NCR Cebu Development Center, Inc. vs. Commissioner of Internal Revenue

DECISION

Fa bon-Victorino, J.:

This is a Petition for Review 1 filed on February 9, 2016 by NCR Cebu Development Center, Inc. praying for the setting aside of the Final Decision 2 dated January 7, 2016 assessing it for alleged deficiency value-added tax (VAT), final withholding tax (FWT), withholding VAT (WVAT), and miscellaneous taxes aggregately valued at P111,241, 154.77 for the year 2010, detailed below:

Basic

Surcharge

Interest

Compromise

Total

- p S,636 S22.14 p 1 409 130.S4 p s 321,494.60 p so 000 .00 p 12,417 147.28 32 026,764.24 8,006 691.06 30 412,264.34 so,ooo.oo 70,49S 7 19.64 12 810 70S.69 3 202,676.42 12 164 90S.74 so 000.00 2812281287 .8S P50 473,992.07 P12 618,498.02 P47,898 664.68 150 000.00 P111 141 154.77

Miscellaneous

100 000.00

Total

P50,473,992.07 P12,618,498.02 P47,898,664.68 P150,000.00 P111 241,154.77 Petitioner NCR Cebu Development Center, Inc. is an organized domestic corporation, with principal office located 1 Docket, Vol . 1, pp. 10-34.

2 Exhibit "R-1S", BIR Records, pp. 881-882. / in e-Office Building, Asiatown, I.T. Park, Apas, Cebu City. 3 It is registered with the Bureau of Internal Revenue (BIR) with Taxpayer Identification No. (TIN) 228-442-028-000 and Certificate of Registration issued on January 7, 2004. 4 Per its Articles of Incorporation, petitioner's primary purpose is "to carry on all or any of the businesses of software and hardware development and services, and the provision of related technical services; to carry on the businesses of computer programmers and consultants, to act as advisers, investigators and consultants in relation to systems of, and mechanical and other aids for all kinds of calculations and measurements in connection with the promotion, arrangement, design, programming, production and compilation of data processing methods and to provide specialized training and preparation in relation to all matters pertaining thereto; to discover and develop new processes and materials and to obtain rights of development and sale in respect thereof; and to perform functions necessary or useful for carrying on the foregoing businesses or any of them or likely to be required by customers or of persons having dealings with the company except as internet service provider. "5 On the other hand, respondent is the Commissioner of the Internal Revenue (CIR) with the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto or other matters arising under the National Internal Revenue Code (NIRC) or other laws or portions thereof administered by the Bureau of Internal Revenue (BIR). He holds office at the BIR National Office Building, BIR Road, Diliman, Quezon City.

On November 4, 2011, petitioner received Letter of

Authority

(LOA)

No.

LOA-123-2011-000000346

dated October 20, 2011, authorizing the named revenue officers to examine its books of accounts and other accounting records for all internal revenue taxes for the period from· January 1, 2010 to December 31, 2010, pursuant to Audit Criteria for 3 Exhibit "P-2", Docket, Vol. 9, p. 4130. 4 Exhibit "P-14", Docket, Vol. 10, p. 4554. 5 Exhibit "P-2", Docket, Vol. 9, p. 4119. 6 Exhibit "R-1", BIR Records, p. 223. /

Taxable Years (TYs) 2009 and 2010 issued by the BIR Large Taxpayers District Office - Cebu.

On October 25, 2013, petitioner's President executed a Waiver of the Defense of Prescription under the Statute of Limitations of the NIRC7 extending the period to assess and collect taxes until June 30, 2014. 8 On May 9, 2014, petitioner received a Preliminary Assessment Notice (PAN)9 dated May 6, 2014 with Details of Discrepancies, indicating that after examination, the BIR found deficiency income tax (IT), VAT, withholding tax-final, withholding tax-VAT, withholding tax-expanded, documentary stamp tax (DST), and others-miscellaneous taxes for the year 2010. 10 On May 22, 2014, petitioner, in its Reply, protested the the finding of deficiency taxes, interest and compromise penalties as stated in the PAN. 11 On June 23, 2014, petitioner received the Formal Letter of Demand with attached Details of Discrepancies and Assessment Notices (FLD-FAN) 12 dated June 20, 2014 for deficiency IT, VAT, withholding tax-final, withholding tax- VAT, withholding tax-expanded, DST, and others- miscellaneous taxes for the year 2010. 13 On July 23, 2014, petitioner filed its protest disputing the tax assessment indicated in the FLD-FAN. 14 On June 17, 2015, petitioner received the Final Decision on Disputed Assessment (FDDA) 15 issued by Ole- Assistant Commissioner,

Large

Taxpayers

Service, for deficiency IT, VAT, withholding tax-final, withholding tax- VAT, withholding tax-expanded, withholding tax- 7 Exhibit "R-5", BIR Records, p. 299. 8 Par. 4, Joint Stipulation of Facts ad Issues (JSFI), Docket, Vol. 6, p. 2683. 9 Exhibit "R-8", BIR Records, pp. 380-387. 1o Par. 5, JSFI, Docket, Vol. 6, p. 2683. 11 Par. 6, JSFI, Docket, Vol. 6, p. 2683. 12 Exhibits "R-10" and "R-11" and sub-markings, BIR Records, pp. 403-410 and 396-402, respectively.

13 Par. 7, JSFI, Docket, Vol. 6, p. 2683. 14 Par. 8, JSFI, Docket, Vol. 6, p. 2684. 15 Exhibit "R-13", BIR Records, pp. 688-700. ~ compensation, DST, and others-miscellaneous taxes for the year 2010. 16 On July 16, 2015, 17 petitioner paid the deficiency assessments for withholding tax-expanded, withholding tax- compensation, DST, and penalty for alleged failure to include the TINs of seven employees in the Alphalist. On the same date, petitioner filed a

Request

for

Reconsideration

impugning the FDDA issued by respondent's authorized representative. 18 On January 7, 2016, petitioner received the Final Decision issued by former BIR Commissioner Kim 5. Jacinto- Henares for deficiency IT, VAT, withholding tax-final, withholding tax-VAT, and others-miscellaneous taxes. 19 On February 4, 2016, petitioner paid the deficiency assessments for IT20 and VAT21 . Thereafter, or on February 9, 2016, petitioner filed the present Petition for Review with the CTA.

On April 8, 2016, respondent filed his Answer22, contending that the assessment has sufficient basis in fact and in law.

Further, petitioner was accorded due process when it was served with the LOA, PAN, FLO, FDDA and the Final Decision by respondent.

Moreover, petitioner already paid the amount of P1,026,804.92 on February 4, 2016. Besides, respondent stated that the deficiency taxes were assessed after the audit investigation was conducted. The result of the audit investigation revealed that the expenses allegedly related to a claimed deduction were not directly related to and not necessary in the production/ development of software products.

Employees can still 16 Par. 9, JSFI, Docket, Vol. 6, p. 2684. 17 Par. 11, JSFI, Docket, Vol. 6, p. 2684. 1s Par. 10, JSFI, Docket, Vol. 6, p. 2684. 19 Par. 12, JSFI, Docket, Vol. 6, p. 2684. 20 Par. 13, JSFI, Docket, Vol. 6, p. 2685. 21 Par. 14, JSFI, Docket, Vol. 6, p. 2685. 22 Docket, Vol. 1, pp. 386-403.

/ develop software programs/products without the add-on benefits and not mandatorily required under labor laws. Hence, the corresponding deficiency assessment for IT was assessed against petitioner for such related expenses disallowed as part of the direct costs. On the VAT assessment, petitioner's act of extending loans to its local affiliates was not among its PEZA registered activities.

Per BIR Ruling (DA-053-08) dated January 30, 2008, income derived not from a registered activity of the PEZA company, shall be subject to regular corporate income tax and the PEZA company shall also be liable for 12°/o VAT. The tax treatment of petitioner pursuant to BIR Ruling (DA-053-08) likewise finds basis under Revenue Regulation (RR) No. 20-2002, which clarified the tax treatment of income earned from unregistered activities by enterprises registered under the Bases Conversion and Development Act of 1992 and the Philippine Economic Zone Act of 1995. Hence, the subject transaction is subject to VAT. Petitioner was also subjected to FWT on its foreign transactions since it failed to file a tax treaty relief application before availing the benefit of exemption from FWT on the said foreign transactions as required under Revenue Memorandum Order (RMO) No. 1-2000. It is for the same reason that petitioner is liable for deficiency WVAT on its payments of service fees and software license fees for services rendered abroad as well as royalties from property located outside the Philippines.

Finally, the imposition of compromise penalty is in order as petitioner failed to register as VAT taxpayer pursuant to Revenue Regulation (RR) 16-2005, as amended by RR No. 3-2012.

Petitioner likewise failed as a VAT taxpayer, to file the corresponding VAT returns and to submit the requisite Summary Lists of Sales/ Purchases as required under Section 4.114-3 of RR 16-2005. Petitioner is as well liable for compromise penalties for violation of the provision in the Tax Code and Revenue Memorandum Order (RMO) No. 19-2007.

/

On April 22, 2016, petitioner filed a Reply23 refuting respondent's argumentation in his Answer. On August 26, 2016, a Pre-Trial Order24 was issued after the parties filed their Joint Stipulation of Facts and

Issues25

on August 3, 2016 punctuating the pre-trial proceeding.

In support of its case, petitioner presented its Tax Accountant, Marietta B. Ticagan 26, and the Independent Certified Public Accountant (!CPA), Atty. Adan T. Delamide27 • Prabal Mitra28, Richard McKenzie29, and Ajay Jhamb30, were presented as witnesses via their respective written interrogatories/deposition.

Witness Marietta B. Ticagan testified 31 that petitioner is part of the NCR group of companies in the Asia Pacific Region, engaged in providing various consumer transaction technologies worldwide. Its ultimate parent company is NCR Corporation, which was incorporated in the United States of America.

Allegedly, petitioner was assessed for deficiency VAT on the interest income realized from a loan extended in favor of NCR Philippines. Admittedly, petitioner also granted a loan to NCR Dutch BV, however, it is not engaged in the business of financing or extending loans, nor is such activity incidental to its corporate functions, as indicated in its primary purpose stated in its Articles of Incorporation. The witness explained that petitioner extended a loan to NCR Philippines when it suffered extraordinary financial losses. The loan was not intended to generate income but petitioner charged interest thereon in compliance with the 23 Docket, Vol. 1, pp. 416-425.

24 Docket, Vol. 6, pp. 2713-2722.

2s Docket, Vol. 6, pp. 2682-2696.

26 Minutes of the hearing dated January 17, 2017, Docket, Vol. 6, p. 2966. 27 Minutes of the hearing dated April 3, 2017, Docket, Vol. 7, p. 3453. 28 Docket, Vol. 6, pp. 2882-2886 and Exhibits "P-16" to "P-16-d", Docket, Vols. 7 and 8, pp. 3459-3480 and 3552-3570.

29 Docket, Vol. 6, pp. 2882-2886 and Exhibits "P-21" to "P-21-d", Docket, Vol. 8, pp. 3956- 3971.

30 Docket, Vol. 6, pp. 2882-2886 and Exhibits "P-20" to "P-20-d", Docket, Vols. 7 and 8, pp. 3481-3508.

31 Judicial Affidavit dated July 14, 2016, Docket Vol. 4, pp. 1890-1907. / transfer pricing requirements of the BIR, as in fact, the loan and the interest imposed were not supported by a written contract.

In view of the foregoing, deficiency VAT should not be imposed.

Petitioner was likewise assessed for deficiency FWT and VAT on the alleged ground that it failed to file a tax treaty relief application before paying non-resident foreign entities for services rendered and software license fees.

She

believed that there was no need for a prior tax treaty relief application because the services and license fees were rendered by non-resident foreign entities and services were performed outside of the Philippines, hence, not subject to tax, and consequently not subject to withholding taxes. The witness further declared that compromise penalties were imposed on petitioner for non-registration for VAT, non-filing of VAT returns, and non-submission of Summary Lists of Sales and Purchases. But petitioner, who was then a VAT-registered taxpayer was advised by Revenue District Office (RDO) No. 81, that before it can qualify as a large taxpayer, it should cancel its VAT Registration.

More

importantly, as a PEZA-registered corporation whose Incor11e Tax Holiday (ITH) has already expired, petitioner is entitled to the preferential 5°/o tax rate on its. gross income in lieu of other taxes, hence, not n·able fer VAT, and the reportorial requirements that go with it.

The Court-commissioned ICPA, Attorney Adan T.

Delamide;

testified32 that he audited petitioner's voluminous documentary evidence pertaining· to. the present case, and interviewed petitioner's tax accountant, Marietta B. Ticagan.

Thereafter, he prepared the ICPA Report containing his findings which was submitted to the Court on December 19, 2016.

As to the assessment for deficiency IT, petitioner would no longer contest the sarne as in fact it already paid the amount of P1,026,804.92, evidenced by BIR (Payment) Form No. 0605, and BIR eFPS confirmation of payment. 32 Judicial Affidavit d3ted March 27, 2017, Docket Vol. 7, pp. 3431-3441. /

Petitioner

likewise already paid the amount of P12, 763,059.87 comprising the assessment for deficiency VAT imposed on the interest income earned from the loan granted to NCR Philippines notwithstanding its stance that it should not be liable for the same. The payment is likewise evidenced by BIR (Payment) Form No. 0605, and SIR eFPS confirmation of payment.

As to the assessment for FWVAT and FWT imposed on petitioner's payment of service fees and software license fees, he found that debit notes were issued prior to the said payments, acknowledged through sales Invoices wherein both debit notes and sales invoices were issued from abroad by foreign entities.

The certifications issued by the Securities and Exchange Commission (SEC) state that the foreign companies are not registered in the Philippines. These debit notes and sales invoices also indicated that the services in relation to the billings and payments made were rendered outside the Philippines.

Witness Prabal Mitra, 33 a citizen of India and residing therein, testified34 through written interrogatories, that he is the Accounting Manager of the NCR group of companies in the Asia Pacific Region, which includes herein petitioner. Petitioner NCR Cebu Development Center, Inc. was registered with the PEZA as an

Ecozone Information

Technology Enterprise to provide software, mechanical, and electrical engineering services at the Asiatown I.T. Park. He corroborated the testimony of petitioner's previous witness that petitioner granted a loan in favor of NCR Philippines which became the basis for the imposition of deficiency VAT on the interest income earned from the said loan.

He believed that the imposition of deficiency VAT was erroneous since petitioner was and is not engaged in the business of financing or extending loans, nor are such activities the primary purpose of petitioner as shown in its 33 Judicial Affidavit dated July 14, 2016, Docket Vol. 8, pp. 3552-3570. 34 Without cross-interrogatories from respondent. /

Articles of Incorporation. The loan was not covered by a written contract and interest was charged to comply with the transfer pricing requirements of the BIR, with normal income tax properly reported on said interest without VAT charged on the same.

The assessment for deficiency FWT and VAT on petitioner's payments to non-resident foreign entities for services rendered and software license fees, on the basis that petitioner failed to file a tax treaty relief before implementing exemption from withholding on the said payments, is likewise erroneous.

These payments were for the services rendered by non- resident foreign corporations and the services were performed wholly outside of the Philippines, hence, not taxable and therefore without need to withhold taxes. Similarly witness Ajay Jhamb testifying via written interrogatories35, declared that he is the Finance Director of NCR India and residing therein, 36 that by reason of his functions involving accounting and bookkeeping, he is knowledgeable of the various services rendered by NCR India to its internal and external clients. Petitioner is a foreign affiliate of NCR India, both entities being part of the NCR group of companies belonging to the NCR Asia Pacific Group.

In 2010, petitioner secured the services of NCR India for bookkeeping and reporting purposes including Information Technology services for which services NCR India collected service fees. The details of the services were summarized through debit notes.

No personnel from NCR India came to the Philippines to render such services and no physical work was conducted in the Philippines, hence, all services were performed outside the Philippines. To back up his testimony, the witness executed a Certification on Offshore Services.

35 Judicial Affidavit dated July 14, 2016, Docket Vol. 8, pp. 3501-3508. 36 Without cross-interrogatories from respondent. /

Witness Richard McKenzie, testified 37 that he is the Finance Vice President and Head of Tax of NCR Corporation, a corporation incorporated in the United States of America, and the parent company of petitioner. In such capacity, he oversees the tax activities across all jurisdictions where NCR has a presence, including the jurisdiction of petitioner. In 2010, petitioner obtained the services of NCR

Corporation

and by reason thereof,

NCR

Corporation

collected from petitioner. The services involved information technology processing and application services which were all performed in the United States of America. No personnel of NCR Corporation came to the Philippines to render the services, and no physical work was conducted in the country.

In other words, all the services rendered were performed outside the Philippines. The witness issued a

Certification

on

Offshore

Services

and the services performed were summarized in debit notes. On June 20, 2017, petitioner filed Offer of Documentary Evidence38, resolved in the Resolution 39 dated August 8, 2017, wherein the Court admitted all of petitioner's documentary exhibits except Exhibits "P-1-b" and "P-3-a". Petitioner filed Tender of Excluded Evidence40 on December 13, 2017.

On the other hand, respondent presented his sole witness, Revenue Officer Angelita A. De Guzman. 41

She

testified that she conducted the audit of petitioner for the year 2010 as authorized under Letter of Authority (LOA) No. LOA-123-2011-000000.34 dated October 20, 2011, which was served on petitioner on

November

4, 2011.

Subsequently, a First Notice, a Second and Final Notice were sent to petitioner for its presentation of its accounting records.

Petitioner executed a Waiver of the Defense of Prescription extending the period to assess for the year 2010 until June 30, 2014.

37 Judicial Affidavit dated July 27, 2016, Docket Vol. 6, pp/ 2730~2736. 38 Docket, Vol. 9, pp. 4101-4112.

39 Docket, Vol. 10, pp. 4568-4569. 40 Docket, Vol. 10, pp. 4610-4614. 41 Minutes of the hearing dated December 4, 2017, Docket, Vol. 10, p. 4600; Judicial Affidavit / dated July 12, 2016, Docket, Vol. 1, pp. 431-441.

J

After the

audit, petitioner was found liable for deficiency taxes, thus, a Preliminary Assessment Notice (PAN) was recommended. The PAN issued on May 6, 2014 was served on petitioner on May 9, 2014, finding petitioner liable for deficiency IT, VAT, FWT, FWVAT, EWT and DST. Since petitioner did not protest the PAN, the issuance of a Final Assessment Notice (FAN) and Formal Letter of Demand (FLD) was recommended.

However, it appeared from the record that petitioner filed a Reply to the PAN which was unknown to her when she made her recommendation. On June 20, 2014, the FLD with FAN were issued and served on petitioner on June 23, 2014. Petitioner protested the FLD with the FAN. After review of petitioner's arguments and upon recommendation, a Final Decision on Disputed Assessment (FDDA) was issued on June 15, 2015 and received on June 17, 2015, assessing petitioner for deficiency IT, VAT, FWT, FWVAT, EWT, WTC, and DST. Petitioner moved for the reconsideration of the FDDA but the same was denied in the Letter dated January 7, 2016. In the Resolution42 dated January 12, 2012, the Court admitted all the documents formally offered by respondent on December 11, 201743 • The case was submitted for decision on April 6, 2018. 44

STATEMENT OF THE ISSUE

The parties submitted the following issue45 for the resolution of the Court:

Whether petitioner is liable to pay the aggregate amount of One Hundred Twelve Million

Two Hundred Thirty-Six Thousand Seven Hundred

Seventy Four Pesos and Seventy Four Centavos

(P112,236, 774.74) for deficiency income tax, VAT, Withholding Tax-Final, Withholding Tax-VAT and Compromise Penalties for taxable year 2010, as 42 Docket, Vol. 10, pp. 4625-4626. 43 Docket, Vol. 10, pp. 4602-4609. 44 Resolution dated April 6, 2018, Docket, Vol. 10, p. 4671. 45 JSFI, Docket, Vol. 6, p. 2685.

./ well as the corresponding 25°/o surcharge and 20°/o deficiency and delinquency interest pursuant to Sections 248 and 249 of the Tax Code.

DISCUSSION/RULING

Section 228 of the NIRC of 1997, as amended, pertinently provides, thus:

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."

Clearly under the foregoing provision that a taxpayer has thirty (30) days from receipt of the FAN within which to file its administrative protest.

It also has sixty (60) days from the filing of the administrative protest to submit all relevant supporting documents.

Section 228 states that if the protest is not acted u pan within 180 days from submission of documents, the taxpayer adversely affected by the inaction of the CIR may appeal to the CTA within 30 days from the lapse of the 180- day period. 46 Therefore, petitioner had 30 days to appeal respondent's denial of its protest to the CTA. 47 Evidence show that petitioner received the FLD-FAN on June 23, 2014. It had 30 days from receipt of the FLD-FAN or until July 23, 2014 to file a protest. In fine, petitioner timely filed its administrative protest on July 23, 2014. On June 17, 2015, petitioner received the FDDA issued by OIC-Assistant Commissioner, Large Taxpayers Service, for deficiency income tax, VAT, withholding tax-final, withholding tax-VAT, withholding tax-expanded, withholding tax-compensation, DST, and others-miscellaneous taxes for the year 2010.

Petitioner moved for a reconsideration on July 16, 2015.

On January 7, 2016, petitioner received the Final

Decision

issued by former BIR Commissioner Jacinto- Henares for deficiency income tax, VAT, withholding tax- final, withholding tax-VAT and others- miscellaneous taxes. Counting 30 days from receipt of respondent's Final Decision on January 7, 2016, petitioner had until February 9, 201648 within which to file its Petition for Review with the Court. 46 Commissioner of Internal Revenue vs. First Express Pawnshop, G.R. Nos. 172045-46, June 16, 2009.

47 Fishwealth Canning Corporation vs. Commissioner of Internal Revenue, G.R. No. 179343, January 21, 2010.

48 February 6 and 7 fell on a Saturday and Sunday and February 8, 2016 was declared a

J

special non-working day (Chinese New Year), Proclamation No, 1105, August 20, 2015.

Therefore, the instant Petition for

Review

was also seasonably filed on February 9, 2016. On the merits of the case.

On June 17, 2015, petitioner received the FDDA, which indicated the following assessments: 49

Coverage of the FDDA

Basic

Increments

Total

Income Tax

p 689,846.38 p 604 934.99 p 1 294 781.37

VAT

5 636,522.14 6 404 827.49 12 041 349.64

Withholding Tax - Final

32 026,764.24 36 327 988.15 68,354 752.39

Withholding Tax- VAT

12 810 705.69 14,561 195.26 27,371 900.95

Withholding Tax - Expanded

11,740.22 13 363.56 25 103.78

Withholding Tax -

Compensation

44 914.44 49 647.76 94 562.20

Documentary Stamp Tax

734.09 1 652.03 2!386.12

Others-Miscellaneous Taxes

- 78 500.00 78!500.00

Total

P51,221,227.21 P58,042, 109.24 P109,184,836.45 On July 16, 2015, petitioner paid the deficiency assessment involving withholding tax-expanded, withholding tax-compensation, DST, and the penalty for alleged failure to include the TINs of seven employees in the Alphalist. On the same date, petitioner filed a Request for Reconsideration to contest respondent's finding pertaining to the unpaid deficiency tax assessments on income tax, VAT, withholding tax-final, withholding tax-VAT, and portion of the miscellaneous taxes. 50 On January 7, 2016, petitioner received respondent's Final Decision, finding petitioner liable to pay the following deficiency taxes and con1promise penalties: ------,------. ----- .~----T------,- --l .

Basic

Surl~harge

Interest

Compromis~. _Iota! . j

IT

P

508 147.76

P

-

P

457 472.20

P ~QOO::QQ_ ~-

995,619.96

I VAT

5 636 522.14 1 409,130.54 5 321,494.60 50 000.00 _ _!b.417,147:??_

WT-Final

32.026,764.24 8 006 691.06 ~412,264.34 SO,OOO.QO 1 __ 7~495,719.641 WT-VAT __ j__1:b810,705.69 3.201.t§76.42 _ _.!bl64t2_05.74 L 50,000.0_0 !

_28.~.72~L287.85 J 4 '~ Pai. 9, JSFI, Docket, Vol. 6, p. 2684; BIR Recor_ds, PP.· 688-700. / 50 Page 2 of the Request for Reconsideration, J-\nnex A of the Petition for P.eview, Docket, Voi. 1, p. 202; Par. 10, JSFI, Docket, Vel. 6, p. 2684.

Total

P50,982,139.83 P12,618 498.02 P48,356,136.88 P180,000.00 P112,136 774.73

Others-

Miscellaneous

100 000.00

Total

P50,982,139.83 P12,618,498.02 P48 356,136.88 P180,000.00 P112,236,774.73 In its Memorandum51 , petitioner manifested that it will no longer contest respondent's assessment for deficiency income tax and VAT, as in fact it already paid them on February 4, 2016.

The deficiency income tax and VAT assessments are deemed extinguished by virtue of petitioner's payment on February 4, 2016.

Thus, the Court shall only discuss the remaining deficiency tax assessments, i.e., withholding tax- final, withholding tax-VAT, and others-miscellaneous taxes. As stated in the petitioner liable for withholding tax-VAT, computed as follows:

Final Decision 52, respondent found deficiency withholding tax-final, and others-miscellaneous taxes,

WITHHOLDING TAX - FINAL

Service Fees paid by NCR Cebu to the NCR

Group

P105,220,594. 79

Software License Fees

1,535,286.00 Total amount subject to Withholding Tax-

Final

P106, 755,880.79

Basic WT-Final at 30%

p 32,026,764.24

Add: 25% Surcharge

P8 006 691.06

20% Interest (1/16/11-10/15/15)

30 412 264.36

Compromise Penalty

50 000.00 38 468 955.40

TOTAL FINAL TAX DUE

p 70,495 719.64

WITHHOLDING TAX - VAT

Service Fees paid by NCR Cebu to the NCR

Group

P105,220,594. 79

Software License Fees

1,535,286.00

Total

106,755,880.79 12% VAT thereof p 12,810,705.69

Add: 25% Surcharge

P3 202 676.42

20% Interest (1/16/11-10/15/15)

12,164,905.74

Compromise Penalty

50,000.00 15 417 582.16

TOTAL WV DUE

P28,228,287 .85 51 Docket, Vol. 10, pp. 4647-4648. 52 Exhibit "R-15", BIR Records, p. 881. /

OTHERS- MISCELLANEOUS TAXES

Nature of Violation

Non-registration of Value Added Tax type Non-filing of VAT returns

Non-Submission of Summary Listings-

Sales/Purchases

Total Penalties

Amt. of suggested

Compromise

Penalty

p 25 000.00 25 000.00 50,000.00 p 100,000.00 Respondent assessed Final Withholding Tax on the payment of Service Fees made by petitioner to NCR Group in the amount of P105,220,594. 79, as well as, the Software License Fees of P1,535,286.00, on the ground that petitioner failed to file a Tax Treaty Relief Application (TTRA) before the transaction in violation of Revenue Memorandum Order (RMO) No. 1-2000 and 72-2010.

For this reason, both transactions were subjected to Final Withholding Tax at 30°/o pursuant to Sections 28(B)(1) of the NIRC of 1997, as amended.

The said Service Fees and Software License Fees were likewise subjected by respondent to VAT Withholding on the same ground. Respondent claims that the use of Software License is considered royalties subject to VAT pursuant to Section 7(B) of RMC No. 44-2005.

Service Fees fron1 NCR

Group

Corp.

P105,220,594.79

Petitioner

argues that a prior tax treaty . relief application is unnecessary since the subject transactions are not taxable, not on the basis of an international treaty, but based on express provisions of the NIRC, as amended. Petitioner further states tl1at only income derived fron1 sources within the Philippines are subject to withholding tax. Thus, compensation fer labor or personal services perforrned outside the Philippines by non-resident foreign corporation shall not be taxable, as in this case pursuant to Sections 22(!) 53 and 23(F), 54 in relation to Sections 42(A)(3) and (C)(3).ss 53 SEC. 22. Definitions: -When used in this Title: /

Petitioner claims that the Service Fees it paid to NCR Group were for services rendered abroad thus, should not be subject to Philippine income tax, and consequently, should not be subject to withholding tax. Further, petitioner avers that the service fees were accrued or paid in consideration of the back-office support services performed outside the Philippines, which included general administrative, management, advisory, technical, and professional services, which were made pursuant to the Integrated Service Agreement (ISA) between petitioner and

NCR

Corporation, the terms of which petitioner also implemented in respect of the other non-resident foreign affiliates. 56 It must be noted at this point that the obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000, 57 and that a prior application for tax treaty relief is not mandatory before a taxpayer may enjoy the relief provided under Philippine tax treaties58 . As to whether these transactions withholding tax, the

First

Division

of eloquently discussed this matter as follows:

XXX

XXX

XXX

are the subject to

Court

has (I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines. 54 SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

XXX

XXX

XXX

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. 55 SEC. 42. Income from Sources Within the Philippines. - (A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines:

XXX

XXX

XXX

(3) Services. - Compensation for labor or personal services performed in the Philippines;

XXX

XXX

XXX

(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines:

XXX

XXX

XXX

(3) Compensation for labor or personal services performed without the Philippines;x x x 56 Exhibit "P-19", Judicial Affidavit of Marietta B. Ticagan, Q32 & A32, Docket, Vol. 4, pp. 1898-1899; Exhibit "P-16-d", Judicial Affidavit of Mr. Prabal Mitra, Q32 and A32, Docket, Vol. 8, p. 3560.

57 Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, G.R. No. 188550, August 19, 2013.

58 CBK Power Company Limited vs. Commissioner of Internal Revenue, G.R. Nos. 193383-84 / and 193407-08, January 14, 2015.

~

In general, a non-resident foreign corporation is liable for gross income tax on income derived from all sources within the Philippines. Section 28(8)(1) of the NIRC of 1997, as amended, provides: SEC. 28. Rates of Income Tax on Foreign Corporations. -

XXX

XXX

XXX

(B)

Tax

on

Nonresident

Foreign

Corporation. - ( 1) In General.

-

Except

as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35°/o) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5( c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30°/o).

On the other hand, to be liable for VAT, a non- resident foreign corporation should render service in the Philippines. Sections 105 and 108(A) of the NIRC of 1997, as amended, state:

SEC.

105. Persons Liable.

-

Any

person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

XXX

XXX

XXX

The rule of regularity, to the contrary notwithstanding, services as defined in this ~

Code

rendered in the

Philippines

by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

XXX

XXX

XXX

SEC.

108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

(A)

Rate and Base of Tax. - xxx The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, xxx

XXX

XXX

XXX

Based on above-mentioned provisions of the NIRC, in order for petitioner not to be subject to FWT, it must prove that MidAmerican Energy Holdings Company is (1) a foreign corporation not engaged in business in the Philippines; and

(2) its source of income came from outside of the Philippines. On the other hand, in order for petitioner not to be subject to WVAT, it must prove that

MidAmerican

Energy

Holdings

Company

is (1) a non-resident foreign corporation;

and (b) it rendered services outside of the Philippines." 59 (Emphasis supplied) As consistently ruled by this Court in a number of cases60, to be considered as non-resident foreign corporation doing business outside the Philippines, such must be proven by presenting, for each corporation involved, at the very least, both Securities and Exchange Commission (SEC) Certification of Non-Registration and proof of incorporation 59 Visayas Geothermal Power Company vs. Commissioner of Internal Revenue, CTA Case No. 8425, November 17, 2014, as affirmed in CTA EB No. 1291, September 21, 2016. 60 Deutsche Knowledge Services Pte. Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 9079, January 9, 2018; Deutsche Knowledge Services Pte. Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 8065, September 20, 2017; Deutsche Knowledge Services Pte. Ltd. vs. Commissioner of Internal Revenue, CTA Case Nos. 8623, 8656, 8661 & 8685, August 4, 2017; Emerson Electric (Asia) Limited-ROHQ vs. Commissioner of Internal Revenue, CTA Case No. 8657, December 21, 2016; and Procter & Gamble Asia, Pte. Ltd. vs. Commissicner / of Internal Revenue, CTA Case No. 7820, June 22, 2016. w erA CASE NO. 9255 or registration, and that there is no other indication which would disqualify said entity in being classified as a non- resident foreign corporation.

According

to petitioner, the non-resident foreign affiliates to whom it paid service fees in the total amount of P105,220,594. 79 are the following:

1. NCR Corporation; 2.

NCR (Beijing) Financial Equipment System

Company Limited;

3.

NCR Korea Ltd.;

4.

NCR Corporation India Pvt Ltd.;

5.

NCR Malaysia Sdn Bhd;

6. NCR Singapore Pte Ltd.; 7.

NCR Australia Pty Limited;

8.

NCR Asia Pacific Pte Ltd.;

9.

NCR Thailand Ltd.; and

10. NCR Japan Ltd. Petitioner claims that NCR Corporation is the ultimate parent company of NCR Cebu.

The other entities are petitioner's non-resident foreign affiliates belonging to the NCR APAC Group. 61 To prove that the above-named entities are not registered corporations/partnerships in the Philippines and were incorporated/organized/domiciled abroad, petitioner presented in evidence the SEC Certifications of Non- Registration of Company,62 as well as the copies of Certificates of Registration of each company63 •

Except for "NCR (Beijing) Financial Equipment System

Company Limited", where the SEC Certification provided by petitioner pertains to "NCR

Beijing

Sales

and Management"64, the rest of its foreign affiliated companies are considered as non-resident foreign corporations not engaged in business in the Philippines, to wit: 61 Exhibit "P-19", Judicial Affidavit of Marietta B. Ticagan, Q25 & A25, Docket, Vol. 4, pp. 1897-1898; Exhibit "P-16-d", Judicial Affidavit of Mr. Prabal Mitra, Q25 and A25, Docket, Vol. 8, p. 3559.

62 Exhibits "P-3" to "P-3-I".

63 Exhibits "P-4" to "P-4-I".

/ 64 Exhibit "P-3-a".

J

erA CASE NO. 9255

Name of Company

NCR Corporation

NCR (Beijing) Financial Equipment

System Company Limited

NCR Korea Ltd.

NCR Corporation India Pvt Ltd.

NCR Malaysia Sdn Bhd

NCR Singapore Pte Ltd.

NCR Australia Pty Limited

NCR Asia Pacific Pte Ltd.

NCR Thailand Ltd.

NCR Japan Ltd.

SEC Certification of

Non-Registration of

Certificate of

Company

Registration

Exhibit "P-3"

Exhibit "P-4"

NONE

Exhibit "P-4-A"

Exhibit "P-3-b"

Exhibit "P-4-B"

Exhibit "P-3-c"

Exhibit "P-4-C''

Exhibit "P-3-d"

Exhibit "P-4-D"

Exhibit "P-3-e"

Exhibit "P-4-E"

Exhibit "P-3-f"

Exhibit "P-4-F"

Exhibit "P-3-g"

Exhibit "P-4-G"

Exhibit "P-3-h"

Exhibit "P-4-H"

Exhibit "P-3-i"

Exhibit "P-4-I"

Further, it was ruled that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, it is the place where the labor or service was performed that determines the source of income. 65 In the present case, the source of income of NCR Group are the general administrative, management, advisory, technical, and professional services that were provided to petitioner.

In other words, it is paramount to determine where such services were performed. Petitioner presented the ISA66 it entered into with NCR Corporation to purportedly prove the nature of the services performed by its foreign affiliates and that the same were performed outside the Philippines. In defining the service to be rendered, Section 1.1 of the said agreement provides that "[t]he Service Provider ('referring to NCR Group'), as directed and requested by the Service Recipient, agrees that it shall render the Services, that are specified and described in 'Appendix A' which is attached hereto, to the Service Recipient."

However, upon examination of the said "Appendix A", nothing is contained therein except the name and address of petitioner, i.e., "eBioc 1 Tower, Cebu IT Park, Apas, Lahug, Cebu City, Philippines". 65 Commissioner of Internal Revenue vs. Juliane Baier-Nickel, as represented by Marina Q. De Guzman (Attorney-in-fact), G.R. No. 153793, August 29, 2006. / 66 Exhibit "P-5", Docket, Vol. 9, pp. 4265-4270. !A/

Nonetheless, the Certifications on Offshore Services67 executed by the Tax Director, Manager, or other authorized representative of petitioner's foreign affiliates provide a clearer view of the nature of services provided to the latter. Also, as stated in their certifications "no physical work was conducted in the Philippines, as all the services rendered by the Corporation or its employees and representatives, as summarized in Appendix A attached hereto, were performed outside the Philippines and are not effectively connected to a permanent establishment in the Philippines." A scrutiny of the appendices or annexes attached in each certifications shows that the same refer to the "2010

ISA Cost Contribution -

Service Provider Documentation"

which indicated the detailed description of the nature of the services that a particular NCR entity may perform to its affiliated company, such as Global IT Services -

Data and

Application

Servers,

Workgroup

Services, Applications, Human Resources Service Delivery Centers, Technology Support, Compensation Benefits, Human Resources Global

HR -

Regional Service Delivery Management and Support,

Asia Pacific Account to Reporting Team and Associate

Service Team, Compensation and Benefits, and Treasury Functions and Operations for Asia Pacific, Japan and Eastern Europe Regions.

Petitioner also presented the Schedule of Service Fees68 showing the name of the alleged service provider ·and the corresponding service fees paid thereto, to wit:

Month

FML-CSUB

Service Fees/ Allocated Charges

PhP

US$

p $ 201001 6768-9620

ISA CHARGE TRUE-UP

1 567 451.24 33 596.64 201004 6768-9620

ISA CHARGE ADJ 2009

201004 6768-9620

ISA CHARGE Q1 2010

201004 6768-9620

GSL-INDIA Q1 2010

201007 6768-9620

ISA CHARGE Q2 2010

201007 6768-9620

GSL-INDIA Q2 2010

201010 6768-9620

ISA CHARGE Q3 2010

201010 6768-9620

GSL-INDIA Q3 2010

ISA CHARGE Q4 2010 ASIAN

201012 6768-9620

CORRECTION

201012 6768-9620

ISA CHARGE Q4 2010

67 Exhibits "P-6" to "P-6-I", Docket, Vol. 9, pp. 4271-4494. 68 Exhibit "P-7", Docket, Vol. 9, pp. 4495-4496. 3 584 227.68 80 780.43 21 760 285.04 490 427.88 576 880.99 13 001.60 22 953 791.78 494 001.76 874 276.15 18 815.80 23 836 349.52 554 011.61 907 074.99 21 082.51 (45 470.35) (1 038.61) 28,380,791.28 648,259.28 /

CfA CASE NO. 9255

201012 I 6768-9620 I GSL-INDIA 04 2010

Total

824 936.47 18 842.77 P105, 220,594.79 $2,371 781.67 To corroborate the foregoing, petitioner presented the Debit Notes69 which states that the "Services were rendered within the country location of the servicing NCR entities. Please see supporting details."

The Court noticed that these Debit Notes were issued by Global ISA Pool and NCR Global Solutions Limited, which are not among those affiliated companies to which the P105,220,594. 79 service fees were paid. Despite such fact, however, the "supporting details" attached thereto clearly provide a list of NCR entities with the corresponding countries where the services were rendered. The data in the schedule of service fees and the supporting details attached to the Debit Notes may be summarized as follows:

Country

where the service

Budget

was

Service

Amount

Budget Description

ID

rendered

Provider

Invoice No. 1001000004 dated 23-Jan-10 issued by Global ISA Pool

ITS Applications Development

United I NCR Corporation

$ 27 734.84 and Support

I201

States

United

5 861.80 Workgroup Services 1208

States

NCR Corporation

$ 33,596.64 Invoice No. 1001000013 dated 22-Apr-10 issued by Global ISA Pool

ITS Applications Development

($ 53,454.25) and Support - Gurgaon

NCR Corporation I

ITS Applications Development

I202

India

India Pvt Ltd. - 65,094.30 and Support - Gurgaon

Gurgaon India

1

ITS Applications Development

. Facility (5~ 69,140.38 and Support - Gurgaon $ 80,780.43 -- Invoice No. 1001000003 dated 22-Apr-10 issued by Global ISA Pool and Invoice No. 1004000001 dated 23-Ae_r-10 issued by NCR Global Solutions Limited --

Asia Pacific

$ 4£248.51 APAC & CEE RTC (Treasury)

D701

Singa_Qore

Region Office rl 1,753.32 I HR C&~

G704

United

NCR Cqrporation

----- - - -------- 69 Exhibit "P-8", Docket, Vol. 9, pp. 4497-4500, Vol. 10, pp. 4501-4513.

J

erA CASE NO. 9255

25 058.93 HR Shared Service Centers 41,162.53;

H R Region/Service Centers

APAC

10,216.78

ITS Applications Development

219,718.57 & Support

ITS Applications Development

38 368.84 & Support - Gurgaon 47 109.96 ITS Workgroup Services (8 554.36) GNS Data Circuits

Global Processing - Data

105 660.28 Servers 15 901.32 Information Security 2,784.81 ITS Help Desk India $ 503,429.49

States

Singapore

United

G705

States

G706

China

Korea

Malaysia

Singapore

Australia

Thailand

United

I201

States

I202

India

United

I203

States

United

I209

States

United

I210

States

United

I211

States

I205

India

Invoice No. 1001000004 dated 23-Jul-10 issued by Global !SA Pool and

NCR Singapore

Pte Ltd

NCR Corporation

NCR Beijing

Sales and

Marketing

NCR Korea Ltd

NCR Malaysia

Sdn Bhd

I

NCR Singapore

I

Pte Ltd

NCR Australia

I

Pty Limited

NCR Thailand Ltd

1

I

NCR Corporation

NCR Corporation

1

India Pvt Ltd -

Gurguaon India

Fa ci I ity _ _(STPil

NCR Corporation

NCR Coq~oration

NCR Corporation

NCR CorQoration

NCR Corporation

India Pvt Ltd

Invoice No. 1004000001 dated 15-Jul-10 issued by NCR Global Solutions Limited

Asia Pacific

_$ 4,_459.81 APAC & CEE RTC (TREASURY)_

D701

Sing_a_Q_ore

Region Office

United

1,740.49 HR C&B

G704

States

NCR Corporation

NCR Singapore

Singapore

Pte Ltd

United

24 658.18 HR Shared Service Centers

G705

States

NCR Cor_poration

NCR Beijing

Sales and

China

Marketing

Korea

NCR Korea Ltd

40,716.03;

HR Region/Service Centers

NCR Malaysia

G706

Malaysia

Sdn Bhd

15,195.35 APAC

NCR Singapore

Singapore

Pte Ltd

NCR Australia

Australia

Pty Limited

L____··--· - · -

Thailand

NCR Thailand Ltd

- --·-- - -· - - --- -·- - ~ l

ITS Applications Development

211,895.10 & Support

ITS Applications Development

44,516.74 & Support - Gurgaon 52,460.22 ITS Workgroup Services 3,620.46 ITS Helg Desk India (10,526.84) GNS Data Circuits

Global Processing - Data

103,050.77 Servers 21,031.25 Information Security $ 512,817.56

United

1201

States

1202

India

United

1203

States

1205

India

United

1209

States

United

1210

States

United

1211

States

Invoice No. 1001000001 dated 28-0ct-10 Issued by Global !SA Pool and

NCR Corporation

NCR Corporation

India Pvt Ltd -

Gurguaon India

Facility (STPI)

NCR Corporation

NCR Corporation

India Pvt Ltd

NCR Corporation

NCR Corporation

NCR Corporation

Invoice No. 1004000001 dated 28-0ct-10 issued by NCR Global Solutions Limited ! Asia Pacific $ 956.05 APAC & CEE RTC (TREASURY}

D701

Sing_a_Qore

Reg_ion Office

NCR Corporation

12,418.26; 2010 FSSC APAC - FIN

G703

India

India Pvt Ltd

12,621.74

Japan

NCR Japan Ltd

United

3,424.04 HR C&B

States

NCR Corporation

Asia Pacific

G704

Singapore

Region Office

United

28,942.18 HR Shared Service Center

G705

States

NCR Corporation

NCR Beijing

Sales and

China

Marketing

Korea

NCR Korea Ltd j 46,222.03;

HR Region/Service Centers

NCR Malaysia

G706

Malaysia

Sdn Bhd

5,151.10 APAC

NCR Singapor~

Singapore

Pte Ltd

NCR Australia

Australia

Pty Limited

Thailand

NCR Thailand Ltd

ITS Applications Development

United

226,220.70 & Support 1201

States

NCR Corporation

NCR Corporation

India Pvt Ltd -

I

ITS Applications Development

Gurguaon India

40,982.20 & Support - Gurgaon 1202

India

Facility (STPI)

United

54,175.68 ITS Workgroup Services 1203

States

NCR Cor_Qoration

NCR Corporation

3,309.66 ITS Hel~ Desk India 1205

India

India Pvt Ltd

United

(5,492.89) GNS Data Circuits 1209

States

NCR Corporation

Global Processing - Data

United

120,146.37 Servers 1210 l__

States

NCR Corporation

- · ------ -~ -~

26 017.00 Information Security ~ 575_~:094.12

United

I

I211

States

NCR Corporation

I

I

I

Invoice Nos. 1001000001 dated 28-0ct-10 and 30-Dec-10 issued by Global !SA Pool and

I

Invoice No. 1004000001 dated 29-Dec-10 issued by NCR Global Solutions Limited

I

Asia Pacific

$ 1 479.79 APAC & CEE RTC (TREASURY)

D701

Singapore

Region Office

I

NCR Corporation

1 (7 888.52) 2010 FSSC APAC - FIN

G703

India

India Pvt Ltd

I

7 817.07

Japan

NCR Japan Ltd

I

United

7,724.60 HR C&B

G704

States

NCR Corporation

Asia Pacific

Singapore

Reqion Office

United

28 431.69 HR Shared Service Center

G705

States

NCR Corporation

NCR Beijing

Sales and

China

Marketing

Korea

NCR Korea Ltd

62,246.30; HR Region/Service Centers

NCR Malaysia

G706

Malaysia

Sdn Bhd

7,533.25 APAC

NCR Singapore

Singapore

Pte Ltd

NCR Australia

Australia

Pty Limited

Thailand

NCR Thailand Ltd

ITS Applications Development

United

250,762.24 & Support

I201

States

NCR Corporation

NCR Corporation

India Pvt Ltd -

ITS Applications Development

Gurguaon India

87,956.08 & Support - Gurgaon

I202

India

Facility (STPI)

United

50,005.18 ITS Workgroup Services

I203

States

NCR Corporation

NCR Corporation

3,492.45 ITS Help Desk India

I205

India

India Pvt Ltd

United

(7,800.14) GNS Data Circuits

I209

States

NCR Coq~oration

Global Processing - Data

United

111,964.66 Servers

I210

States

NCR Cor_Q_oration

United

24,948.18 Information Security

I211

States

NCR Corporation

United

23,197.39 ITS Application - ERP

I212

States

NCR Corporation

United

15,231.85 ITS Field Operations

I213

States

NCR Corporation

(1,038.61) Asian Correction Part 2

CORR2

$ 666,063.44 $2,371,78_!.~7- - -·-· ------------- ---- ------------------------------------- /

Consequently, petitioner was able to prove that the service fees in the amount of P105,220,594. 79 were paid to non-resident foreign corporations not engaged in business in the Philippines for services rendered outside the Philippines. Thus, respondent's assessment subjecting petitioner to deficiency withholding tax-final and withholding tax-VAT on the Service Fees paid to NCR Group must necessarily be cancelled.

Software

License

Fees - P1,535,286.00 Similar to the Service Fees paid to NCR Group, petitioner submits that the Software License Fees, being income derived from sources outside the Philippines, should not be subject to Philippine income tax and consequently, should not be subject to final tax in the Philippines. Petitioner maintains that royalties from property located in the Philippines or from any interest in such property are considered as income from sources within the Philippines and thus, will be subject to Philippine income tax and consequently, final tax.

Conversely, royalties from property located without the Philippines or from any interest in such property including royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties are considered as income from sources outside the Philippines, thus, should not be subject to Philippine income tax and final tax.

Petitioner hinges its contentions on the provisions of the NIRC of 1997, as amended, particularly, Sections 42(A)(4) and (C)(4f0 in relation to Section 23(F). 70 SEC. 42. Income from Sources Within the Philippines. - (A) Gross Income From Sources Within the Philippines. - The following items of gro£s income shall be treated as gross income from sources within the Philippines:

XXX

XXX

XXX

( 4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for- (C) Gross Income From Sources Without the Philippines. -The following items of gross income shall be treated as income from sources without the Philippines.

XXX

XXX

XXX

( 4) Rentals or royalties from property located without the Philippines or from any interest in / such property including rentals or royalties for the use of or for the privilege of using without loV""

Petitioner claims that said software license fees relate to services rendered by the following foreign entities: (a) TechSource Systems Pte. Ltd., (b) Insight Direct USA, Inc., and (c) MKS Systems Limited.

Further, these license fees were accrued or paid in consideration of the use of accounting software acquired from the said enumerated foreign entities; and that the fees arose from the lease and use of their properties outside the Philippines. Petitioner alleges that it was provided the installation package to enable the installation and implementation of the software by downloading it; that software license fees also included costs for the support services related to the software, including charges for the license maintenance and server maintenance; and that maintenance charges included the provision of software updates, periodic fixes and error corrections for the software products. 71 Moreover, petitioner asserts that the software support services were performed by said foreign entities in the countries where they were located; and that they did not send any personnel in the Philippines to provide support services to petitioner in 2010.72 The Court is not persuaded.

As earlier discussed, for petitioner not to be subjected to withholding tax, it must prove that the service providers are (1) foreign corporations not engaged in business in the Philippines, and (2) its source of income came from outside of the Philippines.

However, other than the Schedule of the Software License Fees73 and the corresponding Invoices74 issued by Techsource Systems Pte Ltd., Insight Direct USA, ~nc., and MKS System Limited, as well as the Judicial Affidavitl5 of petitioner's Tax Accountant, Marietta B. Ticagan and the the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and x x 71 Exhibit "P-16-d", Judicial Affidavit of Mr. Prabal Mitra, Q57 and A57, Docket, Vol. 8, p. 3564. 72 Exhibit "P-16-d", Judicial Affidavit of Mr. Prabal Mitra, Q58 and ASS, Docket, Vol. 8, p. 3565. 73 Exhibit "P-9".

74 Exhibit "P-10".

/ 75 Exhibit "P-19", Docket, Vol. 4, pp. 1890-1906, particularly, Answers to QSO to Q52. "' ,_..:5:;.~..

·-~~

CfA CASE NO. 9255

Judicial Affidavit of the Accounting Manager of the NCR APAC Group, Prabal Mitra, no other evidence was provided by petitioner to prove that the entities which rendered the services were foreign corporations not engaged in business in the Philippines and that the services were indeed performed outside the Philippines. Thus, respondent's assessment subjecting the software license fees to withholding tax must be upheld.

Accordingly, petitioner is liable to pay the basic deficiency withholding tax-final and withholding tax-VAT in the amounts of P460,585.80 and P184,234.32, respectively, as determined below:

Withholding

Withholding

Tax-Final

Tax-VAT

Software License

Fees

P1,535 286.00 P1,535,286.00 x Rate 30°/o 12°/o

Basic Tax Due

P460,585.80 P184,234.32

Others

-

Miscellaneous

Taxes- 1'100,000.00 Respondent imposed compromise penalty amounting to P100,000.00 against petitioner for its failure to file the returns/attachments required by law or regulation, pursuant to Section 255 of the NIRC of 1997, as amended, as determined using the schedule of suggested compromise penalties prescribed under RMO No. 19-2007, detailed as follows:

Amount of I

suggested

Violated

compromise I

__ Nature of Violation

Amount

Provision

pena!!Y__, No registration of VAT type P251000.00 Sec 236(G) NIRC p 25,oop.oo 1

Non-filing of VAT Returns

25,000.00

Sec 114 NIRC

25,000.0~

Non-submission of

I

Summary Listings-

RR 16-2005

Sales/Purchases

P50,000.00 Sec.4.114-3(1) SO,OOO.OOJ

Total Penalties

PlOO,OOO.OO - - ..

·---~""""-"' ~----..........:!'li~~ ---~~a-...._"- /

Such imposition cannot be sustained. Per RMO No. 01-90, 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 cannot compel a taxpayer to pay the compromise penalty because by its very 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. 76 Absent a showing that herein petitioner consented to the compromise penalty, its imposition should be deleted.

The imposition of the compromise penalty without the taxpayer's conformity is illegal and unauthorized. 77 Since there is nothing in the records which shows that petitioner agreed to pay the compromise penalty, the amount of suggested compromise penalties of P100,000.00 cannot be sustained.

WHEREFORE, premises considered, the instant Petition for Review is PARTIALLY GRANTED. Accordingly, the assessment for miscellaneous taxes (compromise penalty) is CANCELLED and SET ASIDE. On the other hand, the deficiency withholding tax-final and withholding tax-VAT are

AFFIRMED

but with MODIFICATION. Accordingly, petitioner is ORDERED TO

PAY

respondent the amount of P2,280,882.09, representing basic deficiency withholding tax-final and withholding tax-VAT and the twenty-five percent (25°/o) surcharge, twenty percent (20°/o) deficiency interest and 20°/o delinquency interest imposed on the deficiency withholding tax-final and withholding tax-VAT under Sections 248(A)(3) and 249(8) and (C) of the NIRC of 1997, 76 The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, eta/., G.R. / Nos. L-12928 and L-12932, March 31, 1962. tV'

as amended, respectively, computed until December 31, 2017, as determined below:

FWT

P—- 460,585.80

FVAT

P 184,234.32

TOTAL

P—-644,820.12

Surcharge (25%

Deficiency Interest (20%) until January 7, 201678

FWT - 1/11/2011 to 1/7/2016

(P460,585.80 x 20% x 1,822 days/365 days 459,828.67

FWVAT - 1/10/2011 to 1/7/2016

(P184,234.32 x 20% x 1,823 days/365 days Total Amount Due, January 7, 2016 20% Deficiency Interest from January 8, 2016 until December 31, 2017

FWT - 1/8/2016 to 12/31/2016

(P460,585.80 x 20% x 724 days/365 115,146.45 46,058.58 161,205.03 459,828.67 184,032.42 184,032.42 P1,449,886.24 P1,035,560.92 days) 182,720.07 182,720.07

FWVAT - 1/8/2016 to 12/31/2016

(P184,234.32 x 20% x 724 days/365 days) 73,088.03 73,088.03 20% Delinquency Interest from January 8, 2016 until December 31, 2017

- FWT - 1/8/2016 to 12/31/2017

(P1,035,560.92 x 20% x 724 days/365 410,819.79 410,819.79

FWVAT - 1/8/2016 to 12/31/2017

(P414,325.32 x 20% x 724 days/365 164,367.96 P1,629,100.78 164,367.96 P651,781.31 | P2,280,882.09 In addition, petitioner is ORDERED TO PAY delinquency interest at the rate of twelve percent (12%) on the total amount due of P1,449,886.24 as of January 7, 2016, 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 Tax Reform for Acceleration and Inclusion (TRAIN) and as implemented by Revenue Regulations No. 21-2018.

Associate Justice’

I Concur:

~~ ~ _,?,, MA. BELEN M. RINGPIS-LIBAN

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. Z!¥ R. FABON-VICTORINO sociate Justice

Acting Chairperson

CERTIFICATION

Pursuant

to

Section

13

of Article

VIII

of the Constitution, and the

Division

Acting

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