WATERFRONT CEBU CITY HOTEL & CASINO, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION WATERFRONT CEBU CITY C.T.A. CASE NO. 8005 HOTEL & CASINO, INC., Members: Petitioner, -versus- CASTANEDA, JR.,Chairperson, CASANOVA, and MINDARO-GRULLA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, '7 OEC 1ZZ01Z/" tfrt ,.M. Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION CASANOVA,/..: The Petition for Review1, filed by petitioner-Waterfront Cebu City Hotel & Casino, Inc., prays for the cancellation of respondent's assessment for deficiency income tax in the amount of P2,579,289.48 for taxable year 2006. Petitioner is a domestic corporation duly organized and existing under the laws of the Philippines with principal office at Salinas Drive, Lahug, Cebu City. 2 Respondent is the duly appointed Commissioner of Internal Revenue, vested with authority to act as such, including, among others, the power t~ 1 Docket, pp . 5-1 I 2 Par. I, Stipulation of Facts, Joint Stipu lation of Facts and Issues (JSFI), Docket, p. 88

DECISION CTA CASE NO. 8005 authorize the examination of taxpayer's books of accounts, to issue and decide deficiency assessments of internal revenue taxes. 3 The facts of the case, as jointly stipulated by the parties, are as follows: 4 "3. On August 31, 2007, the Bureau of Internal Revenue issued Letter of Authority No. 2007 00006956 for the investigation of Petitioner's business operations and books of accounts for Calendar Year 2006. 4. The Formal Letter of Demand issued by BIR Large Taxpayers District Office-Cebu LTDO No. 123 was received by Petitioner on April 30, 2009. Petitioner submitted is (sic) formal protest letter and written reply to the BIR in its letters of May 25, 2009 and July 23, 2009, respectively. 5. Respondent issued its Final Decision on Disputed Assessment on October 31, 2009 directing Petitioner to either pay the assessments or to appeal the decision to the Court of Tax Appeals within 30 days of receipt of the decision. The Petitioner received the decision on November 9, 2009 seeking collection of deficiency assessments as follows: Income Tax 2,579,289.48 Value Added Tax 1,389,389.61 Expanded Withholding Tax 1,732.20 6. Petitioner has paid the deficiency Value Added Tax assessment in the amount of P1,389,389.61 on December 1, 2009 through the BIR's Electronic Filing and Payment System (EFPS). Printed copies of EFPS Filing Reference, Confirmation Report and BIR Payment Form No. 0605 are attached as Annexes H, H-1, H-2 and H-3 of the Petition for Review. 7. Petitioner has paid the deficiency Expanded Withholding Tax Assessment of P1,732.20 on December 1, 2009 through the BIR's Electronic Filing and Payment System. x x x x x x.'~ 3 Par. 2, Stipu lation of Facts, JSFI , Ibid 4 Par. 3-7, Stipulation of Facts, JSFI , Ibid, pp. 89-90

DECISION CTA CASE NO. 8005 On December 8, 2009, petitioner filed the instant Petition for Review with this Court to appeal respondent's denial of its protest on deficiency income tax assessment. On February 10, 2010, respondent filed her Answer5 and interposed the following Special and Affirmative Defenses, to wit: "4. Petitioner's protest on the assessment has no factual basis. The Final Assessment on Disputed Assessment states that the adjustment of 2008 Income Tax Return amounting to P1,506,576.00 cannot be honored due to the ongoing investigation for the taxable year 2007. 5. The Final Decision on Disputed Assessment also disallowed a total of P212,950.27 on Creditable Withholding Tax at Source (Forms 2307). Petitioner failed to submit complete documents to substantiate its claims and some were disallowed on its face value pursuant to Section 2.58.3(A) of RR. No. 2-98. 6. Finally, it is a well-settled rule in taxation that assessments are prima facie presumed correct and made in good faith. The taxpayer has the duty of proving otherwise, and in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed." On May 19, 2010, the parties filed their Joint Stipulation of Facts and Issues6 which this Court subsequently approved per its Resolution7 promulgated on May 24, 2010. After presentation of its evidence, petitioner filed its Formal Offer of Evidence8 on December 12, 2011 with respondent's Comment (Re: Petitioner's Formal Offer of Evidence)9 filed on December 15, 2011. e4- 5 Docket, pp. 62-66 6 Ib id, pp. 88-90 7 Ibid, p. 92 8 Ibid , pp. 219-228 9 Ibid, p. 386-388

DECISION CTA CASE NO. 8005 In a Resolution 10 dated January 9, 2012, this Court resolved to admit Exhibits "A" to "F"; "I"; and "K" to "T", inclusive of submarkings. On March 6, 2012, respondent, after completion of the testimony of her witness, Alicia Socorro T. Abutazil, filed her Formal Offer of Evidence.11 Petitioner filed its Comment (Re: Respondent's Formal Offer of Evidence)12 on April 3, 2012. In a Resolution promulgated on April 16, 2012, this Court admitted all of the respondent's exhibits consisting of Exhibits "1" to "10" and its submarkings. The parties were likewise required to file their respective memorandum within thirty (30) days from receipt of the resolution. On May 10, 2012, respondent filed a Manifestation13 stating that she is adopting the arguments in her Answer on February 10, 2010 as her Memorandum. Petitioner, having failed to file its memorandum within the period given by the Court, as per Report dated August 1, 2012 of the Records Division, a Resolution 14 was issued by this Court considering the case submitted for decision as of August 2, 2012. The parties jointly stipulated on this lone issue for resolution of this Court, to wit: "Whether or not petitioner is liable for deficiency Income Tax Assessment in the amount of P2,579,289.48 for taxable year 2006 plus surcharges and interests.'~ 10 Ib id, pp. 390-39 1 II Ibid, pp. 406-41 0 12 1bid, pp. 41 I-413 13 Ibid, 417-419 14 Ibid, p. 431

DECISION CTA CASE NO. 8005 Petitioner was assessed by respondent for deficiency income tax for taxable year 2006 for having a discrepancy on prior year's excess tax credits claimed and disallowed creditable tax withheld at source, as detailed herein below: 15 Discrepancy on prior year's excess tax credits cla imed p 1,506,576.00 P1,719,526.27 Disallowed creditable tax withheld at source 212,950. 27 859,763.16 Interest Total Income Tax Assessment P2,579,289.43 The resolution of the instant case will, therefore, depend on the factual findings on whether or not the above-enumerated items of assessment, which are items of deduction against petitioner's income tax liability, will actually give rise to an income tax payable by the petitioner for taxable year 2006. Petitioner submitted its Annual Income Tax Returns for taxable yea rs 2005 to 2008 which reflected the following details: CY 2005 CY 2006 CY 2007 CY 2008 Exhibit " B" Exhibit " C" Exhibit " D" Exhibit "E" Sales/ Revenues/ Receipts/ Fees p 780,851,508.00 P768,747,351.00 p 731,918,319.00 P740,285,854.00 Less : Cost of Sales/ Services Gross Income from Operation 427 738 854.00 433 324 345.00 135 012 036.00 391 355 175 .00 Add: Non-Operating & Other Income Total Gross Income p 353,112,654.00 P335,423,006.00 P596,906,283.00 P348,930,679 .00 Less: Deductions Taxable Income 2 071176.00 564 909.00 - 418 120.00 Rate Income Tax p 355,183,830.00 P335,987,915.00 p 596,906,283 .00 P349,348,799 .00 MCIT 257 030 396.00 289 407 183.00 543 320 551.00 316 211124.00 Tax Due p 98,153,434.00 p 46,580,732.00 P53,585,732.00 P33,13 7, 675.00 32.50% 35.00% 35.00% 35 .00 % p 31 899 866.05 P16 303 256.20 P18 755 006.20 P11 598 186.00 p 7 103 676 .60 p 6 719 758.30 11 938 125.66 6 986 975.98 p 31,899,866.05 P16,303,256.20 P18,755,006.20 P11,598 , 186 . 0~ i- 15 Item A, Exhibits " F" and "9", BIR Records, p. 2954

DECISION CTA CASE NO. 8005 Less: Unexpired Excess of Prior Year's MCIT 12 830 239.00 p 16,303,256.20 P18,755,006.20 P11,598,186.00 Aggregate Income Tax Due p 19,069,627.05 Less: Prior Year's Excess Credits 18,187,237.00 12,785, 038.00 9,489,870 .00 2,545,181.00 Creditable Tax Withheld for 1st 3 8,396,160 .00 8,816,550.00 12, 141,562.00 4,348,318 .00 Quarters 3 764 692.00 4 191 538.00 1175 331.00 4 992 467 .00 Creditable Tax Withheld for 4th Quarter P(11 278 461.95) P(9,489 869.80) P(4 051 756.80) p (287 780.00) Total Amount Payable/(Overpayment) The alleged discrepancy on prior year's excess credits claimed amounting to P1,506,576.00, was the result of erroneous carry-over of excess income tax credits in the amount of P11,278,461.9516 for taxable year 2005 to the succeeding taxable year 2006. Instead of the income tax credits of P11,278,461.95, petitioner erroneously carried over the amount of P12,785,038.0017 to taxable year 2006 thereby overstating the prior year's excess tax credits reflected in its 2006 Annual Income Tax Return by P1,506,576.05. In its letter-protestl8 dated May 25, 2009 to the Formal Letter of Demand, petitioner asserts that the respondent's assessment for taxable year 2006 has no effect because the assessed amount was already adjusted/deducted in its 2008 Annual Income Tax Return: "Discrepancy on Prior Tax Credit, ITR 2006 & 2005 The discrepancy in the amount of P1,506,576.00 in the 'Prior Years Excess' credit were adjusted in 2008 per filing of ITR. This has no effect in the amount to be paid in 2006 since the excess credit for the year to be carried over in 2007 was P4,051,757.00 but we only carried the amount for filing our ITR 2008 in the amount of P2,545,181.00 instead."GY 16 Line 29 Exhibit " B" 28A 17 Line Exhibit "C" "K", 18 Exhibit BIR Records, p.2723

DECISION CfA CASE NO. 8005 Respondent, however, in Item A.l of the Final Decision on Disputed Assessment ("FDDA")19 did not honor petitioner's adjustment in its 2008 ITR to correct the assessed amount because said adjustment affected the succeeding taxable year 2007 which is still under investigation. Item A.l of the FDDA reads as follows: "A. X X X XXX 1. Discrepancy on prior years excess tax credits claimed - P1,506,576.00 Please be informed that your adjustment of 2008 ITR to take up the discrepancy cannot be honored since the said adjustment affected the taxable year 2007 which is under investigation. Sec. 6 of the Tax Code states that any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn and may be modified, changed or amended provided that no notice of audit has been actually served upon the taxpayer. Moreover, the carryover of excess tax credits for taxable year 2007 is not yet validated since the investigation is still on-going." Upon a scrutiny of petitioner's Annual Income Tax Returns for the taxable years 2005 and 2006, this Court finds that the assessed amount of P1,506,576.00 on prior year's excess credits would not give rise to a deficiency income tax liability on the part of the petitioner for the following reasons, to wit: 1. The assessed amount does not in any way pertain to an expense or income account which could affect petitioner's income tax due (before deduction for tax credits/payments is made) for the taxable year 2006. 2. Had petitioner been able to declare in its 2006 Annual ITR the prior year's excess tax credit of P11,278,461.95 instead of P12,785,038.00, it would still have an overpayment of P7,983,293.75 as of December 31, 2006, as shown below:$ 19 Exhibits "F" and "9" BIR Records, p. 2954

DECISION CTA CASE NO. 8005 Prior Year's excess credits P11,278 461.95 Add: Creditable Tax Withheld for the First Three Quarters P8 8161550.00 Creditable Tax Withheld per BIR Form No. 2307 for the Fourth 4,191,538.00 13,008 088.00 Quarter P24,286 549.95 Total Tax Credits Less: Income Tax Due 16,303,256.20 P7,983,293.75 Total Overpayment Also, respondent's contention that the adjustment made in taxable year 2008 ITR cannot be honored since the adjustment affected taxable year 2007 which is under investigation is misplaced. It must be stressed that, based on the above adjusted computation of total overpayment as of December 31, 2006, the tax benefit derived therefrom redounded to the succeeding year 2007 which is beyond the scope of the present assessment. Since the tax benefit will be in the succeeding year, at most, it may only be assessed in the said succeeding year 2007. Thus, assessing petitioner for the alleged deficiency income tax for the year 2006 is not proper. As to petitioner's creditable tax withheld at source in the amount of P212,950.27, respondent disallowed the same because petitioner failed to submit the Certificate of Creditable Tax Withheld at Source supporting the same. To refute the findings of respondent, petitioner submitted various Certificates of Creditable Tax Withheld at Source before this Court marked as Exhibits "Q-1" to "Q-101" but only for the creditable withholding taxes amounting to P151,060.53, as presented herein below: ~

DECISION CTA CASE NO. 8005 DBP Exhibit No. Amount Remarks BDO Faithful Reproduction Abbott Laboratories Q-1 p 254.44 Abbott Laboratories Q-2 of the Original Abbott Laboratories Q-3 3,972 .37 Abbott Laboratories Q-4 81.70 Certified True Copies Abbott Laboratories Q-5 Abbott Laboratories Q-6 157.39 Photocopies Abbott Laboratories Q-7 24.51 Faithful Aboitiz Equity Ventures Q-8 24.51 Aboitiz Equity Ventures Q-9 Reproduction of the Rustans Coffee Q-9-a 162.49 Original Smart Communications Q-10 204.91 Smart Communications Q-11 Photocopies Smart Communications Q-12 49.02 Zuellig Pharma Q-13 9,943.21 Abbott Laboratories Q-14 Abbott Laboratories Q-15 234 .17 Bayer Phils Q-16 7,269.82 Bayer Phils Q-17 Bayer Phils Q-18 343 .64 NFA Regional Office Q-19 716.36 NFA Regional Office Q-20 167.27 NFA Regional Office Q-21 133.75 Petron Corp Q-21(a) 127 .28 Petron Corp Q-21{b) PLDT Q-22 24.55 PLDT Q-23 299.31 San Miguel Corp Q-24 San Miguel Corp Q-25 65.29 San Miguel Corp Q-26 621 .02 San Miguel Corp Q-27 458 .81 San Miguel Corp Q-28 377.80 San Miguel Corp Q-29 San Miguel Corp Q-30 54.46 San Miguel Corp Q-31 251.15 San Miguel Corp Q-32 257 .89 San Miguel Corp Q-33 2,912 .05 San Miguel Corp Q-34 299 .55 San Miguel Corp Q-35 103.48 San Miguel Corp Q-36 San Miguel Corp Q-37 54.46 San Miguel Corp Q-38 1,187.27 San Miguel Corp Q-39 San Miguel Corp Q-40 207.27 Q-41 250.73 Q-42 605.98 328 .36 1, 103 .81 59 .58 1,512.31 152.71 830.61 420.46 78 .21 163 .39 556 .66 153 .90

DECISION Q-43 127.08 CTA CASE NO. 8005 Q-44 492 .61 Page 10 of 13 Q-45 123 .85 Q-46 San Miguel Corp Q-47 54.46 San Miguel Corp Q-48 54.46 San Miguel Corp Q-49 54.90 San Miguel Corp Q-50 6,796.28 San Miguel Corp Q-51 333.14 San Miguel Corp Q-52 6,796.28 SANOFI Q-53 1 2 5 .0 0 SANOFI Q-54 717 .27 SANOFI Q-55 3 0 0 .0 0 SANOFI Q-56 54.46 SANOFI Q-57 3 4 4 .9 4 SANOFI Q-58 1 8 , 0 0 8 .33 SANOFI Q-59 69 .11 SANOFI Q-60 147 .27 SANOFI Q-61 63 .54 SANOFI Q-62 219 .67 SANOFI Q-63 49.02 SM Prime Holdings Q-64 109 .09 SM Prime Holdings Q-65 1,238.60 SM Prime Holdings Q-66 1 7 5 .0 0 Smart Communications Q-67 200.14 Tsuneishi Heavy Q-68 180.36 Unilever Foods Q-69 3,818.38 Unilever Foods Q-70 107 .11 Unilever Foods Q-71 118.87 Unilever Foods Q-72 43 .64 Unilever Foods Q-73 226 .82 Unilever Foods Q-74 112 .61 Unilever Foods Q-75 54.46 Unilever Foods Q-77 152.44 HSBC Q-76 1 0 8 .93 HSBC Q-78 219 .64 Petron Corp Q-79 409 .71 Petron Corp Q-80 49.02 PLOT Q-81 1 9 , 5 1 8 .24 PLDT Q-82 96.22 Pilipinas Makro Q-83 54.46 SANOFI Q-84 63 .54 SANOFI Q-85 21,881.21 SANOFI Q-86 796 .26 SANOFI Q-87 6, 1 2 5 .89 SANOFI Q-88 10,519 .54 SANOFI Q-89 492 .01 SANOFI Q-90 6,575 .79 SANOFI 65 1.92 SANOFI SANOFI SANOFI

DECISION CfA CASE NO. 8005 SANOFI Q-91 127.08 Server Phils Q-92 1,982.73 Server Phils Q-93 SM Prime Holdings Q-94 149.04 Solvay Pharma Q-95 90 .77 Solvay Pharma Q-96 Solvay Pharma Q-97 108.93 Unilever Foods Q-98 143 .84 Unilever Foods Q-99 173.40 Unilever Foods Q-100 1,287.50 Unilever Foods Q-101 148.46 TOTAL 96 .76 462 .54 P151,060.53 This Court, however, is constrained to consider only the creditable withholding taxes supported by original certificates amounting to P254.4420� The other creditable withholding taxes of P891.0721 , while supported by original certificate, shall be disallowed because they were not among those that were disallowed by respondent as per Schedule of Disallowed 2307 Certificate22 � In fine, petitioner's disallowed tax credits amounted to P212,695.83 (P212,950.27 less P254.44). After considering the foregoing adjustments, this Court finds that petitioner is not liable for any deficiency income tax. In fact, petitioner will still have a tax overpayment of P7,770,596.92, as computed below, which may be carried over to the succeeding taxable year: Tax Credits Reflected in 2006 ITR p 25,793,125.00 Less: Overstatement of Tax Carried Over from Previous Quarter 1,506,576.05 Disallowed Tax Credit for the Year 212,695 .83 Adjusted Tax Credits Less : Tax Due p 24,073,853.12 Tax Overpayment to be carried over to succeeding taxable year 16,303,256.20 p 7,770,596.92 20 Exhibit "Q- 1" 21 Exhibits "Q-21 ", "Q-2 1(a)" and "Q-21(b)" 22 Exhibit "Q"

DECISION CTA CASE NO. 8005 In sum, respondent's deficiency income tax assessment against petitioner should be cancelled and/or withdrawn. WHEREFORE, premises considered, petitioner's Petition for Review is hereby GRANTED. Accordingly, the assessment for deficiency income tax in the amount of P2,579,289.48 for taxable year 2006 is hereby CANCELLED. SO ORDERED. ~ CAESAR A. CASANOVA Associate Justice WE CONCUR: c:Ju~~ e.G.�-~~~� J6ANITO C. CASTANEDA, JR( Associate Justice ~ N.M~. G~ CIELITO N. MINDARO-GRULLA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ~ c G.if"~~ ..st 0 JUANITO C. CASTANEDA;fR. . Acting Presiding Justice