COMMISSIONER OF INTERNAL REVENUE v. FSM CINEMA, INCORPORATED

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC COMMISSIONER OF CTA EB No. 1084 (CTA CASE NO. 7525) INTERNAL REVENUE, Present: Petitioner, DEL RO_SARIO,PJ; -versus- CASTANEDA, JR., BAUTISTA, FSM CINEMA, UY, CASANOVA, INCORPORATED, FASON-VICTORINO I MINDARO - GRULLA, Respondent. COTANGCO-MANALASTAS and RINGPIS-LIBAN, JJ. Promulgated: JAN Z3 2015 )(-- ------ --- - ----- -------- ------- - - -~~; ~ ~~� ~ L--- -)( DECISION FASON-VICTORINO, J.: In this Petition for Review, petitioner Commissioner of Internal Revenue (CIR) prays to set aside the Amended Decision1 dated July 4, 2013 and the Resolution2 dated November 5, 2013 rendered by the Court in Division in CTA Case No. 7525 entitled FSM Cinemas, Inc. vs. CIR, and another one be issued directing respondent to pay in full the / assessed deficiency expanded withholding tax (EWT) and 1 Id., pp. 26-34. 2 Id., pp. 36-41.

Decision CTA EB No. 1084 final withholding tax (FWT), in the amounts of Php2,299,339.35 and Php2,360,097.90, respectively, for taxable year 2000, plus the accrued interest and twenty-five percent (25�/o) surcharge pursuant to Sections 248 and 249 of the National Internal Revenue Code (NIRC) of 1997. THE FACTS AND THE CASE Petitioner is the Commissioner of Internal Revenue, with authority to assess and collect all internal revenue taxes, fees and other charges, and to enforce all forfeitures, penalties, and fines connected therewith, with office at the 5th Floor, BIR National Office Building, BIR Road, Diliman, Quezon City. Respondent, on the other hand, is a Philippine � corporation, with principal office at the 4th Floor, Festival Supermall, Filinvest Corporate City, Alabang, Muntinlupa City, Metro Manila. On August 22, 2002, respondent received BIR Form No. 1920 (Audit Notice) dated August 2, 2002, with OCN 9AN0000004800, issued by Makati Revenue Regional Office, authorizing the examination of its books of account and accounting records for all internal revenue taxes for the period January 1 to December 31, 2000. On January 3, 2006, respondent received the Formal Assessment Notices (FANs) Nos. IT-4800-00-05-0452,3 2 VT-4800-00-05-0452,4 WE-4800- 00-05- 0452' 5 WF-4800-00 - 05-04526, all dated December 23, 2005 at its business address at the 4th level, Festival Supermall, Inc. Filinvest Corporate City, Alabang, City of Muntinlupa, indicating that it has deficiency income tax, value added tax, expanded and final withholding tax in the total amount of P66,882,432.937. On January 23, 2006, respondent filed a protest / against such assessments. u/' 3 Exhibit 3. ' 4 Exhibit 4. 5 Exhibit 5. 6 Exhibit 6. 7 Exhibit 7.

Decision CTA EB No. 1084 On October 2, 2006, respondent filed with the Court in Division a Petition for Review8 grounded on alleged inaction on the part of petitioner and praying for the cancellation and termination of the assessments issued by petitioner for deficiency IT, VAT, EWT and FWT, in the total amount of P66,952,432.93 for taxable year ending December 2000, docketed as CTA Case No. 7525. On December 12, 2005, petitioner filed her Answer9 with special and affirmative defenses. On August 13, 2008, respondent filed a Motion to Declare the Alleged Deficiency Income Tax and Value-Added Tax Assessments Extinguished under Republic Act (R.A.) No. 948010, due to its alleged availment of the benefits under the Tax Amnesty Law, otherwise known as R.A. No. 9480. In the Resolutions dated October 9, 2008 11 and January 26, 2009 12, the Court treated the incident as a motion to withdraw the Petition for Review insofar as the assessments covered by the tax amnesty. On May 25, 2012, the Court in Division dismissed the Petition for Review for lack of jurisdiction13. Aggrieved, respondent timely moved for partial reconsideration14, which was granted in the assailed Amended Decision15 of July 4, 2013, in this wise: WHEREFORE, the assailed Decision promulgated on May 25, 2012 is SET ASIDE and the instant Petition for Review filed on October 2, 2006 is hereby GRANTED. Accordingly, Assessment Notice No. WE- 4800-00-05-0452 for deficiency expanded withholding tax in the amount of 8 Division docket, vol. 1, pp. 1-10. 9 !d., pp. 36-38. 10 Division docket, vol. I, pp. 169-172. 11 Id., pp. 190-191. 12 Id., pp. 200-203. 13 Division docket, vo l. II, pp. 585-596. 14 !d., pp. 599-607 . 15 Supra, Note 2.

Deci si o n CTA EB No. 1084 P2,299,339.35 and Assessment Notice No. WF-4800-00-05-0452 for deficiency final withholding tax in the amount of P2,360,097.90, both for taxable year 2000, are hereby CANCELLED and SET ASIDE. SO ORDERED. The foregoing decision was effectively affirmed when the Court in Division denied petitioner's Motion for Partial Reconsideration for lack of merit in the similarly assailed Resolution of November 5, 2013. Hence, this Petition for Review raising the following issues: I. WHETHER OR NOT THE DEFICIENCY EXPANDED WITHHOLDING TAX ASSESSMENT ISSUED BY PETITIONER CIR TO HEREIN RESPONDENT FOR TAXABLE YEAR 2000 HAS PRESCRIBED . II. WHETHER OR NOT THE DEFICIENCY FINAL WITHHOLDING TAX ASSESSMENT ISSUED BY PETITIONER CIR TO HEREIN RESPONDENT FOR TAXABLE YEAR 2000 WAS ERRONEOUS. III. WHETHER OR NOT RESPONDENT IS LIABLE TO PAY THE ASSESSED DEFICIENCY EXPANDED WITHHOLDING TAX AND FINAL WITHHOLDING ASSESSMENTS IN THE AMOUNTS OF Php2,299,339 .35 and Php2,360,097.90, RESPECTIVELY, FOR TAXABLE YEAR / 2000. /

Decis io n CTA EB No. 1084 Petitioner claims that she was able to prove that respondent filed false expanded withholding tax returns for the period January to December 31, 2000, hence, the 10- year prescriptive period under Section 222(a) of the NI RC of 1997 shall apply. Consequently, the disputed FAN No. WE- 4800-00-05-0452 dated December 23 , 2005 was issued within the 10-year prescriptive period, thus, the assessment has not yet prescribed. Petitioner further claims that to be spared from t ax imposed on inter-corporate dividend, the taxpayer must prove that the dividend was recorded in the books of both the issuing and the recipient stockholders, as provided under BIR Ruling No. DA- 583 -99, 16 and as held in the case of Engtek Philippines, Inc. vs. Commissioner of Internal Revenue17� Lastly, absent any proof to the contrary, the t ax assessments should be given full weight and credit as t hey are presumed correct and made in good faith. In t he absence of proof of any irregularities in the performance of duties, which burden lies on the taxpayer, an assessment duly made by a BIR examiner and app roved by his senior officers should not be disturbed .18 In rejecting the arguments, respondent counters t hat petitioner's assessment for alleged deficien cy expanded withholding tax was made beyond the 3-year prescriptive period. And since no false return was filed , the ten-year prescriptive period invoked by petit ioner is not applicable. Moreover, petitioner's assessment for deficie ncy fi na l withhold ing tax is erroneous because the int er-corporat e dividends it issued are exempt from final withhold ing tax pursuant to Section 27(0) of the NIRC of 1997, as shown in the evidence it presented. 16 October 6, 1999. 17 CTA EB No. 89 (CTA Case No. 6644) , June 14, 2006. / 18 Interprovincial Autobus Co., Inc. vs. Commissioner of Internal Revenue, 98 Ph il. 290; Sy Po vs. Court of Tax Appeals, et. a/., G. R. No 81446, August 18, 1998; Dayri t et. a/. vs. Cruz, et. a!., L-39910, September 26, 1988, August 18, 1988.

Decision CTA EB No. 1084 RULING OF THE COURT EN BANC To be sure, petitioner's arguments in her Petition for Review are not new. She merely restated her arguments in her previous pleadings which were already considered and correctly ruled upon by the Court in Division in the assailed Amended Decision and Resolution of July 4, 2013 and November 5, 2013, respectively. Thus, the Court En Bane sees no compelling reason to deviate from the findings of the Court in Division that the assessment for deficiency expanded withholding tax issued by petitioner against respondent was made beyond the 3-year prescriptive period, therefore, void; and the assessment for deficiency final withholding tax was erroneous as cash dividends issued by respondent to another domestic corporation are tax-exempt. As held in the assailed Amended Decision, the period to assess internal revenue taxes is three (3) years after the last day prescribed by law for the filing of the return, or three (3) years from the day the return was filed, when filed beyond the period prescribed by law, as provided in Section 203 of the NIRC of 1997, to wit: "SEC. 203. Period of Limitation upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." In relation to the foregoing prov1s1on, Section 2.58(A)(2)(a) of Revenue Regulations (RR) No. 2- 98 . / requires that the withholding tax return, whether creditable

Decision CTA EB No. 1084 or final, shall be filed and payments shall be made within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year. Applying the foregoing provisions to the instant case, the Court in Division correctly ruled that the return must be filed and the payment must be made within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 25 of the following year. Thus, the last day of the statute of limitations for each month covering the period from January to December 2000 are summarized as follows: Period Date filed Reckoning Last day to date of the 3- assess year period to assess January February February 10, February 2000 8, 2000 2000 10/ 2003 February March 9, March 10, March 10, 2000 2000 2000 2003 March April 10, April 10, April 10, 2000 2000 2000 2003 April 2000 May 10, May 10, 2000 May 10, 2000 2003 May 2000 June 8, June 10, June 10, 2000 2000 2003 June 2000 July 7, July 10, 2000 July 10, 2000 2003 July 2000 August 10, August 10, August 10, 2000 2000 2003 August September September September 2000 8, 2000 10, 2000 10/ 2003 September October 9, October 10, October 10, 2000 2000 2000 2003 October November November November 2000 10, 2000 10, 2000 10, 2003 November December December December 2000 11, 2000 11, 2000 11, 2003 December January January 25, January 25, I 2000 10, 2001 2001 2004

Decision CTA EB No. 1084 A review of the record reveals that petitioner received the FAN No. WE-4800-00-05-0452 dated December 23, 2005 on January 2, 2006. Hence, the assessment for deficiency expanded withholding tax was made beyond the 3-year prescriptive period provided by law, therefore, it is void. However, to justify its belated assessment petitioner argues that respondent's expanded withholding tax returns filed for the period January to December 31, 2000 were false returns, hence, the 10-year prescriptive period under Section 222 (a) of the NIRC of 1997 applies. The Court En Bane is not persuaded. As observed by the Court in Division, petitioner raised the issue of the applicability of the 10-year prescriptive period due to petitioner's alleged filing of a false return only in her Motion for Reconsideration to the Amended Decision of July 4, 2013. To quote: "Section 222 (a) of the National Internal Revenue Code of 1997, as amended, provides that in the case of a false or fraudulent return with intent to evade tax or of failure to file a return , the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten ( 10) years after the discovery of the falsity, fraud or omission. Indeed, the Supreme Court, in the case of Aznar vs. Court of Tax Appeals, et a/., defined that a false return implies deviation from the truth, whether intentional or not. Also, basic is the rule in evidence that the burden of proof lies on the party who makes the allegations- ei incumbit probatio, qui dicit, non qui negat; cum per rerum naturam factum negantis probatio nulla sit. / Evidently, it is respondent's burden to prove

Decision CTA EB No. 1084 that petitioner willfully filed false returns; thus, validating the former's right to assess the latter's taxes within ten years after the discovery of the falsity, as an exception to the statute of limitation on the assessment of taxes. However, the Court notes that the issue on false returns is only raised in the instant motion. A scrutiny of the records reveals that in the Details of Discrepancies, attached to the Formal Assessment Notice, it was indicated that the assessment was due to petitioner's failure to withhold and remit the expanded withholding tax due on income payments. Further, respondent's witness, Renata Balmores, testified that the deficiency withholding tax on compensation was assessed because some payments were not subjected to expanded withholding tax. In sum, there was neither allegation nor evidence presented by respondent to show that petitioner's Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) are false returns. In fact, respondent disallowed petitioner's expenses on the ground of non -withholding of petitioner's income payments. But then, failure to withhold does not automatically imply falsity. The aforesaid issue is raised only now for the purpose of placing the instant case within the exception to the rule limiting the period to assess and collect taxes, or only when this Court found that respondent's right to assess petitioner on its deficiency for expanded withholding taxes had already j prescribed. Noteworthy is that such scenario is not availing in the Aznar case for the then Collector of Internal Revenue had alleged in his assessment the falsity of the return and

Decision CTA EB No. 1084 had already charged Aznar with fraud penalty. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed." Well-settled is the rule that issues not raised during trial cannot be raised for the first time on appeal, more especially in a motion for reconsideration. 19 The Supreme Court, in cases more than one, had consistently ruled that no question will be entertained on appeal unless it has been raised in the proceedings below. Points of law, theories, issues and arguments not brought to the attention of the lower court, administrative agency or quasi-judicial body, need not be considered by the viewing court, as they cannot be raised for the first time at that late stage. Basic considerations of fairness and due process impel this rule. Any issue raised for the first time on appeal is barred by estoppel. "20 Anent the deficiency assessment for final withholding tax issued by petitioner against respondent, again, the Court En Bane agrees with the findings of the Court in Division that the cash dividends issued by respondent to another domestic corporation is exempt from payment of tax as provided under Section 27(0)(4) of the NIRC of 1997, which reads as follows: I 19 Jesus Cuenco vs. Talisay Tourist Sports Complex, Incorporated and Matias B. Aznar III, G.R. No. 174154, July 30, 2009 . 20 S.C. Megaworld Construction and Development Corporation, vs. Engr. Luis U. Parada, represented by Engr. Leonardo A. Parada of Genlite Industries, G.R. No. 18380 4, September 11, 2013, citing Besana v. Mayor, G.R. No. 153837, July 21, 2010, 625 SCRA 203, 214, Jacot v. Oaf, G.R. No. 179848, November 27, 2008, 572 SCRA 295, 311, and Villaranda v. Villaranda, 467 Phil. 1089, 1098(2004).

Decision CTA EB No. 1084 "SEC. 27. Rates of Income Tax on Domestic Corporations. - XXX XXX XXX (D) Rate of Tax on Certain Passive Incomes. - XXX XXX XXX (4) Intercorporate Dividends. Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax." As provided above, dividends received by a domestic corporation from another domestic corporation are not subject to tax. The Court En Bane cannot as well subscribe to petitioner's argument that for an inter-corporate dividend to be spared from tax, the taxpayer must prove that the dividend was recorded in the books of both the issuing corporation and the recipient stockholders, as required under BIR Ruling No. DA-583-99, and held in the case of Engtek Philippines, Inc. vs. Commissioner of Internal Revenue. On the contrary, the Court En Bane quotes with approval the disquisition of the Court in Division on the matter, to wit: "xxx. Nowhere is it provided that there is a need to record the dividends in the respective books of the issuing corporation and the recipient corporate stockholders in j order for an inter-corporate dividends to be exempted from taxation. XXX XXX XXX

Decision CTA EB No. 1084 The following differences between the Engtek case and the instant case are noteworthy: Engtek case FSM case 1. Petitioner is not a 1. Petitioner is a domestic domestic corporation . corporation 2. It issued cash 2. It issued cash dividends to dividends to 99.99�/o foreign 99. 99�/o domestic corporation as corporation as petitioner is owned petitioner is by Engtek collectively owned Teknologi Holdings 99.99�/o by Festival BHd, which is Supermall, Inc. and registered and Cinema Services existing under the Chain Corporation, laws of Malaysia. which are both domestic corporations registered under the Securities and Exchange Commission (SEC). 3. There was 3. There was no reversal of the reversal of the cash dividends same 4. Petitioner did not 4.Petitioner presented offer in evidence and formally offered its accounting its audited financial records such as statements for its audited taxable year 2000 financial and statements of statements for income and retained the year 2000 to earnings for taxable prove its financial year 2000 and the position at the same were admitted time the cash in evidence. dividends were J declared. Clearly, the Engtek case is not applicable in the case at bar.

Decision CTA EB No. 1084 The purpose of the dividend exclusion is that it is a device for reducing extra or double taxation of distributed earnings. Since a corporation cannot deduct from its gross income the amount of dividends distributed to its shareholders during the taxable year, any distributed earnings are necessarily taxed twice, initially, at the corporate level when they are included in the corporation's taxable income, and again, at the corporation-shareholder level when they are received as dividend. Thus, without exclusion, the successive taxation of the dividend as it passes from corporation to corporation would result in repeated taxation of the same income and would leave very little for the ultimate shareholder. Thus, subjecting petitioner to deficiency final withholding tax will defeat the purpose of Section 27 (D) (4) of the National Internal Revenue Code (NIRC) of 1997." Finally, the prima facie correctness of a tax assessment does not apply upon proof that it is utterly without foundation - meaning it is arbitrary and capricious. 21 In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presurrlption of correctness of assessment being a mere presumption cannot be made to rest on another presumption. Hence, assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be .22 Considering the above findings that the assessment for deficiency expanded withholding tax issued by petitioner against respondent was made beyond the 3'-year 21 Commissioner of Internal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975, J March 31, 2005. 22 Commissioner of Internal Revenue vs. Island Garment Manufacturing Corporation and the Court of Tax Appeals, G.R. No. L-46644, September 11, 1987, citing Commissioner of Internal Revenue vs. Alberto D. Benipayo, G.R. No. L- 13656, January 31, 1962.

Decision CTA EB No. 1084 prescriptive period, therefore, void and the assessment for deficiency final withholding tax was erroneous considering that the cash dividends issued by respondent to another domestic corporation is tax-exempt, the Court cannot sustain petitioner's position that respondent is subject to expanded withholding tax and final withholding tax. Finding the ruling of the Court in Division within the ambit of what the law and jurisprudence provide, the same must be sustained and not disturbed. WHEREFORE, the Petition for Review filed by petitioner Commissioner of Internal Revenue on December 11, 2013 is hereby DENIED for lack of merit. Accordingly, the assailed Amended Decision dated July 4, 2013, and the assailed Resolution dated November 5, 2013, are hereby AFFIRMED. SO ORDERED. � We Concur: ROMAN G. DEL OSARIO Presiding Justice ~;4c-~~~~ LOVELL . BAUTISTA Assoc ate Justice .fUANITO C. CASTANED~,- JR. Associate Justice ER~P.UY CAESA�;;SANOVA Associate Justice Associate Justice

Decisi on CTA EB No. 1084 ~ N. Mh..~ .. 0~ (On Official Business) CIELITO N. MINDARO-GRULLA AMELIA R. COTANGCO-MANALASTAS Associate Justice Associate Justice (On Official Business) MA. BELEN RINGPIS - LIBAN Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation among the members of the Court En Bane before the case was assigned to the writer of the opinion of the Court En Bane. Presiding Justice