CTA Case No. 5725 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY

PHILIPPINE MINING SERVICE CORPORATION, Petitioner.

- versus - C.T.A. CASE NO. 5725

REVENUE, COMMISSIONER OF INTERNAL Respondent. JUL 2 5 2002 Promulgated: Cmonpalmar

DECISION

The instant Petition for Review is an appeal for the cancellation and withdrawal of

the deficiency income tax, value-added tax and excise tax assessments issued by the

respondent against petitioner for the fiscal year ended April 30, 1995 in the aggregate

amount of P130,305,575.00.

Petitioner is a domestic corporation duly organized and existing under the laws of

the Republic of the Philippines, with principal office located at the l1th Floor, Allied

Bank Center, Ayala Avenue, Makati City (par. I, Joint Stipulation of Facts)

On July 7, 1980, Petitioner entered into a service contract with Dolomite Mining

Corporation (DMC), the lessee of Mining Lease Contract No. MRD-224 granted in its

favor on March 5, 1980 by the Philippine government covering a total area of 571.1970

hectares of mining ciaims located in Alcoy and Dalaguete, Cebu (Exhibit V)

Among the provisions included in the said contract are:

C.T.A. CASE NO. 5725 PAGE 2 DECISION-

1.) Petitioner shall act as DMC's exclusive mining service contractor to explore develop, exploit, mine, manage and operate the mining claims, process, ship. all such service as shall be required of it under the contract (Section i. Chapter 1, Basic Agreement). and market the products thereof, and otherwise perform and provide any and

2.) As operating expenses, all costs and expenses actually incurred by petitioner in the production of dolomite and in the operation of the dolomite project shall be reimbursed to petitioner by DMC every month, subject to reconciliation at the end of each fiscal year of petitioner (Section 15,Chapter II1, Operating Expenses and Service Fee)

3.) Operating expenses shall include, but not limited to, management and marketing fees and the cost of assigning personnel within or without the petitioner as follows. Philippines, and shall be itemized in the project accounting books of

d) direct operating costs b C mine overhead depreciation and amortization interests of borrowed funds for dolomite project administration

C

f duties, taxes, fees and other charges paid in connection with dolomite

g) miscellaneous (Section 16, Chapter III, Operating Expenses and project Service Fee)

4. DMC shall pay petitioner every year on or before the last day of the month

of the dolomite project, provided, however, that petitioner may, in its exclusive discretion, reduce the service fee from time to time if the economics following the end of each fiscal year of DMC, a service fee which shall be of the project or compliance with laws, regulations and guidelines on the matter would require or necessitate the reduction of the said service fee (Section 17,Chapter III, Operating Expenses and Service Fee); equal to forty per cent (40%) of the net proceeds of the operations,before tax

5. It is a special condition of the contract that the proceeds of the sale of responsibility for such reimbursement and payment of the operating expenses and service fee shall not in any event extend beyond the totality of the III, Operating Expenses and Service Fee); products derived from operations of the dolomite project shall be the only source of funds for reimbursement and payment of the operating expenses and the service fee due to petitioner, and that DMC's maximum liability or proceeds derived from operations of the dolomite project (Section 18, Chapter

DECISION C.T.A. CASE NO.5725 PAGE 3

6.) Petitioner shall have the exclusive right to purchase all the dolomite ore produced from the mining claims under such terms and conditions as shall be agreed upon between DMC and petitioner, subject to domestic requirements (Section 30, Chapter IX, Sale of Dolomite Ore).

On December 5, 1997, the BIR sent a letter to petitioner informing the latter that a

report of investigation on its income and business tax returns has been submitted to

Revenue District Officer Hernani S. Arboleda for appropriate action. Attached thereto

were the report of investigation and the memorandum of Revenue Officer Celestino

Mejia recommending, among others. the issuance of an assessment notice for the

following alleged deficiency taxes (par. 3, Joint Stipulation of Facts: pages 425 to 433 &

537,BIR records

a) Deficiency income tax Interest Surcharge Basic tax due P 43,315,584.48 26.621.036.29P 80,765.516.89 10,828,896.12

b Deficiency output VAT 1. On collection of reimbursements Surcharge Interest Basic tax due P4,701,347.99 P9.122.777.58 1,175,337.00 3.246.092.59

2.) On understated revenues Surcharge Basic tax due Interest P7,940,530.12 P15.053.921.68 5128.259.03 1,985,132.53 24,176,699.26

C Deficiency Excise Tax Surcharge Interest Basic tax due P 2,714,672.63 2.103.871.28 1,357,336.31 P111.118.096.37 6.175.880.22

On April 8, 1998, petitioner received Pre-Assessment Notices assessing petitioner

of the following (par. 4, Joint Stipulation of Facts; pages 437-438, BIR records):

DECISION- C.T.A. CASE NO.5725 PAGE 4

a) Deficiency income tax Surcharge Basic tax due Interest P 51.672,590.06 31.165,030.87 12,918,147.51 95,755,768.44

b Deficiency Excise T ax

Surcharge Interest Basic tax due P 2,714,672.63 2.134.954.28 1,357,336.31 6,206,963.22

C Deficiency VAT Interest Surcharge Basic tax due 12.641.878.11 3,160,469.53 8.567.803.43 P.126,332,882.73 24.370.151.07

On April 13, 1998, petitioner received from the respondent's office various

assessnient notices (Nos. 02-175-FY95B-98-B2-410 and LA 85955-FY95-410) all dated

April 6, 1998, assessing petitioner for alleged deficiency income tax, value added tax, and

excise tax for fiscal year ending April 30, 1995 in the aggregate amount of

P130,305,575.00,inclusive of surcharge and interest, broken down as follows (par. 5,

Joint Stipulation of Facts; pages 439, 444 & 447, BIR records):

Deficiency income Tax Interest Basic Tax Due Surcharge P 51,672,590.06 34.233.090.91 P 98,823,828.48 12,918,147.51

b Value-Added Tax Basic Tax Due Surcharge Interest P 12,641,878.11 3.160.469.53 9.279.544.59 25.081.892.23

C Excise Tax

Surcharge Interest Basic Tax Due P 2,714,672.63 2,327,845.35 1,357,336.31 P130,305.575.00 6,399,854.29

PAGE 5 C.T.A. CASE NO. 5725 DECISION

The various assessment notices merely contained the amounts of alleged

deficiency income tax,value added tax and excise tax petitioner was being assessed of

without any showing as to how said amounts were arrived at or computed (par. 6, Joint

Stipulation of Facts).

On May 12,1998,petitioner filed with the BIR a protest letter dated May 9,1998

against the alleged deficiency income tax, value-added tax and excise tax assessments

and requested that the sane be withdrawn and cancelled (par. 7, Joint Stipulation of

Facts; pages.473 to 479,BIR records)

On June 4, 1998, petitioner filed a supplemental protest dated June 2. 1998 with

the BIRpar.8,Joint Stipulation of Facts;pages 506 to 507,BIR records

Subsequently, Revenue Officer Mejia modified his findings as to the amount of

alleged liability of petitioner but reiterated his recommendation for the issuance of an

assessment notice (par. 9, Joint Stipulation of Facts; pages 510 to 517 & 530-534, BIR

tecords

No subsequent notice of Formal Assessment, however, was issued incorporating

the new findings of Revenue Officer Mejia and modifying the earlier assessments made

by the BIR (par. 1O, Joint Stipulation of Facts).

Respondent failed to act on the case or resolve the protest and supplemental

protest filed by petitioner within the period of one hundred eighty (180) days from July

11,1998 or until January 7, 1999. Hence,Petitioner filed the instant Petition for Review

on January 29, 1999 or within thirty (30) days from the last day of the aforesaid 180 day

period (pars. 11 & 12, Joint Stipulation of Facts)

C.T.A.CASE NO.5725 PAGE 6 DECISION

Respondent, in his Answer filed through registered mail on March 4, 1999. interposed the following Special and Affirmative Defenses:

"6. The adjustments to net income as addition thereto per findings of the Examiner are in order;

7. The assessments in question were made and issued in accordance with existing laws, rules and regulations;

8. That petitioner failed to submit documents to controvert the assessment;

9. All presumptions are in favor of the correctness of the tax assessment 290. (Interprovincial Autobus, Inc. vs. Collector of Internal Revenue, 98 Phil.

As jointly stipulated by the parties, the issues to be resolved by this Court are

I. Whether or not the assessments for the alleged deficiency income tax and value-added tax are valid:

2. Whether or not petitioner has properly paid the excise tax in accordance with Iaw; and

3. Whether or not petitioner's right to due process was violated in the issuance of

the aforesaid assessments.

Before we delve on the first and second issues, we find it appropriate to discuss

first the third issue of whether there was non-compliance with Section 228 of the 1997

Tax Code in the issuance of the assessments resulting to violation of petitioner's right to

due process.

Section 228 of the 1997 Tax Code, provides among others, that "the taxpayer

shall be informed in writing of the law and the facts on which the assessment is made;

otherwise, the assessinent shall be void." As well enunciated by the petitioner in its

meinorandum, this is in consonance with the due process requirement of the 1997

Philippine Constitution, which provides that "No person shall be deprived of his property

DECSO

PAGE C.T.A. CASE NO. 5725

without due process of law." The taxpayer needs to know the nature of the examiner's

findings in order to be able to refute the same and provide an explanation regarding the

proposed assessments

It is undisputed that on December 5, 1997, the BIR sent a letter to the petitioner

informing the latter that a report of investigation on its income and business tax returns

had been submitted to Revenue District Officer Hernani S. Arboleda for appropriate

action. Attached thereto were the report of investigation and the memorandum of

Revenue Officer Celestino Mejia recommending, among others, the issuance of an

assessment notice for the alleged deficiency taxes (par. 3, Joint Stipulation of Facts). The

attached investigation report of Revenue Officer Celestino Mejia (pages 425 to 433,BIR

records) contained the detailed findings made by the latter, the facts and the law on which

the recommended assessments were based. The recommended assessiments were

basically the same amounts that were finally assessed against petitioner. They differed

only because of the period covered for the imposition of interest charges. Moreover, in

its protest letters dated May 9,1998 and June 2, 1998,petitioner was able to effectively

contest the subject assessments and submit documents to support its claim that the

assessments were erroneous. Indeed, at the time the assessments were issued, petitioner

knew very well the law and the facts on which they were based. Since the requirement

under Section 228 of the 1997 Tax Code that the "taxpayer shall be informed in writing

of the law and the facts on which the assessment is bascd" has been sufficiently met, it

follows then that the assessments dated April 6, 1998 were not null and void.

Likewise, we find no merit in petitioner's invocation of our decision in the case of

Sunnyvale Development Corporation vs. Commissioner of Internal Reveme, CTA Case

DECISION

PAGE 8 C.T.A. CASE NO. 5725

No. 5730, dated Jamuary 4, 2001. The facts in the Sunnyvale case are different from the

instant case. Unlike in the present case, the respondent in the Sunnyvale case did not

submit any BIR records or evidence by which we can ascertain that Sunnyvale was

informed in writing of the facts and the law from which the assessment issued against it

was based.

We shall now proceed to the issue of whether the alleged deficiency income tax

assessment of P98, 823,828.48 is valid or not.

The said assessment arose from: I) the alleged understatement of petitioner's

revenues from sale of dolomite ore in the amount of P87.345,831.30 and 2) the

disallowance of the following expenses claimed by petitioner as deductions from its gross

income for fiscal year 1995:

Realized Foreign Exchange Loss Interest Expense Alcoy Branch Administrative Expense P6,225,703.00 19,929,056.68 8,983,712.00

Taxes and Licenses Expense Total: P_36,413,229.68 1.274.758.00

The BIR examiner computed the alleged understated dolomite sales of

P87,345,831.30 by merely dividing the peso values of petitioner's beginning and ending

inventories and purchases of dolomite ore for FY 1995 by the acquisition price thereof

per wet metric ton (i.e. at P13 or P18) in order to arrive at the alleged volume of dolomite

ore sold for the said year. The resulting volume of dolomite ore sold was then multiplied

by the selling price of P210.00 and compared with the reported sales of P151,015,797.00

ending up with the alleged unreported sales of P87,345,831.30.

The Interest Expense of P6,225,703.00 was disallowed based on the BIR

examiner's findings that the said amount was reimbursable under Chapter III, Section

DECSON C.T.A.CASE NO.5725 PAGE 9

16(e) of the notarized mining service contract between petitioner and DMC as the related

Ioans were secured to finance petitioner's mining operations. Likewise, the BIR

examiner reasoned out that: 1) there was no proof of loan contract between petitioner and

the lenders, Kawatetsu Mining Co., Ltd. (KMC) and Philippine Sinter Corporation

Retirement Plan (PSCRP) such that interest not stipulated in writing is not deductible and

2) Petitioner and KMC are related taxpayers as enumerated under Section 29(b)(ii) and

Section 30(b)(3) of the 1994 Tax Code which provides that interests between related

taxpayers are not deductible.

With respect to the disallowed Realized Foreign Exchange Loss of P8,983,712.00

the BIR examiner pointed out that the actual Realized Foreign Exchange Loss amounted

only to P3,249,790.59 and that the remaining amount of P5,733,921.41 was a mere

provision and has not been actually realized. Nevertheless, according to the BIR

examiner, the entire amount of P8,983,712.00 should be disallowed as this expense was

derived from loans used in petitioner's mining operations, thus, reimbursable under

Chapter III, Section 16(g) of the notarized mining service contract between petitioner and

DMC

The Alcoy Branch Administrative Expense of P19,929,056.68 and Taxes and

Licenses Expense of P1,274,758.00 were disallowed also on the basis that the same were

allegedly reimbursabie under Section 16(c) and (f) of the notarized mining service

contract between petitioner and DMC, hence, not deductibie.

Upon the other hand, Petitioner argued that the BIR examiner's computation of

the alleged understated dolomite sales of P87,345,831.30 was erroneous since it did not

take into account the additional processing costs incurred by petitioner in converting the

DECISION C.T.A.CASE NO. 5725 PAGE 10

raw dolomite ore into its marketable state. Petitioner stated that in FY 1995 it was able to

mine and extract for DMC 635,303 wet metric tons (wmt) of dolomite ore.Pursuant to

the terms of the service contract, petitioner allegedly purchased all of the 635,303 wet

metric tons of dolomite ore at P18 per wmt or the aggregate price of P11,435,454.00

(Exhibits MM to YY). Upon purchase of the raw dolomite ore from DMC, petitioner

allegedly further processed the same incurring costs such as Hauling Cost, Plant Cost, G

Line Cost, Ex-Line Cost, Maintenance Cost and Electrical Cost amounting to

P66,381,560.05 (Exhibit U-4). This alleged further processing cost of P66,381,560.05 as

well as the purchase price of the raw dolomite ore of P11,435,454.00 formed part of

petitioner's total production cost of P77,817,014.05 as shown in its Cost of Sales and

Ending Inventory for FY 1995 (Exhibit U). Likewise, according to petitioner, the BIR

examiner failed to consider in its computation that the peso values of the beginning and

ending inventories of dolomite ore for FY 1995 also included further processing costs

Petitioner claimed that the further processing costs of P66,381,560.05 pertained to its

independent operations and were not covered by its mining service contract with DMC

hence, the said additional costs were not reimbursed by DMC. Petitioner averred that the

only mining costs and expenses reimbursed by DMC pursuant to the service contract

amounted to P6,373,594.01

Regarding the disallowed Interest Expense, Realized Foreign Exchange Loss.

Alcoy Branch Adninistrative Expense and Taxes and License Expense in the aggregate

suni of P36,413,229.68, petitioner maintained that the same were incurred during the

processing of the raw dolomite ore into its marketable state and therefore are non-

reimbursable by DMC

DECSON C.T.A.CASE NO. 5725 PAGE

A critical point in resolving the issue of whether or not the alleged deficiency

income tax assessment is valid lies in the determination of whether or not the disallowed

further processing costs of P66,381,560.05 that resulted to the alleged unreported

dolomite sales of P87,345,831.30 and the disallowed expenses of P36,413,229.68 were

reimbursed by DMC to petitioner.

As culled from the records, petitioner not only acted as the exclusive mining

service contractor of DMC in the production/extraction of dolomite ore from the mining

clains owned by the latter in Alcoy and Dalaguete,Cebu but also became the exclusive

buyer of the raw dolomite ore it produced/mined for DMC (Section 30, Chapter IX of the

Service Contract [Exhibit V]; Sales and Purchase Contract of Dolomite Ore, pages 524

530, BIR records).Thus, petitioner incurred two types of costs and expenses in its

operations, namely: 1) those costs and expenses incurred by petitioner as a service

contractor of DMC in mining and producing the dolomite ore which under the Service

Contract (Exhibit V) were to be reimbursed by DMC; and 2) those incurred by petitione

in connection with the processing of the raw dolomite ore after buying them from DMC

and before the same were sold to third parties. Only the costs and expenses under the

first type were covered by the Service Contract and reimbursed by DMC to petitioner.

The second type of costs and expenses pertained to petitioner's independent operations

and were borne solely by petitioner

Petitioner had shown through the various billings/letters, schedules (Exhibits A to

E & T), official receipts (Exhibits X to BB) issued by petitioner to DMC and billing

statements/invoices issued by DMC to petitioner (Exhibits CC to KK & MM to YY) that

the only mining costs and expenses reimbursed by DMC to petitioner amounted to

DECISION C.T.A. CASE NO. 5725 PAGE 12

P6,373,594.01. The further processing costs of P66,381,560.05 and various expenses

amounting to P36,413,229.68 were not reimbursed by DMC to petitioner. Thus, it was

erroneous on the part of the BIR examiner to exclude the further processing costs of

P66,381,560.05 and various expenses of P36,413,229.68 as petitioner's deductions from

gross income for FY 1995. It bears stressing that petitioner's mining service contract

with DMC is considered terminated upon petitioner's purchase of the raw dolomite ore

from DMC. Any costs/expenses incurred by petitioner in bringing the purchased raw

dolomite ore into saleable state pertained to petitioner's own operations and outside of its

Service contract with DMC

Based on the foregoing, we can only conclude that the deficiency income tax

assessment was erroneous and without factual basis.

However,in his Memorandum (BIR Records,pp.427-433,particularly at p.430

Exhibit 2,respondent's examiner, Revenue Officer Celestino M. Mejiain addition to

the allegation of reimbursement, raised the following grounds for the disallowance of

interest expense:

b. PSCRP. Interest not stipulated in writing is not deductible: There was no proof of loan contract between PMSC and KMC and

C PMSC and KMC are related taxpayers as enumerated under deductible." (BIR Records, p. 430) which provides that interests between related taxpayers are not Section 29 (b)(ii) in relation to Section 30(b)(3) of The Tax Code

Also, in his aforementioned memorandum, respondent's examiner upon

investigation noted that realized foreign exchange loss of the petitioner only amounted to

P3,249,790.59 while the amount claimed as deduction was P8,983,712.00 or an over

statement of P5,733,921.41.(BIR Records,p. 430)

DECISION C.T.A. CASE NO. 5725 PAGE13

To refute the allegation that the loans contracted by PMSC with the Philippine

Sinter Corporation Retirement Plan (PSCRP) and Kawatetsu Mining Co., Ltd (KMC)

were undocumented, petitioner presented: (l) The "Promissory Note" dated April

30,1994 between PMSC as borrower and PSCRP as lender with maturity date of April

30, 1996, and (2) The "Loan Agreement" between KMC as lender and PMSC as borrower

(Exhibits "F" and "G", respectively).

As to the charge that PMSC and KMC are related taxpayers and that therefore, the

interest expense should be disallowed under then Sections 29(b)(ii and 30(b)(3) of the

Tax Code, we find no legal basis for the disallowance of such expense under the

aforementioned provisions of the Tax Code. Section 29(b)(ii) provides in pertinent part

25(a)(l), there shall be allowed as deductions the items specified in income subject to tax under Sections 21a); 24(a), (b and (c); and SEC.29. Deductions from gross inconie.-In computing taxable

paragraphs a toi) of this Sectionxx x

X XX

(b) Interest.

taxable year on indebtedness in connection with the taxpayer's profession. trade or business, except on indebtedness incurred or continued to ( purchase or carry obligation the interest upon which is exempt from taxation as income under this Title. In general.- The amount of interest paid or accrued within a

2 No deduction shall be allowed in respect of interest under the succeeding paragraphs:

X X X

(ii) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 30(b)

On the other hand, Section 30 (b)(3) of the Tax Code provides:

PAGE 14 C.T.A.CASE NO.5725 DECISION

SEC. 30. Items not deductible.

XX X

net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly (b) Losses from sales or excharges of property. -- In computing

X X X

(3) Except in the case of distributions in liquidation, between two

year of the corporation preceding the date or exchange was, under the law of each of which is owned, directly or indirectly..by or for the same individual if either one of such corporations, with respect to the taxable corporations more than fifty per centum in value of the outstanding stock

personal holding company applicable to such taxable year, a_personal holding_company or a foreign

x x x [Emphasis supplied]

Other than the mere allegation that the petitioner and KMC are related taxpayers.

respondent presented no proof that the taxpayers are related taxpayers pursuant to Section

30(b)3) in relation to Section 29(bii of the Tax Code. There is nothing in the records

to show that between the petitioner and KMC more than fifty per centum in value of the

outstanding stock of each of which is owned, directly or indirectly, by or for the same

individual". Also, there is no evidence to show that either petitioner or KMC was a

personal holding company or a foreign personal holding company.

It is true that as a general rule tax assessments are presumed to be correct.

However, assessments should not be based on presumption no matter how reasonable or

logical the presumption might be. In order to stand the test of judicial scrutiny, the

assessment imust be based on actual facts. The presumption of correctness of assessment

DECON PAGE 15 C.T.A.CASE NO.5725

being a mere presumption cannot be made to rest on another presumption (Collector of

Internal Revenue vs. Benipayo, G.R. No. L-13656, January 31, 1962, 4 SCRA 182)

For the above stated reasons, the disallowance of interest expense has no legal and

factual basis. Consequently, the interest expense should be allowed as deduction.

With respect to the disallowance of unrealized foreign exchange loss in the

amount of P5,733,921.41, we must sustain the findings of respondent's examiner. Upon

investigation, respondent's examiner determined that petitioner's realized or actual

foreign exchange loss amounted to only P3,249,790.59 while it claimed P8,983,712.00 as

deduction. These findings were never refuted by the petitioner. Consequently, 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,"must be applied here. Failure to

present proof of error in the assessment will justify the judicial affirmance of said

assessment (Conmissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc. and

The Court of Tax. Appeals, G.R. No. 76281, September 30, 1991, 202 SCRA 125:

Commissioner of Internal Revenue vs. Court of Appeals, Atlas Consolidated Mining

and Development Corporation and Court of Tax Appeals,G.R.No.104151,March 10

1995; Atlas Consolidated Mining and Developntent Corporation vs. Court of Appeals,

Comumissioner of Internal Revenue and Court of Tax Appeals, G.R.No. 105563

March 10, 1995,242 SCRA 289; Ferdinand R. Marcos II vs. Court of Appeals, The

Comnissioner of The Bureau of Internal Revenue and Herminia D.De Guzman,G.R

No.120880.June 5,1997,273 SCRA 47;Cagayan Robina Sugar Milling Co.vs.Court

of Appeals, Central Board of Assessnent Appeals, Board of Assessment Appeals, and

0

C.T.A.CASE NO.5725 DECISION - PAGE16

The Provincial Assessor of Cagayan, G.R. No. 122451, October 12, 2000, 342 SCRA

663

As a result of the disallowance of unrealized foreign exchange loss of

P5,733,921.41,petitioner is liable for deficiency income tax of P3,833,677.53,computed

as follows:

Add: Overstatement of Realized Foreign Exchange Loss Net income per return Adiusted net income P 25,243,859.00 P 30.977.780.41 5,733.921.41 1

Income tax due thereon Less. Less: Tax credit applied in FY 1996 Tax credits/payments P 8,992,953.00 157.603.00 P 10,842,223.14 8,835,350.00 Deficiency income tax Add: Surcharge Interest (August 16, 1995 to April 6, 1998) P 501,718.29 1.325.086.10 P 2,006,873.14 P3.833,677.53 1.826.804.39

With reference to the alleged deficiency VAT assessment of P25,081,892.23, the

said assessment resulted from the imposition of VAT on: 1.) the alleged unreported sales

of dolomite ore of P87,345,831.30 and 2) on petitioner's acquisition of dolomite ore

inventories amounting to P77,817,014.00 representing reimbursement of expenses and

collection of service fees.

Since we have earlier ruled that the alleged unreported sales of doloinite ore of

P87,345,831.30 was erroneous and had no factual basis,it necessarily follows that the

imposition of deficiency VAT thereon is devoid of merit. Thus, what is left to be

determined is the validity of the deficiency VAT assessinent on the alleged dolomite ore

inventories amounting to P77,817,014.00 acquired by petitioner from DMC as payment

for services rendered and reimbursement of expenses. The BIR examiner computed the

amount of P77,817,014.00 as follows:

40

PAGE 17 C.T.A.CASE NO.5725 DECISION

Cost of Goods Sold Add. Total Collection of Reimbursable Operating Expenses Less. and service fees in kind (dolomite ore) for the year Dolomite Inventory, Beg. Dolomite nventory,End P 85,298.426.00 P 83,759.339.00 P77.817.014.00 1.539,087.00 7.481.412.00

The amount of P77,817,014.00 was further broken down into

b) C) ) 2.) e) g Reimbursable Mining Costs/Service Fees Hauling Costs Plant Costs Repairs and Maintenance Cost Glass Line Costs Expansion Line Costs Total Collected Reimbursable Operating Costs Electrical Cost and Service Fees in Kind (dolomite ore) P 11,435.45400 P77.817,014.05 25,922,649.20 12,235,448.10 17,351,594.45 5.116,468.78 3,982,693.98 1.772,705.54

The examiner opined that the amount of P77.817,014.00 should form part of

petitioner's gross receipts subject to 10% output VAT pursuant to Section 102 of the

1994 Tax Code, thus:

properties-a Rate and base of tax-There shall be levied.assessed and the sale or exchange of services,including the use or lease of properties collecteda value-added tax equivalent to 10% of gross receipts derived from SECTION I02.Value-added tax on sale of services and use or lease of

The phrase "sale or exchange of services"means the performance of all kinds personexcluding value-added tax. of services in the Philippines for others for a fee, remuneration or consideration, inciuding those performed or rendered by construction and service contractors; The term "gross receiptsmeans the total amount of money or its equivalent representing the contract price compensation, service fee,rentals or royalty including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services perforined or to be performed for another XXX XXX XXX

Likewise,the examiner cited VAT Ruling No.183-90 dated August 17.1990

which states that if the contract calls for the contractor to supply both labor and materials.

his total collection.excluding the 10% VATshall be constituted as his taxable gross

I

C.T.A.CASE O.5725 PAGE 18 DECISION -

receipts. Hence, the examiner alleged that it may not legally be contended that only the portion of the total gross receipts viz., pertaining to labor component, shall be subject te VAT but rather the total amount received from such contract excluding VAT, is the taxable gross receipts. On reimbursement of expenses, the examiner alleged that BIR Ruling No. 163-88, VAT Ruling No. 258-89 and other rulings, state that reimbursable

expenses are subject to VAT except receipts on reimbursable expenses which are in the

name of the client. In the instant case, according to the examiner, petitioner's expenses

were all in its own account name and even went to the extent of actually claiming all the

corresponding input VAT from said expenses.

Petitioner, on its part, alleged in its protest letter dated May 9, 1998. that it

properly declared all its gross receipts from sale of services and sales of dolomite ore

The bulk of its dolomite ore sales were allegedly export sales subjected to zero-percent

VAT. To prove its allegationpetitioner presented in evidence its Quarterly VAT Returns

for the second quarter of 1994 up to the second quarter of 1995 (Exhibits H, I, J, K, K-1]

L & L-1).

We find petitioner liable for deficiency VAT on the reimbursed expenses of

P1,920,474.61.

As can be seen from the examiner's computation, the total costs of

P77,817,014.00 represents the sum of the purchase price of the raw dolomite ore of

P11,435,454.00 and the further processing costs of P66,381,560.05 (Hauling Cost,Plant

Cost, G-Line Cost, Ex-Line Cost, Maintenance Cost and Electrical Cost). Since we had

earlier ruled that the further processing costs of P66,381,560.05 were not reimbursed by

DMC to petitioner, the corresponding deficiency VAT thereon is devoid of merit

0

C.T.A. CASE NO. 572S PAGE 19 DECISION

With respect to the purchased dolomite ore of P11,435,454.00 which allegedly

represents reimbursement of expenses and payment for service fees, the documents

submitted by petitioner show that out of the reimbursed expenses of P6,373,594.01

(Exhibit T), the amount of P3,929,982.00 was offset against DMC's billings/invoices for

petitioner's purchase of raw dolomite ore for the period of May, 1994 to January, 1995

(Exhibits CC to KK). The remaining reimbursed expenses of P2,443.612.01 were paid in

cash by DMC to petitioner (Exhibits X,Y,Z,AA& BB) for the period of April,1995 to

September, 1995. Below is the breakdown of the reimbursed expenses of P6,373,594.01:

offset against DMC's billings Reimbursed expenses which were

Exhibit CC DD GG HH Kk EE FF JJ 1-Sep-94 1-May-94 1-Aug-94 1-Nov-94 1-Dec-94 1-Jun-94 1-Oct-94 1-Jan-95 1-Jul-94 Date P Amount 435,699.60 330,909.60 487,015.20 429,912.00 581.960.40 348,096.00 320,838.00 409.096.80 586.454.40

Subtotal: P 3,929,982.00

Were paid in cash by DMC Reimbursed expenses which

X Y Z 28-Apr-95 12-Apr-95 12-Apr-95 8 313,912.51 567,649.44 456,952.26

BB AA 1-Aug-95 7-Sep-95 Subtotal: P 2.443,612.01 651.205.44 453.892.36

Total: P.6.373.594.01

Since petitioner failed to show that the receipts covering the reimbursed expenses for the

period of May 1, 1994 to April 28, 1995 in the amount of P5,268,496.21 were not under

its name,the same should form part of its taxable gross receipts for FY 1995 based on

C.T.A. CASE NO. S725 PAGE 20 DECISION

the aforequoted definition of gross receipts" under Section 102 of the 1994 Tax Code

Neither did petitioner establish that the amount of P5,268,496.21 formed part of its

taxable gross receipts for FY 1995. Hence, petitioner should be assessed the

corresponding deficiency output VAT. However, since the assessment was made on

April 6,1998, the 10% output VAT due on reimbursed expenses for May, 1994 to

December, 1994 amounting to P3,348,021.60 had already prescribed. Therefore, only

insofar as the remaining amount of P1,920,474.61 shall petitioner be held liable for

deficiency VAT in the amount of P340,147.00 computed as follows:

Exhibit Kk X P 581,960.40 Jan. 1995 Reimbursed Expenses P April 1995 313.912.51 Total

ZZ Y P 581,960.40 P 1338.514.21 P1.920,474.61 567.649.44 456.952.26

Basic output VAT due Interest Surcharge July21,1995 to April6,1998 April 18,1995 to April 6,1998 52,905.49 P 39,316.75 13,226.37 121,683.11 P 30,420.78 82,594.49 174,588.60 43,647.15 82.594.49 39,316.75

P_105.448.62 P234.698.38 P34Q.147.00

Finally, as to the issue of whether or not the deficiency excise tax assessinent is

valid, the BIR examiner argued that petitioner is the one liable for the payment of the

extracted dolomite ore for it is the operator of the mining claims and the person having

possession of the said ore as provided under Section 4 of Revenue Regulations No. 13-94

dated July 20,1991,to wit

"SECTION 4.Persons liable.AIl lessees,concessionaires,owners or

natural or juridical persons, shall be liable to the payment of the excise tax minesite and/or place of production. Should minerals, mineral products or quarry/mines, producers or manufacturers of mineral products, whether due on minerals, mineral products and quarry resources removed from the operators of mines, processors of minerals, licensees or permittees of

C.T.A. CASE NO. 5725 PAGE 21 DECISION

quarry resources be removed from the minesite and/or place of production without the payment of the tax, the owner or person having possession thereof shall be liable for the tax due thereon."

Moreover, according to the examiner, Section 16(f) of Chapter III of the notarized

mining service contract states that petitioner is the one liable for the payment of said

excise tax although subject to reimbursement by DMC

Petitioner, on the other hand, contended that its purchase of dolomite ore from

DMC, the mining claims owner, is no longer subject to excise tax as the said tax had

already been paid by DMC upon the extraction of the ore. Petitioner further averred that

the Bureau of Internal Revenue has confirmed in BIR Ruling UN-04095 dated January

17, 1995 that petitioner is not liable for the excise tax on the purchase of the extracted

dolomite ore from DMC as this has already been paid by the latter, thus:

XXX XXX XX

only to the 10% VAT under Section 100 of the Tax Code, as amended. It is The excise tax on minerals and mineral products shall be payable by lessees concessionaires, owners or operators of mines, processors of minerals licensees or permittecs of quarry/mines, producers or manufacturers of no longer subject to the additional ad valoreim tax. In reply thereto, please be informed that your opinion is hereby confirmed mineral products, whether natural or juridical persons, upon removal from the minesite and/or place of production. Should minerals, mineral products or quarry resources be removed from the minesite and/or place of production without payment of the excise tax, the owner or person having possession thereof shall be liable for the tax due thereon.(Sec. 4,Revenue Regulations no. 13-94). If the taxpaid mineral or mineral products are subsequently sold by the producer, owner or lessee of the mining claims, it shall be subject

liable to the payment of additional excise tax. dolomite ore for processing for the domestic and export market is no longer already paid the excise tax on the dolomite ore, PMSC which purchases said Since as represented, DMC as the owner or lessee of the mining claims has

XXX XXX XXX

I

PAGE 22 DECISION - C.T.A. CASE NO. 5725

It is admitted that the BIR has not issued any subsequent ruling reversing the aforequoted BIR ruling (par.14, Joint Stipulation of Facts). Thus, petitioner maintained that it was erroneous on the part of the respondent to hold petitioner liable for excise taxes anew on its purchase of dolomite ores from DMC.

We concur with the petitioner.

It is clear from the aforequoted provisions of RR 13-94, implementing Section

151(a)(2) of the 1994 Tax Code, that either DMC, being the lessee of the mining clains

or petitioner, being the operator or person in possession of the extracted dolomite ore

could be held liable to pay the excise tax due thereon

Records reveal that DMC paid the corresponding excise taxes due on the

extracted dolomite ore as evidenced by the Quarterly Percentage Tax Returns/Excise Tax

Returns of Mineral Removals filed by DMC with the BIR for the subject period of the

assessment Exhibits M,N,O,P,Q,R & S) and the related BIR official receipts (Exhibits

M-1,N-1,O-1,P-1,Q-1,R-1 & S-1),computation schedules (Exhibits O-2,Q-2) and as

testified to by Ms.Merlinda C.Velasco, DMC's Accountant (TSN. October 4, 1999)

Inasmuch as DMC already paid the excise tax due on the extracted dolomite ore.

petitioner is no longer liable to pay excise tax. Accordingly, the deficiency excise tax

assessment of P6,399,854.29 issued against petitioner is erroneous.

WHEREFORE, in view of all the foregoing. the deficiency excise tax

assessment of P6,399,854.29 for FY 1995 is hereby cancelled and/or withdrawn.

However, petitioner is hereby ORDERED TO PAY to respondent the deficieucy income

tax of P3,833,677.53 and deficiency VAT of P340,147.00 in the aggregate sum of

C.T.A. CASE NO. 5725 PAGE 23 DECISION-

P4,173,824.53 for FY 1995, inclusive of surcharge and deficiency interest, computed as

follows:

Basic tax due Surcharge P 2,006,873.14 In come 501,718.29 Deflclency Tax P 174,588.60 VAT 43,647.15 Total

Interest P 3,833,677.53 _P_340147.00 P 4,173,824.53 1.325.086.10 121,911.25

In addition, petitioner is ORDERED TO PAY to respondent 20% delinquency interest

on P4,173,824.53 computed from May 9, 1998 until fully paid pursuant to Section

249(a)(c)(3) of the 1994 Tax Code.

SO ORDERED.

CUANITO C.CASTANEDA, JR. LVC C.Castaneoa

Associate Judge

I CONCUR:

Lo ERNESTO D.ACOSTA

Presiding Judge

CERTIFICATION

I hereby certify that the above decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Section 13,Article VIII of the Constitution

c lo. ERNESTO D. ACOSTA

Presiding Judge