CTA Case No. 6203 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* LITTLEGIANT STEEL PIPE CORPORATION, Petitioner, C.T.A. CASE NO. 6203 -versus- Members: ACOSTA, Chairman BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL REVENUE, Promulgated : Respondent. JUL 19 2005 t!t?tJ~tll~~ X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION ACOSTA, E., P.J.: This case involves a judicial review of the final decision 1 of the respondent Commissioner of Internal Revenue regarding two (2) disputed assessments for deficiency income tax and value-added tax in the aggregate amount of P140,958,961.72 for the calendar year ended December 31, 1997. The facts as established by the records and pleadings of the case are as follows: 1 Exhibits PPPPPP and PPPPPP-1.

DECISION - C.T.A. CASE NO. 6203 Page 2 Petitioner Littlegiant Steel Pipe Corporation is a corporation duly organized and existing under the laws of the Republic of the Philippines with office address at JTKC Com pound, Cainta, Rizal.2 On July 20, 1998, petitioner received a Letter of Authority No. 000018424 dated July 17, 1998 authorizing Revenue Officers E. Sandoval, S. Pagdilao, C. Dongon, C. Lee, M. Arias, and C. Floreza to be supervised by Grp. Head S. Camara of Special Team created pursuant to RSO 673-98 to examine its books of accounts and other accounting records for all internal revenue taxes for the period 1997 and unverified prior years. 3 Eventually, on January 20, 2000, petitioner received two (2) undated Assessment Notices issued by the Enforcement Service of the Bureau of Internal Revenue through Assistant Commissioner Percival T. Salazar covering the following 1997 deficiency tax assessments4 : Basic Interest Com~romise Total Deficiency Income Tax p 76,635,252.15 P18,476,376.12 P25,000.00 p 95,136,628.27 (ST- INC-97-0160- 2000) 30,196,045.36 15,601,288.09 25,000 .00 45,822,333.45 Defi ciency Value-Added Tax P106,831,297 .51 P34,077,664 .21 PSO,OOO .OO P140,958,961.72 (ST-VAT-97-0159-2000) Totals On January 21, 2000, petitioner received Final Notice5 of demand requiring it to pay within thirty days upon receipt the deficiency tax assessments the total amount of P140,958,961.72. On February 21, 2000, petitioner posted through registered mail its protest6 requesting for the cancellation of the aforementioned deficiency tax assessments. 2 Per Letter of Authori ty No. 0000 18424, Exhibit LLLLLL. 3 BI R Records, p. 438; Summary of Stipulated Facts, par. 3. 4 BIR records, pages 830 and 831. 5 Exhibit 000000.

DECISION- C.T. A. CASE NO. 6203 Page 3 On April 24, 2000, petitioner submitted all the relevant supporting documents to refute the merit of the assessments in accordance with Section 228 of the National Internal Revenue Code of 1997.7 On November 20, 2000, within thirty (30) days from the lapse of one hundred eighty (180) days from the submission of supporting documents with the respondent, petitioner filed the instant Petition for Review with this Court pursuant to Section 228 of the National Internal Revenue Code of 1997. The jointly stipulated issues to be resolved by the Court are the following: 1. Whether the assessment for deficiency income tax in the amount of P95, 136,628.27, inclusive of increments, has basis in fact and in law. Such assessment is broken down, as follows: 1.1. Whether there are alleged unrecorded sales of P193,032,000.00 to Milwaukee Industries Corporation. 1.2. Whether the foreign exchange losses tota ling P12,444,701.84 sustained by Petitioner during the year are proper deductions from gross income during that year. 1.3. Whether the custom duties paid to the banks for incoming importations of the company should be allowed as deductions from gross income. 1.4. Whether there are undeclared importations which resulted in an alleged untaxed gross profit of P11,264,518. 73. 1.5. Whether export sales amounting to P1,727,504.38 are not supported by documents. 2. Whether the assessment for deficiency value-added tax in the amount of P45,822,333.45, inclusive of increments, 6 Exhibit QQQQQQ . 7 Exhibit RRRRRR; Summary of Stipulated Facts, par. 7.

DECISI ON - C.T.A. CASE NO. 6203 Page 4 has basis in fact and in law. Such assessment is broken down, as follows: 2.1. Whether there are alleged unrecorded sa les of P193,032,000.00 to Milwaukee Industries Corporation. 2.2. Whether discounts after sales in the amount of P1,245,823.76 are not allowable for VAT purposes. 2.3. Whether there is a substantive discrepancy between total vatable sales per invoices, net of discounts, and total vatable sales declared per return which resulted in unaccounted vatable sales of P35,551,883.56. 1. DEFICIENCY INCOME TAX P95, 136,628.27 The deficiency income tax of petitioner was computed by the examiners as follows8: Taxable Net Income per Return P193,032,000 .00 p 1,397,215.20 Add/(Less) Adjustments 12,444,701 .84 1,295 ,759.00 218 ,036,979 .57 Unrecorded sales to Milwaukee Ind . P219 434194 77 Disallowed exchange rate differential 11 ,264 ,518 .73 Disallowed import purchases Untaxed gross profit on unrecorded imported purchases Taxable Net Income per Audit Income Tax Due p 18,476,376.12 p 76 ,801 ,968 .17 Less : Tax Withheld/Paid per Return 25 ,000 .00 166.716 .02 Deficiency Income Tax Add : p 76 ,635 ,252 .15 Interest 18.501 ,376 .12 Compromise p 95 136 628 .27 TOTAL AMOUNT PAYABLE 1.1. Unrecorded sales In September 1997, petitioner delivered to Milwaukee Industries Corporation 21,448 metric tons of hot rolled steel coils valued at P193,032,000.00. The deliveries were paid through local Letters of Credit (LC) opened with Rizal Commercial Banking Corporation (RCBC) and were credited in petitioner's Current Account Number 109-04347-8. 8 BIR Records, page 764.

DECISION - C.T.A. CASE NO. 6203 Page 5 However, after evaluation of petitioner's pro-forma sales invoices and delivery receipts, the examiners noted that the sales were not recorded by petitioner. They also found that the proceeds of the letters of credit were not recorded in petitioner's books of accounts. Hence, the latter was assessed of unrecorded sales in the amount of P193,032,000.00. Petitioner does not dispute the deliveries of hot rolled steel coils to Milwaukee Industries Corporation and the drawing of letters of credit with RCBC for the payment of the goods. However, petitioner argues that there are no unrecorded sales. The delivery and drawing of the LC were erroneous being based on the misunderstanding of the parties. The sales were not recorded because they were eventually cancelled. Milwaukee returned the goods and petitioner paid the equivalent amount of the LCs drawn. And since the sales were not recorded, petitioner also did not record the goods returned by Milwaukee Industries Corporation. Hence, it alleges that the unrecorded sales were already offset against the unrecorded sales returns. Petitioner presented the letter dated October 8, 1997 of Milwaukee Industries Corporation9 to support its contention that the parties agreed to cancel the sales. For better appreciation, the said letter is hereby fully reproduced: October 8, 1997 LITTLEGIANT STEEL PIPE CORPORATION F.P. Felix Avenue, Cainta, Rizal Attention: Mr. Nazarito Fua Plant Manager Re: Hot Rolled Steel Coils 9 Ex hibits KKKKKK and KKKKKK-1.

DECISION- C.T.A. CASE NO. 6203 Page 6 Gentlemen: We write to confirm our agreement on the matter. To prevent litigation and by way of compromise, we agreed on the following: (1) Milwaukee will be returning the hot rolled steel coils. Littlegiant delivered under Delivery Receipts Nos. 16872, 17915, 17918, 17952, 17857, 179556, 179652, and 179673 on September 8 to26, 1997. Milwaukee shall be able for returning the cost of returning the same. Milwaukee confirms receipt through Rizal Commercial Banking Corporation (RCBC) check nos. 651119, 651142, 651143 and 651179 totalling 193,032,000.00 (in pesos) of drawing erroneously made by Littlegiant on RCBC Letters of Credit BFX109LC970004233, BFX103LC970004236, FBX109LC970004238, and BFX109LC970004241; (2) Milwaukee and Littlegiant shall release, rem iss and forever discharge each other, their officers, employees, agents and successors-in-interest from any action, sum of money or other obligations arising from or in connection with the above-referenced matter. If the foregoing reflects our agreement, kindly signify your signature by signing the space provided below. Very truly yours, (signed) Philip Go Milwaukee Industries Corporation Conforme : (signed) Nazarito Fua Littlegiant steel Pipe Corporation Likewise, to prove that petitioner returned the proceeds of the LCs in the sum of P193,032,000.00, four checks in favor of Milwaukee Industries Corporation were offered as evidence to the Court, to wit:

DECISION - C.T .A. CASE NO. 6203 Page 7 PA Y MENT LETIER OF CREDIT Date Check No. Exh. Amount Date LC No. Ex h. Amount 09/26/97 65111 9 A, A-1 p 52 ,020,000.00 09/26/97 BFX109LC9700D4233 F p 52 ,020,000.00 09/30/97 651142 B, B-1 54,000 ,000.00 09/30/97 BFX1 03LC9700D4236 G 54 ,000 ,000 .00 10/02/97 651 143 C, C-1 47,007 ,000.00 10/02/97 BFX109LC9700D4238 H 47 ,007 ,000 .00 10/06/97 65 1179 D, D-1 40,005 ,000.00 10/06/97 BFX109LC9700D4241 40 ,005 ,000.00 ~j 93 032 000 00 ~ j 93 032 000 00 Moreover, the deliveries of the returned hot rolled steel coils to petitioner by Milwaukee were supported by the following documents: Date Ex h. Covered by Weight Amount in MT 10-13-97 z DR No. p 20,002,500.00 2,222.50 20,002,500.00 10-16-97 AA 179652 2,222.50 26,010,000.00 179673 2,890 .00 26,010,000.00 10-20-97 BB 16872 2,890.00 23,503,500.00 cc 17857 2,611.50 23,503,500 .00 10 -23-97 17952 2,611.50 27,900,000.00 179556 3,100.00 26,100,000 .00 10-27-97 DD 17918 2,900.00 17915 e193 ,o3z,ooo.oo 10-29-97 EE 21 ,118.00 11-02-97 FF 11-05-97 GG Tot a I We find the above documentary evidence of petitioner sufficient to support its explanation that indeed its sales to Milwaukee Industries Corporation of hot rolled steel coils were cancelled. We are also convinced that the unrecorded sales were cured by the unrecorded sales returns emanating from the cancelled sales. In fact, the examiners additionally noted that the proceeds of sales were not recorded by petitioner. This means that while petitioner drew the LCs, it did not record the amount encashed, denoting petitioner's intention not to reflect the whole cancelled sale transaction. Hence, there is no reason for the petitioner to be assessed for undeclared sales because the said sales were cancelled. The above finding notwithstanding, this Court believes that petitioner should be liable for penalty in violation of Section 6 of Revenue Regulations

DECISION - C.T.A. CASE NO. 6203 Page 8 No. V-1, as amended, otherwise known as the "Bookkeeping Regulations" which provides: Section. 6. Transactions to be recorded in the simplified set of bookkeeping records. - The amount of sales of goods, wares, or merchandise or the value of services rendered for the day, whether cash or on credit, shall be entered in the record of daily sales and cash receipts not later than five o'clock in the afternoon of the day following the date of the transaction. Xxx. Petitioner admitted that it did not record the sale of hot rolled steel coils to Milwaukee Industries Corporation in the amount of P193,032,000.00 and the subsequent cancellation thereof. Now, for such violation petitioner should be liable for a fine of three hundred pesos (P300.00) pursuant to "Chapter VI - General penal provisions" of the Bookkeeping Regulations, to wit: Chapter VI. - General penal provisions A person who violated any provision of this Code or any regulation of the Department (now Ministry) of Finance made inconformity with the same, for which delinquency no specific penalty is provided by laws shall be punished by a fine of not more than three hundred pesos or by imprisonment for not more than six months, or both . (Sec. 352, Commonwealth Act No. 466). 1.2. Foreign Exchange Losses In the Final Decision on Disputed Assessment, the Assistant Commissioner for Enforcement Service, Percival T. Salazar, maintains that petitioner's foreign exchange losses in the amount of P12,444,701.84 for the year 1997 should be disallowed as a deduction from gross income. The reason being: The liabilities under Trust Receipt Payable were restated by debiting Miscellaneous Expense-Exchange Rate Differential

DECISION- C.T.A. CASE NO. 6203 Page 9 and crediting Trust Receipt Payable. This is a mere prov1s1on because loss is recognized only upon remittance or payment. Petitioner expounds that the foreign exchange losses arose from nineteen (19) US dollar-denominated Letters of Credit under Trust Receipts (LC/TRs) which were actually sustained by the petitioner during the year 1997. 10 The foreign exchange losses are detailed in the table below: Arising from the 16 dollar-denominated p 5,166,802.76 LC/TRs: P1,305,828 .00 Payment in 1997 Arising from the 3 dollar-denominated 5,972,071.00 7,277,899.00 LC/TRs: ( 0.08) Payment in 1997 Payment in 1998 after conversion of P12.444.701.84 2 dollar-denominated LC/TRs to peso-denominated LCITRs in 1997 Unlocated difference Total Foreign Exchange Losses Petitioner elaborates the above foreign exchange losses in two categories: 1.2.a. Losses from 16 dollar-denominated LC!TRs During the years 1996 and 1997, petitioner on various occasions opened sixteen (16) US dollar-denominated LC/TRs with RCBC, to wit: Entry For Amount Conversion Rate Date Exh. LC/TR No . in US$ at 0[1ening Peso Value 26,620 ,576.81 1/24/96 LL 95-4196 1,016 ,052.55 26 .200 3,256 ,703.71 5/13/96 MM 96-5321 124 ,349 .13 26 .190 2,996 ,160.98 2,956 ,560.47 8/29/96 NN 96-5917 114 ,270 .06 26 .220 3,218 ,516.86 3,039 ,576 .08 12/10/96 00 96-6516 112 ,395 .38 26 .305 4,830 ,309.41 11/6/96 pp 96-6517 122 ,516 .82 26 .270 4,057 ,900 .00 2,595 ,347 .78 2/3/97 QQ 97-0056 115 ,310 . 17 26 .360 5,288 ,065.48 3,614 ,100.00 3/21/97 RR 97-0082 183 ,313.45 26 .350 3,615 ,430 .00 3/24/97 154,000 .00 26 .350 ss 97-0365 412,525 .00 4,419,991 .88 4/29/97 TT 97-0433 98 ,345 .88 26 .390 5,470,028 .12 3/25/96 201 ,373.40 26 .260 3,162,005.43 9/30/97 uu 96-4706 105,000 .00 34.420 79 553 798 01 w 97-1415 10/15/97 ww 97-1414 105 ,560.00 34 .250 7/22/97 XX 97-0968 14,500 .00 28.450 7/31/97 150,339 .86 29.400 10/1/97 yy 97-1252 156,734 .33 34 .900 zz 97-1620 3/14/96 AAA 96-4924 120,457.35 26 .250 TotaI 2 894 518 38 10 Pages 16 to 25, TSN, March 11, 2003.

DECISION- C.T.A. CASE NO. 6203 Page 10 In 1997, petitioner either partially or fully paid the above listed LC{fRs. Due to exchange rate differential of US dollar to Philippine peso from the opening of the LC{fRs to the actual payment thereof, petitioner allegedly incurred foreign exchange losses in the aggregate amount of P5,166,802. 76. There is no disagreement between the parties that foreign exchange losses are deductible from gross income. The main reason of respondent for the disallowance is because the account is a mere provision and that the expense was not yet paid or remitted. Hence, the Court is tasked to look upon the deductibility of the expense. The laws applicable are Section 37 and Section 39 of the National Internal Revenue Code of 1993 which provide: SEC. 37. General Rule. - The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year as the case may be) in accordance with the method of accounting regularly employed in keeping the books of the taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computations shall be made in accordance with such method as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income. xxx SEC. 39. Period for which deductions and credits taken. The deductions provided for in this Title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred" dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period. xxx (Both underlining supplied)

DECI SION- C.T.A. CASE NO. 6203 Page 11 Based on the Court's evaluation of the records of the case, petitioner adopts the accrual method of accounting with the calendar year as its accounting period. " Accrual Basis" is defined in Black's Law Dictionary as: [M]ethod of accounting that reflects expenses incurred and income earned for any one tax year. I n contrast to the cash basis of accounting, expenses do not have to be paid to be deductible nor does income have to be received to be taxable . (Underlining supplied). Under the accrual method of accounting, losses are recognized as they are incurred and not when they are paid . Hence, foreign exchange losses incurred during the year must be deducted from gross income in the same year in order to reflect proper income. Of course, when an expense is paid during the yea r, the expense is also deductible during the year. Records show that in the year 1997, petitioner either partially or fully settled the above listed sixteen ( 16) LC/ TRs as evidenced by either an RCBC Debit Advice or company voucher. Below, is a summary of documents purporting payments for the respective LC/ TRs as admitted by the Court: RCBC Littlegiant For LC/ Amount US$-Peso Debit Advice Date Voucher TR No. in US$ Rate Peso Value 01-07-97 QQQ 26 .305 04-08-97 95-4196 16,000.00 26 .375 420,880.00 04-08-97 RRR 26.375 3,279,708.30 04-14-97 96-5321 124,349.13 26.375 11-03-97 sss 35.400 376,372.83 07-28-97 96-5917 14,270.06 28.900 2,637,500.00 07-22-97 TTT 28.600 3, 978,796.45 11-25-97 96-5917 100,000.00 34.300 2,023,000.00 10-30-97 uuu 35.000 1,501,981.05 11-12-97 vvv 96-6516 112,395.38 34.250 2,064,688.50 10-22-97 www 34.800 12-15-97 96-6517 70,000.00 39.800 42,136 .50 12-09-97 AAAA 35.100 1,895,566.25 12-08-97 BBBB 96-6517 52,156.82 35.250 12-01-97 35.200 10,908.06 11-26-97 ecce XXX 97-0056 60,000.00 34.670 1,990,000.00 05-02-97 26.380 1,755,000.00 11-03-97 DDDD yyy 97-0056 310.17 35.400 11-10-97 EEEE 34.850 705,000.00 03-05-97 FFFF zzz 97-0056 55,000.00 26.350 1,056,000.00 10-06-97 35.275 1,144,110.00 GGGG 97-0082 313.45 4,062,520.00 HHHH 1,003,444.15 97-0082 50,000.00 2,439,500.00 III! 5,306,189.09 97-0082 50,000.00 KKKK 634,950.00 97-0082 20,000.00 97-0082 30,000.00 97-0082 33,000.00 97-0365 154,000.00 97-0433 28,345.88 97-0433 70,000.00 JJJJ 96-4706 201,373.40 97-1415 18,000.00

DECISION- C.T.A. CASE NO. 6203 Page 12 10-20-97 NNNN LLLL 97-1414 100,000.00 34 .050 1,940,850.00 10-22-97 MMMM 97-1414 43,000.00 34 .800 1,496,400.00 09-01-97 RRRR 97-0968 14,500.00 30 .500 08-07-97 0000 97-1252 60,339.86 28.650 442 ,250 .00 07-31-97 ssss 97-1252 90,000.00 29.400 1,728,736.99 10-20-97 pppp 97-1620 34 .050 2,646,000 .00 02-05-97 96-4924 100,000.00 26 .345 3,405,000 .00 03-11-97 QQQQ 96-4924 90,457 .35 26.350 2,383,098.89 30,000.00 790,500.00 Verification of the above documents leads Us to conclude that foreign exchange loss was incurred by petitioner in the year 1997 in the amount of P4,841,888.58 due to foreign exchange rate differential of the sixteen LC/TRs from their opening up to the actual settlement thereof, computed as follows: Payment RCBC Petitioner LCffR A mount Ori ginal Payment Exchange Fore ign Date Debit Voucher No . Settl ed Exchange Exchange Rate Exchange Advice Loss/(Ga in) 0 1/07/97 Rate Ra te Di fferential p I,680.00 03 /05 /97 02/05/97 QQQ 95-4 I96 $ 16,000.00 26.200 26 .305 0. 105 I8,123.6 1 03/ 11/97 8,593.45 04/08/97 JJJJ 96-4706 20 1,373.40 26.260 26.350 0.090 3,000.00 04/08/97 23 ,004.59 04/ 14/97 RRRR 96-4924 90 ,4 57 .35 26.250 26.3 4 5 0.095 2,2 1I.86 I 1/03/97 I 5,500 .00 07/22/97 ssss 96-4924 30,000.00 26.250 26.350 0 . 100 I ,022,235 .9 8 07/28/97 122,364 . I 9 I 0/30/97 RRR 96-532 1 124,349. I3 26 . 190 26.375 0. I 85 184, 10000 I 1/12/97 2,679. 87 I 1/25/97 sss 96-59 17 14,270.06 26.220 26 .375 0 . 155 433 ,950.00 I 0/22/97 476,400.00 12/0 1/97 TTT 96-59 17 100,000 .00 26.220 26 .375 0 . 155 2,64 8.65 I 2/ 08 /97 265,500.00 12/09/97 uuu 96-65 I6 I I2,395.38 26 .305 35.400 9 095 I 78 ,0 0 0 .00 I2/ 15/97 437,500.00 I 1/26/97 www 96-65 I7 52,5 I6.82 26 .270 28 .600 2.330 672 ,500 .00 05 /02 /97 274,560.00 I I/03/97 vvv 96-65 I7 70 ,000.00 26.270 28 .900 2 .630 4,620.00 I 1/10/97 255 ,396 .38 yyy 97 -0056 3 10. 17 26 .360 35 .000 8.640 592,200 .00 zzz 97 -0056 55 ,000.00 26.360 34 .250 7.890 XXX 97 -0056 60 ,000.00 26 .360 34 .300 7.940 AAAA 97 -0082 3 I3.45 26 .350 34 .800 8.450 EEEE 97-0082 30,000.00 26 .350 35.200 8.850 DODD 97 -0082 20 ,000.00 26 .350 35.250 8.900 ecce 97 -0082 50,000.00 26 .350 35 . 100 8.750 8888 97 -0082 50,000.00 26 .350 39 .800 I 3.450 FFFF 97 -0082 33 ,000.0 0 26 .350 34 .670 8.320 GGGG 97-0365 154,000.00 26.350 26.380 0 .030 HHHH 97-0433 28 ,3 45.88 26.390 35 .400 9.0 10 I III 97-0433 70 ,000.00 26.390 34 .850 8.460

DECISION- C.T.A. CASE NO. 6203 Page 13 09/0 1/97 NNNN 97-0968 14,500.00 28.450 30 .500 2 .050 29,725 .00 07/3 1/97 ppp p 97-1 252 90 ,0 0 0.0 0 29.400 29.400 08 /07 /97 0000 97-1 252 60 ,339.8 6 29.400 28 .650 (0 .750) (45 ,254.90) (0.200) ( II ,400.00) 10/20/97 LLLL 97-1414 57,000.00 34 .250 34 .050 0.550 23 ,650.00 10/22/97 MMM M 97- 1414 43 ,000.00 34 .250 34.800 0 .855 15,390.00 (0.850) (85 ,000.00) I0/06/97 KKKK 97- 14 15 18,000.00 34.420 35 .275 (8 1 990. 10) I 0/20/97 QQQQ 97- 1620 100000.00 34.900 34.050 ~4 84 1 888 58 Adj ustments : Fo re ign exchange gains unsupported" but were verifi ed by independent CPA in hi s report To ta l 1.2.b. Losses from 3 dollar-denominated LC!TRs Likewise, in 1996 and 1997 another three LC/TRs were opened by petitioner with RCBC on the following dates: Entry For Amount Conversion Rate Date LC!TR No. in us~ 09-19-96 Ex h. 96-7005 at 0Qening Peso Value 07-15-97 97-1080 1,353 ,541. 75 05-22-97 II 97-0563 146 ,953 .35 26.260 35 ,544,006 .36 T ot aI 121,565.82 JJ 32.000 4 ,702 ,507.20 1 622 Q6Q 92 KK 26 .385 3,207,514 .16 ~3 ~5~ Q2Z Z2 Petitioner also paid the above listed LC/TRs partially in 1997 as follows: Payment RCBC Littlegiant For LC/ Amount US$-Peso Peso Value Date Debit Voucher TR No. in US$ Rate 1,412,699 .07 5/8/97 Advice 96-7005 53 ,541 .75 26 .385 5,276 ,000 .00 BBB 000 96-7005 200 ,000.00 26 .380 2 ,638 ,000 .00 5/ 19/97 CCC ppp 96-7005 100 ,000 .00 26.380 1,978 ,500 .00 5/28/97 DDD 96-7005 75 ,000 .00 26.380 1,978 ,875 .00 6/5/97 EEE 96-7005 75 ,000 .00 26.385 1,979 ,250 .00 6/13/97 FFF 96-7005 75,000.00 26.390 1,055 ,600 .00 6/16 / 97 96-7005 40 ,000 .00 26 .390 3 ,034 ,275 .00 6/23/97 GGG 96-7005 115,000.00 26 .385 2,639 ,000.00 6/25/97 HHH 96-7005 100,000 .00 26 .390 213 ,500.00 6/30/97 96-7005 30 .500 442 ,650.00 9/1/97 Ill 96-7005 7 ,000 .00 34 .050 2,481 ,500.00 10/20/97 JJJ 96-7005 13,000.00 35.450 207 ,176.58 10/28/97 97-1080 70 ,000.00 34.800 54 490.54 10/22/97 KKK 97-0563 34 .800 10/22/97 5,953.35 25 391 516 19 LLL 1,565 .82 MMM 931 Q6Q 92

DECISION- C.T.A. CASE NO. 6203 Page 14 From the above payment, the foreign exchange loss of petitioner is computed to be at P907,488.47, to wit: Pa yment RCBC Petitioner LCfTR Amount Original Payment Exchange Foreign Date Debit Voucher No . Settled Exchange Exchange Rate Exchange Advice 53,541.75 Loss/(Gain) 05 /08 /97 BBB 000 96.7005 200,000 .00 Rate Rate Differential 05/ 19/97 CCC 96-7005 100,000.00 26.260 26 .385 0. 125 6,692.72 05 /28 /97 ppp 96-7005 75,000.00 26.260 26 .380 0 . 120 24,000.00 06 /05 /97 DOD 96-7005 75,000.00 26.260 26.380 0 . 120 12,000.00 06/ 13/97 96-7005 75,000.00 26.260 26.380 0 . 120 06/ 16/97 EEE 96-7005 40,000.00 26.260 26.385 0. 125 9,000.00 06 /23 /97 FFF 96-7005 115,000.00 26.260 26 .390 0 . 130 9,375.00 06 / 25 /97 GGG 96-7005 100,000.00 26.260 26.390 0. 130 9,750.00 06/30/97 96-7005 26.260 26 .385 0. 125 5,200.00 09/01 /97 HHH 96-7005 7,000.00 26 .260 26 .390 0 . 130 14,375.00 I 0/20/97 96-7005 13 ,000 .00 26.260 30 .500 4.240 13 ,000.00 I 0/28/97 Ill 96-7005 70 ,000 .00 26 .260 34 .050 7.790 29,680.00 I 0/22/97 JJJ 97- 1080 5,953.35 26.260 35.450 9 . 190 101 ,270.00 I 0/22/97 97-0563 32.000 34 .800 2.800 643 ,300.00 KKK I ,565.82 26 .385 34 .800 8.415 16,669.38 Tota I P931 ,060.92 13, 176.38 LLL P907 ,488.48 MMM On December 29, 1997, the outstanding balance for the two dollar- denominated LC(TR Nos. 96-7005 and 97-0563 in the amounts of US$430,000.00 and US$120,000.00, respectively, was converted into peso- denominated obligation at the exchange rate of P37.90 to US$1.00.12 The peso equivalent of the said two LC(TRs is P20,845,000.00 (US$550,000.00 x P37.900/US$). The foreign exchange loss in the amount of P6,387,000.00 is thereby computed as follows: LC / T R Outstanding Original Exchange Exchange Foreign No. Balance Exchange Rate Rate Exc hange in US$ 37.900 Loss/(Gai n) 96-7005 430,000.00 Rate 37.900 Differential p 5,005,200.00 97-0563 120 ,000.00 26.260 11.640 1,38 1,800.00 550,000.00 26.385 11. 5 15 p 6,387,000.00 Total 11 Exh ibits TTTT and UUUU were not among the documents ad mitted by the Court. 12 Exhibit JJJJJJ .

DECISION- C.T.A. CASE NO. 6203 PagelS On the same day, petitioner paid the converted peso-denominated obligation in the sum of P1,297,000.00 for LC/TR No. 96-7005 leaving a peso balance of P15,000,000.00 for the said LC/TR13 � Thus, the total foreign exchange loss incurred by petitioner during the year 1997 for the above listed three (3) LC/TRs is P1,305,828.36 (P907,488.47 + P398,339.89 [(P34,221.64 x 26.260) less (P34,221.64 x 37.900)]). Hence, pursuant to Section 29(d) of the National Internal Revenue Code of 1993, the amounts of P4,841,888.58 and P1,305,828.36 or a total of P6,147,716.94 which were paid in 1997 as foreign exchange losses from the nineteen (19) LC/TRs are deductible from petitioner's gross income. The controversy now lies with the remaining balance of P6,296,984.90 (P12,444,701.84 less P6,147,716.94) which was allegedly sustained by petitioner during the year 1997 under accrual method. After a careful scrutiny of the documents relative to the claimed deduction, the Court is not convinced that the amount of P6,296,984.90 was sustained during the year 1997. The testimony of petitioner's witness is wanting of corroborative documents. The Certification issued by RCBC as to conversion of US$ to Peso denominated obligation in December 1997 is lacking of details. In addition, as noted by the commissioned independent CPA, the above amount was not supported by Peso Trust Receipts Statements. 14 13 Exhibit NNN. 14 Exhibit IIIII-4.

DECISION- C.T.A. CASE NO. 6203 Page 16 1.3. Disallowed Import Purchases Respondent disallowed the import purchases in the amount of P1,295,759.00 on the ground stated in the Final Decision on Disputed Assessment as follows: The taxpayer availed of the Voluntary Assessment Program (VAP) by paying value-added tax (VAT) of PhP61,900.00 for sales of PhP619,000.00 and income tax of PhP216,650.00 (35% of PhP619,000.00). In the same series of entries, imported purchases of PhP1,295,759.00 were debited with corresponding credit to cash for the same amount. Obviously, to allow this additional cost adjustment of PhP1,295,759.00 in 1997 against the cost of PhP619,000.00 which was subject of VAT and income tax paid through Voluntary Assessment Program (VAP) would negate the effect of VAP. In fact, the taxpayer would even gain in terms of reduction of the income tax liability in 1997 as a result of said cost adjustment. Petitioner explicates that the amount of P1,295,759.00 represents payment for advance customs duties for importations in 1997 which are duly supported by RCBC's bank debit advices and validated Import Entry Declarations. It is a year-end adjustment to correct the amount of customs duties chargeable to imported goods for sale (which forms part of the cost of inventory and the cost of sales) and for imported machineries and supplies (which forms part of the operating expenses). The expense is allowable deduction from gross income pursuant to Section 29(1)(a) of the National Internal Revenue Code of 1993. We find for the petitioner. The settlement of the present issue lies on the determination of the effect of year-end adjustment to petitioner's availment of VAP.

DECISI ON - C.T.A. CASE NO. 6203 Page 17 We see no plausible reason why respondent should disallow a year- end adjustment just because petitioner availed of the VAP. While it is true that the customs duties will increase the amount of cost of goods sold and consequently decrease the sales of petitioner of the same amount, however, such adjustment is necessary to correct petitioner's financial record and to reflect proper income. As correctly premised by petitioner, the customs duties are ordinary and necessary business expense deductible from its gross income pursuant to Section 29(1)(a) of the National Internal Revenue Code of 1993. To quote: Sec. 29. Deductions from gross income. - In computing for taxable income subject to tax under Sections 21(a); 24(a), (b) and (c); and 25(a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section xxx (a) Expenses. - (1) Business expenses. - (A) In general. All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in pursuit of a trade, profession or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. In fact, respondent did not question the deductibility of the expense but merely concerned himself of the effect of VAP due to the recognition of the expense. We find no direct relation between petitioner's availment of VAP and the recording of customs duties as addition to cost of goods sold. We further observe that the VAP availed by petitioner was for the year 1996

DECISIO N - C.T.A. CASE NO. 6203 Page 18 while cost adjustment pertains to 199715. Inasmuch as respondent failed to show what effect of 1996 VAP was negated in the year 1997, this Court holds that 1997 year-end adjustment for customs duties which were duly substantiated by receipts16 is a proper deduction from gross income. However, the total customs duties that was duly supported by document based on the report of the commissioned independent CPA17, amounted only to P1,283,106.00. Therefore, the difference of P12,653.00 (P1,295,759.00 less P1,283,106.00) cannot be allowed as a deduction from gross income for being unsubstantiated. 1.4. Untaxed Gross Profit on Unrecorded Imported Purchases Respondent concludes that petitioner has untaxed gross profit due to undeclared importation in the amount of P11,264,518.73. This comes from the data gathered from the Third Party Information Unit of the Bureau of Internal Revenue which originated from Sociedad Generales de Surveillance (SGS). The documents from SGS disclosed that during the year 1997, petitioner had a total importation of US$3,833,016.57. However, the worth of goods per importation documents presented by petitioner to the respondent amounted only to US$1,902,271.44 leaving an understatement of imported purchases in the sum of US$1,930,745.13. Consequently, the alleged understatement resulted in untaxed gross profit in the amount of P11,264,518.73 derived at as follows: 15 (see page 747, SIR records) 16 Exhibit IIIIII, inclusive of submarkings. 17 Exhibit FFFFFF-7.

DECISION- C.T.A. CASE NO. 6203 Page 19 Importation per SGS records US$ 3,833,016.57 Less: Importation per LGSPC records 1,902,271.44 Variance Multiply by convers ion rate US$ 1,930,745.13 Peso Equivalent PhP/US$ 30.63 Divide by rate of Cost of Sales to PhP59 , 138,723.33 Net sales 84% Understatement of imported purchases PhP70,403,242.05 Multiply by gross profit rate Untaxed Gross Profit on Understatement 16% Of Imported Purchases PhP11.264.518 .73 Not surprised with the discrepancy noted by the respondent, petitioner clarifies that the amount of importation per SGS records and that of its books of accounts will indeed not reconcile . The data of SGS cover all importations made by petitioner during the year 1997 whether the goods imported are for sale to its customer or to be used for its business operations. The account "Purchases-Imported" appearing in petitioner's books which was (the only account) examined by respondent is limited to importation of goods for sale to customer. Respondent failed to consider other imported goods purchased by petitioner for its operations which were recorded under the account titles "Machineries", "Supplies", "Prepaid Charges" and other appropriate accounts. 18 We find the explanation of petitioner well taken. In the report of Our commissioned independent CPA19 the difference between the figures appearing in the importation documents of SGS and that of petitioner's records were reconciled and accounted for. We find the audit procedures adopted by accounting firm, CGM Co., complete and sufficient to come-up with the conclusion that there was no unrecorded 18 Exhibit FFFFFF-4. 19 Exhibit FFFFFF.

DECISION - C.T.A. CASE NO. 6203 Page 20 imported purchases which should be taxed based on gross profit ratio. The examination, as evaluated by the Court, is carried out meticulously and the findings noted were all supported by documents. We have verified the report against the documents on record and We find the same in order. Hence, there is no basis for imposition of additional income. 1.5. Unsupported Export Sales. The unsupported export sales in the amount of P1,727,504.38 was not among the discrepancies noted for 1997 deficiency income tax but part of the assessment for 1997 deficiency value-added tax of petitioner. Hence, We will tackle the same when We discuss the validity of the assessment for 1997 deficiency value-added tax. Prescinding from the above findings, petitioner is still liable for 1997 deficiency income tax in the amount of P3,140,804.83, computed as follows: Taxable Net Income per Return P6,296 ,984.90 P1,397,215 .20 Add/(Less) Adjustments 12 ,653 .00 6 .3 09.547.90 Disallowed exchange rate differential P7,7 06,853 .10 Disallowed import purchases Taxable Net Income per Audit Income Tax Due P2,697,398 .59 Less: Tax Withheld/Paid per Return 166 716.02 Deficiency Income Tax Add : Interest P2 ,530 ,682 .57 TOTAL AMOUNT PAYABLE 610 ,122 .26 P3140 804 83 The compromise penalty of P25,000.00 will not be imposed as compromise implies mutual agreement which is absent in the case under consideration (H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6915, April 11, 2005). The imposition of the same without the conformity of the taxpayer is illegal and

DECISION- C.T.A. CASE NO. 6203 Page 21 unauthorized (Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., G.R. No. 35266, January 21, 1991). 2. DEFICIENCY VALUE-ADDED TAX P45, 822, 333 .45 Respondent believes that petitioner is liable for 1997 deficiency value-added tax in the amount of P45,822,333.45. The deficiency was arrived at after respondent held petitioner liable for 10% value-added tax on five (5) items of discrepancies. The assessment2� is reproduced hereunder for better appreciation, to wit: Taxable Receipts per Return P193,032,000 .00 P311 ,385,470.32 Add/(Less) Adjustments: 1,245 ,823 .76 301 ,960,453.75 Unrecorded sales to Milwaukee 1,727 ,504.38 Disallowed discounts granted after 35,551 ,883.56 ~6:13 3~5 92~ . Q7 Sales 70,403,242.05 Unsupported export sales Unaccounted vatable sales Undeclared sales traceable to Unrecorded import purchases Taxable Receipts per Audit Output Tax Due p 15,601 ,288.09 p 61 ,334 ,592.41 Less : Creditable Input VAT 25,000 .00 13,535,958.31 VAT Due Less: Tax Withheld/Paid Per Return p 47 ,798 ,634 .10 Deficiency Value-Added Tax 17,602,588 .74 Add : p 30,196,045.36 Interest Compromise 15,626,288 .09 TOTAL AMOUNT PAYABLE ~ ~5 822 333 ~5 2.1. Unrecorded Sales to Milwaukee Earlier, We have discussed that the unrecorded sales of petitioner to Milwaukee Industries Corporation in the amount of P193,032,000.00 were cancelled. Accordingly, there is no taxable transaction. However, We find it appropriate to hold petitioner liable for deficiency interest for the unrecorded 20 BIR records, page 761.

DECISION- C.T.A. CASE NO. 6203 Page 22 sales from the time petitioner should have paid the VAT on such sales up to the dates of their cancellation (the return of the goods). We have noted that the unrecorded sales were made by petitioner from September 8 to 26, 199721 but the goods were returned by Milwaukee Industries Corporation on different dates in October and November 199722 � Hence, petitioner should pay deficiency interest computed from the time the output VAT on unrecorded sales in September 1997 should have been paid up to the return of goods in October and November 1997. For the unrecorded sales of petitioner in September 1997, the output VAT is due on October 20, 1997 pursuant to Section llO(a) of the National Internal Revenue Code of 1993. Consequently, the deficiency interest is computed from October 21, 1997 to the respective dates of sales returns in October and November 1997, to wit: Should be Date Unrecorded Output VAT 20% Payment Returned Sales Due Defic iency 10-13-97 Date 10-16-97 p 20,002,500.00 p 2,000,250.00 Interest 10-20-97 10-20-97 20,002,500.00 2,000,250.00 10-20-97 10-23-97 26,0 10,000.00 2,60 1,000.00 p 4,275.62 10-20-97 10-27-97 26,010,000.00 2,60 1,000.00 9,0 15.04 10-20-97 10-29-97 23,503,500.00 2,35 0,350.00 11 ,590.77 10-20-97 11-02-97 23,503,500.00 2,350,350.00 19,873.97 10-20-97 11-05-97 27,900,000.00 2,790,000.00 I 0-20-97 26,100,000.00 2,6 10,000.00 22,882.19 10-20-97 p 67,637.52 Tot a I P1 23,Q3 2,QQQ,QQ p 12,3Q3 ,2QQ,QQ Therefore, petitioner is liable to pay deficiency interest in the amount P67,637.59 due to unrecorded sales. 21 Exhibits J to Q. 22 Exhibits Z, AA to GG .

DECISION- C.T.A. CASE NO. 6203 Page 23 2.2. Disallowed Discounts Granted After Sales There is no dispute that discounts granted after sales is not allowed as deduction from gross sales for purposes of computing output VAT liability pursuant to Section 100(d)(2) of the National Internal Revenue Code of 1993 which provides: Sec. 100. Value-added tax on sale of goods or properties.- (a) Rate and base of tax.- xxx XXX XXX XXX (d) Determination of the tax. - (1) The tax shall be computed by multiplying the total amount indication in the invoices by 1/11. (2) Sales returns, allowances and sales discounts. - The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given. (Underlining supplied). Petitioner, however, maintains that it has no discounts granted after sales. The amount disallowed by the respondent of P1,245,823. 7623 actually represents sales transactions wherein sales invoices were issued to customers but no deliveries were made due to non-availability of goods or the goods to be delivered were found defective. 24 23 Should be P1,255,823.76 per 1997 Quarterly VAT returns. 24 Pages 5 to 6, TSN, December 11, 2001.

DEOSION - C.T.A. CASE NO. 6203 Page 24 After a painstaking verification of the documents supporting the petitioner's cancelled sales25 the Court is convinced that the amount of P1,255,823.76 actually pertains to cancelled sales and not to discounts granted after sales. However, as reported by the commissioned independent CPA, the amount of P223,291.5026 was not properly substantiated, broken down as follows: cancelled sales recorded twice in the Sales P208,416.76 Book - Local Sales 14,874.74 cancelled sales- partial with no supporting P223,291.50 Credit Memorandum Total Thus, pursuant to the above-quoted Section 100(d)(2) of the National Internal Revenue Code of 1993 only the amount of P1,032,532.26 (P1,255,823.76 less P223,291.50) is deductible from gross sales. The amount of P223,291.50 is subject to 10% value-added tax. 2.3. Unsupported Export Sales Petitioner declared in its quarterly VAT retums27 export sales in the aggregate amount of P1,727,504.38. However, respondent subjects the said export sales to 10% VAT for alleged failure of petitioner to substantiate the same. Hence, We have to determine whether the sales of petitioner in the amount of P1,727,504.38 is subject to VAT at 0%. We rule against petitioner. 25 Exhibits ZZZZZ- 1 to ZZZZZ-140 & YYYYY-1 to YYYYY-4, DDDDDD-1 to DDDDDD- 143a in relation to the report the commissioned CPA (Exhibit XXXXXX). 26 Exhibits DDDDDD-76, DDDDDD-92, DDDDDD-99, DDDDDD-100, DDDDDD-101 and DDDDDD-122, inclusive of submarkings. 27 c .., J... :a...:._ vvvvv- 1 ~""' vvvvv 1

DECISI ON- C.T .A. CASE NO. 6203 Page 25 After a careful perusal of the documents presented by petitioner to prove that the amount of P1,727,504.38 represents export sales/ 8 We have noted that the commercial invoices of petitioner failed to comply with invoicing requirements under Section 4.108-1 of Revenue Regulations No. 7- 95 in relation to Sections 108 and 238 of the National Internal Revenue Code of 1993. Section 4.108-1. Invoicing Requirements. - All VAT- registered persons shall, for every sale or lease of goods or properties or service, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN, and address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. XXX XXX XXX SEC. 108. Invoicing and accounting requirements for VAT-registered persons. -(a) Invoicing Requirements. -A VAT- registered person, shall for every sale, issue an invoice or receipt. In addition to the information required under Section 238, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. XXX XXX XXX 28 Exhibits EEEEEE-1 to EEEEEE-5, inclusive of submarkings.

DECISION- C.T .A. CASE NO. 6203 Page 26 SEC. 238. Issuance of receipts or sales or commercial invoices. - All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at P25.00 or more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the case of sales, receipts or transfers in the amount of PlOO.OO or more, or regardless of amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client. xx.x" The commercial invoices issued by petitioner to support its export sales failed to meet the above standard. Petitioner failed to indicate that it is a VAT-registered person, followed by his taxpayer's identification number. The word "zero-rated" is also not imprinted in the invoices. In addition, there was no indication that the commercial invoices were authorized to be printed by the Bureau of Internal Revenue as required in Section 239 of the National Internal Revenue Code of 1993 which provides: SEC. 239 . Printing of receipts or sales or commercial invoices. - All persons who print receipts or sales or commercial invoices shall, for every job order, secure from the Bureau of Internal Revenue an authority to print said receipts or invoices before printing the same. No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show, among other things, the name, business style, taxpayer account number and business address of the person or entity to use the same. XXX XXX XXX Corollarily, for failure of petitioner to comply with the requisites under the law, the export sales in the amount of P1,727,504.38 cannot be qualified

DECISION- C.T.A. CASE NO. 6203 Page 27 as zero-rated for VAT purposes. Moreover, the commissioned independent CPA noted the said export sales have either no export declaration/permits or supported by photocopied export declarationjpermits. 29 Hence, respondent's assessment for 10% value-added tax is sustained. 2.4. Unaccounted Vatable Sales This discrepancy refers to the alleged unaccounted difference between the amount of sales recorded in sales book and the declared vatable sales in the quarterly VAT returns of petitioner, to wit: Sales per Sales Book-Local p 346,907,354.06 Less : Sales subj ect to VAT per 3 11,385,470.32 Quarterly VAT Return p 35.521.883.74 Discrepancy The amount was disallowed by respondent for failure of petitioner to properly account (as the title suggests) for the vatable sales appearing in its local sales book. Petitioner explains that it is its practice to record sales in the sales book inclusive of VAT. 30 However, in the Quarterly VAT returns, the declared sales are net of output VAT. Obviously, the total sales per book (which is inclusive of output VAT) and the total sales reported in the VAT returns (which is net of output VAT) will not tally. After a thorough examination of the records supporting petitioner's stand, We are swayed that petitioner has no unaccounted vatable sales. 29 Exhibit XXXXXX-8. 30 TSN, December 11, 2001, pages 8 to 10.

DECISION- C.T.A. CASE NO. 6203 Page 28 Worthy to note at this juncture is the report of the commissioned independent CPA with respect to the alleged disparity.31 Pertinent portions of the said report state that: Based on the procedures we performed, we present below our findings and observation: 1. The amount of the Company's total local sales for the taxable year 1997, as recorded in the Sales Book-Local Sales provided to us by the Company, that we ascertained to be properly substantiated by supporting documents as outlined under the procedures performed is P3 46,907,354.06. 2. The Company's total sales net of cancelled sales and VAT for the taxable year 1997 amounting to P313,123,093.28, which consists of both local and export sales amounting to P311, 385,470.28 and P1,737,6 23, respectively, as derived from its Sales Book- Local and Export Sales, is equal to the amount presented in the Company's 1997 audited FS. The details are shown in the following table: Accounts Annex Table I Per Audited Per VAT Difference Per Sales FS Returns Local Sales: Book-Local p 34,266,059.98 313,123,093.31 P312,641 ,294.08 3,127,512.99 Gross Sales A&B P346 ,907 ,3 54.06 1,25 5,823 .76 4,3 83 ,336. 75 31,138,546.99 Cancelled Sales A&B 311,385,470.32 (31 , 138,547.03) 342,524,0 17.31 Net Sales-gross of VAT A&B 31 , 138,547.03 311,385,470.32 (0.04) 1,727,504.38 10, 118.62 Output VAT A&B 311,385,470.28 1,737, 623.00 313,112,974.70 (0.03) Net Sales-net of VAT A&B 10, 118.58 313,123,093.28 Export Sales A&B Total Sales A B We noted that it is the Company's practice to record local sales in the Sales Book-Local Sales at the invoice amount, which includes the 10% output VAT. Cancelled sales are recorded as a separate entry under cancelled sales rather than a mere cancellation of the original sales entry. At the end of each month, entries are made to record sales (net of output VAT) and the output VAT. It is in the General Ledger (GL) recording that the invoice amount is segregated into sales and output VAT. The amount of 31 Exhibit XXXXXX.

DECISION - C.T.A. CASE NO. 6203 Page 29 sales that is recorded in the GL is the total sales (per Sales Book) during the month less cancelled sales and output VAT. As illustrated in Table 1 above, the amount declared in the Quarterly VAT returns filed for the taxable year 1997 as gross taxable sales amounting to P311,385,470.32 actually represents the Company's total local sales net of cancelled sales and VAT as derived from the Sales Book- Local Sales and that the difference of P31,138,546.99 represents the total output VAT on local sales. Moreover, the unaccounted variance per Sales Book-Local Sales and per VAT returns amounting to P35,551,883.56 computed by the BIR and included in the assessment is accounted for as follows: Table 2 Ann ex De sc r i p t i o n Amount 35,551,883.56 A& B Total Unaccounted Variance per Sales Book and A 35,551,883.78 B per VAT Returns as Assessed by the BIR Accounted for as follows: Cancelled Sales per Sales-Book-Local Sales 4,383 ,336.75 31 , 138,547.03 OutputVATperSalesBook-Local Sales 30,000.00 Difference on Gross Sales between: Per BIR's Computation 346,937,354.06 Per Sales Book-Local 346,907,354.06 Rema inin g Unaccounted Variance 0.22 The summaries showing the total sales net cancelled sales, at both gross and net of VAT, for taxable year 1997 derived from Sales Book-Local Sales versus the total sales per Company's 1997 audited FS and amounts per Quarterly VAT returns and supporting attachments are presented in Annexes A and 8 of th is Report, respectively. Photocopies of supporting Sis on gross sales are submitted to this Court as Exhibits CCCCCC-1 to CCCCCC-4374 and DDDDDD-1 to DDDDDD- 143a and are faithful reproductions of the originals. The above report is explicit and is hereby adopted . We have verified the supporting documents cited therein and We find the same in order. Therefore, the unaccounted vatable sales should be disregarded as explained in the report cited.

DECISION- C.T.A. CASE NO. 6203 Page 30 2.5. Undeclared Sales Traceable to Unrecorded import purchases Lastly, respondent opines that petitioner has undeclared sales arising from undeclared importation. This particular item stems from the unmatched importation per petitioner's books of accounts and from the data gathered by the Third Party Information Unit of the Bureau of Internal Revenue which originated from Sociedad Generales de Surveillance (SGS). However, We have earlier ruled in issue 1.4 of the deficiency income tax that petitioner has no unmatched importation based on the audit report32 submitted to Us by the commissioned independent CPA which were duly supported by documents. Hence, We find this particular issue moot and academic for discussion. In sum, petitioner is still liable for 1997 deficiency value-added tax in the reduced amount of P363,508.92, computed as follows: Taxable Receipts per Return p 223 ,291 .50 P311 ,385,470 .32 Add/(Less) Adjustments 1.727,504 .38 1,950,795 .88 Disallowed discounts granted after P313 336 266.20 Sales - Unsupported p 31 ,333,626.62 Unsupported export sales 13,535,958 .31 Taxable Receipts per Audit p 17,797 ,668 .31 Output Tax Due 17 ,602,588.74 Less: Creditable Input VAT VAT Due p 195,079 .57 Less: Tax Withheld/Paid Per Return Deficiency Value-Added Tax 100,791 .76 Add : 67 637.59 Interest on Deficiency VAT ~ 363 5Q8 92 Interest on Unrecorded Sales TOTAL AMOUNT PAYABLE 32 Exhibit FFFFFF, inclus ive of submarkings.

DECISION- C.T.A. CASE NO. 6203 Page 31 The compromise penalty of P25,000.00 should not be imposed in the absence of mutual agreement between the parties (Collector of Internal Revenue vs. UST, 104 Phil. 1062; Dr. Felisa L. Vda. De San Agustin, in substitution of Jose Y. Feria, in his capacity as Executor of the Estate of Jose San Agustin vs. Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001). WHEREFORE, premises considered, the Petition for Review is hereby DENIED. The deficiency assessments for income and value-added taxes are hereby UPHELD but in reduced amounts, computed as follows : Basic Interest To t al Deficiency Income Tax P2,530,682.57 P610,122.26 P3,140,804 .83 (ST-INC-97-0160-.2 000) 195,079.57 168,429 .35 363 ,508 .92 Deficiency Value-Add ed Tax P2,725 ,762.14 P778,551 .61 P3,504 ,313 .75 (ST-VAT-97-0159-2 000 ) Totals According ly, petitioner is ORDERED to PAY the respondent the aggregate amount of P3,504,313.75, plus 20% delinquency interest per annum from February 21, 2000 until fully paid, pursuant to Section 249 of the National Internal Revenue Code of 1993. In addition, a fine of three hundred pesos (P300.00) is imposed for violation of the Bookkeeping Regulations . SO ORDERED. (l___::-u, - ~ ERNESTO D. ACOSTA Presiding Justice

DECISION- C.T.A. CASE NO. 6203 Page 32 Associate Justice ~ CAESAR A. CASANOVA Associate Justice CERTIFICATION I hereby certify that the above decision was reached after due consultation with the members of the Division of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~ 11-~ ERNESTO D. ACOSTA Chairman, First Division Presiding Justice