SOUMAK COLLECTIONS, INC. v. THE COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OFTAXAPPEALS QUEZON CITY THIRD DIVISION SOUMAK COLLECTIONS, INC., P etitioner, CTA CASE NO. 8686 -versus- Members: BAUTISTA, Chairperson; FABON-VICTORINO, and RINGPIS-LIBAN,ll THE COMMISSIONER OF INTERNAL REVENUE , Respondent. Promulgated: FEB 2 4 2016 c.-,_.::._.__ {0 : C{() q . ,... . X-----------------------------------------------------------------------------------------------X DECISION RINGPIS-LIBAN, J. STATEMENT OF THE CASE The Petition for Review seeks to set aside the Final Decision on Disputed Assessment (FDDA) dated July 8, 2013 finding Soumak Collections, Inc. liable for alleged deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), and documentary stamp tax (DST) in the aggregate amount ofP2,827,881.27 for taxable year 2008. STATEMENT OF FACTS Petitioner Soumak Collections, Inc. is a domestic corporation duly organized and validly existing under Philippine laws, with business office at 101 Bormaheco Condominium, Zapote Street cor. Metropolitan Avenu)./

DECISION CTA CASE NO. 8686 Page 2 of20 Makati City.1 It engages in, conducts, and carries on the business of buying, selling, distributing, marketing at wholesale and retail insofar as may be permitted by law, all kinds of goods, commodities, wares and merchandise of every kind and description, and enters into all kinds of contracts for the export, import, purchase, acquisition, sale at wholesale or retail and other disposition for its own account as principal or in representative capacity as manufacturer's representative, merchandise broker, indentor, commission merchant, factors or agents, upon consignment of all kinds of goods, wares, merchandise or products whether natural or artificial.2 On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR) vested with the authority to carry out the functions, duties, and responsibilities of said office, including, inter alia, the power to issue assessments, to decide disputed assessments, and to cancel and abate tax liabilities, pursuant to the provisions of the National Internal Revenue Code (NIRC) of 1997, and other tax laws, rules and regulations. She holds office at the BIR National Office Building, Agham Road, Dillman, Quezon City. On October 13, 2009, respondent issued a Letter of Authority, which petitioner received on October 28, 2009, authorizing the examination of petitioner's books of accounts and other accounting records for all internal revenue taxes covering taxable year 2008.3 Consequently, respondent required petitioner to submit documents pertinent to the investigation.4 Respondent sent petitioner a Final Notice5 dated January 5, 2010 in connection with the subject investigation, which petitioner received on January 14, 2010.6 Thereafter, petitioner transmitted the required documents to respondent. 7 Subsequently, respondent issued a Notice for Informal Conference, which was received by petitioner on October 6, 2011.8 On October 20, 2011, petitioner replied to the said notice for informal conference and submitted additional documents.9 On November 15, 2011, petitioner received a letter dated November 3, 2011 from respondent, stating that certain claimed input taxes were disallow~ 11 Par. 2, Stipulation of Facts, Joint Stipulation of Facts QSF), docket, p. 763. 2 Exhibit "P-2", docket, pp. 529 to 539 3 Exhibits "R-1", "R-1-a" and "R-1-b", BIR records, p. 50 4 Exhibits "R-2", "R-2-a" and "R-2-b", BIR records, p. 49 5 Exhibit "P-3", docket, p. 557; Exhibits "R-4", "R-4-a" and "R-4-b", BIR records, p. 54 6 Par. 3, Stipulation of Facts, ]SF, docket, p. 763 7 Exhibits "P-4", "P-4-A", "P-4-B" "P-4-C" and "P-4-D", docket, pp. 558, 574, 575, 576 and 577, respectively 8 Exhibit "P-5", docket, p. 578; Exhibits "R-5", "R-5-a" and 'R-5-b", BIR records, p. 731 9 Exhibit "P-6", docket, pp. 583 to 586

DECISION CTA CASE NO. 8686 Page 3 of20 because some of petitioner's suppliers did not issue receipts, and attached therewith is a revised computation of the deficiency taxes.10 Petitioner replied to the letter dated November 3, 2011 and submitted again additional documents on December 9, 2011.11 However, respondent still disallowed petitioner's input tax through a letter which was received by petitioner on December 13, 2011.12 Respondent issued a Preliminary Assessment Notice (PAN) with Details of Discrepancies both dated December 23, 2011, which was received by petitioner on January 2, 2012.13 On January 11, 2012, a Waiver of the Defense of Prescription was executed by Yolanda P. Johnson, President and General Manager of the petitioner14 On January 12, 2012, respondent issued a Formal Assessment Notice (FAN), informing petitioner of its income tax, VAT, EWT, and DST deficiencies for taxable year 2008, detailed as follows: 15 Income Tax Taxable income/ (loss) per ITR p 526,827.00 531,147.72 Add: Unsupported Expenses (Annex B) p 1,057,974.72 p 370,291.15 Taxable Income per Audit 849,854.00 (787,146.76) Basic Income Tax Due 1,157,437.91 - Less: Tax Paid_lJ_er ITR 659,581.06 849,854.00 1,817,018.97 Prior year excess tax credit p p 849,854.00 Creditable tax withheld p 787,146.76 Total 90,041.65 p 102,742.91 Less: Deductions/Disallowance p Disallowed prior years excess tax credit Excess tax credit carried over to succeeding quarter Basic Deficiency Income Tax Add: Interest (04/16/09 to 2/20/12) TOTAL AMOUNT DUE VALUE-ADDED TAX Vatable Sales per Return p 12,720,419.86 p 1,526,450.38 Less: Creditable Input Tax 696,923.23 Claimed Input Taxes Less: Deductions from Input Tax Unsupported Input Taxes (Annex B) p Disallowed Input Taxes claimed per 192,784.56 504,138.67 p Return (Schedule 1) 1,022,311.71 720,737.95 VAT Payable/(Excess Input Tax) Less: Tax Paid per Return 10 Par. 4, Stipulation ofFacts,JSF, docket, pp. 763-764; Exhibit "P-7", docket, p. 636; Exhibits "R-6" and "R- 6-a", BIR records, p. 737 11 Exhibit "P-8", docket, pp. 644 to 647 12 Exhibit "P-9", docket, p. 648 13 Par. 6, Stipulation ofFacts,JSF, docket, p. 764; Exhibit "P-10", docket, pp. 649 to 652 14 Par. 7, Stipulation ofFacts,JSF, docket, p. 764; Exhibit "P-11", docket, p. 653 15 Par. 8, Stipulation of Facts,JSF, docket, p. 764; Exhibit "P-12", docket, p. 655 to 656

DECISION CTA CASE NO. 8686 Page 4 of20 Basic Deficiency Value-Added Tax p 301,573.76 Add: Interest (01/26/09 to 02/20/12) 185,075.41 TOTAL AMOUNT DUE p 486,649.17 EXPANDED WITHHOLDING TAX Basic Tax Due (Schedule 2) p 3,970.39 Add: Interest (1/16/09 to 2/20/12) 2,458.38 TOTAL AMOUNT DUE p 6,428.77 DOCUMENTARY STAMP TAX Basic Tax Due (Schedule 2) p 31,692.00 Add: 50% Surcharge p 15,846.00 35,642.65 67,334.65 Interest (01/06/09 to 02/20/12) 19,796.65 TOTAL AMOUNT DUE Thereafter, petitioner filed its protest to the FAN. Respondent received the protest letter on January 17, 2012.16 This was followed by another letter sent by petitioner to respondent dated February 8, 2012, stating that it attached thereto a copy of the tally it prepared and photocopies of its January, February, and 1st Quarter of 2008 returns for the latter's appreciation.17 Petitioner paid basic tax due for EWT in the amount of P3,970.39 and interest as of the time of payment on March 27, 2012.18 This is the same basic tax due forming part of the EWT assessed in the FDDA in the total amount ofP7,625.33. 19 Petitioner paid the basic tax due for DST in the amount of P31 ,692.00, surcharge in the amount of P15,846.00, and interest as of the time of payment on March 27, 2012.20 These amounts are the same basic tax due and surcharge forming part of the DST assessed in the FDDA in the total amount of P76,885.66. 21 On June 19, 2012, petitioner sent a letter to respondent, manifesting that the disallowed prior year's excess tax credit amounting to P849,854.00 claimed in the income tax return for 2008 did not appear in petitioner's income tax return for 2007, and based on the reported Financial Statement for 2007, the said amount was the balance of Deferred Tax Assets for the year 2007.22 Thereafter, respondent sent petitioner a letter dated November 29, 2012, which was received by petitioner on December 4, 2012. In the said letter, respondent informed petitioner that its case was already forwarded to the Assessment Division for the issuance of the FDDA.2~ 16 Exhibit "P-13'', docket, p. 663 17 Exhibit "14", docket, p. 664 18 Exhibits "P-18", "P-19", "P-19-a", docket, pp. 688 to 691 19 Par. 11, Stipulation ofFacts,JSF, docket, p. 764 20 Exhibits "P-18", "P-20", "P-20-a", "P-20-b", docket, pp. 688 to 689, p. 693, p. 694 and p. 695, respectively 21 Par. 12, Stipulation ofFacts,JSF, docket, p. 764 22 Exhibit "P-15", docket, p. 682 23 Par. 9, Stipulation of Facts,JSF, docket, p. 764; Exhibit "P-17", docket, pp. 686 to 687

DECISION CTA CASE NO. 8686 Page 5 of20 On July 8, 2013, respondent issued the FDDA with Details of Discrepancies, which petitioner received on July 11, 2013.24 In the said FDDA, respondent assessed petitioner for deficiency income tax in the amount of P2,165,835.87, deficiency VAT in the amount of P577,534.41, deficiency EWT in the amount of P7,625.33, and deficiency DST in the amount of P76,885.66, all inclusive of interest. As a result, petitioner filed the instant Petition for Revie~5 on August 7, 2013. Respondent filed her Answer6 by registered mail on October 18, 2013. In the Answer, respondent interposed as her special and affirmative defenses the following: that "Assessment are prima facie presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed; that the Court of Tax Appeals, being a court of special jurisdiction, can take cognizance only of matters that are clearly within its jurisdiction; that Section 3, Rule 4 of the Revised Rules of the Court of Tax Appeals provides that only decisions of the Commissioner of Internal Revenue (CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other laws administered by the Bureau of Internal Revenue can be subject of appeal before this Court. And considering that the petitioner failed to ftle the necessary supporting documents, the assessment in the instant case already became final and executory, and demandable; that the Final Decision on Disputed Assessment issued on July 8, 2013 which adopted the findings embodied in the Formal Assessment Notice (FAN) and its Details of Discrepancies both dated January 12, 2013 for failure of the petitioner to submit any supporting paper/documents to its protest, reflects the internal revenue liabilities of the petitioner for the taxable year 2008 as a result of its failure to pay Income Tax in the amount of P2,165,835.87, VAT in the amount of P577,534.41, Expanded Withholding Tax in the amount of P7,625.33, Withholding Tax on Compensation in the amount of P15,344.73, and Documentary Stamp Tax in the amount of P76,885.66, exclusive of the 50% surcharges and 20% interest per annum; that the bases of the findings in the aforementioned assessment are enumerated 1n the Details of Discrepancies. Thereafter, the case was set for Pre-Trial Conference on January 23, 2014.27 Subsequently, petitioner's Pre-Trial Brief8 and the Pre-Trial Brief (foy 24 Exhibit "P-1", docket, pp. 524 to 527 25 Docket, pp. 6 to 24 26 Docket, pp. 254 to 259 27 Notice of Pre-Trial Conference issued on October 29, 2013, docket, p. 260 28 Docket, pp. 283 to 290

DECISION CTA CASE NO. 8686 Page 6 of20 the Respondentf9 were flied on January 20, 2014 and January 16, 2014, respectively. On February 25, 2014, the parties flied with this Court their Joint Stipulation of Facts30� The Pre-Trial Order31 was later issued by the Court on May 19,2014. During trial, both parties presented their respective documentary and testimonial evidence. After presentation, marking, identiflcation, and offer of evidence, the Court admitted as part of petitioner's documentary evidence Exhibits "P-1" to "P-22", with the exception of Exhibits "P-21", "P-21-L", "P-21-M", and "P- 21-N", which were denied admission for petitioner's failure to submit the originals for comparison?2 On the other hand, the Court admitted as part of respondent's evidence Exhibits "R-1" to "R-7-a"; while Exhibits "R-8" and "R-8-a" were denied admission for failure to correspond with the documents actually marked.33 Petitioner flied its Memorandum34 on February 18, 2015. Respondent failed to submit her Memorandum as per Records Veriflcation Repore5 of the Court's Judicial Records Division dated February 20,2015. In the Resolution dated March 9, 2015,36 the Court declared the case submitted for decision. STATEMENT OF ISSUES The parties submitted the following issues37 for this Court's disposition: "1. Whether petitioner is liable for the following taxes for the flscal year 2008: A. income taxes in the total amount ofP2,165,835.8/ 29 Docket, pp. 270 to 272 30 Docket, pp. 763 to 766 3t Docket, pp. 773 to 779 32 Resolution dated July 23,2014, docket, pp. 809 to 810 33 Resolution dated January 6, 2015, docket, pp. 840 to 842 34 Docket, pp. 843 to 860 35 Docket, p. 861 36 Docket, p. 863 37 Stipulation of the Issues,JSF, docket, p. 765

DECISION CTA CASE NO. 8686 Page 7 of20 B. value-added taxes m the total amount of P577 ,534.41." DISCUSSION/RULING JURISDICTION OF THE COURT Section 228 of the National Internal Revenue Code 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 pre-assessment 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 void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue 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/

DECISION CTA CASE NO. 8686 Page 8 of20 Respondent issued the FAN on January 12, 2012, which pet1t1oner protested on January 17, 2012.38 On February 8, 2012, petitioner submitted documents such as the tally sheet that petitioner prepared and the photocopies of its January, February, and 1st Quarter of 2008 returns.39 Respondent released the FDDA denying the said protest on July 8, 2013, and petitioner received the FDDA on July 11, 2013.40 Accordingly, petitioner had thirty (30) days from July 11,2013 or until August 10,2013 within which to appeal the adverse decision of respondent. Petitioner filed the instant Petition for Review on August 7, 2013, hence, the Court has jurisdiction over this case. The Court shall now proceed to determine whether petitioner is liable for the assessed deficiency taxes. Petitioner was assessed for alleged deficiency income tax, VAT, EWT, and DST for taxable year 2008, computed as follows: 41 I. Income Tax Basic Tax Interest Total II. VAT p 1,157,437.91 p 1,008,397.96 p 2,165,835.87 III. EWT IV. DST 301,573.76 275,960.65 577,534.41 Total 3,970.39 3,654.94 7,625.33 31,692.00 45,193.66 76,885.66 P1,494,674.06 P1,333,207 .21 P2,827 ,881.27 I. DEFICIENCY INCOME TAX- P2,165,835.87 Respondent assessed petitioner for deficiency income tax covering taxable year 2008 amounting to P2,165,835.87, inclusive of interest, computed as follows:42 Taxable income (loss) per ITR p 526,827.00 Add: Unsupported Expenses (Annex B) 531,147.72 Taxable Income per Audit p 1,057,974.72 Basic Income Tax Due (35%) p 370,291.15 38 Exhibits "P-12" and "P-13", docket, pp. 655 to 656 and 663 39 Exhibit "P-14", docket, p. 664 40 Exhibit "P-1", docket, pp. 524 to 528 41 Exhibit "P-1" 42 Exhibit "P-1"

DECISION p 849,854.00 CTA CASE NO. 8686 Page 9 of20 - Less: Tax Paid per ITR p 849,854.00 Prior year excess tax credit Creditable tax withheld P849,854.00 1,637,000.76 (787,146.76) 787,146.76 p 1,157,437.91 Total Less: Deductions/Disallowance 1,008,397.96 Disallowed prior year's excess tax credit P2,165,835.87 Excess tax credit carried over to succee~g _(luarter Basic Deficiency Income Tax Add: Interest (04/16/09 to 08/23/13) TOTAL AMOUNT DUE The resolution of whether or not the 2008 deficiency income tax assessment of P2,165,835.87 is correct basically hinges on the propriety of the expenses and tax credits disallowed by respondent, namely: A. Unsupported expenses P531,147.72 P849,854.00 B. Disallowed prior year's excess tax credit P787,146.76 c. Amount carried over to succeeding year A. Unsupported Expenses- P531,147.72 Invoking Section 34(A)(1)(b) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed expenses in the aggregate amount of P531,147.72 for being unsupported by official receipts or invoices.43 While petitioner concedes to the disallowance of the amount of P63,147.00, petitioner asserts that the remaining amount of P468,000.72 (P531,147.72 less P63,147.00) has been substantiated by official receipts and invoices.44 However, perusal of the evidence submitted would lead to the following unsupported expenses totaling P121,320.10, detailed as follows: Per BIR's Audit"S Supporting Documents Per this Court's Verification (Exhibit Number) Allowable Disallowed Disallowed Sales Official Expense Expense Amount Invoice Recei}>_t CV# Deduction Input VAT Deduction 43 Exhibit "P-1", Details of Discrepancies, docket, p. 526 44 Petitioner's Memorandum, docket, pp. 848 to 851 45 Exhibit "P-1", Annex B, docket, p. 528

DECISION CTA CASE NO. 8686 Page 10 of20 Romeo Roderico Valdizno 3892 p 6,300.00 "P-21-B" "P-21-C" p 2,866.09 p 6,300.00 Apolinar Maylon Jr. 3872 2,866.09 "P-21-F" 12,500.00 Apolinar Maylon]r. 3870 14,000.00 p 1,500.00 - Teresa Marble Corp. 3861 32,450.00 27,733.03 - Oscar Bullan 3853 54,100.00 2,625.00 32,450.00 E. Murio Inc. 37,747.50 57,946.43 54,100.00 Ocean-link Container Term 3816 37,747.50 Inc. 3799 First lm_lJerial Cargo 3792 24,924.21 "P-21-AA" 3,328.07 24,924.21 Nanette Kagaoan 3788 42,568.41 "P-21-G" 315 42,568.41 Crispin Lohan 3787 49,062.00 "P-21-AA" 18,000.90 Nanette Kagaoan 3907 6,953.57 Eusebio Cruz 4047 5,200.00 5,200.00 Teresa Marble Corp. 4038 2,940.00 "P-21-H" - Crispin Lohan 4033 3,125.00 Osmundo Esguerra 4078 64,900.00 "P-21-I" 3,125.00 Toyotacars Motor Parts 1,386.00 PLDT/BIR Form 2307 41,852.58 - under the name of Fibex 15,680.00 Phils. Inc. 1,386.00 Best Ship~~ Lines 41,852.58 Eliza Reyes 15,680.00 Nanette Kagaoan Nora Abastillas 4032 5,917.19 "P-21-K" "P-21-R" 40,500.00 2,429.42 5,917.19 Nora Abastillas 4031 13,353.75 13,353.75 Eliza Reyes 4029 40,500.00 "P-21-P" 40,095.00 9,760.80 Eliza Reyes 4026 5,446.43 "P-21-T", 20,245.21 P24,286.86 - Joel Tiyad 3965 4,400.00 "P-21-U" 80,190.00 5,446.43 Eliza Reyes 4010 13,800.00 4,400.00 CrisfJin Lohan 4009 30,546.45 81,340.00 13,800.00 Daniel Ramon Viloria 4007 7,942.08 19,500.00 30,546.45 Salvador Yasona 4006 38,313.00 P385,540.76 7,942.08 4003 40,095.00 38,313.00 Eliza Reyes 3997 12,200.00 Marina Nabejet/Office 3995 22,674.63 - Warehouse 3,920.40 12,200.00 Joel Tiyad 3991 First Imperial Cargo 80,190.00 - Nanette Kagaoan 3955 3,920.40 Crispin Lohan 4135 3,045.00 "P-21-W" "P-21-X" Vivien D. Smith 4134 57,750.00 "P-21-Z" - Eliza Reyes 4130 (377,357.00) 4128 92,960.00 3,045.00 4121 57,750.00 4107 2,989.00 (377,357.00) 13,860.00 19,500.00 1,859.20 P531,147.72 2,989.00 13,860.00 - P121,320.10 Thus, the Court will sustain the disallowance of the amount of P121,320.10 as deduction from petitioner's taxable gross income for the year 2008 in accordance with Section 34(A) (1) (b) of the NIRC of 1997, as amended, which statesy

DECISION CTA CASE NO. 8686 Page 11 of20 "SEC. 34. Deductionsfrom Gross Income. - xxx (A) Expenses.- (1) Ordinary and Necessary Trade, Business or Professional Expenses.- 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, management, operation and/or conduct of the trade, business or profession of the taxpayer. B. Disallowed Prior Year's Excess Tax Credit- P849,854.00 Pursuant to Section 76 of the NIRC of 1997, as amended, respondent disallowed the prior year's excess tax credit in the total amount of P849,854.00 as per evaluation of petitioner's 2007 Annual Income Tax Return (ITR) which does not have excess tax credit to be carried over to the succeeding taxable year 2008.46 Records reveal that petitioner did not submit evidence such as the prior year's ITR and Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307) to refute the afore-mentioned disallowance. Moreover, petitioner did not contest the disallowance since the filing of its Petition for Review up to the submission of its Memorandum. Thus, being an erroneous claim of tax credit on the part of petitioner, respondent's disallowance thereof should be upheld. C. Amount Carried Over to Succeeding Years - P787,146.76 Respondent disallowed excess tax credit carried over to succeeding taxable years in the amount of P787,146.76 in order to allegedly recapture the tax benefit realized by petitioner.47 The Court opines that it is improper for respondent to add back such amount. Respondent failed to state her basis in establishing the allegation thy 46 Exhibit "P-1", Details of Discrepancies, docket, p. 526 47 Exhibit "P-1", Details of Discrepancies, docket, p. 526

DECISION CTA CASE NO. 8686 Page 12 of20 petitioner used the excess tax credit in the succeeding years. Since the tax benefit will be in the succeeding years, at most, petitioner may only be assessed in the said succeeding years. In sum, petitioner is liable to pay basic deficiency income tax for taxable year 2008 in the amount ofP105,169.28, computed as follows: Taxable income/ (loss) per ITR p 526,827.00 Add: Unsupported Expenses 121,320.10 Taxable Income per Audit p 648,147.10 Basic Income Tax Due Less: Tax Payments for the fttst three quarters p 226,851.49 Basic Deficiency Income Tax 121,682.21 P105,169.28 II. DEFICIENCY VALUE-ADDED TAX- P577,534.41 Respondent computed the deficiency VAT assessment in the amount of P577,534.41, inclusive of interest, as follows: 48 Vatable Sales per Return P12,720,419.86 Output Tax (12%) p 1,526,450.38 Less: Creditable Input Tax P696,923.23 Claimed Input Taxes Less: Deductions from Input Tax p 90,041.65 192,784.56 504,138.67 102,742.91 p 1,022,311.71 Unsupported Input Taxes (Annex B) Disallowed Input Taxes Claimed per Return 720,737.95 (Schedule 1) p 301,573.76 VAT Payable/(Excess Input Tax) 275,960.65 Less: Tax Paid per Return p 577,534.41 Basic Deficiency Value-Added Tax Add: Interest (01/26/09 to 08/23/13) TOTAL AMOUNT DUE Two items of the assessment are vital in the determination of whether or not petitioner is liable of any deficiency VAT for taxable year 2008, namely: 1. Unsupported Input Taxes p 90,041.65 2. Disallowed Input Taxes Claimed per Return P102,742.91 A. Unsupported Input Taxes - P90,041.6Y 48 Exhibit "P-1", docket, p. 524

DECISION CTA CASE NO. 8686 Page 13 of20 Pursuant to Sections 110 and 113 of the NIRC of 1997, as amended, respondent disallowed unsupported input tax credits claimed by petitioner in the amount ofP90,041.65, detailed as follows: 49 CV# Input VAT 4032 Best Shipping Lines 4029 p 1,430.75 Nanette Kagaoan 3997 Ramon Daniel Viloria 3955 653.57 Marina Nabejet/Office Warehouse 3896 2,451.28 Eliza Reyes 3895 loel Tiyad 3894 326.25 Nanette Kagaoan 3878 J oselito Roxas 3872 p 4,861.85 Apolinar Maylon, Jr. 3870 Apolinar Maylon, Jr. 3834 p 7,118.44 Joel Tiyad 3832 Eliza Reyes 3821 39,618.86 Eusebio Cruz 3819 Luminaire Printing 3799 8,522.40 First Imperial Cargo 3792 Nanette Kagaoan 3939 1,446.43 Nanette Kagaoan 3918 Crispin Lohan 3911 343.93 Sobair Comilao 4078 Toyota Motor Parts 1,500.00 PLDT/BIR From 2307 under Fibex Phils 2,571.43 Total Unsupported Input Tax 6,463.89 4,350.00 803.57 4,560.90 3,328.08 1,467.86 428.51 330.00 1,680.00 645.51 p 85,179.80 p 90,041.6550 Petitioner asserts that out of the total disallowance of P90,041.65, P55,863.67 was not claimed as input tax and P29,768.15 was properly supported by official receipts and/or sales invoices; thus, only the balance of P4,409.83 should be disallowed.51 The Court finds petitioner's contention of unclaimed input taxes in the amount of P55,863.67 meritorious. The schedules of input taxes52 for the months of January to December 2008 disclose that the said input taxes were not claimed by petitioner as input tax credits for the subject year. Therefore, ~ 49 Exhibit "P-1", Annex B, docket, pp. 526 and 528 50 P90,071.66 instead of P90,041.65, (P4,861.85 + 85,179.81 = P90,071.66), computational error on the part of respondent 51 Petitioner's Memorandum, docket, pp. 852 to 856 52 Exhibits "P-22" and sub-markings, docket, pp. 724 to 728

DECISION CTA CASE NO. 8686 Page 14 of20 is erroneous on the part of respondent to disallow the amount of P55,863.67, detailed below, since petitioner did not derive any tax benefit therefrom: Eliza Reyes CV# Input VAT Joel Tiyad 3896 p 7,118.44 J oselito Roxas 3895 39,618.86 Joel Tiyad 3878 1,446.43 Eusebio Cruz 3834 2,571.43 Crispin Lohan 3821 4,350.00 Sobair Comilao 3918 428.51 Total 3911 330.00 P55,863.67 With regard to the input taxes claimed by petitioner as being supported by proper documentation totalling P29,768.15, perusal of the evidence submitted shows that only the amount of P14,999.21 represents petitioner's valid creditable input VAT as duly supported by VAT invoices/official receipts pursuant to Section 110(A)(1) in relation to Section 113(A)(1) and (2) of the NIRC of 1997, as amended. Below is the breakdown of the amount of P14,999.21: INPUT Supporting VAT Documents (Exhibit Number) Nanette Kagaoan CV# Disallowed Claimed Per Creditable Disallowed Invoice Official Nanette Kagaoan 3894 Per BIR's VAT Return Per Inv/OR per this "P-23-A" Receipt Nanette Kagaoan 3792 Court's "P-23-C" "P-23-B" Apolinar Maylon, Jr. 3939 Audit p 8,522.40 p 8,380.41 "P-23-I" "P-23-C" Apolinar Maylon,Jr. 3872 3,328.07 verification "P-23-F" "P-23-J" 3870 p 8,522.40 1,446.80 "P-23-M" "P-23-G" 343.93 P141.99 3,328.08 3,328.08 1,500.00 0.01 1,467.86 1,467.86 P14,999.21 21.06 343.93 343.93 P163.06 1,500.00 1,500.00 P15,162.27 P15,162.27 As indicated in the above table, petitioner's claimed input VAT per returns amounted to P15,162.27 instead of the creditable input VAT of P14,999.21. Thus, the discrepancy in the amount of P163.06 representing over-claimed input VAT shall be disallowed. Included in the P29,768.15 input VAT claimed by petlt.loner to be properly supported is the amount of P4,560.90, pertaining to petitioner's alleged payment to First Imperial Cargo per CV#3799. A scrutiny of CV#379953 and the related Bureau of Customs Import Entry and Declaratio~ 53 Attachment of Exhibit "P-6", docket, p. 587

DECISION CTA CASE NO. 8686 Page 15 of20 Form54, Bill of Lading5S, Temporary Assessment Notice56 and Assessment Notice57 shows petitioner's payment for customs duties (CUD) in the amount of P42,068.00 and import processing fees (IPF) in the amount of PSOO.OO totalling P42,568.00 and VAT in the amount of P37,687.00 in the aggregate sum of P80,255.00 on its importation of bedding products and fabric in January 2008. While the amount of VAT paid by petitioner on the importation was P37,687.00, respondent disallowed the amount of P4,560.90 representing 12% of P42,568.00, the sum of the CUD and IPF. Since the VAT due on the importation in the amount ofP37,687.00 was paid, it was erroneous on the part of respondent to disallow the amount ofP4,560.90. As to the remaining disallowed input VAT of P10,044.98, included in the P29,768.15 input VAT claimed by petitioner to be properly supported, the same shall be disallowed for petitioner's failure to substantiate by proper VAT invoices or official receipts in accordance with Sections 11 O(A) in relation to Section 113(A)(1) and (2) of the NIRC of 1997, as amended, detailed as follows: Ramon Daniel Viloria CV# Disallowed Reason for Disallowance Marina Nabejet/Office Warehouse Input VAT per Although supported by VAT OR, it Luminaire Printing 3997 cannot be determined from the OR Eliza Reyes 3955 this Court's whether the input VATclaim pertains to 3819 verification goods or services 3832 Input VAT claim on purchase of goods Total p 2,451.28 supported by tape receipt instead of VAT invoice 326.25 Input VAT claim on purchase of services supported by VAT invoice 803.57 instead of VAT OR 6,463.89 Input VAT claim merely supported by a receiving form P10,044.99 In sum, petitioner's unsupported input VAT that should be disallowed amounted to P14,617.87, computed as follows: Unsupported Input VAT per BIR's audit P14,999.21 p 90,041.65 Less: Properly Supported Input VAT 55,863.67 75,423.78 Unclaimed input VAT 4,560.90 P14,617.87 Erroneously disallowed input VAT on importation Unsupported Input VAT per this Court's verification 54 Attachment of Exhibit "P-6", docket, p. 588 55 Attachment of Exhibit "P-6", docket, p. 590 56 Attachment of Exhibit "P-6", docket, p. 589 57 Attachment of Exhibit "P-6", docket, p. 591

DECISION CTA CASE NO. 8686 Page 16 of20 B. Disallowed Input Taxes Claimed per Return- P102,742.91 Respondent's verification disclosed that petitioner's claimed input tax per VAT returns for the four quarters of taxable year 2008 amounting to P696,923.23 was in excess of the allowable input tax of twelve percent (12%) of purchases for the same period. As a result, pursuant to Sections 110 and 113 of the NIRC of 1997, as amended, respondent disallowed the excess amounting to P102,742.91, computed as follows:58 1st Quarter Purchases per Input Tax per Should be Discrepancy 2nd Quarter VAT Return Return p 210,454.78 p 109,952.72 3rd Quarter p 1,753,789.82 4th Quarter p 320,407.50 195,517.32 (1,124.55) Total 1,629,311.04 194,392.77 133,134.88 (6,029.81) 1,109,457.30 127,105.07 55,073.34 (55.45) 458,944.51 p 594,180.32 p 102,742.91 55,017.89 p 4,951,502.67 p 696,923.23 Petitioner contends that it made a typographical error or miscalculation in filling out the VAT return for the first quarter of taxable year 2008 and that instead of the declared purchases of P1,753,789.82, the correct amount should be P2,665,811.06, composed of domestic purchases in the amount of P722,017.40 and imported goods in the amount of P314,067.07 for January, domestic purchases in the amount of P631,047.84 for February and domestic purchases in the amount of P998,678. 75 for March. With this adjusted first quarter purchases, petitioner posits that it even overpaid input taxes in the amount ofP6,699.64. This Court agrees with petitioner. Following the correct computation of the total amount of purchases for the first quarter of taxable year 2008, petitioner actually had under-claimed its input tax per returns for the entire year 2008 in the amount of P6,699.64, as shown below: Purchases per Return Input Tax per Return Should be Discrepancy -Input Input Tax Tax Per Return is higher/ (lower) January p 722,017.40 p 86,375.1959 Domestic purchases 314,067.0860 37,688.05 Imported purchases 631,047.84 75,074.2861 February (Domestic purch.) ss Exhibit "P-1", docket, p. 526 59 Exhibit "P-6", docket, p. 613 60 Exhibit "P-6", docket, p. 613 (P37,688.05 + 12%) 61 Exhibit "P-6", docket, p. 615

DECISION 998,678.75 121,269.9862 P319,897.33 p 510.17 CTA CASE NO. 8686 P2,665,811.07 p 320,407.50 195,517.32 (1,124.55) Page 17 of20 133,134.88 (6,029.81) 1,629,311.04 194,392.77 55,073.34 (55.45) March (Domestic purch.) 1,109,457.30 127,105.07 1st Quarter 55,017.89 P703,622.87 P(6,699.64) 2nd Quarter 458,944.51 p 696,923.23 3rd Quarter P5,863,523.92 4th Quarter Total Consequently, the deficiency VAT assessment on the P102,742.91 input tax disallowance should be cancelled. In sum, petitioner is liable to pay basic deficiency VAT for taxable year 2008 in the amount ofP123,407.07, computed as follows: VATable Sales per Return P12,720,419.86 Output Tax p 1,526,450.38 Less: Creditable Input Tax P696,923.23 682,305.36 Claimed Input Taxes 14,617.87 p 844,145.02 Less: Unsupported Input Taxes VAT Payable (Excess Input Tax) 720,737.95 Less: Tax Paid per Return Basic Deficiency Value-Added Tax p 123,407.07 III. EXPANDED WITHHOLDING TAX- P7,625.33 Pursuant to Section 2.57.2 of Revenue Regulations No. 02-98, as amended, respondent assessed petitioner for deficiency EWT for taxable year 2008 in the aggregate amount of P7,625.33, including interest, breakdown of which is as follows:63 Basic Tax Due (Schedule 2) P3,970.39 Add: Interest (01/16/09 to 08/23/13) P3,654.94 Total Amount Due P7,625.33 Based on Schedule 2 of the Details of Discrepancies attached to the FDDA, respondent computed the basic deficiency EWT due as follows:64 Goods l Amount Tax Rate EWT l Additions to Property and Equipment jP 37,978.00 I 62 Exhibit "P-6", docket, p. 617 63 Exhibit "P-1", docket, pp. 525 and 526 64 Exhibit "P-1", docket, p. 527

DECISION 6,184,788.99 CTA CASE NO. 8686 Page 18 of20 75,812.61 Inventory Purchases 79,449.59 Office and Store Supplies Gas and Oil Lubricants p 6,378,029.19 1% p 63,780.29 Subtotal p 543,019.00 16,736.42 Services 71,817.05 Communication, Light and Power 94,615.00 Dues and Subscriptions 27,647.91 Repairs and Maintenance 70,639.00 p 179,981.67 R~resentation and Entertainment Insurance Expense 18,384.00 176,011.28 Advertising and Promotional Expense p 3,970.39 Transportation and Travel 62,081.66 Subtotal Rentals 29,435.00 Professional Fees 18,647.39 Audit Fees Professional and Le~ Fees p 836,821.05 2% Commission Expenses Subtotal p 1,436,341.00 5% TOTAL Less: Amount Remitted p 20,000.00 Basic Tax Due 177,601.00 78,878.10 p 276,479.10 10% Petitioner states that it paid the said assessment on March 27, 20126\ even before the FDDA was issued, in the total amount of P6,513.64 consisting of the basic tax of P3,970.39 and the deficiency interest of P2,543.25. Also, respondent did not dispute this assertion of petitioner. Verily, it is not one of the issues jointly stipulated by the parties for the resolution of the Court. Considering the foregoing, the said assessment should be set aside for having been duly paid by petitioner. IV. DOCUMENTARY STAMP TAX- P76,885.66 Citing the case of Commissioner of Internal &venue vs. Filinvest Development Corporation66, respondent assessed petitioner for deficiency DST for taxable year 2008 in the total amount of P76,885.66, including increments, computed as follows: 67 Basic Tax Due P15,846.00 p 31,692.00 Add: 50% Surcharge 29,347.66 45,193.66 Interest (01/06/09 to 08/23/13) P76,885.66 Total Amount Due 65 Exhibit "P-19" and sub-markings, docket, pp. 690 to 692 66 G.R. Nos. 163653 and 167689, July 19, 2011 67 Exhibit "P-1", docket, pp. 525 and 527

DECISION CTA CASE NO. 8686 Page 19 of20 In Schedule 3 of the Details of Discrepancies attached to the FDDA, respondent computed the basic deficiency DST due as follows: Advances from Stockholders P6,392,370.00 Multiply by: DST Rate P1/P200 Tax Due p 31,962.00 Petitioner points out that it paid the above-stated assessment on March 27, 201268, even before the FDDA was issued, in the total amount of P68,011.90 consisting of the basic tax of P31,692.00, surcharge of P15,846.00 and deficiency interest of P20,473.90. Respondent did not refute this assertion of petitioner. Further, it is not one of the issues jointly stipulated by the parties to be resolved by the Court. Therefore, this assessment should be set aside for having been duly paid by petitioner. WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. The deficiency EWT and DST assessments are CANCELLED in view of petitioner's payment of the same. The deficiency income tax and VAT assessments for taxable year 2008 are UPHELD in the modified amount of TWO HUNDRED EIGHTY-FIVE THOUSAND SEVEN HUNDRED TWENTY PESOS AND 44/100 (P285,720.44). Accordingly, petitioner is ORDERED TO PAY the amount of P285,720.44, inclusive of the twenty-five percent (25%) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: TYPEOFTAX BASIC TAX SURCHARGE TOTAL Income Tax , 105,169.28 , 26,292.32 , 131,461.60 Value-added Tax 123,407.07 30,851.77 Total P228,576.35 P57,144.09 154,258.84 P285,720.44 In addition, petitioner is ORDERED TO PAY: (a) Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency income tax and value-added tax computed from the dates indicated below until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended: TYPE OF TAX BASIC TAX DEFICIENCY INTEREST Income Tax P105,169.28 COMPUTED FROM Value-added Tax P123,407.07 April 15, 2009 January 25, 2009 68 Exhibit "P-20" and sub-markings, docket, pp. 693 to 695

DECISION CTA CASE NO. 8686 Page 20 of20 (b) Delinquency interest at the rate of 20% per annum on the total amount of P285,720.44 and on the 20% deficiency interest which have been accrued as afore-mentioned in (a), computed from August 23, 2013 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended. SO ORDERED. Oh4. .7 ..A ~ ~ - ..,&,.. '- WE CONCUR: MA. BELEN M. RINGPIS-LIBAN ~ISTA LOVEALssLoRci.a:t;~~ce Associate Justice ATTESTATION I attest that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. LOVE~AUTISTA 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 Justice