WESTERN MINDANAO POWER CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY THIRD DIVISION ********* WESTERN MINDANAO POWER CTA Case No. 9248 CORPORATION, Members: Petitioner, -versus- UY, Chairperson, RINGPIS-LIBAN, and MODESTO -SAN PEDRO, JJ. COMMISSIONER OF INTERNAL Promulgated: REV ENUE, A Respondent. I /.'/g i' - � X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION UY, J.: Before this Court is a Petition for Review filed by Western Mindanao Power Corporation, petitioner, on January 22 , 2016, against the Commissioner of Internal Revenue, respondent, praying that judgment be rendered cancelling and withdrawing the assessment for the alleged deficiency income tax, value-added tax, withholding tax on compensation , expanded withholding tax, final tax, documentary stamp tax and compromise penalties for the calendar year 2012 in the aggregate amount of P50,968,525.45. THE FACTS Petitioner Western Mindanao Power Corporation is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal place of business at the 41h Floor, Alphaland Southgate Tower, 2258 Chino Roces Avenue corner ~

DECISION CTA Case No. 9248 Page 2 of23 EDSA, Makati City. 1 It is a registered taxpayer of the Bureau of Internal Revenue ("BIR"), Large Taxpayers Service ("LTS"), as shown by its Certificate of Registration dated January 17, 2000, with Taxpayer's Identification No. 004-661-556-000.2 On the other hand, respondent is the duly appointed Commissioner of Internal Revenue (CIR) vested under appropriate laws with the authority to carry out the functions, duties, and responsibilities of said office, including inter alia, the power to decide disputed assessments and to cancel and abate tax liabilities, pursuant to the pertinent provisions of the National Internal Revenue Code of 1997 and other tax laws, rules and regulations. 3 On May 8, 2014, the BIR Large Taxpayers Service Excise, LT Excise Audit Division 1, issued a Letter of Authority authorizing RO Ma. Cleofas Magat, Lilian Yvette Marie Aspiras, Julius Rex Bungabong, Roque Gilda Ganaden and Group Supervisor Teresita Villamor to examine petitioner's books of accounts and other accounting records for all internal revenue taxes including documentary stamp tax and other taxes for the period January 1, 2012 to December 31, 2012.4 Thereafter, petitioner executed two waivers, as follows: the first Waiver of the Statute of Limitation Under the National Internal Revenue Code executed on January 8, 2015, extending the period to assess until June 30, 20155 ; and the second Waiver of the Statute of Limitation Under the National Internal Revenue Code executed on May 18, 2015, extending the period to assess until December 31, 2015. 6 On July 31, 2015, petitioner received a copy of respondent's Preliminary Assessment Notice (PAN) alleging that petitioner is liable for alleged deficiency Income Tax, Value-Added Tax (VAT), Withholding Tax on Compensation (WTC), Expanded Withholding Tax (EWT), Final Tax, Documentary Stamp Tax (DST), and administrative penalties for the Calendar Year (CY) 2012 in the 1 Par. 1, Stipulated Facts, Joint Stipulation ofFacts and Issues (JSFI), Docket- Vol. 3, p. 1276. 2 Par. 2, Stipulated Facts, JSFI, Docket- Vol. 3, p. 1276. 3 Par. 3, Stipulated Facts, JSFI, Docket- Vol. 3, pp. 1276 to 1277. 4 Exhibit "R-1 ", BIR Records, Folder 1, p. 3. 5 Exhibit "R-2", BIR Records, Folder 1, p. 436. 6 Exhibit "R-3", BIR Records, Folder 1, p. 438. ~

DECISION CTA Case No. 9248 Page 3 of23 aggregate amount of P124,064,343.74 (inclusive of interest until July 31, 2015). On August 14, 2015, petitioner filed a Reply to respondent's PAN stating that the PAN has no basis both in law and in fact and requesting its withdrawal and cancellation.7 On September 18, 2015, petitioner received a copy of respondent's Formal Letter of Demand (FLDl with its corresponding Final Assessment Notices (FAN/ demanding payment of alleged deficiency Income Tax, VAT, WTC, EWT, Final Tax, DST and administrative penalties for the CY 2012 in the total amount of P77,352,390.68. On October 16, 2015, petitioner filed with the BIR Large Taxpayers Service (LTS) a Request for Reinvestigation requesting that the FLO issued against petitioner for alleged deficiency taxes for CY 2012 be voided, cancelled and withdrawn for lack of factual and legal bases. 10 Petitioner allegedly submitted on December 15, 2015 the supporting documents relating to its Request for Reinvestigation. Thereafter, petitioner received a Final Decision on Disputed Assessment (FDDA) on December 23, 2015 demanding payment on the alleged Income Tax, VAT, WTC, EWT, Final Tax, DST and administrative penalties for the CY in the total amount of P50,968,525.45, broken down as follows11 : Income Tax Basic Tax Surcharge Interest Compromise Total Increments Total VAT 10,230 861.15 5,454,590.63 5,454,590.63 15,685,451.78 Compensation 20,798 877.52 109 586.00 12,000,667.41 30,548.66 12,000,667.41 32,799,544.93 EWT 109,586.00 150,000.00 53,040.78 Final Tax 91,062.49 53,040.78 180,548.66 498,087.85 144,103.27 DST 855,136.71 498,087.85 30,548.66 1 ,353,224.56 Compromise 367,308.25 Total 438 344.00 257,722.25 150,000.00 30,548.66 805,652.25 32,414,281.87 18,264,108.92 18,554,243.58 150,000.00 50,968,525.45 7 Exhibit "P-5", Docket- Vol. 4, pp. 2099 to 2105; Exhibit "R-11" (Entire BIR Records), Folder 3, pp. 800 to 806. 8 Exhibit "P-6", Docket- Vol. 4, pp. 2106 to 2113; Exhibit "R-7", BIR Records, Folder 3, pp. 840 to 847. 9 Exhibit "P-6", Docket- Vol. 4, pp. 2114 to 2120; Exhibit "R-8", BIR Records, Folder 3, pp. 833 to 839. 10 Exhibit "P-7", Docket- Vol. 4, pp. 2121 to 2128; Exhibit "R-11" (Entire BIR Records), Folder 3, pp. 908 to 915. 11 Exhibit "P-9", Docket- Vol. 4, pp. 2134 to 2136; Exhibit "R-1 0", BIR Records, Folder 3, pp. 1008 to 1010. ~

DECISION CTA Case No. 9248 Page 4 of23 On August 25, 2016, petitioner paid respondent, through the SIR's electronic Filing and Payment System (eFPS), the amount of P4,395, 710.19, composed of: (1) P666,339.50 as payment for the components of the deficiency Value Added Tax (VAT) assessment such as VAT on Sale of Fixed Asset, VAT on Interest Income and VAT on other Income; and (2) P2,335,702.67 and P1 ,393,668.03 as payment for the deficiency EWT and DST assessments for CY 2012, inclusive of penalties and interest, respectively. 12 Consequently, petitioner filed the instant Petition for Review on January 22, 2016. 13 Respondent filed his Answer on May 16, 2016, 14 interposing, among others, the following "Special and Affirmative Defenses", summarized as follows: Petitioner's Income Tax Upon verification from petitioner's Summary List of Purchases (SLP) vis-a-vis petitioner's suppliers or income payments per Summary List of Sales (SLS), it showed a discrepancy which resulted in unrecorded gross profit in the amount P34, 102,870.49 Petitioner's Value-Added Tax Per verification from petitioner's SLP vis-a-vis petitioner's SLS showed that there was a discrepancy which resulted in undeclared sales in the amount of P53,210,907.30; That petitioner was also found liable for VAT from the proceeds of its sale of Property Plant and Equipment amounting to P843,039.61; That the Input Tax in the amount of P94,500.00 must also be disallowed and that unsupported input tax deferred on capital goods in the amount of P11 ,758,927.74 must be disallowed pursuant to Sec. 4.110-3 of RR 16-2005; That petitioner is also liable for unreported Output Tax in the amount of P13, 717,950.29. 12 Par. 15, Stipulated Facts, JSFI, Docket- Vol. 3, p. 1279. Exhibit "P-105'' to Exhibit r "P-107'', Docket- Vol. 4, pp. 2372 to 2376,2377 to 2378,2382 to 2384. 13 Docket- Vol. I, pp. 10 to 31. 14 Docket- Vol. I, pp. 230 to 239.

DECISION CTA Case No. 9248 Page 5 of23 Petitioner's Withholding Tax on Compensation Upon verification of BIR Form 1601 C against petitioner's: alphalist compensation in the amount of P5,389.49 and entries in the general ledger in the amount of P85,376.00, disclosed a discrepancy considered as under remittance, and therefore petitioner is liable for deficiency EWT amounting to P144, 103.27, inclusive of increments. Petitioner's Expanded Withholding Tax Petitioner was found liable for expenses not subjected to Expanded Withholding Tax in the amount P51 ,606,408.94 imposed on income payments in said amount not subjected to EWT, or the EWT thereon was under-withheld, pursuant to Section 57(8) of the Tax Code of 1997, as amended and implemented by Revenue Regulations 2-98, as amended. Petitioner's Final Tax Petitioner remitted only the Final Tax on interest payment for the period from November 14, 2012 to February 14, 2013 and August 14, 2012 to February 14, 2013, were remitted only on March 13, 2013 which should have been on January 16, 2013, hence 20% interest was imposed pursuant to Sec. 2.57 of RR 2-98. A penalty in the amount of P30,548.66 was imposed. Petitioner's Documentary Stamp Tax Petitioner is liable for advances to/from related parties not subject to Documentary Stamp Tax in the amount of P87,668,784.12, and in its mortgage of Property, Plant and Equipment (PPE) in the amount of P642,344,087.00. Petitioner's Other Tax Liability Administrative penalty amounting to P150,000.00 was also imposed for failure to pay internal revenue taxes at the time or times required by law, and for failure to withhold or remit withheld taxes at the time or times required~

DECISION CTA Case No. 9248 Page 6 of23 The Pre-Trial Conference initially set on August 4, 201615 was reset to September 7, 2016 in the Order dated July 19, 201616 in view of petitioner's Motion to Defer Pre- Trial Conference17 filed on July 15, 2016. On September 2, 2016, respondent filed his Pre- Trial Brief18 and a Motion for Extension of Time to File Judicial Affidavits and Transmit BIR Records, praying that the Judicial Affidavit of respondent's witnesses be allowed to be submitted at least five (5) days before their scheduled hearing dates to testify and that the BIR Records be allowed to be submitted at least thirty ~30) days from the date of the pre-trial, or up until October 6, 2016. 1 The said motion was granted on September 15, 2016, giving respondent until October 5, 2016 ( the date set for Pre-Trial Conference), to file judicial affidavit of witnesses and until October 6, 2016 to transmit the BIR Records.20 On the other hand, petitioner filed its Pre- Trial Brief on September 5, 2016?1 After the Pre-Trial Conference held on October 5, 2016,22 the parties filed their Joint Stipulation of Facts and Issues within the extension period granted on November 9, 2016.23 The same was approved in the Resolution dated November 29, 2016.24 Subsequently, the Court issued its Pre-Trial Order on March 6, 2017. 25 During trial, petitioner presented the following witnesses: 1) Amalia A. Soterio26; 2) Estelita M. Alcaraz27; and 3) Liza S. Glodoviza. 28 15 Resolution dated May 26, 2016, Docket- Vol. I, pp. 243 to 244. 16 Docket- Vol. I, p. 249. 17 Docket- Vol. I, pp. 245 to 248. 18 Docket- Vol. I, pp. 251 to 254. 19 Docket- Vol. I, pp. 256 to 259. 20 Order dated September 15,2016, Docket- Vol. 2, pp. 1238 to 1239. 21 Docket- Vol. I, pp. 397 to 408. 22 Minutes of the hearing and Order dated October 5, 2016, Docket- Vol. 3, pp. 1241 to 1245. 23 JSFI, Docket- Vol. 3, pp. 1276 to 1289. 24 Docket- Vol. 3, p. 1318. 25 Docket- Vol. 3, pp. 1380 to 1413. 26 Exhibit "P-200", Docket- Vol. I, pp. 270 to 283; Minutes of the hearing and Order both dated May 9, 2017, Docket- Vol. 3, pp. 1456 to 1459. 27 Exhibit "P-201", Docket- Vol. 3, pp. 1480 to 1515; Minutes of the hearing and Order both dated July 13,2017, Docket- Vol. 4, pp. 1904 to 1911. 28 Docket- Vol. 4, pp. 2001 to 2004; Order dated February 15, 2018, Docket- Vol. 4, pp. 2009 to 2010. ~ ,-�,�

DECISION CTA Case No. 9248 Page 7 of23 On May 4, 2018, petitioner submitted its Formal Offer of Evidence29 which were all admitted by the Court in the Resolution dated July 5, 2018. 30 For his part, respondent presented Revenue Officer Julius Rex Bungabong. 31 Thereafter, respondent filed his Formal Offer of Evidence on October 30, 2018. 32 Petitioner filed a Comment (Re: Respondent's Formal Offer of Evidence) on November 15, 2018?3 Subsequently, the Court admitted all of respondent's evidence in the Resolution dated January 28, 2019. 34 On April 29, 2019, the instant case was submitted for decision35, taking into consideration petitioner's and respondent's Memorandum filed on April 16, 201936 and March 28, 2019, 37 respectively. Hence, this Decision. THE ISSUE As stipulated by the parties, the sole issue for this Court's resolution 38 is as follows: "Whether or not petitioner is liable in the aggregate amount of P50,968,525.45 representing deficiency Income Tax, VAT, WTC, Final Tax and Compromise Penalty for CY 2012." Petitioner's arguments: Petitioner argues that respondent's deficiency tax assessments should be cancelled for lack of legal and factual basis. 29 Docket- Vol. 4, pp. 2024 to 2073. 30 Docket - Vol. 4, pp. 2554 to 2556. 31 Minutes of the Hearing and Order dated October 9, 2018, Docket- Vol. 5, 99. 2570 to 2572. 32 Docket- Vol. 5, pp. 2576 to 2582. 33 Docket- Vol. 5, pp. 2584 to 2589. 34 Docket- Vol. 5, pp. 2593 to 2594. 35 Docket- Vol. 5, p. 2657. 36 Docket- Vol. 5, pp. 2621 to 2654. 37 Docket- Vol. 5, pp. 2606 to 2613. 38 Issue, JSFI, Docket- Vol. 3, p. 1280. ~

DECISION CTA Case No. 9248 Page 8 of23 Allegedly, respondent's findings that petitioner had alleged undeclared sales and undeclared purchases for CY 2012 are devoid of factual and legal basis for being based on unverified third-party information. Both the FLO and FDDA failed to provide petitioner with specific information on the details of the alleged discrepancy between petitioner's Summary List of Purchases ("SLP") and its suppliers' Summary List of Sales ("SLS"). Thus, petitioner would have no way of knowing and understanding the legal and factual basis of respondent's findings. As regards respondent's deficiency VAT assessment, the same should also be cancelled similarly for lack of factual and legal basis. In support of its stance, petitioner alleges the following: (1) it did not have undeclared sales amounting to"P53,210,907.30 in CY 2012; (2) it did not have other income, amounting to P1, 778,585.69, which was not subjected to VAT; (3) respondent's disallowance of input tax in the amount of P94,500.00 is erroneous and without legal basis. Anent respondent's deficiency CWT assessment, there is allegedly no under-remittance of P5,689.49 and that respondent erroneously included items not subject to WTC. Further, petitioner contends that its right to due process was violated due to the change in the basis of respondent's deficiency final tax assessment for CY 2012. Lastly, petitioner submits that respondent's assessment for compromise penalties should be cancelled for the absence of petitioner's consent thereto. Respondent's counter-arguments: Respondent counter-argues that the assessments issued against the petitioner for deficiency Income Tax, Value Added Tax, Withholding Tax on Compensation, Expanded Withholding Tax, Final Tax, Documentary Stamp Tax, and other tax liabilities have bases in facts and law, and thus, are valid and lawful. The said factual and legal bases were discussed in the Special and Affirmative Defenses raised in respondent's Answer. Well-settled is the rule that tax assessments are entitled to the presumption of correctness and made in good faith, while it is thf

DECISION CTA Case No. 9248 Page 9 of23 taxpayer who has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. THE COURT'S RULING The Petition for Review is partly meritorious. In the FDDA, respondent demanded that petitioner pay the alleged deficiency Income Tax, Value-Added Tax, Withholding Tax on Compensation, Expanded Withholding Tax, Final Tax, Documentary Stamp Tax and administrative penalties for CY 2012 in the total amount of P50,968,525.45, broken down as follows: Income Tax Basic Tax Surcharge Interest Compromise Total VAT 15,685,451.78 WTC 10,230,861.15 - 5,454,590.63 - 32,799,544.93 EWT - Final Tax 20,798,877.52 - 12,000,667.41 - 144,103.27 DST - 1,353,224.56 Compromise 91,062.49 - 53,040.78 - 30,548.66 30,548.66 855,136.71 - 498,087.85 805,652.25 - 150,000.00 - 109,586.00 - 150,000.00 438,344.00 - 257,722.25 - - TOTAL 32,414,281.87 109,586.00 257,722.25 180,548.66 50,968,525.45 The Court shall now look into the merits of each deficiency tax assessments. Deficiency Income Tax In the FDDA, respondent assessed petitioner of Unrecorded gross profit from Extraction of Master Files per CAA TTS pursuant to RMO No. 14-2011 amounting to P34,102,870.49. Respondent alleges that, by comparing the purchases reported on the Summary List of Purchases (SLP) vis-a-vis petitioner's suppliers or income payments per Summary List of Sales (SLS), petitioner had undeclared purchases amounting to P19, 108,036.81. Respondent, by using the Cost Ratio, used the gross up value of these undeclared purchases to draw the imputed gross profit amount of P34, 102,870.49.11t

DECISION CTA Case No. 9248 Page 10 of23 Respondent's assessment for deficiency income tax is unwarranted. The three (3) elements on the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. 39 Income tax is assessed on income received from any property, activity or service.40 Such being the case, in the imposition or assessment of income tax, it must be clear that there was an income, and such income was received by the taxpayer, not when there is underdeclaration of purchases. Furthermore, it must be emphasized that for income tax purposes, a taxpayer is free to deduct from its gross income a lesser amount, or not claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein. 41 In this case, respondent's assessment arose from a presumption that the undeclared purchases automatically resulted in undeclared income subject to income tax, which is not correct. Respondent's imposition or assessment of the subject income tax does not hold water because the assessment was not based on undeclared income actually received by petitioner. Hence, the supposed "Unrecorded gross profit from Extraction of Master Files per CAA TTS pursuant to RMO No. 14-2011" in the computed amount of P34, 102,840.49 must not be considered in the subject deficiency tax assessment. Deficiency Value- Added Tax Respondent assessed petitioner for alleged deficiency Value- Added Tax amounting to P32,799,544.93 including increments, computed as follows: 39 Commissioner ofInternal Revenue vs. The Court ofAppeals, eta!., G.R. No. 108576, January 20, 1999. 40 Supra. 41 The Commissioner ofInternal Revenue vs. Phoenix Assurance Co. Ltd.,etseq., G.R. Nos. L-19727 and L-19903, May 20, 1965. p'tl

DECISION CTA Case No. 9248 Page 11 of23 Taxable Base per Vat Returns Php1 ,361,175,835.81 Add: Adjustments Php57 ,358,886.99 A. Data from SLS Suppliers 38.250.850.18 Data from SLP WMPC 19,108,036.81 Undeclared Purchases 35.91% Divided by Cost Ratio Undeclared Sales 53,210,907.30 B.1 Proceeds from Sale of PPE Php843,039.61 "nnq "~19.61 8.2 Interest Income Not Subjected to VAT 115,247.00 Pho1.419 "'QR nR?.72 B.3 Other Income not Subjected to VAT 4.051.033.00 Taxable Base Per Audit Output Tax (12%) Php170,327,527.53 Input Tax on Capital Goods Php27,089,643.00 95 187 ROB 59 Current Input Tax 34.156.116.53 75,139,718.94 Total Available Input Tax 68.058.791.71 Add: Input Tax Closed to Expense Php61 ,245,759.53 Total 55.038.984.71 7,080,927.23 Less: Input Tax Deferred on Cap Goods Total Input Tax AQ!)Iied Php116,284,744.24 13.717.950.29 Less: 21 nn? 4"1<:;.65 20,798,877.52 12nnr Rfl7.41 C. Disallowed Input Tax Ph_p95,282,308.59 VAT Payable .799. "'"" 93 Less: Creditable VAT Withheld Certificate 94 <:;nr, nn Total Add: D. Unremitted Output VAT Total Basic VAT Payable Interest Total VAT DeficienC}' A. Undeclared Sales in the amount of ~53. 210.907.30- Respondent's verification disclosed that petitioner has undeclared sales amounting to P53,210,907.30 after reconciliation of the purchases data from SLP of petitioner as against the data extracted from the SLS of its various suppliers, allegedly disclosing a difference of P19, 108,036.81, representing undeclared purchases. The said amount was computed as follows: Data from SLS Su!'Qiiers Php57,358,886.99 Data from SLP WMPC 38. ?<;n Rl;n 18 Undeclared Purchases 19,108,036.81 Divided by Cost Ratio 35Jl1% Undeclared Sales 53,210,907.30 The assessment on this item must be cancelled.~

DECISION CTA Case No. 9248 Page 12 of23 The amount of P53,210,907.30 is related to the previously discussed discrepancies under deficiency Income Tax. In line with the findings discussed earlier, no deficiency VAT assessment should arise from an undeclared purchase. As discussed, respondent is incorrect to presume that the undeclared purchases automatically resulted in undeclared income, therefore the imposition of VAT thereon is likewise incorrect. As such, the imposition of VAT assessment pertaining thereto shall be cancelled. B. Proceeds from Sales of PPE and VAT on Interest Income in the amount of P843, 039.61 - Anent the items on the deficiency VAT assessed on the sale of its Property Plant and Equipment (PPE) amounting to P843,039.61 and Interest Income amounting to P115,247.00, records show that on August 25, 2016, petitioner partially paid respondent on its alleged deficiency VAT as evidenced by BIR Form No. 0605 thru Unionbank with reference number 29160001659856642 amounting to P666,339.50, broken down as follows: Tax Base Tax VAT on Sale of Fixed Php843,039.61 Php 101,164.75 Asset (PPE) 115,247.00 VAT on Interest Income 13,829.64 VAT on Other Income 2,272, 160.70 Total 272,6:29.28 Add: Penalty (20%) 387,653.68 Total Payment 27~,6~5.82 Pho666,3~9.5043 Thus, insofar as the deficiency VAT assessed on the sale of its PPE amounting to P843,039.61 and Interest Income amounting to P115,247.00, petitioner's payment of deficiency VAT on said items must be deducted upon the final settlement of the total deficiency VAT. C. Other Income Not Subjected to VAT Respondent's verification disclosed that petitioner has other income per Trial Balance in the amount of P4,051 ,033.00 that were allegedly not subjected to VAT. 42 Exhibits "P-105" and "P-105-a", refer to the CD attached to petitioner's FOE. 43 Petitioner's Memorandum, Docket- Vol. 5, p. 2624~

DECISION CTA Case No. 9248 Page 13 of23 In relation to the deficiency VAT payment made by petitioner as discussed above, petitioner partially paid P272,659.28 for deficiency VAT on other income amounting to P2,272, 160.70. Hence, petitioner in its Memorandum alleges that it did not have other income amounting to P1,778,872.3044 (P4,051,033.00 less P2,272, 160.70), which was not subjected to VAT. Petitioner avers that it is not actually income but a mere reversal of the accrued commitment fee recorded by the petitioner in CY 2012 relating to a loan executed with Union Bank of the Philippines. In support of its dispute pertaining to the said assessment, petitioner presented Journal Voucher45, Journal Voucher Register46 and Page 256 of General ledger Book47. However, upon examination of the details of the said documents, it does not show proof that it pertains to the loan executed by the petitioner with Union Bank. Thus, respondent's assessment of other income amounting to P1, 778,872.30 shall remain. D. Disallowed Input VAT in the amount of P94. 500.00 In the FDDA, respondent disallowed Input Tax in the amount of P94,500. According to respondent, petitioner has overclaimed purchases upon verification and comparison of petitioner's SLS Extract and SLP which disclosed a positive difference of P787,500.00 considered as overclaimed purchases. Thus, respondent assessed petitioner in the amount of P94,500.00 (P787,500.00 multiplied by 12%). Petitioner submits that the input VAT amounting to P94,500.00 pertains to its payment of purchase of transportation equipment, as duly supported by official receipt48 and sales invoice49 issued by lsuzu Automotive Dealership, Inc. The Court finds the supporting documents presented by petitioner particularly, Sales Invoice No. 06798 dated December 21, 2012 corroborates petitioner's allegation that the input VAT of P94,500.00 pertains to its purchase of transportation equipment. Therefore, the assessment of this item is unwarranted. 44 Par. 53, Petitioner's Memorandum, Docket- Vol. 5, p. 2638. 45 Exhibit "P-151", refer to the CD attached to petitioner's FOE. 46 Exhibit "P-152", refer to the CD attached to petitioner's FOE. 47 Exhibit "P-153", refer to the CD attached to petitioner's FOE. 48 Exhibit "P-43-a", Docket- Vol. 4, p. 2300. 49 Exhibit "P-43-b", Docket- Vol. 4, p. 2301. ~

DECISION CTA Case No. 9248 Page 14 of23 E. Unremitted Output Tax in the amount of F13. 717. 950.29 Respondent argues that petitioner is liable for unreported Output Tax in the amount of P13,717,950.29. Respondent's verification of petitioner's Audited Financial Statement disclosed that there was Output Tax of P40,631 ,044. 71 (Gross of P2,877,000.00 input VAT and Withholding VAT of P16,851 ,000.00), when compared to the 12% VAT accruals for October 26-November 25, 2012 (for PSA Nos. 211-214). The result is that there was a difference of P13,717,950.29 considered as output tax. On the other hand, petitioner argues that it exclusively sells electricity to the National Power Corporation (NPC)/Power Sector Assets and Liabilities Management (PSALM), both government owned and controlled corporations (GOCC). That payments made to the NPC and PSALM are subject to the 5% Final withholding VAT. Considering that petitioner sells 100% of its generated power to GOCC's, petitioner submits that it does not have any unremitted output tax amounting to P13,717,950.29 for CY 2012. Moreover, petitioner contends that as testified by petitioner's Accountant, Estelita Alcaraz, all receipts of petitioner from its sale of electricity to NPC/PSALM are duly subjected to 5% final VAT withholding and any discrepancy is merely due to timing difference in the reporting. The Court finds that the assessment of respondent does not refer to the 5% Final withholding VAT but on the basis of a difference between petitioner's Audited Financial Statement and accruals for October 26 - November 25, 2012. Petitioner's allegation is unsupported by documentary proof to refute respondent's assessment. Moreover, as to the allegation of timing difference, the same is unsubstantiated. Thus, the deficiency VAT on this item should be retained. From the foregoing, petitioner is still liable for basic deficiency VAT amounting to P14,319,068.64, computed as follows: Taxable Base per VAT Returns 843,039.61 1,361 '175,835.81 Add: Adjustments 115,247.00 5,009,319.61 I~ Proceeds from Sale of PPE 4,051,033.00 Interest Income Not Subjected to VAT Other Income Not Subjected to VAT

DECISION 1,366, 185,155.42 CTA Case No. 9248 Page 15 of23 163,942,218.65 Taxable Base per Audit 95,282,308.59 68,659,910.06 Output VAT (12%) 68,058,791.71 Less: Input VAT Applied 601 '118.35 VAT Payable 13,717,950.29 Less: Creditable Tax Withheld 14,319,068.64 Total Add: Unremitted Output VAT Basic Deficiency VAT WITHHOLDING TAX ON COMPENSATION Respondent assessed petitioner for alleged deficiency Withholding Tax on Compensation amounting to PhpP144, 103.27 including increments, computed as follows: A. Under-remittance per Recon of BIR Form 1601 C vs Alpha list Php5,686.49 B. Discrepancy per Recon of GL Entries vs BIR Form 1601 C 85 376.00 Total 91,062.49 Interest (20%) 53,040.78 Total Deficiency WTC Php144, 103.27 A. Under remittance per recon of 8/R Form 1601 C vs. Alphalist In the FDDA, respondent finds that petitioner is liable for deficiency Withholding Tax on Compensation in the amount of P5,686.49 as per verification of petitioner's BIR Form 1601C vis-a-vis the Alphalist compensation. Petitioner argues that there is no under-remittance in the amount of P5,689.49. Petitioner contends that respondent erroneously included, from its comparison of the Alphalist and the Audited Financial Statements, items not subject to WTC, such as non-taxable salaries of minimum wage earners, employer's share in Social Security System, Philippine Health Insurance Corporation and Home Development Mutual Fund, de minimis benefits, accrual of pension expense, actual pension pay-out in CY 2012 and fringe benefits. We agree with petitioner~

DECISION CTA Case No. 9248 Page 16 of23 An examination of the BIR Form 1601C,50 BIR Form 1604-CF,51 respondent's working paper/schedules52 and the Alphalist53 reveals that petitioner does not have under-remittance, as presented below: Total Tax Withheld Per BIR Form Php9,697,321.96 1601C Less: Amount of Tax Withheld as 87,013.26 Adjusted Schedule 7.1 - Alphalist of Employees - Terminated before Dec. 31 Schedule 7.2- Alphalist of Employees 9,572,110.13 9,659,123.39 whose compensation income 38,198.57 are exempt from withholding tax but - subject to income tax Schedule 7.3- Alpha list of Employees as of December 31 with no Previous employer within the year. Schedule 7.4- Missing Alphalist Difference Upon comparison between the total tax withheld per BIR Form 1601 C versus the alphalists shows a difference of P38, 198.57 indicating that petitioner has no under-remittance. Based on this difference, the allegation of respondent is unfounded and the assessment of this item must be cancelled. B. Discrepancy per Recon of GL Entries vs. BIR Form 1601C In the FDDA, respondent's reconciliation of BIR Form 1601 C as per entries on Employees Withholding Tax account per General Ledger (GL) of petitioner disclosed a discrepancy of P85,376.00, considered by the respondent as under-remittance. Petitioner argues that the discrepancy pertains mostly to taxes withheld from or refunded to contractual employees and withheld taxes refunded to regular employees covering the period October 1, 2012 to December 31, 2012. A perusal of the documents presented by petitioner such as Payroll Summary, Debit/Credit Memo, UnionBank Deposit Slips, Accounts Payable Voucher, Revolving Fund Voucher and 50 Exhibit "R-11" (Entire BIR Records), pp. 165 to 188. 51 Exhibit "R-11" (Entire BIR Records), pp. 195 to 197. 52 Exhibit "R-11" (Entire BIR Records), pp. 638 to 639. 53 Exhibit "R-11" (Entire BIR Records), pp. 190 to 194(b

DECISION CTA Case No. 9248 Page 17 of23 Reconciliation Schedule54 reveal that petitioner was able to properly provide documents, explanations and reconciliation schedule to refute the assessment. Thus, this assessment will be cancelled. In sum, the assessment of deficiency Withholding Tax on Compensation in the aggregate amount of P144, 103.27 must be cancelled. EXPANDED WITHHOLDING TAX Respondent assessed petitioner for deficiency Expanded Withholding Tax including increments in the amount of P1 ,353,224.56 [P855, 136.71 (Basic EWT) plus P498,087.85 (Interest)], which the latter acknowledged because of its payment on August 25, 2016, as evidenced by BIR Form No. 0605 thru Unionbank with reference number 291600016598611 55 amounting to P2,335,702.67, broken down as follows: Basic Expanded Withholding Tax P1 ,353,224.56 Add: Penalty (20%) Total Payment 982,478.11 P2 335 702.67:.6 However, deficiency and delinquency interest must be imposed pursuant to Sections 248(A) and 249(B) and (C), of the NIRC of 1997, as amended by Republic Act No. 10963 and implemented by Revenue Regulations No. 21-2018. Thus, interest and surcharge on the basic deficiency Expanded Withholding Tax must be adjusted as follows: Basic Tax Due EWT 25% SurcharQe 1,353,224.56 Sub-Total 338,306.14 1,691,530.70 20% Deficiency Interest: 794,880.40 16-Jan-13 to 23-Dec-15 2,486,411.10 (1 ,353,224.56 x 20% x1 072/365) Total Amount Due, Dec. 23, 2015 54 Exhibits "P-108" to "P-149-b", CD. f"il 55 Exhibits "P-1 06" and "P-1 06-a", CD. 56 Petitioner's Memorandum, Docket- Vol. 5, p. 2624.

DECISION CTA Case No. 9248 Page 18 of23 20% Deficiency Interest: 182,407.26 24-Dec-15 to 25-Aug-16"' 335,154.59 j1 ,353,224.56 X 20% X 246/365) 40,711.92 3,044,684.87 20% Delinquency Interest: 24-Dec-15 to 25-Aug-16 (2,486,411.1 0 X 20% X 246/365) 26-Aug-16 to 31-Dec-17 (2,486,411.10 less 2,335,702.6758 = 150,708.43 X 20% X 493/365) Total Amount Due, Dec. 31,2017 DOCUMENTARY STAMP TAX Respondent assessed petitioner for deficiency Documentary Stamp Tax including increments in the amount of P805,652.25, broken down as follows: Basic Documentary Stamp Tax P438,344.00 Surcharge 109,586.00 Interest 257,722.25 TOTAL P805. 652.25 Petitioner acknowledged this assessment because of its payment on August 25, 2016, as evidenced by BIR Form No. 0605 thru Unionbank with reference number 29160001659849959 amounting to P1,393,668.03, broken down as follows: Tax Total P::~vment Anent deficiency and delinquency interest pursuant to Sections 248(A) and 249(8) and (C), of the NIRC of 1997, as amended by RA 57 Date of Payment: August 25,2016, Exhibits "P-106" and "P-106-a", CD. 58 Amount Paid on August 25, 2016. 59 Exhibits "P-107'' and "P-107-a", CD. 60 Petitioner's Memorandum, Docket- Vol. 5, pp. 2624 to 2625. 1'1

DECISION CIA Case No. 9248 Page 19 of23 No. 10963 and implemented by RR No. 21-2018, the interest and surcharge on the basic deficiency DST is adjusted accordingly: Basic Tax Due 438,344.00 25% Surcharge 109,586.00 Sub-Total 547,930.00 20% Deficiency Interest: 259,883.95 807,813.95 06-Jan-13 to 23-Dec-15 (438,344.00 x 20% x1082/365) 59,086.37 Total Amount Due, Dec. 23, 2015 108,888.89 20% Deficiency Interest: 975,789.21 I 1,393,668.03 24-Dec-15 to 25-Aug-16 (P417,878.82) I (438,344.00 X 20% X 246/365) 20% Delinquency Interest: 24-Dec-15 to 25-Aug-16 (807,813.95 X 20% X 246/365) Total Amount Due, August 25, 2016 Payment on August 25, 2016 DST Due (Overpayment) Based on the foregoing, it appears that petitioner made an overpayment in the amount of P417,878.82. Consequently, no DST liabilities including increments will be imposed upon the petitioner. FINAL TAX & COMPROMISE PENALTIES In the FDDA, respondent assessed petitioner of compromise penalties in the following amount: Final Tax Compromise Compromise 30,548.66 TOTAL 150,000.00 180,548.66 ~

DECISION CTA Case No. 9248 Page 20 of23 Notably in the details of the FDDA, the Final Tax imposed by respondent to petitioner is labeled as "Final Tax" but what respondent is actually imposing is compromise penalty for the remittance of accrued interest. It must be stressed that a compromise penalty is imposed to avoid prosecution for violation of the provisions of the Tax Code. 61 The nature of a compromise penalty is explained in the case of Commissioner of Internal Revenue vs. Armando L. Abacf2, to wit: "a compromise implies agreement. One party cannot impose it upon the other. If an offer of compromise is rejected by the taxpayer, as in this case, the Commissioner of Internal Revenue should file a criminal action if he believes that the taxpayer is criminally liable for violation of the tax law as the only way to enforce a penalty. As penalty can be imposed only on a finding of criminal liability." (Emphasis supplied) In the instant case, there is no showing that petitioner consented to the compromise penalty. Hence, its imposition should be deleted. The imposition of the compromise penalty without the taxpayer's conformity is illegal and unauthorized.63 Thus, petitioner cannot be held liable for Compromise Penalty in the amount of P180,548.66. WHEREFORE, in light of the foregoing considerations, the Petition for Review is PARTIALLY GRANTED. Accordingly, petitioner is ORDERED TO PAY the amount of THIRTY EIGHT MILLION SIX HUNDRED FORTY SIX THOUSAND THIRTY ONE PESOS AND 44/100 (P38,646,031.44) representing deficiency VAT and EWT for calendar year 2012, inclusive of twenty- five percent (25%) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, and twenty percent (20%) deficiency interest and 20% delinquency interest imposed under Section 249(A) and (B), respectively, of the same Code, computed until December 31, 2017, which is prior to its amendment under the TRAIN Law, computed as follows: 61 The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, et a/., G.R Nos. L-12928 and L-12932, March 31, 1962. 62 G.R. No. L-19627, June 27, 1968. 63 Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., et a/., G.R. No. L-35266,January21, 1991~

DECISION CIA Case No. 9248 Page 21 of23 Basic Tax Due VAT EWT TOTAL 25% Surcharge Sub-Total 14,319,068.64 1,353,224.56 15,672,293.20 3,579,767.16 338,306.14 3,918,073.30 20% Deficiency Interest: 17,898,835.80 1,691 ,530. 70 19,590,366.50 26-Jan-13 to 23-Dec-1564 (14,319,068.64 X 20% X 1062/365) 8,332,521.04 8,332,521.04 16-Jan-13 to 23-Dec-15 26,231,356.84 794,880.40 794,880.40 (1,353,224.56 x 20% x1072/365) 2,486,411.10 28,717,767.94 Total Amount Due, Dec. 23, 2015 I 20% Deficiency Interest: 1,930,131.99 1,930,131.99 24-Dec-15 to 25-Aug-1665 182,407.26 182,407.26 (14,319,068.64 X 20% X 246/365) 3,535,843.17 3,535,843.17 24-Dec-15 to 25-Aug-1666 6,906,056.74 (1 ,353,224.56 X 20% X 246/365) I 6,906.056.74 20% Delinquency Interest: 1 24-Dec-15 to 25-Aug-16 (26,231 ,356.84 X 20% X 246/365) 335,154.59 335,154.59 26-Aug-16 to 31-Dec-17 40,711.92 40,711.92 (26,231 ,356.84 less 666,339.5067 = I 25,565,017.34 X 20% X 493/365) 38,603,388.74 3,044,684.87 41,648,073.61 666,339.50 2,335,702.67 3,002,042.17 24-Dec-15 to 25-Aug-16 (2,486,411.1 0 X 20% X 246/365) 37,937,049.24 708,982.20 38,646,031.44 26-Aug-16 to 31-Dec-17 (2,486,411.10 less 2,335,702.6768 = 150,708.43 X 20% X 493/365) Sub-total Amount Due, December 31, 2017 Less Payment made on August 25, 2016 Total Amount Due, Dec. 31, 2017 64 FDDA was received on Dec. 23, 2015, Exhibit "P-9", Docket- Vol. 4, pp. 2134 to 2136. 65 Date of Payment: August 25,2016, Exhibits "P-105" and "P-105-a", CD. 66 Date of Payment: August 25,2016, Exhibits "P-106" and "P-106-a", CD. 67 Amount Paid on August 25,2016. 68 Amount Paid on August 25, 2016f0

DECISION CTA Case No. 9248 Page 22 of23 In addition, petitioner is ORDERED TO PAY delinquency interest at the rate of twelve percent (12%), on the total unpaid amount as of August 26, 2016 in the amount of P25,715,725.7769 , computed from January 1, 2018 until full payment thereof pursuant to Section 249(C) of the Tax Code, as amended by RA No. 10963 and implemented by Revenue Regulations No. 21-2018. SO ORDERED. ERL~.UY WE CONCUR: Associate Justice Q!v. ~ -:$ (' ~ MA. BELEN RINGPIS-LIBAN Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ER~P.UY Associate Justice Chairperson, 3rd Division 69 Only the remaining VAT(Php25,565,017.34) and EWT(Phpl50,708.43) DUE as of August 26, 2016 shall be computed until full payment thereof. .,�"

DECISION CTA Case No. 9248 Page 23 of23 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. Presiding Justice