HAWAIIAN-PHILIPPINE COMPANY v. COMMISSIONER OF INTERNAL REVENUE

CTA Form No.8 1-000016-0053

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS

QUEZON CITY

FIRST DIVISION

CTA CASE NO. 10726

HAWAIIAN-PHJLIPPINE COMPANY, Petitioner,

- versus - NOTICE OF DECISION

REVENUE, COMMISSIONER OF INTERNAL Respondent.

To:

OFFICE OF THE SOLICITOR GENERAL 1 34 Amorsolo St., Legaspi Village, Makati City

Bureau of Intenra! Revenue Room 703 , Litigation Division, BIR National Officc Building Sen. Miriam P. Defensor-Santiago Avenuc Diliman, Quezon City ATTY. FELIX PAUL R. VELASCO III ATTY. MICHAEL KEVIN P. BAYONA

BANIQUED AND BELLO San Miguel Avenue, Ortigas Center Suite 803, 8th Floor, Jollibee Centre 1605 Pasig City

GREETINGS:

a Decision was rendered in the above-entitled case, copy of which is attached hereto. You are hereby notified by these presents that on November 13, 2024.

Quezon City, Philippines, November 14, 2024.

Atty. Margarette Y. Guzman Executive/Clerk of Court IN U

Page I of I

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY

FIRST DIVISION

COMPANY, HAWAIIAN-PHILIPPINE Petitioner. Members: CTA CASE NO. 10726

-versus- CUI-DAVID, JJ. DEL ROSARIO, P.J., Chairperson BACORRO-VILLENA, and

INTERNAL REVENUE, COMMISSIONER Respondent. OF Promulgated: NOV 13/2024: (D:1JAM)

DECISION

CUI-DAVID, J.:

withdrawal and cancellation of the Formal Letter of Demand Before this Court is a Petition for Reviewi seeking the

{FLD) and Final Assessment Notices (FAN} issued against petitioner, assessing it for deficiency income tax (IT), value added tax (VAT}, final withholding VAT (FWV), and expanded withholding tax (EWT) for the fiscal year (FY) ending September 30,2017.

THE PARTIES

organized and existing under the laws of the Philippines with office address at Brgy. Hawaiian, Silay City, Negros Occidental.2 Petitioner Hawaiian-Philippine Company is a corporation

Internal Revenue (CIR} who holds office at the Bureau of Internal Revenue (BIR) National Office Building, Agham Road, Diliman Quezon City.3 Respondent is the duly appointed Commissioner of

Docket -- Vol. I, pp. 6-63. Docket-Vol. I, p. 6, par. 2, vis-a-vis Docket Vol. II, p. 825, Joint Stipulation ofFacts and Issues (JSFI), par. 1. Id. at 6, par.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue CTA Case No. 10726 DECISION Page 2 of 31 X X

THE FACTS

00000040, dated October 25, 2018, with attached Checklist of Requirements and First Request for Presentation of Records petitioner's books of accounts and other accounting records for all internal revenue taxes, including documentary stamp tax (DST) and other miscellaneous taxes for FY ending September (the "first LOA") from the BIR Excise Large Taxpayers Tax Audit Division I (ELTAD I). The LOA authorized the examination of 30.2017.4 Petitioner received Letter of Authority (LOA) No. 121-2018

July 18, 2019 (the "second LOA"), replacing the first LOA with the Records/Documents from ELTAD I.5 Petitioner received L0A No. 121-2019-00000241. dated attached First Request for Presentation Of

the presentation of documents and records.6 On October 1, 2019, petitioner received a First Notice for

Accounting Records, reiterating the request to present Notice for the Presentation of Books of Accounts and Other documents and accounting records.7 On March 11, 2020, petitioner received a Second and Final

Assessment Notice (PAN) with attached Details of Discrepancies from OIC-Assistant Commissioner (OIC-ACIR) Manuel V. Mapoy (Mapoy) of the BIR Large Taxpayers Service. : The PAN informed On November 24, 2020, petitioner received a Preliminary

petitioner of its alleged deficiency income tax, VAT, FWV, EWT. final withholding tax (FWT), withholding tax on compensation (WTC), and DST, amounting to P262,781,388.79, inclusive of interest, surcharge and penalties,9 broken down as follows:

Tax Type Basic Def. Tax Surcharge Interest Administrative Penalty Total

EWT Income Tax FWN VAT P73,919,657.82p 90,466,605.02 5,677,169.51 70,779.52 17,694.88 P25,493,145.48 51,474,267.91 2,141,464.67 40,272.58 P50,000.00 50,000.00 25,000.00 15,000.00 P99,462,803.30 141,990,872.93 7,843,634.18 143,746.98

FWT 2,019,909.72 761,922.88 25,000.00 2,806,832.60 WTC 955,390.30 360,379.33 25,000.00 1,340,769.63

Exhibit "P-10", Docket - Vol. II, p. 1089. Exhibit "P-I1", Docket -- Vol. II, p. 1092. Exhibit "P-17", Docket -- Vol. II, pp. 1134-1143. Docket Vol. I, p. 826, JSFI, I. Stipulation of Facts, par. 6. Exhibit "P-9", BlR Records, p. 2. Exhibit "P-11-1", Docket -- Vol. II. p. 1093.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION CTA Case No. 10726 Page 3 of 31 A

DST TOTAL Tax Type P179,734,944.89 [Pi7,694.88P82,788,749.02 Basic Def. Tax 6,625,433.00 Surcharge 2,517,296.17 Interest Administrative P240,000.00p262,781,388.79 Penalty 50,000.00 9,192,729.17 Total

Petitioner filed a reply to the PAN on December 9, 2020.10

FLD11 with attached Details of Discrepancies and FAN12 from Deputy Commissioner (DCIR) of the Operations Group, Arnel SD. Guballa (Guballa). The FLD/FAN reiterated the alleged On December 22, 2020, petitioner received an undated

P271,013,199.52, inclusive of increments, as follows:13 deficiency IT, VAT, FWV, EWT,WTC, and DST, in the amount of

Tax Type Basic Def. Tax Surcharge Interest Compromise Total Income Tax P73,885,778.02 p P26,234,475.43 8 P100,120,253.45

FWV VAT 99,222,714.83 70,779.52 17,694.88 57,467,613.53 40,993.94 156,690,328.36 129,468.34 EWT WTC 5,677,169.51 955,390.30 2,199,324.11 370,116.28 7,876,493.62 1,325,506.58

Administrative Penalties DST 3,349,419.89 1,306,729.28 215,000.00 4,656,149.17 215,000.00 TOTAL P183,161,252.07P17,694.88P87,619,252.57[P215,000.00P271,013,199.52

On January 21, 2021. petitioner filed a protest to the FLD/FAN and a Request for Reinvestigation14 addressed to

M. Cardona.15 DCIR Guballa, OIC-ACIR Mapoy and Chief of ELTAD I, Christine

the protest, petitioner submitted relevant supporting On March 19, 2021, or within 60 days from the filing of

documents through a Letter dated March 18, 2021.16

On December 23, 2021, petitioner received the Final Decision on Disputed Assessment (FDDA),17 dated September

assessments and reconsidering several other assessment items, but ultimately assessing petitioner for deficiency income tax, VAT, FWV, EWT, and administrative penalty for FY ending 10, 2021, issued by respondent, cancelling the WTC and DST September 30. 2017, in the aggregate amount of

12 Exhibit "P-18", Docket - Vol. II, pp. I144--1166. Exhibit "P-19", Docket - Vol.II, pp. 1168-1175 Exhibit "P-20", Docket -- Voi. 1I, pp. 1176-1183

14 Exhibit "P-21", Docket - Vol. II, pp. I184-1213. Supra note 9, at par. 7.

Id. S 6 Exhibit "P-23" Docket Vol. i, pp. 1217-1220; Exhibit "R-10", BIR Records Folder I of 4, pp. 447450. Exhibit "P-22", Docket -Vol. II pp. 1214-1216

DECISION

Hawaiian-Philippine Company v. Commissioner of Intemal Revenue Page 4 of 31 CTA Case No, 10726

P258,923,924.61, inclusive of increments,18 summarized as follows:

Tax Type Basic Deficiency Surcharge Interest Compromise Total IT P73,010,980.30 8 p32,476,890.28 8 P105,487,870.58

FWV VAT 99,151,704.78 70,779.52 17,694.88 46,495,407.22 47,346.68 145,647,112.00 135,821.08 EWT Administrative Penalties 5,086,220.61 2,426,900.34 140,000.00 7,513,120.95 140,000.00 TOTAL P177,319,685.21P17,694.88P81,446,544.52 P140,000.00P258,923,924.61

for Review,19 which was raffled to the Court's Second Division. On February 2, 2022, petitioner filed the present Petition

On March 2, 2o22, Summons20 was issued to respondent

Extension of Time to File Answer,21 which was granted on March On March 18, 2022, respondent filed a Motion for

21, 2022.22 Within the extended period, respondent filed his Answer23 through registered mail on April 19, 2022.

On April 21, 2022, respondent filed a Motion to Defer

dated April 26, 2022.25 Transmittal of BIR Records,24 which was granted in an Order

issued, setting the pre-trial conference on June 29, 2022, but it On May 2, 2022, a Notice of Pre-Trial Conference26 was

was later reset to August 1, 2022.27

Brief29 Respondent's Pre-Trial Brief2: and Petitioner's Pre-Trial were filed on July 28, 2022, and July 29, 2022 respectively.

On August 16, 2022, respondent transmitted the BIR Records for this case.3o

30 19 Supra note 9, at par. 10 Docket -- Vol. I, p. 719. Supra note i

Id. at 720-723. 2

23 3 Docket - Vol. II, pp. 732-747. Id. at 725, Order

28 Id. at 752, Notice of Resetting Id. at 820-823. Compliance. Docket - Vol. I, pp. 726 -729. Id. at 750-751 Id. at 759-795 Docket Id. at 753-757 -- Vol. II, p. 731

DECISION CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 5 of 31

August 31, 2022. Subsequently, a Pre-Trial Order32 was issued parties submitted their Joint Stipulation of Facts and Issues31 on on October 6, 2022 Following the Pre-Trial Conference on August 1, 2022, the

Mayen U. Jambonganan33 and Independent Certified Public Trial ensued, with petitioner presenting its witnesses: Ms.

Accountant (ICPA) Ms. Krista V. Bambao.34

Petitioner then filed its Formal Offer of Evidence,35 to which

Evidence36 on February 27, 2023. In a Resolution dated March 14, 2023, the Second Division partially admitted and denied some of petitioner's exhibits.37 As a result, petitioner filed a 202338 on March 28, 2023, which was granted in a Resolution respondent filed a Comment (Re: Petitioner's Formal Offer of dated May 18,2023.39 Motion for Reconsideration (of the Resolution dated March 14)

Due to the reorganization of the Court's Divisions under

case was transferred to this Court on May 29, 2023.40 Administrative Circular No. 01-2023 dated May 23, 2023, the

witness, Revenue Officer Chad G. Fameronag, completed his testimony.41 Thereafter, respondent filed his Formal Offer of Comment (on Respondent's Formal Offer of Evidence dated February 2, 20213 [sic] on December 19, 2023. Respondent's exhibits were admitted in a Resolution dated February 7 Evidence42 on December 13, 2023, to which petitioner filed a At the hearing on November 28, 2023, respondent's lone

2024.44

2024. However, respondent did not file a memorandum.46 The Memorandum for Petitioner45 was filed on March 18.

3 Id. at 852-867 Id. at 912 & 913-914, Minutes of the Hearing & Order dated January 18, 2023, respectively Id. at 915, Minutes of the Hearing dated January 19. 2023 Id. at 825-841 Docket - Vol. III, pp. 1412-1414 Id. at 918--966

Jd. at 1417-1422. Resolution.

Id. at 1441-1443 Id. at 1425--1430 Id. at 1444. Resolutic 4 55-1457 & 1458-1459, Minules of the Hearing & Order, respectively.

Id. at 1546, Records Verification dated March 19, 2024. Id. at 1478-1543 Id. at 1468-1471 Id. at 1476-1477 Id. at 1461-1466

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 6 of 31 DECISION

decision.47 On April 16, 2024, this Court submitted the case for

THE ISSUES

The issues stipulated by the parties are as follows:48

A. WHETHER OR NOT THE RIGHT OF THE GOVERNMENT AND FWV FOR FISCAL YEAR ENDING SEPTEMBER 30, 2017 HAS PRESCRIBED; and TO ASSESS PETITIONER FOR DEFICIENCY VAT, EWT,

B. WHETHER OR NOT PETITIONER IS LIABLE TO PAY DEFICIENCY INCOME TAX, VALUE-ADDED TAX, FINAL TAX IN THE AMOUNT OF P258,923,924.61, INCLUDING WITHHOLDING VAT, AND EXPANDED WITHHOLDING INTEREST.

Petitioner's arguments:

September 2017, and FWV for the same period has already prescribed. Petitioner adds that the assessments are void the first to fourth quarters, EWT from October 2016 to Petitioner argues that respondent's right to assess VAT for

indefinite. because petitioner's tax liability in the FLD/FAN remains

constitute a valid demand for payment of taxes, as it merely requested petitioner to pay its deficiency tax liabilities. Lastly, petitioner claims that the assessments are void for failure to Petitioner also points out that the FLD/FAN did not

state the facts and law on which they are based, asserting that the assessments lack factual and legal basis.

Respondent's arguments:

indicates a demand for payment and a definite amount of tax liability. Respondent avers that the FLD/FAN has fixed Respondent contends that the wording of the FLD/FAN

petitioner's deficiency tax liabilities, with only the interest subject to change depending on whether petitioner pays the deficiency assessment beyond the due date indicated

Docket - Vol. II, p. 827, JSFI, II. Stipulation of Issues: Docket Vol. II, p. 854, Pre-Trial Order dated October 6. Id. at 1547, Resolutio 2022, I.B. Stipulation of Issues.

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Intermal Revenue DECISION Page 7 of 31

made in accordance with prevailing laws and rules, as they present the factual and legal basis for the assessments. As income tax, VAT, FWT, and EWT, along with a compromise penalty. such, respondent posits that petitioner is liable for deficiency Respondent further claims that the assessments were

THE COURT'S RULING

The Court has jurisdiction over this Petition for Review.

ascertain whether it has jurisdiction over this case. Before delving into the merits, the Court must first

amended by RA No. 9282,5o confers jurisdiction on this Court relative to the decisions of respondent, to wit: Section 7(a){1) of Republic Act (RA) No. 1125,49 as

SEC. 7. Jurisdiction. - The CTA shall exercise:

as herein provided: a. Exclusive appellate jurisdiction to review by appeal

Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising administered by the Bureau of Internal Revenue; under the National Internal Revenue or other laws 1. Decisions of the Commissioner of Internal

No. 9282, provides the period for filing an appeal before the CTA, viz.: Relatedly, Section 11 of RA No. 1125, as amended by RA

inaction of the Commissioner of Internal Revenue ... may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(al(2) herein Appeal. - Any party adversely affected by a decision, ruling or SEC. 11. Who May Appeal; Mode of Appeal; Effect of

AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS FOR OTHER PURPOSES. ANACTCREATING THECOURTOF TAX APPEALS RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE CERTAIN SECTIONS OR REPUBLIC ACT NO. 1 125 AS AMENDED, OTHERWISE KNOWN AS THE LAW CREATING THE COURT OF TAX APPEALS, AND

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Intermal Revenue DECISION Page 8 of 31

the Court of Tax Appeals (RRCTA), to wit: 3(a)(l), Rule 4 and Section 3{a), Rule 8 of the Revised Rules of The above provisions are likewise provided under Section

Dioisions. -- The Court in Divisions shall exercise: SEC. 3. Cases within the jurisdiction of the Court in

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal fees or other charges, penalties in relation Revenue assessments, refunds of internal revenue taxes, thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; in cases involving disputed

Commissioner of Internal Revenue to act on the disputed party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments. .. filed within thirty days after receipt of a copy of such decision assessments ... may appeal to the Court by petition for feview or ruling, or expiration of the period fixed by law for the SEC. 3. Who may appeal; period to file petition. - (a) A

jurisdiction to review, by appeal, a decision or ruling of affected within thirty (30) days from receipt of such decision or respondent. The appeal must be filed by the party adversely ruling or after the period fixed by law for action expires. Based on the foregoing, this Court has exclusive

10, 2021,51 was received by petitioner on'December 23,2021.52 In this case, the FDDA issued by respondent on September

Counting thirty (30) days from that date, petitioner had until January 22, 2022, to file a Petition for Review before this Court.

On January 12, 2022, the Supreme Court issued Memorandum Order No. 10-2022,53 physically closing the

provided under Administrative Circular No. 01-2022, the filing January 31, 2022, due to the rise in COVID-19 cases. As courts in the National Capital Region from January 13, 2022 to

Exhibit "P-23", Docket - Vol. II, pp. 1217-1220. RE: RISING CASES OF COVID 19 INFECTION/PHYSICAL CLOSURE OF COURTS IN SELECT AREAS. Supra note 9, at par. 10.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION CTA Case No.10726 Page 9 of 31

periods for any pleadings due in January 2022 were extended until February 1, 2022.54

February 2, 2022, to file the appeal with the CTA. working holiday,55 petitioner had until the next working day. Since February 1, 2022 was declared a special non-

2022; thus, the Court assumes jurisdiction over the case. This Petition for Review was timely filed on February 2

liabilities and a demand for amount of petitioner'stax payment of deficiency taxes. The FLD/FAN contains a definite

Revenue v. Fitness By Design, Inc. (Fitness By Design),56 among FLD/FAN, aside from being undated, does not specify a definite amount of liability, as it bears the phrase: "Note: Interest - others, to argue that the assessments are void because the subject to adjustment if payment is made beyond December 31, 2020." Petitioner relies on the case of Commissioner of Internal

This argument is misplaced.

FAN lacked a definite amount of tax liability due 'to this notation: "Please note, however, that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004." This means that the tax due remained subject to The Supreme Court, in Fitness By Design, held that the

before or after the specified due date. modification, depending on whether the payment was made

December 31, 2020"57 does not render petitioner's deficiency tax liabilities indefinite as to render it void. The note merely serves "lilnterest - subject to adjustment if payment is made beyond In contrast, in this case, the FLD/FAN statement that

as a reminder that interest would need to be adjusted if the assessed deficiency taxes were paid after December 31, 2020

Prociamation No. 1236 s. 2021, DECLARING THE REGULAR HOLIDAYS AND SPECIAL (WORKING/NON- G.R. No. 215957, November 9, 2016 [Per J. Leonen, Second Division]. Exhibit "P-19", Docket -- Vol. II, p. 1171. COURT SUBMISSIONS FALLING DUE IN THE MONTH OF JANUARY 2022 IN ALL COURTS, January 10. RE: EXTENSION OF THE DEADLINES FOR THE FILING OF ANY AND ALL PLEADINGS AND OTHEF 202 WORKING) DAYS FOR THE YEAR 2022,October 29,2021

Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION CTA Case No. 10726 Page 10 of 31

in accordance with Section 249 of the 1997 National Internal Revenue Code (NIRC), as amended, which states:

SEC. 249. Interest. -

of twenty percent (20%)58 per annum, or such higher collected on any unpaid amount of tax, interest at the rate the date prescribed for payment until the amount is rate as may be prescribed by rules and regulations, from fully paid. (A)In General. - There shall be assessed and

(B)Deficiency Interest. -

(C)Delinquency Interest. - ... {Emphasis supplied]

the amount of interest will be adjusted and computed if Under Section 249 of the 1997 NIRC, as amended, only

FLD/FAN. The basic tax deficiencies, however, remain unchanged. Therefore, the FLD/FAN is valid because it contains payment is made beyond the due date indicated in the

a due date and a definite tax liability.

because it did not demand payment of taxes but merely "requested to pay [the] aforesaid deficiency tax"59 is untenable. Similarly, petitioner's contention that the FLD/FAN is void

A demand is defined as:

asserted in the courts. An imperative request preferred by one to do or yield something or to abstain from some act. Request for payment of debt or amount due. An asking with authority, claiming or challenging as due."60 person to another, under a claim of right, requiring the latter "[tlhe assertion of a legal right; a legal obligation

request for payment. Thus, using phrases such as "requested to Based on the foregoing, a demand may take the form of a

pay" or "requested to settle" does not negate an unequivocal demand for payment of deficiency taxes.

revenue tax liabilities. There, the taxpayer also argued that the that the taxpayer was "requested to pay" its deficiency internal In Fitness By Design, the last paragraph of the FAN stated

Black's Law Dictionary 429 (6th ed., 1990). (Italics supplied) The rate has been changed to "doublc the legal intcrest rate for loans or forbearancc of any moncy in the absencc of Acceleration and Inclusion (TRAIN), effective January 1, 2018. Exhibit "P-19", Docket -- Vol. II, p. i171 an express stipulation as set by the Bangko Sentral ng Pilipinas" under Republic Act No. 10963, Tax Reform for

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 11 of 31 DECISION

for payment. FAN issued was merely a request for payment and not a formal demand. Interestingly, however, the Supreme Court did not find the absence of the due dates in the FAN negated the demand issue with the use of the word "request" and instead held that

confirms respondent's intent to demand payment before the indicated date. In this case, the FLD/FAN indicates the due date, which

Given the validity of the FLD/FAN, the Court now proceeds to rule on the substantive merits of petitioner's appeal.

Respondent's assessments have partially prescribed.

The assessment of tax is deemed made, and the three (3)- year period for the collection of the assessed tax begins to run on the date the assessment notice is released, mailed, or sent to the taxpayer.61 Furthermore, Sections 203 and 222 of the 1997 NIRC, as amended, clarify that the assessment refers specifically to the service of the FAN upon the taxpayer.62

Considering that the undated FLD/FAN appears to have been personally served by respondent63 and received by petitioner on December 22, 2020, said date shall be deemed the date of assessment.

the date of sending the FLD/FAN to the taxpayer is when the Revenue v, Villanueva, Jr.,64 the Supreme Court affirmed that Also, in the recent case of Commissioner of Internal

assessment is made:

[T]he CIR's right to assess and collect from

three-year prescriptive period under Section 203 of the 1997 respondent deficiency taxes for 2006 is subject to the ordinary NIRC. The three-year period is reckoned from the last day prescribed by law for the filing of the return, or in a case where a return is filed beyond such period, from the day the return was actually filed

G.R. No. 249540, February 28, 2024 [Per J. Caguioa, Third Division]. No. 128315, June 29, 1999 [Per J. Panganiban, Third Division] Exhibit "R-8", BIR Records, pp. 3 70-384. [Per J. Leonen, Third Division]. Comn J. Caguioa, First Division]: Commissioner of Internal Revenue v. Pascor Reafry & Development Corporation, G.R. 0n issioner of Internal Revenue v. Transitions Optical Philippines, Inc. G.R. No. 227544, Novcmber 22, 2017 of Internal Revenue v. Court of Tax Appeals Second Division, G.R. No. 258947, March 29, 2022 [Per

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION Page 12 of 31

the FAN/FLD assessing respondent of deficiency income tax year: (a) 1st Quarter April 26, 2009; (b) 2nd Quarter --- July 26, 2009; (c) 3rd Quarter -- October 26, 2009; and (d) 4th and VAT for taxable year 2006 was only sent to respondent, taxes. Verily, the subject assessments are void for being barred by prescription. [Emphasis supplied] had until June 12, 2010 within which to assess respondent for deficiency income taxes. For VAT, the CIR had the following dates within which to assess respondent for the same taxable Quarter -- January 26, 2010. However, as the CIR admitted, via registered mail, on January 24, 2011, which is clearly beyond the allowable period for assessment and collection of Here, the CTA found that for taxable year 2006, the CIR

assessments are considered made on December 22, 2020, when the FAN/FLD was served to and received by petitioner.65 Thus, following established jurisprudence, the

Revenue Memorandum Circular (RMC) No. 136-2020,66 which extended the three-year prescriptive period to assess in areas placed under ECQ or MECQ. RMC No. 136-2020 provides that the period to assess shall exclude 137 days from March 16, 2020. However, during the surge of COVID-19, the BIR issued

below: The periods to assess have partly prescribed, as tabulated

VAT Income Tax Tax Type for filing of 01/15/2018 Prescribed tax return Last Day Actual filing 01/12/2018 date of tax return 01/15/2021 year period to assess End of 3- (RMC No. 136- Extended period to assess67 N/ A68 2020 when FAN/FLD 12/22/2020 was deemed Prescribed made on No

2nd quarter Ist quarter 04/25/2017 01/25/2017 04/24/2017 01/23/2017 04/25/2020 01/25/2020 11/23/202070 N/ A69 Yes Yes

65 Docket -- Vol. II, pp. 812-813, Q30, Judicial Affidavit of Revenue Officer Chad G. Fameronag: BIR Records,

NCR was placed under ECQ/MECQ from March 16, 2020 to May 31, 2020 (77 days) plus 60 days per RR No. 11- SUBJECT: Clarification on the Suspension of the Statute of Limitation Provided Under Revenue Regulations (RR) The original prescriptive date is extended in view of RR No. 11-2020 and RMC No. 136-2020 issued on Dec. 7. the number of days covered by the period of suspension, which is a total of ore hundred thirty-seven (137) days." The suspension of the 3-year period started from March 16, 2020, when the state of emergency was declared due to day extension under RR No. 11-2020, there are additionai 75 days for the BIR to assess. Total of 212 days (137 + No. 11-2020, December 7, 2020. 2020, which states that "the counting of the three (3)-year prescriptive period for the period to assess... shall exclude 2020 = 137 days Considering that the FLD/FAN was issued within the original prescriptive period, there is no need to count the extended period to assess The extended period to assess (counting 137 days) is until Sept. 9, 2020. However, since NCR+ was piaced again under MECQ between Aug. 4, 2020 and Aug. 18, 2020 (a period of 15 days), counting these 15 days plus the 60- 142 COVID-i9 15)

CTA Case No. 10726 DECISION Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 13 of 31 X--------

3rd quarter EWT Jan. 2017 Feb. 2017 Apr. 2017 July 2017 Nov. 2016 Sep. 2017 Oct. 2016 Dec. 2016 Mar. 2017 Aug. 2017 4th quarter May 2017 June 2017 Tax Type 11/14/2016 02/14/2017 06/14/2017 03/14/2017 07/14/2017 for filing of 07/25/2017 01/14/2017 04/14/2017 05/14/2017 08/14/2017 09/14/2017 10/25/2017 12/14/2016 Prescribed 10/14/2017 tax return Last Day Actual filing 01/18/2017 02/13/2017 03/13/2017 09/11/2017 11/12/2016 04/11/2017 10/12/2017 07/20/2017 10/24/2017 06/10/2017 07/11/2017 05/12/2017 08/14/2017 date of tax 12/13/2016 return 01/18/2020 02/14/2020 06/14/2020 10/14/2020 07/25/2020 11/14/2019 09/14/2020 10/25/2020 03/14/2020 04/14/2020 05/14/2020 07/14/2020 08/14/2020 12/13/2019 year period to assess End of 3- 12/12/202074 01/12/202175 02/11/202176 03/14/202177 04/14/202178 05/14/202179 (RMC o. 136 11/12/202073 5/25/202172 2/22/202171 Extended period to assess67 2020 NA NA A NA NA When FAN/FLD 12/22/2020 was deemed Prescribed made on Yes Yes Yes Yes Yes Yes No Yes NO N NO N NO NO

Sep. 2017 Nov. 2016 June 2017 FWV80 May 2017 July 2017 Dec. 2016 Mar. 2017 Oct. 2016 Jan. 2017 Feb. 2017 Apr. 2017 Aug. 2017 10/10/2017 11/10/2016 03/10/2017 09/10/2017 01/10/2017 02/10/2017 04/10/2017 05/10/2017 07/10/2017 08/10/2017 12/10/2016 06/10/2017 None None None None None None None None None None None None 01/10/2020 03/10/2020 06/10/2020 04/10/2020 07/10/2020 09/10/2020 02/10/2020 05/10/2020 08/10/2020 12/10/2019 11/10/2019 10/10/2020 01/08/202183 02/07/202184 03/10/202185 04/10/202186 05/10/202187 11/08/202081 12/08/202082 NA NA NA NA NA Yes Yes Yes Yes Y es Yes Yes NO NO NO NO

applying the 10-year prescriptive period for assessment, which income tax (for FY ending September 2017), VAT (for the 3rd and wouid warrant such application.88 Therefore, only the deficiency 2017), and FWV (for the periods from May to September 2017) 4th quarters), EWT (for the periods from May to September The PAN and FLD/FAN did not state that the CIR was

3 14 The extended period to assess (counting 137 days) is until March 11, 2021, pius additional 75 days therefrom. The extended period to assess (counting 137 days) is until Aug. 29, 2020, plus additional 75 days therefrom. The extended period to assess (counting 137 days) is until Dec. 9. 2020, plus additional 75 days therefrom. The extended period to assess (counting 137 days) is until Sept. 28, 2020, plus additional 75 days therefrom. s The extended period to assess (counting 137 days) is until Oct. 29, 2020, plus additional 75 days therefrom.

17 The extended period to assess (counting 137 days) is until Nov. 28, 2020, plus additional 75 days therefrom. The extended period to assess (counting 137 days) is untii Dec. 29, 2020, plus additional 75 days therefrom.

1o The extended period to assess (counting 137 days) is until Jan. 29, 2021, 'plus additional 75 days therefrom. The extended period to assess (counting 137 days) is until Feb. 28, 2021, plus additional 75 days therefrom.

81 0 The extended period to assess (counting 137 days) is until Aug. 24, 2020, pius additional 75 days therefrom. The assessment for alleged deficiency FWV emanated from payments to NRFCs that were not subjected to FWV pursuant to Sec. I I4 (C) of the Tax Code.

83 4 S The extended period to assess (counting 137 days) is until Sept. 24, 2020, plus additional 75 days therefrom. The extended period to assess (counting 137 days) is until Oct. 25, 2020, plus additional 75 days therefrom. The extended period io assess (counting 137 days) is until Nov. 24, 2020, plus additional 75 days therefrom. 8$ The extended period to assess (counting 137 days) is untii Dec. 25, 2020, plus additional 75 days therefrom. 8 87 The extended period to assess (counting 137 days) is until Jan. 25, 2021, plus additional 75 days therefrom. The extended period to assess (counting 137 days) is until Feb. 24, 2021, plus additional 75 days therefrom. 88 Supra note 64.

CTA Case No. 10726 DECISION Hawaiian-Philippine Company v, Commissioner of Internal Revenue Page 14 of 31 Y

shall be considered by the Court in determining petitioner's tax liabilities.

deficiency income tax for FY Petitioner is not liable for ending September 30, 2017.

Respondent assessed petitioner for deficiency income tax amounting to P105,487,870.58, including increments, for the FY ending September 30, 2017, to wit:89

Taxable Income per Return Total Taxable Income per Audit Audit Adjustments: I. Undeclared Income from Reconciliation II. Undeclared FIT differential from NTC of Sales per Book vs. per ITR P209,719,260.07 33,650,674.27 p514,693,782.34 p271,323,848.00 243.369.934.34

Income Tax Due P154,408,134.70 Less: Payments/Tax Credits Income Tax Payments Creditable Withholding Tax per BIR Form 2307 p 60,223,913.40 21,173,241.00 81,397,154.40 Basic Deficiency Income Tax Due P73,010,980.30 Add: Interest 32,476,890.28 Total Deficiency Income Tax Due P105,487,870.58

The following items, which are discussed in detail hereafter, comprise the foregoing assessment:

(b) Undeclared Feed-In-Tariff (FIT) differential from (a) Undeclared income from reconciliation of sales per National Transmission Corporation (NTC) book vis-a-vis Income Tax Return (ITR) P209,719,260.07 p 33,650,674.27

a per ITR - P209,719,260.07 Undeclared income from reconciliation of sales per book vs.

Respondent identified an alleged undeclared income from the reconciliation of petitioner's sales per book vis-a-vis the ITR and computed it as follows:9o

Exhibit "P-23", Docket - Vol. II, pp. 1217-1218. See also Tabie 4, Page 10 of Exhibit "P-40", Docket --Vol. II (not Exhibit "P-23, Docket -- Vol. II, pp. 1217-1218. paginated between pp. 898 & 899).

Hawaiian-Philippine Company v. Commissioner of Internal Revenue CTA Case No. 10726 DECISION Page 15 of 31

Sale of Goods from Reconciliation of AR Per Book P2,329,027,840.23

Total Sales Per Book Sale of Electricity P2,346,291,894.07 17,264,053.84

Undeclared Income Sales Declared Per ITR P209,719,260.07 2,136,572,634.00

P2,329,027,840.23 allegedly representing Sales of Goods from Reconciliation of AR per book,' [thel FLD/FAN did not provide Petitioner countered that "in arriving at the amount of

arrived at." Allegedly, "respondent merely provided a separate any breakdown or schedule showing how the amount was audit working paper, which simply summed up the amounts in

adjustments, such as returns, corrections of errors, and other taken from the general ledger," and failed "to consider the adjustments that resulted to reduction of sales."91 creditstoaccounts the debit portion of petitioner's accounts receivable allegedly receivable representingvarious

Petitioner also surmises that respondent failed to exclude from the total debits the amount of output VAT included in the receivables when the sales on account were recorded.92

Further, petitioner asserts that it was not formally

based.93 In its reply to the PAN, petitioner submitted individual informed of the facts and law on which the assessment is

customer's ledgers for the detailed transactions to account for the discrepancies found by respondent.94 Petitioner also stated in its protest letter to the FLD/FAN that it was unable to determine how respondent's examiners computed the total debits of its accounts receivable. Thus, regarding this particular item of assessment, the FLD/FAN failed to comply with the due process requirement that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made.95

Section 228 of the 1997 NIRC, as amended, provides:

Commissioner or his duly authorized representative finds that SEC. 228. Protesting of Assessment. - When the

proper taxes should be assessed, he shall first notify the taxpayer of his findings:

Exhibit "P-21", Docket -- Vol. I1, pp. 1187-1188. Docket -- Vol.II1, pp. 1509-1511, Memorandum for Petitioner, pars. 83--86. See also Exhibit "P-13-1", Docket - Id. at 1512-1514, Memorandum for Petitioner, pars. 92-99. Exhibit "P-18", Docket - Vol. HI, pp. 1148-1149. Vol.II, pp. I108-t120. Docket - -Voi. II, p. 1512, Memorandum for Petitioner, par. 88.

CTA Case No. 10726 DECISION Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 16 of 31 Y

and the facts on which the assessment is made; otherwise, the assessment shall be void. The taxpayers shall be informed in writing of the law

assessment based on his findings. and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an Within a period to be prescribed by implementing rules

filing a request for reconsideration or reinvestigation within all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, Such assessment may be protested administratively by

[Emphasis supplied] or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision the decision shall become final, executory and demandable. If the protest is denied in whole or in part, or is not acted

In relation thereto, Section 3.1.3 of Revenue Regulations (RR) No. 18-2013,96 states:

tax or taxes shall state the facts, the law, rules, and Notice (FLD/FAN). - The Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued by the FLD/FAN calling for payment of the taxpayer's deficiency Commissioner or his duly authorized representative. The 3.1.3 Formal Letter of Demand and Final Assessment

regulations, or jurisprudence on which the assessment is based; otherwise, the assessment shall be void (see illustration in ANNEX "B" hereof). {Emphasis supplied]

The FDDA states that respondent's examiners investigated petitioner's Accounts Receivable from Sales per General Ledger

Detail Listing.97 However, this information was not found upon scrutiny of the BIR Records. Thus, the Court cannot verify respondent's Schedule of Trade Receivable Per Book, from which the total debits of P2.329,027,840.23 arose.98

6 Amending Certain Sections of Revenue Regulations No. 12-99 Relative to the Due Process Requirement in the

Exhibit "R-11", BIR Investigation Records, p. 235. Issuance of a Deficienicy Tax Assessment, November 28, 2013. Exhibit "P-23", Docket -- Vol. II, p. I217.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue CTA Case No. 10726 DECISION Page 17 of 31 X

the amounts of debit transactions used by respondent versus the debit amounts reflected in the subsidiary ledgers, to wit:99 The Court-commissioned ICPA also reports deviations in

Nestle Fresh N Famous Countertrade Es Marketing Enterprises Aspenn Enterprises All Asian First PGMC Customer P555,552,438.10 Schedulel00 340,170,176.71 Per BIR 27,486,558.54 60,607,240.80 77,951,588.30 16,132,687.75 P580,377,332.13 Per Detailed Subsidiary 343,187,817.40 Ledgers 101 78,465,940.96 29,880,166.72 68,954,356.73 8,396,240.00 P(24,824,894.03) (2,393,608.18) (3,017,640.69) (8,347,115.93) Difference 7,736,447.75 (514,352.66)

Various-trade Sucden Phils., Inc. Molasses Luckietyrrific Negros del Norte ED & F Man Phils. Marketing debtors FT Zucherro 280,222,701.65 175,908,623.37 112,031,000.00 35,162,891.92 68,194,527.00 99,299,873.04 50,571,468.77 283,281.092.30 133,050,440.41 112,031,000.00 78,198,300.00 36,296,905.06 98,890,083.65 25,830,000.00 (10,003,773.00) (1,134,013.14) (3,058,390.65) 42,858,182.96 24,741,468.77 409,789.39 0.00

Bacolod Goodrise 6,515,090.00 6,555,000.00 {39,910.00} Roxol Bioenergy SVG 137,472,112.26 3,168,000.00 136,800,620.65 3,200,000.00 671,491.61 (32,000.00)

Traders Islas Commodity 82,408,876.50 82,957,376.50 548,500.00)

A/R Bagasse CADPI/CACI A/R Muscovado A/R Traders Central Azucarera de La Carlota 126,599,146.90 21,726,318.02 44,589,549.60 6,448,971.00 808,000.00 136,856,050.21 21,726,318.02 48,664,354.00 8,376,141.00 808,000.00 (10,256,903.31) (1,927,170.00) (4,074,804.40) 0.00 0.00

TOTAL P2,329,027,840.23 P2,322,783,535.74 P6,244,304.49

The ICPA likewise verified petitioner's credit portion of accounts receivable per subsidiary ledgers and found the following: 102

TOTAL Collections Other Adjustments Past Year Collections P2,496,770,782.27 P2,153,472,854.88 237,352,505.84 105,945,421.55

00 Exhibit "P-40", Table 7, pp. 13-14, Docket Vol. II (not paginated betwecn pp. 898 & 899); Exhibit "P-24", Dockct Exhibit "R-11", BIR Investigation Records, p. 235. - Vol. II, p. 1221.

0 Exhibits "P-24-1" to "P-24-22", Docket - Vol. II, pp. 1222-1278. 02 Table 6 of Exhibit "P-40", pp. 12-13, Docket -- Vol. II (not paginated between pp. 898 & 899).

CTA Case No. 10726 Page 18 of 31 DECISION Hawaiian-Philippine Company v. Commissioner of Internal Revenue

3

receipts, sales invoices, official receipts, or journal vouchers.10s voucher/s; (b) reversal of sales returns; (c) adjustments to account for returned goods; (d) reversal of sales; (e) re- classification; and (e) miscellaneous charges.104 The adiustments to accounts receivable pertain to (a) adjustment to account for errors in the summation of journal The foregoing collections are supported by collection

on the ground that it violated petitioner's right to due process However, this portion of the assessment must be canceled

as it was not informed of the facts, laws, rules, regulations, or jurisprudence on which the assessment is based, pursuant to Section 3.1.3 of RR No. 18-2013.

The presumption of correctness of assessments does not apply when the assessment is without foundation or rational basis.lo5 Here, respondent failed to show the rational basis and foundation of its computation of petitioner's alleged undeclared

respondent in a deficiency notice is rendered void.106 Thus, the income. Without any foundation, any determination made by

finding of deficiency income tax arising from the supposed undeclared income must be

b Undeclared Feed-In-Tariff (FIT) differential from NTC

P33,650,674.27

Respondent allegedly found undeclared sales in the amount of P33,650,674.27 related to petitioner's sale of power thus:107

estimated FD Under-Recovery related to sale of power Data from NTC shows that there were undeclared

amounting to Php33,650,674.27. This was assessed the 30% regular income tax pursuant to Sec. 27(A) of the Tax Code, as amended in relation to Sec. 32 and 34 of the same Code.

Petitioner avers that, aside from the foregoing, no other

P33,650,674.27'was calculated, where the said amount was detailswere provided to show how the amount of

sourced, or what amounts were compared that resulted to the said amount.108

03 Exhibits "P-41" to "P-1392", and USB marked as "P-40-2'

100 06 Commissioner of Internal Revenue v. Spouses Magaan, G.R."No. 232663. May 3, 2021 [Per J. Leonen, Third Exhibit "P-40",p. 13,Dock Division], citing Conmissioner of Interal Reveue v. Hantex Trading Co., Inc.G.R. No. 136975, March 31, 2005 [Per J. Callejo, Sr., Second Division]. - Vol. I(not ac nated between pp. 898 & 899).

Docket -- Vo!. Il, p. 1517, Memorandum for Petitioner, par. I15. Exhibit "P-23", Docket -- Vol. II, p. 1218.

DECISION

Page 19 of 31 CTA Case No, 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue

P33,650,674.27.110 bearing the logo of the NTC or TransCo entitled "Estimated FD Under-Recovery corresponding to RE Generators that have not subheading "In compliance with ERC directive during the Davao document includes petitioner's name along with the amount started to bill as of May 2017 Billing, In Php," with the leg expository hearing on November 21, 2017."109 This Upon scrutiny of the BIR Records, there is a document

2010. FIT refers to a renewable energy policy that offers for their own use.111 The FIT differential (FD) represents the guaranteed payments at a fixed rate per kilowatt-hour for (ERC) formulated and promulgated the FIT system rules in emerging renewable energy sources, excluding any generation difference between (1) the forecast applicable FIT Rate for the As a background, the Energy Regulatory Commission

annual energy generation from the eligible RE Plant for the kWh delivered, and (2) the forecast applicable cost recovery rate year that each eligible RE Plant is expected to receive for each as determined under the Guidelines, multiplied by the projected

year.112

Further, Section 2 (viii), Article I of the 2014 Revised Rules for the Issuance of Certificates of Compliance (COCs) for Generation Companies, Qualified End-Users and Entities with Self-Generation Facilitiesl13 provides:

Renewable Energy (RE)

viii. A Generation Company operating an RE Plant eligible to avail of the FIT System shall indicate in its COc application its intention to operate under the FIT System The said Generation Company shall be allowed to the issuance of a COC explicitly indicating FIT operate and be entitled to payment of FIT only upon

Eligibility of the said RE Plant. No COC which grants of a Generation Company operating an RE plant unless it FIT Eligibility (FIT-Eligible COC) shall be issued in favor Endorsement (COE) for FIT Eligibility by the Department has been issued the appropriate Certificate of

of Energy (DOE). The FIT-Eligible COC shall indicate the period of entitlement to the FIT which commences on the Commercial Operations date indicated in the COE issued

U3 Exhibit "R-1!", BIR investigation Records, p. 276. ERC Resolution No. 16 (2010), sec. l.3, Feed-In Tariff (FIT) Rules. ERC Resolution No. 16 (2014), A Resolution Adopting The 2014 Revised Rules for the Issuance of Certificates of Order, ERC Case No. 2016-192 RC dated April 27, 2017. Compliance (COCs) for Generation Companies, Qualified End-Users and Entities With Seif-Generation Facilities; Docket - Voi. HII, p. I 515, Memorandum' for Petitioner, par. 104 (d

CTA Case No. 10726 Page 20 of 31 DECISION Hawaiian-Philippine Company v. Commissioner of Internal Revenue

by the DOE, unless another date is indicated therein. subject to Section 2(xi), Article I hereof." [Emphasis supplied}

Project was issued a Confirmation of Commerciality.115 But (DOE) as a Renewable Energy (RE) Developer of Renewable Biomass Energy Resources on March 12, 2013,114 and on January 22, 2014, its Bagasse-Fired Biomass Power Generation petitioner asserts that it should not be assessed for deficiency Petitioner is registered with the Department of Energy

issued a certificate of compliance (COC) by the ERC certifying Certification dated September 16, 2021117 stating that MW (Unit 1) Biomass Co-Generation Power Plant with a FIT income tax regarding the FIT differential, as it has never been its eligibility for the FIT system.116 In fact, the ERC issued a petitioner's application for the issuance of a COC for its 8.00

eligible capacity of 2.0 MW located at Silay Hawaiian Central Silay City, Negros Occidental is currently being processed and evaluated.118

payment of FIT since its application for the issuance of a COC Based on the foregoing, petitioner is not entitled to the

for its power plant with FIT-eligible capacity is still under evaluation by the ERC. Hence, the assessment for the FIT differential has no basis.

In sum, the total deficiency income tax assessment for FY ending September 30, 2017, in the amount of P105,487,870.58, must be cancelled.

September 30, 2017. Petitioner is not liable for deficiency VAT for FY ending

Respondent assessed petitioner for deficiency VAT amounting to P145,647,112.00, including incremenits, for FY ending September 30, 2017, as follows:119

4 Exhibit "P-26", Docket -- Vol.II, p. 1318.

Docket -- Vol. I1I, p. 1514, Memorandum for Petitioner, par. 101 Exhibit "P-23", Docket " Vol. II, pp. 1218-1219, and Table 8 of Exhibit "P-40", p. 15, Docket - Vol. II (not Docket --Vol. ill, p. 1515, Memorandum for Petitioner, par. 103. Exhibit "P-27", Docket -- Vol. II,P. 1319 Exhibit "P-28". Docke -VolH.p. 1320

paginated between pp. 898 & 899).

DECISION CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 21 of 31 X

VATable Sales/Revenue per VAT Returns Audit Adjustments: Total Sales/Revenue per Audit Output Tax I. Undeclared Income from Reconciliation of HI. Undeclared Income from Reconciliation III. Undeclared Income from Reconciliation Less: Allowable Input Tax Deferred Input Tax, Beginning of Sales Collected per Return vs. per of Trade Receivable and Sales Collected Output Tax per Return vs. per Book Book P279,078,416.81 373,029,683.82 p60,816,651.54 174,156,784.30 f1,478,611,847.87 f177,433,421.74 P652,346,962.94 826,264,884.93

Less: Deferred Input Tax, Ending Total Available Input Tax Input Tax from Current Purchases Presumptive Input Tax 64,118,720.09120 P134,664,919.23 73,848,267.69

Total Allowable Input Tax VAT Refund/TCC Claimed Others P27,271,543.04 43,274,656.10

Less: Tax Credits/Payments Monthly/Quarterly VAT Remittance 56,792,259.53 84,063,802.57

p 93,369,619.17

Basic Deficiency VAT Total Deficiency Value-Added Tax Due Overpayment per Return Add: Interest P145,647,112.00 P99,151,704.78 46,495,407.22 5,782,085.61

items: The foregoing assessment is comprised of the following

(a) Undeclared income from reconciliation of output tax per VAT returns vs. per book P279,078,416.81

(c) Undeclared income from reconciliation of trade (b) Undeclared income from reconciliation of sales receivable and sales collected collected per return vs. per book P174,156,784.30 p373.029,683.82

At the outset, respondent's right to assess petitioner for deficiency VAT for the first two quarters of FY ending September 30, 2017, has prescribed. However, neither petitioner nor respondent provided a breakdown of the amounts so that the prescribed portion could be determined. Thus, the assessment shall be taken as a whole.

{a Undeclared income from reconciliation of output tax per VAT

returns vs. per book -- P279,078,416.81

120See Exhibit "P-19", Docket -- Vol. II, p. 1169.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION CTA Case No. 10726 Page 22 of 31

from the FLD/FAN:121 Respondent's FDDA upheld the following assessment item

Investigation of the gross-up value of output tax per General Ledger - Detail Listing submitted by the above taxpayer as compared to the sales declared in VAT Returns revealed that Php279,078,416.81. there were. undeclared income amounting to

provide a detailed schedule or breakdown of the assessed the law of the subject assessment, as the FLD/FAN does not amount.122 Petitioner contends that it is not informed of the facts and

(audit working paper), the said amount was computed as follows: 123 According to respondent's Schedule of Initial Findings

Discrepancy Sales Per VAT Returns Other Income Total f931,425,379.75 P279,078,416.81 p752,154,303.83 179,271,075.92 652,346,962.94

and has accounted for the discrepancy as follows:124 values of the credit entries in petitioner's output tax account. However, petitioner avers that this computation is erroneous The amounts for sales and other income are grossed-up

A. Erroneous Amount of Other Income in BIR's (December 2016) computation Item/Adjustment Reconciliation Nature of P20,448,728.10 Per BIR Petitioner P4,466.02 Per p20,444,262.08 Difference Grossed-up Value P170,368,850.67

Total B. Non-inclusion of C. Non-inclusion of Adjustment in BIR's Sales Adjustment in BIR's computation computation (June 2017 {June 2017} Other Incomel 14,117.10 13,041,112.89 10,082.04 P33,489,410.03 13,041,112.89 4,035.06 P279,078,416.92125 108,675,940.75 33,625.50

I 23 2 2 Docket -'Vol. ill p. 1522, Memorandum for Petitioner, par. 137. Exhibit "P-13 -1", Docket -- Vol. II, p. 1118. Exhibit "P-21, Docket -- Vol. II, p.'1194. Exhibit "P-23",Dockct - Vol. II, p. 1218 Sum, as adjusted.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue CTA Case No. 10726 Page 23 of 31 DECISION

regulations clearly state that the FLD/FAN should contain the to file a protest based on the Schedule of Initial Findings has no bearing. The law mandates that the legal and factual bases of the assessment must be stated in writing in the FLD accompanying the assessment notice.126 facts on which the assessment is based. The taxpayer's ability As previously discussed, the law and related rules and

due process requirements of the law in issuing a deficiency tax details of the foregoing assessment item did not comply with the assessment. Thus, the Court is compelled to cancel this item of The Court finds that respondent's failure to provide the

assessment.

b Undeclared income from reconciliation of sales collected per

return vs.per book -P373,029,683.82

compared to the collections declared per VAT Returns, revealed undeclared income amounting to P373,029,683.82, as shown below:127 collections from the schedule of Accounts Receivable per General Ledger - Detail Listing, submitted by the, taxpayer, Respondent alleges that an investigation of petitioner's

Account Amount

Collection from Sale of Electricity AR Collection from Sale of Goods Per Book Total Collection per Book p2,520,448,676.46 P2,503,184,622.62 17,264,053.84

Collection Per VAT Returns 2,147,418,992.64 Discrepancy P373,029,683.82

The schedule of Accounts Receivable per book was compared based on the summary of beginning, debit, credit. and ending balances pertaining to the sales movements per customer.128

Petitioner counters that respondent merely summed up

receivable129 and compared this total to the collections per VAT the amounts in the credit portion of petitioner's accounts

return.130

Exhibit "P-23", Docket "Voi. II, p. 1218. Docket -- Voi. III, p. 1524, Memorandum for Petitioner, par. 149. Commissioner of Internal Revenue v. Enron Subic Power Corporation, G.R. No. 166387 (Resolution), January 19. Docket --Vol. II, p. 1524, Memorandum for Petitioner, par, 150. See also Exhibit "P-16, Docket -- Vol. II, p. I132. 2009 [Per J. Corona, En Banc]. (d

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 24 of 31 DECISION

X

amount P2,147,418,992.64 picked up by respondent from examination, the credits in petitioner's accounts receivable consist of the prior year's collections, the current year's collections, and other adjustments.131 On the other hand, the petitioner's VAT returns represents petitioner's total sales for the subject fiscal year: It should be noted that, according to the ICPA

"P-7-11"135 "P-7-2"132 "P-7-5"133 "P-7-8"134 Exhibit 4 th Qtr 2nd Qtr 3rd Qtr 1st Qtr 2017 FY P206,505,935.30 277,265,094.01 116,543,940.51 52,031,993.12 Taxable p5,374,572.96 Zero-rated 4,038.991.43 7,236,120.28 614,369.17 P454,662,136.42 469,110,324.15 475,967,161.21 78,068,354.08 Exempt p666,542,644.68 750,414,409.59 535,235,274.61 195,226,663.76 Total

TOTAL P652,346,962.94 P17,264,053.84P1,477,807,975.86P2,147,418,992.64

Thus, taking the total credits of petitioner's accounts receivable as total collections compared to the total sales is erroneous.

Further, an examination of petitioner's audited financial statements (AFS) for FY ending September 30, 2017, shows that

especially sales of sugar, molasses, and loose bagasse: 136 most of petitioner's revenues come from sales of goods

Revenues from the sale of: Total Sugar Molasses Loose Bagasse Power P2,136,572,634.00 P1,831,094,086.00 242,423,774.00 45,790,720.00 17,264,054.00

Based on the foregoing, the sale of power accounts for only 0.808% (P17,264,054.00 divided by P2,136,572,634.00), while sales of goods make up 99.192% of the total revenues for FY ending September 30, 2017.

Under Sections 106(A)(1) and 113(A)(1) of the 1997 NIRC as amended, sales of goods must be supported by invoices and reported in VAT returns when the invoice is issued, not when the receivables are collected. For easy reference, the relevant provisions of law are quoted hereafter: Y

31 Exhibit "P-40", pp. 12-13, Docket -- Vol. II (not paginated between pp. 898 & 899).

!33 34 I3S 3 I 31 Id. 1040. Exhibit "R-1 I ", BIR Investigation Records, p. 207. Docket -- Vol. II, p. 1023. Id. at 1031. Id. 1046

CTA Case No. 10726 DECISION Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 25 of 31 Y

Properties. SEC. 106. Value-added Tax on Sale of Goods or

assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to twelve of the goods or properties sold, bartered or exchanged, such percent (12%) of the gross selling price or gross value in money tax to be paid by the seller or transferor. (A) Rate and Base of Tax. There shall be levied.

and intangible objects which are capable of pecuniary estimation and shall include: (1) The term 'goods or properties'shall mean all tangible

Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;

{b} property or right; The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like

{C The right or the privilege to use in the Philippines of any industrial, commercial or scientific

equipment;

{ The right or the privilege to use motion picture films, films, tapes and discs; and

(e Radio, television, satellite transmission and cable television time.

money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, properties shall form part of the gross selling price." barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or The term 'gross selling price'means the total amount of

VAT-registered Persons. SEC. 113. Invoicing and Accounting Requirements for

(A) Invoicing Requirements. -- A VAT-registered person shall issue:

(1) of goods or properties; and A VAT invoice for every sale, barter or exchange

2 A VAT official receipt for every lease of goods or properties, and every sale, barter or exchange of

services.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue CTA Case No. 10726 DECISION Page 26 of 31

P373,029,683.82 based on petitioner's collections lacks legal and factual basis, and this assessment item must be cancelled. Thus. computing the undeclared income of

a. Undeclared income from reconciliation of trade receivable and sales collected -P174,156,784.30

ending balances of petitioner's trade receivable account were considered rather than just the total credits:137 collections of P174,156,784.30. This time, the beginning and A similar computation by respondent reflects undeclared

Trade Receivable, End. Collection Total Collection Sales per VAT Returns Sales of Goods (Per ITR/FS) Total Add: Other Income (Per VATR) Undeclared Collections Trade Receivable, Beg. Sales of Service - Power (Per ITR/FS) Loose Bagasse (plus year-end adj.) Molasses Sale of Scrap and Salvage Materials Rental, Agency Fees, and Others Handling and Storage Fees Sugar (VATable) Sugar (Non-VAT) 1,187,615,729.60 P643,478,356.40 P 6,397,060.00 242,423,774.00 47,768,472.10 1,837,105.00 634,443.00 P2,380,498,909.10 P2,312,707,169.10 P2,321,575,777.10 f174,156,784.30 2,121.286,332.10 2,147,418,992.80 P241,948,523.00 67,791,740.00 17,264,054.00 8,868,608.00

period collections and other adjustments to the receivable account. However, respondent failed to consider petitioner's prior

assess petitioner for undeclared income arising from the undeclared collection in the VAT Returns simply because As discussed earlier, it is erroneous for respondent to

petitioner is required by law to declare in the VAT Returns its sales of goods upon the issuance of sales invoices and sales of

total sales are made up of more than 99% sales of goods, respondent's computation failed to capture any undeclared services upon the issuance of official receipts. Since petitioner's

income

W

137Exhibit "P-23", Docket -- Vol. II, p. 1219.

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION Page 27 of 31

September 30, 2017, amounting to P145,647,112.00, must be cancelled for lack of basis. Thus, petitioner's total deficiency VAT for FY ending

deficiency deficiency EWT for FY ending Petitioner is not liable for September 30, 2017. FWV and

resident foreign corporations (NRFC) that based on the returns filed that were not subjected to final withholding VAT.? Thus, P135,821.08, including increments, pursuant to Sec. 114(C) of the 1997 NIRC, as amended:138 respondent assessed a deficiency FWV in the amount of Respondent found that "there were payments to non-

Income payments not subjected to FWV P589,829.32139 Basic FWV Due P70,779.52 Surcharge (25%) Interest 47,346.68 17,694.88

Total amount due P135,821.08

provided these payments do not exceed the threshold of P1,919,500.00.140 withholding percentage tax for income payments to NRFCs, Petitioner counters that it is, at most, subject only to a 3%

We find for respondent.

Section 4.114-2(b) of RR No. 16-2005,141 as amended by RR No. 4-2007,142 provides:

Money Payments and Payments to Non-Residents. SEC. 4.114-2. Withholding of VAT on Government

(b) The government or any of its political subdivisions, instrumentalities or agencies including GOcCs, as well as private corporation," individuals, estates and trusts, whether large or non-large taxpayers, shall withhold

3 Exhibit "P-23", Docket -- Vol. II, pp. 1217, 1219. 30 See Exhibit "p-19", Docket -- Vol. f, p. I169. 140 AX Docket -Vol.III, pp. 1534-1535, Memorandum for Petitioner, pars. 201-203. SUBJECT: Consolidated Value-Added Tax Regulations of 2005. A? SUBJECT: Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known

as the Consolidated Value-Added Tax Regulations of 2005.

CTA Case No. 10726 Hawaiian-Philippine Company v. Commissioner of Intermal Revenue DECISION Page 28 of 31 K

twelve percent (12%) VAT, starting February I, 2006, with respect to the following payments:

by non-residents; and (1) Lease or use of properties or property rights owned

non-residents. [Emphasis supplied] (2) Other services rendered in the Philippines by

returns for FY ending September 30, 2017, shows that petitioner did not report any purchase of services from non- residents.143 However, an examination of petitioner's quarterly VAT

the breakdown of the assessed amount as follows:144 The Details of Discrepancies attached to the PAN reflect

NRFCs Income Payment Tax Due Actom PTY Ltd f184,193.32 P22,103.20

Kimberly HK Trading and Consultancy Co Ltd David Hale Consulting 202,984.00 202,652.00 24,318.24 24.358.08

Total P589,829.32 70,779.52

breakdown145 is neither shown in the Details of Discrepancies This item was retained in the FLD/FAN, but the foregoing

nor in the FDDA.146

increments, thus:147 deficiency EWT amounting to P7,513,120.95, including On the other hand, respondent assessed petitioner for a

During audit, it was uncovered that income payments amounting to Php254,311,030.50 were not subjected to the corresponding EWT rates pursuant to Sections 57 and 58 of on EWT amounting to Php5,086,220.61. the [NIRC], as amended... These resulted to a basic deficiency

Petitioner contends that the PAN, FLD/FAN and FDDA provided no specific details, computations, or breakdowns showing how the amount was derived. In a separate audit working paper received by petitioner before the issuance of the PAN, respondent's revenue officers listed petitioner's expenses

143 Line 21K/L, Exhibits "P-7-2", "P-7-5" "p-7-8" and "P-7-11", Docket Vol. II, pp. 1023, 1031, 1040 & 1046

14 Exhibit "P-17, Docket -- Vol. II, p. I141 respectively

A6 Exhibit "P-19", Docket -- Vol. II, p. 11'74.

Exhibit "P-23, Docket - Vol. II, p. 1219. Exhibit "P-23, Docket -Voi. II. p. 1219.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue Page 29 of 31 DECISION CTA Case No. 10726

as per the AFS for FY ending September 30, 2017,148 and compared them with the total income payments reported in the returns.149

FDDA shows that there are no specific details or computations explaining the assessed amount. This omission violates petitioner's right to due process. In Commissioner of Internal Revenue v. Enron Subic Power Corporation,15o the Supreme Court has ruled that: Indeed, an examination of the subject PAN, FLD/FAN, and

were not valid substitutes for the mandatory notice in writing were mere perfunctory discharges of the CIR's duties in correctly assessing a taxpayer. The requirement for issuing informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the requirement of issued an advice, a preliminary letter during the pre- employee of Enron, as well as the preliminary five-day letter, of the legal and factual bases of the assessment. These steps a preliminary or final notice, as the case may be, what such notice must contain. Just because the CIR assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was The advice of tax deficiency, given by the CIR to an

made.

and assessment notice. Thus, such cannot be presumed. and RR No. 12-99 would be rendered nugatory. The alleged the assessment be stated in the formal letter of demand Otherwise, the express provisions of Article 228 of the NIRC "factual bases" in the advice, preliminary letter and "audit working papers" did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice. [Emphasis supplied] The law requires that the legal and factual bases of

amounting to P135,821.08 and P7,513,120.95, respectively, are Thus, the deficiency FWV and EWT assessments,

cancelled'due to lack of factual basis in the Details of Discrepancies attached to the FLD/FAN.

150 Supra note I26. Exhibit "R-11", BIR Investigation Records, pp. 191-192 Docket --Vol. II, pp. 1536-1537, Memorandum for Petitioner, pars. 212-213.

Hawaiian-Philippine Company v. Commissioner of Internal Revenue DECISION CTA Case No. 10726 Page 30 of 31

Petitioner is not liable for

FY ending September 30, 2017. administrative penalties for

Memorandum Order (RMO) No. 19-2007,152 as amended by P140,000.00151 in accordance with Sections 249 and 255 of the NIRC of 1997, as amended, and as implemented by Revenue RMO No. 7-2015.153 Respondent also imposed administrative penalties of

2015, "compromise penalties are only amounts suggested in settlement of criminal liability and may not, therefore, be pay them. It is well-settled that the Court has no jurisdiction to imposed or exacted on the taxpayer" if the taxpayer refuses to compel a taxpayer to pay a compromise penalty, as it implies a This imposition cannot be sustained. Under RMO No. 7.

mutual agreement between the parties with respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer.154

compromise penalty, its imposition should be cancelled. The Absent a showing that petitioner consented to the

is illegal and unauthorized.155 imposition of the same without the conformity of the taxpayer

taxes for FY ending September 30, 2017. In summary, petitioner is not liable for any deficiency

must stem from a valid assessment.156 While respondent's findings enjoy a presumption of correctness, it is an established As a final note, the BIR's right to collect deficiency taxes

doctrine that the same must still be based on actual and verifiable facts, not mere presumptions.157

05 Exhibit "P-23", Docket -- Vol. II, p. 1220. SUBJECT: The Revised Consolidated Schedule of Compromise Penalties for Violations of the National Internal Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., G.R. No. 35266, January 21, 1991 [Per J. Prine Steel Mill, Inc. Commissioner of Internal Revenue v. Island Garment Manufacturing Corporation. G.R. No. L-46644, September The Philippines International Fair. Inc. v. The Collector of Internal Revenue, et al., G.R. Nos. L-12928 & L-12932, Revenue Code SUBJECT: the National Internal Revenue Code. March 31. 1962 [Per J. Dizon, En Banc]. Narvasa, First Division] Dimaampao, Third Division] The Consolidated Commissioner of hnternal Revenute, G.R. No. 249153, September 12, 2022 [Per J. Revised Schedule of CompromisePenalties for Violations of

11, 1987, [Per j. Padilla, Second Division], quoting Collector of Internal Revenue v. Benipayo, G.R. L-13656, January 31, 1962 [Per J. Dizon, En Banc].

DECISION

Hawaiian-Philippine Company v. Commissioner of Internal Revenue CTA Case No. 10726 Page 31 of 31

instant Petition for Review is GRANTED WHEREFORE, in light of the foregoing considerations, the

Accordingly, the Formal Letter of Demand and Final Assessment Notice Nos. IT-2017-00047, VT-2017-00014,WG- 2017-00011, WE-2017-00049, and administrative penalties are CANCELLED and SET ASIDE. Furthermore, the Final Decision

assessing petitioner of deficiency income tax, value-added tax, fiscal year ending September 30, 2017, are REVERSED and on Disputed Assessment issued on September 10, 2021, final withholding VAT, and expanded withholding tax for the SET ASIDE

SO ORDERED

111A LANEE'S. CUI-DAVID

Associate Justice

WE CONCUR

XXX ROMAN G. DEL ROSARIO

Presiding Justice

JEAN MARIEA BACORRO-VILLENA

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 before the case was assigned to the writer of the opinion of the Court.

ROMAN G. DEL ROSARIO

Presiding Justice