COVANTA ENERGY PHILIPPINE HOLDINGS, INC. v. COMMISSIONER OF INTERNAL REVENUE

.I 0. REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION COVANTA ENERGY PHILIPPINE C.T.A. CASE NO. 7103 HOLDINGS, INC., Members: Petitioner, ACOSTA, Chairperson -versus- . UY, and FASON-VICTORINO, JJ. COMMISSIONER OF INTERNAL Promulgated: :E-~~~~~~-------~~~~~~~~~~�---- ~-~1~~ ~~,~~ ~~-x ..........~ . DECISION FASON-VICTORINO, J.: In this Petition for Review filed on November 25, 2004, petitioner Covanta Energy Philippine Holdings, Inc. seeks the cancellation and withdrawal of the assessments issued against it by respondent Commissioner of Internal Revenue (CIR) for alleged deficiency value-added tax (VAT), expanded withholding tax (EWT), and documentary stamp tax (DST) for taxable year 2000, inclusive of increments and compromise penalty, in the aggregate amount of P2 , 196,138.04. 1219

DECISION CTA Case No . 7103 THE FACTS Petitioner Covanta Energy Philippine Holdings, Inc. (CEPHI) alleges that it is duly organized and existing local corporation with principal office at the 17th Floor, Robinsons Equitable Tower, ADS Avenue corner Poveda Street, Ortigas Center, Pasig City. It is registered with the Bureau of Internal Revenue (SIR) Revenue District Office (RDO) No. 43. 1 Respondent CIR is the government official authorized under the National Internal Revenue Code (NIRC) of 1997 to assess and collect internal revenue taxes as well as to decide disputed assessments, subject to the exclusive appellate jurisdiction of this Court. He may be served with summons and other notices at the BIR National Office Building, BIR Road, Diliman, Quezon City. On February 28, 2004, petitioner received Formal Letters of Demand and Assessment Notices, all dated January 23, 2004, issued by respondent assessing it for deficiency VAT, EWT, and DST in the aggregate amount of P2,196,138.04, broken down as follows: 2 1 Annex es " A" and " B", Petition for Review , docket, pp . 13 and 14; par. 2, Stipulation of Fa ct s, Joint Stipulation of Facts and Issues, docket, pp . 86 -87 . 2 Ex hibits " BBB", " CCC", " AAAA" , " AAAA- 1", " BBBB", and " CCCC". 12ZO

DECISION CTA Case No. 7103 DEFICIENCY TAX A MOUNT Value-added Tax P1 252 869.02 Expanded Withholding Tax Compromise Penalty on Withholding Tax on 862 804.35 Compensation 1,000.00 Documentary Stamp Tax TOTAL 79 464.67 P2, 196,138.04 According to petitioner, the alleged deficiency VAT arose from respondent's conclusion that there was erroneous computation of output tax, not to mention the disallowed input taxes3. Respondent deduced that petitioner did not compute the output tax based on gross receipt as required under Section 108 of the Tax Code. Moreover, some input taxes claimed were for the purchase of non- VAT goods such as gasoline, if not expenses for the account of petitioner's affiliates and subsidiaries, shown as follows: AIR-January 1 1/275 727.06 None Manaqement Fees Earned 485 667.17 P15 346,574.00 Less: A/R- December 31 2001 Gross Receipts 1 023 309.07 Output Tax 14 323,264.93 Less: Input Tax per Return Disallowed Input Taxes 1 432,326.49 Value-added Tax Payable Less: Paid per return 790,059.89 Add: carried over to.next quarter 642,266.60 Deficiency VAT Interest up to 2.24.04 None T ota l Defici en cy V AT 132,703.93 774 970.53 477 898.49 P1, 2 5 2,869.02 3 Annex "C", Petition for Review, docket, pp. 15-16; par. 12, Stipulation of Facts, Joint Stipulation of Facts and Issues, docket, pp. 88-89 .

DECISION CTA Case No. 7103 Petitioner as well complains respondent's assessment on deficiency EWT for taxable year 2000 amounting to P862,804.35 on the ground that it failed to withhold on various income payments subject to EWT, in violation of Revenue Regulation 2-98,4 as indicated below: 2000 ACCOUNT AMOUNT WITHHOLDING TAX DUE Courier Freight Repairs and Maintenance p 111,679.67 p 1,116.80 Security/Janitorial Advertisement 359,163 .94 3 591.64 Janitorial - HKGA Professional Fees 114,907.01 1,149.07 Rental Expenses Total EWT Due 17 462.00 174.62 Less: EWT Remitted Deficiency EWT 23,749.00 237.49 Add: Interest up to 2.24.04 TOTAL DEFICIENCY EWT 3 279 384.68 327,938.36 P12 665 421.52 633 271.08 967,479.06 433,785.65 533 693.41 329 110.94 p 862,804.35 Petitioner also rejects respondent's imposition of compromise penalty of Pl,OOO.OO for its failure to file an alphabetical list (Aiphalist) of employees subjected to withholding tax for the taxable year 2000, in violation of Section 2.83.2 of Revenue Regulations (R.R.) No. 2-98. Petitioner also denies liability on deficiency DST relative to the several contracts of lease it executed with various lessors for its u s / ' 4 Annex "0", Petition for Review, docket, pp . 17- 18; par. 14, Stipulation of Facts, Joint Stipulgation of Facts and Issues, docket, p. 89 .

DECISION CTA Case No. 7103 in business operation and as residence of its foreign executives, which required the payment of documentary stamp tax pursuant to Section 194 of the Tax Code. 5 The alleged deficiency DST is broken down as follows: NAME OF DATE OF BASIC DST SURCHARGE INTEREST TOTAL LESSOR p 2,421.00 p 605.25 p 2,158.00 p 5,184.25 Cam ira CONTRACT Holdings 08.12.99- 1,092.00 273.00 973.37 2,338.37 11.02.01 6,535.44 Trixie 09.03.99- 3,052.00 763 .00 2,720.44 9,599.74 Brothers 11.02.01 6,526.47 Ofelia Cheah 09.08.99- 4,483.00 1,120.75 3,995.99 37,493 . 17 11.02.01 11,787.23 Abaya 08.30.01 - 3,001.00 750.25 2,775.22 P79 464.67 Investment 12.31.04 06.13.00- 17,509.00 4,377.25 15,606.92 Federico 08.31.01 Galang 08.31.99 - 5,420.00 1,355.00 5,012.23 Jobeliz Realty 08.31.01 06.15.99- Pan American 07.24.02 Total P36 978.00 P9_L244.50 P33..L242.17 On March 18, 2004, petitioner formally protested the foregoing assessments, citing the factual and legal bases against the subject assessments and prayed for their withdrawal and cancellation. The same letter protest made respondent aware that petitioner already submitted supporting documents to the BIR Task J Force on Independent Power Producers. 6 5 Annex "E", Petition for Review, docket, pp. 19-20; par. 17, Stipulation of Facts, Joint Stipulation of Facts and Issues, docket, p. 90 . 6 Annex "J", Petition for Review, docket, pp . 25-28; par. 7, Stipulation of Facts, Joint Stipulation of Facts and Issues, docket, p. 88.

DECISION CTA Case No. 7103 On November 19, 2004, petitioner paid respondent P34,409.83 in settlement of its alleged deficiency DST liability. 7 On November 25, 2004, petitioner filed the instant Petition for Review for failure of respondent to render a decision on the protest against the disputed assessments. On January 31, 2005, respondent filed his Answer with the following Special and Affirmative Defenses 8 : 4.) Respondent has no personal knowledge on the date of receipt by petitioner of the Final Assessment Notice. Thus, no admission can be made regarding such fact. 5.) Respondent takes exception from petitioner's assertion that it has submitted all relevant documents in support of its protest. Many of the documents submitted by the petitioner fail to controvert items/issues in the assessment. Nonetheless, the petitioner submitted substantial documents in support of numerous issues in its protest. 6.) The Income Tax Returns of the petitioner for taxable year 2000 showed sales/receipts of P15,346,574.00 . The General Ledger of taxpayer for the same year showed Accounts Receivable ending balance of P 1,023,309.07. Thus, petitioner's Gross Receipts for the year, subject to output VAT amounts to P14,323,264.93, or an output VAT of P1,432,326.49. The taxpayer did not pay anything of this output VAT. On the other hand, petitioner claimed input VAT in the amount of P1,060, 789.49 (deductible from output VAT). However, the examiners in this case, after thorough investigation, disallowed numerous input VAT entries amounting to / 7 Annex es " K" and " K- 1", Petition for Review, docket, pp. 29 - 30; par. 18, Stipulation of Facts, Joint Stipulation of Facts and Issues, docket, p. 91. 8 Docket, pp. 44 -45 .

I' DECISION CTA Case No. 7103 P485,667.17, on the basis that these expenditures of the petitioner are either non-VAT items, or coming from purchases made by affiliates and subsidiaries. The BIR records containing the worksheet of the examiners will show supporting computations and particular disallowances made. Thus, Output VAT due P575,131.32 p 1,432,326.49 Less : 214,928.57 (790.059 .89) Input VAT allowed p 642,266.60 Carried-over input tax from last quarter of 1999 132.703.53 VAT payable for 2000 p 774,970.53 Add: Carried-over to next quarter Basic VAT deficiency The taxpayer did not pay any VAT for taxable year 2000. 7.) Of the assessment on petitioner for deficiency expanded withholding tax, only the payments to ACCRA Law Offices and SGV are payments to General Professional Partnerships. The bulk of the assessment is withholding on rent and service providers of the company. The examiners made a detailed investigation and verification of the documents submitted by petitioner, and found that there is a discrepancy in the amount collected and paid by petitioner for withholding taxes. The onus of proving that the needful withholding taxes were indeed paid rests on the petitioner. 8.) While petitioner represents that it has already paid P34,309.83 of the documentary stamp taxes due for taxable year 2000, the assessment for petitioner amounts to P79,464.67 (interest only up to 23 January 2004): Thus, the payment made by petitioner is not the full payment for said tax liability. 9.) It is presumed that tax assessments are correctly and legally made. The burden of assailing the same rests on the party alleging irregularity. In the instant case, petitioner fails to discharge this burden.

DECISION CTA Case No. 7103 On March 14, 20059 and March 16, 2005 10, the parties filed their respective pre-trial briefs followed by their Joint Stipulation of Facts and Issues on May 13, 2005, which the Court approved on June 9, 2005 11 � Trial ensued during which the parties presented evidence in support of their respective positions. On September 24, 2008, while respondent's Formal Offer of Documentary Evidence was pending resolution, petitioner filed a Motion for Leave of Court to Serve Supplemental Petition Upon Respondent and to Present Additional Evidence12, with the Supplemental Petition13 attached thereto, praying for the cancellation of the assessments for deficiency VAT and DST for the taxable year 2000 issued against it in the amount of P1,252,869.02 and P79,464.67, respectively, in view of its availment of tax amnesty under Republic Act (R.A.) No. 9480. On November 3, 2008, respondent filed a Supplemental In his Special and Affirmative Defenses, respondent focused on petitioner's alleged availment of tax amnesty under R.A. 9 Docket, pp . 50-61. 10 Docket, pp . 62-71. 11 Docket, p. 95. 12 Docket, pp. 683-687. 13 Docket, pp . 688 -695. 14 Docket, pp. 757 -765 . 12 2G

DECISION CTA Case No. 7103 9480. Allegedly, petitioner's action was still under investigation/examination and the BIR had a year to verify petitioner's qualifications for the grant of amnesty. Besides, availment of amnesty must still be proved by petitioner. More importantly, there is nothing in R.A. 9480, which should be strictly construed, that proVides for cancellation of deficiency tax assessments. On December 11, 2008, petitioner filed a Supplemental Formal Offer of Evidence15 to which respondent filed a Comment on December 19, 2008. In its Resolution of February 5, 2009, 16 the Court admitted petitioner's Exhibits "SSS" to "DDDD-1" and deemed partially withdrawn its Petition for Review and the Supplemental Petition for Review insofar as the assessment for deficiency VAT and DST for the taxable year 2000 were concerned considering petitioner's compliance with the all the requisites for availment of tax amnesty under R.A. No. 9480. 15 Docket, pp. 781-786. 16 Docket, pp. 846-847.

DECISION CTA Case No. 7103 On February 24, 2009, petitioner sought clarification and/or reconsideration 17 of the foregoing Resolution to which respondent filed a Comment on March 23, 2009 .18 On May 12, 2009, the Court ruled on the incident as follows: WHEREFORE, the assessment for deficiency Value Added Tax and Documentary Stamp Tax for the year 2000 is hereby CANCELLED and SET ASIDE solely in view of petitioner's availment of the Tax Amnesty under RA 9480. The parties are GRANTED a non-extendible period of thirty (30) days from receipt hereof within which to file their simultaneous Memoranda on the remaining issues pertaining to Deficiency Expanded Withholding Tax Assessment. SO ORDERED. On August 14, 2009, the Court denied respondent's Motion for Reconsideration 19 filed on May 29, 2009,2� to which petitioner interposed an objection on June 29, 2009 21 . On December 8, 2009, the case was submitted for decision 22, after petitioner and respondent filed their memoranda on June 15, 200923 and November 23, 2009, respectively. 24 17 Docket, pp . 848-860 . 18 Docket, pp . 868-875. 19 Resolution dated August 14, 2009, docket, pp. 963-965 . 20 Docket, pp. 892-903. 21 Docket, pp. 950-961. 22 Docket, pp. 910-943 . 23 Docket, pp . 981 -996 .

DECISION CTA Case No . 7103 THE ISSUES Respondent assessed petitioner for alleged deficiency VAT, expanded withholding tax, and DST in the aggregate amount of P2,196,138.04, broken down as follows: DEFICIENCY TAX AMOUNT Value -added Tax p 1 252 869.02 Expanded Withholding Tax Compromise Penalty on Wit hh oldingTax on Compensation 862 804 .35 Documentary Stamp Tax 1 000.00 TOTAL 79 464.67 p 2 196 138.04 But as stated earlier, petitioner availed of the benefits under R.A. 9480 resulting in the cancellation of the assessment for deficiency VAT and DST for ta xa ble year 2000 issued against it by respondent. Hence, only the issues pertaining to the assessment for deficiency expanded withho ld ing tax and the compromise penalty on withholding tax on compensation are left for resolution, to wit25 : I. WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY EXPANDED WITHHOLDING TAX AND COMPROMISE PENALTIES IN CONNECTION THEREWITH 24 Reso luti on dated December 8, 2009, do cket, pp . 999 . 25 Docket, p. 84 7. 122 8

I' DECISION CTA Case No. 7103 II. WHETHER OR NOT PETITIONER WITHHELD EXPANDED WITHHOLDING TAX ON INCOME PAYMENTS FOR OFFICE IMPROVEMENTS OR OPERATIONAL EXPENSES, PARTICULARLY, COURIER FREIGHT, REPAIRS AND MAINTENANCE, SECRETARIAL AND JANITORIAL SERVICES, ADVERTISEMENTS AND RENTAL EXPENSES III. WHETHER OR NOT PETITIONER'S PAYMENT OF PROFESSIONAL FEES TO GENERAL PROFESSIONAL PARTNERSHIPS IS SUBJECT TO EXPANDED WITHHOLDING TAX . THE RULING OF THE COURT 1. Compromise Penalty on Withholding Tax on Compensation Respondent imposed a compromise penalty of Pl,OOO.OO for petitioner's alleged failure to file an alphalist of its employees subjected to withholding tax for taxable year 2000, in violation of Section 2.83.2 of Revenue Regulations No. 2-98. However, there is no indication that petitioner voluntarily entered into such a �compromise with respondent. It was imposed and included in the computation of the assailed assessments without any participation on the part of petitioner. A compromisy 1230

.' DECISION CTA Case No. 7103 agreement by its very nature is mutua l,26 meaning with the knowledge and consent of both parties. The compromise pena lty, being an imposition cannot be compulsorily imposed on the one who did not agree to its imposition. 27 Thus, without the knowledge and conformity of petitioner the compromise penalty is ill egal and unauthorized. 28 In fine, respondent's imposition of a compromise penalty cannot be sustained. 2. Deficiency Expa nded Wit hholding Tax Respondent assessed petitioner for alleged deficiency EWT in the amount of P862,804.35 for taxable year 2000, inclusive of increments, for failure to withhold taxes on the fo llowing transactions: ACCOUNT AMOU NT W ITHHO LDI NG TAX DUE Courier Freight p 111 679.67 p 1 116.80 Repairs and Maintenance 359,163.94 3 591.64 Securities & Janitorial 114,907.01 1 149.07 Advertisement 17,462.00 174.62 Janitorial - HKGA 23 749 .00 237.49 Professional Fees 327 938.36 Rental Expense 3 279 384 .68 Total EWT Due P12 665 421.52 633 271.08 p 967 479.06 26 Vda . De San Agustin vs. CIR, G.R. No. 138485, September 10, 2001. 27 Atlas Consolidated Mining and Development Corporation (doing business under the name Atlas-Itochu Consortium) vs . Commissioner of Internal Revenue, CTA Case No . 5671, August 29, 2002. 28 Commissioner of Internal Revenue vs. Lianga Bay Logging Co ., Inc. , eta/. , G.R. No. L- 35266, January 21, 1991. 1Z::} 1

DECISION 433 785.65 CTA Case No. 7103 p 533 693.41 329 110.94 Less: EWT Remitted p 862L8Q4.35 Deficiency EWT Add: Interest up to 2.24.04 TOTAL DEFICIENCY EWT For better appreciation, the Court shall address separately each item in detail. Professional Fees: The Professional fees in the amount of P3,279,383.68 may be broken down as follows: 29 Payments Made to: p 475 000.00 Corporation (5%) 679 922.71 Individual (10%j 537 200.00 General Professional Partnerships Out-of-Pocket 21 545.52 Expenses/Reimbursements 1,565 715.45 Others P3L279J_383.68 Total The alleged deficiency EWT on professional fees amounting to P327,938.36 was arrived at by subjecting petitioner's total payments of professional fees for taxable year 2000 amounting to P3,279,383.68 to a tax rate of ten percent (10%). 29 Exhibit " P" . 12J 2

DECISION CTA Case No . 7103 Petitioner claims that of the total amount of P3,279,383.68, only P91,742.27 is due as EWT. Witness Rowena V. Guinto in her Sworn Statement dated September 13, 200530, explained how petitioner arrived at the amount of P91,742.27 as EWT due from the total amount of professional fees that petitioner paid for the taxable year 2000, thus: A: The BIR's findings are not accurate. Out of the total amount of P3,279,383.68, the EWT due is only P91, 742.27. Q: What is your basis for saying this? A: I prepared a summary of the items listed under ' Professional Fees' based on the invoices and official receipts in Petitioner's name for the year 2000. XXX XXX XXX A: Since the Details of Discrepancy given by the BIR was not clear as to how it arrived at the amount of P3,279,383.68, I presumed that it just applied the rate of ten percent ( 10%) to the total amount of professional fees of P3,279,384.68 listed in Petitioner's General Ledger. So I retrieved the invoices and official receipts related to the entries in the General Ledger. I then based the summary I prepared on these invoices and official receipts . Q: Why do you say that out of the total amount of P3,279,383.68, the EWT due is only P91,742 .27. A: According to the summary, the taxable amount of P475,000.00 was paid to corporations, so the corresponding Expanded Withholding Tax ('EWT') due is P23,750.00 (P475,000.00 x 5%). The taxable amount of P679,922. 71 was paid to individuals, so the EWT due is P67,922.27 (P679,922.71 x 10%). Therefore, the total amount of EWT due is P91,742. y 30 Exhibit " Q". 12:>J

.. DECISION CTA Case No. 7103 Q: Since you stated that the total amount paid for professional fees was P3,279,383.68 but that only P1, 154,922.71 (P475,000.00 + P679,922. 71) was taxable, how do you account for the remainder amounting to P2,124,460 .97? A: As shown in the summary under the heading 'Non- Taxable Amount', we paid the total amount of P537,200.00 to General Professional Partnerships ('GPP's'). Specifically, these GPP's were the ACCRA Law Office, Sycip Salazar Gatmaitan & Hernandez Law Office, and SGV & Co. We also paid a total of P21,545.52 as reimbursements for out-of-pocket expenses. Lastly, we paid a total of P1,565, 715.45 to a non -resident foreign corporation for services performed outside the Philippines. The Court cannot but agree with petitioner's contention that professional fees for services rendered by an individual are subject to 10% withholding tax, while professional fees for services rendered by a taxable corporation or juridical person are subject to only 5%, pursuant to Section 2 .57 .2 of Revenue Regulations No. 2- 98. However, of the alleged combined taxable professional fees of P1,154,922.71, only the amount of P25,000.00 was duly substantiated31 by documents of payments to a corporation. No additional and relevant supporting documents were adduced to prove that the remaining professional fees of P1,129,922.71 (P1,154,922.71 less P25,000.00) were also paid to juridical person or entity. Mere allegation to that effect sans supporting evidence is at most self-serving and does not deserve consideration. Well- settled is the rule that tax assessments are presumed to be correct 31 Exhibit " P- 39 ". / 123 4

.. DECISION CTA Case No. 7103 unless the contrary is shown, and the burden of proof rests upon the taxpayer to overcome this presumption. While the determination of a deficiency tax by the Government is only prima facie correct, the duty to prove otherwise is on the taxpayer. 32 And petitioner utterly failed to discharge this burden. Thus, the imposition of 10% withholding tax rate on the remaining professional fees of P1,129,922.71 is sustainable. As to the payment of professional fees to general professional partnership (GPPs) and out-of-pocket expenses/reimbursements in the amount of P537,200.00 and P21,545.52, respectively, the Court finds for petitioner. Section 22(8) of the NIRC of 1997 defines general professional partnerships as partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Corollarily, Sections 26 of the NIRC of 1997 and Section 2.57.5(B) of Revenue Regulations No. 2-98 provide as follows:../ 32 H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue, C.T.A. EB No. 68 (C.T.A. Case No. 6238), April 24, 2006, citing Gutierrez v . Collector of Internal Revenue, L- 19537, May 20, 1967; Tan Guan v. Court of Tax Appeals, L- 23676, April 27, 1967; Republic v. Philippine Rabbit Bus Lines, Inc. L-26862, March 30, 1970 . 1 ., ,. r ~ JJ

DECISION CTA Case No. 7103 SEC. 26. Tax Liability of Members of General Professional Partnerships. A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. Xxx SECTION 2.57.5. Exemption from withholding. - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: XXX XXX XXX (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: xxx Clear from the foregoing that income payments made to a general professional partnership, as a juridical person, are exempt from income tax, vis-a-vis the expanded withholding tax. Its partners are the ones liable in their individual capacities for the payment of income tax, pursuant to Section 26 of the NIRC of 1997. The Supreme Court had the occasion to dwell on the matter in Rufino R. Tan vs. Ramon R. del Rosario Jr., as Secretary of Finance and Jose U. Ong, as Commissioner of Internal Revenue33 , thus: Partnerships are, under the Code, either 'taxable partnerships' or 'exempt partnerships.' xxx 'Exempt partnerships,' upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. Here, the partners themselves, not the partnership (although it is / 33 G.R. Nos . 109289 and 109446, October 3, 1994. 12JG

.. DECISION CTA Case No . 7103 still obligated � to fi le an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. After careful examination of the pertinent supporting documents34 in relation to the above-quoted provisions of law and jurisprudence, this Court finds that the amount of P548,638.04 (P537,200.00 plus P11,438.04), representing professiona l fees paid to general professional partnerships and out- of-pocket expenses duly supported by pertinent documents, should not be subjected to withholding tax; while the remaining out-of-pocket expenses/reimbursements of P10,107.48 (P21,545.52 less P11,438.04) should be subject to 10% withholding tax. The details of the amount of P548,638.04 are as follows: Payee Exhibit GPPs Amount p 30 000.00 O u t-o f-Po cket ACCRA Law Office P-2 ACCRA Law Office P-4 36 000.00 Exoen se s I Reimbursements ACCRA Law Office P- 7 ACCRA Law Office P- 9 30 000.00 p 5 936.54 ACCRA Law Office P- 11 30 000 .00 ACCRA Law Office P- 13 30 000 .00 v ACCRA Law Office P-15 30 000.00 ACCRA Law Office P- 17 30 000.00 / 34 Exhibits " P- 2" to " P- 38". 1 .-,,. .., t..J.

'. DECISION CTA Case No. 7103 ACCRA Law Office P- 19 36 000.00 5 501.50 ACCRA Law Office P- 25 36 000.00 p 11 4 3 8 .04 ACCRA Law Office P-28 36 000.00 ACCRA Law Office P- 3 1 78 000 .00 ACCRA Law Office (30 000.00) SGV & Co. P- 3 7 140 000.00 Sycip Salazar P- 38 25 200.00 T OTAL p 537 200.00 The same is true insofar as the amount of P1,565,715.45 allegedly paid to a non-resident foreign corporation for services performed outside the Philippines. Petitioner was unable to establish that the transaction involved a non-resident foreign corporation and the payments were for services rendered outside the Philippines. That being the case, it should be subject to a 10% withholding tax. To recapitulate, petitioner shall be subject to deficiency expanded withholding tax on professional fees in the amount of P271,824.56, computed as follows: Payments made to: 25 000.00 Tax EW T p 1 129,922.71 r ate Corporation 5% 1 250.00 Individual 10% p 112 992.27 Out-of- Pocket Expense/Reimbursement 10,107.48 10% 1 010.75 Others 1 565,715.45 10% 156 571.54 Tota l P2,73 0 ,745. 6 4 p 271,824.56 1 .-,,. " i.JU

.' DECISION CTA Case No. 7103 Courier Freight: For courier freight, respondent claims that petitioner paid a total amount of P111,679.67, hence, petitioner should have paid the corresponding one percent ( 1%) withholding tax as provided under R.R. No. 2 - 98 or in the amount of P1,116.80. But petitioner asserts that it is inaccurate. Out of P111,679.67, the taxable amount is only P48,843.55. Ms. Rosita Beleno in her Sworn Statement35 explained as follows: Q: As per the BIR, the taxable amount for courier freight is P111,679.67. According to your summary, it is P48,843.55 . How do you account for the difference of P58,619 .32? A: Firstly, Exhibits 'U - 1' and ' U-2' show that a payment of P213.00 was made for registered mail. Secondly, Exhibit 'U-13' and ' U- 14' show a payment of P2,430.12 made t6 a general professional partnership, the ACCRA Law Office, for out-of-pocket expenses. Lastly, Exhibit ' U-29' shows a payment of P55,976.20 made to a foreign, non-resident entity." With the supporting documents, the Court partially agrees with petitioner that the entire amount of P111,679.67 is not subject to expanded withholding tax. However, the amount of P55,976.20, is subject to tax for petitioner's failure to prove that it was made to a foreign non-resident entity. / 35 Exhibit " SSS ".

DECISION CTA Case No . 7103 The total accounted courier freight amounts only to P107,462.87 (P48,843.55 + P58,619 .32). It is therefore safe to conclude that the remaining unaccounted courier freight of P4,216.80 shall also be subject to expanded withholding tax. In sum, petitioner shall be liable for deficiency expanded withholding tax on courier freight in the amount of P1,090.37, computed as follows: Taxable as admitted by WT EWT Petitioner Rate Payment to Foreign p 488.44 Supplier p 48 843.55 1% Unaccounted Ex pense 559.76 Total 55,976.20 1% 42.17 4,216.80 1% p 1,090.37 p 109,036.55 Repairs and Maintenance: Petitioner is also assessed for alleged deficiency EWT on its payments for repairs and maintenance. The deficiency EWT was arrived at by subjecting petitioner's total payments for such repairs and maintenance for the year 2000 in the amount of P359,163 .94 to a tax rate of one percent (1 %) . Petitioner counters that respondent's findings are grossly inaccurate having failed to consider that the payments listed undy 1~40

DECISION CTA Case No. 7103 "Repairs and Maintenance" include purchases of spare parts and other goods in the sum of P309,759.77. Petitioner explains that since it was not among the "Top 5,000 Corporations" at the time, it's purchases of spare parts and other goods shall not be subject to EWT, pursuant to Section 2.57.2(M)(3) of R.R. No. 2 - 98, which provides as follows: SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed thereon. - XXX XXX XXX XXX (M) Income payments made by the top five thousand (5,000) corporations - xxx XXX XX X XXX (3) A corporation shall not be considered a withholding agent for purposes of this Section, unless such corporation has been determined and duly notified in writing by the Commissioner that it has been selected as one of the top five thousand (5,000) corporations. But from the Schedule of Repairs and Maintenance prepared by petitioner it appears that not all of the non-taxable purchases were duly supported by documentary evidence. The amount of P78,240. 75, from the alleged non-taxable repairs and maintenance of P309,759.77, in addition to the taxable amount of P49,404.17 as acknowledged by petitioner, shall be subject to EWT. The details of the findings are as follows: /

DECISION CTA Case No . 7103 FindinjJ_s Amount 1. Supporting documents not in the name of petitioner Exhibit "0-1" 180.00 Exhibit "0-2" 145.00 Exhibit "0 -3" 60.00 Exhibit " 0 -12" 120.00 Exhibit "0-13" 60.00 Exhibit "0-20" 565.00 Exhibit "0-24" 170.00 Exhibit "0-25" 90.00 Exhibit "0-28" 60.00 Exhibit " 0 - 29 " 1 000.00 Exhibit " 0 - 33 " 800 .00 Exhibit "0-34" 400.00 Exhibit "0-37" 1 139.75 Exhibit "0-38" 60 .00 Ex hibit "0-42 " 49.00 Exhibit " 0 -45" 100.00 Exhibit "0-46" 122.00 Exhibit "0-47" 165.00 Exhibit " 0-48" 210 .00 Exhibit "0-49" 50.00 Exhibit " 0 -50" 140.00 Exhibit "0-53" 225.00 Exhibit "0-58" 200.00 Exhibit "0 -59" 150.00 Exhibit "0-60" 550 .00 Exhibit "0 -61" 200.00 Exhibit "0-62" 100.00 Exhibit "0-64" 2 130.00 Exhibit "0-73" 900.00 124 2

DECISION 1 000.00 CTA Case No. 7103 1 198.00 260.00 Exhibit " 0 -77" 250 .00 Exhibit "0-78" 1 362.00 Exhibit "0-79" 1 700.00 Exhibit "0-81" 2 000.00 Exhibit "0-82" 2 500.00 Exhibit "0-83" 350.00 Exhibit "0-86" 146.00 Exhibit "0-91" 3 516.00 Exhibit " 0-92" 7 416.10 Exhibit " 0-93" 275.00 Exhibit "0-94" 12 366.80 Exhibit "0-97" 23 446.10 Exhibit "0-98" 67 926.75 Exhibit "0-111" Exhibit "0-125" 250.00 Sub-total � 1 362.00 2. Without supporting documents 1 333.00 JV#1447 JV#1447 915.00 JV#1444 1 119.00 JV#1444 1 940.00 JV#1461 1 595.00 JV#1735 1 800.00 JV#1928 10 314.00 JV#2003 78,240.75 Sub-total TOTAL 124J

DECISION CTA Case No. 7103 Securities and Janitorial: Respondent also says that out of P114,907.01 paid for security and janitorial services, petitioner should have paid a withholding tax of P1,149.07, pursuant to R.R. No. 2-98. But petitioner rejects . it arguing that the taxable amount is only P111,839.09. The discrepancy of P3,067. 92 was directly paid for the overtime work to Joey Siaron, an employee of the service agency employed by petitioner and not to the agency itself. In support thereof, petitioner presented the approved Request � for Payment form36 for the overtime work of Joey Siaron. But this without more cannot sustain the claim that such payment was made directly to Joey Siaron. Moreover, there is nothing in the Request for Payment form that shows receipt of the said amount by Joey Siaron. In the absence of clear and convincing evidence, the finding of respondent on this item is in order. Advertisement: The assessed deficiency EWT on payments for advertisements amounting to P174.62 was arrived at by subjecting the said / 36 Exhibit " R-29". 124 4

DECISION CTA Case No . 7103 Page 2 7 of 32 payments for the taxable year 2000 in the amount of P17 ,462.00 to a tax rate of one percent ( 1%). However, petitioner claims that it has no deficiency EWT on payments for advertisements since the entire amount of P17 ,462.00 was paid to PLDT to include petitioner in its telephone directory. Since publication of telephone directory does not make PLDT an advertising agency, petitioner's payment does not fall within the coverage of Section 2.57 .2(E)(4 )(h) of R.R. No. 2-98. This Court is not persuaded. While it may be true that publication of telephone directory does not make PLDT an advertising agency, yet its income payment thereon is subject to EWT by virtue of Section 2.57 .2(E)(4 )(f) of R.R. No. 2-98, which provides: SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon. XXX XXX XXX XXX (E) Income payments to certain contractors. - xxx XXX XXX XXX (4) Other contractors - XXX / XXX XXX 1245

DECISION CTA Case No. 7103 (f) Printers, bookbinders, lithographer and publishers except those principally engaged in the publication or printing of any newspaper, magazine, review or bulletin which appears at regular intervals, with fixed prices for subscription and sale. Admittedly, PLOT advertised and published petitioner's telephone numbers in its directory and the payment made thereon was an income subject to EWT. Therefore, respondent's assessment of deficiency EWT on advertisement amounting to P174.62 has to be upheld. Janitorial Services-HKGA: Anent the alleged deficiency EWT of P237 .49 on Janitorial Services-HKGA computed by subjecting the amount of P23,749.00 paid to Janitorial Services- HKGA for the year 2000 to a tax rate of one percent ( 1%), petitioner claims that the entire amount was paid in cash from petitioner's petty cash fund to individuals for janitorial services they had rendered and not to any janitorial agency. As this is amply supported by documents 37, the assessment for EWT on / Janitorial Services-HKGA must necessarily be cancelled. / ~ 37 Ex hibits " V- 1" to " V-48 ". 124G

DECISION CTA Case No. 7103 Rental: This time, the claimed total rental payments of P12,665,421.52 was subjected to a tax rate of five percent (5%) giving rise to the deficiency EWT of P633,271.08 on the rental payments. Petitioner contends however that for the year 2000, its rental expense was only P7,383,571.11. Thus, the EWT due must only be P369,178.56, computed at the same rate of 5%. Using the same documents as basis, particularly the Lease Agreements38, this Court finds that petitioner's rental payments subject to EWT amounts to P7,579,439.49, with the corresponding EWT of P 378,971.97, computed as follows: Lessor Period Reference Mo n thly Rental f o r To tal Rental Year 2000 Cam ira 8/15/99 - Exhibit w- (Net of P1,258 832.73 Holdings 10/14/00 VAT) 4 7 8,40 9.86 10/15/00 - 1 Trixie 11/02/00 P85 000.00 P807,500.00 1,339,0 3 8 .98 Brothers 11/03/00 - Exhibit w- 1 200,000.00 11/02/01 53 832 .73 53 832.73 Ofelia Chean 2 Fede r ico Advance Rental 79 500.00 159 000.00 Galang 9/03/99 - Exhibit w- 11/02/00 238 500 .00 11/03/00 - 3 11/02/01 40 860.63 408 606.30 9/03/99 - Exhibit w- 11/02/00 34 901.78 69,803.56 11/03/00 - 4 11/02/01 114 366.32 1 143 663.20 6/13/00- Exhibit w- 6/13/01 97 687 .89 195 375.78 17 100 000.00 1 200 000.00 Exhibit w- 18 Exhibit W- 31 38 Exhibits "W- 1" to "W-38".

DECISION CTA Case No. 7103 7/25/99 - 210 526.32 7/24/00 2 640 000.00 Pan American Advance Rental Exhibit w- 231 578.95 2 640 000.00 Jobeliz Realty 7/25/00 - 7/24/01 33 52 631.58 315 789.48 663 157.92 9/01/99 - 57 894.74 347 368.44 p 7,579,439.49 2/28/00 Exhibit w- 3/01/00 - 5�/o 8/31/00 36 p 378 971.97 9/1/00 - 2/28/01 Exhibit w- 3/01/01 - 8/31/01 37 TOTAL Rental subject to EWT x EWT Rate EWT Due on Rentals Hinged on the foregoing discussion, petitioner has deficiency EWT liability amounting to P 220,701.39, computed as follows: TAX BASE EWT Courier Freight p 109 036.55 p 1 090.37 Repairs and Maintenance Securities and Janitorial 127 644 .92 1 276.45 Advertisement Professional Fees 114 907 .01 1 149.07 Rental Expense Total EWT Due 17 462.00 174.62 Less: EWT Remitted Deficiency EWT 2,730 745.64 271,824 .56 7 579 439.49 378 971.97 p 654 487.04 433 785.65 p 220 701.39 WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. The compromise penalty imposed on petitioner in the amount of Pl,OOO.OO is hereby CANCELLED, while the assessment for deficiency expanded withholding tax (EWT) issued by respondent against petitioner for taxable year 2000 is MODIFIED. Petitioner is hereby ORDERED TO PAY deficiency expanded withholding t a x / 1248

DECISION CTA Case No. 7103 the amount of P60 1,404.77, inclusive of interest and pena lties, computed as follows: BASIC D EFICIEN CY EW T p 220,70 1.39 p 55 175.35 Add : 25% Surcharge 208 850 .03 20% Deficiency Interest (up to October 18, 160 159.04 424 184.42 2005) p 644,885.81 20% Delinquency Interest (P220,701.39 + P55,175.35 + P208,850 .03) x 20% - from February 23 2004 to October 18 2005 TOTAL AMOUNT DUE Voluntary payment of deficiency EWT per Less : Ex hibit "GGG"39 Basic Tax p 22 190.41 Interest up to October 18 2005 21 290 .63 43 481.04 AMOUNT STILL DUE p 601,404.77 Additionally, petitioner is hereby ORDERED TO PAY respondent the following: (a) deficiency interests at the rate of twenty percent (20%) per annum on basic expanded withholding tax of P198,510.98 (P220,701.39 less P22,190.41) computed from October 19, 2005 until full payment thereof, pursuant to Section 249(B) of the NIRC of1997; and (b) delinquency interest at the rate of twenty percent (20%) per annum on the tota l deficiency tax of P601,404. 77 and on the 20% deficiency interest which have accrued as afore-stated in (a), ~ 39 The alleged "Voluntary Payment for 2000 Late Payment of Expanded Withholding Tax for Jorkims Corporation" (Exhibit "HHH") was not considered in the computation of EWT Still Due since this Court cannot ascertain if the said payment was indeed related to the EWT on the professional fees subject of the assessment.

DECISION CTA Case No. 71 03 Pag e 32 of 32 computed from October 19, 2005 until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997. SO ORDERED. We concur: ~~~. ~ ERNESTO D. ACOSTA Presiding Justice E ~ .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. ~61 � c~ ERNESTO D. ACOSTA Presiding Justice 12 50