25, 2010

2011 53

2011 EWT Returns (BIR Form No. 1601-E)

Period

Date Filed

January 2010

February 10, 201054

February 2010

March 10, 201055

March 2010

April 8, 201056

April 2010

May 7, 201058

May 2010

June 10, 201059

June 2010

July 9, 201060

July 2010

August 10, 201062 47 Exhibit "P-13-C", docket, vol. I, p. 363. 48 April 25, 2010 fell on a Sunday.

49 Exhibit "P-13-F", docket, vol. I, p. 367. 50 July 25, 2010 fell on a Sunday.

51 Exhibit "P-13-1'', docket, vol. I, p. 370.

Last Day to File

Return

February 10, 2010 March 10, 2010 April 12, 201057 May 10, 2010 June 10, 2010 July 12, 201061 Aug_ust 10, 2010 52 October 25, 2010 was declared a special non-working holiday. 53 Exhibit "P-13-L", docket, vol. I, p. 373. 54 Exhibit "P-7-A", docket, vol. I, p. 280. 55 Exhibit "P-7-B", docket, vol. I, p. 283. 56 Exhibit "P-7-C", docket, vol. I, p. 286. 57 April 10, 2010 fell on a Saturday. 58 Exhibit "P-7-D", docket, val. I, p. 289. 59 Exhibit "P-7-E", docket, vol. I, p. 292. 60 Exhibit "P-7-F", docket, vol. I, p. 295. 61 July 10, 2010 fell on a Saturday. 62 Exhibit "P-7-G", docket, vol. I, p. 298.~

Last Day to

Assess

April 26, 2013 July 26, 20 13 October 26, 2013 January 25, 2014

Last Day to Assess

February 10, 2013 March 10, 2013 April 12, 2013 May 10, 2013 June 10, 2013 July 12, 2013 August 10,2013

August 2010

September 20 10

October 2010

November 2010

September 9, 201063 October 11, 201064 November 10, 201066 December 1 0, 201067 December 20 10 January 10,201168 September 1 0, September 10, 2010 2013 October 11, 201065 October 11, 2013 November 10, 2013 November 10, 2010 December 10, December 10, 2010 2013 January 17,201169 January 17, 2014 In this case, the FLD and the FANs were both dated April 28, 2015 and received by petitioner on the same day. Based on the above table, it would seem that the FLD and the FANs were issued beyond the three-year prescriptive period to assess. However, Section 222(b) of the NIRC of 1997, as amended, provides for an exception to the three-year prescriptive period to assess, to wit:

"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." (emphasis supplied) From the foregoing, the above provision authorizes the extension of the original three-year prescriptive period by the execution of a valid waiver, where the taxpayer and the CIR may stipulate to extend the period of assessment. This waiver must be executed prior to the lapse of the period prescribed by law, and by subsequent written agreements before the expiration of the period previously agreed uponJO 63 Exhibit "P-7-H", docket, vol. I, p. 301. 64 Exhibit "P-7-1", docket, vol. I, p. 304. 65 October 10, 2010 fell on a Sunday. 66 Exhibit "P-7-J", docket, vol. I, p. 307. 67 Exhibit "P-7-K", docket, vol. I, p. 310. 68 Exhibit "P-7-L", docket, vol. I, p. 313. 69 January 15, 2011 fell on a Saturday. 7° Commissio'}!!£-of Internal Revenue vs. Standard Chartered Bank, G.R. No. 192173, July 29, 201S.t.fNo/ npCISION As mentioned earlier, petitioner executed several waivers that extended the period to assess petitioner's tax liabilities for taxable year 2010.

The first waiver was executed by petitioner on July 16, 2013 and accepted by the BIRon July 25, 2013. Pursuant to Section 222(b) of the NIRC of 1997, as amended, the waiver must be executed prior to the lapse of the period prescribed by law for the assessment of the tax. In relation thereto, Revenue Memorandum Order (RMO) No. 20- 9071 provides that both the date of execution by the taxpayer and date of acceptance by the BIR should be before the expiration of the period of prescription. Applying the foregoing, it is clear that respondent's right to assess petitioner for deficiency VAT for the 1st quarter of TY 2010 (last day to assess was on April 26, 2013) as well as for deficiency EWT for the months of January 2010 to June 2010 (last day to assess was on July 12, 2013) had prescribed when the first waiver was executed on July 16, 2013 and accepted by the BIR on July 25, 2013. Considering that the waiver was executed and accepted after the expiration of the period of prescription, then, there was nothing to extend. Thus, respondent's right to assess petitioner for deficiency VAT for the 1st quarter of taxable year 20 10 and deficiency EWT for the months of January 2010 to June 2010 was already barred by prescription.

Consequently, the tax assessments for these periods are deemed invalid.

As a corollary, the deficiency VAT assessment for the 2nd to 4th quarters of TY 2010 and the deficiency EWT assessment for the months of July 2010 to December 2010 were issued within the extended period to assess under Section 222(b) in relation to Section 203 of the NIRC of 1997, as amended, by virtue of the waivers executed by petitioner. Correspondingly, the assessments for these periods are considered as timely issued.

Notwithstanding the Court's finding that there are certain periods which have prescribed, petitioner did not show which 71 Subject: Proper Execution of the Waiver of the Statute of Limitations Under the National Internal Revenue Code, April 4, 1990. U£...../ portion of the assessments pertain to the prescribed period. It must be recalled that VAT assessments in question pertain to the entire taxable year of 20 10, so petitioner should have apprised the Court of the amounts pertaining to the VAT assessments which should have been excluded due to prescription. In light of the doctrine that all presumptions are in favor of the correctness of tax assessments, 72 this Court is constrained to treat all of the subject tax assessments as referring to the unprescribed portions. We now delve into the merits of each of the items of the assessments issued by respondent.

I. Deficiency Income Tax (IT) Respondent assessed petitioner of deficiency income tax for taxable year 2010 amounting to P34,387,300.73, inclusive of increments, computed as follows:73

PI

TAXABLE INCOME PER ITR

1,155,001.93

ADJUSTMENTS:

Undeclared Income -Line by line matching- SLS vs AITEID data

vs CWT (Schedule 1)

1,992,397.90

Unsupported Sales Returns and Discounts

38,893,4 72.37

Disallowed Losses

340,578.80 Unaccounted Income due to Undeclared Purchases from

Affiliates/Purchase of Services (Schedule 2 & 3)

3,952,845.29

Disallowed Income Payments for Non-withholding

(Schedule 4)

17,810,519.93 p

TOTAL TAXABLE INCOME

64,144,816.22

TAX RATE

30% p

INCOME TAX DUE

19,243,444.87

LESS: TAX CREDITS/PAYMENTS

p

Prior Years Excess Credits

86,870.87

Tax Payments

460,010.99

Creditable Tax Withheld - Form 2307

226,647.19 p

TOTAL

773,529.05

Less: Unsupported Prior Years Excess Credits

86,870.87 72 CommissioneroflnternaiRevenue vs. BankofthePhilippinelslands, G.R. No. 134062, April17, 2007; Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue, G.R. No. 168498, April 24, 2007.

Excess MCIT

427,028.47 259,629.71 p

BASIC DEFICIENCY INCOME TAX

18,983,815.16 20% Interest Per Annum (4/ 16/11 - 4/30/ 15) 15,353,485.57

Compromise Penalty

50,000.00

TOTAL AMOUNT DUE

P34,387 ,300. 73 The Court shall determine the validity of the assessment by looking into the propriety of the following items of adjustments imputed and disallowed by respondent: A. Undeclared Income due to Discrepancy of Sales- SLS vs. AITEID vs. SAWT B.i. Unsupported Sales Returns and Discounts B.ii. Disallowed Losses C.

Unaccounted Income due to Undeclared Purchases from Affiliates

and Purchase of Services

D.

Disallowed Income Payments due to Non-Withholding

of Tax

E.

Unsupported Prior Year's Excess Credits

F.

Excess MCIT Carried-Over to Succeeding Period

A.

Undeclared Income due to

Discrepancy of Sales - SLS

vs.

AITEID

vs.

SA WT

(P 1, 992,397. 90) p 1,992,397.90 38,893,4 72.37 340,578.80 3,952,845.29 17,810,519.93 86,870.87 427,028.47 According to respondent, a comparison between the Summary List of Sales (SLS), which was an attachment to the VAT returns, as against the Audit Information, Tax Exemption and Incentives Division (AITEID) data and the Summary Alphabetical List of Withholding Tax (SAWT) showed an undeclared income amounting to P1,992,397.90. This was assessed for income tax purposes pursuant to Section 32 of the NIRC of 1997, as amended, viz:

SCHEDULE 1 - SLS vs AITEID DATA vs CWT

REGISTERED NAME

PER SLS

AITEID DATA

SAWT

DIFFERENCE

Aherin Gerald Orzales

p 1,357,353.25 p 1,357,353.25

Alro Construction and Dev Corp

10,361.83 10,361.83

And Hung Concepcion Inc

703,532.08 703,532.08

Bens Baker Corp

62,266.92 62,266.92 Biggs Inc.

p 278,433.43 p 273,737.00

Bituon Beach Resort Corp

5,821.42 5,821.42

Central MetroTrade Distributors

Inc.

Cheery Land and Bakeshop Inc

Department of Agriculture

Digibine Corporation

Dy Henson Co

Fornix Corp

Graceland Food Industries Inc

Joy Daraga Supermarket Corp

Jy Legazpi Mktg Corp

Kho Suzette Oblina

Lasala Rogelio Tiu

LCC Liberty Commercial Center

Inc

LCC Shopmore Coml Corp

Lion Commercial Corp

Lucky Best Enterprises

Magdaraog Rennie Ching

Malangit Reyn.ato Conche

Master Square Supermart

Metro Legazpi Devt Corp

Nagaland Development

Corporation

Nunez Ma. Susan Ferred

Ongjoco Anita Yap

Panganiban Melchor Edaugal

Philippine Fil Studios Inc

Po Jr Jacinto Tan

Provincial Government of

Camarines Sur

Rada Ricardo

Ranola Nnie

Reves Andres

Roberte Lee Obiedo

Sampaguita Chains Corp

Santelices Dante Magno

South Star Drug

Southern Nature Craft Co

Tabaco Liberty Commercial

Center Inc

Tycnagco Merli Cresini

Virac Fortune Ent

Total

Undeclared Sales

Gross Profit Rate

Undeclared Income

PER ITR

SALES

COST OF SALES

GROSS INCOME

2,216,084.47 41,678.57 630,888.00 2,079,672.56 70,918.75 3,057,828.03 1,812,088.29 1 ,226, 756.40 10,982.15 1,421,457.90 7,279,579.20 824,738.11 768,689.78 fP21,719, 795.64]74 P418,497 010.34 379,820,557.75 p 38,676,452.59 2,165,629.47 31,592.92 31,592.9 41,678.57 31,301.92 31,301.9 10,153,250.58 10,153,250.5 152,664.25 152,664.2 630,888.00 3,280.33 3,280.3 7,567.83 7,567.8 16,473.25 16,473.2 4,119,426.83 4,119,426.8 2,224,042.56 144,370.01 536,464.83 465,546.0:

3,093,619.09 35,791.01 51,746.43 51,746.4:

5,224.08 5,224.01 12,713.42 12,713.4:

1,811,732.10 1,258,509.00 31,752.6( 10,982.15 149,238.58 149,238.51 193,919.50 193,919.5( 17,392.83 17,392.8:

1,242,482.67 1,242,482.6~ 62,803.58 62,803.51 269,976.34 269,976.3" 38,129.50 38, 129.5( 375,160.67 375, 160.6~ 277,676.42 277,676.4~ 1,425,493.61 4,035.71 89,921.58 89,921.5E 16,487.50 16,487.5( 3,071,560.33 7,274,876.00 1,288,266.08 1,288,266.0E 827,702.40 2,964.2S 128,169.58 128, 169.5E 767,669.78 P23,624,039.75 P22,664,747.33 P21,558,661.93 9o/c p 1,992,397.90 - 91% 9% 74 The total should be P21,719,795.64 but the total indicated in the Details of Discrepancies is P418,481,385.32, see Exhibit "P-23-A", docket, val. I, p. 432. efA.---- In the determination of the alleged undeclared gross income, the· alleged undeclared sales that resulted from the matching was grossed up using petitioner's gross profit ratio for the year, as shown above.

Petitioner argues that the matching procedure performed by respondent using the data reported by petitioner in its SLS and comparing it with the BIR's AITEID and SAWT data of petitioner's customers will not have the same outcome, considering that petitioner and its various customers may not adopt the same accounting method in keeping their Books of Accounts which may result in a timing difference. Petitioner further asserts that respondent's resort to the ratio method in making the assessment is not justified because as provided for under Title XIII(G)(A)(2) of Revenue Audit Memorandum Order No. 01-00, reconstruction of income using a petitioner's Gross Profit Ratio or Gross Margin Percentage is generally employed where the taxpayer keeps no records or its records are inadequate, or where there is strong suspicion that the taxpayer has received income from undisclosed sources. Such is not the case for petitioner because it submitted documents to respondent on many occasions negating the idea that it has inadequate records, or that it has no records or that it received income from undisclosed sources. In its attempt to reconcile the findings of respondent, petitioner performed a line-by-line evaluation of the matching made by respondent and arrived at the following:

Table 1: PER RESPONDENT:

PER SLS

AITEID DATA

SAWT

DIFFERENCE

1. Discrepancy in Trade p p

Name/TIN

2,173,577.07 2,173,577.07

2. SLS vs. SAWT- Timing p p

Difference

8,681,371.75 9,687,554.26 1,006,182.51

3. Sales to Juridical Entities 10,848.16 10,848.16

4. Sales to Service Oriented 1,383,827.681

Entities

1,383,827.68

5. Sales to Individuals 16,984,226.49 16,984,226.49

Total

p 8,681,371.75 P20,552,479.40 P9,687,554.26 P21,558,661.91

Table 2: PER PETITIONER:

PER SLS

AITEID DATA

SAWT

DIFFERENCE

1. Discrepancy in Trade p p

Name/TIN

5,687,205.81 2,173,577.07 p (3,513,628.74)

2. SLS vs. SAWT- Timing p 1,006,182.51 i

Difference

8,681,371.75 9,687,554.26

3. Sales to Juridical Entities 10,848.16 10,848.16

4. Sales to Service Oriented

Entities

1,383,827.68 1,383,827.68

5. Sales to Individuals 16 984,226.49 16,984,226.49

Total

P14,368,577.56 P20,552,479.40 P9,687,554.26 P15,871,456.10 Petitioner explains that item No.

1 of Table 2 or

"Discrepancy in Trade Name/TIN" means that respondent failed to pick up the sales of petitioner per SLS because there were trade names or tax identification numbers which were differently identified or reported by petitioner and its customers, although pertaining to the same entities or customers. The amount not picked up by respondent is P5,687,205.81 which is actually higher than its assessment per SLS vs. AITEID data of P2, 173,577.07,75 As to items 3, 4 and 5 of Table 2, allegedly there were no sales reported per petitioner's SLS but based on AITEID data, petitioner's customers reported purchases from the former. However, no certifications or other proofs were given by respondent in making this assessment based on AITEID data; thus, petitioner could not respond intelligentlyJ6 Lastly, as regards reconciling item no. 2 which pertains to the purported discrepancy in the amount of sales reported per petitioner's SLS as against its SAWT, petitioner posits that respondent failed to consider the possibility that there must be timing difference in the reporting per SLS, which primarily is for VAT reporting purposes, and SAWT, which relates primarily to withholding taxes on income payments. There may be a timing difference as the requirement for reporting of gross sales for VAT purposes is different from reporting of taxes withheld on income taxes per SAWTJ7 The Court finds that the deficiency assessment pertaining to items no. 1, 3, 4, and 5 should be cancelled considering that the figures lifted by respondent from its AITEID data were not verified with externally sourced data to check their veracity. Neither did respondent secure the required certifications or confirmation from the alleged third-party sources to support the integrity of the amounts per AITEID data.

In the cross-examination of respondent's witness during the hearing held on November 7, 2016,78 RO Felina B. Guimbao, made the following statements:

ATIY. BARAOIDAN: .

Yes Your Honors.

Q

Were this information, what is the nature of such data which you compared to the SLS of the petitioner and CWT?

ATIY. VICENTE:

The question is vague Your Honors.

ATIY. BARAOIDAN:

Q

What is the nature, what are these data, because you mentioned AITEID data, what are these data, are they sales, purchases?

JUSTICE CASTANEDA, JR.:

Q

What do these data pertain to?

MS. GUIMBAO:

A

This pertains to sales Your Honors.

JUSTICE CASTANEDA, JR.:

Q

This pertains to sales?

MS. GUIMBAO:

A

Yes Your Honors, that's why the comparison is the SLS, the AITEID data and the CWT, which is the Creditable Withholding Tax Your Honors. ATIY. BARAOIDAN:

Q

From whom are these data retrieved from? MS. GUIMBAO:

A

The same are submitted by the taxpayer, the creditable withholding tax also is stated in the ITR as claims, as tax credits and payments ma'am.

ATIY. BARAOIDAN:

Q

And the AITEID?

MS. GUIMBAO:

A

The AITEID data is from the Audit Incentives Division which we assumed it as Third Party Information ma'am.

XXX

XXX

XXX

ATTY. BARAOIDAN:

Q

Whose responsibility is it, to verify the accuracy of the data coming from AITEID?

MS. GUIMBAO:

A

The taxpayer ma'am.

ATTY. BARAOIDAN:

Q

But the information came from the division of the Bureau of Internal Revenue, how can the petitioner now have access on such information and verify the accuracy of the same?

MS. GUIMBAO:

A

The documents are from the AITEID and we assumed that it is really reliable ma'am.

XXX

XXX

XXX

ATTY. BARAOIDAN:

Q

Isn't it the responsibility of the BIR to go over all the third party alleged customers for you to verify if such purchases were actually made and to request them for certifications and showed it to the taxpayers for them to contradict or admit the same?

MS. GUIMBAO:

A

No ma'am, it would take time for me to make a confirmation for customer. So, I must have to think of another audit technique that I can report because it takes time for me if I will make a confirmation.

XXX

XXX

XXX

ATTY. BARAOIDAN:

Q

Yes Your Honors. However, the main issue Your Honors is that there were no certifications coming from the third-party sources. That is why, we are asking the witness if there was even an attempt on their end to at least get or verify the information coming from this third party sources based AITEID they got. MS. GUIMBAO:~

A

I didn't really make any information ma'am. From the foregoing testimony of RO Guimbao, she merely assumed the reliability of the AITEID data. As admitted, there were no confirmations made from the third-party sources, neither did she attempt, to at least get, or verify the information coming from the purported third-party sources per AITEID. The lack of supporting certification or confirmation from the purported customers of petitioners should have been secured to verify the correctness of the amounts. It is worth stating that under RMO No. 04-0379 , the BIR recognizes the need to verify the amounts reflected in the quarterly report with other externally sourced data In ascertaining the taxpayer's under-declaration of revenues or overstatement of costs and expenses, if any. The pertinent portions of RMO No. 04-03 are quoted thus: "The Bureau of Internal Revenue is reengineering its work processes in order to increase revenue collections and to pursue quality audit by making use of available internal and external information resources. In order to strengthen and enhance i1:s assessment functions, the utilization of information technology has been identified as an effective tool to improve tax administration through the development of the Reconciliation of Listings for Enforcement (RELIEF) system. The RELIEF system was created to support third party information program and voluntary assessment program of the Bureau through the cross-referencing of third party information from the taxpayer's Summary List of Sales and Purchases prescribed to be submitted on a quarterly basis pursuant to Revenue Regulations Nos. 7-95, as amended by RR 13-97, RR 7-99 and RR 8-2002.

The RELIEF system shall cover all VAT taxpayers above threshold limits set by RR 8-2002 to submit Summary Lists of Sales and Purchases in magnetic form based on a prescribed electronic format. The consolidation and matching of information with other externally sourced data will detect underdeclaration of revenues/ overdeclaration of cost and expenses, thus, resulting to greater tax potential." 79 SUBJECT: Guidelines and Procedures on the Processing of Quarterly Summary Lists of Sales and Purchases and of the ImB95ition of Penalties Therefor as Provided under Revenue Regulations No. 8-2002.(MV"'

Likewise, in the case of G & W Architects, Engineers and Project Consultants Co. us Commissioner of Internal Revenue8°, this Court held that while there is no showing from the guidelines provided under RMO Nos. 32-078 1 and 46-0482 that the sworn statements from the third-party information sources are indispensable and mandatory, the fact remains that the amounts of undeclared purchases (undeclared income in this case) found by respondent were admittedly unverified. Thus, the same casts doubts as to the reliability and correctness of the findings of deficiency taxes assessed by respondent. True, tax assessments by tax examiners 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. All presumptions are in favor of the correctness of tax assessments.83 However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment," i.e., without any foundation character, the determination of the tax due is without rational basis. 84 As held in the case of Collector of Internal Revenue us. Benipayo,8s the assessment must be based on actual facts.

As regards item no. 2, as can be gleaned from the above- provided Schedule 1, the discrepancy of P 1, 006, 182.51 is derived from the following:

REGISTERED NAME

PER SLS

SAWT

DIFFERENCE

LCC Liberty Commercial Center

p p p

Inc

2,079,672.56 2,224,042.56 144,370.00

LCC Shopmore Coml Corp

70,918.75 536,464.83 465,546.08

Lion Commerical Corp

3,057,828.03 3,093,619.09 35,791.06

Lucky Best Enterprises

51,746.43 51,746.43 80 CTA Case No. 8604, August 16, 2016. 81 SUBJECT: Prescribing Guidelines and Procedures in Handling 2006 Letter Notices Generated · Thru Reconciliation of Listing for Enforcement System (RELIEF) and Third Party Matching- Bureau of Customs (TPM-BOC) Data Program. 82 SUBJECT: Additional Supplement and Guidelines in Handling Letter Notices with Discrepancies Arising from Data Matching Processes as defined in Revenue Memorandum Order (RMO) Nos. 34-2004 and 30-2003, as amended by RMO Nos. 42-2003 and 24-2004, which remain Unserved, have been Served but are Without Response, or are Under Protest by Taxpayers.

Metro Legazpi Devt Corp

Provincial Government of

Camarines Sur

Roberte Lee Obiedo

Tabaco Liberty Commercial

Center Inc

Total

1 ,226, 756.40 1,258,509.00 31,752.60 269,976.34 269,976.34 1,421,457.90 1,425,493.61 4,035.71 824,738.11 827,702.40 2,964.29 P8,681 ,371. 75 P9,687,554.26 P1,006,182.51 Petitioner attributes the discrepancy of Pl,006,182.51 to timing difference. However, petitioner failed to present evidence to show that, indeed, the difference merely arose from the timing difference in its recognition of income as declared in its VAT returns vis-a-vis the income reported in the SAWT of its customers.

Neither did petitioner prove that the subject discrepancy was reported as income and accordingly subjected to income tax in any other taxable year. Failure on the part of petitioner to present proof as to the allegations made is self-serving and does not prove anything. It is basic in the rule of evidence that bare allegations, unsubstantiated by evidence, are not equivalent to proof. In short, mere allegations are not evidence. 86 Consequently, respondent's deficiency income tax assessment on the undeclared income of P92,988.88, as computed below, shall be sustained:

Undeclared Sales

x Gross Profit Rate _iP38,676,452.59 /P418,497 ,0 10.34)

Undeclared Income

B. Unsupported Sales Returns and Discounts (P38,893,472.37) and Disallowed Losses (P340,578.80) P1,006,182.51 0.092417512 p 92,988.88 Respondent disallowed the sales returns and discounts in the amount of P38,893,472.37 and the losses claimed per income tax return amounting to P340,578.80 for lack of the substantiation requirements for deductibility as required under Section 34(A)(l)(b) of the 1997 NIRC, as amended.

l.

Unsupported Sales Returns and Discounts

Petitioner argues that the inferences of respondent from its findings of fact are manifestly mistaken and there is no citation of specific evidence on which they are based. Respondent did not even mention that there was a failure on the part of petitioner to substantiate the said sales returns and discount. Further, there appears no justification on how respondent concluded that these "sales returns and discounts" are the same as "deductible business expenses" under Section 34(A)(1)(a) of the 1997 NIRC, as amended, when it disallowed the same and relied on Section 34(A)(1)(b) of the same law. 87 We do not agree.

Contrary to the allegation of petitioner, respondent did mention the basis of his assessment. As clearly indicated in the FLD, the disallowance is described as "Unsupported sales returns and discounts". Also, in the Details of Discrepancies attached to the FLD, respondent explained that the disallowance "represents unsupported sales returns and discounts". Verily, the disallowance is due to petitioner's failure to comply with the substantiation requirement of deductibility as required under Section 34(A)(1)(b) of the 1997 NIRC, as amended.

Section 34(A){1)(b) ofthe 1997 NIRC, as amended, provides for the disallowance of the ordinary and necessary expenses as deduction from gross income upon failure of the taxpayer to substantiate the same with sufficient evidence. By the nature of returns and discounts, the same are indeed not ordinary and necessary expenses contemplated under the said section.

Be

that as it may, the Court has the power to determine a question of law- that is, the correct application of law or jurisprudence to a certain set of facts.

Section 27(A) of the 1997 NIRC, as amended, defines the term "gross income" as that equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. In the case of Commissioner of Internal Revenue us. Central Luzon Drug Corporation88 , the High Court discussed the nature of sales discounts as follows:

"Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted accounting principles (GAAP) in the country, this type of discount is reflected in the income statement as a line item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive at net sales. This type of presentation is resorted to, because the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices. This manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple, more convenient to apply than the net method, and produces no material errors over time.

However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of accounts and reflected in the financial statements. A separate line item cannot be shown, because the transactions themselves involving both accounts receivable and sales have already been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum- -along with sales returns, allowances and cost of goods sold- - is deducted from gross sales to come up with the gross income, profit or margin derived from business. In another provision therein, sales discounts that are granted and indicated in the invoices at the time of sale-- and that do not depend upon the happening of any future event -- may be excluded from the gross sales within the same quarter they were given. While determinative only of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible from gross sales." Essentially, sales returns and discounts, being deductions from gross sales to come up with the gross income, ultimately reduce the taxable net income of a taxpayer, hence, partake the nature of tax exemptions.

Exemption from taxation is not favored, and exemptions in tax statutes are never presumed. Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing_.

authority. 89 As such, proper substantiation is an essential requirement before it can be allowed as a deduction from gross 1ncome.

In other words, deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.90 To be entitled to claim a tax deduction, the taxpayer must competently establish the factual and documentary bases of its claim.91 Nevertheless, in order to further dispute this assessment, petitioner avers that as of December 31, 2010, it reported in its

Audited

Financial

Statements

92 a total sales of P418,497,010.00 and as stated in the Notes to the Financial Statements, revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of business activities; that revenue is shown net of sales, value-added tax, returns, rebates and discounts. Petitioner alleges that on November 8, 2011, a copy of its 2010 Worksheet was submitted to respondent which contains the total Monthly Debits and Credits of its Sales Account, which became the source of BIR's assessment. As shown below, the amount of P38,893,472.00 under the Debit column pertains to the sales returns and discounts which were disallowed by the respondent, while the amount of P418,497,010.00 under the Credit column corresponds to the Total Sales for year 20 10 of petitioner:

Sales

DR

CR

Balance- 01/31

January

p 1,130,342 p 24,994,896

February

3,351,519 31,963,381

March

1,893,638 45,234,485

A_Qril

8,751,630 45,128,702

May

8,868,688 58,292,974 89 Esso Standard Eastern, Inc. vs. Acting Commissioner of Customs, G.R. No. L-21841, October 28, 1966.

9° Commissioner of Internal Revenue vs. General Foods, (Phils.) Inc., G.R. No. 143672, April 24, 2003.

91 H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, G.R. No. 173373, July 29, 2013.

92 Exhibit "P-15-8", docket, val. I, pp. 390-409 (but was identified by Sarah Ecija Lacra as Exhibit "P-15-A", docket, v91. I, p. 218; as noted in the Resolution dated October 13, 2016, docket, val. II, p. 694).~

Sales

Office

June

July

August

September

October

November

December

Total

Balance- 12/31

p 1,825,533 47,271,399 1,542,139 31,852,733 1,416,670 34,063,785 1,315,054 31,511,699 1,497,647 34,685,325 1,181,888 32,835,313 6,118,725 39,555,789 38,893,472 p 457,390,483 p 418,497,011 Petitioner posits that the Debit and Credit entries found in the Sales Account of a taxpayer usually represent the following transactions:

DEBITS:

1. To record Sales Returns, Discounts and Rebates;

2. Correction of Erroneous Credit Entry; and

3. Adjusting Journal Entryjies.

CREDITS:

1. To record Sales;

2. Correction of Erroneous Debit Entry; and

3. Adjusting Journal Entryjies.93 As correctly pointed out by petitioner, the sales account should be presented net of sales returns, allowances and discounts.

However, as mentioned earlier, proper substantiation is an essential requirement before it can be allowed as a deduction from gross income. As ascertained by the Court-commissioned ICPA, Mr. Rendon P. Gammag 94 , out of the total sales returns and discounts of P38,893,472.37, petitioner was able to present documents to support the amount ofP35,221,267.56. As borne by the records, petitioner had recorded sales discounts in the total amount of P34,590,566.49 and sales returns in the amount ofP630,701.07 from its four (4) sales offices, to wit:

Gross Sales

Discounts

93 Exhibit "P-24", docket, val. I, p. 453. 94 Exhibit "P-28". ~

Returns

Net Sales

Exhibit

Exhibit No. of I No. of

Supporting I

Schedule

Invoices

Legazpi

Mas bate

Naga-

Daet

Sorsogon

Total

of Sales

Returns

and

Discounts

P-27-A-1-1 to

P-27-A-11-

f' f' f' f' 552;

58,425,748.61 6,412,894.09 13,049.40 51,999,805.12

P-27-A

Box Nos. 1-5

P-27-B-1-1 to

P-27-B-12-

3967;

87,404,734.08 9,243,426.21 165,855.00 77,995,452.87

P-27-B

Box Nos. 6-16

P-27 -C-1-1 to

P-27-C-12-

6270;

Box Nos. 28- 141,229,184.16 16,032,265.79 413,606.67 124,783,311.70

P-27-C

50

P-27-D-1-1 to

P-27-D-11-

1985;

Box Nos. 16- 32,092,921.50 2,901,980.40 38,190.00 29,152,751.10

P-27-D

1"319, 152,588.35 1"34,590,566.49 1"630,701.07 1"283,931,320.79 Upon scrutiny of the ICPA report together with the supporting documents submitted by petitioner, the Court finds the above findings proper. The sales invoices clearly indicated the amount of discounts and/or returns as deductions to come up with the total net sales.

Thus, the sales returns and discounts amounting to P35,221 ,267.56 may be validly deducted frorn petitioner's total sales. However, the remaining claimed sales returns and discounts of P3,672,204.81 (P38,893,472.37 minus P35,221 ,267. 56) should be disallowed for being unsupported. Consequently, the assessment thereon should be sustained. zr. Disallowed (Unsupported) Losses Petitioner contends that Section 34(D)(1)(a) governs the deductibility of Losses and not Section 34(A)( 1 )(b) of the 1997 NIRC, as amended. The said provision of law allows losses to be deducted from gross income if the same were incurred in relation to the trade, profession or business of the taxpayer and that it w~s actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity. 95 Relative thereto, petitioner alleges that the losses it claimed amounting to P340,578.80 represent breakages, missing products and returnable containers during load out 95 Exhibit "P-24", docket, vol. I, pp. 453-454. ~ 27 and load in of stocks and during the transfer of stocks from petitioner's main office to its various warehouses, then to customers and vice-versa. It added that most of the products that it is handling are contained in breakable containers. Despite petitioner's foregoing explanation, it never presented any proof to support its claimed losses; hence, the assessment thereon should be sustained. C. Unaccounted Income due to Undeclared Purchases from Affiliates (P2,295,600.83) and

Purchase

of

Services

(P1 ,657 ,244.46)

Respondent's

verification disclosed that the total purchases made by petitioner from its alleged affiliates, Asia

Brewery

and Interbev, amounted to P366,553,008.38 (P171,734,252.61 + P194,818,755.77).

However, per petitioner's reconciliation of Cost of Sales, actual purchases from affiliates amounted only to P344,009, 152.13 or a discrepancy of P22,543,856.25.

Respondent also found that petitioner claimed as cost/expenses from gross income the expenses in the total amount of P61,257,061.07 but per VAT returns, domestic purchase of services amounted only to P44,982, 158.00 or a discrepancy of Pl6,274,903.07.

Respondent

considered both discrepancies as unaccounted purchases and using the gross profit ratio, found that there was an under declaration of sales resulting in a total undeclared income of P3,952,845.29. This was thus assessed and added back as taxable income for income tax purposes pursuant to Section 32 of the NIRC, as amended. The unaccounted income due to discrepancy of purchases from affiliates and unsupported purchases of domestic services was computed in the Details of Discrepancies96 , as follows: SCHEDULE 2 - UNACCOUNTED INCOME DUE TO DISCREPANCY OF

PURCHASES FROM AFFILIATES

Month I

ASIA BREWERY

I

INTERBEV

Tax Base

p

Jan

8,230,185.82

Feb

12 '7 64' 57 3. 21

Mar

17,408,608.93

Apr

16,189,670.38

May

20,641,149.11

Jun

17,702,574.10

Jul

9, 721,548.22

Aug

13,066,181.25

Sep

11,435,890.18

Oct

12,258,426.78

Nov

13,750,688.38

Dec

18,564,756.25 p 171,734,252.61

Input Tax

p 987,622.30 1,531,748.79 2,089,033.07 1,942,760.45 2,476,937.89 2,124,308.89 1,166,585.79 1,567,941.75 1,372,306.82 1,471,011.21 1,650,082.61 2,227,770.75 p 20,608,110.31 Total Purchase of Goods from Affiliates per

SLP

Less: Net Purchases per Cost of Sales

Variance

Undeclared Sales

UNDECLARED INCOME

Gross Profit Rate:

Sales

Cost of Sales

Gross Income

PER TP RECONCILIATION:

Beg. Inventory

Add: Purchases

Purchases Returns

Purchases Discounts- NV

Complimentaries- Charged to

advertising

Net Purchases- Excluding Freight

Freight

Net Purchases

TGAS

Less: Ending Inventories

Tax Base

Input Tax

p p 14,856,973.21 1,782,836.79 11,402,968.75 1,368,356.25 22,198,160.71 2,663,779.29 15,663,956.66 1,879,674.80 23,960,933.04 2,875,311.96 27,420,410.71 3,290,449.29 11,530,892.86 1,383,707.14 11,681,821.43 1,401,818.57 16,167,714.29 1,940,125.71 15,240,290.18 1,828,834.82 13,367,370.54 1,604,084.46 11,327,263.39 1,359,271.61 p 194,818,755.77 p 23,378,250.69 Over claimed

Input Tax

p 366,553,008.38 344,009,152.13 p p 22,543,856.25 2, 705,262.75 p 24,839,457.08 tp 2,295,600.83 418,497,010.34 100% 379,820,557.75 91% 38,676,452.59 9% p 19,496,689.4 7 p 366,841,522.32 (288,513.93) (18,300, 158.94) (4,243,697 .32) p 344,009,152.13 46,719,926.57 p 390,729,078.70 p 410,225,768.17 30,405,210.42 p

Cost of Sales

379,820,557.75

SCHEDULE 3 - UNSUPPORTED PURCHASES OF DOMESTIC SERVICES

PERITR

p

Freight In

46,719,927.00

Professional Fees

39,100.00

Other Outside Services

5,900,140.46

Advertising

6,483,182.49

Repairs and Maintenance- Labor

1,257,578.84

Research and Development

104,553.36

Insurance

22,559.57 Comm, Light and Water 730,019.35 p

Total - Purchase of Services per ITR

61,257,061.07

Less: Purchase of Services per VAT Returns

44,982,158.00 p

Unexplained Purchases

16,274,903.07

Undeclared Sales

17,932,147.53

UNDECLARED INCOME

p 1,657,244.46 Petitioner contends that respondent's allegations have no factual support as he failed to take into consideration that not all of the transactions of a taxpayer are subject to VAT. To strengthen its stand, petitioner made a reconciliation of the alleged undeclared purchases showing that it has no undeclared income97 , to wit:

PURCHASES FROM ABI & IPI

ABI

IPI

Total

I

Purchases per SLP

P171,734,252.61 P194,818,755.77 P366,553,008.38

Less:

Purchase Discounts (Not Subject to VAT)

8,573,832.56 9,726,326.38 18,300, 158.9'!_

Charged to Complimentaries (Advertising

Account)

3,446,103.57 797,593.75 4,243,697.32

Total Deductions

12,019,936.13 10,523,920.13.

22,543,856.26

Net Purchases as Computed (Purchases per

SLP)

P159,714,316.48 P184,294,835.64 P344,009, 152.12

Net Purchases per Cost of Sales

344,009,152.13

Variance

p (0.01)

PURCHASES OF SERVICES

-~

Freight

p 46,719,927.00

Professional Fee

39,100.00

Other Outside Services

5,900,140.46

Advertising

I

Complimentaries

4,243,697.32

Promotion

2,239,485.17

Repairs and Maintenanc.e

Research and Development

Insurance

Communication, Light and Water

Purchases of Services per ITR (BIR)

Less:

Purchase of Goods - Advertising

-- Purchase of Services from Non-VAT Suppliers

Total

Purchase of Services subject to VAT per Books

Purchase of Services per VAT Returns

VARlANCE

1,257,578.84 104,553.36 22,559.57 730 019.35 p 61,257,061.07 6,483,182.49 9,791,719.75 16,274,902.24 p 44,982,158.83 44,982,158.83 0.00 With regard to the unaccounted income due to undeclared purchases from affiliates, the ICPA subscribed to the above reconciliation. As ascertained by the ICPA, the variance of P22,543,856.26 that is subject of respondent's assessment allegedly pertains to purchase discounts/ credit memos from suppliers, purchase returns and complimentaries and such are supported by relevant documents, to wit: p

Net Purchases per Petitioner's Reconciliation

344,009,152.13

Net Purchases per ICPA Examination

p Purchases from Asia Brewery Inc. (P-27-El) 172,002,803.57 Purchases from Interbev Philippines, Inc.

(P-27-El)

194,834,861.61

Less: Purchase Discounts/Credit Memos

(P-27-E2)

( 18,300,158. 94)

Purchase Returns (P-27-E2)

(284,656. 79)

Complimentaries (P-27-E3)

(4,243,699.32) 344,009,150.13

Noted Discrepancy

p 2.00 Upon examination of the ICPA report together with the documents that pertain to the alleged purchase discounts, returns and complimentaries, the Court finds that only the invoices supporting the purchases from Asia Brewery, Inc. and Interbev Philippines, Inc., as well as the documents supporting the complimentaries are found in the records. The purported evidence supporting the alleged purchase discounts/ credit memos and purchase returns are not in Box No.8, as indicated in the List of Source Documents 98 provided by the ICPA. Needless to say, petitioner failed to discharge its burden in proving that the amounts of P18,300,158.94 and P284,656.79 refer to purchase discounts/credit memos and purchase

returns, respectively, thus, may be considered as undeclared purchases.

Be that as it may, respondent's presumption that the undeclared purchases automatically resulted in undeclared income subject to income tax is incorrect. Moreover, let it be noted that the three elements in the imposition of income tax are:

1. there must be gain or profit;

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

3. it is not exempted by law or treaty from income tax.99 Income tax is assessed on income received from any property, activity or service that produces the income. 100 Such being the case, in the imposition or assessment of income tax, it must be clear that there was an income, and such income was received by the taxpayer, not when there is an under- declaration of purchases.1o1 In this case, said elements are not present. Respondent merely presumed that the alleged discrepancy/ under-declared purchases constitute an undeclared income.

Hence, respondent's assessment was not based on undeclared income actually received by petitioner.

It is important to note that for income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein.1o2 Thus, even when there is under-declaration of purchases, the same is not prohibited by law. Accordingly, mere reliance on the fact that there were under-declared purchases is not enough basis for the Court to uphold respondent's assessment 99 Commissioner of Internal Revenue vs. The Court of Appeals, eta!., G.R. No. 108576, January 20, 1999.

100 Ibid

101 Philippine Daily Inquirer, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 7853, February 16, 2012.

102 The Commissio'!j7 of Internal Revenue vs. Phoenix Assurance Co., Ltd, G.R. No. L -19727, May 20, 1965.~ of the subject deficiency income tax.

Consequently, respondent's deficiency income tax on the alleged additional taxable income on the undeclared purchases from ABI and lnterbev should be cancelled.

As regards the discrepancy of P16,274,903.07, the Court finds that respondent's imposition of income tax thereto does not hold water as he simply relied on presumption that there was unaccounted purchases of services. To reiterate, findings that there are unaccounted purchases would automatically result in an undeclared income which would in turn increase petitioner's income tax liability is not based on actual facts and thus, is a mere presumption.

At this juncture, it must be pointed out that in order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption. Assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be.I03 Thus, for lack of factual basis, the deficiency income tax assessment pertaining to the alleged unaccounted purchases of P16,274,903.07 is likewise cancelled. D. Disallowed Income Payments due to Non-Withholding of Tax (P 1 7, 81 0, 51 9. 9 3) After matching of data per ITR/ FS against EWT alphabetical list, respondent found that certain payments were not subjected to EWT as required under RR Nos. 2-98, 17-2003 and 30-2003, and as such, cannot be claimed as deduction from gross income pursuant to Section 34(K) of the NIRC of 1997, as amended.

In the Details of Discrepancies1o4, the disallowed income payments of P 1 7, 810,519.93 is determined as follows: 103 Collector of Internal Revenue vs. Alberto D. Benipayo, G.R. No. L-13656, January 31, 1962; Commissioner of Internal Revenue vs. Island Garment Manufacturing Corporation and the CourtofTaxAppeals, G.R. No. L-46644, September 11, 1987.

SCHEDULE4 DISALLOWED INCOME PAYMENTS FOR NON WITHHOLDING

INCOME PAYMENTS SUBJECT TO EWT

CY 2010

CONTRACTORS

CONTRACTORS

RENTAL

PROFESSIONAL

1% 2% 5% 15%

INCOME PAYMENTS SUBJECTED TO EWT

Purchases

1"366 841 522.32 1"366,841 522.32 Freil?.ht 46 719,926.57 1"46 719 926.57

Rental

186 674.58 1"186,674.58

Professional Fees

39 100.00 f' 39,100.00

Securitv Services

442 857.15 442 857.15

Other Outside

Services

5,900,140.46 5,900,140.46

Advertising

6,483,182.49 6,483,182.49

Repairs &

Maintenance

-Labor

1 257 578.84 1,257 578.84

Research &

Development

104,553.36 104,553.36

Office Supplies

128,059.48 128 059.48

Insurance

22 559.57 22 559.57

Representation &

Entertainment

69,134.03 69,134.03

Transpo and Travel

894,179.63 894,179.63

Fuel and Oil

4,908,214.80 4,908 214.80

Comm Light and

Water

730 019.35 730 019.35

INCREASE IN PPE

Transportation &

Eauioment

1,652.00

Office Furniture &

Eauioment

63 130.00

Others

7,658.00 72,440.00 72,440.00

TOTAL

1"371,950,236.60 62,624,131.45 186,674.58 39,100.00

NON- LT- PER LETTER

DATED 12/29/10

(371 950 236.60) - - - Multiply bv EWT Rate 1% 2% 5% 15%

EWT per Audit

1 267 681.36 - 1 252 482.63 9 333.73 5 865.00

Less: EWT Remitted per

Monthly Returns

909 885.97 897 328.89 6 692.08 5,865.00 Deficiency EWT, Basic 357,795.39 [355,153.74j1DS [2,641.65j106 r - ]107

20% Interest per Annum

307 802.06

Compromise Penalty

16,000.00

TOTAL AMOUNT DUE

681,597.45 44 866,444.50 133,841.60 39,100.00

INCOME PAYMENTS

NOT SUBJECTED TO

EWT

1"62,849,906.03.

45,039,386.10 1"17,810,519.93 Petitioner argues that it had properly subjected all its income payments to withholding tax for taxable year 2010. The alleged non-withholding of tax based on the reconciliation made by respondent is not accurate because not all operational 105 In the Details of Discrepancies, the "EWT Remitted per Monthly Returns" was erroneously added to "EWT per Audit" instead of deducted, thus, "Deficiency EWT, Basic" for Contractors (2%), Rental (5%) and Professional (15%) were erroneously shown as P2,149,811.52, P16,025.81, and P11730.00, respectively.

-Page 37 of 58

expenses of petitioner are covered by the Expanded Withholding Tax System under RR No. 2-98, as amended.

To further disprove respondent’s assessment, petitioner made the following reconciliation:

Repairs and Maintenance

Summary of Income Payments Subject to WE - BIR _| Suppliers | Contractors i Rental Professionals

Account Titles | at 1% at 2% a

Freight : - 46,719,926.57 - - 1 Rental - - 186,674.58 - q : P Professional Fees - - 39,100.00 Security Services - i 442,857.15 - : Other Outside Services | - 5,900,140.46 - = Advertising ; - 6,483,182.49 - - | Repairs and Maintenance - 1,257,578.84 | | - :

L Research and Development - 104,553.36 - | - Insurance - 22,559.57 | - :

Representation and Entertainment 69,134.03 | - = Transportation and Travel - al 894,179.63 | - ao - | Communication, Light and Power 730,019.35 | - - Total [_.___ | ¥62,624,131.45 | pfpe.674.se | p 39,100.00 Summary of Income Payments Subject to WE -|Benchmark |

[ Suppliers Contractors Rental | Professionals

Account Titles @ 1% @ 2% | @ 5% @15%__ | Freight - | 46,719,926.57 = =| - Rental ls ,674. 58 -

P

| Professional Fees - - Z 39,100.00 Security Services 442,857.15 | - - Other Outside Services 5,900,140.46 | - + >

Advertising

Complimentaries P4,243,697.3 - - Promotions 2,239,485.1 - = a 104,553.36 Insurance - 22,559.57 Representation and Entertainment | 69,134.03 - 894,179.63 730,019.35

Research and Development -

L

Transportation and Travel :

Communication, Light and Power Less: Non- Large Taxpayer ee Peter pated 12/19/10 i ; :

_-Cash Purchasés, PCF, Heunby ieementa:

|

Total Income Payments Subjected to EWT

| Total Income Payments Per Alphalist/BIR-

| 1604E

39,100.00 44,734,354.98 186,674.58 39,100.00 44,734,354.98 186,674.58

Variance

Based on the foregoing reconciliation, petitioner alleges that respondent subjected the Advertising and Representation Accounts to 2°/o withholding tax applicable to Contractors which were recorded in the Books of Account as Supplier of Services. Since it was notified that they have been classified as a Large Taxpayer only on December 29, 201 01os, therefore as of the year ending December 31, 2010, all income payrnents of petitioner to its regular suppliers have not been subjected to withholding tax.

Further, petitioner alleges that respondent failed to consider the income payment it made that is beyond the coverage of RR r;.Jo. 2-98 totaling to P11,337,459.95, which represents Casual Purchases, Petty Cash Disbursements incurred by Salesman and Sales Office (such as, but not limited to, meals, representation and entertainment, gasoline, out-of- town fieldwork expenses and supplies); and/or expenses that were paid in cash and reimbursed to various employees (such as, but not limited to, prepaid cellphone loads, registered mails transmitted to customers and the like).109 Moreover, petitioner submits that assuming that certain expenses were not subjected to withholding taxes, respondent cannot simply disallow the expenses claimed as deduction from gross income for failure by the taxpayer to subject them to withholding taxes. If there is a deficiency in the payment of the withholding tax, respondent should, at the very least, assess it for deficiency in withholding taxes and not disallow the expense altogether. 11 o We rule against petitioner.

As regards the claimed advertising expense of P6,483, 182.49, it must be noted that respondent's assessment thereon was based on Section 2.57.2(E) of RR No. 2-98, as amended, stating that income payments to certain contractors, whether individual or corporate, is subject to 2°/o withholding tax, irrespective of whether or not it was notified as one of the top 20,000 corporation. Thus, petitioner's contention that since it was notified as a Large Taxpayer only on December 29, 2010, is of no consequence. By the very nature of the expense, the same should be subjected to EWT at the rate of 2°/o.

Likewise, based on its reconciliation, petitioner claims that the amount of P69, 134.03 pertains to payment to supplier of goods and is not subject to 2°/o EWT, but rather to 1 °/o as a consequence of it being classified as one of the top 20,000 corporation. However, we cannot ascertain whether the said income payments being subjected by respondent to 2°/o EWT are indeed not involving payments for services rendered by its suppliers subject to EWT under Section 2.57.2(E) of RR No. 2- 98, as amended, in the absence of documents to support petitioner's claim.

Further, petitioner claims that the amount of P11,337,459.95 represents payments for casual purchases, petty cash disbursement incurred by salesman and sales office, and/ or expenses that were paid in cash and reimbursed to various employees which are beyond the coverage of RR No. 2-

98. However, petitioner failed to properly substantiate the same with documentary evidence in order for the Court to verify the actual nature of its payment and to ascertain whether the said income payments of P11,337,459.95 are indeed not subject to withholding tax. Thus, we cannot rule in favor of petitioner. As to petitioner's contention that respondent cannot simply disallow the expenses claimed as deduction from gross income for failure by the taxpayer to subject them to withholding taxes, Section 34(K) of the NIRC of 1997, as amended, is instructive, to wit:

(K) Additional Requirements for Deductibility of

Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, Section 58 and 81 of this Code. (Emphasis supplied) The foregoing provision clearly states that any amount paid or payable taken into account in computing the gross income shall be allowed as deduction only if it is shown that the withholding tax required therefrom was paid to the BIR. Hence, respondent's disallowance of said expenses as not subjected to withholding tax is proper.~

TY 2010

January

February

March

April

Mav

June

July

August

Septembe

r

October

November

December

TOTAL

It is to be noted, however, that based on records, the income payments subjected to EWT per Monthly Retnittance Return of Creditable Income Taxes Withheld (Expanded) or BIR Form No. 1601-Ell 1 actually amounted to P44,960, 129.56, as shown below:

Contractor IS u be on tractor

Professionals (WI 011) I

(WC 120)

Rental (WI 100)

Rental (WC10Ql

Juridical we 011)

TOTAL

Tax

Income

Tax

Income

Tax

Income

Tax

Income

Withheld

Payment

Withheld

Payment

Withheld

Payment

Withheld

Income

Pavment (Php)

(Php)

(Phol

(Php)

(Php)

_lPll£)_

(Php)

(Php)

Payment (Phol

2,439 816.75 48,796.35 2 105.26 105.26 - 2 441 922.01 2,047,365.18 40,947.31 5 500.00 275.00 - - 2 052 865.18 4,166 509.79 83,330.21 37,430.26 1,871.52 - - 4,203,940.05 2,647,355.73 52,947.12 13,105.26 655.26 18,000.00 900.00 2,678,460. 99 I ,605,488.44 32,109.77 8,662.50 433.13 39,100.00 5,865.00 1,653,250.94 6,570,796.85 131,415.96 14,162.50 708.13 - 6,584,959.35 7,458 253.83 149 165.13 7 605.26 380.26 - 7 465 859.09 2 584 710.90 51 694.22 - 2,584 710.90 3,441 566.09 68,831.33 2 105.26 105.26 18,000.00 900.00 3,461,671.35 4,875 185.43 97 503.71 2 105.26 105.26 - 4,877 290.69 4,485,645.51 89,712.90 14,162.50 708.13 - - 4,499,808.01 2,411,660.48 48,233.23 13,730.52 686.52 30,000.00 1,500.00 - 2,455,391.00 44,734,354.98 894,687.23 120,674.58 6,033.73 66,000.00 3,300.00 39,100.00 5,865.00 44,960,129.56 As such, the disallowed income payments due to non- withholding of tax thereon amounts to P17,889,776.47,· as computed below:

Total income payments subject to EWT Less: Subjected per alphabetical list Income payments not subjected to EWT E. Unsupported Prior Year's Excess Credits (P86,870.87) p 62,849,906.03 44,960,129.56 P17,889,776.47 As reflected in the FLD, respondent disallowed the excess tax credit from prior years amounting to P86,870.87 which was carried over tn the subject taxable year 20 10 for being unsupported.

The disallowance is proper since records of the case reveal that petitioner failed to present the corresponding Certificates 111 Exhibits "P-7-A" to "P-7-L", docket, val. I, pp. 280-315. ~

Tax

Withheld

(Phol

48,901.61 41 222.31 85,201.73 54,502.38 38,407.90 132,124.09 149 545.39 51 694.22 69,836.59 97,608.97 90,421.03 50,419.75 909,885.97 of Creditable Taxes Withheld at Source (BIR Form No. 2307) to substantiate the same.

F. Excess MCIT Carried-Over to

Succeeding

Period

(P427 ,028.4 7) As reflected in the FLO, the amount of P427,028.47 representing excess MCIT was deducted by respondent from the total allowable tax credits considering that the said amount has been forwarded to the succeeding year, pursuant to Section 2.58.3 of RR No. 2-98.

A careful examination of petitioner's Annual ITR 112 for taxable year 2010 reveals that the amount of P427,028.47 disallowed by respondent represents the excess of the MCIT (P773,529.05) over the regular or normal income tax (P346,500.58) which is carried forward and credited against the regular corporate income tax (RCIT) for the three (3) immediately succeeding taxable years, pursuant to Section 27(E)(1) and (2) of the NIRC of 1997, as amended, to wit: SEC. 27. Rates of Income Tax on Domestic Corporations.

XXX

XXX

XXX

(E)

Minimum Corporate Income Tax on Domestic

Corporations.-

(1) Imposition ofTa.x.- A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Fonuard of Excess Minimum Tax. -Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years."

Implementing the above provision is Section 2.27(E) of RR No. 09-98, as amended by RR No. 12-07, which states: Sec. 2.27(E) Minimum Corporate Income Tax (MCIT) on Domestic Corporations. -

(1) Imposition ofthe Tax.- A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning on the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

XXX

XXX

XXX

The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is imposed under Sec. 27(A) and Sec. 28(A)(l) of the Code. The final comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year and the payable or excess payment in the Annual

Income

Tax

Return

shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax returns whether this be MCIT or normal income tax." xxx It is clear from the foregoing provisions that the 2o/o MCIT on gross income shall be imposed whenever the taxpayer- corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the RCIT due from such taxpayer-corporation. In other words, it is imposed in lieu of the normal or regular corporate income tax of 30o/o. Considering that petitioner's MCIT is greater than its RCIT due as reflected in its Annual ITR for 2010, the MCIT applies. Considering further that the MCIT will be credited against the RCIT for the three (3) immediately succeeding taxable years, pursuant to Section 27(E)(2} of the NIRC of 1997, as amended, its benefit will redound in the succeeding years. Thus, it is inappropriate to disallow the same for such is beyond the scope of the present assessment.~ In view of the foregoing discussion, the Court finds petitioner liable to pay the basic deficiency income tax of P6,258,507.09 for taxable year 2010, computed as follows: p

Taxable Income per ITR

1,155,001.93

Adjustments:

Undeclared Income- SLS vs SAWT

92,988.88

Unsupported Sales Returns and Discounts

3,672,204.81

Disallowed Losses

340,578.80 Disallowed Income Payments due to Non- withholding 17,889,776.47 p

Total Taxable Income

23,150,550.89

Tax Rate

30% p

Income Tax Due

6,945,165.27

Less: Tax Credits_LPayments

p

Prior Years Excess Credits

86,870.87

Tax Payments

460,010.99

Creditable Tax Wtihheld - Form 2307

226,647.19

Total

773,529.05

Less: Unsupported Prior Years Excess

Credits

86,870.87 686,658.18

BASIC DEFICIENCY INCOME TAX

p 6,258,507.09 II. Deficiency Value-Added Tax (VAT) Respondent assessed petitioner of deficiency value-added tax for taxable year 2010 amounting to P30,108,251.62, inclusive of increments, as follows: p

TAXABLE SALES PER VAT RETURNS

418,497,010.33

ADJUSTMENTS:

Undeclared Sales not subjected to VAT- see p

Income Tax

64,330,266.54

Undeclared Sales Returns and Discounts

38,893,4 72.37 103,223,738.91 p

TAXABLE INCOME PER AUDIT

521,720,749.24 p

OUTPUT TAX

62,606,489.91

LESS: CREDITABLE INPUT TAX

p

Input Tax Claimedper VAT Returns

50,048,275.73

Less: Disallowed Input Tax

3,809,409.02

Input Tax Carry Over

149,654.30 46,089,212.41 ldM.

p

VAT PAYABLE

16,517,277.50 LESS: VAT PAYMENTS/CREDITS (320,626.98113 + 342.86) 321,019.84 p

BASIC DEFICIENCY VAT

16,196,257.66 ADD: UNREMITIED VAT- (Schedule 5.1) 8,647.00 p

TOTAL BASIC DEFICIENCY VAT

16,204,904.66 20% Interest Per Annum ( 1 j 20 I 2011 - 4/30/2015) 13,853,346.96

Compromise Penalty

50,000.00 p

TOTAL AMOUNT DUE

30,108,251.62 Based on the foregoing, the deficiency VAT mainly arose from the following:

A. Undeclared Sales not Subjected to VAT B. Undeclared Sales Returns and

Discounts

C. Disallowed Input Tax D. Input Tax Carry Over E. Unremitted VAT A.

Undeclared Sales not subjected to VAT (P64,330,266.54) p 64,330,266.54 38,893,4 72.37 3,809,409.02 149,654.30 8,647.00 The amount ofP64,330,266.54 is related to the previously discussed discrepancies under deficiency Income Tax. To reiterate, said amount arose from the following: Discrepancy of Sales - SLS vs. AITEID vs. p

SAWT

21,558,661.93 Undeclared Purchases from Affiliates 24,839,457.08

Undeclared Purchase of Services

17,932,147.53

Total

P64,330,266.54 As earlier discussed, out of the alleged undeclared sales of P21,558,661.93, only the amount of Pl,006,182.51 shall be considered undeclared sales for petitioner's failure to prove that the same merely arose from the timing difference in its recognition of income as declared in its VAT returns vis-a-vis as

contained in the SAWT of its customers. Consequently, the same shall be subjected to deficiency VAT. With regard to the undeclared sales due to undeclared purchases from affiliates and undeclared purchase of services in the amounts of P24,839,457.08 and P17,932,147.53, respectively, in line with the findings as earlier discussed, that respondent's presumption that the undeclared purchases automatically resulted in undeclared income is incorrect, the imposition of VAT thereon is likewise incorrect. As such, the deficiency VAT assessment pertaining thereto shall be cancelled.

B. Undeclared SalesReturns and Discounts (P38,893,472.37) As earlier discussed, out of the total amount of P38,893,472.37, petitioner was able to prove that only the amount of P35,221,267.56 pertains to sales returns and discounts. Thus, the remaining amount of P3,672,204.81 should be subjected to deficiency VAT. C.

Disallowed Input Tax

(P3,809,409.02) Respondent's verification disclosed that the purchase invoices/ official receipts evidencing the claimed input tax did not meet the invoicing requirements as set forth under Section 113 in relation to Sections 110 and 237 of the NIRC of 1997, as amended, hence, resulted in the disallowance of the total amount ofP3,809,409.0211 4 , to wit:

Reasons for

Name of Supplier

Tax Base

Input Tax

Disallowance

p

INVALID/NO

3 Kids Enterprises

378,502.32 p 40,553.82 TIN

INVALID/NO

AGN Trucking and Trading

177,922.80 19,063.16 TIN

INVALID/NO

Antonio Ikeda Movers Inc

113,151.40 12,123.37 TIN

INVALID/NO

Caltex San Isidro

6,400.00 685.70 TIN

INVALID/NO

Car Access Auto Supply

13,905.00 1,489.80 TIN

INVALID/NO

Caramoran Gas Station

7,350.00 787.50 TIN

CMT Hauling Services

Island Gasoline Station

Jennifer S Kababayan Hotel Inc.

Joedel Realty and Development Corp

Lim Enterprises Inc.

Masbate Electric Cooperative

New Bicol Veterans Security Agency

Regina Shipping Lines Inc

Robertson Department Store and

Supermarket

Sorsogon Caltex Service Station

Sorsogon IT Electric Cooperative

Sorsogon Tire Sales and Service Center

Sunny View Hotel

Taurus Security Agency and Allied

Services

Virac Gasoline Station

Ace Hardware Philippines

All Electronics Enterprises

Alpha Construction Supply

Beth Trading

BGC Marine and Industrial Machine

Bicol Premium Steel Corporation

Bitshop Bicol Sale Center

Business Ro_yale Services Inc

Camarines Norte Electric Cooperative

Coby' Electronics Corp

Contegeo Cargo Solutions

Coslor Enterprises

D and T General Mdse

Daraga !surplus Center

Dugan Trucking

89,807.00 35,300.00 5,478.00 4,800.00 17,140.00 122,684.64 55,000.00 46,440.00 6,946.50 5,890.00 41,879.14 10,788.00 29,200.00 147,000.00 23,356.00 11,698.50 14,999.00 6,141.00 6,300.00 88,165.96 12,196.89 20,945.00.

30,869.50 33,412.19 7,950.00 2,036, 780.70 25,460.88 7,010.00 68,395.00 108,885.91

INVALID/NO

9,622.17 TIN

INVALID/NO

3,782.11 TIN

INVALID/NO

586.94 TIN

INVALID/NO

514.27 TIN

INVALID/NO

1,836.46 TIN

INVALID/NO

13,144.75 TIN

INVALID/NO

5,892.85 TIN

INVALID/NO

4,975.73 TIN

INVALID/NO

744.24 TIN

INVALID/NO

631.06 TIN

INVALID/NO

4,487.05 TIN

INVALID/NO

1,155.85 TIN

INVALID/NO

3,128.32 TIN

INVALID/NO

15,750.00 TIN

INVALID/NO

2,502.39 TIN

INVALID/NO

1,253.41

TIN

INVALID/NO

1,607.03 TIN

INVALID/NO

657.97 TIN

INVALID/NO

675.00 TIN

INVALID/NO

9,446.35 TIN

INVALID/NO

1,306.81 TIN

INVALID/NO

2,244.11

TIN

INVALID/NO

3,307.45 TIN

INVALID/NO

3,579.89 TIN

INVALID/NO

851.79 TIN

INVALID/NO

218,226.52 TIN

INVALID/NO

2,727.96 TIN

INVALID/NO

751.08 TIN

INVALID/NO

7,328.01

TIN

INVALID/NO

11,666.34 TIN

INVALID/NO

Ella Auto Repair ShoQ_

33,975.00 3,640.17 TIN

INVALID/NO

Fortona Department Store

12,600.00 1,350.00 TIN

INVALID/NO

G Malijan Trucking

1,935,780.80 207,405.07 TIN

INVALID/NO

Gapan Motors

12,118.00 1,298.36 TIN

INVALID/NO

Good Deal Hauling Services

51,531.40 5,521.21

TIN

INVALID/NO

Hizon Transport Services and Trading

3,338,702.52 357,718.12 TIN

INVALID/NO

Hotrod Detective and Protective Agency

84,000.00 9,000.00 TIN

INVALID/NO

Hypertech Computers

5,715.00 612.32 TIN

INVALID/NO

!riga Joe Hardware Auto Supply 13,301.25 1,425.13 TIN

INVALID/NO

Jellys Trucking Services

65,358.50 7,002.70 TIN

INVALID/NO

Jocelle S Garden and Tourist Inn

44,413.00 4,758.53 TIN

INVALID/NO

JRS Express

7,395.00 792.28 TIN

INVALID/NO

Justin Auto Parts

7,628.00 817.27 TIN

JYL Auto Supply and General

INVALID/NO

Merchandise

8,811.00 944.03 TIN

INVALID/NO

JZ Valenzia Enterprises

215,315.60 23,069.53 TIN

INVALID/NO

KR Carrier

245,043.36 26,254.65 TIN

INVALID/NO

LBC Express Sel Inc

10,600.00 1,135.84 TIN

INVALID/NO

Lee and Sons Printing Corp

8,250.00 883.93 TIN

INVALID/NO

Legazpi Champion Auto Supply

71,895.00 7,703.05 TIN

INVALID/NO

Legazpi lsuzu Center 5,200.00 557.14 TIN

INVALID/NO

LFH Venture Merchandising Corp

9,566,604.98 1,024,993.38 TIN

INVALID/NO

Lolo S Music Bar

10,000.00 1,071.43 TIN

INVALID/NO

Luzonian Machine Sho_Q

9,460.00 1,013.57 TIN

INVALID/NO

Mannbo Enterprises

10,000.00 1,071.43 TIN

INVALID/NO

Marissas Trucking and Hauling Services

46,685.69 5,002.05 TIN

INVALID/NO

Masbate Consolidated Arrastre Inc

186,793.72 20,013.61

TIN

Masbate New Life Marketing and

INVALID/NO

Merchandise

37,258.00 3,991.93 TIN

INVALID/NO

Master Square Supermarket

10,604.00 1,136.12 TIN

INVALID/NO

Montenegro Shipping Lines

4,693.00 502.83 TIN

INVALID/NO

MRTC Trucking Services Corporation

991,531.66 106,235.55 TIN

Mudbugs Sports Bar and Cafe

Naga A and M Mahusay Trading

Naga Sony Auto Parts Center

Neptune Auto Supply

New Camarines Lumber Co

North West Enterprises

Our Beverly Village Trucking Corp

Overland Motors

Philippine Airlines Legaspi

Platon Trucking

Power Plus Store

Refaircon Commercial Services

Renz Trucking Services

Robertson Mall

Rufino A Manzano

SCI Construction and Gen Merchandise

Shimmery Enterprises

Sincere Staff Management Services

SJ Computer Center

Sorsogon D Best Store

Tigon Security Investigation

Tuiza Trucking Services

Uniphil Marketing Corporation

Value Care Health Systems Inc

VJ Tee Trucking Services

Weathermaker

Wide Area Network Transport Service

Winston Enterprises

Total

101,739.00 19,163.00 28,714.00 90,895.00 11,118.00 . 22,768.19 2,179,638.32 359,664.00 11,746.00 1' 193,413.46 6,399.85 23,105.00 25,405.00 6,892.00 39,200.00 1,108 767.80 13,540.00 91,242.25 18,850.00 6,235.00 210,000.00 3,042,649.26 5,735.00 13,373.13 34,828.00 19,465.00 5,994,025.82 6,500.00 P35,554,487.89

INVALID::J

10,900.61 TIN

INVALID/NO

2,053.18 TIN

INVALID/NO

3,076.48 TIN

INVALID/NO

9,738.76 TIN

INVALID/NO

1,191.22 TIN

INVALID/NO

2,439.45 TIN

INVALID/NO

233,532.65 TIN

INVALID/NO

38,535.43 TIN

INVALID/NO

1,258.50 TIN

INVALID/NO

127,865.72 TIN

INVALID/NO

685.70 TIN

INVALID/NO

2,475.54 TIN

INVALID/NO

2,721.96 TIN

INVALID/NO

738.42 TIN

INVALID/NO

4,200.00 TIN

INVALID/NO

118,796.52 TIN

INVALID/NO

1,450.72 TIN

INVALID/NO

9,775.96 TIN

INVALID/NO

2,019.64 TIN

INVALID/NO

668.03 TIN

INVALID/NO

22,500.00 TIN

INVALID/NO

325,998.14 TIN

INVALID/NO

614.46 TIN

INVALID/NO

1,432.83 TIN

INVALID/NO

3,731.57 TIN

INVALID/NO

2,085.53 TIN

INVALID/NO

642,217.08 TIN

INVALID/NO

696.43 TIN P3,809,409.02 Petitioner argues that the reason stated in justifying the disallowance of the input taxes is due to "INVALID /NO TIN'~ without indication as to which purchase invoices/ official receipts are subject to disallowances and that there was no specification as to whose tax identification numbers have "Invalid/No TIN".

Further, petitioner posits that it should not be faulted for the mistake of its suppliers issuing the purchase invoices/ official receipts. Also, petitioner argues that nothing in the cited provisions of the 1997 NIRC, as amended, specifically Sections 110, 113 and 237, was there a statement that failure to indicate the TIN of either the seller or the buyer on an otherwise valid purchase invoice or official receipt would result in the disallowance of input tax credits. Petitioner further contends that Section 113(B) of the 1997 NIRC, as amended, provides for the "information contained in the VAT invoice or

VAT

official receipt", without any provision as to the disallowance of any input tax for failure to provide any of the enumerated information.

The portion of Section 113 which provides for the consequence of disallowance of creditable input taxes is found under Section 113(D), which is imposed for issuing erroneous VAT invoice or VAT official receipt and the consequence of which is on the "issuer-seller", which is not the petitioner in the present case.

Petitioner's arguments have no merit. Section 113(B)(4) of the NIRC of 1997, as amended, provides as follows:

"SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.-

XXX

XXX

XXX

(B) Information Contained in the VAT Invoice or VAT Official Receipt. -The following information shall be indicated in the VAT invoice or VAT official receipt:

XXX

XXX

XXX

(4) In the case of sales in the amount of one thousand pesos (P 1 ,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and Taxpayer's Identification Number (TIN) of the purchaser, customer or client."(Emphasis supplied) ac....--- Based on the foregoing, it is indispensable that the sales invoice and official receipts supporting a claim for input tax shall bear the needed information, such as the TIN of the purchaser as in this case, before the same can be applied against petitioner's output tax. Without such vital information, the invoices or official receipts cannot be allowed as proper support for an input tax credit. This is so because compliance with all the VAT invoicing requirements provided by tax laws and regulations is mandatory.11s As to petitioner's reasoning that the consequence of the disallowance of the input VAT should be on the "issuer-seller", this Court sitting En Bane made the following declarations in the case of Deutsche Knowledge Services, Pte. Ltd. us. Commissioner oflnternal Revenuell6:

"While it may be true that the said VAT invoices or official receipts were issued without its participation and control, Deutsche Knowledge, to whom the burden of proof rests claiming tax refunds, must be vigilant to require its suppliers of goods and services to issue pertinent VAT invoice or official receipt, as the case may be, which bear all the information required by law and revenue regulations. In other words, having been charge with the burden to prove its claim for refund, Deutsche Knowledge must have been watchful in ensuring that its every purchase of goods and services is supported by a legally compliant VAT official receipt or invoice, as the case may be."

Petitioner should have been vigilant in ensuring that the invoices and official receipts issued against it are compliant with the invoicing requirements provided by laws and regulations. Since petitioner claimed the same as creditable input tax, it has the burden to prove such entitlement. Further, petitioner cannot question which purchases are subject of the. disallowances as it can easily identify the pertinent supporting documents issued by the above- mentioned suppliers. Since petitioner had in its possession the supporting invoices and/ or official receipts, it could have presented the same ·before this Court to disprove respondent's assessment.

115 Eastern Telecommunications Philippines/ Inc. vs. Commissioner of Internal Revenue, G.R. No. 183531, March 25, 2015.

As such, the findings of respondent pertaining thereto shall be sustained.

D.

Input

Tax

Carry-Over

(P149,654.30) In arriving at petitioner's alleged deficiency VAT liability for the year 2010, respondent disallowed the excess tax credits of P149,654.30 reflected in petitioner's Quarterly VAT Return for the fourth quarter of 2010 117 .

Respondent, however, did not explain the basis of the disallowance of the said excess input tax, thus, pursuant to Section 228 of the 1997 NIRC, as amended, this item of assessment shall be considered void. E.

Unremitted VAT (P8,647.00) In the Details of Discrepancies (Schedule 5.1) 11s , respondent computed the alleged unremitted VAT ofP8,647.00, as follows:

PerFS Note No. 13 Output Taxes, Beg.

P4,278, 193.00 Input Taxes, Beg.

4,269,546.00

VAT Payable

p 8,647.00 Petitioner argues that respondent failed to provide explanation in adding· the same in the computation of the alleged deficiency VAT.

The Court finds that although respondent did not elaborate the reason for the addendum of the amount of P8,647.00, still petitioner is apprised on what constitute the same, i.e., by providing the above computation, the data of which were sourced from petitioner's Audited Financial Statements (AFS).

Nonetheless, the Court finds the assessment erroneous. It is noted that the alleged unremitted VAT pertains only to the beginning balances, i.e., as of January 1, 2010, of output

and input VAT in the amounts of P4,278,193.00 and P4,269,546.00, respectively. Respondent disregarded the fact that during the year 2010, petitioner incurred and/or paid input taxes from purchases of goods and services and output taxes from its VATable sales. As evidenced by the Monthly and Quarterly VAT Returns for taxable year 2010 119 , said output taxes have been settled by crediting against the same the cash payments 12o , creditable VAT withheld 121 and input taxes incurred and paid by petitioner. Had respondent only took into account the details of Note 13 122 of petitioner's Audited Financial Statements, he would find that petitioner has no VAT liability as of December 31, 2010, to wit:

Tax Base

Tax Due

Output taxes for the year p Beginning balance, 2010 4,278,193

Sales

p 418,497,010 50,219,641 p 54,497,834 Input taxes p Beginning balance, 2010 4,269,546 Capital goods p 59,939 7,193 Goods other than capital goods 372,026,866 44,643,224 Purchase of services 44,982,159 5,397,859 p p 417,068,964 54,317,822 VAT payable p 180,012

Creditable VAT

(343) VAT payments during the year (329,324) Balance as of December 31, 2010 p (149,655) Thus, the assessment on the amount of P8,64 7.00 should be cancelled.

In view of the foregoing discussion, the Court finds petitioner liable to pay the amount of P4 ,221, 161. 17, representing basic deficiency VAT for taxable year 2010, computed as follows:

119 Exhibits "P13-A" to "P-13-L", docket, vol. I, pp. 360-373. 120 Exhibits "P13-B" to "P-13-E" (Monthly VAT Declaration for the months of February and May 2010), docket, vol. I, pp. 361 and 365. 121 Exhibit "P-13-L" (Quarterly VAT Return for the Fourth Quarter of CY 2010), docket, vol. I, p. 373.

p Taxable sales per VAT Returns 418,497,010.33 .

Add: Adjustments

Undeclared Sales- discrepancy of sales SLS p VS. SAWT 1 ,006,182.51

Undeclared Sales- Unsupported Returns and

Discounts

3,672,204.81 4,678,387.32 I

PI

Adjusted Taxable Sales

423,175,397.65

Output Tax

50,781,047.72

Less: Allowable Input Tax

p

Input Tax Claimed per VAT Returns

50,048,275.73

Less: Disallowed Input Tax

3,809,409.02 46,238,866.71

VAT Payable

4,542,181.01

Less: VAT Payments/Credits

321,019.84

BASIC DEFICIENCY VAT

p 4,221,161.17 III. Deficiency Expanded Withholding Tax The assessed deficiency expanded withholding tax for taxable year 2010 amounting to P681 ,597 .45, inclusive of increments, was computed as follows:

BASIC DEFICIENCY EXPANDED WITHHOLDING TAX

(Schedule 6)

p 357,795.39 20% Interest Per Annum (l_L16/11- 3/31/15) 307,802.06

Compromise Penalty

16,000.00

TOTAL AMOUNT DUE

p 681,597.45 The basic deficiency EWT relates to the disallowed income payments in the amount of P17,889,776.47 due to non- withholding of EWT. As discussed, petitioner failed to prove that the said income payments have been properly subjected to EWT; hence, the deficiency EWT assessment should likewise be sustained.

Accordingly, petitioner is liable to pay the basic deficiency EWT ofP357,795.39 for taxable year 2010, computed as follows:~

Income

Difference

Income

Income

Income Payment

Payments Subject

Payments

Payments not

Subject to to Withholding

Withholding

Subjected to

Tax

Subjected to

Withholding

Withholding Tax

Tax

Tax Due

Withholding Ta'!:

Withheld

Withholding Tax

Tax Still Due

Payment to

Contractor

Rental

Professional

Total

p p p p p p 62,624 131.45 1,252,482.63 44,734,354.98 894 687.24 17 889,776.47 357,795.39 186 674.58 9 333.73 186 674.58 9 333.73 - - 39 100.00 5,865.00 39 100.00 5 865.00 - - p 62,849,906.03 1'1,267,681.36 p 44,960,129.56 1'909,885.97 p 17,889,776.47 1'357 '795.39 IV. Deficiency Fringe Benefit Tax Respondent assessed petitioner of deficiency fringe benefit tax for taxable year 2010 amounting to P205,019.05, inclusive of increments, as follows:

BASIC DEFICIENCY FRINGE BENEFIT TAX (Schedule

p 7) 93,654.97

Surcharge

23,413.74

20% Interest Per Annum (4/ 16/11 - 3/31/15)

75,950.34

Compromise Penalty

12,000.00 p

TOTAL AMOUNT DUE

205,019.05 As stated in the Details of Discrepancies, respondent found that petitioner failed to pay the fringe benefit tax on the benefits granted to its officers in violation to Section 2.33(B) of RR No. 3-98, determined as follows:

Fringe Benefits per ITR

p 199,016.82

Gross-up Monetary Value

292,671.79

Fringe Benefits Tax

93,654.97

Less: Tax Paid

- Deficiency WR, Basic P93,654.97 Petitioner submits that the amount represents expenses incurred for various Team Building Activities such as excursions, sports activities, seminars (i.e., family planning), and costs incurred during the company's Christmas party. The said amount does not represent a fringe benefit that is taxable under the NIRC arid RR No. 3-98.~

In petitioner's Memorandum, it alleges that it had submitted to respondent various documents such as Reconciliation of Salaries and Allowances per ITR vs. AFS, Reconciliation of Taxable Salaries and Allowances per Annual Alphabetical List vs. BIR 1601-C, and Schedule of Fringe Benefits not subject to FBTon December 12, 2013, to prove that the same are not fringe benefits subject to FBT. 123 Petitioner, however, did not present the alleged documents before this Court.

It is a basic rule in civil cases that he who alleges a fact has the burden of proving it by a preponderance of evidence. It is incumbent upon the party claiming affirmative relief from the court to convincingly prove its claim. Bare allegations, unsubstantiated by evidence, are not equivalent to proof; in short, mere allegations are not evidence.I24 Hence, for failure of petitioner to present relevant documents, the deficiency FBT shall remain. IV. Compromise Penalty Respondent imposed compromise penalties on the foregoing deficiency taxes in the total amount of P128,000.00, to wit:

COMPROMISE

TAX TYPE

PENALTY

Income Tax

p 50,000.00

Value-added Tax

50,000.00

Expanded Withholding Tax

16,000.00

Fringe Benefit Tax

12,000.00

TOTAL

p 128,000.00 Under RMO No. 01-90, as amended by RMO No. 19-07, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. It is well-settled that the Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because by its very 123 Docket, vol. II, pp. 808-809.

124 Ermelinda C Mana/oto, eta!. vs. Ismael Ve/oso III, G.R. No. 171365, October 6, 2010 .•

Basic

Surcharge (25%)

nature, it implies a mutual agreement between the parties in respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer. 12s Absent a showing that herein petitioner consented to the compromise penalty, its imposition should be deleted. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized.l26 In the present case, there is nothing in the records which would show that petitioner consented to the compromise penalty. Thus, the imposition of which in the deficiency income tax, VAT, EWT, and FBT in the total amount of P128,000.00 cannot be sustained.

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

The compromise penalties in the total amount of P128,000.00 imposed by respondent against petitioner for taxable year 2010 are CANCELLED. However, the assessments issued by respondent against petitioner for taxable year 20 10 covering deficiency income tax, VAT, EWT and FBT are PARTIALLY UPHELD. Accordingly, petitioner is ORDERED TO PAY respondent the amount of P40,704,439.00, representing basic deficiency IT, VAT, EWT and FBT and twenty-five percent (25°/o) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, and twenty percent (20o/o) deficiency interest and 20°/o delinquency interest imposed under Sections 249(B) and (C) of the same Code, respectively, computed until December 31, 20 17, as determined below:

IT

VAT

EWT

FBT

TOTAL

p p p p 10 931,118.6~ I 6 258,507.09 4,221 161.17 357 795.39 93,654.97 1,564,626.77 1,055 290.29 89 448.85 23,413.74 2,732 779.65 Deficiency Interest (20%) until April 30, 2015

IT- 4/16/2011 to 4/30/2015

(f>6,258,507.09 x 20% x 1,476 days/365 days) 5 061 674.78

VAT- 1/26/2011 to 4/30/2015

(1'4,221, 161.17 x 20% x 1,556 days/365 days) 3,598,973.58

EWT- 1/16/2011 to 4/30/2015

(f>357,795.39 x 20% x 1,566 days/365 days) 307 017.85

FBT- 1/11/2011 to4130I2015

80 620.25 9 048,286.46 125 The Philippines International Fai~;. Inc. vs. The Collector of Internal Revenue/ eta!., G.R. Nos. L-12928 and L-12932, March 31, 1962.

(P93,654.97 x 20% x 1,571 days/365 days) Total Amount Due, April 30, 2015 Deficiency Interest (20%) from May 1, 2015 until December 31, 2017

IT - 5/1/2015 to 12/31/2017

(P6,258,507.09 x 20% x 976 days/365 days

VAT - 5/1/2015 to 12/31/2017

| (P4,221,161.17 x 20% x 976 days/365 days) _

EWT - 5/1/2015 to 12/31/2017

(P357,795.39 x 20% x 976 days/365 days

FBT - 5/1/2015 to 12/31/2017

(P93,654.97 x 20% x 976 days/365 | days) Delinquency Interest (20%) from May 1, 2015 until December 31, 2017

IT - 5/1/2015 to 12/31/2017

(P12,884,808.64 x 20% x 976 days/365 days

VAT - 5/1/2015 to 12/31/2017

(P8,875,425.04 x 20% x 976 days/365 days}

EWT - 5/1/2015 to 12/31/2017

(P754,262.09 x 20% x 976 days/365 | days)

FBT - 5/1/2015 to 12/31/2017

(P? 197,688.96 x 20% x 976 days/365 days Total Amount Due as of December 31, 2017 P12,884,808.64 | P 8,875,425.04 | P_ 754,262.09 3,347,015.30 2,297,453.86 P197,688.96 191,347.01 6,890,725.06 4,746,528.68 — | _#23,122,549.00 | P15,879,407.58 | P1,348,984.33_ implemented by RR No. 21-2018.

Reform for Acceleration and Inclusion (TRAIN)

7- CATHERINE T. MANAHAN

I CONCUR:

Associate Justice

ANITO C. CASTANEDA, JR.

Associate Justice

P22,712,184.73 +—_+— 5,845,902.33 12,146,35 :

1.94 | P40,704,439.00 | In addition, petitioner is ORDERED TO PAY delinquency interest at the rate of twelve percent (12%) on the total unpaid amount of P22,712,184.73 as of April 30, 2015, as determined above, computed from January 1, 2018 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as the Tax and as

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~c.~7~ JUANITO C. CASTANEDA, JR.

Associate Justice

Chairperson

CERTIFICATION

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

Presiding Justice