HONDA CARS MAKATI, INC v. COMMISSIONER OF INTERNAL REVENUE

REPUBUC OF THE PHIUPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* HONDA CARS MAKATI, INC., Petitioner, -versus- C.T.A. CASE NO. 6689 COMMISSIONER OF INTERNAL REVENUE, Members: Respondent. ACOSTA, Chairperson BAUTISTA, and CASANOVA, Jl, tN;rr Promulgated: APR 11 2007i x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x DECISION CASANOVA, C., J.: Before Us is a Petition for Review under Section 7 ci Republic Act No. 1125, as amended by Republic Act No. 9282, seeking the reversal of the Final Decision on Disputed Assessment dated March 21, 2003 issued by the Commissioner of Internal Revenue and the cancellation of amended Assessment Notice No. WE-060-97-03-273 for deficiency withholding tax on compensation income in the amount of One Million Fifty Thousand One Hundred Eighty Five Pesos and 36/100 (P1,050,185.36) involving the taxable year 1997.@....

DECISION C.T.A. CASE NO. 6689 Page 2 The material antecedent facts: Honda Cars Makati, Incorporated (''petitioner'') is a corporation duly organized and existing under and by virtue ci the laws of the Republic ci the Philippines, with principal business address at Magallanes Commercial Center, Makati City. It has two (2) branches, namely, Honda Cars Pasig and Honda Cars Alabang with respective businesses located at E. Rodriguez Avenue, Calle Industria, Bagumbayan, Quezon City and Alabang Zapote Road corner Investment Drive, Alabang, Muntinlupa Oty.1 Petitioner is primarily engaged in the sale, distribution, service, repair of automobiles, motor cars, motor trucks, wagons, buggies, carriages and mechanically propelled vehicles, and vehicle engines, parts, accessories, supplies, and other articles; to operate chain stores and general merchandising pertaining to motor vehicles; to build, maintain, lease or otherwise acquire, own, hold and operate warehouses, agencies, structures, service centers and showrooms which may be used in connection with its business; to buy and sell and generally deal in all kinds of merchandise, fixtures, and chattels, relating to motor vehicles; to acquire and own patents, improvements and franchises, and to operate under such patents, improvements and franchises, any commercial dealings enumerated in its Artides of Incorporation.2 On the other hand, the Commissioner ci Internal Revenue (''respondent'') is empowered to perform the duties ci his office induding, among others, the power to decide, cancel and abate tax liabilities in accordance with the provisions of the 1993 National Internal Revenue Code (''NIRC''), as amended. For the taxable year 1997, petitioner allegedly deducted income tax due on the compensation earned by its employees working at its main office and its two office branches. It subsequently filed the corresponding tax returns on income tax remittances of the said taxes to the Bureau of Internal Revenue (''SIR'').@.. 1 Pars. 1 & 2, Joint St~ulation d Facts, Rollo, p. 102. 2 Rollo, p. 11.

DEOSION C.T.A. CASE NO. 6689 Page 3 After an investigation by the respondent on petitioner's books r::l accounts and records for taxable year 1997, there has been found due from the latter defidency withholding tax on compensation. Thus, on June 29, 1999, respondent issued a Preliminary Assessment Notice informing petitioner of the pre-audit result r::l its BIR Form No. 1743 IR for the calendar year 1997 and the tax due thereon in the amount of P791,364.26 representing deficiency withholding tax on compensation, computed as follows: 3 Basic Tax (Under remittance) P502,988.76 Add: 25% Surcharge 125,747.19 20% Interest 01-26-98 to 03-15-99 142,628.34 Compromise penalty 20,000.00 TOTAL AMOUNT DUE P791.364.26 Subsequently, on January 11, 2001, the petitioner received Final Assessment Notice (FAN) No. WHT-060-97-0Q-671 from the respondent demanding payment of the amount of P1,031,834.29 under Sections 78 to 83 of the 1997 NIRC, as amended, to be paid on or before February 9, 2001, as follows: Assessment No. WHT-060-97-00-671 Deficiency Withholding Tax Basic Tax (Under remittance) p 502,~8.76 Add: Surcharge 125, 747.1 9 383,098.34 Interest 01-26-98 to 02-12-2001. 20,000.00 Suggested compromise penalty TOTAL AMOUNT DUE P1 . 031.834. 2~ On February 8, 2001, the petitioner protested the said defidency withholding tax on compensation of P1,031,834.29, inclusive of surcharge, interest and compromise penalty for the year 19975 on the ground that petitioner had already been examined and assessed by the BIR National Office Tax Fraud Division for taxable years 1996 and 1997 and had fully settled the same in November 1999.~ 3 Exhibit 3. ~ Par. 4, Joint Stipulation of Facts, p. 103. 5 Par. 5, Joint Stipulation of Facts, Rollo, p. 103. 6 Rollo, p. 23.

DECISION C.T.A. CASE NO. 6689 Page 4 In reply thereto, respondent informed petitioner that the assessment done by the Tax Fraud Division pertains only to expanded withholding tax while the case at hand pertains to withholding tax on compensation. Respondent then reiterated his demand for the payment r:J deficiency withholding tax on compensation but in the reduced amount of P829,191.69, indusive of increments, computed as follows: Deficiency Withholding Tax P502,988.71 25% Surcharge P502,988.71 Total 306,202.98 20% Interest 1-26-98 to 2-12-01 20,000.00 Compromise Penalty P829,191.69 Total Amount Due On April 1, 2003, the petitioner received the assailed Final Decision on Disputed Assessment and amended Assessment No. WE-060-97-03-273 from the respondent through Assistant Regional Director Anselmo G. Adriano denying its protest, alleging the following: Discrepancy arises from the difference between the tax due and tax withheld II!JIIinst the toi:JI/ remiti:Jince: Per Alpha list of employees p 4,150,745.19 Per BIR Form 17431 R 3,647,756.48 Annual Information Return of Income p 502.988.71 Tax withheld on compensation Difference Verification disclosed that you did not remit, the correct amount of tax as required to be withheld pursuant to Section 73 & 74 of the NIRC of 1993. In view thereof, this office therefore amend and modify the above-mentioned Assessment as shown in the hereunder computation: Basic Tax (under remittance) 502,988.76 Add: Interest 01-26-98 to 04-22-03 527,196.60 Suggested compromise penalty 20,000.00 (RMOl-90) p 1,050,185.367 Total Amount Due and Collectible The aforementioned Final Decision on Disputed Assessment and Assessment Notice No. WE-060-97-03-273 required petitioner to pay the alleged 1997 deficiency withholding tax on compensation equivalent to P1,050,185.36 on or before April 22, 2003. In addition, respondent emphasized that his decision is final decision on the matter, to wi~ 7 Par. 8, Joint Stipulation of Fads and Issues, Rollo, p. 104.

DECISION C.T.A. CASE NO. 6689 Page 5 "You are hereby requested to pay the aforesaid revised assessment representing deficiency withholding tax upon receipt hereof, inclusive of penalties inddent to delinquency. This is our final dedsion. If you disagree, you may appeal this final dedsion with the Court of Tax Appeals within thirty (30) days from receipt hereof, otherwise, your defidency withholding tax assessment shall become final, executory and demandable." Hence, this Petition for Review filed on April 30, 2003. In his Answer to the Petition, the respondent raised the following Special and Affirmative Defenses: "4. The assessment in question was mi!lde 11nd issued in IICCOrdllnce with l11w, rules 11nd regullltions; 5. The iiSSessments done by the T11x Fr11ud Division perl:llins only tD exp~~nded withholding tllx on compeiiSIItion; 6. Thllt contnlry tD petitioner's d11im thllt they llllve 11n over-remittllnce of Php28,718.19, verificlltion disclosed tlult petitioner did not remit the correct 11mount of tllx as the discrep~~ncy 11rises from the difference between the tllx due 11nd the tllx withheld llflllinst the IICtulll remittllnce; 7. All presumptions 11/'e in fllvor of the co/TeCI:ness of the t11x 11ssessment. .a Petitioner presented CPA Senior Finance and Administration Manager Belinda U. Ramos and Finance Administration Manager Victoria T. Frejas. On the other hand, respondent proffered the testimony of Revenue Officer II Teresita Canete. Both parties tendered likewise their respective documentary evidence. The petitioner and respondent jointly stipulated on the following issues for this Court's resolution: (II) Whether or not petitioner withheld 1111d remitted the correct 11mount of withholding tllx on compeiiSIItion income p11id tD its employees for e~~lend11r ye11r 1997; {b) Whether or notpetitioner is lillble tD the 11/leged deliciency withholding tllx ~JSSeSSment on compenSlltion p11id tD its employees during the e~~lend11r ye~~r 1997 in the 11mount of One Hi/lion Fifty ThouSIInd One Hundred Eighty-Five Pesos 1111d 36/100 (P1,050,185.36), inclusive of surchllrges 11nd intsrest, for t11x11ble ye11r 1997 covenJd by Amended Assessment Notice No. WE-D60-97-D3-273 dilled Hllrch 21, 2003~ n. B RoHo, pp. 71 to

DEOSION C.T.A. CASE NO. 6689 Page 6 (c) Whether or not the 11//eged deficiency withholding tax IISSeSStnent on compeiiSIItion income p11id by petitioner for t11x11ble ye~~r 1997 is due to the 11/leged disc:rep11ncy llrising from the difference between the tiiX due 11nd tllx withheld11911inst the totlll remittllnce by the petitioner; (d) Whether or not there is 11 discrep11ncy in 11m011nt of taxes withheld by petitioner on compeiJSIItion income p11id to its employees in 1997 per its Alp/Ill List of Employees for 1997 11nd 11m011nt of taxes withheld per petitioner's AnnUli/ Infonnlll:ion Returns ofIncome TIIXes Withheld on CompenSIItion, Exp11nded lind Rn11/ Withholding TIIXes [SIR Fonn No. 1743 IR} for 1997. ~ The issues being interrelated, the same shall be jointly discussed. Petitioner asserts that the proffered documents which include the alpha list of employees and Annual Information Returns for the year 1997 duly establish two key points: Rrst, the absence of any discrepancy arising from the difference between the tax due and the tax withheld as against the total remittance for the said period on the compensation income paid to its employees; and second, the over remittance of P28,900.01. Thus, if only respondent had thoroughly examined these two documents, he would not have found petitioner liable for any deficiency withholding tax on compensation. Petitioner further claims that it filed the pertinent alpha list of employees and Annual Information Returns for all the three existing offices situated at Makati City, the office branches at Quezon City and Muntinlupa City. And that respondent erred in solely examining the Annual Information Return filed by the branch office at Quezon City, the outcome of which is a discrepancy in the taxes withheld and remitted by the petitioner on compensation paid to the employees for the year 1997. Respondent argues, however, that per verification of the records, petitioner did not remit the correct amount of taxes evidenced in the divergence between the tax withheld and the tax remitted. We agree with the petitioner~ 9 RoHo, pp. 105 to 106.

DECISION C.T.A. CASE NO. 6689 Page 7 In arriving at the alleged defidency withholding tax assessment on compensation income, the BIR examiner considered only the following Alpha Usts of Employees for 1997, to wit: Exhibit Withholding taxes withheld on Compensation paid per Alpha List of Exhibits RR and CCC Exhibits SS and DDD Employees Exhibits TI and EEE Exhibits UU and FFF p 66,863 .59 Exhibits AAA and GGG 47,541.82 Exhibits BBB and Hllli Total 1,643 ,315.92 5,688.46 35,044.73 2,352.290.67 P4.150.745.19 The BIR examiner then compared the total withheld taxes on compensation income per alpha list of employees in the amount of P4,150,745.19 with the amount of P3,647,756.48 as shown in only one of petitioner's Annual Information Retums. 10 Consequently, a discrepancy in the amount of P502,988.76 resulted between the tax due and tax withheld as against the total remittance which became the basis of respondent's issuance of deficiency withholding tax assessment on compensation for taxable year 1997 in the total amount of P1,031,834.29, inclusive of increments, later modified to P1,050,185.36. However, a complete and thorough examination of all the Alpha Usts of Employees and Annual Information Returns filed by petitioner for the year 1997 for withholding taxes on compensation paid to its employees for all of its existing offices, namely, its main office located in Magallanes, Makati City, and its two brances located in Pasig City and Alabang, Muntinlupa City would reveal an over remittance in the amount of P28,900.01, as illustrated in the Analysis of Withholding Tax on Compensation, 11 as follow~ 10 Exhibit LL. 11 Exhibit sss.

DECISION C.T.A. CASE NO. 6689 Page 8 HONDA CARS MAKATI, INC. ANALYSIS O F WITHHOLDING TAX (WI) O N COMPENSATION FOR THE YEAR 1997 Category ofEmployees Wf on Compensation Per Refer to Exhibit With no previous employer within the year cl annual compensation Alpha List of Employees is more than or equal to P60,000.00 per annum p 3,775,937.31 00 With no previous employer within the year cl annual compensation 2,352,290.67 BBB and HHH is less than P60,000.00 per annum 1,643,315.92 TI and EEE 5,6 8 8. 46 UU and FFF Resigned Associates Senior Personnel 44,753.56 NN T O TAL 35,044.73 AAAand GGG 4 7, 541.82 SS andDDD 66,863.59 RRand CCC 127,328.26 yy 143, 144.83 pp 2,1 80,9 16.59 QQ l 9 9 3 . 3 3 7.36 m P U.416.163.10 HCMI - Magallanes, Makati p 7,527,340.55 MM HCMI - Pasig 3,647,756.48 LL HCMI - Alabang 1J69,966.08 KK TOTAL P U,445,063.11 Under (O ver) Remittance (p 28,200 01 ) Based on the above schedule, petitioner's total taxes withheld from its employees in the amount of P12,416,163.10 as reflected in its alpha lists of employees12 when compared with the total taxes it has remitted to the BIR in the amount of P12,445,063.11 as reflected in its Annual Information Returns of Income Tax Withheld on Compensation, Expanded and Final Withholding Taxes13 and the various Monthly Remittance Returns of Income Taxes Withheld14 result to an over remittance of P28,900.01@..- 12 Exhibits KK, LL, MM. 13 Exhibits NN to UU, YY & AAA to III. 14 Exhibits A to Z, AA to JJ.

DECISION C.T.A. CASE NO. 6689 Page 9 Indubitably, the issuance ci 1997 defidency amended tax assessment stems from respondent's erroneous computation of the taxes withheld on the compensation income of petitioner's employees and the corresponding remittances thereon. Thus, the same should be cancelled. WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, the assessment for defidency withholding tax on compensation in the amount of P1,050,185.36 for taxable year 1997 is hereby CANCELLED and SET ASIDE. SO ORDERED. ~ CAESAR A. CASANOVA Associate Justice WE CONCUR: 0-.=--'Vt.. Q'-w'\- ERNESTO D. ACOSTA P iding 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's Division. Ll.st~~ ERNESTO D. ACOSTA Presiding Justice Chairman, First Division