DE LA SALLE UNIVERSITY, INCORPORATED v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION DE LA SALLE UNIVERSITY C.T.A . CASE NO. 7303 INCORPORATED Petitioner, Members : ACOSTA , PJ, - versus - BAUTISTA , and, CASANOVA , JJ COMMISSIONER OF INTERNAL Promulg ated : REVENUE , Respondent J\}l 2 9 2010 ~ 1:l(fl\ll X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - AMENDED'OECIS ON ACOSTA , PJ This resolves petitioner's "Motion for Parti al Reconsid eration of the Court's Res olution dated 05 January 201 0" filed on January 29 , 20 10, with respondent's "Comm ent" fi led on Feb ruary 12, 20 10, and petitioner's "Motion to Admit Attac hed Suppl em ent and a Suppl em ent to th e Motion for Partial Reconsid eration )" filed on April 6 , 2010 . 1 iU 7 f r,

A MEN DED DEC ISION C .TA Case No. 7303 On th e outset , th e Court, in th e interest of substantial ju sti ce and in 1 consid eration of th e pertin ent app lication of th e Rul es of Court which permit th e same , GRANTS petitioner's Motion to Admit Attached Supplement and a Supplement to th e Motion for Partial Reconsideration. Petitioner' s Supplemental Motion for Partial Reco nsiderati on is hereby ADMITTED and shall be resolved herewith alongside with petitione r's Motion fo r Partial Reconsid eration In its Motion for Partial Reconsidera tion , petitioner assails the Court's Decision dated January 5, 2010, th e dispositive portion th ereof reads WHEREFORE , th e Pe tition for Review is PARTIALLY GRANTED . The DST Assessment on the loan transactions of petitioner in the amoun t of P 1,681 ,774 .00 is hereby CANCELLED . However, petitioner is ORDERED to PAY de ficiency income tax ,_VAT and DST on its lease contracts , plus 25% surc harge for th e fisca l years 2001 . 2002 and 2003 in th e total amount of P 18, 42 1, 363 .53 , comp uted as fol lows In come Ta x VA T DS T TOTAL p p p p Bas ic 9 ,248 ,286 56 2,627 ,35414 28,904 89 11 ,904 ,545 59 Surch arge (25%) 2 ,312 ,071 .64 656 ,838 .54 7,226 .22 2,976 ,136.40 Intere st 2~7_9 . ~90:§1_ __ -- __§_~_1 '7 9Q 36 9,000 .57 3,540,68 1.54 TOTAL p 14 ,440 ,24 8.81 p 3,935 ,98 3. 04 p 45 ,131 .68 p 18 ,421 ,363 .53 In addi tion , pe ti tioner is hereby held liable to pay 20% de linquency interest on the tota l amo unt due computed from September 30 , 2004 until full paymen t thereof pursuan t to Secti on 249(C)(3) of the NIRC . Further, the comprom ise pe nalties im posed by responden t were excl ud ed , there being no co mpromise agree men t between the parties. SO ORDERED The petiti oner anchors its Motion on th e following grounds 1. Under th e standard of sub stantia l evidence , there is a reasonable connection on the use of the income for educa tion purposes 1 Rule 10 Section 6. Supplemental Pleadings.- Upon motion of a party , the court may , upon reasonable notice and upon such terms as are JUSt, permit him to serve a supplemental pleading setting forth transactions , occurrences or events which have happened since the date of the pleading sought to be supplemented xxx 2

AMENDED DECISION C .TA Case No. 7303 2. The Court must declare the invalidity of the present assessment for having been issued on a void Letter of Authority . Petitioner argued that since in the YMCA 2 case, which the Court pronounced as the applicable case in the Assailed Decision , the Court only required substantial evidence as the standard of proof to prove that (a) the taxpayer IS a non-stock , non-profit educational institution , and (b) the revenues and assets are used actually , directly and exclusively for educational purposes for it to be exempted from taxes ; thus , it should be the standard of proof applied to this case Further, petitioner alleged that the assessment must be considered invalid in view of the void Letter of Authority issued by the respondent as basis for the assessment In support of its arguments , petitioner submitted its Statement of Receipts , Disbursement & Fund Balance for the Period June 1, 1999 to May 31 , 2000 ; Statement of Fund Changes as of May 31 , 2000 ; Summary Schedule to Support Misplaced Vouchers for the Period of 3 Years From School Year June 1, 2001 to May 31 , 2003 ; Schedule of Disbursement Vouchers Examined (Unlocated Documents) for the Fiscal Year Ended May 31 , 2001 ; Schedule of Disbursement Vouchers (Unlocated Documents) for the Fiscal Year Ended May 31 , 2002; and Schedule of Disbursement Vouchers (Unlocated Documents) for the Fiscal Year Ended May 31 , 2003 The same were admitted by the Court in Its R~solution 3 dated June 9, 2010 . On his part , the Respondent , in its Comment, asserted that while the Court is not bound by the rigid technical rules of procedure , It must abide by 2 Commissioner of Internal Revenue vs. Court of Appeals and Young Men 's Christian Association of the Philippin es, Inc ., G R No. 124043 , October 14 , 1998. 3 Rollo , pp . 936-93 7 3 ll 09

AMENDED DECISION C.TA Case No . 7303 the weight and sufficiency of evidence required in civil actions which is preponderance of evidence . Moreover, respondent believed that the issue on the invalidity of the Letter of Authority is bereft of merit considering that said issue was never raised nor considered for review during trial. In its Supplemental Motion for Re co nsideration , petitioner asserted that since its case is on all fours with the case of Ateneo de Manila University, 4 (Quezon City), Inc. vs. Commissioner of Internal Revenue , in which the assessment of therein petitioner was cancelled , the Court must pronounce that petitioner has fulfilled the same degree of evidence in this case to prove that herein subject revenues were actually , directly and exclusively used for educational purposes . No comment to petitioner's Supplemental Motion was filed by respondent After a judicious evaluation of the arguments of both parties , the Court is persuaded to partially reconsider the assailed Decision . It is noteworthy that the grounds set forth by petitioner in its Motion were adequately resolved in the Resolution 5 of this Court on April 6, 2010 . To reiterate , the Court already laid down the requirement of preponderance of evidence as the degree of proof in order for petitioner to establish its claim for tax exemption over its income tax , which it alleges to be actually , directly and exclusively used for education purposes , viz : App lying , th erefore, the doctrin e in the afore-cited case, this Co urt, reiterat es th e requirement, on the part of pe titioner, to prove that the incom e supposedly exempt from tax is used "actually, directly, and exclusive ly for ed uca tional purposes ". • CTA Case Nos . 7246 & 7293 promulgated on March 11, 2010 5 Rollo , pp788-796 4 11 10

AMENDED DECISION C.TA Case No . 7303 The consideration whether the income of petitione r was used "actually , directly , and exclusively for educa tional purposes " depends on th e pieces of ev id ence petitioner have presented . Co ntrary , however , to th e all ega tion of petitioner in its Motion that only th e standard of substantial evide nce is required as the degree of proof in this Co urt , it is a basic ten et und er th e Rules of Co urt that in ci vil cases brought before th e Cou rt of Justice , th e party having th e burden of proof must establish his case by a preponderance of evidence . And cons id eri ng that th e Court of Tax Appeals is a co urt of record and is require d to conduct a formal trial (trial de novo) where th e parties must present th ei r evide nce accordingly , it ca nn ot be equated to an administrative or quasi -j udi cial tribunal w hich requi res on ly substanti al evidence as degree of proof !i On the issue of the invalidity of assessment owing to the alleged void Letter of Authority , the .Court has already found the same to be unmeritorious for failure of the petitioner to raise it in the original proceeding and only on appeal , vi z On petitioner's assertion that th e Letter of Au thority , from which the assessment was based , is void , the same deserves scant cons id era ti on . It is too late a day for th e petitioner to raise said issu e. Well-settled is th e rule that issues not raised in th e original proceeding can not be raised for th e first time on appea l. Thus , points of law, th eories and argumen ts broug ht before the atte nti on of the Appella te Court need not - and ordinarily wil l not - be co nsid ered by the Co urt Petitioner's allegation ca nn ot be accepted by the Court on its face , to do so would be tantamoun t to a denial of 7 respondent 's right to due process . In view of the Court's admission of petitioner's additional documents ,8 and in consideration of the requirement of preponderance of evidence as the degree of proof in this case , the Court shall now evaluate and consider the additional evidence accordingly 6 Resolution , Apr il 6 , 20 10 , p 6. 7 Ibid, p 8 . 8 Exhibits "W , WW, XX , YY , ZZ, AAA" in supra 5 .1• 1 ..i.. .l .1.

AMENDED DECISION C.TA Case No . 7303 As already estab lished , petitioner derived its income from its lease con tracts for canteen and bookstore services with the following concessionaires 9 1. Alarey , Inc 2. Capri International , In c. 3 Zaide Food Corporation 4. La Casita Raja 5. MTO International Product Mob ilizer, Inc It was ea rlier alleged that rental income received from the foregoing concessionaires has been added to the Depository Fund- PE Sports Complex Fund and to the Phys ica l Plant Fund (PPF ); and , such income has been limitedly spent on the Current Fund- Capital Projects Account (CF- 10 CPA) . In the Assailed Decision , the Court found insufficient substantiation on the part of petitioner to prove that th e proceeds of petitioner's loan from Philippine Trust Company (PTC) were duly accounted for or reported as an addition to th e PE -Sport Complex Fund . Specifically, th e Court found petitioner's Statem ent of Receipts , Disbursements and Fund Balance for the year 2001 unwarranted for failure to show a beginning balance , considering that the loans were made for fis ca l years 1999 and 2000 ; thus , falling short of the requirem ent of preponderance of evide nce . In order to cure this defect, petitioner submitted its Statement of 11 Receipts , Disburs eme nts and Fund Balance for the fiscal year 2000 and 9 Exhibits J to Q 10 Exhibits LL-1 and LL-2 . 11 Exhibit W 6 ~ 1 ') 1 .1- .L '-

A MENDED DEC ISION C.T A Case No 73 03 12 Statement of Fund Changes as of May 31, 2000 to prove that proceeds of the PTC loan were includ ed in the fund Examination of the same documents showed "Exte rnal Borrowing " as a source of fund in the amount of P93 ,860 ,675 .40 Petitioner's contro ller testified that it pertains to the loan obtained from PTC less dedu ctions for interest and other charges 13 The Court now finds th e foregoing substantiation of petitioner to be in order Thus , th e Court con clud es that th e petitioner's rental in come from MTO-PE Sports Complex and La Casita whi ch were transmitted and used for the payment of th e PTC loan on th e PE-Sports Comple x were used actually , directly and exclusi ve ly used for edu cational purposes . The degree of preponderance of evid ence was suffi ciently met Anent Petition er's renta l income from Alarey , Inc , Zaide Food Corp ., Capri Internation al and MTO-Bookstore whi ch were transmitted to th e CF- CPA, petition er again fai led to fully acc ount for and substantiate all th e disbursements from th e CF-CPA Th e Co urt, again , cannot asce rtain wheth er rental incom e from th e foregoing con ce ssionaires was ind eed used for educational purposes. As to petition er's argum ent that it need not submit the written agreem ent betwee n petitioner and St Yon sin ce th e co ntributions to th e latter were already born e by St Yon 's Arti cles of Incorporation and journa l vouchers , again , th e Court is not persuad ed. Th e amount of contributions to St Yon cann ot be verifi ed so lely by exa mining its Arti cles of Incorporation 12 Exhibit WW. 13 Exhibit BBB , Pages 3 to 4, 0 5 an d A5 . 7

AMENDED DECISION C.TA Case No . 73 03 With regard the unsubstantiated disbursements from the CF-CPA, Petitioner al leged that th e supporting documents were inadvertently misp laced due to migration of accounts to its new accounting software used sometime in 2001 . In lieu thereof, petitioner submitted downloaded copies of the Schedule of Disbursement Vouchers from its accounting software . The Court is not convinced . According to ICPA's findings , the petitioner was ab le to show only th e disbursements from the CF-CPA amounting to P7 ,305 ,104.71 , P8 ,747 ,116.40 14 and P6 ,259 ,078 30 for the fiscal years 2001 , 2002 and 2003 , respectively Thus , only the portion of the rental income pertaining to the substantiated disb ursements of the CF-CPA wil l be considered as used actually , directly and exclusively for educa tional purposes . For failure to sufficiently account for the unsubstantiated disbursements , however, the same must be subjected to income and value added tax . Therefore, the rate to be applied is based on the total disbursements and is computed as follows 2 001 2 00 2 2 00 3 Total disbursements per vouchers 15 p 7,305,1 04 .71 p 8,74 7, 11 6.40 p 6,259,078.30 Divide by total disbursements per subsidiary ledgers 16 p 14,158,711.48 p 17, 126,033.76 p 23,463,543.02 Ratio of subst a ntiated disbursements 51.59% 51.0 7% 2 6 .68% Multiply by the total rent income alleged ly added to and used in the CF-CPA p 5,456, 757. 00 p 6,002,422 .00 p 6,602,655.00 Re nt in com e pertaini ng to t he subst a ntiated po rtio n of CF- CPA Dis burse m e nts p 2,81 5,140 .9:1 p 3,065,43? .9 2 p 1,7 61 ,588 .3 5 14 Exhibi t MM , pag e 12 and Exhibits LL -25-A , LL-25-B, and LL-25-C (inclus ive of sub-markings ). 15 Exhibits LL-25-A , LL-25- B, and LL-25-C . 16 Exhibits LL-29-A , LL-29- B and LL-29-C. 8

AMENDED DECISION C.TA Case No . 7303 In conclusion , the petitioner is liable for deficiency income tax arising from rental income which was not sufficiently proven to have been used for educational purpose s in the amount of P4 , 167,86712 , computed as follows : 2001 2002 2003 TOTAL Total rent in come from concessionaries p 8,644 ,7 14 .50 p 9, 645,802 .00 p 10,610,379.00 p 28,900,895.50 Less: Rent in come used in construction of PE Complex : MTO-PE Complex p 1,663,200.00 p 1, 900,800.00 p 2,090,880.00 p 5, 654,880. DO La Casita Raja Fastfood ______ 1,524,757 5Q 1, 742,580.00 ____h_9 16 844.00 5, 184,181. 50 Subtotal p ~}_87,J_}_?;_5()_ - P __ _1,_§~3, 380. 9Q_ .!!____ '?t_f!f!j'J2~:!!_!J____F 10,839,061.50 Rent income al legedly added and used in the CF-CPA p 5,456, 757 .00 p 6,002,422.00 p 6,602,655 .00 p 18,061 ,834.00 Less: Rent income pertaining lo the substantiated portion of CF-CPA Disbursements 2,81 5,140.94 3 065 436.92 1, 761 588 .35 7 642, 166.21 Rent income perta ining to the unsubstantiated disbursements p 2,64 1,616.06 p 2,936,985.08 p 4,841,066.65 p 10,419,667.79 Tax rate 32'll,, 32'\'o ----·--- - ----- 32% 32% Basic deficiency in come tax p 845,317. 14 p 939,835.23 p 1,549, 141.33 p 3,334,293.69 Add: 25% Surcharge 211 329.29 234 958.8 1 387 285 .3 3 833 573.42 Total Deficiency Income Tax p 1,056,646.43 p 1,174,794.03 p 1,936,426. 66 p 4,167,867. 12 Petitioner IS likewise liable for deficiency VAT on its rental mcome which was not sufficiently proven to have been used for educational purposes in the amount of P1 ,302,458.47 , computed as follows 2001 2002 2003 TOTAL Rent income pertaining to the unsubstantiated disbursements p 2, 641,616.06 p 2,936,985 .08 p 4,841,066.65 p 10,419,667.79 Tax rate 10°/c, 10% 10% - - - - - · - - · - - - - - - - - - - - - · - - - - - - - - - - -- - - 10% Tax due p 264,161.61 p 293,698. 51 p 484,106.66 p 1,041, 966.78 Add : Surcharge 66 040.40 73 424.63 121 026.67 260,491.69 Total amount due p 330,202.01 p 367, 123.14 p 605,133.33 p 1,302,458.47 Proceeding to the argument raised by petitioner in its Supplemental Motion , the same is bereft of merit. After evaluating the allegations and circumstances raised in the both cases , the Court is of the conclusion that the Ateneo case is not on all fours with the instant case . Petitioner's allegation is bereft of merit l.il::i

A MEND ED DEC ISION C.T A Case No . 7303 It is of importance to note that th e bases for. the deficie ncy income and value-added tax assess ments on both cases are di ffere nt In the Ateneo Case, petitioner Ateneo was assessed by responde nt 17 based on Section 2.2 of Department of Finance (DOF ) Circular No. 137-87 and Bureau of Internal Revenue (BIR ) Ruling No 173-88 , while in this case , peti ti oner was assessed based on th e case of Abra Valley Co llege vs. Aquino. 18 As reference , the pertinent provisions of th e subj ect issuances and jurisprudence are quoted hereund er Section 2.2 of DO F Circ ul ar 137-87 "2 .2 Revenues derived from and asse ts used in the opera ti ons of cafete rias/ca ntee ns, dorm itories , books tores, are exempt from taxa tio n provided th ey are own ed and op erated by th e educatio nal in stitutio n as an cill ary acti viti es and th e same are located w ithi n th e schoo l pre mises." BIR Ruling No . 173 -88 "Non-stock , non- profi t ed uca tiona l institutions are exemp t from tax on al l revenues derived in pursua nce of its pu rpose as an ed uca tiona l institutio n and used actua ll y, directly , and exclusive ly for educa tiona l purposes . The exem ption herein con templ ated refers to internal reve nu e taxes and cu stoms duti es , in ap propriate cases, imposed by the national govern men t on all revenu es and assets of non-stock, non-profit ed uca ti onal in stitutions used actuall y, direc tl y, an d exclusive ly for educa tional purp oses . They shall , however , be subject to interna l revenue taxes on income from trade , bu si ness or other acti vity th e co nduct of wh ich is no t rela ted to the exercise or performance by such educa tio nal institution of its edu ca tiona l purpose or fu ncti on . XXX XXX XXX "Moreover, re venues de rived from and asse ts used in th e operations of ca feteri as/ca nteens , dormitories , and bookstores are exemp t from taxa ti on provid ed they are o wned and op erated by th e edu ca ti onal insti tution as ancillary act ivi ti es and th e same are loca ted w ithi n th e sc hoo l prem ises . Accordi ngly, the ta x ex empti o n does not in c lud e c antee n own ed by but operated by a c onc ession aire . "Fina ll y, the income from miscell aneous schoo l-rel ated operatio ns like car stickers are likewise exemp t from inco me tax imposed under the Tax Code , as amended . It is , howeve r, understood that the Benedictine Abbey 7 ' "Ru les and Regula tions Implementing Section 4(3) , Article XIV of the New Constitution ." 18 G.R. No. L-39086 June 15.1988 10 1 ~ 1 .l.!. .l. v r.

AMENDED DECISION C.TA Case No . 7303 School (San Beda Alabang) , Inc . shall be subject to internal revenue taxes on its income from trade , business or other activity the conduct of which is not related to the exercise or performan ce by such educational institution of its educational purposes or function ." Abra Vall ey Coll ege vs. Aquino "xxx Oth erwise stated , th e use o f the s c hool building or lot for co mm ercia l p u rp oses is n eith e r co ntemplated by law , nor by juri s prud en ce . Thus , while the use of the second floor of the main building in the case at bar for residential purposes of the ·D irector and his family , may find justification under the concept of incidental use , which is complimentary to the main or primary purpose- educational , th e leas e of th e first floor th ereof to th e Northern Mark etin g Co rporation ca nnot by any s tret c h of th e im agin ation be c onsid ered in c id ental t o th e purpose of edu ca ti o n ... (emph asis supplied) The main issue in the Ateneo case is whether petitioner Ateneo may be he ld liable to pay deficiency income taxes and VAT under Section 2.2 of DOF Circu lar 137-87 and Bl R Ru ling No 173-88 The Court ruled in the negative and furth er held that Section 4(3) , Article XIV of the 1987 Constitu tion does not require canteens to be owned and operated by the educational institution , contrary to the allegation of respondent 19 Considering that the Court found the bases of the assessment to be unmeritorious , the assessments were ca nce lled . Converse ly, m the case at bar, respondent sought to apply in the assessment the Abra Valley case in relation to Section 27 and 108 of the NIRC of 1997 , which held that those part of school premises leased as restaurants and bookstores for a fee do not constitute actual , direct, and exclu sive use for the purpose of education and is not w1thin the ambit of the Constitutional exemption . Petitioner, on the other hand , asserted that the applicable jurisprudence is the YMCA case 20 and that it passes the two- pronged evidentiary test provided in the said case The Court herein found 19 CTA Case Nos . 72 46 & 7293 , March 11. 20 10. 20 Supra. 11 l.i.l7

AMENDED DECISION C .TA Case No . 7303 Page12of13 petitioner's allegation meritorious , however, laid the burden of proof on petitioner to prove that its ren tal income from its concessionaires are actua ll y, directly and exclusively used for educational purposes The ev id ent disparity in the issues put forth in both cases laid a different approach on the part of th e Court on how to evaluate the pieces of evidence submitted by both parties Moreover, the respondents in both cases also gave distinct defenses which did not boil down to the issue on whether the petitioners were ab le to prove that the rental incomes were actually , directly and exclusively used ·for edu cation purposes . The wisdom of the Court cannot be eq uated on Its decision on two different cases with two different issues . WHEREFOR E, petition er's Motion for Partial Reconsideration is hereby PARTIALLY GRANTED . Petitioner is hereby ORDERED to PAY for deficiency income ta x, VAT and DST plus 25 % surcharge for the fiscal years 2001 , 2002 and 2003 in the total adjusted amount of P5 ,506,456 .71, computed as follows : Incom e Tax Basic Tax p 845,3 17. 14 p 939,835.23 p 1,549,141.33 p 3,334,293.69 Surcharge _____ l.!_ 1J 32~.)~-- - _?34,958..:!ll__ _____l8?L2_85_.3_3 _ __ 833,573.42 Subtotal p _Lf§0_6464J - p 11 174J 94J[L P ___ _!, 910 4!_6.§6 .. ..E. __ '!~_1_67, f!.§!.l..?... VAT Basic Ta x p 26':1,161.61 p 293 ,698.51 p 484,106 .66 p 1,04 1,966.78 Surcharge 66,040.40 73,424 .63 121,026.67_ __ 260,491.69 Subtotal p - 3}~202.01 p !_§.!j2}., 1j_ _ P __ __6_05,L}J_}J__ !!___ 1J J0~4_5fj. 47_ DST Basic Ta x p 8,644.7 1 p 9,647.80 p 10,612.38 p 28,904.89 Surcharge -·· ...._ _ _z.J._6 1.J.~---- .. -- 2,4 11.95 ____2,653. 10 7,226.23 Subtotal p 10, 805.89 p 12, 059.75 p 1], 265.48 p J6, 1J1.12 Total De fi cie ncy Tax p 1,397,654.32 p 1,553,976.92 p 2,554,825.47 p 5 ,506,456 .7 1 In addition , petitioner is hereby held liable to pay 20% per annum deficiency interest on the following basic deficiency taxes , computed from the ~~ 12 111 3

'' AMENDED DECISION C.TA Case No . 7303 dates indicated herein until fu ll payment thereo f pursuant to Section 249(8) of the NI RC of 1997 , as amended 2001 2002 2003 Income Tax p 845,317.14 p 939 ,83 5.23 p 1,549,141.33 Computed from September 15, 2001 September 15, 2002 September 15, 2003 VAT p 264, 16 1.61 p 293,698.5 1 p 484,106.66 Computed from June 25, 200 1 June 25, 2002 June 25, 2003 DST p 8,644.7 1 p 9,647.80 p 10,61 2.38 Computed from June 10, 2001 June 10, 2002 June 10, 2003 Further, Petitioner is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes , surcharge and deficiency interest which have accrued as stated above from September 30 , 2004 until fully paid . SO ORDERED . CL-_-'-< - D~ ERNESTO D. ACOSTA Presiding Justice WE CONCUR : TISTA CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article V III, Section 13 of tl:le Constitution , it is hereby certified that the conclusions in the above Amended Decision were reached in consu ltation before the case was assigned to the writer of the opinion of the Court's Division . ~~-- lP· ~ ERNESTO D. ACOSTA Presiding Justice Chairperson , First Division 13 l i1 9