CTA Case No. 3530 (Decision)

I EPU I OP �tH PHIUJ> COURT Of TAX APP-�~ QUEZO C T11' / TOURS SP ECIALISTS, INC., Petitioner, - versus - C.T.A. CASE NO. 3530 COMMISSIONER OF INTERNAL RE VENUE, Respondent. X- - - - - - - - - - - X DECI S I 0 N This is a pe tition for review of the dec is ion of respondent Comm i ssioner of In ter na l Rev e nue hold- ing petitioner Tours Specialis ts , Inc. liable for the a mounts of e495,333 . 97, el42,420 .32 and el2 7 ,686. 00 or a total of e765,440.40 a s defici e ncy income tax f or the ye a rs 197 4, 1975 and 1976, respectively . Petitioner is a corp oration duly organ iz ed and e xisti ng u nde r the laws o f the Philippines, with prin- ci pal offi ce and address at P. Burgos St., corner Merc~des St., Makati. I t is engaged in the tours se r vicing busine s s and is duly reg istered with the Philippine Tourism Auth ority under Certificate of Reg ist r atio No. 002 and 002- A dated Au gust 9, 19 74 and May 18, 1976 , r espectiv ely. (Exhs. "K" and "1<-.l", pp. ll q an d 115 , BIR records.) As a registered tourism en terpri se, petitioner, avai l .ing �of the r e duced income tax ince nt ives granted 146

DEC ISI ON - CTA CASE NO. 353 0 - 2- in Pr e sidential Decree No. 535, deducted from its net taxabl e jncome for the years in question, the fo llowing a mo u nts it c ompute d to be 50% of i ts total foreign cu rre ncy earni ngs : 19 74 !:! 2�, 4 71 '8 0 0 . 13 (Exh. "A-1", p. 16, BI R r e c o 1� d s � ) 1975 82,125 , 784.44 ( Ex h. 11 B-l", p . 40, BIR records .) 1976 81,341,993.00 (Exh. "C- 1", p. 65, BIR records . ) On Novembe r 22, 1977, t he Philippin~ Tourism Au t hority, o r simply Authority, pur s uant to Presi- dential Dec ree No . 535 , which vests in it the admi- nistrati o~ of investment incentives to registered tour i sm enterprises, issued "Ce rt ifica t e of Re d L�ce d Incom e Tax under Section B(a) of P.O. 53 5 " al lowing petiti oner to d educt from its net tax ab le income, 50% of i t s foreign e xchange earnings as de termined by said Auth or ity. This certification is reproduced hereunder: (Exh. " J" , p. 116, BIR records , ) 22 November 1977 Tours Sre cialists, Inc. Makati Bel - Air Condominium 5022 P. Burgos St r eet Makati, Metro Manila Re: Ce rti f ication of Reduced Income Ta x u nd er ��section 8 ( a) of P. D. 53 5 Gentlemen : Pursuant to Pre sid enti a l Decree No . 535 which ves ts in the Philippine Tourism Autho- rity the administration of inv est ment incen-

DECISION - CTA CASE NO. 3530 - 3- ti ves to registered tourism enter- prises, you e~ e hereby allowed to dedu ct from your net ta x abl e in come for the yea rs specified hereunder the following amount s: 1974 ~1,147,346.00 1975 ~1,261,559.00 1976 ~1,476,8 8 3.00 The deductible amounts represent 50 ,6 o f y ou r For e i g n Exc h a ng e Ea r n i n g s of P-2,294,692, ~2,523,118 a nd ~2,95),767 for the years 19 74, 19 75 a n d 19 76 res- pect i vely . This certificate is subiect to the provisions of Se ct ion 8(a) P.D. 535 and Section 10 of R.A . 6135 . We trust that you will be guide d accordingly. Very truly yours, (SGD.) RODOLFO A. CACDAC Ac t ing General Manager cc: Department of Finance. Bure a u of Inte rn al Revenue Under Letter of Authority No. 04348 NA dated December 4, 1977, respondent's examiners of the Investme nt I ncentives Division conducted an exam- ination of peti tioner's income tax liabilitie s for the years 1~74 to 1976. (Exh . "6", p . 136, BIR records.) After investigation, said examiners reco rn:1e nded the disallowan ce of the reduced income tax incentives a vailed of by petitioner for these years and the dis- allowance of claimed expenses in the respective amounts

DECISION - CTA CASE NO. 3530 - 4- of 829,076.75, El0,918.39 and E20,833.21 for the ye ars 1974, 1975 and 1976. On the bas1s of the findings and recommendations of the examiners, respondent issued against petitioner the following deficiency income tax assessments dated November 29, 1979 and March 12, 1981 for the years 1974 2nd 1975 to 1976, respectively: ( EX h � 1 0 II II ' p � 14 2 ' BI R records ; Ex h . '1 12 11 ~ p � l 7 9 8 T R records � ) 1974 Net (loss) income per return (e1,475,657.61) Add: Unallowable deductions: Reduced inc. tax - 82,471,800.13 Prior year's un- supported cxps. 29,076.75 Net income per investigation Tax due thereon ����� Less: Tax already assessed Bdlance � � � � . � � [:! 348,826.74 Add: 14% int. fr. 4/16/75 - 4/16/78 1L~6,507.23 TOTAL AM00NT DUE AN D COLLECTIBLE � � �--~~2 ~~~~2z 1975 Net loss per return ����� (el ,821,571.23) Add: Una llowable expenses: Red uced income tax 82 ,125,784.44 Prio r year's un- s upported expenses. . 9,918.39 Tours expenses - un- su~po rted ��� 1 ,000.00 Net income per �nvestigati on 2,136,702.83 . Tax due thereon � � � � � e 315,131.55 . e lOD,296.oo Addz 14% int. fr. 4-16-76 to 4-16-79 �������� 42,124.32 TOTAL AMOUNT DUE & COLLECTIBLE 15.J.

DECISI01 CTA CASE NO. 3530 - 5- 1976 Net loss per retur n ��� �� (81,077,341.03) Ad d : Unal l owable de d u c tions Red uc ed income t ax el,341 , 993.00 Disall owed expenses � 20~883 . 21 Net income p er investiga~ion � � � 1 , 362,826.21 Tax due t hereon ��� ��� .�� e 285,485.18 e 89 , 919 . 80 Add: 1 4% i nt . f r. 4- 1 6 -77 to 4-16 - 80 37 ,766.31 TOT AL AMOUN T DU E & COLLEC TI BLE g- -_- -_1- f-1-!-. �- ~-�-!-.-!�- In its letters dated December 11, 1979 and March 24 , 1981, petiti oner pr otested t h ~ foregoing defic i ency in - come tax assessments. ( Exh. " 14", pp . 145-148, BIR r e cords; Exh. "15" , pp . 182-183, BIR recor ds.) The said prote s ts we re however denied b y r es p ondent in a letter dated August 18, 1982. (Exh. " 16" , p. 196 , BIR recor ds. ) Hence the instant appeal. The issue po s ed for res o l u tion is whether petitioner is entitled to the reduced incom e tax incentiv e s for the years 1974, 1975 and 19 76 under Pre si dential Decree No. 535. Th e app l icable pr o visions o f Pre s idential Decree No. 535 read: nsEC. 8 . Incentives Available to a Registe~d Tourism Ente rp rise - (a) Fifty per c e nt (50%) of fo r eign exchange ea r ned in t he first five years from the start of operatio ns shall be deductible fr om net taxable income, s ub- j ec t to other provisions of Section 10 of Re public Act No . 6135 and r ules and regu- lations t o be promulgated by the Authority. XXX XXX xxx". 1 r� ; U f-..,

DECISION - CTA CASE NO. 3530 - 6- "SEC . 6. Conditions for Av o. il ment of Tourism Inc entives - XXX XXX X XX (c) In the case of re gistered tourism e nterprises located in or who se sphere of a ctivity is in Greater Manila, an aver a ge of se ve nty percent (70%) of its revenues must be in foreign currency, never falling below fifty percent (50%) in any given year within the period for which the incentive s ar e granted and in the case of regist e r e d tourism enterprises located outside Greate r Manil a: or whose s ph e r e o f activity is out - side t i e same, a n overage of fifty percent (50%) of revenues shall be in foreig n cur- renc y , never falling below th i rty-five perc e nt (35%) in any given ye a r with i n the pe riod for which inc en tives ar e granted~ XXX XXX xx x". The i ncentiv e s a vailed of by petitioner we re disallowed by responder t on the gro un d that pe ti- tioner failed to meet the conditions for avail ment of tourism incentives under Section 6(c) ab ove. Based on respondent's computation , petitioner ' s a verag e fo r eign e xchange earnings for the three year s wa s o nly 49.02% of its gross reven ues, which is way below th e mini mum of 70% r e quired under Sec t ion 6(c), and in 1974 and 1975 its percentag e s of fo r ei g i1 exchange earnings t o gross :r evenues o f 40.2 2% o nd 46 .70 %, r e spectively, fell be l ow 50% of j_ts re v enues. Respond e nt arrived at the above figure s as follows: (Exh . "5", p. 119, BIR r e cords.) 1 lr.�Jt.~

DECISION - CTA CASE NO. 3530 - 7- 1974 1975 1976 Total Revenue per E5 ,402,561. 74 EL~,910,834.00 Income Statement E5,704,616.08 50% 50% 50% E2,7Dl,280. 87 82,455,417.00 FX Minimum require- ment per P.D. 535 E2,852,308.04 E2,523,11B.DO E2,953,767.00 FX Earn ings per PTA ~-----!-z-~-l.-!-�-f-.-!-~-z ~-----~-2-~-~-2-2-Q-.-!-QQ- Certificate E2,294,692 .0 0 6--0--.--1--5--%-- Short/Over of Mini- �mum requirement ~-----2-2-Z-.t-�-1-�-.-!-Q-~ Rate of FX earnings 40 ' 2 2 ?~ to Gross Revenue Average FX fur 3 yrs. Petitioner, as s ailing respondent's computation, sub- mitted the following computation showing that the percent- ages of its f oreign exchange earnings to its gr ;Jss revenues for the years 1974 to 1976 were 71%, 77% and 87%, resp ect- ively, or an average of 78.33% of its revenues, never falling below 50% in any of the ye ars in question: (Exh. "J-1", p. 190, BIR records.) 1974 1975 1976 Gross Revenue (all inclusive) e5,7D4,616.oo E5,150,562.00 E4 , 910,835 . 00 Less tour costs 22462f254 .00 12888!350.00 1 2 507 2 901.00 (hotels, rest au- e3,262,2lz.oo E3,402,934 .00 rants, transport- ation, etc.) Gross Revenu e , TSI services e3 ,242, 36 2.oo NET foreign exchange e2,523,118.00 E2,953,766.DO earnings (after � deducting receipts 77% which were for hotels, restaurarts , etc.)~2 ,2 94 ,692.DD Pe r.c e n t a g e o f f o r e i g n exchange earnings 71%

DECISIO N - GA CASE NO. 3530 - 8- Thus t he controversy centers on which, one of the tw~ co mp utations correctly represents the pe r- centages of petitioner's foreign exchange earnings to i t s gr oss revenues for purposes of a vailment of the reduced income tax incentives . To ob tai n th e p e rcentage required in Secti on 6(c), re s pondent applied the formula- f oreign e x- change earnings over gross re venues. For th e f' oreign exchange e a r nings in his com- puta ti on, respondent adopted the figures certified by the Authority a s petitioner 's foreign exch a nge earnings for the years 1974 to 1976 (see Exhibit "J" ) and for t he gross revenues, the gross income from operations declared by petitioner in its income tax returns f o r the s a me years. Applying the above formula , petitioner took up as its foreign exchange earnings , the same foreign ex c han ge earning s as cer t ified by the Authority but for its gross revenues, petitioner deducted tour costs, such as hotel room charges, transportation and restau- rant cost s , from its gross income from operations for these years. Evidently, the point of di sagreement betwee n the contending parties is whether or not in the computation of gross revenues, tour costs should be exclude d from gross income from operations . 15u

DECISION - CTA CASE NO. 3530 - 9- Petiti6ner claims that the Philippine Tourism Authority in the course of its examination conducted in October or November 1977, excluded tour costs in the determinati on of petitioner's foreign exchan gG earnings as per the Authority's certification, al- though it subs equently provi ded petitioner with th e figures for the tour costs. It is contend ed by peti - tioner that if tour costs were excluded from its foreign cxch3 :1ge earnings, the same s hould like wise be excluded from its gros s revenues so as not to distort the proportion of its foreign exchange earn- ings to gross rev e nues. Thus in its computation , petitioner subt racted the tour costs from its gross income from operations. Respondent mai ntains , however, that assuming that petitioner's contention is correct, petitioner nonetheless can not deduct the alleged tour costs for lack of sufficient evidence that the figures f ~ r the tour costs we re determined by the Authority itself, and i n the certification, were excluded from peti- tioner's foreign exchange ear~ings . Other than the self-s erving testimony of petiti oner' s lone witness, there is no evidence, documentary or ot herwise, showing that portion of the gross income from oper- ati ons allegedly intended for tour costs. As a . g~ed

DECISION - CTA CASE NO. 3530 - 10 - by respondent, there is no way of determining how much sh oul d be deducted from the gross income fr om operations in ord er to arr ive at what petitione r claims as its true revenue . We agree with resp on dent . Pet i tione r 's sole wi tne ss , its accoun t ing manager, te stified before the Court that the figures in petitioner's computati o:1 i;:cluding those of the to4r costs , we re actu a lly supplied by the Authority by telephone call only, because the Authority could not furnish the actual records as there should be a formal require ment from the Bureau of Internal R ~ v enue. (t.s.n~, pp. 31-33, June 13, 19B5. ) The testi mony of petitioner's witness on t he figures for the tour costs alleged l y dedu cte d from its f orei gn exchan ge earnirigs by the Authority is, at best, no more than hearsay and therefore has no probative va lue . No official o f the Authority wa s presented to corro borat e her stat~men t. Nei the r was there a ny d oc umentary ev i dence offered by petiti one r t o est abli sh t he correctness of said fig " r es. � In a vaili ng of the reduc ed in come tax incentives, petitioner made its own co mputation of its tota l fore i gn exchange earnings, and in its income tax re- turns, deducted 50 % of these from its net taxable income for the yea rs in questio n. 1 t' .' - -1

- '' DECISION - CTA CASE NO. 3530 Annex "A", attached hereto, is a comp a rative an alysis of the total foreign exchang e earnings of pe t it ione r as ascer t ai ned by it and as dete rm ine d by the Aut hority in its certification. I~ will be noted that for the years 1 9 74 to 1975 the total foreign exchange earnings of petitioner as fou nd by it, compared to tho se determined by th e Auth ority, were much mo .e by ~2,648,988.26 and ~1,72 8,450 .88, respec ti vely. I n its memorandum, pet itioner, t o bolster its claim, attributed thes e differences to it s having computed its total for e ign exchange earn- ing s without any deduc t i on for tour costs . ( p �. 54' CTA re . ords.) As shown for 1 9 76, however , t he determination by petit ioner of its for ei gn exchange earni ng s wa s less by e269,781.00 than the finding s of the . Au th ority . If as petitioner contends, the fore ign e xcha nge ear n- ings certified by the Authority were net of tour costs , then on the bas is of petitioner's computat i on of its 197 4 and 1975 foreign ex change earnings which include tour costs , petitioner's tot a l f ore ig n exchange earnings could not be les s but should be much mar~ than those found by th e Authority, c o nsideri ng that the all~ged tou r �cos ts for 19 76 amounted t o E1 , 50 7 , 9 0 1 "00 � I �� -II

DECISION - CTA CASE NO. 3530 - 12 - Clearly, petitioner's claim that its foreign exchan~e earnings as certified by the Authority were net of tour costs, is not amply s upported by the evidence on r ec ord. Since petitioner's computation, showing th at its foreign exchange earnings exc ee ded an average of 70% of its gross revenues for the years in question, is premised.on the above claim, we find said computation to be err c ne o us. Petitioner insists that lacking contr ary evi- dence adduced by respondent, the certification by the Authority should be given full weight and ere- dence since the Authority is the agency called upon to implement President i al Decree No. 535. As correctly pointed out by responden t, the 11 Certificate of Reduced Income Taxn issued by the Philippine Tourism Authority is conditional in c ha r a ct e r � I n fa c t , i t i s s t a t ed the r e i n t ha t, 11 This certificate is subject to the provisions of Sec t i o n 8 ( a ) P �D� 5 3 5 -an d Sec t i o n 1Q. o f R� A� 6 13 5 " � As aforequoted, Section B(a) in turn provides that the deductibility of the 50 % foreign exchange earn- ings from net taxable income is "subject to other provisions of Section 10 of Republic Act No. 6135 and rules and regulatio~s to be promulgated by the Author ity". Briefly stated, the c ertification is subject to petitioner 1 s compliance with the rules 15J

DECISION - CTA CASE NO. 3530 - 13 - and regulations prom ulga t ed by the Authority to implement the provisions of Presidential Decree No. 535, among which rules are the conditions for availment of incentives (Exh . "I", pp. 36-37, CTA records), thus the c ertificati on is not conclusive. As to Annex 11 A" of petitioner's memorC\ndum (p. 52, CTA records) which was issued by the Philippine Tourism Authori Ly, certifying that petitioner has satisfactorily complied with the conditi ons of its registrati on and "has attained foreign exchange earnings of 70.8, 77.3 and 84.4 as percentages of its gross revenues for the y e a ~ s 1974, 1975 and 1976, respectively", this certifi- cation was not presen t ed as evide nce, h c\; ing been allegedly received by peti t ioner after it rested its case. Then it does not even state the manner of how the percentages shown therein was . arrived at, the basis thereof and the figu r es taken into account in .the computation of such percentages. Moreover, the alleged certifi c ation was not pro- perly iden t ified and it does not bear the seal of the Philippine Tourism Authority. If petitioner received this certification, which is dated 6 September 1983, after it had rested its cas e on Jun e 13, 1983 (p. 4 3, CTA records), why did not lCO - I'

DECISION - CTA CASE NO. 3530 - 14 - � peti ti oner file a motion to present it as evidence when r~spondent produced his evidence only on March 14, 1984 (p. 50, CTA records)? Undoubtedly, the Bureau of Internal Revenue has 'the authority to ascertain whether pe titioner has complied with the conditions for availment of the incentive, by vi r .tue of Socti on I of President! al Decree No. 308 promulgated on October 9, 1973, amend- ing the approved sta ffing pattern of the Bureau of Internal Revenue, which reads: "SECTION 1. An Investment Incentives Divisi on is hereby created under the Enforr.e- ment Service which shall handle and proces c all applications for tax exemptions of industries operating under the Board of Inve stments or such other special laws granting incentives to taxpayers, and tax prob le ms aris i ng out of the operations of the Export Processing Zone Authority." and the pertinent portion of Section 324 of the National Internal Revenue Code of 1977 as amended by Presidential Decree No. 1457, which provides : " SEC. 324. Preservation of books . of accountg, and other accounting records. - XXX XXX XXX Any provision of existing general or special law to the contrary notwithstanding, the books of accounts and other pertinent: record s of tax-exempt organizations or entities shall be subject to examination by the Bureau of Internal Revenue for the purpose of ascertai~ing whether such organizations or entities are complying lG I -I

DECISION - CTA CASE NO. 3530 - 15 - with the conditions under which they have been granted tax exemptions and their tax liability, if any." It was on the strength of this authority that respon dent's examiners of the Investment Incentives Division investigated the accounting records of peti- tioner and ascertained that its foreign exchange earnings fell below the average mini mum requirement of 70% provided by law as ~ hc ~ n in respondent's computation. The burden rested on petitioner to prove otherwise, bu t petitioner failed to do so. The Court recognizes that in accordance with settled principles respondent's determination is presu mptively correct and casts upon petitioner the burden of offer- ing adequate and competent evidence that i t is entitled to the reduced inco me tax in~entive for t h e years 1974, . 1975 and 1 976 pursuant to Presidential Decree No . � 535 � It is to be c onceded, as arg ued by respondent, that tax incen t ives are in the nature of tax ex emptio . s, they being limitation& on the power of the state to tax. Since it has been the constant uniform holdino that exemption from taxation is not favored and is never presumed, if granted, it must be strictly cons- trued against the taxpayer and liberally in favor of the �taxing a uthority. (Jai-Alai Corpora t ion vs. Collector,. 106, Phil., 345; Esso Standard Eastern I �I I

DECISION - - 16 - CTA CASE NO. 3530 ..... vs. Commissione r of Customs, L-~1841, Oct. 28 1 1966, 18 SC~A 488; Phil. Acetylene vs. Commissioner of Internal Revenue, L-19707, August 17, 1967, 20 SCRA 1056_; Commissi oner o f Internal Revenue vs. Guerrero, L-20942, Sept. 22, 1967 , 21 SCRA 180.) Having reached the conclusion that petitioner's computation is erroneous, it is thus cleat that peti- tioner failed to meet the ~o n rlitions for availment of the t ourism incentives. It follows that petitioner Tours Specialists, Inc. is not entitled to the reduced income tax incentives for the years 1974 to 1976. With respect to the claimed expenses in tl e amounts of e29,076.75, el0,918.39 and ezo,833.21 for 1974 to 1976, respectively, these were disallowed by respondent on the g~ound that they were incurred in prior periods or were not properly supported. Peti- tioner was given a~ple opportunity to present its objection to the assessment in an informal conference on August 10, 1979 called for that purpose by respon- dent. No protest, however, was interposed by peti- tioner on ~:: t : e3e disallowed expenses. (p. 139, BIR records.) Nor was there any attempt to substantiate them. The regulati ons require that any cla i m for �deduction must be substantiated by record showing in detail . the amount and nature of the expenses

- DECISION - GA CASE NO. 3530 - 17 - incurred . (See Sec. 66, Rev. Regs. ,lo. 2.) In view of the foregoing, respondent's decision will have to be sustained. Accordingly, petitioner Tours Specialists, Inc. is hereby ordered to pny to respondent Commissioner of Internal Revenu e the sum of ~765,440.40 as deficiency income tax for taxabl e years 1974 to 1976, inclusive, plus surcharge and i n t e r e s t i nc i d e n t to d e 1 i r ��: !J f. ;; c y pu r s u a nt t o t h e p r o - visions of Secti on 5l(e) of the applicable National Internal Revenue Code, as amendej. WH ~ REFORE , the decision nppealed from is hereby affirmed al petitioner's costs. SO or.DERED. Quezo n City, Metro Manila, August 30 ~ 1985. ~~ Atv1ANTE F Presidi n WE CONCUR: " ?. ~\.t. �?~ �""/ "'.~ CO STANT L Cft ROl\QUIN Associate Judge I

- ANNEX "A" FOREIGN EXCHANGE EARNINGS Petitioner Philip:)ine Difference Tou:r Costs To u r i s m Exh. "J-1" Authority per Certification (Exh. "J") Per Inc ore Tax Retu rns 1om.; .1omo sm.; 1974 82, 471 , 80 0 .13 84, 943, 600 .26 82, )94,692. 00 8 2 ,~ 48, 90 0.26 E2,462,254.00 1975 82,125,784.44 8L!,25 1,56 8.88 1976 El,341,993.00 82,683,986 .00 82,523,118. 00 81,728,450.88 El, BB8,350 .00 :ce. . 82, 953,767 .00 269,7B 1.oo): e1,5o7,9o1.oo 16'1-A