SOUTHERN LUZON DRUG CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION SOUTHERN LUZON DRUG CTA Case No. 8941 CORPORATION, Members: Petitioner, -versus- CASTANEDA, JR., Chairperson CASANOVA, and MANAHAN, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, SEP 07 2018 /~ r/;; -;.: -~ ~ ~-I-~ ~-~ Respondent. X- - - - - - - - - - - - - - - ; -- - - - - .X MANAHAN, J.: This case involves a Petition for Review filed by Southern Luzon Drug Corporation to appeal the Commissioner of Internal Revenue's denial of its protest against the assessment for deficiency value-added tax plus interest for the taxable period January 1, 2 0 12 t o June 3 0 , 2012. FACTS Petitioner Southern Luzon Drug Corporation is a corporation organized u nder Philippine laws with principal place of business at No. 7, Mercury Avenue (formerly Richmonde Avenu e), Bagumbayan, Quezon City. 1 Respondent is th e duly appointed Commissioner of Internal Revenue (CIR), vested by law to implement and enforce t h e provisions of the National Internal Revenue Code (NIRC) and other tax laws.2 1 Docket, Vol. I, Petition for Review (PFR) , pp. 6-7. 2 Docket, Vol. II , Joint Stipulation of Facts and Issues (JSFI), p . 779. ~

DECISION CTA Case No. 8941 Page 2 of23 Petitioner received Letter of Authority (LOA) No. LOA-V07- 2012-00000165/SN: eLA2011000353003 dated December 11, 2012 (First LOA), authorizing the examination of petitioner's books of accounts and other accounting records for the period January 1, 2012 to June 30, 2012. 4 The First LOA was received by petitioner on December 13, 2012. Petitioner received LOA No. LOA-040-2013-0001232/SN: eLA2011000673475 dated December 2, 2013 (Second LOA) for the investigation of the books of accounts and other accounting records of petitioner for the period January 1, 2012 to December 31, 2012, for all internal revenue taxes.6 Petitioner received Letter Notice (LN) No. 040-RLFTRS-12- 00-00916 dated June 9, 2014,7 requiring petitioner to reconcile and explain the allegedly under-declared sales in the amount of Php53,469,245.53 for taxable year 2012.8 The BIR issued the Preliminary Assessment Notice (PAN)9 dated May 26, 2014, 10 and received by petitioner on June 3, 2014. 11 On June 19, 2014, respondent issued, and petitioner received, the Formal Letter of Demand No. VAT-040-B001-1212 with attached Assessment Notice13 (FLD/FAN), signed by then Regional Director Jonas DP Amara, for deficiency VAT and interest for the period January 1, 2012 to June 30, 2012.14 Petitioner filed its protest15 to the FLD /FAN on July 21, 2014. The FLD contained the following computation: 3 Docket, Vol. IV, Exhibit "P-5", p. 1938; BIR Records, Exhibit "R-2", p. 8. 4 Docket, Vol. II, JSFI, p. 780. s Docket, Vol. IV, Exhibit "P-9", p. 1942. 6 Docket, Vol. II, JSFI, p. 780. 7 Docket, Vol. IV. Exhibit "P-10", p. 1944. B Docket, Vol. II, JSFI, p. 780. 9 Docket, Vol. IV, Exhibit "P-12", pp. 1946-1947; Vol. V, Exhibits "R-7" and "R-7.1", pp. 2202-2203. 10 Docket, Vol. II, JSFI, p. 780. " Docket, Vol. I, PFR, p. 10. 12 Docket, Vol. I, Exhibits "P-13" and "P-13-A", pp. 404-405; Vol. V, Exhibits "R-8.1" and "R-8.2", pp. 2205-2206. 13 Docket, Vol. V, Exhibit "R-8", p. 2204. 14 Docket, Vol. II, JSFI, p. 779. IS Docket, Vol. I, Exhibit "P-14", pp. 407-408.~

DECISION CTA Case No. 8941 Page 3 of23 DEFICIENCY VALUE ADDED TAX P1, 155,791,492.25 Taxable revenue/receipts per VAT returns 244,454,158.40 Add: Adjustments per investigation P1 ,400,245,650.65 Additional vatable sales from undeclared purchases p 168,029,478.08 Taxable sales/receipts per investigation 135,568,387.75 Output tax due thereon p 32,461,090.33 Less: Allowed tax credits/payments P1 78,698,850.20 12,895,501.64 21,692,239.79 Input tax on current purchases 24,276,855.23 p 45,356,591.97 Input tax carried over from previous period P224,667,945.22 Input tax deferred on capital goods exceeding P1M from 89,099,557.47 previous period Total Less: eDxecfeeerdrem. dg iPn1pMut tax on capital P24,581,547.68 good s 41,703,018.86 Input tax allocable to exempt sales 154.30 Disallowed input tax Additional input tax allocable to 3,126,437.61 exempt sales Excess input tax credits carried over 19,688,399.02 to succeeding period Deficiency value added tax Add: 20% interest p.a. (07 /26/2012 to 07 /21/2014) TOTAL AMOUNT DUE Petitioner received a Letter dated October 23, 2014 16 denying with finality the protest to the FLD I FAN .17 Petitioner received the said letter on October 30, 2014. 18 Petitioner also received a Preliminary Collection Letter (PCL)19 dated October 15, 2014, on October 31, 2014.20 Petitioner likewise received a Final Notice Before Seizure21 dated November 3, 2014. 22 On December 1, 2014, the instant Petition for Review (With Application for a Temporary Restraining Order and/ or Writ of Preliminary Injunction)23 was filed. Petitioner prays that assessment for taxable period January 1, 2012 to June 30, 2012 be cancelled and set aside. After conducting hearings on the Application for Temporary Restraining Order and/or Writ of Preliminary Injunction, the admission of evidence and submission of memoranda, the Court denied the application. In its Resolution dated May 8, 2015, the Court reasoned that petitioner failed to prove that it presently has no means to pay its current liabilities including the tax assessments.24 Petitioner's Motion for 16 Docket, Vol. I, Exhibit "P-18", p. 421. 17 Docket, Vol. II, JSFI, p. 781. 18 Docket, Vol. I, PFR, p. 11. 19 Docket, Vol. I, Exhibit "P-19", p. 422. 20 Docket, Vol. II, JSFI, p. 781, in relation to Vol. 1, PFR, p. 12. 21 Docket, Vol. I, Exhibit "P-20, p. 423. 22 Docket, Vol. II, JSFI, p. 781. 23 Docket Vol. I, pp. 6-36. / 24 Docket, Vol. I, Resolution dated May 8, 2015, pp. 551-555.,......

DECISION CTA Case No. 8941 Page 4 of23 Reconsideration was likewise denied.2s Said resolutions were the subject of a petition for certiorari with the Supreme Court docketed as G.R. No. 221283, which was subsequently dismissed. 26 Meanwhile, respondent, within the extended period granted,27 timely filed his Answer28 on January 29, 2015. The case was set for pre-trial with petitioner filing its Pre-Trial Brief29 on July 7, 2015, and Amended Pre-Trial Brief30 on August 3, 2015. Respondent filed his Pre-Trial Brief31on August 4, 2015. On August 24, 2015, the parties filed their Joint Stipulation of Facts and Issues (JSFI)32, which was approved and adopted in the Pre-Trial Order33 dated September 1, 2015. Petitioner filed its Motion For Commissioning of Independent Certified Public Accountant (ICPA)34 on September 10, 2015 to commission Michael L. Aguirre of M.L. Aguirre & Co., as ICPA. Said motion was granted and Michael L. Aguirre was commissioned as ICPA on October 7, 2015.35 The case proceeded to trial with petitioner presenting the following witnesses: (1) Jefferson L. Culanag;36 (2) Cyre M. Clores;37 and (3) Michael L. Aguirre.38 Petitioner filed its Formal Offer of Evidence (FOE)39 on March 16, 2016. The Court issued its Resolution dated June 15, 2016 admitting and denying several of petitioner's exhibits.40 On reconsideration, the Court issued Resolution dated December 2, 2016 which resulted to the denial of Exhibit "P-28-d" only.41 25 Docket, Vol. II, Resolution dated September 15, 2015, pp. 827-829. 26 Docket, Vol. IV, pp. 1471-1472. 27 Docket, Vol. I, pp. 208-210, in relation top. 211. 28 Docket, Vol. I, pp. 496-504. 29 Docket, Vol. II, pp. 688-706. 30 Docket, Vol. II, pp. 743-766. 31 Docket, Vol. II, pp. 767-773. 32 Docket, Vol. II, pp. 779-797. 33 Docket, Vol. II, pp. 800-807. 34 Docket, Vol. II, pp. 813-815. 35 Docket, Vol. II, Minutes of Hearing dated October 7, 2015, p. 841; Oath of Commission, p. 842 36 Docket, Vol. II, Minutes of Hearing dated October 7, 2015, p. 841; Vol. IV, Minutes of Hearing dated February 1, 2016, p. 1468. 37 Docket, Vol. II, Minutes of Hearing dated October 28, 2015, p. 843. 38 Docket, Vol. IV, Minutes of Hearing dated January 18, 2016, p. 1395. 39 Docket, Vol. IV, pp. 1566-1935. 40 Docket, Vol. V, pp. 2082-2098. 41 Docket, Vol. V, pp. 2184-2186.~

DECISION CTA Case No. 8941 Page 5 of23 On the other hand, respondent presented the following witnesses: (1) Alexis F. Suiiga;42 and (2) Jennifer P. Enriquez.43 Respondent filed his FOE44 on May 2, 2017, which was resolved by the Court on October 6, 201745. The Court granted the parties thirty (30) days within which to file their respective memoranda. 46 Petitioner filed its Memorandum47 on November 11, 2017, however, respondent, despite notice, failed to file his memorandum per Records Verification48 dated November 27, 2017. Considering the foregoing, the instant case was deemed submitted for decision on December 12, 2017.49 ISSUESSO The parties submit the following issues for resolution: 1. Whether or not FLD No. VAT-040-8001-12 dated June 19, 20 14 is void for having been issued pursuant to a withdrawn Letter of Authority. 2. Assuming arguendo that FLD No. VAT-040-BOO 1-12 dated June 19, 2014 is valid, whether or not the deficiency VAT and interest assessed therein have become final and executory. 3. Assuming arguendo that FLD No. VAT-040-8001-12 dated June 19, 20 14 is valid, whether or not petitioner had undeclared purchases in the amount of Php216,097,476.04, resulting to additional VATable sales of Php244,454, 158.40, rendering petitioner liable for deficiency VAT and interest. 4. Assuming arguendo that FLD No. VAT-040-8001-12 dated June 19, 20 14 is valid, whether or not petitioner is liable for deficiency VAT and interest arising from disallowed 42 Docket, Vol. V, Minutes of Hearing dated March 6, 2017, p. 2233. 43 Docket, Vol. V, Minutes of Hearing dated April 19, 2017, p. 2257. 44 Docket, Vol. V, pp. 2259-2264. 45 Docket, Vol. V, pp. 2280-2281. 46 Id. 47 Docket, Vol. V, pp. 2285-2328. 48 Docket, Vol. V., p. 2329. 49 Docket, Vol. V, p. 2330. so Docket, Vol. II, JSFI, pp. 781-782.~

DECISION CTA Case No. 8941 Page 6 of23 input VAT of Php3,126,437.61 in relation to VAT exempt sales. 5. Whether or not the petitioner 1s liable to pay the questioned deficiency VAT. Petitioner's Argumentssl Petitioner argues that the deficiency VAT and interest assessed under FLD No. VAT-040-B001-12 dated June 19, 2014 is void for having been issued pursuant to a cancelled/ repealed LOA. Petitioner states that the First LOA was cancelled/repealed by the issued Second LOA, since the Second LOA includes the tax type and tax period covered by the First LOA. Assuming arguendo that FLD No. VAT-040-B001-12 is valid, petitioner argues that the assessment has not become final and executory. Petitioner states that it timely filed its protest on July 21, 2014 contrary to the statement of respondent that petitioner filed the protest on August 1, 2014; that the protest complied with the requirements for a valid protest. As to the alleged underdeclaration of purchases, petitioner argues that it did not under-declare its 2012 purchases in the amount ofPhp216,097,476.04; that respondent did not present the Summary List of Sales allegedly submitted by petitioner's suppliers to enable petitioner to examine and verify the transactions; that respondent failed to inform petitioner of the factual and legal basis of the assessment on undeclared purchases; and, that the discrepancy from the declared purchases by petitioner and the sales declared by its suppliers is caused by the difference in the period of recognition of sales by the supplier and the period of recognition of purchase by the petitioner. As to the alleged disallowed input VAT ofPhp3,126,437.61 in relation to VAT-exempt sales, petitioner argues that only Php 1,807,696.00 should have been disallowed; that petitioner paid Php1,807,696.00 plus interest amounting to Sl Docket, Vol. I, PFR, pp. 13-26; Vol. V, Memorandum, pp. 2293-2326.tMV"'

DECISION CTA Case No. 8941 Page 7 of23 Php728,030.99 on July 30, 2014; and, considering the payment, this item of assessment should be cancelled. Finally, petitioner argues that deficiency interest should not be imposed since the 20o/o deficiency interest under Section 249(B) is only imposed on deficiency assessments for income tax, estate tax and donor's tax. Respondent's Counter-Arguments52 Respondent states that the First LOA pertains to VAT while the Second LOA involves all other internal revenue taxes, thus, the two LOAs pertain to different tax types. Respondent also argues that petitioner failed to timely file a valid protest with the correct office; that petitioner filed its protest at the Revenue District Office (RDO) No. 40-Cubao instead of the Office of the Regional Director as required in Revenue Memorandum Circular (RMC) No. 39-20 13; and, that this failure to validly file a protest rendered the assessment against petitioner as final, executory and demandable. RULING OF THE COURT The petition has merit. The Court has jurisdiction over the petition for review. Under Rule 4, Section 3(a)(1)53 of the Revised Rules of the Court of Tax Appeals (RRCTA}, the Court in division has jurisdiction over the decisions of the CIR in cases involving disputed assessments. In the instant case, the FLD/FAN was issued by respondent and received by petitioner on June 19, 20 14.54 Petitioner timely filed its protest on July 21, 20 1455.56 52 Docket, Vol. I, Answer, pp. 498-503. 53 Rule 4 Jurisdiction of the Court Sec. 3. Cases within the jurisdiction of the Court in Divisions. - (a) Exclusive original or appellate jurisdiction to review by appeal the following: (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue. 54 Docket, Vol. I, Exhibit "P-13", pp. 405-406. 55 Docket, Vol. I, Exhibit "P-14", pp. 407-408. 56 July 19, 2014 fell on Saturday.~

DECISION CTA Case No. 8941 Page 8 of23 Petitioner received respondent's letter dated October 23, 2014 on October 30, 2014, denying petitioner's protest and stating that the assessment under FLD No. VAT-040-8001-12 has become final, executory and demandable.s7 The letter further stated that it is the final decision. Pursuant to Rule 8, Section 3(a)58 of the RRCTA, petitioner had thirty (30) days from receipt of the final decision within which to file its petition for review. Counting thirty (30) days from October 30, 2014, petitioner had until November 29, 2014 to file its petition. Considering that November 29, 2014 was a Saturday, petitioner timely filed its petition for review on December 1, 2014. � Anent respondent's argument that the assessment has become final and executory when petitioner failed to file the protest in the correct venue, the Court finds no merit. Respondent cites RMC No. 039-201359 which provides in part: 1. All letters of protest, requests for reinvestigation/ reconsideration and similar correspondences shall only be filed by the taxpayers or their duly authorized representatives, in person or through registered mail with return card, with the Office of the concerned Regional Director (RD), Assistant Commissioner-Large Taxpayers Service (ACIR-LTS) and Assistant Commissioner- Enforcement Service (ACIR-ES), who signed the Preliminary Assessment Notices (PANs). FANs and Formal Letters of Demand, for proper recording of the protests, and evaluation if the same is in accordance with Section 228 of the NIRC, as implemented by Revenue Regulations No. 12-99. If the aforesaid procedures are not followed, then the letters of protest, requests for reinvestigation I reconsideration and similar correspondences shall be considered void and without force and effect. 57 Docket, Vol. I, Exhibit "P-18", p. 421. 58 Rule 8 Procedure in Civil Cases Sec. 3. Who may appeal; period to file petition. - (a) A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments ... may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling... 59 Receipt of Protest Letter on Final Assessment Notices and Final Decision on Disputed Assessments, April4, 2013.~

DECISION CTA Case No. 8941 Page 9 of23 Respondent alleges that petitioner filed its protest in the wrong venue when it filed with the RDO instead of the Regional Office. However, respondent did not present any evidence to prove the same. In the records, petitioner's protest was addressed to the Regional Director, furthermore, the denial of petitioner's protest was signed by said Regional Director. Considering the foregoing, the Court has jurisdiction over the petition for review. The First LOA was not repealed by the issuance of the Second LOA. Petitioner argues that the Second LOA repealed the First LOA; that two LOAs covering the same tax type and taxable period cannot exist simultaneously. Petitioner cites Revenue Memorandum Order No. (RMO) 44-201060 which provides: IV. Policies and Guidelines XXX XXX XXX 7. In the event that, in the course of the processing of a request for issuance of an electronic LA submitted by an investigating office, it should be determined that a valid LA has been previously issued by another investigating office for the same taxpayer covering the same tax type(s) and taxable period, the resolution of which investigating office shall handle the audit shall be determined by the Commissioner of Internal Revenue, or the designated official. The Court does not agree with petitioner's contentions. The details of the First and Second LOA are set out in the table below for ease of comparison: Authorized BIR First LOA61 Second LQA62 employees RO Alexis Sunga RO Saladin Damato GS Efren Clemente GS Elma Capistrano 60 Electronic Issuance of Letters of Authority, May 12, 2010. 61 Docket, Vol. IV, Exhibit "P-5", p. 1938; BIR R5Cords, Exhibit "R-2", p. 8. 62 Docket, Vol. IV, Exhibit "P-9", p. 1942.~

DECISION CTA Case No. 8941 Page 10 of23 Investigating Revenue District No. Revenue District No. Office V07 -Assessment 040-Cubao Tax Type Division VT All internal revenue Tax Period taxes including Basis January 1, 2012 to documentary stamp tax Signatory June 30, 2012 (DS), other taxes RMO 20-2012, Value (miscellaneous)(OTH) Added Tax Audit January 1, 2012 to Program December 31, 2012 Jonas DP Amora Sec. 6(A) and Sec. 1O(C) OIC-Regional Director of the NIRC of 1997, as RR 7 -Quezon City amended. Jonas DP Amora OIC-Regional Director RR 7 -Quezon City It is true that an examination of the books and other accounting records shall be made only once in a taxable year. 63 In relation to this, RMO 044-10 provides that the CIR or the designated official shall resolve which investigating office shall handle the audit in the situation wherein two LOAs are issued for the same taxpayer covering the same tax type(s) and taxable period. However, there is no provision in said RMO 044-10 which provides that the issuance of a second LOA covering the same tax type(s) for the same taxable period repeals the first LOA. The same may only be implied from the need to determine which investigating office shall handle the investigation. Applying the foregoing, the Court finds that the two LOAs do not cover the same tax type and taxable period. The First LOA covers VAT for January 1, 2012 to June 30, 2012, while the Second LOA covers all internal revenue taxes including documentary stamp tax (DST) for the period January 1, 2012 to December 31, 2012. While it may appear that the Second LOA also includes VAT for the entire year, thereby duplicating the coverage of the First LOA, an examination of the PAN64 and FLD65 issued under the Second LOA shows that only VAT for the 3rd and 4th quarters is included therein. Since the two LOAs do not cover the same tax type and taxable period, there is no need to resolve which investigating office shall 63 NIRC, Sec. 235. Preservation of Books and Accounts and Other Accounting Records.- ... The said books and records shall be subject to examination and inspection by internal revenue offices: Provided, That for income tax purposes, such examination and inspection shall be made only once in a taxable year, ... 64 Docket, Vol. V, Exhibit "P-46", pp. 2141-2147, at p. 2142. 65 Docket, Vol. V, Exhibit "P-48", pp. 2161-2166, at p. 2162.~

DECISION CTA Case No. 8941 Page 11 of23 handle the investigation, and therefore, the investigation under each LOA is valid. Furthermore, RMO 020-1266 provides for such a situation wherein a taxpayer is chosen for the VAT audit program and subsequently picked for the regular audit. It states: IV. Audit Policies and Procedures A. In General XXX XXX XXX 11. If the taxpayer has been previously selected in the RDO for regular audit of all internal revenue tax liabilities in 2011 or any prior year, significant findings on the audit ofVAT should be communicated to the Chief-AD for possible risk identification in the current quarters. If an eLA has been issued under the VAT audit program and subsequently, the taxpayer becomes a candidate for regular audit in the RDO based on the selection criteria under the annual audit program, the request for eLA for regular audit should not include the VAT liability. The head of the VAT Audit Team should transmit a copy of the VAT findings to the RDO conducting the regular audit to determine their relevance and effect to other tax liabilities. This was subsequently clarified in RMO 027-13,67 which provides: II. Policies 3. Item IV.A.11 of the above RMO is hereby amended to read as follows: "xxx XXX XXX Thus, where there is already an eLA issued by the VAT Audit Team for any taxable quarter for 2012 and/or 66 2012 Value-Added Tax Audit Program, August 23, 2012. 67 Amendments to the 2012 Value-Added Tax (VAT) Audit Program, September 26, 2013~

DECISION CTA Case No. 894 I Page 12 of23 thereafter, and the taxpayer has been selected for regular audit in the RDO, the tax type to be requested for investigation by the Revenue District Officer shall be: All internal revenue taxes except VAT." To be sure, the RDO involved herein, RDO No. 40-Cubao failed to comply with the above requirement to exclude VAT in its request for LOA for the regular audit (Second LOA). However, again, there is no provision that failure to comply with the provisions of the RMO renders the LOA invalid. Instead, any violation or deviation from the said RMOs opens the concerned BIR employee to disciplinary or administrative sanctions, to wit: V. Violations Any violation of this Order will be referred by the concerned revenue official to the IS for investigation, or the lAD, thru the IS, may initiate its own fact-finding revalida on the violation/infraction ofROs, Legal Officers, Group Supervisors, VAT Audit Heads, Chiefs of Legal Divisions of regional offices and RDs. In this regard, the ACIR-IS, through the DCIR-OG, may recommend to the Commissioner the relief, re-assignment, transfer or imposition of administrative sanctions on any revenue official/RO violating any provisions of this Order.68 From the foregoing, the Court finds that the First LOA was not repealed by the issuance of the Second LOA. The First LOA is valid, therefore, the PAN and FLD/FAN issued pursuant thereto were issued with authority. The Court will now determine the merits of the assessment, in relation to the alleged payment of deficiency VAT amounting to Php1,807,696.00 plus interest of Php728,030.99 on July 30, 2014.69 The assessments should be cancelled. 68 RMO 020-12, August 23, 2012. 69 Docket, Vol. I, PFR, p. 26, in relation to Exhibits "P-15", "P-15-A" to "P-15-D", pp. 411- 415.~

DECISION CTA Case No. 8941 Page 13 of23 The assessment against petitioner, as found in the FLD, is shown below: DEFICIENCY VALUE ADDED TAX P1, 155,791,492.25 Taxable revenue/receipts per VAT returns Add: Adjustments per investigation 244,454,158.40 P1 ,400,245,650.65 Additional vatable sales from undeclared purchases Taxable sales/receipts per investigation Output tax due thereon p 168,029,478.08 Less: Allowed tax credits/payments 135,568,387.75 p 32,461,090.33 Input tax on current purchases P178,698,850.20 21,692,239.79 12,895,501.64 Input tax carried over from previous period 24,276,855.23 p 45,356,591.97 Input tax deferred on capital goods exceeding P1M from P224,667,945.22 previous period 89,099,557.47 Total Less: eDxecfeeerdr em. dg iPn1pMut tax on capital P24,581,547.68 goo d s Input tax allocable to exempt sales 41,703,018.86 Disallowed input tax 154.30 Additional input tax allocable to 3,126,437.61 exempt sales Excess input tax credits carried over 19,688,399.02 to succeeding period Deficiency value added tax Add: 20% interest p.a. (07 /26/2012 to 07 /21/2014) TOTAL AMOUNT DUE However, petitioner made a partial payment of Php2,535,726.99 on July 30, 2014,70 thus, reducing the deficiency VAT to Php42,820,864.98, computed as follows: TaxTyi>_e Basic Interest Total Value-added tax Less: Payment made on Php32,461 ,090.33 Php12,895,501.64 Php45,356,591.97 July 30, 2014 TOTAL 2,535,726.99 Php42,820,864.98 The validity of the assessment shall be discussed based on the following items: A. Additional VATable sales from undeclared__I)_urchases Ph_p 244,454,158.40 B. Disallowed input tax 154.30 C. Additional input tax allocable to exempt sales D. Excess input tax credits carried over to succeeding 3,126,437.61 period 19,688,399.02 A. Additional VATable sales from undeclared purchases of 70 Docket, Vol. I, Exhibit "P-15-A to D", pp. 412-415.~

DECISION CTA Case No. 8941 Page 14 of23 Php216, 097,4 76.04 Php244, 454, 158.40. Respondent's verification and matching of information/ data provided by petitioner's sellers against the purchases declared in the latter's tax returns and submitted schedules disclosed the following discrepancies, hence, petitioner is assessed for the corresponding deficiency VAT pursuant to Section 106 and 108 of the NIRC: 71 Supplier Per Third-Party Per Taxpayer's Difference Information Schedule Alphaquest Enterprises Php - Php (4.33) Php 4.33 Basic Distributors Inc. 1,743,845.08 787,948.68 2,531,793.76 Body Needs and Basics, Inc. 539,136.70 348,617.08 190,519.62 Croley Foods Manufacturing Corp. 205,545.53 174,767.16 30,778.37 Energizer Philippines Inc. 906,389.85 674,092.75 Ever Bilena Cosmetics Inc 232,297.10 Golden ABC Inc. 6,316.74 (1,957.33) 8,274.07 80,481.29 73,731.25 6,750.04 Mega Market Inc. (620.08) 620.08 Mercury Drug Corporation 1,299,369,485.29 1,295,585,306.16 3,784,179.13 Mercury Drug Group of Companies 2,043,345.59 1,357,685.98 685,659.61 Nestle Philippines Inc 8,796,193.58 5,699,477.17 3,096,716.41 Rhodesian Distribution (1' 161.92) 1,161.92 Robinsons Land Corp 139,164.58 Scanasia Overseas, Inc. 224,448,360.41 120,957.25 18,207.33 Sia, Alice C. 17,895,461.34 206,552,899.07 So, Stewart Gan 282,160.71 Team Asia Corporation 415,089.82 (4,209.75) 282,160.71 Discrepancy in purchases 415,089.82 4,209.75 Php 216,097,476.04 Divided by cost of goods sold rate* 88.40% Additional VATable sales from undeclared purchases Php 244,454,158.40 *Based on 2012 Information per BIR-ITS Php 3,213,277,640.09 100.00% Sales 2,840,487,233.59 88.40% Cost of sales 11.60% Gross income Php 372,790,406.50 Petitioner argues that this item of assessment was rendered in violation of petitioner's right to be informed of the factual and legal bases of the assessments against it, not to mention that the assessment is without factual basis. 71 Docket, Vol. I, Exhibit "P-13-A" Details of Discrepancies, p. 405.~

DECISION CTA Case No. 8941 Page 15 of23 Respondent did not furnish petitioner with copies of the Summary List of Sales submitted by the aforementioned suppliers in order to allow petitioner an opportunity to examine and verify for itself the dates, nature, and amounts of the transactions used by the BIR in its computation of the deficiency VAT assessment. To sustain this item of assessment is highly violative of petitioner's right to due process. Lacking such information, petitioner was not able to fully respond to the assessments against it. This is tantamount to violation of petitioner's due process rights, rendering the assessment void.72 Further, petitioner asserts that the presence of undeclared purchases, assuming it was true, does not automatically result to liability for deficiency VAT. Contrary to petitioner's argument that the assessment is void, a review of the records shows otherwise. The FLD shows how respondent arrived at the alleged discrepancy, particularly in the details of discrepancies. Even though respondent failed to provide the summary list of sales submitted by petitioner's suppliers, the summary list of purchases and the supporting official receipts and invoices are readily available to petitioner. With these documents at hand, petitioner may easily determine the discrepancies subject of this assessment. Therefore, petitioner cannot say that it was deprived of an opportunity to refute respondent's findings. Indeed, the Supreme Court has had occasion to rule: In a long line of cases decided by this Court, we consistently stressed that the requirement of the law to inform the taxpayer of the basis of the assessment should not be construed as limiting to the assessment notice itself. Upon a careful study of the law, it is noteworthy to emphasize that assessment notices need not be a full narration of the facts and laws on which the assessment is based. Further, the law mandates that the notice to acquaint the taxpayer of the basis of his assessment must be in writing but it does not categorically state that the assessment itself must contain such information. It is enough that petitioner be substantially informed of the law and the facts on which the assessment for a tax liability is made in any other written document presented to the taxpayer. Thus, so long as the parties are notified and were given the opportunity to explain their side, the 72 Docket, Vol. V, Petitioner's Memorandum, paragraphs 71, 73 and 75, pp. 2314-2315.~

DECISION CTA Case No. 8941 Page 16 of23 requirements of due process are satisfactorily complied with.73 The Court shall now determine whether the aforementioned discrepancy from alleged undeclared purchases may give rise to deficiency VAT. The Court disagrees. By dividing the total undeclared purchases by the cost of sales rate, respondent is essentially assessing petitioner for undeclared sales from the alleged undeclared purchases. It must be pointed out that under Section 106(A) of the NIRC, VAT is assessed on 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." Also, under Section 108 of the NIRC, VAT is assessed on the ((gross receipts derived from the sale or exchange ofservices". Significantly, the law defines "gross selling price" and "gross receipts", as follows: "... 'gross selling price' means the total amount of money or its equivalent which the purchaser pays or is obligated to pay the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax." "... 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Clearly, VAT can be imposed only when it is shown that the taxpayer received an amount of money or its equivalent from its sale, barter, or exchange of goods or properties, or from sale or exchange of services, and not when there are under-declared 73 Southern Negros Development Corporation v. Commissioner ofInternal Revenue, CTA EB No. August, 8, 2006, citing Calma, et al., v. Court of Appeals, et al., G.R. No. 122787, February 9, 1999.~

DECISION CTA Case No. 8941 Page 17 of23 purchases. In other words, VAT is imposed when one sells, not when one purchases. At this juncture, it must be pointed out that in order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption, cannot be made to rest on another presumption.74 Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be.7s As such, respondent's conclusion that petitioner had undeclared sales arising from said alleged undeclared purchases cannot be enforced against petitioner; lest, petitioner shall be taxed arbitrarily. Accordingly, the deficiency VAT assessment on the alleged undeclared purchases should be cancelled and withdrawn. B. Disallowed input tax Php154.30 In its protest letter76 to the FLD, petitioner stated that it is agreeable to pay said VAT deficiency including interest. As such, this item of assessment shall not be disturbed. C. Additional input tax allocable to exempt sales Php3,126,437.61 Respondent's investigation disclosed that petitioner is also engaged in transactions which are exempt from VAT. Hence, petitioner is not allowed any tax credit of VAT input tax on purchases attributable to the exempt sales/ receipts pursuant to Sections 4. 109-1 (A) and 4. 110-4 of Revenue Regulations (RR) No. 16-2005. 74 Collector of Internal Revenue v. Alberto D. Benipayo, G.R.No. L-13656, January 31, 1962; Commissioner ofInternal Revenue v. Island Garment Manufacturing Corporation and the CourtofTaxAppeals, G.R. No. L-46644. September 11, 1987. 75 Collector of Internal Revenue v. Alberto D. Benipayo, G.R.No. L-13656, January 31, 1962; Commissioner of Internal Revenue v. Island Garment Manufacturing Corporation and the Court of Tax Appeals, G.R. No. L-46644. September 11, 1987. 76 Docket, Vol. I, Exhibit "P-14", p. 407~

DECISION CTA Case No. 8941 Page 18 of23 The disallowed input tax allocable to exempt sales in the amount of Php3, 126,437.61 was computed as follows: VATable sales Php 1,155,791,492.25 Exempt sales 387,045,185.94 Total sales/receipts Php 1,542,836,678.19 Claimed input tax per VAT returns Php 178,698,850.20 Multiply by: Rate of exempt sales/Total sales 25.09% Input tax allocable to exempt sales 44,829,456.47 Less: Input tax allocable to exempt sales per VAT returns 41,703,018.86 Additional input tax allocable to exempt sales Php 3,126,437.61 Petitioner disagrees with said findings and asserts that it is only liable to pay the deficiency VAT in the amount of Php 1,807,696.00, as computed below: Input tax directly attributable to VAT-exempt sales Php 40,407,517.00 Input tax not directly attributable to VAT-exempt sales 3,103,198.00 Total input tax allocable to exempt sales Less: Input tax allocable to exempt sales per VAT returns Php 43,510,715.00 Additional input tax allocable to exempt sales 41,703,019.00 Php 1,807,696.00 Thus, on July 30, 2014, petitioner paid the admitted basic VAT of Php 1,807,696.00 plus interest in the amount of Php728,030.99, or In the aggregate amount of Php2,535,726.99.77 Considering this payment, petitioner argues that this item of assessment should be cancelled for lack of merit.78 We find against petitioner. Section 110(C) of the NIRC, provides for the determination of the amount of input tax creditable for a certain period, as follows: Sec. 110. Tax Credits.- xxx (C) Determination ofCreditable Input Tax.- The sum of the excess input tax carried over from the preceding month or quarter and the input tax creditable to a VAT- registered person during the taxable month or quarter 77 Docket, Vol. I, Exhibits "P-15 to 15-D" and "P-16", pp. 411-420. 78 Docket, Vol. I, Petition for Review, pars. 66 to 70, pp. 25-26.~

DECISION CTA Case No. 8941 Page 19 of23 shall be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to exempt sale. The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies, such as the Board of Investments and the Bureau of Customs. (Emphasis supplied) Relatively, it was observed that petitioner is engaged in taxable and exempt sales of goods. In short, it is engaged in mixed transactions. It is clearly shown that for the first and second quarters of taxable year 2012, petitioner reported in its Quarterly VAT returns79 taxable sales subject to 12�/o VAT and exempt sales. Accordingly, if a VAT-registered person (or entity) is engaged in VATable and VAT-exempt transactions (and zero- rated transactions), the tax credits allowable will be computed under an apportionment formula, in view of the provision of Section 112 (A) of the NIRC, to wit: ...where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any on of the transactions, it shall be allocated proportionately on the basis of the volume of sales. Corollary thereto, Section 4.110-4 of RR No. 16-2005 provides the guidelines in determining the amount of input tax attributable to a specific sales type in case of mixed sales for a particular period. The pertinent provisions state: SECTION 4.110-4. Apportionment of Input Tax on Mixed Transactions. - A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: 79 Docket, Vol. IV, Exhibits "P-25" and "P-28", pp. 1968-1969, and 2000-2001. ~

DECISION CTA Case No. 8941 Page 20 of23 1. All input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; Provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies, including government- owned or controlled corporations (GOCCs) shall not be credited against output taxes arising from sales to non- Government entities; and 2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT- exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit. Thus, based on the foregoing, there is no dispute that when there are mixed transactions, and a direct attribution of the input VAT cannot be made on such sales, a proportionate allocation on the basis of volume of sales must be made. No tax credit, however, is allowed for input taxes in case ofVAT-exempt transactions. In its computation, petitioner claims that the input VAT amount of Php40,407,517.00 is directly attributable to its VAT- exempt sales. However, petitioner did not provide proof to specifically pin-point that the said claimed input VAT is indeed directly attributable to such VAT-exempt sales and was not used in generating its sales subject to 12�/o VAT. Thus, it is but appropriate to apportion the entire input VAT due or paid on the basis of the volume of its sale made in each quarter. Accordingly, the input VAT allocable to VAT-exempt sales amounts to Php44,731,067.30, as computed below: VATable Sales 1st Quarter 2012 2nd Quarter 2012 Total Exempt Sales Php 566,432,331.25 Php 589,359,161.00 Php 1,155,791,492.25 Total Sales 186,892,519.42 200 152,666.52 387,045,185.94 Php753,324,850.67 Php789,511,827.52 Php 1,542,836,678.19 Input Tax Deferred on Capital Goods Php 11,714,168.21 Php 12,562,687.02 Php 24,276,855.23 exceeding f'1M from Previous Quarter 2,532,174.34 Input Tax on Purchases of Capital Goods 1,945,655.76 586,518.58 Exceeding P1M 26,809,029.57 Php 13,659,823.97 Php 13 149,205.60 Php 24,581,547.68 Total Input Tax on Capital Goods exceeding 12,562,687.02 12,018,860.66 2,227,481.89 ..._,_ f' 1M deferred for the succeeding period Amortization of Input Tax on Capital 1,097,136.95 1,130,344.94 Goods exceeding P 1M

DECISION CTA Case No. 8941 Page 21 of23 Input Tax on Purchases of Capital Goods 102,139.38 64,599.70 166,739.08 not Exceeding P1 M Domestic Purchases of Goods other than 85,576,635.36 80,753,947.26 166,330,582.62 Capital Goods 4,376,112.23 5,293,241.94 9,669,354.17 Domestic Purchases of Services Php 91,152,023.92 Php 87,242,133.84 Php 178,394,157.76 Total Input VAT Total Input VAT Php 91,152,023.92 Php 87,242,133.84 Php 178,394,157.76 Divided by Total Sales 753,324,850.67 789,511,827.52 1,542,836,678.19 Multiply by Exempt Sales 186,892,519.42 200,152,666.52 387,045,185.94 Input VAT Allocable to Exempt Sales Php 22,613,924.64 Php 22,117,142.66 Php 44,731,067.30 Consequently, the additional input VAT allocable to exempt sales which petitioner cannot claim as tax credits amounts to Php3,028,048.44, as computed below: Input VAT Allocable to Exempt 1st Quarter 2012 2nd Quarter 2012 Total Sales Php 22,613,924.64 Php22,117,142.66 Php44, 731,067.30 Less: Input VAT Allocable to 20,4 72,293.53 Exempt Sales per VAT Returns 21,230,725.33 Php1,644,849.13 41,703,018.86 Additional Input VAT Allocable Php 1,383,199.31 Php3,028,048.44 to Exempt Sales D. Excess input tax credits carried over to succeeding period- Php19,688,399.02 Respondent deducted the amount of Php19,688,399.02 from the allowed tax credits/payments of petitioner which effectively disallows the same. This was lifted from Line 29 of the 2nd Quarterly VAT Return,8o or the total amount of overpayment for taxable quarter ended June 30, 20 12 which is to be carried over to the next period. However, respondent failed to provide the legal and factual basis for excluding said input tax credits in the assessment. This renders the disallowance null and void. In view of the foregoing, petitioner is not liable for deficiency VAT for the first and second quarters of taxable year 2012, considering that petitioner has sufficient input tax credit to cover its output VAT liability for the same period, as computed below: so Docket, Vol. IV, Exhibit "P-28", p. 2001.

DECISION CTA Case No. 8941 Page 22 of23 Taxable revenue/receipts per VAT Php1 ,155,791,492.25 returns Php 138,694,979.07 Output tax due thereon Php178,698,850.20 Less: Allowed tax credits/payments 21,692,239.79 Input tax on current purchases 24,276,855.23 Input tax carried over from Php224,667,945.22 previous period Input tax deferred on capital Php24,581,547.68 69,312,769.28 155,355,175.94 goods exceeding P1M from previous 41,703,018.86 period 154.30 Total 3,028,048.44 Less: Deferred input tax on capital Php (16,660, 196.87) goods exceeding P 1M Input tax allocable to VAT exempt Sales Disallowed input tax Additional input tax allocable to exempt sales Basic Deficiency VAT WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the assessment issued by respondent against petitioner for the 1st and 2nd quarters of taxable year 2012 covering deficiency VAT is hereby CANCELLED and SET ASIDE. SO ORDERED. C~ ATHER~ INE~ M, ANAH~ AN Associate Justice WE CONCUR: ~c~c~'f5..<~R. --&{? Associate Justice CAESAR A. CASANOVA Associate Justice

DECISION CTA Case No. 8941 Page 23 of23 CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. a<�u,e~ c ~~~-;a~ Q JUANITO C. CASTANEDa,e!JR. Acting Presiding Justice