LIQUIGAS PHILIPPINES CORPORATION, v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION ************* LIQUIGAZ PHILIPPINES C.T.A. CASE NO. 8141 CORPORATION, Members: Petitioner, -versus- CASTANEDA, JR., Chairperson, CASANOVA, and MINDARO-GRULLA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, NOV ZZZOlZ/ Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION CASANOVA, .j_.: This Petition for Review, filed on July 29, 2010, seeks the cancellation and nullification of the Final Decision on Disputed Assessment (FDDA) issued by the Commissioner of the Bureau of Internal Revenue (BIR) against petitioner Liquigaz Philippines Corporation for alleged deficiency expanded withholding tax, withholding tax on compensation and fringe benefit tax for the year 2005 in the aggregate amount of Twenty Two Million Three Hundred Eighty Thousand Twenty Five Pesos and 19/100 (P22,380,025.19), inclusive of interests and compromise penalties. As culled from the records, the facts of the case are as follows:6.

DECISION CTA CASE NO. 8141 Petitioner is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at 3/F NOL Tower, Commerce Avenue, Madrigal Business Park, Alabang, Muntinlupa City. 1 On the other hand, respondent is the Commissioner of the Bureau of Internal Revenue (BIR), who was duly appointed and is empowered to perform the duties of her office, including, among others, the power to decide, cancel and abate tax liabilities pursuant to Section 204(B) of the Tax Code, as amended by Republic Act (R.A.) No. 8424, otherwise known as the "Tax Reform Act" (TRA) of 1997. On July 11, 2006, petitioner received a copy of a Letter of Authority (LOA) No. 00067824 dated July 4, 2006 issued by the respondent, authorizing the investigation of all internal revenue taxes of petitioner for taxable year 2005. 2 Petitioner received, on April 9, 2008, an undated letter purporting to be a Notice of Informal Conference as well as the detailed computation of petitioner's alleged tax deficiency.3 Petitioner received, on May 28, 2008, a copy of the Preliminary Assessment Notice (PAN) dated May 20, 2008, together with the attached ~ 1 Par. 4, Petition for Review, Docket, p. 7. 2 Par. 6, Stipulation of Facts, Joint Stipu lation of Facts and Issues (JSFI), Docket, Ibid , P. 170. 3 Par. 7, Stipu lation of Facts, JSFI , ld .

DECISION CTA CASE NO . 8141 details of alleged discrepancies, for the calendar year ending December 31, 2005. 4 On June 25, 2008, petitioner received a copy of the Formal Letter of Demand/Formal Assessment Notice and attached details of alleged discrepancies dated June 16, 2008, covering calendar year ending December 31, 2005. Petitioner filed its protest relative to the respondent's Formal Letter of Demand/Formal Assessment Notice5 on July 25, 2008.6 Petitioner submitted, on September 23, 2008, to the respondent the supporting documents relative to its protest. 7 Petitioner received on July 1, 2010 a copy of the assailed FDDA dated June 28, 2010, covering the tax investigation/audit under LOA No. 00067824 for the calendar year ending December 31, 2005.8 On the basis of the FDDA, which constitutes as a denial of petitioner's protest, petitioner filed its Petition for Review before this Court on July 29, 2010, in accordance with the provision of Section 228 of the National Internal Revenue Code (NIRC) of 1997, which provides: "SEC. 228. Protesting of Assessment. - XXX XXX XXX If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from4!>- 4 Par. 8, Stipu lation of Facts, JSFI , ld ., p. 171 . 5 Par. 9, Stipu lation of Facts, JSFI, Id. 6 Par. 8, Stipulation of Facts, JSFI , Id. 7 Par. 9, Stipulation of Facts, JSFI, Id. 8 Par. I0, Stipulation of Facts, JSFI , Id.

DECISION CTA CASE NO. 8141 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." In her Answer9 filed on September 6, 2010, respondent interposed the following Special and Affirmative Defenses: "6. Respondent adopts the abovementioned admissions and denials as part of her special and affirmative defenses. 7. Respondent belies petitioner's claim that the Final Decision on Disputed Assessment (FDDA) issued against petitioner is null and void because it failed to state the facts and the law on which it is based. 8. The provision under Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, mandating that 'taxpayers shall be informed in writing of the law and facts on which the assessment is made; otherwise, the assessment shall be void' does not particularly pertain to the FDDA, rather to the Final Assessment Notice (FAN)/Formal Letter of Demand issued against taxpayers. 9. Respondent's FAN/Formal Letter of Demand contain (sic) the specific details of discrepancies to which petitioner's tax deficiencies were computed. 10. The Annex C provided under paragraph 3.1.6 of Revenue Regulations (RR) 12-9910 is only shown for purposes of giving a sample illustration and does not strictly mean that all FDDA issued by the Commissioner or his authorized representative should be patterned on the same format. Thus, contrary to petitioner's allegations, the subject FDDA ha ~ 9 Docket, pp. 110-118. 10 Implementing the Provisions of the Nationallnternal Revenue Code of 1997 Governing the Rules on Assessment ofNationallnternal Revenue Taxes, Civil Penalties and Interest and the Extra-judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of Suggested Compromise Penalty.

DECISION CTA CASE NO. 8141 complied with the requirements under RR 12-99, since it states the facts, the applicable law, rules and regulations on which such decision is based. 11. The essential elements of due process are notice and an opportunity to present one's side, which was accorded to petitioner as evidenced by the protest letter11 it submitted against respondent's FAN/Formal Letter of Demand. Further, petitioner was duly notified of its tax deficiencies through respondent's issuance of Letter of Authority, Notice of Informal Conference, PAN, FAN/Formal Letter of Demand and FDDA, that was admitted to by petitioner under paragraphs 7, 11, 12, 13, 14 and 17 of its Petition for Review. 12. In its Petition for Review, petitioner exhaustively discussed its alleged: (a) deficiencies on expanded withholding tax (WT); (b) deficiencies on WT on compensation; (c) unpaid fringe benefit taxes; and (d) interest and compromise penalties. Had there been failure of respondent's FDDA to state the fact and the law on which it is based, petitioner could not have exhaustively discussed its alleged deficiencies and unpaid taxes. 13. The FDDA was issued against petitioner after evaluation of the arguments raised by petitioner in its protest against respondent's FAN/Formal Letter of Demand . It should be noted that petitioner's deficiency tax assessments per FAN/Formal Letter of Demand amounted to P24,332,347.20. But after evaluation of the supporting documents it submitted to respondent, there still found deficiency taxes amounting to P22,380,025.19, computed below as follows: Tax Type Basic Interest Compromise Total WT-Expanded p 1 823 782.67 P1 630 644.08 p 25 000.00 p 3 479 426.75 WT-Compensation Fringe Benefits Tax 2 366 836.98 2 116 188.95 25 000 .00 4 508 025 .93 Total 7 572 236.16 6 770 336.35 50 000.00 14 392 572.51 P11 762 855.81 P1 0 517 169.38 p 100 000.00 P22 380 025 .19 11 Admitted by petitioner in paragraph 15 of its Petition fo r Review.

DECISION CfA CASE NO. 8141 14. Based on the result of the re-investigation conducted against the withholding tax liabilities of petitioner, the total amount of tax discrepancies assessed against petitioner as indicated in the FAN/Formal Letter of Demand amounted to P207,145,707.39, but only P119,653,246.43 was duly supported by petitioner, leaving an unsupported amount of P87,492,460.96, to wit: Tax Type Per FAN Per Supporting Still WT-Expanded P178 838 491.53 Documents Unsupported WT-Compensation P63,285 066.91 Frinqe Benefits Tax 9 318 255.84 (PUS 553 424.62) Total 18 988 960.02 9 318 255.84 P207 145 707.39 - 14 889 138.21 P87,492 460.96 (4 099 821.81) (P119 653 246.4:n The foregoing amount of "still unsupported" tax discrepancies was used in computing the total deficiency taxes of petitioner which amounted to P22,380,025.19, as indicated in respondent's FDDA. Thus, respondent avers that the FDDA was issued after she completely evaluated the supporting documents submitted by petitioner. Clearly, petitioner's allegations under paragraph 21 of its Petition for Review are baseless and mere exaggerations. 15. Accordingly, deficiency expanded WT on Income Payment amounting to P1,823,782.67 was assessed in accordance with Section (sic) 5712 & 5813 of the 12 SEC. 57. Withholding of Tax at Source. - (A) Withholding of Fina l Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner , requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(8)( I ),24(8)(2),24(C),24(0)( I);25(A)(2),25(A)(3),25(B),25(C),25(0),25(E);27(D)(I ),27(0)( 2),27(0)(3 ),27(0)(5);28(A)(4),28(A)(5),28(A)(7)(a),28(A)(7)(b),28(A)(7)(c),28(8)(I ),28(8)(2), 28(8)(3),28(8)(4)28(8)(5)(a),28(8)(5)(b),28(8)(5)(c);33; and 282 of this Code on specified items of income shall be withhe ld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. (B) Withholding of Creditab le Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (I%) but not more than thirty-two percent (32%) thereof, which sha ll be credited against the income tax liability of the taxpayer for the taxable year. XXX 13 SEC. 58. Returns and Payment of Taxes Withheld at Source. - (A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholdi ng agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized agent bank, Revenue District Officer, -dfi,

DECISION CTA CASE NO. 8141 NIRC of 1997, as amended and implemented by RR 2-9814. Unpaid WT on Salaries of P2,366,836.98 was assessed pursuant to Section 8015 & 81 16 of the NIRC of 1997, as amended. Unpaid Fringe Benefit Tax of P7,572,236.16 was assessed pursuant to Section 3317 of the NIRC, as amended and RR 3-9818� Collection Agent, or duly authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government unti l paid to the collecting officers. The return for final withholding tax shall be filed and the payment made within twenty-five (5)(sic) days from the close of each calendar quarter, while the return for the creditable withholding taxes sha ll be fi led and payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withhe ld at more frequent intervals when necessary to protect the interest of the government. 14 Implementing Repub lic Act No. 8424, "An Act Amending The National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation , Withholding of Creditable Value-Added Tax and Other Percentage Taxes. 15 SEC. 80. Liabi lity for Tax. - (A) Employer. - The employer shall be liable for the withholding and remittance of the correct amount of tax required to be deducted and withheld under thi s Chapter. If the employer fails to withhold and remit the correct amount of tax as required to be withheld under the provi sion of this Chapter, such tax sha ll be co ll ected from the employer together with the penalties or additions to the tax otherwise app licable in respect to such failure to withhold and remit. 16 SEC. 81. Filing of Return and Payment of Taxes Withheld. - Except as the Commissioner otherwise permits, taxes deducted and withhe ld by the emp loyer on wages of emp loyees shall be covered by a return and paid to an unauthorized agent bank, Collection Agent, or the duly authorized Treasurer of the city or municipality where the employer has his legal residence or principal place of business, or in case the employer is a corporation , where the principal office is located. The return shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter: Provided, however, That the Commissioner may, with the approval of the Secretary of Finance, require the employers to pay or deposit the taxes deducted and withheld at more frequent intervals, in cases where such requirement is deemed necessary to protect the interest of the Government. The taxes deducted and withheld by employers shall be held in special fund in trust for the Government until the same are paid to the said collecting officers. 17 SEC. 33. Special Treatment of Fringe Benefit. - (A) Imposition of Tax. - A final tax of thirty-four percent (34%) effective January I, 1998; thirty- tree percent (33%) effective January I, 1999; and thirty-two percent (32%) effective January I, 2000 and thereafter is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the emp loyee (except rank and file employees as defined herein) by the emp loyer, whether an individ ua l or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January I, 1998; sixty-seven percent (67%) effective January I, 1999; and sixty-eight percent (68%) effective January I, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed a~

DECISION CTA CASE NO. 8141 16. Based on the foregoing, respondent affirms the validity of her FDDA against petitioner. The Honorable Supreme Court in the case of Commissioner of internal Revenue vs. Bank of Philippine Islands9 states that: "Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are favor of the correctness of tax assessments." During trial, the parties presented their pieces of evidence, both testimonial and documentary, to prove their respective case. On April 11, 2012, this Court ordered the parties to file their respective Memorandum, within thirty (30) days from receipt of the said Resolution20. In a Resolution21 dated June 26, 2012, the case was submitted for decision, taking into consideration respondent's Memorandum22 filed on May 15, 2012 and petitioner's Memorandum23 filed on May 16, 2012. The sole issue jointly stipulated by the parties24, is as follows: ~ the applicable rates imposed thereat: Provided, further, That the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (I 00%) and the applicable rates of income tax under Subsections (8), (C), (D) and (E) of Section 25 . XXX. 18 Implementing Section 33 of the National Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to Special Treatment of Fringe Benefits. 19 G.R. No. 134062, April 17,2007. 20 Docket, pp. 412-413. 21 Ibid, p. 486. 22 Memorandum, !d., pp . 475-482. 23 Memorandum [For the Petitioner], !d., pp. 414-470. 24 Stipulation of Issue, JSFI , !d., p. 172.

DECISION CfA CASE NO. 8141 1. Whether the FDDA issued by the respondent against the petitioner is valid. Petitioner maintains that the Final Decision on Disputed Assessment (FDDA) issued by respondent is null and void for failure to state the facts and the law on which it is based. Petitioner further argues that respondent only enumerated the laws and regulations upon which the assessment is allegedly based but did not explain as to how the figures were arrived at or which of the arguments raised and supporting documents submitted by the petitioner in its protest merited her appreciation. Hence, petitioner strongly contends that the assessment issued is arbitrary since it failed to comply with the requirements of due process. Petitioner cites Section 228 of the NIRC of 1997, as amended, and implemented by Revenue Regulations No. 12-99, which provides: 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: 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." XXX XXX XXX REVENUE REGULATIONS NO. 12-99 SECTION 3. Due Process Requirement in the Issuance ofa Deficiency Tax Assessment-_,. XXX XXX XXX

DECISION CTA CASE NO. 8141 3.1.6 Administrative Decision on a Disputed Assessment.-The decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void (see illustration in ANNEX C hereof), in which case, the same shall not be considered a decision on a disputed assessment; and (b) that the same is his final decision. On the other hand, respondent counter-argues that the FDDA was issued against petitioner after evaluation of the arguments the latter raised in its protest against the Formal Assessment Notice/Formal Letter of Demand. The petition is partly meritorious. Respondent's Formal Letter of Demand (FLO), which included a Details of Discrepancies,25 showed the following deficiency tax liabilities of petitioner in the total amount of P24,332,347.20, broken down as follows: 26 Basic Deficiency tax Expanded Withholding Fringe Benefits Total Add : Interest up to June 30, 2008 Withholding Taxon Tax P16 158 454.72 (49.41%) Compromise Tax Compensation P9 501 564.07 Compromise - non-filinq of alphalist Total deficiency ta xes P3 675 048.78 P2 981 841.87 4 744 722.81 8 033 892.48 100 000.00 1 815 841.60 1473 328.07 so 000.00 40 000.00 25 000.00 25 000.00 - 20 000.00 20 000.00 P24,33 2,347. 20 P14 296 286.88 P5,535,890.38 P4,500,169.94 A perusal of the FLO reveals that the Details of Discrepancies attached thereto shows the factual and legal bases of the subject assessments, which in turn, helped petitioner to effectively contest the subject assessments and submit documents in support of its claim. 27 Consequently, the FDDA reflected reductions in petitioner's basic deficiency tax liabilities ~ 25 Exhibit "E-1". 26 E xhibit "E". 27 Exhibits " F" and "G".

DECISION CTA CASE NO. 8141 A comparison of the FLD and FDDA, shows the following : Basic Expanded Withholding Fringe Benefits Total Deficiency Withholding Taxon Tax P16 158 454.72 Tax Tax Compensation P9 501 564. 07 11 762,855.81 7 572 236.16 Per FLD P3,675 048. 78 P2 981 841.87 P4,395,598. 91 Per FDDA 1,823 782 .67 2 366 836.98 P1,929,327.91 Differe nce P1,851,266.11 P615,004.89 Upon further scrutiny of the evidence, this Court was able to trace the source of the discrepancy in the amounts reflected in t he FLD and the FDDA and noted t he following : Deficiency Expanded Withholding Tax Respondent's examiner found that t he fo llowi ng income payments were allegedly not subjected to expanded withholding tax: 28 Income Payments Amount Tax Rate Expanded Withholding Contractor/Services p 275 461.54 2% Tax Due Commission 2 116 203.35 10% P5 509.23 Brokers 1 392 997.76 10% 211 620.34 Purchase-Goods 71 004 300.24 1% 139 299.78 Other Services 7 856 987.02 2% 710 043.00 Professional fees 6 341 391.75 10% 157 139.74 Rentals 4 026 294.54 5% 634 139.18 Interest Expense on Loans 18 909 525.88 2% 201 314.73 Importation Charqes: 378 190.52 Bank Charqes 6,118 836.47 2% Brokers Fee 1,649 254.23 10% 122 376.73 Wharfage 8 961 322.61 2% 164 925.42 Arrastre 26 940 450.94 2% 179 226.45 LPG Purchases 23 245 465.20 1% 538 809.02 TOTAL P178,838 491.53 232 454.65 P3,675,048.78 Petitioner, on the other hand, raised the fol lowing in its protest letter: 2..9-.. 28 Exhibit "E-1". 29 Exhibit "F".

DECISION CfA CASE NO. 8141 1. Commissions Petitioner argues that out of the assessed amount of 1>2,116,203.35, income payments to the following persons were subjected to expanded withholding tax: 30 Payee Amount Glen Solis p 53 641.00 Victor Buenaventura 174 331.50 Aristeo Castillo 121 422.18 Meqa Metro Manila Gas Corp. Soiits Philippines Corp. 39 329.75 TOTAL 452 212.20 P840 936.63 2. Brokers Petitioner asserts that it is not liable for deficiency expanded withholding tax in relation to its income payments to brokers for the following reasons: 31 1. Non-resident suppliers: IP 112 419 .36 p 292 801.53 a. COS-Brok.&Handlinq-(2) Premiershlp/Wehterbv I 180 382.17 1100 196.23 b. COS-Brok.&Ha ndIinq-Havdock/CIipper Posh Pl 392 997.76 2. Paid in subsequent year Total 3. Purchases of Goods Respondent's assessment on purchases of goods consists of the following: 32 Purchases P6 350 321 051.29 Less: Importation 5 732 026 825 .85 Local purchases Other overhead p 618 294 225.44 Personnel Party 5 009 873.00 Training 258 138.41 Canteen 270 895.07 Working clothes 61456 .07 Electricity 1 790.00 1 630 208.92 30 Exhibit "F". 31 Exhibit F, p. 3. 32 Exhibit "F", pp. 3 to 4.

DECISION CTA CASE NO. 8141 Water 84 347.90 Gas 6 200.00 Cars-Fuel Small Equipment 1 250 584.66 Articles of Publicity 119 963.63 Sales campaigns 461 532.18 Gifts 231 327.29 Promotions 553 837.44 Sponsoring 40 951.00 Games 168 752.53 Telephone 370 808.24 Portable telephone Small Office Equipment 1 371 702.84 Printed papers Docs 1 228 060.57 Additions to Fixed Assets Total 553 272.52 Less: Per Alpha List 486 460.73 Difference 56 092 567.00 p 688 546 955.44 617 542 655.20 p 71 004 300.24 Considering the foregoing, petitioner protested some of the items included in the assessment, namely: local purchases, training, electricity, small equipment, articles of publicity, sales campaigns, gifts, small office equipment, printed papers and docs, and additions to fixed assets. Based on the arguments it raised, petitioner offered the following computation: 33 Purchases P6 327 075 405.84 Less: Importation 5 732 026 825.85 Local purchases Other overhead p 595 048 579.99 Personnel Party 5 009 873.00 Training 258 138.41 Canteen 81 293 .33 Working clothes 61 456.07 Electricity 1 790.00 Water 1 215 246.08 Gas 84 347.90 Cars-Fuel 6 200.00 Small Equipment and 1 250 584.66 materials Articles for Publicity 17 668.18 Sales campaigns 255 409.09 Gifts Promotions 32 600.00 Sponsoring 496 037.44 Games Telephone 40 951.00 Portable telephone 168 752.53 Small Office Equipment 370 808.24 1 371 702.84 33 Exhibit "F", p. 10 1 228 060.57 441 288.68

DECISION CfA CASE NO. 8141 Printed papers Docs 188 720.25 Additions to Fixed Assets 34 806 090.35 Total p 642 435 598.61 Less: Per Alpha List Difference 617 542 655.20 p 24,892,943.41 4. Other Services Petitioner admitted respondent's findings that the following income payments were not subjected to withholding tax in the taxable year 2005 because the same were amortization of prepayments from which the required tax had been withheld: 34 OH-Insurance p 3 472 367.00 Group Insurance 66 172.00 External Med Insurance-Cars 1440 024.61 Insurance-Others 227 727.74 TOTAL 704 746.41 PS,911,037.76 Thus, only payments in the account Rest-Hotei-Phils. amounting to ~1,945,947.26 remain unexplained. 5. Professional Fees Respondent found a discrepancy between petitioner's trial balance accounts and alphalist in the amount of ~6,341,391.08. However, petitioner offered the following computation to show a revised discrepancy of ~431,642.38, to wit: 35 Purchases p 2 200 000.00 p 6 341 391.08 Less: Non-taxable GPP payments Non-professional service payments: 2 265 506.15 5 909 748.70 Interimpers Employees 223 194.02 Other contractors-Utilities p 431,642.38 Other contractors-Sec 1 037 554.08 Recruitment costs 183 494.45 Revised Discrepancy 34 Exhibit "F", p. 11 . 35 Exhibit "F", p. 12 to 13

DECISION CTA CASE NO. 8141 6. Rentals Similarly, petitioner submits that the following should be deducted from respondent's deficiency withholding tax assessment on rentals: 36 Foreign rental reimbursement p 1 647 372.00 Amortization for various individuals 2 345 911.99 TOTAL P3,993,283.99 7. Importation Charges Petitioner claims that amounts recorded in the account "Importation Charges" actually represent wharfage, arrastre and bank charges paid to the Bureau of Customs (BOC), which is not subject to income tax. Hence, the total amount of P43,669,864.25 should not be included as part of the deficiency EWT computation. 37 8. Purchases of LPG The alleged discrepancy of P23,245,465.20 on which it is assessed of deficiency withholding tax corresponds to an adjustment made by petitioner for an overstatement of its importation.38 As explained, it is petitioner's accounting practice "to record all gas importation and local purchases in the account Cost of Sales (COS). At each month-end, the inventory level is determined and any changes [are] charged to the account 'COS-Inventory Change' to properly set up the actual cost of sales for the period.';_ 36 Exhibit "F", p. 13. 37 Exhibit "F", p. 13 to 14. 38 Exhibit "F", p. 14. 39 Exhibit "F", p. 4.

DECISION CTA CASE NO. 8141 9. Compromise for Non-filing of Alphalist of Payees Petitioner asserts that respondent's imposition of f'20,000.00 compromise penalty for non-filing of alphalist of payees is without basis as its Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No. 1604-E) for the taxable year 2005 showed that petitioner likewise filed its related Alphalist. 40 If all the arguments raised by petitioner in its Protest will be considered there will be an additional deduction of 1'131,074,693.12 thus, resulting in the reduction of 1'843,889.63 in its assessed basic deficiency EWT, computed as follows: Basic Deficiency Deductions per Should be per Tax Ex pa nded FDDA Rate Pa r t icula rs Pe r FLO Protest 2% Withholding Tax Contractor/Services p 275 461.54 10% Commission p 275 461.54 p - 10% p 5 509.23 Brokers 1 275 266.72 1% Purchase-Goods 2 116 203.35 840 936.63 2% 127 526.67 Other Services - 10% Professional fees 1 392 997.76 1 392 997.76 5% - Rentals 24 892 943.41 Interest Expense on 71 004 300.24 46 111 356.83 2% 248 929.43 Loans 1 945 947.26 Importation Charges: 7 856 987.02 5 911 039.76 2% 38 918.95 Bank Charges 431 643 .05 10% Brokers Fee 6 341 391.75 5 909 748.70 2% 43 164.31 Wharfage 33 010.55 2% Arrastre 4 026 294.54 3 993 283.99 1% 1 650.53 LPG Purchases TOTAL 18 909 525.88 - 18 909 525.88 378 190.52 6 118 836.47 6 118 836.47 - - 1 649 254.23 1 649 254.23 - - 8 961 322.61 8 961 322.61 - 26 940 450.94 26 940 450.94 - - 23 245 465 .20 23 245 465.20 P178 838 491.53 P131 074 693.12 - - - P4 7,76 3,798.4 1 p 843,889.63 However, respondent's FDDA indicates that petitioner's basic deficiency expanded withholding tax remains in the amount of 1'1,823,782.67. Clearly, there are items in petitioner's protest that were not considered b~ ~o Exhibits "Z" and "Z-2"

DECISION CTA CASE NO. 8141 respondent. Thus, respondent's deficiency expanded withholding tax assessment for taxable year 2005 is void pursuant to Section 228 of the NIRC of 1997, as implemented by Revenue Regulations No. 12-99. Deficiency Fringe Benefits Tax Petitioner was assessed of deficiency fringe benefits tax as follows: 41 Income payments subject to FBT per TB: p 1 218 293.09 p 1147 740.15 Rest Hotel-Abroad 70 552.94 7 410 238.17 Less: Hotel-Abroad subjected to FBT Travel Cost p 11 878 118.82 10 430 981.70 1 447 137.12 p 18 988 960.02 Membership & Subscription p 27 924 941.21 Less : Membership & Subscription subjected to FBT 32% Total MV of FB not subjected to FBT p 8 935 981.19 Grossed up MV Tax Rate 565 582 .88 Basic Deficiency FBT due p 9 501 564.07 Add : Unpaid FBT (ITR vs 1603) 4 744 722.81 50 000.00 Total Basic Def. FBT due P14,296, 286.8 8 Add: Interest up to June 30 2008 (49.41 %) Compromise Total FBT deficiency In its protest letter, petitioner countered that expenses recorded in its Rest Hotel-Abroad account amounting to f>1,147,740.15 and "Travel Cost" account amounting to P7,410,238.87 are legitimate business expenses for purposes of attending business meetings or conferences abroad and any amount paid specifically, either as advances or reimbursements for travelling, representation and other bona fide ordinary and necessary expenses, incurred or reasonably expected to be incurred by the employee in the performance of his duties are not considered compensation and should not be subject to fringe benefits tax. 4~ 41 Exhibits "E" and "E-1" and "F", p. 16. 42 Exhibit "F", p. 17.

DECISION CTA CASE NO. 8141 Anent its Membership & Subscription account, petitioner claims that the following memberships are under its name for being a member thereto and not borne by petitioner for its employee: Clubs/ Associations Amount Commerce Condominium Corp. p 549 880.50 French Chamber of Commerce in the Phils.-Le Club 9 000.00 LPGIA Membership (2004-2005) New Petroleum Players Association 6 260 000.00 Philippine Institute of Petroleum Companies 29 166.69 Rotary Club of Makati-Ayala Shell Fleet Card 587 606.83 TOTAL 15 000.00 8 083.98 P7 458 738.00 If the foregoing were considered by respondent, petitioner's deficiency fringe benefits tax assessment would only amount to P1,964,285.80, computed as follows: p 10 430 981.70 Membership_ & subscription 7 458 738 .00 Less: Per protest p 2 972 243.70 Total MV of FB not subjected to FBT p 4 370 946.62 Grossed up MV Tax rate 32% Basic Deficiency FBT p 1 398 702.92 Add : Unpaid FBT (ITR vs 1603) Total Basic Deficiency FBT 565 582 .88 p 1,964 285.80 Respondent's FDDA shows petitioner's basic deficiency fringe benefits tax liability in the amount of P7,572,236.16. However, respondent, again, did not provide the details of its FDDA, thus, petitioner has no way of knowing what items were considered by respondent in making the deficiency fringe benefits tax assessment void. -D.-

DECISION CTA CASE NO. 8141 Deficiency Withholding Tax on Compensation Respondent assessed petitioner of deficiency withholding tax on compensation as shown below: 43 Salaries per ITR p 52 239 313. 00 Per Alphalist Discrepancy 42 921 057.16 Tax rate p 9 318 255.84 Tax due Interest (1.10.06 to 4.30.08) 32% Compromise penalty p 2 981 841.87 Compromise penaltv-Non-filinq of Alphalist p 1,473,328.07 Total amount due 25 000.00 20,000.00 1 518 328.07 p 4,500, 169.94 Petitioner argues that its salaries account includes accrued bonus, 13th month pay, pre-pension, group insurance, external med care, personnel party, games, canteen costs, working clothes and training, which are not subject to withholding tax on compensation as these are not yet paid (accrued) pursuant to Section 2.79(A) of Revenue Regulations 3-98 and form part of the employees' "de minimis benefits". Moreover, it includes contributions to SSS, Medicare and Pag-ibig Fund. 44 Anent the tax rate used to compute petitioner's deficiency withholding tax on compensation, petitioner asserts that the rate 25.40% (f>10,274,474.70/f>40,446,472.37) is more appropriate because it represents the effective tax on compensation paid for the taxable year 2005. It was computed based on total withholding tax on compensation paid and the total taxable compensation income for the year. ~ 43 E xhibit "E". H Exhibit "F", pp. 15 to 16. 45 Exhibit "F", p. 16.

DECISION CTA CASE NO. 8141 Thus, petitioner claims that it should not be liable to the ~20,000.00 compromise penalty for non-filing of alphalist as it filed an Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) with its corresponding Alphalist of Employees for the taxable year 2005.46 Since petitioner did not specify how much of the salaries account pertain to "de minimis benefits", or accrued bonuses and salaries & wages, or contributions to SSS, Medicare and Pag-ibig Fund, this Court applied the effective rate suggested by petitioner to the discrepancy found by respondent's examiner per FLO, thus: Salaries per ITR p 52 239 313.00 Per Alphalist 42 921 057.16 Discrepancy Tax rate p 9 318 255.84 Basic withholding Tax on compensation 25.40% p 2,366,836.98 Respondent's FDDA showed petitioner's basic deficiency withholding tax on compensation in the same amount of ~2,366,836.98. The Court-commissioned independent CPA, Mr. Antonio 0. Maceda, Jr. of Maceda Farnacio & Co., reported that petitioner was not able to substantiate the discrepancy found by respondent on petitioner's withholding tax liability on compensation47� Hence, respondent's assessment for basic deficiency withholding tax on compensation in the amount of ~2,366,836.98 should be upheld.,p.- 46 Exhibits "X.'CX" and ''XXX-2". 47 Exhibit " IIII", p. 15.

DECISION CTA CASE NO. 8141 Given the foregoing discussion, this Court therefore finds that only the assessment for deficiency withholding tax on compensation in the amount of P2,366,836.98 was valid, while the assessment for deficiency expanded withholding tax and fringe benefit tax should be declared null and void for failure of respondent to observe due process as provided under Section 228 of the NIRC of 1997, as amended and implemented by Revenue Regulations No. 12-99. As mentioned earlier, a careful study of the FDDA issued by respondent shows that petitioner was not duly informed as how the assailed assessments were arrived at by the respondent. While it is true that the legal provisions were indicated in the said FDDA, respondent nonetheless failed to show the basis for the amounts indicated therein. Hence, respondent clearly violated Section 228 of the NIRC of 1997, as amended, as it failed to comply with the requirement set forth in law. Thus, this Court finds the assessment notice insofar as the assessments on deficiency expanded withholding tax and fringe benefit tax invalid on the ground that it failed to state the factual bases on which the assessment on deficiency expanded withholding tax and fringe benefit tax were made. While it is true that assessments are prima facie presumed correct and made in good faith, the taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment duly made by a Bureau of Internal Revenue examiner and8S-

DECISION CTA CASE NO. 8141 approved by his superior will not be disturbed48 � However, the same is not applicable to the instant case since respondent failed to comply with the requirements of due process under the law, that is, assessments in order to be valid must have legal and factual bases. As held in the case of Collector of Internal Revenue vs. Benipayo49, "assessments should be based on facts and not mere presumptions". Applying the foregoing jurisprudence in the instant case, the income tax deficiency assessment cannot be enforced against petitioner, otherwise, the Court stands to tax petitioner arbitrarily. Further, in the case of Commissioner of Internal Revenue vs. Enron Subic Power Corporatiorf0, to wit: "The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12- 99 would be rendered nugatory. The alleged 'factual bases' in the advice, preliminary letter and 'audit working papers' did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice." (boldfacing supplied) Finally, a void assessment cannot give rise to an obligation to pay deficiency taxes, and it divests the taxing authority of the right to collect them. 5~ 48 Interprovincial Autobus Co., lnc. vs. CIR, 98 Phil. 290; Sy Po vs. CTA, et. al. , G. R. No. 81446, August 18, 1988; Dayrit et. al. vs. Cruz, et. al. , L-3991 0, September 26, 1988. 49 G.R. No . L-13656 , January 3 I, 1962, 4 SCRA 182. 50 G.R. No. 166387, January 19, 2009.

DECISION CTA CASE NO. 8141 As to the compromise penalty charged by respondent against petitioner in the amount of P25,000.00 for the latter's alleged non-filing of Alphalist of Employees, the same shall be cancelled there being no compromise agreement between the parties. Moreover, records show that petitioner actually filed its Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604- CF)52 for taxable year 2005 with the corresponding Alphalist of Employees53, contrary to respondent's claim. WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the assessments for deficiency expanded withholding tax in the amount of P3,479,426.75 and fringe benefits tax in the amount of P14,392,572.51 issued by respondent against petitioner for taxable year 2005, both inclusive of interest and compromise penalty is hereby CANCELLED and WITHDRAWN for being void. However, the assessment for deficiency withholding tax on compensation for taxable year 2005 is hereby AFFIRMED with MODIFICATIONS. Accordingly, petitioner is hereby ORDERED to PAY respondent the amount of P2,958,546.23, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: ~ 51 FMF Development Corporation vs. Commissioner of Intern al Revenue, CA-GR SP No . 73973 , February 23, 2004. 52 Exhibits " XXX " and " XXX-I " . 53 Exhibit " XXX-2".

DECISION CTA CASE NO. 8141 Salaries per ITR ~ 52,239,313.00 Less: Salaries Per Alphalist 42,921,057.16 Discrepancy Tax rate ~ 9,318,255.84 Basic Withholding Tax on 25.40% Compensation Add: 25% Surcharge ~ 2,366,836.98 Total Amount Due 591,709.25 ~ 2,958,546.23 In addition, petitioner is liable to pay: (a) deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency withholding tax on compensation of ~2,958,546.23 computed from January 20, 2006 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and (b) delinquency interest at the rate of twenty percent (20%) per annum on the total amount due of ~2,958,546.23 and on the deficiency interest which have accrued as aforestated in (a) computed from July 1, 2010 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997, as amended. The compromise penalty of P25,000.00, originally imposed by respondent is hereby excluded there being no compromise agreement between the parties. SO ORDERED . ~ CAESAR A. CASANOVA Associate Justice

DECISION CTA CASE NO. 8141 WE CONCUR: c. aa._~~~ Qf-~ .Q JUANITO c. CASTANEDA,1R, � Associate Justice (;jJ.it N. M~~- C~ CIELITO N. MINDARO-GRULLA 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. ~~~~ . ~~~ ~ JUANITO c. CASTANEDAf'JR. Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division 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. L.t-(t.. Q~ ERNESTO D. ACOSTA Presiding Justice