Ibms Technology Phils. Corporation vs. The Commissioner of Internal Revenue

DECISION

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Respondent is the duly appointed Commissioner of Internal Revenue, with principal office address at the 5th Floor, Bureau of Internal Revenue (BIR) National Office Building, Agham Road, Diliman, Quezon City.3

ANTECEDENTS (ADMINISTRATIVE LEVEL)

On May 13, 2016, respondent issued Letter of Authority

(LOA)

No.

eLA201200035835 dated

May

13, 2016,4 authorizing the examination of petitioner's books of account and other accounting records for deficiency internal revenue taxes, for the period from January 1, 2014 to December 31, 2014.

On December 14, 2017, respondent issued Preliminary Assessment Notice (PAN), with Details of Discrepancies, covering deficiency income tax of P11,463,465.42, VAT of P611,604.58, EWT of P57,207.63, WTC of P7,847,051.97, FWT of P1,104,082.19,

DST

of P46,003.42, and

IAET

of !>4,662,333.42, inclusive of interests, for taxable year (TY) 2014.5 On January 12, 2018, petitioner received the FAN (Parts 1 and 2) dated January 5, 2018, covering deficiency income tax of P11,593,917.38,

VAT

of P618,371.99,

EWT of

P57,838.45, WTC of P7,933,580.45, FWT of P1,114,602.74, DST of P46,441.78, IAET of P4,712,177.13, and compromise penalty of P80,000.00, inclusive of interests and penalties, for TY 2014.6 On February 12, 2018, petitioner filed a Protest/Request for Reinvestigation against the FAN.7 Within sixty (60) days therefrom or on April 11, 2018, petitioner submitted the documents in support of its protest.s 3 Par. 1, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket - Vol. I, p. 176.

4 Exhibit "P-1 ", BIR Records, p. 2. sPar. 2, Admitted Facts, JSFI, Docket- Vol. I, p. 176; Exhibit "P-15", BIR Records, p. 512.

IBMS Technology Phl'ls. Corporation vs. Commissioner of Internal Revenue

PROCEEDINGS BEFORE THIS COURT

Petitioner filed the present Petition for Review on November 7, 2018.9 On January 7, 2019, respondent filed his Manifestation with Motion to Admit Answer, 1o to which petitioner posted its Comment/ Opposition with Motion on January 22, 20 19.11 In the said Motion to Admit, respondent attached his Answer, 12 interposing his special and affirmative defenses. In the Resolution dated April 12, 2019,13 the Court granted respondent's Manifestation with Motion to Admit Answer and admitted the said Answer, and initially set the case for mediation on May 2, 20 19. On May 29, 2019, petitioner filed a Manifestation with Motion, 14 praying that the mediation be rescheduled. Thus, in the Resolution dated June 10, 2019,15 the mediation proceedings was reset to July 8, 2019. After the said proceedings, on January 14, 2020, the mediator filed her Mediator's Report, stating that the mediation is unsuccessful. 16 The Court initially set the case for Pre-Trial Conference on March 5, 2020,17 but wa s finally reset to and held on August 27, 2020.18 Prior thereto, respondent's Pre-Trial Brief was filed on March 2, 2020 ,19 while petitioner's Pre-Trial Brief with Manifestation was submitted on March 3 , 2020.20 9 Docket- Vol. I, pp. 10 to 19. 1o Docket - Vol. I, pp. 47 to 50. " Docket- Vol. I, pp. 68 to 69. 12 Docket - Vol. I, pp . 5 1 to 55. I3 Docket - Vol. I, pp. 74 to 75. 14 Docket - Vol. I, pp. 76 to 77. IS Docket - Vol. I, p. 82.

I6 Docket - Vol. I, p. 93.

17 Refer to the Resolution dated J anuary 22, 2020, Docket - Vol. I, p. 104; Notice of Pre- Trial Conference dated January 23, 2020, Docket- Vol. I, pp. 105 to 106. 18 Refer to Notice of Resetting dated February 26, 2020 and June 30, 2020, Docket - Vol. I, pp. 110 and 158, respectively; Minutes of hea ring held on, and Order dated, August 27, 2020, Docket - Vol. I, pp. 164 to 168, and 172 to 175, respectively. 19 Docket- Vol. I, pp. 11 1 to 118. 2o Docket- Vol. I, pp. 139 to 143.~

L

CfA Case No. 9970 IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Respondent transmitted the BIR Records of the present case [consisting of one (1) folder, five hundred seventy-five

(575) pages)] on February 5, 2020.21 On September 11, 2020, the parties filed their Joint Stipulation of Facts and Issues, 22 which was approved in the Resolution dated September 17, 2020,23 thereby terminating the Pre-Trial.

The Pre-Trial Order dated December 9, 2020 was then issued by the Court. 24 Trial then ensued.

During trial, petitioner presented its documentary and testimonial evidence. It offered the testimonies of the following individuals, namely:

(1) Ms.

Chervie

Rose

Janapin,2s petitioner's Finance Clerk; and (2) Revenue Officer (RO) Roland Dela Torre,26 as hostile witness. In the meantime, during the hearing held on July 13, 2021, counsel for respondent manifested that she will dispense with the presentation of RO Dela Torre as her witness, subject to cross examination during RO Dela Torre's presentation as hostile witness of petitioner.27 After presentation of RO Dela Torre as hostile witness during the hearing held on March 1, 2022, the Court granted petitioner a period of fifteen (15) days to file Formal Offer of Evidence, while respondent was granted the same period within which to file comment.

Moreover, considering that respondent is no longer presenting any evidence, the Court gave both parties a period of thirty (30) days to file their respective memorandum. 28 21 Compliance dated February 5, 2020, Docket- Vol. I, p. 107. 22 Docket- Vol. I, pp. 176 to 178. 23 Docket- Vol. I, p. 200.

24 Docket- Vol. I, pp. 255 to 270. 25 Exhibit "P-207", Docket - Vol. I, pp. 144 to 155; Minutes of hearing held on, and Order dated, March 2, 2021, Docket- Vol. I, pp. 333 to 337. 26 Minutes of hearing held on, and Order dated, March 1, 2022, Docket - Vol. II, pp. 427 to 427 -A, and 428 to 428-A, respectively. 27 Minutes of the hearing held on, and Order dated, March 1, 2021, Docket- Vol. I, pp. 384 to 388.

28 Minutes of hearing held on, and Order dated , March 1, 2022, Docket- Vol. II, pp. 427 to 427-A and 428 to 428-A, respectively. ~ ' "' IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue Petitioner filed its Formal Offer of Evidence on March 17, 2022.29 Respondent posted his Comment and Opposition (To Petitioner}s Formal Offer of Evidence dated March 15} 2022) with Manifestation on March 31, 2022.30 Respondent also posted a Motion for Leave of Court to File Demurrer to Evidence, with attached Demurrer to Evidence, on March 31, 2022.31 Petitioner later filed its Comment/ Opposition with Motion on April 12, 2022,32 praying that the Motion for Leave be denied, and that RO Dela Torres' Judicial Affidavit dated February 28, 2020, and all attachrpents thereto, be expunged from the records of the case.

In the Resolution dated June 14, 2022,33 the Court denied respondent's Motion for Leave of Court to File Demurrer to Evidence, but gave petitioner the opportunity to comment on petitioner's Motion incorporated in its Comment/ Opposition. In the same Resolution, the Court admitted petitioner's offered exhibits, except for the following:

1. Exhibits "P-9", "P-11" and "P-248", for failure to identify;

2. Exhibits "P-10", "P-11-a", "P-19", "P- 19-a", "P-23", "P-25", "P-36", "P-40 to P-41 ", "P-46", "P-193 to P-195", "P-197 to P-200", "P-232 to P-233", "P-238", "P-293 to P-293-a", "P- 297-b to P-297 -c", "P-30 1", "P-305", "P-313", "P-338" and "P-339", for failure to present originals for comparison; 3 . Exhibits "P-20", "P-20-a", "P-76", "P-77" and "P-78", for failure to submit duly marked exhibits;

4. Exhibits "P-109", "P-110", "P-111", "P- 112", "P-113", "P- 248-a", "P-251", "P-251-a" and "P-251-b", for failure to present originals for comparison and for failure to identify; and

5. Exhibits "P-207", "P-217", "P-253" and "P-253-a", for not being found in the records of the case. On July 22, 2022, petitioner filed a Motion for Leave to Admit with Tender of Excluded Evidence and Manifestation. 34

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Respondent, on the other hand, posted his Comment/ Opposition (To Petitioner's Motion for Leave to Admit with Tender of Excluded Evidence and Manifestation) on August 18, 2022.35 Respondent's Memorandum was posted on July 20, 2022,36 while petitioner filed its Memorandum on July 22, 2022.37 In the Resolution dated August 18, 2022,38 the Court granted petitioner's Motion to Expunge the Judicial Affidavit of Revenue Officer Roland S. Dela Torre dated February 28, 2020, and ordered the Judicial Affidavit of RO Dela Torre dated February 28, 2020 expunged from the records of this case. On October 20, 2022, the Court issued a Resolution,39 denying petitioner's Motion for Leave to Admit, while noting its Tender of Excluded Evidence and Manifestation. Accordingly, the Court made part of the records of the case Exhibits "P-9", "P-1 0" "P-11" "P-11-a" "P-19" "P-19-a" "P-20" "P-20-a" "P- ' ' ' ' ' ' ' 23" "P-25" "P-36" "P-40 to P-41" "P-46" "P-76" "P-77" "P- , ' ' ' ' ' ' 78" "P-109" "P-110" "P-111" "P-112" "P-113" "P-193 toP- ' ' ' ' ' ' 195" "P-197 to P-200" P-232 to P-233" "P-238" "P-248" "P- ' ' ' ' ' 248-a" "P-251" "P-251-a" "P-251-a" "P-251-b" "P-293 toP- ' ' ' ' ' 293-a" "P-297-b to P-297 -c" "P-30 1" "P-305" "P-313" "P- ' ' ' ' ' 338" and "P-339".

In the same Resolution, the Court submitted the present case for decision.

THE ISSUES

The parties stipulated the following issues for this Court's resolution, to wit:

"1.

Whether the Letter of Authority (LOA) is valid for lack of revalidation on or before the expiration of the 180-day period.

erA case No. 9970 IBMS Technology Ph!'ls. Corporation vs. Commissioner of Internal Revenue

2.

Whether Petitioner is liable for deficiency Income Tax (IT) of Php11,593,917.38, Value-Added Tax (VAT) of Php618,371.99, Expanded Withholding Tax (EWT) of Php57 ,838.45, Withholding Tax on Compensation (WTC) of Php7,933,580.45,

Final

Withholding

Tax

(FWT)

of Php1,114,602.74, Documentary Stamp Tax (DST) of Php46,441.78,

Improperly Accumulated Earnings Tax (IAET) of

Php4,712,177.13,

and Compromise Penalty (MC)

of Php80,000.00, inclusive of interests and penalties, for TY 2014, as indicated in the FAN dated 05 January 2018.

3. Whether Petitioner made an overpayment."40 Petitioner's arguments:

Petitioner argues that the LOA is invalid for lack of revalidation on or before the expiration of the 180-day period; and that even granting, for the sake of argument, that the LOA is valid, petitioner is not liable for the deficiency taxes as enumerated in the FAN.

Respondent's counter-arguments:

Respondent

contends that failure to revalidate petitioner's LOA does not affect its validity nor the assessment made pursuant to the same; that the requirement on the issuance of Notice of Informal Conference was deleted under Revenue Regulations (RR) No. 18-2013 dated November 28, 2013, which amended RR No. 12-99; that respondent has fully complied with the due process requirement under Section 228 of the Tax Code, as amended, and RR No. 12-99, as amended by RR No. 18-20 13; that petitioner is liable for the deficiency income tax, VAT, EWT, WTC, FWT, DST,

IAET and

compromise penalty; and that the necessity of proving that the tax assessment is invalid lies with the party assailing the validity of the assessment.

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

THE COURT'S RULING

The present Petition for Review is partially granted. The lapse of the audit period does not render the subject LOA invalid and will not have the effect of revoking the authority given thereunder to the concerned RO.

Petitioner avers that the LOA is invalid because under Revenue Memorandum Order (RMO) No. 19-2015, the report of investigation/verification of cases covered by electronic Letters of Authority (eLAs) shall be submitted by the RO within one hundred eighty (180) calendar days only.

Petitioner

further alleges that under CTA Case No. 8837 dated March 19, 2018, the non-compliance of the concerned RO within the prescribed period and the required procedure of surrendering the LOA for revalidation would inevitably render the LOA invalid.

Petitioner claims that in the present case, respondent issued the LOA on May 13, 2016, which was received by petitioner on May 20, 2016. The PAN was issu ed on December 14, 2017, while the FAN was issued on January 5, 2018 which was received by petitioner on January 12, 2018. The period from the time the LOA was received by the petitioner on May 20, 2016 to th e time when the PAN and FAN were issued on December 14, 2017 and January 5, 2018, respectively, is already more than eighteen (18) months, which is clearly beyond the six (6) months or 180-day prescribed period. Petitioner further maintains that after the lapse of the 180-day prescribed period, respondent did not also comply with the required procedure of surrendering the LOA for revalidation. This fact was admitted by RO DelaTorre himself during direct-examination on March 1, 2022 as according to him4 1 ''There is no use of revalidating ofthe Letter of Authority".

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Petitioner further contends that the non-compliance within the one hundred eighty ( 180) calendar days to submit the investigation/verification of the case covered by the LOA, and the required procedure for surrendering the LOA for revalidation rendered the LOA invalid. Consequently, this also renders the PAN and FAN invalid. Thus, the PAN and FAN are void and ineffectual and bear no valid fruit. This Court disagrees with petitioner. Admittedly, under RMO No. 19-201542 , there is indeed a 180-day period for regional cases within which to submit a report of investigation. However, nothing therein states that in case the 180-day period to submit the said report of investigation is not observed, the LOA issued will be a nullity. In fact, in the same issuance, it was clearly stated that the failure to render a report of investigation/verification within the time frame shall not nullify the eLA. The pertinent portion of RMO No. 19-2015 reads:

"28. Failure on the part of the RO to render a report of investigation/verification within the time frame prescribed above shall not nullify the eLA. The eLA is enforceable even if it remains outstanding beyond the time frame for submission of report of investigation/verification by the RO assigned to the case, subject to the period of limitation under Sections 203 and 222 of the Tax Code of 1997, as amended. However, the RO who fails to submit the report investigation/verification shall be subject to anv applicable administrative sanction." (Emphases and underscoring added) In this regard, it must also be noted that the requirement of revalidation of LAs for failure to complete audit was already withdrawn beginning June 1, 2010, pursuant to RMO No. 44- 201043, the pertinent portion of which reads: "8. Beginning June 1, 2010, the rule on the need for revalidation of LAs for failure of the revenue officials to complete the audit within the prescribed period shall be withdrawn. Accordingly, there is no need for 42 SUBJECT: BIR Audit Program. 43 SUBJECT: Electronic Issu ance of Letters of Authority. ~ IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue revalidation of the LA even if the prescribed audit period has been exceeded. However, the failure of the RO to complete the audit within the prescribed period shall be subject to the applicable administrative sanctions." (Emphasis and underscoring added) Moreover, the above provision was reiterated in RMO No. 19-2015, the relevant portion of which reads: "29. As stated in Item Number IV.8 of RMO No. 44-2010, it is reiterated that pending eLAs as of the effectivity of the said Order shall no longer be revalidated. In case the report of investigation cannot be rendered within the prescribed period, the concerned RO shall prepare a monthly progress report starting from the time such audit report should have been rendered stating therein the reason for the delay in the submission of the report of investigation duly noted by his GS and approved by the RDO/ LTD/LTAD. The said progress report/s shall be attached to the docket of the case."

(Emphasis

added) Clearly, the revalidation of LOAs which should be done "for failure of the revenue officials to complete the audit within the prescribed period)), has been withdrawn beginning on June 1, 2010. The effect of such failure is merely to subject the concerned RO(s) to applicable administrative sanctions, not to render null the issued LOA. More significantly, the lapse of the said period of audit would not have the effect of revoking the authority given to the concerned RO(s). Thus, as correctly argued by respondent, the lapse of the 180-day period under RMO No. 19-2015, and the failure to revalidate the LOA, are of no moment; and thus, the same will not have the effect of nullifying the subject tax assessments. The assessments are partially upheld.

In the FAN, the aggregate amount of P26, 156,929.92, inclusive of surcharges and interests was found to be deficient for taxable year 2014, summarized as follows:~

IBMS Technology Ph1'ls. Corporation vs. Commissioner of Internal Revenue

Basic Deficiency

Tax Type

Tax

Surcharge

Interest

Income tax t' 7,439,837.98 t' 1'4,154,079.40

Value-Added Tax (VAT)

385,953.79 232,418.20

Expanded Withholding

Tax (EWT)

35,976.54 21,861.9 1

Withholding Tax on

Compensation (WTC)

4,934,827.65 2,998,752.80

Final Withholding Tax

(FWT)

600,000.00 150,000.00 364,602.74

Documentary Stamp

Tax (DST)

25,000.00 6,250.00 15,191.78

IAET

2,842,648.79 7 10,662.20 1,158,866.14 Compromise penalty

TOTAL

P16,264,244. 75 P866,912.20 P8,945, 772.97 I.

Income Tax

Total

t•11,593,917.38 618,371.99 57,838.45 7,933,580.45 1,114,602.74 46,441.78 4,712,177. 13 80,000.00 P26 , 156,929.92 Respondent assessed petitioner for deficiency income tax forTY 2014 amounting to P11,593,9 17 .38 , with details as follows:44 Taxable Income (Loss) per return Add: Adjustments/ disallowances Disallowed Expenses due to non-withholding

(Schedule 1)

Salaries and Wages not subjected to withholding tax

(Schedule 2)

Adjusted Taxable Income

Basic Income Tax Due

Less: Tax credits/payments:

Prior Year's Excess Credits

Creditable withholding tax

Less: Disallowed Creditable

Withholding Tax

Basic Deficiency Income Tax

Add: Interest (04. 16.15- 0 1.29.18)

TOTAL AMOUNT DUE

1'1 ,278,092.00 958,206.97 p 7,749,577.00 p 247,988.31 20,114,158.05 20,362,146.36 p 28, 111,723.36 p 8,433,517.01 p 673,794.00 319,885.03 993,679.03 p 7,439,837.98 4,154 079.40 P11,593,917.38 The following items comprised the deficien cy Income tax assessm ent:

A. Disallowed Expenses due to non-withholding p 247,988.31 B. Salaries and Wages not subjected to withholding tax 20,114, 158.05 C. Disallowed Creditable Withholding Tax 958,206.97

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

A. Disallowed Expenses due to non-withholding Respondent's examiner found that the following expenses or deductions claimed by petitioner were not su bjected to withholding tax, thus disallowed as deduction from gross income pursuant to Section 34(K) of the NIRC of 1997, as amended: 45 Sch edule 1:

Expense/

Per alphalist/

Disallowed

Income Payments

Per ITR

160 1-E

Expenses

Rate

EWTDue

Rent

p 1,166,935.00 p 1,138,754.05 p 28,180.95 5% p 1,409.05 Professional fees 510,370.00 290,562.64 219,807.36 10% 21,980.74

TOTAL

P1,677,305.00 P1,429,316.69 P247,988.31 P23,389.79 Petitioner avers that it "religiously withheld and remitted the withholding taxes for rental and professional fees inclusive in the total of Pl ,736,412.84 as evidenced by BIR Form 1604- E 46"_47 However, the Court notes that the total amount of P1,736,412.84 includes all of petitioner's income payments/ expenses for taxable year 20 14 and does not solely pertain to withholding tax on rental and professional fees. Meanwhile, respondent disallowed only a portion of petitioner's rental and professional fees that were not subjected to withholding, as shown above.

Petitioner submitted its monthly remittances for the year 2014.48 However, other than the foregoing documents, petitioner did not explain or substantiate the discrepancy between the amounts of rental and professional fees per ITR and the amounts as shown per remittance returns. Hence, the disallowance of rental and professional fees expenses for the year 20 14 amounting to P247,988.31 should rem8ln.

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

B. Salaries and Wages not subjected to withholding tax Respondent likewise compared the amount of salaries and wages claimed by petitioner as deduction in its income tax return with the total compensation reported in its monthly remittance returns for the year 20 14. The discrepancy of P20, 114,158.05 1s disallowed for failure to withhold the corresponding tax on compensation, thus:49

Schedule 2:

Salaries and Wages Per FS/ITR

Less: Salaries and Wages per 1601C

Salaries & wages not subjected to withholding tax

Multiplied by

Basic Deficiency Withholding Tax

, 1,209,036.44 p 4,927,985.28 p 25,405,954.00 5,291,795.95 p 20,114,158.05 24.5341% p 4,934,827.65 Based on records, respondent's total salaries and wages per FS/ITR in the amount of P25,405,954.00 consists of the following:

Cost of services - Direct labor Operating expenses -Salaries, wages and employee benefits Total Salaries & wages per BIR audit f> 15,996,777.0050 9,409,177.0051 p 25,405,954.00

Petitioner

accounted and explained the foregoing discrepancy as follows:52 Salaries & wages not subjected to withholding tax Less: Reconciling items

1. Total compensation per BIR Form 1604-CF

Less: Per FAN

2. Non-taxable fringe benefits f> 7,981,916.48 5,291,795.95

3. Payments to subcontractors and/or independent contractors

Total

Unaccounted Balance

49 Exhibit "P-16", BIR Records, p. 536. p 20,114,158.05 f> 2,690,120.53 594,139.61 12,440,005.03 p 15,724,265.17 p 4,389,892.88 so Schedule 2C, Line 20, Exhibit "P-13", BIR Records, p. 280. See also BIR Records, p. 269.

s1 Schedule 4, Line 29, Exhibit "P-13", BIR Records, p. 279. See also BIR Records, p. 268.

.

s2 Paragraph 9(b), III. Discussion/ Arguments, Memorandum for Petitioner, Docket- Vol. II, pp. 1026 to 1028. ~

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

First, petitioner argues that respondent's basis on the BIR Forms 160 1-C is incorrect because it refers only to remittances of withholding taxes on compensation and are incomplete. 53 Petitioner's monthly remittances of withholding taxes on compensation for the year 2014 is summarized as follows:

Month

Taxable

Tax Amount

Exhibit

(2014)

Total Compensation

Compensation

Remitted

P-55

Jan

p p p 79,691.78

P-58

Feb

81,904. 13

P-61

Mar

68,836.60

P-64

Apr

75,903.40

P-114

May

552,222.36 466,136.10 78,776.9 1

P-1 16

Jun

1,166,012. 15 1,116,879.04 266,079.64

P-118

Jul

585,048.24 562,241.83 81,893.38

P-120

Aug

577,245.03 554,438.62 90,259.94

P-122

Sep

582,672.2 1 510,710.04 91,159.90

P-124

Oct

593,783.04 557,053.43 85,92 1.55

P-126

Nov

582,672.21 540,710.04 9 1,159.90

P-130

Dec

652,140.71 619,816.18 117,449.31

TOTAL

p 5,291,795.95 p 4,927,985.28 p 1,209,036.44 As shown above, petitioner did not report the amounts of total compensation and total taxable compensation for the months of January to April2014. Nonetheless, petitioner avers that in its Annual Information Return (BIR Form No. 1604- CF), total compensation for the year 2014 amounts to P7,981,916.48. Unfortunately, the said document was denied admission as evidence by the Court for petitioner's failure to present originals for comparison and for failure to identify. 54 As such, it cannot be used to support petitioner's assertion. Next, petitioner avers that the amount P594,139.6155 pertains to either non-taxable fringe benefits or expenses for entertainment, amusement and recreation, which are recorded 53 Paragraph 9 (b), III. Discu ssion/ Arguments, Memorandum for Petitioner, Docket - Vol. II, p. 1026.

54 Resolution dated J une 14, 2022, Docket - Vol. II, p. 1013. 55 Paragraph 9 (b), III. Discussion / Arguments, Memorandum for Petitioner, Docket - Vol. II, p. 1026. See also Annex B of Formal Offer of Evidence, Docket- Vol. II, p. 980. ~ '

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue as part of the salaries and wages account as evidenced by various payment vouchers, official receipts (ORs) or invoices.56 Examination of the foregoing documents shows that they are indeed expenses for entertainment, amusement, and recreation for petitioner's employees, which compnse of employees' uniform, expenses for birthday celebrations, anniversary, and Christmas party expenses and giveaways for the year 2014. However, only the amount of P135,835.60 is duly substantiated and is not subject to withholding tax, thus, deductible. The rest in the amount of P458,304.0 1 shall be disallowed as deductions from gross income for the reasons detailed as follows:

Properly substantiated and deductible expenses

OR/

Exhibit

Date

Inv. No.

Su~~lier

Amount

P-257-b 04/ 08/ 2014 413903

Amber Golden Chain of Restaurants

p 2 ,148.21

P-259

04 / 10/2014 0012715 Ordofood Enterprises, Inc.

270.54

P-261

04/24/ 2014 12 1424

7-Eleven Pesuena Enterprises

17.86

P-262

04 / 24/2014 13700 Chicken's R Us, Inc.

2,449.11

P-267

05/ 29/2014 06100 Goldilocks Bakeshop Inc.

379.46

P-268

05/29 /2014 4630 Clicc, Inc.

1,585.71

P-270

06/19/ 2014 14446 Chicken's R Us, Inc.

918.75

P-271

06/19/2014 001-395961 Pan de Mia. Food Co. Inc.

160 .71

P-272

05/29/2014 429396

Amber Golden Chain of Restaurants

1,808.93

P-274

06/24/2014 12316 National Book Store Inc.

356.92 P-276-b 07/21/ 2014 0851

Gain Tailoring Shop OR# 0851

30,566.25

P-278

08f 08f2014 5053 Clicc, Inc.

1,644.65

P-279

08/08/2014 4 1636

LSS Fastfood Makati

600.00

P-280

08/ 08/2014 6147 The Sweet Life by Ange, Co.

1,400.00 P-284-b 08/18/20 14 0853

Gain Tailoring Shop

30,566.25

P-286

09/ 15/2014 5302 Clicc, Inc.

2,812.50 P-287-b 09/15/2014 13377 Soundway Entertainment Inc.

13,392.85 P-287-c 09/15/2014 13378 Soundway Entertainment Inc.

2,372.90 P-288-b undated 0854

Gain Tailoring Shop

18 ,750 .00 P- 289-b 10/ 10/2014 0856

Gain Tailoring Shop

18,000.00

P-295

12/06/2014 00002

One Pix Photo Booth

5,634.00

Subtotal

P135,835.60 56 It is noted that in its protest to the FAN, petitioner avers tha t the amount P744,408.60 pertains to either non-taxable fringe benefits or expenses for entertainment, amusement and recreation. Exhibit "P-17", Docket - Vol. II, pp. 469 OM..,/' to 470.

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Supported by documents other than official receipts or invoices P-255-b P-260-b P-298-b 04/14/2014 04/29/2014 12/16/2014

Subtotal

Email & Deposit

Slip

Deposit Slip

Statement of

Account

Banco de Oro

Banco de Oro

Sodexo Benefits and Rewards Services

Phils., Inc.

P 15,000.00 12,000.00 150,000.00 P177,000.00 Supported by ORs or invoices but NOT issued in the name of the company

P-281

P-282

P-283

08/08/2014 08/09/2014 08/09/2014

Subtotal

453767 06226 06227

Amber Golden Chain of Restaurants

Goldilocks Bakeshop Inc.

Goldilocks Bakeshop Inc.

Supported by payment vouchers and cash voucher only Exh.

P-256

P-263

P-264

P-265

P-266

P-269

P-273

P-275

P-277

P-285

P-290

P-291

P-292

P-294

P-296

Date

04/10/2014 04/30/2014 05/08/2014 05/06/2014 06/04/2014 06/23/2014 07/03/2014 07/10/2014 08/11/2014 09/17/2014 10/16/2014 11/26/2014 11/24/2014 12/09/2014 12/03/2014

Subtotal

Voucher No.

14 00593 14 00660 14 00710

LMF 140048

14 00828 14 00916 14 00961 14 00982 1401091 14 01284 14 01412 14 01620 14 01568 14 01696 14 01686

Particulars

Payment Voucher

Payment Voucher

Payment Voucher

Cash Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

Payment Voucher

P 1,800.00 1,397.00 99.00 P 3,296.00

Amount

r 3,569.20 15,000.00 3,247.35 664.00 3,959.10 1,098.75 356.92 1,230.00 5,567.42 3,801.03 7,357.23 2,575.00 5,000.00 3,175.00 100,000.00 P156,601.00 Claimed twice per Annex B (including VAT portion)

P-259

P-262

04/10/2014 04/24/2014

Subtotal

0012715 13700 Ordofood Enterprises, Inc.

Chicken's R Us, Inc.

P 303.00 2,743.00 P_ 3,046.00 Supported by documents which are denied admission as evidence P-293 12/03/2014 14 01676 Payment Voucher P 5,000.00 P-297-b 12/03/2014 107201 Shopwise 110,063.85 Subtotal P115,063.85

OR/Invoice

VAT Portion of the expenses Amount Net of VAT Input Tax P-257-b Amber Golden Chain of Restaurants P 2,400.00 lacecies P 251.79 P-267 Goldilocks Bakeshop Inc. 425.00 379.46 45.54 P-268 Clicc, Inc. 1,776.00 1,585.71 190.29 Cogp

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

-----------------------------------------------------

P-270

Chicken's R Us, Inc.

1,029.00

P-271

Pan de Mia. Food Co. Inc.

180.00

P-272

Amber Golden Chain of Restaurants

2,020.00

P-274

National Book Store Inc.

399.75

P-278

Clicc, Inc.

1,842.00

P-286

Clicc, Inc.

3,150.00 P-287-b Soundway Entertainment Inc.

15,000.00 P-287-c Soundway Entertainment Inc.

2,657.00 918.75 160.71 1,808.93 356.92 1,644.65 2,812.50 13,392.85 2,372.90

Subtotal

P30,878.75 P27,581.59

TOTAL

110.25 19.29 211.07 42.83 197.35 337.50 1,607.15 284.10 p 3!297.16 P594, 139.61 Thus, out of the amount of !>594,139.61, only !>135,835.60 can be allowed as deductions from gross income and the remaining !>458,304.01 should be disallowed for petitioner's failure to properly substantiate and show that the same should not be subjected to withholding tax. Finally, petitioner argues that the amount of P 12,440,005.0357 recorded under salaries and wages are payments to sub-contractors and/ or independent contractors.58 The said expenses were allegedly subjected to 2o/o withholding tax, which were remitted as part of its total remittances for the taxable year 2014 of !>1,736,412.84.59 Further, petitioner maintains that these were recorded as Direct Labor and reported under Cost of Services in its Income Statement.

Petitioner submitted the official receipts and invoices6o to support its argument. However, the best document to prove that the foregoing expenses were indeed already subjected to withholding taxes would be the alphalist that is a required attachment to the monthly remittance returns. Petitioner did not submit as evidence such alphalists; thus, the Court cannot ascertain whether the corresponding income payments of the subject expenses are indeed included 1n the remittances.

57 It is noted that in its protest to the FAN, petitioner avers that the amount P15,996,777.00 pertains to payments to Third Generation Network Solutions Corp. (TGNSC}, a company sub-contractor, and other sub-contractors and/ or independent contractors. Exhibit "P- 17", Docket - Vol. II, pp. 470 to 471. 58 Paragraph 9{b), III. Discussion/ Arguments, Memorandum for Petitioner, Docket - Vol. II, pp. 1027 to 1028. See also Annex C of Formal Offer of Evidence, Docket - Vol. II,

p. 98 1.

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

In fine, the disallowed salaries and wages expense is adju sted to the amou nt of P19,978,322.45, computed as follows:

Salaries & wages not subjected to withholding tax Less: Non-taxable fringe benefits Unaccou nt ed Balance p 20,114,158.05 135,835.60 p 19,978,322.45 C. Disallowed Creditable Withholding Tax Respondent's examiner found that of the claimed creditable withholding taxes for the year 20 14 of P1,278,092.00, the amount of P958,206.97 should be disallowed for being unsupported. 51 Petitioner counters that it actually supported the creditable withholding tax of P1,278,092.00 as evidenced by BIR Form No. 230762 issued by its various clients. However, upon scrutiny, only the amount of P835,490.29 is duly su pported by certificates of withholding (BIR Forms No. 2307), to wit:

Ex h.

Payor

Income Payment

CWT

P-21

STI Educational System

p 2,863,375.87 p 57,267.52

P-22

Datalec Technology Corp.

11,267.01 121.60

P-24

IBM Philippines, Inc.

5,1 12 ,500.00 102,250.00

P-26

Business Process Outsourcing Int'l. 38,483. 11 384.83

P-27

Charoen Pokphand Foods

794,642.86 15,892.86

P-28

Charoen Pokphand Foods

1' 170,000.00 23,400.00

P-29

Charoen Pokphand Foods

401,785.71 8,035.71

P-30

Concentrix Services Corp.

470,809.08 9,416.18

P-31

Concentrix Services Corp.

36,486.08 729.72

P-32

Concentrix Services Corp.

28,679.50 573.59

P-33

DB&B Philippines Inc.

186,000.00 3,720.00

P-34

DB&B Philippines Inc.

186,000.00 3,720.00

P-35

DB&B Philippines Inc.

158,000.00 3,160.00

P-37

Filinvest Land Inc.

77,625.00 776.25

P-38

Filinvest Land Inc.

77,625.00 776.25

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

P-39

P-42

P-43

P-44

P-45

P-47

P-48

P-49

P-50

P-51

P-52

P-53

P-54

P-148

P-149

P-150

P-151

P-152

P-153

P-154

P-155

P-156

P-157

P-158

P-159

P-160

P-161

P-162

P-163

P-164

P-165

P-166

P-167

P-168

P-169

P-170

P-171

P-172

P-173

P-174

P-175

P-176

P-177

P-178

P-179

P-180

P-181

P-182

P-183

Filinvest Land Inc.

Manulife Data Services Inc.

Philippine Women's University

Philippine Women's University

Philippine Women's University

PHO2 Damco Philippines Inc.

Synnex-Concentrix Corp.

Synnex-Concentrix Corp.

Synnex-Concentrix Corp.

P.J.Lhuillier Inc.

Thome Ship Management PTE Ltd. Thome Ship Management PTE Ltd. Thome Ship Management PTE Ltd.

Manulife Data Services Inc.

Towers Watson Global Business Services Inc.

Holy Cross of Davao College Inc. IBM Philippines, Inc.

STI Educational System

Ateneo de Manila University

Business Process Outsourcing Int'l. Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

Concentrix Services Corp.

DB&B Philippines Inc.

DB&B Philippines Inc.

Filinvest Land Inc.

Filinvest Land Inc.

NCR Cebu Development Center Inc.

One Stop Warehousing Solutions

PhilHealthCare Inc.

Philippine Women's University

Philippine Women's University

Philplans First Inc.

Philplans First Inc.

3,200.00 1,660,714.29 1,785.71 12,946.43 141,011.71 19,967.21 48192.83 43,799.06 396,103.52 415,000.00 399,107.50 232,143.00 87,053.50 783,750.00 401,848.00 5,985,000.00 2,220,000.00 484,483.22 10,351.86 19,505.36 117,922.14 94,492.25 376,647.26 316,882.82 121,351.98 66,251.62 52,119.86 47,440.16 58,136.18 43,799.06 48,192.93 36,222.99 316,882.82 65,875.39 28,679.51 300,000.00 660,000.00 760,000.00 372,000.00 360,000.00 4,267.00 321,428.50 3,900.00 88,081.00 413,284.50 1,785.71 4,017.86 133,928.57 107,142.86 32.00 33,214.29 35.71 258.93 1,410.12 399.34 963.86 875.98 7,922.07 8,300.00 7,982.15 4,642.86 1,741.07 15,675.00 8,036.96 119,700.00 44,400.00 9,689.66 103.52 195.05 2,358.44 1,889.85 7,532.95 6,337.66 2,427.04 1,325.03 1,042.40 948.80 1,162.72 875.98 963.86 724.46 6,337.66 1,317.51 573.59 6,000.00 13,200.00 15,200.00 7,440.00 7,200.00 42.67 6,428.57 78.00 880.81 8,265.69 35.71 80.36 2,678.57 2,142.86 wy ),

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

-----------------------------------------------------

P-184

Philplans First Inc.

72,500.00 1,450.00

P-185

Pointwest Innovations Corp.

21,538.46 430.77

P-186

P.J.Lhuillier Inc.

90,771.93 1,591.57

P-187

P.J.Lhuillier Inc.

38,380.94 767.62

P-188

Thome Ship Management PTE Ltd. 45,059.50 901. 19

P-189

Thome Ship Management PTE Ltd. 388,839.50 7,776.79

P-190

Thome Ship Management PTE Ltd. 45,059.50 901. 19

P-191

Thome Ship Management PTE Ltd. 798,214.00 15,964.28

P-192

Thome Ship Management PTE Ltd. 176,785.50 3,535.71

P-196

Holy Cross of Davao College Inc. 1 ,354,125.00 27,082.50

P-201

Business Process Outsourcing Int'l

5,285.71 52.86

P-202

Accu test Technologies Phils.

18,086.68 180.87

P-203

DB&B Philippines Inc.

69,642.86 1,392.86

P-204

DB&B Philippines Inc.

45,000.00 900.00

P-205

DB&B Philippines Inc.

22,500.00 450.00

P-206

Concentrix Services Corp.

79,220.70 1,584.41

P-208

Concentrix Services Corp.

94,161.82 1,883.24

P-209

Concentrix Services Corp.

240,000.00 4,800.00

P-210

Concentrix Services Corp.

14,534.04 290.68

P-211

Concentrix Services Corp.

660,000.00 13,200.00

P-212

Concentrix Services Corp.

245,000.00 4,900.00

P-213

DB&B Philippines Inc.

23,214.29 464.29

P-214

Electro-Systems Industries Corp. 21,401.79 2 14.02

P-215

Filinvest Land Inc.

624,107.00 12,482. 14

P-216

Filinvest Land Inc.

177,678.50 3,553.57

P-218

Filinvest Land Inc.

80,357.00 1,607.14

P-219

Filinvest Land Inc.

174,230.00 1,742.30

P-220

NCR Cebu Development Center Inc. 6,670.00 133.40

P-221

Philippine Women's University

513,392.86 10,267.86

P-222

Philippine Women's University

282,200.82 5,644.02

P-223

Philippine Women's University

499,999.95 10,000.00

P-224

Philplans First Inc.

214,285.71 4,285.71

P-225

Philplans Firs t Inc.

267,857.14 5,357.14

P-226

Pointwest Innovations Corp.

3,800.00 76.00

P-227

Pointwest Innovations Corp.

9,620.08 192.40

P-228

Thome Ship Management PTE Ltd. 475,000.00 9,500.00

P-229

Torm Shipping Phils Inc.

45,106.08 902. 12

P-230

Pointwest Innovations Corp.

33,455.94 669. 12

P-231

IBM Philippines, Inc.

338,750.00 6,775.00

P-234

DHL Global Forwarding Phils.

49,107.14 982.14

P-235

Towers Watson Global Business Services Inc. 78,284.71 1,565.69

P-236

Towers Watson Global Business Services Inc. 217,039.00 4,340.78

P-237

Towers Watson Global Business Services Inc. 323,613.00 6,472.26

P-239

Holy Cross of Davao College Inc. 1,363,393.00 27,267.86

P-240

Caspo Incorporated

3,846.15 76.92

P-241

Concentrix Services Corp.

60,000.00 1,200.00

P-242

Concentrix Services Corp.

696,080.00 13,921.60

P-243

Concentrix Services Corp.

660,000.00 13,200.00

P-244

Pointwest Innovations Corp.

3,800.00 76.00 ~

CIA Case No. 9970 ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

P-245

Pointwest Innovations Corp.

59,500.00

TOTAL

P42, 130,471.69 1,190.00 P835,490.29 Considering the foregoing, the Court finds that only the creditable withholding tax of P442,60 1. 71 is unsupported: Creditable withholding tax forTY 2014 Less: Creditable Withholding Tax properly supported by BIR Form 2307 Unsupported creditable withh olding tax p 1,278,092.00 835,490.29 p 442,60 1.71 It should be noted that petitioner's income tax paym ents of !>372,986.60 for the year 20 14 have not been considered by respondent. The amount is broken down below:

Quarter

Exhibit

(20 14)

P-106 to 108

1 Sl Qtr.

P-254 to 254-a

3rd Qtr.

P-13

4<h Qtr.

TOTAL

Date Paid

05/30/2014 11/27/2014

Amount Paid

p 51,441.00 262,911.60 p 314,352.6063 58,634.0064 p 372,986.60 The Court finds that this amount should be incorporated in the computation of petitioner 's deficiency income tax. In fine, petitioner is liable for deficiency income tax for the year 20 14 in the adjusted amount of !>6,510,495.44, computed thus:

Taxable Income per return p 7,749,577.00 Add: Adju stments/ disallowances Disallowed Expenses due to non- p 247,988.31 withholding Salaries and Wages not subjected to 19,978,322.45 20,226,310.76 withholding tax

Adjusted Taxable Income

P27,975,887.76

Basic Income Tax Due

p 8,392,766.33 Less: Tax credits/payments:

Prior Year's Excess Credits

p 673,794.00 Income Tax Pavment under 372,986.60 63 Line 3, Schedu le 7- Tax Credits/ Payments, Exhibit "P-13", BIR Records, pp. 266 and 277.

64 Total amount paid is P85,582.00 consisting of income tax due for th e quarter of P58,634 .00 and penalties of P26,948.00. See Exhibits "P- 13" and "P-14", BIR Records, pp. 26 1 to 263 and 282. CPh--

IBMS Technology Ph!'ls. Corporation vs. Commissioner of Internal Revenue

Regular /Normal Rate from Previous

Quarters

Creditable withholding tax p 1,278,092.00

Less: Disallowed Creditable

442,601.71 835,490.29 1,882,270.89

Withholding Tax

Basic Deficiency Income Tax

.. 6,510 ,49 5.44 II.

Value-Added Tax (VAT)

Respondent assessed petitioner for deficiency VAT 1n 2014, as follows:65 Taxable Receipts per return Add: Receipts not Subjected to VAT (Schedule 3) Taxable Sales as adjusted

Output Tax Due

Less: Input Tax claimed per return

Less: Input Tax Carried Forward to Succeeding Period

VAT Payable

Less: Payments per VAT returns

Basic Tax Due

Add: Interest (0 1.26.15 - 0 1.29.18)

TOTAL AMOUNT DUE

A. Sales not subjected to VAT p 8,979,765.02 2,038,090.63 p 62,618,614.42 3,211,281.69 .. 65,829,896. 1 1 p 7,899,587.53 6,941,674.39 p 957,913. 14 571,959.35 p 385,953.79 232,418.20 p 618,371.99 Respondent's examiner found that, upon comparison of the amount of receipts per ITR as against the amount of receipts subjected to VAT per VAT returns, there are receipts not subjected to VAT amounting to P3,2 11,281.69, hence, assessed and subjected to 12°/o VAT pursuant to Section 108 of the Tax Code, to wit:66 Sche dule 3:

Sales per ITR/FS:

Regular Sales

Other Income

Sales per VAT

Sales not subjected to VAT 65 Exhibit "P-16", BIR Records, p. 538. p 97,571,953.00 606,898.00

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

As shown above, respondent picked up petitioner's reported sales as declared in its ITR, particularly Schedules 1 and 3.67 However, petitioner asserts that respondent's findings "do not specify the receipts which were not subjected to VAT, hence, defective as it cannot respond to such finding specifically. "68 Petitioner also avers that some of its transactions are VAT zero-rated and submitted Philippine Economic Zone

Authority

(PEZA)

certifications69 to support it.

Upon

examination, the Cou rt finds that respondent clearly considered all of petitioner's sales, including its zero-rated sales for the year 20 14, as shown hereafter:

Exhibit

Period

VA Table

Zero-rated

Total Sales

P-97

1st Qtr.

,. 24, 13 1,055.27 ,.

1,938,367.45 ,.

26,069,422.72

P-100

2nd Qtr.

17,781,377.75 4,452,201.62 22,233,579.37

P-102

3•d Qtr.

16,642,353.82 11,911,135.73 28,553,489.55

P-104

4th Qtr.

4,063,827 .58 14,047,250.09 18,111,077.67

TOTAL

1'62,618,614.42 p 32,348,954 .89 ,. 94 ,967,569.31 We cannot subscribe to petitioner's assertion that the assessment is defective for respondent's failure to specify the receipts which were not subjected to VAT. On the contrary, it is incumbent upon petitioner to explain or account for the said discrepancy since respondent clearly indicated the source or how the amount in the above computation was arrived at. Hence, for petitioner's failure to explain the discrepancy, the subject assessment should remain. Once again, the Court reiterates that tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a BIR examiner and approved by his 67 Exhibit "P-13", BIR Records, pp. 268 to 269. 68 Paragraph 10, III. Discu ssion / Arguments, Memorandum for Petitioner, Docket- Vol. II, p. 1029.

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue su perior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.70 B . Input Tax Carried Fonuard to Succeeding Period By the end of the fourth quarter of taxable year 20 14, petitioner had P2,038,090.63 excess input taxes.71 Respondent dedu cted the same from th e total input taxes for the taxable year in computing for the input taxes that are to be offset against the output tax due since this shall be carried over to the next succeeding period/ quarter( s) as provided under Section 11 O(B) of the Tax Code as amended. 72 The Court finds this deduction proper as the carried over excess input tax for the taxable year 2014 may have been utilized to offset against any output tax that petitioner may have incurred in th e succeeding taxable period. Besides, petitioner failed to proffer any evidence to establish sufficiently that it did not utilize the said input tax carried over of P2,038,090.63 to th e succeeding period. Thus, if the Court were to allow this without ascertaining that such excess input tax carried over is still available, taxpayers may end up benefiting twice from it, i.e., tax credit against outpu t VAT in the subsequent periods and payment for deficiency VAT at the expense of the government.

It should be noted that per respondent's FAN, total input taxes for 2014 amounted to P8,979,765.02. However, upon verification of its quarterly VAT returns, petitioner's total input taxes amounted to P8,980,365.03, to wit: Ex h ibit

Period

Total Input Tax

P-97

1st Qtr.

, 3, 133,168.23

P-100

2nd Qtr.

2,225,623.80

P-102

3rd Qtr.

1,145,521.56

P-104

4th Qtr.

2,4 76,051.44

TOTAL

p 8,980 ,365.03

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Thus, petitioner's total input taxes that are applicable against the output tax due per respondent's audit should be P6,942,274.40, computed as follows: Total input tax per VAT returns filed Less: Input tax carried over to su cceeding period Adjusted Allowable input tax p 8,980,365.03 2,038,090.63 p 6,942,274.40 As to petitioner's VAT payments per returns, while respondent picked up the amount of P571,959.35, the Court found that petitioner made total payments amounting to Pl,l38,823.02, as shown below:

Exhibit

Period

P-79 to P-81

J anuary 20 14

August 2014

Total VAT Payments

P-90 to P-92

VAT Paid

p 929,266.21 209,556.81 p 1,138,823.02 Upon recomputation, petitioner's deficiency VAT liability assessment for the taxable year 20 14 should be cancelled, thus:

Taxable Receipts per return Add: Receipts not Subjected to VAT Taxable Sales as adjusted

Output Tax Due

Less: Input Tax claimed per return

Less: Input Tax Carried Forward to Succeeding Period

VAT Payable

Less: Payments per VAT returns

Basic Tax Due

III. Expanded Withholding Tax p 8,980,365.03 2,0 38,090.63 p 62,618,614.42 3,211,281.69 p 65,829,896. 11 p 7,899,587.53 6,942,274.4 p 957,313.13 1' 138,823.02 (P 181,509.89) In addition to petitioner's rentals and professional fees previously found by respondent as not subjected to withholding tax, the following expenses are likewise found to be not subjected to withholding tax, thus, assessed for deficiency EWT in the total amount ofP35,976.54: CHI-- .• ..

ISMS Technology Ph!Ys. Corporation vs. Commissioner of I nternal Revenue

Schedule 4

Expense/ Income

Payments

Purchase of sewices &

Contractors:

Fuel and Oil

Office Supplies

Repairs and Mainten ance

Acquisition of Equipment

Direct Charges-Materials,

Supplies and Facilities

Sub-total

Less: Importation s

Per ITR

Per Alphalist/

Disallowed

Expenses

1601-E

J>

117,021.00 379,082.00 101,623.00 2,465,390.00 46,525,080.00 p 49,588,196.00 18 ,271 ,392.82

Rate

EWT Due

TOTAL

p 3 1,3 16 ,803.18 p 30,058,128.30 P1,258,674 .88 1% p 12,586.75

Add: EWT (Schedule 1)

TOTAL

23 ,389.79 p 35,976.54 Again, petitioner insists that it withheld and remitted all the required withholding taxes on its payments for rental and professional fees. However, as previously discussed, without supporting documents submitted as evidence, petitioner's mere assertion cannot overcome the presumption of regularity of respondent's assessment.

With regard to the additional EWT assessment of P12,586.75, petitioner avers that it cannot be assessed as the company is n ot listed as on e of th e Top Twenty Thou s and Corporations by the BIR. 73 However, the Court notes that in its monthly remittance returns, petitioner actually withheld as a Top 20,000 Corporation on income payments to local suppliers of goods and services:

Tax Required

Exhibit

Mon th

Tax Base

Tax Rate

to be Withheld

P-132

May

p 5,001,382.61 1% p 50 ,013 .83

P-134

Jun

1,509,730.00 1% 15,097.30

P-136

Jul

9 19,943.00 1% 9,199.43 206 ,156.50 2% 4, 123.13

P-138

Aug

2 12,456.17 2% 4,249. 12 524,666.00 1% 5 ,246.66

P-140

Sep

1,219,593.97 2% 24,391.88 1,800,250. 11 1% 18,002.50

P- 142

Oct

841,647.10 2% 16,832.94 3,140,713.34 1% 31,407.13

P- 144

Nov

1,87 1,810.50 2% 37,436.21 73 Paragra ph 11 , III. Discu ssion/ Arguments, Memorandu m for Petitioner, Docket - Vol. II, p. 1029. ~ , ;

/BMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

P-146

Dec

6 ,961,820.00 2 ,774,341.00 1,173,528.00 1% 2% 1% 69,618.20 55,486.82 11,735.28 Again, for failure of petitioner to submit evidence to prove otherwise, the assessment for deficiency EWT in the amount of P35,976.54 is upheld.

IV. Withholding Tax on Compensation As previously discussed, respondent's examiner found salaries and wages that were not subjected to withholding tax on compensation, hence the expense was disallowed as a deduction from gross income. The corresponding withholding tax liability is likewise assessed herein:74

Schedule 2:

Salaries and Wages Per FSI ITR

Less: Salaries and Wages per 1601C

Salaries & wages not subjected to withholding tax

Multiplied by

Basic Deficiency Withholding Tax

p 1,209,036.44 p 4,927,985.28 p 25,405,954.00 5,291,795.95 P20, 114,158.05 24.5341% p 4 ,934,827.65 To recall, the Court found that only the non-taxable fringe benefits amounting to P135,835.60 can be considered. Accordingly, petitioner is liable for deficiency withholding tax on compensation in the adjusted amount of P4,901,501.61 , computed as follows:

Salaries & wages not subjected to withholding tax Mu ltiplied by:

Basic Deficiency Withholding Tax on Compensation

V.

Final Withholding Tax

p 1,209,036.44 p 4,927,985.28 p 19,978,322.45 24 .5341% , 4,901,501.61 Respondent's verification disclosed that petitioner failed to withhold and remit the FWT on the cash dividends declared

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue amounting to P600,000.00, hence, assessed pursuant to Section 2.57 .1 of RR No. 2-98, as amended. Petitioner counters that the final tax amounting to P840,000.00· was paid and remitted, although BIR Form No. 1601-E was used instead of BIR Form No. 1601-F.75 However, petitioner's Monthly Remittance Return of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601-E) for the month of April 2014 and the corresponding proofs of payment were denied admission as evidence by the Court. 76 Thus, for petitioner's failure to proffer evidence to support its claim, the following deficiency FWT assessment should remain:77

Schedule 5 :

Cash dividends Multiplied by: Tax rate

Basic Deficiency Final Withholding Tax

VI.

Documentary Stamp Tax

t> 6,000,000.00 10% p 600,000.00 Respondent's examiner found that petitioner failed to pay the DST on its advances pursuant to Section 179 of the NIRC of 1997, thus, petitioner was assessed as follows:78

Schedule 6 :

Advances from related parties

Multiplied by DST Rate

Basic Deficiency Documentary Stamp Tax

p 5,000,000.00

X

p 1.00 I P200.00 p 25,000.00 Petitioner counters that the subject amount pertains to its "Deposit for Future Subscription and that the proposed increase in capitalization was still pending with the SEC. Hence, subjecting the said deposit to 'Stamp on Debt Instruments' xxx 1s premature as there was no debt 75 Paragraph V of Exhibit "P-17", Docket - Vol. II, p. 472. See also Paragraph 13, III. Discu ssion/ Arguments, Memorandum for Petitioner, Docket - Vol. II, p. 1030.

" ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue instrument then issued."79 However, petitioner failed to support its allegation with documentary evidence. As a consequence, the foregoing assessment should be upheld. VII. Improperly Accumulated Earnings Tax

Respondent's

investigation disclosed that petitioner accumulated retained earnings and profits instead of having them distributed as dividends, h ence, the latter assessed for IAET pursuant to Section 29 of the 1997 NIRC, as amended, and implemented by RR No. 2-2001, as follows:so

Schedule 7

Taxable income for the year Less: Income tax paid Dividends declared

Total

Add: Retained Earnings from prior years Accumulated Earnings as of Dec. 31, 2014 Less: Amount that may be retained

Improperly Accumulated Taxable Income

IAET Rate

Improperly Accumulated Earnings Tax

P2,351 ,821. 10 6,000,000.00 f> 7,749,577.00 8,351,821.10 p (602,244.10) 29,528,732.00 p 28,926,487.90 500,000.00 p 28,426,487.90 10% p 2,842,648. 79 Petitioner avers that it appropriated its retained earnings for the acquisition of a land/property to be used for its office, considering the high cost of rentals in Makati City and for future expansion.81 To support its allegation, petitioner submitted a Secretary's Certificate dated J uly 15, 2020.82 A reading of the said Secretary's Certificate ·reveals that at the special meeting of the Board of Directors of the corporation on February 8 , 2015, petitioner declared a cash dividend in the amount of P4,000,000.00 to qualified stockholders of record as of December 31, 20 14, which will be paid on or before April 25, 2015.

Other documents submitted by petitioner purportedly supporting its contentions were denied admission as evidence, 79 Paragraph 14, III. Discussion/ Arguments, Memorandum for Petitioner, Docket- Vol. II, p. 1030.

80 Exhibit "P- 16", BIR Records, p. 534. 81 Paragra ph 15, III. Discu ssion / Arguments, Memorandum for Petitioner, Docket- Vol. II, p. 1030.

82 Exhibit "P-12", Docket- Vol. II, p. 466. ~

L ~

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue hence, cannot be considered, namely, the Board Resolution dated April 25, 2014, the Secretary's Certificate dated March 18, 2021 of the board meeting on April 25, 2014, and the appraisal report dated April 17, 2016. Pursuant to Section 3 of RR No. 2-2001, the following constitute accumulation of earnings for the reasonable needs of the business:

"SECTION 3. Detennination of Reasonable Needs of the Business. xxx For purposes of these Regulations, the following constitute accumulation of earnings for the reasonable needs of the business:

a . Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years;

b. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body;

c. Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body;

d. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement;

e. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its dis tri bu tion;

f. In the case of subsidia ries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/ or relevant documentary evidence."

(Emphasis

supplied) However, petitioner failed to prove that the appropriation of its retained earnings is for the reasonable needs of the business for lack of eviden ce. On the other hand, examination of petitioner's Balance Sheet as of December 3 1, 2014 shows that petitioner's capital ~ l -

" ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue stock amounts to P5,000,000.00,83 not P500,000.00 as determined by respondent's examiner. Thus, respondent's computation of IAET should be adjusted accordingly. Pursuant to the foregoing, petitioner's deficiency IAET should be P1,992,648.79, computed as follows:

Taxable income for the year Less: Income tax paid Dividends declared - 2014 Dividends declared - 2015

Total

Add: Retained Earnings from prior years Accumulated Earnings as of Dec. 31, 2014 Less: Amount that may be retained

Improperly Accumulated Taxable Income

IAET Rate

Improperly Accumulated Earnings Tax

Com promise penalty I" 2,351,821.10 6,000,000.00 4,000,000.00 p 7,749,577.00 p 12,351,821.10 p (4,602,244.10) 29,528,732.00 p 24,926,487.90 5,000,000.00 I" 19,926,487.90 10% p 1,992,648.79 Respondent also imposed a compromise penalty of P80,000.00 for the following violations:84 Nature ofViolation Failure to file and pay the improperly accumulated earnings tax return Failure to file and pay the documentary stamp tax return Failure to file and pay the final withholding tax return

TOTAL

Violated Provision

Section 29, NIRC Section 179, NIRC Section 255, NIRC

Amount Due

p 40,000.00 30,000.00 10,000.00 I' 80,000.00 Respondent's basis for the foregoing is Section 255 of the NIRC, as amended .85 Su ch imposition cannot be su stained.

Under Revenue

Memorandum

Order

("RMO")

No.

007-15, compromise pen alties are only amounts su ggested in settlement of criminal 83 Schedule 10, Line 13, Exhibit "P- 13", BIR Records, p. 276. See also BIR Records, p. 265.

84 Exhibit "P-16", BIR Records, p. 533. ·-- ___....- 85 Exhibit "P-16", BIR Records, p. 533. ~

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""" ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue liability, and may not be imposed on or exacted from 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 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.s6 Absent a showing that herein petitioner consented to the compromise penalty, its imposition should be cancelled. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized.87 To recapitulate, petitioner is liable for the following basic deficiency taxes for the year 2014: Type ofTax Income tax

Expanded Withholding Tax (EWT)

Withholding Tax on Compensation (WTC)

Final Withholding Tax (FWT)

Documentary Stamp Tax (DST)

IAET

TOTAL

Basic Deficiency

~ 6,510,495.44 35,976.54 4,901,501.61 600,000.00 25,000.00 1,992,648.79 p 14,065,622.38 In addition to the foregoing basic deficiency taxes, petitioner is liable to a penalty of 25o/o surcharge imposed on the basic deficiency taxes pursuant to Section 248(A)(3) of the 1997 NIRC, as amended, which provides: "SEC. 248. Civil Penalties.-

(A)

There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases:

XXX

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; xxx" 86 The Philippines International Fair, Inc. vs. The Collector of Internal Revenue et al., G.R. Nos. L-12928 and L-12932, March 31, 1962, 4 SCRA 781. 87 Commissioner of Internal Revenue vs. Liangga Bay Logging Co., Inc. and the Court of Tax Appeals, G.R. No. 35266, J anuary 2 1, 1999, 193 SCRA 92-93. ~ l ...., "

ISMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Moreover, petitioner is liable to pay the deficiency interest at the rates of 20°/o per annum computed from the date prescribed for its payment until December 31, 2017 and 12°/o computed from January 1, 2018, upon the effectivity of the TRAIN Law, until the demand made by the Commissioner or his authorized representative on February 5, 2018, in accordance with Section 249(B) of the 1997 NIRC, as amended by TRAIN Law.

To recall, the FAN issued by respondent states:ss "In view thereof, you are requested to pay your aforementioned deficiency tax liabilities through the duly authorized agent bank in which you are enrolled using the electronic BIR Payment Form (eBIR Form 0605) within the time as shown in the enclosed assessment notice. xxx" The said Assessment Notices show a due date of February 5, 2018.89 Likewise, petitioner is liable to pay the delinquency interest at the rate of 12°/o per annum imposed on the basic deficiency tax, 25°/o surcharge and deficiency interest computed from February 5, 2018 until full payment thereof pursuant to Section 249(C) of the 1997 NIRC, as amended. Thus, for the taxable year 2014, petitioner is liable to pay the aggregate amount of P25,345,346.56, consisting of basic deficiency taxes, surcharges, and deficiency interest computed as of February 5, 2018, detailed as follows: Basic deficiency tax

Add:

25% Surcharge

Deficiency Interest on:

Income Tax

20% from April 16, 20 15 to Dec. 31, 2017 (P6,510,495.44 X 20% x 9911365 days) 12% from Jan. 1, 2018 to Feb.

5, 2018 (P6,510,495.44 X 12% X 36/365 days)

Income Tax

EWT

WTC

p 6,510,495.44 p 35,976.54 p 4,901 ,501.61 1,627,623.86 8,994.14 1,225,375.40 3,535,288.21 77,055.73

erA Case No. 9970 IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

EWT

WTC

20% from Jan. 2 1,2015 to Dec. 31,2017 (P35,976.54 x 20%x 1,076/ 365 days) 12% from Jan. 1, 20 18 to Feb. 5, 2018 (P35,976.54 X 12% X 36/365 days) 20% from Jan. 21, 20 15 to Dec. 31, 2017 (P4,901,501.61 X 20% x 1,076/365 days) 12% from Jan. 1, 2018 to Feb.

5, 20 18 (P4,901,501.61 X 12% x 36 365 da s Total Amount Due on February 5, 2018

Basic Deficiency Tax

Add:

25% Surch arge

Deficiency Interest on:

FWT

DST

IAET

20% from Jan. 2 1,2015 to Dec. 3 1,2017 (P600,000.00 X 20% X 1,076/365 days) 12% from Jan. 1, 2018 to Feb.

5, 2018 {P600,000.00 X 12% X 36/ 365 days) 20% from Jan. 6, 2015 to Dec.

31, 2017 (P25,000.00 X 20% X 1,081/365 days) 12"/o from Jan. 1, 2018 to Feb. 5, 2018 (P25,000.00 X 12% X 36/365 days) 20% from Jan. 16, 2016 to Dec. 31, 2017 (P1 ,992,648.79 X 20% x 1,076 I 365 days) 12% from Jan. 1, 2018 to Feb.

5, 2018 (P1,992,648.79 x 12%x 36 365 da s Total Amount Due on February 5, 2018

TOTAL AMOUNT DUE

21,211.37 425.80 2,889,871.63 58,012.29 P11,750,463.24 P66,607.85

P

9 ,074,760.93

FWT

DST

IAET

p 600,000.00 p 25,000.00 p 1,992,648.79 150,000.00 6,250.00 498, 162.20 353,753.42 7, 101.37 14,945.21 295.89 78 1,773.44 23,584.23 p 1,110,854.79 P46,491.10 P 3,296,168.66 p 25,345,346.57 In addition, petitioner is liable for delinquency interest at the rate of 12°/o per annum on the respective total amounts still due on February 5, 2018, computed from February 6, 2018 until full payment thereof pursuant to Section 249(C) of the 1997 NIRC, as amended by TRAIN Law and implemented by Revenue Regulations No. 21 -2018.

WHEREFORE, the instant Petition for Review 1s PARTIALLY GRANTED. Respondent's VAT assessment and the compromise penalties are CANCELLED for lack of merit, while the assessments for deficiency income tax, EWT, WTC, FWT, DST and IAET are UPHELD, but with modification. Accordingly, petitioner is ORDERED TO PAY respondent the following: ~ ~ j

IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

Deficiency

Interest as of

Basic Deficiency

25% Surcharge

Feb. 5,2018

Income Tax

p 6,510,495.44 I' 1,627,623.86 I' 3,612,343.94

Expanded

Withholding Tax

(EWT)

35,976.54 8 994.14 21,637. 17 Withh olding Tax on

Compensation

(WTCJ

4,901,50 1.61 1,225,375.40 2,947,883.92

Final Withholding

Tax (FWT)

600,000.00 150,000.00 360,854.79

Documentary

Stamp Tax (DST)

25,000.00 6 ,250.00· 15,241.10

IAET

1,992,648.79 498,162.20 805,357.67

TOTAL

¥14,065,622.38 ¥3,516,405.60 ¥7,763,318.59

Total

I' 11,750,463.24 66,607.85 9,074,760.93 1' 110,854.79 46,491.10 3,296,168.66 P25,345,346.57 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of twelve percent (12°/o) per annum on the total amount due of P25,345,346.57 as of February 5, 2018, as determined above, or equivalent to the amount of P8,332.7290 per day, computed from February 6, 2018 until full payment thereof pursuant to Section 249(C) of the 1997 NIRC, as amended by TRAIN Law and implemented by Revenue Regulations No. 21-2018.

WE CONCUR:

~·7.~ CATHERINE T. MANAHAN

Associate Justice

Presiding Justice

~ ~ {~-~(~ MARIAN IViJF. REdS-FAJ'ARDO

Associate Justice

90 P25,345,346.57 multiplied by 12% divided by 365 days.

CfA Case No. 9970 IBMS Technology Phils. Corporation vs. Commissioner of Internal Revenue

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is here by 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.

Presiding Justice