NEXT MOBILE, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court ofTax Appeals QUEZON CITY Third Division NEXT MOBILE, INC., CTA CASE NO. 8516 Members: Pe ti ti on er, -versu s- Bautista, Chairperson Fabon-Victorino, and Ringpis-Liban, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. OCT 1 4 2015 X ----------------------------------------------------------------------------~-::=__!_~!_!_L:.-~~------------ X DECISION BA UTISTA, J: The Case1 This is a Petition for Review filed on July 13, 2012, pursuant to Section 7(a)(1) 2 of Republic A ct (" RA ")No. 11253, as amended by RA No. 92824 and RA No. 95035, seeking for the Court to nullify the Final Decision of responden t for p ayment of deficien cy incom e tax, interest an d com promise p en alty again st p etitioner for taxable year 2006 in the 1 Records, CfA Case No. 8516, pp. 6 and 24. 2 Sec. 7. Jurisdiction. -The Court of Tax Appeals shall exercise: (a) Exclusive appellate jurisd iction to review by appeal, as herein provided . (1) Decision s of the Commissioner of Interna l Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees o r other charges, penalties in relation thereto, or other matters arising und er the National Internal Revenue Code or other laws adminis tered by the Bureau of Internal Revenue. 3 An Act Creating the Court of Tax Appeals, as amended. 4 An Act Expanding the Jurisdictioll of the Court ofTax Appeals (CTA), Elevating its Rank to the Level ofa Collegiate Court with Special jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sectiolls of Republic Act No. 11 25, as amended, Otlzerwise K11own as the Law Creating the Court of Tax Appeals, and for Other Purposes. 5 An Act Enlarging the Orgmzizatiollal Structu re of tlze Cou rt of Tax Appeals, Amending for tlze Purpose Certain Sections of tile Law Creatillg tlze Court of Tax Appeals, and for Other Purposes. ~

DECISION CTA CASE NO. 8516 aggregate amount of Php79,320,554.30; and to order respondent to cancel the said assessment. The Parties6 Petitioner Next Mobile, Inc. is duly organized and existing under Philippine laws, with principal address at Next Mobile Building, 2244 Espana Avenue, Sampaloc, Manila. Respondent Commissioner of Internal Revenue ("CIR") is the government authority designated to collect all taxes, grant refunds, issue and abate assessments, and examine books of accounts and returns filed with it to determine the correctness of taxes paid under the 1997 National Internal revenue Code ("NIRC"). The Facts As stated in the Joint Stipulation of Facts and Issues ("JSFI")7 filed by registered mail on October 19, 2012, the factual antecedents of this case are as follows: 3. Next Mobile is authorized to construct, establish, operate and maintain radio paging systems and mobile communications services, and to install and operate corresponding radio transmitting and receiving stations and communication facilities in or outside the Philippines. 4. On 27 April2007, Next Mobile filed its Annual Income Tax Return or accomplished BIR Form 1702 ("2006 ITR") for taxable year 2006 with the Bureau of Internal Revenue ("BIR"). 5. On 21 September 2007, Next Mobile received a letter of authority 00000367 dated 18 September 2007 together with a "First Request for Presentation of Records" ("LOA 00000367") for the examination of Next Mobile's J books of accounts and other accounting records for all internal revenue taxes for taxable year 2006. ( � Id., Joint Stipulation of Facts and Issues ("JSFI"), pp. 152-159. 7 Id.

DECISION CTA CASE NO. 8516 6. On 9 October 2007, Next Mobile received the Second Request for Presentation of Records dated 27 September 2007 ("Second Request"). 7. On 15 October 2007, Next Mobile, through a letter dated 14 October 2007 ("14 October 2007 Letter"), requested for an extension of time or until 15 November 2007, within which to submit the required books of accounts in the Second Request in view of the examination being conducted by Next Mobile s external auditors of the said books of accounts. 8. On 16 October 2007, Next Mobile received the Final Request for Presentation of Records dated 10 October 2007 ("Final Request"). 9. On 19 February 2008, Next Mobile received the Summons and/ or Subpoena Duces Tecum dated 11 February 2008 ("Subpoena"). 10. On 29 February 2008, Next Mobile, in a letter dated 29 February 2008 ("29 February 2008 Letter"), submitted to the Regional Director, all the documents listed in the Subpoena. 11. On 4 May 2009, Next Mobile received a Notice of Informal Conference dated 30 April 2009 ("Notice of Informal Conference") from Respondent through Revenue District Office No. 32 ("RDO 32"). 12. On 30 July 2009, Next Mobile received a Revised Post Reporting Notice dated 29 July 2009 ("Revised Post Reporting Notice") from Respondent through RDO 32. 13. On 6 April 2010, Next Mobile received from Respondent, through Regional Director of Revenue Region No. 6 ("Regional Director"), a Preliminary Assessment Notice dated 25 March 2010 ("PAN") for deficiency income tax and compromise penalty allegedly due for CY 2006. 14. On 15 April 2010, Next Mobile received from ( Respondent, through Regional Director, a formal letter of

DECISION CTA CASE NO. 8516 demand [("FLD")] with final assessment notice dated 14 April2010 ("FAN") for the deficiency income tax, inclusive of interest, and compromise penalty in the aggregate amount of P 79,298,554.30 ("Deficiency Tax Assessment"). 15. On 14 May 2010, Next Mobile filed a written protest dated 13 May 2010 ("Protest") to the FAN. 16. On 8 June 2010, Respondent, through Regional Director, issued a letter: (1) informing Next Mobile that the entire docket of the case, including the protest, was forwarded to RDO 32; and (ii) instructing Next Mobile to address all communications to RDO 32 ("8 June 2010 Letter"). 17. On 11 June 2010, RDO 32 issued a tax verification notice authorizing Revenue Officers Dionisio Cruz, Jr. under Group Supervisor Alemar Sani to handle the internal revenue taxes of Next Mobile for taxable year 2006 which was the subject of the Protest. 18. On 13 June 2012, Next Mobile received a letter dated 08 June 2012 from the Regional Director ("[Final Decision]") reiterating the Deficiency Tax Assessment and requesting for the payment of the same, otherwise, the case will be forwarded to the Collection Division of Revenue Region No. 6. 19. On 6 July 2012, Next Mobile, through the undersigned, sent a letter dated 5 July 2012 to the Regional Director ("5 July 2012 Letter") stating that Next Mobile would treat the 8 June 2012 Letter as the Respondent's final decision on the Protest unless Next Mobile receives a written communication, on or before 13 July 2012, clarifying that the re-investigation would continue. 20. On 13 July 2012, Next Mobile filed the instant Petition for Review assailing the Deficiency Tax Assessment. 21. On 31 July 2012, Next Mobile received a letter l dated 27 July 2012 from the Regional Director (27 July 2012 Letter") informing Next Mobile that the docket of the case

DECISION CTA CASE NO. 8516 Page 5 o�49 was forwarded to the Collection Division of Revenue Region No. 6. 22. The following documents are authentic and duly executed: a. 2006 ITR; b. LOA 00000367; c. Second Request; d. Next Mobile's 14 October 2007 Letter; e. Final Request; f. Subpoena[;] g. Next Mobile's 29 February 2008 Letter; h. Notice of Informal Conference; 1. Revised Post Reporting Notice; j. PAN; k. FAN; 1. Protest; m. 8 June 2010 Letter; n. [Final Decision]; o. Audit Report on Income Tax for taxable year 2006; p. Audit Report on Income Tax-MCIT for taxable year 2006; q. Next Mobile's 5 July 2012 Letter; r. 27 July 2012 Letter addressed to Next ( Mobile;

DECISION CTA CASE NO. 8516 Page6of49 On August 31, 2012, respondent filed her Answer,s interposing the following Special and Affirmative Defenses: 14. RESPONDENT hereby adopts by way of reference all of the allegations in the foregoing paragraphs insofar as the same are material and relevant, and alleges that: The subject assessment has become final and executory; hence, not appealable to this Honorable Court. 15. Under Section 228 of the Tax Code of 1997, as amended, a tax assessment may be administratively protested by filing a request for reinvestigation or reconsideration within 30 days from receipt of due assessment notice. Within sixty (60) days from the filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final; 16. In the instant case, while a protest on the assessment was indeed filed on 14 May 2010, the subject taxpayer, however, failed to submit "relevant supporting documents" in support of its protest. A thorough perusal of the records of the case would show that the subject taxpayer merely submitted "schedules" of its claimed expenses and not" relevant supporting documents" as clearly required by law; 17. Therefore, considering that the subject taxpayer failed to submit documents in support of its protest, the Final Assessment Notice No. 30-06-IT0071 it received on 14 May 2010 has become final, executory and demandable. Accordingly, the said assessment ceases to be a disputed assessment and thus, the legality and validity thereof can no longer be the subject of a judicial inquiry in the instant Petition for Review (La Flor Dela Isabela, Inc. vs. ~~ CIR, CTA Case No. 7709, 09 June 2010); (- � Id., Records, pp. 58-61.

DECISION Cl'A CASE NO. 8516 Page 7 o�49 18. Moreover, without conceding to the claim that the subject assessment had attained finality, respondent respectfully submits that her letter dated 8 June 2012 addressed to the subject taxpayer cannot, in any way, be considered as a Final Decision which is appealable to this Honorable Court pursuant to its jurisdiction provided under Section 7 of Republic Act No. 1125, as amended; 19. Contrary to the claim of the petitioner, the respondent's letter dated 8 June 2012 is neither a demand letter nor a collection letter so as to [be considered] as a Final Decision of the respondent on the protest. Rather, said letter is a mere statement of the consequence of the failure to comply with the requirements to submit supporting documents within the 60-day period. Accordingly, the Honorable Court has no jurisdiction to entertain the instant Petition. Procedural due process has been complied with in the issuance of the assessment. 20. Verily, under existing rules and regulations, a final assessment notice (FAN) shall be issued after the taxpayer filed or failed to file a reply to the preliminary assessment notice within 15 days from receipt thereof (Revenue Regulations Nos. 12-85 and 12-99 and Revenue Memorandum Order No. 37-94); 21. However, it should be noted that the FAN in the instant case was not issued in total disregard of the right of the subject taxpayer to file a reply to the Preliminary Assessment Notice (PAN). Records show that the PAN was sent through mail to the subject taxpayer as early as 25 March 2010. After the lapse of sufficient period of time from the mailing of the PAN, it may be reasonably presumed that the subject taxpayer has received the PAN; 22. More importantly, it should be emphasized that a PAN is not indispensable and the issuance thereof may be dispensed with. In fact, the subject taxpayer is not obliged to protest the PAN and failure on its part to file a reply thereto will not result in the finality of the assessment. What the law requires is the issuance of FAN

DECISION CTA CASE NO. 8516 Page 8 o�49 which is in substantial compliance of what is mandated under Sec. 228 of the National Internal Revenue Code of 1997, as amended. (BPI vs. CIR, CTA Case No. 7397, 09 April 2008 and Direct Container Line Phils., Inc. vs. CIR, CTA Case No. 7676, 70 September 2009); 23. In the case of Commissioner of Internal Revenue vs. Menguito, GR No. 167560, 17 September 2008, the Supreme Court elucidated the indispensability of the PAN, thus: "It should be emphasized that the stringent requirement that an assessment notice be satisfactorily proven to have been issued and released, or if receipt thereof is denied, that said assessment notice have been served [onl the taxpayer, applies only to formal assessments prescribed under Section 228 of the NIRC, but not to post-reporting notices or pre-assessment notices. [sic] A post-reporting notices or pre-assessment notices do not bear the gravity of a formal assessment notice. The post-reporting notice or pre-assessment notice merely hint at the initial findings of the BIR against a taxpayer and invites the latter to an "informal" conference or clarificatory meeting. Neither notice contains a declaration of the tax liability of the taxpayer or a demand for payment thereof Hence, the lack ofsuch notices inflicts no prejudice on the taxpayer for as longll as the latter is properly served a formal assessment notice." (emphasis and underscoring supplied) 24. In the instant case, while the subject taxpayer was not able to respond to the PAN, it was, nevertheless, duly served with the PAN dated 25 March 2010. In fact, the subject taxpayer was not denied due process and no prejudice was inflicted against it because of the protest filed on 14 May 2010. Accordingly, its failure to file a reply to the PAN shall not be deemed as a deprivation of its right to procedural due process. ( Petitioner has the burden of showing the incorrectness of the subject assessment.

DECISION CTA CASE NO. 8516 Page 9 of49 25. The subject assessment is valid and correct and the petitioner has the burden of proof to impugn its validity (Behn Meyer & Co. vs. Collector of Internal Revenue, 27 Phil. 647). Thus, similarly held, tax assessments by examiners are presumed correct and made in good faith and the taxpayer has the duty to prove otherwise (Commission ofInternal Revenue vs. Construction Resources of Asia, Inc., 145 SCRA 671); and assessments duly made by the BIR examiner and approved by her superior officers will not be disturbed (Gutierrez vs. Villegas, 8 SCRA 547); 26. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but also that the taxpayer is right (Tan Guan vs. Court of Tax Appeals, et. al., 19 SCRA 903 [1967]; Collector of Internal Revenue vs. Bohol Land Transportation Co., 107 Phil 967 [1960]); 27. All presumptions are in favor of the correctness of the assessment made by the Commissioner of Internal Revenue; the taxpayer must prove the contrary (Commissioner of Internal Revenue vs. Antonio Tuason, Inc. 173 SCRA 397; Commissioner of Internal Revenue vs. Construction Resources ofAsia, Inc., 145 SCRA 671); 28. The assessments were issued in the regular course and within the reglementary period to assess provided by law. Respondent and petitioner filed their respective Pre-trial Briefs9 on September 21, 2012 and September 24, 2012. On October 19, 2012, the parties filed their JSFJlO by registered( mail, and thus a Pre-Trial Order11 was issued on November 16, 2012. 9 Id., pp. 84-90 and 91-102. to Id., JSFI, pp. 152-159. 11 Id., pp. 176-184.

DECISION CTA CASE NO. 8516 Page 10 of49 On August 22, 2013, petitioner filed its Formal Offer of Evidence,12 to which respondent filed her Comment13 on September 9, 2013. On October 1, 2013, the Court resolved14 petitioner's Formal Offer of Evidence, which was questioned by petitioner in its Motion for Partial Reconsideration15 dated October 29, 2013. There being no comment on the part of respondent, the Court issued a resolution16 thereon on January 14,2014. On June 9, 2014, respondent filed her Formal Offer of Documentary Evidence17, to which petitioner filed its Comments/Objectionsls on June 30,2014 by registered mail. On August 26, 2014, the Court resolved19 respondent's Formal Offer of Documentary Evidence and granted the parties thirty (30) days from receipt to file their respective memorandum. Petitioner filed its Memorandum20 by registered mail on September 29, 2014, followed by Respondent's Memorandum21 filed on October 28, 2014. Thus on November 3, 2014, the Court promulgated a Resolution22 submitting the case for Decision. Hence, this Decision. The Issues23 1. WHETHER THE COURT HAS JURISDICTION TO ( ENTERTAIN THE INSTANT PETITION FOR REVIEW; 12 Id., pp. 852-926. 13 Id., pp. 927-928. 14 Id., pp. 955-956. 1s Id., pp. 957-960. 16 Id., pp. 971-972. 17 Id., pp. 1045-1055, exclusive of annexes. 1s Id., pp. 1147-1161. 19 Id., pp. 1164-1165. 20 Id., pp. 1170-1196. 21 Id., pp. 1198-1206. 22 Id., p. 1208. 23 Id., JSFI, pp. 156-157.

DECISION CTA CASE NO. 8516 2. WHETHER THE RIGHT OF NEXT MOBILE TO PROCEDURAL DUE PROCESS UNDER SECTION 228 OF THE 1997 NIRC AND REVENUE REGULATIONS NO. 12-99 WAS VIOLATED WHEN RESPONDENT ISSUED THE FAN AND THE JUNE 8, 2012 LETTER. 3. WHETHER THE FAN HAS BECOME FINAL AND DEMANDABLE; 4. WHETHER RESPONDENT INDICATED IN THE FAN THE FACTS AND LAW WHY PETITIONER DID NOT INCUR AN OPERATING LOSS FOR CY 2006; 5. WHETHER THE DEFICIENCY TAX ASSESSMENT HAS FACTUAL AND LEGAL BASES; AND 6. WHETHER PETITIONER IS LIABLE TO PAY THE DEFICIENCY TAX ASSESSMENT. Petitioner's arguments Petitioner avers that the Court has jurisdiction to entertain the suit since respondent's letter dated June 8, 2012 is the decision appealable to the Court under Section 228 of the 1997 NIRC; that the assessment is not final, executory and unappealable as petitioner submitted all relevant documents in support of its protest; that the FAN and Final Decision were issued in violation of petitioner's right to procedural due process under Section 228 of the 1997 NIRC and Revenue Regulations ("RR") No. 12-99; that the tax assessments have no factual and legal bases since petitioner properly substantiated the expenses claimed as deductions and that the questioned expenses were either properly subjected to or exempt from withholding tax; that petitioner's taxable income was at a loss and not at the amount of zero, as claimed by respondent; that adding back of the net loss is void for being a wholesale disallowance of petitioner's expenses; and that petitioner is not liable for any compromise penalty for it did not , ( consent to the said imposition. Respondent's Counter-Arguments

DECISION CTA CASE NO. 8516 Page 12 of49 Respondent claims that the subject assessment is final and executory; that procedural due process has been complied with in the issuance of the deficiency assessment; and that the assessment provides the factual and legal bases required. The Ruling of the Court The Court finds partial merit in the Petition for Review. The Court has jurisdiction to entertain the present Petition for Review since the assessment has not yet attained finality. Respondent claims that the assessment has attained finality due to petitioner's non-compliance with Section 228 of the 1997 NIRC for failure to present relevant supporting documents in relation to its protest. Hence, the assessment may not anymore be questioned before this Court. A cursory reading of the relevant portions of Section 228 of the 1997 NIRC should shed light on this issue, as follows: SECTION 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 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

DECISION CTA CASE NO. 8516 Page 13 of49 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. The above provision provides the remedy to dispute a tax assessment within a certain period of time. It states that an assessment may be protested by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment by the taxpayer. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. Should the protest be denied, it may be appealed to the CTA within thirty (30) days from receipt of said denial. In the case of Commissioner of Internal Revenue v. First Express Pawnshop Company Inc.24, the Supreme Court explained that "relevant supporting documents" are those documents necessary to support the legal basis in disputing a tax assessment, as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents but cannot demand what type of supporting documents should be submitted.25 Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit.26 Thus, petitioner may choose to submit the ( 24 G.R. Nos. 172045-46, June 16,2009,589 SCRA 253. 15 Id. 26 Id.

DECISION CTA CASE NO. 8516 Page 14 o�49 protest even with no supporting documents without invalidating its protest.27 The lack of documentation will only matter in the BIR's evaluation of the merits of the said protest, but should not result in the finality of the deficiency assessment.28 Records reveal that petitioner received the FAN29 on April 15, 2010 and it had until May 17, 2010 to submit its protest since May 15, 2010 falls on a Saturday. On May 14, 2010, petitioner filed its Protest.3� Hence, petitioner has sixty (60) days from the filing of the said protest or until July 13, 2010, to submit relevant supporting documents, only if it chooses to do so. Petitioner has complied with the requisites in disputing an assessment pursuant to Section 228 of the 1997 NIRC and RA No. 1125 since it filed its protest three days before due date. Whether or not it submitted additional documents to prove its claim does not have a detrimental effect on its protest. On the issue of jurisdiction, Section 7 of RA No. 112531, as amended, grants the CTA the exclusive appellate jurisdiction to review the decisions of respondent in cases involving disputed assessments, fees or other charges, and penalties in relation thereto, or other matters arising under the 1997 NIRC. Further, Section 11 of RA No. 1125 32 27 Phil Foods Properties, Inc. v. Commissioner of Internal Revenue, CTA Case Nos. 8185 & 8238, December 3, 2014. '"Id. 29 Records, p. 1083. 30 Records, pp. 1058-1067. 31 SECTION 7. Jurisdiction.- The CTA shall exercise: a. Exclusive appellate jurisdiction to review by appeal, as herein provided: 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; xxx 32 SECTION 11. VVho May Appeal; Mode ofAppeal; Effect ofAppeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein. Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) J days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. A Division of the CTA shall hear the appeal: Provided, however, That with respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court in the exercise of its appellate jurisdiction appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 43 of the 1997 Rules of Civil Procedure with the CTA xxx

DECISION CTA CASE NO. 8516 Page 15 o�49 provides that any taxpayer adversely affected by a decision of the CIR may file an appeal with the CTA within thirty (30) days after the receipt of such decision. It is undisputed that on June 13, 2012, petitioner received the Final Decision of respondent dated June 8, 2012 on its protest, reiterating the assessment and requesting for payment of the alleged deficiency taxes stated therein.33 Therefore, it has until July 13, 2012 to file its appeal with the Court. Thus, on July 13, 2012, petitioner timely filed its Petition for Review34. On the basis of the foregoing, the tax assessment cannot be considered as final, executory and demandable; and the petitioner was correct in filing the present Petition for Review with the Court, which in turn, has jurisdiction to entertain the same. Petitioner's right to procedural due process was not violated by respondent when the latter issued the FAN ahead of the former's protest to the PAN. Petitioner argues that the FAN was issued in violation of its right to procedural due process under Section 228 of the 1997 NIRC and Revenue Regulations No. 12-99. One of the most basic and fundamental precepts of law enshrined in the Constitution is that no person shall be deprived of his property without due process of law.35 The concept of due process in tax assessments can be found in Section 228 ofthe 1997 NIRC and Section 3 ofRR No. 12-99. The previously-stated Section 228 of the 1997 NIRC provides that if the CIR finds that proper taxes should be assessed, the taxpayer shall be notified of the finding through a PAN. On the other hand, Section 3 of RR No. 12-99, states the detailed process which assessments should undergo to ensure that the taxpayer is accorded due process, to wit: " Records, JSFI, p. 155. 34 Id., pp. 6-29. 35 Article Ill, Section 1: "No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws."

DECISION CTA CASE NO. 8516 SECTION 3. Due Process Requirement m the Issuance ofa Deficiency Tax Assessment. - 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. - The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the

DECISION CTA CASE NO. 8516 facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be sufficient: (i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or (ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or (v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries )

DECISION CTA CASE NO. 8516 Page 18 of49 and spare parts, has been sold, traded or transferred to non-exempt persons. 3.1.4 Formal Letter of Demand and Assessment Notice. - The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. The above clearly provides the procedures to be undertaken by revenue officers in the issuance of a deficiency assessment. As stated therein, the taxpayer is given a fifteen (15)-day period from receipt of the PAN within which to reply. Failure to reply would make the taxpayer in default, and a FAN and FLD shall be issued. In the case at bar, the PAN was issued on March 25, 2010 and received by petitioner on April6, 201036. On April15, 2010, petitioner received the FAN dated April 14, 2015.37 Then on May 14, 2010, petitioner filed its protest to the FAN.38 While it is true that respondent did not await the lapse of the fifteen (15)-day period before the latter issued the FAN and FLD, the requirements for procedural due process under RR No. 12-99 were substantially complied with. ( 36 Records, JSFI, p. 154; pp. 1079-1081; Exhibit "GG." 37 Id., p. 154; p. 1083. 38 Id., p. 154

DECISION CTA CASE NO. 8516 Page 19 of49 A Notice of Informal Conference39 was received by petitioner on May 4, 2009 and in compliance with such notice, petitioner's representatives met with Ms. Alma Cayabyab on May 8, 2009.40 The purpose of the Informal Conference is to afford the taxpayer with an opportunity to present his side of the case. Thus, at that stage, petitioner was already given the opportunity to rebut the findings of the BIR. It must be noted that a protest against the PAN is not indispensable, unlike the protest against the FAN, and the fact of non- protest shall not, in any way, make the former final and unappealable.41 While the FAN was issued ahead of the fifteen (15)- day period, it inflicts no prejudice on petitioner, as long as the latter was properly served such FAN and that it was able to intelligently contest the FAN by filing a protest letter within the period provided by law.42 In the case of International Exchange Bank v. Commissioner of Internal Revenue43, the Supreme Court upheld the decision of the CTA En Bane in affirming the decision of the CTA Division in ruling that the taxpayer was accorded procedural due process even if the FAN was issued prior to the expiration of the fifteen (15)-day period to respond to the PAN. Therefore, the mere fact that petitioner received the FAN even before it had the opportunity to respond to the PAN is no basis for the claim of deprivation of due process since petitioner was given ample opportunity to explain itself through its meetings with BIR personnel, and it protests to the PAN as well as to the FAN. The deficiency tax assessment has factual and legal bases. As provided in the previously-cited Section 228 of the 1997 NIRC, taxpayers shall be informed in writing of the law and the facts on which the assessment is made, failure to do so shall render the said ) assessment void. "Id., p. 154; Exhibit "EE." 40 Exhibit "EE." 41 Global Metal Tech Corporation v. Commissioner of Internal Revenue, CTA Case No. 8329, September 23,2014. 42 Id. 43 G.R. No. 171266, April4, 2007, 520 SCRA 688.

DECISION CTA CASE NO. 8516 Page 20 o�49 An inspection of the FAN44 issued on April14, 2010 will reveal the breakdown of the total amount due, to be paid on or before May 17,2010: Tax Due j;1 49,530,346.44 Surcharge 25% - Interest (up to 04/15/2010) 29,718,207.86 Compromise Penalty 50,000.00 Total Amount Due II 79,298,554.30 The FLD45 dated April 14, 2010 provided further details of the Deficiency Income Tax and Compromise Penalty, to wit: Taxable Income per return Add: 50% Disallowances- sec. 6 (B), NIRqRMC 23-2000 unsupported exp.- sec. 34 NIRC Purchases 5,026,241.50 Salaries/wages & Benefits- Direct Cost/DE 16,606,693.00 Materials/supplies/facilities/ rental per BIR Form 1702 153,136,521.00 Less: Rental Inc. Site Switch perF/S 82,222,577.00 Materials & supplies 70,913,944.00 35,456,972.00 Ofher 4,144,631.00 Fringe Benefits 1,470,550.00 Membership fees 25,416.50 Repairs & Maintenance -supplies 3,735,476.00 Office Supplies 308,798.50 Interest expense 3,258,409.50 Insurance 1,583,668.50 Representation & Entertainment 1,047,274.50 Transportation & Travel 1,663,209.50 Communication., light & water 9,945,158.00 Recruitment & training 465,915.50 Administrative Expenses - others 154,041.00 Bills processing 919,782.00 Others 6,100,489.00 91,912,726.00 48,122,038.10 Not subjected to withholding tax- Sec. 34k, NIRC Commissions 206,450.00 Rental Inc. Site Switch per F/S 82,222,577.00 per 1601 48,516,682.20 33,705,894.80 Professional fee perBIR 1702 41,028,033.00 per BIR 1601 26,818,339.70 14,209,693.30 44 Records, p. 1083. �s Id., pp. 1084-1086.

DECISION 140,034,764.10 CTA CASE NO. 8516 49,012,167.44 Page 21 of49 (518,179.00) Taxable income per investigation 49,530,346.44 Tax Due 29,718,207.86 50,000.00 Less: tax credits /payments per return 3,875,794.00 4,393,973.00 79,298,554.30 Less: Unsupported BIR 2307 518,179.00 To applied to succeeding year 3,875,794.00 Deficiency Income Tax Due Add: 25% Surcharge 20% Interest p. a. from _ _ _ _ _ to 4/15/2010 (Sec. 249) Compromise Penalty (sec. 254 in relation to RMO 19-2007) TOTAL AMOUNT DUE & COLLECTIBLE Compromise Penalty- sec. 2SO NIRC 1,000.00 1,000.00 Non-filing of alphalist of income payments subject to withholding tax 4,000.00 Non-filing of alphalist of compensation 12,000.00 Non-filing of Quarterly Summary List of Sales 4,000.00 Non-filing of MAP 22,000.00 Non-filing of SAWT TOTAL AMOUNT DUE & COLLECTIBLE From the foregoing, it is evident that respondent clearly indicated the factual and legal bases of the assessment, viz.: Assessment Item Factual Basis Legal Basis Purchases 1210,052,483.00 Tentative ITR At 50% -Sections 6(B) and 34 of the SalariesI wages & Benefits - Direct 16,606,693.00 Tentative ITR 1997 NIRC; RMC No. 23-2000 Cost/OE 70,913,944.00 Tentative ITR; Materials/supplies/facilities/ rental AFS Section 34(K) of the 8,289,262.00 Tentative ITR 1997NIRC Other 2,941,100.00 Tentative ITR Fringe Benefits Tentative ITR Membership Fees 50,833.00 Tentative ITR Repairs & Maintenance - supplies 7,470,952.00 Tentative ITR Office Supplies Tentative ITR Interest Expense 617,597.00 Tentative ITR Insurance 6,516,819.00 Tentative ITR Representation & Entertainment 3,167,337.00 Tentative ITR Transportation & Travel 2,094,549.00 Tentative ITR Communication, Light & Water 3,326,419.00 Tentative ITR Recruitment & Training 19,890,316.00 Tentative ITR Administrative Expenses - Others Tentative ITR Bills Processing 931,831.00 Tentative ITR Others 309,082.00 Tentative ITR Commissions 1,839,564.00 AFS; BIR Form Rental Inc. Site Switch 12,200,978.00 1601 206,450.00 Tentative ITR; BIR Professional Fee 33,705,894.80 Form 1601 14,209,693.30

DECISION 29,718,207.86 Items assessed Section 249 of the CTA CASE NO. 8516 50,000.00 Items assessed 1997NIRC Page 22 of 49 Section 254 of the 22,000.00 Items assessed 1997 NIRC; RMO Interest No. 19-2007 Compromise Penalty Section 250 of the 1997NIRC Compromise Penalty Hence, petitioner's claim that the assessment has no factual and legal bases has no leg to stand on. Petitioner is liable to pay deficiency income tax and interest for taxable year 2006. On the outset, the Court would like to emphasize two things: (1) that assessments are presumed correct and (2) the Court is not bound by the findings of the Independent Certified Public Accountant ("ICPA"). Assessments by tax examiners are presumed correct and made in good faith and the taxpayer has the duty to prove otherwise.46 All presumptions are in favor of the correctness of tax assessments.47 In the absence of any proof of irregularity in the performance of duties, an assessment duly made by a BIR examiner and approved by his superior officers will not be disturbed.4B Failure to present proof of error in the assessment will justify judicial affirmation of said assessment.49 The Court has consistently ruled that it is not bound by the findings in the ICPA Report, which is a mere tool or guide to aid the Court in the resolution of the case. so Therefore, the determination of the merit or the probative value of such report is still within the province of the Court, which is free to adopt or disregard, completely or partially, the findings of the ICPA.51 In fact, the Court can make its 46 Sy Po v. Court of Appeals, G.R. No. L-81446, August 18,1988,164 SCRA 524. 47 Commissioner of Internal Revenue v. Bank of the Philippine Islands, G.R. No. 134062, April17, 2007, 521 SCRA 373. 48 Id. 49 Commissioner of Internal Revenue v. Court ofAppeals, G.R. Nos. 104151 and 105561, March 10, 1995,242 SCRA 289; Delta Motors Co. v Commissioner of Internal Revenue, CTA Case No. 3782, May 21, 1984. so The Abbas' Orchard School, Inc. v. Commissioner ofInternal Revenue, CTA Case No. 8377, ( November 4, 2014, citing Stateland, Inc. v. Commissioner of Internal Revenue, CTA Case No. 8457, November 28, 2013. '' Id.

DECISION CTA CASE NO. 8516 own evaluation of the documents presented during the trial in order to intelligently resolve the conflict brought before it.52 A. Deficiency Income Tax - 50% Rule Respondent's assessment on petitioner's deficiency Income Tax is based on the 50% Rule pursuant to Section 2.4(c) of Revenue Memorandum Circular ("RMC") No. 23-0053, to wit: 2.4 Existing Revenue Procedures and jurisprudence Governing Assessment Based on the Best Evidence Obtainable. Provided hereunder are the existing revenue procedures and jurisprudence governing issuance of a deficiency tax assessment based on the best evidence obtainable: XXX XXX XXX (c) Assessment Based on Estimate; 50% Rule, in Absence of Receipts to Prove Actual Amount of Expense Deduction. - The Court held in the Mariano Zamora case that, if there is a showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to absence of documentary evidence, it is the duty of the BIR to make an estimate of the deduction that may be allowable in computing the taxpayer's taxable income, bearing heavily against the taxpayer whose inexactitude is of his own making. That disallowance of 50% of the taxpayer's claimed deduction is valid. Section 34(A) of the 1997 NIRC provides the expenses which may be deducted from gross income and the substantiation requirements related thereto: SECTION 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under / 52 Id. 53 November 27, 2000.

DECISION CfA CASE NO. 8516 Page 24 of49 Sections 24(A}; 25(A); 26; 27(A), (B) and (C); and 28(A}(l), there shall be allowed the following deductions from gross mcome: (A) Expenses. - (1) Ordinary and Necessary Trade, Business or Professional Expenses. - (a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/ or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/ or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, ( taking into account the needs as well as the special

DECISION CTA CASE NO. 8516 Page 25 of49 circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the, development, management, operation and/ or conduct of the trade, business or profession of the taxpayer. XXX XXX XXX (B) Interest. - (1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness m connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax: Provided, That effective January 1, 2009, the percentage shall be thirty-three percent (33%). When a taxpayer claims a deduction, it must point to a specific provision of the statute authorizing such deduction and be able to prove entitlement thereto.54 The taxpayer must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed.55 There are three conditions for the deductibility of a business expense, vzz.: 54 Atlas Consolidated Mining and Development Corporation vs. Commissioner ofInternal Revenue, G.R. No. L-26911, January 27,1981,55 SCRA 5; Commissioner of Internal Revenue v. Atlas Consolidated Mining and Development Corporation and Court of Tax Appeals, G.R. No. L-26924, January 27, 1981, ....J 102 SCRA 246. \ 55 Id.

DECISION CTA CASE NO. 8516 Page 26 of49 1. the expense must be ordinary and necessary; 2. it must be paid or incurred within the taxable year; and 3. it must be paid or incurred m carrying on a trade or business. In the case of H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue,56 the Supreme Court ruled that the requisites for the deductibility of ordinary and necessary trade or business expenses, like those paid for security and janitorial services, management and professional fees, and rental expenses, are that: (a) the expenses must be ordinary and necessary; (b) they must have been paid or incurred during the taxable year; (c) they must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) they must be supported by receipts, records or other pertinent papers. The proper substantiation requirement for an expense to be allowed is the official receipt or invoice, issued by the service providers concemed.57 Moreover, cash vouchers must be validated with official receipts to be given probative value.ss The findings59 of the ICPA, Dy Go and Company, can be summarized as follows: Items Disallowed based on the 50% 50% 100% Per Tentative Per !CPA Report Exhibit Rule 5,026,241.50 ITR (Allowed) "MM-11' _cl. c2. c3. ental c4. Other " 2.941.100.04 "MM-14" c5. Fringe 1,470,550.00 "MM-16-1' ~ � >fees ~.50 c7. Rep~s&� 1,047,274.50 _c8. D_ffice ~ c9. Interest clO. "MM-19-1" 1,968,839.14 ell. & 2,094,549.00 c12. T t & Travel 1.054.1R1.27 1-3" - c13. , light & water 1-228' 56 G.R. No. 173373, July 29, 2013, citing Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007, 515 SCRA 556. 57 Id. 58 Id. 59 Exhibit "MM."

DECISION CfA CASE NO. 8516 Page 27 o�49 c14. Recruitment & training 465,915.50 931,831.00 5%,665.33 "MM-23-4" c15. Administrative Expenses- 154,041.00 308,082.00 - "MM-26" others 919,782.00 1.839,564.00 900,502.05 "MM-24-5" c16. Bills processing 6,100,489.00 12,200,978.00 221,215.58 "MM-24-4" c17. Others Items Disallowed due to Non- BIR Assessment Allowable Expense that Exhibits Withholding Expense should be Disallowed 109,928.80 d. Not subjected to withholding tax - Sec. 34k, NIRC dl. Commissions 206,450.00 96,521.20 "A" to"L" 1,301,248.00 d2. Rental 33,705,894.80 "MM-12-11," "MM- 774,245.35 12-12" and"A" to d3. Professional fee 14,209,693.30 483,618.98 34,560.02 e. Creditable Withholding 518,179.00 "L" "MM-28" Taxes for 2006 "MM-27" The individual cost and expense items are discussed below in the order presented in the FLD. The Court found that petitioner's claimed deductions, except for interest expense, were not adequately supported by documentary evidence. Hence, respondent's disallowances applying the 50% rule of approximation provided under Section 2.4(c) oJRMC No. 23-0()6� are upheld, as follows: 1. Purchases- Php5,026,241.50 Based on the Tentative Annual Income Tax Return ("ITR")61, petitioner declared Php10,052,483.00 worth of Purchases for the taxable year 2006 but based on the ICPA Report, only Php969,810.00 of the said Purchases should form part of the Cost of Sales. Upon careful examination of the Schedule of Purchases62, only the amount of Php6,600.00 was included in the exhibit folder and supported merely by Accounts Payable Vouchers, which are insufficient proof to substantiate the said expense. 2. Salaries/wages & benefits-direct cost/operating expenses Php16,606,693.00 This item represents Salaries, Wages and Benefits declared in the Tentative ITR of petitioner, broken down as follows: \ Schedule 3: Direct Charges- Salaries, Wages and Benefits I r 16,606,693 I 60 As cited in the case of Mariano Zamora v. Collector of Internal Revenue and Court of Tax Appeals, l G.R. No. L-15290, May 31, 1963. " Exhibit "MM-3." "Exhibit "MM-10-1."

DECISION 16,606,693 CTA CASE NO. 8516 p 33,213,386 Page 28 of49 Schedule D: Salaries and Allowances Total Salaries, Wages and Benefits According to the ICPA Report, the schedule of salaries and wages (Exhibit "MM-11") provides further breakdown of the above, VlZ.: Salaries and wages p 23,976,252.89 SSS and ECC Contribution PAGIBIG Contributions 1,255,581.70 Employee insurance benefit expense Employee benefit expense - others 108,700.00 Bonus Overtime expense 4,855,058.60 Total 43,591.67 2,328,941.42 645,260.60 p 33,213,386.88 Upon careful scrutiny of the records, no Exhibit "MM-11" was found. Consequently, petitioner failed to substantiate its Salaries, Wages and Benefit expense. 3. Materialsjsuppliesjfacilitiesjrental - Php33,986,422.00 According to the ICPA Report, this item is composed of site and switch utilities, maintenance, roaming settlement, interconnection and other site related costs which are supported by billing statements, official receipts and vouchers. It further discussed that the BIR's assessment for this account was arrived at, as follows: Per Tentative ITR p 150,195,421.00 153,136,521.00 Direct charges - 2,941,100.00 p 82,222,577.00 Materials/supplies/facilities/ rental 70,913,944.00 p 35,456,972.00 Fringe Benefits Less: Rentals including Site Switch perFS Balance Disallowance at 50% Due to the separate line item for fringe benefits found in the FLD (Item c5 above), the ICPA recommended that the 50% disallowance in the amount of Php70,913,944.00 be reduced by the Php2,941,100.00 attributable to Fringe Benefits, and that petitioner be assessed for ) Php67,972,844.00 (Php70,913,944.00 less Php2,941,100.00) instead. {

DECISION CTA CASE NO. 8516 Page 29 of49 Upon further review of the related documents, the ICPA only accounted for Php64,139,767.81 per Exhibit "MM-12-8." While the Court agrees that there was double assessment for Fringe Benefit Expense, it disagrees with the amount of Materialsjsuppliesjfacilitiesjrental found by the ICPA. Upon careful scrutiny of the exhibits, the Court came up with its own findings, to wit: Items included in the Per Court's Findings Exhibit Materialsfsuppliesffacilities/ (Allowable Expense) rental account I' 21,401,290.50 "MM-12-9" Site and Switch Utilities Site and Switch Maintenance 48,839.55 "MM-12-10" Rent Expense 1,704,592.78 "MM-12-12" Total p 23,154,722.83 Out of the Php150,195,421.00 declared as Direct charges - Materials/ supplies/facilities/rental account in the Tentative ITR, only Php23,154,722.83 was properly supported by VAT invoices, official receipts and other adequate records. Since petitioner failed to provide other adequate records that will overturn the BIR's assessment, the 50% disallowance should be upheld but in the modified amount of Php33,986,422.00, computed as follows: Per Tentative ITR p 150,195,421.00 82,222,577.00 Direct charges - Materials/supplies/facilities/ rental Less: Rentals including Site Switch perFS 67,972,844.00 Balance p 33,986,422.00 Disallowance at 50% 4. Direct cost- others- Php4,144,631.00 Based on the ICPA Report,63 this item is composed of direct commissions, vehicle maintenance & gasoline, software/hardware maintenance, transportation and travel, and demo equipment cost with an aggregate amount of Php8,289,262.00. It was able to obtain a schedule of this item in Exhibit "MM-13" and to account for Php1,097.531.1364 based on the supplier's invoices, official receipts and / ~ payment vouchers examined. " Exhibit "MM." 64 Exhibit "MM-13-7."

DECISION CTA CASE NO. 8516 Page 30 o�49 However, upon careful scrutiny of the submitted exhibits, below is the summary of the Court's findings, showing petitioner's insufficient proof of this expense: Items included in the Per Court's Findings Exhibit Direct Cost - Others account Transportation and Travel (Allowable Expense) "MM-13-8" Computer Hardware Rental "MM-13-10" Software/Hardware Maintenance I' 52,893.69 "MM-13-11" Vehicle Maintenance & Gasoline "MM-21-5" or "MM-13-9" 7,857.19 Total 31,016.60 234,797.81 p 326,565.28 5. Fringe Benefits- Php1,470,550.00 According to the ICPA, it was able to obtain a schedule (Exhibit "MM-14") which contained monthly accruals of retirement benefit costs amounting to Php245,091.67 and which was subsequently confirmed by Ms. Leticia Bello, Accounting Manager of petitioner. The ICPA further stated that since such items are mere provisions for retirement benefit costs, they should be included as a reconciling item in petitioner's ITR. However, upon careful review of the exhibits submitted, the Court was unable to find any exhibit folder supporting the alleged Exhibit "MM-14." Neither was there any reconciling computation of a retirement benefit cost in the Tentative ITR. 6. Membership fees - Php25,416.50 Based on the ICPA Report, this item represents payments to various organizations, but only the aggregate amount of Php12,500.0065 was adequately supported by official receipts, payment vouchers and other related records. Records reveal that only the amount of Php5,803.57, net of VAT, was properly supported by Provisional Receipt No. 7330 while the rJ other attached Official Receipt No. 255717 was disallowed because it was dated November 14, 2005, which is an out-of-period expense. 65 Exhibit "MM-15-1."

DECISION CTA CASE NO. 8516 7. Repairs and Maintenance- Supplies - Php3,735,476.00 Based on the ICPA Report, this account represents payments for security, janitorial and building maintenance for various offices of the Company. Using the schedule (Exhibit "MM-16") obtained by the ICPA, it was able to inspect and validate the various sales invoices, official receipts, billing statements and payment vouchers; and ascertain that the amount of Php4,907,853.21 (Exhibit "MM-16-1") was adequately substantiated. Upon careful scrutiny of the attached documents per exhibit folder, the Court came up with the following findings: Date OR No. Invoice Vendor Name Amount Reference Nos. Nofs. (Net of VAT) (Exhibit "MM- 29-May-06 14973 1539 The Orient Square Condominium Assoc., Inc. p 132,858.75 16-1") 10-Mar-06 151407 6472 Superior Maintenance Services, Inc. 64,925.45 02-May-06 6482 Radar Security & Watchman Agency, Inc. 131,420.97 14 03-Apr-06 5385 6284 SN Iron Works 1,339.29 17,18 01-Apr-06 Pag-asa Construction Supply 169.64 42 to 45,210 01-Apr-06 3044 =7 Pag-asa Construction Supply 62.50 22-Feb-06 649 Pag-asa Construction Supply 66.% 54 27-Mar-06 11741 221915 Welcome Supermarket Inc 50.89 54 27-Mar-06 221884 Welcome Engineering and Machine Works 312.50 54 23-Mar-06 6218 Christian Gas Air Products 392.86 54 24-Mar-06 5858 Infiltrade Enterprises 580.36 54 21-Mar-06 C.). Lagman Tradin~ 26.79 54 22-Mar-06 C). Lagman Tradin_g_ 1,750.00 54 29-M"Y::06 Radar Security & Watchman Agenc}J_ Inc. 135,404.22 54 07-ju1-06 Radar Security & Watchman Agency, Inc. 166,624.12 54 54 14-Aug-06 5875 Radar Security & Watchman Agency, Inc. 149,765.50 56 to 59 60 to 63, 169, 01-Sep-06 5880& Radar Security & Watchman Agency, Inc. 154,031.79 241 30-Qct-06 5881 Radar Security & Watchman Agency, Inc. 84 to 87,216, 5895 154,114.09 244 88 to 91,179, 30-Nov-06 16459 The Orient Square Condominium Assoc., Inc. 159,257.89 180, 217, 245 15,824.05 99 to 102, 218, 14-Mar-06 5927 Espafta Tower Condominium Association, Inc. 18,906.75 246 11,344.05 121 08-Aug-06 7251 Espafta Tower Condominium Association, Inc. 19,350.43 153 to 155 750.00 156 to 159 13-Nov-06 8101 Espana Tower Condominium Association, Inc. 1,500.00 161 168,240 29-May-06 6218 Radar Security & Watchman Agency, Inc. p 1,320,829.85 175 187 to 188 16-May-06 825 Angelique Square Commercial Building 17-jul-06 853 Angelique Square Commercial Building Total Allowable Repairs and Maintenance Expense While the following items were disallowed based on the corresponding reasons: Reason for Disallowance Documents Attached per Exhibit Folder No BIR Authority to Print Invoice #s 2683, 2684, 2685, 2743, 2716, 32, 39, 2760, 2761, 2936,2924,2937,2939,2938,2944,2942,2936,2924,2937, 2939,2942,2683,2684,2685,2743,2716,32,39,2760,2761, ) 2924,2936,2937,2939,2938,2944,2942,2683,2684,2685, 2743, 2716, 2760, & 2924

DECISION CTA CASE NO. 8516 Page 32of49 Not in the name of petitioner Cash Invoice #s 2711, 94430, & 144651; Sales Invoice Out of Period #7232 Cash Invoice #s 2693, 2321, 2345, 2440, 2355, 202824, Documents submitted are 2305, 2924, & 94430; Sales Invoice #33721; Official inadequate to support the declared Receipt #5741 expense amount SOA #s 137274, 37272, 138942, 138941, 138437, 140963, 140968, 141213, 142449, 142450, 142451, 145019, 145018, 144655,144281,144280,142519,143505,145748,145849, 146472, 146471, 148027, 148030, 147505, 147510, 149078, 150668, 149068, & 150687; PO #3084 Included in the !CPA Schedule but OR #s 5889 & 5385 the document cannot be found in Exhibit "MM-16-1" 8. Office Supplies - Php308,798.50 Based on the ICPA Report, this item represents disbursements for printing of customized checks, official receipts, copy paper, toners and other supplies which were disbursed through petty cash fund or payment vouchers. Upon examination of sales invoices, official receipts and payment vouchers of the schedule (Exhibit "MM-17"), the ICPA noted that the amount of Php339,110.94 was found to be in order. Upon careful review of the documents in the said exhibit folder, the Court found the following: No. Nofs. (Net of Nos. VAT) (Exhibit "MM-17- Hans I' 4,892.86 2, 5, 6 ' 7, 27, 28, 52,

DECISION CTA CASE NO. 8516 Page 33 of49 16-Mar-06 PR Car Finder Publishing Corp. 1,071.43 31 31345 &PR 31344 53694 Agua Vida . Inc. 312.50 34 53724 53774 Agua Vida . Inc. 1,187.50 34 53790 53870 Agua � . Inc. 1,375.00 34 53955 53970 Agua � . Inc. 312.50 34 54029 5412' Agua Vida . Inc. 1,281.25 34 54144 54211 Agua Vida , Inc. 1,343.75 34 54294 54389 Agua Vida , Inc. 312.51 34 54394 54482 Agua v;. , Inc. ,343.' ~ 54559 1: 54650 Agua � . Inc. 1,250.~ 36 25 54660 01-jun-06 54743 Agua Vida , Inc. 3!2.51 36 15-jun-06 ~ Agua � , Inc. 1,843.75 36 40507 1908 198 Agua � . Inc. ,281.25 36 41904 .06 ;5Q3 Agua � , Inc. 1.562.50 38 55!3 5521 Agua Vida: , Inc. 312.50 38 55265 55301 Agua Vida : , Inc. 1,531.25 38 55367 55408 Agua Vida , Inc. 1,312.50 38 55452 212946 Agua V' , Inc. 1,343.75 38 33310 Agua Vida: , Inc. 312.50 38 6578 Agua Vida: , Inc. 1,406.25 38 80468 Agua Vida : , Inc. 1,531.25 40 8344~ \gua Vic nc. 311.50 40 85765 \gua nc ,43 r.50 40 17584 60028 \gua nc. ,31 :.so 40 74435 \gu<l nc . ,31: 40 148709 1195 Agu<l .a : Inc. 312 <I() 525356 Agua � 'ida : , Inc. 1.25C ~ 293736 Agua Vida: , Inc. 1,437 43 1368 Agua Vida. , Inc. 312.50 43 290206 40491 Agua Vida , Inc. 1,343.75 43 ~1120 Agua Vida , Inc. 1,093.75 43 645_ Agua Vida : , Inc. 312.50 43 142290 Agua Vida , Inc. 1,218.75 43 28270 28268 Silicon Valley 1,340.91 48 1752 Power Mac Center 6,6%.43 54 3!971 32089 Pag-asa 1 Supply 40.18 58 160430 2114 Liberty , Inc. 3 ;1.85 71 3995 56814 Romeo . Austria Trading 2,510.00 72 1314 40885 Arts~ :orours ;7.& 73 84 0 Rom_eo . Austrja Trading I, ;o: 81 01-jun-06 Romeo V. Austria 2,321. joca 227.' Celltron ; Co. 954.' 1 Supply Center, Inc. ,392.: Nextel' 71, Malo Gen. : (the Invoice No. is. 26.' � s Center 26.79 91 Inc. 446.43 91 Solid ; Center 21.43 91 Alexan C 15.18 91 ; Gen Mdsg Co. 580.36 91 307.14 91 I& . I Supply Corp. 304.46 91 Screw City I 20.91 92 Tee:r~suy :- ~ 1,207.86 92 8440 RJPC Telecoms- Branch 7,142.86 95 1594 851: ; Cop}' :enter' <_�en. 241.07 96 20-Dec- 6 65 R)PC Branch 3,571 28-Mar-06 712 Sayoc 32. ABC 1,169, :Inc. 82, 21-Feb-06 :Trading 127.: :Trading 122.73 .20 Celltron 357.14 .20 5053 PG ,Branch - I 316.07 120 71.43 120 23-jan-06 72.73 120 Y2KScrew 89.29 122 t Inc. Inc. 4!.29 126 'Trading :enter 1,030.00 129 \LV_}\_~ 142.86 130 902 Makati MICRQ5HO 33.48 131 687.50 131

DECISION CTA CASE NO. 8516 Page 34 of49 24-Nov-06 1389 National Telecommunications Communication 1,250.00 131 19-Aug-06 45479 MRV Refrigeration & Air Conditioning Parts & 383.93 131 Supplies 27-0ct-06 32065 ROTA-Cool Ref & Air Conditioning Supplies 312.50 138 27-0ct-06 23127 LETACO Industrial Gas Center 312.50 138 19-Jan-06 895 Joca Enterprises 1,272.73 141 19-Jun-06 831 Techfinity, Inc 3,214.29 142 )an-06 425, Marlyn Beauty Shop 33.00 144 424, 429, and 431 06-jan-06 227926 johnnys Supermarket 114.32 144 02-Feb-06 230640 johnnys Supermarket 113.39 146 29-Mar-06 71566 Enigma 1,084.82 147 16-May-06 34790 Purewater 142.86 148 09-May-06 34645 Purewater 178.57 148 27-Apr-06 34357 Purewater 142.86 148 11-Feb-06 33986 Purewater 178.57 148 22-Mar-06 33488 Purewater 178.57 148 06-Mar-06 33100 Purewater 178.57 148 08-Jul-06 36634 Purewater 142.86 153 07-jul-06 36195 Purewater 35.71 153 21-jun-06 35816 Purewater 142.86 153 01-Jun-06 35169 Purewater 178.57 153 Total Allowable Office Supplies Expense p 189,566.53 While the following documents were disallowed based on the following: Reason for Disallowances Documents Attached1"'' Exhibit Folder Out of period SI #s 50882, 51043, 51124, 51210, 51362, 51398, 51584, 51622,51788,92731,36473,17372, 17479,31744,92599& The documents are not included 92731 ref. no. 154; OR #s 842, 738 (p. 87), 95011; CI #s in the list but are found in the 95018, 607459, 238523; Delivery Receipt 368; OR#36 and exhibit folder tape receipts p. 123 Official Receipt not in compliance SI #s 51849, 51849, 51936, 52094, 52178, 52250, 52468, 52673 with BIR Rules & 52696 The corresponding documents p. 42; p. 63; Rompa Enterprise Ref. No. 149 were not in the name of Next Mobile, Inc. OR # 40507 was included in the !CPA schedule but the amount if still added will be more than the amount being Document does not refer to claimed as a deduction Office Supplies and Expense OR from National Bookstore p. 47; SI # 54930 and Nat'l Documents submitted are Bookstore OR (p. 62); p. 70; SI #92599; Nat') Bookstore OR inadequate to support the p.91; SI #83319; OR #226 and Nat') Bookstore OR (p.96); declared expense amount OR #127; tape receipts for Ref. No. 113; CI #28271; CI #658 (p.125); OR #718 (p:129); OR #900 (p.149) OR# 37031(Liquidation of medical benefit in the amount of Php308.25) Petty Cash Voucher 16682 (p.89); Delivery Receipt (DR) No. 424 (p.101); DR#489 and other paper for Ref. No. 102; DR #660 and other docs for Ref. No. 103; DR #560; DR #836; DR #1018; DR#s 892 & 634 (p.113); docs submitted for Ref. No. 114; OR and Tape receipts for Ref. No. 115; Job Order p.129; tape receipts for Ref. No. 138; DR #964 p.143 9. Interest Expense - Php2,652,400.45

DECISION CTA CASE NO. 8516 Page 35 of49 Based on the ICPA Report, this item is composed of interest incurred on short-term notes obtained by petitioner mostly from Bank of Commerce, Metropolitan Bank and Trust Company and United Coconut Planters Bank. Upon inspection of the original copies of the official receipts and payment vouchers, the ICPA found that the valid interest expense for 2006 is Php5,118846.23 and interest expense per Tentative ITR included a non-deductible portion in the amount of Php37,525.12, thus the Total Non-Deductible Interest Expense was recomputed based on Section 34(B)(1) of the 1997 NIRC66, as follows: Interest income as reported per tentative ITR p 90,970.00 113,712.50 Gross up at 80% 33% Multiply by non-deductible factor per NIRC 37,525.12 Non-deductible portion of interest expense p 1,511,497.15 37,525.12 Interest still to be supported by the Petitioner p 1,549,022.65 Non-deductible portion per NIRC Total Non-deductible p Upon the Court's careful examination of the documents and the Tentative ITR, interest income per Tentative ITR is Php545,817.00, instead of Php90,970.00, while the duly supported Interest Expenses are provided below: Per Bank Official Receipts Per !CPA Schedule Allowable Exhibit Date OR No. OR Amount Interest Expense 11MM-18-1" (Non-VAT) 30-Jan-06 35-000*903 j;l 90,762.00 I! 90,762.00 j;l 90,762.00 1 19-Jan-06 48-000822 25,522.15 25,522.15 25,522.15 2 07-Feb-06 48-000844 564,827.27 32,113.97 32,113.97 3 08-Feb-09 48-000846 4,501.12 4,501.12 4,501.12 4 09-Feb-06 48-000849 52,742.22 52,742.22 52,742.22 5 14-Feb-06 48-000852 13,824.17 13,824.17 13,824.17 6 16-Mar-06 48-000888 23,179.86 22,645.80 22,645.80 7 No date 48-000877 4,300.92 4,300.92 4,300.92 8 08-Mar-06 48-000875 2,725,538.54 24,413.54 24,413.54 9 15-Mar-06 48-000886 12,198.53 12,198.53 12,198.53 12 31-Mar-06 035-00030** 91,822.50 91,822.50 91,822.50 13 18-Apr-06 4*000918 26,880.13 26,880.13 26,880.13 14 04-Apr-06 035-000-30*5 21,281.88 21,281.88 21,281.88 15 09-May-06 48-000941 128,117.31 5,129.88 5,129.88 17 17-May-06 48-000%2 37,465.95 37,465.95 37,465.95 18 18-May-06 48-000%3 24,356.63 24,356.63 24,356.63 19 23-May-06 8177-000280 644,369.76 644,369.76 644,369.76 20 30-May-06 35-0003*** 292,720.00 132,857.00 132,857.00 21 09-Jun-06 48-000991 7,789.99 7,789.99 7,789.99 22 ! 66 "In general. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income; Provided however, that the taxpayers' otherwise allowable deduction for interest expense shall be reduce by forty-two percent (42%) of the interest income subject to final tax; Provided that effective January 1, 2009, the percentage shall be thirty three percent (33% )"

DECISION CTA CASE NO. 8516 ?R. m..llh 4R-flll09RS ' <;,;7 ?1\ Sl\7 ?1\ 3,567.26 26 1/ 129,441.66 1?9 441 27 N; 1?9 ""1 "" 28 qr 27,186.99 27,186.99 27,186.99 29 1 1Rh9S ?R 1Rii9S?R 1R h9S ?R 30 3U-000618 3,908.29 31 ?1\RI\9 ?1\ ?.; Rh9 ?.; 3,908.29 34 3: 4: 1" ?.; Rh9 ?.; 35 118,513.33 37 05-0ct-06 3U~ I()( 11,069.63 11 01\9.1\, 11RS1 : ' ' 39 10-nrt-On 20! 1.98 1101\91>, 13-0ct-06 'lO: 90 29,; 1.22 43 27-nrt..llh 1111 ?R'" 0 1.90 45 30-0ct-06 :.om� 1: 46&47 81' 65,677.08 '" 51 11"- "11\'l 01 E 52 96,434.70 6:i,677.08 E 16. 53 4R-001?0? ?0 ?OR'' '1h9 01 54 96,- 55 4R~1??1 '0"' :.so 9E1,434.70 ?0 ?OR." 56 ?0 ?OR qo 'o "<.SO 57 'IU 1SR1' :.50 'o ."?.so 1.S R1?.50 58 I?R'�" 1SR1?SO 5 11 110 ?R'" 110 ?R' '' 6 7( 705,753.43 705,753.43 6 "" 81'1 R.OSOOO ROSOOO 6 ,031250 ROSO.OO ()4. 035-( ,o_,, �.so 7,578.13 ,0,1~.50 ".n, 1311 11 65,67 m.n, �-M ;,677 7.S7R.1' 479.17 2f 20R31 11. Dor-M 9,479 14,677.08 6:i,677.08 14,677.08 ?0 9S/l,R1 19-Dor-M 1320 nos 71\4 01 R?S0/100 !7 R? smnn 130,491.66 .17 11. nor-M 1304 no491 "" 1 '.08 p ?09SO 2/ nor-M p R? son on 1,0 491 "" Total p Thus, the non-deductible portion of interest expense shall be computed as follows: Interest Expense p 4,044,538.16 Less: Non-Deductible Portion of Interest Expense per NIRC 180,119.61 3,864,418.55 Interest Income p 545,817.00 Multiply by non-deductible factor r!_er NIRC 33% Non-deductible Interest Expense Allowable Interest Expense p Petitioner was able to provide adequate proof relating to the amount of Php3,864,418.55 out of the disallowed Interest Expense in the amount of Php3,258,409.50 (50% of Php6,516,819.00 in the Tentative ITR). Thus, the disallowed Interest Expense shall be recomputed as follows: Interest Expense per Tentative ITR I" 6,516,819.00 Less: Allowable Interest Expense Disallowed Interest Expense 3,864,418.55 p 2,652,400.45

DECISION CTA CASE NO. 8516 10. Insurance Expense- Php1,583,668.50 According to the ICPA Report, insurance expenses incurred by petitioner pertain to premium payments for all-risk insurance from Prudential Guarantee and Assurance, Inc., performance bonds from Trinity Insurance Consultants, Inc. and Philippines First Insurance. It further declared that after examining the official receipts and payment vouchers of petitioner, only the amount of Php770,563.64 was properly substantiated. Based on record, only one official receipt, OR No. 463995 dated January 18, 2006, from Prudential Guarantee was attached to support this expense amounting to Php1,458,871.0967, net of VAT, which is less than the assessment of the BIR. 11. Representation and entertainment- Php1,047,274.50 The ICPA computed for the ceiling amount that petitioner may claim to be allocated between its sales of goods and services based on Section 5 ofRR No. 10-2002, as follows: Nature Sales/Revenues Percentage Apportionment Sale of Service 87.996437% Sale of Goods p 184,312,886 12.003563% p 1,843,128.49 Totals 101J.OOOOO% 25,142,056 251,420.51 p 209,454,942 p 2,094,549.00 Nature Sales/Revenues Percentage Ceiling Sale of Service 1% p 1,843,128.86 Sale of Goods p 184,312,886 .05% Totals 125,710.28 25,142,056 p 1,968,839.14 p 209,454,942 Nature Sales/Revenues Apportionment Ceiling Disallowed Sale of Service p 184,312,886 p 1,843,128.49 p 1,843,128.86 Sale of Goods p - Totals 25,142,056 251,420.51 125,710.28 p 209,454,942 p 2,094,549.00 125,710.28 p 1,968,839.14 p 125,710.28 However, upon careful review of the documents in Exhibit "MM- 20-1," only the amount of Php199,537.59 have complied with substantiation requirements, to wit: 67 Exhibit "MM-19-1."

DECISION CTA CASE NO. 8516 Date OR Invoice Vendor Name Amount Reference No. No/s. (Net of VAT) Nos. 06-Jan-06 99194 EDSA Shangri-La p 17,987.40 (Exhibits 3,100.73 "MM-20- 02-Jan-06 34713 EDSA Shangri-La 6,254.19 2,273.70 1") 10-Feb-06 16076 EDSA Shangri-La 13,510.28 3 6,043.24 3 06-Feb-06 16530 EDSA Shangri-La 3,093.31 16 58,200.91 09-Feb-06 12680 EDSA Shangri-La 5,960.71 8 9 01-Mar-06 118400 EDSA Shangri-La 10 12 30-Jan-06 12003 EDSA Shangri-La 01-Mar-06 118399 EDSA Shangri-La 27-Mar-06 PR# Hotel Inter-Continental 111 Manila 28-Feb-06 16641 EDSA Shangri-La 888.71 14 09-Mar-06 3511 Atchie's Resto-Bar 1,125.00 15 Corporation 10-Mar-06 3514 Atchie's Resto-Bar 450.00 15 Corporation 21-Jul-06 121857 EDSA Shangri-La 17,588.89 27 13-0ct-06 3084 Le Souffle at Rockwell 24,107.14 31 05-Sep-06 136664 Makati Shangri-La 26,785.71 32 25-Jan-06 10372 Max's Restaurant 1,276.54 39 11-Jan-06 438 Red Ribbon 285.71 39 20-Jan-06 470 French Baker 370.54 39 18-Jan-06 7587 Baker Fresh Foods 7,587.00 39 Philippines, Inc. 17-Jan-06 10344 MaX1S Restaurant 862.60 39 14-Jan-06 693 Red Ribbon 477.23 39 12-Jan-06 4625 Luk Foo International 1,084.82 49 Cuisine, Inc. 12-Jan-06 6641 Tower Cafe 223.21 54 Total Properly Substantiated Meal and Entertainment p 199,537.59 Expense 12. Transportation and Travel - Php1,663,209.50 According to the ICPA Report, this item includes expenses for gasoline consumed, vehicle maintenance, travel and lodging expenses; and only the amount of Phpl,054,181.2768 was able to comply with the substantiation requirements. However, upon the Court's examination of the records, it was revealed that only the amount of Php287,691.50 was properly substantiated: '"Exhibit "MM-21-3."

DECISION Exhibit CTA CASE NO. 8516 Page 39 of49 Items included in Transportation and Travel Per Court's Findings (Allowable Expense) Transportation & Travel I' 52,893.69 "MM-13-8" Vehicle Maintenance & Gasoline 234,797.81 11MM-21-5" or Total "MM-13-9" p 287,691.50 13. Communication, light and water- Php9,945,158.00 The ICPA Report provides that this item pertains to expenses for utilities related to Philippine Long Distance Telephone ("PLDT"), Bayantel Communications, Eastern Telecoms, Meralco and Maynilad Waters Services, Inc., among others. It was able to validate that only the amount of Php5,605,960.1569 was properly substantiated by adequate supporting documents. Upon the Court's scrutiny of the exhibit folders pertaining to this item, the allowable expense in the amount of 3,841,562.50 is lower than the BIR assessment at Php9,945,158.00, viz.: Items included in the Per Court's Findings Exhibit (Allowable Expense) Communication, light and water account uMM-22-6" 2,023,882.53 "MM-22-7" Building Utilities I' 1,713,854.29 "MM-22-8" "MM-22-9" Leased Lines 55,454.74 48,370.94 Telecom-Local 3,841,562.50 Telecom-Long Distance Total p 14. Recruitment and training- Php465,915.50 Based on the ICPA's findings, this includes expenses for training, seminars, staff meetings, job postings, forums and other employee related activities. It was able to vouch that only Php596,665.33 was properly substantiated by adequate records. However, upon careful examination of the exhibit folders, the J Court came up with the finding that petitioner was able to substantiate only Phpl4,741.71 vis-a-vis the assessment of Php465,915.50, to wit: ( "Exhibit "MM-2-5."

DECISION Per Court's Findings Exhibit CTA CASE NO. 8516 (Allowable Expense) Page 40 of49 p 535.71 "MM-23-5" Items included in the Trainings and Seminar 14,205.99 "MM-23-6" account p 14,741.71 Trainings and Seminars Recruiting Total 15. Administrative Expenses- Others- Php154,541.00 The ICPA found that this item pertains to payments for bank charges on fund transfers, returned checks, payroll, issuance of manager's check and letter of credits; and was able obtain a schedule of this account (Exhibit "MM-26"), to arrive at the disallowance in the amount of Php154,541.00. A careful scrutiny of the records reveal that there was no Exhibit "MM-26" provided. However, based on the ITR, the basis for this line item is the amount of Php309,082.00, which should result to a disallowance in the amount of Php154,541.00, in accordance with the 50% Rule, instead of the assessed amount of Php154,041.00. 16. Bills Processing- Php919,782.00 The ICPA Report states that this item includes printing and enveloping of petitioner's bills to customers, service fee for bills payment and credit card; and vouches that the amount of Php900,502.05 was properly substantiated by documents. However, in the course of the Court's independent examination of the records, it only found one valid invoice, Invoice No. 4289,7� to support this expense in the amount of Php2,727.00. 17. Others- Php6,100,489.00 The findings of the ICPA provides that this item relates to payments for litigation settlement expenses, settlement of roaming fees, association dues, chattel mortgage fees and other related ) expenses; it was able to validate Php221,215.58 (Exhibit "MM-25-4") as ~ part of this expense. 7o Exhibit "MM-24-6."

DECISION CTACASENO. 8516 Page 41 of49 However, upon careful scrutiny of the records submitted, the Court found that petitioner was able substantiate only up to Php62,631.96, viz.: Items included in the Per Court's Findings Exhibit Others account (Allowable Expense) "MM-25-5" Other Income/Expense "MM-25-6" BOD Retainer Fee p 62,631.96 Total - p 62,631.96 In sum, the total disallowed expenses of petitioner for taxable year 2006, based on the 50% Rule are as follows: Items Disallowed based on the 50'Yu Rule Disallowances Exhibit 5,026,241.50 "MM-10-1" Purchases J1 16,606,693.00 "MM-11" "MM-12-8" Salaries/wages & Benefits- Direct Cost/OE 33,986,422.00 "MM-13-7" 4,144,631.00 "MM-14" Materials/supplies/facilities/ rental 1,470,550.00 "MM-15-1" 25,416.50 "MM-16-1" Direct Cost - others 3,735,476.00 "MM-17-1" 308,798.50 "MM-18-1" Frin_ge Benefits 2,652,400.45 "MM-19-1" 1,583,668.50 "MM-20-1" Membership Fees 1,047,274.50 "MM-21-3" 1,663,209.50 "MM-22-5" Repairs & Maintenance - supplies 9,945,158.00 "MM-23-4" 465,915.50 Office Supplies 154,541.00 "MM-26" 919,782.00 "MM-24-5" Interest Expense 6,100,489.00 "MM-24-4" Insurance 89,836,666.95 Representation & Entertainment Transportation & Travel Communication, Light & Water Recruitment & Training Administrative Expenses - Others Bills Processin_g Others Total p B. Deficiency Income Tax- Disallowance Due to Non-Withholding of Taxes The pertinent provision is Section 34(K) of the 1997 NIRC, viz.: SECTION 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under

DECISION CTA CASE NO. 8516 Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(l), there shall be allowed the following deductions from gross income: XXX XXX XXX (K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, Sections 58 and 81 of this Code. Section 2.58.5 ofRR No. 2-98, as amended by RR No. 14-02 and RR No. 17-03, provides additional rules regarding the requirement of deductibility in relation to withholding of taxes, to wit: Section 2.58.5. Requirements for Deductibility. Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Sees. 57 and 58 of the Code. A deduction will also be allowed in the following cases where no withholding of tax was made: (A) The payee reported the income and pays the tax due thereon and the withholding agent pays the tax, including the interest incident to the failure to withhold the tax, and surcharges, if applicable, at the time of the audit/investigation or reinvestigation/ reconsideration; (B) The recipient/payee failed to report the income on the due date thereof, but the withholding agent/ taxpayer pays the tax, including the interest incident to the failure to withhold that tax and surcharges, if applicable,

DECISION CTA CASE NO. 8516 Page 43 of49 at the time of the audit/investigation or reinvestigation/reconsideration; (C) The withholding agent erroneously underwithheld the tax but pays the difference between the correct amount and the amount of tax withheld, including the interest, incident to such error, and surcharges, if applicable, at the time of the audit/investigation or reinvestigation/ reconsideration. xxx 1. Commission- PhpO.OO Based on the BIR Assessment this expense item was disallowed due to non-withholding of taxes. However, upon checking the Tentative ITR and the submitted BIR Forms 230772, the Court found the following: ATC Income Payments Tax Withheld WC140 Wl140 p 2,673,057.00 p 267,305.70 Total 82,528.80 8,252.88 p 2,755,585.80 p 275,558.58 Out of the assessment in the amount of Php206,450.00, petitioner was able to prove that it withheld taxes for its commissions in the amount of Php275,558.58, hence, the attributable BIR assessment shall be denied and petitioner shall be allowed to deduct the said expense. 2. Rental- Php7,240,828.00 According to the ICPA Report, the total rent expense subjected to withholding taxes amounted to Php48,516,682.20, which was compared with rentals in the amount of Php80,921,329.00, allegedly based on the Tentative ITR, which is composed of the following: Site and switch rental p 73,680,501.00 Building rent Difference 7,240,828.00 p 80,921,329.00 72 Exhibits "MM-27-1" to "MM-27-4."

DECISION CTA CASE NO. 8516 Page 44 of49 However, upon review of the Tentative ITR, only the amount of Php7,240,828.0Q73 relating to Building rent was declared as Rental expense for the taxable year 2006, the allocation thereof was found in Note 19 of the Audited Financial Statement74, viz.: Cost of sales and services 2006 2005 Administrative expense p 73,478,070.00 p 77,853,988.00 Totals 8,744,507.00 10,049,722.00 p 82,222,577.00 p 87,903,710.00 The examination of BIR Forms No. 2307 and their respective alphalists revealed the following: ATC Income Payments Tax Withheld WC100 WI100 p 36,018,456.20 p 1,397,922.81 Total 20,558,226.00 1,027, 911.30 p 56,576,682.20 p 2,425,834.12 Consequently, out of the Php82,222,577.00 Rent expense per AFS, only Php56,576,682.20 have been subjected to 5% Expanded Withholding Tax, pursuant toRR No. 2-98, as amended. Considering that petitioner only claimed the deduction in the amount of Php7,240,828.00 as Rent expense in its Tentative ITR and the Court cannot determine whether the same was subjected to withholding tax, only the declared amount of Php7,240,828.00 per Tentative ITR should be the disallowed and not the full amount of Php33,705,894.80. 3. Professional Fee- Php12,932,592.37 The ICPA found that Professional Fees are mainly composed of payments made for consultancy and audit fees, manpower services and messengerial services, with the amount of Php13,435,447.95 pertaining to payments for services rendered by 4th Dimension Multi- Purpose Cooperative ("4th Dimension") and as such is exempt from ( payment of income tax pursuant to Article 62 of RA No. 693875, as implemented by Section 3.2 ofRR No. 20-01. 73 Exhibit "MM-3." 74 Exhibit "MM-9." 7' "An Act to Ordain a Cooperative Code of the Philippines."

DECISION crA CASE NO. 8516 Page 45 of49 However, upon careful checking of all the submitted evidence, the Court discovered the following: ATC Income Payments Tax Withheld WC011 WlOlO p 4,163,917.93 p 624,587.69 WI011 Total 8,133,114.00 813,311.40 15,798,408.70 2,369,761.30 p 28,095,440.63 p 3,807,660.39 Consequently, out of the declared Professional Fees per Tentative ITR amounting to Php41,028,033.00 only Php28,095,440.63 were subjected to withholding tax. Thus, the difference of Phpl2,932,592.37 (Php41,028,033.00 less Php28,095,440.63) should be disallowed as Professional Fees expense due to non-withholding of tax. 4. Creditable Withholding Taxes - Php54,128.08 The BIR disallowed creditable withholding taxes claimed by petitioner in the amount of Php518,179.00 due to absence of Creditable Withholding Tax Certificates or BIR Form No. 2307. Upon its own examination of petitioner's CWT certificates, the ICPA was able to validate that petitioner was able to present CWT certificates amounting to Php483,618.98 and recommended that the disallowance be reduced to Php34,560.02. An examination of Exhibits "MM-27-1" to "MM-27-4" reveal the following findings: Creditable Withholding Taxes Exhibit "MM-27-1" First Quarter !' 113,218.55 "MM-27-2" 4,965.15 "MM-27-3" Second Quarter "MM-27-4" 202,135.50 Third Quarter 143,731.72 Fourth Quarter 464,050.92 Total Creditable Withholding Taxes with BIR Form 2307 p r Consequently, only Php464,050.92 out of the declared CWT per Tentative ITR amounting to Php518,179.00 may be used as tax credits from creditable tax withheld. The remammg Php54,128.08 (Php518,179.00 less Php464,050.92) shall be disallowed for failure of petitioner to substantiate the same with BIR Form No. 2307.

DECISION CTA CASE NO. 8516 Page 46 of49 In sum, the disallowances due to non-withholding of taxes are: Items Disallowed due to Non- Expense that should be Exhibits Withholding Disallowed Commissions p - Jl A" to "L" "MM-12-11," Rental 7,240,828.00 "MM-12-12" and Professional Fee 12,932,592.37 "A" to "L" Creditable Withholding Taxes for 2006 54,128.08 "MM-28" "MM-27' Total I! 20,227,548.45 Based on the foregoing discussions, petitioner is liable for a total deficiency tax of Php33,325,336.74, broken down as follows: Taxable Income per return l> (3,875,794.00) Add: 50% Disallowances- Sections 6(B) & 341997 NIRC; RMC No. 23-2000 Purchases l> 5,026,241.50 16,606,693.00 Salaries/wages & Benefits- Direct Cost/OE 33,986,422.00 4,144,631.00 Materials/supplies/facilities/ rental 1,470,550.00 Direct Cost - others 25,416.50 Fringe Benefits 3,735,476.00 308,798.50 Membership fees 2,652,400.45 Repairs & Maintenance- supplies 1,583,668.50 1,047,274.50 Office Supplies 1,663,209.50 9,945,158.00 Interest expense 465,915.50 Insurance 154,541.00 919,782.00 Representation & Entertainment 6,100,489.00 Transportation & Travel l> Communication, light & water - Recruitment & training 7,240,828.00 12,932,592.37 Administrative Ex~nses - others l> Bills processing l> Others l> 3,875,794.00 Not subjected to withholding tax- Sec. 34(k) 1997 NIRC 89,836,666.95 54,128.08 Commissions ),1 20,173,420.37 ),1 106,134,29332 Rental expense l> 35% Professional fee 37,147,002.66 Taxable income per investigation (3,821,665.92) 33,325,336.74 2006 Corporate Tax Rate at 35% \ Tax Due IV Less: Tax credits /payments per return l> Less: Unsupported BIR 2307 I Deficiency Income Tax Due C. Compromise Penalty

DECISION CfA CASE NO. 8516 Page 47 o�49 Respondent imposed compromise penalties in the aggregate amount of Php22,000.00 on the subject deficiency tax assessments, detailed as follows: Non-filing of alphalist of income payments subject to withholding tax I' 1,000.00 Non-filing of alphalist of compensation 1,000.00 Non-filing of Quarterly Summary List of Sales 4,000.00 Non-filin_g_of MAP Non-filing of SAWT 12,000.00 4,000.00 Total Amount Due & Collectible p 22,000.00 The Court has ruled in the case of The Abba's Orchard School, Inc. v. Commissioner of Internal Revenue, CTA Case No. 8377, November 4, 201476 that it has jurisdiction to compel a taxpayer to pay compromise penalty for it implies a mutual agreement between the taxpayer and the BIR with respect to the tax which is so compromised. Absent any proof that petitioner consented to the compromise penalty, the same should not be imposed, otherwise, its imposition is illegal and unauthorized.77 Considering that there is no proof that petitioner agreed to the imposition of the compromise penalty, the same is hereby cancelled. WHEREFORE, in view of the foregoing, the present Petition for Review is hereby PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED TOPAY deficiency Income Tax for the taxable year ended December 31, 2006, in the modified amount of Php41,656,670.93, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the 1997 NIRC, computed as follows: Type of Tax Basic Deficiency 25% Surcharge Total Income Tax 41,656,670.93 33,325,161.74 8,331,334.19 In addition, petitioner is liable to pay: 1. Deficiency interest at the rate of twenty percent (20%) per annum pursuant to Section 249(B) of the 1997 NIRC on the basic deficiency Income Tax of Php33,325,161.74 computed from April 15, 2007 until full payment thereof; and ) 7' citing Sarangani Resources Corporation v. Commissioner of Internal Revenue, CTA Case No. 8105, November 8, 2013. 77 Id.

DECISION CTA CASE NO. 8516 Page 48 of49 2. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount due of Php41,656,670.93 (inclusive of 25% surcharge), and on the 20% deficiency interest which have accrued as aforestated in (1), computed from May 17, 2010 until full payment thereof, pursuant to Section 249(C) of the 1997 NIRC, as amended. SO ORDERED. LOVEL~ISTA Associate Justice WE CONCUR: . FABON-VICTORINO ~.".7 A n~ .. � <-_' (With Dissenting Opinion) 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. LOVELL R.liSTA Associate Justice Chairperson

DECISION CTA CASE NO. 8516 Page 49 o�49 CERTIFICATION Pursuant to Section 13 of Article VIII of the Constitution and the Division's 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

Republic o f the Philippines COURT OF TAX APPEALS Q uezon City THIRD DIVISION NEXT MOBILE, INC., CTA CASE NO. 8516 Petitioner, Members: -versus- Bautista, Chairperson Pabon-Victorino, and Ringpis-Lib an, JJ COMMISSIONER OF INTERNAL Promulgated: REVENUE, OCT 1 ~ 201~ Respondent. X-----------------------------------------------------------------------------------------------X DISSENTING OPINION With all due respect, I would like to offer my view on the issue of due process raised in this case, namely the validity of a Final Assessment Notice (FAN) issued by the BIR to a taxpayer only ten (10) days after the former issued the latter a Preliminary Assessment Notice (PAN), and without waiting for said taxpayer to respond to the PAN or for the period of fifteen (15) days granted for said response in respondent's own regulations to expire. The law is clear on the matter. In particular, Section 228 of the National Internal Revenue Code ("Tax Code") provides a clear procedure for protesting o f assessments, which is follows: 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: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by thy

CTA Case No. 851612 Dissenting Opinion withholding agent; or(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or(d) When the excise tax due on exciseable articles has not been paid; or(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. 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 one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Emphasis supplied.) The word "shall" used above in reference to a taxpayer's response to a preassessment notice or PAN shows that it is mandatory, and the word "required" confirms this. Hence, it is only if the taxpayer fails to respond as required that the Commissioner or his duly authorized representative may issue an assessment based on his findings/

CTA Case No. 851613 Dissenting Opinion In the instant case, respondent was obligated to wait fifteen (15) days for petitioner to file its response to the former's preassessment notice or PAN, for this is the period that respondent itself provided for in Revenue Regulations No. 12-99, to wit: "3.1.2 Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date ofreceipt ofthe PAN he shall be considered in default. in which case. a formal letter of demand and assessment notice shall be caused to be issued by the said Office. calling for payment of the taxpayer's deficiency tax liability. inclusive of the applicable penalties." (Emphasis supplied.) The above administrative provision does not in any way conflict with Section 228 of the Tax Code. Section 228 of the Tax Code itself provides that the period for which to be prescribed by implementing rules and regulations and Revenue Regulations 12-99 are precisely the regulations entided "Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes."1 Moreover, taxpayers may rely upon a rule or ruling issued by the Commissioner from the time the rule or ruling is issued up to its reversal by the Commissioner or this Court.2 While the Decision relies on the 2008 case of Commissioner of Internal Revenue vs. Meguito3 where the Supreme Court ruled on the validity of a FAN issued when receipt of the PAN is denied, the same is not on the case here. Here there was manifest violation of due process when respondent disregarded the period that it granted in its own regulations to the detriment of the taxpayer. Such disregard of the authority's own rules and regulations can be very misleading, especially to taxpayers who are not lawyers and follow the BIR's issuances in good faith. They should not be met with bad faith. No goo~ 1 Complete Title: "Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra- Judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty" 2 Commissioner of Internal Revenue v. San Roque, G.R. No. 187485, October 8, 2013. 3 G.R. No. September 17, 2008.

CTA Case No. 851614 Dissenting Opinion deed should be punished. More importandy, in 2010 the Supreme Court, in Revenue vs. Metro Star Superama, Inc.,4 emphasized the importance of complying with the requirement to send a PAN to the taxpayer as an integral part of due process in the issuance of a deficiency tax assessment. It then declared in no uncertain terms that the failure of the CIR to stricdy comply with the requirements laid down by law and its own rules is a denial of the taxpayer's right to due process. Undeniably, providing the taxpayer with a copy of the PAN is meaningless to the concept of due process if, after all, his rigl.t to respond to it within the prescribed period would be ignored. Also, in Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue 5 the Supreme Court ruled that non-compliance with , statutory and procedural due process renders the final assessment notice as null and void even if the taxpayer protested the formal assessment, to wit: "While PSPC indeed protested the formal assessment, such does not denigrate the fact that it was deprived of statutory and procedural due process to contest the assessment before it was issued. Respondent must be more circumspect in the exercise of his functions, as this Court held in Roxas v. Court of Tax Appeals: 'The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the golden egg.' And in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously."' The above jurisprudence finds application in the instant case where respondent issued a FAN even while the petitioner was still preparing to file its required response to the PAN issued it in accordance with both Section 228 of the Tax Code and Revenue Regulations 12-99, cited above, and disregarding petitioner's rights thereunder. It is clear from Section 228 of the Tax Code that the right to respond to a "preassessment notice" or PAN is given to the taxpayer, and from Revenue Regulations 12-99 that the period of fifteen (15) days to file said response is also the taxpayer's; such rights granted to the taxpayer are not fer the taxing authority to waive/ 4 G.R. No. 185371, December 8, 2010, cited in Hon. Presiding Justice Roman G. Del Rosario's Dissenting Opinion dated August 14, 2015. 5 G.R. No. 172598, December 21, 2007, cited in Hon. Presiding Justice Roman G. Del Rosario's Dissenting Opinion dated August 14, 2015.

CTA Case No. 851615 Dissenting Opinion Moreover, if a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation, hence there is no use debating about the meaning of Section 228 of the Tax Code when its words are very clear. The FAN issued by the respondent to a petitioner only ten (10) days after the former issued a PAN, and without waiting for said taxpayer to respond to the PAN or for the period of fifteen (15) days granted for said response in respondent's own regulations to expire, is therefore void and of no force and effect. WHEREFORE, I vote to GRANT the Petition. SO ORDERED. ~- ~ ..1; <.......: MA. BELEN M. RINGPIS-LIBAN Associate Justice