CTA Case No. 2624 (Decision)

REPtlRUC 0 THE PIIttJPPfN COUR . o::: TAX APPEALS QUEZO CIT C. F. BRJ..UI'-1 & CO., Petitioner, - versus - CTI\ CASE NO . 2624 CTh CASE NO. 2661 THE CChuvllSSIO!~Ef~ CJF INT EI\NAL EEVENUE, Respondent. X- - ---------X C. F. Bfu,UN & CO., and BRAUN TEA!~~WORW CORPOHATION, Petitioners, - versus - THE COh'JviiSSlui<ER OF INTEHNAL REVENUE, x _ _ _ _ _ __ ~e~p�n9eQt~ x DECI S I 6N These two (2) cases are in connection with two disputed assessments, one for deficiency contractor's tax and the other for deficiency income tax. These cases arose from the engineering services rendered , the procurement of materials and the construction and erection of the complex fertilizer plant of the Esso Standard Fertilizer & Chemical Co., Inc. (Philippines), Esso Fertilizer for brevity, at Limay, Bataan during the years 1964, 1965 and 1966. These cases, which have a common prin~ipal issue, were jointly heard by this Court. Re: CIA C/'-'.SE NO. 2624 Petitioner C.F. Braun & Co., hereinafter referred to as Braun & Co., during the time material to this action, was a non-resident foreign corporation not engaged in business in the Philippineso It was created and organized under the laws of the

DECISION - CT!"\ CASES NuS. 2624 & 2661 - 2- State of California, U. S . A. and its office is located at 1000 South Fremont Avenue, Alha mbra, California. On September 20, 1963, Braun & Co. entered into a contract with Esso Fertilizer ~her ein for a consid- eration of $19,333,60U.OU (equivalent to P75,594,376.00 at the exchange rate of P3.91 to $l.GU), it undertook to furnish the eng ineering s ervic es and procure �the materials and supplies required and to be used in put- ing up the fertilizer plant of Esso Fertilizer in Ba- taan, Philippi~es, the pertinent portion of which reads as fol l ows: AHTlCLE 1 - THE ~iORK - Contractor , who is deeme d an independent tontractor here- under , shall furnish, subject to the con- ditions and exceptions hereinafter noted, competent supervision, procurement, and en- gineering . services consisting of , but not limited to, all process and mechanical en- gineering , purc hasing and expediting, and construction drawings; also the supply of imported materials including transportation to the Philippines, required for the cons- truction and th e erection of Amr11onia, Urea , Sulfuric and Phosphor ic Acid , and Complex Fertilizer plants and their attendant facil- ities (All hereinafter referred to as the 11 VJork 11 ), on a designated site on Owner's pro perty at Bataan, Philippines (hereinafter referred to as the "Work Si Le 11 ). The work by Contractor sha ll be in accordance with the foll owing specifications, drawings, ins- tructions and agreements identified with � referenee to this Contract (hereinafter called the 11Job Specific tion. 11 ) (Exhs. 7Fs & 3, ~P� 268-285, BIR Rec., CTA Case No. 2624.) Somet ime in the years 1965 and 1966, respondent Commissioner of Internal Revenue caused the verification of the intern al revenue tax liabili ties of Braun & Co. for the fiscal years ending June 30, 1964~ 1965 and 130

DECISION - CIA Ct.S.~ S NOS. 2624 & 2661 -3- 1966. ( Pp. 10-105 BIR rec., CIA Case No. 2624). On the basis of the finding of BIR examiners that Braun & Co. failed to pay the percentage taxes provi ded in Sec t i ons 18 2, 183, 186 , 190 and 19 1, in re lati oQ to Sections 208 and 209, all of the Ta x Code, respond- ent, on January 15, 1970, assessed Braun & Co . the to- t <3 l amoL,nt of P8 ,056.557. 79 representing compensating , fixed and percentage taxes, inclusive of surcharge, f~r the years 1964, 1965 and 1966 (Exhs. 7Es & 4 , pp. 26 6 , BIR rec., CIA Case No. 2624.) , broken down as f ol- lows: Compensating tax due on imported ar ticles: 7% compensating tax due on P74 ,934,104 .90 � o � ��� 0 0 � � P5,245,387.34 Fi xed and Perc entage Taxes 1964 Gross re- P30,799,809.06 �43 ,709, 738.88 P425,056.9 6 ceipts � � � 923 '9 94. 27 1 ' 311 ' 29 2 0 16 12, 7?1. 71 3% tax due ther eon � o Add: 25% sur- charge � � 230,998.70 327,823.04 4,250.57 Fixed tax � � 20 00 --------~2~0~�-00~ ----~2~0~0~00~ Total fixed & PE;rcent9ge Taxes Due � � � P 1 , 155,012.97 ? Gl:V-\ND TOTAL OF AMOUi~ T DUE AND COLLECTIBLE ~ 8,056,557 . 79 Braun 8. Co. protested sa i d assessment in a letter date d February 18, 1970 on the ground that there is nei- ther factual nor legal basis for subjecting it to said t axes as it is a non-resident forei gn corporation and is not engaged in business in the Phi lippines. (Exhs. 7Gs 13J

. \'' DECISION - CT/\ CASES NOS. 2624 & 2661 - 4- & 5, pp. 287-300, BIR rec., CIA Case No. 2624.) Act- ing on the protes t , respondent in his letter dated August 21, 1972, informed Braun & Co. of his decision� to withdraw and cancel the assessment wi th respect t? the compensating tax in the amount of ~5,245,387.34, bu t reiterated the demand for payment of percentage taxe s and surcharges in the total amount of �2,81 1,170.- 45 for the years 1964, 1965 and 1966. (Exhs. 7ls & 6, pp. 334-335, BI~ rec., CIA Case No. 2624.) Not satis- fied with the action of respondent, Braun & Co. request- ed a reconsideration on October 11, 1972 of the revised assessment. (Exh. 7Js, pp. 336-337, BIR rec., CIA Case No. 2624 . ) The same was, however, denied by respond- ent in his letter dated June 18, 1974 (Exhs. 7Ks & 9, pp. 372-373, BIH Rec., CTA Case No. 2624.) From said decis i on , Bra un & Co. appealed to this Court on Sep- te mber 5, 1974. Re: CTA Case _tl..9.L_2661 It appears that there are two petitioners in this ca se, namely : � (a) C., F. Braun & Co., the same petitioner in CTJ\ 2624; and (b) Braun Transworld Corporation, here- inafter referred to as Transworld, which, during the time material to the case, is a corporation organized and exi sting under the laws of the Republic of� Liberia but licensed by our Secur ities & Exchange Commission on De- cerrb er 24, 1963 to engage in business in the Philippines (Exh. 10, p. 36, CIA rec., CI A Cas e No. 2624), with its

DECIS I ON - CIA CAS ES NOS. 2624 & 266 1 - 5- principa l office locuted at 80 Broad Street, Monrovia, Liberia. ( pp. 46-47 , CIA Case No. 2624. ) On September 20, 1963, Tran~world, likewise en- . tered i nto a contract with Esso Standa r d Fertilizer. & Chemi ca l Co., Inc., Phil. ) a l so hereinaft er referred to a s Esso Fer t ili zer, whereby f or a consideration of ?9,381,400.00 or $1,915,600.00 it undertook to perform the construction and erection of the fertiliz~r plant of Esso ~ertilizer at Bataan, Philippines, the pe r ti- nent portion of which mads as follows: AHTICLE 1 - THE WORK - Contr a ctor, who is deemed an independent contractor hereunder, shall fur- nish subject to the conditi ons and exceptions hereinafter noted, competent supervision, labor, construction equipment and t oo ls, Philippine sup- plies and materials, and tempor ary structures and facilities, and transportation in the Philippines of all materials, equipment, tools and supplies, including without limi tation, unloading, hauling and handling to � and ' at the . Wor!� Site, customs clearance, government safety inspections and ope- rating permi ts, and other services inside the Phil- ippines to const ruct and erect hmmonia, Urea, Sul- furic and Phosphoric Acid, and Complex Fertilizer plants and their attendant facilities (all herein- after referred to as the "Work"), on a designated site on Owner's property at Bataan, The Philippines (hereina fter referred to as the "Work Site"). The Wo:rk by �Contractor shall be in accordance with the following specifications, drawings, instructions and agr eements identified with reference to this Contract (hereinafter called the "Job Specifica- tion"} . (Exhs . 7Ds & 2, pp. 178-206, BIR rec. CIA Case No. 2624) On October 15, 1964, Transworld filed its income tax return f or the year covering 1964 and paid as corporate i nc ome tax the tota l amoun t of ~174,868.00, (pp. 79-86, BIR rec., CIA Case No. 2661.) On April 19, 1965, Trans- wor l d filed i ts income tax r eturn for the fiscal year

DECISION - CTA CASES NOS. 2624 & 2661 - 6- ended Ju,.ne 30, 1965 ( pp�~� 45-46, BIR rec,, CTA Case No, 2624 ) , and on October 14, 1966 it f i l ed its income tax return for the fiscal yea r e'nded June 30 , 1966,� (pp. 78- 79, BIR rec., CTA Case No, 2624,) For receipts of i ts services performed pursuant to its contract with Esso Fer tilizer, Transwor l d had accordingly paid and correctly the 3% contractor's tax based upon the con- sideration of the contract, ( Exh, 1, pp. 241-248, BIR rec . , CTA Case �No. 2624.) On July 16, 1970, respondent assessed Braun & Co, and/or Transworld, deficiency income taxes for the years ended June 30, 1964, 1965 and 1966 in the aggregate amount of ~1,687,633,64 , the details of\hich are as fol l ows: FY - 6 -30-64 Net income per investigation � P5,854,251.70 Ta x due thereon � � � � � � � 1,748,2~5.00 Less: Amount already assessed __ 378~16,0~ B a 1 a n c e ��� o o �� Pl,369,359.00 Add: t% mo. int. from 10-16-64 to 10-17-67 � � � � � � � � _246,484,6~ TOTAL AMOUNT DUE & COLLECTIBLE � � � � � � � ~1.6~~843~2 FY - 6-30-65 Net income per return � � � 64,792.39 Add: Unallowable deduc- 46 ,429,83 tbns: (1 ) Billings rec eived from ESFAC by C, F. Braun & Co, Inc ��� P 425,056.96 Less: Allowable de du ct ion ba s ed on net profit s r ate method � 418,893,63 B a 1 a n c e P 6,163 ,33 ( 2 ) Vac at i on l eave l iability � � 20,766.50 (3) Prof it sharing 8. reti rement exp. J9 , :po, 00

DECISION - CIA CASES NOS. 2624 & 2661 - 7- Net income per investigation , ��� �111,222,26 Tax due thereon �� � � � � � , o � 25,367,00 Less: Amount already assessed � � � 14,254 , 00 Ba 1t%a nc e ����������� 11,113,00 Add: mo. int, fro 10-16-65 to P 10-16-68 �����������. �- 2 ,000,34 TOTAL AMOUNT DUE & COLLECTIBLE , � o � � o � � �7?13 , 133,34 FY - 6-30-66 Net income per raurn � o o ���� o ?943,626,00 Add: Unallowable deductions: (1) Billings received from ESFAC bY C,F. Braun & Co,, Inc,, �� f43,709,738,88 Less: Allowabl~ de- ductions based on net .profit rate me- � � � � 43,644~174,27 thod B a l a n c e �� P 65,654.61 (2) Vacation leave liability; profit sharing & retire- ment expenses & un- supported expenses 121,953,80 187,518.41 Net income per investigation �����Pl,l3l, 144.75 Tax due there on � � � � � � o � � � � 331,343,00 Less: Amount: already assessed � � � o 281 , 617,00 Ba l t%a nc e ���� o � o ���� ,P 49,726.00 Add: mo. int, fr. 10-16-66 to 10-17- 69 � � � � � � � � � � � � � 8 , 950,68 TOTAL AhDUNT DUE & COLLECTIBLE � � � � � o � � � '?58 , 676 , 68 GRAND IOTA L Ai!tGUNT DUE � � � � � � � � � � � �P .L,687, 633 1 6i (Exhs. 7Ls & 6 , pp. 177-178, BIR rec., CIA Case No . 2661)~ On Septerrber 17, 1970, Braun & Co,, and/or Transworld dispute d sa~d assessment, on the ground, among others, that as a' foreign corporation not engaged in business in the Philippines, Braun & Co, is not subject to Philippine income tax on it s income for services rendered abroad and with respect to the deductions claimed by Transworld in its return these are allowable as ordinary and necessa- ry busines~ expenses. ( Exhs~ 7Ms &7, pp. 218-222, SIR rec., CTI\ Case No, 266lj On November 26, 1974, respondent denied Braun & Co, and/or Transwor ld's protest and demanded the payment

DECISION - CTA CASES NOS. 2624 & 2661 - 8- of deficiency income taxes, in the aggregate amount of ~1,687,633.64 for the fiscal year ended June 30, 1964, 1965 and 1966, inclusive of interest. (Exhs. 70s & 8, pp. 270-271, SIR rec., CTA Case No. 2661.) Hence, this appeal. The issues raised by the parties in these cases are as follows: 1) Whether petitioner C.F. Braun & Co. per- formed services in the Philippines in con- nection with the construction and erection � of the fertilizer plant of Esso Fertilizer at Limay, Bataan; 2) Whether the disallowance of some deductions claimed by Transworld in its 1965 and 1966 income tax returns are justified; and 3) Whether the assessments herein involved were is~ued within the period prescribed by law. In the instant cases, the parties are in agreement with the legal tax principles that non-resident foreign corporations are subject to tax if the same ha ve per- formed services for which it derived income in the Phi- lippines, or have otherwise receipts derived fr om sour- ces within the Philippines. As to contractor s tax , it has be~n rul~d that receipts by a domestic corporation for construction work, based upon a contract, and per- formed in its entirety abroad cannot be subject to the 3% contractor's tax because the Philippine government cannot reach the same by taxation for lack of territor- ia l jurisdiction (See BIR Ruling No. 65-001, January 8, 1965.) As to income tax, it is explicitly pr ovided by the statute that a f oreign corporation not engaged 13G

DlCISION - CTA C.SES NOS. 2624 & 2661 - 9- in tr~de or bu~iness in the Phil i ppines is subj~ct to ta x on its gross income from source s within the Phi- _l_.lppl. n cs (S ec. 24 ( b)(l), Tax Code::.). Compen s ation for labo r or personal s ervice s arc treated a s gross inco m0 fron so urc es within the Philippines if the services ar ~ pe rfo rm ed in the Philippines (Sec. 37(a)(3), Tax Corle . ) Convfrscly, compensation for labor or per sonal ser v i ces arc + r Fat ~ d as gross income fro m sources with - out the Philippines if +he labor or personal services are perform ed o utside of thC' Fh i lippines (S ec. 37(c) ( 3), TuX Code. ) In t he light of the applicubility of the ut ove principles to th e p urtic ulur facts of th e instant CJsc r, we wi Jl now d is cu ss the issu es raised by the parties . Whether pctitio~cr C.F. Bra un & Co ., performed services in the Philippines in c onnection with th e con st ructi on and erection of the fertilizer plant of Esso Fertilizer at Limay, Bataan so ~s to be li ub l e to tax thereon . It is th e . contcntion of Braun & Co. in s ubstan c e , t h ,J t bc:ing a non-re:si d cnt fcr c ign cor;:. oro.tion , the cngin- ecrins servic es and procurement of materials co nt emplated in its contract with Isso Ferti li zer which it unde rtoo k i ~ the con st ruct ion of the f ertilizer plant at Limay, Bataan, were performed outside the Phi lippines, a nd there- fore, the gro ss rccc:ipts and income derived thc r cfro~ c annot be s ubject to tax und~r Philippine Laws. I n brushi ng aside this s tand of Brau n & Co., rcspon- ~en t maint ai ns that the ser vi ces in qucst i ~ n were performed -f I") 1""1 _j_ .:) '

DECISION - CIA CASES NOS. 2624 & 2661 10 - in the Philippines. To support this theory, respondent alleges: (1) that Braun & Co. and Transworld are one and t he same entity, not only because the former owns all the shares of the latter but the emplciyees of Braun & Co. are also the employees of Tran swor ld and the business of the latter are contolled by the former; (2) that Esso Ferti- lizer paid Braun & Co. on the basis of monthly stages of the work proving that the services were per formed in the Philippines; and (3) that Transworld was organized as a subterfuge of Braun & Co. in connection with the cons- truction of the Esso Fertilizer plant. In short , respond- ent would wasnt us to disregard the separate juridical per- sonalities of Braun & Co. and Transworld and to consider the latter as merely an adjunct, alter ego or subsidiary of Braun & Co. Consequently, the gross receipts of Braun & Co. should perforce. be subject to contractor's tax as well as to income tax under Philippine laws . To us, this argument of respondent seems to be in conflict with the established fact that during the years involved , Braun & Co. ~as a non-resident foreign corpora- tion not licensed to do business in the Philipf,ines. (Par . 1, Petition, admitted in Par. 1, Answer, supra.) Thus, Braun & Co. being admittedly a non-resident foreign corpo- ration, it � can be taxed only on income derived from sources within the Philippines (Sec. 24( b)( 1), supra.), or on com- pensation f or labor or per sonal services p:.rformed with- in the Philippines (Sec. 37 ( a )(3), supra.) From the provision of the contra ct entered into by and bet-

--�-�---------~�----'----'-..;_.....� DECISION - CTA CASES NOS. 2624 & 2661 - 11 - ween Braun & Co. and Esso Fertilizer aforesaid, it can be rea dily noted that the competent s pervision, procure- ment and engineering services cons isting of all proces- ses of mechanical engineering, p rchasing and expedit- ing of constr'uction drawings, and also the supply of �. imported materials including transportation to the Phi- lippines which Braun & Co. undertook to furnish simply re- quire that the same shall be in accordance with the job specifications approved and accepted by Esso Fertilizer. The evidence show that in un dertaking its contracted services, Braun & Co. made preliminary engineering work and studies to be used as basis of the job specification and these were all done in Alhambra, California and Con- necticut. (See Exh. ?Ws, pp. 137-190, Deposition of Arthur Schaefer) After Braun & Co s proposals were ac- cepted by Esso Fertilizer, the detail~ and final engineer- ing plan, drawing or designs were then prepared in accord- ance with the job specificJtion and these were like- wise done abroad. (Exhs. ?Ws & 7Xs, ~!:..�..) The same . is true with respect to the procurement of materials � The evidence indicate that the procurement of materials were done outside the Philippines (See Exhs. A-Z, AA to II, Folder I), after which they were shipped to Limay, Bataan. (Exhs. WVV'N, Folder 3) These, to our findings, are the contracted services performed by Braun & Co . With respect to the contention that Braun & Co. and Transworld are one and the same entity, we cannot agree. 139

DECISION - CTA CASES NOS. 2624 & 266 - 12 - Aside from res po nde nt's admi ssion that Braun & Co . is a non-resident foreign corporation, i t i s an elementa~y principle in corporation law that a corpora tion is an entity se par ate and distinc t from ~ts stockho lders and f rom other corporaions to which it maybe connected. No evidenc e whatsoever was pre ented by r espondent that Transworld, so as to give ground for t he disregard of its corporate identity, was used by Braun & Co. as a means or device to defeat public convenience, or, otherwise defraud th e Government of lawful revenue . A Tax pa yer is free to choose the form in which it will do business , an d if, having cho osen a form and actually carries on the business un der the structure it hus adopted, the governme nt cannot deprive it of the benefit of that chosen form, except only upon a clear showing that that form is unrea l or sham. (Paper Indu stries Corporation of the Philippines an d Bislig Bay Lumber Co., Inc . v. Commis s ioner of Internal Revenue, CTA Case No. 2402 , Septenber 15, 1976; citing Hig gins vs. Smit h , 308 U .S~ 473.) On the assertion that Esso Fertilizer paid Braun & Co. on the basis of the wor k performed, we ca nno t likewise agree. This mo de or manner of payment adopted by Esso Fertiliz er is bu t an ordinary procedure applied in a cons t r uction job or proj~ct where staggered payment is done f or conv~nience and in order to assure the ovmer that the contra ctor would perform their obligation. Be si des, we c annot se e how this manner of payment would show that Braun & Co~ r e ndered services i n the Philippines~ 1 �1 0

���--�---~---------�- . ~ DECISION - C~"A C/1.SE S NOS. 2624 & 2661 - 13 - As to the argument that Transworld was organized as a subterfuge of Br~un & Co. we are convinced that this is no~ so. The rEcords show that Transworld , during the yr::..ar s in quEstion, vJas a for ei gn corporation organized and Existing un ~~ Er the: laws of thE Republic of LibEria� but licEnsed by the Philippine SecuritiEs & Ex change Commi s sion, to eng~e in business in the Phi l ippines, particularly in the construction of industrial plants , (Par. 1,, Petition, admitted in Par. 1, AnswEr, ~lll:Q�) Evidence also indicates that ev en before the Esso Fer- tilizer plant in Limay, Bataan was constructEd, Trans- world had alrc:-ady been engc:g cd in the construction of plants in different countries such as that of thE In- ternational Chemicals Inc. at Australia , New ZEaland; the Sasol plant in South Africa; and the plant of Ess o Chemic NV in the Netherlands. (lxh. 7Ts, pp . 11-12, Dc:posit:ion of 'dilliam G. Fields) In fine, WG find no basis for disregarding the sE- paratc juridical pc:rsonalities of the two corpor ations and to conclude t ha t Braun & Co . pErformed or rendered services in the PhilippinEs or receivEd compensation from sources withi n the Phi l ippines in co nnecti on with the c onst r~cti o n of the Esso Fertilizer plant in Limay, Gataan. It neces s~ rily follows, t hereforE, that with the exception of Transworld wh ich we hold liable for con- tractor and for income tax, Braun & Co. under the cir- cums tanccs is not liable either for any contr actor's tax as wc:l l as for in come tax . \ 2nd Issue::.: Whether or no t the disallowance of somE

DECIS ION - CIA CASES NOS. 2624 & 2661 - 14 - deductions claimed by Transworld in i ts 1965 and 1966 income tax returns are jus- tified; and Undoubtedly, being a foreign corporation licensed to do business in the Philippines, Transworld is tax~ able upon its net income f rom .s our_ces within the Phi:- lippines (Se c . 24(2), Tax Code), or on compensation for labor or personal ser vic es performed in the Philip- pines (Sec . 37(a)(3), supra. ). It appears however, . that respondent disallowed the foll owing deductions claimed by Transworld in its 1965 and 1966 income tax return s; (a) Vacation liability 1964-6~ 1965-66 20, 766.� 50 ����� P 45,013.80 (b) Profit sharing and retirement expenses ��� � � 56,940.00 19,500.00 (c) U supported expen- ges � .� ���. � ����� ?O , OOOqOO Tota l � �.�.....�� PrrrlR2 J..a.,9,20,a.�,O P 4Q,~�.L~9 . (Exh. 4, pp. 1 6 5 - 17 2 , rec., e'T Ac ase o. 2b6l) The reason of respondent f or di~allowing these de- ductions is that these disallowances , not having been subject to a protes t by f: titioner adrninistrativel y, it can no l ong er be qucstiuned in this case. However, as stated elsewhere in this decis i on, Braun and/or Trans- .. wor ld had duly protes te d respondent's assessment dated July 16, 1970. In effect the validity, legali t~r, pro- priety and correctness of the entire assessment includ- in g the aforesaid disallowances were disput ed by pet- itioner. Notwithstanding the protest made, we are nevertheless constrained to sustain the disa llowances of the vaca tion l eave liability, profit sharing and re- tiremen t expenses on the ground that Transworld had failed to giv e satisfactory proof that such expenses

DECISION - CTA CASES NOS. 2624 & 2661 - 15 were actual ly made or were incurred. The law allows deduction f rom gros s income the necessary and ordhary business expenses of a business. But in order that these expenses can be deductible ; it must be shown sa- tisfactorily tha t such expenses have actually been paid or incurred, and if thus paid or incurred, the disa~ lowance of the deductions are, therefore, in order. (See Visayan Trans. Co. v. Domingo, CTA Case No. 1119, September 30, 1964~) As to the T-20,000.00 expenses allegedly incurred in recruiting labor and securing labor permits, respond- ent disallowed the deduction on the ground that Trans- world did not present evidence to support such expense. We therefore sus tain the disallowance of the P20,000.0CJ unsupported expense. It is a cardinal rule in taxation that deduction is a matter of legislative grace. (See Perez v. Comru. o f Int. Rev., CTA Case No. 1707, February 10, 1969.) Considering the amount of expenses incurred in recruit- ing labor and securing labor permits and the nature of said expenses and there being no proof of th js expense, it is doubtful whether the same have actually be en spent for the purpose, and it was propr for respondent to disallow the claim in the absence of evidence to support their deductibility (Tan Guan v. CTA No. L-23676, April 27, 1967, 19 �seRA 903 )o Moreover, in appeals to the Court of Tax Appeals, the determination of the Commissioner o Internal Rev- 143

DECISION - CT A CnSES NOS. 2624 & 2661 - 16 - enue is presumptively correct and the burden of proof is on the taxpayer to show thG contrary (Coll. of Int. Rev . v. Bohol Land Trans. Co., 107 .i?hil. 965). In this connectio n , Tr answorld having failed to overcom~ its burden of showing that the disallowance by res- � . pendent i s not corrc:ct, the disallowance of the afore- said deductions must be sustained. Whether or not the a ssessments herein involved were issued withi~ the period prescfibed by law. !3 raun & Co .� and/or T~answorld, in t heir petition for review and menoranda h ave raised tbe question of prescription. These cases involved deficiency assess- nents for the ~a xabl 2 y ea r~ 1964 to 1966, but as had been discussed in relation to t he first issue, Brau n & Co . is not liable for contractor's tax as well as income tax, the re fore, the is sue he rein , boils down to whether th e deficiency income tax assc:ssm cnt against T:cansworld for the fiscal y ear ended June 30, 1964, has already pr escribed. It ~ppea~s that Iransworld has not be~n charge with the f a~lure to file an income +ax returns, or the filing of a false or fraudulent returns and that the respondent had not imposed the 50% f raud pen alty. Such being the case, the questio n of prEscr i ption at b~r falls squarely under Section 331 of the Tax Code. Un- der analogous facts, this Court has ruled that when respondent did not include the fraud penalty in the deficiency assessment, it is an indication that res- 1 '1 �.1~ L

DECISION - CTA CASES NOS. 2624 & 2661 17 - pondent himself did not believe that the filing of the income tax return was a ttended vith fraud with intent to evade payment of tax (Gomez v. Domingo, CTA Case No. 1168,. February 15, 1964; C.M. Hosl"ins & Co. Inc. vs. Comm. of Int. Rev., CTA Case No. 1623, September 22; 1967; American Rubber Co. v. Coll. of rnt. Rev. CTA Case No. 164, July 31, 1965). In view of this, we are inclin ~ d to agree with counsel of Transworld, that the defici ency inc ome tax assessment for the fiscal ye ar ended June 30, � 1964 was issued beyond the five - year per- iod provided by l aw counted from the filing of the re - turn, considering that the rciurn was filed Oct ober 15, 1964, and the assessment having been issued only on July 17, 1970. In other words, more than five years having elapsed, counted from the filing of the 1964 income tax r eturn to the date the assessment was made on July 17, 1970, it is clear that the right to assess the de- ficiency t a x for s aid period has therefor e pre s cribe d. In the final analysis, Transworld is liable f or deficiency income tax in the amount of P46,398.78 for 1965 and 196 6, computed as follows: Fi s ca l Ye ar 6- 30-65 Net inc ome per return � � � 0 � P 943,626.34 Add: Una llowable deductions : ( 1 ) Vacation leqve liabi- lity; profit sharing & retire- ment expenses & unsupport- ed expenses � � � � � 121 , 953,80 Net income per investiga- tion � � � � � oP1,065,580. 14 Tax due thereon � o �� �� 311,674.00 1 ~15

---~ --=�~'�'-=-=---�- --- --��=-=--=--��== = == == DECI SI ON - CTA CASES NOS . 2624 & 2661 - 18 - Less amount already assessed � � � 0 � p 281,617.00 Ba t1%a n c e � �� �� ��� o � 0 �p 30 ,057. 00 Add mo. int. from 10-16-65 to ~� 5,410 . 26 10-16-68 ����0 � � � � 0 Total amou nt due � � � � � � o � � .. f 0 35,456.26 Fisca l Year 6-30-65 Net i ncome per rdl.lrn � � � �� � � � P 64,792.39 Add: Una l lowable deductions ( 1 ) Vaca t i on le ave lia- bility � � � p 20,766.50 (2) Profit sharing & r etirement exp. � �� � 19,500 .00 40 , 266L50 Net -i n come per investig ation �� P 105,058.89 Ta x due thereon � � � � �� � �� P 23 518.00 Less: Amount alrea dy assessed � � ~-=1..,.:.4~,254.00 Ba 1t%a nc e �� � ��� � � �� P 9, 264.00 Add: mo. int. fr. 10-16-66 to 10-16-69 � � � 0 � � � � � � � ---~66~~ Total amount due � �� � ���� P 10,931.52 TOTAL AMOUNT DUE & COLLECTIBLE � ! _46,d2_8. 78 Accordingly, petitioner Braun Transworld is liable to pay respondent Commissioner of Int ernal Rev e nue th e amounts of f>35,467.26 and Pl0,931.52, as deficinncy income tax for the years 1965 and 1966, respectively, or a total of P46,398 .78, plus surcharges and interests which have ac crued theXreon incident to delinquency. WI-JER c FOI~E, the appealed decision of the Commission- er of Interna l Revenue in CIA Case No. 2624 is hereby revr rsed. The ap pealed decision of the Commissioner of Inter- nal Revenu-e in CT/\ Case No. 2661 is hereby modified. Petiti oner Braun Tra nswor l d Cor pora tion i s hereby or- dered to pay responde nt de f i ci enc y i ncome tax in the t t a l sum of P46 , 398.78 f or taxable year 1965 a nd 1966, in cluslve of sur charges and interests pursuant to Sec- 14G

Dl:CISION - CT A CASES NOS. 2624 & 2661 - 19 - tion 5l(e) of th e National Internal Reven ue Code , as amended. With co sts against pEtitioner Brau n Tr answorld Corporation . SO ORDERED. Que zon City , April 30, 1979. ~C~;; CQ,JSTc\~JT E p�. RoAQUI N Asso c iate Judge FI~ .. / I CO'JCUR:~\ aW1;~ 1\li"'!TC ~cting Pr Esiding Judge 14 }A;