RITEGROUP INCORPORATED VS. COMMISSIONER OF INTERNAL REVENUE

THIRD DIVISION RITEGROUP INCORPORATED, P etiti oner, CTA CASE NO. 8651 -ve rs u s - Members: BAUTISTA, Chairperson; COMMISSIONER OF INTERNAL PABON-VICTORINO, and REVENUE, RINGPIS-LIBAN,.ll Respondent. Promulgated: 7o ';oo ........... X-----------------------------------------------------------------------------------------------X DECISION RINGPIS-LIBAN, J. THE CASE This Petition for Review filed by Ritegroup Incorporated seeks the invalidation and cancellation of the Final Assessment Notice and the Formal Letter of Demand No. 043A-B0282-08 dated January 13, 2012 issued by the Commissioner of Internal Revenue for taxable year (TY) 2008, assessing it for alleged deficiency income tax - P7,770,554.22, deficiency value-added tax (VAT) - P3,005,918.88, deficiency expanded withholding tax (EWT) - P44,763.11 , deficiency fringe benefit tax (FBT)- P108,087.37, and compromise penalty- P12,000.00; or in the aggregate amount ofTen Million Nine Hundre~

THE FACTS Petitioner Ritegroup Incorporated is a domestic corporation duly organized under Philippine laws, engaged in the business of supplying medical and laboratory products. Its principal office is located at Unit 2202 Prestige Tower, Ortigas Jr. Road, Ortigas Center, San Antonio, Fasig City.1 On the other hand, respondent is the Commissioner of the Bureau of Internal Revenue (BIR), vested by law with authority to perform the duties of said office, including, among others, the power to assess and collect all national internal revenue taxes, fees and charges, and to enforce all forfeitures, penalties, and fines connected therewith. He holds office at the BIR National Office Building, Agham Road, Dillman, Quezon City. On November 23, 2009, respondent issued a Letter of Authority (LA) No. LOA 2008 0049704 and received by petitioner on December 1, 2009, authorizing revenue officers to examine petitioner's books of accounts and other accounting records for all internal revenue taxes covering the period from January 1, 2008 to December 31, 2008.2 On July 18, 2011, petitioner received a Notice of Informal Conference dated July 6, 2011.3 Subsequently, petitioner received a Preliminary Assessment Notice4 (PAN) on January 4, 2012. On January 13, 2012,5 petitioner received a Formal Letter of Demand6 (FLD) dated January 13, 2012 with Detail of Discrepancies7 and Final Assessment Notices (FAN) 8 assessing it for alleged deficiency taxes for TY , 2008 in the aggregate amount ofP10,941,323.58, computed as follows:9 TYPE AMOUNT DUE Deficiency Income Tax p 7,770,554.22 Deficiency Value-added Tax 3,005,918.88 Deficiency Expanded Withholding Tax 44,763.11 Deficiency Fringe Benefit Tax y 108,087.37 1 Par. 1, The Parties, Petition for Review, docket, vol. 1, p. 9 2 Exhibit "P-1", docket, vol. 4, p. 2418; Exhibit "R-2", BIR records, p. 247 3 Par. 2,JSFI, docket, vol. 4, p. 2158; Exhibit "R-3", BIR records, p. 499 4 Par. 3, JSFI, docket, vol. 4, p. 2158; Statement of Material Dates/Facts, Petition for Review, docket, vol. 1, p. 7; Exhibit "R-6", BIR records, pp. 557 to 558 Statement of Material Dates/Facts, Petition for Review, docket, vol. 1, p. 7 6 Exhibit "P-26", docket, vol. 4, pp. 2586 to 2588 7 Exhibit "P-26.1", docket, vol. 4, pp. 2589 to 2590 8 Exhibit "P-3", docket, vol. 1, pp. 38 to 42; Exhibit "R-7", BIR records, pp. 564 to 568 9 Par. 5,JSFI, docket, vol. 4, p. 2159

Petitioner disputed the aforesaid FAN on January 26, 2012.10 On September 25, 2012, petitioner received a letter dated September 7, 2012 issued by Mr. Jonas DP. Amora, OIC-Regional Director of Revenue Region No. 7, Quezon City, stating that the investigating officer of Revenue District Office (RDO) No. 43A-Pasig City recommended the reiteration of the assessments issued against petitioner.11 The letter also requested the payment of petitioner's tax liabilities and indicated that it was a final decision. On October 9, 2012, petitioner filed with the BIR a Letter of Appeal dated October 7, 2012. 12 Due to inaction of respondent, petitioner filed this Petition for Review on May 7, 2013.13 In the Answer14 filed on July 19, 2013, respondent interposed the following special and affirmative defenses: "4. Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise. Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue, G.R. No. 168498, April 24, 2007, 522 SCRA 144; 5. The Petitioner failed to submit ALL RELEVANT SUPPORTING DOCUMENTS to its protest. Hence, the same had become final and demandable under Section 228 of the National Internal Revenue Code of 1997 which states: Sec. 228 Protesting of Assessment. 'xxx XXX XXX Such assessment may be protested administratively by filing a request f~ 10 Exhibit "P-4", docket, vol. 4, pp. 2422 to 2425. II Par. 6,JSFI, docket, vol. 4, p. 2159; Exhibit "P-5", docket, vol. 1, p. 52. 12 Par. 7,JSFI, docket, vol. 4, p. 2159; Exhibit "P-6", docket, vol. 4, pp. 2429 to 2435. 13 Par. 8,JSFI, docket, vol. 4, p. 2159. 1 ~ Docket, vol. 2, pp. 1054 to 1058.

by 1mp1ement1ng rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. xxx xxx xxx' As a matter of fact, the protest of the Petitioner was denied by Regional Director Jonas DP. Amora in his letter the Petitioner dated September 7, 2012, the basis of which is the Petitioner's failure to submit documents in support of its protest. The Petitioner's Petition for Review even confirmed this fact. No documentary evidence was presented by the Petitioner to prove that the supporting documents were submitted in the course of the audit investigation. Further, there is likewise no documentary evidence to prove that the supporting documents to the protest were submitted within the sixty day period provided under Section 228 of the National Internal Revenue Code of 1997. 6. The herein Petitioner was fully appraised of the facts and the law on which the Final Assessment was issued. The Final Assessment Notice, Demand Letter and Details of Discrepancies which were all together sent at the same time to the Petitioner, contained, in detail, the manner of computation, the facts on which the assessment was based and the provisions of the law used in arriving at such deficiency assessment. There appears a glaring disparity in the purchases account as declared in the Financial Statement of the Petitioner and that found in the books of accounts of the Petitioner. Nothing in the Financial Statement submitted had explained the aforesaid discrepancy in the purchases account, not even the Notes to the Financial Statement. The Petitioner did not submit any supporting document with respect to its purchases. The discrepancy in the purchases accounts mentioned above should therefore be considered as an overstatement of purchases, which should be disallowed and said disallowance bears several tax consequences; 7. There also appeared a discrepancy in the alphalist submitted by the Petitioner and the Financial Statement/ITR submitted with respect to the Legal a~

8. There were no supporting documents submitted to substantiate Meeting and Conference Expense, contrary to the allegations of the Petitioner that it did make available the said documents during the audit investigation. Assuming, without necessarily admitting, that supporting documents were submitted to substantiate the Meeting and Conference Expense, the proofs submitted by the Petitioner does not even bear the company name of the Petitioner as the entity to whom the Official Receipts were issued. 9. The part of the factual basis for assessing the Petitioner deficiency value-added tax is the disallowed input tax commensurate to the disallowed purchases. With the disallowance of the overstated purchases of the Petitioner, it follows that Petitioner should not be allowed to claim input tax deductions for said disallowed purchases. 10. There is no evidence on record to prove that the plane ticket which was subjected to Fringe Benefit Tax is not a First Class Plane Ticket. There is neither any evidence submitted to prove that the purchase of the plane ticket was made for the travel of an employee of the Petitioner to prove actual occurrence of an official business meeting or convention to which Petitioner's representative is an attendee" Petitioner flied, through registered mail, its Reply15 on July 31, 2013 and received by the Court on August 5, 2013. Petitioner filed its Pre-Trial Brief16 on August 27, 2013; while respondent's Pre-Trial Brie�17 was submitted on September 27, 2013. On November 14, 2013, petitioner moved to commission Mr. Sonny Bonilla as the Independent Certified Public Accountant for the case,18 which the Court granted on November 28, 2013~ IS Docket, vol. 2, pp. 1060 to 1065. 16 Docket, vol. 2, pp. 1073 to 1091. 17 Docket, vol. 3, pp. 2097 to 2101. 18 Motion for Appointment and/or Commissioning of Independent Certified Public Accountant, docket, vol. 4, pp. 2149 to 2152. 19 Minutes of the Hearing, docket, vol. 4, p. 2175.

During trial, petitioner presented Mr. Sonny Bonilla, Ms. Mhay Madlangbayan, and Ms. Mayzl Domingo as its witnesses. Thereafter, petitioner formally offered its documentary evidence, which were all admitted by the Court.22 On the other hand, respondent presented the following witnesses: Revenue Officers John Byron Jakes T. Lasam and Leyte C. Portugal. Respondent formally offered his documentary evidence, which were all admitted on December 1, 2015.23 After the Court considered petitioner's Trial Memorandum (For: Petitioner Ritegroup, Incorporated)24 filed on February 5, 2016 and the Records Verification Report25 of the Judicial Records Division dated February 9, 2016 stating that respondent failed to file his Memorandum, the case was declared submitted for decision on February 11, 2016.26 THE ISSUES The parties submitted the following issues27 to be resolved by this Court: 1. Whether there is basis for respondent in assessing petitioner for the alleged deficiency income taxes; 2. Whether petitioner submitted all the required documents requested; 3. Whether the assessment has become final due to petitioner's failure to submit supporting documents in the reinvestigation and protest; 4. Whether there is basis for respondent in assessing petitioner for the alleged deficiency VAT from the alleged sale of a company vehicle, disallowed input tax, and unaccounted expense)/ 2o Docket, vol. 4, pp. 2158 to 2173. 21 Docket, vol. 4, pp. 2178 to 2186. 22 Resolution dated October 4, 2014, docket, vol. 4, pp. 2531 to 2532 and Resolution dated December 18, 2014, docket, vol. 5, pp. 3482 to 3483. 23 Resolution, docket, vol. 6, pp. 3537 to 3538. 2~ Docket, vol. 6, pp. 3549 to 3616. 25 Docket, vol. 6, p. 3617. 26 Resolution, docket, vol. 6, p. 3619. 27 Par. II,JSFI, docket, vol. 4, p. 2160.

LJ J 0 l. l. has already been paid and settled by the latter; 6. Whether respondent committed grave error in concluding that petitioner is liable for the alleged deficiency FBT for the purchase of a business class ticket for a legitimate business conference, and the use of a company car by the company's sales manager; and 7. Whether petitioner is liable for the alleged deficiency taxes assessed for TY 2008. The above-enumerated issues can be summarized into two main issues, to wit: 1. Whether the assessment has become final due to petitioner's failure to submit supporting documents in the reinvestigation and protest; and 2. Whether petitioner is liable for the alleged deficiency income tax, VAT, EWT, FBT, and compromise penalty forTY 2008. RULING OF THE COURT Before proceeding to the main issue, the Court shall resolve first the timeliness of the filing of this Petition for Review. Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, provides: "SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: XXX XXX XXX The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be voiy

amy aumonzea representative shall 1ssue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable." Relative thereto are Sections 3.1.4 and 3.1.5 of Revenue Regulations (RR) No. 12-99 implementing the aforesaid provision, to wit: "3.1.4 Formal Letter of Demand and Assessment Notice. - The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, othenvise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. 3.1.5 Disputed Assessment. - The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof. x x y

~ ~ L ~ J the Commissioner or his duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable; Provided, however, that if the taxpayer elevates his protest to the Commissioner within (30) days from date of receipt of the final decision of the Commissioner's duly authorized representative, the latter's decision shall not be considered final, executory and demandable, in which case, the protest shall be decided by the Commissioner. If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one hundred eighty (180) days from date of submission, by the taxpayer, of the required documents in support of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable." In the present case, petitioner received on September 25, 2012/8 a copy of the denial of the protest to the FAN issued by OIC-Regional Director Jonas DP. Amora of Revenue Region No.7, Quezon City. Petitioner then appealed the said denial before respondent on October 9, 2012,29 which was within the thirty (30)-day period from receipt of such denial by the latter's duly authorized representative. Accordingly, respondent had one hundred eighty (180) days from October 9, 2012 or until April 7, 2013 within which to act on petitioner's protest. However, respondent failed to act on the same; thus, petitioner had thirty (30) days from April 7, 2013 or until May 7, 2013 within which to appeal such inaction. Since petitioner filed this Petition for Review on May 7, 2013, the same was timely filed. The Court shall now proceed to resolve the main issues. Petitioner contends that it is the taxpayer's prerogative to submit documents and to determine what documents should be submitted. Petitioner likewise argues that if the taxpayer chose to submit the protest without supporting documents, it does not invalidate the properly filed prote/ 28 Exhibit "P-5", docket, vol. 1, p. 52. 29 Exhibit "P-6", docket, vol. 4, pp. 2429 to 2435.

A perusal of the Protest Letter dated January 26, 2012 shows that petitioner attached a Summary of Comparative Computations. Likewise, further scrutiny of the records reveals that respondent did not require petitioner to submit additional supporting documents pertinent to the protest. The Court emphasizes that respondent cannot demand from petitioner what type of supporting documents that should be submitted, pursuant to the Supreme Court decision in the case of Commissioner of Internal Revenue vs. First Express Pawnshop Company, Inc. 30, which states: "The term 'relevant supporting documents' should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit." (Emphasis supplied) It is clear from the foregoing that the FAN has not become final due to petitioner's purported failure to submit supporting documents. Nonetheless, before the Court resolves the main issue of whether petitioner is liable for the deficiency taxes, the Court shall settle first the issue which petitioner presented in its Memorandum. Petitioner claims that the LA, by virtue of which the subject FAN was issued, was not revalidated after 120 days from the date of its issuance. Petitioner posits that under Revenue Memorandum Order (RMO) No. 38-88 and Revenue Memorandum Circular (RMC) No. 40-2006, a revenue officer is allowed only one hundred twenty (120) days from the date of receipt of the LA by the taxpayer to conduct the audit and submit the required report of investigation; and if the revenue officer is unable to submit such report within the 120-day period, he must then submit a progress report to his Head of Office and surrender the LA for revalidation. Section 13 of the NIRC of 1997, as amended, statey 30 G.R. Nos. 172045-46, June 16, 2009.

ass1gned to pertorm assessment tunctlons 1n any dlstnct may, pursuant to a Letter of Authority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction of the district in order to collect the correct amount of tax or to recommend the assessment of any deficiency tax due in the same manner that the said acts could have been performed by the Revenue Regional Director himself." Corollary thereto is RMC No. 23-09 which provides that failure of the revenue officer to request for revalidation of LA or the expiration of the revalidation period does not nullify the LA nor will it affect or modify the rules on the reglementary period within which an assessment may be validly issued, to wit: "I. Revalidation ofLAs The revalidation of LA shall give rise to the extension of the period within which the Revenue Officer (RO) assigned to the case shall submit the report of investigation to higher authorities for review and approval, without the imposition of applicable administrative sanctions. Depending on the classification of the pending tax case, said extension period shall be equivalent to the original prescribed number of days within which to report the case under existing revenue issuances. Failure on the part of the RO to request for the revalidation of LA or the expiration of the 'revalidation period' does not nullify the LA nor will it affect or modify the rules on the reglementary period within which an assessment may be validly issued. However, this shall be considered as a ground for the imposition of disciplinary action and demerit in the performance rating of the concerned RO, including the reassignment of the case to another RO if the Regional Director, upon the recommendation of the Revenue District Officer, deems it necessary." It is noteworthy that RMC No. 23-09 was issued on April 16, 2009 and the subject LA was issued on November 23, 2009 and received by petitioner on December 1, 2009. The Court shall now proceed to determine whether petitioner is liable for deficiency taxe~

amount ot :r1u,~41 ,jLj..Jts, mclustve ot surcharge, mterest and comprormse penalty, broken down as follows: Tax Type Basic Surcharge Interest Total Income Tax p 4,960,217.37 p 14,469.26 p 2,810,336.85 p 7,770,554.22 VAT EWT 1,867,189.23 1,138,729.65 3,005,918.88 FBT 27,701.82 17,061.29 44,763.11 Compromise Penalty 57,877.05 35,741.06 108,087.37 Total 12,000.00 p 6,912,985.47 p 14,469.26 p 4,001,868.85 p 10,941,323.58 I. Deficiency Income Tax - P7,770,554.22 and Deficiency EWT - P44,763.11 Respondent found petitioner liable for deficiency income tax for TY 2008 in the amount ofP7,770,554.22, computed as follows: 32 Taxable income per ITR p 692,012.00 Add: Adjustments per investigation: p 12,511,344.83 Disallowed purchases Disallowed meetings & conferences expense 662,134.85 Non-deductible representation expense 83,151.32 Unaccounted expenses Income payments not subiected to withholding tax 430,364.97 Disallowed donation Disallowed expenses 524,031.00 Taxable income per investigation 48,557.65 27,348.00 14,286,932.62 p 14,978,944.62 Income tax due thereon (35%) p 5,242,630.62 Less: Allowed tax credits/Q~ments: Prior year's excess credits p 19,029.00 Payments 82,907.25 Creditable withholding tax 180,477.00 282,413.25 p 4,960,217.37 Deficiency Income Tax Add: 20% Interest p.a. (04.16.09 to 2.13.12) 2,810,336.85 TOTAL AMOUNT DUE ---- - - p_7'770,554.22 ------ - ---~ --~ --~ In order to determine whether petitioner is liable for deficiency income tax, the Court shall scrutinize the propriety of each of the following items: 1. Disallowed Purchases P12,511,344.83l 2. Disallowed Meetings and conferences expense 662,134.8~ 31 Exhibit "P-3", docket, vol. 1, pp. 38 to 47. 32 Exhibit "P-3", docket, vol. 1, p. 44.

u. .LJl:::><:UlUWt:U .LJUllaUUll p 27,348.00 7. Disallowed expenses 1. Disallowed Purchases - P12,511,344.83 Respondent's verification disclosed that the purchases reported in petitioner's financial statements (FS) in the amount of P20,771,606.00 were overstated by P12,511,344.83 as compared to the amount of P8,260,261.17 recorded in petitioner's books. Thus, respondent disallowed the discrepancy of P12,511,344.83 as deduction from petitioner's gross income pursuant to Section 34(A) of the NIRC of 1997, as amended. In his Answer to the instant Petition, respondent has stated that nothing in petitioner's FS, not even in the Notes to FS, explained the discrepancy on purchases, and petitioner did not submit any document to support the said purchases. On the other hand, petitioner argues that it was not informed that lack of supporting documents for the purchases was the basis for disallowance, or the fact of payment for purchases was ever put into question. According to petitioner, it should have been informed that the assessment was due to failure to present supporting documents relative to the purchases. It is only now before this Court that respondent raised for the first time the issue of substantiation of unrecorded purchases. Allegedly, respondent's failure to inform petitioner violated petitioner's right to due process; hence, the FAN must be cancelled outright. Petitioner also contends that the disallowed purchases were, in large part, importations of products for resale, and as such, were ordinary and necessary expenses directly attributable to the conduct of its trade. Even though these purchases were not recorded in its books, the accurate and complete figures representing the same were purportedly reported in its FS and were duly substantiated. The Court finds that the assessment should be partially upheld. Contrary to its claim, petitioner knew from the time the Notice for Informal Conference33 until the PAN34 and the FANs/FLD35 were issued that the basis of respondent's assessment is the issue of substantiation of ~ 33 Exhibit "R-3", BIR records, pp. 496 to 499. 3~ Exhibit "R-6", BIR records, pp. 554 to 558. 35 Exhibit "R-7", BIR records, pp. 559 to 568.

auu; ur urnc1a1 receipts 1n support ot the disallowed purchases of P12,511,344.83 were available for examination and substantiation. Petitioner has further indicated therein that the sales invoices and/or official receipts sufficiently meet the substantiation requirements as prescribed by Section 34(A)(1)(b) of the NIRC of 1997, as amended. In view thereof, petitioner cannot argue now that it was denied of due process. Petitioner has been properly informed in writing of the factual and legal bases of the subject assessment pursuant to Section 228 of the NIRC of 1997, as amended. It is clearly stated in the Details of Discrepancies attached to the PAN and FANs/FLD that respondent disallowed the amount of P12,511,344.83 representing the overstatement/difference found in petitioner's claimed purchases per FS vis-a-vis those reflected in its books citing as legal basis Section 34(A) of the NIRC of 1997, as amended, the pertinent portions of which state: "SEC. 34. Deductions from Gross Income. - xxx, there shall be allowed the following deductions from gross income: (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, management, operation and/or conduct of the trade, business or exercise of a profession, including: XXX XXX XXX (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, manageme~ 36 BIR records, pp. 507 to 510. 37 Exhibit "P-4", docket, vol. 4, pp. 2422 to 2428. 38 Exhibit "P-6", docket, vol. 4, pp. 2429 to 2435.

Based on the above provision, ordinary and necessary business expense, such as purchases in the instant case, shall be allowed as deduction from gross income, provided that the same is supported by sufficient evidence such as official receipts or other adequate records. Records show that petitioner erred in reflecting the amounts of P13,883,739.00 and P11,475,415.00 as Merchandise Inventory-January 1, 2008 and Purchases for the year 2008, respectively, in Note 1039 of its Notes to FS. The amount of P20,771,606.00 (rounded off) has been used by respondent as purchases in computing the correct amount of petitioner's Merchandise Inventory-January 1, 2008; and it was based on the latter's General Ledger- Trial Balance40, thus: Merchandise Inventory, Dec. 31, 2008 p 10,855,944.01 Add: Cost of Sales 14,503,210.38 Cost of Goods Available for Sale 25,359,154.39 Less: Merchandise Inventory, Jan. 1, 2008 4,587,548.05 Purchases for 2008 P20,771,606.34 In support of its purchases for TY 2008, petitioner has submitted various sales invoices, official receipts, Bureau of Customs (BOC) Import Entry and Internal Revenue Declarations (IEIRDs), Import Entry Declarations (IEDs) and other documents41 which were examined by the Court- commissioned Independent Certified Public Accountant (ICPA), Mr. Sonny S. Bonilla. The latter has accounted petitioner's purchases covering TY 2008 amounting to P20,645,983.65 as follows: 42 39 Exhibit "P-29", docket, vol. 4, p. 2595. ~0 BIR records, pp. 369 to 404. 41 Exhibits "P-32" to "P-32.267", "P-35" to "P-35.14", "P-36" to "P-36.23", "P-37" to "P-37.9", and "P-39" to "P-39.131B." ~2 Exhibit "P-67", docket, vol. 4, p. 2287.

Unsubstantlated other char_g_es of importation 403,704.58 Subtotal p 1,549,566.57 Grand Total p 20,645,983.65 *The amountper ICPA :r summary is 20,606.74 but the comet amount stated above was based on page 5 ofthe !CPA Report. Of the exceptions noted by the ICPA, the local purchases with variance of P10,761.0343 pertained to the amounts included per supporting documents but not part of petitioner's claimed purchases per schedule, and are also included in the P5,021,159.27 local purchases for resale allowed by the ICPA. As a result, the amount of Pl 0,761.03 has been erroneously accounted twice by the ICPA. Since the amount of P10,761.03 is duly supported with sales invoices, it is properly included in the amount ofP5,021,159.27local purchases for resale allowed by the ICPA, hence, reducing the exceptions noted by the ICPA to P1,538,805.54 and the total purchases as accounted for by the ICPA to P20,635,222.62. Aside from the recommended disallowed purchases by the ICPA in the amount of P1,538,805.54, the amount of P136,383.38, representing the difference between petitioner's claimed purchases of P20,771,606.00 and the amount of P20,635,222.62 purchases accounted by the ICPA, shall be disallowed as deductions from gross income for being unsupported. Further verification of the ICPA's f1ndings on purchases with valid documents reveals that purchases amounting to P2,247,981.74 should also be disallowed for the reasons stated hereunder: Reference I Disallowed Purchases Reason for disallowance Exhibit No. 15,830.48 Importation with original copy of lED Annex "C", Exhibit "P-67" 15,830.48 (Brown Envelope) 333,321.43 Amount per lED (P407,423.31) is lower than the 425,956.39 113,907.69 amount of purchase per schedule (P423,253.79) "P-35.5" p /overclaim ~ Subtotal p Importations with photocopied IEDs Annex "D",Exhibit "P-67" JQ_ocket,Vol.5, p. 3032) Supported by Land Bank of the Philippines (LBP) OR but VAT amount was not separately shown; amount "P-36.A" p of purchase cannot be determined therefrom Supported by LBP OR but VAT amount was not separately shown; amount of purchase cannot be determined therefrom "P-36.2.D" Supported by LBP OR but VAT amount was not separately shown; amount of purchase cannot be -determined therefrom- "P-36.3.B" 43 Exhibit "P-67", docket, vol. 4, p. 2265.

Supported by LBPOR but VAT amount was not "P-36.20.B" 162,813.40 separately shown; amount of purchase cannot be "P-36.21-B" determined therefrom 165,768.14 Supported by LBP OR but VAT amount was not 50,957.86 separately shown; amount of purchase cannot be 1,924,187.55 determined therefrom 67,400.00 Supported by photocopies of IEDs and copy of "P-36.23" to 14,875.00 computation only "P-26.23.A" 82,275.00 Subtotal p 33,846.61 676.20 Importation with original copies of BOC Form Annex "E" of Exhibit "P- (Official Receipt) 67" (Brown Envelope) 3,649.56 2,634.45 Unreadable BOC OR but with LBP OR; amount of 8,600.00 12,995.37 purchase based on LBP OR (P154,133.33) is lower the 1,419.60 amount indicated per schedule (P221 ,533.33) "P-37" to "P-37.A" p 63,821.79 /overclaim 24,720.00 BOC OR not dated "P-37.3" 32,208.00 Subtotal p 43,323.25 4,944.00 Other importation charges Annex "G" of Exhibit "P- 19,776.00 4,187.31 Discrepancy in the total amount of purchases per 67" (Brown Envelope) summary (P1,203,270.71) and per schedule of the 3,908.36 same ICPA Re_r:>_ort _{!1,169,424.10) Page 8; Annex "G" of 28,800.00 161,866.92 Exhibit "P-67" (Docket, 2,247,981.74 Vol. 4, p. 2267; Brown Envelo_pe) p Supported by Debit/Credit Note dated outside the "P-39.1" taxable year 2008 Supported by unreadable invoice "P-39.10" Supported by OR issued not in the name of petitioner "P-39. 75" Purchases listed twice per schedule "P-39.56" ,"P-39.93" Supported by documents dated outside the taxable "P-39.106" to _year 2008 "P-39.106.B" VAT amount was included in the amount of purchase per schedule; supported by VAT OR without TIN and address of petitioner and VAT amount was not "P-39.107.A", separate!Y_ shown "P-39.107" Subtotal p Local purchases for resale Annex "F" of Exhibit "P- Supported by document with unreadable details 67" (Brown Envelope) "P-32.20" p Supported by document with unreadable details "P-32.53" Supported by document with unreadable details "P-32. 75" Supported by VAT invoice not dated and without "P-32.101" TIN of petitioner Supported by VAT invoice with unreadable date and "P-32.165" without TIN of petitioner Supported by document with unreadable details "P-32.232" Supported by document with unreadable details "P-32.239" Supported by document with unreadable details "P-32.240" Subtotal p Total p In sum, petitioner's purchases for TY 2008 that shall be disallowed as deductions from gross income would amount only to P3,923,170.66, computed as follow(/'

- uo,jtSJ.j~ purchases of P20,635,222.62 accounted by the ICPA 2,247,981.74 Additional disallowances per the Court's further verification P3,923,170.66 Total Disallowed Purchases 2. Disallowed meetings and conferences expense - P662,134.85 Respondent disallowed the meetings and conferences expense of P662,134.85 for petitioner's failure to fully substantiate the same with necessary documentary evidence, pursuant to Section 34(A)(1)(b) of the NIRC of 1997, as amended. The disallowance was derived as follows: 44 Meetings and conferences per F/S P1,344,695.00 Meetings and conferences with proper documents 682,560.15 Disallowed Meetings_an~conferences expense P662,134.85 L___. _ _ _ _ _ _ _ Petitioner asserts that during trial, it presented Exhibit "P-1 0"45 consisting of official receipts, invoices and other proof of payments for expenses incurred during meetings and conferences. The said supporting documents are allegedly made available to the revenue officers during their audit, and even submitted for the convenience of respondent as Annexes to the Letter46 Appeal dated October 7, 2012. According to petitioner, even assuming for the sake of argument that it has failed to fully substantiate these expenses, it is not proper to have the entire amount of expenses disallowed. Citing the cases of Mariano Zamora vs Collector ofInternal Revenue and Court ofTax Appeali7 and Visqyan Cebu Terminal Co., Inc. vs Collector of Internal Revenue48, petitioner prays that at least fifty percent (50�/o) of the expenses be allowed as valid deduction. The Court finds the assessment in order. As provided by Section 34(A) (1) (b) of the NIRC of 1997, as amended, the substantiation requirement for deductibility of expenses requires sufficient evidence, such as official receipts or other adequate recordy 44 Exhibit "P-3", Detail of Discrepancies, Item I.b, docket, vol. 1, p. 46. 45 Docket, vol. 4, pp. 2438 to 2439. 46 Exhibit "P-6", docket, vol. 4, pp. 2429 to 2435. 47 G.R. No. L-15290, May 31,1963. 48 G.R. No. L-12798, May 30, 1960.

consrruea agamst tne taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed.50 A perusal of Exhibit "P-10" shows that it is not what petitioner purports it to be, but it is a mere schedule or summary of expenses which is self-serving. It is not, in itself, sufficient to prove petitioner's claimed meetings and conferences expenses, unless it is accompanied by pertinent invoices and/or official receipts, which petitioner failed to submit before this Court. Likewise, the Court finds no merit in petitioner's invocation of the "50% rule, in the absence of receipts to prove actual amount of expense deduction", which was enunciated in the cases of Mariano Zamora and Visqyan Cebu Terminal Co., Inc., and reiterated in Section 2.4(c) of Revenue Memorandum Circular No. 23-00 as follows: "2.4 Existing Revenue Procedures and Jurisprudence Governing Assessment Based on the Best Evidence Obtainable. - Provided hereunder are the existing revenue procedures and jurisprudence governing issuance of a deficiency tax assessment based on the best evidence obtainable: XXX XXX XXX (c) Assessment Based on Estimate; 50% Rule, in the Absence of Receipts to Prove Actual Amount of Expense Deduction. - The Court held in the Mariano Zamora case that, if there is a showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to absence of documentary evidence, it is the duty of the BIR to make an estimate of the deduction that may be allowable in computing the taxpayer's taxable income, bearing heavily against the taxpayer whose inexactitude is of his own making. That disallowance of 50�/o of the taxpayer's claimed deduction is valid." Based on Section 2.4(c) of RMC No. 23-00, the "50% rule" is to be resorted to by respondent when no invoices or receipts are submitted by the taxpayer to prove its claimed expense deduction. In the instant case, petitioner has presented documents supporting its claimed meetings and conferences expenses up to a certain extent, which respondent ascertained to be amountiny 49 H. Tambunting Pawnshop, Im: vs. Commissioner ofInternal Revenue, G.R. No. 173373,July 29,2013. 50 Phi/ex Mining Corporation vs. Commissioner ofInternal Revenue, G.R. No. 148187, April16, 2008.

thereot 1n the amount of P682,560.15 as substantiated. Only the remaining 49% amounting to P662,134.85 has been disallowed by respondent for being unsupported. Even if the Court applies the 50% rule, the amount of P682,560.15 allowed by respondent as deduction from petitioner's gross income is even greater than the amount of P672,347.50 representing 50�/o of the total claimed expense ofP1,344,695.00. In fine, petitioner has failed to discharge its burden of proof as to the substantiation of its meetings and conferences expense in the amount of P662,134.85; hence, the disallowance of the same is sustained. 3. Non-deductible representation expense- P83,151.32 Finding that petitioner's representation expense per FS exceeded the statutory limit, the excess amount over the limitation was assessed by respondent as non-deductible, pursuant toRR No. 10-2002.51 According to respondent's tax audit, while the representation expense perFS was P127,684.00, there were expenses included as part of meetings and conferences and travel and transportation expenses which were in the nature of representation, thus, exceeding the limit amounting to P83,151.32.52 Petitioner, on the other hand, argues that the representation expense it claimed as deduction is well within the statutory limit. Allegedly, respondent has failed to provide the basis for his finding in all of his notices and communications sent to petitioner in violation of the latter's right to due process, as embodied in Section 228 of the Tax Code; hence, the assessment must be struck down for being void. The Court agrees with petitioner. A scrutiny of the notices and communications53 issued by respondent to petitioner indicates that other than stating that the assessed amount of P83,151.32 is in excess of the prescribed limit, no further details have been provided. Respondent has never indicated how the amount of P83,151.32 was arrived at. Furthermore, respondent's finding that some expenses lodged in the meetings and conferences and travel and transportation expenses are in the nature of representation causing to exceed the limit, is a mere stateme~ 51 Exhibit "P-3", Detail of Discrepancies, Item I.e, docket, vol. 1, p. 46. 52 Exhibit "R-4", BIR records, p. 518. 53 Exhibits "R-3" to "R-4" and "R-6" to "R-7", BIR records, pp. 496 to 499, pp. 517 to 518, pp. 554 to 558, and pp. 559 to 568, respectively.

assessed amount ot f"~:U, l.J l.j2. It is a mandatory requirement under Section 228 of the NIRC of 1997, as amended, as implemented by RR No. 12-99, that a taxpayer shall be informed not only of the law but also of the facts on which the assessment is made; otherwise, the assessment shall be void. This is in consonance with the due process requirement of the 1997 Philippine Constitution, which provides that "no person shall be deprived of his property without due process of law." The taxpayer needs to know the nature of the examiner's findings in order to be able to properly contest the same and submit supporting documents. In the case of Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc. 4 5, the Supreme Court ruled as follows: "xxx Any short-cuts to the prescribed content of the assessment or the process thereof should not be countenanced, in consonance with the ruling in Commissioner of Internal Revenue v. Enron Subic Power Corporation to wit: XXX XXX XXX 'We disagree. The advice of tax deficiency, given by the CIR to an employee ofEnron, as well as the preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharges of the CIR's duties in correctly assessing a taxpayer. The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different nom the requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was made~ 54 G.R. No. 197515,July 2, 2014 citing CommiSJioner ifInternal Revenue vs. Enron Subic Power Corporation, G.R. No. 166387, January 19, 2009 and Commissioner o/ Internal Revenue vs. A5{!"'ena T. Rryes, G.R. No. 159694, January 27,2006.

cam10r oe presumea. utnefWlse, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged 'factual bases' in the advice, preliminary letter and 'audit working papers' did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice. We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts on which the assessment is made. Such amendment is in keeping with the constitutional principle that no person shall be deprived of property without due process. In view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question was VOl'd. XXX. ' In the same vein, we have held in Commissioner rif Internal Revenue v. Rryes, that: 'Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of basis for - not to mention the insufficiency of- the gross figures and details of the itemized deductions indicated in the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and collection 'should be made in accordance with law as any arbitrariness will negate the very reason for government itself.' Applying the aforequoted rulings to the case at bar, it is clear that the assailed deficiency tax assessment for the EWT in 1994 disregarded the provisions of Section 228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue Regulations No. 12-99 by not providing the legal and factual bases of t h y

Accordingly, insofar as the non-deductible representation expense of P83,151.32 is concerned, the assessment is void for respondent's failure to inform petitioner of the specific facts on which the said assessment was based in violation of Section 228 of the NIRC of 1997, as amended, and RR No. 12- 99. Nonetheless, the Court finds that petitioner's claimed representation expense in the amount of P127,684.00 is a valid deduction against its taxable gross mcome. Sections 2 and 5 of RR No. 10-02, as quoted hereunder, provide for the limit on entertainment, amusement and recreation expense, including representation expense, which may be claimed as deductions: "SECTION 2. Definition of Terms. -For purposes of these Regulations, the term 'Entertainment, Amusement and Recreation Expenses' includes representation expenses and/or depreciation or rental expense relating to entertainment facilities, as described below. The term 'Representation Expenses' shall refer to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert, play, sporting event, and similar events or places. For purposes of these Regulations, representation expenses shall not refer to fixed representation allowances that are subject to withholding tax on wages pursuant to appropriate revenue regulations. XXX XXX XXX SECTION 5. Ceiling on Entertainment, Amusement, and Recreation Expense. - There shall be allowed a deduction from gross income for entertainment, amusement and recreation expense, as defined in Section 2 of these Regulations, in an amount equivalent to the actual entertainment, amusement and recreation expense (i.)l" paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50 percent(%) of net sales

Applying the above provision, petitioner being engaged in the sale of food and medical products to hospitals 55 its allowable representation expense , shall not exceed 0.50% of its net sales of P26,190,642.0056. Therefore, its ceiling for representation expense amounts to P130,953.21 (P26,190,642.00 x .005). Clearly, the claimed representation expense of P127,684.0057 does not exceed or even reach the ceiling of P130,953.21. Consequently, the whole amount claimed shall be allowed as deduction from gross income. 4. Unaccounted expenses- P430,364.97 Based on respondent's verification, the following expenses per petitioner's alphalist were not fully reported in its FS/ITR resulting in an unaccounted source of cash which led to the inference that part of its income had not been declared: 58 Legal and notarial expenses Per Alphalist Per FS/ITR Difference P318, 166.63 P233,331.00 p 84,835.63 Rent expense P586,489.34 P240,960.00 345,529.34 Unaccounted expenses -- -- --�- -- -- P430,364. 97 -� -~~ -~- The Court finds the assessment without merit. It is worthy to note that the imputation of alleged undeclared income is based on a mere presumption that since there were undeclared expenses, there were corresponding undeclared income. Even if these alleged unaccounted expenses are to be treated as unaccounted sources of income, the same will be offset by recording the equivalent payments as expenses. As such, no taxable income will result from the said transactions. While it is axiomatic that all presumptions are in favor of the correctness of tax assessments, the assessment itself should not be based on presumptions no matter how logical the presumption might be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. 59 For lack of factual basis, the deficiency income tax assessment pertaining to the alleged undeclared income from unaccounted expenses of P430,364.97 is cancelled/ 55 Notes to Financial Statements, Note 1, BIR records, p. 255. 56 Exhibit "P-27", Line 17C, docket, vol. 4, p. 2591. 57 Exhibit "P-28", docket, vol. 4, p. 2594. 58 Exhibit "P-3", Detail of Discrepancies, Item I.d, docket, vol. 1, p. 46. 59 Collector ofInternal Revenue vs. Benipqyo, G.R. No. L-13656, January 31, 1962.

Respondent disallowed the following income payments in the amount of P524,031.00 for petitioner's failure to subject the same to withholding tax, pursuant to RR No. 02-98, as amended; thus, petitioner was assessed for the corresponding deficiency EWT in the amount of P44,763.11, computed as follows: 60 PerFS Per Difference Alphalist p 308,766.00 Payments to contractors/sub-contractors: P107,162.00 215,265.00 Re_Q_airs and maintenance 62,352.00 Delivery expenses P524,031.00 Advertising and promotion 139,252.00 Tax Due Total p 6,175.32 P308,766.00 - Incentives and commissions 21,526.50 Income payments not subjected to withholding tax 215,265.00 - p 27,701.82 Pay_ments to contractors/sub-contractors: P308,766.00 Tax Rate 17,061.29 Incentives and commissions 215,265.00 2% p 44,763.11 Deficiency Expanded Withholding Tax 10% Add: 20% Interest p.a. (01.16.09 to 02.13.12) !_otal_De~iel!_cy E;WT_ In its letter of appeal61 to the BIR Commissioner, petitioner has pointed out that it already settled the related 2% deficiency EWT on the repairs and maintenance, delivery expenses and advertising and promotion; while the incentives and commissions amounting to P215,265.00 were properly reported in its BIR Form No. 1601E and BIR Form No. 1604E. Petitioner has presented its Payment Form (BIR Form No. 0605) and the related Transaction Acknowledgement and EFPS Payment Form62 proving that it paid on October 9, 2012, the amount of P6,175.32 representing 2% deficiency EWT due on the repairs and maintenance, delivery expenses and advertising and promotion in the total amount of P308,766.00. In view of the said payment, the deficiency income tax assessment on the disallowed expense deductions of P308,766.00 is cancelled. On the other hand, while the basic deficiency EWT assessment is cancelled, petitioner is still liable to pay the amount of P6,250.1 0, representing 25% surcharge, 20% deficiency and delinquency interest, pursuant to Sections 248(A)(3), 249(B) and (C) of the NIRC of 1997, as amended, computed as follows: IB"ic deficiency EWT I I' 6,175.~ 60 Exhibit "P-3", FLD and Detail of Discrepancies, Items 1.3 and III, docket, vol. 1, pp. 44 and 46. 61 Exhibit "P-6", docket, vol. 4, p. 2432. 62 Exhibit "P-21", docket, vol. 4, pp. 2508 to 2512.

\1"'0,1/).:JL x LUV/o x 1,54~/ :J()) days) 4,~64.66 from Sept. 25, 2012 to Oct, 9, 2012 (P6,175.32 x 20% x 14/365 days) 47.37 20% Delinquency Interest from Sept. 25,2012 to Oct. 9, 2012 on basic deficiency EWT and surcharge 59.22 [(P6,175.32+P1,543.83) x 20% x 14/365 days] 35.02 on deficiency interest due for Jan. 15,2009 to Sept. 25,2012 12,425.42 (P4,564.66 X 20% X 14/365) 6,175.32 Total Amount Due P6,250.10 Less: Payment on October 9, 2012 Basic Tax Amount Still Due As to the incentives and commissions, petitioner has failed to prove that it properly withheld and remitted the EWT due thereon. The vouchers63 presented by petitioner in support of the incentives and commissions do not prove the fact of withholding. Even though it can be gleaned from the second page of petitioner's Annual Information Return of Creditable Income Taxes Withheld (Expanded) [BIR Form No. 1604E]64 that the EWT of P21,526.47 was listed as part of the P61,141.13 taxes withheld and remitted to the BIR, there was no payee indicated therein, to which the said income payment may have been made. Moreover, nothing in its Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) [BIR Form No. 1601E]65 shows that it subjected an income payment in the nature of incentives and commissions with ATC WC515 amounting to P215,264.70. Thus, respondent's basic deficiency 10% EWT assessment in the amount of P21,526.50 is upheld pursuant to Section 2.57.2(0) of RR No. 02-98, as amended by RR No. 17-03, which provides: "(0) Commissions of independent and/ or exclusive safes representatives, and marketing agents of companies. - On gross commissions, rebates, discounts and other similar considerations paid/granted to independent and/or exclusive sales representatives and marketing agents and sub-agents of companies, including multi-level marketing companies, on their sale of goods or services by way of direct selling or similar arrangements where there is no transfer of title over the goods from the seller to the agent/sales representative. - Ten percent (10�/// 63 Exhibits "P-60" to "P-60.11", docket, vol. 4, pp. 2672 to 2683. 64 Exhibit "P-43-A", docket, vol. 4, p. 2638. 65 Exhibits "P-42" to "P-42.7" and "P-42.9" to "P-42.11", docket, vol. 4, pp. 2626 to 2636.

wrncn sraies Inae "(K) Additional Requirements for Deductibility of Certain Pqyments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, 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 in accordance with this Section, Sections 58 and 81 of this Code." 6. Disallowed Donation - P48,557.65 and 7. Disallowed expenses - P27,348.00 Respondent disallowed petitioner's donation expense in the amount of P48,557.65, being in excess of the statutory limit pursuant to Section 34(H) of the NIRC of 1997, as amended. The amount of P48,557.65 was computed as follows: 66 Donation per FS P692,012.00 p 87,535.00 Less: Limit (5% non-ind/10% ind) 87,535.00 38,977.35 Taxable net income perFS P779,547.00 P48,557.65 Donation per FS 5% Taxable net income before donation Multiply by rate Disallowed Donation Likewise, the following expenses were disallowed as deductions from gross income pursuant to Section 34 of the NIRC of 1997, as amended:67 Provision for probable losses p 21,420.00 Penalty charges 5,928.00 Disallowed expenses P27,348.00 Petitioner has not controverted the findings of respondent. However, petitioner maintains that it already settled the related 35% income tax deficiency on the disallowed donation and disallowed expenses on provision for probable losses and penalty charges. As such, said disallowances should be disregarded and cancelledj/ 66 Exhibit "P-3", Detail of Discrepancies, Item I.f, docket, vol. 1, p. 46. 67 Exhibit "P-3", Detail of Discrepancies, Item I.g, docket, vol. 1, p. 46.

Provision for probable losses p 21,420.00 Penalty charges 5,928.00 Donations and Contributions 87,535.00 Total Income Tax (P114,883.00 x 35%) 114,883.00 P40,209.05 However, as can be seen from the above computation, the amount of P87,535.00 donations and contributions that was subjected to the 35% income tax rate was more than the amount of P48,557.65 disallowed by respondent for the said expense. Thus, the income tax payment of P40,209.05 was more than the P26,566.9869 basic deficiency income tax assessment on the subject disallowed expenses. To properly account for the valid disallowance on the subject expenses and the payment made by petitioner, the assessed disallowances on donation and contributions in the amount of P48,557.65 and other expenses, namely, provision for probable losses and penalty charges, in the amount of P27,348.00 shall remain, and the income tax payment thereon in the amount of P40,209.05 shall be deducted to arrive at the total deficiency income tax still due from petitioner. In sum, petitioner is liable to pay basic deficiency income tax in the amount of P1,626,348.56, deficiency EWT in the amount of P21,526.50, and increments amounting to P6,250.10 on the P6,175.32 deficiency EWT paid by petitioner on October 9, 2012, computed as follows: Taxable income per ITR P3,923,170.66 , 692,012.00 Add: Adiustments per review 662,134.85 215,265.00 , 4,876,476.16 Disallowed Purchases 48,557.65 5,568, 488.16 Disallowed Meetings and conferences expense Income payments not subjected to withholding tax 27,348.00 , 1,948,970.86 Disallowed Donations and contributions Disallowed Provision for probable losses and Penalty , ~ 282,413.7~ charges 19,029.00 Adjusted Taxable income 82,907.25 180,477.00 Income tax due thereon (35%) Less: Allowed tax credits/payments: Prior year's excess credits Payments Creditable withholding tax 68 Exhibits "P-13" to "P-13-A", docket, vol. 1, pp. 921 to 924. 69 P26,566.98 = (P48,557.65 + P27,348.00) X 35%.

Payments to contractors/sub-contractors: Income Tax Rate Tax Due Incentives and commissions Payment Basic Deficiency EWT P308,766.00 2% p 6,175.32 Less: Payment made on October 9, 2012 10% 21,526.50 Basic Deficiency EWT Still Due 215,265.00 p 27,701.82 Increments representing 25% surcharge, 20% 6,175.32 deficiency and delinquency interest on the P6,175.32 deficiency EWT paid by petitioner on P21,526.50 Oct. 9, 2012 p 6,250.10 II. Deficiency VAT- P3,005,918.88 Respondent computed the deficiency VAT assessment for TY 2008 in the amount of P3,005,918.89 by adding adjustments to petitioner's taxable sales/receipts per VAT returns consisting of proceeds from sale of fixed assets not subjected to VAT amounting to P449,812.00 and unaccounted expenses amounting to P430,364.97; and disallowing input tax amounting to P1 ,501,361.38 and input tax attributable to sale to government amounting to P255,960.12, as shown below:70 Taxable Sales/Receipts per VAT returns f' 449,812.00 J f' 26,190,392.92 Add: Adjustments per Investigation: 430,364.97 I Proceeds from sale of fixed assets not subjected to VA'l' Unaccounted expenses 880,176.97 i Taxable Sales/Receipts per investigation I f' 27,070,569.89 Output Tax Due thereon f'1 ,501,361.38 f' 93,819.00 f' 3,248,468.39 I Less: Allowed tax credits/_!Jlly_ments: 255,960.12 51,185.29 1,381,279.15 Input tax carried over from the previous period 477,509.85 f' 1,867,189.2371 Payments 2,516,086.51 Creditable VAT withheld f'3, 138,600.65 1,138,729.65 Current input tax P3,005,918.88 Total 1,757,321.50 Less: Disallowed input tax // Disallowed input tax attributable to sale to govt. Deficiency Value-Added Tax Add: 20% Interest_p.a. (01.27.09 to 02.13.12) TOTAL AMOUNT DUE 70 Exhibit "P-3", FLD, docket, vol. 1, p. 44. 71 It should be P1,867,189.24.

1. Disallowed input tax attributable to sale to government -P255,960.32 Respondent found that the input tax credits attributable to sales to government was overstated by P255,960.32, as computed below; therefore, respondent disallowed the same pursuant to RMC No. 65-05, as amended, and RR No. 4-07:72 Input tax attributable to sale to government P10,002,179.40 0.38 Sale to government 26,190,401.25 X P2,516,086.52 Total sales Amount of input tax per VAT returns p 956,112.88 700,152.56 Less: Standard input tax to sale to government Disallowed input tax (closed to expense) P255,960.32 Petitioner has agreed to the above findings of respondent. In fact, as can be seen from petitioner's computation of partial setdement of deficiency VAT as presented in Item II.2, petitioner has considered the amount of P255,960.32 as deduction to tax credits. Since petitioner did not refute the subject disallowance, the same is upheld. 2. Proceeds from sale of asset not subjected to VAT -P449,812.00 Petitioner avers that the actual proceeds from the sale of its company vehicle were only P100,000.00 and that the amount of P449,812.00 assessed by respondent referred to the book value of the said company vehicle. Allegedly, the tax base for VAT purposes should only be P1 00,000.00. The Court agrees with petitioner. Section 106(A) of the NIRC of 1997, as amended, provides that a VAT rate of twelve percent (12%) shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, based on the gross selling price or gross value in money of the goods or properties sold. It further defines "gross selling price" as the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale. As such, petitioner's sale of its company vehicle shall be subjected to VAT based on the sales proceeds therefrom without regard to the vehicle's / 72 Exhibit "P-3", Detail of Discrepancies, Item II.d, docket, vol. 1, p. 47.

petltloner's Notes to FS. Notably, even during the audit investigation, Revenue Officer Leyte Portugal included in her findings per Memorandum dated September 2, 2011 75 that petitioner submitted proof that the proceeds from sale of fixed asset not subjected to VAT was only P100,000.00 and not P449,812.00. In admitting its deficiency VAT liability on the P1 00,000.00 sales proceeds of its company vehicle and the P255,960.32 disallowed input tax attributable to sales to government, petitioner paid the amount of P126,798.9976 on January 12,2012, which was computed as follows: 77 Taxable Sales/Receipts per VAT returns p 241,879.58 P26, 190,401.25 Add: Adjustments per Investigation: 526,043.71 100,000.00 Proceeds from sale of flxed assets not subjected to VAT 2,516,085.99 P26,290,401.25 Taxable Sales/Receipts per investigation p 3,154,848.15 P3,284,009.28 Output Tax Due thereon 255,960.12 3,028,049.16 Less: Allowed tax credits/payments: p 126,798.99 Input tax carried over from the previousperiod Payments Current input tax Total Less: Input tax (excess over actual -sales to gov't) Deficiency Value-added Tax However, the said payment of P126,798.99 is lower by P141,161.13 as compared with the assessed deficiency VAT in the amount of P267,960.1278, which was derived from the P100,000.00 proceeds from petitioner's sale of company vehicle and P255,960.12 disallowed input tax on sales to government. Nevertheless, since the Court upholds the P267,960.12 deficiency VAT assessment, petitioner's partial payment of P126,798.99 shall be deducted therefrom. 3. Unaccounted expenses- P430,364.97 This assessment was based on the same finding under the deficiency income tax assessment that there were expenses per petitioner's alphalist, ~ 73 Exhibit "P-14", docket, vol. 4, p. 2492. 74 Exhibit "P-54" to "P-54.3", docket, vol. 4, p. 2661. 75 Exhibit "R-4", par. 3, docket, vol. 3, p. 2114. 76 Exhibit "P-15", docket, vol. 4, pp. 2493 to 2498. 77 Attached to Exhibit "P-4", docket, vol. 4, p. 2426. = 78 P267,960.12 [P100,000.00 X 12%] + P255,960.12.

The assessment is devoid of merit. As discussed earlier (Item 1.4), even if the expenses per alphalist were to be considered as income subject to output VAT, the same shall be offset by treating the equivalent payments as purchases for which input tax credits may be claimed. Hence, no VAT-able income will result from the said transactions. 4. Disallowed input tax- P1,501,361.38 Input taxes in the amount of P1,501,361.3879 were disallowed in connection with the assessed disallowed purchases as discussed under the deficiency income tax assessment (Itern 1.1). As determined earlier, petitioner's purchases amounting to P3,923,170.66 are found to be proper disallowances. Consequently, only the input VAT corresponding thereto, in the amount of P470,780.48 (P3,923,170.66 x 12%) shall be disallowed as credits against petitioner's output tax due. In fine, petitioner is still liable for basic deficiency VAT for TY 2008 in the amount of P616,188.11, computed as follows: Taxable Sales/Receipts per VAT returns P26, 190,392.92 Add: Adjustments per Investigation: P470,780.48 p 93,819.00 100,000.00 Proceeds from sale of fixed assets not subjected 255,960.12 51,185.29 P26,290,392. 92 to VAT p 3,154,847.15 477,509.85 Taxable Sales/Receipts per investigation 2,516,086.51 2,411,860.05 P3,138,600.65 p 742,987.10 Output Tax Due thereon Less: Allowed tax credits/payments: 726,740.60 126,798.99 p 616,188.11 Input tax carried over from the previous period Payments // Creditable VAT withheld Current input tax Total Less: Disallowed input tax Disallowed input tax attributable to sale to government Deficiency Value-Added Tax Less: Payment made on January 12,2012 Basic Deficiency Value-added Tax Still Due 79 P1,501,361.38 = P12,511,344.83 X 12%.

.L 1.- - - - - - - - - - - - - - - - - appropriate return and to withhold and remit the FBT due on the following benefits, pursuant to Section 33 of the NIRC of 1997, as amended, and RR No. 03-98: 80 Fringe benefits: Plane ticket~251,850.73 x 30%) p 75,555.22 Car- Altis (P94,867.00 x 50%) Total 47,433.50 Divide by p 122,988.72 Grossed up monetary value Applicable rate 68% Deficiency Fringe Benefit Tax Add: 25% Surcharge p 180,865.78 20% Interest p.a. (01.13.09 to 02.13.12) 32% TOTAL AMOUNT DUE p 57,877.05 P14,469.26 50,210.32 35,741.06 P108,087.37 Petitioner claims that the subject plane ticket was merely a business class ticket and for a legitimate business trip, hence, not subject to FBT. Petitioner also alleges that the car in question was being used by its sales manager as a company vehicle, which has remained in the name of the company, and is limited to official sales operations that are necessary, beneficial and convenient to petitioner. In the Answer81 , respondent states that there was no evidence on record to prove that the plane ticket was not a first class plane ticket. Allegedly, there is neither any evidence submitted to prove that the purchase of the same was made for an official business meeting or convention to which petitioner's representative was an attendee. The assessment is partially upheld. Section 33(A) of the NIRC of 1997, as amended, provides for the imposition of fringe benefits tax on the grossed-up monetary value of the fringe benefit granted by the employer to its managerial or supervisory employees as follows: "SEC. 33. Special Treatment ofFringe Benfjit.- (A) Imposition of Tax.- A final tax of xxx thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposy 80 Exhibit "P-3", Detail of Discrepancies, docket, vol. 1, pp. 45 and 47. 8! Par. 10, docket, vol. 2, pp. 1056 to 1057.

corporauon \Unless tne tnnge benettt ts requtred by tne nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by xxx sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D) and (E) of Section 25." (Emphasis supplied) Section 33(B) of the NIRC of 1997, as amended, defines Fringe Benefits as any good, service, or other benefit furnished or granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee such as, but are not limited to the following: 1. Housing; 2. Expense account; 3. Vehicle of any kind; 4. Household personnel, such as maid, driver and others; 5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; 7. Expenses for foreign travel; 8. Holiday and vacation expenses; 9. Educational assistance to the employee or his dependents; and 10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. However, Section 2.33(C) of RR No. 03-98, implementing Section 33(A) of the NIRC of 1997, as amended, provides that no fringe benefit tax shall be imposed on the following: "SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS.//

........ o/ J 0 J general, the fringe benefits tax shall not be imposed on the following fringe benefits: XXX XXX XXX (5) If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business or profession of the employer; or (6) If the grant of fringe benefit is for the convenience of the employer." Corollary thereto, Section 2.33(B)(7) of RR No. 03-98, provides that: "SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS.- XXX XXX XXX (B) Difinition ofFringe Benifit. - xxx XXX XXX XXX (7) Expenses for foreign traveL - (a) Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as expenses for food, beverages and local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average US$300.00 or less per day, shall not be subject to a fringe benefit tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane ticket shall not be subject to a fringe benefit tax. However, 30 percent of the cost of first class airplane ticket shall be subject to a fringe benefit t a y

mereor snomoereo oy me employer snail be treated as taxable fringe benefits of the employee." (Emphasis supplied) Petitioner has proffered before this Court the electronic ticket82 and related communications83 to prove that the plane ticket, subject of the present assessment, was merely business class and that the trip was business-related. An examination of the foregoing documents shows that the flights were booked for petitioner's President and CEO, Ms. Marlene E. Orozco ("Ms. Orozco"), to travel from Manila to Amsterdam, Netherlands (connecting flight) to Dusseldorf, Germany (final destination) and back from Brussels, Belgium to Amsterdam, Netherlands to Manila via KLM Royal Dutch Airlines. All the flights are for "Restricted Business/Z" trips for a total cost of P169,890.00 as clearly indicated in the e-ticket. It has also been established that the said foreign travel of Ms. Orozco to Dusseldorf, Germany was for the purpose of visiting the Medica 2008 Exhibition for the furtherance of petitioner's business of buying and selling of food and medical products. Undoubtedly, the P169,890.00 cost of Ms. Orozco's plane ticket is not subject to FBT, pursuant to Section 2.33(B)(7)(a) and (b) of RR No. 03-98 in relation to Section 33(A) of the NIRC of 1997, as amended. Nonetheless, petitioner has failed to explain the discrepancy between the assessed amount of P251,850.73 and the substantiated amount of P169,890.00. In view thereof, the assessment on the difference of P81,960.73 shall remain in line with the rule that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment.84 With reference to the deficiency FBT assessment on the Toyota Altis (1.8, Beige Mica) car, petitioner has presented an internal memorandum85 signed by its President and CEO, Ms. Orozco, and addressed to its National Sales Manager, Ms. Gina T. Franco, assigning the said car to the latter for official use and hospital coverage effective July 18, 2008. It is likewise stated therein that the "car assignment is not permanent and may be assigned to another person in the future as the exigencies in operational efficiencies may reqm.re"/ 82 Exhibit "P-16", docket, vol. 4, pp. 2499 to 2501. 83 Exhibit "P-17", docket, vol. 4, pp. 2503 to 2506. 84 Man�os II vs. Court ofAppeals, eta/., G.R. No. 120880,June 5, 1997. 85 Exhibit "P-18", docket, vol. 4, p. 2507.

p1.vuuu~, w u1e ~au1e ~~ uur ~UDJecr r n 1 pursuant to .::>ecuon L.jj(_L..JCJJ an of RR No. 03-98 in relation to Section 33(A) of the NIRC of 1997, as amended. In sum, petitioner is liable to pay basic deficiency FBT for TY 2008 in the reduced amount ofP11,570.93, computed as follows: Fringe benefits: Plane ticket (P81,960.73 x 30%) p 24,588.22 Divide by 68% Grossed up monetary value Multiply by applicable rate p 36,159.15 Deficiency F_!inge Be!lefit Tax X 32% ~11,570.9-!_ IV. Compromise penalty- P12,000.00 It must be stressed that a compromise penalty is imposed to avoid prosecution for violation of the provisions of the Tax Code.87 Pursuant to RMO No. 01-90, as 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 same without the conformity of the taxpayer is illegal and unauthorized. 88 In this case, there is nothing in the records which would show that petitioner consented to the compromise penalty. Thus, the imposition of the amount of P12,000.00 compromise penalty cannot be sustained. WHEREFORE, premises, considered, the instant Petition for Review is PARTIALLY GRANTED. The assessments covering deficiency income tax, VAT, EWT, and FBT for TY 2008 are UPHELD but in the modified amount of P2,844,542.63, inclusive of the twenty-five percent (25%) surcharge imposed under Section 248(A) (3) of the NIRC of 1997, as amended, in the amount of P6,250.10, twenty percent (20%) deficiency and delinquency interest on the partial deficiency EWT payment ofP6,175.32 or in the aggregate sum of P2,850,792.73, computed as follows:/ 86 Exhibit "P-54", Notes to FS, Note 5, docket, vol. 4, p. 2661. 87 The Philippines International Fair, Inc. vs. The Colledor rif Internal Revenue, et aL, G.R. Nos. L-12928 and L-12932, March 31, 1962. 88 Commissioner if'Internal Revenue vs. Lianga Bqy Logging Co., Im: et aL, G.R. No. L-35266, January 21, 1991.

VAT 616,188.11 154,047.03 770,235.14 EWf 21,526.50 5,381.63 26,908.13 FBT 11,570.93 2,892.73 14,463.66 Subtotal p 2,275,634.10 p 568,908.53 P2,844,542.63 25% surcharge, 20% deficiency and p 6,250.10 p 6,250.10 delinquency interest on the P6,175.32 P2,850, 792.73 deficiency EWf paid by petitioner on Oct. 9,2012 Subtotal TOTAL ------ - - ------ In addition, petitioner is liable to pay: a) Deficiency interest at the rate of 20% per annum on the basic deficiency income tax, VAT, EWT, and FBT computed from the dates indicated below until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended: Type ofTax Basic Tax Deficiency interest Income Tax P1 ,626,348.56 computed from , 616,188.11 April 15, 2009 VAT January 25, 2009 EWT ,, 21,526.50 January 15, 2009 FBT 11,570.93 January 10, 2009 b) Delinquency interest at the rate of 20% per annum on the total amount of P2,844,542.63 and on the deficiency interest which have accrued as afore-stated in (a) computed from February 13, 2012 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended. SO ORDERED. Ghil. ~ .,0'- MA. BELEN M. RINGPIS-LIBAN Associate Justice WE CONCUR: LOVELL (BAUTISTA A R. PABON-VICTORINO ssociate Justice Associate Justice

l 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. LOVELL .(BAUTISTA Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, is it 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 Jusrice