KALAYAAN ENGINEERING COMPANY INC., v. COMMISSIONER OF INTERNAL REVENUE

CTA Form No.8 llllllllllllllllllllllllllllllll llllllll lll lllllllllllllllllll 22-000168-0077 REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION CTA CASE NO. 10839 KALAYAAN ENGINEERING NOTICE OF DECISION COMPANY INC., Petitioner, - versus- COMMISSIONER OF INTERNAL REVENUE, Respondent. To: OFFICE OF THE SOLICITOR GENERAL 134 Amorsolo Street, Legazpi Village Makati City ATTY. ALBERT C. ARPON ATTY. CARL FITRI A. H USS IN ATTY. JONELLE ELLINE A. MAGALONG Bureau of Internal Revenue - R evenue Region 8A 36th Floor, Legal Di vision, Export Bank Plaza Building 3 13 Sen. Gi l Puyat Avenue com er Chino Roces Avenue Makati City HECHANOVA BUGAY VILCHEZ & ANDAYA-RACADIO Ground Floor, Salustiana D . Ty Tower I04 Pasco de Roxas Avenue 1229 Makati City GREETINGS: You are hereby notified by these presents that on October 29, 2025, a Decision was rendered in the above-entitled case, copy of which is attached hereto. Quezon City, Philippines, October 30, 2025. .. Atty. Maria J~F. Chan-Te Executive Com1 III

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION KALAYAAN CTA CASE NO. 10839 ENGINEERING COMPANY INC. , Members: Petitioner, BACORRO-VILLENA, Acting Chairperson) and CUI-DAVID, JJ. -versus- COMMISSIONER OF Promulgated: INTERNAL REVENUE, , Respondent. OCT 2~ -y(JfM X- - - - - - - - - - - - - - - - - - - - - - - ~ - - - - - - - - - - - - - X DECISION CUI-DAVID, J.: Before the Court is a Petition for Review filed by petitioner, Kalayaan Engineering Company Inc. (petitioner), praying that, after trial on the merits, judgment be rendered cancelling the deficiency assessment on Income Tax (IT) , Value-Added Tax � (VAT), Expanded Withholding Tax (EWT), Withholding Tax on Compensation (WTC), Documentary Stamp Tax (DST) , and Compromise Penalty, for the taxable period January 1, 2016 to December 31, 2016, in the total amount ofP31,547,253.48.1 THE PARTIES Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines.2 It is registered with the Bureau of Internal Revenue (BIR) under Certificate of Registration OCN No . 048RC20220000000259, with Taxpayer Identification Number (TIN) 000-126-408-00000, w/ 1 Docket- Vol. I, p. 22, Petition for Review, Prayer. !d. at 30- 36, Exhibit " P-2''.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X and has its registered address at 4253 Emilia St., Palanan 1235 City of Makati. 3 Respondent is the duly appointed Commissioner of Internal Revenue (CIR or respondent), vested with the authority to act as such, including, among others, the power to authorize the examination of taxpayers' books of accounts and to issue and decide deficiency assessments of internal revenue taxes. 4 THE FACTS On September 18, 2017, petitioner received Letter of Authority (LOA) No. AUDM35/014060/2017 / eLA20 1500048959 dated September 6, 2017, 5 authorizing Revenue Officer (RO) Kharima M. Simbanatao and Group Supervisor (GS) Conchita Ladrera to examine its books of accounts and other accounting records for all internal revenue taxes for taxable year (TY) 2016.6 On February 1, 2019, petitioner received an undated Notice for Informal Conference. 7 Thereafter, on July 31, 2019, petitioner received a copy of the Preliminary Assessment Notice (PAN) dated July 26, 2019, with attached Details of Discrepancies, s informing petitioner that after investigation, there has been found due from it, deficiency Income Tax, VAT, WTC, EWT, DST, and compromise penalty totaling N4,901,072.47, inclusive of increments, for TY 2016. On September 12, 2019, petitioner received the Formal Letter of Demand and Assessment Notices (FLD/FAN) Parts I and II with Details ofDiscrepancies, dated September 10, 2019,9 assessing petitioner of internal revenue taxes and compromise penalty in the aggregate amount off'45,276,644.01 forTY 2016. !d. at 519 and 37-39, Joint Stipulation of Facts and Issue (JSfl), Stipulation of Facts. par. 2: ,and. Exhibit "P-r. respectively. !d. at 7 & 312, Petition for Review, par. 4. \Vhich \vas not specifically denied in Answer, par. 7.2, respectively, and therefore deemed admitted. !d. at 7 & 312, Petdionfor Review, par. 5 vis-0-vis Answer. par. 8. respectively. Exhibits "P-4" and "R-1" to �'R-1-B''. BlR Records- folder 6 of 6 (Exhibit "R-8"). p. 2. !d. at 706. Exhibit "R-2'". Docket- Vol. L pp. 7 & 312. Petition for Review. par. 6 vis-Q-vis Answer, par. 8 respectively: Exhibits ��p.y� and "R-4-A to "R-4-G", BlR Records- Folder 6 of 6 (Exhibit "R-8"). /d., Petition/or Review, par. 7 vis-it-vis Answer, par. 8. respectively; Exhibits ��P-6" and "R -5-A .. to �'R-5-M'', BlR Records- Folder 6 of6 (Exhibit "R-8").

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X On October 11, 2019, petitioner filed a Protest and Request for Re-investigation.!o On March 21, 2022, petitioner received the Final Decision on Disputed Assessment (FDDA) dated March 10, 2022,11 which adjusted the deficiency tax assessment against petitioner in the total� amount of P31,547,253.48, inclusive of increments, computed as follows: Tax Type Basic Deficiency Surcharge Interest Compromise Total Tax Penalty Income Tax I' 1'10,508,983.74 1'26,496,725.76 VAT 1'15,987,742.02 - 56,353.09 I' 136,725.39 WTC 80,372.30 - EWT - 1,514,378.38 3,657,477.44 DST 2,143,099.06 - 261,286.93 - 631,051.70 Corh promise 369,764.77 - 219,564.44 - 605,273.19 Penalty 308,567.00 77,141.75 - TOTAL - 20,000.00 1'31,547,253.48 - - - 20,000.00 1'77,141.75 1'18,889,545.15 1'12,560,566.58 P20,000.00 On April 19, 2022, petitioner filed the present Petitionfor Review. 12 On July 1, 2022, within the period granted by the Court,13 respondent filed his Answer, 14 raising special and affirmative defenses, to wit: (a) petitioner failed to present relevant documents; and (b) petitioner's claim should be dismissed due to insufficiency of evidence. On July 13, 2022, respondent transmitted the BIR Records of the case, consisting of2,669 pages divided into six (6) parts.1s In a Resolution dated July 14, 2022, 16 the parties were directed to appear personally, or through their authorized representative/ s, before the Philippine Mediation Center - Court of Tax Appeals (PMC-CTA) on August 11, 2022. However, mediation was declared unsuccessful per the Mediator's Report v dated January 10, 2023, submitted on January 11, 2023. 17 10 Exhibit ��P-7", BIR Records- Folder 5 of6 (Exhibit �'R-8"), pp. 751-766. 11 Docket- Vol. I, pp. 7 & 312, Petition for Review, par. 9 vis-a-vis Ans>ver. par. 8. respectively: Exhibits .. p.s�� and "R-7", BlR Records- Folder I of6 (Exhibit �'R-8"), pp. 2587-2593. 12 Docket- Vol. I, pp. 6-25. 13 !d. at 304-306. & 310. Respondent's Aiorionfor Eaension of Time to File Answer dated May 30. 2022, and Resolution dated June 20, 2022. respectively. 14 !d. at311-319. 15 ld. at 376, Compliance dated July 11,2022. 16 !d. at 378. 17 !d. at 403.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x On March 7, 2023, petitioner filed an Urgent Omnibus Motion to Suspend Collection of Taxes and to Lift Warrant of Distraint and/ or Levy & Garnishment.ls Respondent submitted his Comment/Opposition via accredited courier on March 27, 2023. 19 At the hearing held on March 30, 2023, . petitioner presented the testimony of its Finance and Accounting Manager, Ms. Mercedita J. Pascua1.2o On April 14, 2023, petitioner filed its Formal Offer of Evidence to the Urgent Motion to Suspend Collection of Taxes. 21 Respondent filed his Comment/ Opposition (on Petitioner's Formal Offer of Evidence dated April 14, 2023) on April 27, 2023. 22 In a Resolution dated July 21, 2023,23 the Court: 1. Admitted petitioner's offered exhibits for its Urgent Omnibus Motion, except Exhibits "P-8" and "P-15", for petitioner's failure to submit the originals for comparison, and Exhibit "P-15-A", for petitioner's failure to submit the duly marked exhibit; 2. Partially granted petitioner's Urgent Omnibus Motion; 3. Suspended the collection of the alleged deficiency taxes, subject to the posting of the bond by petitioner; 4. Ordered respondent to lift and set aside the Warrant of Distraint and/or Levy (WDL) dated February 8, 2022; 5. Enjoined respondent, his representatives, agents, or other persons acting on his behalf from executing, enforcing, implementing, or otherwise giving effect to said WDL, and from pursuing any administrative action for collection of petitioner's alleged taxes subject of the present case unless subsequently ordered by the Court; and 6. Directed petitioner to post the required cash and surety bond stated therein. On August 18, 2023, petitioner filed a Partial Motion for Recor:-sideration, 24 praying that the Resolution dated July 21, 18 /dat416-424. 19 !d. at 481-484. 20 !d. at 462-466 and 488-494. Exhibit "P-14..; Minutes of the hearing held on. and Order dated. March 30. 2023, respectively. 21 Id at 507-509. 22 /dat513-515. 23 Docket- Vol. II, pp. 558-569. " /d at 601-606.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X 2023 be modified, and the bond requirement for the lifting of the WDL and Garnishment dated February 8, 2023 be removed. Respondent filed his Comment/ Opposition (on Petitioner's Partial Motion for Reconsideration dated 18 August 2023) on August 29, 2023. 25 In a Resolution dated October 26, 2023,26 the Court: 1. Denied petitioner's Partial Motion for Reconsideration for lack of merit; and 2. Gave petitioner a new and non-extendible period of ten (10) days to post a cash or surety bond equivalent to the amount of the basic deficiency taxes claimed. Due to petitioner's failure to post the required bond despite notice,27 the Court, in its Resolution dated December 1, 2023,28 recalled and set aside the Resolution dated July 21, 2023, granting petitioner's Urgent Omnibus Motion. On November 15, 2023, petitioner submitted a copy of its Petition for Certiorari with Prayer for Temporary Restraining Order/ Writ of Preliminary Injunction29 filed before the Supreme Court, praying that: (1) the Resolutions dated July 21, 2023 and October 26, 2023 be modified, and the bond requirement for the lifting of the WDL and Garnishment dated February 8, 2023 be removed; and (2) that a Temporary Restraining Order /Writ of Preliminary Injunction be issued to enjoin this Court from implementing the said Resolutions. Meanwhile, the Pre-Trial Conference was held on March 30, 2023. 3D Prior thereto, Petitioner's Pre-Trial Brief31 and Respondent's Pre-Trial Briej32 were both submitted on March 24, 2023. On April 28, 2023, the parties submitted their Joint Stipulation of Facts and Issues, 33 which was approved by the Court in its Resolution dated May 23, 2023, 34 thereby � 25 Id. at 626--629. " /d. ai 646 649. 27 /d. at 725, Records Verification dated November 22, 2023 issued by the Judicial Records Division of this Court. 28 /d. at 885�8. 29 /d. at 726-742. �10 Docket- Vol. I, p. 412, Resolution dated January 20, 2023; 413-415. Notice of Pre-Trial Conference dated January 26. 2023; 488-494, t\:finutes of the hearing !wid on, and Order dated. I\'farch 30, 2023. 31 /d. at 445-449. " ld. at45J-458. 33 !d. at 519-525. 34 !d. at 529-530.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x terminating the Pre-Trial. The Pre-Trial Order dated August 4, 2023 was then issued. 35 Trial ensued, during which both parties presented and offered their respective testimonial and documentary evidence. Petitioner presented the testimonies of two witnesses: (1) Ms. Mercedita J. Pascual,36 AVP-Finance and Administration; and (2) Mr. Wilfrido C. Rodriguez, 37 the Court-commissioned Independent Certified Public Accountant (ICPA). 38 The Report of the ICPA was filed on November 8, 2023. 39 On January 29, 2024, Petitioner's Formal Offer ofEvidence was filed, 40 to which respondent filed his Comment/Opposition (To Petitioner's Formal Offer of Evidence) via accredited courier on February 5, 2024.41 In a Resolution dated April 17, 2024,42 the Court admitted petitioner's offered exhibits, except Exhibits f"oPu-n1d29i1n6t'"he"Pre-1co2r9d3s0'o"f"tPh-e1c2a9s3e5.'" and "P-12936'" for not being Respondent, for his part, presented the testimony of RO Kharima M. Simbanatao.43 On July 19, 2024, respondent filed his Formal Offer of Evidence, 44 to which petitioner submitted its Comment To Respondent's Formal Offer of Evidence dated July 19, 2024, on July 29, 2024.45 In a Resolution dated September 6, 2024,46 the Court admitted all of respondent's offered exhibits. Respondent's Memorandum 47 and Petitioner's Memorandum4B were both filed on October 14, 2024. 35 Docket- Vol. II, pp. 572-583. 36 Exhibit ��P-11 '",Docket- Vol. I, pp. 159-169; Docket- Vol. II, pp. 587-588, Order dated, August 9, 2023. 37 Exhibit �'P-18", Docket- Vol. II, pp. 685-D90; Docket- Vol. II. pp. 886-A to 886-8, Order dated January 23. 2024. 38 /d. at 636 and 637-638, Oath of Commission dated September 21, 2023 and Order dated September 21, 2023, respectively. " ld. at 652-D82. Exhibit ""P-30"". " Jd. at888-898. 41 ld. at 900-902. " Jd. at 909-911. 43 ld. at 915-928 and 936-938, Exhibit ��R-9'' and Minutes of the hearing held on. and Order dated, July 16,2024, respectively. 44 Id. at 941-94 7. 45 !d. at 951-957. 46 ld. at 964-965. 47 Jd. at 967-974. 48 !d. at 967-983.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner oflnternal Revenue X----------------------------------------------------------------------------------------X The case was submitted for decision on November 7, 2024.49 THE ISSUE As stipulated by the parties, the sole issue for resolution lS: WHETHER PETITIONER IS LIABLE FOR DEFICIENCY ASSESSMENT ON IT, VAT, WC, WE, DST, AND COMPROMISE PENALTY IN THE TOTAL AMOUNT OF P31,547,253.48.so Petitioner's arguments: Petitioner submits that the deficiency Income Tax be withdrawn and cancelled based on the following: 1. Sales/receipts not subjected to mcome tax !'29,040,527.07 Petitioner claims that while such amount was received by petitioner during the taxable year, the same does not constitute unreported revenues/undeclared income for income tax purposes as this amount represents sales already reported as income under the accrual method in the previous years (booked as receivables in previous years but collected in the current period). 51 2. Disallowed expenses- !'5,541 ,117.20 Petitioner asserts that such disallowance is erroneous as the payments thereon were made to validly registered taxpayers, and that all expenses claimed are properly substantiated.s2 3. Salaries and wages not subjected to withholding tax- !'17,208,835.34 Petitioner contends that the subject adjustment IS improper as respondent merely considered the 49 !d. at 987, Notice of the Resolution dated November 7, 2024. 50 Docket- Vol. II, p. 579, Pre-Trial Order: Docket- Vol. I, p. 519. JSFI, Issue. 51 Docket- Vol. II, p. 974, Petitioner's .Hemorandum, par. 43. 52 !d. at 974, Petitioner's Jfemorandum. par. 46.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue JC----------------------------------------------------------------------------------------x returns pertaining to its head office in Makati, when in fact, it likewise files and remits withholding tax on compensation in its branch office in Cebu, for its Cebu- based employees; and that respondent failed to take into account the other non-taxable compensation consisting of de minimis benefits and non-taxable bonuses.53 4. Disallowance of creditable taxes withheld- P450,597.84 Petitioner insists that its documents will bear that all creditable taxes applied against income tax payable in the current period were in order and, thus, should not have been disallowed. 54 5. Excess Minimum Corporate Income Tax (MCIT) over Normal Income Tax -P970,541.00; and Excess credit carried over to succeeding period- P13,695,667.00 Petitioner disagrees with such disallowances as no less than the CTA has ruled that excess tax credits (whether excess MCIT or excess Creditable Withholding Tax [CWT]) carried over by a taxpayer to the succeeding taxable years should not be disallowed in the current year's tax audit since any benefit that may be derived from the carry-over will pertain to the succeeding taxable year. 55 Petitioner also submits that the deficiency VAT assessment should be set aside, withdrawn, and cancelled, for having no basis in fact and in law, as petitioner has supporting documents that could substantiate its input VAT claims. These include those payments/ expenses cited by the BIR as the cause of these disallowances. 56 Petitioner likewise insists that the deficiency EWT has no basis for failure of respondent to consider the following: (a) the nature of the payments which were not subjected to withholding tax; and (b) the amounts reflected in the income statement in the current period for financial statement purposes under the accrual method of accounting (e.g. rental) for which the pertinent withholding taxes had already been withheld and remitted in prior periods in accordance with Section 2.57.4 of 53 !d. at 975, Petitioner's i\4emorandum. pars. 48--49. 54 !d. at 975, Petitioner's Alemorandum, par. 53. 55 !d. at 976. Petitioner's lv!emorandum, par. 57. 56 /d. at 977-978, Petitioner's Memorandum, pars. 64-65.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Revenue Regulations (RR) No. 2-98, as amended. On the alleged unwithheld taxes applicable to payments for the purchase of goods, petitioner claims that these payments were actually the amount of materials reported by petitioner as part of its Cost of Sales/Services in its Income Tax Return (ITR) and Income Statement. These materials were sourced from petitioner's inventory, for which withholding taxes had already been paid and remitted in the preceding period.57 As for the deficiency WTC, petitioner reiterates its explanation and defenses stated in the above-stated deficiency Income Tax. ss Petitioner also disagrees with the DST assessment on the following grounds: (1) the amount of P11, 114, 140.00 under "Due to Related Parties" constitute payments on outstanding accounts, for which DST had already been paid; (2) the amount of 1"46,762,077.00 under "Increase in Borrowings" constitutes amounts due to financial institutions for which DST has already been withheld from loan proceeds or paid for by said financial institution; and (3) the amount of 1"3,837 ,061.00 under "Advances to Officers" does not constitute loans subject to DST but constitutes amounts which were advanced for the purcJ::lases of goods and services to be liquidated by said officers. 59 Lastly, petitioner claims that it has timely filed the required BIR Form for DST and, thus, the compromise penalty has no basis.so Respondent's counter-arguments: Respondent contends that petitioner's claims should be dismissed due to insufficiency of evidence; that respondent fully complied with the due process requirement under Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, and RR No. 12-99, as amended by RR No. 18-2013; that petitioner is liable for the deficiency Income Tax, VAT, WTC, EWT, DST, and compromise penalty; and that the necessity of provi!lg that the tax assessment is invalid lies with the party assailing the validity of the assessment. " !d at 978-979. Penrwne1 's \femorandum. pars 69-73 V' 58 !d. at 980, Petitioner's Memorandum, par, 78. 59 !d. at 981, Petitioner's Memorandum, par. 82. 60 Jd. at 982. Petitioner's Memorandum, par. 85.

DECISION CTA Case No. 10839 Ka1ayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X THE COURT'S RULING The present Petition for Review is partly meritorious. The Petition for Review is timely filed. Before delving into the merits, the Court must first determine whether it has jurisdiction to take cognizance of the present Petition for Review. Section 7(a)(1) and (2) of Republic Act (RA) No. 1125,6 1 as amended by RA No. 9282,62 vests in the CTA exclusive appellate jurisdiction over decisions and inactions of the CIR, vzz.: SEC. 7. Jurisdiction.- The CTA shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: (1) Decisions of the [CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; (2) Inaction by the [CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, ... (Emphasis supplied) Complementing this, Section 11 of RA No. 1125, as amended, prescribes the period to file an appeal: SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling, or inaction of the [CIR]... 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 !"IXed by law for action as referred to in Section 7(a)(2) herein. (Emphasis supplied) \tl Gl An Act Creating the Court ofTi.l..x Appeals, June 16, 195...J-. 62 An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating Its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging Its Membership, Amending for the Purpose Certain Sections of Republic J\ct No. !125, as Amended. Otherwise Known as the La\v Creating the Court ofTax Appeals. and for Other Purposes, March 30, 2004.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X The above provisions are likewise provided under Section 3(a)(1) and (2), Rule 463 and Section 3(a), Rule 864 of the Revised Rules of the Court of Tax Appeals (RRCTA). Clearly, the CTA has jurisdiction over appeals from decisions of the CIR, provided the appeal is filed within thirty (30) days from petitioner's receipt of such decision. Here, petitioner received the FDDA on March 21, 2022. Counting 30 days therefrom, petitioner had until April20, 2022 to file an appeal with this Court. Thus, the instant Petition for Review filed on April19, 2022, was timely. Petitioner is liable for deficiency Income Tax for the taxable year 2016. Per the FDDA, respondent assessed petitioner of deficiency Income Tax amounting to P26,496,725.76, including increments, for the TY 2016, thus:6s Taxable income per return 1'1 ,332,321.00 Add: Discrepancies per investigation 1'29,040,527.07 51,790,479.61 Sales not subjected to income tax 5,541,117.20 1'53,122,800.61 Disallowed expenses (Annex A) Salaries and wages not subjected to withholding Tax 17,208,835.34 Taxable Income per investigation Income Tax Due 1'15,936,840.18 1'15,065,904.00 Less: Total tax credits/payments 1'450,597 .84 Less: Discrepancies per investigation Disallowed creditable taxes withheld (Annex B) 63 SEC. 3. Cases Within the Jurisdiction ofthe Court in Divisions.- The Court in Divisions shall exercise: (a) Exclusive original or appellate jurisdiction to revie\v by appeal the following: (I) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal reveriue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue; (2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable la\V provides a specific period for action: SEC. 3. Who may appeal; period to file petition. - (a) A party adversely affected by a decision, ruling, or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner oflnternal Revenue to act on the disputed assessments. In case of inaction of the Commissioner of Internal Revenue on claims for refund of internal revenue taxes erroneously or illegally collected, the taxpayer must file a petition for review \vi thin the two-year period prescribed by law from payment or collection of the taxes. 65 Exhibits �'P-8" and "R�7", BIR Records- Folder I of 6 (Exhibit "R�8"), p. 2593.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Excess Minimum Corporate 970,541.00 15,116,805.84 (50,90 1.84) Income Tax (MCIT) over normal 13,695,667.00 1'15,987,742.02 income tax I' 2,277,705.71 Excess credit carried over to the 8,231,278.03 10,508,983.74 succeeding period 1'26,496,725.76 Basic tax due Add: Interest 20% (Apr.16, 2017 to Dec. 31, 2017) Interest 12% (Jan. 1, 2018 to Apr. 15, 2022) TOTAL AMOt[NT DUE The following items, which are addressed in detail hereafter, comprise the foregoing assessment: a) Sales/Receipts not subjected to Income Tax 1"29,040,527.07 b) Disallowed Expenses f' 5,541,117.20 c) Salaries and Wages not subjected to Withholding Tax 1"17,208,835.34 d) Disallowed Creditable Taxes Withheld f' 450,597.84 e) Excess MCIT over Normal Income Tax f' 970,541.00 f) Excess Credit Carried Over to Succeeding Period 1"13,695,667.00 a) Sales/Receipts not subjected to Income Tax- ?29, 040,527.07 Respondent's examiner found sales/receipts that are allegedly not subjected to income tax, computed as follows: 66 Sales/Receipts per VAT Return . 1'648,268,484.28 Add: Accounts Receivable, end (1'319,865,563.00/ 1.12) 285,594,252.68 42,668,273.00 Deferred Revenue1 beg. 1'976,531 ,009.96 Total Less: Accounts Receivable, beg. I' 163,055,825.8967 (1'182,622,525.00/ 1.12) 60,559,872 .oo6s 947,490,482.89 Deferred Revenue, end 723,874,785.0069 P29,040,527.07 Sales/Receipts per Income Tax Return (ITR) ' Sales/Receipts not subjected to Income Tax From the foregoing computation, it is clear that respondent compared petitioner's sales per VAT Returns with its sales per ITR, including petitioner's collection from accounts receivable and realized deferred revenue, to arrive at the sales not subjected to income tax. Petitioner avers that respondent failed to consider that sales. reported for VAT purposes do not necessarily equal the amount of sales reported for income tax purposes, 70 and while M Schedule 1. Annex J\. Exhibits "P-6'' and "R-s-c��. I31R Records- Folder 6 of6 (Exhibit "'R-8.. ). 1l 'J/ ' ,, Refer to Exhibits "P-5" and "R-4-B", BIR Records- Folder 6 of 6 (Exhibit "R-8"). 68 !d. 69 !d. 70 Docket- Vol. II, p. 973, Petitioner's Jfemorandum, par. 36.

DECISION CTA Case No. 10839 � Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x the amount ofP29,040,527.07 was received by petitioner during the TY 2016, the same does not constitute unreported revenues/undeclared income for income tax purposes as this amount represents sales already reported as income in the previous years. 71 Petitioner further claims that respondent "might have overl6oked the fact that not all receipts received by the Petitioner from its clients constitute income for the taxable period".72 Petitioner continues that the advances received from its clients (usually in the form of mobilization fees) do not constitute revenue or income at the point of receipt. Further, as an entity engaged in long-term construction contracts, it is required to report its income on the basis of the percentage of completion pursuant to Section 48 of the NIRC of 1997, as amended.73 It likewise contends that it reports its income on an accrual basis, which means that income earned and accrued during the taxable year is reported as revenue, whether collected in said year or not.74 On the other hand, all of petitioner's receipts on its service contracts, regardless of whether they pertain to past, present, or future sales, are reported in its VAT Returns in the period when these are received,75 Notably, the ICPA verified petitioner's general ledger of accounts receivable and deferred revenue and revenue accounts, together with Billing Statements, Sales Invoices (Sis), Official Receipts (ORs), and other supporting documents. 76 Taking into consideration the contract sales, sale of materials, downpayment, and retention, adjustments for recoupment of downpayment, retention, withholding tax, revenue and downpayment, and job in progress, VAT, and accounts payable, 77 the ICPA's findings on the verification of petitioner's accounts receivable are as follows: 78 71 /d. at' 974, Petitioner's ;\Iemorandum, par. 43. 72 !d. at 972, Petitioner's Jfemorandwn, par. 32. 73 !d. at 972, Petitioner's .Hemorandum, pars. 33-34. 74 /d. at 973-974, Petitioner's ,\4emorandum, pars. 38 & 42. 75 Jd at 973, Petitioner's Memorandum. par. 35. 70 Exhibits "P-112'' to "P-899'', Annexes "A-I" to �'A-6", USB (Exhibit "P-30-B"); Exhibit "P-30", Docket- Vol. II. pp. 655-<561. 77 Docket- Vol. II, at pp. 655-657, Exhibit "P-30. 78 !d. at 657. Exhibit "P-30".

DECISION CTA Case No. 10839 Ka1ayaan Engineering Company Inc. v. Commissioner of Internal Revenue � x----------------------------------------------------------------------------------------x Table 10� Particulars Reference Amount Beginning Balance, Per Audited Financial Statements Exhibit "P-1 0" 1'182,622,525.00 (AFS) Table 5 761,480,444.82 Billings and Sis Table 6 Adjustments on billing_s Table 7 ll38,464,407.31)_ Receij)ts Table 8 (603, 121,623.60)_ Adjustments on receipts Table 9 Adjustments (10,071,369.86) 'Ending Balance Exhibit "P-1 0" 127,419,993.76 Ending Balance, Per AFS 319,865,562.81 Difference 319,865,563.00 P0.19 Similarly, the !CPA's findings on the verification of petitioner's deferred revenue account, including adjustments, are summarized below:79 Table 11� Particulars Reference Amount Be2:innin_g_ Balance, Per AFS Exhibit "P-1 0" f'42,668,273.00 Down payment billings Table 5 50,637,284.03 Recoupment of down payment on contract sales subject to VAT from Table 6 (72,951 ,320.28) billings Recoupment of down payment on Table 6 (1,920,000.00) contract sales is not subject to VAT Table 6 8,631.00 from billings Table 8 Table 9 (1,287,337.02) Down_pay_ment adjustment on billing_s Annex D-1 45,923,747.90 Recoupment of down payment from collection receipts Annex D-2 (21 ,301,094 .89) Adjustments from accounts receivable Annex D-3 Recoupment of down payment from 17,160,671.13 sales receipts Annex F Down payment from sales receipts Exhibit "P-10" 1,890,000.00 subject to VAT . (480,265.90) 60,348,588.97 Down payment from sales receipts not 60,559,872.00 P211,283.03 subject to VAT Adjustments Ending Balance Ending Balance, Per AFS Difference Finally, for petitioner's revenue account, the ICPA reported the following findings:so Table 12� Reference Amount Table 5 1'565,849,467.64 Particulars Revenue from billings of contract sales subject to VAT 70 !d. at 658. Exhibit "P-30". 80 !d. at 659, Exhibit "P-30".

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Revenue from billings of contract Table 5 26,545,195.77 sales not subject to VAT Table 5 3,518,669.90 Revenue from billings of sale of materials subject to VAT Table 5 50,917.86 Revenue from billings of sale of Table 6 (3,370.94) materials not subject to VAT Table 8 Revenue adjustments from billings Table 9 (5,241,145.67) Revenue adjustments from collection Annex E 176,144,808.63 receipts of billings Revenue from sales receipts Exhibit "P-1 0" (321 ,484.86) Adjustments 766,543,058.33 Total revenue from billings and 766,543,058.00 receipts Per AFS P0.33 Difference While the ICPA "found no exception on the recognition of revenue during TY 2016 using the accrual method of .accounting" ,81 petitioner is correct in stating that sales per VAT Returns do not necessarily equal sales per ITR for various reasons, such as the use of the accrual method of accounting and the percentage of completion revenue recognition. However, petitioner still failed to clearly account for the difference found by respondent. In fact, the ICPA found a discrepancy in the revenue amounts reported in the Audited Financial Statements (AFS) and ITR:82 Table 13� Reference Amount Exhibit "P-1 0" Particulars Exhibit "P-9" 1"766,543,058.00 Revenue per AFS 723,874,785.00 Revenue per ITR P42,668,273.00 Difference The Court emphasizes that tax assessments by tax examiners are presumed correct and made in good faith and .that the taxpayer has the duty to prove otherwise. 83 In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a BIR examiner and approved by his superior officers will not be disturbed because presumptions are m favor of the correctness of tax assessments.s4 Hence, for petitioner's failure to overcome the presumption of regularity in the performance of respondent's duties, the 81 !d. 82 !d. 83 Cagayan Robina Sugar Milling Co. v. Court ofAppeals, G.R. No. 122451. October 12,2000 [Per J. Qui sum bing, Second Division] 84 Sy Po v. Honorable Court ofTax Appeals. G.R. No. 81446, August 18, 1988 [Per J. Sarmiento, Second Division].

DECISION CTA Case No. 10839 Kalayaan Engineering Company 1nc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X assessment of sales/receipts not subjected to income tax in the amount ofP29,040,527.07 is upheld. b) Disallowed Expenses- ?5,541, 117.20 Per the FLD/FAN, respondent's investigation of the alphalist of payees from whom taxes were withheld disclosed that some payees are registered in the BIR ITS Database as local empl<;:>yees under Executive Order (EO) No. 98 and One-Time- Transaction (ONETT), while others have invalid or incorrect TINs. Hence, transactions with the aforesaid payees are considered unsupported with ORs/Sis pursuant to Section 34(A) of the NIRC of 1997, as amended. Further investigation of respondent disclosed that the claimed miscellaneous expense in the amount ofP2,000,000.00 paid to the City ofTaguig is not �supported by any official receipt.ss In the FDDA, the amount is adjusted from P10,822,471.90 to P5,541,117.20 to reflect the expenses duly substantiated with relevant documents.B6 The ICPA reports that the breakdown of the foregoing disallowed expenses as shown in Annex A of the FDDA B7 actually sum up to the amount of P5,602,076.00, as shown below: 88 Table 20� Reference Amount Annex G-189 Particulars Annex G-2 1'3,098,559.17 With available supporting documents 2,503,517.96 Without available supporting documents Total P5,602,077.13 Further verification by the Court shows that only the .following expenses amounting to P184,050.43 are substantiated with sufficient evidence, such as ORs or other adequate records pursuant to Section 34(A)( 1)(b) of the NIRC of 1997, as amended: Exhibit SU1111lier's Name Invoice OR/Invoice Amount of No. Date Number Income MERALCO EB lnv. Payment "P-1850" Apr. 27, 2016 SAN FERNANDO ELECTRIC LIGHT 4146043899929 1'818.99 "P-1869" AND POWER CORP. Jan. 21, 2016 OR 7849053 3,991.93 85 Annex A, Exhibits "P-6'' & "R-5-E'', 13IR Records- folder 6 of6 (Exhibit "R-8"). 86 Exhibits �'P-8" and "R-7", BIR Records- Folder I of6 (Exhibit "R-8"), p. 2591. 87 Exhibit "P-110", USB (Exhibit "P-30-B"). 88 Exhibit �'P-30'', Docket- Vol. II, p. 661. 89 Exhibits "P-1850" to �'P-2012", USB (Exhibit "P-30-B").

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x "P-1870" SAN FERNANDO ELECTRIC LIGHT Jan. 21,2016 OR 7849051 3,701.16 "P-1871" AND POWER CORP. "P-1872" Jan. 21,2016 OR 7849055 108.51 "P-1874" SAN FERNANDO ELECTRIC LIGHT 6,842.11 "P-1876" AND POWER CORP. Jan. 1,2016 OR 0001810 "P-1877" Jan. 9, 2016 187.00 "P-1880" ALAN C. DAVID MANAGEMENT Feb. 27, 2016 BILL 6,842.11 "P-1881" AND HOLDING COMPANY, INC. 201601091!8202 "P-1882" 138.17 CITY OF SAN FERNANDO WATER OR000)819 4,854.88 "~-1884" DISTRICT 5,004.10 Feb. 15, 2016 SOA9191483 "P-1885" ALAN C. DAVID MANAGEMENT 682.24 "P-1888" AND HOLDING COMPANY, INC. Apr. 16, 2016 SOA 9342309 2,490.82 "P-1889" 5,339.92 "P-1890" SAN FERNANDO ELECTRIC LIGHT Apr. 16, 2016 SOA 9342100 "P-1892" AND POWER CORP. Apr. 9, 2016 3,025.56 "P-1896" Jun. 20, 2016 B1LL "P-1897" SAN FERNANDO ELECTRIC LIGHT 20160409134078 1,789.90 "P-1898" AND POWER CORP. 5,224.12 "P-1900" OR 26939094 "P-1903" SAN FERNANDO ELECTRIC LIGHT 3,975.89 1 "P-1904" AND POWER CORP. Jun. 7, 2016 OR 8212286 4,132.12 "P-1905" Jun. 8, 2016 4,854.93 "P-1908" CITY OF SAN FERNANDO WATER Jun. 8, 2016 BILL 3,684.21 DISTRICT 20160608134078 6,842.11 6,009.09 ANGELES ELECTRIC SOA 3359171 2,051.01 CORPORATION 3,315.94 Jun. 16, 2016 SOA 9493994 SAN FERNANDO ELECTRIC LIGHT 188.88 & POWER CO., INC. Sep. 21, 2016 SOA 28831510 3,286.02 CITY OF SAN FERNANDO WATER Feb. 15, 2016 SOA 9551011 233.39 DISTRICT 645.19 Feb. 16, 2016 SOA 9154141 983.88 BALIBAGO WATERWORKS Jan. 20, 2016 31,500.00 SYSTEM, INC. Jan. 29, 2016 OR 0156 10,500.00 10,500.00 SAN FERNANDO ELECTRIC LIGHT Feb. 8, 2016 OR 0001818 10,500.00 & POWER CO., INC. BILL 361.89 Nov. 8, 2016 549.94 ANGELES ELECTRIC 20160208134014 426.73 CORPORATION Dec. 22, 2016 4,732.14 SOA 3748481 SAN FERNANDO ELECTRIC LIGHT Jan. 13, 2016 & POWER CO., INC. May 19, 2016 OR 27595307 Jan. 6,2016 EB Inv. SAN FERNANDO ELECTRIC LIGHT Jan. 30, 2016 & POWER CO., INC. Mar. 2, 2016 4116011!02036 Jun. 8, 2016 OR 1462296 NELSON MARICEL CANTANERO Jul. 2, 2016 Sep. 1, 2016 OR 0001328924 ALAN C. DAVID MANAGEMENT Oct. 2, 2016 AND HOLDING COMPANY, INC. Mar. 22, 2016 AR 000121611 Feb. 14, 2016 AR 000126675 CITY OF SAN FERNANDO WATER Mar. 9, 2016 DISTRICT Oct. 20, 2016 OR 7002 OR 7049 BALIBAGO WATERWORKS OR 7217 SYSTEM, INC. OR 7270 OR 0001418569 ANGELES ELECTRIC EB Inv. CORPORATION 4116021098315 OR 1044952 MERALCO SI 002812 "P-1913" MERALCO MERALCO (TAGAYTAY EXTENSION "P-1914" OFFICE) "P-1915" MERCANTILE STORE GROUP INC. "P-1916" MERCANTILE STORE GROUP INC. "P-1918" REESE DORMITORY "P-1919" REESE DORMITORY "P-1920" RE~SE DORMITORY "P-1921" REESE DORMITORY "P-1923" MERALCO "P-1924" MERALCO "P-1926" GT WATER CORP. "P-1929" AUTOSTAR TRADING CO.

DECISION CTA Case No. 10839 Ka1ayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x "P-1931" MERALCO Jun.23,2016 OR 1486402 4,032.26 "P-1932" MERALCO Jul. 11, 2016 OR 1501463 5,148.87 "P-1948" MERALCO Oct. 6, 2016 OR 1566888 5,588.23 "P-1949" MERALCO Oct. 6, 2016 OR 1566887 1,738.81 "P-1950" MERALCO Oct.17,2016 OR 1574586 "P-1951" MERALCO Oct.17,2016 OR 1574585 289.10 "P-1961" MERALCO Nov. 25, 2016 OR 1603940 925.26 "P-1962" MERALCO Nov. 25, 2016 OR 1603939 1,013.55 "P-1963" MERALCO Nov. 25,2016 OR 1603938 321.73 "P-1964" Nov. 25, 2016 OR 1603937 597.02 ME~LCO 125.03 "P-1972" Sep. 7, 2016 BILL ZAMBALES I ELECTRIC 1608056363 2,305.29 "P-1973" COOPERATIVE Nov. 25, 2016 TOTAL !NV 1,650.40 MERALCO 4246112843825 Pl84,050.43 The rest of the subject disallowed expenses are either �unsubstarJtiated as found by the ICPA (in the amount of f'2,503,517.96) or supported by mere acknowledgement receipts, voucher payable, cash disbursement vouchers, or petty cash vouchers, which are not considered as proper documents in substarJtiating expenses under Section 237 of the NIRC of 1997, as amended, to wit: SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. - All persons subject to an internal revenue tax shall, for each sale and transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sale or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however, That where the receipt is issued to cover payment made as rentals, commissions, compensation or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client. The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business, for a like period. (\s regards the evidentiary value of vouchers in proving the expenses incurred, the Court reiterates its stand that the same v should be validated with ORs to be given probative value, as

DECISION CTA Case No. 10839 � Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X upheld and affirmed by the Supreme Court in H. Tambunting Pawnshop, Inc. v. Commissioner ofInternal Revenue,9o thus: From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue receipts, sales or commercial invoices, prepared at least in duplicate. The provision likewise imposed a responsibility upon the purchaser to keep and preserve the original copy of the invoice or receipt for a period of three years from the close of the taxable year in which the invoice or receipt was issued. The rationale behind the latter requirement is the duty of the taxpayer to keep adequate records of each and every transaction entered into in the conduct of its business. So that when their books of accounts are subjected to a tax audit examination, all entries therein could be shown as adequately supported and proven as legitimate business transactions. Hence, petitioner's claim that the NIRC of 1977 did not require substantiation requirements is erroneous. In order that the cash vouchers may be given probative value, these must be validated with official receipts. Petitioner's management and professional fees were disallowed as these were supported merely by cash vouchers, which the Court's Division correctly found to have little probative value. (Emphases supplied) Thus, this item of assessment is maintained in the reduced amount ofP5,357,066.77, computed as follows: Disallowed expenses per FDDA 1'5,541,117.20 Less: Substantiated expenses 184,050.43 Adjusted disallowed expenses P5,357 ,066. 77 c) Salaries and wages not subjected to withholding tax - ?17,208,835.34 In the course of his audit, respondent compared the amounts of salaries and wages paid by petitioner per. its ITR for the TY 2016, with the total salaries and wages reported in its alphalist, and disallowed the difference as salaries and wages not subjected to withholding tax, thus:91 v 90 G.R. No. 173373, July 29,2013 [Per J. Bersamin, First Division]. 91 Schedule 3, Annex A, Exhibits �'P-6'' and �'R-5-E'', BIR Records- Folder 6 of6 (Exhibit ..R-8'').

DECISION CTA Case No. 10839 Ka1ayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Salaries, Wages and Benefits - Direct Cost 1'288,360,512.00 Salaries and Allowances-Operating 35,875,203.00 1'324,235,715.00 Per Alphalist With no previous employer I' 22,069,356.75 Non-taxable 125,316,096.19 Taxable 2,287,489.64 Terminated before December 31 9,812,798.72 Non-taxable Taxable Minimum Wage Earners =:':-14-:-7'--'05,-:-47'1",=-13=-8=.3'-'6'---:::=:3-::0:--7-::0','::2'::6'-' =-8:c70:9-':6. :-'6:--- Disallowed Salaries and Wages due to Non-Withholding 1'17,208,835.34 Petitioner argues that respondent failed to consider its remittances from its Cebu Branch, and the de minimis benefits and non-taxable bonuses.92 Relative thereto, the ICPA reports his findings as follows:93 Table 22� Particulars Reference Amount Per AFS Cost of service - direct labor Exhibit "P-1 0" 1'288 ,360,512.00 General and administrative expenses - 35,875,203.00 Salaries and wages and bonuses Exhibit "P-10" 387,652.38 324,623,367.38 Salaries and wages charged under the 974,834.60 acquisition of property, plant, and 5,311,232.89 equipment (PPE~ Annex 0-3 17,878,933.77 98,682,393.90 Total salaries and wages per AFS 134,577,889.93 Per Alphalist of Employees 938,088.87 Makati alphalist schedule 7.1 I Exhibit "P-51" 4,876,132.00 Non-taxable 4,190,425.60 Taxable Exhibit "P-51" 26,633,702.30 Makati alQ_halist schedule 7.3 I Exhibit "P-52" 12,963,248.43 Non-taxable 307,026,882.29 1'17,596,485.09 Taxable Exhibit "P-52" Makati alphalist schedule 7.5 Minimum wage earners Exhibit "P-53" Cebu alphalist schedule 7.1 Non-taxable Exhibit "P-69" Taxable Exhibit "P-69" Cebu alphalist schedule 7.3 Non-taxable Exhibit "P-70" Taxable Exhibit "P-70" Cebu aJphalist schedule 7.5 Minimum wage earners Exhibit "P-71" Total gross compensation per alphalist Difference Docket- Vol. II, p. 975. Petitioner's Memorandum, pars. 48-49. 93 /d. at 662--D63, Exhibit �'P-30".

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X It is noted that the difference found by the ICPA is similar to the difference found by respondent, except for the salaries and wages charged under the acquisition of property, plant, and equipment (PPE) of P387,652.38. Thus, contrary to petitioner's allegation, it is clear that respondent did include in the computation petitioner's de minimis benefits and non-taxable bonuses and its remittances from its Cebu Branch. However, the ICPA found that petitioner's salaries and wages account per AFS/ITR include payments to subcontractor, employer's share in the Social Security System (SSS), Home Development Mutual Fund (HDMF), Philippine Health Insurance Corporation (PHIC) for jobs in progress, maternity benefit, and medical and dental benefits, as shown below:94 Table 23� Amount Particulars !'266,208,925.45 Cost of service 4,591,573.34 Job in progress - labor 17,560,012.78 Job in progress- subcontractor95 35,581,459.36 45,684.71 Job in progress- SSS/HDMF/PHIC employer's share96 General and administrative expenses 24;8,058.61 Salaries and wages 324,235,714.25 Maternity benefit 324,235,715.00 Medical and dental97 (P0.75) Total Per ITR/AFS (Exhibits P-9 and P-10) Difference Income payments made to subcontractors98 are subject to 2% creditable withholding tax, while the employer's share in the SSS, HDMF, and PHIC99 are not subject to withholding tax on compensation. On the other hand, maternity benefits 100 are advanced by petitioner to its employees in behalf of the SSS, while medical and dental 1o1 are expenses reimbursed by petitioner to its employees. These income payments are not included as part of gross compensation in the alphalist of employees.1D2 94 Jd at-663. Exhibit �'P-30''. 95 Exhibits "P-2132" to "P-2163", Annex 1-1. USB (Exhibit "P-30-8"). 06 Exhibits �'P-2013'' to �'P-2052", "P-2053" to ''1'2090". and "P-2091" to "P-2131". Annexes H-1 to H-3. USB (Exhibit "P-30-B''). 97 Exhibits "P-2164'' to "P-2199". Annexes K-1 to K-2. USB (Exhibit "P-30-B"). "~ Annex I, Exhibit ''P-30", Docket- Vol. IT. p. 665. 99 Annex H, Exhibit ��r-30''. Docket- Vol. II. p. 664. 100 Annex J. Exhibit ��P-30'', Docket- Vol. II. p. 665. 101 Annex K, Exhibit "P~30''. Docket- VoL II, p. 665. 102 Exhibit "P-30", Docket- Vol. ll, pp. 664--{i65.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x The Court agrees with the foregoing findings. Verification by the ICPA of the foregoing expenses shows that remittances to the SSS, HDMF, and PHIC, in the total amount of P19,404,366.21, vis-a-vis the amount recorded in Job in progress - SSS/HDMF/PHIC employer's share in the amount of P17,560,012.78, yield a difference of P1,844,553.43. The discrepancy is accounted for as employer's share recorded under the General and Administrative Expenses in the AFS, acquisition of PPE, and others.I03 As to the substantiation of the subject reconciling items, the ICPA findings are summarized as follows: ICPA Descri11tion With Without Total Report 104 Job in progress - supporting supporting documents documents Annex H SSS/HDMF/PHIC employer share !>17,900,770.36 !>(340,757.58) !>17,560,012.78 Annex I Job in progress - AnnexJ Subeontractor 4,372,074.15 219,499.19 4,591,573.34 Annex K 45,684.71 45,684.71 Maternity benefit 208,920.16 39,138.45 P22,481,764.67 248,058.61 Medical and dental P!36,435.23} P22,445,329.44 TOTAL Considering the foregoing, the computation of salaries and wages not subjected to withholding tax should be determined as fol,lows: Per AFS/ITR: Cost of service Job in progress - labor !>266,208,925.45 Job in progress- subcontractor 219,499.19 General and administrative expenses Salaries and wages 35,581,459.36 Maternity benefit 45,684.71 Medical and dental 39,138.45 !>302,094,707.16 Per Alphalist !>307 ,026,879.66 Salaries and Wages due to Non-Withholding P(4,932,172.50) Thus, the disallowance of salaries and wages should be cancelled for lack of factual basis. d) Disallowed creditable taxes withheld -?450,597.84 103 Docket- VoL II, p. 664. Exhibit �'P-30'', Tables 25 and 26. '" USB (Exhibit ��P-30-8'").

DECISION CTA Case No. 10839 � Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X Respondent disallowed petitioner's creditable withholding taxes amounting to P450,597.84 for being supported by Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) dated in the TYs 2015 and 2017_1os Petitioner, however, argues that "the creditable taxes which were claimed against income tax payable for the period.. . under review consist of creditable taxes which can be properly deducted from said tax payable", and that its documents will show that the same should not have been disallowed. los The ICPA found that out of the P450,597.84 disallowed CWT, only P115,468.40 is supported by BIR Form No. 2307, but is dated outside ofTY 2016.107 Verification by the Court reveals that the supported CWTs are all for the period January to March 2017. 1�8 Relative thereto, Section 2.58.3(A) of RR No. 2-98, provides: SEC. 2.58.3. Claim for Tax Credit or Refund.- (A) The amount of creditable tax withheld shall be allowed as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which income was earned or received. � Applying the foregoing prov1s10n, petitioner's CWT supported by BIR Form No. 2307 for the period January to March 20 17 are allowed as a tax credit in the period in which income was earned or received. Petitioner did not submit any explanation or other supporting documents to prove that the corresponding income of the subject CWT was earned or received in the TY 2016. Hence, the disallowance should be maintained. e) Excess MCITover Normal Income Tax- ?970,541.00 f) Excess Credit Carried-over to succeeding period- p 13,695,667.00 In computing petitioner's adjusted tax credits and payments, respondent deducted the excess MCIT over normal income tax in the amount ofP970,541.00 and excess creditable taxes carried over to the succeeding period of !>13,695,667.00 105 Annex A, Exhibits "P-6'' and '"R-5-E''. BIR Records~ Folder 6 of6 (Exhibit "R-8''). 106 Docket- Vol. II, p. 975, Petitioner's Alemorandum, pars. 52-53. 107 Table 29, Exhibit "P-30", Docket- VoL II, p. 666. 108 Exhibits "P-2200" to �'P-221 7", Annex L-1. USB (Exhibit "P-30-B'').

DECISION CTA Case No. 10839 � Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue JC----------------------------------------------------------------------------------------x from petitioner's total tax credits for the year 2016 amounting to !'15,065,904.00. Respondent's reason for the disallowance is that these amounts shall be carried over to the succeeding taxable year when they are credited against petitioner's income tax liabilities. 1og The ICPA verified the utilization of the foregoing tax credits in the succeeding taxable periods and reported his findings, summarized as follows:llo Exhibit No. "P-9" "P-101" "P-102" "P-103" 2016 2017 2018 2019 Taxable Year I' 1,370,237.00 I' 7,002,773.00 15,065,904.00 1'13,767,495.00 17,986,489.00 I' 9,766,840.00 Income Tax due (regular rate) 1'(13,695,667.00) 9,260,685.00 13,101,508.00 Less: Current year tax credits !'(13,695,667.00) 1'4,506,810.00 1'(10,983,716.00) !' (3,334,668.00) Tax, payable/ (Excess current 13,695,667.00 9,188,857.00 20,172,573.00 year tax credits) Less: Prior year excess tax 1'(9, 188,857.00) !'(20, 172,573.00) 1'(23 ,507,24 1.00) credits Excess tax credits carried over to succeeding years The Court notes that petitioner did not utilize the excess of the MCIT over normal income tax as credit against its tax liabilities for the succeeding three (3) taxable years. 111 After the lapse of the 3-year period, the excess MCIT over normal income tax asset loses its creditability. 112 In this case, since petitioner did not use the excess of MCIT over normal income tax as tax credit, there is no reason for respondent to disallow the saiTie. On the other hand, the excess CWT is used as credit against its tax liabilities in the TYs 2017 and 2021, as shown previously and hereafter: 113 Exhibit No. "P-104" "P-105" "P-106" Taxable Year 2022 Income Tax due (regular rate) 2020 2021 Less: Current year tax credits !' 4,839,125.00 I' 9,474,997.00 I' 3,836,824.00 9,567,291.00 7,335,590.00 8,728,701.00 109 Annex A, Exhibits ''P-6" & �'R-5-E... BIR Records- Folder 6 of 6 (Exhibit .. R-8 .. ). 110 Tables 30--36, Exhibit .. P-30", Docket- Vol. II, at pp. 666-Q68. 111 Line 4. Schedule 7- Tax Credits/Payments, Exhibits "P-101"' to ��P-103". USB (Exhibit ��P-30-B'"). 112 Sec. 2.27(E)(7), Revenue Regulations (RR) No. 9-98 states: ''{7) Accounting treatment of the excess minimum corporate income tax paid - Any amount paid as excess minimum corporate income tax shall be recorded in the corporation's books as an asset under ac.count title 'deferred charges-minimum corporate income tax'. This asset account shall be carried forward and may be credited ag<1inst the normal income tax due for a period not exceeding three {3) taxable years immediately succeeding the taxable year/sin \.vhich the same has been paid. Any amount of the excess minimum corporate income tax which has not or cannot be so credited against the normal income taxes due for the 3-year reglementary period shall Jose its creditability. Such amount shall be rcmoYcd and deducted from 'deferred charges-minimum corporate income tax' account by a debit entry to 'retained earnings' account and a credit entry to 'deferred charges-minimum corporate income tax' account since this tax is not allowable as deduction from gross income it being an income tax." {Emphasis supplied) 111 Tables 30--36, Exhibit .. P-30", Docket- Vol. II, at pp. 666-Q68.

DECISION � CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Tax payable/ (Excess current I' (2,496,465.00) I' 746,296.00 I' (5,730,467.00) year tax credits) 23,507,241.00 114 26,003,706.00 25,257,410.00 1'(26,003,706.00) Less: Prior year excess tax 1'(25,257,410.00) 1'(30,987,877.00) credits Excess tax credits carried over to succeeding years Hence, respondent is correct in disallowing petitioner's excess CWT carried over to the succeeding taxable period. This is to ensure that petitioner will not benefit twice from the same tax credits [i.e., (a) as deduction from the assessed deficiency income tax; and (b) as credit against its income tax liability in the succeeding taxable periods]. Although the subject disallowed excess CWT is not fully utilized as of the TY 2022, the tax credits remain in petitioner's ITR which is readily available for use whenever petitioner has income tax liabilities. In sum, the total deficiency Income Tax assessment for TY 2016 should be adjusted in the amount of P9,799,335.29 computed as follows: Taxable Income (Loss) per return 1'1,332,321.00 Add: Adjustments/ disallowances 34,397,593.84 !'35,729,914.84 Sales/Receipts not subjected to Income Tax (Schedule 1) 1'29,040,527.07 1'10,718,974.45 Disallowed Expenses (Annex B) 5,357,066,77 919,639.16 P9, 799,335.29 Taxable Income Tax Due Less: Credits/Payments Creditable Taxes Withheld 1'15,065,904.00 Less: Disallowed Creditable Taxes 1'450,597.84 Withheld 13,695,667.00 14,146,264.84 Excess Credit Carried Over to Succeeding Period B3.sic Deficiency Income Tax Petitioner is liable for the deficiency VAT for the TY 2016. Respondent assessed petitioner of deficiency VAT amounting to P136,725.39, including increments, for the TY 2016 1 thus: 11 5 114 The ''Prior Year"s Excess Credits Other Than I\ICIT' (Line 44, Part IV) shown in the 2020 Annual Income Tax Return (ITR) [Exhibit �'P-104''] is 1"23.507,242.00. Hmvever, the overpayment (Line 20, Part II) shmvn in the 2019 Annual ITR (Exhibit "P-103") is actually P23.507,241.00. Hence, the difference ofrl.OO in the prior year excess tax credits for 2020,2021 and 2022 Annual!TR. 115 Exhibits "P�S'' and "R�7" to �'R�7�C". BIR Records- Folder I of 6 (Exhibit "R�S''). p. 2592.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Taxable receipts subject to 12% per VAT 1'623,554,262.88 return 1'74,826,511.55 Output Tax Due Less: Allowable input tax per audit 1'46,991,088.77 Input tax from the current period 80,372.30 46,910,716.47 Less: Disallowed input tax (Annex A) ----~~~~----~~~~~c_ VAT Payable 1'27,915,795.08 Less: VAT Payments per returns 27,835,422.78 Basic VAT Due Add: Interest 20% (Jan. 26, 2017 to Dec. 31, 1'80,372.30 2cl17) 1'14,973.47 Interest 12% (Jan. 1, 2018 to Apr.15, 2022) _____4~1~�~37~9~�~6=2______~5~6~,3~5~3~�~09=- TOTAL AMOUNT DUE 1'136, 725.39 Notably, the foregoing assessment is comprised solely of the disallowed input taxes amounting to !'80,372.30 for being �unsubstantiated. This is in relation to the disallowed expenses for the Income Tax assessment of !'5,541, 117.20 for being unsupported. The disallowed input taxes are as follows: 116 TIN Taxpayer/Payee Income Input Taxes 402-887-570-0000 Payment Claimed 313-158-725-000 Dimson Marlou 1'1,041.43 154-504-656-000 1'8,679.00 63,340.98 117-703-762-000 Tabuada, Ronnie 527,841.50 276-746-60 1-000 AMC Rewinding and Battery 125.89 008-128-484-000 625.00 Charging 131,250.00 39.00 000-082-588 75.00 TOTAL Angels Burger Argie Bakeshop. 15,750.00 Armorcon Systems Builders 1,875.34 Co!]J_ 1'80,372.30 Golden Cup Exim Marketing Corp. 1'668,395.50 It is further noted that the total input taxes claimed should be !'82,247.64. However, respondent only assessed the amount of !'80,372.30, which excludes the input taxes claimed from Golden Cup Exim Marketing Corp. of !'1,875.34. As such, the Court is constrained to recognize the assessed amount of !'80,372.30. In this case, petitioner did not submit documents to refute the said disallowance. 117 Thus, respondent's deficiency VAT assessment in the amount of !'136,725.39 is upheld. 1" Exhibit �'P-110'", USB (Exhibit "P-30-B"). 117 Exhibit "P-30'", Docket- Vol. II, p. 668.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Petitioner is not liable for the deficiency WTC for the TY 2016. This item of assessment arises from respondent's findings of salaries and wages not subjected to withholding tax and 1s related to the deficiency Income Tax assessment:118 Disallowed Salaries and Wages due to Non-Withholding 1'17,208,835.34 Multiplied by: Average Withholding Rate Tax withheld per the alphalist of employees 1'12,950,826.67 12.45348% Taxable salaries per the alphalist of employees 1'103,993,626.79 - - - - - - 1'2, 143,099.06 Basic Deficiency Withholding Tax on Compensation Consistent with and based on its earlier discussion herein, this Court finds that the disallowance of the subject salaries �and wages should be cancelled. Consequently, the deficiency WTC assessment should likewise be cancelled for lack of factual basis. Petitioner is liable for the deficiency EWT for the TY 2016. Respondent's exammer allegedly found that petitioner failed to remit the correct EWT on its income payments, as shown hereunder: 119 Per FS/ITR Per Alphalist Discrepancy Rate EWT Due Rental 1'3,231,940.00 1'3,256,850.40 1'631,755.60 5% 1'31 ,587. 78 Cost 656,666.00 102,225.60 366,002.40 10% 36,600.24 Operating Subtotal 1'3,888,606.00 !'468,228.00 Professional Fees Payments to Supplier of Goods 1'19,284,603.00 301,576.75 1'369,764.77 Acquisition of PPE 332,918,332.00 Materials, Supplies, and 754,149.00 Facilities Office Supplies 1'352,957,084.00 Subtotal Less: Importations, other than 7,206,333.34 1'345,750,750.66 315,593,075.50 30,157,675.16 capital goods Total 118 Schedule 3, Annex A, Exhibits "P-6'' and ..R-5-E'', BIR Records- Folder 6 of6 (Exhibit ��R-8''). 119 Schedule 4, Annex A, Exhibits �'P-6" and "R-5-E'', BIR Records- Folder 6 of6 (Exhibit "R-8").

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x In assailing the assessed EWT, petitioner claims that respondent failed to consider, among others, the amounts reflected in the income statement in the current period for financial statement purposes under the accrual method of accounting (e.g., rental) for which the pertinent withholding taxes had already been withheld and remitted in prior periods (i.e., the prior year), in accordance with Section 2.57.4 ofRR No. 2-98, as amended.12o As for the alleged unwithheld taxes on payments for professional fees, petitioner claims that these payments were made to professional partnerships that are not subject to income tax. 121 Regarding the alleged unwithheld taxes applicable on payments for the purchase of goods, petitioner avers that some of these payments pertain to the amount of materials reported by petitioner as part of its cost of salesI services in its ITR and income statement, and sourced from its inventory, for which withholding taxes had already been paid and remitted in the preceding period.l22 The ICPA examined petitioner's documents and reported his findings as follows:l23 f. Without withholding tax on income payments Table 45� Reference Amount of Should be Tax Difference Income Tax Withheld Withheld !'45,635.33 Particulars Annex M-2 Payment 150.00 Annex N-3 1'912,706.57 !' 45,635.33 Per Rental 150.00 Alphalist of 17,093.19 Professional fee Annex 0-6 1,500.00 'Acquisition of Payees 7,063.12 PPE 11%) Annex 0-7 !'- Acq~/sition of PPE 2%) - Materials, supplies, and 1,708,517.45 17,093.19 - facilities Office sUPPlies 353,155.87 7,063.12 - Total Annex P-5 17,335,001.05 173,350.05 - 173,350.05 Annex-Q-3 94,731.95 947.33 - 947.33 1'20,405,612.89 1'244,239.02 P- P244,239.02 120 Docket- Vol. II, p. 979., Petitioner's Memorandum, par. 70. ' 21 /d. at 979,Petitioner'slvlemorandum,par. 71. 122 !d. at 979, Petitioner's Memorandum, par. 72. 123 Exhibit �'P-30", Docket- Vol. II, at pp. 670-672.

. DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x A.3) I also noted some transactions that do not have available supporting documents during my verification. Table 46� Reference Amount of Income AnnexM Payment 124 Particulars AnnexN Rental AnnexO !' 2,143,382.50 Professional fees 42,784.03 Acquisition of PPE Annex P Materials, supplies, and AnnexQ 1,986,050.17 facilities Office supplies 10,880,302.83 210,274.63 From the foregoing, the ICPA found that income payments amounting to P20,405,612.89 were not subjected to withholding tax, and income payments in the amount of P15,262,794.16 are not substantiated (a total of P35,668,407.05 income payments). However, respondent only found income payments not subjected to withholding tax in the amount ofP31,155,433.16: Particulars Amount of Rental Income Payment Professional fees !' 631,755.60 Payments to the supplier of goods TOTAL 366,002.40 30,157,675.16 P31,155,433.16 Hence, for petitioner's failure to sufficiently disprove �respondent's findings, the Court is constrained to uphold respondent's assessment of deficiency EWT in the amount of P369,764.77. Petitioner is liable for deficiency DST for the TY 2016. Respondent allegedly found that petitioner has related party transactions, increase in borrowings, and advances to officers, which were not subjected to DST:l25 124 WithatotalofP15,262,794.16. '" Schedule 5, Annex A, Exhibits '�P-6" & �'R-5-E'', BIR Records- Fuldcr 6 of 6 (Exhibit ��R-8'').

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X Due to related parties 1'11,114,140.00 Increase in borrowings 46,762,077.00 Advances to officers 3,837,061.00 Total 61,713,278.00 Multiply by DST Rate Pl.OO/P200.00 Basic Tax Due l' 308,567.00 Petitioner avers that respondent's assessment 1s erroneous and improper for the following reasons:l26 (a) The amount of Php11, 114,140.00 under 'Due to Related Parties' constitutes payments on outstanding accounts, for which DST had already been paid; (b) The amount of Php46, 762,077 under Increase in Borrowings constitutes amounts due to financial institutions for which DST has already been withheld from loan proceeds or paid for by said financial institution; (c) The amount of Php3,837,061.00 under 'Advances to Officers' does not constitute loans subject to DST but constitute amounts which were advanced for the purchases of goods and services to be liquidated by said officers. Under Section 9 of Revenue Regulations 13- 2004, these transactions are exempt from DST. Due to related parties - P 11,114,140.00 An examination by this Court of petitioner's AFS shows the following: 127 LIABILITIES 2016 2015 Current Liabilities 1'65,783,407.00 1'18,361,429.00 192,575,764.00 145,662,456.00 Borrowings 60,559,872.00 42,668,273.00 Trade and other payables 45,728,713.00 31,318,071.00 Deferred revenue 1'364,647,756.00 1'238,0 10,229.00 Other current liabilities 1'249 ,230.00 1'909, 131.00 Total 42,709,650.00 35,306,242.00 Non-current Liabilities 176,647.00 688,253.00 Borrowings 4,576,520.00 9,567,726.00 Accrued retirement benefits 1"47,712,047.00 1'46,471,352.00 Deferred tax liabilities 1'412,359,803.00 1'284,481 ,581.00 Due to related parties Total TOTAL LIABILITIES 126 Docket- Vol. 11, p. 98 L Petitioner's . Hemorandum. par. 82. 127 Exhibit �'P-10'". USB (Exhibit ��P-30-8'"): BIR Records- Folder 6 of 6 (Exhibit ��R-8'"). p. 638.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Note 18 of the Notes to Financial Statements shows the following significant transactions of petitioner with related parties: 128 a Advances to officers 2016 Nature of Balance Amount of Outstanding Transactions at transactions balance DirectorsI Shareholders Loans 1,920,240 Beginning (3,837,061) 2015 Loans of Period 5,757,301 5,757,301 (1,323,402) DirectorsI Shareholders 7,080,703 b Due to re ated parttes 2016 Nature of Balance Amount of Outstanding Transactions at transactions balance DirectorsI Shareholders Loans 4,576,520 DirectorsI Shareholders Dividends Beginning (994,252) payable of Period (3,996,954) - Key mai).agement Compensation 5,570,772 personnel to key 3,996,954 9,489,888 - management Affiliate personnel - 630,000 - 2015 Rent 653,401 - 2,303,073 5,570,772 DirectorsI Shareholders Loans 3,996,954 DirectorsI Shareholders Dividends 4,917,371 (3,800,000) payable 1,693,881 - Directors (Shareholders Deposit for 9,741,093 future 3,800,000 - Key management subscription 630,000 personnel Compensation - to key Affiliate management - personnel Rent From the foregoing, it is clear that the amount Pll, 114,140.00 comes from the following items, to wit: 129 Decrease in loans from directors and shareholders !>994,252.00 Compensation to key management personnel (KMP) 9,489,888.00 Rent to affiliate Total 630,000.00 Pl1,114,140.00 128 Exhibit "P-1 0", USB (Exhibit �'P-30-8"): BIR Records- Folder 6 of 6 (Exhibit "R-8"), pp. 608--{)09. 129 See also Table 48, Exhibit ''P-30''. Docket- Vol. II, p. 673.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X The ICPA verified the amount 1'994,252.00, and his findings are as follows:l3o . Table 49� Particulars Reference Amount Advances Annex R-1 (P2,900,000.00) Payment of advances Annex R-2 Adjustments Annex R-3 3,800,000.00 Total 94,252.56 P994,252.56 The advances amounting to P2,900,000.00 is subject to DST. The payments and adjustments cannot be subject to DST pursuant to Section 179 of the NIRC of 1997, as amended, which provides: SEC. 179. Stamp Tax on All Debt Instruments. - On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (I'l.OO) on each Two hundred pesos (!'200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: (Emphasis supplied) From petitioner's Notes to Financial Statements, it is clear that it has an outstanding balance on loan from directors and shareholders as of the end of the TY 2015 in the amount of 1'5,570,772.00. This means that the original issuance of the debt instruments was made in the TY 2015 and prior thereto. However, the examination of petitioner's books is only for the period January 1, 2016 to December 31, 2016, as per No. LOA No. AUDM35/014060/2017 /eLA201500048959 dated Sept~mber 6, 2017.131 Likewise, compensation paid to key management personnel amounting to 1'9,489,888.00 is not subject to the DST, but to the WTC. The ICPA verified this amount to petitioner's Alphalist ofEmployees132 and reported the following findings: 133 130 Docket- Vol. II, pp. 673-{;74, Exhibit ""P-30"". 131 Exhibits ''P-4" and '�R-1 '', BIR Records- Folder 6 of 6 (Exhibit '"R-8''), p. 2. 132 Exhibits �'P-51"" to ""P-53"", USB (Exhibit "'P-30-8'"). 133 Exhibit �'P-30", Docket- Vol. II, p. 674.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X Table 50� Line TIN KMP Amount 189-171-548- ARIVARA, ROMELL 1' 1,054,115.30 682,339.03 31 0000 ABRANTES 1,616,480.28 909-126-962- CATALAN, ELEAZAR 1,813,505.75 115 0048 LAZARTE 1,825,858.25 102-377-763- LAHOZ, JOSE ANTONIO 697,927.60 259 0000 OLIVER 885,894.04 105-818-325- LAHOZ, RICARDO 1,007,919.69 9,584,039.94 260 0000 VERZOSA 9,489,888.00 131-242-953- LAHOZ, VICTORINO !'94,151.94 261 0000 BENJAMIN VERZOSA 198-034-817- NAZARETA, FELIPE 337 0000 ICUTANIM 149-274-618- PASCUAL, MERCEDITA 374 0000 JIMENO 118-082-406- PROBADORA, ARNEL 395 0000 BELARMINO Total Per Alphalist Per AFS (Exhibit P-10) Difference On the other hand, the ICPA is correct to note that the loans incurred in the TY 2016 amounting to I'2,900,000.00 are subje_ct to DST. Unfortunately, petitioner did not submit any convincing evidence to support its allegation that DST thereon has been paid. The ICPA also noted that there were no available supporting documents for petitioner's rent to affiliate in the amount of I'630,000.00. Thus, these transactions should indeed be assessed of deficiency DST. Increase in borrowings -?46,762,077.00 Anent the increase in borrowings, the amount of I'46,762,077.00 was computed from the net increase of petitioner's current and non-current borrowings, thus: 134 2016 2015 Increase/ (Decrease) Borrowings - 1'65,783,407.00 1'18,361,429.00 1'47,421,978.00 Current Borrowings- Non-current 249,230.00 909,131.00 (659,90 1.00) Net Increase !'66,032,637.00 !'19,270,560.00 !'46,762,077.00 The ICPA verified the foregoing amounts picked up by respondent from petitioner's AFS for the TY 2016, thus:I35 134 Exhibit �'P-I 0", USB (Exhibit �'P-30-8"); BIR Records- Folder 6 of 6 (Exhibit "R-8''), p. 638. 135 Exhibit �'P-30'', Docket- Vol. II. p. 674.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Table 51: Reference Amount Particulars Annex S-1 (1'116,000,000.00) Annex S-2 Loans availed 69,000,000.00 Loan payments Annex S-3 Adjustments - amortization of 237,923.97 discount (P46,762,076.03) Total However, as previously intimated, payments and adjustments are not subject to DST pursuant to Section 179 of the NIRC, as amended, since the said provision covers only "every original issue of debt instruments". The ICPA also verified petitioner's loans availed in the TY 2016 amounting to f'116,000,000.00 with its related promissory notes, which shows that DST were already deducted from the loan proceeds. 136 However, further verification by this Court shows the following: Exhibit No. Financial Institution Loan Amount DST not deducted from proceeds of loan 1"10,000,000.00 "P-12907" China Bank 10,000,000.00 10,000,000.00 Supported blJ journal vouchers onlJ.J 12,000,000.00 "P-1291 0" Metropolitan Bank and Trust Co. 2,000,000.00 "P-12911" Metropolitan Bank and Trust Co. 1"44,000,000.00 "P-12912" Metropolitan Bank and Trust Co. "P-12913" Metropolitan Bank and Trust Co. Total From the foregoing, petitioner failed to prove that the DST on loans availed in the amount of f'44,000,000.00 were already paid or deducted from the proceeds. Hence, the same should be assessed of deficiency DST. Advances to officers -?3,837,061.00 From petitioner's Note 18 of Notes to Financial Statements, the amount f'3,837,061.00 represents a decrease in the account advances to officers, to wit: 137 2016 2015 Decrease Advances to Officers !'1,920,240.00 !'5,757,301.00 !'3,837,061.00 136 Annex S�l, Exhibit "'P-30"", USB (Exhibit "'P-30-8'"). 137 Exhibit ��p.J o��, USB (Exhibit �'P-30-B'"): BIR Records- Folder 6 of 6 (Exhibit '"R�8""). p. 615.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x The ICPA found that the subject advances "are not loans but adjustments of the excess or over of the advances received subject for liquidation. An adjustment was also posted to close the retention payable to advances to officers account": !38 Table 52: Reference Amount Particulars Annex T-1 Pl,053.00 Annex T-2 20,589.68 Advances subject for liquidation- excess of funds Annex T-3 (3,858,203.40) Advances to an affiliate - CHILLEX INT'L. PHILS., INC. Adjustment to close retention payable to CHILLEX INT'L. PHILS., INC. Total (P3,836,560. 72) Further verification by this Court reveals that only advances subject for liquidation-excess of funds in the amount of l"1�,053.00 are supported by cash disbursement vouchers, petty cash vouchers and Sis or receipts, while advances to an affiliate - Chillex International Phils., Inc. (Chillex) are not substantiated. To reiterate, adjustment to close retention payable to Chillex is not subject to DST pursuant to Section 179 of the NIRC of 1997, as amended. In sum, petitioner is liable for deficiency DST on the following transactions in the adjusted amount of f237 ,752.95, computed as follows: Due to related parties: !'2,900,000.00 !' 3,530,000.00 Advances made in 2016 630,000.00 Rent to affiliate 44,000,000.00 Increase in borrowings: 20,589.68 Loans availed P47,550,589.68 Advances to an affiliate - Chillex Int'l. Pl.00/200.00 Phil~., Inc. p 237,752.95 TOTAL Multiply by DST Rate Basic deficiency DST 138 Exhibit ''P-30'', Docket- VoL II, p. 675.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x----------------------------------------------------------------------------------------x Petitioner is not liable for compromise penalty. In the FDDA, respondent imposed compromise'penalty in the amount of P20,000.00, for the alleged failure of petitioner to file DST. 139 However, such imposition cannot be sustained. Under Revenue Memorandum Order No. 7-2015, 140 "compromise penalties are only amounts suggested m settlement of criminal liability, and may not therefore be imposed or exacted on the taxpayer" in the event that a taxpayer refuses to pay the same. It is well-settled that this Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because by its very nature, it implies a mutual agreement between the parties in 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. 141 The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 142 Thus, the said imposition must be cancelled. To recapitulate, petitioner is liable for the following deficiency taxes for the taxable year 2016 in the total amount of P10,487,225.31, summarized as follows: Tax Type Basic Deficiency Income Tax 1"9,799,335.29 VAT 80,372.30 EWT 369,764.77 237,752.95 DST P10,487,225.31 Total In addition to the foregoing basic deficiency taxes, petitioner is liable to a penalty of 25% surcharge imposed on the basic deficiency taxes pursuant to Section 248(A)(3) of the NIRC of 1997, as amended, which provides: SEC. 248. Civil Penalties. - 139 Exhibits "P-8'' and ..R-7", BIR Records- Folder 1 of 6 (Exhibit ��R-8''), p. 2592. 140 Thl..': Revised Consolidated Schedule of Compromise Penalties for Violations of the National Internal Revenue Code. 141 The Philippines International fGir, Inc. v. The Collector ofInternal Revenue, G.R. Nos. L-12928 & L-12932, March 30, 1962 [Per J. Dizon, En Bane]. 142 Commissioner of Internal Revenue v. Lianga Bay Logging Co., Inc., G.R. No. L-35266, JanUaJ)' 21. 1991 [Per J. Narvasa, First Division].

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; Moreover, in accordance with Section 249(B) of the NIRC of 1997, as amended, petitioner is liable to pay deficiency interest at the rate of 20% per annum computed from the date prescribed for its payment until the full payment thereof. However, with the effectivity ofRA No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, on January 1, 2018, the 20% deficiency interest shall be computed until December 31, 2017 only. The TRAIN Law amended (i) the interest rates in Section 249 of the NIRC; (ii) the computation of deficiency interest from the date prescribed for its payment until the full payment thereof, or upon issuance of a notice and demand by respondent, whichever comes earlier; and (iii) provides that the deficiency and delinquency interest prescribed under subsections (B) and (C) thereof shall not be imposed simultaneously. The Assessment Notices bear the date October 10, 2019143 as the time prescribed to pay the total amount due. Likewise, pursuant to Section 249(C) of the NIRC of 1997, as amended, petitioner is liable to pay delinquency interest at the rate of 12% per annum computed from October 11, 2019 until full payment thereof. Thus, for the TY 2016, petitioner is liable to pay the aggregate amount of P16,860,345.72, consisting of basic deficiency Income Tax, VAT, EWT, and DST, surcharge, and deficiency interest computed as of October 10, 2019 as follows: Basic tax due Income Tax VAT EWT DST TOTAL Add: 25% Surcharge I' 9,799,335.29 I' 80,372.30 I' 369,764.77 I' 237,752.95 I' 10,487,225.31 20% Deficiency Interest: 2,449,833.82 20,093.08 92,441.19 59,438.24 2,621,806.33 143 Exhibits "R-5-G", �'R-5-W, "R-5-J", and ��R-5-K", BIR Records- Folder 6 of 6 (Exhibit "R-8").

DECISION CTA Case No. 10839 Ka!ayaan Engineering Company Inc. v. Commissioner of Internal Revenue X----------------------------------------------------------------------------------------X (Apr. 18,2017144 to Dec. 31, 1,385,330.69 I ,385,330.69 14,973.47 14,973.47 2017) 69,900.74 (1'9,799,335.29 X 20% X 69,900.74 46,899.21 46,899.21 (258 I 365days)] 2,087,661.13 2,087,661.13 (Jan. 26, 2017 to Dec. 31, 2017) 17,122.60 17,122.60 (1'80,372.30 X 20% X 78,775.09 78,775.09 (340 I 365days)] 50,651.15 50,651.15 (Jan. 21,2017 145 to Dec. 31, 3,472,991.82 32,096.07 148,675.83 97,550.36 3, 751,314.08 1'15,722,160.93 1'132,561.45 1'610,881.79 2017) 1'394,741.55 1'16,860,345.72 (1'369,764.77 X 20% X (345 I 365days)] (Jan. 6, 2017 to Dec. 31, 2017) [1'237,752.95 X 20% X (360 I 365days)] 12% Deficiency Interest: (Jan. 1, 2018 to Oct. 10, 2019) (1'9,799,335.29 X 12% X (6481365days)] [1'80,372.30 X 12% X (648I 365days)] [1'369,764.77 X ]2% X (648 I 365days)] (1'237,752.95 X ]2%' X (648 I 365days)] Total deficiency_ interest Total Amount Due WHEREFORE, in light of the foregoing considerations, the present Petition for Review is PARTIALLY GRANTED. Accordingly, the compromise penalty in the amount of J>20,000.00, imposed for the alleged failure of petitioner to file Documentary Stamp Tax, and the deficiency assessment for Withholding Tax on Compensation for taxable year 2016, are CANCELLED and SET ASIDE. However, the deficiency assessments for Income Tax, Value-Added Tax, Expanded Withholding Tax, and Documentary Stamp Tax for TY 2016 are UPHELD WITH MODIFICATIONS. Accordingly, petitioner is hereby ORDERED TO PAY respondent the total amount of Pl6,860,345.72, representing deficiency taxes, inclusive of surcharge and interest, broken down as follows: 144 J\pri115, 2017. the last day for filing and paying the 2016 income tax return fell on a Saturday. hence, due date is moved to the next working day, i.e., April 17.2017. 14 ~ Petitioner is an electronic filing and payment system (eFPS) filer: hence, pursuant to Section 2.58 ofRR No. 2-98. as amended by RR No. 17-2003, paying the December 2016 EWT due via the eFPS shall be five (5) days later than the January 15 of the fo!!owing year. ;.e., January 20. 2017.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner oflnternal Revenue X----------------------------------------------------------------------------------------X Tax TyJ.le Basic Surcharge Interest Total Income Tax Deficienc:ll: !' 2,449,833.82 !' 3,472,991.82 !' 15,722,160.93 VAT !' 9,799,335.29 EWT 20,093.08 32,096.07 132,561.45 DST 80,372.30 92,441.19 148,675.83 610,881.79 Total 369,764.77 59,438.24 394,741.55 237,752.95 1'2,621,806.33 97,550.36 1'16,860,345. 72 1'10,487,225.31 1'3,751,314.08 In addition, petitioner is ORDERED TO PAY respondent delinquency interest at the rate of 12% per annum on the total amount due of Pl6,860,345.72 reckoned from October 11, 2019 until full payment, equivalent to !'5,543.13 146 per day, pursuant to Section 249(C) of the NIRC of 1997, as amended by TRAIN Law and implemented by RR No. 21-2018. Finally, pursuant to Section 13 of RA No. 9282, and considering that this Decision is partly favorable to the national government, the BIR, through respondent, is hereby authorized to enforce collection through distraint and levy upon petitioner's goods, chattels, effects, personal property (including stocks, securities, debts, credits, bank accounts, and other interests), and/ or real property, in sufficient quantity to satisfy the tax liability and any increments due to delinquency. SO ORDERED. LAN~~~AVID Associate Justice !CONCUR: 146 ~16.860,345.72 multiplied by !2%divided by 365 days.

DECISION CTA Case No. 10839 Kalayaan Engineering Company Inc. v. Commissioner of Internal Revenue x-------~--------------------------------------------------------------------------------x 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. CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the First Division Acting 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's Division. --- ~-~' MA. BELEN M. RINGPIS-LIBAN Acting Presiding Justice