CTA Case No. 3782 (Decision)

DELTA MOTORS CORPORATION, C.T.A. CASE NO. 3782 Petitioner, >I - versus - CO~~ISSIONER OF INTERNAL REVENUE, Respondent . X ------------------------ X DEC I S I 0 N This is an appeal from the decision da ted February 24, 198 4 of respondent Commissione r of Internal R venue denying the protest of petitioner Delta Motors Cor poration against the tax assessments issued against it in the ~88,850,097 .13 ~n tage amount s 0f ~46,52 6,110 . 74 and ~42,323,986.19 or a totaltaxes of representing deficiency for the years 1975, 1976, 1977 and first semester of 1978. For r epeated failu re of petitioner to appe a r or to pro- secute its action by presenting evidence at the scheduled hearings, the case was submitted for decision by respondent on the basis of the pleadings and the records of the Bur e au of Internal Revenue bearing on che case. 82

DECISION - CTA CASE NO. 3782 - 2- The material facts as stated in the petition for review and adm itted in the answer are : 1. That petitioner is a domestic corporation engaged in the business o f , among others, manufacture and sale of passenger cars and commercial vehicles, with principal offices at 2285 Pasong Tamo Extension, Makati, Metro Manila, where it may be served with notices, writs, processes and other legal papers. 2 . That r ~ spondent is the du l y appointed h ead of the Bu r eau of Internal Revenue, the office charged with the duty of enforcin g revenue laws and collecti ~~ internal revenue taxes, who holds office at the BIR National Building, Diliman, Quezon City, where he may be served with summons, processes, notices and other legal papers. 3. That petit ioner is a registe r ed pioneer enter- prise, hav ing been granted by the Board of Investments a certificate of qualification which entitles the firm to cer tain pr iv ileges concerning taxes on man ufactured auto- mobile engines. 4. That for tte years 1975, 1976, 1977 and the first two qua rter s of 1978, petitioner filed the required business tax returns f or trucks and automobiles and paid the taxes due the reon, although re spondent specifi~ally denies this allegation for lack of knowledge and information sufficient to form a belief as to the truth thereof and whethe r the 83

----~------~---�~~ --~-- DECI SION - CTA CASE NO. 3782 - 3- -- amounts claimed t o have been pai d were actually pai d a nd remitted to the gove rnment is subject of verification. 5 . That on April 18, 1980, respondent assessed against and dema nded from petitioner payment of the amount of ~35,117,287.56 alleg edly due as deficiency percentag e (sales ) t ax, inclusive of interests and penalties for 1975 and 1976. 6. That on May 1 9, 1980 f 2 titioner contest e d the aforesaid assessment and furthe r requested administrative hearing of the case. 7. That respondent, on J anuary 15, 1982, while the cas e mentione d in paragraphs 5 and 6 is still pend L1g resolution by his o ffice, issued another letter of demand ur gin g petitioner to pay th e sum of P42 ,32 3,986.19 all e ge c. 1 y representing deficiency percentage (sales ) taxes for the year 1977 and the first semester of 1978. 8. That on February 4, 1982, peti tioner protested said assessment and requested that a "conference hearing" be held i n the appellate division of the Bureau of Internal Re venue to i nclude lik ew i s e the other assessments which involve the s a me i ss ues. 9 . That after the submission of "v;ritten rebu ttal memorandum", re spondent denied petitioner's protest and modified the o riginal assessments by adding thereto the sum of Pll,408,823.38 as alleged additional defic iency 81

DECISION - CTA CASE NO. 3 782 - 4- percentage (sales) _taxes for the periods involved. Tl:e final decision is embodied in respondent's letter dated February 24, 1984. Hence, the instant appeal. The records of the Bureau of Internal Revenue bearing on this case show that per investigation conducted by a revenue examiner of said office for business taY purposes covering the years 197 5 and 1976, it was ascertained that petitioner fail~d to pay the correct amounts of sales tax as manufactur er of cars and commercial vehicles pursuant to Section l83(a), in relation to Sections 184-A and 186, penalized under Section 209, all of the National Internal Revenue Code (Sections 193(a), 195, 199 and 221, respectively, Tax Code of 1977, as amended). The same investigation also revealed that during the same years petitioner failed to pay the correct amounts of sales tax as manufacturer of electric fans, refrigerators, air conditioners (Daikin brand)~ television sets, stereo sets (Sharp brand) as provided for in said Section l83(a), in relati n to Sections l85( i), 185-A and 185-B, penalized under Section 209, all of the same Code (consolidated under Sections 196 and 197, and Section 221, Tax Code of 1977, as amended)~ It was likewi se ascertained that during the years in question, petitioner failed to pay the correct amounts of percentage tax as contractor engaged in the servicing of the motor 8~ tJ

DECISION - CTA CASE NO. 3782 - 5- veh icle s and appliances sold by it pursuant to Section 183( a) and Section 191, also penalized under Section 209, all of the same Code (Sections 193(a), 205 and 221, respectively, Tax Code of 1977, as amended). FinallyF the said investigation also disclosed t hat during the year 1976 , pet itioner failed to pay the correct amount of advance sales tax d ue on its imported raw materials for air conditioners , as pro� r i ~ed for in Section 183(b), in relation to Section 185-A of the same Code (Sections 193(b) and 197, Tax Code of 19 77, as amended)~ Accordingly, as averred in paragraph 5 in the petition for review stated above, respondent asses s ed and d emanded from petitioner payment of the amount of P35,11 7,287.56 as deficiency percentage (sales, contractor's and advance sales) taxes, inclusive of interests and penalties for 1975 and 1976. As afore-said in paragraph 6 of the petition for review, petitioner contested the assessment and requested an administrative hearing of t he case. Again on January 15, 1982, as stated in paragraph 7 above, upon investigation of petitioner, there was found due from it the tota l amount of P42 ,3 23 , 986.19 repre- senting sales tax, surcharg e and interest for the year 1977 and the first two quarters of 1978. Petitioner likewise protested this assessment (paragraph 8 , above) and r equested an administration hearing of the case. 8G

DECISION - CTA CASE NO. 3782 - 6- The records of the Bureau of Internal Revenue also reveal that in a letter dated January 15, 1982 petitioner explained its position to respondent Commissioner of Internal Revenue on the aforesaid assessments and the reasons why they should be cancelled and withdrawn. However, on the contention of petitioner that in the determination of the sales tax due on its manufactured cars, it correctly deducted the cost of the engines which petitioner alleaed is tax exempt under Section 186-A of the Revenue Code, respondent in his letter decision of February 24, 1984 rejected this argument as not valid. As resolved by the Commissioner of Internal Revenue: "Beginning 1973, the ca':: industry has been authorized to adopt the sales tax crediting system under Section 184-A of the Tax Code, while the other industries were still using the costs deduction method until 1978. S i nce you are already covered by Section 184-A of the Tax Code which allows you to credit sales tax on your raw materials used in the manufacture of cars, you cannot therefore validly adopt the cost deduction method which was no longer permitted by Section 184-A of the Tax Code. To do so would therefore contravene rules and regulations issued by this Office in implementing the sales tax crediting system as formally intro- duced by Section 184-A of the Tax Code. Accord- ingly, the deficiency percentage tax assessment on the cost of the engines for the said period is hereby reiterated. It appears also that during the said period covered by this parti- cular assessment, you allowed the "taxes deemed paid" on your engines to be deducted as part of the creditable taxes against the gross sales tax d ue thereon, thus r educing your sales tax l iability by ~11,408,823. 38. Th is is patently illegal considering that the "tax deemed paid provisions" which you invoked became effec tive 87

DECISION - CTA CASE NO. 378 2 - 7- only o n J uly l, 1978 ; hence, the same applies to your case during the second semester ~f 1978 only. Consequently, this particular assess- ment of ~ 35,117,2 87.56 is being modified to in ~ lude th e sum of ~11,408,823.38 mak ing a total recomputed s ales tax liability of P46,526 ,ll0.94, which repre sents the deficiency percentage tax on the c ost of your engines as well as the unauthorized imputation of "taxes deemed pa id " on said engines, during the period und e r review. We therefore reiter~te the collection of t he said tax liability from you." On the deficiency sales tax on optional parts and ac c essories wJ:-, ich were inclueied in the gros s selling prices of the Toyota cars manufactured and sold by pe- titioner, r esponaent ruled in the same decision that: This Offic e has already issued a cate- gorical ruling on the contested assessment case s of General Motors Corporation, which upheld the view that optional parts and accessories are considered standard parts of a car and ther efore , the prices o f such optional parts and accessories should form part of the gross selling prices of the cars. ~his ruli ng was principally based on the decision of the Supreme CouLt in the Eulog1o Rodriguez case (G.R. L-12783 dated March 25, 1961) , which ruled that said op- tional parts and accessories constitute standard parts of a c a r and the~ore, the prices thereof should oe included in the invoice price of the car. Incidentally, the General Motors Corporation has paid the sales tax arising from said optional parts ~nd accessories. Consequently, we reject your protest on this assessme nt and we rei- Lerate collection. And wi th re spect to the other issuas involved in the dSses smenL, t he Commissioner 0f Internal REvenue sustained the r ol lowing findings: 88

DEC I SIO~'-l - Cl'A Cio.SE :!0. 378i.. - 8 �- 1. ~hat t here was an overstatement of your deduc t ible raw materials used in the manufac ture of commercial vehicles and appliances for 1975-1976 and 1977-1978 for sales tax purposes, was clearly established by the examiners, in accord- ance with Revenue Re0ulations No. 7 75 dated March 15 , 1975. The deficiency sales taxe s on your commercial vehicl.es and appliances in the total amount of ~5,759,804.94 is therefore reiterated fer collection. 2. Thal you are subject tc the 3% contractor's taxes of Pll,094.83 for 1975-76. Th i s finding has not bee > c Jnt-ested by you; hence, you accepted this liability. 3. That you are subject to the advance sales tax of Pl28,712.44 for 1976. You failed to introduce evidence to warrant the imposition of l ower tax rate of 7% than the 15% levied thereon . A mere simple denial is not sufficient to revel- 8 t he findings/recommendation of the in- vestigating o f ficers for the imposition of the 15% tax rate. Ac cordingly, petitioner was requested to pay the amou nts of P46 , 526,110.94 and P42,323,986.19 or' a tot-al of P88,850,097.13 as deficiency percentage taxes, s ubject to the updating of interest and penalties, fo ~ 1975-1976 and 1977-1978. Ther e is no showing in the pleadings or in the records that petitioner questioned the computations of t he deficiency taxes assessed against it by respondent. We t a ke it that this is not an issue in this case. While pet itioner prays in its petitio~ for review filed with this Court that after hearing, this Court renders judgment 89

DECISION - CTA CAS E NO. 3782 - 9- in its favor by holding that the assessments of ~46,526,110.94 a n d ~42,323,986.19 representing deficiency percentage t axes, inclusive of inta:es t s and penalties, for 1975-1976 and 197 7-19 78, are null and void which should be withdrawn a nd cancelled , petitioner either failed to appea r or to present evidence at the scheduled hearings to substantiate the nu l lity and illegality of the assessments. The Cou rt recog nizes U <t t he/burden of proof is on the taxpayer contesting the validity or correctness of an assessmen t to prove not only that the Commissioner of Intern a l Revenue is wrong but that he (taxpayer) is right. (Lino Gut i errez vs. Collector of Internal Revenu e , CTA Case No. 504, January 28, 1962; see also Tan Guan vs. Court of Tax Appeals , L-23676, April 27, 1967, 19 SCRA 903. ) And if the taxpayer fails to present evidence or pr oof in support of his allegations in his petition for rev iew, or to prosecute his action, as in t h is case, con- fo rmably to the doctrine of the presumption in favor of the correctness of t he tax assessment (Interprovincial Au t o bus Co., Inc . vs. Collector of Int e rnal Revenue, L-6 741, January 31, 1956, 98 Phil. 290; Collector of In t ernal Revenue vs. Bohol Land Transportation Co. , L-1 309 9 and L-13463, April 29, 1960, 107 Phil. 965), the Court of Tax Appea ls will merely sustain the assessment aga inst the _taxpaye r . (Ca r esosa vs. Bureau of Internal

DECISION - CTA CASE NO. 378 2 - 10 - Revenu e, CTA Case No. 3713, January 25, 1985, - certiorari d e ni ed in G.R. No. L-70758, Aug. 30, 1985.)~ Since no evidence was presented by petitione r to substantiate the errors that are claimed to have been committed by the Commissioner of In ternal Revenue in making the assessments in question, this Court has no other alternative than to r e sor t to the legal truism that "all presumptions are in favor of the correctness of tax asses s ments." The burden of proof is on the tax- payer to show the contrary. Petitioner utterly failed to do . This action finds support in the followirg au- thor it ies: (See Collector of Internal Revenue vs. Bohol Land Transportation Co.; Boho l Land Transportation Co. vs. Co lle ctor o f Int ernal Revenue, L~l3099 & L-13462, April 29 , 1960, 107 Phil. 965.) "All pr-esumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and th~ validity of their actions are presumed. They will be presumed to have taken into consider- ation all the facts to which their atten- tion was called. No presumption can be indulged that all .of th e public officials of the state in the various counties who have to do with t he assessment of property for taxation will knowingly violate the duties imposed upon them by law. "A s a logical outgrowth of the pre- sumption in favor of the validity of assessments, when such assessments are assailed, the burden of proof is upon the c omp laining party. It is incumbent upon the property owner clearly to show that the assessment ~as erroneo u ~ in order to 91

DECISION - CTA CAS E NO. 3 7 82 - 11 - relieve himself from it.' (51 Am . J r. pages 620-621)." (Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, ~8 Phil. , 290~ 52 Off. Gaz., L27 791.) "Whe n an i mporte r chall enges by legal steps the corr ectness of the assessment of a duty by t he Collector of Customs, the question to be decid ed is not whet ~ er the Collector was wrong but wheth e r t he importer was right , t he burden being on the latter to establish the correctness of his own con- tention." (Behn, Meyer & Co. vs. Collector of Customs, 26 Phil., 647) "That the determirL:tL;n of t he tax defi c iencJ by the Government has prima facie va l idity and the burden rests upon the tax- payer to o ver come thi s presumption and to show to the sat i sfaction of the Tax Court that the determination was not correct." (Perez vs. Court of Tax Appeals, et al, , G.R. No. L-10507 , May 30, 195 8)" Thi s i s specially true in this case where respondent's special and affirmative defenses, the validity of which as borne o ut from the records of the case, have the effect, if not controverted by adequate and competent evidence, of nullifyi ng petit ioner's cause of action. Thus: SPECIAL AND AFFI RMATIVE DEFENSES 5. Investigation disclosed that in subject taxa ble years, petitioner f a iled to pay - a ) The cor r ect sa le s tax as manufacturer of cars a nd commercial vehicles pursuant to the provision s of Sec tion 183(a) in r elation to Sections 184-A and 186, and penalized under Section 209 (now Sees. 193 (a}, 195, 199 and 221), all of the Tax Code, as amended; b) The c o r r ect sa l es tax a s manufact urer o f applianc e s pur suant to the provisions of Section 183(a) in rela tion to Sections l85(i), 185-A and 185-B, and penalized under Section 92

DECISION - CTA CASE NO. 3782 - 12 - 209 (now consolidated in Sections 196 and 197, and 221) ~ all of the Tax Code, as amended; c) The correct percentage tax as con tractor engaged in servicing of motor vehicles and appliances sold by petitioner, pursuant to Sections 193(a) and 191, pe- nalized under Section 209 (now Sections l93(a), 205 and 221) ,. all of the Tax Code as amended; � d) The correct advance sales tax due on impoited raw material s for air-condi- tioners pursuant to Section l83(b) in relation to Section 185 A (now Sections l93(b) ani 197), all of the Tax Code, as amended; � 5. Investigation also disclosed that - a) Petitioner issued additional billings throug h debit memos, for the optional parts insta l led and services rendered on each car sold without including the corresponding amount as part of the gross selling price of the car for sales tax purposes in violation of the Supreme Court's decision in Eulogio Rodriques case (G.R. No. L-12783 dated March 25, 1961, l SCRA 766), which held that said optional parts and accessories constitute standard parts of a car and therefore, the price thereof should be included in the invoice price of the car; b) Petitioner deducted the cost of the tax-exempt engines it manufactured from the gross sell ing price o f the car sold that reduced the tax base for sales tax purposes, in contravention of Section 184 - A of the Tax Code; c) Petitioner overstated the deductible raw mat~rials used in the manufacture of commercial vehicles and appliances for sales tax purposes; d) Petitioner maintains a service depart- ment where it earned income s u bject to 3% contractor's tax in the amount of ~11,094.83 93

DECIS I ON - CTA CASE NO. 3782 - 13 - fo r 1975-1976, and which finding was not contested; e) In 1976, petitioner paid only 7% advance sales tax on all of its import- ations although the imported Daikin air- conditioner above 3 tons is classified as "non-integrated" subject to 15% sales t ax. Hence, the deficiency advance sales tax of ~128,7 12 .44 representing the difference betwee n the rate of 7% and 15%, i s still due and collectible; 6. Petitioner executed a Waiver of t he Statute of Limitation on July 28, 1983; 7. The assessment levied again st pe- titioner is presumed correct and valid, and it is incumbent upon taxpayer to prove the contrary (Interprovincial Autobus Co., Inc. vs . Col. of Int. Rev., L-6741, Jan. 31, 1966, Appeals, L023676, April 27, 1967, 19 SCRA 90 3) ; 8. The assessments of ~46,526,110.94 and ~42,323,986 . 19 representing deficiency percentage taxes, inclusive of interests and pena lties for 1975-1976 and 1977-1978, res - pectively, or a total of ~88,850,097.13, is in accordance with law and revenue regulations. Even more, under section 3 of Rule 17, Rules of Court, if pla intiff (petitioner herein) fails to appear at the time of the trial, or to prosecute his action for an unreasonabl e leng th of time, which actually happened in this case, the action may be dismissed upon motion of the defendant (respondent) or upon the court's own motion. This dismissal shall have the effect of an adjudication upon the merits, unless otherwise provided by court. Par enthetically, it may be stated that the

DECISION - CTA CASE NO. 3782 - 14 - g eneral rules provi d ed in the Rules of Court govern proceed ings in the Court of Tax Appeals. The rules I ' promulg ated by the Court o f Tax Appeals are merely II / supplementar y. (Perez vs. Araneta, .103 Phil. 1167.) At any rate, the merit of respondent's assessments involved 1n this case is cleGr on the face of the appealed decision, the pertinent portions of which have already been quoted at length above , and of which peti- tioner has fai led to show to the Court that the deter- mination was erroneous. Accor ding l y, petitioner Delta Motors Co r poration is hereby ordered to pay respondent Commissioner of Int er nal Re venue the amount of ~88,850,097.13 as defi- ciency percentage taxes for the years 1975, 1976, 1977 and 1978, plus 20% interest per annum from February 24, 1984 until fully paid pursuant to the provisions of Section 193 of the 1977 National Internal Revenue Code, as amende d by Pre s idential Decree No. 1705 dated August 1, 1980 . WHEREFORE, the d e cision appealed from is hereby affirmed at petitioner's costs.

DECISION - CTA CASE NO. 3782 - 15 - SO ORDERED. Que zon City, Metro Manila, May 21, 1986 . rJ. ,., t !Lh.� :-.. !x~l. --c-~C~ (/ � AMANTE F LLER Presidin JuCige \-'J'E CONCUP.: CONSTANTE C. ROAQUIN Associate Judge 96