TS TECH PHILIPPINES, INC. represented by TS TECH TRIM PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION TS TECH PHILIPPINES, INC. CTA Case No. 8178 represented by TS TECH Members: TRIM PHILIPPINES, INC., Petitioner, - versus- Castaneda, Jr., Chairperson Casanova, and Cotangco-Manalastas, JJ. COMMISSIONER OF Promulgated: INTERNAL REVENUE, APR 06 Z015 Respondent. <' }{- - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - ~ - - - - - }{ -----., f / /J:Oij~:.,.. DECISION ~-J' COTANGCO-MANALASTAS, This resolves the Petition for Review filed by TS Tech Philippines, Inc. on October 12, 2010 to seek the cancellation and setting aside of the Formal Letter of Demand (FLD) dated July 29, 2008, the Assessment Notices, and the Collection Letter dated August 23, 20 10 covering the alleged deficiency income ta}{, value-added ta}{ (VAT), e}{panded withholding ta}{ (EWT), and withholding ta}{ on compensation (WTC) in the total amount oLP75,514,965.24 for ta}{able year 2005. FACTS TS Tech Trim Philippines, Inc. (representing TS Tech Philippines, Inc.) is a domestic corporation duly organized and e~sting under and by virtue of the laws of the Republic of the Philippines, with principal office at 102 East Main Avenue, V Laguna Technopark, Special E}{port Processing Zone, Bifian, Laguna. 1 1 Par. 1, Stipulation of Facts, Joint Stipulation of Facts and Simplification oflssues (JSFSI), docket, pp. 82- 83. l_

DECISION CfA CASE NO. 8178 Petitioner TS Tech Philippines, Inc. is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at 111 East Science Avenue, Laguna Technopark, Biiian, Laguna, and engaged in the manufacture, export, and sale of car seats and interior components of cars and other motorized vehicles to the local market. It is registered with the Philippine Economic Zone Authority (PEZA) as an Economic Zone Facilities Enterprise enjoying five percent (5o/o) preferential tax in lieu of all national and local taxes. It is now merged with TS Tech Trim Philippines, the latter being the surv1v1ng corporation, and the former being the absorbed and dissolved corporation. Accordingly, TS Tech Philippines Inc. is herein represented by TS Tech Trim Philippines, Inc. Petitioner is also duly registered with the Bureau of Internal Revenue (BIR). 2 On the other hand, respondent Commissioner of Internal Revenue is the chief of the Bureau of Internal Revenue, the government agency officially responsible for the assessment and collection of all national intemal revenue taxes, fees and charges and the enforcement of all forfeitures, penalties, and fines connected with such taxes. She holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City. On July 14, 2006, Letter of Authority No. 00040861 dated July 4, 2006 was served to petitioner, authorizing the examination of petitioner's books of accounts and other accounting records for all internal revenue taxes for the period from January 1, 2005 to December 31, 2005.3 Pursuant to the Letter of Authority, an undated Preliminary Assessment Notice (PAN)4 was issued and received by petitioner, stating that petitioner is liable for deficiency income tax, deficiency VAT, and deficiency withholding tax for taxable year 2005 to which petitioner filed its protests on July 16, 2008. On August 1, 2008, petitioner received a Formal Letter of Demand6 dated July 29, 2008 issued by respondent, assessing { 2 Par. 2, Stipulation of Facts, JSFSI, docket, p. 83. 3 Exhibit "1 ". 4 Exhibit "B", "8", and "8-a". 5 Exhibit "C". . 6 Exhibits "D" and "10".

DECISION CfA CASE NO. 8178 petitioner deficiency Income tax ln the amount of P45,871 ,886.04, deficiency VAT ln the amount of P26,944,168.37, deficiency EWT ln the amount of P1, 112,671.95, and deficiency WTC ln the amount of P1 ,586,238.88. Petitioner filed its protest letter to the Formal Letter of Demand on September 1, 2008.7 Subsequently, petitioner filed a Supplemental Letter Protests against the FLD on October 31, 2008 and a Second Supplemental Letter Protest9, also against the FLD, on December 2, 2008. However, on September 13, 2010, petitioner received a Collection Letter wherein respondent requested petitioner to pay the amount reflected in the Assessment Notice and FLD. 1o Petitioner then appealed the Collection Letter by filing the instant Petition for Review on October 12, 2010. In her Answer11 filed on November 12, 2010, respondent interposed the following defenses: 7. Petitioner TS Tech Philippines, Inc., is liable to pay its deficiency income tax, value-added tax, expanded withholding tax and withholding tax on compensation in the total amount of Seventy Five Million, Five Hundred Fourteen Thousand, Nine Hundred Sixty Five and 24/100 (P75,514,965.24). 8. Petitioner claims that it was denied due process for failure to be informed in writing of the law and facts on which the assessment is based. However, the formal letter of demand and assessment notices indicated not merely the tax, compromise, and interest due thereon but likewise sufficiently stated the facts, the law, rules and regulations on which the assessment was based upon. Thus, petitioner V cannot impugn the validity of assessment on the supposed omission. 7 Exhibit "E". 8 Exhibit "G". 9 Exhibit "H". 10 Exhibit "F". 11 Docket, pp. 49-62.

DECISION CTA CASE NO. 8178 9. Comprehensive study of petitioner's books of accounts and pertinent accounting records disclosed that it is liable to pay the total deficiency income tax assessment. It is liable for the payment of P24,155.99 pursuant to Section 32 of the NIRC quoted as follows: XXX XXX XXX The foregoing represents gross income derived by applying the gross profit method based on the difference between the reported importation per VAT returns and the importation data furnished by the Bureau of Customs to the Audit Information, Tax Exemption and Incentives Division (AITEID) of the respondent. The amount of P51,337,432.79 represents income payments not subjected to Expanded Withholding Tax and the amount of P2,212,105 represents purchases excluded in the summary list of purchases. While the amount of P3,457,910 represents excess purchases claimed by petitioner upon comparison of VAT returns and purchases as reflected on the information of the Bureau of Customs provided by AITIED [sic]. In addition, the amount of P406, 120.00 representing importation dated December 6, 2004 was assessed. The foregoing were properly disallowed pursuant to Section 34 (K) of the NIRC which provides: XXX XXX XXX The amount of 3,199,403.68 representing unaccounted salaries and allowances is subjected to tax pursuant to Section 32 of the NIRC and Section 44 which provides: XXX XXX XXX While the amount of P34,891,665.67 representing the difference between the summary sales per VAT returns and alphalist of income payments subjected to Expanded Withholding Tax acquired through third party information was assessed pursuant to Section 32 of the NIRC. 10. Petitioner is liable to pay the amount of P221,210.50 which represents input tax from purchases not included in the summary list of purchases submitted to V respondent. It was properly disallowed pursuant to Section 110 and Section 113 of the NIRC, hereunder quoted:

DECISION CTA CASE NO. 8178 XXX XXX XXX While the amount of P345,791.00 represents excess input tax claimed by petitioner on VAT return as compared to the information of the Bureau of Customs furnished by AITIED [sic]. The amount of P40,612.00 refers to input tax from importation dated December 6, 2004. The foregoing were assessed pursuant to Section 110 of the NIRC, which provides: XXX XXX XXX Discrepancy in importation per schedule submitted by petitioner and Bureau of Customs data from AITEID disclosed that the amount of P4,736,468.99 represents unaccounted sales and assessed pursuant to Section 105 of the NIRC which provides: XXX XXX XXX Moreso, the amount of P34,891,665.67 representing the difference between the summary of sales per VAT returns and alphalist of income payments subjected to Expanded Withholding Tax derived from customers was assessed pursuant to Section 106 of the NIRC. The respective amounts of P6,597, 104.64 representing unsupported exempt sales, P90,960,855.70 representing unsupported zero-rated sales and P33,736,894.62 representing discrepancy between sales subjected to VAT as appearing on returns and sales as reflected on Audited Financial Statement were likewise assessed pursuant to Section 106 of the NIRC. 11. With respect to withholding tax, petitioner is liable to pay the amount of P716,538.38 representing basic deficiency expanded withholding tax assessed pursuant to Section 57(B) of the NIRC which provides: XXX XXX XXX The amount of P3, 199,403.68 representing the discrepancy between compensation as appearing in Audited Financial Statement and alphalist was assessed pursuant to Section 79 and 80 of the NIRC. 12. Petitioner claims that the Final Assessment Notices received on August 1, 2008 was formally protested within the reglementary period of 30 days. However, it did not aver the fact of submission of necessary documents in support of V its protest. Upon investigation, it was revealed that indeed, petitioner failed to submit necessary documents within 60

DECISION CTA CASE NO. 8178 days from the filing of protest. This omission is fatal to the administrative claim. XXX XXX XXX 13. With respect to the issue of prescription of the right to assess and collect withholding tax on compensation, expanded withholding tax and value-added tax, it must be noted that the taxpayer must raise the issue of prescription at the earliest possible time. It cannot, as a rule, be raised for the first time on appeal. Since prescription is one of the affirmative defenses of the taxpayer, it is incumbent upon him to positively establish when the prescriptive period started to run and when the same ended. He must prove that he has submitted the required returns. If he fails to do so, the conclusion must be that no such returns have been filed and the Government has ten (10) years within which to make the corresponding assessments pursuant to Section 222 of the NIRC. (Taligaman Lumber Co. vs. Collector, G.R. No. L-15716, March 31, 1962) In this foregoing case, petitioner never raised the issue of prescription in the administrative level and to be allowed to allege it without specifically pleading the facts appurtenant thereto, before this Honorable Court would be offensive to the basic rules of fair play, justice and due process. 14. On that note, it must be stressed that assessments are presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. (Marcos II vs. Court of Appeals G.R. No. 120880 June 5, 1997) 15. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but the taxpayer is right. Otherwise the presumption of correctness of tax assessment stands (Commissioner of Internal Revenue vs. Hantex Trading Co. Inc., G.R. No. 136975, March 31, 2005) 16. Petitioner has not pointed out any prov1s10n or item in the assessment notice which bears a trace of falsity. The averments were based on conjectures, surmises and speculations. These cannot supply the basis for the charge of impropriety of the assessments made. ~

DECISION CTA CASE NO. 8178 The case was set for pre-trial conference on December 3, 2010.12 Petitioner's Pre-Trial Briefl3 was filed on November 30, 2010; while respondent's Pre-Trial Brief14 was filed on November 26, 2010. On December 16, 2010, the parties filed with the Court their Joint Stipulation of Facts and Simplification of Issues15. Then a Pre-Trial Order16 was issued by the Court on January 19,2011. Trial ensued, g1v1ng both parties the opportunity to present their documentary and testimonial evidence. After the presentation of the parties' respective evidence, petitioner filed its Memorandum17 on April 4, 2014; while respondent filed her Memorandum18 through registered mail on April 7, 2014. Thereafter, the case was submitted for decision on April23, 2014.19 ISSUES The parties submitted the following issues2o for this Court's disposition: 1. Whether or not the subject assessments are null and void. 2. Whether or not petitioner is liable for the deficiency income tax, value-added tax, expanded withholding tax and withholding tax on compensation assessments in the amount of y P75,514,965.24 inclusive of interest and penalty for the calendar year 2005. 12 Notice of Pre-Trial Conference issued on November 12,2010, docket, p. 64. 13 Docket, pp. 73-77. 14 Docket, pp. 66-71. 15 Docket, pp. 82-85. 16 Docket, pp. 90-93. 17 Docket, pp. 1366-1410. 18 Docket, pp. 1412-1434. 19 Docket, p. 1461. 20 Stipulated Issues, Pre-Trial Order, docket, p. 91.

DECISION CTA CASE NO. 8178 DISCUSSION/RULING The Court shall first address the issue on jurisdiction of the Court over the instant case in relation to respondent's allegation that the subject assessment has already attained finality. Respondent alleges that the Formal Letter of Demand/Final Assessment Notice (FLD/FAN) was received by petitioner on August 1, 2008; thus, petitioner had thirty (30) days or until August 31, 2008 within which to protest the same. However, according to respondent, the protest to the FLD/FAN was received by the BIR only on September 1, 2008, or one (1) day after the lapse of the period to protest. In view thereof, the assessment against petitioner has attained finality by the mere lapse of time and is no longer open to dispute and discussion. While it is true that petitioner had until August 31, 2008 to file its protest on the FLDI FAN, the said date fell on a Sunday. Thus, the last day shall be on the next working day, which is September 1, 2008. Clearly, petitioner filed its protest within the period provided by law. Respondent likewise contends that petitioner failed to submit documents to support its protest within the sixty (60)- day period fixed by law. It must be noted that petitioner in its Supplemental Protest filed on October 31, 200821 mentioned that it is submitting for consideration the following documents: 1. As Annex A, BIR Form No. 2550Q filed by TIPI for calendar year (CY) 2005; 2. As Annex B, Reconciliation Schedule of Sales not subject to VAT; 3. As Annex C, Breakdown of Scrap Sales per Audited Financial Statement (AFS); 4. As Annex D, PEZA Certificate of Registration/PEZA Certification issued to Automotive Interiors Corporation and Honda Cars Philippines, Inc.; 5. As Annex E, sample Sales Invoices issued to Honda Cars V Philippines, Inc.; 6. As Annex F, Schedule of'ITPI's Rental Payments; 21 Exhibit "G".

DECISION CTA CASE NO. 8178 7. As Annex G, BIR Form No. 1601-E filed for CY 2005; and 8. As Annex H, reconciliation schedule on the salaries and employees' benefits given to TIPI employees. Accordingly, petitioner is considered to have complied with the submission of supporting documents as required under Section 228 of the National Internal Revenue Code (NIRC) of 1997. Therefore, respondent's allegation that the sixty-day period to submit supporting documents already lapsed and made the FAN final and executory deserves scant consideration. Furthermore, it must be noted that despite the submission of the documents previously mentioned, the undated Memorandum22 presented by respondent referred to the protest letter of petitioner and stated that petitioner failed to submit the required documents to refute the subject assessment within sixty (60) days as provided under Section 228 of the NIRC of 1997, as amended and implemented by Revenue Regulations (RR) No. 12-99. In the same Memorandum, it was recommended that the assessment be reiterated and that the docket be forwarded to the Large Taxpayers Collection Enforcement Division (LTCED) in order to enforce collection. In other words, respondent failed to consider the documents submitted by petitioner and immediately recommended the reiteration of the assessment. Respondent likewise alleged in her Memorandum23 that petitioner's refusal to present its Books of Accounts and other Accounting Records for examination by Revenue Officer Ma. Catalina G. Benedicta caused the initial assessment to be issued based on discrepancies as found in Tax Reconciliation Schedules or data furnished by the Bureau of Customs or third-party documents. According to respondent, she arrived at the assessment using the "best evidence obtainable", which is based on Revenue Memorandum Circular (RMC) No. 23-2000; which provides that in the absence of accounting records or other records necessary for the determination of taxpayer's internal~ 22 Exhibit "13". 23 Docket, p. 1440.

DECISION CTA CASE NO. 8178 revenue tax liabilities, the tax should be determined on the best evidence available. In this regard, the Court finds relevant Section 6(8) of the NIRC of 1997, as amended, which requires that the assessment of the tax be determined based on the Best Evidence Obtainable in the absence of accounting records or other records. Section 6(8) of the NIRC of 1997, as amended, reads: "SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. - XXX XXX XXX (B) Failure to Submit Required Returns, Statements, Reports and other Documents. - When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. In case a person fails to flle a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufflcient for all legal purposes." (Emphasis supplied) In obtaining the best evidence, respondent is given vast powers which she could exercise under Section 5 of the NIRC of 1997, as amended, which provides: "SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons. - In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:/---

DECISION CTA CASE NO. 8178 (A) To examine any book, paper, record, or other data which may be relevant or material to such inquiry; (B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government- owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures or consortia and registered partnerships, and their members; (C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (D) To take such testimony of the person concerned, under oath, as may be relevant of material to such inquiry; and (E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all persons owning or having the care, management or possession of any object with respect to which a tax is imposed. The prov1s1ons of the foregoing paragraphs notwithstanding, nothing in this Section shall be construed as granting the Commissioner the authority to inquire into bank deposits other than as provided for in Section 6(F) of this Code." The power of the Commissioner to assess based on the best evidence obtainable was elaborated in the case of ~

DECISION CTA CASE NO. 8178 Commission of Internal Revenue us. Hantex Trading Co. Inc. 24, wherein the High Court ruled as follows: "The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer's records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business. In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayer's return. In Campbell, Jr. v. Guetersloh, the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had taxable income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may examine and subpoena, if necessary, traders' and brokers' accounts and books and the taxpayer's book accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any practicable proof that is available in the circumstances of the particular situation. Citing its ruling in Kenney v. Commissioner, the U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question. XXX XXX XXX The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful v concealment is an invincible barrier to proof. However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously." (Emphasis supplied) 24 G.R. No. 136975, March 31,2005.

DEOSION CfA CASE NO. 8178 Simply put, while respondent has the power to assess petitioner based on the best evidence obtainable and may resort to the exercise of its powers under Section 5 of the NIRC of 1997 and to approximation in the calculation of the taxes due, the same should not be arrived at arbitrarily and capriciously. As a general rule, tax assessments by tax examiners are presumed correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, a prima facie case of liability on the part of the taxpayer is made. If a taxpayer files a Petition for Review before this Court and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitioner- taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record- keeping requirements of the Tax Code. However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment," i.e., without any foundation character, the determination of the tax due is without rational basis.2s As already mentioned, petitioner attached supporting documents to its Supplemental Protest against the FAN, which was filed on October 31, 200826, the last day for submission of relevant supporting documents. Furthermore, petitioner submitted additional documents attached to its Second Supplemental Protest dated December 2, 200827� Even though belatedly filed, respondent could have at least verified the said documents to show that the subject assessment recommended to be upheld in a Memorandum28, which resulted in the V Issuance of the Collection Letter, was based on the best evidence obtainable. For failure to establish that the 25 Commission ofInternal Revenue vs. Hantex Trading Co. Inc., supra. 26 Exhibit "G". 27 Exhibit "H". 28 Exhibit "13".

DECISION CTA CASE NO. 8178 assessment was based on the best evidence obtainable, the determination by this Court must rest on all the evidence introduced and its ultimate determination must find support in credible evidence. Accordingly, the Court shall now proceed to discuss the validity of the assessment issued by respondent against petitioner. Petitioner was assessed by respondent of deficiency income tax, VAT, EWT, and WTC for taxable year 2005 in the total amount of P75,514,965.24 inclusive of interest and compromise penalty, broken down as follows: DEFICIENCY TAX AMOUNT Income Tax p 45,871,886.04 Value-added Tax Expanded Withholding Tax 26,944,168.37 Withholding Tax- Compensation 1,112,671.95 Total 1,586,238.88 p 75,514,965.24 For orderly presentation of the discussion, the Court shall first discuss the propriety of the assessment on deficiency EWT, followed by deficiency WTC, deficiency income tax, and deficiency VAT. I. DEFICIENCY EXPANDED WITHHOLDING TAX- Pl,l12,671.95 Respondent computed the deficiency EWT assessment against petitioner for taxable year 2005 in the amount of P1, 112,671.95, as follows:29 Income payments suqject to EWT p 67,255,977.33 Add: p 40,669,945.46 Purchase of Goods not subjected to 1% Purchase of Services not suqjected to 2% 7,451,181.53 Rental not subjected to 5% Income payments suqject to EWT 3,216,305.80 51,337,432.79 Tax Due thereon Less: Tax Paid p 118,593,410.12 Tax Still due p 1,821,904.81 29 Exhibit "10", BIR Records, p. 885. 1,105,366.43 p 716,538.38

DECISION CTA CASE NO. 8178 Interest (Jan. 16, 2006 to August 31, 2008)(958 days) p 376,133.57 Compromise Penalty 20,000.00 396,133.57 Expanded Withholding Tax Deficiency p 1,112,671.95 Upon comparison of petitioner's expense items/income payments as reflected in its Annual Income Tax Return (ITR) and Audited Financial Statements (AFS) with those shown in its Alphalist for the year 2005, respondent found that the amounts of P40,669,945.46, P7,451, 181.53, and P3,216,305.80 were not subjected to one percent (1o/o) EWT of P406,699.45, two percent (2o/o) EWT of P149,023.63, and five percent (5�/o) EWT of P160,815.29, respectively, pursuant to Section 57(B) of the NIRC of 1997, as amended, in relation to RR No. 2-98, as amended. Below is the breakdown of the said amounts per respondent's computation schedule:30 Account Title Per ITR (or AFS) Per Audit Per Alphalist Difference Cost of Sales Exempt & Special Rate Regular Rate In Philippine Peso Mdse. lnvty beg. 75,559,114.00 Add: Purchases 46,025,439.90 75,050,298.10 53,530,886.91 21,519,411.19 a Importation 75,050,298.10 196,634,852.00 1,181,263.00 1,181,263.00 b Domestic 1,189,991.00 1,189,991.00 c Total Goods Available 8,983,912.00 Less: Mdse. Invty end Factory tools & 1,181,263.00 supplies 1,189,991.00 Others Deductions Office supplies 839,676.00 839,676.00 839,676.00 d Representation & Entertainment 710,039.00 710,039.00 710,039.00 e 1,880, 920.00 1,880,920.00 1,880,920.00 f Transportation & travel 13,197,118.00 13,197,118.00 13,197,118.00 g Miscellaneous 151,527.27 151,527.27 151,527.27 h Increase in assets Total 299,819,596.37 94,200,832.37 53,530,886.91 40,669,945.46 1% EWTDue 942,008.32 535,308.87 406,699.45 Cost of Sales 75,559,114.00 2,195,981.00 2,816,794.20 2,195,981.00 i Mdse. Invty beg. 46,025,439.90 2,305,150.00 2,305,150.00 j Add: Purchases 75,050,298.10 5,472,423.00 2,655,628.80 k 196,634,852.00 Importation 276,107.00 276,107.00 I Domestic 8,983,912.00 Total Goods Available 2,305,150.00 Less: Mdse. Invty end 5,472,423.00 Direct Labor Indirect labor 276,107.00 Deductions Repairs & Maint.-Labor 30 BIR Records, p. 782.

DEOSION CTA CASE NO. 8178 Insurance 258,954.00 258,954.00 240,639.27 18,314.73 m Total 10,508,615.00 3,057,433.47 7 451,181.53 2% EWTDue 210,172.30 61,148.67 149 023.63 Cost of Sales Mdse. Invty beg. 1,469,768.00 75,559,114.00 1,594,819.00 365,794.20 1,229,024.80 n Add: Purchases 1,594,819.00 5,024,547.00 5,024,547.00 46,025,439.90 -0 Importation 75,050,298.10 1,987,281.00 Domestic 196,634,852.00 8,606,64 7.00 1,987,281.00 p Total Goods Available 3,216,305.80 Less: Mdse. lnvty end 8,983,912.00 430,332.35 Depreciation 160,815.29 Rental 5,024,547.00 Rental Deductions 1,987,281.00 Rental 5,390,341.20 Total 269,517.06 5%EWT From the above table, the items reflected on the lines designated as "a" to "p" are the accounts affected by the assessment for deficiency expanded withholding tax. According to petitioner, the alleged domestic purchases of goods not subjected to 1�/o EWT in the amount of P21,519,411.1931 were derived by respondent in the following manner: Purchase of Merchandise/Cost of Goods Manufactured per ITR32 p 121,075,738.00 Less: Importations per VAT retums33 46,025,439.90 Balance 75,050,298.10 Less: Purchases of goods subjected to 1% EWT per 1604-E34 53,530,886.91 Alleged domestic purchases not subjected to EWT P21,519,411.19 The Court-commissioned Independent Certified Public Accountant (ICPA) noted that in arriving at the said finding, respondent used the entire amount of Cost of Goods Manufactured without considering its components. The breakdown of the Cost of Goods Manufactured as presented in Note 15 of the AFS35 is shown below: Purchases of direct materials p 95,052,439.00 Direct Labor 2,305,150.00 31 Item "a" of respondent's computation schedule. 32 Exhibit "T", Line 43. 33 Exhibit "TIT", Annex "E". 34 Exhibit "BB". 35 Exhibit "U", p. 23, Note 15-Cost of Sales.

DECISION CTA CASE NO. 8178 Depreciation36 9,129,925.00 Indirect Labor 5,4 72,423.00 Renta137 3,429,728.00 Communication, Light, Water 1,882,914.00 Royalties 1,431,906.00 Factory tools and supplies 1' 181,263.00 Others 1,189,991.00 Total P121,075,738.00 In addition to this, the ICPA observed the following: 1. The purchases of raw materials consist of importation in the amount of P46,025,439.90 that is not subject to expanded withholding tax; 2. The purchase of goods subjected to expanded withholding tax per 1604E involved goods purchased and paid during the year; 3. The usage of the goods was not only attributable to Cost of Sales but also allocated to administrative expenses and inventory; and 4. The "Purchase of MerchandiseI Cost of Goods Manufactured" also includes expenses subjected to 2�/o and So/o EWT. The Court concurs with the observation of the ICPA with regard to the fact that components of the Cost of Goods Manufactured include purchase of services since the manufacturing process does not only entail the usage of material goods but also the employment of necessary labor, facilities and utilities to process such materials. Accordingly, the costs of direct labor, depreciation, indirect labor, rental, communication, light, water, royalties, factory tools and supplies and other costs mentioned in the above table must not be considered in computing the alleged deficiency EWT from domestic purchases. In addition, the Court noted that the amounts representing Factory Tools and Supplies and Others have been separately included in the deficiency EWT assessment. f Considering the same in this finding will doubly subject the said accounts to deficiency EWT. Thus, the Court deems it 36 Difference with Depreciation per Note 15 of Notes to FS is Pl,469,678, which is the amount reflected as part of Cost of Sales (Service) under special rate in the AITR (Exhibit "T", Line 49). 37 Difference with Rental per Note 15 of Notes to FS is Pl,594,819, which is the amount reflected as part of Cost of Sales (Service) under special rate in the AITR (Exhibit "T", Line 50).

DECISION CTA CASE NO. 8178 proper to disregard said amounts in computing the domestic purchases allegedly not subjected to withholding. Based on the above table as well as the observations stated herein, petitioner's domestic purchases of goods subject to 1�/o EWT shall be recomputed as follows: Purchase of MerchandiseI Cost of Goods Manufactured p 95,052,439.00 46,025,439.90 per ITR (includes only of Purchase of Direct Materials per breakdown above) P49,026,999.10 Less: Importations per VAT returns Domestic purchases of goods subject to 1% EWT Likewise, the Court noticed that respondent erroneously imposed 2�/o EWT on petitioner's importations from various foreign companies38 in the amount of P2,195,981.00. Pursuant to Section 2.57.2(M) of RR No. 02-98, as amended by RR No. 17-03, the mandated 2% EWT applies only to income payments made to local/resident suppliers of services. Also, respondent erroneously charged 2�/o EWTon direct labor in the amount of P2,305, 150.0039 and indirect labor in the amount of P5,472,423.0040. As can be seen from petitioner's Trial Balance41, the breakdown of such amounts comprised of salaries and wages, hence, must be assessed under the deficiency withholding tax on compensation. In addition, respondent erred in doubly subjecting the rental amount of P1,594,819.0042 to 5o/o EWT. In the Notes to AFS, particularly Note 1543, it was indicated that the total rental charged to Cost of Sales amounted to P5,024,547.00, which was partly charged to petitioner's revenues from lease of properties in the amount of P1,594,819.00, while the remaining portion in the amount of P3,429,728.00 was charged to its sales of goods. In arriving at the deficiency 5o/o EWT assessment, respondent imposed 5% EWT on both amounts of P1,594,819.00 and P5,024,547.00; hence, the V erroneous double imposition of 5o/o EWT on the rental of P1,594,819.00. 38 Exhibit "TTT", Annex "E". 39 Item "j" per BIR's computation schedule. 40 Item "k" per BIR's computation schedule. 41 Exhibit "KKK", p. 10. 42 Item "n" per BIR's computation schedule. 43 Exhibit "U", p. 23.

DECISION CTA CASE NO. 8178 Taking into account all the foregoing, petitioner is liable to pay basic deficiency 1o/o EWT in the amount of'P146,466.46 and deficiency 5�/o EWT in the amount of P81,074.34 totalling P227 ,540.80, computed as follows: Per ITR (or AFS) Income Payments Per Court's Examination subject to EWT Exempt & Account Title Special Rate Regular Rate 1% 2% 5% 10% Mdse. lnvtv beg. In Philippine Peso Add: Purchases 75 559,114.00 Importation Domestic 46 025 439.90 49 026 999.10 Total Goods 75,050,298.10 Available Less: Mdse. Invty end 196,634,852.00 Depreciation 8 983,912.00 Rental Dec. (inc.) in RM lnvty 1,469 768.00 - 1 594 819.00 Direct Labor Depreciation 2,305,150.00 - Indirect labor 9,129,925.00 Rental 1,469,768.00 5,472 423.00 - 5,024,547.00 Com. Lights & Water 1 594 819.00 3,429 728.00 1,882,914.00 Royalties 1 882,914.00 Factory tools & 1,431 906.00 1,181,263.00 supplies 1,189,991.00 1,181,263.00 Others 1,189,991.00 Dec. in WIP invty Dec. in FG invty 14 035,522.00 1,987,281.00 Cost of Sales 1,987,281.00 Salaries & Allowances 276 107.00 Rental 276,107.00 Repairs & Maint.- 839,676.00 839,676.00 258,954.00 Labor 258 954.00 Office supplies 710,039.00 Insurance 710,039.00 1,880,920.00 Representation & Entertainment 1,880,920.00 1,422,589.00 Transportation & 1,422,589.00 travel 3,477,575.00 13 197,118.00 Com. Lights & Water 2,270,497.00 Taxes & Licenses 1,535,346.00 Depreciation 1,510,491.00 Amortization of 13 197,118.00 151,527.27 _pension trust 68,177,533.37 Miscellaneous 1,535,346.00 Research & devt 43,402,115.00 Deductions Increase in assets 151,527.27 TOTAL Less: Amount 3,840 564.00 7 011,828.00 1,535,346.00 remitted per 53,530 886.91 6,657,358.02 5 390 341.20 1,673,933.20 1604E Not subjected to 14,646,646.46 - 1,621,486.80 - EWT 1% EWTRate 5% Deficiency EWT Due 146,466.46 81,074.34

DECISION CTA CASE NO. 8178 Recapitulation: Income EWTDue Deficiency 1% EWT Payments Not 146,466.46 Deficiency 5% EWT Subjected to 81,074.34 Total 227,540.80 EWT 14,646,646.46 1,621,486.80 II. DEFICIENCY WITHHOLDING TAX ON COMPENSATION- P1,586,238.28 In respondent's Formal Letter of Demand44, the deficiency assessment on withholding tax on compensation was computed as follows: Taxable compensation per return4s p 10,722,624.38 Add: Salaries & Wages not subjected to withholding tax 3,199,403.68 Taxable compensation per audit Tax Due 13,922,028.06 Less: Tax Paid46 2,467,360.09 Tax Still due 1,443,551.51 Interest (Jan. 16, 2006 to August 31, 2008)(958 days) 1,023,808.58 Compromise Penalty 537,429.70 Compensation Withholding Tax Deficiency 25,000.00 p 1,586,238.28 The amount of salaries and wages not subjected to withholding tax was broken down as follows:47 Salaries and wages per AITR/ AFS48 p 14,035,522.00 Salaries and wages per 160 1-C49 10,836,118.32 P3, 199,403.68 Contrary to respondent's computation, the total amount of taxable compensation declared in the BIR Form No. 1601C only amounted to P10,609,130.44, broken down as follows: Exhibit Period Taxable "EE.1" Covered Compensation "EE.2" January 2005 p 1,782,555.19 "EE.3" February 2005 1,728,413.30 44 Exhibit "D". March 2005 1,507,023.65 45 Exhibits "EE.l" to "EE.12". 46 Exhibit "PPP". 47 BIR Records, p. 870. 48 Exhibits "T" and "U". 49 Exhibits "EE.l" to "EE.12".

DECISION April2005 1,629,817.51 CTA CASE NO. 8178 May 2005 2,987,074.12 June 2005 Page 21 of 55 July 2005 861,006.98 113,239.69 "EE.4" Total P10,609, 130.44 "EE.5" "EE.6" "EE.7" The !CPA presented the computation of salaries, wages and benefits that petitioner presented to him for examination, as follows:so Salaries and wages - administrative per ITRSI and FSS2 Salaries, Wages, 13th month and bonus p 5,429,446.90 Employee benefits 1,656,396.63 SSS, HDMF, PhilHealth 116,870.05 Separation pay 6,832,807.67 p 14,035,521.25 Cost of Sales - salaries and wages per ITR and FS Direct labor-salaries, wages, 13th month & 2,305,150.58 bonus 5,472,423.72 Indirect labor P21,813,095.55 Salaries, wages, 13th month and bonus p 2,922,220.58 Employee benefits 2,215,391.56 SSS, HDMF, PhilHealth 334,811.58 Petitioner claims that the total salaries and wages- administrative expenses were reflected not only in the AFS but more so in the Annual ITR that amounted to P14,035,521.25. This supposedly includes the salaries and wages, 13th month pay, employee benefits, and SSS and Pag-ibig contributions. According to petitioner, respondent failed to consider the direct and indirect labor costs that were recorded and reflected in the AFS and Annual ITR amounting to P5,227,371.16 (P2,305,150.58 plus P2,922,220.58) and instead, considered only the salaries and wages in administrative expense which apparently and evidently include non-taxable compensation (i.e., SSS, Philhealth, HDMF contributions), whereas the direct V and indirect labor costs under cost of sales were erroneously considered in the assessment of deficiency EWT. 50 Exhibit "TTT", p. 35. 51 Exhibit "T", Line 76. 52 Exhibit "U", Notes to Financial Statements, Note 15.

DECISION CfA CASE NO. 8178 In addressing this assessment, the Court shall be guided by Section 2.78.l(B) of RR No. 2-98, which reads: "SECTION 2.78.1. Withholding of Income Tax on Compensation Income. - XXX XXX XXX (B) Exemptions from withholding tax on compensation. - The following income payments are exempted from the requirement of withholding tax on compensation: (1) Remunerations received as an incident of employment, as follows: XXX XXX XXX (b) Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, such as retrenchment, redundancy, or cessation of business. The phrase 'for any cause beyond the control of the said official or employee' connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him. The separation was not of his own making. Whether or not the separation is beyond the control of the official or employee, being essentially a question of fact, shall be determined on the basis of prevailing facts and circumstances. It shall be duly established by the employer by competent evidence which should be attached to the monthly return for the period in which the amount paid due to the involuntary separation was made. Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age. Any payment made by an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment. ~ XXX XXX XXX

DECISION CfA CASE NO. 8178 (e) Payments of benefits made under the Social Security System Act of 1954 as amended; and XXX XXX XXX (11) Thirteenth (13th} month pay and other benefits.- (a) Thirteenth (13th) month pay equivalent to the mandatory one (1) month basic salary of officials and employees of the government, (whether national or local), including government-owned or controlled corporations, and or private offices received after the twelfth (12th) month pay; and (b) Other benefits such as Christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private offices. xxx The above stated exclusions (a) and (b) shall cover benefits paid or accrued during the year provided that the total amount shall not exceed thirty thousand pesos (P30,000.00) which may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. (12) GSIS, SSS, Medicare and other contributions. - GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees. xxx" (Emphasis supplied) Petitioner contends that the separation pay given to employees must not be subject to withholding tax. Even though it did not specifically invoke that such separation pay was on account of the dismissal of the employees beyond their control, the facts and the circumstances of petitioner proved to be so. As can be deduced from Note 1 of the AFSS3, TS Tech Philippines, Inc., by approval of its Board of Directors on May 16, 2005, had ceased its manufacturing operations effective June 20, 2005 and consequently separated all its employees and paid separation cost of P6,832,808.00. Further, as jointly admitted by the parties, TS Tech Philippines, Inc. is now merged with TS Tech Trim Philippines, Inc.54� As such, it can ~ 53 Exhibit "U". 54 Par. 2, JSFI, docket, p. 83.

DECISION CTA CASE NO. 8178 be said that TS Tech Philippines, Inc. is now dissolved; hence, the dismissal of the employees was beyond its control. Consequently, all costs of separation paid to said employees are not subject to withholding tax on compensation. However, from the claimed amount of P6,832,808.00, only the amount of P5,588,224.93 was duly supported by evidence tiournal entries, separation pay computation, Release, Waiver and Quit Claim)ss. The remaining unsupported portion amounting to P1,244,583.07 shall be disallowed by this Court. Petitioner was correct in stating that payments on account of SSS, 13th month pay, bonuses, and other employee benefits (not exceeding P30,000.00) to its employees are exempt from withholding tax. But then, it is incumbent upon petitioner to prove that those amounts actually pertain to payments on account of those exempted from withholding tax as provided by RR No. 2-98. On this point, petitioner failed to satisfy the Court with such fact. It did not submit the accompanying schedules on its BIR Form No. 1601C from January to December 2005 for the Court to verify if the amounts presented in the breakdown above were among those non-taxable income payments as contemplated in RR No. 2-98. Neither did it submit any evidence proving the remittance of the contributions to SSS, HDMF, Philhealth, the monthly salary computation schedule or other supporting documents that can provide for the breakdown of the 13th month pay, the bonuses, and the other employee benefits. Furthermore, while petitioner submitted Exhibit "000" purporting to provide the breakdown of the 13th month pay attributable to those Employees Terminated Before December 31, verification of the said document shows however that it actually contains a summary of the amount of withholding tax on compensation remitted from January to December 2005 and not as what petitioner had intended to present. Hence, this document failed to support petitioner's claim that those amounts actually pertain to payments on account of those exempted from withholding tax as provided by RR No. 2-98. ~ 55 Exhibits "SSS.l" to "SSS.79".

DEOSION CfA CASE NO. 8178 In view of the foregoing, the Court upholds the assessment with the following revised computation of the deficiency WTC in the amount ofP764,116.41: Salaries and wages - admin P7 ,202, 713.58 Salaries and wages including benefits 1,244,583.07 p 8,447,296.65 Unsupported separation pay P2,305, 150.58 Salaries and wages - cost of sales Direct Labor 5,472,423.72 7,777,574.30 Indirect Labor P16,224,870.95 Total taxable compensation Less: Compensation subjected to income tax 10,609,130.44 p 5,615,740.51 per BIR Form No. 1601C Salaries and wages not subject to withholding 13.6066902% tax p 764,116.41 Withholding tax rate per BIR Form No. 1601CS6 Deficiency withholding tax on compensation III. DEFICIENCY INCOME TAX- P45,871,886.04 According to the FLD, the assessed amount for deficiency income tax was computed as follows:s7 Taxable Income per ITR p - Add: Unaccounted Sales (Per TRS LN vs. CWT vs. ITR) p 34,891,665.67 Unaccounted Purchases (Per BOC Data) 24,155.99 Taxable Income p 2,212,105.00 Add: Disallowance 3,475,910.00 34,915,821.66 406,120.00 Unsupported purchases (Local) 3,199,403.68 60,630,971.47 Unsupported purchases (Importation) 95,546,793.13 Disallowed Purchases (out of period) 40,669,945.46 31,052,707.77 Salaries and Wages not subjected to WT- 7,451' 181.53 Compensation 3,216,305.80 - Payment to suppliers not subjected to 1% EWT p Payment of services not subjected to 2% EWT p 31,052,707.77 Rental expense not subjected to 5% EWT 14,769,178.27 Taxable Income per Audit p Tax Due Less: Tax Paid Tax Still Due Interest (April 16, 2006 to August 31, 2008) (868 days) 56 p 1,443,551.51 + P10,609,130.44 Total Taxes Withheld Total Taxable Compensation 13.6066902% WTC Rate per BIR Forms No. 160IC 57 Exhibit "I 0".

DECISION 50,000.00 CTA CASE NO. 8178 p 45,871,886.04 Compromise Penalty Income Tax Deficiency A. Unaccounted Sales (per ITR vs. CWT vs. BIR TRS-LN) P34,891,665.67 The unaccounted sales were derived by the BIR as follows: 58 Customer Per TS Tech PerTRS-LN PerCWT Discrepancy Automotive Schedule p 8,331,880.99 p 8,327,865.04 Interiors Corp. 137,859,856.00 136,302,585.00 p (1,734,776.35) Honda Cars p 6,597,104.64 Phils., Inc. 5,476,703.00 9,867,609.00 (23,345,754.19) 114,514,101.81 88,171.04 16,510.00 (9,722,964.09) Isuzu Phils. 144,644.91 (88, 171.04) (P34,891,665.67) Kawasaki Motors (213,683.69) Unaccounted Sales The resulting discrepancy as found in the above table was computed by choosing the greater amount of income between TRS-LN (Tax Reconciliation System-Letter Notice) and per CWT, and then subtracting the same from the income reflected in the schedules of petitioner. As described in the Details of Discrepancys9, this finding is based on the difference between the summary of sales per VAT Returns and the Alphalist of Income Payment subjected to Expanded Withholding Tax submitted by the Customers/Payors provided by the third-party information per TRS-LN. Petitioner provided sales invoices6o as evidence of the total amount of sales revenue that it allegedly earned for CY 2005. The summary of invoices61 would show that petitioner's total revenue based on sales invoices for CY 2005 amounted to P194,557,361.84. This is slightly greater than the amount of income subject to regular corporate income tax rate reported in the Annual ITR62 and the AFS63 for CY 2005 both~ 58 Exhibit "TIT", p. 3. 59 Exhibit "10-c", BIR Records, p. 884. 60 Exhibits "V.l" to "V.649". 61 Exhibit "TTT", Annex "A". 62 Exhibit "T".

DECISION CTA CASE NO. 8178 amounting to P188,353,868.0064 � The resulting difference 1s P6,203,493.84. Petitioner alleged in its Memorandum65 that said discrepancy is due to petitioner's sales to its affiliate, TS Tech Trim Philippines, Inc. (TTTPI), wherein said sales per Statement of Accounts amounted to P69,930,447.49 instead of P64,259,658.00, and the remaining discrepancy in the amount of P532,705.65 is merely due to timing difference in the withholding and remittance of the corresponding and applicable taxes. Meanwhile, the Court-commissioned Independent CPA noted that the discrepancy amounting to P6,203,493.84 can be considered as undeclared sales. The said difference in the amount of petitioner's sales to TTTPI indicated that the sales were under-reported; likewise, the remrun1ng balance amounting to P532,705.65 appeared to be represented by debit memos that were not substantiated by petitioner. The Court conducted its own examination of all related documents, and considered as basis that which respondent used in arriving at the discrepancy above. Petitioner provided original copies of the creditable withholding tax certificates issued to it by its clients. The Court summarized the CWTs per customer, detailed below: Supplier Covered Period Income pavment Tax Withheld Exhibit 1/1/05 to 3/31/05 p 1,956,941.75 p 39,219.16 No. Automotive Interiors 4/1/05 to 6/30/05 6,370,923.29 Y.l Corporation 8,327,865.04 127,418.46 Y.7 Subtotal 166,637.62 Honda Cars Philippines 1/1/05 to 3/31/05 p 18,286,208.00 p 182,862.08 Y.2 Inc. 1/1/05 to 3/31/05 55,649,416.00 556,494.16 Y.3 4/1/05 to 6/30/05 45,877,225.00 458,772.25 Y.8 Subtotal 4/1/05 to 6/30/05 10,604,103.00 106,041.03 Y.9 7/1/05 to 9/30/05 3,460,565.00 34,605.65 Y.14 7/1/05 to 9/30/05 2,425,068.00 24,250.68 Y.15 P136,302,585.00 P1,363,025.85 Isuzu Philippines 1/1/05 to 3/31/05 p 3,778,005.00 p 37,780.05 Y.4 Corporation 1/1/05 to 3/31/05 (202,756.00) (2,027.56) Y.S 1/1/05 to 3/31/05 (907.90) (90.79) Y.6 63 Exhibit "U". 64 Exhibit "T", Line 15B. 65 Petitioner's Memorandum, docket, pp. 1370-1380.

DECISION CTA CASE NO. 8178 4/ 1/0S to 6130/0S 143,9SO.OO 1,439.SO Y.10 4,963,791.00 49,637.91 Y.11 4/l/OS to 6/30/0S (132,466.00) (1,324.66) Y.12 1,114,329.00 11,143.29 Y.16 4/l/OS to 6I30IOS p 9,663,945.10 p 96,557.74 7 I 1IOS to 9 I30IOS 16,510.00 Subtotal P154,310,905.14 Kawasaki Motors Phils. 7 I 1IOS to 913010S 165.10 Y.13 Inc. P1,626,386.31 Total CWTs for CY 2005 It is noteworthy that respondent had factual basis of comparison, since the income payments made by each supplier based on the CWT certificates they issued to petitioner tally with the amounts found under "per CWT" of the table depicting how the assessment was arrived at. Furthermore, petitioner failed to adequately defend itself out of the assessment. Petitioner also neglected to offer a reconciliation of the discrepancy noted by respondent to shed light on the right amount of sales subject to income tax. As noted, respondent based her assessment by comparing the higher amount per TRS-LN or CWT against the amount reflected in the sales schedule of petitioner. In most of the instances, the amounts per TRS-LN were higher than the amounts reflected in the CWT, thus were mostly used in arriving at the discrepancy. However, the Court finds this as inappropriate basis to derive the discrepancy for purposes of determining the amount to be assessed as deficiency income tax. It must be pointed out that petitioner attempted to reconcile the discrepancy despite respondent's failure to provide a copy of the TRS-LN. Also, respondent failed to present to this Court a copy of the TRS-LN in order to assess the veracity of the amounts claimed to have been obtained from the said source. Hence, the Court finds it equitable that the determination of the amount of discrepancy must be based on the available evidence presented for verification, pertaining to the CWTs provided by petitioner, which the total income V payments and tax withheld amounted to P154,310,905.14 and Pl,626,386.31, respectively.

DECISION CTA CASE NO. 8178 In addition to this, the Court agrees with the !CPA's finding that there were undeclared sales from noted unsupported difference between the total amount of invoices presented for verification and the total amount per AFS and Annual ITR. Consequently, this shall be added to the assessment on deficiency income tax. Considering the foregoing, the said finding of the ICPA is upheld, with revisions, however, on the amount of discrepancy from P34,891,665.67 to P39,472,231.31, computed as follows: Customer PerTSTech PerCWT Discrepancy Automotive Interiors Schedule Corporation p 8,327,865.04 p 1,730,760.40 p 6,597,104.64 136,302,585.00 21,788,483.19 9,663,945.10 9,519,300.19 Honda Cars Philippines Inc. 114,514,101.81 16,510.00 230,193.69 Isuzu Philippines Corporation 144,644.91 P154,310,905.14 P33.268,737.47 6,203,493.84 Kawasaki Motors Phils. Inc. (213,683.69) P39 ,472,231.31 Total Discrepancy P121,042,167.67 Add: Unsupported difference noted by ICPA Total Unaccounted Sales B. Undeclared gross profit due to unaccounted importation P24,155.99 The alleged undeclared gross income from unaccounted importation was derived by respondent as follows:66 Gross profit rate used: P191,693,868.00 100.00% Sales per ITR 99.49% Less: Cost of Sales per ITR 190,715,528.00 00.51% Gross Profit per ITR p 978,340.00 Assessed gross income: p 4,712,313.00 Unaccounted importation per BOC data Divided by 99.49% Unaccounted Sales per BOC data P4,736,468.99 (4, 712,313.00) Undeclared gross income p 24,155.99 Based on the Details of Discrepancy67, this amount represents the gross income derived by applying the gross ~ 66 Exhibit "TTT", p. 5. 67 Exhibit "I 0-c".

DECISION CTA CASE NO. 8178 profit rate method on the difference between the reported importation per VAT returns and the importation data furnished by the Bureau of Customs to the AITEID-BIR. The above amount was allegedly assessed pursuant to Section 32 of the NIRC of 1997, as amended. The unaccounted importation based on BOC's data 1s composed of the following:68 Date Import Entry Purchases Input Tax No. 2/14/2005 p 1,149,778.00 p 114,977.80 5/6/2005 17075 141,595.00 14,159.50 6/10/2005 48799 613,181.00 61,318.10 6/16/2005 63574 6/17/2005 65645 2,619,466.00 261,946.60 65740 188,293.00 18,829.30 P4, 712,313.00 P471,231.30 Records indicate that both parties did not dwell significantly on the matter. Petitioner even failed to present necessary pieces of evidence to dispute the same. Thus, the Court finds no basis in disturbing this particular item of assessment. It was noted, however, that in computing for the gross profit rate, respondent used as basis the combined amounts of salesI revenues and cost of salesI services under the Special Rate and Regular Rate in the Annual ITR:69 Special Rate Regular Rate Total Percentage P3,340,000.00 P188,353,868.00 Item 15- (3,064,587 .00) (187,650,940.00) P191,693,868.00 100.00% SalesI RevenuesI ReceiptsI Fees 275,413.00 702,928.00 (190,715,527.00) 99.49% Item 16 - Cost of 978,341.00 0.51% SalesI Services Item 17- Gross Income from Operation The Court finds this improper. Based on Schedule 1, Item 38 of the Annual ITR, the sales subject to Special Rate pertain to Lease of Properties. Therefore, it cannot be logical for a property leasing operation to require an importation of goods for it to sustain leasing income. It must not be considered in the computation of gross profit for purposes of~ 68 BIR Records, p. 871. 69 Exhibit "T".

DECISION CTA CASE NO. 8178 determining the amount of deficient income tax and to use only the amounts under the Regular Rate as basis. To recompute it from the same source, the Court finds the following as the appropriate rates to be used: Item 15 - Sales/Revenues/Receipts/Fees Regular Rate Percentage Item 16- Cost of Sales/Services p 188,353,868.00 100.0000000% Item 17- Gross Income from Operation 99.6268046% (187,650,940.00) 702,928.00 0.3731954% Hence, the amount to be assessed from undeclared gross profit due to unaccounted importations 1s revised to P17,652.01: Unaccounted importation per BOC data p 4,712,313.00 Divided by 99.6268046% Unaccounted Sales per BOC data p 4,729,965.01 Undeclared gross income (4,712,313.00) p 17,652.01 C. Disallowed purchases for lack of supporting documents P2,212,105.00 Upon comparison of the purchases as reflected in petitioner's summary of purchases and as declared in petitioner's VAT Returns, respondent found that petitioner has unsupported expenses in the amount of P2,212, 105.00, computed as follows:7o Domestic Purchases per Summary List of Purchases p 61,813,615.32 Import Purchases per Summary List of Importations 46,025,439.90 Total Purchases per Summary Lists 107,839,055.22 Total Purchases per VAT retums 110,051,160.22 Discrepancy (P2,212, 105.00) Petitioner avers that P1,776,532.40 of the discrepancy r was properly documented and the corresponding withholding taxes were paid and remitted. 70 Exhibit "TTT", p. 5.

DECISION CTA CASE NO. 8178 Furthermore, the findings of the ICPA71 show that the amount of P1,776,532.40 represents accrual of expenses which was subjected to EWT and was reported in the Alphalist of Payees Subject to Expanded Withholding Tax72 and BIR Form No. 1604-E73. Said amount is substantiated by journal vouchers (JV), invoices, and official receipts74. It must be noted that the particular item was declared by respondent to be unsupported. This means that petitioner must present valid supporting documents in order to refute the same. However, instead of presenting invoices or official receipts, petitioner merely established the fact of withholding by submitting JVs and tracing it to the BIR Returns. Petitioner then concludes that the alleged unsupported purchases are allowable deductions. The Court finds petitioner's position misplaced. Even though the fact of withholding is essential for it to be valid as a deduction for income tax purposes, the same should have been adequately proven by presenting the pertinent return reflecting the amount withheld for the transaction. Petitioner only presented the Annual Return for Expanded Withholding Tax (BIR Form No. 1604-E) and the corresponding Alphalist of Payees. The Alphalist, however, merely showed the total amount of income payments to payees throughout the year. Thus, the Court cannot establish if the transactions, which allegedly embody this particular assessment item, were actually included in those total amounts of payment per payee. Nevertheless, upon re-examination of the submitted pieces of evidence, the Court finds that only P1,688,690.03 was supported by JVs and of this amount, only P139,412.46 V was supported by valid invoices or official receipts, computed as follows: 71 Exhibit "TTT", p. 6. 72 Exhibit "BB". 73 Exhibit "CC". 74 Exhibits "AA.l" to "AA.ll".

DECISION CTA CASE NO. 8178 Payee Income Tax Withheld JVExh Invoice/OR BPI/MS Insurance Corp payments p 1,189.40 No. Exh. No. BPI/MS Insurance Corp p 62,534.10 AA.l AA.l.l Laguna TS Land, Inc. 3,645.42 AA.2 AA.2.1 Magic Genie Shuttle 71,493.66 AA.3 none Service 19,935.23 VISSCOR 398,704.68 136.36 AA.4 none VISSCOR 6,818.18 AA.S none Tri-R Allied Industries, AA.6 none Inc. 102,442.67 2,253.74 Laguna TS Land, Inc. 102,442.67 2,253.74 AA.7 AA.7.1 VISSCOR AA.8 none VISSCOR 5,384.70 53.85 AA.9 none TS Tech Philippines Inc AA.lO none 398,704.68 19,935.23 AA.ll none 102,142.99 2,247.15 39,317.02 398,704.68 864.97 Pl ,688,690.03 19,935.23 p 72,450.32 Due to the foregoing, the Court finds that petitioner should be granted allowable deduction but only to the extent of P139,412.46 (the sum of P62,534.10, P71 ,493.66 and P5,384.70), while the disallowance of P2,072,692.54 should be upheld. D. Disallowed importation due to lack of supporting documents P3,475,910.00 Respondent disallowed petitioner's claimed deduction for importation in the amount of P3,475,910.00 for being unsupported. In the Formal Letter of Demand, respondent explained that this particular disallowance represents excess purchases claimed per petitioners VAT Return as compared to the purchases reflected per BOC furnished by AITEID; hence, assessed pursuant to Section 34 of the NIRC of 1997, as amended. From the BIR Records, it appears that the amount was derived by grossing up the VAT paid for the following items7s, V which formed part of the disallowed input tax arising from the same allegation: 75 BIR Records, p. 871.

DECISION CTA CASE NO. 8178 Date Import Entry Input Tax No. 1/15/2005 p 7,469.00 1/24/2005 001205 13,530.00 4/4/2005 12163 39460 324,792.00 P345, 791.00 The gross value of the above amount is only P3,457,910.00 (P345,791.00 divided by 10o/o VAT rate) and not P3,4 75,910.00. On the other hand, petitioner alleges that the imported purchases amounting to P3,457,910.00 has been duly accounted for and substantiated with supporting documents that include, but not limited to, bill of lading, commercial invoices, and Bureau of Customs assessment form76� A summary of the findings of this Court after examination of the documents shows: Exhibit Nos. Date IEIRD Input Tax Invoice Bill of IEIRD BOC Tax Base No. Lading Assessment per IEIRD none 1/15/2005 1205 p 7,469.00 none none none Notice p - 1/24/2005 12163 13,530.00 none none DD.2 4/4/2005 39460 4,389.53 none none DD.4 none 135,298.43 4/4/2005 39460 1,960.61 none none DD.4 none 4/4/2005 39460 2,828.19 none none DD.4 DD.4.1 43,895.29 4/4/2005 39460 8,797.43 none none DD.4 DD.4.1 4/4/2005 39460 none DD.3 DD.4.1 19,606.06 306,815.83 DD.4.1 P345, 790.59 DD.4.1 28,281.96 87,974.81 3,068,158.25 P3,383,214.80 Despite the insufficiency of the submitted documents to warrant support on the existence of the transaction, the Court has already given credence to petitioner's presentation of the IEIRD alone since the said document sufficiently laid out the details of the importation (i.e., importer, nature and quantity of goods imported, and tax due). As for IEIRD No. 1205, petitioner presented BOC Form No. 38-A, which is an Official Receipt issued by the BOC with Reference No. 12040318777 indicating a VAT amount of{-- 76 Exhibits "DD.l" to "DD.4". 77 Exhibit "DD.l ".

DECISION CTA CASE NO. 8178 P7,687.00. However, the Court cannot consider the said evidence since the document does not indicate that the payment actually referred to IEIRD No. 1205. All the foregoing considered, the Court finds that petitioner should be allowed to deduct the supported importation amounting to P3,383,214.80 and should only be disallowed the amount of P74,695.20 for failure of petitioner to account for and support the same. E. Disallowed purchases for being out-of-period P406, 120.00 In its Memorandum, petitioner avers that the disallowed purchase in the amount of P406, 120.00 for being outside the period of claim (i.e., taxable year 2005) appears to be not substantiated and remained to be a mere allegation. Relevantly, Section 34 of the NIRC of 1997, as amended, provides for the general definition of allowable deductions in a taxable year, to wit: "SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income t ax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(l), there shall be allowed the following deductions from gross 1ncome: (A) Expenses. - (1) Ordinary and Necessary Trade, Business or Professional Expenses. - (a) In General.- There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, V management, operation and/ or conduct of the trade, business or exercise of a profession xxx." (Emphasis supplied)

DECISION CTA CASE NO. 8178 An examination of the Summary List of Importation78 shows that Import Entry No. C 146084 with a landed cost of P406, 120.00 was imported on December 6, 2004 with the corresponding payment of VAT in the amount of P40,612.00 made on December 15, 2004. Further, the ICPA Report mentions that petitioner was amenable to the said fact. 79 Considering that the evidence and the ICPA Report confirms that the disallowed amount of P406, 120.00 is outside the period of the subject assessment, viz., taxable year 2005, the Court shall not disturb the said item of assessment. F. Disallowed expenses due to non-withholding 1. Salaries and Wages (Non- withholding of WTC) P3, 199,403.68 Respondent claims that the account salaries and wages for the year 2005 in the amount of P3, 199,403.68 was not subjected to withholding tax pursuant to Section 32 in relation to Section 44 of the NIRC of 1997, as amended. As a consequence of the alleged non-withholding, respondent disallowed the said amount from petitioner's claimed deductible expenses. As earlier discussed under the deficiency WTC assessment, petitioner failed to prove that it withheld and remitted the withholding tax due on the salaries and wages in the amount of P5,615,740.51. Section 34(K) of the NIRC of 1997, as amended, which provides for the Additional Requirement for Deductibility of Certain Payments states that "Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income xxx shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue". Out of the P5,615,740.51 salaries and wages for which petitioner failed to withhold and remit the corresponding tax,~ 78 Exhibit "TTT", Annex E. 79 Exhibit "TIT", p. 7.

DECISION CTA CASE NO. 8178 the amount of P244,550.QQBO was not claimed as deduction from petitioner's taxable gross income. As a result, only the remaining amount of P5,371,190.51 shall be disallowed as deduction. 2. Income payments and rental expense not subjected to EWT Based on the finding that petitioner failed to withhold and remit the EWT on certain income payments/expenses pursuant to RR No. 2-98, as amended, as discussed under the deficiency EWT assessment, respondent disallowed the following income payments/expenses as deductions from petitioner's taxable gross income: Payment to suppliers not subjected to 1% EWT P40,669,945.46 Payment of services not subjected to 2% EWT 7,451,181.53 Rental expense not subjected to 5% EWT 3,216,305.80 As earlier discussed, petitioner failed to prove that it properly withheld and remitted the 1�/o EWT due of P146,466.46 on its income payments of P14,646,646.46 and the So/o EWT of P81,074.34 on rental payments of P1,621,486.80. However, of the P14,646,646.46 income payments subject to 1o/o EWT, the following amounts were not claimed by petitioner as deductible expenses: Office Supplies Amount Exhibit "T" Representation and Entertainment p 14,630.00 Section D Transportation and Travel Miscellaneous 12,371.00 Line 91 Subtotal 32,772.00 20,907.00 Line 96 P80,680.00 Line 97 Line 108 Increase in Assets: p 47,727.00 Machinery and Factory and 103,800.00 Office fumiture, fixtures equipment P151,527.00 Total Increase in Assets81 p 3,181.80 Less: Depreciation for 2005 Machinery and Factory (P47,727 + 15 years82) 80 Exhibit "T", Section E, line 76. 81 Exhibit "U", Notes to Financial Statements, Note 11, p. 21. 82 Exhibit "U", Notes to Financial Statements, Note 2.6, p. 10.

DECISION CfA CASE NO. 8178 Office fum., fixtures and equipment (P103,800 + 3 yearsB3) 34,600.00 Total Depreciation p 37,781.80 Unamortized Increase in Assets 113,745.20 P194,425.20 Total Unclaimed Deduction Consequently, only the amounts of P14,452,221.26 and P1,621,486.80 representing income payments to suppliers not subjected to 1�/o EWT and rental expense not subjected to 5�/o EWT, respectively, shall be disallowed from petitioner's claimed deductible expenses pursuant to Section 34(K) of the NIRC of 1997, as amended, detailed below: Payment to supplier not subjected to 1% p 14,646,646.46 Less: Unclaimed Deductions 194,425.20 Disallowed Payments to suppliers not subjected to 1% EWT p 14,452,221.26 Disallowed Rental Expense not sul::>iected to 5% EWT 1,621,486.80 Total Disallowed Deductions P16,073,708.06 In summary, petitioner is liable to pay basic deficiency income tax for taxable year 2005 1n the amount of PS, 166,024.81, computed as follows: Taxable income (loss) P39,472,231.31 (P29 ,401 ,455.00) Income items not subjected to income 17,652.01 tax/ disallowed expenses: 63,488,289.63 2,072,692.54 P34,086,834.63 Unaccounted sales 74,695.20 Unaccounted gross income 35% Unsupported purchases (local) 406,120.00 P11,930,392.12 Unsupported purchases (importation) 5,371,190.51 Disallowed Purchases (out of period) 14,452,221.26 6,764,367.31 Salaries and Wages not subiected to WTC 1,621,486.80 P5,166,024.81 Payment to suppliers not subiected to 1% EWT Rental expense not subjected to 5% EWT p 5,137,981.00 Taxable income 1,626,386.31 Income Tax rate Income tax due thereon Less: Creditable withholding tax Excess credits carried forward from previous years Current year tax credits Basic deficiency income tax due 83 Exhibit "U", Notes to Financial Statements, Note 2.6, p. 10.

DECISION CTA CASE NO. 8178 IV. DEFICIENCY VALUE-ADDED TAX- P26,944,168.37 Respondent computed the deficiency VAT assessment as follows: 84 Vatable Sales per Return p 93,094,968.04 Add: Unaccounted Sales per BOC data p 4,736,468.99 170,922,989.62 34,891,665.67 P264,017,957.66 Unaccounted Sales per TRS LN vs. CWT vs. ITR 6,597,104.64 p 26,401,795.77 90,960,855.70 Exempt Sales (Unsupported) 33,736,894.62 8,701,883.30 p 17,699,912.47 Zero-Rated Sales (Unsupported) p 5,931,497.59 Sales not subjected to VAT (Audited F/S vs. VAT 6,402,572.03 9,244,255.90 returns) 4,602,543.99 p 26,944,168.37 Vatable Sales per Audit p 16,936,613.61 7,627,116.81 Output Tax Due P9,309,496.80 Less: Available Input Tax 607,613.50 Carried over from previous quarter p 9,194,255.90 Input Tax (local) 50,000.00 Input Tax (importation) Available Input Tax Less: Input Tax forwarded to next quarter Available Input Tax Less: Disallowed Input Tax Unsupported Input Tax P221,210.50 Input Tax not found per BOC 345,791.00 data Input Tax - out of period 40,612.00 Output Tax Due Interest (Jan. 26, 2006 to August 31, 2008) Compromise Penalty VAT deficiency As can be seen from the above computation, the assessment arose from the following items: A. Unaccounted Sales per BOC data P221,210.50 , 4,736,468.99 B. Unaccounted Sales per TRS LN vs. CWT vs. ITR 345,791.00 34,891,665.67 C. Exempt Sales (Unsupported) 40,612.00 D. Zero-Rated Sales (Unsupported) 6,597,104.64 E. Sales not subjected to VAT 90,960,855.70 33,736,894.62 (Audited F/S vs. VAT returns) F. Input Tax forwarded to next quarter 7,627,116.81 G. Disallowed Input Taxes 607,613.50 Unsupported Input Tax Input Tax not found per BOC Data Input Tax- Out of Period 84 Exhibit "10", BIR Records, p. 886.

DECISION CTA CASE NO. 8178 The Court shall determine the propriety of each of the aforesaid items. A. Unaccounted sales per BOC data- P4,736,468.99 The alleged unaccounted sales per BOC data in the amount of P4,736,468.99 was derived by dividing the unaccounted importation per BOC in the amount of P4,712,313.00 by the gross profit rate of 99.49o/o. As earlier discussed under item III(B), the finding of the deficiency income tax for undeclared gross income should be upheld for lack of supporting documents. Accordingly, the said finding shall extend to this particular item of assessment under deficiency VAT. However, as discussed therein, due to the improper usage of percentage by respondent, the Court revised the amount to P4,729,965.01. B. Unaccounted sales per TRS-LN- P34,891,665.67 The circumstances of this particular item have already been laid down in item III(A) above, pertaining to the Court's discussion on petitioner's deficiency income tax. The Court's finding that petitioner had unaccounted sales in the revised amount ofP39,472,231.31 shall remain and petitioner shall be liable for the corresponding deficiency VAT. C. Unsupported exempt sales- P6,597,104.64 In the FLD and the Details of Discrepancyss, respondent found that petitioner failed to substantiate VAT-exempt sales in the amount of P6,597,104.64, hence, was subjected to 10�/o deficiency VAT pursuant to Section 106 of the NIRC of 1997, as amended. The Court finds the assessment in order. As stated in its Articles of Incorporation86, petitioner is primarily engaged in the manufacture of car seats and interior components of cars and other similar motorized vehicles.~/ 85 Exhibit "10" and submarkings. 86 Exhibit "J".

DECISION CTA CASE NO. 8178 While petitioner did not indicate any amount in Line 21 - Exempt Sales/Receipts of its Quarterly VAT Returns87 for taxable year 2005, petitioner reported in its Summary List of Salesss VAT-exempt sales transactions to Automotive Interiors Corporation (AIC), a PEZA-registered entity, with Registration Certificate No. 99-08 dated February 10, 199989 , in the amount P6,597,104.64, broken down as follows: Period Covered VAT-Exempt Sales January 2005 P3,267,311.699o 865,944.5691 March 2005 1,168,889.0992 Apri12005 1,294,959.3093 Ma_y 2005 P6,597, 104.64 Total Under Executive Order (E.O.) No. 226, otherwise known as the "Omnibus Investments Code of 1987", sales by a VAT taxpayer from the customs territory to entities located 1n export processing zones are considered export sales, to wit: "ARTICLE 23. 'Export Sales' shall mean the Philippine port F.O.B. value, determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of exports products exported directly by a registered export producer or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same: Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents: Provided, further, That without actual exportation the following shall be considered constructively exported for purposes of this provision: (1) sales to bonded manufacturing warehouses of export- oriented manufacturers; (2) sales to export processing zones; xxx" (Emphasis supplied) "ARTICLE 77. Tax Treatment of Merchandise in the Zone.- (1) Except as otherwise provided in this Code, foreign r and domestic merchandise, raw materials, supplies, articles, // equipment, machineries, spare parts and wares of every 87 Exhibits "FF-1" to "FF-12", 88 BIR Records, pp. 740, 741, 742, and 744. 89 Exhibit "M" or "HH". 90 BIR Records, p. 744. 91 BIR Records, p. 742. 92 BIR Records, p. 741. 93 BIR Records, p. 740.

DEOSION CTA CASE NO. 8178 description, except those prohibited by law, brought into the zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise whether directly or indirectly related in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding. (2) Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the zone, shall be considered as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such transaction." (Emphasis supplied) Section 106(A)(2)(a)(5) of the NIRC of 1997, as amended, treats export sales governed by Executive Order No. 226 and other special laws as subject to zero percent VAT, to wit: "SEC. 106. Value-added Tax on Sale of Goods or Properties. - (A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: XXX XXX XXX 2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales.- The term 'export sales' means: XXX XXX XXX (5) Those considered export sales under Executive V Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws."

DECISION CTA CASE NO. 8178 Moreover, the Supreme Court 1n the case of Commissioner of Internal Revenue vs. Toshiba Information Equipment (Phils.}, Inc.94 explained thus: "Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory; thus, creating the fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise? The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT." (Emphasis supplied) Similarly, in the case of Commissioner ofInternal Revenue vs. Sekisui Jushi Philippines, Inc.95, the Supreme Court elucidated that: "Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero percent." After examination of AIC's Certificate of Registration with the PEZA96 , the Court finds that the same is not sufficient to prove that AIC was PEZA-registered in taxable year 2005. Considering that the registration is subject to the provisions~ 94 G.R. No. 150154, August 9, 2005. 95 G.R. No. 149671, July 21,2006. 96 Exhibit "M" or "HH".

DECISION CTA CASE NO. 8178 and rules and regulations of Republic Act No. 7916 as well as the terms and conditions of the Registration Agreement, the PEZA registration may be revoked if an entity violates any of the afore-mentioned. It is therefore imperative for petitioner to prove that AIC is registered with PEZA in the year 2005, when the subject sales of goods were made to AIC, to justify the imposition of VAT at zero percent (0�/o). Absent the required PEZA certification, the Court is constrained to uphold the deficiency VAT assessment. D. Unsupported zero-rated sales- P90,960,855.70 Respondent alleged that petitioner failed to substantiate zero-rated sales amounting to P90,960,855.70; hence, petitioner was assessed 10�/o deficiency VAT on the said amount. While petitioner did not report any zero-rated sale in Line 20- Zero-rated Sales/Receipts of its Quarterly VAT Returns97 for taxable year 2005, petitioner claims that it made zero-rated sales to the following companies 1n the amount of P90, 960,855.70: Customer Amount TS Tech Trim Philippines, Inc. (TTTPI) p 65,946,656.00 Honda Cars Philippines, Inc. (HCPI) Total 25,014,199.70 P90,960,855. 70 To prove that sales to the above entities are zero-rated VAT, petitioner presented statements of accounts9s and sales invoices99 issued to TTTPI and HCPI, respectively, as well as Certificate of Registration No. 94-94 dated January 20, 1998100 and Certificate of Registration No. 00-040 dated May 17, 2000101 issued by PEZA to TTTPI and HCPI, respectively. Again, the Court finds the PEZA certificates insufficient to prove that TTTPI and HCPI were PEZA-registered in taxable year 2005. Since the registration is subject to the provisions and rules and regulations of Republic Act No. 7916 as well as{-- 97 Exhibits "FF-1" to "FF-12"0 98 Exhibits "KK01" to "KKo6"o 99 Exhibits "JJo1" to "JJo25"o 100 Exhibit "L"o 101 Exhibit "N"o

DECISION CTA CASE NO. 8178 the terms and conditions of the Registration Agreement, the PEZA registration may be revoked if an entity violates them. Hence, it is necessary for petitioner to prove that 'ITfPI and HCPI are registered with PEZA in the year 2005, when the subject sales of goods were made to 'ITfPI and HCPI, to justify the imposition of VAT at zero percent. Moreover, the statements of accounts presented to prove zero-rated transactions with 'ITfPI are unacceptable proof of transactions for not being compliant with Section 113(A)(l) and B(2)(c) of the NIRC of 1997, as amended, requiring a VAT zero-rated invoice for every zero-rated sale, barter or exchange of goods and properties. Absent the required PEZA certifications for 'ITfPI and HCPI and VAT compliant zero-rated sales invoices issued to 'ITfPI, the Court is constrained to uphold the deficiency VAT assessment. E. Sales not subject to VAT- P33,736,894.62 According to the Formal Letter of Demandl02, the assessment came from the discrepancy between the sales subjected to VAT per VAT Returns and the sales per AFS. Respondent computed the sales not subjected to VAT as follows: Sales per ITR (Regular rate) P18,649,930.00 p 188,353,868.00 Add: Proceeds from sales of ftxed assets per 13,698,725.00 3,340,000.00 36,035,955.00 cash flow statement 347,300.00 p 224,389,823.00 Income from scrap sales FS Rental income per FS - 97,557,960.34 Other income per FS p 126,831,862.66 Vatable Sales/ Receipts p 6,597,104.64 Less: Adjustments 90,960,855.70 93,094,968.04 Unsupported Exempt Sales P33, 736,894.62 Unsupported Zero-rated sales Sales subject to VAT per audit Sales suqject to VAT per return Sales not subjected to VAT 102 Exhibit "10".

DECISION CTA CASE NO. 8178 As can be deduced from the above table, the assessment is composed of several findings to be discussed individually as follows: 1. Proceeds from sales of f"lxed assets per cash flow statement (P18,649,930) Petitioner disposed most of its personal assets in 2005 in preparation for the merger with TITPI. The total proceeds of Pl8,649,930.00 were reflected in the Statement of Cash Flow103 � The sales of assets not subjected to VAT were derived by respondent as follows: Classification Transferee Transfer Price Net Book Value Machineries & Equipment Yashima Sangyo Phils., Inc. p 11,896,414.78 p 11,896,414.78 Vehicle TS Tech Trim Phils, Inc. 3,025,860.47 3,025,860.47 Vehicle TS Tech Trim Phils, Inc. 1,909,043.45 1,909,043.45 Vehicle TS Tech Trim Phils, Inc. Vehicle 992,646.73 992,646.73 Total Employees of TS Tech 825,964.57 478,864.37 P18,649,930.00 P18,302,829.80 Based on the Report of the ICPA, the sale of machineries and equipment to Yashima Sangyo Phils., Inc. (YSMI) is evidenced by a contract of salelo4. YSMI is a PEZA-registered entity under PEZA Registration No. 05-50105. On the other hand, vehicles sold to TITPI, which is also a PEZA-registered entity under PEZA Certification No. 94-94, were supported by journal vouchers enumerated below: Amount Voucher No. Exhibit No. P3,025,860.4 7 3282 PP.l 3284 PP.2 1,909,043.45 3334 PP.3 992,646.73 V Likewise, the vehicles sold to petitioner's employees were supported by Journal Voucher No. 3386106. The resulting gain 103 Exhibit "TTT", Findings and Observations e.l, p. 15. 104 Exhibit "NN". 105 Exhibit "00". 106 Exhibit "PP.4".

DECISION CTA CASE NO. 8178 on the sale in the amount ofP347,100.20 was reported as part of Other Operating Income in the Financial Statements. In the Petition for Review, petitioner contends that said sales and/ or transactions are not made in the course of business of petitioner, thus, are not subject to VAT imposed under Section 106 of the Tax Code.l07 The Court finds this averment untenable. Significantly, in CS Garments, Inc. vs. Commissioner of Internal Revenuelos, this Court sitting En Bane held that sales or transactions in the ordinary course of trade or business include transactions incidental thereto pursuant to Section 105 of the Tax Code, to wit: "xxx It further alleged that since its primary business is to engage in the manufacture of garments for sale abroad, the sale of its used company car does not have a direct relevance to petitioner's primary business of manufacturing of garments. The argument is without merit. Section 105 of the NIRC of 1997, as amended, states that: 'SEC. 105. Persons Liable.- Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code. XXX XXX XXX 'The phrase 'in the ordinary course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private V organization (irrespective of the disposition of its net income and whether or not it sells exclusively 107 Par. 26, Petition for Review, docket, p. 9. 108 CTA EB No. 287 (CTA Case No. 6520), January 14,2008.

DECISION CTA CASE NO. 8178 to members or their guests), or government entity. (Emphasis supplied) Based on the foregoing, the VAT is imposed on a sale or transaction entered into by a person in the course of any trade or business. A transaction will be characterized as having been entered into by a person in the course of trade or business if it is: (1) regularly conducted; and (2) undertaken in pursuit of a commercial or economic activity. Likewise, transactions that are made incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business. 'Incidental' means something else as primary; something necessary, appertaining to, or depending upon another, which is termed the principal. Hence, an isolated transaction is not necessarily disqualified from being made incidentally in the course of trade or business. Here, petitioner's pnmary business 1s the manufacturing of garments for sale abroad. In carrying-out its business, petitioner acquired and eventually sold a Mercedes Benz to its General Manager Mr. Sudhoff. Prior to the sale, the motor vehicle formed part of petitioner's capital assets, specifically under the account, 'Property, Plant and Equipment'. The Rules on International Accounting Standards (lAS) 16 defines Property, Plant and Equipment as follows: '6. Definitions Property, plant and equipment are tangible assets that: (a) are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period.' (Emphasis supplied) Therefore, the sale of the motor vehicle is an incidental transaction because the said vehicle was purchased and used in furtherance of petitioner's business." Applying the foregoing, petitioner's sales of vehicles, machineries and equipment were clearly made in the course of its trade or business subject to the 10�/o VAT.~

DECISION erA CASE NO. 8178 On the other hand, petitioner also anchors its averments on the fact that it is an entity existing under Republic Act No. 7916. Same is the case with its vendees (TTTPI and YSMI) of machineries and equipment. Then again, as stated earlier, it cannot be ascertained from TTTPI's PEZA Certification of Registration whether it is still duly registered with the PEZA in 2005. As regards YSMI's PEZA Certification of Registration, the same shows that YSMI was duly registered with the PEZA when the sale transaction occurred in August 2005. However, the sale cannot qualify for VAT zero-rating under Section 106(A)(2)(a)(5) of the NIRC of 1997, as amended, as it is unsupported by VAT zero-rated sales invoice. 2. Income from scrap sales per FS (P13,698,725) The ICPA verified the income from scrap sales presented in the AFSI09 in the amount of P13,698,725.00 and discovered that the account does not consist solely of scrap sales but also includes various income recorded in petitioner's books, broken down as follows:IIo Classification Amount Write-off of long outstanding payables p 6,067,257.31 Negative balance of bad debts expense Reversal of accruals 4,591,772.60 Negative balance of support fees 1,589,928.40 Scrap sales 1,347,768.66 Insurance claim Amortization of car loan 56,023.99 Scrap sales to associate 25,174.07 Divided income 18,000.00 TOTAL 2,200.00 600.00 P13,698, 725.03 Petitioner submitted General Journal Entries in support of the write-off of long outstanding payables in the amount of P6,067,257.31 111 , net credit balance of bad debts expense in the amount of P4,591,772.60112, reversal of accruals in the~ 109 Exhibit "U", Notes to Financial Statements, Note 17. 110 Exhibit "TIT", p. 16. 111 Exhibits "QQ.l" to "QQ.6". 112 Exhibits "RR.l" to "RR.3".

DECISION CTA CASE NO. 8178 Page SO of 55 amount of P1,500,000.00113 and the credit balance of support fees expense amounting to P54,590.81114. Petitioner argues that the nature of the above transactions is not VATable for it is not a sale or service in the ordinary course of business. However, these general journals merely showed that the accounting transactions were taken up in the books and eventually presented in the AFS. They are insufficient to prove the existence and the details of the said transactions. Hence, the Court cannot verify the nature and actual circumstances of the said items to be able to arrive at a reasonable understanding of their possible tax consequences. For this reason the Court upholds this particular assessment item. 3. Rental Income per FS not subjected to VAT (P3,340,000.00) Petitioner entered into a contract of sublease on August 31, 2005 with YSPI, a PEZA-registered entity and is subject to 5o/o preferential tax rate. The contract of subleasens covers the period August 31, 2005 to August 31, 20 15 with a contract price of P10,020,000 annually, divided by twelve equal monthly installments, payable on the 10th day of each month. Respondent's assessment was based on petitioner's treatment of the said rental income as a VAT-exempt sale, on account of both petitioner and YSPI being PEZA-registered entities. It was noted that per the Annual ITR116, the amount of P3,340,000.00 was reported as income subject to 5o/o Gross Income Tax (GIT) based on the incentives granted by PEZA. For VAT purposes, such rental income is VAT-exempt V pursuant to Section 109(K) of the NIRC of 1997, as amended, which states: 113 Exhibit "SS". 114 Exhibit "TT'. 115 Exhibit "UU". 116 Exhibit "T".

DECISION CTA CASE NO. 8178 "SEC. 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: XXX XXX XXX (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;" Considering the foregoing, the deficiency VAT assessment on rental income in the amount of P3,340,000.00 shall be cancelled. 4. Other income perFS (P347,300.00) The other income allegedly not subjected to VAT 1s broken down as follows: Gain on sale of transportation equipment to TS Tech employees p 347,100.00 Dividend Income 200.00 Total P347,300.00 As correctly pointed out by the ICPA, the amount of gain on sale of transportation equipment to TTTPI was already covered by the deficiency VAT assessment on the proceeds on sale of assets not subject to 10o/o VAT.ll 7 As a result, this item of assessment in the amount of P347,100.00 should be canceled. Anent the dividend income of P200.00, since the same is neither a sale of good nor sale of service, the deficiency VAT assessment thereon shall be cancelled. V In fine, the sales not subjected to VAT shall be re- computed as follows: 117 Exhibit "TTT", Findings and Observations, e.4, p. 18.

DECISION CTA CASE NO. 8178 Proceeds from sales of fixed assets p 18,649,930.00 Income from scrap sales 13,698,725.00 Sales not subjected to VAT P32,348,655.00 F. Input Tax forwarded to next quarter P7,627,116.81 Petitioner contends that respondent failed to account for the excess input tax as of the end of CY 2005 in the amount of P7,627,116.81 reflected in Line 31 of the Quarterly VAT Return for the fourth quarter of CY 2005.118 Looking at the deficiency VAT computation presented at the beginning of the report, respondent deducted the same from the total available input VAT to be credited against the output VAT liability. Since respondent was not able to provide the factual and legal bases for disallowing such excess input VAT, the Court finds it proper to cancel such disallowance. G. Disallowed Input Taxes- P607,613.50 The breakdown for the disallowed input taxes as assessed by respondent is illustrated as follows: Unsupported input tax p 221,210.50 Input tax not found per BOC data 345,791.00 Input tax- out of period 40,612.00 Total P607 ,613.50 It is observed that these disallowed input VAT arose from the corresponding assessment for deficiency income tax as earlier discussed in items III(C), (D), and (E). Hence, the Court's findings for such items shall extend to the corresponding input VAT assessment. As a result, the disallowed input tax is revised as follows: Unsupported input tax Revised Amount Revised Input Input tax not found per BOC data per Deficiency IT Tax Assessment p 207,269.25 p 2,072,692.54 7,469.52 74,695.20 118 Exhibits "FF.ll" to "FF.l2".

DECISION 406,120.00 40,612.00 CTA CASE NO. 8178 P2,553,507. 74 P255,350. 77 Input tax- out of period In light of the foregoing discussions, petitioner is liable to pay basic deficiency VAT for taxable year 2005 in the amount of P10,039, 115.13, computed as follows: Vatable Sales per Return p 93,094,968.04 Add: Unaccounted Sales per BOC data p 4,729,965.01 174,108,811.66 39,472,231.31 p 267,203,779.70 Unaccounted Sales per TRS LN vs. CWT vs. ITR 6,597,104.64 p 26,720,377.97 90,960,855.70 Exempt Sales (Unsupported) 32,348,655.00 16,681,262.84 p 10,039,115.13 Zero-rated Sales (Unsupported) p 5,931,497.59 Sales not subjected to VAT (Audited F/S vs. VAT 6,402,572.03 returns) 4,602,543.99 Vatable Sales per verification P16,936,613.61 Output Tax Due 255,350.77 Less: Available Input Tax Carried over from previous quarter Input Tax (local) Input Tax (importation) Avallable Input Tax Less: Disallowed Input Tax Unsupported input tax P207,269.25 Input tax not found per BOC data 7,469.52 Input tax- out of period 40,612.00 Basic deficiency VAT V. COMPROMISE PENALTIES As regards the imposed compromise penalties, it must be stressed that compromised penalty is imposed to avoid prosecution for violation of the provisions of the Tax Code.119 Pursuant to Revenue Memorandum Order (RMO) No. 01-90, later amended by RMO No. 19-07, compromise penalties are only suggested in settlement of criminal liability, and may not be imposed or exacted on a taxpayer in the event that a taxpayer refuses to pay the same. Clearly, the compromise penalty implies a mutual agreement between the parties in respect to the thing or subject matter which is so compromised. The imposition of the compromise penalty V without the conformity of the taxpayer 1s illegal and unauthorized.12o 119 The Philippines International Fair, Inc. vs. The Collector ofInternal Revenue, eta/., G.R. Nos. L-12928 and L-12932, March 31, 1962. �12 Commissioner ofInternal Revenue vs. Lianga Bay Logging Co., Inc., eta/., G.R. No. 35266, January 21, 1991.

DECISION CTA CASE NO. 8178 There was nothing in the records which would show that petitioner consented to the compromise penalty. Consequently, the compromise penalty should not be imposed and must be cancelled. WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED. The assessments issued by respondent against petitioner for taxable year 2005 covering deficiency expanded withholding tax, withholding tax on compensation, income tax, and value-added tax are hereby AFFIRMED but with modifications. Accordingly, petitioner is ORDERED TO PAY respondent the amount of P20,245,996.43 representing deficiency expanded withholding tax, withholding tax on compensation, income tax, and value-added tax, inclusive of the twenty-five percent (25o/o) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: Deficiency Tax Basic Tax 25% Surcharge Total p 284,426.00 Expanded Withholding Tax p 227,540.80 p 56,885.20 Withholding Tax on 955,145.51 Compensation 764,116.41 191,029.10 6,457,531.01 Income Tax 5,166,024.81 1,291,506.20 12,548,893.91 10,039,115.13 2,509,778.78 P20,245, 996.43 Value-Added Tax P16,196,797.15 P4,049, 199.28 TOTAL In addition, petitioner 1s ORDERED TO PAY the following: a) Deficiency interest at the rate of twenty percent (20�/o) per annum on the basic deficiency expanded withholding tax, withholding tax on compensation, income tax, and value- added tax computed from the dates indicated below until full payment thereof pursuant to Section 249(B) of the NIRC, as amended; Expanded Withholding Tax Basic Tax 20% Deficiency Withholding Tax on Compensation p 227,540.80 Interest Computed Income Tax Value-Added Tax 764,116.41 from 5,166,024.81 10,039,115.13 January 15, 2006 January 15, 2006 April 15,2006 April25,2006

DECISION CTA CASE NO. 8178 b) Delinquency interest at the rate of 20% per annum on the total amount of P20,245,996.43 and on the 20�/o deficiency interest which have accrued as afore-stated in (a), computed from August 31, 2008 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended. SO ORDERED. ~ d_ c: ~.J-~__,# AMEL~COTAN~ANALASTAS Associate Justice WE CONCUR: ~~C-~~.Q. fo JtJANITO c. CASTANEDK, jR. CAESAR A. CASANOVA Associate Justice Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~~ C.~~~t:J.. J'UANITO C. CASTANEDA:, JR. Associate Justice Chairperson CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. Presiding Justice