CTA Case No. 3756 (Decision)

Q ~ tJRUC 0 P �n ?. PIUUl'il'tlVO ~OURT OF TAX A PPEA.L,t:~ QUfZON Cl..,.., HOLLAND MILK PROD UCTS, INC ., C.T.A. CAS E NO. 3756 Petitioner , - versus - COMMISSIONER OF I NTERNAL REVENUE, Respondent. X - - - - - -------------- - - - - - - X DEC I SION Petitioner co mes on an issue que stio ning the factual and legal basis of the respo nde nt ' s denial of its prot est against the deficiency assessments for witholding tax at source for 1974 and income taxes for the years 1975 , 1976 and 1977 as originally demanded in a letter dat ed June 20, 1983 itemized and computed as follows: 1974 - Deficie ncyr-thholding Tax At Source Selling price of HCMI shares in HOMPI ��� e 6 , 000,000.00 Less: Cost of shares of stock �����o���� 4,000,000 . 00 Capital gains subject to tax ������ ������ e 2,000 ,000.00 35% Tax due thereon �� � ��������� � �� � ����� 700,000.00 Add: 50% Surcharge ����������� � ������� � � 350 , 000.00 42% Interest (maximum) � � � � �������� 294 , 000.00 TOTAL AMOUNT DUE AND COLLECTIBLE ........ e J._t344,000.00 1975 - D.eficiency I&'ome Tax Net income per return �� � ���� � ����������� 217,822,747.00 Add: Additional income : Undeclared income arising from rebates, overprici ng , price fall protection, interest adjustments, freight rebates, i nsurance claim, commission and sho r t landings. A$670, 000 � 89 . 5033 6,367 , 211.00 Net income per investigation � ����������� 224,189,958.00 ,1... [- 0

DECISION - CTA CASE NO. 3756 2 Income tax due thereon � � ����������� � ����� � e B,4S6,485.oo Less: Income tax due per r eturn ���������� 6,2 27,961.00 Balance �� �����~�� � ����������� ������� �� ���� e 2,22B,524.oo Add: 50% Surcharge �� � ��� ���� oo oQ�� ��� ���� 1 '114' 26 2. 00 42% Interest (maximum) ��� ��� �� ������ 935 '9 80 . 08 TOTAL AMOUNT DUE AND COLLECTIBLE �� ���� ��� � =8=4='=2=7=8~,7=~ 1976 - Deficiency Income Ta x Net income per return �������� � ��� � �� �� � ��� 829,897,863 . 00 Add: Additional i ncome: Undeclared income arising from rebates , overpricing, price fall protection, int erest adjustments, freight rebates , insurance cl aim, commission and sho r t la ndings. January 52 19 76 A $127,176 .61 X B9.4531 = Bl, 202, 213�. 21 _June 20 , 1976 A $450 ,000.00 x B9.1946 = ~~' 13 7 ' 570.00 July 9, 1976 A $418,268 .81 x B9.2212 = 3 ,8561940. 35 9 ,196,723.56 Net i ncome per investigation ��� � �� � ������ ~ 839 , 094,586.56 Income tax due ther eon �� ���� � �~������T���� 813,673,105.00 Less : Income tax due per return ���������� 10,454 , 252.00 Balance ��������� ~ ���� �� ~ �� � ��� ����� ��� ���� e 3,218 , 853.00 Add: 50% Surcha rge � ���������� ������ � ����� 1 , 609 , 426.50 42% Interest (ma xi mum) ��� ���� ��� � ��� 1,351,918. 26 TOTAL AMOUNT DUE AND COLLECTIBLE � ���� ����� e 6,180,197.76 - = 19 77 - Defigiencyiincome Tax Net income per return �������������������� ~ 39,858,099.00 Add: Additional income: Undeclared income arising from rebates, overpricing, price fall protection, interest adjustments, freight rebates, insurance claim, commissions and short landings. 181

DECISION - CTA CASE NO. 3756 3 March 9, 1977 A $585,968.42 X ~8.1967 = P4,803,007.35 March 27, 1977 A $826,894.10 X ~8~2088= ~!787,8 08 .~ �%11,590,815.64 Net income per investigation ��� ...���. �.��.� .. ~51,448,914.64 Income tax due ti1ereon �����.��.��.�.�� � .��.��� Pl9,491,253.00 Less: Income tax due per return .��..����.��.� 15,097,857 . 00 Balance ....... . ........ .. ............ . ........ Et 4,393,396.00 Add: 50% Surcharge ���� � ��� ��.....� �� . �..�� . . � 2,196,698.00 14% Int. fr. 4/16/78 to 7/31/80 �������.� 1,409,137.83 20% Int. fr . 8/01/80 to 4/16/81 ����� �� �� o:::--:::--::6":::"21~,~8~4'i:--l."-=2-=-7 TOTAL AMOUNT DUE AND COLLECTIBLE �������������� P 8,621,073.10 ==:z::r :an:z:m=r:=s�z=r!":!f:W Petitioner, Holland Milk Products, Inc. (HOMPI for short) a domestic corporation organized and existing under and by virtue of Philippine laws is engaged in the manufacture/pro- duction of dairy/milk products . It secures raw materials (skim powder mi lk, etc.) .from the Australian Dairy Corporation (formeily the Australian Dairy Produce Board) ~ an agency of the Australian Government. Its capital shares are owned and distributed as follows: GF Equity, Inc . . . . . . . . . . . . . . . . . . . . . . . . 60% *Holland Canned Milk International ...�� 26 2/3% *Australian Dairy Produce Board .��..� . � 13 1/3% (*Non-resident foreign corporation) Sometime in 1974, HOMPI shares owned or held by Holland Canned Milk International, a non-resident foreign corporation were sold and trensferred to the Australian Dairy Produce Board (now Australian Dairy Corporation) , likewise a non-resident forei gn corporation not engaged in trade or business in the Philippines. 18 ~ �

DECISION - CTA CASE NO. 3756 4 In fealty to the statutory requisit i ons, petitioner filed corporate income tax returns for the years 1974, 1975, 1976 and 1977 and paid the corre s ponding tax due as follows: -Year Amount Paid O.R. and Dates 1974 Pl,769,520.00 2207298 - 4-14-75 1975 5,045,058.00 2977333 - 4-19-76 1976 6,674,842.00 09358425- 4-15-77 1977 7,433,210.00 30692056- 4- 17-78 In a subsequent investigation/verification of the afore- said tax returns conducted by the respondent's of f ice, there was assessed aga i nst, and paid by the petitione r, the following deficiency inc~me t axes, viz.: Yea r Deficiency Assessment O. R. & Date 1974 p 9,397.41 22 0 7458 - 5-19-75 1975 34,932.00 11959525 1976 30,498.38 21230941 - 8- 4-77 1977 73,353.27 2453446 - 2-10-78 - 7- 2-79 Accordingly , corresponding letters of confirmation were issued by the respondent's effice declaring petitioner's tax cases for the years 1974 through 1977 closed and te r minated. It appears however that by a report of the Revenue Attache in Australia sometime in September, 1981, evoking a sense o f a deja vu as to petitioner 1 s "possible tax evasion" in its business dealings with the Australian Dairy Corporation, respondent Commi s sioner of Internal Re ve nue ordered a s econd look into the books of accounts and other accounting records of the petitioner which culminated in another deficiency assessment now under consideration �� 183 c

DECISION - CTA CASE NO. 3756 5 Petitioner protested and sought cancellation and with- drawal of the assessments in a letter dated July 25, 1983, but to no avail as the same was denied by the respondent Commissioner of Internal Revenue under letter dated February 22, 1984. Hence this petition for review. All told the disputed tax cases of the herein petitioner covering a four year (4) period - 1974 to 1977, were the subject of earlier investigation/verification, found deficient, corresponding taxes paid and the cases accordingly declared closed and terminated by the respondent's prede- cessors. Petitioner must have found a reassuring prospect of a warm cubby-hole within the import and scope of that legal constraint against multiple investigation such that taxp�ayers' books of account s and records "shall be subject to examination only once in a taxable year during the five year period by internal revenue officers." (Sec. 324, Tax Code)~ Having fared consistent with the legal mandate, it must have come as an unwarranted expectation for peti- tioner to labor a~ain through a gauntlet of a dema nding wringer of an examination/verification giving rise to the assessments for deficiency withholding and income taxes encapsulated in respondent's letter of demand of June 20, 1983, supra. The apparent patina of cogency impr essed

DECISION - CTA CASE NO. 3756 6 nonetheless, we have but to ~iew with ease the peti - tioner's righteous indignat ion in prying loose from what it considers an arbitrarily imposed second assessment. Settled is the rule that the Government is not estopped by the errors and mistakes of its agents. The first issue raised, re: deficiency withholding tax at source for the year 1974, hardly presents a grip- ping question. Petitioner is being held liable as with- holding agent for the amount of ~700,000.00 before the incremental surcharge and interest, representing the tax on the capital gain s derived by HoLland Canned Milk In ter- national in the sale of its HOMPI stocks to th e Australian Dairy Corporation pursuant to Section 53(b) (2) of the Tax Code, providing, "In the case of foreign corporations sub- ject to tax under this Title not engaged in trade or business within the Ph ilippines, there shall be deducted and withheld at source in the same manner and upon the same items as is provided i n subsection (b) (1) .of this section, as well as on remunerations f or technical services or otherwise, a tax equa l to thirty-five (35%) per cent thereof ." (Emphasis supplied) . Moreover, Presidential Decree No. 1457 has grafted an amendatory proviso in Section 37(e) of the Tax Code, providing, "That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within 18';

DECISION - CTA CASE NO. 3756 7 the Philippines regardless of where the said shares are sold ... The petitioner maintains that no tax is due on the sale and transfer of the petitioner's stocks by Holland Canned Milk International to the Au s tralian Dairy Cor- poration, both non-resident corporations not engaged in trade or business in the Philippine s , because the l ocus of the undertaking was outside the Philippines. 11 Admitted- ly, the sale of HOMPI (petitioner) shares between Holland Canned Milk International and Australian Dairy Produce Board (now Australian Dairy Corporation) which are both non-resident foreign corporations, was entered into and consummated outside the Philippines in 1974. This fact was confirmed by the BIR agents in Par. 8 of their Joint Affidavit . Clearly, the capital gains received by Holland Canned Milk International was derived solely from sources outside the Philippines. Therefore, it is not s ubject to tax by the Philippine Government, pursuant to Section 24(b) of the NIRC, as amended, which provides: '(b) Tax on foreign corporations. - (1) Non- resident corporations - a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income receiv ~~ during each taxable year from all sources within the Philip�ines, as i n tere st , dividendsL rents, royalties, includin.g remunerations for t~ch nical services, salaries, premiums , emoluments or-- other fixed or determinable annual, periodical or casual gains, profits and income and capital gain~~� (Undersc?ring supplied) 18G

DECISION - CTA CASE NO. 3756 8 That whatever gains received by Holland Canned Milk Inter- national a risi ng out of the sale of its stockholdings in HOMPI {petitioner), to the Australian Dairy Produce Board, is income out si de the Philippines, is supported by the clear and unmistakable provision of Section 37( e ), last sentence, before i ts amendment in 1978, Thus , it provides: 'x x Gains, profits, and income derived from the purcha s e of personal property within and its sale without the Philippines x x x shall be treated as derived entirely from sources within the country in which sold.' (underscoring supplied) As thus shown, in sofar as the provisions of Section 24(b) .and Section 37(e) of the Tax -Co de are brought to bear upon the facts and circumstances obtaining in t he case at bar, the capital gains realized by Holland Canned Milk International as a consequence of the sale of stocks were solely from s ources outside the Philippines and therefore not subject to tax by the Philippine Governmen t . Petitioner was under no obligat i on much le s s in a position to withhold the tax as it never was the payor nor the custodian of the income . The amendatory provision in PD 1457, supra, interposed by the respondent, finds no application as it took effec t only on June 11, 1978 and the transaction in the case at bar dates back to 1974. Obviously, the deficiency assessme nt for withholding tax at source against the petitioner as withholding agent has fallen sharply at odds with the statutory proscription. c l n ~

DECISION - CTA CASE NO. 3756 9 The deficiency income taxes for the years 1975, 1976 and 1977, assessed on the alleged "huge underdec- laration of income" by petitioner (HOHPI) "through its officers, derived by way of rebate arrang eme nts, over- pricing, price fall protection, interest adjustments, insurance claims, commissions and shortlandings with the Australian Dairy Corporation in connection with the sale and s upply of skim .milk powder and other dairy products between the two corporations" appear to have been based on the copies of the report and related documents su bmi tted by the Revenue Attache in Australia which respondent deemed as the best evidence obtainable, to wit: (a) Report prepared by the Au stralia n Dairy Corporation (ADC) and Asia Dairy Indu s trie s (HK) Ltd., (ADI) dated October 2,1982 on the "Sale s of Skim Mil~ Powder to Holland Milk Products, Inc. (petitioner)"~ (b) Report dated April 27, 1982 of K.F. Brigden , Auditor General, Australia, on the "Rebate Arrangement which applied to Australian Dairy Produce Board/ Australian Dairy Corporation sales of skim milk powder to Holland Mil~ Products, Inc. during the period December, 1974 to 1977"~ and, (c) "Off ici al Hansard Report" of the proceedings in the Aust~alian Senate Committee on Finance and Government Operations regarding the rebate arrangement by Australian Dairy Corporation with Holland Milk P Products . Inc. Ensconced in the aforesaid reports is an information "pointing out in particular the payments made, to HOMPI's credit, by the Australian Dairy Corporation/Asia Dairy Industr ies o~ the shipments of ski m milk powder to HOMPI 1.l. 8'1�,)

------------~~= DECISION - CTA CASE NO. 3756 10 pursuant to t he supply agreement covering the period from 10 October 19 75 to 27 March 1977, to wit: 'Once the system was established, Mr. Uytengsu telephoned at irregular intervals, inquir e d a s to HOMPI ' s credit, and then nominated an amount to be remitte d in the established fashion . P ~yments were made as follows: Payment Date Amount (A$) 30.10 . 75 670,000 . 00 5. l. 76 127,176.61 20. 6 . 76 450,000.00 9. 7.76 418,268.81 9. 5.77 585,968.42 27. 3.77 826,894.10 Total .� 3,0~8,307.94 'These remittances formed part of the ADC Annual Financial Statements and were subject to audit by the Commonwealth Auditor-General. 'The way in which these amounts paid has arisen to the credit to HOMPI as follows: Item Amount (A$) 1 . Rebate-$25 per tonne on 31 . 362 784,042.00 tonnes 1,323,219.00 2. Overpricing 517,699.00 3. Price Fall Protection 292,079.00 4. Int~rest Adjustments 103,962.00 5. 2 per cent commission 6 . Freight rebate/insurance 57,14 8. 00 3,0 78,149.00 claims /shortlandings Total 'The difference betwee n the two amounts, (credits and amount paid), is du e to bank charge s , roundings, etc.' � (Exhibit 2-. B, p. 43, BIR Ee c.)" .10 ,.-... '.

DECISION - CTA CASE NO. 3756 11 Petitioner assails the 1egal sufficiency of the reports as the sole evidentiary basis for the assess- ments and hold3 on to the proposition that - "On the admissibility o f the various reports, namely, the Report of ADC/ADI Management and the Report of the Auditor General of Australia, we strongly restate our position that the said evide nce are double hearsay and should have been excluded from the records. There is no showing whatsoever that HOMPI was involved or a party to the investigation conducted. If at all, the investigation was conducted for the purpose of eY.posing c ertain irre- gularities in some Au stral ian government agencies. There is no scintilla of evidence linking HOMPI to the tran- sactions. Thus, in two investigatio ns previously cc ndu c ted by representatives of respondent, there had bee n no indi- cation whatsoever of HOMPI's participation, directly or indirectly in the so-calle d rebate or commission arrange- ments. HOMPI's name was only utilized as a front but it did not re ce ive any benefit from the all~ged arrangements. Again, at �the ri~k of being repetitiou s, it is stressed that the exhibits, Report of ADC/ADI Management and Report of the Auditor General of Australia, s hould be excluded for being inadmissible as they mi serably failed to meet the requirement of Section 20, Rule 132 of the Rules of

-------------- DECISION - CTA CASE NO. 3756 12 Court, which provides that: 'Whenever a copy of a writing is atte sted for the purpose of evidence , the atte sta t ion must state in substance that the copy is a correct copy of the original or specific part the reof, as the case may be. The attestation must be under the official sea l of the at t e s ting offic e r , if there be any, or i f he be the clerk of court having a seal, under the seal of s uc h court.' So be i t. Rather t han be flummox e d into taking a precipitate action .we choose not to resort to the narrow labyr inth i c a l technicali ties and by reason the reof di s - cornbobulate altogether the opportunity of having the ca se adjudicated on the merit. The subject tax deficiency is essentially addressed to the alleged "huge underdeclaration of income" con- sequenced by a kind of s l ic kly practiced arrang e ments under the supply of skim milk powder agre e ment between the pet itioner and Austr a lian based corporations . If we go by the records, the circumstances o b taining are by no means clear ~ s to any showing of direct and affi rmative participation or i nvo lvement of the petitioner in the "irregularities" .committed by certain officials of the Australian Dai ry Corpor ation and the As ia Dairy Industrie s (HK) Ltd. It comes as an aggravated chutzpah considering that "petitioner did not have any opportuni ty to be heard for it was never a party ther e to." Neither is it clear as to any showing of petitioner's effective control and o'wnership of any s pecific amoun t of fu nd s 18 1

DECISION - CTA CASE NO. 3756 � 13 drawn or derived from such af~iliating business practice s of rebates, commissions and the like, extended by the Australi an Da iry Corporation. Clearly discernible from the "ADC/ADI Repo rt" which brooks the circumstantial clout for the controverted assessme nts, are such findings denegating petitioner's availment of any such bounty dir ectly or serendipt iously , thus ��� "ULTIMATE DESTI NATION OF THE FUNDS - The total amounts involved were remitted as directed by Mr. Uyteng s u to the 'Charter e d Bank Si ngapore for account of Chartered Bank, Hongkong per instruction of Mr. W. Uyt e ngsu or Mr. G. Young.' It can be seen that the amount that left ADC wa s not__Eaid to HOMPI (petitioner), th e organization which had the credit entitlement, although the payment method was directed by the President of HOMPI. " (Page 23 of Exh. 2-A; p. 41, BIR records) (Underlining supplied). "CURRENT S'l'ATUS OF THE ACCOUNT - As indicated earlier it is not known in who s e name the ac c ount is conducted or at which bank the account is conducted. It is not known wh et her amounts have been withdrawn from the account and for what purpose the y have been util ized . It is not kno wn, for e xample, if the Dutch partners in HOMPI (Holland Canned Milk) have received their not ional equity in the amounts remi tted by ADC." (Page 27 of Exh 2-A;. p. 37, BIR Records) (Underlining suppl�ied) "8.16. The rebate was therefore not in fact paid to HOMPI; it was paid to a bank to be h e J.d for disbursement at the direction of e ither of the two principals of HOMPI's majority shar e halie r s , GF Equity. If the rebate h a d been pai d dir e ct to HOMPI, it would pr e sumably have been distribute d t o the shareholders as dividends or in some other way accounted for to the shareholders, x x x Furthermore, we have been able to obtain no additional

DECISION - CTA CASE NO. 3756 14 information on the details of the disbursement of the remainder of the rebate funds." (BIR Records, pp. 73 -74) "8.17. The matter is complicated even more by the fact that the ADC paid moneys to the foreign bank significantly over a nd above the rebate payments . x x x The eventual where- abouts of these fund s is also unknown to the Committee. The Auditor-General did not comment on these large payments when auditing the ADC accounts. x x x" (BIR Records, p. 73) . (Underlining supplied) Viewed in the light of the foregoing, we cannot validly infuse cognizance to an assessment found s hort of specific support in terms of tractable~ data openly laid and fully disclosed, much less fashion a "possible tax evasion" case out of inconclusive ends with ambiguous means of validating the principal cause of action. It will be too much of a stretch to hold petitioner account- able for such amount of income more than what was called upon it by law to declare. It may be necessary to repeat what the Supreme Court he ld and what so plainly apply to the case at bar that - Assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. And, in order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correc tness of a ssess- ment being a mere pr esumption cannot be made to rest on another presumption. (Collector of Internal Reve nue v. Benipayo, 4 SCRA 185 ) ~ The re sponde nt has fumbled into

DECISION - CTA CASE NO. 3756 15 a reversible e rror. The reach of the issues upon which we rest our decision renders resolution of other subsidiary questions of prescription and fr aud unnecessary . UPON THE VIEW WE TAKE OF THE CASE, the assessments for deficiency withholding tax at s ource and income taxes for the taxable years 1974-1977 inclusive of interest and penalty against the peti tioner are hereby set aside and cance lled . No costs. SO ORDE RE D. Quezon City, Metro Manila, August 29, 1986., ~R~YES~ As s ociate Jud e WE CONCUR: TANTE C 7:<~UIN Associate Judg~ lS 1