PHILIPPINE TOBACCO FLUE-CURING AND REDRYING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City FIRST DIVISION PHILIPPINE TOBACCO CTA Case No. 7991 FLUE-CURING AND For: Assessment REDRYING CORPORATION, Petitioner, -versus- Members: DEL ROSARIO, PJ, Chairperson UY, and MINDARO-GRULLA, JJ. COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. MA X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION MINDARO-GRULLA, !_.: This a Petition for Review filed on November 6, 2009 by Philippine Tobacco Flue-Curing and Redrying Corporation as petitioner against the Commissioner of Internal Revenue (CIR) as respondent, with the Court in Division, pursuant to Section 7(a)(1) of Republic Act (RA) No. 1125, An Act Creating the Court of Tax Appeals, as a m e n d e d 1 as well as , Rule 4, Section 3 (a) (1), in relation to Rule 8, Section 4(a), < of the Revised Rules of the Court of Tax Appeals (RRCTA?. 1 Sec. 7. Jurisdiction. -The CTA shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: XXX XXX (2) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds or internal revenue taxes, fees of other charges, penalties in relation thereto, or other matters arising under the National Interna l Revenue Code or other laws administered by the Bureau of Internal Revenue; XXX XXX 2 Rule 4. Sec. 3. Cases within the jurisdiction of the Court in Division. - The Court in Division shall exercise:

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 2 of 35 CTA Case No. 7991 DECISION Petitioner seeks the cancellation and withdrawal of the Final Decision on Disputed Assessment (FDDA)3 of the CIR finding petitioner liable for alleged deficiency income tax, value-added tax (VAT), withholding tax on compensation, expanded withholding tax (EWT), documentary stamp tax (DST) and inspection fees, inclusive of interest and penalties, in the aggregate amount of P10,842,528. 74 covering fiscal year (FY) ending August 31, 2005. Petitioner is a corporation duly organized and existing under Philippine laws, with principal office address at 802 A. Bonifacio Street, Balintawak, Quezon City. It is primarily engaged in the leasing of real property.4 Respondent is the Commissioner of the Bureau of Internal Revenue (BIR) vested with authority to exercise the functions of said office, including, inter alia, the power to abate or cancel tax liability. Respondent holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City.( (a) Exclusive original over or appellate jurisdiction to review by appeal the following: XXX XXX (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code of other laws administered by the Bureau of Internal Revenue; XXX XXX Rule 8. Sec. 4. Where to appeal; mode of appeal. - (a) An Appeal from a decision or ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claim for refund of internal revenue taxes erroneously or illegally collected; the decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade & Industry, the Secretary of Agriculture, and the Regional Trial Court in the exercise of their original jurisdiction, shall be taken to the Court by filing before it a petition for review as provided in Rule 42 of the Rules of Court. The Court in Division shall act on the appeal. 3 Exhibit "A", Docket, pp. 14 to 16. 4 Pars. 1 and 2, Facts, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 306.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 3 of 35 CTA Case No. 7991 DECISION On November 7, 2008, petitioner received an undated Preliminary Assessment Notice (PAN) from the Large Taxpayers Audit and Investigation Division II (LTAID II) of the BIR regarding its income tax return for the fiscal year ending August 31, 2005. Petitioner was initially assessed its deficiency tax amounting to =P27,221,724.14. 5 On November 21, 2008, petitioner filed its protest letter to the PAN and the supporting documents to the BIR- LTAID II.6 On December 3, 2008, petitioner received from the BIR-LTAID II a Formal Letter of Demand (FLO) dated November 26, 2008 with attached Audit Results/Assessment Notices all dated December 2, 2008, which alleged that petitioner had deficiency taxes for FY ending August 31, 2005, in the total amount of =P26,124,490.16, broken down as follows: 7 Income Tax p 24 612 198.05 Value-added Tax 789 632.65 Withholding Tax on Compensation 426 497.44 Expanded Withholding Tax 122 926.53 Final Withholding Tax 89 098.49 Documentary Stamp Tax 58 632.36 Inspection Fees 25 504.64 TOTAL :1126,124,490.16 On December 23, 2008, petitioner filed a protest letter to the FLO with all its supporting documents addressed to respondent, through Olivia 0. Lao, OIC-Head Revenue Executive Assistant, Large Taxpayers Service-Excise of the BIR National Office.8' 5 Par. 5, Facts, JSFI, Docket, pp. 306 to 307; Exhibit "K", Docket, pp. 42 to 44. 6 Par. 6, Facts, JSFI, Docket, p. 307; Exhibit "L", Docket, pp. 45 to 46. 7 Par. 7, Facts, JSFI, Docket, p. 307; Exhibit "M", Docket, pp. 81 to 83. 8 Par. 8, Facts, JSFI, Docket, p. 307; Exhibit "N", Docket, pp. 93 to 234.

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 4 of 35 CTA Case No. 7991 DECISION On February 4, 2009, petitioner received a Tax Verification Notice (TVN) dated January 14, 2009, indicating that the BIR-LTAID II would reinvestigate the matter.9 On June 29, 2009, petitioner, through counsel, filed its Supplement to the Protest Letter. 10 On October 7, 2009, petitioner received the Final Decision on Disputed Assessment dated September 11, 2009, together with Details of Discrepancies, Audit Result/Assessment Notices, and Computation of Deficiency Taxes issued by respondent. 11 In the said FDDA and Assessment Notice, respondent found petitioner liable for deficiency taxes for FY ending August 31, 2005, in the aggregate amount of P10,842,528. 74, inclusive of interest and compromise penalties, computed as follows: TAX TYPE BASIC INTEREST COMPROMISE TOTAL p 5,788 ,354.84 P4 ,389 ,309.48 p 50,000.00 P1 0,227,664.32 Income Tax 1,675 .00 1,344 .69 700 .00 3,719 .69 VAT 248 ,364 .86 465,81 3.60 Withholding Tax- 23 ,324 .87 54 ,24 3.67 Compensation 201 ,448.74 16 ,000 .00 30,280.48 63 ,425 .76 Withholding Tax- 13 ,575 .00 27,661 .70 Expanded 18,918 .80 12 ,000 .00 P1 0,842,528.74 Documentary Stamp Tax 24 ,645 .28 8,500 .00 11 ,086.70 3,000 .00 Inspection Fees TOTAL P6, 105,575.05 P4,646,753.69 P90,200.00 Hence, on November 6, 2009, petitioner filed the instant Petition for Review .12 On January 11, 2010, respondent filed her Answer13 alleging the following defenses: "11. The assessment for fiscal year 2005 deficiency Income Tax, Value Added Tax, Withholding Tax, Documentary Stamp Tax and Inspection Fees in the ~ 9 Par. 9, Facts, JSFI, Docket, p. 307 ; Exhibit " 0 ", Docket, p. 235 . 10 Par. 10, Facts, JSFI, Docket, p. 307; Ex hibit " P", Docket, pp. 236 to 239 . 11 Par. 11, Facts, JSFI , Docket, p. 307; Exh ibits " A" to " 1", Docket, pp . 14 to 26. 12 Docket, pp. 1 to 11. 13 Docket, pp. 264 to 271.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 5 of 35 CTA Case No. 7991 DECISION aggregate amount of P10,842,528. 74 was issued in accordance with law and jurisprudence. 12. As far as the assessment for deficiency Income Tax, the same was derived from petitioner's own documents such as its Income Tax Return, Financial Statements, Monthly Remittance Return of Income Taxes Withheld on Compensation and Official Registry Book. The Details of Discrepancies of the Assessment reveal the following: 'INCOME TAX 1. Income oavments not subjected to expanded withholding tax-P1,157,005.72 Verification of income payments per FS/ITR showed that there were income payments amounting to P1, 157,005.72 which were not subjected to expanded withholding tax as prescribed under Section 57(B) of the Tax Code, as amended, and implemented by Revenue Regulations No. 2-98; hence, disallowed as deductible expense and assessed pursuant to Section 34(K) of the NIRC as amended. 2. Salaries not subjected to withholding tax P776,140.20 Comparison of the Summary of Salaries & Wages claimed per Monthly Remittance Return of Income Taxes Withheld on Compensation (P5,458,879.07) against taxable Salaries & Wages per ITR/FS (P6,235,019.27) disclosed that the compensation amounting to P776,140.20 was not subjected to withholding tax, hence, disallowed as deductible expense and assessed pursuant to Section 34(K) of the Tax Code, as amended, and Section 2. 78.1 of Revenue Regulations No. 2-98. 3. Undeclared Gross Profit on Undeclared Sale of Leaf Tobacco-P16,102,024.50 Verification from the taxpayer's Official Registry Book (ORB) disclosed that it processed leaf tobacco<"

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 6 of 35 CTA Case No. 7991 DECISION in which the total stocks handled was 1,412,500 kilos . Bases (sic) on the submitted export documents, taxpayer has undeclared its export sales of leaf tobacco in the amount of P40,781,137.92. Using the maximum industry gross profit rate (GPR) of 39.484�/o, the corresponding undeclared income of P16,102,024.50 is assessed pursuant to Section 32 of the Tax Code, as amended. 4. Unsupported Tax Credits-P17,100.31 Verification of creditable withholding taxes claimed revealed that the amount of P17, 100.31 was unsupported; hence, disallowed pursuant to Section 58(8) of the Tax Code as amended.' 13. As far as the assessment for deficiency Value Added Tax verification from the SIR's Integrated Tax Systems disclosed that some of the petitioner's suppliers were registered as non-vat taxpayers while others have invalid TINs which were not found in the data base . Thus, the input taxes claimed by the taxpayer from these suppliers amounting to P1,675.00 were disallowed pursuant to Sections 110 and 113 of the Tax Code, as amended. 14. As far as the assessment for deficiency Withholding Tax, the same was derived from petitioner's own documents such as its Income Tax Return, Financial Statements and Monthly Remittance Return of Income Taxes Withheld on Compensation. The Details of Discrepancies of the Assessment reveal the following: 'WITHHOLDING TAX ON COMPENSATION 1. Salaries not subjected to withholding tax - P776, 140.00 Comparison of the Summary of Salaries & Wages claimed per Monthly Remittance Return of Income Taxes Withheld on Compensation (P5,458,879.07) against Taxable Salaries & Wages per ITR/FS ~

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 7 of 35 CTA Case No. 7991 DECISION (P6,235,019.27) disclosed that the compensation amounting to P776,140.20 was not subjected to withholding tax; hence assessed pursuant to Section 80 (A) of the Tax Code as amended, and Section 2.80 (A)(1) of Revenue Regulations No. 2-98. WITHHOLDING TAX - EXPANDED 1. Income oavments not subjected to withholding tax - P1.157,005.72 Comparison of income payments per FS/ITR as against the annual information of taxes withheld at source disclosed amounts not yet subjected to withholding tax aggregating to P1, 157,005. 72; hence, assessed pursuant to Section 57(B) of the Tax Code, as amended, and Sec. 2.57.2 of Revenue Regulations No. 2-98.' 15. As far as the assessment for deficiency Documentary Stamp Tax verification of petitioner's lease contracts with its lessees showed that petitioner underpaid the tax due in the amount of P30,280.48. Thus, petitioner was assessed the same pursuant to Section 194 of the Tax Code as amended. 16. As far as the assessment for deficiency Inspection Fees, the same was derived from petitioner's own documents such as its Official Registry Book and its returns. The Details of Discrepancies of the Assessment reveal the following: 'INSPECTION FEES - P13,575.00 Under-payment of inspection fees-P13,575.00 Verification from the taxpayer's official registry book (ORB) disclosed that it processes leaf tobacco in which the total stocks handled was 1,412,500 kilos. Based on returns submitted it was disclosed that it paid inspection fees of P28,800 .00 only; hence, the assessed unpaid amount of P13,575.00 pursuant to Section 146 of the Tax Code, as amended.'4

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 8 of 35 CTA Case No. 7991 DECISION 17. For reasons more than obvious, there is no denying the validity and correctness of the assessments. Failure to present proof of error in the assessment will justify judicial affirmation of said assessment (Delta Motors Co. vs. Commissioner, CTA Case No. 3782, 21 May 1986; Commissioner of Internal Revenue vs. Court of Appeals, et a/., G.R . Nos. 104151 and 105563, 10 March 1995)." During trial, petitioner presented as its witness Ignacio Luis Tan, its Vice-President. 14 Thereafter, petitioner filed its Formal Offer of Evidence15 on February 23, 2012, submitting Exhibits "A" to "Y", inclusive of sub-markings; which this Court admitted with the exception of Exhibits "Q"I "R"I "S"I "X", and "Y", in the Resolutions dated May 8, 201216 and July 16, 2012. 17 The documentary evidence formally offered and admitted are as follows: Exhibit Description Final Decision on Disputed Assessment and A attachments dated September 11, 2009 Details of Discrepancies B Audit Result/Assessment Notice Audit Result/Assessment Notice c Audit Result/Assessment Notice Audit Result/Assessment Notice D Audit Result/Assessment Notice E Audit Result/Assessment Notice ~ F G H 14 Minutes of Hearing dated January 11 , 2011 and April 5, 2011 , Docket, pp. 412 and 427. 15 Docket, pp. 606 to 613 . 16 Docket, pp. 646 to 647 . 17 Docket, pp. 684 to 686 .

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 9 of 35 CTA Case No . 7991 DECISION I Computation of Deficiency Taxes-August 31, 2005 J Annual Income Tax Return (BIR Form No. 1702) K Preliminary Assessment Notice dated November 2008 L Protest Letter with attachments dated November 21, 2008 M Formal Letter of Demand dated November 26, 2008 N Protest Letter with attachments dated December 23, 2008 0 Tax Verification Notice (TVN) dated February 04, 2009 P Supplement to the Protest Letter dated June 29, 2009 T Reply-Letter of Mr. George Vinluan, former Assistant Head, Excise Tax, Regions 1, 2 and 3 with attachments U Judicial Affidavit of Mr. Ignacio Luis Tan V Petition for Review filed on November 06, 2009 W Manifestation and Motion to Suspend/Defer Time to File Formal Offer of Evidence. On the other hand, during the July 11, 2013 hearing, counsel for respondent manifested that she would not be presenting evidence on the ground that only legal issues are involved in this case. Upon motion of the parties, both parties were granted a period of thirty (30) days from July 11, 2013 to file their memoranda. 18 (' 18 Minutes of Hearing dated July 11, 2013, Docket, p. 756.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 10 of 35 CTA Case No. 7991 DECISION On October 2, 2013, this case was submitted for decision, considering petitioner's Memorandum filed on August 15, 2013 and respondent's Memorandum filed on September 9, 2013. 19 The following are the parties' jointly stipulated issues20 submitted for this Court's consideration: "1. Whether or not Petitioner is liable for Deficiency Taxes amounting to PhP10,842,528. 74. 2. Whether or not the Petition was timely filed as provided in Section 228 of the NIRC of 1997." The above-enumerated issues can be summarized as follows: "Whether or not petitioner is liable to pay the aggregate amount of P10,842,528. 74, representing deficiency income tax, value-added tax, withholding tax on compensation, expanded withholding tax, documentary stamp tax, and inspection fees, inclusive of interest and penalties, covering fiscal year ending August 31, 2005." In the Formal Letter of Demand (FLO) dated November 26, 2008 with attached Assessment Notices, respondent assessed petitioner for deficiency taxes for FY ending August 31, 2005, in the total amount of P26, 124,490.16, broken down as follows: 21 Tax Type Basic Interest Compromise Total Income Tax P15,351 ,373.78 P9,21 0,824 .27 P50 ,000.00 P24,612 ,198.05 Value-added Tax 470,465 .00 303 ,167.65 Withholding Tax- 16 ,000 .00 789,632 .65 Compensation 248 ,364 .86 Withholding Tax- 67,114 .31 162,132.58 16,000.00 426,497.44 43,812 .22 12 ,000 .00 122 ,926 .53 19 Resolution dated October 2, 2013, Docket, p. 851. 20 Docket, p. 307. 21 Par. 7, Facts, JSFI, Docket, p. 307; Exhibit "M", Docket, pp. 81-83.

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 11 of 35 CTA Case No. 7991 DECISION Expanded 45 ,697.45 34,401 .04 9,000.00 89 ,098.49 30,280.48 19,851 .88 8 ,500 .00 58 ,632 .36 Final Withholding Tax 13 ,575 .00 3,000 .00 25,504 .64 Documentary Stamp Tax P16,226,870.88 8 ,929 .64 P114,500.00 P26, 124,490.16 Inspection Fees P9,783,119.28 Total After evaluation of the documents and records submitted by petitioner in support of its protest to the aforesaid assessments, respondent issued a Final Decision on Disputed Assessment dated September 11, 2009, canceling the assessment for deficiency final withholding tax but still assessing petitioner for deficiency income tax, VAT, withholding tax on compensation, EWT, DST, and inspection fees for FY ending August 31, 2005, in the following reduced amounts totaling :P10,842,528. 74: Tax Type Basic Interest Compromise Total Income Tax p 5,788,354.84 P4 ,389,309.48 p 50,000.00 P10,227,664.32 Value-added Tax Withholding Tax - 1,675 .00 1,344 .69 700 .00 3 ,719 .69 Compensation Withholding Tax - Expanded 248 ,364 .86 201 ,448.74 16,000.00 465,813 .60 Documentary Stamp Tax 23 ,324 .87 18,918 .80 12,000.00 54,243 .67 Inspection Fees 30 ,280.48 24,645 .28 63,425 .76 TOTAL 13 ,575 .00 11 ,086.70 8,500 .00 27,661 .70 3 ,000 .00 P6, 105,575.05 P4,646,753.69 P90,200.00 P10,842,528.74 The total assessment of :P10,842,528. 74 per respondent's FDDA is the subject of the instant Petition for Review. Petitioner argues that the assessment made by respondent is void for failure to clearly inform it as to the basis of the assessment, citing Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, Revenue Regulations (RR) No. 12-99, and Supreme Court decision in Commissioner of Internal Revenue vs. Enron Subic Power Corporation. 22 Petitioner avers that the witholding tax on income payments amounting to :P1, 157,005.72, the bulk of which < 22 G.R. No. 166387, January 19, 2009.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 12 of 35 CTA Case No. 7991 DECISION includes payments for services made by Meralco, Soliman Security, and Servicio Filipino, among others, were properly withheld and remitted to the BIR; and the income payments included those paid to lawyers (Villaraza and Angangco Law Office, Puyat Jacinto Law Office, and Roco Bunag Kapunan Law Office) consultants (Stock Transfer Service, Inc. and D.A. Tejero & Amoranto) and accountants/auditors (CGM & Co., R.S. Bernaldo & Associates), all of which are exempt from withholding tax, citing Section 26 of the NIRC of 1997, as amended, Revenue Memorandum Circular (RMC) No. 3- 2012, and BIR Ruling No. 90-98. Likewise, petitioner points out that the income tax on the Compensation/Salaries which allegedly were not subjected to withholding tax in the amount of P776,140.20, included those salaries which were charged to it by its affiliates with the income taxes properly withheld and remitted by said affiliates; and that petitioner does not have the obligation to withhold the taxes because it is not the payor-corporation as contemplated under Section 57(8) of the NIRC of 1997, as amended. Petitioner further posits that expenses include the accrual of the employee benefits for the year 2005 that were paid in fiscal year 2006, particularly, the employee bonuses and the conversion of sick and vacation leaves. Petitioner also claims that it submitted sufficient proof to support the tax credits but it was not considered by respondent with respect to respondent's finding that creditable withholding taxes worth P17,100.31 were unsupported. As to the undeclared gross profits on undeclared sales of leaf tobacco, petitioner asserts that it only acted as a lessor of the facilities in Candon and that petitioner's revenue pertains only to the lease of its tobacco processing facilities to Victoria Trading Center (VTC) in the year 2005, not to the tobacco processed by VTC. Petitioner admits that it is a recipient of an L6 Permit, but it explains that it was not unusual for a tobacco company to use an L6 permit of another processing plant as this has been a regular business practice or custom between tobacco companies like VTC and c

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 13 of 35 CTA Case No. 7991 DECISION processing plants like that of petitioner's in the !locos Region. As to the inspection fee and documentary stamp tax liabilities, petitioner contends that the same should be charged to VTC as a consequence of it not owning the tobacco processed by VTC. As alleged by petitioner, in all of VTC 's business papers, petitioner stated therein that the transactions were "on behalf of Victoria Trading Center", i.e., petitioner was acting as an "agent" and that following the basic principle of an implied agency, the principal and not the agent is liable. As to the VAT assessment, petitioner alleges that contrary to respondent's finding that Mapfre Asia Insurance (Mapfre) was a non-VAT taxpayer with invalid Taxpayer Identification Number (TIN), disallowing the input tax claimed, Mapfre is indeed VAT-registered with TIN 000 -491- 771-000, which copy of the Certificate was furnished by the Large Taxpayers Division of the BIR. Respondent, in her Answer and Memorandum, argues that the assessments for deficiency income tax, VAT, withholding tax, DST, and inspection fees in the aggregate amount of P10,842,528. 74 covering fiscal year ending August 31, 2005 were issued in accordance with law and jurisprudence. The assessment for deficiency income tax was derived from petitioner's own documents such as its Income Tax Return, Financial Statements, Monthly Remittance Return of Income Taxes Withheld on Compensation, and Official Registry Book. Respondent likewise avers that: (1) comparison of the Summary of Salaries and Wages claimed per Monthly Remittance Return of Income Taxes Withheld on Compensation (P5,458,879.07) against Taxable Salaries and Wages per ITR/FS (P6,235,019.27) disclosed that the compensation amounting to P776, 140.20 was not subjected to withholding tax; hence, disallowed asc

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 14 of 35 CTA Case No. 7991 DECISION deductible expense and assessed pursuant to Section 34(K) of the NIRC of 1997, as amended, and Section 2.78.1 of RR No. 2-98; (2) comparison of income payments per FS/ITR as against the annual information of taxes withheld at source disclosed amounts not yet subjected to withholding tax aggregating to P1,157,005.72; thus, assessed pursuant to Sections 39(K) and 57(B) of the NIRC of 1997, as amended, and Section 2.57.2 of RR No. 2-98; (3) verification of petitioner's lease contracts with its lessees showed that petitioner underpaid the tax due in the amount of P30,280.48; thus, petitioner was assessed documentary stamp tax pursuant to Section 194 of the NIRC of 1997, as amended; and (4) verification of the taxpayer's Official Registry Book disclosed that it processed leaf tobacco in which the total stocks handled was 1,412,500 kilos. Based on returns submitted, it paid inspection fees of P28,800.00 only; hence, petitioner was assessed deficiency inspection fees of P13,575.00 pursuant to Section 146 of the NIRC of 1997, as amended. Finally, respondent argues that petitioner failed to present evidence and to establish the inaccuracy of the assessment; therefore, the disputed assessments are presumed valid and binding for failure of petitioner to controvert the same; that she faithfully observed the procedure prescribed under Revenue Regulation No. 12-99; and that from all the testimonial and documentary evidence, the only fact that petitioner was able to prove is that it was assessed by respondent. Before going to the merits of the case, this Court shall resolve first petitioner's contention that the assessment is void because it does not inform petitioner of its factual and legal bases in violation of Section 228 of the NIRC of 1997, as amended. Section 228 of the NIRC of 1997 reads: c

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 15 of 35 CTA Case No. 7991 DECISION "SEC. 228. Protesting of Assessment. - 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." Based on the FDDA and the Details of Discrepancies, respondent used the following as basis of the assessment: FACTUAL BASIS LEGAL BASIS Income Tax � Income payments not � Sections 32, 34, and 58 of the NIRC of 1997, VAT subjected to EWT as amended Withholding Tax - Compensation � Salaries not subjected to � Sections 106, 110, Expanded Withholding Tax DST WTC and 113 of the NIRC of Inspection Fees 1997 as amended � Undeclared Gross Profits � Section 2.80(A)(1) of on undeclared sales of leaf RR No. 2-98 tobacco � Undeclared local sales of leaf tobacco � Compensation not subjected to withholding tax � Income payments not � Section 2.57.2 of RR subjected to EWT No. 2-98 � � Underpayment of DST Section 194 of the involving lease NIRC of 1997, as contracts/rental income amended � Underpayment of � Section 146 of the inspection fees involving NIRC of 1997, as processed leaftobacco amended Based on the FLD dated November 26, 200823, Audit Result/Assessment Notices all dated December 2, 200824 and the annex25 attached thereto, the FDDA26 dated c- 23 Exhibit "M", Docket, pp. 81 to 83. 24 Docket, pp. 84 to90. 25 Analysis of Income Payments/Expenses subject to W/T & Possible Sources of Input Tax, Docket, pp. 91-92. 26 Exhibit "A", Docket, pp. 14 to 16.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 16 of 35 CTA Case No. 7991 DECISION September 11, 2009, the Details of Discrepancies27, the Audit Result/Assessment Notices28, and the Computation of Deficiency Taxes29, including the annexes30 which contained tables of computation, the receipt of which petitioner did not dispute, clearly informed petitioner of the factual and legal bases of the assessment pursuant to Section 228 of the NIRC of 1997, as amended. The Court will now address each deficiency tax covered by the assessments. I. INCOME TAX Respondent computed the deficiency income tax assessment of P10,227,664.32 as follows31 : Net Income/(Loss) per ITR p 20 978 337.87 Add: Adjustments p 1 157 005.72 Income Payments not subjected to EWT 776 140.20 Salaries not subjected to w/tax on Compensation 16 102 024.50 18 035 170.42 Undeclared Gross Profit on Undeclared Sale of p 39 013 508.29 Leaf Tobacco Net Income per Audit Tax Due p 12 484 322.65 Less: Tax Already Paid Prior Year's Excess credits P8 247 960.24 Add: CWT claimed per ITR p 2 463 605.17 Less: Disallowances (17 100.31) 2 446 504.86 Less : Excess Credits carried over next year (3 998 497.29) Deficiency Income Tax 6 695 967.81 Add: Penalties p 5 788 354.84 Interest from Dec. 15 2005 to Sept. 30 2009 Compromise 0.7583 P4 389 309.48 Total Amount Due 50 000.00 4 439 309.48 < PlO 227,664.32 27 Exhibit "B", Docket, pp. 17 to 18. 28 Exhibit "C" to "H", Docket, pp. 19 to 24. 29 Exhibit "I", Docket, pp. 25 to 26. 30 Annexes "A-2" to "A-11", Docket, pp. 29 to 39. 31 Exhibit "I", Docket, p. 25.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 17 of 35 CTA Case No . 7991 DECISION As indicated above, the deficiency income tax assessment arose from the adjustments made by respondent on petitioner's taxable income, as well as the disallowances by respondent of petitioner's claimed tax credits, to wit: Income payments not subjected to EWT p 1 157 005.72 Salaries not subjected to withholding tax on 776 140.20 compensation Undeclared gross profit on undeclared sale of leaf 16,102 024.50 tobacco 17,100.31 Disallowed CWT 3 998,497.29 Disallowed excess credits carried over next year 1. Income payments not subjected to EWT P1,157,005.72 Based on the finding that there were income payments per petitioner's financial statements/income tax return (FS/ITR) in the amounts of P1,154,696.50 and P2,309.42 that were not subjected to 2�/o and 10�/o EWT, respectively, as prescribed under Section 57(B) of the NIRC of 1997, as amended, and implemented by Revenue Regulations No. 2- 98, respondent disallowed the sum of P1,157,005. 72 as petitioner's deductible cost/expense pursuant to Section 34(K) of the NIRC of 1997, as amended. 32 Below is the breakdown of the amount of P1,157,005.7233 : Claimed Per Annual Income Tax Return Income Professional Cost of Services Payments Made Fees by Top 10,000 Facilities Corporations on (' Outside Services Others Purchases of Services P1 659 606.05 4 189 647.33 3 412 338.85 32 Exhibit "A", Docket, p. 14. 33 Docket, pp. 29 to 30.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 18 of 35 CTA Case No. 7991 DECISION Deductions 1 553 663.63 P517 565.02 Professional Fees 674,560.85 Security Services 517 565.02 Other Outside Services 1 568 477.00 515 255.60 Insurance 144 297.63 Representation & Entertainment 88,159.19 2 309.42 Transportation & Travel 953 746.56 0.10 Communication Light & Water 602 192.91 Miscellaneous 230.94 14 846 690.00 Total 13 691 993.50 Per alphalist Difference 1 154 696.50 Tax Rate 0.02 Basic EWT Due 23 093.93 Petitioner, on the other hand, contends that the witholding tax on income payments of P1, 157,005.72, the bulk of which included payments for services made by MERALCO, Soliman Security and Servicio Filipino, among others, were properly withheld and remitted to the BIR. Moreover, the income payments allegedly included those which were paid to lawyers (Villaraza and Angangco Law Office, Puyat Jacinto Law Office, and Roco Bunag Kapunan Law Office), consultants (Stock Transfer Service, Inc. and D. A. Tejera & Amoranto) and accountants/auditors (CGM & Co., R.S. Bernaldo & Associates), all of which are allegedly exempt from any withholding tax pursuant to Section 26 of the NIRC of 1997. Likewise, petitioner alleges that the Stock Transfer Service, Inc. is not subject to the expanded withholding tax system considering that payments to a stock transfer agent in the form of retainer fees and additional processing fees are not among those specified under Revenue Regulations No. 6-85 and Section 57(B) of the NIRC of 1997, as opined by the BIR Commissioner in BIR Ruling No. 90-98 dated June 15, 1998. Based on Section 34(K) of the NIRC of 1997, as amended, an expense/cost shall be allowed as deduction from gross income only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR. For easy reference, Section 34(K) is quoted hereunder: (

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 19 of 35 CTA Case No. 7991 DECISION "SEC. 34. Deductions from Gross Income. - xxx XXX XXX XXX (K) Additional Requirements for Deductibility of Certain Payments. - 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." Relative thereto, Section 2.57.2(A) and (M) of RR No. 2-98, as amended by RR No. 17-03, requires the withholding of 2�/o and 10�/o creditable income tax on purchases of services by top 10,000 corporations and professional fees paid to certain individuals, respectively, to wit: "SECTION. 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon. - Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: (A) Professional fees, talent fees, etc., for services rendered by individuals - On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals- Ten percent (10�/o); (1) Those individually engaged in the practice of professions or callings: lawyers; certified public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical, structural, industrial, mmmg, sanitary, metallurgical and geodetic engineers; marine surveyors; doctors of veterinary <

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 20 of 35 CTA Case No. 7991 DECISION science; dentist; professional appraisers; connoisseurs of tobacco; actuaries; and interior decorators; (2) Professional entertainers such as but not limited to actors and actresses, singers and emcees; (3) Professional athletes including basketball players, pelotaris and jockeys; (4) All directors involved in movies, stage, radio, television and musical productions; (5) Insurance agents and insurance adjusters; (6) Management and technical consultants; (7) Bookkeeping agents and agencies; (8) Other recipients of talent fees; (9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors. The amounts subject to withholding under this paragraph shall include not only fees, but also per diems, allowances and any other form of income payments. In the case of professional entertainers, athletes, and all recipient of talent fees, the amount subject to withholding tax shall also include amounts paid to them in consideration for the use of their names or pictures in print, broadcast, or other media or for public appearances, for purposes of advertisements or sales promotion. XXX XXX XXX (M) Income payments made by the top ten thousand (10,000) private corporations to their local/ resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. - Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines Supplier of goods - One percent (1 �/o) Supplier of services -Two percent (2�/o)'c

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 21 of 35 CTA Case No. 7991 DECISION Petitioner proffered before this Court the documents it submitted in support of the protest letter34 it filed with the BIR on December 23, 2008. The said documents included schedules35 showing a breakdown of income payments amounting to P1,594,900.07 originally found by respondent's examiner to have not been subjected to EWT per the FLO dated November 26, 2008. Based on the schedules, the amount of P1,594,900.07 allegedly comprised of income payments on services in the amount of P1,154,696.30 not subjected to EWT and professional fees in the amount of P440,203. 77 not subjected to EWT, detailed as follows: INCOME PAYMENTS ON SERVICES NOT SUBJECTED TO EWT p 32 484.98 Cost of services 36 000.00 Accrual of expense for August 2005 (Servicio Filipino), paid Sept. 2005 Security allowance of officer (GBK) 178 267.76 Accrual of expense for August 2005 (Soliman Security) , paid Sept. 2005 Cash purchase of Christmas give-aways to tenants 10 050.00 Administrative expenses 40 748 .99 Light & water (accrual of expense paid the following month Sept 2005) 144 297 .63 Representation (meal reimbursements of officers/facilitation fee) Security expense 70 962.93 Accrual of expense for August, (Soliman Security) was paid Sept 2005 Contract services 61 740.46 Accrual of expense for August, paid Sept and Dec 2005 200 000.00 PSE's annual listing maintenance fee Seminar fees 16 636.37 Various membership dues like Map, Rotary club, Philjec 92 105.00 Transportation & travel (transpo reimbursements/parking fee of 88 159.19 drivers/messenqers) 107 267 .50 Petty cash reimbursements (cellcards, official calls by officers) Miscellaneous 11 612 .25 Cash payments to Dominion Bus Line (freight charges) OPE's of Stock Transfer, D. A Tejera, CG & Co, Villaraza, not subject to 30,459.40 30,008.30 w/tax Bank charges not subject to wtax 3 300.00 Flowers for employees (died) 595.54 Unlocated difference p 1,154,696.30 Subtotal Professional Fees Not Subject to EWT Partnersh ip: 34 Exhibit "N", Docket, pp. 93 to 94. 35 Exhibit "N", Annexes A and B, Docket, pp . 95 to 96 .

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 22 of 35 CTA Case No. 7991 DECISION CGM & Co p 214 000.00 RS Bernaldo & Associates Stock transfer 95 318.18 Unlocated difference Subtotal 130 891.67 Total (6 .08) p 440 203.77 p 1,594,900.07 Other than the schedules, petitioner did not submit any document in support of the income payments amounting to P1, 154,696.30. Without the related invoices and/or official receipts, the actual nature of the income payments of P1,154,696.30 cannot be ascertained. Consequently, the income payments of P1, 154,696.30 shall be considered as subject to 2�/o EWT as prescribed under Section 2.57 .2(M) of RR No. 2-98, as amended by RR No. 17-03, 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. 36 Therefore, respondent's disallowance of the amount of P1, 154,696.30 as deduction from petitioner's FY 2005 taxable gross income should be upheld. As to the income payments of P440,203. 77, petitioner presented various check vouchers and official receipts reflecting payments to Constantino Guadalquiver & Co., R.S. Bernaldo & Associates, and Stock Transfer Service, Inc., detailed as follows: Docket In Payment of CV# Date OR# Date Amount Total Page# < Paid to Constantino Guadalquiver & Co. (CG & Co.) Professional fee for the month of August & other 05- 97 charges 00067 09/17/04 1276 09/30/04 p 20 ,174.00 1318 Billing in connection with 1317 1502 the preparation of audit 05- 98 schedules 00166 10/20/04 10/29/04 2 ,200 .00 Professional fee for the month of September and 05- 99 other charges 00167 10/20/04 10/29/04 1 9,938 .0 0 12/07/04 20 ,027.70 Professional fee for the 05- 100 month of October 2004 00250 11/23/04 36 Marcos II vs. Court of Appeals, et. al., G.R. No. 120880, June 5, 1997.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 23 of 35 CTA Case No. 7991 DECISION and other charges Professional fee for financial record keeping 101 for Nov 2004 05-402 01/17/05 1587 01/27/05 20,018.50 1653 03/08/05 19,8 9 5 .15 Services rendered for the 1654 03/01/05 19,474.00 102 month of December 2004 05-537 03/02/05 1735 04/06/05 1807 04/27/05 Services rendered for the 1915 06/17/05 103 month of January 2005 05-538 03/02/05 1953 07/01/05 1998 07/22/05 Professional fee & other 2064 08/29/05 2125 no date charges for the month of 104 Feb 2005 05-607 04/01/05 19,452.00 19,268.15 Professional fee for the 19,040.00 105 month of March 2005 05-642 04/22/05 Professional fee for the 106 month of April 2005 05-766 06/14/05 Professional fee for the month of May 2005 & 107 other charges 05-774 06/20/05 19,052 .00 19,030.50 Professional fee for June 19,184.00 19,360.00 108 2005 05-839 07/15/05 Professional fee for the 109 month of July 2005 05-914 08/23/05 Professional fee for the 110 month of August 2005 05-976 09/19/05 2 5 6 ,114 .00 Paid to R.S. Bema/do & Associates 05-1414 02/21/06 1451 03/02/06 p 120,000.00 Final billing for the fiscal 13,776.00 year end audit as of 133,776.00 111 August 31 , 2005 out of pocket expenses Paid to Stock Transfer Service, Inc. Retainers fee for the month of August & other 05- 00029 115 charges 09/06/04 126380 no date p 11,356.01 05- 10/18/04 127112 Retainers fee for the 00161 11/08/04 127608 12/08/04 127936 month of September & 05- 12/21/04 128300 00217 116 other charges 02/08/05 129050 10/28/04 11 ,330.00 05- 03/02/05 129544 Retainers fee for the 00280 04/01/05 130502 04/28/05 130692 month of October & other 05- 06/01/05 131085 00335 06/30/05 131522 117 charges 08/29/05 132323 12/02/04 12,034.02 05-474 Retainers fee for the 05-533 month of November & 05-606 05-653 118 other charges 05-737 no date 11,356.01 Retainers fee for the 05-793 05-933 month of December 2004 119 & other charges no date 11,356.01 Retainer fee for the month of Jan 2005, computer charge for the month of December 2004 & share in whse rental for 120 the month of Jan 2005 02/18/05 11,356.01 no date 12,072.51 Retainer fee for Feb 04/28/05 12,316 .55 121 2005 and other charges 05/11/05 11 ,881.01 06/09/05 11 ,356.01 Retainer fee for the 07/08/05 11,356.01 month of Mar 2005 & no date 11,356.01 122 other charges Retainer fee for Apr 2005 123 & other charges Retainer fee for the 124 month of May 2005 Retainer fee for the month of June 2005 and 125 other charges 126 Retainer fee as August

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 24 of 35 CTA Case No. 7991 DECISION 2005 & warehouse rental Retainer fee as Transfer Agent for the month of 127 July 2005 05-851 07/22/05 131932 08/12/05 11 ,856.01 150,982.17 P527 ,096 .17 Likewise, petitioner submitted a Certification37 from the Stock Transfer Service, Inc. stating that as transfer agent, Stock Transfer Service, Inc. is not subject to EWT per BIR Ruling No. 90-98 dated June 15, 1998. Attached to the Certification is an excerpt of BIR Ruling No. 90-98. 38 Since the afore-mentioned documents reflected professional fees paid to general professional partnerships, which are exempt from income tax and consequently from EWT pursuant to Section 26 of the NIRC of 1997 in relation to Section 2. 57. S(B) of RR No. 2-98, as amended, as well as retainer fees paid to Stock Transfer Service, Inc., which are not subject to EWT per BIR Ruling No. 90-98, respondent, in her FDDA, aptly reduced the disallowed payments for professional fees from P440,203. 77 to P2,309.42. Clearly, the documents submitted by petitioner before this Court were already considered by respondent in her FDDA and no other document was presented by petitioner to disprove respondent's finding that it failed to withhold EWT on the income payments on services in the amount of P1,154,696.30 and on professional fees in the amount of P2,309.42, totaling P1,157,005. 72. Thus, the amount of P1,157,005. 72 cannot be validly deducted from petitioner's taxable gross income pursuant to Section 34(K) of the NIRC of 1997, as amended. 2. Salaries not subjected to w ithholding tax on compensation P776, 140.20t 37 Docket, p. 130. 38 Docket, p. 131.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 25 of 35 CTA Case No. 7991 DECISION Invoking Section 34(K) of the NIRC of 1997, as amended, and Section 2. 78.1 of RR No. 2-98, respondent disallowed as deduction from petitioner's gross income, the amount of P776,140.20 representing the difference between the Salaries and Wages of P6,235,019.27 reflected per petitioner's FS/ITR vis-a-vis the amount of P5,458,879.07 shown per petitioner's Monthly Remittance Returns of Income Taxes Withheld on Compensation. Petitioner claims that the amount of P776,140.20 included salaries which were charged to petitioner by its affiliates for which the corresponding income taxes were properly withheld and remitted by its affiliates. Petitioner purportedly does not have the obligation to withhold the taxes because it is not the payor-corporation as contemplated under Section 57(B) of the NIRC of 1997. Petitioner further avers that the amount of P776,140.20 included the accrual of the employee benefits for the year 2005 that were paid in FY 2006, particularly, the employee bonuses and the conversion of sick and vacation leaves. Petitioner presented the following schedule39 reconciling the Salaries and Wages as reflected on its books in the amount of P6,235,019.27 and as shown on its returns in the amount of P5,446,791.57: Unreconciled balances Per Book Per Return p 6,235,019 .27 p 5,446,791 .57 Add/( deduct) : Salaries charged by affiliates to PTFC, included in 1601C (426 ,190.33) of affiliates (282 ,646 .91) Non-taxable 131h month/SLNL Included in alpha list but charged to Victoria, deducted 173,897.00 from expense (366,194 .77) Accrual of bonus and SLNL for FY 2005 to be paid Sept. 2005 156,690 .41 Bonus paid this FY but recorded as exp. in prior year, incl. (45 .00) in 1601C ( 11 ,214.40) Meal expense erroneously recorded as payroll (174 ,685 .04) Non-taxable separation pay (24 ,164.90) Under-declared salaries in 1601 C but corresponding tax was remitted Non-taxable salaries of newly hired employee , exemption is higher than income 39 Exhibit "N", Annex C, Docket, p. 143.

Philippine Tobacco Flue-curing and Redrying Corporation v . CIR Page 26 of 35 CTA Case No . 7991 DECISION Salaries included in 1601 C but charged to affiliates, not 166,326 .24 P5,446,791.57 recorded as expense P5,446, 791.57 Reconciled balances Per petitioner's Monthly Remittance Returns of Creditable Income Taxes Withheld for FY 200540, the amount of P5,446,791.57 indicated by petitioner in the above schedule as Salaries and Wages per return is the correct figure and not P5,458,879.07 as found by respondent. Thus, the discrepancy between the Salaries and Wages per books and per return is P788,227. 70 instead of P776,140.20. As to the alleged salaries in the amount of P426,190.33 which were charged to petitioner by its affiliates, petitioner submitted the supposed billing statements41 . However, these documents do not even show the issuer. Petitioner should have presented documents proving actual payment of the salaries to its affiliates. To establish that the corresponding tax was withheld and remitted, petitioner should have submitted the Monthly Remittance Return of Income Taxes Withheld on Compensation (BIR Form No. 1601C) and Annual Information Return of Income Tax Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604CF) filed by its affiliates for the subject period. Regarding the amounts of P173,897 .00 and P166,326.24 representing salaries included in petitioner's alphalist but not recorded as expenses because these were allegedly charged to its affiliates, including Victoria Trading Center, petitioner presented invoices42 and statements of account43 issued by petitioner to Victoria Trading Center and L'Hirondelle Holdings, Inc. However, these documents merely prove that certain amounts of salaries were billed/charged by petitioner to its affiliates and do not establish that the said salaries were not claimed by petitioner as deductible expenses. c 40 BIR Records, pp. 77 to 88. 41 Docket, pp. 144 to 154. 42 Attached to Exhibit " N", Docket, pp . 155 to 156. 43 Attached to Exhibit " N", Docket, pp. 157 to 168.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 27 of 35 CTA Case No. 7991 DECISION With reference to the alleged accrual of bonus, sick leave (SL) and vacation leave (VL) for FY 2005 to be paid in September 2005 in the amount of P366, 194.77, while Section 2. 79(A) of RR No. 2-98, as amended, requires withholding of tax upon payment of compensation, petitioner failed to present documents proving actual payment of the amount of P366,194.77 in FY 2006. The same holds true with the remammg reconciling items. Petitioner failed to provide documents by which this Court can ascertain the veracity of the amounts indicated in the schedule . Thus, the Salaries and Wages in the amount of P776, 140.20 cannot be deducted from petitioner's taxable gross income for FY 2005. Consequently, petitioner should be held liable for deficiency income tax thereon. 3. Undeclared gross profit on undeclared sale of leaf tobacco - P16,102,024.50 Respondent imputed against petitioner an undeclared gross profit on undeclared sale of leaf tobacco in the amount of P16, 102,024.50 based on the following findings: "Verification from the taxpayer's official registry book (ORB) disclosed that it processed leaf tobacco in which the total stocks handled were 1,412,500 kilos. Based on the submitted export documents, taxpayer has undeclared its export sales of leaf tobacco in the amount of P40,781,137.92. Using the maximum industry gross profit rate (GPR) of 39.474�/o, the corresponding undeclared income of P16,102,024.50 is assessed pursuant to Section 32 of the Tax Code, as amended." On the other hand, petitioner contends that it never earned any revenue from the sale of leaf tobacco as it acted only as a lessor of its tobacco processing facilities in Candon ~

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 28 of 35 CTA Case No. 7991 DECISION pursuant to the Contract of Lease it had with Victoria Trading Center which actually processed and sold the tobacco leaves. In order to support its claim, petitioner presented its Contract of Lease with VTC44, export sales invoices45 with the indication "AND ON BEHALF OF VICTORIA TRADING CENTER", Phytosanitary Certificate46, Certificate of Fumigation47, Export Declaration48 with the indication "AND ON BEHALF OF VICTORIA TRADING CENTER", Certificates of Origin49, Bills of Lading 50 with the indication "AND ON BEHALF OF VICTORIA TRADING CENTER", Container List51 , Weight List52, reply-letter53 of Mr. George Vinluan, Head- Excise Tax for Regions 1, 2 and 3 with attachments, and Judicial Affidavit54 of Mr. Ignacio Luis Tan. While it was indicated in the export sales invoices, export declarations and bills of lading that petitioner exported the leaf tobacco on behalf of Victoria Trading Center, petitioner failed to prove that the export proceeds were remitted to VTC. Inasmuch as petitioner failed to establish that the exported leaf tobacco belongs to VTC and it did not benefit from the exportation thereof, respondent's deficiency income tax assessment on petitioner's undeclared gross profit on undeclared sale of leaf tobacco in the amount of P16, 102,024.50 should be upheld. 4. Disallowed CWT- P17,100.31 Pursuant to Section 58(B) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed CWT i ~ 44 Exhibit "N", Annex D, Docket, pp. 169 to 172. 45 Exhibit "N", Annexes D.1 and D.2, Docket, pp. 173 to 174. 46 Exhibit "N", Annexes D.6 and D.14, Docket, pp. 178 and 208. 47 Exhibit " N", Annexes D.5 and D.13, Docket, pp. 179 and 207. 48 Exhibit "N", Annex D.7, Docket, p. 180. 49 Exhibit "N", Annexes D.8-D.9 and D.15- D.16, Docket, pp. 181 to 182 and 209 to 210. 50 Exhibit "N", Annexes D.10 and D.17, Docket, pp. 183 and 211. 51 Exhibit "N", Annexes D.ll and D.18, Docket, pp. 187 and 214 . 52 Exhibit "N", Annexes D.12 and D.19, pp . 188 to 206; pp. 215 to 227. 53 Exhibit "T", Docket, p. 656. 54 Exhibit "U", Docket, pp. 657 to 659 .

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 29 of 35 CTA Case No. 7991 DECISION the amount of P17,100.31 for being unsupported. For petitioner's failure to refute respondent's findings, the disallowance of the CWT of P17,100.31 should be sustained. 5. Disallowed Excess Credits Carried over Next Year - P3,998,497 .29 Respondent disallowed petitioner's tax credits in the amount of P3,998,497.29, which were carried over to FY 2006. The Court finds the disallowance improper because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding FY 2006. Since the tax benefit will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year. In sum, save for the compromise penalties of PSO,OOO.OO and respondent's disallowance of the excess credits carried over the following year in the amount of P3,998,497 .29, the deficiency income tax assessment should be upheld. Petitioner is liable to pay basic deficiency income tax in the reduced amount of P1,789,857.55, computed as follows: Net lncome/(Loss) per ITR p 20,978,337.87 Adjustments p 1,157,005.72 18,035 ,170.42 776 ,140.20 p 39 ,013,508.29 Income Payments not subjected to EWT Salaries not subjected tow/tax on 16 ,102 ,024 .50 Compensation Undeclared Gross Profit on Undeclared Sale of Leaf Tobacco Net Income per Audit Tax Due p 12.484,322 .65 Tax Already Paid Prior Year's Excess credits P2.463 ,605 .17 P8 ,247 ,960 .24 10 ,694.465 .10 Add : CWT claimed per ITR (17,100 0 31 ) 2.446 ,504 .86 p 1,789,857.55 Less: Disallowances Deficiency Income Tax

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 30 of 35 CTA Case No. 7991 DECISION II. VALUE-ADDED TAX The deficiency VAT assessment resulted from respondent's disallowance of petitioner's claimed input tax credits on local purchases in the amount of =P1,675.00. Respondent stated in her FDDA that: "Verification from the SIR's Integrated Tax Systems disclosed that some of the taxpayer's suppliers were registered as non-vat taxpayers while others have invalid TINs which were not found in the data base; hence, the input taxes claimed by the taxpayer from these suppliers amounting to P1,675.00 were disallowed pursuant to Sections 110 and 113 of the Tax Code, as amended." Petitioner argues that respondent's finding that the input tax from Mapfre Asia Insurance was disallowed for the reason that Mapfre was a non-VAT taxpayer or was found to be holding an invalid Taxpayer Identification Number (TIN) does not hold water because Mapfre is indeed VAT- registered with TIN 000-491-771-000. While petitioner submitted Mapfre's BIR Certificate of Registration dated January 27, 2006 marked as Exhibit "R" showing that Mapfre is VAT-registered with TIN 000-491- 771-000, the said exhibit however was denied admission by this Court for petitioner's failure to have the same identified during trial. 55 For petitioner's failure to prove that the input tax of =P1,675.00 is duly supported by an invoice (for purchase of goods) or official receipt (for purchase of services) duly issued by a VAT-registered entity pursuant to Section 110(A) in relation to Section 113(A) and (B) of the NIRC of 1997, as amended, the same should be disallowed. Therefore, the assessment for basic deficiency VAT in the amount of =P1,675.00 should be upheld. ( 55 Resolutions dated May 8, 2012 and July 16, 2012, Docket, pp. 646 to 647 and 684 to 686.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 31 of 35 CTA Case No. 7991 DECISION III. WITHHOLDING TAX ON COMPENSATION This assessment was based on the same finding under the deficiency income tax assessment that petitioner failed to withhold the corresponding tax on Salaries and Wages in the amount of P776,140.20 pursuant to Section 80(A) of the NIRC of 1997, as amended and Section 2.80(A)(1) of Revenue Regulations No. 2-98. As discussed earlier, petitioner failed to establish that the Salaries and Wages of P776,140.20 is not subject to withholding tax on compensation; thus, it should be held liable to pay basic deficiency withholding tax on compensation in the amount of P248,364.86. IV. EXPANDED WITHHOLDING TAX This assessment was based on the same finding under the deficiency income tax assessment that petitioner's purchases of services in the amount P1,154,696.50 and professional fees paid in the amount of P2,309.42 were not subjected to 2�/o and 10�/o EWT, respectively, pursuant to Section 57(B) of the NIRC of 1997, as amended, and Section 2.57.2 of RR No. 2-98. As previously determined, petitioner failed to establish that its income payments for purchases of services in the amount of P1,154,696.50 and professional fees in the amount of P2,309.42, totalling P1,157,005.72, are not subject to EWT or that the required tax thereon has been properly withheld; hence, petitioner shall be held liable to pay basic deficiency EWT in the respective amounts of P23,093.93 and P230.94, totalling P23,324.87. V. DOCUMENTARY STAMP TAX Upon comparison of the P54,531.48 documentary stamp tax due on petitioner's rental income of t

Philippine Tobacco Flue- curing and Redrying Corporation v. CIR Page 32 of 35 CTA Case No. 7991 DECISION P54,530,484.00 as reflected in its audited financial statements for FY 2005 vis-a-vis the amount of P24,251.00 DST paid by petitioner for the same year, respondent assessed petitioner for basic deficiency DST in the amount of P30,280.48 pursuant to Section 194 of the NIRC of 1997, as amended. Below is the computation of the amount of P30,280.4856 : Taxable Base per Return - Add: Adjustment per Audit P54,530,483.97 Rental Income for the year P54 530,483.97 Taxable Base per Audit p 54,531.48 Documentary Stamp Tax due on Lease Contracts 24 251.00 Less: Payments (Annex A-9) Deficiency Documentary Stamp Tax p 30,280.48 Petitioner did not contest the basic deficiency DST of P30,280.48 in its protest letter57 dated December 23, 2008 and in the Petition for Review filed before this Court. Consequently, respondent's assessment for basic deficiency DST of P30,280.48 is deemed admitted by petitioner. VI. INSPECTION FEES Respondent's examination of petitioner's Official Registry Book disclosed that petitioner processed leaf tobacco in which the total quantity of stocks handled was 1,412,500 kilos with the corresponding inspection fee of P42,375.00 which is higher than the inspection fee of P28,800.00 paid by petitioner. As a result, respondent assessed petitioner for deficiency inspection fees in the amount of P13,575.00, as computed below, pursuant to Section 146 of the NIRC of 1997, as amended: Total Kilograms of Leaf Tobacco Handled {Annex A- P1.412 500.00 10) 0.03 Rate of Inspection Fees Inspection Fees due per Audit p 42 375.00 56 Exhibit "I", Docket, p. 26; BIR Records, p. 369. 57 Exhibit "N", Docket, p. 94.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 33 of 35 CTA Case No. 7991 DECISION Less: Payments (Annex A-ll) 28 800.00 Deficiency Inspection Fees p 13,575.00 Petitioner alleges that the said inspection fees should be charged to VTC as a natural consequence of petitioner not owning the tobacco processed by VTC. As earlier stated, petitioner failed to establish that the leaf tobacco it exported actually belongs to VTC. Hence, petitioner should be held liable for deficiency inspection fees of P13,575.00. Respondent imposed compromise penalties on the subject deficiency taxes in the total amount of P90,200.00. The following compromise penalties will be cancelled there being no compromise agreement between the parties: TAX TYPE COMPROMISE Income Tax PENALTY Value-added Tax Withholdinq Tax on Compensation p so 000.00 Expanded Withholding Tax Documentary Stamp Tax 700.00 Inspection Fees 16,000.00 TOTAL 12,000.00 8,500.00 3,000.00 P90,200.00 Under Revenue Memorandum Order No. 01-90, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. Compromise penalties imply mutual agreement between the taxpayer, on one hand, and the Commissioner of Internal Revenue, on the other. Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 58 WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. The compromise penalties of P90,200.00 are cancelled there< 58 Commissioner of Internal Revenue vs .Lianga Bay Logging Co., Inc., et. a/., G.R. No. 35266, January 21, 1999.

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 34 of 35 CTA Case No. 7991 DECISION being no mutual agreement between the parties. However, the assessments for deficiency income tax, value-added tax, withholding tax on compensation, expanded withholding tax, documentary stamp tax, and inspection fees issued by respondent against petitioner for fiscal year ending August 31, 2005 are hereby AFFIRMED with some MODIFICATIONS. Accordingly, petitioner is hereby ORDERED TO PAY respondent in the reduced amount of P2,633,847 .20, inclusive of the twenty-five percent (25�/o) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, broken down as follows: TAX TYPE BASIC 25% TOTAL Income Tax DEFICIENCY SURCHARGE ~2 . 237 , 321 . 94 Value-added Tax TAX ~47,464 . 39 Withholding Tax on 2 ,093 .75 Compensation ~ 1,789,857.55 Expanded Withholding Tax 310 ,456 .08 Documentary Stamp Tax 1,675 .00 418 .75 29 ,156.09 Inspection Fees 37 ,850 .60 Total 248 ,364 .86 62,091 .22 16,968 .75 23 ,324.87 5,831 .22 30 ,280.48 7 ,570 .12 P2,633,847.20 13,575 .00 3 ,393 .75 P2,107,077.76 P526, 769.44 In addition, petitioner is hereby ORDERED TO PAY: a) Deficiency interest at the rate of twenty percent (20�/o) per annum on the basic deficiency income tax, VAT, withholding tax on compensation, EWT, DST, and inspection fees computed from the dates indicated below until full payment thereof pursuant to Section 249(8) of the NIRC of 1997, as amended: TAX TYPE DEFICIENCY Income Tax INTEREST COMPUTED Value-added Tax Withholding Tax on Compensation FROM Expanded Withholding Tax December 15 2005 Documentary Stamp Tax September 25, 2005 Inspection Fees September 14, 2005 September 14, 2005 August 31, 2005 August 31, 2005

Philippine Tobacco Flue-curing and Redrying Corporation v. CIR Page 35 of 35 CTA Case No. 7991 DECISION b) Delinquency interest at the rate of 20�/o per annum on the total amount of P2,633,847 .20 and on the 20�/o deficiency interest which have accrued as afore-stated in (a), computed from November 6, 2009 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended. SO ORDERED. ~ N. 1\1�.~:~- ~~ WE CONCUR: CIELITO N. MINDARO-GRULLA Associate Justice Presiding Justice ER~P.UY Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. Presiding Justice Chairperson, 1st Division