SAN ROQUE POWER CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

'' ; REPUBliC OF THE PHiliPPINES Coon at Tax Appeals QUEZON CITY SPECIAL FIRSTDIVISION SAN ROQUE POWER CTA CASE NO. 7787 CORPORATION, Members: Petitioner, Uy, Chairperson, and Fabon-Victorino, 11. -versus- Promulgated: COMMISSIONER OF APR 30 013 ; 2 ;:JO ._,_. INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION UY,}.: The instant Petition for Review was filed by petitioner San Roque Power Corporation, against respondent Commissioner of Internal Revenue, praying that, after due hearing, judgment be rendered setting aside the Formal Letter of Demand dated January 14, 2008 and Assessment Notice Nos. WE-04-06-005-017-501-000 for deficiency expanded withholding tax; WF-04-06-005-017-501-000 for deficiency final withholding tax; and FBT-04-06-005-017-501-000 for deficiency fringe benefits tax, all dated January 15, 2005, in the total amount of P118,619,729.22 issued by respondent for taxable year 2004. � THE FACTS Petitioner is a domestic corporation engaged in the operation of a hydroelectric power generating plant located at Barangay San j \ Roque, San Miguel, Pangasinan. 1 It is registered with the Board of 1 Respondent's Memorandum , Docket, p. 2339.

DECISION CTA Case No. 7787 Page 2 of32 Investments on a pioneer status as new operator of hydroelectric power generating plant under Certificate of Registration No. 97-356.2 On February 7, 2006, petitioner received Letter of Authority ("LOA'') No. 00027833 dated February 22, 2006 issued by Revenue District Office (RDO) No. 06 of the Bureau of Internal Revenue (BIR), authorizing Revenue Officers Rodelio SJ Dacanay, Gregorio Z. Nipal, Almira Navarro, and Jinky Lim to examine its books of accounts and other accounting records relative to all internal revenue taxes for the period covering January 1, 2004 to December 31, 2004.3 Thereafter on April 4, 2007, petitioner received a Notice of Informal Conference dated April 3, 2007 issued by BIR RDO No. 06, finding petitioner to have deficiency withholding tax on compensation, expanded withholding tax (EWT), value-added tax, and final withholding tax (FWT), inclusive of applicable increments, for taxable year 2004 on the basis of the investigation of the aforesaid Revenue Officers,4 as follows: Withholdinq Tax on Compensation p 4 287.333.80 Expanded Withholding Tax 3,625,338.56 Final Withholdinq Tax 98,234,867.07 Value-Added Tax 4.614 888.03 Total p 110,762,427.46 Although petitioner by then is under the jurisdiction of the BIR Large Taxpayer Services, petitioner opted, without objection from the BIR Large Taxpayer Services, that the examination of its books of accounts and other accounting records for all internal taxes for taxable year 2004 be continued by BIR RDO No. 06 as the latter has all the records pertinent to such examination. 5 In response to the issues raised by petitioner in its letter dated April 27, 2007, BIR RDO No. 06 conducted a re-investigation as contained in its letter dated August 6, 2007.6 t On November 21, 2007, petitioner received a second Notice of Informal Conference dated November 15, 2007, wherein BIR RDO 2 Exhibits "TTT-1" and "TTT-3". 3 Docket, p. 1143. 4 Docket, p. 1143. 'Docket, p. 1143. 6 Docket, p. 1144.

DECISION CTA Case No. 7787 Page 3 of32 No. 06 amended its assessment for alleged deficiency taxes for taxable year 2004, as follows: Deficiency Expanded Withholding Tax p 3.241.714.71 Deficiency Frinqe Benefits Tax 6,109,673.68 Deficiency Final Withholdinq Tax 106,688,374.79 Total p 116,039.763.187 Thereafter, on December 27, 2007, petitioner received a letter of even date from BIR RDO No. 06 informing petitioner that it will pursue the assessments reflected in the Notice of Informal Conference.8 Subsequently on January 2, 2008, petitioner received a copy of the Preliminary Assessment Notice (PAN) dated December 28, 2007 issued by BIR Revenue Region No. 1, enumerating the following tax deficiencies (inclusive of interest and late payment charges): Expanded Withholding Tax p 3,530,629.68 Deficiency Final Withholdinq Tax 107,699,106.77 Deficiency Fringe Benefits Tax 6.167 554.80 Total P117,397,291.2SY On January 24, 2008, petitioner received copies of the Formal Letter of Demand and Assessment Notices dated January 14 and 1S, 2008, respectively, which were issued or mailed by the BIR on January 1S, 2008, for deficiency taxes under Assessment Notice Nos. WE-04-06-00S-0 17-SO 1-000, WF-04-06-00S-0 17-SO 1-000, and FBT- 04-06-00S-017-S01-000, as follows: Expanded Withholding Tax p 3,365,719.78 Final Withholdinq Tax Fringe Benefits Tax 108,822,142.29 Total 6.231.867.15 P118,619,729.22w In its letter dated February 21, 2008 to BIR Revenue Region No. 1, petitioner protested the assessment and collection of purported deficiency taxes under Assessment Notice Nos. WE-04-06- 00S-017-S01-000, WF-04-06-00S-017-S01-000, and FBT-04-06-00S!\ 7 Docket, p. 1144. 8 Docket, p. 1144. 9 Docket, pp. 1144 to 1145 10 Docket, p. 1145.

DECISION CTA Case No. 7787 Page 4 of32 017-501-000 dated January 15, 2008 and Formal Letter of Demand dated January 14, 2008, for being barred by prescription and bereft of factual and legal bases.11 In a letter dated April 3, 2008 of BIR Revenue Region No. 1, petitioner was informed that the letter of demand and assessment notices still stand and its request for cancellation was denied with finality. 12 Thus, on May 22, 2008, petitioner filed the instant Petition for Review to assail the aforesaid denial of its protest against respondent's Formal Letter of Demand dated January 14, 2008 and Assessment Notice Nos. WE-04-06-005-017-501-000, WF-04-06-005- 017-501-000, and FBT-04-06-005-017-501-000, all dated January 15, 2005 issued by BIR Revenue Region No. 1, of Calasiao, Pangasinan. In her Answer13 filed on November 3, 2008, respondent interposes the following special and affirmative defenses: "6. Respondent adopts the abovementioned admissions and denials as part of his special and affirmative defenses. 7. The assessments for Withholding Tax on Compensation, Expanded Withholding Tax, Final Withholding Tax and Value-Added Tax respectively, were issued in accordance with law. In the Formal Letter of Demand, respondent clearly stated petitioner's tax liabilities, to wit: 'Please be informed that after review of the investigation reports on your income, withholding and business tax liabilities the taxable year 2004 submitted by Revenue Officers Jinky Lim, Rodelio Dacanay and Gregorio Nipal under Letter of Authority No. 00027833 dated February 22, 2006, there have been found still due from you deficiency taxes as shown thereunder: ~ II Exhibit ''J". 12 Exhibit "K". 13 Docket, pp. 1085 to 1090.

DECISION CTA Case No. 7787 Page 5 of32 Assessment No.: WE-04-06-005-017-501-000 Deficiency Expanded Withholding Tax P3,565,719.78 Assessment No.: WF-04-06-005-017-501-000 Deficiency Final Withholding Tax P108,822,142.29 Assessment No.: FBT-04-06-005-017-501-000 Deficiency Fringe Benefits Tax P 6,231,142.29 TOTAL p 118.619.729.22 Please note that the interest will be adjusted if paid beyond February 12, 2008. The twenty-five percent (255) surcharge and twenty percent (20%) interest per annum was based on the provisions of Section 248 (A) and Section 249 (B) of the 1997 NIRC, while the compromise penalty was in accord with RMO 1-90 and Section 250 of the 1997 NIRC. The narrative details covering the aforementioned discrepancies and the detailed computation of the deficiency taxes are shown at the back hereof as Annex A.' Based on the foregoing, the assessment issued against petitioner is valid being supported by factual and legal bases. An assessment contains a computation of tax liabilities and a demand for payment of such liability within a prescribed period. It is worthy to note that assessment notices need not be a full narration of facts and laws on which the assessment is made. It is enough that the petitioner be substantially informed of the law and the facts on which the assessment for a tax liability is made. The Preliminary Assessment Notices received by petitioner indicated the amount of deficiency tax liability and a demand to pay within a prescribed period. The Supreme Court held that assessments simply required a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a A prescribed period. \" �

DECISION CTA Case No. 7787 Page 6 of32 8. The right of respondent to assess petitioner for withholding taxes did not prescribe because the investigation upon petitioner's books and records has yet to conclude. That being the case, the right of respondent to assess petitioner is not barred by prescription and the filing of the Petition for Review is premature, pending the conclusion of the investigation. In paragraph I(B) under the heading 'DISCUSSION', petitioner ratiocinated that it did not ask for a re- investigation and yet respondent's revenue officers conducted a re-investigation anyway. The truth is, the claimed 're-investigation' is a continuation of the investigation on petitioner's books and records. This fact is highlighted when petitioner said that, 'In sum, we respectfully object to the assessment for lack of factual and legal bases contrary to pertinent Bureau of Internal Revenue (BIR) rulings on the matter. We manifest that we reserve our right to submit additional documents should the need arises. Should you require the submission of additional documents, please let us know. By its own words, petitioner agreed that the investigation has not yet terminated, and that it shall comply with any request for the submission of documents should respondent's examiners deem it necessary. The use of the word 're-investigation' in this case did not denote the usage of a technical or legal term. It simply means to study again by close examination and systematic inquiry. At most, it is but a misnomer for continuing the investigation. The offer of petitioner to give additional documents so requested is but part of the investigation. The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayer's records in whatever form they may be kept. Thus, contrary to petitioner's belief, assessment on its books and records is not barred by prescription. The hurried resort to judicial A remedy has only led to premature filing of the instant Petition for Review.' ~�

DECISION CTA Case No. 7787 Page 7 of32 9. In the absence of evidence to the contrary, assessments are presumed correct. In the case of Commissioner of Internal Revenue vs. Bank of the Philippine Islands, the Supreme Court held: 'Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.' The burden of proof (sic) is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong, but also that the taxpayer is right. The presumption in favor of the correctness of tax assessments stands where evidence to the contrary is wanting." After pre-trial held on December 4, 2008, the parties filed their Joint Stipulation and Facts and Issues14 on July 1, 2009. This was approved by the Court in the Resolution15 dated July 6, 2009. Before the scheduled date of petitioner's initial presentation of evidence, petitioner filed a Motion to Set Case for Preliminary Hearing to Resolve Issue of Prescription on July 16, 2009. 16 In line therewith, both parties manifested that they will not present evidence on the issue of prescription. 17 In compliance with the Resolution18 dated August 24, 2009, respondent filed her Memorandum19 on September 28, 2009 while petitioner filed its Memorandum [Re: Issue of$! Prescriptionf0 on October 1, 2009. ~ 14 Docket, pp. 1236 to 1239. 15 Docket, p. 1244. 16 Docket, pp. 1250 to 1254. 17 Docket, pp. 1258 and 1266. 18 Docket, p. 1271. 19 Docket, pp. 1272 to 1283. 20 Docket, pp. 1285 to 1308.

DECISION CTA Case No. 7787 Page 8 of32 In the Resolution21 dated November 13, 2009, the Former Second Division of this Court resolved the issue of prescription. Assessment Notice Nos. WE 04-06-005-017-501-000 and WF-04-06- 005-017-501-000 for deficiency expanded withholding tax and deficiency final withholding tax covering the period of January to November 2004, and Assessment No. FBT 04-06-005-017-501-000 for deficiency fringe benefits tax for taxable year 2004 were CANCELLED AND SET ASIDE for having been issued beyond the prescriptive period. As to the remaining assessment for deficiency Expanded Withholding Tax and deficiency Final Withholding Tax for December 2004, the Court set the initial presentation of evidence for the petitioner on January 20, 2010. A Motion for Reconsideration of the foregoing Resolution was filed by respondent on December 8, 200922, but the same was denied in the Resolution23 dated April 14, 2010 for lack of merit. Meanwhile, respondent assailed the Court's Resolutions dated November 13, 2009 and April 14, 2010 before the Court of Tax Appeals En Bane by way of a Petition for Review, docketed as CTA EB No. 626, pursuant to Rule 8 of the Revised Rules of the Court of Tax Appeals. The Court En Bane, in its Decision promulgated on August 31, 2011, denied respondent's Petition for Review and affirmed in toto the Court's Resolutions dated November 13, 2009 and April 14, 2010.24 Respondent's Motion for Reconsideration on the Decision of the Court En Bane was likewise denied in the Resolution dated January 2, 2012.25 During the trial of this case with respect to the rema1mng assessment for deficiency Expanded Withholding Tax and deficiency Final Withholding Tax for December 2004, both parties presented and offered their respective evidence. Petitioner's formally offered pieces of documentary evidence, as contained in its Offer of Documentary Evidence26, were admitted in the Resolutions dated August 11, 2011 and October 10, 2011Y Thereafter, respondent's formally offered evidence, as stated in her Formal Offer of Evidence28 filed on February 29, 2012, were admitted in the Resolution29 dated r 21 Docket, pp. 1406 to 1416. 22 Docket, pp. 1417 to 1425. 23 Docket, pp. 1457 to 1459. 24 Docket, pp. 1774 to 1796. 25 Docket, pp. 1943 to 1946. 26 Docket,pp.1657to 1755. 27 Docket, pp. 1651 to 1653 and 1851 to1853. 28 Docket, pp. 2187 to2195. 29 Docket, pp. 2331 to 2332.

DECISION CTA Case No. 7787 Page 9 of32 April 13, 2012. With the submission of respondent's Memorandum on May 23, 201230 and petitioner's Memorandum on August 10, 2012, the instant Petition for Review was submitted for decision in the Resolution dated August 23, 201231 � Hence, this Decision. THE ISSUES The parties submitted the following stipulated issues32 for this Court's resolution, to wit: "1. Whether or not respondent's right to assess has prescribed. 2. Assuming arguendo that respondent's right to assess has not prescribed, whether or not the assessment notices have factual and legal bases. 3. Whether or not petitioner is liable for alleged deficiency in Expanded Withholding Tax (EWT), Final Tax (FT) and Fringe Benefit Tax (FBT) and increments for the taxable year 2004." THE COURT'S RULING The first issue on prescription had been extensively discussed in the Court's Resolution dated November 13, 2009, wherein it was held that the three (3)-year period of prescription under Section 203 of the National Internal Revenue Code (NIRC) of 1997, as amended, applies to this case. The Court also found that there was no allegation in respondent's Answer pertaining to petitioner's filing of fraudulent or false returns or non-filing of returns, which could have been considered as an exception to the period of limitation to assess and collect tax as provided in Section 222 of the NIRC; and that neither petitioner requested for any reinvestigation, nor executed any rf\ waiver of the statute of limitations, which could have suspended the running of the prescriptive period. 30 Docket, pp. 2338 to 2348. 31 Docket, p. 2450. 32 Docket, p. 1238.

DECISION CTA Case No. 7787 Page 10 of32 Thus, taking into consideration the filing dates of the EWT and FWT returns for the months of January to November 2004, and fringe benefits tax (FBT) for the whole year of 2004 vis-a-vis the date of issuance of the Formal Letter of Demand, the assessments, except the alleged deficiency EWT and FWT for the month of December 2004, are already barred by prescription. The dispositive portion of this Court's November 13, 2009 Resolution states: "WHEREFORE, as prayed for, petitioner's motion to cancel the subject assessments on the ground of prescription is hereby GRANTED. Accordingly, Assessment Notice No. WE 04-06-005-017-501-000 and Assessment No. WF-04-06-005-017-501-000 for deficiency Expanded Withholding Tax and deficiency Final Withholding Tax, respectively, covering the period of January to November 2004 are hereby CANCELLED and SET ASIDE for having been issued beyond the prescriptive period. Likewise, Assessment No. FBT 04-06- 005-017-501-000 for deficiency Fringe Benefits Tax for taxable year 2004 is hereby CANCELLED and SET ASIDE for having been issued beyond prescriptive period. As to the remam1ng assessment for deficiency Expanded Withholding Tax and deficiency Final Withholding Tax for December 2004, let the initial presentation of evidence for the petitioner be set on January 20, 2010 at 9:00a.m." To reiterate, the deficiency EWT and FWT assessments covering the period of January to November 2004 and deficiency FBT for 2004 were issued beyond the 3-year prescriptive period. Therefore, respondent's right to assess the said taxes had prescribed. The portion of respondent's assessment which was assessed within the 3-year prescriptive period involves the alleged deficiency EWT and FWT covering the month of December 2004. Consequently, the resolution of the second and third jointly stipulated issues will cover only the said assessed deficiency EWT and FWT for December 2004. I. Expanded Withholding Tax The assessment of the BIR for deficiency EWT actually pertains to two components. First is for the amount of P1,407,735.85,( '

DECISION CTA Case No. 7787 Page II of32 inclusive of increments, allegedly representing unremitted taxes withheld for the months of February to September. Second is for the amount of P2,157,983.93 relative to the income payments subject to 10% and 15% EWT. The said assessed amounts are computed as follows: Basic Interest Late Total Payment EWT p 769,212.61 p 558 023.24 p 80,500.00 P1,407,735.85 1,336,212.96 821,770.97 2,157,983.93 P2,105,425.57 P1,379,794.21 p 80,500.00 p 3,565,719.78 A. EWT- P1,407,735.85 Respondent computed the deficiency expanded withholding tax of P1,407,735.8533, with a basic tax of P769,212.61 for the year 2004, as follows: Month Remittance Per Difference 20% Late Total January PerBIR Form Attachments35 Unremitted Interest Payment Amount Due February p 704,590.33 March 1601-E34 p- p- p- p- April p 704,590.33 360,956.82 Mav 622,794.77 23,233.60 18,199.66 6 000.00 47,433.26 June 337,723.22 473 861.19 2,080.00 1,594.67 1 000.00 4,674.67 July 620 714.77 816 219.26 16 000.00 August 273 861.19 1,130,204.16 200 000.00 150 000.33 16 000.00 366,000.33 September 616 219.09 425,867.92 146 666.34 16 000.00 October 930,204.16 606,668.26 200 000.17 143 333.00 8 500.00 362 666.51 November 381,969.05 662 966.77 30,729.21 8 500.00 December 556 668.29 744 998.64 200 000.00 34,166.70 8 500.00 359 333.00 TOTALS 612 966.77 608,257.93 33 333.33 83,128.08 744 998.64 379,423.80 43,898.87 - 608,257.93 P7,536,809.85 49,999.97 - 92,666.67 379,423.80 - P6,767,597.24 50 000.00 - 91 833.33 - - - - - P80,500.00 - - P558,023.24 - P769,212.61 P1,407,735.85 From the comparison of the amounts between BIR Forms 1601- E and per schedule of income payments to payees (referred to as "Attachments''), the deficiency EWT in the basic amount of P769,212.61 pertains to the discrepancies in the EWT due for the months of February to September 2004. Likewise, as can be gleaned from the above schedule, the amount of EWT due per BIR Form 1601-E for the month of December 2004 tallies with the amount{' 33 Exhibit "4-B", BIR Records, p. 2628; Exhibit "E", Docket, p. 760. 34 Exhibits "0" to "Z-1 ". 35 Exhibits "000-2-a" to "000-2-1".

DECISION CTA Case No. 7787 Page 12of32 remitted per attachment. Inasmuch as the assessment for the first component in the total amount of P1,407,735.85 refers to the months of February to September, which are already barred by prescription, the same should be cancelled. B. Subject to 10% and 15% EWT- P2,157,983.93 Respondent's examiner computed the deficiency EWT subject to 10% and 15% for taxable year 2004 in the amount of P2,157,983.9336 as follows: EWT EWTDue Rate Legal Fees- Makati (Per Trial Balance) P34 500,882.17 Legal Fees - 0 & M (Per Trial Balance) 41,984.99 Audit Expenses - Makati (Per Trial Balance) 2,499,612.02 Total p 37 042 479.18 Less: Payment to 5GV (Refer to attached schedule) 6 227 999.20 Legal & Audit Fee Subject to EWT P30 814 479.98 15% P4,622,172.00 0 & M Consultancy Fees Expense - Makati (Per Trial P42 150 066.57 Balance) Consultancy Fees - Makati 22 471 649.57 Consultancy Fees- Land 9 628 189.S1 Consultancy Fees - 0 & M 2 074 645.01 Consultancy Fees - Outside Special Services 269 800.00 Total P76 594 350.66 Less Payments to: SHKPSL (subject to Final Tax) (Notes to F5 17) Pl3 912,812.00 KPIC (subject to Final Tax (Notes to FS 17) 35 313,747.00 Total P49 226,559.00 Consultancy Fees subiect to EWT P27 367 791.66 P1 686 363.68 Mat., Services - Surveying Services - O&M RASA 1 379 280.00 Surveying Mat., Services - Dam Monitoring - O&M RASA Consultants Total P3 065 643.68 36 Exhibit "4-C", BIR Records, p. 2626; Exbibit "E", Docket, p. 761; Exhibit "000-1-b".

DECISION CTA Case No. 7787 Page 13 of32 Total Consultancy Fees subject to EWT P30,433,435.34 Payees with more less than gross receipts of P720 000.00 per year: Various Consultants: per attachments to 1601-E January_ 543 040.30 February 428,167.00 March 544,778.50 April 503,934.50 May 522 823.10 June 510 342.80 July 499,635.00 August 526,629.10 September 533,915.00 October 530 088.70 November 547 839.10 December 592 096.70 P6 283 289.80 10% 628 328.98 Payees with more than the gross receipts of P720 000.00 per year: P24 150 145.54 15% 3 622 521.83 Total P30 433 435.34 P4,250,850.81 Total Expanded Withholding Tax Due P8,873,022.81 Less: 2004 Expanded Withholding Tax Remittance Expanded Withholding Tax Still Due 7,536,809.85 20% Interest p 1 336 212.96 Expanded Withholding Tax Still Due 821,770.97 P2,157,983.93 A scrutiny of the Detailed General Ledger (GL)37, the Summary of Monthly Balances per GL38, and the Independent Certified Public Accountant (CPA) Report39 shows that of the alleged Professional, Consultancy, and Legal Fees of P116,434,236.04 for taxable year 2004 only the amount of P13,882,244.24 pertains to the month of December 2004, thus: Expense Account Exhibit Total perGL December Legal Fees - Makati QQQ-1-6.7.1 p 34 500 882.17 p 4 682 504.36 Legal Fees - 0 & M 000-2-6.2.2 41 984.99 - Audit Expenses- Makati QQQ-3-6.4.2 2,499 612.02 574 611.92 0 & M Consultancy Fees Expense - Makati QQQ-4-6.4.1 42 150 066.57 4,741 795.00 Consultancy Fees - Makati 000-6-6.6.1 22 471 649.57 2 724 874.45 Consultancy Fees - Land QQQ-5-6.5.1 9,628 189.51 619,296.73 Consultancy Fees - 0 & M QQQ-7-6.4.3 2 074 645.01 176 516.32 Mat., Services Surveying Services - O&M RASA Surveying 000-8-6.4.2 1 686 363.68 254 545.46 f' 37 Exhibits "QQQ-1-6.1" to "QQQ-1-6.7", "QQQ-2-6.1" to"QQQ-2-6.2", "QQQ-3-6.1" to "QQQ-3-6.4", "QQQ-4-6.1" to "QQQ-4-6.4", "QQQ-5-6.1" to "QQQ-5-6.5", "QQQ-6-B.l" to "QQQ-6-6.6", "QQQ- 7-6.1" to "QQQ-7-6.4", "QQQ-8-6.1" to "QQQ-8-6.4", "QQQ-9-6.1" to "QQQ-9-6.4" and "QQQ-1 0- A" to "QQQ-1 0-J". 38 Exhibits "QQQ-1", "QQQ-2", "QQQ-3", "QQQ-4", "QQQ-5", "QQQ-6", "QQQ-7'', "QQQ-8" and "QQQ-9". 39 Exhibit "WWW", No.4, pp. 10 to II.

DECISION CTA Case No. 7787 Page 14 of32 Mat., Services � Dam Monitoring � QQQ-9�6.4.3 I 1 380 842.52 108 100.00 O&M RASA Consultants 000�9�6.1.2 Subtotal p 116,434,236.04 P13,882,244.24 Consultancy Fees � Outside Specia I Services 269 800.00 Total p 116,704,036.04 The Consultancy Fees - Outside Special Services amounting to P269,800.00 per BIR Computation Sheet cannot be traced from petitioner's record, hence, cannot be verified as to the nature of such expense. A perusal of the Trial Balance40 and Audited Financial Statements41 confirms no similar expense account with the same amount. Consequently, the assessment for the same is improper and should be cancelled. Of the total fees of P13,882,244.24, pertaining to the month of December 2004, the Independent CPA ascertained that the total Professional Fees only amount to P13,877,444.2442 as hereunder summarized: Findings Amount Exhibit "WWW" Professional fees accrued and/or paid to GPP, hence exempt from 10%/15% EWT p 4 9651252.46 Annex "8~1" Professional fees accrued and/or paid to non� residents, hence, exempt from 10%/15% 11,628,588.07 Annex "B-2" EWT Professional fees accrued based on estimated 1,000,000.00 Annex "B-3" amounts, hence not subjected to EWT Reclassification of input VAT to expense 609 694.14 Annex "B-4" accounts 7 533.00 Annex "B-5" Annex "B-6" Others unverified amount 1 522 864.01 Professional fees subiect to EWT 1,406 425.00 Annex "B-7" Consultancy fees subjected to withholding tax on compensation (7 262,912.44) Annex "B-8" Reversals of professional fees previously p 13,877,444.24 Annex "B" recorded in November 2004 Total for the month of December 2004 Evidently, there is a difference of P4,800.0043 between the Detailed General Ledger versus the Independent CPA's summary. The Independent CPA noted that this pertains to the "Mat. Services- Dam Monitoring-Land'144 account which formed part of the total amount of P108,100.00 for "Mat. Services-Dam Monitoring-O&M 40 Exhibit "000-3". f' 41 Exhibit "000-4". 42 Exhibit "WWW", p. 25. 43 1'13,882,244.24 less 1'13,877,444.24. 44 Exhibit "WWW", p. II, and Exhibit "QQQ-9".

DECISION CTA Case No. 7787 Page 15 of32 RASA Consultants" account for December 2004. Petitioner did not offer any evidence to support the said expense; thus, the assessment should remain. 1. Professional fees accrued and/or paid to GPP - P4,965,252.4645 Petitioner avers that Professional Fee in the amount of P4,965,252.46, as presented below, refers to payments and accruals to general professional partnerships (GPPs) which are exempt from creditable withholding tax, in accordance with the prov1s1on of Section 2.57.5 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 14-2002: Professional fees Actually billed Accrued based Total accrued &/or paid to and/or paid on estimates P4,262,311.10 GPP p 3,343,288.10 P750,000.00 Legal Fees - Makati - 169,023.00 Audit Expenses - Makati 459,339.26 243,602.10 702,941.36 Total p 3,802,627.36 P1,162,625.10 P4,965,252.46 Section 22(B) 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. Corollary thereto, Section 26 of the same NIRC provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax. The Supreme Court, in the case of Tan vs. Ramon R. del Rosario Jr., et a/.46, had the occasion to rule that the income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Considering that general professional partnerships are exempt from income tax, payments made to these partnerships are not subject to withholding tax pursuant to Section 2.57.5 of Revenue Regulations No. 2-98.47 45 Exhibit "WWW" Annex "B-1" 46 G.R. Nos. 10928cl and 109446, October 3, 1994. 47 Sec. 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:

DECISION CTA Case No. 7787 Page 16of32 Thus, the Professional Fees in the amount of P3,802,627.3648, which are duly substantiated by accounts payable vouchers49, together with supporting statement of accounts50 or official receipts51 billed by various GPPs, shall not be subject to EWT. Anent the Professional Fees accrued based on estimates in the amount of P1,162,625.10, the Independent CPA ascertained that it is petitioner's practice to accrue the estimated Professional Fee expense incurred for the month based on previous month's billings and/or based on contracts. As the accrual is based only on the estimated amount, petitioner did not subject the same to withholding tax. 2 5 However, petitioner did not present additional documents other than its journal vouchers53 and Summary of Accruals54, which are self-serving, to support its allegation that the amount of P1,162,625.10 is due to GPPs. Therefore, it may be subjected to EWT. Section 2.57.4 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 12-01, provides when the obligation to withhold the tax arises, to wit: "SEC. 2.57.4. Time of Withholding. - The obligation of the payor to deduct and withhold the tax under Section 2.57 of these Regulations arises at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor's books, whichever comes first. The term 'payable' refers to the date the obligation becomes due, demandable or legally enforceable. Provided, however, that where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor's (A) XXX (B) Persons enjoying exemption from payment of income taxes pursuant to the provision of any law, general or special, such as but not limited to the following: xxx 48 Exhibits "QQQ-l-A.5" and "QQQ-3-A.3". 49 Exhibits "QQQ-l-C.6", "QQQ-l-C.7", "QQQ-1-C.S", "QQQ-3-C.l ",and "QQQ-3-C.2". 50 Exhibits "QQQ-l-C.7.2", "QQQ-l-C.7.3", "QQQ-3-C.l.3", and "QQQ-3-C.2 to "QQQ-3-C.4". 51 Exhibits "QQQ-l-C.6.1 ", "QQQ-1-C.S. I", and "QQQ-3-C.l.4". 52 Exhibit "WWW", p. 12. 53 Exhibits "QQQ-l-C.5", "QQQ-4-C.2", and "QQQ"3-A.2". 54 Exhibits "QQQ-l-C.5.1" and "QQQ-4-C.2.2".

DECISION CTA Case No. 7787 Page 17 of32 books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes." (Emphasis supplied) Based on the foregoing prov1s1on, the duty of petitioner to withhold arises when the Professional Fees are paid, becomes payable, or are accrued/recorded as expense in petitioner's books, whichever comes first. After which, the corresponding return and remittances must be made within 10 days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 25 of the following year. 55 Applying the above prov1s1ons in the present case, it is necessary to evaluate the case records as to the date when petitioner's obligation to withhold arose. First, it must be determined when petitioner accrued or recorded the Professional Fees in its books and when was it claimed as expense for tax purposes. Petitioner's Annual Income Tax Return (ITR) for year 2004 shows that it claimed the accruals in the amount of P1,162,625.10 as expense for the year 2004, though there was no income tax benefit derived thereon as petitioner is exempt from paying tax on its income from operation. However, the same cannot be given probative value as it was not formally offered as evidence in the present case. Consequently, what is left for determination is when did the income payments of petitioner become payable, i.e., due, demandable or legally enforceable, or has actually been paid. Records, however, reveal that no supporting documents were presented by petitioner to enable this Court to determine when the amount was due for payment or actually paid. Thus, the same is subject to 15% EWT. "Section 2.58(A)(2) of Revenue Regulations 2-98, as amended by Revenue Regulations No. 12-01, Annex "B"(2).

DECISION CTA Case No. 7787 Page 18 of32 In sum, the total amount of P1,162,625.10 shall be subjected to 15% EWT. 2. Professional Fees accrued and/or paid to non-residents- P11,628,588.0756 Petitioner claims that Professional Fees in the amount of P11,628,588.07 pertains to payments and accruals to non-residents, hence, exempt from EWT. Based on the evidence presented, the Court finds the following: Payee Reference Service Rendered Billing Amount for the month of: Date A. Exempt- 0 l!r. M ConsultanCY Fees Expense-Makati November 2004 KPIC QQQ-4-A.4 QQQ-4-C.4. 2 ($50 000 at 56.097) 6-Dec-04 p 2 804 850.0 none 2 817 050.00 December 2004 P5 621 900.00 KPIC QQQ-4-A.2 QQQ-4-C.2.2d ($50 000 at 56.341) Sub-total B. Billed Prior to December 2004 Milbank QQQ-1-A.6 QQQ-1-C-10 Sept to Oct 2004 17-Nov-04 p 82 013.72 ($1,455.46 at 56.349)- 17-Nov-04 Milbank QQQ-1-A.4 QQQ-4-C.2.2a Legal Fees Makati 26-Nov-04 112 682.00 September 2004 8-Nov-04 Amec QQQ-6-A.3 000-6-C.1.3a ($2,000 at 56.341)- 3 294 828.45 Legal Fees Makati RW Beck QQQ-6-A.3 QQQ-6-C.3.2a November 2004 442 223.55 Sub-total ($58.594 at 56.231)- P3,931,747.72 Consultancy Fees- Makati October 2004 ($7,852.12 at 56.319)- Consultancy Fees- Makati C. Billed in December 2004 Milbank QQQ-1-A.6 QQQ-1-C-9 November 2004 13-Dec-04 164 585.90 ($2,922.75 at 56.312)- 13-Dec-04 RW Beck QQQ-6-A.3 QQQ-6-C.2.3a Legal Fees-Makati 276 465.45 November 2004 p 441051.35 ($4,909.53 at 56.312)- Consultancy Fees- Makati Sub-total D. No Proof of Billing/Payment Milbank QQQ-1-A.4 QQQ-4-C.2.2a December 2004 p 112 682.00 ($2,000 at 56.341)- Legal Fees-Makati 56 Exhibit "WWW", Annex "B-2".

DECISION CTA Case No. 7787 Page 19 of32 Winthrop Q00-1-A.4 000-4-C.2.2b November and 563 410.00 QQQ-6-A.2 QQQ-4-C.2.2 December 2004 Amec Q00-6-A.2 OQQ-4-C.2.2 ($10,000 at 56.341)- 563 410.00 Legal Fees-Makati RW Beck 394 387.00 Sub-total December 2004 p 1 633 889.00 ($10,000 at 56.341)- Pll 628 588.07 Consultancy Fees- Makati December 2004 ($7,000 at 56.341)- Consultancy Fees- Makati TOTAL Of the Professional Fees of P11,628,588.07, only the amount of P5,621,900.00 represents payments to non-residents, the services of which were performed outside the Philippines. Therefore, the said amount of P5,621,900.00 is exempt from EWT because only income payments to persons residing in the Philippines are subject to creditable withholding tax pursuant to Section 2.57.2 of Revenue Regulations No. 02-98. The amount of P3,931,747.72 pertains to Professional Fees billed prior to December 2004. Considering that the obligation of petitioner to withhold the taxes arose during the periods prior to December 2004, and though billed in consonance with the provisions of Section 2.57.4 of Revenue Regulations No. 2-98 as amended by Revenue Regulations No. 12-01, the same are already barred by prescription. Thus, the said assessment should be cancelled. On the other hand, the Professional Fees in the amount of P441,051.35 should be subjected to EWT as the same refer to billings made in December 2004 for which, at such time, petitioner is already obligated to withhold the corresponding taxes. As regards the remaining amount of P1,633,889.00, it cannot be ascertained when the same was billed or actually paid; thus, the assessment shall be sustained. 3. Professional Fees accrued based on estimated amounts - P1,000,000.0057 I Legal Fees- Makati P l,OOO,OOO.OQ 57 Exhibit "WWW", Annex "B-3".

DECISION CTA Case No. 7787 Page 20 of32 The Independent CPA explained that the Legal Fees-Makati in the amount of Pl,OOO,OOO.OO were Legal Fees accrued due to M.Y. Chua Law Office58, a professional practitioner. The Independent CPA noted that the said accrued Legal Fees, which were not subjected to EWT, were reversed in JV No. 007447 dated January 4, 200559 � Further, on January 27, 2005, petitioner received the actual billing from M.Y. Chua Law Office amounting to Pl,028,100.0060; which was recorded as Legal Fees per APV No. 02064761 � It appears that said amount of Legal Fees were subjected to 15% EWT and the taxes due were remitted to the BIR on February 9, 2005.62 Considering the foregoing, the said assessed item must be cancelled. 4. Reclassification of input VAT to expense accounts - P609,694.1463 Reclassification of input VAT to expense p 76,665.50 TOTAL accounts (40,285.86) P36,379.64 Legal Fees - Makati 521 520.00 521,520.00 0 & M Consultancy Fees Expense - Makati Consultancy Fees - 0 & M 51,794.50 51,794.50 Total p 609,694.14 P609,694.14 The amount of P88,174.1464 shows re-classification of input VAT to expense account with previous vouchers supporting the original entry made/transaction taken up in the GL supported by journal vouchers65 with related billing statements, official receipts or sales invoices66 � Original transactions and journal entry were taken up in the books prior to December 2004 and pertains to billing from GPP and non-resident; hence, not subject to EWT. The reclassification of input VAT to O&M Consultancy Fees _A Expense-Makati amounting to P521,520.0067 for Sithe Philippines 58 Exhibit "QQQ-1-C.5-1". i� 59 Exhibit "QQQ-1-C.5.2". 60 Exhibit "QQQ-1-C.5.1 0". 61 Exhibit "QQQ-1-C.5.6". 62 Exhibits "QQQ-1-C.5.13" to "QQQ-1-C.5.14". 63 Exhibit "WWW", Annex "B-4". 64 1'76,665.50 + (1'40,285.86) + 1'51,794.50. 65 Exhibits "QQQ-1-C.11 ", "QQQ-1-C.12" and "QQQ-7-C.1 ". 66 Exhibits "QQQ-!-C.ll.3", "QQQ-!-C.!!.4", "QQQ-!-C.I2.8" and "QQQ-7-C.I.5a" to "QQQ-7-C.I.5g". 67 Exhibits "QQQ-4-A.3" and "QQQ-4-C.3" to "QQQ-4-C.3.4".

DECISION CTA Case No. 7787 Page 21 of32 Holdings, Inc. originally billed and paid in year 2003 should, likewise, not be subjected to EWT since petitioner's obligation to withhold tax therefrom arose in 2003. 5. Others, unverified amount- P7,533.0068 The unverified amount of P7,533.00 included in the "Legal Fees-Makati account" remained unaccounted; thus, the same should still be included in the computation of EWT. 6. Professional Fees subject to EWT- P1,522,864.0169 Subjected to PROFESSIONAL FEES 2% 10% 15% Total SUBJECTED TO EWT p- p 21 000.00 P71,000.00 Legal Fees - Makati p- - - 50 000.00 P969,296.73 Consultancy Fees - Land 124,721.82 - 454 296.73 - 254 545.46 Consultancy Fees - 0 & M - 103,300.00 Mat., Serv.-Surveying Serv.-O&M - 12 500.00 - RASA Survevinq - Mat., Serv.-Dam Monitoring-O&M - 350 000.00 152 500.00 RASA Consultants 124 721.82 - - - 254 545.46 - - - - 103 300.00 Total P124 721.82 P920,096.73 p 478 045.46 P1 522 864.01 The amount of P124,721.82 included under Consultancy Fees - O&M refers to purchase of internet services as evidenced by journal vouchers with related billing statements and official receipts which was properly subjected to 2% EWT. 70 Professional Fee in the amount of P350,000.00 included under Consultancy Fees-Land pertains to payment to Smart Managers Consultancy, Inc.71, which was subjected to 10% EWT instead of the applicable rate of 15% for December 2004. Petitioner claims that it has no tax deficiency after it made an additional payment in th~ 68 Exhibit "WWW", Annex "B-5". 69 Exhibit "WWW", Annex "B-6". 70 Exhibits "QQQ-7-A", "QQQ-7-A.3", "QQQ-7-C.2", "QQQ-7-C.3". "QQQ-7-C.2.4" to "QQQ-7-C.2.5", "QQQ-7-C.3.6", "QQQ-7-C.3.7", "Z", and "000-2-1". 71 Exhibit "QQQ-5-A.5".

DECISION CTA Case No. 7787 Page 22 of32 amount of P17,500.00 on February 26, 2008, supported by BIR Form No. 0605 and BIR official receipt72� However, considering that the withholding tax of P17,500.00 was already due for payment on January 15, 2005 but was remitted only on February 26, 2008, the same shall be imputed with interest computed from January 15, 2005 until February 26, 2008, pursuant to Section 249(A) of the NIRC of 1997. On the other hand, the remaining Professional Fees in the amount of P1,048,142.19 73 which are duly supported by vouchers, , billing statements and official receipts74, were properly subjected to EWT. 7. Consultancy Fees subjected to withholding tax on compensation - P1,406,425.0075 I O&M Consultancy Fees Expense - Makati I P1,406,425.00 I The Independent CPA explained that the amount of P1,406,425.0076 consists of payments to seconded employees which were subjected to withholding tax on compensation; hence, not subject to EWT. Examination of cash vouchers with supporting documents77 and Monthly Remittance Return of Income Taxes Withheld on Compensation78 (BIR Form No. 1601-C) proves that these were properly subjected to withholding tax on compensation. 8. Reversals of Professional Fees previously recorded in November 2004- P7,262,912.4479 Legal Fees - Makati p (1 730 093.00) Audit Expenses - Makati (128,329.44) 0 & M Consultancy Fees Expense - Makati (2,808,050.00) Consultancy Fees - Makati (2,246,440.00) Consultancy Fees - Land (350,000.00) Total p (7,262,912.44) 72 Exhibits "AA" and "AA~l". 73 1'1,522,864.01 less 1'124,721.82 less 1'350,000.00. 74 Exhibits "QQQ�l-A.2", "QQQ�l-A.3", "QQQ-5-A.2", and "QQQ-8-A". 75 Exhibit "WWW", Annex "B-7". 76 Exhibits "QQQ-4-A" and "QQQ-4-A.5". 77 Exhibits "QQQ-4-C.5" to "QQQ-4-C.6". 78 Exhibits "UUU", "UUU-1", and "UUU-2". 79 Exhibit ''WWW", Annex "B-8".

DECISION CTA Case No. 7787 Page 23 of32 The Independent CPA explained that at the beginning of the following month, the accrued expenses of immediately previous month are automatically reversed, i.e., to credit same expense accounts recorded for the prior month-end accruals. At the end of the same month, petitioner would again accrue the estimated expense if actual billing is still pending. However, upon receipt of the actual billing, the amount of accruals will be reversed and the expense would be set-up based on the actual billing.80 Reversals of Professional Fees except reversal for Consultancy Fees-Land of P350,000.00 in the total amount of P6,912,912.4481 previously recorded in November 2004 were properly supported by vouchers82, showing reversals of previously recorded fee/expense accounts accrued in November 2004 with attached journal vouchers prepared in November 2004. The amount of P350,000.00 is just a reclassification from one expense account (Consultancy Fees-Land) to another expense account (Information, Education, Comm Expense)83, already previously subjected to EWT; hence, no additional EWT due. In sum, petitioner should be held liable for deficiency EWT for December 2004, as computed below: EXPANDED WITHHOLDING TAX AMOUNT Leqal Fees - Makati p 750 000.00 p 1,767,233.90 Accrued to GPP 169 023.00 Accrued to GPP 164,585.90 Actually billed and/or paid to non-residents* 112,682.00 Accrued to non-residents** 563,410.00 Accrued to non-residents** 7 533.00 Others unverified amount 276 465.45 1 234 262.45 Consultancy Fees- Makati 563 410.00 Actually billed and/or paid to non-residents* 394 387.00 Accrued to non-residents** Accrued to non-residents** Audit Expenses - Makati 243,602.10 Accrued to GPP Mat., Services - Dam Monitoring - O&M RASA Consultants 80 Exhibit "WWW", p. 12. 81 1'7,262,912.44 less 1'350,000.00. 82 Exhibits "QQQ-1-A.l ", "QQQ-3-A.l ", "QQQ-4-A.l ", and "QQQ-6-A.l ". 83 Exhibits "QQQ-5-A.l" and "QQQ-5-C.5".

DECISION CTA Case No. 7787 Page 24 of32 Mat. Services-Dam Monitoring-Land -unverified 4 800.00 TOTAL P3,249,898.45 EWT Rate 15% Basic EWT Due P487 484.77 Add: 25% Surcharge 121,871.19 Total Amount Due p 609,355.96 Deficiency on Increments for Late Remittance P17,500.00 of Withholding Taxes Smart Managers Consultancy, Inc. [1'350,000.00 x 4,375.00 (15%- 10%)] 10 816.44 15 191.44 Add: 25% Surcharges 20% Interest (01-25-05 to 02-26-08) p 32,691.44 [P17 500.00 X 20% X 1128 days+ 365] 17 500.00 Total tax due P15,191.44 Less: Payments (02-26-08) rP350 00.00 x 5%1 Total Amount Due * Billed 1n December 2004 totaling to 1'441,051.35. ** No Proof of billing/payment totaling to P1,633,889.00 II. Final Withholding Tax Petitioner was assessed for deficiency FWT for taxable year 2004 in the amount of P108,822,142.2984, allegedly for petitioner's failure to provide the loan agreements so as to verify the veracity of the payments on loans, as well as the final withholding taxes paid, computed as follows: Final Tax- On Foreign Banks and Non-Resident Foreign p 64,914,248.00 Corporation 588,904 471.24 Accrued Interest Expense Payable - Beginning I p 653,818 719.24 71,009,131.00 FS p 582 809,588.24 Add: Interest Expense I FS p 58,280 958.82 Total p 164,053 308.15 Less: Accrued Interest Expense Payable - Ending I FS Interest Expense Paid Final Tax on Interest Expense paid to Foreign Banks 10% (Section 28(A)(7)(b) of the N.I.R.C., as amended) Final Tax on dividends declared 32% (Section 28(B)(5)(b) of the N.I.R.C., as amended) 84 Exhibit "4-D", BIR Records, p. 2625.

DECISION CTA Case No. 7787 Page 25 of32 Other Payments to Non-Resident Foreign Corporations Consultancy Fee Paid to: SHKPSL Notes to FS no. 17 P13 912 812.00 KPIC Notes to FS no. 17 35 313 747.00 HARZA Per trial balance 5,770 879.07 Commitment fee paid to KPIC Notes to FS no. 8,580 216.00 17 TOTAL P63 577 654.07 Final Tax on Other payments to non-resident foreign corporations_132%) {Section 28(8)(1) of the N.I.R.C., as amended} p 20,344,849.30 p 242,679,116.28 Total Final Tax per Audit 175,296,984.83 Less: Final Tax remitted p 67 382,131.45 Balance 41,440,010.84 20% Interest {Section 249(A) of the N.I.R.C., as amended} Total Amount Due P108,822,142.29 To summarize, the assessment is composed of the following: Final Tax on: P58,280,958.82 164,053,308.15 Interest Expense paid to Foreign Banks (10%) Dividends declared (32%) P20,344 849.30 Payments to non-resident foreign corporations (32%) Records indicate that the final tax on dividends declared amounting to P164,053,308.15 was remitted on September 8, 2004, as evidenced by BIR Form No. 1601-F for August 200485� No dividend declaration or payment was recorded for December 2004; thus, there are only two components left for discussion, namely: the final tax on interest expense paid to foreign banks in the amount of P58,280,958.82 and the final tax on payments to non-resident foreign corporations in the amount of P20,344,849.30. A. Final tax on interest expense paid to foreign banks P58,280,958.82 85 Exhibit "II".

DECISION CTA Case No. 7787 Page 26 of32 Per Detailed General Ledger'l6, total interest expense balance recorded for the month of December 2004 amounts to only P49,890,550.88, to wit: Interest Expense Exhibit Balances Exhibit Balance for for the year December Tranche A RRR-2-b RRR-2-a Tranche B RRR-2-d 2004 RRR-2-c 2004 I' I' 291,223 976.14 24,907,333.82 186 913 781.78 15 495 359.19 Tranche C RRR-2-f 110 766 713.30 RRR-2-e 9 487 857.87 I' I' Total Amount per GL RRR-1 588,904 471.22 49,890,550.88 Computations of interest expense are broken down to Tranches A, B, and C Credit Agreements to determine the portions which are exempted from Philippine income taxation and which are subject to preferential tax rate of 10%. Petitioner submits that the interest payments made to foreign banks noted by respondent were for the (a) loans from the Export- Import Bank of Japan (JEXIM)-Tranche A Senior Loans; (b) syndicated loans from the private sector guaranteed by JEXIM- Tranche B Senior Loans; and (c) syndicated loans from the private Sector-Tranche C Senior Loans. The loans financed or guaranteed by JEXIM were pursuant to JEXIM Credit Facility Agreement87, JEXIM Participation AgreementB8, and Political Risk Guarantee AgreementB 9 � While, the loans financed by the private sector were pursuant to the Tranche C Credit Agreement90� Of the total interest expense recorded for the month of December 2004 totaling to P49,890,550.88, P40,402,693.01 pertains to interest expense on Tranches A and B loans which was not subjected to FWT caused by petitioner's reliance on BIR Ruling DA- ITAD No. 113-03 dated August 1, 2003.91 Only the amount of P9,487,857.87 interest expense on Tranche C loan agreement for the r month of December 2004 was subjected to 10% final tax, which was~ duly remitted on January 12, 2005.92 86 Exhibits "RRR-2.1" to "RRR-2.12". 87 Exhibits "RRR-4-B" and "RRR-7". 88 Exhibit "RRR-5". 89 Exhibit "RRR-6". 90 Exhibit "RRR-4-C.l" to "RRR-4-C.46". 91 Exhibit "FFF". 92 Exhibits "MM" and "RRR-14-L"

CDPaTEgACe I2CS7aIsOoefNN32o. 7787 Considering that the facts set out in BIR Ruling No. DA-ITAD 113-03 and those facts uncovered in petitioner's documentary evidence93 are the same, the opinion of respondent in said BIR Ruling deserves respect. Thus, following by analogy the ruling in Commissioner of Internal Revenue vs. San Roque Power Corporatiorr4, petitioner can legally rely on BIR Ruling No. DA-ITAD 113-03 from the time of its issuance until after it will be reversed. As confirmed in BIR Ruling No. DA-ITAD 113-03, the interest income derived by petitioner's non- resident foreign lender-banks from loans financed or guaranteed by the Export-Import Bank of Japan (JEMIX), being a financial institution wholly owned by the Japanese government, is exempt from Philippine income tax. B. Final Tax on payments made to non-resident foreign corporations - P20,344,849.30. 1. Consultancy Fees paid to SHKPSL, KPIC and HARZA - P54,997,438.07 The Independent CPA summarized the Consultancy Fees paid to SHKPSL (SHKPS or Sithe Hong Kong Power Services, Ltd.), KPIC (Kansai Power International Corporation), and HARZA (HECI or Harza Engineering Company International, L.P.) recorded in December 2004 as follows: Consultancy Fee Total Total Amount Exhibit Total 5H KP5 traced to Note Amount recorded prior 555-5-A Transactions 17 of AF5 to December recorded in KPIC traced to Note I' 17 of AF5 13 912 812.00 2004 December HECI traced to trial 2004 balance 35 313 747.00 I' 13 912 812.50 I' (0.50) Total 5 770 879.07 p 31 102 471.57 555-5-B 4,211 275.43 54,997,438.07 5 296 683.37 555-5-C 474 195.70 p p 50,311,967.44 4,685,470.63 r Based on records, there were no consultancy payments to ~~x~:~.:::_4~:~''R::~,~:R:5'~::::,~:~R~~,~~:.RR=:~D"~~n:~~R:~~~~,~~R-~~ 94 GJ"..R. No. 187485, February 12,2013, pp. 39 to 40.

DECISION CTA Case No. 7787 Page 28 of32 SHKPS amounting to P13,912,812.50 pertain to Consultancy Fee for the period prior to December 2004, which shall be cancelled outright as the same are already barred by prescription. As regards the Consultancy Fees in the amount of P4,685,470.63, the Independent CPA, based on his further examination of vouchers, invoices, billings and related documents for the month of December 2004, noted the following: 95 Materials, O&M Services- Consultancy Consultants Findings Fees-Makati (DA-O&Ml Total Exhibit QQQ-4-A.4 a. Consultancy fee for QQQ-4-A.5, seJVices rendered QQQ-4-C.6 QQQ-4-A.5, offsite from November QQQ-4-C.5 1-30, 2004 pursuant to 555-5-C the O&M Consulting 555-5-C Agreement with JV, invoice from KPIC, recorded only December 2004 I' 2,804,850.00 1'2,804,850.00 b. Payments to Mr. Kiyoshi Washihira seconded to the Company-subjected to withholding tax on compensation 656 331.85 656 331.85 c. Payments to Mr. Naoki Kobayashi seconded to the Company- subjected to withholding tax on compensation 750 093.15 750 093.15 d. Payment for Professional fees rendered for the offsite activities relative to the review of reports as described in Project Activities for Period November 1-30, 2004 recorded only December 2004 192 490.70 192 490.70 e. Professiona I fees accrued for December 2004 with JV and schedule of expense accrual for offsite seJVices 281,705.00 281,705.00 I' p Total 4,211,275.00 474195.70 1'4,685,470.70 r The Consultancy Fee for services rendered offsite in the amount of P2,804,850.00 pursuant to Operation and Maintenance 95 Exhibit "WWW", pp. 23 to 24.

DECISION CTA Case No. 7787 Page 29 of32 ("O&M'') Consulting Agreement with SHKPS96, Amended and Restated Operation and Maintenance Consulting Agreement97, and Amendment Agreement with KPIC98 with related supporting documents99 pertains to payments to non-residents for services rendered outside the Philippines; hence, exempt from income tax and FWT. With regard to payments to seconded employees, Mr. Kiyoshi Washihira and Mr. Naoki Kobayashi, in the amount of P1,406,425.00100, the same were properly subjected to withholding tax on compensation, as evidenced by Monthly Remittance Return of Income Taxes Withheld on Compensation101 (BIR Form No. 1601-C). Accordingly, the said payments are not subject to FWT. Anent the amount of P192,490.70, which refers to payment to HECI under Consulting and Professional Services Agreement102, a scrutiny of the supporting sales invoice103 shows that the services involved were rendered outside the Philippines. Hence, it should be considered income derived from sources outside the Philippines and not subject to Philippine income tax as well as to FWT. The Professional Fees accrued for HECI's offsite services in the amount of P281,705.00 (letter "e'') were supported by Consulting and Professional Services Agreement104, vouchers, schedule of expense accrual, and invoices105; thus, not subject to FWT. 2. Commitment Fee paid to KPIC - P8,580,216.00 Based on the Schedule of Professional Fees-KPIC106, accounts payable/journal vouchers, invoices and other relevant supporting documents107, Commitment Fee paid to KPIC amounting to P8,580,216.00 involves transactions prior to December 2004. r Therefore, the assessment pertaining thereto shall be cancelled due}\ to prescription. 96 Exhibit "SSS-1 ". 97 Exhibit "SSS-2". 98 Exhibit "MMM". 99 Exhibits "QQQ-4-C.4" and "QQQ-4-C.4.2" to "QQQ-4-C.4.4". 100 1'656,331.85 add 1'750,093.15. 101 Exhibits "UUU'', "UUU-1", and "UUU-2". 102 Exhibit "SSS-3". 103 Exhibits "SSS-5-C-12.3a" to "SSS-5-C-12.3c". 104 Exhibit "SSS-3". 105 Exhibits "SSS-5-C" and "SSS-5-C-11" to "SSS-5-C-12". 106 Exhibit "SSS-6". 107 Exhibits "SSS-6-A-1" to "SSS-6-A-6".

DECISION CTA Case No. 7787 Page 30 of32 To recapitulate, the assessment for the entire FWT shall be cancelled while the assessment for deficiency expanded withholding tax for December 2004 shall be reduced to P487,484.77. Additionally, petitioner is liable to pay surcharge in the amount of P121,871.19 (P487,484.77 at 25%), pursuant to Section 248(3) of the NIRC of 1997; interest at the rate of 20% per annum on the basic deficiency EWT of P487,484.77, computed from January 15, 2005 until full payment thereof, pursuant to Section 249(A) of the NIRC of 1997; and delinquency interest at the rate of 20% per annum on the basic deficiency EWT of P487,484.77, computed from February 14, 2008 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997. As regards the late remittance of the balance of the EWT on the Professional Fees (Consultancy Fees-Land) in the amount of P17,500.00, petitioner is liable to pay respondent interest thereon at the rate of 20% per annum from the date prescribed for its payment (i.e., on January 15, 2005)108 until the full payment of the said balance on February 26, 2008, equivalent to the amount of P 10,902.50, pursuant to Section 249(A) of the NIRC of 1997. WHEREFORE, in view of the foregoing considerations, the Petition for Review is PARTIALLY GRANTED. The deficiency final withholding tax for December 2004 is hereby CANCELLED and SET ASIDE, while the assessment for basic deficiency EWT for December 2004 is hereby REDUCED to P487,484.77. Moreover, petitioner is hereby ORDERED to pay respondent the said basic deficiency EWT, and the following surcharge and interests, to wit: 1) surcharge in the amount of P121,871.19 (P487,484.77 at 25%), pursuant to Section 248(3) of the NIRC of 1997; 2) interest at the rate of 20% per annum on the basic deficiency EWT of P487,484.77, computed from January 15, 2005 until full payment thereof, pursuant to Section 249(A) of the NIRC of 1997; and 3) delinquency interest at the rate of 20% per annum on the _ _ _ _b_a_si_c_d_e_fi_ciency EWT of P487,484.77, computed from~ 108 Section 2.58(A)(2), Revenue Regulations No. 2-98, as amended.

DECISION CTA Case No. 7787 Page31 of32 February 14, 2008 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997. Lastly, as regards the late remittance of the balance of the EWT on the Professional Fees (Consultancy Fees-Land) in the amount of P17,500.00, petitioner is hereby ORDERED to pay respondent interest thereon at the rate of 20% per annum from the date prescribed for its payment (i.e., on January 15, 2005)109 until the full payment of the said balance on February 26, 2008, equivalent to the amount of P 10,902.50, pursuant to Section 249(A) of the NIRC of 1997. SO ORDERED. . ER~.UY Associate Justice I CONCUR: ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. � E~P.UY Associate Justice Chairperson 109 Section 2.58(A)(2), Revenue Regulations No. 2-98, as amended.

DECISION CTA Case No. 7787 Page 32 of32 CERTIFICATION Pursuant to Section 13 of Article VIII 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