FIRST DIVISION
**** *********
ACOSTA, Chairperson
-versus - BAUTISTA, and
CASANOVA, JJ.
BAUTISTA, J.:
Before this Court is a Petition for Review praying for t he cancellat ion and
petitioner for taxable year 1997, in t he sum of TVVO HUNDRED FIFTY NINE MILLION
p
Undeclared sales 18,919,837.00
Royalty 15,050,738.69 448,096,593.15
Net income per audit p 323,709,637.15
Tax due p 113,298,373.00
DECISION
C.T.A. CASE NO. 6385
Page 2 of 31
Petitioner is a corporation duly organized and existing under the laws of the
Philippines, with principal office at the MMPC Building, Ortigas Avenue Extension,
Cainta, Rizal. 1
empowered to perform the duties of said office, including, among others, the power
March 21, 2001 from the BIR Revenue Region No. 7, Quezon City, covering alleged
deficiency income tax for taxable year ended December 31, 1997 in the amount of
On April 16, 2001, petitioner filed its Reply to the Preliminary Assessment
On April 20, 2001, petitioner received the Final Assessment Notice dated April
11, 2001 under Demand No. 46101 and Assessment No. 000009, covering deficiency
income taxes in the total amount of P259,811,285 .50, with the following details: 5
1
Par. 1, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 96 .
2
Par. 2, JSFI, Docket, p. 96.
3
Par. 3, JSFI, Docket, p. 96.
4
Par. 4, JSFI, Docket, p. 97.
5
Par. 5, JSFI, Docket, p. 97 .
DECISION
C.T.A. CASE NO. 6385
Page 3 of 31
6
Par. 10, JSFI, Docket, pp . 98-99.
DECISION
C.T.A. CASE NO. 6385
Page 4 of 31
On May 11, 2001, petitioner, through its tax counsel, SGV & Co., filed a letter
protesting the foregoing Final Assessment Notice with the BIR Revenue Region No.
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DECISION
C.T.A. CASE NO. 638S
Page 5 of 31
7, and requesting that the same be cancelled or withdrawn for lack of legal or factual
bases. 7
On May 23, 2001, counsel for petitioner received a letter from BIR Revenue
Region No. 7, stating that the case relating to the Final Assessment Notice No.
000009 had been forwarded to the BIR Revenue District Office No. 46,
On July 9 and 10, 2001, within the reglementary sixty (60)-day period
provided by law for the submission of all relevant supporting documents, petitioner
filed with BIR RDO No. 46 of Cainta/Taytay, Rizal the pertinent documents in support
As of January 6, 2002 or after the lapse of one hundred eighty (180) days
from the date of filing of all relevant supporting documents, respondent had not
acted on petitioner's protest letter. In accordance with Section 228 of the Tax Code,
petitioner is given an option to file with this Court a Petition for Review within thirty
days from the expiration of the aforesaid 180-day period of inaction of respondent.
Hence, on February 4, 2002, petitioner filed the instant Petition for Review.
On April 26, 2002, respondent filed his Answer raising several Special and
Affirmative Defenses. 10
Trial proceeded and petitioner submitted its evidence, while respondent was
On December 12, 2007, the case was submitted for decision considering
Memorandum. 12
I
7
Par. 8, JSFI, Docket, p. 98.
8
Par. 11, JSFI, Docket, pp. 99-100.
9
Par. 9, JSFI, Docket, p. 98.
10
Docket, pp. 55-59.
11
Resolutio n dated August 15, 2007, Docket, pp. 827-828.
12
Docket, p. 905.
DECISION
C.T .A. CASE NO. 6385
Page 6 of 31
The following are the stipulated issues submitted for the Court's resolution:
P108,913,892.25 on the ground that the loans from which the interest arose were
not connected with the taxpayer's trade or business, pursuant to Section 29(a)(1)(A)
13
BIR Records, p. 665.
DECISION
C.T.A. CASE NO. 6385
Page 7 of 31
Manager for Accounting Department, testified that petitioner needed the said loans
its Income Tax Return for taxable year 1997, showed the following: 15
Mr. Almario explained that petitioner only obtained loans when the Asian
economic crisis hit the country in 1997 which resulted in the devaluation of the peso
shown in the decrease of net sales and increase in payables, receivables and
inventory. Consequently, it needed more funds to pay for its foreign currency-
argues that it only had an average of P450 million investments in 1997, contrary to
erroneous figure by adding all the debits recorded in the Short-Term Investments
account without considering the fact that these represented mere roll-overs of the
14
15
16
17
18
TSN, dated December 9, 2002, pp. 20-25 .
Exhibit'' A" .
Exhibits "X" to "X-3".
Exhibit " A-3- 2".
Letter to BIR dated May 10, 2001, from SGV & Co, BIR Records, pp. 1025-1034.
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DECISION
C.T.A. CASE NO. 638S
Page 8 of 31
respondent concluded that the loan proceeds obtained by petitioner were invested in
without obtaining any evidence corroborating such findings. Hence, this Court
corporations more than fifty per centum in value of the outstanding stock of each is
owned, directly or indirectly, by or for the same individual, if either one of such
corporations, with respect to the taxable year of the corporation preceding the date
of the sale or exchange was under the law applicable to such taxable year, a
19
G.R. No. L-13656, January 3 1, 1962.
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DECISION
C.T.A. CASE NO. 638S
Page 9 of 31
Almario, testified that this interest expense refers to its account with Nissho Iwai
Corporation, an affiliate in Japan. 20 Petitioner, through its tax counsel SGV & Co.,
outstanding capital stock and Nissho Iwai Corporation owns only 48.99997% of
Code of 1977, as amended, is not applicable to the present case and the Interest
20
TSN, February 27, 2003, pp. 16-17.
21
BIR Records, p. 1031.
22
Exh ibit "I-1".
23
TSN, February 27, 2003, p. 22.
DECISION
C.T.A. CASE NO. 6385
Page 10 of 31
amended provides:
petitioner argued that it dealt with these entities on an arm's length basis, thus, the
rent rates were based on existing market prices in 1997. 25 Contracts of lease
between petitioner and Bri lliante Realty Corporation 26 , petitioner and Diamante
The law explicitly provides that for rent expense to be deductible from
income for tax purposes, the taxpayer should have no equity to the property being
rented. Hence, this Court finds the disallowance of petitioner's rent expense paid to
24
BIR Records, p. 432.
25
BIR Records, pp. 1030-1031.
26
Exhibits "J" and " K".
27
Exhibit " L".
DECISION
C.T.A. CASE NO. 6385
Page 11 of 31
respondent disallowed petitioner's claimed direct labor, salaries and wages in the
free bonus and tax free monetized vacation leave credits of petitioner's employees,
respectively, in arriving at the salaries and wages of employees per alphalist in the
31
amount of P585,670,480.09, as shown below:
Bernaldo, the difference between the amount of direct labor, salaries and wages per
books vis-a-vis the amount shown in the alphalist should be P94,397,173.03, instead
of P37,160,143.50, to wit:
28
BIR Records, p. 609.
29
BIR Records, pp. 4 34-436.
30
Exhibit " M-4" to " M-6".
31
Exhibit " M-6".
DECISION
C.T.A. CASE NO. 6385
Page 12 of 31
Per alphalist:
Employees p 528,433,450.56
Managers 73,990,404.41 602,423,854.97
Difference p 94,397,173.03
I
32
Exhibit " AAA", Annex "C.1".
33
Exhibit'' AAA", Annex "C.2".
DECISION
C.T.A. CASE NO . 638 5
Page 13 of 31
vouchers and payroll summaries, which proved payment of the aforesaid benefits in
1977, as amended, and Section 2(b)(3) of Revenue Regulations No. 12-86, SSS,
Medicare and Pag-ibig Contributions are excluded from the computation of gross
compensation. Also, petitioner's claimed deduction for group life insurance and
group and accident insurance for its employees are not subject to withholding tax in
accordance with Section 28(b)(1)(5) of the National Internal Revenue Code of 1977,
as amended.
Christmas package, office uniforms, death benefit, employee news media and others
provides:
34
Exhibits "CCC-1" to "CCC-307".
DECISION
C.T.A. CASE NO. 638S
Page 14 of 31
Petitioner did not submit documents from which this Court can verify whether
income.
B. Efficiency Variance
income.
C. Temporary Differences
it is shown that the tax required to be deducted and withheld therefrom has been
paid to the Bureau of Internal Revenue, whether the same is paid or payable. Since
was not subjected to withholding tax during the year it was claimed as an expense,
D. Unaccounted Difference
from petitioner's gross income. However, it should be noted that the Salaries and
Wages per Alphalist should be P602,423,854.97 and not P602,423,851.97; and the
P5,170,801.97.
)
DECISION
C.T.A. CASE NO. 6385
Page 16 of 31
In sum, petitioner failed to prove that it withheld the tax due on the claimed
follows:
V. Rental Expense
P16,795,188.87 for the latter's alleged failure to withhold the tax due thereon
Income Payment
Payee Not Subjected to EWT
PerFS Per Al~halist
A. Luz p 545,455.00 p 818,181.80
A. Yu 650,000.00 780,000.00
AE & E Dev. Corp. 831 ,875.00 878,460.00
Blanquita Gonzales 818,526.00 848,842.20
PI Leasing Corp. 15,470,630.67 p 15,470,630.67
Brill ante 28,703,600.00 35,879,500.00
Brillante 7,172,727.00
Century Iron Works 94,585.06 1,444,451 .60
Citimotors 168,800.00 171 ,690.00
CTM Mgt. Corp. 1,398,778.00 3,087,000.00
Daiya Sales 3,823,920.45 3,888,542.80
Diamante 2,040,000.00 20,400,000.00
Diamante 18,360,000.00
Dr. Erlinda Germar 570,000.00 600,000.00
Dr. F. Inocencio 756,000.00 756,000.00
Edita Cheng 40,000.00 480,000.00
Felina Bravo 240,000.00 240,000.00
Generations Prop., Inc. 867,273.00 1.426,363.60
35
BIR Records, pp. 609-610.
(
DECISION
C.T.A. CASE NO. 6385
Page 17 of 31
expense per petitioner's financial statements and per alphalist in the amount of
6
P11,583,908.66/ as follows:
A scrutiny of the above computation reveals that both the respondent and the
petitioner's financial statements, but they differed in the amount of rent expense per
I
36
Exhibit "AAA", Annex " B".
DECISION
C.T.A. CASE NO. 6385
Page 18 of 31
by Monthly Remittance Returns of Income Taxes Withheld (BIR Form 1743W)38 and
Final Withholding Taxes (BIR Form 1604) 39 with Alphalists; while rental payments
This Court finds the first and third reconciling items in order, but the rest are
not. Pursuant to the previously quoted Section 29U) of the National Internal
Revenue Code, as amended, the 1997 rent expense not subjected to withholding tax
in the amount of P7,391,936.23 and the 1997 accrual of rent expense subjected to
cannot be deducted from petitioner's taxable gross income because petitioner did not
withhold the corresponding taxes at the time they were claimed as expenses.
37
Exhibit " AA".
38
Exhibits " BB", "CC", "DD", " EE", " FF", "GG" and " BBB-397" to " BBB-433 ".
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39
Exhibit "N".
40
Exhibits " BBB-1" to " BBB-396" .
DECISION
C.T.A. CASE NO. 6385
Page 19 of 31
corresponds to the discrepancy between income payment (rental) per alpha lists
41
BIR Records, p. 785.
42
I
BIR Records, p. 610.
DECISION
C.T.A. CASE NO. 638S
Page 20 of 31
between petitioner's recognition of rent expense in its books and the withholding of
Upon verification, some of the rental payments listed in the alphalist44 were
supporting documents, such as rent contracts and statements of account from the
lessors, to wit:
However, payments made in taxable year 1997 to the following lessors were
not supported:
43
44
BIR Records, p. 1028.
Exhibit " N".
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DECISION
C.T.A. CASE NO. 638S
Page 21 of 31
disallowed by respondent for failure to withhold the required tax therefrom, pursuant
to Section 29U) of the National Internal Revenue Code of 1977, as amended. It was
computed as follows: 45
The Independent CPA found that the advertising expenses under item (a) in
I
45
BIR Records, p. 613.
46
Annex "D" of Exhibit " AAA".
DECISION
C.T.A. CASE NO. 638S
Page 22 of 31
and "the amounts are correctly lodged to the said accounts because these
from various dealers and income from sale of excess advertising materials in the
stated that:
adoption of accrual bases of accounting, this Court finds that the 1997 accrued
amended .
47
Exhibi t " AAA", p. 8 .
48
Ibid.
49
Exhibit " AAA", p. 8.
DECISION
C.T.A. CASE NO. 6385
Page 23 of 31
50
P62,474,730.94 and petitioner's supporting documents, the amount of
51
P20,556,262.32 pertaining to service cheques and adjustments should be
disallowed as deduction from petitioner's gross income, because petitioner did not
submit documents other than journal vouchers by which this Court could verify the
nature thereof.
claims and supplies for motor shows and others which do not fall in any of the
6-85, as amended.
P550,070.79, the same shall not be considered for lack of supporting documents.
advertising and sales promotion should be upheld but only to the amount of
I
50
An nex " D.2" of Exhibit " AAA" .
51
An nex "1 " of this Decision.
DECISION
C.T.A. CASE NO. 638S
Page 24 of 31
The Independent CPA accounted for the difference in unit sales 53 , as follows:
A. L300
The Independent CPA confirmed the examiner's findings and explained that
the discrepancy was due to the error in the classification of model when the sale
52
Exhibit "JJ "; BIR Records, p. S75 .
53
Exhibit " AAA", Annex " E" .
54
Exhibit " KK- 1".
55
Exhibit "KK- 2"/ BIR Records, p. 588 .
DECISION
C.T. A. CASE NO. 6385
Page 25 of 31
transaction was recorded. Instead of recording the sale for L300 Chassis Cab Model,
considered the shortage of 2 units L300 Chassis Cab Model and ignored the overage
is correct but the computation for the shortage should have been as follows:
Inasmuch as the L300 Van model costs more than the L300 Cab model, if the
shortage in the reported sales for the L300 Cab model is offset with the overage in
the reported sales for the L300 Van model, petitioner has no deficiency tax liability
B. Strada
Petitioner alleged that the 23 units Strada were imported from Japan as
completely built-up units (CBU) in the year 1996 and, as such, they did not appear in
the production report but were included in the inventory checklist and sales for the
year 1997.
I
56
Exhibit " AAA", p. 9.
57
Exhibi t " MM"; BI R Records, pp. 483-484 and 491 -493 .
58
BIR Records, p. 588 .
DECI SION
C.T.A. CASE NO. 6385
Page 26 of 31
Verification showed that the said units were indeed imported from Japan 59
and formed part of petitioner's beginning inventory60 and reported sales for the year
1997. 61 The discrepancy found by respondent's examiners was a mere result of their
erroneous computation of the number of units sold for the year 1997. Since the 23
units of Strada were not locally manufactured by petitioner, it was erroneous on the
part of respondent to base its computation for the total number of units sold solely
C. Adventure
for as follows: 10 units were capitalized as pool cars and 3 units were exported to
Mitsubishi Japan for testing. It is represented that these units were used for
prototyping and production trial runs. Petitioner presented vehicle invoices 62 and
journal voucher63 to prove the transfer of 10 units to its fixed assets account, and
export invoices 64 and journal vouchers 65 to prove the exportation of 3 units to Japan;
1997 66 showed that the 10 KZ vehicles were among the pooled cars . However,
petitioner did not submit a schedule of its export sales for the year 1997 for the
Court to ascertain and verify that the 3 units KZ Adventure were indeed among those
exported vehicles.
59
Exhibits " EEE-755" to " EEE-773".
60
Exhibi t " EEE-798"; BIR Records, p. 483-484.
61
Exh ibi ts " EEE-7 19" to " EEE-732"; Exhibits " EEE-733" to " EEE-754"; Exhibit " LL-3".
62
I
Exhibits " NN " to " NN -10".
63
Exhi bit " 00".
64
Exhibits " PP" to " PP-3-2".
65
Exhibits "QQ" and " RR".
66
BIR Records, pp. 562-563.
DECISION
C.T.A. CASE NO. 6385
Page 27 of 31
KZ Adventure
Unaccounted difference 3
Unit cost p 477,508.00
Total unaccounted sales p 1,432,524.00
IX Royalty
necessary expense for the reasons that it is for the know-how or technology in the
manufacture of vehicles and for petitioner to be able to sell the vehicles under the
brand name Mitsubishi (a trademark owned by MMO). Without the payment of the
royalties, petitioner will not be allowed to use the technology provided by MMO and
Corporation (PAMC) and Mitsubishi Motors Corporation (MMC) 69 , and the Certificates
of Registration Nos. 1848-A and 1849-A from the Bureau of Patents, Trademarks and
67
BIR Records, p. 664.
68
Letter to BIR dated May 10, 2001, p. 9; BIR Records, p. 1026.
69
Exhi bit " V".
DECISION
C.T.A. CASE NO. 6385
Page 28 of 31
Technology Transfer for the renewal of manufacturing and patent and technology
Corporation (MMC) dated March 22, 1995. It also presented the Certificate of Filing
of Amended Articles of Incorporation 72, showing the change of name from Philippine
In the case of Republic Planters Bank vs. Court of Appeals 73 , the High
Thus, the provision in Section 29(a)(1)(A) of the Tax Code of 1977 does not
apply and respondent's disallowance of the royalty expense is without legal basis.
I
70
Exhi bit " S".
71
Exhibit " U".
72
Exhibit " P".
73
G.R. No. 93073, December 21, 1992.
DECISION
C.T.A. CASE NO. 6385
Page 29 of 31
that it presented Certificates of Creditable Tax Withheld at Source [BIR Form 2307
(formerly Form 1743-750)] to respondent's examiners during the audit and sent
Section " E" of petitioner's Annual Income Tax Return 75 for taxable year 1997
showed total creditable taxes withheld for the said year in the amount of
P88,474,492.00. Petitioner's Summary of Income Tax Withheld for the year 199776
withheld 77 revealed that the fo llowing should also be disallowed for the reasons
herein stated:
computed as follows:
74
I
Exhibit "0".
75
Exhibit " A".
76
Exhibit " HH".
77
Exhibits "HH-1" to " HH-72".
DECISION
C.T.A. CASE NO. 6385
Page 30 of 31
delinquency interest computed from May 11, 2001 until full payment thereof
SO ORDERED.
WE CONCUR:
L\p. \'~
ERNESTO D. ACOSTA
Presiding Justice
CAESA~VA
Associate Justice
CERTIFICATION
consultation before the case was assigned to the writer of the opinion of the
Court's Division.
L~-c~
ERNESTO D. ACOSTA
Presiding Justice
Chairperson, First Division