CTA Case No. 2070 (Decision)

�'EPUBt.lC 0~ THE I!L...IPP.. J& COOR.T 'OF TAr APPEALS , QUh.ZON CITY I ISLAND GARMENT MANUFACTURING C . T . A. CASE NO . 2070 CORPORATION� � Petitioner� - versus COMMISSIONER OF INTERNAL REVENUE� Respondent. X~- - ~~- - - - ~- - " X DEC I S I 0 N Appeal from the decision of respondent Commissioner of Internal Revenue assessing and demanding from peti- tioner Island Garment Manufacturing Corporation. (now Riverside Products Industries) the amounts of P291, 402 . 01 as advance sales tax and P335.787 . 93 as defi- ciency income tax for the years 1962 and 1963,. inclu- sive of surch~rges. interests and compromise penalties, or Petitioner is a corpor~tion organized and existing under the laws of the Philippines with office and busi- ness address at 2609 Old Panaderos st�� Sta� Ana. Ma- nila. It is an embroidery firm duly licensed and ope- rating under Republic Act No . 313 7, and is engaged in the importation of raw materials such as textile fab- rics and cotton piece goods from abroad. Under its agreement with the foreign suppliers. petitioner is required to process and manufacture the imported tex" tile materials into finished garments in accordance with the sketches and patterns of the suppliers . The finished articles are then exported back to the fo- reign suppliers under the direct supervision of the

DECISION - CTA CASE NO . 2070 - 2- Embroidery and Apparel Control and Inspection Board (EACIB or simply Embroidery Board for short) and the Bureau of Customso These foreign suppliers in turn remit to petitioner the labor cost plus certain pere centage representing overhead expenses --...- of the latter. By virtue of Republic Act No, 3137� all impor~ tations of textile fabrics received by petitioner are exempt ~~om duties and special import taxes. However~ its net income as embroidery contractor consi sting of the remittances received from foreign suppliers is subject to income tax. (Exh, "1 11 � PP� 66-70� BIR records.) It appears that on October 2le 1964 to February 24� 1965 respondent. thru his agents�' conducted an investigation of petitioner ' s tax liabilities for the years 1962 and 1963. As a result t hereofe' res- pondent issued a.ssessment-demand letters dated Octo~ ber 25� 1965 (Exh. "2"� . �p . 78.,� BIR records) and October 27 � 1965 (Exh. "3" 40 pp. 80-81 BIR records) requiring petitioner to pay the amounts of P335 787~ 93 and P291~4o2.ol~ representing deficiency income tax for 1962 and 1963 and as advan~e sales tax also for the same years, respectively. computed as fol" lows:

DECISION- ~ CTA CASE NO . 2070 - 3- Net income per return - - - - .. -P Add: Addition~! income: � Undeclared income from sales �of embroidery tex- tile materials - - - - - - - - - ~ 627.858,29 Net income per investigation - - - - ~ ~629,985,12 Tax due thereon - - - - - - - - - - - .. -180 ..- ell"9.9-. -5 . 5.,.. ,3 Less: Amount already assessed - - - 468,00 Balance - - - - - - -- - - - - - Pl80.528,00 Add: 50% surcharge - - - - - - - - - 90.264,00 1/2% monthly interest from 4-17-63 to 10-27-65 - - - - l.ooo,oo Compromise under Section 73 of the Tax Code - - - - -- TOTAL AMOUNT DUE & COLLECTIBLE P2994 304t47 Net income per return - ---- ~ 2,721,56 Add: Additional income: Undeclared income from sales of embroidery tex~ tile materials - - - - - - - - 101,265.33 Net income per investigation P 103, 986 , 89 Tax due thereon ---- 23.196 0 00 599 , 00 Less : Amount already assessed - - Balance - - - - - - - - - - - - - P 22,597,00 11.,298,50 Add: 50% surchage - - - - - - - 1/2% monthly interest from 4-16-64 to l0-27-65 - - - - 2..087,96 Compromise under Section 73 of the Tax Code - - - - - - 500,00 TOTAL AMOUNT DUE & COLLECTIBLE - - P 36,483.46 Total Landed Cost 'Pl.837.727,38 Add: 25% Mark-Up 459,43lci85 Amount Subject to Tax P2, 297.159 , 23 7% Advance Sales Tax Due Thereon - - - - - p 160,801,15 Add: 75% Surcharge - - - - - - 120,600,86 TOTAL AMOUNT DUE AND p 281,402,01 DEMANDABLE

DECISION CTA ~ASE NO. 2070 4� - Petitioner protested the assessments in its letters dated November 11,. 1965 (Exh. "AA"� pp. 87- 88,. BIR records). and September 27, 1966 (Exh. "BB"� pp. 179-182 BIR records.) Pursuant to said protests. the case was investigated and heard by respondent,. thru the Appellate Divis ion of the Bureau of Internal Reve- nue,. from May 16 1967 to February 12., 1969,.. but not until petitioner has waived the statute of limnations up to December 31,. 1971. (P 0 204,i BIR records.) The records show that after the administrative hearing before the Appellate Division.� Atty. Al icia Tomacruz.� Hearing Officer,. recommended to the Chief� Appellate Division, the cancellation of the assessments against petitioner for failure of respondent's examiners to substantiate the assessments. (Exhs . "E" & "E-1"� P� 426�1 BIR reco rds .) Atty. Zoilo R. Zandoval� Assistant Chief of the same Division# likewise recommended the cancellation and withdrawal of the assessments. (Exh. "E-2"~ P� 426� BIR records.) Notwithstanding these recommendations� respondent in a letter dated August 8~ 1969, received by peti~ tioner on September 23, 1969 denied petitioner's protest (Exhs. "BB-1" 11 & "ltt"., p . 430,. BIR records .) .� and reiterated his request for payments of the amounts of P335� 787 � 93 and P291~ � 402.0l as deficiency income tax and advance s ales tax. respectively. for the years 1962 and 1963. Upon receipt of respondent�s decision

DECISION - CTA CASE NO./ 2070 � -s - denying its protest#'� petitioner# ori the same day {Sep- tember 23�' 19.69) .~ replied to respondent ' s denial requesting (according to petitioner) reconsideration thereof., ' al.... though respondent claims that the reply merely acknowledged receipt of .such denialo {Exhs 0 "BB-2" & "BB-2-a"# pp . 194-195� CTA records.) This letter of petitioner was ... . received by respondent on October 9, 1969. on February - 18~ 1970 petitioner received from respondent a Final N0 tice Before Seizure dated November 20~ 19694 ( Exh~ "BB-3".,. p . 444,. BIR records .) Hence,. this instant appeal filed by petitioner on February 26~ 1970. The issues raised by the parties for determination by this Court are as follows : 1 o Whether or not the appeal '-'Tas filed within the thirty-day period prescribed in Section 11 of Re- public Act No . 1125; and 2. Whether or not petitioner is liable to pay the sums of ~335� 787 � 93 and P291,. 402 oOl.� representing deficiency income tax and advance sales tax for 1962 and 1963~ respectively. or a total of P627,189.94o The parties do . .not quarrel that the appealable decision of the Commissioner of Internal Revenue from

DECISION ..., CTA CASE NO~ . 2070 which an appeal can be taken to this Court within thirty ( 30) days from receipt thereof�~ under the provisions of Sections 7 & 11 of Republic Act No. 1125�' is the letter of respondent dated August a. 1969 and received by peti- tioner� on September 23., 1969 0 As stated earlier.,.~ peti.... tioner was assessed for deficiency income tax and ad- vance sales tax on October 25 and 27# 1965.,. respectively. These assessments were protested by petitioner in its two letters dated November 11~, 1965 and September 27 1 1966. Pursuant to said protests. respondent heard the case from May 16t' 1967 to February 12�, 1969,. after which a decision was rendered by respondent in his letter dated August a �. 1969 denying the protest and reiterating his request for payment of the amounts of P335" 787.93 and ~291'� 402 .ol as deficiency income tax and advance sales tax, respectively� for the years 1962 and 1963. Since such letter of August a. 1969 denied the request of petitioner for the reconsideration,. can- cellation or withdrawal of the original assessments~ ' it is the decision of the Commissioner of Internal Revenue appealable to the Court of Tax Appeals~ (Villa" min vs. Court of Tax Appeals a nd Collector of Internal Revenue, L...ll536� October 31* 1960e 109 Phil.896; Fili- pinas Investment and Finance Corporation vs. Commis- sioner of Internal Revenue. L-23501 1 May 16�1 1967,. 20 SCRA 50r Surigao Electric co. Inc. vso Court of Tax Appeals. L-252a9. June 2a~ 1974� 57 SCRA 523.) 1 \

DECISION CTA CASE NO. 2070 - 7 .,.. The collision occurs, however, at the proposition whether the letter of petitioner dated September 23, 19691 disputing the "mathematical computation" em- ployed by respondent in as&ertaining petitioner's quantity of manufactured and exported finished garments and requesting, for th'e reason stated th e rein, to " s ee our way clear and find this to merit your (respondent's) utmost consideration" (Exho "BB-2"), interrupted the running of the thirty-day period of appeal fixed under Section 11 of Republic Act No . 1125. Respondent contends that said letter of S~ptember 23, 1969 pf petitioner is pro-forma, hence~ it did not interrupt the period of appeal to this Court. Petitioner avers, on the other hana, that it is not pro-forma, hence, it suspended the period of appeal from October 91 19691 when it was� filed with respondent to the date of receipt by p e titioner of the Final Notice of Seizure on February 18, 1970, which for all intents and purposes amounted to an implied denial of its request for reconsideration. (Republic vs. Lim mian Teng, L-21731, March 31, 1966* . +:. 16 SCRA 584.) Consequently, when the petition for re- view was file d with this Court on February 26, 1970� ac~ cording to petitioner, only 24 days have been consumed of the thirty-day period of appeal, computed as follows:

DECISION CTA CASE NO. 2070 ,_ 8 Number of Days Consumed Septo 231 1969 - receipt by peti- tioner of respondent's denial of the protest 16 - to - Oct. 9� 1969 - filing of a motion for reconsideration of said denial Oct. 101 1969 - Feb. 17� 1970 {period for appeal suspended during pendency of motion for reconsidera- tion) Feb. 18# 1970 - receipt of Final Notice Before Seizure to - 8 Feb. 26� 1969 - filing of Peti~ tion for Review TOTAL NUMBER OF DAYS CONSUMED - - - 24 Days A request for reeonsideration of the decision of respondent is pro forma if it merely reiterates the grounds already stated in the first request for cancel- lation or withdrawal of the assessment. (Filipinas Investment and Finance Corporation vs. Commissioner of Internal Revenue~ No. L-23501� May 16, 1967~ 20 SCRA 50) In the instant case, it will be noted that in requiring petitioner to pay alleged advance sales taX and ~ defictency income tax for 1962 and 1963, respondent in his original letter-assessmen~of October 25, 1965 and October 27� 1965 merely stated that upon investigation, the former will- fully failed to export all its finished articles and willfully neglected to declare the income from the sale thereof. In contesting and disputing the said assessements

DECISION ... CTA CASE NO. 2070 - 9- in his letters of November 11. 1965 and September 24� 1966� petitioner raised the issues of : (1) correctness of the figures or amounts appearing therein1 (2) autho- rity of respondent to question the validity or propriety of the official acts of the Bureau of Customs and the ~mbro idery and Apparel Control and Inspection Board1 (3) finality of the cance~lation of all the bonds filed to guaranty exportation of the finished products .and liquidation of import entries pursuant to Section 1603 of the Tariff and customs Code; ( 4) efficacy of the certificatiohs and/or reports of the agents and/or Exa- miners of respondent that raw materials imported in 1962 and 1963� the y ears under q uestion# were all accounted for; (5) failure of respondent s examiner to find evi... dence showing violation of the provisions of the National Internal Revenue Cod e� after a search of petitioner-'s premises pursuant to a search warrant issued by Judge Amado G. Roan of the City Court of Manila was conducted; and (6) regularity of petitioner's inventories of raw and finished materials. After a protracted hearing of the case� respondent in his letter of August a. 1969 ren- dered a decision denying petitioner's protest ~nd un- wrapped for the first time the "mathematical computa- tion" theory as the method employed by his examiners in ascertaining the quantity of finished products manu- factured and exported by petitioner. Respondent also

DECISION - CTA CASE NO . 2070 - 10- the adduced for/ first time the iss u e that since the docu- men ts presented by petitiohe r to pnove liquidation of i ts import entries were only photostatic or carbon co- p i es of originals, the same did not constitute evidence to prove actual exportatioh o On September 23�1 1969 petitioner disputed for the first time the "mathematical computation" theory of respondent on the ground that it "is based merely on incomplete copies of our export papers which we then hav e on ou r offic e l files , those they were able to se~ cure from the Bureau of Customs and from the Embroidery Board, which taken together does not reflect the com- plete papers and documents for our expo~ t s in the years 196 2 and 196 3 0 Thei r (examiners of the Bureau of I n ternal Revenue) findings was (were) never based on actual physical counting of stocks in occular ins- pection of representative stocks and its packaging in cartons and boxes." (Exh. "BB-2" , p . 196, CTA re- cords.) While petitioner also reiterated in this re- quest for reconsideration the issue it raised in its petition for the cancellation or withdrawal of the ori- ginal assessments as to whether respondent could still question the prerogative of the Emb� oidery and Apparel Control and Inspection Board and the Bureau of Customs i n clearing petitioner of l i abi lities for its importations

DECISION .... CTA CASE NOo 2070 - ~-Ll- in 1962 and 1963� and the finality of the liquidations of its import entries pursuant to Section 1603 of the Tariff and Customs Code� the same were disregarded. if not completely ignored, by respondent in its decision on the disputed assessments dated August a. 1969. Since petitioner's request for reconsideration of September 23, 1969 did not merely reiterate the grounds stated in its first request for cancellation of the assessments but also called attention to those facts or arguments which have been disregarded in the decision of respondent dated August a. 1969. it can hot be considered pro forma. (Filipinas Investment & Finance Corporation vsl Commissioner of Internal Revenue, supra�; Surigao E:J,.ectric co . Inc . vs. Court of Tax Appeals,: N0 � L- 252a9. June 2a# 1974� 57 SCRA 523.) Consequently. considering that petitioner consumed only a total of twenty four (24) days out of the thirty _(30) days pres- cribed under sections 7 and 11 of Republic Act No. 1126~ the instant petition for review was filed seasonably with this Ccurt. Having reached the conclusion that this Court has jurisdiction to take cognizance of this case. the next question is whether or not petitioner is liable to pay the amounts of 'P335,.7a7 . 93 and P291,402 . 0l rep- resenting deficiency income tax a nd advance sales tax. respectively~ for the years 1962 and 1963, or a total

DECISION - CTA CASE NO , 2070 The basis of respondent's assessments is the alleged over-declaration of petitioner1 s exportation of embroidered goods computed as follows : (a) Overdeclared exportation in 1962 � o � � � � � � � 657,076,66 yards (b) Overdeclared exportation in 1963 � � � � � � � � � 227,. 140,76 yards (c) Unsupported exportation 4941 223 .40 yards in 1962 and 1963 � � � � TOTAL DISCREPANCY ���� , 1 , 3 7 8 1 440,82 yards v In arriving at ~his discrepancy, respondent al- leges that: 1. With respect to the overdeclar.ed exporta- tion in 1962 of 657,076o66 yards of textiles~ his in- vestigating examiners found that on the basis of twenty (20~ invoices issued in 1962~ petitioner claimed to have exported in said year 37,973,33 do- zens of finished garments contained in 636 cartons consuming 817,444,10 yards of imported fabrics, How- ever. actual inspection conducted by examiners of respondent of the boxes containing the exported fi- nished garments showed that it was physically im- possible for the said 636 cartons with a total vo- lume of only 2~200 cubic feet to contain the alleged exportation of 37.973,33 dozens of finished gar- ments.

.~it,.. ,r DECISION - CTA CASE NO. 2070 l~ - By mathematical computations, respondent claims to have ascertained that with the use of the said 636 cartons1 petitioner could have actually manu- factured and exported not more than 6�925 dozens of finished garments.,� consuming not more than 160� 367.44 yards of imported textiles. Hence~ the above~ stated discrepancy of 657,076Q66 yards representing the difference between 817~444.1 yards� allegedly exported and 160.367~44 yards of fabrics used im the manufacture of 6 111925 dozens o f finished gar- ments. (Exh "BB-1" ~ pp . 190....191, CTA records 4 ) 2o As regards the overdeclared exportation in 1963 of 227,140.76 ya.rds of imported textiles. respondent states that his examiners likewise as- certained by mathematical computation that .it was physically impossible for petitioner to have manufac- tured and exported 13...,564.75 dozens of finished gar- � ments. using 313.576 yards of imported fabrics and packed them in only 260 cartons with a total volume of only 9~5 cubic feet . A phys ical inspection of the boxes in which the exported products were supposedly mntained. according to respondent. showed that the 260 cartons could have accommodated not more than 2�573.1 dozens o f finished garments, requiring not more than 86.435 . 25 yards of imported fabrics~ Res- pondent�s examiners. therefore# reported a discrepancy

DECISION _ CTA CASE NO . 2070 - 14 - of 227.140.76 yards of imported textiles, which is the difference between 313#576 yards~ allegedly con- sumed to make the finished g3.rments, ~nd 86,..:435 . 24 yards~ the quantity of raw materials needed to manufacture the 2�573.1 dozens of finished products. (Exh. "BB-1", supra.) 3. And as regards the alleged exportation in 1962 and m963 of 494e223 .40 yards of imported fabrics. respondent merely states that petitioner could not present to his examiners the corresponding shipping documents evidencing exportation of the finished goods (Exh. "BB-1", supra) The aforestated raw material discrepancies ag- gregating 1�378, 440.8 2 yards subsequently became the basis of the two (2) assessments - one for advance sales tax and another for income tax in the sums of ~291.402 . 01 and P335.787.93~ respectively. (Exh. "BB-1"., pp. 190-193, CTA records) As petitioner succintly stated it~ based on the findings of res- pondent1 s examiners that petitioner overdeclared its exportations for the years 1962 and 1963� respondent �concluded that the discrepancy in yardage between what was declared for export and what was actually exported was not manufa.ctured into finished garments but channelled or sold illegally in the local mar- keto Hence.j the assessments for advance sales tax and deficiency income tax on the alleged income rea~ lized from the sale thereof.

DECISION CTA CASE NO . 2070 - 15 - By alleging that he employed mathematical com- putations in ascertaining the quantity of finished products actually manufactured and exported by peti- tionei. respondent concedes at least that his assess- ments were based on mere inferences and presumptions. Likewisep by stating that it was physically impossible for such number of cartons with such volume capacity to contain such exportation., or for petitioner to have manufactured and exported such finishedgarments# res- pendent admits that his assessments were not based on actual facts but merely on approximations and calculations. And avering that the raw material discrepancies in yaresp arrived at by mere inferences and presumptions� subsequ~ntly became the basis of the assessments for advance sales tax and for income tax. respondent failed to indicate his nebulous position how the advance sales tax. or the undeclared income from sales of embroidery textile materials in pesos and centavos were arrived at. M0 reover. since fraud is imputed to petitioner; frau~ dulent intent was deduced from surmises and conjectures. unsupported by clear and convincing proof to this ef~ feet. An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served.,. an obligation arises on the part of the taxpayer con- cerned to pay the amount assessed and demanded. Hence� \

DECISION CTA CASE NO. 2070 - 16 - assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may beo The assessment must be based on actual factso The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presump~ tiono (Collector of Internal Revenue vs. Benipayoi L-13656,. January 31� l962e 4 SCRA 182). While i t is true that all presumptions are in favor of the correct- ness of tax assessments~ such presumption is proper only if the assessment is based on actual facts but does not arise if it is based merely on mere inferen- ces. (Medina vs. Commissioner of Internal Revenue,., CTA Case No~ 1245� December 27* 1971; Herrera vs. Commissioner of Internal Revenue, CTA Case No. 2060~ June 27� 1972; Samson VS 0 Collector of Internal Re- venue. CTA Case No. 232~ June 30� 1958; Viterbo VSq Collector of Internal Revenue , CTA Case No. 363�; De- cember 26_.� 1950.) Likewise~ i t is alreEi!;dY a well established doctrine that fraud cannot be presumed but must be proven. (Jose B. Aznar vs. Court of Tax Appeals� L-20569� August 23~ 1974. 58 SCRA 519~) Assuming that it was physically impossible for the 636 cartons with a total volume of only 2~200 cubic feet t to contain exportation of 37.,973o 33 dozens of finished garments�' the same does not give rise to

DECISION CTA CASE N0 1 2070 - 11> .... the inference, even by mathematical c oMpUtption ~ that with the use of said 636 cartons* petitioner has actually manu facEtured and e xported not more than 6�J925 dozen s of imported textiles, consuming not more than 1601 367 . 44 yards mf imported fabrics . Likewise� granting that i t was physically impossible for pet itioner to hav e manu- factured and exported 13#564. 73 dozens of finished garments. using 313e 576 yards of imported fabrics and packed them in only 260 cartons with a total volume of only 985 cub ic feet, the same does not give rise to the presumption that the 260 cartons could hav e a c commodated not more than 2., �573 . 1 dozens of finished garments� requiring not more than 861 435 . 25 yards of impo rted fabrics~ and resulting in a discrepancy of 227 .140 .76 yards of imported textiles~ which is the difference between 313� '576 yards, and 86 , ,435. 35 yard s . And based on these presu~ption s and inferences. the same will not bring forth the conclusion that the Government was cheated and defrauded of advance sales tax and income tax in the sums of P291., �4o2 . 0l and !"'335., 78 7 �93 � respe ctively_., because petitioner chan- nelled to the local market the discrepancy in yards between what was declared for export and what was - presumed to be actually exported as finished productso

DECISION CTA CASE NO. 2070 -HB .r Then. of importance here is the kind and nature of the garments manufactured and exported by peti- tioner. - They consistse1 among others., of ladies blouses. ladies pajamas. children's dresses., men's and boy s polo shirts and negligee# of di~ferent sizes and., of course. consuming per_piece varying number of � yards of imported textiles. An d by their very nature~ these g�g~q~s~ apparels are generally flimsy and can be compressed. The fact that a dozen of the same or similar finished garments consumes so much number of yards of imported textiles and occupies a certain volume of space in a carton does not therefore provide a sufficient inference that a dozen of other or different kind or kinds of finished apparels also consumes the same number of yards of imported textiles and occupies the same volume of space ins~de the same carton. At any rate, it bears emphasis that the import entries covering the importations of textiles of peti- tioner in 1962 and 1963, the years in question, had already been completely and finally liquidated. Peti- tioner was gra.nted on February 81 1962 by the Embroi- dery and Apparel Control and Inspection Board autho- rity to manufacture embroidery apparels and garments for export under Republic Act No. 3137. It made a ' total of 32 importations in 1962 and 54 importations in 1963 consisting of 1, 174, 021 yards and 1.,423.426.25 yards# respectively, of various textile materials. For these importations., surety bondswere filed by various surety firma in the total amounts of P2,020 . 563oOO

DECISION .CTA CASE NO . 2070 for 1962 and P3#98l.oo8 .oo for 1963 to guarantee their exportations. (Exhs. "A" & "B"� pp. 134-136 & 137-138., CTA records; pp . 389-392. BIR records . ) Subsequently~ the warehousing entries covering said importations were finally and fully liquidated and cancelled. In the absence of any showing to the contrary. and none has been presented by respondent. t here is no valid reason for this Court not to belie ve that the imported textile materials were all manufactured into embroidery apparels and garments and actually exported to the foreign suppliers as proven by the following evidence presented by. petitioner: Document&ry Evidence:- 1. Exhibit "A" - Certification by Segundo Ja- vier.. Special Investigator. Legal Department. con- curred with by Isauro c. Garcia. Chief� Ruling & Research Division. Apolinario A. Ramos~ Chie f* Liti- gation Division~ and Vicente AQ Feria.. Chief.� Ap- pe~late Division, all of the Bureau of Customs. that petitioner made a total of 32 importations in 1962.. consisting of various textile mgterials to be manufactured for exportations and a total amount of ? 2.020#563.00 was filed by various surety firms to guarantee their exportations ; and the warehousing entries covering said importations were fully li- quidated and cancelled; and the impor tations consi- dere d fully exportedo

DECISION ..., CTA CASE NO. 2080 - ao 2. Exhibits "B"-# "B-1"# "B-2" - Certification made by the same officials mentioned in Exhibit "A" above regarding the 54 importations in 1963 by peti- tioner of various textile materials to be manufactured for exportations# the total amount of P3#98l~008.oo surety bonds filed to guarantee their exportations~ the full liquidation and cancellation of the ware- housing entries covering the importations~ and con- sidering the importations fully exported. 3. Exhibit "C" - Indorsement dated October 24, 1968 of the Chairman of the Embfoidery and Apparel Control and Inspection Board to the Head� Legal De.- partment." Bureau of Customs~ of the certification dated October 23� 1968 of Teresita A. Costa~ Trade Control E~miner on the full liquidation and can- cellation of the 32 import entries of various tex- tile materials imported by petitioner during the year 1962$ 4~ Exhibits "C-1" & "C-2" - The certifica- tion of Teresita A. Costa~ Trade Control Examiner of the Embroidery and Apparel Control and Inspection Board~ on the full liquidation and cancellation of the 32 import entries of various textile materials imported by petitioner during the year 19624

DECISION . CTA CASE NO. 2070 - 2 J. - 5. Exhibit "D" - Iftdorsement of the Chairman., Embroidery and Apparel Control and Inspection Board to the Head1 Legal Department, Bureau of Customs~ of the certification dated February 10.� 1969 of Teresita A..., Costa~ Trade Control Examiner,. ~ on the full liquidation and cancellation of the 54 import entries of the various textile materials imported by petitioner during the year 1963 0 6o Exhibits "D-1" and "D-2" - The certifica... tion of Teresita A. Costa, Trade Control Examiner,. Embroidery and Apparel Control and Inspection Board, on the full liquidation and cancellation of the 54 import entries of various textile materials imported by petitioner during the year 1963~ 7 . Exhibits "F" to "Q" - Certificates issued by the Collector of Customs,. Manila,. of the cancel .... lation of the surety bonds posted by petitioner on its importations for 1962 and 1963i it appearing that the articles covered therein have already been re-exported. 8 0 Exhibits "R" & "S" - .certificates of Inspection. Identification and Loading of the fi- nished garments exported by petitioner in 1962 and 1963o So Exhibits "U" & "U-1" - Certifications by the Embroidery and Apparel Control and Inspection (

DECISION CTA CASE NO. 2070 - ~~- Board dated September 21. ~ 1966 that all importations by petitioner during 1962 and 1963 were fully liqui- dated. 10. Exhibit "V" - Application to export pro- ducts manufactured from nonded materials under Republic Act No. 3137 to the Embroidery and Apparel Control and Inspection Board accomplished by peti- tioner for the exportation of importednaterials. Testimonial Evidence.- And in this backdrop~ we do not see any plausible reason to question or doubt the oral evidence pre- sented by petitioner� to wit: 1- Ricardo Bringas, customs Storekeeper of the Embroidery and Apparel Control and Inspection Board.,, assigned to petitioner's warehouse from August 1962 to November 1967� whose principal duty was to see to it that the textile raw materials impated by peti- tioner were duly manufactur~d under his supervision into finished garments and actually exported� tes- tified that: At the time the raw materials is trans- ferred to the warehouse there is the boat note that I sign stating the fact that that kind of raw materials with import entry is transferred to the warehouse. Thenp I record the raw materials by import entry. the vessel. the registry number, and the date of 'arrival and the invoice of that import

DECI SION - CTA CASE NO . 2070 - :2'3 - entry . After that~ I inform the Embroidery Board that that kind of raw materials I re- ceived on a certain date . After informing the Embroidery Board~ the operator will ap- ply for the release of that raw materials to the Chairman of the Embroidery Board� together with the specified patterns of t hat kind of raw material � or that kind of import entry. After the Chairman of the Embroidery Board ap- proves the release certificate. which is called Form 6 of the Certificate of Raw Materials,. then the operator vlill present a copy of Form 6 - which is the duplicate . The original copy is retained by the operator. and the duplicate is given to me by the operator. Then, the operator begins to withdraw certain quantities of that raw material for cutting and processing specified with the p~tternse which is at the back of Form 6& Then. I supervise the cutting of that raw ma- terial. After it is already cut. it is pro- cessed� it is turned into finished productsQ Then the finished products are packed in bundles of one dozen each. And when there are many finished products then the operator applies with the Embroidery Board for the exportation of that finished product. After the Board approves the exportation of the finished products then the examiner will go to the factory to identify the finished pro- duct with the samples in the import entry that is atta~hed with the import entry of the examinero Then the examiner begins count- ing the finished products in boxes accord~nq . to the packing list. After counting the num- ber of dozens i n the boxeB that tally with the packing list then the examine r signs Form 7,. that is,. the Certificate of Inspection~ identification and loading and I also sign Form 7. After signing Form 7, the examiner seal the boxes o � � closes the boxes ana seal them. After sealing the boxes. we write our name in every box that is exported. Then the broker will get ~he boxes and then go to the pier, to exportQ

DECISION CTA CASE NO. 2070 In ghe piere the Form 15 whi~h I have accompli s hed� that means the ac- companiment of the export shipments from the factory to the pi e r~ w~ll be verified by the agent of the Customs. He will count the exportation by boxeso After counting the boxes then the expor- tation will be loaded in the ship. In the ship# the Customs inspector will count again the number of boxes that are loaded in the ship. (Pp. 237-241," t . so q.) He also testified that his principal duty was to see to i t that the quantities of raw mat~ rials withdrawn from petitioner's warehouse were actually re-exported in finished products~and, he,tog ether with an examiner of the Embroidery and Apparel Con- trol Inspection Board., computed the consumption of raw materials with the finished products. (Pp. 280- 282#, t.s.n.) Mr. Bringas likewise stated that before the finished garments were brought to the pie r for re-exportation, an examiner from the Bureau of Cus- toms had first to inspect and examine the ship~ent in the warehouse and together they will count each bundle and the number of pieces contained therein. (Pp. 286-288, t . s.n9 ) After the bundles have been counted and the boxes sealed� the customs store- keeper had to accomplish (b) EACIB Form No. ?~Certificate of Inspection, Identification and Loading~ and (c) export in- voices. (p. 288� t.s.n.) Thereafter, the

DECISION - CTA CASE NOo 2070 ~ 25' shipment, accompanied by the customs storekeeper.t' will be brought to the pier where inspections and ex~mina tions will again be made by the customs boarding a�;fJ.cer in the presence of the customsstorekeeper and customs examinero (ppo 290-291� t.s.n.) 2. Toribio Perez~ Examiner of the Embroidery Section of the Bureau of Customs. collaborated in all material aspects the testimony of Mro Bringas 0 He testified that he was the customs examiner as~ signed to examine all import entries of petitioner; upon receipt of the entry paperst he examined the imported materials and his findings were reflected in the entry; once the embroidery materials have been processed and ready for exportation. he will identify them by comparing the raw materials with the finished articles for export; after the finished products were already re-exported and cancellation of the bonds was requested, he examined the commercial invoices� bills of lading and export entriesr and if he found them out to be in order~ he would make recommendation to the Collector of Customs for cancellation of the bond. (Pp. 178-187� 19Gr 201-202. 213� t.son.) Upon com- pletion of his examination, he accomplished the Cer�ificate of Inspection. Identification ahd Loading (Exh. 11 R" - "7"� Po 223.., BIR recordso), where he certified as to the quantity of the arti~ cles exported after actual physical count.

DECISION CTA CASE NOo 2070 - 2~ - 3o Segundo Javier,. Special Investigator.. Legal Department of the Bureau of Customs, testified that petitioner had complied with Republ i c Act No . 3137 by re-exporting the articles previously consign ed to it for manufacture; that all importations of petitioner in 1962 and 1963 were re-exported as shown by his certi- fications marked as Exhibits "A" & h that the en- B"�I tries covering said importations had been fully li- qu i dated . (Ppo 8~34 1 t.son.~ 4 . On the basis of the records of the Embroidery and Apparel Control and Inspection Board~ Teresita Ao Costa. Trade Control Examiner I of said Board cer- tified on Octo ber 23� 1968 ( Exhibits "C-1" & "C~2"� PPo 141-1421 CTA records) and February 10., 1969 (Exh.i- bits "D-1" & "D-2"; pp .. 144-145,. CTA records), and also testified1 as to the full and complete liquidation of the import entries on all importations made by petitioner in 1962 and 1963. (Pp. 409-412~ t.s.no) 5~ Me lecio Franco� Customs Bond Supervisor~ Law Division of the Bureau of Customs, testified that before a.n embroidery firm1 like petitioner, could operate~ i t must first file a bond to guarantee exportation of its manufactured products o Upon being informed by the Appraiser's Divi s ion and the Embroidery and Apparel Control and Inspection Board that petitioner had re- exported all the articles consigned to it~ the Chief

DECISION CTA CASE NO . 2070 - .-27 - of the Law Division , Bu.reau of Customs . ordered the cancellation of all the bonds filed by petitioner to cover all importations in 1962 and 1963. (Pp. 160- 178., t . s .no) All the above-mentioned witnesses are officials and/ or employees of either the Embroidery and Apparel Control and Inspection Board or the Bureau of Customs. the government offices called upon to enforce. execute and implement the provisions of Republic Act No. 3137 by virtue of which petitioner was authorized to operateo And it will be noted that most_ if not all of their testimonies, were based or taken from off icial recmrds of these government agencies . Since these testimonies proceed from of�icia~ of the Government in charge with the proper implementation and enforcement of the provisians of Republic Act No. 3137� they are given,in the absence of evidence to the contrary. and none has been presented by respondent# much weight and respect. In this setting, and in the light of the � principle of regularity in the performance of official functions , it can hardly be said that petitioner over- declared its exportations in 1962 and 1963, It may not be amiss to mention here in passing, as correctly pointed out by petitioner, that: 1. On March 3, 1966 the Bureau of Internal Revenue, South Manila, issued a certification attesting to the fact that "BIR Examiners Honorio Gabriel and Oscar Liwanag have verified the Inventory filed by Island Garment Manufacturing Corporation of 2609 Old Panaderos, Sta Ana, Manila, for th~ _ period ending December 31, c ~ ,.?

DECISION CT,.. C.i.~ NO. 2970 28 - 1965 and found to be in accordance with Revenue Regula- tions as provided for in the provision0 of the Na tional Internal Revenue 0ode. 11 (Exh-- . ~~"V>l- 3 11 , p . 1'72 , BIR re- cords; pp . 324- 325, t . s . n . ) The phrase 11 for the pe- riod ending December 31 , 1\)65 v1as explained during the hearing of this case before this Court to refer to the start of p_,e. titioner 1 s operat �i.on in 1\)6~ up to De- cember 1 , 1965. 2 ,. On July 14 , 1965 a certification 1.-1as made by Bureau of ]nternal Revenue Examiner Oscar Lii.;anag of Regional District No o 6 , South Manila , to the effect that a search has been made and conducted in the residence , off ices and bodegas of petitioner pur-, suant to a Search ~�Iarrant issued by Judge Roan of the City Court of Manila dated July 14, 1965, it appearing that there was probable cause to believe violation of the Tax Code and that in the residence , bodega or offices of petitioner there were certain business re- cords and documents svidencing violation of said Code , which should be seized ~p . 117 , BIR records . ) The return of the v1arrant offic~r , however, stated 11 that . none of those mentioned in the search warrant was found despite diligent efforts exerted � 11 (Exh o Y 11 11 , p . 145~ BIR records o) ;

D'SCISION CTA C~SE NO . 2070 , - 29 - 3� A clearance certificate was issued by Bureau of Internal Revenue Examiner Hbnorio C. Gabriel, upon inspection of petitioner on February 17 , 1967, that there is nothing wrong vlith its business operations . (Exh . "Z" , p . 159 , CTA records . ) 4. If it is true that Island Garment lvfanufacturing I Corporation made all these overdeclarations , as observed by petitioner, ho�11 come that none of its foreign suppliers ever complained of being short changed up to this time? It appears that the agreement between petitioner and its foreign suppliers , before the former exports the finished articles , is to first notify the latter and requests pay- ment of costs of labor o It is only after said payment is received that petitioner ships the finished articles., If there was actually overdeclaration of exports , the very first to complain should naturally be the foreign sup- pliers because they would be receiving less than what they should actually received based on their payments for the labor cost of processing the raw materials o 5. .c-�nd as earlier stated , the decision of respon- dent appealed from denying the protest of petitioner and reiterating the payment of the amounts of �335 , 787 o93 ahd ~291 , ~�02 . 01 as deficiency income tax and advance sales tax , respectively , for the years 1962 and 1963 , v1as issued by the Commissioner of Internal Revenue not... withstanding the recommendation of his Appellate Division,

DECISION - CTA CASE NOo 2070 '� which heara this case, that the assessments against peti- tioner be can~elled and withdrawn for failure of the BIR examiners to subst~ntiate their assessments (Exhs . "E" & "E-1"� p. 426,. BIR records 9 ) As regards item (c) of the assessment (Exh. "BB- 1)": ' (c) Unsupported exportation in 1962 and 1963 494~223.40 yards respondent included it as part of the over-declared ex- portation of embroidered goods of petitioner because of the latter's alleged failure to present to his exa- miners the corresponding shipping documents evidencing exportation of the finished goods. While the documen- tary andoral evidence>~' ' discussed earlier,. show that all of petitioner.11 s importations of textile fabrics have been properly and duly accounted for e the reason why the ship- ping documents evidencing exportation of finished goods~ as testified to by Enrique Jocson~ President and General Manager of petitioner, is that the records of importations and exportations in 1962 and 1963 could no longer be loca~ ted. This was due to the fa~t that these shipping docu- ments were either submitted to the Embroidery and Ap- parel Control and Inspection Board in connection with its application for exportation or with the Bureau of Customs for the liquidation of the import entries. (Ppo

DECISION - CTA C~\.SE NO �. 2070. - 3�1 - 297- 298 , 314, 387- 389 , t . s . n . ) Copies of these papers and documents \,Jere also furnished the Committ ee on �Jlays and Neans of the Senate on August 25 , 1967 which were duly receipted by its Chairman , Rodolf(j) {fu.l:f~Oll1 o These shipping documents , among others , were: the storekeeper ' s book , 1962-1967; import invoices for the neriod 1962- 1967;. export invoices for export shipments for the pe- riod 1962- 1967; copies of all bonds filed with the ~ur eau of Customs; liquidation papers of all imported entries exported up to August 1967; boat notes for every shipment made ; delivery receipts for 1962-1966;_ and ap- proved licenses vJi th foreign suppliers . (Exho T 11 11 , p . 158 , CT records o) Nr . J ocson also testified what in filing the application for exportation I�Ji th the Embroi- dery ahd pparel Control and Inspection Board , petitioner was required to attach the import e:atties , export en- tries and bills of lading and these papers were also forl;Jarded to the Bureau of Customs for purposes of li- quidation o (Pp . 396-399 , t . s . n.) ':le see no possible ground to ignore or disregard this explanation of petitioner considering that no proof was presented by respondent to contradict the same , and the exportations in 1962 and 1963 have all been duly pro- ven by petitioner by documentary and oral evidenceo

DECISION CTA CASE NOo 2070 32 - Petitioner having satisfactorily shown that all of its importations of textile raw materials during the years 1962 and 1963 had been . exported to its foreign suppliers~ pursuant to Republ i c Act No . 3137~ there could be no sale of such raw materials subject to the sales tax. It follows that petitioner did not derive any undeclared income from the sale of such textile materials ~tlhich is subject to income tax. Accordingly-,. the assessments of, respondent Commissioner of Internal Revenue a.gainst petitioner Island Garment Manufacturing Corporation in the amount s of ~291 1 402.01 . as advance sales tax and P335~787 . 93 as deficiency income tax for the years 1962 and 1963, inclusive of surcharges. i nte r ests and compromise penalties, or a total of P627 , 189 . 91 ~ cannot be sustained . WHEREFORE. the decision appealed from should be as it is hereby reversed . No costs. SO ORDERED. Quezon City, June 22. 1977 . a,.,~~- AMANTI::: Acting Pre I CONCUR: . / ~OAQUIN Associate Judge /