SURPLUS MARKETING CORPORATION v, COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY THIRD DIVISION ********* SURPLUS MARKETING CTA Case No. 9290 CORPORATION, Members: Petitioner, UY, Chairperson, -versus- RINGPIS-LIBAN, and MODESTO -SAN PEDRO, JJ. COMMISSIONER OF INTERNAL Pr omulgated: REVENUE, J / ' . c..--,.__ y; ~ Respondent. ..-?'! � X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION UY, J.: Before this Court is a Petition for Review filed by Surplus Marketing Corporation , petitioner, on March 11 , 2016, against the Commissioner of Internal Revenue, respondent, praying for the cancellation and setting aside of respondent's Final Decision, finding petitioner liable for alleged deficiency taxes, penalties and interests for taxable year 2010, listed as follows : (a) Income Tax in the amount of P145,271 ,573.72 ; (b) Improperly Accumulated Earnings Tax in the amount of P19,51 0,137.37; (c) Value Added Tax in the amount of P229,470,890.49; (d) Expanded Withholding Tax (EWT) in the amount of P 7 3 9 ,029 .64 ; (e) Withholding Tax on Compensation (WTC) in the amount of P5,921 ,671. 78; (J (f) Documentary Stamp Tax in the amount of P223,699.24.

DECISION CTA Case No. 9290 Page 2 of61 THE FACTS Petitioner Surplus Marketing Corporation, is a corporation duly organized and existing under the laws of the Philippines. It is primarily engaged in the business of trading such as, but not limited to garments on a wholesale and retail basis. 1 Petitioner may be served with notices, pleadings and other processes at Suite 1102, 11th Floor, 139 Corporate Center 139 Valero Street, Salcedo Village, 1227 Makati City. 2 On the other hand, respondent Commissioner of internal Revenue (CIR) is being sued in his official capacity as the head of the Bureau of Internal Revenue (BIR), having been duly appointed to exercise the powers and perform the duties of his office including, inter alia, the power to decide disputed assessments, refunds or internal revenue taxes, fees and other charges, penalties imposed in relation thereto, or other matters arising under the Tax Code. 3 Respondent holds office and may be served with summons, notices and other processes at the 5th Floor, BIR National Office Bldg., BIR Road, Diliman, Quezon City.4 On April 29, 2011, petitioner filed its Annual Income Tax Return (ITR) for taxable year (TY) 2010. 5 On September 23, 2011, the BIR Large Taxpayers Regular Audit Division 1 issued Letter of Authority (LOA) No. LOA-116-2011- 00000137 authorizing Revenue Officers Olivia Aviles, Aurora Pelayo, Olivia Sison, Rogelio Gonzales, Riza Sudano and Group Supervisor Marivic Bautista to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for the period from January 1, 2010 to December 31, 2010 pursuant to Audit Criteria forTY 2009 and 2010. 6 Thereafter, petitioner, through Cecilia R. Patricio, executed five (5) Waivers of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code to wit: 1 Par. 1, Admitted Facts, Joint Stipulation ofFacts and Issues (JSFI), Docket- Vol. 4, p. 2123. 2 Par. 2, Admitted Facts, JSFI, Docket- Vol. 4, p. 2123. 3 Par. 3, Admitted Facts, JSFI, Docket- Vol. 4, p. 2123. r 4 JSFI, Admitted Facts, par. 4, Docket- Vol. 4, p. 2123. 5 Exhibit "P-10-a", Docket- Vol. 5, pp. 2489 to 2491. 6 Exhibit "P" and "R-1", BIR Records, Folder I, p. 4.

DECISION CTA Case No. 9290 Page3of61 Waivers Date of Execution Prescriptive period of BIR's right to assess 15' Waiver May 29, 2013' 2"0 Waiver September 23, 2013� December 31,2013 3'd Waiver June 30, 2014 4m Waiver March 3, 2014~ 5'" Waiver July 18, 2014w September 30, 2014 October 20, 201411 December 31, 2014 March 31,2015 On August 13, 2014, respondent issued a Preliminary Assessment Notice (PAN)12 assessing petitioner for deficiency taxes for the taxable year 2010, broken down as follows: Tax Basic Surcharge Interest Compromise Total Type Amount Penalty IT 121,436,023.32 - 80,147,775.39 50,000.00 201,633,798.71 IAET 13,966,929.30 9,637,181 22 25,000.00 27,120,842.85 VAT 156,245,041.45 3,491 '732.33 107,809,078.60 50,000.00 264,104,120.05 EWT 25,000.00 WTC 938,241.02 - 655,830.47 25,000.00 1,619,071.49 DST 7,313,100.88 - 5,046,039.61 20,000.00 12,384,140.49 Reg. 309,136.10 - 213,303.91 3,000.00 619,724.04 Fee 12,500.00 8,625.00 24,125.00 77,284.03 - On February 5, 2015, petitioner received a copy of the Formal Letter of Demand (FLO) with Details of Discrepancies and Audit ResuiUAssessment Notices13 from Nestor S. Valeroso, Ole- Assistant Commissioner, Large Taxpayer Service assessing petitioner for alleged deficiency taxes, penalties and interest for the taxable year 2010, as follows: 14 Tax Basic Surcharge Interest Compromise Total Type Amount Penalty IT 81,936,096.59 - 66,204,366.05 50,000.00 148,190,462.64 IAET 8,966,929.30 7,395,026.59 25,000.00 18,628,688.22 VAT 132,254,361.69 2,241,732.33 107,985,686.32 50,000.00 EWT 307,203.78 16,000.00 240,290,048.01 WTC 372,503.68 - 2,505,401.97 25,000.00 695,707.46 3,037,955.58 - 5,568,357.55 - 7 Exhibit "R-3", BIR Records, Folder I, p. 543. 8 Exhibit "R-4", BIR Records, Folder I, p. 544. 9 Exhibit "R-5", BIR Records, Folder I, p. 546. 10 Exhibit "R-7", BIR Records, Folder I, p. 669. 11 Exhibit "R-9", BIR Records, Folder I, p. 670. 12 Exhibit "R-8", BIR Records, Folder 1, pp. 619 to 626. 13 Exhibit "R-11 ", BIR Records, Folder 1, pp. 684 to 698. 14 Par. 6, Admitted Facts, JSFI, Docket- Vol. 4, p. 2124~

DECISION CTA Case No. 9290 Page 4 of61 DST 109,136.10 27,284.03 90,004.54 12,000.00 238,424.67 TOTAL 226,676,982.94 2,269,016.36 184,487,689.25 178,000.00 413,611 ,688.55 On March 9, 2015, petitioner filed with respondent its protest letter15 to the FLO questioning the validity of the said assessments for lack of factual and legal bases. 16 On October 16, 2015, petitioner received a copy of the Final Decision on Disputed Assessment (FDDA)17 denying petitioner's protest in part and finding petitioner liable for alleged deficiency taxes, penalties and interests for TY 2010 in the total amount of P401, 137,002.25, broken down as follows: 18 Tax Basic Surcharge Interest Compromise Total TY!l_e Amount Penalty IT 75,518,239.06 - 69,703,334.66 50,000.00 145,271,573.72 IAET 8, 966,929.30 8,276,475.74 25,000.00 19,510,137.37 VAT 2,241 '732.33 50,000.00 EWT 118,319,180.24 111,101,710.25 16,000.00 229,470,890.49 WTC - 25,000.00 739,029.65 DST 372,503.68 350,525.96 12,000.00 3,037,955.58 - 2,858,716.20 5,921,671.79 - 223,699.24 109,067.10 102,632.14 - TOTAL 206,323,874.97 2,241,732.33 192,393,394.95 178,000.00 401 '137,002.25 Petitioner filed a letter re~uesting for reconsideration before the CIR on November 16, 2015. 1 Thereafter, on February 12, 2016, petitioner received a denial lette~0 from the CIR of petitioner's request for reconsideration reiterating the assessment contained in the FDDA.21 Subsequently, petitioner filed the instant Petition for Review on March 11, 2016 assailing the said assessment. Respondent filed his Answer on June 20, 2016, 22 interposing the following special and affirmative defenses: (1) That there was no error or illegality that can be ascribed to respondent's assessment of 15 Exhibit "P-7" and Exhibit "R-12", BIR Records- Vol. 1, pp, 699 to 744. 16 Par. 7, Admitted Facts, JSFI, Docket- Vol. 4, p. 2124. 17 Exhibit "P-6" and Exhibit "R-14", BIR Records- Vol. 1, pp. 797 to 808. 18 Par. 8, Admitted Facts, JSFI, Docket- Vol. 4, p. 2124 to 2125. 19 Exhibit "P-8" and Exhibit "R-15", BIR Records- Vol. 1, pp. 809 to 848. 20 Exhibit "P-1" and Exhibit "R-1 7", BIR Records- Vol. 1, p. 854. 21 Par. 9, Admitted Facts, JSFI, Docket- Vol. 4, p. 2125. 22 Docket- Vol. 3, pp. 1435 to 1443~

DECISION CTA Case No. 9290 Page 5 of61 petitioner's deficiency tax liability, as respondent properly appraised petitioner of its tax deficiencies; and (2) That the law heavily presumes upon the favor of the propriety and exactness of the tax assessments. Pre-trial conference was initially set on October 13, 2016?3 However, upon motion of petitioner filed on September 27, 2016, 24 and without objection from respondent, 25 Pre-Trial Conference was reset to February 9, 2017.26 Petitioner filed its Pre- Trial Brief on February 3, 2017,27 while respondent filed her Pre- Trial Brief on February 6, 2017.28 After the Pre-Trial Conference held on February 9, 201729, petitioner filed a Motion to Allow the Engagement of an Independent Certified Public Accountant was filed on February 17, 2017. 30 On February 27, 2017, the parties filed their Joint Stipulation of Facts and Issues, 31 which was approved in the Resolution dated March 9, 2017. 32 Thus, Pre-Trial was deemed terminated and the Court subsequently issued the Pre-Trial Order dated March 27, 2017. 33 During trial, petitioner presented Elrey T. Ramos, 34 the Court commissioned Independent Certified Public Accountant (ICPA) and Florita V. Sabangan, 35 petitioner's Accounting Manager. On September 22, 2017,36 petitioner filed its Formal Offer of Evidence without respondent's comment despite due notice.37 23 Docket- Vol. 3, p. 1445 to 1446. 24Petitioner's "Motion for Cancellation ofthe October 13, 2016 Pre- Trial Conference", Docket- Vol. 3, p. 1454 to 1456. 25 Respondent's "Comment" filed on October 4, 2016, Docket- Vol. 3, p. 1459 to 1461. 26 Order dated September 30,2016, Docket- Vol. 3, p. 1457. 27 Docket- Vol. 3, pp. 1473 to 1480. 28 Docket- Vol. 3, pp. 2021 to 2024. 29 Docket- Vol. 4, pp. 2032 to 2034. 30 Petitioner's "Motion to Allow the Engagement of an Independent Certified Public Accountant" was granted by the Court in the Order dated April4, 2017, Docket- Vol. 4, pp. 2041 to 2043 and Docket- Vol. 4, pp. 2173 to 2175, respectively. 31 Docket- Vol. 4, pp. 2123 to 2131. 32 Resolution dated March 9, 2017, Docket-Yo!. 4, pp. 2139-A to 2139-B. 33 Docket- Vol. 4, pp. 2154 to 2164. 34 Exhibit "P-77", Docket- Vol. 4, pp. 2352 to 2421; Exhibit "P-81", Docket -Vol. 5, pp. 2877 to 2881. 35 Exhibit "P-33", Docket-Yo!. 3, pp. 1484 to 1525. 36 Docket- Vol. 5, pp. 2437 to 2475. 37 Records Verification Report dated October 13, 2017, Docket- Vol. 5, p. 2825;

DECISION CTA Case No. 9290 Page6of61 In the Resolution dated December 6, 2017, the Court admitted some of petitioner's evidence, while those exhibits that were not found in the records of the case and those exhibits that were formally offered but failed to correspond with the documents actually marked, were denied admission. Hence, petitioner filed a Motion for Partial Reconsideration (of the Resolution promulgated on December 6, 2017) on December 22, 2017, 38 praying that the Court partially reconsider the assailed Resolution, to allow resubmission of the denied exhibits, to set a hearing for the identification of the USB containing said exhibits and to allow petitioner to re-offer same documents. For his part, respondent interposed his objection thereto in his Comment to Petitioner's Motion for Partial Reconsideration filed on January 19, 2018. 39 On March 14, 2018, the Court granted petitioner's motion to allow re-submission of re-marked exhibits and set a hearing for the identification of the USB containing said exhibits. Thus, resolution of petitioner's Motion for Partial Reconsideration of the Resolution promulgated on December 6, 2017 was held in abeyance.40 Petitioner filed its Manifestation and Compliance (Re: Resolution promulgated on March 14, 2018) on March 26, 2018.41 Subsequently, petitioner filed a Supplemental Formal Offer of Evidence for the Petitioner on April10, 2018. 42 On July 4, 2018, the Court partially granted petitioner's Motion for Partial Reconsideration of the Resolution promulgated on December 6, 2017 and admitted the exhibits in petitioner's Supplemental Formal Offer of Evidence. 43 On September 21, 2018, the instant case was transferred to this Court's Third Division pursuant to CTA Administrative Circular No. 02-2018, "Reorganizin~ the Three (3) Divisions of the Court" dated September 18, 2018. 38 Docket- Vol. 5, pp. 2839 to 2848. 39 Docket- Vol. 5, pp. 2852 to 2854. 40 Docket- Vol. 5, pp. 2864 to 2869. 41 Docket- Vol. 5, pp. 2871 to 2873. 42 Docket- Vol. 5, pp. 2888 to 2893. 43 Docket- Vol. 5, pp. 2903 to 2906. 44 Order dated September 21, 2018, Docket- Vol. 5, p. 2910~

DECISION CTA Case No. 9290 Page 7 of61 Subsequently, respondent presented his sole witness, Revenue Officer (RO) Aurora Pelayo on January 17, 2019.45 On February 4, 2019, respondent filed his Formal Offer of Evidence, 46 with petitioner's Comment (on the Respondent's Formal Offer of Evidence) filed on February 13, 2019. 47 Thereafter, the Court admitted all of respondent's documentary evidence on March 15, 2019 48 On April 17, 2019, respondent filed his Manifestation stating that he is adopting the arguments raised in his Answer in lieu of filing a Memorandum. 49 On the other hand, petitioner filed a Motion for Extension of Time to Submit Petitioner's Memorandum on April 24, 2019, praying for an additional period of twenty (20) days from April 25, 2019, or until May 15, 2019, to file its memorandum.50 The Court granted the same on May 2, 2019.51 On May 15, 2019, petitioner filed its Memorandum. 52 Consequently, this case was submitted for decision on May 20, 2019.53 Hence, this Decision. THE ISSUE The parties stipulated a sole issue for this Court's resolution, to wit: "Whether or not petitioner is liable for the alleged deficiency taxes for the taxable year 2010 in the aggregate amount of P401, 137,002.24, inclusive of penalties and interests; which alleged deficiencies were assessed per Final Decision on Disputed Assessment ("FDDA") and was sustained by the respondent in his (sic) Final Decision denying the Motion for Reconsideration on the FDDA." 54 45 Minutes of the hearing and Order dated January 17, 2019, Docket- Vol. 5, pp. 2912 to 2913. 46 Docket- Vol. 5, pp. 2915 to 2921. 47 Docket- Vol. 5, pp. 2923 to 2930. 48 Docket- Vol. 5, pp. 2934 to 2935. 49 Docket- Vol. 5, pp. 2936 to 2937. 50 Docket- Vol. 5, pp. 2939 to 2941. 51 Order dated May 2, 2019, Docket- Vol. 5, p. 2944. 52 Docket- Vol. 5, pp. 2945 to 3002. 53 Resolution dated May 20, 2019, Docket- Vol. 5, p. 3004. 54 Issue, JSFI, Docket- Vol. 4, p. 2125~

DECISION CTA Case No. 9290 Page 8 of61 Petitioner's arguments: In assailing respondent's assessments of deficiency taxes, petitioner raises the following arguments, to wit: INCOME TAX Petitioner disputes the adjustments in the taxable income per Income Tax Return, itemized as follows: A. Under-Declaration of Sales Petitioner alleges that it has no under-declaration of sales and assails respondent's assessment on the following grounds: (1) The assessment is based on unverified third-party information derived from SIR's system; (2) Respondent's use of extrapolation method in arriving at what it deemed undeclared sales is highly speculative; and (3) The purchase transaction is not a basis for assessing income tax. B. Disallowed Sales Returns and Allowances The discount fees and sales discounts which comprise the disallowed "sales returns and allowances" are supported and, thus, are valid deductions for purposes of computing any alleged income tax liability of petitioner. C. Disallowed Expenses Respondent erred in disallowing deductible expenses in the amount ofP27,724,704.62. Allegedly, these expenses should not be disallowed because these are valid deductions from petitioner's gross income and are duly supported. Thus, this assessment should be cancelled for lack of factual or legal bases. D. Disallowed Expenses Due to Non-withholding of Tax The deficiency assessment for Expanded Withholding Tax (EWT) in the amount of P1 0,373, 770.13 should be cancelled for want of factual or legal bases. At the very least, the same should be reduced insofar as it was able to prove that portion of expenses which are exempt from withholding tax pursuant to Revenue Regulations No. 2-98 as amended.~

DECISION CTA Case No. 9290 Page9of61 E. Unsupported Creditable Tax Withheld Tax credits claimed in its ITR were supported by BIR Form 2307 which were reviewed and verified by the ICPA and only the amount P13,506.23 were found to be unsupported. IMPROPERLY ACCUMULATED EARNINGS TAX Petitioner contends that the unappropriated Retained Earnings (RE) of P24,285,696.00 was the proper amount that should be considered in computing Improperly Accumulated Earnings Tax (IAET). Thus, respondent's deficiency assessment must be cancelled. Petitioner further asserts that it will be deprived of its right to due process because the alleged IAET liability of petitioner for CY 2010 was based on wrong facts and figures. VALUE-ADDED TAX A. Undeclared Income The deficiency VAT assessment is allegedly without factual or legal bases. Petitioner asserts that there was failure of respondent to present the required Certifications I Sworn Statements required under Revenue Memorandum Orders No. 42-2003 and 46-2004. That in the absence of the said Certifications/Sworn Statements, the assessment is based on unverified data and are therefore mere presumptions. B. Disallowed Input Due to Failure to Comply with Invoicing Requirement The subject invoices having been issued by VAT-registered suppliers are substantially compliant with invoicing requirements and should not affect the related input tax claim of the petitioner. EXPANDED WITHHOLDING TAX (EWT) A. Disallowed Expenses Due to Non-Withholding of EWT Petitioner contends that its reconciliation on the alleged disallowed expenses due to non-withholding of EWT showed reduced difference that the ICPA was able to confirm through his independent audit./D

DECISION CTA Case No. 9290 Page 10 of61 B. Purchases not subjected to EWT per Summary List of Purchases (SLP) vs Audit Information Tax Exemption and Incentives Division (AITEIO) The BIR examiners allegedly captured incorrect amount of sales and that respondent's deficiency assessment on EWT is simply based on a mere assumption and not on facts, and the same must be cancelled and set aside. WITHHOLDING TAX ON COMPENSATION Anent the salaries per Financial Statement (FS), petitioner alleges that the BIR examiners were not able to capture the correct amount of salaries, wages and employee benefits reported in petitioner's FS and ITR. As verified by the ICPA, salaries, wages and employee benefits per audited FS amounted to P94,792,410.93 and not P75,099,717.95 as claimed by the BIR. With regard to gross compensation per Alphalist, petitioner alleges that the BIR examiners did not capture the correct amount of compensation of minimum wage earners duly reflected in the Alphalist of employees. In addition, the gross compensation used by the BIR examiners in other items under this assessment refer only to the taxable compensation extracted by the BIR examiners from the Alphalist of Employees and did not consider the non-taxable compensation. Petitioner also disagrees with the use of the maximum withholding rate of 32% in the assessment. Rather, petitioner contends that it may be more reasonable to follow the method used by the ICPA, considering that only a few of petitioner's employees earns more than P500,000.00 net taxable compensation. Lastly, petitioner submits that the ICPA was able to validate based on the evidence and reconciliations, that the difference between salaries and wages per financial statements against the alphalist per BIR assessment should be reduced to P1 ,971,379.05 and the corresponding basic deficiency tax assessment should also be reduced to P142,816.23. DOCUMENTARY STAMP TAX (DST) The DST due on all rental payments under existing lease contracts are allegedly being remitted to the BIR by the lessor!

DECISION CTA Case No. 9290 Page II of61 verified by the ICPA. Hence, the DST deficiency assessment is without factual and/or legal bases. COMPROMISE PENALTY Petitioner disagrees with the imposition of the compromise penalty by respondent. Petitioner asserts that it may not be compelled to pay the same because by its very nature it implies mutual agreement between the parties in respect to the thing or subject which is so compromised. Allegedly, the choice of paying or not paying it distinctly belongs to the taxpayer. Respondent's counter-arguments: Respondent counter-argues that petitioner was informed of the factual and legal bases of the subject deficiency tax assessment through various assessment notices issued during the course of the administrative audit of its tax deficiencies. Clearly, the Details of Discrepancies found in the FLO/FAN attached to the Petition as Annex "F", confirms that respondent was informed of the factual and legal bases of the assessment pursuant to Section 228 of the 1997 NIRC, as amended. Contrary to petitioner's arguments, RMO No. 46-2004 deserves no consideration in the determination of this case. RMO No. 46-2004 was issued to provide additional supplement and guidelines in handling Letter Notices. The instant case involves an audit of all its internal revenue taxes pursuant to Audit Criteria for Taxable Years 2009 and 2010. Thus, to belabor a discussion thereon would be futile considering the inapplicability of the cited RMO to this case. Moreover, respondent submits that the law heavily presumes upon the favor of the propriety and exactness of tax assessments. Allegedly it is up to petitioner to present evidence to establish the inaccuracy or outright invalidity of the assessment made against it. Corollarily, petitioner's failure to do so further confirms the propriety and exactness of the assessment. THE COURT'S RULING The instant Petition for Review is partly meritoriousfl

DECISION CTA Case No. 9290 Page 12 of61 Factual and legal bases of the assailed assessments In the FDDA, respondent assessed petitioner for deficiency income tax, IAET, VAT, EWT, WTC and DST in the aggregate amount ofP145,271,573.72, broken down as follows: Taxable incomeoer return P57,156,877.00 Add: Adiustments A.1 199,443,221.84 205,009,710.63 A. Under-declaration of sales A.1.1 5,566,488.79 8,550,666.00 1. Gross Profit on local ourchases !RMO 42-2003l A.1.2 2. Gross Income (per book vs ITRl A.2 6,351,858.62 38 098 474.95 A.3 21,372,846.00 308,815,728.58 B. Sales returns and allowances A.3.1 10 373 770.33 C. Disallowed exoenses A.3.2 30% A.4 16,397,961.00 92,644,718.57 1. Advertisino 1,401,663.00 2. DePreciation A.5 1,230,976.00 17 126 479.51 75,518,239.06 D. Not subiected to EWT 19 030 600.00 Taxable Income oer Audit (20,593.49) 697;~ Rate Tax due oer audit (1 883 527.00l Less: UnexPired excess of prior vear's MCIT over RCIT 69,703,334.66 Pavment for the 1' 3 ouarters 50 000.00 CWT oer audit TotafOer return Less: Unsuooorted CWT CWT carried over to the next auarter Deficiencv income tax Add: lnterestlfrom 04/16/2011 to 9/30/2015) ComPromise Penaltv TOTAL AMOUNT DUE We look into the propriety of the assailed assessments issued against petitioner. Income Tax A.1 Under-declaration of sales- ,.205,009, 710.63 A.1.1 Gross Profit on undeclared sales arising from undeclared purchases - ,.199,443,221.84 In the FDDA, respondent found petitioner has undeclared sales pursuant to Revenue Memorandum Order (RMO) No. 42-2003 and the same was subjected to income tax pursuant to Section 32 of the National Internal Revenue Code (NIRC), as amended. As a result, respondent derived the assessed amount from the following computation: 55 55 Exhibit "P-6" and Exhibit "R-14", BIR Records- Vol. I, pp. 797 to 80lt

DECISION CTA Case No. 9290 Page 13 of61 Amount of over claimed purchases per FLO P344,886,509.34 Less: with supporting documents 32,936,854.66 Difference on purchases per SLP vs AITEID P311 ,949,654.68 Sales (P311,949,654.68/61%) P511 ,392,876.52 Cost of sales (difference) 311,949,654.68 Gross profit on Undeclared sales (Local) P199,443,221.84 Petitioner argues that it has no under-declaration of sales and questions the legality and propriety of the tax assessment. According to petitioner, the Computer-Assisted Audit Tools (CAATs) extraction data under RMO No. 14-2011 are not evidence in themselves to support a tax assessment. Allegedly, the BIR failed to comply with the procedures laid down in Revenue Memorandum Order (RMO) No. 46-2004. Under said rules, the BIR must secure a Sworn Declaration of the third party, or in this case, the specific clients/customers of the Company that the amounts were indeed sales by the Company to petitioner. Thus, the deficiency assessments resulting from the comparison of the supposed third- party information, which is the Summary List of Sales (SLS) and the petitioner's report or the Summary List of Purchases (SLP) or any other information are mere naked assessment that has no leg to stand on absence of the sworn statements/ declarations from the said third-party sources. This assessment must be cancelled. After thorough examination and verification of the evidence presented in this case, the Court agrees with the findings of the ICPA. Shown hereinbelow is the schedule of comparison made by respondent between Third Party Information (TPI) derived from Audit Information Tax Exemption and Incentives Division (AITEID) against purchases declared in petitioner's Summary List of ,., Purchases (SLP) supporting their findings for P311 ,949,653.07 allegedly as overstated purchases, to wit:

DECISION CTA Case No. 9290 Page 14of61 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- Third Party SLP Adjuslment claimed No. SMC's SLP (Submllled Pl46,547.119.92 Documents & P25,208.284.66 I VS MARKETING CORPORATION Pl21.338,835.26 49,142.721.41 P25.208.284.66 Purchases 14,205,981.91 34.936,739.50 10.422.057.43 14,205.981.91 4.026,295.89 BIG BOX TRADING HOUSE 4,026,295.89 Allowed 3.516.065.09 -121,307.74 2 INCORPORATED -62.5 -121,307.74 p. -742,867.86 -742,867.86 - 141,876.904.82 3 GOLDEN ASTIPLAZ MARKETING INC 6.395,761.54 141,876,904.82 I 41,87 6. 904.82 83.915,910.57 83,915,910.57 83,915,910.57 - 62.701.586.82 TARGET GROUP PHILIPPINES 3,637.372.83 62.701,586.82 62,70 I ,586.82 30.549,627.41 742,805.36 30,549,627.41 30,549.627.41 - 8,161.632.41 INCORPORATED 8.161,632.41 - 7.776,991.84 8.161.632.41 7.776,991.84 5.944.469.08 4 Total 7.776,991.84 5,944.469.08 - 3.812,068.83 5.944.469.08 3,812.068.83 3.640,352.76 MUCH PROSPERITY TRADING 3,81 2,068.83 3,640,352.76 - 3.491,999.00 3.640.352.76 3.491,999.00 - 3.324,642.83 5 Total 3.491.999.00 3.324.642.83 3.271.004.59 3.324.642.83 3.271,004.59 - 3.073,955.49 6 S A INTERNATIONAL SALES INC 3.271,004.59 3.073,955.49 2,941,080.00 3,073.955.49 2.941.080.00 - 1,934.460.16 7 ADVANI APPAREL INC - 2,941.080.00 1,934.460.16 1,694,579.66 I .934.460. 16 1.694.579.66 - 1,687,500.00 8 HOMME PLUS MARKETING COMPANY - 1.694.579.66 1,687,500.00 1,606,250.00 1.687,500.00 1,606,250.00 - 1.420,535.75 PRIME VALUE ENTERPRISES 1,606,250.00 1.420.535.75 - 829,813.24 1.420.535.75 829.813.24 811,595.93 9 INCORPORATED 811,595.93 - 771.428.58 829.813.24 771.428.58 769,155.35 TWINLUCK GENERAL 811,595.93 769,155.35 - 766,071.42 771.428.58 766,071.42 - 707,142.83 10 MERCHANDISINGBRANCH 769,155.35 707,142.83 - 698.437.00 766,071.42 698.437.00 669,642.83 II RAERONDSTARR MARKETING - 707,142.83 669.642.83 - 664,285.75 698.437.00 664.285.75 - 635.714.25 12 FIRST LINEN COMMERCIAL - 669.642.83 635,714.25 - 520.746.58 664.285.75 520.746.58 441.232.50 13 STRATAPRO COMPANY INC 635.714.25 441.232.50 - 305.747.84 520.746.58 305.747.84 288,289.58 14 STRATAPRO COMPANY INC 441.232.50 288,289.58 - 284.826.58 305.747.84 284.826.58 - 249,134.00 15 OBRA EXPRESS TRADING SYSTEMS INC - 288,289.58 249,134.00 155,357.42 284.826.58 155,357.42 - RESURGE MANUFACTURING COMPANY 249,134.00 - 155.357.42 - 16 INC - - 17 MADRAS CROWNPHIL INCORPORATED - 18 PARK TRADE CENTER 19 EUROPLAST INDUSTRIES INC - 20 KINAH GARMENTS ENTERPRISES - 21 SELF GMT TRADING COMPANY - 22 EQUESTRIAN TRADING 23 ASIATIQUE TRADING 24 MULTI GROVE GENERAL MERCHANDISE - 25 BELLA TRADING AND SERVICES - RENZ MATTHEW INTERNATIONAL 26 TRADING CORPORATION - 27 TRISECT GENERAL MERCHANDISE 28 ARIECE ENTERPRISE 29 TWIST ENTERPRISE VISIONVIEW MARKETING 30 INCORPORATED - 31 ASG SUNLIGHT TRADING COMPANY - 32 CASAR! TRADING NORTHERN-WEST ASIA TRADING 33 INCORPORATED KENOMAX GREAT ENTERPRISES 34 INCORPORATED - 35 BEACH RUBBER CO INC - 36 ANGBAROCO - 37 FUN SERVICES INC 38 WAMRUS TRADING INC 39 BETTERWAY GENERAL MERCHANDISE 40 INDUREX CLOTHING - 41 FIRST A TRADING

DECISION CTA Case No. 9290 Page 15 of61 42 HOLYMOON ENTERPRISES �79.965.82 -79.965.82 -79.965.82 PO.OO P424.890,594.74 SubTotal- Trade Suooliers P167,051.514.49 P591,942.109.23 P424,890.594.74 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- No. Third Party SLP Adjustment claimed SMC's SLP (SubmiHed WPP MARKETING COMMUNICATIONS P29.115.72 Pll7.474.41 Documents & P88.358.69 376,163.96 438,882.34 P88.358.69 Purchases 62,718.38 43 INC 62,948.34 62.718.38 59.786.97 3,161.37 60,268.25 59.786,97 Allowed 52,232.54 PRUDENTIAL GUARANTEE AND 8,035.71 58,821.50 52,232.54 p. 28,311.68 30,509.82 101,500.08 28,31 1.68 23,821.51 44 ASSURANCE INC 77,678.57 33,125.08 23,821.51 - 18,303.65 14,821.43 24,380.43 18,303,65 5.446,31 45 DIMENSIONAL SERVICE CORPORATION 18,934,12 5,979.42 5.446.31 - 5,089,39 60.767.83 5,089.39 - 4,841.23 46 ACCURATE PRINTING INC 890.03 4,841.23 - -160.71 55,926.60 8,679.08 -160.71 -356.51 47 DIVERSEY PHILIPPINES INC -356.51 - -2.7 45,54 160.71 - -2.7 45.54 -2,863.52 48 SPACE WORLD CORPORATION 9,035.59 - -2,863.52 - -5,903.58 2.745.54 - -5,903,58 -13,977.23 PERFORMANCE MARKETING 2,863,52 - -13,977,23 - -20,945,09 5.903.58 - -20,945.09 - -26,785.71 49 INCORPORATED 13,977.23 - -26,785.71 -30,000.00 20,945.09 - -30,000,00 - -48,214,12 50 RIGHT EIGHT SECURITY AGENCY INC 26.785.71 -48,214,12 - -59,892,86 30,000,00 51,300,16 -59,892.86 -73,660.71 VICAN INVESTIGATION AND SECURITY 99,514.28 -73,660.71 - -79,687.19 59,892.86 - -79,687,19 - 51 AGENCY INC 73,660.71 - - -I 02,892.86 2,046,383.94 -I 02,892.86 -171.428.51 JOHNSONDIVERSEY PHILIPPINES I 07,142.86 1,966,696.75 -171.428,51 - -500,892.71 200,000.01 4,250.00 -500,892.71 -822,792.96 52 INCORPORATED 2,080,267.87 -250,930,98 - - 1.056]90, 18 571.861.98 28,571.50 -I ,056.790,18 - 254,606, IS 53 ARMAK TAPE CORPORATION Total I ,151.125.35 I ,579,375.16 254,606. IS 446,165.59 - 6,630.52 54 SCANWELL GRAPHICS CORPORATION 14,633,687.31 320,931.00 6,630.52 -2,873,17 2.873,17 94,335,17 �2,873, 17 571.861.98 -3,106,07 MERCURY INTERNATIONAL SECURITY 277,563.39 -3, I 06.07 -93.421.76 448,001.84 700,771.74 -93.421.76 - -1,013,966.38 55 PRINTING CORP, Total I ,756,390.03 14,640,317,83 -I ,013,966.38 - -I ,804,532.56 1,831,384.02 5,377,361.32 -3,299,269,90 A V PAULE CONSTRUCTION CO INC 3,319.782,93 274.457,32 -682,187,92 - -3,618,995,07 3,599,011.78 354,580.08 I ,295,551.63 - 56 Total 742.423.65 - 7,208.7 45,34 UNISPORT MARKETING CORPORATION 2,637,595,01 7,181,893.88 4,894,563.41 2,617,081.98 57 Total 4,914,546.70 58 YU LINCOLN CO Total MALLORCA ANTONIO FUENTESPINA 59 Total 60 MICRO-D INTERNATIONAL INC Total 61 Jobstreet com Philippnes Inc Total DATRIMA PACKAGING INDUSTRIAL 62 CORP Total 63 NG ISABELLE PE Total 64 SALES EDWIN C Total PRIMA PLASTIC MANUFACTURING 65 CORPORATION Total SYMMETRIC GLASS CORPORATION 66 Total ADVANCE ELECTRONICS 67 CORPORATION Total IRVINE CONSTRUCTION CORPORATION 68 Total 69 PUNONGBAYAN ARAULLO Total GENERAL! PILIPINAS INSURANCE CO 70 INC Total SHOPPING CENTER MANAGEMENT 71 CORP - BACOLOD FIRST ASIA REALTY DEVELOPMENT 72 CORP. 73 PILIPINAS MAKRO INC. Total STANFIELD INTERNATIONAL 74 CORPORATION 75 MARKETING CONVERGENCE INC 76 SHOEMART INC Total 77 SM LAND INC 78 SM INVESTMENTS CORPRENT AL 79 PREMIER CENTRAL INC

DECISION CTA Case No. 9290 Page 16 of61 80 PREMIER SOUTHERN CORPORATION 6.592.975.92 8.941.251.67 2.348,275.75 8,959,243.01 -6,610,967.26 12.490,905.76 10,037,756.75 -2,453,149,01 9,922,035.37 -12,375,184.38 81 SM RETAIL INC Totol 103,119,074.82 I 03,412,391. I 6 103,127,031.58 -I 02,833,715.24 293,316.34 82 SM PRIME HOLDINGS INC 2,556,500.58 2.556,500.58 - 2,556,500.58 83 LUMISPEC INDUSTRIAL SALES Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- No. Third Party SLP Adjustment claimed SMC's SLP (SubmHied 84 ARCENAL SYSTEMS ENGINEERING - I ,632, I 43.00 Documents & I ,632,143.00 I ,284,019.40 I ,632, I 43.00 Purchases I ,284,019.40 85 ZENSHIN SYSTEMS CORPORATION - I ,257,460.7 4 1.284,019.40 1,257.460.74 1.166.427.08 I ,257,460.74 Allowed 1.166,427.08 86 PHILIPPINE DAILY INQUIRER INC - 1.166.427.08 - 599,331.00 - 599,331.00 87 PHILST AR DAILY INC - 542,934.00 599,331.00 - 542,934.00 537,493.92 542,934.00 - 537,493.92 88 SUMMIT PUBLISHING CO INC - 533,695.83 537,493.92 533,695.83 - 503,846.82 533,695.83 - 503,846.82 89 BESTILE CORPORATION - 465,428.67 503,846.82 - 465,428.67 - 450,816.75 465,428.67 - 450,816.75 90 VALUE CARE HEALTH SYSTEMS INC 444,792.34 450,816.75 - 444.792.34 - 373.493.25 444,792,34 373.493.25 91 ADFOLIO ADVERTISING - 352.433.25 373,493.25 - 352.433.25 - 347,321.59 352.433.25 - 347,321.59 92 PLDT - 333,991.83 347,321.59 - 333,991.83 329,897.42 333,991.83 329,897.42 93 MILLIMETER DESIGN STRATEGIES INC - 290,202.82 329,897.42 - 290,202.82 - 281,856.76 290,202.82 281,856.76 94 ABSCBN PUBLISHING INC - 257,034.42 281,856.76 - 257,034.42 - 251,977.74 257,034.42 - 251,977.74 SUPERIOR MAINTENANCE SERVICES 246,163.16 251.977.74 - 246,163.16 - 227,232.17 246,163.16 - 227,232.17 95 INC 226,919.25 227,232.17 - 226,919.25 206,785.67 226,919,25 206.785.67 96 AMIGO CLUB ENTERTAINMENT INC 185,986.90 206.785.67 - 185,986.90 176,785.75 185,986.90 - 176,785.75 ANGEL INTERIORS CONSTRUCTION 153,817.91 176.785.75 - 153,817.91 152,801.50 153,817.91 - 152,801.50 97 CORP 142,092.08 152,801.50 - 142,092.08 135,290.25 142,092.08 - 135,290.25 VICTORIA VISUAL INTERNATIONAL 130,043.00 135,290.25 130,043.00 116,056.83 130,043.00 - 116,056.83 9B CORP 115,595.41 116,056.83 115,595.41 113,678.66 115,595.41 - 113,678.66 99 EOUICOM INC I 07,670.59 113,678.66 107,670.59 106,294.32 107,670.59 I 06,294.32 IDEAL PEOPLE MODEL MANAGEMENT 106,294.32 100 co 101 STINGER SECURITY SERVICES INC 102 MANILA ELECTRIC COMPANY 103 TE LATRIZ INTERIORS 104 AIRFREIGHT 2100 INCORPORATED 105 WHEEL BENISON MOTORIST SQUARE HARD WORK CONSTRUCTION 106 PAINTING CONTRACTOR CO 107 SUPRA MULTISERVICES INC 108 PC LIVE 109 DJA SECURITY SERVICES INC CONTINUUM TECHNOLOGY 110 CORPORATION CAPCON ALUMINUM SPECIALIST Ill INSTALLER COMBINED BLUE DRAGON SEC 112 SERVICES INC SAN FERNANDO ELECTRIC LIGHT 113 POWER CO INC 114 INTEGRATED COMPUTER SYSTEMS INC 115 ELINE BUILDERS LEC STEEL MANUFACTURING 116 CORPORATION HYPERVOLT CONTRACTOR 117 CORPORATION 118 KARISSA APPAREL INC 119 ADVANCE MICROSYSTEMS CORP 120 JRS BUSINESS CORPORAliON

DECISION CTA Case No. 9290 Page 17 of61 121 PHILIPPINE AIRLINES INC 105,209.66 105,209.66 105,209.66 122 MARKFIVE INC 96,257.50 96,257.50 . 96,257.50 FEDERAL MANAGEMENT AND 123 MAINTENANCE INC . 93,636.34 93,636.34 93,636.34 124 RECO MODELING AGENCY 92.783.75 92.783.75 . 92,783.75 JOB CLEAN MANPOWER GENERAL 125 SERVICES . 86,634,16 86,634.16 86,634.16 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- No. Third Party SLP AdJustment claimed SMC's SLP (SubmiHed 126 FELPORT INTERNATIONAL MARKETING . 84,821.50 Documents & 84,821.50 127 MANSOR SECURITY AND GENERAL . 83,351.92 84,821.50 Purchases 83,351.92 128 SERVICES . 83,169.67 83,351.92 83,169.67 129 . 82,906.75 83,169.67 Allowed 82,906.75 130 RAPID RADIO COMMUNICATIONS INC . 80,357.25 82,906.75 . 80,357.25 131 . 78,680.00 80,357.25 . 78,680.00 132 GLASSTECH CORPORATION . 76,288.83 78,680.00 . 76,288.83 133 FOUR CORNERS TECHNOLOGIES 4CT . 73,660.75 76,288.83 . 73,660.75 134 INC 72,297.41 73,660.75 . 72.297.41 . 71,790.17 72.297.41 . 71.790.17 135 EDGE OF LIGHT INCORPORATED . 71,428.58 71,790.17 . 71,428.58 136 . 69,517.92 71,428.58 . 69,517.92 137 ME RCATOR MODEL MANAGEMENT INC . 62,651.83 69,517.92 . 62,651.83 138 . 61,778.67 62,651.83 . 61,778.67 139 SALES DISPLAY CENTER . 61.746.01 61.778.67 61.746.01 140 . 58,066.50 61.746.01 . 58,066.50 141 KIKOMO CAPS 56,030.08 58,066.50 56,030.08 142 PALADIN PROTECTIVE SECURITY . 54,446.42 56,030.08 . 54,446.42 143 SERVICES INC . 52.487.42 54,446.42 . 52,487.42 144 JLC CONSTRUCTION . 51' 128.92 52,487.42 . 51,128.92 145 . 51,071.67 51.128.92 . 51,071.67 146 MAXANDREA HOTEL . 50,925.33 51,071.67 . 50,925.33 147 50,890.00 50,925.33 . 50,890.00 148 NET PACIFIC INC . 49,652.49 50,890.00 . 49,652.49 149 CARPETWORLD MANUFACTURING . 49,484.68 49,652,49 49,484.68 150 CORPORATION 48,287.49 49,484.68 . 48,287.49 151 47,142.99 48,287.49 47,142.99 152 TRIPLE 7 MANPOWER SERVICES INC 46,188.51 47,142.99 . 46,188.51 153 LM CAMUS ENGINEERING 45,149.33 46,188,51 45,149.33 154 CORPORATION 44,867.16 45,149.33 . 44,867.16 155 MEGA CORINTHIANS INTEGRATED 44,598.42 44,867.16 44,598.42 156 SECURITY INC 44,147.42 44,598.42 . 44,147.42 43,908.33 44,147.42 . 43,908.33 157 KENTUCKY FRIED CHICKEN 42,527.00 43,908.33 42,527.00 158 41,922.08 42,527.00 . 41,922.08 159 TARGET DISPLAY CO INC 41,505.25 41,922.08 41,505.25 160 41,505.25 . 161 LAMINWOOD DECO CORPORATION . YATAIINTERNATIONAL CORPORATION INNOVE COMMUNICATIONS INC MICROGENESIS BUSINESS SYSTEM SIMPLY SUMPTUOUS INC AHENSIYA MODELO INC CMP FEDERAL SECURITY AGENCY INC JMD INTERNATIONAL CORPORATION BLUEFISH DIGITAL MEDIA TECH CORP GLOBE TELECOM INC POWER MASTER INC REMORE CORPORAliON PHILIPPINE GENERAL INSURANCE CORPORATION CORINTHIANS INTEGRATED SECURITY INC ENVIRONMENT GENERAL SERVICE INC LAMBDAN SECURITY AND DETECTIVE AGENCY INC LYNX SECURITY AND INVESTIGATION AGENCY

DECISION CTA Case No. 9290 Page 18 of61 162 DEFENSE SPECIALIST CORPORATION . 41.363.83 41.363.83 . 41.363.83 ALL AROUND SERVICES AND 163 MERCHANDISING CORP . 41,081.00 41.081.00 . 41.081.00 164 CARLSON TRADING 40,178.74 40,178.74 . 40,178.74 165 ROYAL SECURITY AGENCY INC 37,462.91 37,462.91 37.462.91 166 FIRESTAR SECURITY AGENCY 36,266.33 36,266.33 36,266.33 167 DK P MARKETING CORPORATION . 34,919.82 34,919.82 . 34,919.82 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- No. Adjustment claimed Third Party SLP SMC's SLP (SubmiHed Documents & 34,823.58 Purchases 33,928.58 Allowed 33,302.75 31,967.91 168 STARFORCE SECURITY AND ALLIED - 34,823.58 34,823.58 - 30,544.84 169 SERVICES INC 30,053.66 170 . 33,928.58 33,928.58 . 29,505.67 171 UYB PRINTING CORPORATION 28.464.33 172 33,302.75 33,302.75 . 28,184.42 173 CEBU PACIFIC AIR 27,196.59 174 SHELLSOFT TECHNOLOGY 31,967.91 31,967.91 . 27,058.08 175 CORPORATION 24.403.17 176 ROYAL MANDAYA HOTEL . 30,544.84 30,544.84 . 22,875.25 177 CORPORATION 22,232.33 178 . 30,053.66 30,053.66 . 21,722.58 179 PRINCE KURL JUNIOR CORP 21,644.66 180 . 29,505.67 29,505.67 . 21,270.99 181 ERWIN V BAR LET A 21,250.17 182 3 S INTERNATIONAL FABRICATION 28.464.33 28.464.33 . 21,008.42 183 CORPORA liON 20,894.24 184 28,184.42 28,184.42 20,698.90 185 MICA SECURITY AGENCY INC 20,535.75 186 27,196.59 27,196.59 20,116.58 187 LOLLIPOP SAFETY BALLOONS CENTER 19,986.07 188 . 27,058.08 27,058.08 . 19,669.74 189 LEGEND HOTELS INTL CORP 19,384.08 190 RJC SECURITY AND INVESTIGATION . 24.403.17 24.403.17 - 18,811.15 191 AGENCY INC 18,084.73 192 . 22.875.25 22.875.25 . 17,924.16 193 ADVANCED DESIGNS PHILIPPINES INC 17,857.17 194 TOP GLASS AND ALUMINUM . 22,232.33 22,232.33 16,857.32 195 CONTRACTOR CORP 16,322.99 196 21.722.58 21,722.58 16,125.33 197 LION INTEGRATED SERVICES INC 15,966.92 198 BEAGLE INVESTIGATIVE DETECTIVE 21,644.66 21,644.66 15,845.58 199 AGENCY INC 200 21,270.99 21.270.99 . 201 DAVAO JANITORIAL ALLIED SERVICES 202 . 21,250.17 21.250.17 . EDWIN CALINGASAN . 21,008.42 21.008.42 . KATHERINE L MAGSANOC . 20,894.24 20,894.24 . MILLGOS SECURITY AGENCY PLAGATA SECURITY SERVICES AGENCY . 20,698.90 20,698.90 . INC . 20,535.75 20,535.75 JBL HYDRAULIC ENTERPRISES 20,116.58 20,116.58 MARSDAN SECURITY AGENCY CORP CHERUBIM SECURITY PROTECTIVE 19,986.07 19,986.07 DETECTIVE AGENCY PHILCOM CORP 19,669.74 19,669.74 . ENGELBERT PHILS INC 19,384.08 19,384.08 . DAVAO SECURITY INVESTIGAliON AGENCY INC . 18,811.15 18,811.15 . PACUBAS GENERAL SERVICES . 18,084.73 18,084.73 . LY ENTERPRISES . 17,924.16 17,924.16 . BDOI500019222 . 17,857.17 17,857.17 . PRIMER PRINTING INDUSTRIAL SALES 16,857.32 16,857.32 JOLLIBEE FOODS CORP 16,322.99 16,322.99 CEC INDUSTRIES INCORPORATED 16,125.33 16,125.33 NEW DIRECTION INC 15,966.92 15,966.92 ASALUS CORPORATION . 15,845.58 15,845.58 .

DECISION CTA Case No. 9290 Page 19 of61 203 LAMBDAN SECURITY AGENCY INC 15,439.75 15,439.75 15,439.75 15,013.68 204 STARFORCE SECURITY SERVICES INC 15.013.68 15.013.68 . 14,704.75 13.750.00 205 CMP FEDERAL SECURITY AGENCYINC . 14,704.75 14,704.75 . 13,637.67 12,595.42 206 LEE SONS PRINTING CORP . 13.750.00 13,750.00 . 12,500.09 207 LA MAJA RICA HOTEL 13,637.67 13,637.67 Over- claimed 208 MEDICARD PHILIPPINES INC . 12,595.42 12,595,42 11,942.09 209 PROTECTION TECHNOLOGY INC . 12,500.09 12,500.09 . 11,795.50 II ,652.42 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR 11,294.75 No. Third Party SLP Adjustment II ,209.83 SMC's SLP (SubmiHed 10,800.00 . 11,942.09 Documents & 10,767.91 . 11,795.50 Purchases 10,612.75 11,652.42 Allowed I 0,312.59 . 11,294.75 10,000.00 210 ACTIVE TRAVEL TOURS INC . 11.209.83 11,942.09 . 9,975.08 10,800.00 9,732.17 211 DMB FIRE SAFETY ENTERPRISES . 10,767.91 11,795.50 9,696.50 . 10,612.75 9,616.16 NEW MABUHAY INTERNATIONAL 10,312.59 8,929.08 . 10,000.00 8,412.67 212 SECURITY AGENCY GENERA 9,975.08 11.652,42 . 8,024.51 . 9.732.17 7,990.17 213 SF ALLIED INDUSTRIAL PRODUCTS . 9,696.50 11,294.75 . 7,611.66 . 9,616.16 7,351.82 214 RTL INDL SALES 8,929.08 11,209.83 7,312.50 . 8,412.67 7,155.58 215 BDO INSURANCE BROKERS INC . 8,024.51 10,800,00 7,143.00 . 7,990.17 6,482.34 216 DEXTERTON CORPORATION . 7,611.66 10,767.91 . 6,401.00 7,351.82 6, 112.49 THE SYLVIA MANOR . 7,312.50 10,612.75 . 6,026.83 . 7,155.58 6,000.00 217 ss . 7,143,00 5,915.25 6,482.34 5,500.09 218 LABELLINE ENTERPRISES . 6,401.00 10,312.59 . 5.480.42 . 6,112.49 5,382.09 LUNA PROMOTIONS AND TALENTS 6,026.83 5,357.17 6,000.00 219 MANAGEMENT SERVICES 5,915.25 10,000.00 . 5,271/li 5,500,09 220 EAGLEMATRIX SECURITY AGENCY INC 5,480.42 9,975.08 5,382.09 FORMS INTERNATIONAL ENTERPRISES 5,357.17 5,271.58 221 CORP 9.732,17 . 222 AD STYLE SIGNAGES MARKETING 9,696.50 . 223 DEFENSE SPECIALIST CORPORATION 9,616.16 224 SHERCON BUILDERS 8,929.08 225 SAGITTARIUS SECURITY AGENCY 8,412.67 . 226 NATIONAL BOOK STORE 8,024.51 . 227 ROBUST SECURITY CORPORATION 7,990.17 . 228 TRITONICS COMPUTER SERVICES 7,611.66 . 229 RIBBONAIRE ENTERPRISES 7,351.82 230 AC HOTEL CORPORATION 7,312.50 231 BJK ALUMINUM TRADING SERVICES 7,155.58 . 232 VALUE PLUS BUSINESS INNOVATION 7,143.00 . 233 FIRETRON SAFETY SYSTEM 6,482.34 . 234 SUPERVALUE INC FAO L 0 ARGANDA 6,401.00 . 235 HOTEL GRACELANE 6,112.49 . 236 UNICOM COMPUTER STORE 6,026.83 237 EM ZALAMEA ACTUARIAL SERVICES INC 6,000.00 . 238 AVESCO MARKETING CORPORATION 5,915.25 . 239 GAMMA DESIGN CENTER 5,500.09 . 240 VENIZ HOTEL CORPORATION 5,480.42 . 241 RKJ GENERAL SERVICES SALES INC 5,382.09 KINGS ROYAL HOTEL AND LEISURE PARK 242 CORP 5,357.17 . 243 SEAGULL ENTERPRISES 5,271.58 .

DECISION CTA Case No. 9290 Page 20 of61 244 OASIS HOTEL . 5.107.16 5.107.16 . 5.107.16 4.980.33 4.980.33 245 BORCEL TRANSPORT SERVICES 4.812.50 4,980.33 4,812.50 4.596.08 4.596.08 246 HERMACO COMMERCIAL 4.553.66 4.812.50 . 4,553.66 4.303.58 4.303.58 247 CHANG JIN PHILS INC . 4.285.75 4,596.08 4,285.75 4.071.50 4,071.50 248 LIP A CITY TOURIST DEVELOPMENT CORP 4.553.66 . Per SMC's Over- HARBORTOWN HOTEL MGT SLP claimed 249 CORPORATION . 4.018.00 4,303.58 . 4.018.00 4,017.92 4.017.92 EVERGREEN MANUFACTURING 3,928.67 3,928.67 3,873.25 3.873.25 250 CORPORATION . 3.675.00 4.285.75 . 3.675.00 3.629.58 3.629.58 251 HAPPY HOME REPUBLIC RET AlLERS INC . 3.535.74 4.071.50 . 3.535.74 3,526.83 3.526.83 Supplier Name Per SLS of 3.453.92 TPI's SLS > Less: BIR 3.453.92 Third Party 3,186.42 Adjustment 3.186.42 Seq. 2,982.17 SMC's SLP (SubmHied 2.982.17 No. 2,952.67 Documents & 2,952.67 2.857.17 Purchases 2,857.17 2.857.17 Allowed 2,857.17 2,767.92 2.767.92 252 JAMC MARKETING INC . 2.742.92 4,018.00 2.742.92 2.489.83 2,489.83 253 ANTENOR SIGNS SERVICES . 2.464.33 4.017.92 . 2,464.33 2,258.00 2.258.00 BAT ANGAS CITY REAL HOTEL 2,232.17 2.232.17 2,142.92 2,142.92 254 CORPORATION . 1,964.33 3,928.67 . 1,964.33 1,963.83 1.963.83 ACRE AIRCONDITIONING SPECIALISTS 1.785.75 1.785.75 1,785.75 1.785.75 255 INC 1,722.16 3,873.25 . 1.722.16 1.714.33 1.714.33 256 EL CIELITO INN BAGUIO . 1.651.83 3.675.00 . 1.651.83 1,650.00 1,650.00 257 BUSINESS INN 1.428.58 3.629.58 1,428.58 1,231.42 1,231.42 258 PERMAR INDUSTRIES . 1.229.25 3.535.74 . 1,229.25 1.178.58 1,178.58 259 ROBERT C SAQUIAN . 3,526.83 260 SPARK LINES SERVICES INCORPORATED 3.453.92 . 261 LBC PRINTING PRESS . 3.186.42 . THE WORLDWIDE LIFESTYLE TIMEPIECES 262 INC 2,982.17 263 SIMPLY SUMPTOUS INC 2,952.67 . LOCKHEART MANAGEMENT . 264 DEVELOPMENT . 2.857.17 265 SYSTEM PRODUCTS AND INDUSTRIAL 2.857.17 . 266 OCANA HOLDINGS INCORPORATED . 2.767.92 . 267 FUMACO INC 2,742.92 . 268 SPARK GRAPHICS INC 2.489.83 . 269 LUISI! A CENTRAL PARK HOTEL INC . 2.464.33 . 270 SHEENA LEIGH G MANALESE . 2,258.00 271 ABUEME GENERAL MERCHANDISE 2,232.17 . 272 GRACIOUS HOTEL ANGELl . 2,142.92 . DC SALONGA INTERIORS 273 CONSTRUCTION 1,964.33 PUR ITAN INDUSTRIAL SECURITY AGENCY 274 CORP 1,963.83 . CEASEFIRE INDUSTRIAL SALES AND 275 SERVICES . 1,785.75 1,785.75 276 HOLLAND BLOOM FLOWER SHOP NATIONAL ELECTRICAL SUPPLY 277 HARDWARE . 1.722.16 . 278 PURITY PAPER INC 1,714.33 279 CHAIN MARKETING CORP 1,651.83 280 MANG INASAL RESTAURANT . 1.650.00 . 281 ILOILO BUSINESS HOTEL 1.428.58 . 282 ALAS SECURITY SERVICES INC 1.231.42 . 283 SELECTIVE SECURITY SERVICES INC . 1,229.25 . 284 MP ANALYSIS AND LABORATORY INC 1,178.58

DECISION CTA Case No. 9290 Page 21 of61 285 PHILAM INSURANCE COMPANY INC 1.156.00 1,156.00 - 1,156.00 286 ALPA ASIA HOTELS RESORTS INC 982.17 982.17 - 982.17 287 MRJJ ENTERPRISES INC - 982.17 982.17 - 982.17 288 BOUNTY AGRO VENTURES INC - 798.25 798.25 - 798.25 289 HTM LUNCHEONETIE 750 750 750 290 JAX LIGHTING INDUSTRIES COMPANY 625 625 . 625 MEGATRADE INDUSTRIAL 291 CONSTRUCTION SUPPLY - 607.17 607.17 - 607.17 TIMES TRADING COMPANY 292 INCORPORATED - 589.33 589.33 - 589.33 293 ADVANCE MICROSYSTEMS CORP - 586.58 586.58 586.58 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- No. Third Party SLP Adjustment claimed SMC's SLP (Submitted - 557.16 Documents & 557.16 - Purchases - 535.75 Allowed 535.75 449.66 449.66 294 TPT FOOD UNLIMITED - 392.83 557.16 392.83 - 308.92 308.92 CEDAR SCIENTIFIC CLINICAL - 227 227 295 LABORATORY - 207.75 535.75 - 207.75 - 127.42 127.42 296 BPIMS INSURANCE CORP 116.08 449.66 - 116.08 - 297 JAPAN HOMES INC 97.75 392.83 - 97.75 - 58 58 298 GLASS TECH COMPANY 308.92 - 44.67 44.67 299 FSR SECURITY GENERAL SERVICES - 227 - - 42.5 42.5 300 NS OCANA INC 36.17 207.75 - 36.17 - 23.42 23.42 301 FEDERAL PHOENIX ASSURANCE CO INC - 127.42 - - 8.92 8.92 302 INNOVATRONIX INC - 116.08 - - 1,522,173.00 -0.5 303 CITIHARDWARE GENSAN INC - -0.5 97.75 -23.25 304 PHILIPPINE SEVERAL CORP -23.25 58 -52.75 305 HEAVENLY STITCHIN MOMENT CO -52.75 44.67 - -67.92 ILOILO INTERNATIONAL BOOKS -67.92 -75 -75 306 MAGAZINE 42.5 - -178.58 -178.58 -187.5 307 EXPRESSION STATIONERY SHOP INC -187.5 36.17 - -257.17 308 MERCURY DRUG -257.17 23.42 - -276.83 -276.83 -286.67 309 PHILCOPY CORPORATION -286.67 8.92 - -300.92 -300.92 -495.58 DC SALONGA INTERIORS -495.58 -750.08 -750.08 -1,063.51 310 CONSTRUCTION -1,063.51 1,522,173.00 I ,522, 173.00 -1 '125.08 -1,125.08 -0.5 -2,071.67 311 VISUAL COLOR INC -2,071.67 - \ -2,178.75 PRIMELINE PRODUCTS PHILIPPINES -2,178.75 312 INCORPORATED -23.25 - FUNTASTIC INTERNATIONAL 313 INCORPORATED -52.75 - RAINBOW WORLD FASHION SQUARE 314 CORP -67.92 - 315 WILSON ENTERPRISES -75 - 316 KSJ INTERNATIONAL INCORPORATED -178.58 317 PLANET CLASSIC CORPORAliON -187.5 318 GOLDEN KITE MARKETING -257.17 - 319 ROYAL SPIRIT MKTG -276.83 - 320 EAST LIFE TRADING Total -286.67 - 321 UNCLE COITAGE INDUSTRIES -300.92 - 322 4R EXPORTIMPORTTotal -495.58 - 323 JC FASHION INC -750.08 -1,063.51 324 JAKE COMMERCIAL INCORPORATED 325 SOURCES FUND- C/0 MRS ORA -1.125.08 326 NAT ANI A ENTERPRISES INCORPORATED -2,071.67 CITIMODA TRADING CORPORATION 327 Total -2,178.75 -

DECISION CTA Case No. 9290 Page 22 of61 328 ROMCO ENTERPRISES . -3.714.50 �3.714.50 . -3.714.50 329 CK FASHION COLLECTION CORP Total . -4,678.76 -4,678.76 . -4,678.76 330 WILBORO MARKETING . -5.299.41 -5,299.41 -5,299.41 BAVRAM TRADING INTERNATIONAL 331 INCORPORATED Total -8,103.00 -8,103.00 -8, I 03.00 332 FOREVER 21 PHILIPPINES INC -13,199.50 -13,199.50 -13,199.50 -13,964.33 -13,964.33 -13,964.33 333 NOVELTY SPECIALIST INC Total 334 FRENS CAR CARE SALES CENTER . -20.267.84 -20.267.84 . -20,267.84 335 RAMCOLE INC . -45.473.99 -45.473.99 . -45,473.99 336 AVANTGARD SHOPPING CORP Total . -47.652.85 -47,652.85 . -47,652.85 337 ACE HARDWARE PHILIPPINES INC 401,389.74 401,389.74 401,389.74 MAJOR SHOPPING MANAGEMENT . 338 CORP . 222,789.66 222,789.66 222,789.66 339 SODEXHO PASS INC 156,992.74 156,992.74 . 156,992.74 340 STAR APPLIANCE CENTER INC -BACOLOD -PCF . 133,936.83 133,936.83 . 133,936.83 341 MERIDIEN BUSINESS LEADER INC . 95.247.83 95.247.83 . 95,247.83 Seq. Supplier Name Per SLS of Per SMC's TPI's SLS > Less: BIR Over- No. Third Party SLP Adjuslment claimed SMC's SLP (SubmiHed . 82.710.51 Documents & 82.710.51 64.024.24 Purchases 64,024.24 . 58,831.85 Allowed 58,831.85 . 58,628.41 58,628.41 342 MARKET STRATEGIC FIRM INC SUCAT 49,716.08 82.710.51 . 49,716.08 . 40,535.60 40,535.60 343 MANDURRIAO STAR INC SM BICUTAN . 35,147.16 64,024.24 35,147.16 . 32,105.09 32,105.09 MAINSTREAM BUSINESS INC SM 25.490.57 25.490.57 . 22,318.09 22,318.09 344 BACOLOD . 19,166.50 58,831.85 19,166.50 345 MANDURRIAO STAR INC SAN LAZARO . 6,637.59 58,628.41 . 6,637.59 155,635,320.72 5,649.67 5,649.67 MADISON SHOPPING PLAZA INC SM P322,686,835.21 2,267.92 2,267.92 P322,686,835.21 2.177.15 2,177.15 346 TAYTAY 2,161.25 49.716.08 . 2,161.25 1,872.51 1,872.51 MANILA SOUTHERN ASSOCIATES INC 1.441.66 1,441.66 347 MARl LAO 849.42 40,535.60 849.42 788.08 788.08 MADISON SHOPPING PLAZA INC SM 604.17 604.17 128.17 128.17 348 CAGAYAN DE ORO 183.227.505.15 35,147.16 . -Ill .223,683.07 P775. 169,614.38 P313,666,911.67 METRO MAIN STAR ASIA CORP SM BAY -1.717,258.60 P775, 169,614.38 P311, 949,653.07 349 CITY 32.105.09 . 350 SUPER VALUE INC 25.490.57 . 351 MANDURRIAO STAR INC SM MARIKINA 22,318.09 . METRO MANILA SHOPPING MECCA 352 COR PSTA ROSA 19,166.50 . 353 SUPER SHOPPING MARKET INC 6,637.59 MERCANTILE STORES GROUP INC 354 DASMARINAS 5,649.67 2,267.92 355 INTERNATIONAL TOYWORLD INC MERCANTILE STORES GROUP INC SM 356 CLARK 2.177.15 . WATSONS PERSONAL CARE STORES 357 PHIL I 2,161.25 . 358 SUPER SHOPPING MARKET INC 1.872.51 . 359 SHOPPING CENTER MGT CORP 1.441.66 . 360 MAINSTREAM BUSINESS INC BAGUIO 849.42 MINDANAO SHOPPING DESTINATION 361 CORP 788.08 362 SURPLUS MARKETING CORPORATION 604.17 . 363 MARKET STRATEGIC FIRM INC 128.17 . Sub-total- Non-trade Suppliers 27,592,184.43 138,815,867.50 Grand Total P452.482.779.17 Pl38.815,867.50 Less: adjustment from BIR Grand Total P452,482, 779.17 P138,815,867.50

DECISION CTA Case No. 9290 Page 23 of61 We uphold the findings of the ICPA that only 45 out of the 363 suppliers or 12.40% in percentage, of the total number of petitioner's suppliers were captured in the TPI data of the BIR. With respect to the other 318 suppliers, representing 87.60% of the total, there is no showing that the same were reported or have available TPI data. In this case, respondent's assessment arose from a presumption that the discrepancy were all inexistent purchases. The three (3) elements for the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. 56 Income tax is assessed on income received from any property, activity or service. 57 Such being the case, in the imposition or assessment of income tax, it must be clear that there was an income, and such income was received by the taxpayer. Accordingly, the Court finds that the assessment was based merely on an unverified, undeclared purchases of petitioner. The records of the case are bereft of any showing that respondent verified or confirmed the amounts from the purported third-party information. Without such confirmation or any other satisfactory supporting documents, the subject undeclared purchases data is doubtful, inconclusive and unreliable. Contrary to respondent's stance, petitioner was able to obtain confirmation certificates, 58 as well as invoices, official receipts and other documents59 issued by its suppliers confirming their sale of goods or services to petitioner forTY 2010, which further supports petitioner's claim of legitimacy of its recorded purchases. Upon review and verification of the purchases reflected in petitioner's SLP for the TY 2010, petitioner's purchase transactions are actual and are duly supported by pertinent documents. Thus, the Court finds that the assessment of deficiency income tax amounting to 1"'199,443,221.84 arising from the alleged undeclared purchases is unwarranted. 56 Commissioner ofInternal Revenue vs. The Court ofAppeals. eta/., G.R. No. 108576, January 20, 1999. r 57 Supra. 58 Exhibits "P-46" to "P-46-15". 59 Exhibits "P-47" to "P-47-308.18.

DECISION CIA Case No. 9290 Page 24 of61 A.1.2 Gross income per book vs. Income Tax Return (ITR)- P5,566,488.79. Anent this item, the alleged difference arose between a comparison made by respondent of the sales in petitioner's SLS vis- a-vis the sales and other income per petitioner's ITR in the amount of P5,566,488. 79, consisting of the following: Discount Fees (a) P5,566,318.00 Excess of sales per book over sales per VAT returns (b) 170.79 Total difference P5,566,488. 79 With regard to (a) Discount Fees. petitioner alleges that discount fees amounting to P5,566,318.00 represent discounts given by the petitioner to credit card companies for the latter's payment or settlement of credit card transactions of their cardholders; That discounts were not granted and not indicated in the tape receipts at the time of sale but were deducted from the credit card company's credit card settlement payments; That for income tax purposes the said discounts fees are valid deductible business expense but are not deductible for VAT purposes. Petitioner's argument deserves scant consideration. To refute the assessment, petitioner submitted documents such as Merchant Agreement, Memorandum of Agreement, Promotion Announcement60 and Schedule of sales discount generated from the general ledger61 . The Court finds that the said documents are not sufficient for the Court to ascertain and confirm, if indeed, discounts were actually granted to its customers. Thus, this assessment shall remain. With respect to (b) Excess of sales per book over sales per VAT returns, the noted difference of P170. 79 constitutes undeclared sales by the petitioner and thus, should be subjected to income tax. A.2 Disallowed Sales Returns and Allowances P8,550,666.00 60 Exhibits "P-48" to "P-48.6" 61 Exhibits "P-51-2"; "P-51-2.1" to "P-51-2.12"t

DECISION CTA Case No. 9290 Page 25 of61 Respondent's verification of petitioner's documents disclosed that the amount claimed for sales return and allowances amounting to P8,550,666.00 was not properly documented. Hence, must allegedly be disallowed pursuant to Section 34 (A) (1) b of the NIRC, as amended, which states that "No deduction from gross income shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records." The composition of the sales returns and discounts 1s as follows: Description Amount Discount fees (a) P5,566,318.00 Sales Discount (b) 2 984 349.00 Total P8 550 667.00 With respect to (a) Discount Fees, petitioner reiterates that these represent discounts given to credit card companies for the latter's payment or settlement of credit card transactions of their cardholders; That said discounts are not granted and indicated in the tape receipts at the time of sale; That said discount fees are valid deduction for income tax purposes, however, is non-deductible for purposes of computing the 12% VAT sales. As per petitioner's books of accounts, separate general ledger codes/ accounts, it appears that Discount Fees have been reflected with total amount of P5,566,318.00, briefly summarized as follows: GL Number Description Amount 4030100 4030200 Discount Fees - Bankcard p 3,882,996.00 4030300 Discount Fees - SM (In-House Card) 4030400 Discount Fees - SMAC 177,395.00 4030500 Discount Fees- Sodexho 1 ,256,112.00 4033010 Discount Fees- Others Total Gift Card - MCI 236,562.00 (33.00) 13 284.00 p 5 566 318.00 In the schedule of sales discount generated from the General Ledger (GL)62 , the Court finds that the above GL account numbers representing discount fees cannot be traced in the submitted extracted general ledger. Hence, the Court cannot determine whether such discount fees were granted to its customers. Thus, this assessment shall remain. 62 Exhibits "P-51-2"; "P-51-2.1" to "P-51-2.12"(tJ

DECISION CTA Case No. 9290 Page 26 of61 On the other hand, petitioner alleges that (b) sales discount amounting to P2,984,349.00, represents discounts given to the customers which have been given at the time of sale and property indicated in the sales invoice; That these are valid deduction in the computation of the sales for ITR purposes, as well as, vatable base in conformity with Sec. 106 of the NIRC of 1997, as amended. Upon verification of petitioner's books of accounts, separate general ledger accounts, it appears that Sales Discounts have been reflected with a total amount of P2,984,349.00, broken down as follows: GL Number Description Amount Sales Discount- Outright Promo 4031110 Sales Discount- Outright Non-Promo P1 ,882,794.00 4031120 Sales Discount- Outright Wholesale 278,653.00 4131140 Sales Returns- Outright 822,233.00 4032100 669.00 Total P2 984 349.00 Further perusal of petitioner's schedule of sales discount generated from the general ledger63, the Court finds that the above- listed accounts are traceable to the extracted general ledger, thereby validly supporting petitioner's claim. Therefore, this assessment must be cancelled. A.3 Disallowed Expenses- P27,724,704.62 In the FDDA, respondent found petitioner liable for disallowed expenses in the total amount of P27,724,704.62 noting that some expenses were not supported. Thus, the said amount was disallowed as deductible expense for income tax purposes. Below is the list of these expenses and the amount of transaction: Nature of expense Amount Advertising expense (a) P6,351 ,858.62 Depreciation (b) 21,372,846.00 Total P27, 724,704.62 Petitioner contests the above assessment and argues that the expenses should not be disallowed because these are valid expenses and are duly supported by official receipts and/or sales invoices. "f 63 Exhibits "P-51-1" to "P-51-1.1

DECISION CTA Case No. 9290 Page 27 of61 With regard to (a) Advertising Expenses, records show that the advertising expense incurred or paid by petitioner pertains to the various display expenses, namely: the indoor and outdoor signages, stickers for the package counter, tarpaulins and billboards for the promotion of new and sale product and merchandise. Below is the breakdown of the said advertising expenses with its corresponding suppliers: Supplier Amount Exhibit Philippine Daily Inquirer 1,150,384.57 "P-47-212" Philstar Daily 1,060,466.58 "P-47-213" Mad888 "P-47-163" Summit Publishing 820,564.30 "P-47-264" Adfolio Advertising 573,264.25 "P-47-9" ABS-CBN Publishing 524,424.76 "P-47-3" Printing Excellence 450,816.80 "P-47-220" Shutterbug 347,357.72 "P-47-248" Ideal People Model 259,523.78 "P-47-122" WPP Marketing 239,175.17 "P-47-295" Markfive Inc. 119,487.21 "P-47-178" lnnomark Distributors "P-47-125" Color Commercial 96,257.29 "P-47-57" SM Mart Inc. 94,812.54 "P-47-251" Michael De Guzman 73,269.63 "P-47-193" Erwin Barleta 54,789.60 "P-47-89" Bluefish Digital 47,058.82 "P-47-40" Reco Modelling Agency 46,588.23 "P-47-228" Katherine Magsanoc 46,188.04 "P-47-143" Mercator Model Management 46,048.06 "P-47-187" Chameleon Medelling Agency 44,537.81 "P-47-51" Lollipop Safety Balloons 43,298.96 "P-47-158" Cherry Anne Uy 35,294.12 "P-47-52" Mellimeter Design 27,196.41 "P-47-196" New Directions Inc. 20,588.22 "P-47-200" Space World Corporation 19,000.00 "P-47-256" Prime Spots Inc. 15,966.78 "P-47-217" Label Line Enterprises 14,499.99 "P-47-147" Accurate Printing 13,392.83 "P-47-4" ECL Make up Industry Prince Kurl Junior Corp 9,821.41 "P-47-288" Victoriano Gozano 9,486.60 "P-47-301" First Asia Realty 7,023.81 Others 5,428.57 5,294.11 Total 250.00 30,301.64 6,351,858.62 However, upon verification and scrutiny of the above transactions, it appears that only advertising expenses amounting to~

DECISION CTA Case No. 9290 Page 28 of61 P4,462,081.47 are duly supported by proper documents, while there is a difference of P1, 889,777.15 that must be disallowed for the following reasons, to wit: Supplier Amount Exhibit Philippine Daily Inquirer 676,327.87 "P-47-212.1 - 8" Philstar Daily 806,797.13 "P-47-213.1- 9" Mad888 820,564.30 "P-47-163.1- 55" Summit Publishing 573,264.25 "P-47-264.1 - 7'' Adfolio Advertising 304,144.20 "P-47-9.1 - 19" ABS-CBN Publishing 285,884.00 "P-47-3.1 - 4" Printing Excellence 347,357.72 "P-47-220.1 - 33" Shutterbug 242,857.14 "P-47-248.1 - 6" Ideal People Model Supported by Billing Invoice "P-47-122.1 - 9" WPP Marketing 119,487.21 "P-47-295.1 - 24" Markfive Inc. "P-47-178.1" Innomark Distributors 32,989.69 "P-47-125.1- 2" Color Commercial 2,169.64 "P-47-57, 1 - 3" SM Mart Inc. "P-47-251.1 - 8" Michael De Guzman 67,562.50 "P-47-193.1- 2" Erwin Barleta "P-47-89.1 - 3" Bluefish Digital Supported by Statement of Account "P-47-40.1 - 9" Reco Modelling Agency "P-47-228.1 - 3" Katherine Magsanoc dSupported by Billing Invoice "P-47-143.1" Mercator Model Management Supported by Statement of Account Chameleon Medelling Agency 35,308.85 Lollipop Safety Supported by Billing Invoice Balloons Supported by Billing Statement Cherry Anne Uy Mellimeter Design 72,000.00 "P-47-187.1- 3" New Directions Inc. Space World Supported by Billing Statement "P-47-51.1 - 2" Corporation Prime Spots Inc. 27,196.43 "P-47-158.1- 3" Label Line Enterprises Supported by Billing Statement "P-47-52.1 - 2" Accurate Printing "P-47-196.3" ECL Make up Industry 19,000.00 "P-47-200.1" Prince Kurl Junior Corp Supported by Billing Invoice Victoriano Gozano First Asia Realty Invoice without signature "P-47-256.1 - 2" Others 8,928.58 "P-47-217.1- 2" "P-47-147.1 - 4" 14,300.00 "P-47-4.1 - 3" 5,691.96 "P-47-288.1" Without Documents "P-47-301" Without Documents 250.00 Without Documents Total 4,462,081.47 Therefore, the Court finds that this assessment item must be cancelled partially. The disallowed advertising expenses shall b~

DECISION CTA Case No. 9290 Page 29 of61 modified and reduced to P1,889,777.15 (P6,351,858.62 less P4,462,081.47), which shall remain. With respect to (b) Depreciation expenses in the amount of P21 ,372,846.00, the Court finds that petitioner was able to establish the validity and reasonableness of the claimed depreciation expenses by presenting Lapsing Schedule of Property and Equipment as well as the Lapsing Schedule of Fixed Assets Acquired Year 201064 which was reconciled with the Audited Financial Statements of the petitioner for the year 2010.65 Hence, this assessment shall be cancelled. A.4 Disallowed Expenses for Non-withholding of Tax - ~10,373,770.33 In the FLO, respondent made a comparison of the purchase of goods and services reported in petitioner's ITR and Financial Statement (FS) against the income payments reflected in the alphalist per 1604E, which resulted to an alleged difference of P10,373,770.33. The said difference was construed as purchases not subject to EWT by petitioner, thus, disallowed as deductible expense for IT purpose and was assessed deficiency 30% IT, details of which are as follows: Account Per ITRJFS Per1604E Difference .(A) Purchases (B )Contractors 628,676,516.93 627,223,616.00 1 ,452,900.93 (C)Rent Expense 77,408,462.75 69,048,317.50 8,360,145.25 (D)Management 109,135,101.00 108,901,376.40 Fees 233,724.60 TOTAL 10 790 329.14 10 463 329.59 326 999.55 826 010 409.62 815,636,639.49 10,373,770.13 A. Purchases sub;ect to 1% EWT- P1, 452. 900.93 Allegedly, the following purchases were not subjected to 1% EWT: Purchases of materials per vat returns (a. f) P619,735,428.50 292,694.00 Fuel and Oil Office supplies 3,679,448.00 Addition to PPE 9Note 7 f/s)-465 1,096,872.75 Leasehold Improvement 1,162,056.00 Data ProcessinQ Equipment 64 Exhibit "P-53". 65 Exhibit "P-55". ~

DECISION CIA Case No. 9290 Page 30 of61 Furniture and Fixtures 766,332.00 Store and Office Equipment 1,274,781.00 Repairs and Maintenance TOTAL 668 905.00 Less: Income payments subjected to 1% EWT 628,676,517.25 DISCREPANCY 627 223 616.00 P1 452 901.25 a. 1 Purchases of Materials- P619. 735.428.50 The above alleged purchases of materials used by petitioner are composed of the following: Per VAT return: P142, 194,459.84 1st quarter66 126,084,490.84 2nd quartero:;r 136,112,237.83 215 344 240.25 3rd quarter00 4th quartero:;~ P619, 735.428.76 Total Petitioner contends that respondent considered the total amount of purchase of goods per VAT return. It should be taken into consideration that the purchases per VAT returns reflect all the purchases incurred by the company for the taxable year including fuel and oil and office supplies, which were separately assumed in the assessment. After careful examination, records reveal that the correct amount of net purchases of goods related to cost of sales should be P618,282,527.84 based on the data reflected in petitioner's audited financial statements, as follows: Cost of Sales10 P602,440,285.84 Add: Ending Inventory" 176 912 736.00 Goods available for sale 779,353,021.84 Less: Beginning lnventoryl� 161 070 494.00 Purchases P618,282,527 .84 66 Exhibit "P-56-1 ". 67 Exhibit "P-56-2". 68 Exhibit "P-56-3". 69 Exhibit "P-56-4". 70 Exhibit "P-55", Statement of Comprehensive Income. 71 Exhibit "P-55", Statement of Financial Position 2010. 72 Exhibit "P-55", Statement of Financial Position 2009~

DECISION CTA Case No. 9290 Page 31 of61 From the foregoing, petitioner had properly withheld 1% EWT from all of its purchases of goods. Hence, the assessment will be cancelled, with details as follows: Purchase of materials per F/S (a.1) P618,282,587.84 Fuel and Oil 292,694.00 Office Sup~ies Addition to PPE (Note 7 FS) 3,679,448.00 Leasehold lm_Qrovement Data Processing Equipment 1,096,873.00 Furnitures and Fixtures 1'162,056.00 Store and Office Equipment Repairs and Maintenance 766,332.00 TOTAL 1,274,781.00 Less: Income payments subjected to 1%EWT 668 905.00 627,223,676.84 DISCREPANCY 627,223,616.00 P60.8473 B. Contractors subject to 2% EWT - P8.360, 145.00 With regard to this item, the following are the income payments to contractors that were allegedly not subjected to 2% EWT, to wit: Interest expense/Finance charge (b.1) ,.3, 106,651.00 Janitorial and messengerial services 1,599,757.00 Outside Services 2,130,640.00 Advertising and promotions (b.2) 6,010,851.86 Communication, light and travel Miscellaneous 43,445,324.00 Handling and delivery charges 92,713.00 Other charges (b.3) Repairs and maintenance 2,916,777.00 Security services 1 ,948,288.00 Insurance expense 2,330,535.32 Representation expense (b.4) 1,014,538.12 Transportation expense (b.5)_ Leasehold Improvement 818,012.00 Total 1,033,958.00 Less: Income payment per 1604E 1,818,028.00 Difference 9 142 389.00 77,408,463.00 69 048 317.00 PS 360 145.00 73 The discrepancy of P60.84 is immaterial and will not affect the assessment. ~

DECISION CTA Case No. 9290 Page 32 of61 b.1) Interest Expense/Finance Charge- F3. 106.651.00 Anent this item, the Court finds that this assessment must remain because no documents were presented to refute this assessment. b.2) Advertising and Promotions- F6.010.851.86 Petitioner argues that the advertising expenses reflected in its FS or ITR include not only income payment that are subject to 2% EWT but also items which are subject to 15% EWT and exempt from EWT, with details as follows: DescriJllion Amount Exempt 2% Marketing - Display P140,666.53 1,235,782.28 P140,666.53 Marketing- Publicity MarketinQ - Newspaper 250,587.35 P1 235 782.25 250,587.35 Marketing - Others 1,235,782.28 Less: subject to 15% 4,897,333.44 - MarketinQ - Recruitment -675,876.14 Marketing TV Ads - Production Cost 4,221,457.30 Marketing - GWP, PWP AND 125,370.00 Giveaways 13,787.98 - Total 23 201.21 125,370.00 PS 010 851.86 13,787.98 23 201.21 P4 775 070.37 Furthermore, petitioner contends that the advertising expense of P1 ,235, 782.28 represents payment to Media for advertisement in newspaper of general circulation which is exempt from EWT pursuant to Section 2.57.2 of Revenue Regulations (RR) No. 2-98. 74 A perusal of the records show that petitioner only submitted a schedule of Marketing-Newspaper accounf5 and not the actual general ledger with account number 6009090 or documents such as invoices/official receipts. Mere schedule is not sufficient to refute the assessment. Hence the assessment must be sustained. As to Marketing-Others account amounting to P675,876.14, petitioner claims that the same was already subjected to 15% EWT under Professional Fees account. However, petitioner failed to provide documents to prove the same. Thus, the assessment on 74 "SECTION. 2.57.2- Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon. - XXX XXX XXX (E) Income payments to certain contractors - xxx (4) Other contractors - XXX XXX XXX (h) Advertising agencies, exclusive of gross payments to media; 75Exhibit "P-57''. ~

DECISION CTA Case No. 9290 Page 33 of61 Advertising and Promotions amounting to P6,01 0,851.86 must remain. b.3) Other Charges- P1.948.288.00 Petitioner alleges that the Interest Expense/Finance Charge that was reflected in its audited FS amounting to P3,106,651.0076 already includes the Other Charges of P1 ,948,288.00. However, a perusal of petitioner's 2010 Statement of Comprehensive Income and Notes to Financial Statements No. 8, 77 show that it is not indicated therein, whether "Other Charges of P1 ,948,288.00" was included in the Finance Charges account. Hence, the assessment shall remain. b.4) Representation Expense- P1.033.958.00 Petitioner contends that the representation expense of P1 ,033,958.00 refers to the reimbursement of various expenses made to its employees which were incurred in pursuit of its business, and that reimbursement-of-cost are not considered as income payment and hence, not subject to EWT. However, the Court finds that petitioner did not submit supporting documents for the Court to validate whether these expenses are indeed representation expenses, not subject to 2% EWT. Hence, this assessment shall remain. b.5) Transportation and Travel- P1.818.028.00 On this item, petitioner contends that the transportation expense of P1 ,818,028.00, which was assessed by respondent as subject to 2%, includes income payments which are exempt from EWT amounting to P202,319.09, which represents Per Diem Allowance account, to wit: Description Amount Exempt 2% P164,087.86 P164,087.86 T and T Local -Airfare - T and T Local - Hotel 271,202.94 Accommodation 271,202.94 - T and T Local - Per Diem - Allowance 202,319.09 202,319.09 627,729.33 T and T Local - Others 627,729.33 - 76 Exhibit "P-55", 2010 Statement of Comprehensive Income. 77 Exhibit "P-55".rf

DECISION CTA Case No. 9290 Page 34 of61 Transportation and Travel 552 689.26 - 552 689.26 -Corp. Total P1 818 028.48 P202 319.09 P1 615 709.39 Records show that petitioner only submitted its Policy of Per Diem Allowance78 which the Court finds as insufficient proof that Per Diem Allowance was given to its employees. Hence, must be sustained. C. Rent expense subject to 5% EWT- ~233. 724.60 Anent this item, the Court finds that the difference of rent expense amounting to P233, 724.60 is a valid assessment upon examination of rent expense account per Financial Statement and BIR Form 1604-E, to wit: Rent expense per FS79 P1 09,135,101.00 Less: Income payment per BIR Form 1604-E80 108 901 376.40 Difference P233 724.60 D. Professional fees- 15% amounting to ~326.999.55 Respondent found petitioner liable for professional fees not subjected to 15% EWT with details as follows: Professional Fees (d.1l P333,000.00 Manaqement and Consultancy Fee 9,781,453.00 Re class: part of advertisinq expense (d.2) Total 675,876.14 Less: Income payment per 1604E 10,790,329.14 Difference 10 463 329.59 d. 1) Professional Fees- ~333. 000.00 P326 999.55 Upon verification of the records, the composition of assessed professional fees is as follows: GLCode Account Amount 6016100 Prof Fees-Audit P158,000.00 6016600 Prof Fees- Others Total 175 000.00 P333 000.00 78Exhibit "P-59". 79 Exhibit "P-55", Notes to Financial Statements No. 11.1. 80 Exhibit "P-45"~

DECISION CTA Case No. 9290 Page 35 of61 The above composition of professional fees includes accounts which are exempted from EWT specifically the professional fees - audit amounting to P158,000.00 and some of the other professional fees amounting to P169,000.00. These represents income payments made to a General Professional Partnership (GPP) which is exempted from expanded withholding taxes pursuant to RR No. 2-98,81 as amended by RR No. 14-02,82 which provides as follows: "SECTION 2.57.5. Exemption from Withholding. - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: XXX XXX XXX (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: XXX XXX XXX (4) General professional partnerships." However, upon perusal of the records, the Court finds that the professional fees are supported only by billing statements83 instead of official receipts. Petitioner also submitted documents such as BIR Certificate of Registration84 and Articles of Partnership85, but these documents are not sufficient to prove that professional fees have been paid to the general professional partnership. Hence, the assessment shall remain. d.2) Other Fees subjected to 15% EWT- P675.876.14 Petitioner alleges that income payments made to individual professionals amounting to P675,876.14 were properly subjected to 15% EWT, but were reflected under the FS account of Marketing- Others. 81 Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended Relative to the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes. 82 Subject: Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as amended. 83 Exhibit "P-62", "P-47-83.1", "P-47-222.1" to "P-47-222.10". f 84 Exhibit "P-61 ". 85 Exhibit "P-61 ".

DECISION CTA Case No. 9290 Page 36 of61 We cannot sustain petitioner's argument. In this item, petitioner failed to provide the general ledger reclass entry to verify whether it was properly recorded and subjected to 15% EWT. Hence, the assessment on this item shall remain. In light of the foregoing examination/reconciliation pertaining to the Disallowed Expenses for Non-withholding of Tax in the total amount of P10,373,770.33, the same shall be reduced to P8,920,869.20, broken down as follows: Purchases - Contractors Rent P8,360, 145.25 Management Fees 233,724.60 TOTAL 326,999.55 P8,920,869.20 A.5 Disallowed creditable tax withheld- P20,593.49 Respondent alleges that petitioner has unsupported creditable withholding taxes (CWT) computed as follows: Tax withheld per ITR P1 ,230,976.00 CWT 1 210 382.51 Difference P20,593.49 Petitioner refutes this assessment and argues that tax credits claimed in its ITR were fully supported by BIR form 2307. In addition, respondent did not include in the FAN how the alleged CWT amounting to P1 ,210,382.51 was calculated. Thus, this item of assessment should allegedly be considered null and void. Upon review and verification of the Summary of Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax at Source (SAWT)86 and the BIR Form 230787 presented, the total amount of tax withheld with supporting documents is P1,217,469.77. The amount ofP13,506.23 should be disallowed as tax credit as this is not duly supported by valid documents, to wit: 86 Exhibit "P-63". 87 Exhibits "P-63-1" to "P-63-893'{1tl

DECISION CTA Case No. 9290 Page 37 of61 CWT Claimed per BIR P1 ,230,976.00 Less: Verified and validated CWT 1,217,469.77 Unsupported CWT P13,506.23 In summary, We find petitioner liable for deficiency Income Tax in the reduced basic amount of P6,596,532.27, computed as follows: Taxable Income Per Return 57' 156,877.00 Add: Adjustments A. Under- Declaration of Sales - 21,943,453.14 79,100,330.14 1. Gross Profit on Local Purchases 5,566,488.79 2. Gross Income (Per Books vs. ITR) 5,566,318.00 30% 23,730,099.04 B. Sales Returns and Allowances 1,889,777.15 17,133,566.77 C. Disallowed Expenses - 1. Advertising 2. Depreciation 8,920,869.20 D. Not Subjected to EWT 16,397,961.00 Taxable Income Per Audit 1,401,663.00 Income Tax Rate 1,230,976.00 Tax Due Per Audit Less: 19,030,600.00 Unexpired Excess of Prior Year's MCIT Payment (1st to 3rd Quarters) 13,506.23 CWT per Audit 1,883,527.00 Total Per Return Less: Unsupported CWT CWT carried over to the next quarter Deficiency Income Tax 6,596,532.27 IMPROPERLY ACCUMULATED EARNINGS TAX In the FDDA, petitioner was assessed for deficiency Improperly Accumulated Earnings Tax (IAET) 1n the aggregate amount of P19,510, 137.27, computed as follows: Taxable income 2010 2,808,153.00 P57,166,877.00 Add: Income subjected to final tax 8041195.00 NOLCO 10 849 348.00 Total 68,016,225.00 Less: Income tax paid Total 2 632 629.00 Add: Retained earnings from prior years (A) 65,383,596.00 124 285 696.00

DECISION CTA Case No. 9290 Page 38 of61 Accumulated earnings as of December 31, 2010 50,000,000.00 189,669,292.00 Less: Amount that mav be retained 50 000 000.00 100% of Paid UP Capital (1 00 000 000.00) Dividends Paid on 2011 2,241,732.33 89,669,292.00 Amount subject to improperly accumulated 8,276,475.74 10% earnings tax 8,966,929.20 Rate of Tax 25 000.00 Deficiencv IAET 10 543 208.07 Add: Surcharge (25%) P19,510,137.27 Interestrtrom 01/11/11 to 9/30/2015) Compromise penalty TOTAL AMOUNT DUE Respondent claims that there was indication that petitioner accumulated the earnings and profits instead of distributing said earnings through dividends declaration. Hence, petitioner is liable for deficiency improperly accumulated earnings tax pursuant to RMC No. 35-2011, in relation to Section 29 of the Tax Code. Petitioner counter-argues that only P24,285,696.00 representing un-appropriated retained earnings should be considered in the IAET computation and that the previous years' appropriation of P100,000,000.00 should have been deducted from the beginning balance of Retained Earnings to determine if petitioner has improperly accumulated earnings. Further, the P100,000,000.00 was reserved for its future business expansion. The assessment must be cancelled. Section 29 of the NIRC of 1997, as amended, and implemented by Section 3 of RR 2-2001 88, reads as follows: "SEC. 29. Imposition of Improperly Accumulated Earnings Tax. - (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. 88 Subject: Implementing the Provision on Improperly Accumulated Earnings Tax Under Section 29 of the Tax Code of 1997. ~

DECISION CTA Case No. 9290 Page 39 of61 (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. - (1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings, and profits to accumulate instead of being divided or distributed. XXX XXX XXX (C) Evidence of Purpose to Avoid Income Tax.- XXX XXX XXX (2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. XXX XXX XXX (E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business." Based on the foregoing, the IAET equivalent to 10% of the improperly accumulated earnings shall be imposed on a corporation that permits its earnings and profits to accumulate beyond the reasonable needs of the business, instead of being distributed as dividends to its shareholders or members, unless the corporation, by clear preponderance of evidence, shall prove to the contrary. Pertinent thereto, Section 3 of RR No. 2-2001 enumerates what constitutes accumulation of earnings for the reasonable needs of the business, to wit: "SECTION 3. Determinative of Reasonable Needs of the Business. - xxx(16

DECISION CTA Case No. 9290 Page 40 of61 XXX XXX XXX For purposes of these Regulations, the following constitute accumulation of earnings for the reasonable needs of the business: a) Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years; b) Earnings reserved for definite corporate expansion projects or programs requ1rmg considerable capital expenditure as approved by the Board of Directors or equivalent body; c) Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body; d) Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement; e) Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution; f) In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence." (Emphasis Supplied) Based on the foregoing, the computation of improperly accumulated earnings under Section 29 of the NIRC of 1997, as amended and implemented by Section 3 of RR 2-2001, excludes the earnings and profits of a corporation set aside for the reasonable needs of the business. In this case, petitioner alleges that the reasonable needs of the business fall under Section 3(b) of RR No. 2-2001. To sho"jP

DECISION CTA Case No. 9290 Page41 of61 that retained earnings were appropriated by petitioner, the latter submitted copies of Secretary's Certificate for the appropriations of retained earnings for future expansion amounting to P60,000,000.0089 and P40,000,000.0090 were made in December 1 2004 and December 22, 2006, respectively. Records also show the utilization of appropriated retained earnings of P1 00,000,000.00 according to its business expansion, in a summary of its business expansions from the year 2005 to 201291 : Table 19 BRANCH RI>AN"" OPENING FIXED INITIAL TOTAL I DATE ASSETS INVENTORY INVESTMENT 0229 (SM City� San Lazaro 1) 14 Jul 05 5,135,367.72 INVESTMEN! 0242 (SM City� Sta. Rosa 1) DATE 5,609,040.16 9,217,035.19 0272 (SM City� Clark 2) 9 May 05 16 Feb 06 4, 773,683.19 4,081,667.47 10,702,590.42 0244 (SM Mall of Asia 2) 2 Jan 06 11 May 06 4,910,969.70 5,093,550.26 9,355,372.15 0287 (SM City � Lipa 1) 21 Feb 06 20 May 06 3, 193,193.57 4,581,688.96 15,166,995.11 0294 (SM City � Bacolod 2) 3 Jan 06 21 Sep 06 4,967,181.44 10,256,025.41 0399 (SM City-Taytay 1) 1 Jun 06 3,494,199.34 4, 791 ,630.90 7,984,824.47 0443 (SM City-Marikina 1) 18 Jan 07 1 Mar 07 2,944,160.75 4,681,152.41 9,648,333.85 0472 (SM City. Tarlac 1) 12 Jun 07 8 Nov 07 3,356,154.58 4,582,584.59 8,076,783.93 0848 (SM City� Masinag 1) 25 Jan 08 13 Sep 08 3,057,851.57 5,142,410.83 8,086,571.58 0863 (Cubao Mall1) 15 Jun 10 29 Jul10 3,094,751.88 3,150,116.12 6,506,270.70 0316 (SM City� General Santos 1) 22 Feb 11 5 May 11 4,803,209.04 3,002,875.65 6,060,727.22 TOTAL INVESTMENT 20 Oct 11 2 Dec 11 49,339,762.94 3,433,351.47 6,528,103.35 11Jul12 9 Aug 12 3,477,674.34 8,280,883.38 56,274,728.41 105,614,491.35 Furthermore, on October 3, 2011, petitioner's Board of Directors approved the declaration of cash dividends amounting to P50,000,000.00, an amount that was previously allocated as appropriated retained earnings. 92 Thus, the allegation of respondent that petitioner accumulated profits instead of dividend distribution is not correct. The Court also considered the findings below of the ICPA, that in computing the IAET, the retained earnings from prior years amounting to P124,285,696.0093 as computed by respondent includes the appropriated retained earnings amounting to P100,000,000.0094. The P100,000,000.00 should have been deducted from the beginning balance of retained earnings in the 89 Exhibit "P-64-2". 90 Exhibit "P-64-1 ". 91 Exhibit "P-75", !CPA Report. 92 Exhibit "P-64-3 ". i/O 93 Exhibit "P-55", Statement of Changes in Equity. 94 Exhibit "P-55", Statement of Changes in Equity

DECISION CTA Case No. 9290 Page 42 of61 computation of IAET. The computation of retained earnings available for dividend declaration after excluding the appropriated retained earnings, is as follows: Total Retained Earnings, January 1, 2010 p 124,285,696.00 Less: Appropriated Retained Earnings as at January 1, 2010 100.000,000.00 Unappropriated Retained Earnings, January 24.285,696.00 1. 2010 57,166,877.00 Add: Adjustments Taxable income 2010 2,808,153.00 10,849,348.00 65,383,596.00 Add: Income subjected to final tax 8,041 '195.00 68,016,225.00 NOLCO Total 50,000.000.00 2,632,629.00 Less: Income tax paid 50,000,000.00 65,383,596.00 Total Unappropriated Retained Earnings, 89,669.292.00 December 31, 2010 Less: Amount that may be retained 100,000,000.00 100,000,000.00 100% of Paid Up Capital Dividends paid in 2011 (10,330,708.00) Amount subject to improperly accumulated 10% earnings tax p. Rate of tax Deficiency IAET In sum, the assessment on Improperly Accumulated Earnings Tax must be cancelled. VALUE ADDED TAX In the FDDA, petitioner was assessed for deficiency Value-Added Tax in the total amount of P229,470,890.49, computed as follows: Taxable sales per vat returns ( 1) 1"1 ,004,248,112.85 Add (Deduct) Adjustments: 98,260,443.17 408 654 047.59 A. Undeclared income (2) 69 280 694.50 1,412,902,160.44 Gross profit on undeclared purchases 12% Total taxable sales 169,548,259.25 VAT Rate VAT Due thereon 28 979 748.67 Less: Input tax/payments/credits 140,568,510.58 Input tax per return 22 249 330.34 Less: Input tax failing invoicing 118,319,180.24 requirements VAT Payable per audit Less: VAT payment Net VAT payable due thereon

DECISION CTA Case No. 9290 Page 43 of61 Add: Interest (from 1/26/11 to 9/30/2015) 111,101,710.25 111151710.25 Compromise penalty 50 000.00 1"229,470,890.49 TOTAL AMOUNT DUE (1) Undeclared income amounting to P408.654.047.59. In the FDDA, respondent found petitioner has undeclared sales pursuant to RMO No. 42-2003 and the same should allegedly besubjectedtoVATpursuanttoSection 106,107, 108oftheNIRC, as amended. As a result, respondent arrived at the assessed amount based on the following computation: Overclaimed of purchases P311 ,949,654.65 Add: Mark up (100-61%) 96,704,392.94 (31% X 311,949,654) P408 654 047.59 Amount subject to VAT Petitioner reiterates its argument that just like the Income Tax assessment, the VAT assessment is also without factual or legal bases. Petitioner asserts that respondent failed to present the required Certifications/Sworn Statements required under RMO 42- 2003 and RMO 46-2004. The assessment on this item must be cancelled. In view of the findings of the Court on the assessed deficiency income tax, no deficiency VAT assessment should arise from undeclared sales. As discussed, respondent's assessment arose from a presumption that the discrepancy were all inexistent purchases, and therefore the imposition of VAT thereon is likewise incorrect. As such the imposition of VAT assessment pertaining thereto shall be cancelled. (2) Disallowed input tax for failure to complv with invoicing requirement- P69,280.694.50. In the FDDA, respondent's findings disclosed that input tax claimed per VAT returns failed to comply with the invoicing requirements pursuant to Section 113 of the NIRC, as amended, and thus ' must be disallowed The breakdown is as follows� No address of buyer P14,719,516.83 Invalid TIN 17,771,967.51 No TIN of buyer 36,789,210.20 TOTAL P69,280,694.54

DECISION CTA Case No. 9290 Page 44 of61 A perusal of the records show that respondent failed to provide details of the alleged disallowances which supposedly violated invoicing requirements pursuant to Section 113 of the NIRC, as amended. Hence, the Court agrees with the results of the examination made by the ICPA, to wit: Input W/out TIN & W/out W/out Total Exhiblt Address TIN Address VAT 114,184.32 "P-66-1" 2nd Generation 108,912.88 5,271.44 Garment 1,863,426.97 Advani Apparel 7,040,426.55 1,678,907.43 85,090.76 1, 763,998.19 "P-66-2" Asiatique Trading 192,750.00 Big Box Trading 4,612,078.13 212,357.28 459,468.48 967,105.07 1,638,930.83 "P-66-3" Equestrian Trading 202,500.00 FGU Builders 183,214.29 183,214.29 183,214.29 "P-66-4" First Asia Realty 1,290,503.08 Golden Astiplaz 589,897.80 88,670.11 12,846.87 101,516.98 "P-66-5" Homme Plus 4,012,189.21 170,785.83 13,628.58 184,414.41 "P-66-6" Marketing Prime Value 2,570,187.01 265,434.79 20,163.22 285,598.01 "P-66-7" Raerondstarr 651,449.54 121,225.81 3,055.72 124,281.53 "P-66-8" Marketing 398,957.14 Resurge Manufacturing S@ A International 11,058,490.76 210,779.02 45,413.60 256,192.62 "P-66-9" SM Mart Inc. 52,316.89 4,820.85 4,820.85 "P-66-10" SM Prime Holdings 9,541,906.45 SM Retail Inc. 57,623.40 Stratpro Company 457,448.26 Twinluck General 794,320.75 99,694.35 126,894.18 226,588.53 "P-66-11" VS Marketing 9,366,957.46 247,995.11 121,552.54 - 369,547.65 "P-66-12" 54,936,643.69 3,387,976.90 898,206.24 967,105.07 5,253,288.21 Upon examination of supplier's invoices, the Court finds that the invoices/official receipts presented by petitioner are generally compliant with invoicing requirements except for some invoices/official receipts with total equivalent input VAT of P5,253,288.21 that are found to be not in compliance with invoicing requirementfrt

DECISION CTA Case No. 9290 Page 45 of61 Furthermore, considering that the examination of the ICPA only covered 79.295% of the supplier's invoices subject to the disallowed input VAT, an extrapolation of the estimated input VAT to be allowed due to failure to comply with invoicing requirements was made as follows: Actual disallowed input VAT per review and 69,280,694.50 5, 253,288.21 verification Add: Prorated disallowed input VAT 54,936,643.69 1,371,642.46 Disallowed input VAT by BIR 14,344,050.81 I 6,624,930.67 Less: Total input VAT verified vs. supplier's 9.56% invoice Input VAT without supplier's invoice available on file Multiply by: {5,253,288.21/54,936,643.69) Total disallowed estimated input VAT for failure to comply with invoicinQ requirements The Court finds that the disallowed input tax for non- compliance with invoicing requirements assessed by respondent amounting to P69,280,694.50 should be reduced to P6,624,930.67. In summary, petitioner is liable for basic deficiency VAT in the amount of P6,624,930. 70, computed as follows: Taxable Sales per VAT Returns 1 ,004,248,112.85 Add: Adjustments Undeclared Income: - Gross Profit on Undeclared Purchases 1,004,248,112.85 Total Taxable Sales 12% VAT Rate VAT Due 120,509,773.54 Less: Input Tax Payments/Credits 98,260,443.17 91,635,512.50 Input Tax Per Return 6,624,930.67 28,874,261.04 Less: Input Tax failing Invoicing 22,249,330.34 Requirements VAT Payable Per Audit 6,624,930.70 Less: VAT Payments I Net VAT Payable EXPANDED WITHHOLDING TAX Respondent assessed petitioner of deficiency Expanded Withholding Tax in the total amount of P739,029.64. broken down as follows:~

DECISION CTA Case No. 9290 Page 46 of61 A. Disallowed expenses due to (1) P242,468.08 non-withholding of EWT (2)_ 130 035.60 372,503.68 B. Purchases not subjected to EWT 350,525.96 Deficiency expanded withholdinQ tax 16 000.00 366 525.96 Add: Interest (01.16.11 to 9.30.15) P739 029.64 Compromise TOTAL AMOUNT DUE (1) Disallowed expenses due to non-withholding of EWT - Ft242.468.08. The above alleged purchases not subjected to EWT were computed by respondent, with details as follows: Account Per ITRIFS Per1604E Difference EWT Due (a) Purchases - 14,529.01 1% 628,676,516.93 627,223,616.00 1,452,900.93 (b) Contractors - 167,202.91 2% 77,408,462.75 69,048,317.50 8,360,145.25 11,686.23 (c) Rent expense 49 049.93 -5% 109,135,101.00 108,901 ,376.40 233,724.60 (d) Management 242 468.07 Fees -15% 10,790,329.14 10 463 329.59 326 999.55 Total 826 010 409.62 815 636 639.49 10 373 770.13 As already discussed in the portion of income tax assessment, only the transactions on purchases not subjected to 1% EWT will be cancelled in the amount of P1 ,452,900.93 with the corresponding EWT of P14,529.01. The remaining amount of P8,920,869.40 and its corresponding EWT of P227,939.07 shall remain, to wit: Account Difference EWT Due Purchases - 1% - - Contractors - 2% Rent Expense - 5% 8,360,145.25 167,202.91 Management Fee - 15% 233,724.60 11,686.23 TOTAL 326,999.55 49,049.93 8,920,869.40 227,939.07 (2) Purchases not subtected to EWT per SLP vs A/TIED - Ft130, 035. 60. The alleged deficiency EWT amounting to P130,035.60 arising from the comparison of the purchases reported in petitioner's SL~

DECISION CTA Case No. 9290 Page 47 of61 as against the AITIED or SLS of its supplier can be broken down as follows: 1. Related Party Suppliers p 80,908.23 2. Unrelated Suppliers TOTAL 49,127.37 P130,035.60 1. Transactions with related-partv suppliers- PBO. 908.23 The Court finds that petitioner submitted a Confirmation Certificate95 from the related party suppliers. Hence, the alleged deficiency EWT of P80,908.23 should be reduced to P21 ,401.95, computed bellow: Difference per BIR Matching 1"4,248,704.31 Less: Adjustment as a result of independent review 3,245,221.90 Difference per BIR Matching 1,003,482.41 SM INVESTMENTS CORPRENTAL 682,187.92 1"21,401.95 SM RETAIL INC 2,453,149.01 3,135,336.93 Less: Difference per ICPA review SM INVESTMENTS CORPRENTAL 5,836.39 SM RETAIL INC (115,721.36) j109,884.97) Net difference Deficiency EWT (using EWT Rate of 5%, 2% and 1%) 2. Transactions with unrelated suppliers- P49. 127.37. For this particular item, the Court cannot ascertain this transaction. As found by ICPA, there is no data obtained from the SLS of petitioner's unrelated suppliers and no documents were presented to verify the remaining P49, 127.37 alleged deficiency EWT assessed by respondent. Thus, this assessment must be upheld. Hence, the assessment on purchases not subjected to EWT should be reduced to P70,529.32 (P21 ,401.95 plus P49, 127.37). In summary, petitioner is liable for basic deficiency EWT amounting to P298,468.39, broken down as follows: 95 Exhibits "P-46-1" to "P-46-15'/Io

DECISION CTA Case No. 9290 Page 48 of61 Disallowed Expenses due to Non-Withholding of EWT 227,939.07 Purchases Not Subjected to EWT 70,529.32 TOTAL 298,468.39 WITHHOLDING TAX ON COMPENSATION In the FDDA, respondent assessed petitioner for deficiency withholding tax on compensation in the total amount of P5,921 ,671.78, computed as follows: r;alaries per FS 1 P'75.099.717.95 Less: Gross compensation per alphalist 2 65,606,106.75 ft;mount not subjected to WT 9,493,611 .20 Multiply by: Rate 3 32% Basic deficiency tax 3,037,955.584 fA_dd: Interest (from 1/15/2011 to 9/30/15) 2,858,716.20 Compromise- over-withholding 25 000.00 2 883 716.20 OTAL AMOUNT DUE P5,921 ,671.78 Petitioner argues that respondent was not able to capture the correct amount of salaries and wages and employees benefits reported in the company's FSIITR. The total amount of salaries and wages should be P94,792,411.00 and not P75,099,717.95 which respondent used in their assessment, details of which are as follows: Salaries and Wages P74,836,913.80 SSS, Philhealth, Medicare 6,332,864.53 OEB - 13th Month 5,945,218.22 OEB - Leave Conversion (A) 1,814,221.55 OEB- Others (B) 3,718,029.77 Retirement Benefit Expenses (C) 2,145,163.06 Total P94 792 410.93 Upon examination of the records, the Court finds that the correct amount of Salaries and Wages is indeed P94,792,411.00 per Notes to Financial Statements No. 11.1 Be Furthermore, a reconciliation was made on the salaries, wages and employee benefits reflected in audited FS and the gross -..10 96 Exhibit "P-55".

DECISION CTA Case No. 9290 Page 49 of61 compensation reported in the Alphalist of Employees (1604-CF)97 as shown below: Salaries, wages and employee benefits per AFS P94,792,411.00 Less: Part of the salaries expense excluded in alphalist of employees 14,010,278.91 80,782,132.09 (a) Employer share of SSS,PHIC& PAG-IBIG P6,332,864.53 80,624,974.52 P157,157.57 (b) OEB-Ieave Conversion 1 ,814,221.55 (c) Other Employee Benefits 3,718,029.77 (d) Retirement benefits expense 2, 145,163.06 Salaries, wages and employee benefits, net of exclusive items Less: Gross compensation per alphalist Difference or excess of gross compensation per FS against alphalist of employees (a) Employer share of SSS, PHIC & PAG-/8/G The Court finds that the SSS, PHIC & PAG-IBIG totaling to P6,332,864.53 represent employer's share of mandatory statutory contributions. However, a perusal of the Alphalist on Compensation98 reveals that only P3,771.012.26 were reported, to wit: Resigned Employees for 201 ow P803,232.95 Employees with No Previous Employers luu 1,479,834.47 Minimum Wage Earners101 1,487,944.84 Total P3,771 ,012.26 Thus, the difference of P2,561 ,852.27 (P6,332,864.53 less P3,771,012.26) shall be subjected to withholding tax on compensation. (b) DEB-leave Conversion Anent this item, the OEB-Ieave Conversion amounting to P1,814,221.55 per GL represent monetized value of unused vacation leave credits which were not subjected to withholding 97 Exhibit "P-67''. 98 Exhibit "P-67". 99 Exhibit "P-67", page 6. jl'tJ 100 Exhibit "P-67", page 12. 101 Exhibit "P-67", page 21.

DECISION CTA Case No. 9290 Page 50 of61 taxes, and as such were not reflected in the alphalist of employees by the Petitioner. We find that petitioner failed to present details of OEB-Ieave Conversion amounting to P1 ,814,221.55 claimed as exempt from Withholding Tax on Compensation. Hence, this shall not be excluded from the computation of Withholding Tax on Compensation deficiency. (c) Other emplovee benefits With respect to Others Employee Benefits amounting to P3,718,029.77, petitioner contends that these expenses pertain to the medical cash allowance, achievement awards, Christmas gifts, and other privileges/benefits of relatively small value which are considered as de minimis benefits given to the petitioner's employees which are not subject to withholding tax, and as such not reflected in the alphalist of employees of petitioner. Pursuant to Section 2.78.1 of RR No. 2-98, De mmtmts benefits are facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees. The same provides that de minimis benefits and certain income payments are not subject to withholding tax, to wit: "SECTION 2. 78.1. Withholding of Income Tax on Compensation Income. - (A) Compensation Income Defined. - x x x XXX XXX XXX (3) Facilities and privileges of a relatively small value. - Ordinarily, facilities and privileges (such as entertainment, medical services, or so called 'courtesy discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as compensation subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employee~

DECISION CTA Case No. 9290 Page 51 of61 In the instant case, upon verification only the amount of P470,214.13 are supported with documents, as follows: Asalus Corporation Amount Exhibit Association of CPA Besthealth Medical 3,582.19 "P-47-23.2" Besthealth Medical 7,000.00 "P-4 7-26.1" Drugcheck Phils "P-47-35.2" D-Tech Laboratory 360.00 "P-47 -35.1" Global Health 540.00 "P-47-76.1" Jed Diagnostic 720.00 "P-47-77.1" Lakambini Diagnostic 540.00 "P-47-108.1" Medhaus Medical 640.00 "P-47-134.1" South Super Medical 560.00 "P-47-148.3" Value Care 2,520.00 "P-47-181.1" Value Care 2,010.00 "P-4 7-255.1" Value Care 540.00 "P-47-284.22" Value Care 1,012.00 "P-47-284.3" Value Care 618.75 "P-47-284.4" 27,104.91 "P-47-284.5" 13,200.00 "P-47 -284.6" 409,266.28 TOTAL 470,214.13 Therefore, unsupported de mtmmts benefits amounting P3,247,815.64 (P3,718,029.77 less P470,214.13) shall be subjected to withholding tax on compensation. (d) Retirement benefits expense Petitioner claims that the amount of P2, 145,163.06 pertains to net retirement benefit expense as reflected in its FS in relation to its retirement plan which are valid deductions from gross income as provided by the Tax Code are exempt from withholding tax. The Court finds that this assessment must be cancelled. Section 32 (B) (6) (a) of the NIRC of 1997, as amended, provides: r1 "SEC. 32. Gross Income.

DECISION CTA Case No. 9290 Page 52 of61 XXX XXX XXX (B) Exclusions from Gross Income - The following items shall not be included in gross income and shall be exempt from taxation under this Title: XXX XXX XXX (6) Retirement Benefits, Pensions, Gratuities, etc. - (a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (1 0) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once xxx" Based on the foregoing, retirement benefits received by officials and employees of a private firm under a pension plan that has been qualified by the CIR, shall not be included in the gross income and shall be exempt from income tax and consequently from withholding tax prescribed in Section 79(A) of the NIRC of 1997, as amended. In this case, We agree with the findings of the ICPA that the retirement benefits amounting to P2, 145,163.06 represent current service cost reflected in the 2010 actuarial valuation which is under a BIR registered retirement plan, wherein retirement benefits are paid to all regular full-time employees exempted from withholding of tax on compensation. Records show that petitioner submitted the certification issued by BIR related to retirement plan and the 2010 actuarial valuation 102 and 2010 actuarial valuation 103 in order to show petitioner's retirement benefits plan. Finding the same sufficient, the assessment must be cancelled. r' 102 Exhibit "P-70". 103 Exhibit "P-71 ".

DECISION CTA Case No. 9290 Page 53 of61 In summary, petitioner is liable for basic deficiency withholding tax on compensation in the amount of P563,347.80, as presented below: Difference of Gross Compensation pe FS against Alphalist 157,157.50 Disallowed Salaries and Wages (SSS,PHIC&PAG-IBIG) 2,561,852.27 Disallowed Salaries and Wages (OEB-Leave Conversion) 1,814,221.55 Disallowed Salaries and Wages (Others) 3,247,815.64 Total 7,781,046.96 Multiply by the Estimated Average Withholding Tax Rate 7.24% Basic Deficiency Withholding Tax on Compensation 563,347.80 The estimated average withholding tax rate is computed as follows: Total Withholding Tax on Compensation Remitted 3,372,902.07 Divide by: Taxable Compensation per Alphalist 14,418,620.95 Resigned Employees No Previous Employers 31 ,895,968.81 Minimum Wage Earners Estimated Average Withholding Tax Rate 224,624.51 46,539,214.27 7.24% DOCUMENTARY STAMP TAX Respondent assessed petitioner for alleged deficiency documentary stamp tax (DST) for the lease contracts entered into by the company, computation of which is shown below: Lease Contracts (Note 14 f/s)- 458 P1 09,134,100.00 109136.10 2 000.00 109,136.10 Rate (Section 194) (3+.001) Total DST 109,136,100.00 69 Less: Payment 0.001 109 067.10 Deficiencv DST Add: lnterest(from 1/16/2011 to9/30/15) 102,632.14 114 632.14 12 000.00 P223 699.24 Compromise TOTAL AMOUNT DUE Petitioner contends that the DST due on all rental payments under existing lease contracts are being remitted to the BIR by the lessorfl'()

DECISION CTA Case No. 9290 Page 54 of61 The Court partially upholds the assessment. The findings of the ICPA is that documentary stamp taxes on rental were being paid by lessors and are being included in the lessors' Billing or Statement of Account to petitioner for reimbursement. Investigation showed that the total DST paid by petitioner to the lessor verified against statement of accounts available on file amounted to P81 ,403.00104 only or 75% of the assessed amount. However, this Court cannot assume that all the DST due on all rental payments under the existing lease contracts are being remitted to the BIR by the lessor in behalf of petitioner and correspondingly being paid by petitioner. Although, a certificate from SM Prime Holdings, 105 one of the petitioner's lessor, was also submitted confirming its remittance of DST on leased properties, this is not sufficient to prove that all of the DST due were paid. Therefore, the deficiency DST assessment amounting to P27,664.10(P109,067.10 less P81,403.00) will be assessed to petitioner. COMPROMISE PENALTV In the FDDA, respondent assessed petitioner of compromise penalty in the total amount of P178,000.00, broken down as follows: Income Tax P50,000.00 IAET 25,000.00 VAT 50,000.00 EWT 16,000.00 WTC 25,000.00 DST 12,000.00 TOTAL P"178,000.00 Pursuant to Revenue Memorandum Order No. 19-07,106 compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. It is well-settled that the Court cannot compel a taxpayer to pay the compromise penalty because by its very nature, it implies a mutual 104 Exhibit "P-73". 105 Exhibit "P-72". 106 Subject: The Consolidated Revised Schedule of Compromise Penalties for Violations of National Internal Revenue Code. fi"'

DECISION CTA Case No. 9290 Page 55 of61 agreement between the parties in respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer. 107 Absent a showing that petitioner consented to the subject compromise penalties, as it was in fact, assailing the tax impositions herein, the imposition of the said compromise penalties should be deleted. Simply put, the imposition of the compromise ~enalty without the taxpayer's conformity is illegal and unauthorized. 1 8 Hence, the compromise penalties imposed by respondent in the total amount of P178,000.00 for petitioner's alleged deficiency must likewise be cancelled. IMPOSITION OF THE DEFICIENCY AND DELINQUENCY INTERESTS When the subject tax assessments were made, the imposition of deficiency and delinquency interests were governed by Section 249 of the NIRC of 1997, as amended, to wit: "SEC. 249. Interest. - (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty (20%) per annum, or such higher rate as may be prescribed by the rules and regulations, from the date prescribed for its payment until the amount is fully paid. (B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the fill payment thereof. (C) Delinquency Interest. - In case of failure to pay: XXX XXX XXX 107 The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, et. a/., G.R. Nos. L-12928 and L-12932, March 31, 1962. 108 Commissioner ofInternal Revenue vs. Lianga Bay Logging Co., Inc., eta/., G.R. No. L-35266, January 21, 199jt

DECISION CTA Case No. 9290 Page 56 of61 (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax." However, with the advent of Republic Act No. 10963, otherwise known as the "Tax Reform for Acceleration and Inclusion" (TRAIN Law), which took effect on January 1, 2018, Section 249 was amended as follows: "SEC. 249. Interest. - (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of double the legal interest for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas from the date prescribed for payment until the amount is fully paid: Provided, That in no case shall the deficiency and delinquency interest prescribed under Subsections (B) and (C) hereof be imposed simultaneously. (B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof, or upon issuance of a notice and demand by the Commissioner of Internal Revenue, whichever comes earlier. (C) Delinquency Interest. - xxx xxx xxx." (Emphasis supplied) Based on the foregoing, the following amendments to the imposition of interests are noted: 1. The interest rate is reduced to "double the legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas.'t>

DECISION CTA Case No. 9290 Page 57 of61 Currently, the legal interest rate is 6%, 109 hence the interest rate to be applied on any unpaid amount of tax shall be 12% which is lower than the twenty (20%) interest imposed under Section 249 of the NIRC of 1997. 2. In no case shall the deficiency interest and delinquency interest be imposed simultaneously. As such, the overlapping of interest penalties under the NIRC of 1997 has been effectively eliminated. 3. The period for the application of deficiency interest is modified to run from the date prescribed for its payment until the full payment thereof, or upon issuance of a notice and demand by the CIR, whichever comes earlier. Hence, under the TRAIN law, the running of the period for the computation of the deficiency interest may be interrupted by the issuance of a notice and demand by respondent. It bears noting that under the NIRC of 1997, the deficiency interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof and is not interrupted by the issuance of a notice or demand from respondent. The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication. 110 There being no clear legislative intent to retroactively apply the provisions of the TRAIN law, the same should only be applied prospectively, i.e., beginning from January 1, 2018. Furthermore, it bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation .111 109 BSP MB Circular No. 799, Series 2013 which took effect on July I, 2013. 110 BPI Leasing Corporation vs. Court ofAppeals, et. a/., G.R. No. 127624, November 18,2003. 111 Dizon vs. Court ofTax Appeals, et. al., G.R. No. 140944, April30, 200~

DECISION CTA Case No. 9290 Page 58 of61 Considering the foregoing principles, the effects of the amendments under the TRAIN Law, particularly the imposition of interests, shall be applied to this case. Thus, as of January 1, 2018, the interests to be imposed must already be at 12%, and there must no longer be a simultaneous imposition of deficiency and delinquency interests. WHEREFORE, in light of the foregoing considerations, the Petition for Review is PARTIALLY GRANTED. Accordingly, the assessment issued by respondent against petitioner for the calendar year ending December 31, 2010, covering deficiency Improperly Accumulated Earnings Tax is CANCELLED and SET ASIDE. On the other hand, the deficiency Income Tax, VAT, EWT, WTC and DST assessments are AFFIRMED with MODIFICATION. Accordingly, petitioner is ordered to pay respondent the total amount of P50,627,809.49 representing basic deficiency, 25% surcharge, 20% deficiency interest and 20% delinquency interest imposed thereon under Sections 248(A)(3), 249(8) and (C) of the NIRC of 1997, as amended, computed until December 31, 2017, as determined below: Income VAT EWT WTC DST TOTAL Basic Tax Due 6,596,532.77 6,624,930.70 298,468.39 563,347.80 27,664.10 14,110,943.76 25% Surcharge 1 ,649,133.19 1,656,232.68 74,617.10 140,836.95 6,916.03 3,527,735.94 Sub-Total 8,245,665.96 8,281,163.38 373,085.49 704,184.75 34,580.13 17,638,679.70 20% Deficiency Interest: 16-Apr-11 to 30-Sep-15 5,888,083.22 5,888,083.22 (6,596,532.77 X 20% X 1629/365) 26-Jan-11 to 30-Sep-15 6,149,387.73 6,149,387.73 (6,624,930.70 x 20% x1694/365) 16-Jan-11 to 30-Sep-15 278,679.53 278,679.53 (298,468.39 X 20% X 1704/365) 15-Jan-11 to 30-Sep-15 526,305.75 526,305.75 (563,347.80 X 20% X 1705/365) 16-Jan-11 to 30-Sep-15 25,829.93 25,829.93 (27 ,664.1 0 X 20% X 1704/365) tKJ

DECISION CTA Case No. 9290 Page 59 of61 Total Amount Due, Sep. 30, 14,133,749.19 14,430,551.10 651,765.01 1,230,490.50 60,410.06 30,506,965.86 2015112 20% Deficiency Interest: 2,974,765.19 2,974,765.19 01-0ct-15 to 31-Dec-17 (6,596,532.77 X 20% X 823/365) 2,987,571.49 2,987,571.49 01-0ct-15 to 31-Dec-17 (6,624,930.70 x 20% x823/365) 134,596.98 134,596.98 01-0ct-15 to 31-Dec-17 (298,468.39 X 20% X 823/365) 254,046.71 254,046.71 01-0ct-15 to 31-Dec-17 (563,347.80 X 20% X 823/365) 12,475.37 12,475.37 01-0ct-15 to 31-Dec-17 (27,664.10 X 20% X 823/365) 6,373,740.04 6,373,740.04 20% Delinquency Interest: 01-0ct-15 to 31-Dec-17 6,507,585.51 6,507,585.51 (14, 133,749.19 X 20% X 823/365) 01-0ct-15 to 31-Dec-17 293,919.24 293,919.24 (14,430,551.10 X 20% X 823/365) 01-0ct-15 to 31-Dec-17 554,900.65 554,900.65 (651,765.01 X 20% X 823/365) 01-0ct-15 to 31-Dec-17 27,242.45 27,242.45 (1 ,230,490.50 X 20% X 823/365) 01-0ct-15 to 31-Dec-17 (60,410.06 X 20% X 823/365) Total Amount Due, Dec. 31, 2017 23,482,254.42 23,925,708.10 1,080,281.23 2,039,437.86 100,127.88 50,627,809.49 In addition, petitioner is liable to pay delinquency interest at the rate of 12% on the unpaid amount as of September 30, 2015, computed from January 1, 2018 until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN) and as implemented by RR No. 21-2018, on the following amounts: 112 Exhibit "P-40", Due date reflected in the Assessment Noticefk:J

DECISION CTA Case No. 9290 Page 60 of61 Income Tax P14,133,749.19 Value Added Tax 14,430,551.10 Expanded Withholding Tax 651,765.01 Withholding Tax on Compensation 1,230,490.50 Documentary Stamp Tax 60,410.06 SO ORDERED. ER~.UY Associate Justice WE CONCUR: ~� ~ .4'-- MA. BELEN M. RINGPIS-LIBAN 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. ER~.UY Associate Justice Chairperson, 3'd Division

DECISION CTA Case No. 9290 Page 61 of61 CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution and the Chairperson's Attestation, 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. Presiding Justice