APEX CHEMICAL CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court ofTax Appeals QUEZON CITY Third Division APEX CHEMICAL CORPORATION, CTA CASE NO. 8698 Petitioner, Members: -versus- Bautista, Chairperson Fabon-Victorino, and Ringpis-Liban, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, AUG 2 6 2015 Respondent. X ------------------------------------------------------------------------------------ ---------------------------------- X DECISION BAUTISTA,]: THECASE1 This is a Petition for Review filed in accordance with Rule 4, Section 3(a)(l) ofthe Revised Rules ofthe Court ofTax Appeals2 seeking for the review and setting aside of the Final Decision ("FD") of respondent dated July 11, 2013 against petitioner for alleged tax deficiency assessment in the total amount of Php725,261.83 for taxable year 2007, due to alleged failure of petitioner to submit supporting documents to substantiate its protest; and to uphold petitioner's protest by setting aside and cancelling the disputed assessment. THE PARTIES3 1 Records, CTA Case No. 8698, pp. 15, 338. 2 A.M. No. 05-11-07-CTA , November 22, 2005. and issues to be resolved) ("JSFI"), p. 312. ~ 3 Records, Joint Submission (of the admitted/stipulatedfacts

DECISION CTA CASE NO. 8698 Page2of35 Petitioner Apex Chemical Corporation is a corporation duly organized and licensed to do business in the Republic of the Philippines. Respondent is the duly appointed Commissioner of Internal Revenue ("CIR") in the Republic of the Philippines with authority to perform the duties of the said office in accordance with law, including the power to decide tax cases and disputed assessments pursuant to Section 4 of the 1997 National Internal Revenue Code ("NIRC"). THE FACTS Revenue District Office 043B West, Pasig City ("ROO 43B") issued Tax Verification Notice ("TVN") 2003-00121406 dated October 22, 2008, with the attached "First Notice or Request for Presentation of Records" ("1st RPR"), authorizing Revenue Officer Divina Gracia Ramirez and Group Supervisor Melvin Bedania to verify the supporting documents and/or pertinent records covering all internal revenue taxes of petitioner for taxable year 2007.4 On November 5, 2008 and December 15, 2008, petitioner was served the undated 2nd RPR and 3rd RPR, respectively.s On December 29, 2009, RDO 43B issued a letter to petitioner informing the latter that Revenue Officer Daniel Barrairo and Group Supervisor Melvin Bedania were authorized to continue with the verification of the books of accounts and other related records of petitioner, pursuant to the TVN.6 On January 18, 2010, petitioner sent a letter to RDO 43B, explaining that its records, documents, inventories and equipment were destroyed by Typhoons Ondoy and Pepeng,7 enclosed therewith are the Affidavit of Inventory Loss and Destruction of Records8 executed on November 27, 2009 by one Augusto R. Cruz, Managing Director of petitioner; a Certification issued by Manggahan Barangay Council9; and a Certification issued on October 13, 2009 by one Atty. 4 Id., JSFI, p. 312. ~ s Id., p. 313. � Records, p. 383. 7 Id., pp. 384-385. � Id., pp. 386-387. ' Id., p. 388.

DECISION CTA CASE NO. 8698 Page3of35 Samson J. Juan, the General Manager of Manila Mahogany Marketing Corporationlo. In a letter dated March 26,2010, RDO 43B reassigned the case to Revenue Officer Genaro S. Guevara and Group Supervisor Onofre S. De Guzman.n On May 14, 2010, petitioner received a "Five (5) Day Notice Before Sub-poena Duces Tecum" dated May 4, 2010,12 to which it responded through a Reply-Letter on May 17, 2010,13 Respondent issued a Notice of Informal Conference ("NIC") dated September 3, 2010, with the following findings:14 TAX TYPE BASIC TAX INTEREST COMPROMISE TOTALS PENALTY Income Tax 387,628.75 297,514.34 705,143.09 Value-added Tax 69,936.23 35,667.48 20,000.00 117,603.71 Expanded Withholding Tax 4,161.69 12,000.00 TOTAL DEFICIENCY TAXES 2,301.92 1,000.00 7,469.58 830,216.38 In response, petitioner sent a letter dated September 27, 2010 and received by the Revenue Officer on September 28,2010, submitting its objections to the findings of respondent.15 On January 13, 2011, petitioner received a Preliminary Assessment Notice ("PAN"), which provided the following recomputed deficiency taxes:16 TAX TYPE BASIC TAX INTEREST TOTALS Income Tax 385,403.04 204,422.00 589,825.04 Value-added Tax 69,112.31 39,725.38 108,837.69 Expanded Withholding Tax 7,382.59 4,283.93 11,666.52 TOTAL DEFICIENCY TAXES 710,329.25 1o Id., p. 389. " Id., p. 390. " Id., p. 391. 13 Id., pp. 392-393. 1< Id., pp. 140-145. 1s Id., pp. 395-396. 16 Id., pp. 417-421.

DECISION CfA CASE NO. 8698 Page4of35 On January 17, 2011, petitioner received a Final Assessment Notice ("FAN") and a Formal Letter of Demand ("FLO"), with the updated discrepancies summed up below:17 TAX TYPE BASIC TAX INTEREST TOTALS Income Tax Value-added Tax 385,403.04 216,881.60 602,284.64 Expanded Withholding Tax 69,112.31 41,959.69 111,072.00 TOTAL DEFICIENCY TAXES 7,382.59 4,522.60 11,905.19 725,261.83 On January 26, 2011 and February 16, 2011, petitioner filed its "Protest to the 2007 PAN"18 and letter protest "Re: Apex Chemical Corp. (ACC) 2007 FAN"19, respectively. On February 22, 2012, the Regional Director sent a letter to petitioner informing the latter that a FAN and a FLO have been issued.2o On March 21, 2012, petitioner replied that it has already filed a protest letter to the FAN.z1 On July 11, 2012, respondent sent petitioner a letter introducing a new set of Revenue Officers to conduct a reinvestigation of its books of accounts and other related records in relation to its tax liabilities for 2007.22 However, in its letter reply filed on July 23, 2012, petitioner clarified that it did not request for a reinvestigation but questioned the legitimacy of the issuance of the said FAN.23 On July 19, 2013, petitioner received a letter from the Regional Director of Revenue Region 7 informing it that due to its failure to submit documents in support of its protest, the case was returned by the investigating officer of ROO 43B recommending the reiteration of the assessments, and stating that the same is their final decision.24 Thus, on August 16, 2013, petitioner filed a Petition for Review with the Court, docketed as CTA Case No. 8698.25 { 17 Id., pp. 422-427. 1s Id., pp. 362-367. 19 Id., pp. 428-431. 20 Id., p. 432. 21 Id., p. 433. 22 I d., JSFI, p. 315; Id., p. 435. 23 Records, pp. 436-437. 24 Id., p. 361. 25 Id., pp. 14-112, with attachments.

DECISION CTA CASE NO. 8698 Page 5 of35 On October 10, 2013, respondent filed her Answer26 interposing the following Special and Affirmative Defenses: 7. The assessment for calendar year 2007 deficiency Income Tax, Value Added Tax and Expanded Withholding Tax in the amount of PESOS: SEVEN HUNDRED [TWENTY FIVE THOUSAND] TWO HUNDRED SIXTY-ONE [] AND 83/100 (Php725,261.83) was issued in accordance with applicable laws and regulations. The factual and legal bases of the assessments are contained in the [FLD] and [FAN]. 8. As alleged by Petitioner in its Petition, it received the Final Decision on July 19, 2013. However, Petitioner failed to submit the required documents in support of its protest within sixty (60) days from the date of filing of its letter of protest, hence, the assessment have already become final, executory and demandable. Consequently, this Honorable Court cannot anymore exercise jurisdiction over Petitioner's Petition for Review. Section 3.1.5 of Revenue Regulation No. 12-99 provides as follows: 3.1.5. Disputed Assessment. The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof. If there are several issues involved in the formal letter of demand and assessment notice but the taxpayer only disputes or protests against the validity ofsome of the issues raised, the taxpayer shall he taken on the taxpayers disputed issues until the f taxpayer has paid the deficiency tax or / taxes attributable to the said undisputed 26 Id., pp. 122-128.

DEOSION CfA CASE NO. 8698 Page6of35 assessment. The prescriptive period for assessment or collection of the tax or taxes attributable to the disputed issues shall be suspended. The taxpayer shall state the facts, the applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect. If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. The taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable. The phrase "submit the required documents" includes submission or presentation of the pertinent documents for scrutiny and evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his report of investigation. If the taxpayer fails to file a valid protest against the formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof, the assessment shall become final, executory and demandable. If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable. In general, if the protest is denied, in whole or in part,

DECISION CfA CASE NO. 8698 by the Commissioner or his duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable: Provided, however, that if the taxpayer elevates his protest to the Commissioner within thirty (30) days from the date of receipt of the final decision of the Commissioner's duly authorized representative, the latter's decision shall not he considered final, executory and demandable, in which case, the protest shall he decided by the Commissioner. If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one hundred eighty (180) days from date of submission, by the taxpayer, of the required documents in support of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, the assessment shall become final, executory and demandable. 9. A perusal of the Protest Letter to the [PAN] and [FAN] of the Petitioner does not stand the test as required by the parameters provided under RR 12-99. 10. As to the issue of the validity of the [TVN], it must be noted that the same was duly revalidated on February 23,2009. Hence, the TVN is still valid and can be used as an authority to make assessment. 11. Further, Sec. 203 of the [1997 NIRC] provides for the prescriptive period to make assessment, to wit: "SEC 203. Period of Limitation Upon Assessment and Collection- Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law

DECISION CTA CASE NO. 8698 for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3) year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be consistent as filed on such last day." 12. The [PAN] with Details of Discrepancy was duly issued on December 17, 2010, hence, issued before the expiration of the three (3) year prescriptive period to make assessment counted from the date of filing of the return which in this case is on April2008. 13. Therefore, Respondent has the right to make assessment on Petitioners Income tax in the amount of PhP602,284.64, Value Added Tax in the amount of PhP111,072.00 and Expanded Withholding Tax in the amount of PhP11,905.19 for taxable year 2007; 14. Assuming por arguendo that the instant Petition was filed within the period provided by law, the details of discrepancies disclosed the following: Deficiency Income Tax a. Verification disclosed that Petitioner failed to subject part of the income payments on salaries and related expenses to withholding tax on compensation, thus, disallowed as deductions from Petitioner's gross income pursuant to Section 34(K) of the [1997 NIRC], as amended. b. Verification disclosed that sales reported is understated by PhP31,260.20, hence, assessed pursuant to Section 31, in relation to Section 32 of the [1997 NIRC], as amended. c. Verification disclosed that certain expenses amounting to PhP582,801.92 were not supportey

DECISION CTA CASE NO. 8698 Page 9 of35 with sufficient evidence/documents in violation of Section 34(A)(1)(b) of the [1997 NIRC], therefore, disallowed as deduction from your gross income pursuant to Section 34 of the [1997 NIRC], as amended. d. Verification disclosed that you failed to subject below income payment to withholding tax as required under Revenue Regulations No. 2-98, as amended, thus, disallowed as deductions from Petitioner's gross income pursuant to Section 34(K) of the [1997 NIRC], as amended. Deficiency Value-Added Tax a. Verification disclosed that you claimed input tax from unsupported expenses, hence, disallowed pursuant to Section 110 of the [1997 NIRC], as amended. Deficiency Expanded Withholding Tax a. Verification disclosed that you failed to subject the following income payments to expanded withholding tax as required under Revenue Regulations No. 2-98, as amended. 15. It must be noted that the Petitioner was given an opportunity to dispute the Assessments issued to them when the Respondent granted their request for reinvestigation. However, the same was futile because it failed to submit the documents that would support its allegations and to refute the assessments issued against it. 16. Hence, the failure of the Petitioner to submit substantial documents during the period of reinvestigation to refute the assessments made results in the finality of the assessments made. 17. Finally, well settled [is] the rule that tax assessments by examiners are presumed correct and made in good faith. It is the taxpayer and not the Bureau of Internal Revenue who has the duty of proving otherwise. Equally settled is / the rule that in the absence of proof of any irregularities in

DECISION CTA CASE NO. 8698 Page 10 of35 the performance of official duties, the assessment will not be disturbed. 18. In COMMISSIONER OF INTERNAL REVENUE VS. BANK OF THE PHILIPPINE ISLANDS, GR No. 134062 dated April17, 2007, the Honorable Supreme Court said, to wit: "Tax assessment by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence ofproof ofany irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessment." On December 16, 2013, the parties filed their "Joint Submission (of the admitted/ stipulated facts and issues to be resolved)"27 ("JSFI"), and thus a "Pre-Trial Order"28 was issued on February 4, 2014. On March 19, 2014, petitioner filed its "Formal Offer of Exhibits of Petitioner,"29 which was resolved by the Court on April25, 2014.30 On the other hand, respondent filed her "Formal Offer of Evidence"31 on June 25, 2014, to which petitioner responded with a "Comment on Respondent's Formal Offer of Evidence"32 on July 9, 2014. On July 15, 2014, the Court issued a Resolution admitting the exhibits offered in respondent's "Formal Offer of Evidence," as well as granting the parties thirty (30) days from notice, within which to file their respective memoranda.33 27 Id., pp. 312-323. '" Id., pp. 338-348. 29 Id., pp. 353-360. 30 Id., pp. 463-464. 31 Id., pp. 470-475. 32 Id., pp. 478-480. 33 Id., pp. 483-484.

DECISION CIA CASE NO. 8698 On August 4, 2014, respondent filed its "Respondent's Memorandum,"34 while petitioner filed its "Memorandum for the Petitioner" on August 27,2014.35 Thus on September 1, 2014, the Court promulgated a Resolution36 submitting the case for Decision. Hence, this Decision. THE ISSUES37 Based on the JSFI filed on December 16, 2013, the issues to be resolved are as follows: 1. WHE1HER OR NOT PETITIONER WAS ACCORDED DUE PROCESS, AS REQUIRED BY LAW; 2. WHETHER OR NOT PETITIONER IS LIABLE TO PAY DEFICIENCY INCOME TAX IN THE AMOUNT OF PHP602,284.64, VALUE ADDED TAX IN 1HE AMOUNT OF PHP111,072.00, AND EXPANDED WITHHOLDING TAX IN 1HE AMOUNT OF Pl1,905.19 FOR TAXABLE YEAR 2007, INCLUSIVE OF INTEREST; AND 3. WHE1HER OR NOT 1HE ASSESSMENT HAS ALREADY BECOME FINAL, EXECUTORY AND DEMANDABLE. THE RULING OF THE COURT The Petition for Review is partly meritorious. Petitioner was accorded due process of law in the issuance of the assessment. 34 Id., pp. 485-493. 35 Id., pp. 494-508. 36 Id., p. 512. 37 Id., JSFI, p. 317.

DECISION CIA CASE NO. 8698 Page 12of35 Petitioner claims that it was deprived of its right to due process since from the outset and as early as the informal conference, respondent never considered its explanations and documents; respondent subjected it to continuous and annoying rotation and reshuffling of revenue officers; and respondent already issued FANs on January 7, 2011 when it only served the PAN on January 13, 2011 and the fifteen (15)-day period to respond has not yet began. Hence, the FAN and the FLDs were issued way ahead of its receipt of the PAN and before it had the opportunity to file a protest to the latter, thus depriving it the right to protest the PAN within the fifteen (15)-day period. The relevant provisions of law are Section 228 of the 1997 NIRC and Section 3 ofRevenue Regulations No. 12-9938, to wit: SECTION 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: xxx [Emphasis ours] SECTION 3. Due Process Requirement in the Issuance ofa Deficiency Tax Assessment. 3.1 Mode of procedures m the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference.- The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. xxx 3.1.2 Preliminary Assessment Notice (PAN).- If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists 38 Implementing the Provisions of the National Internal Revenue Code of1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-judicial A/ Settlement ofa Taxpayer's Criminal Violation of the Code Through Payment ofa Suggested Compromise Penalty, September 6, 1999. /r

DECISION CTA CASE NO. 8698 Page 13 of35 sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). xxx [Emphases ours] Pursuant to the above-stated provisions, the revenue officer in charge of audit of the taxpayer's books shall determine, based on their examinations, whether there is sufficient basis/bases to pursue the investigation and/or to issue an assessment against the taxpayer. Therefore, said officer has the authority to look into a taxpayer's books, documents and explanations; and based on his/her own findings, determine whether he/she will continue with the assessment. Hence, petitioner cannot claim deprivation of its right of due process based merely on the fact that the revenue officer assigned to handle the present assessment denied its protests. More importantly, there was no clear finding that the revenue officer involved abused his/her authority since the findings and the assessments were backed up by sufficient facts and law. As to petitioner's claim of continuous and annoying rotation and reshuffling of revenue officers, Section 17 of the 1997 NIRC provides that respondent may assign or reassign revenue officers and employees. Moreover, those assigned to perform assessment or collection functions shall not remain in the same assignment for more than three (3) years, as follows: SECTION 17. Assignment of Internal Revenue Officers and Other Employees to Other Duties. - The Commissioner may, subject to the provisions of Section 16 and the laws on civil service, as well, as the rules and regulations to be prescribed by the Secretary of Finance, upon the recommendation of the Commissioner, assign or reassign internal revenue officers and employees of the Bureau of Internal Revenue, without change in their official rank and salary, to other or special duties connected with the enforcement or administration of the revenue laws as the exigencies of the service may require: Provided, That internal revenue officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than three (3) years: Provided,

DECISION CfA CASE NO. 8698 Page14of35 further, That assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed one (1) year. [Emphases ours] Pursuant thereto, respondent issued Revenue Administrative Order ("RAO") No. 001-0939, which prescribes the splitting of RDO No. 43-Pasig City, aiming to strengthen the decentralization of the BIR's set-up for the purpose of maximizing revenue collections and tax assessments, intensifying enforcement of revenue laws and regulations, and bringing the revenue service closer to the taxpaying public. As a result, the personnel of the RDO was reassigned in 2009, and petitioner's TVN was consequently transferred to another revenue officer. Moreover, the further reassignment of the TVN on March 26, 2010 was in compliance with a Revenue Travel Assignment Order ("RTAO"). Therefore, the reassignments of examiners were prescribed by law, were done in compliance the lawful orders of respondent, and were not meant to directly annoy or inconvenience petitioner. On the matter of the FAN being issued ahead of the protest to the PAN, a perusal of the records reveal that the PAN was indeed issued by respondent on December 17, 201040 and received by petitioner on January 13, 201141, to which petitioner filed its protest on January 26, 201142. While on January 7, 201143, respondent issued a FD and its FANs, which were received by petitioner on January 17, 201144 and protested to by the latter on February 16, 201145. It must be emphasized that due process in our jurisdiction refers to the right of the taxpayer to be informed of the legal and factual findings of the BIR as regards the former's deficiency taxes, and the opportunity to be heard through protest.46 A PAN is preparatory to the issuance of a FAN, and is not, legally speaking, an assessment even if it contains a computation of the tax liabilities of a taxpayer and a 39 Splitting ofRevenue District Office (ROO) No. 43-Pasig City and Redefining Their Areas of L_/ Jurisdiction, February 2, 2009. 40 Records, p. 417; BIR Records, p. 286. 41 Records, p. 420. 42 Id., pp. 362-367. 43 Id., pp. 422-424. 44 Id., p. 427. 45 Id., pp. 428-431. "" Commissioner ofInternal Revenue vs. Steelasia Manufacturing Corporation, CfA EB Nos. 631 and 632, December 22, 2011.

DECISION crA CASE NO. 8698 Page 15 of35 demand for payment of the computed tax.47 Section 228 of the 1997 NIRC clearly refers to the FAN, which should be formally protested to by the taxpayer before it becomes final and executory.48 Hence, the protest against the PAN, unlike the protest against the FAN, is not indispensable.49 A PAN may or may not even be protested to by the taxpayer, and non-protest thereof shall not make it final and non-appealable.50 Thus, the issuance of the FAN before the lapse of the fifteen (15)-day period for the taxpayer to file its protest to the PAN, inflicts no prejudice on the taxpayer as the latter is properly served a FAN, which it was able to intelligently contest by filing a protest letter thereto within the period provided by law.s1 A careful perusal of the records show that in this respect, the FAN issued by respondent on January 7, 2011 contained all the information needed: the facts, the law, and the rules and regulations, which formed the basis of the assessment, as required under Section 228 of the 1997 NIRC. Therefore, petitioner was accorded due process. The assessment has not yet become final, executory and demandable at the time the Petition for Review was filed. Respondent avers that the protest letter filed by petitioner was insufficient, due to the latter's failure to submit any supporting document within sixty (60) days therefrom, making the assessments attain finality.s2 The relevant provision of law is Section 228 of the 1997 NIRC, viz.: SECTION 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first 47 Id. '"Id. 4' Medtex Corporation v. Commissioner of Internal Revenue, CfA Case No. 8508, September 1, 2014. 50 Id. 51 Id. 52 Records, p. 490.

DECISION CfA CASE NO. 8698 Page 16 of35 notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: XXX XXX XXX The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)- day period; otherwise, the decision shall become final, executory and demandable. [Emphasis ours] In the case of Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc.53, the Supreme Court explained that the term "relevant supporting documents" should be understood as those documents necessary to support the legal basis in disputing a tax assessment, as determined by the taxpayer, and the BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which 53 G.R. Nos. 172045-46, June 16, 2009, 589 SCRA 253.

DECISION CTA CASE NO. 8698 Page 17 of35 may require the production of documents that a taxpayer cannot submit. Thus, the fact that petitioner chose to submit the protest without supporting documents does not invalidate the fact of filing a protest. The lack of documentation will only matter in the evaluation of the merits of the protest, but should not result in the finality of the deficiency assessment. Thus, when respondent issued the FD on July 11, 2013, petitioner was correct in bringing up the disputed assessment to the Court. The period to assess some of the taxes covered by the FAN have already prescribed. Section 203 of the 1997 NIRC, as amended, mandates that respondent should issue an assessment for deficiency taxes within three (3) years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later. Any assessment notice issued beyond this three (3)-year prescriptive period shall not be valid, save in certain cases, to wit: SECTION 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. [Emphases ours] Since the instant case involves deficiency Income Tax, VAT and EWT, the prescribed due dates for filing of the returns, to be used as bases for the three (3)-year prescriptive period, varies accordingly.

DECISION CTA CASE NO. 8698 Page I8 of35 Income Tax Section 77(B) of the 1997 NIRC, as amended, provides that the filing of the Income Tax Return shall be on or before the fifteenth (15th) day of April, or the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. - XXX XXX XXX (B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be. Value-added Tax The filing of the Quarterly VAT Returns must be made within twenty-five (25) days after the close of each taxable quarter. Section 114(A) ofthe 1997 NIRC provides, as follows: SEC. 114. Return and Payment of Value-added Tax.- (A) In General. -Every person liable to pay the value- added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis. Expanded Withholding Tax Creditable (and Expanded) Withholding Tax Returns must be / filed within ten (10) days after the end of each month. However, for

DECISION CTA CASE NO. 8698 Page 19 of35 the month of December, it shall be filed on or before January 15 of the following year. Section 58 of the 1997 NIRC, as amended, provides that: SEC. 58. Returns and Payment of Taxes Withheld at Source.- (A) Quarterly Returns and Payments of Taxes Withheld. - xxx XXX XXX XXX The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government. However, the above provision was amended by Section 2.58(A)(2) of Revenue Regulations ("RR") No. 2-9854, as amended by RR No. 17-0355, as follows: SECTION 2.58. Returns and Payment ofTaxes Withheld at Source. (A) Monthly return and payment of taxes withheld at source- XXX XXX XXX (2) WHEN TO FILE - 54 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 ofIncome Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Tax," April17, 1998. 55"Amending Further Pertinent Provisions ofRevenue Regulations No. 2-98, as Amended, Providing for Additional Transactions Subject to Creditable Withholding Tax; Re-Establishing the Policy that the Capital Gains Tax on the Sale, Exchange or Other Disposition ofReal Property Classified as Capital Assets Shall be Collected as a Final Withholding Tax, Thereby Further Amending Revenue Regulations Nos. 8-98 / and 13-99, as Amended by Revenue Regulations No. 14-2000; and for Other Purposes," March 31, 2003. .

DECISION CTA CASE NO. 8698 Page 20 of35 (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payments should be made, within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year; and except for the final capital gains tax on the sale or other onerous disposition of real property considered as capital asset which must be taken/withheld from the seller by the buyer and remitted within thirty (30) days from the date of notarization of the transfer document to the collecting agent of the ROO having jurisdiction over the place where the property is located. XXX XXX XXX (b) With respect, however, to taxpayers, whether large or non-large, who availed of the electronic filing and payment system (EFPS), the deadline for electronically filing the applicable withholding tax returns and paying the taxes due thereon via the EFPS shall be five (5) days later than the deadlines set above, unless the EFPS regulations provide for different deadline dates and except for the final capital gains tax on the sale, barter or exchange of real property where the law fixes a definite deadline for the payment thereof. Based on the BIR records, petitioner's tax returns for taxable year 2007 were filed on the dates provided below: TAX RETURNS I I EXHIBIT DATE OF FILING

DECISION CIA CASE NO. 8698 Page 21 of35 Income Tax -Annual filing "R-lu April15, 200856 Annual Income Tax Return "R-1" April25, 200757 VAT - Quarterly filing "R-1" July 25, 200758 1st Quarter VAT Return "R-1" October 24, 200759 2nd Quarter VAT Return "R-1" January 25, 200860 3rd Quarter VAT Return 4th Quarter VAT Return "R-1" February 9, 200761 "R-1" March 5, 200762 EWT - Monthly filing "R-1" April 10, 200763 January CWT Remittance Return "R-1" May 9, 200764 February CWT Remittance Return "R-1" June 8, 200765 March CWT Remittance Return "R-1" July 10, 200766 April CWT Remittance Return "R-1" August 6, 200767 May CWT Remittance Return "R-1" June CWT Remittance Return "R-1" September 10, 200768 July CWT Remittance Return "R-1" October 8, 200769 August CWT Remittance Return "R-1" September CWT Remittance Return "R-1" November 8, 200770 October CWT Remittance Return December 5, 200771 November CWT Remittance Return January 9, 200872 December CWT Remittance Return The table below will help shed light into the reckoning date of the three (3)-year period to assess: TAX RETURNS ACTUAL DATE OF LASTDATETO LASTDAYTO FILING FILE RETURN ASSESS Income Tax -Annual lilin� Annual Income Tax Return AorillS, 2008 AorillS, 2008 Aori115, 2011 VAT - Quarterlv filin;! Aoril25, 2007 Aoril 25, 2007 Aoril25, 2010 1''Quarter VAT Return July 25, 2007 Julv 25, 2007 Julv 25, 2010 2nd Quarter VAT Return October 24,2007 October 25, 2007 October 24, 2010 3<d Quarter VAT Return I anuarv 25, 2008 I anuarv 25, 2008 lanuarv 25,2011 4tb Quarter VAT Return Februarv 9, 2007 Februarv10,2007 Februarv 9, 2010 EWT- Month/11 {!lin� March 5, 2007 March 10, 2007 March 5, 2010 January Remittance Return AprillO, 2007 April10, 2007 Aoril10, 2010 February Remittance Return March Remittance Return / 56 BIR Records, p. 22. 57 Id., p. 93. sa Id., p. 90. 59 Id., p. 85. 60 Id., p. 81. 6t Id., p. 53. 62 Id., p. 52. 63 Id., p. 51. 64 Id., p. 50. 65 Id., p. 49. 66 Id., p. 48. 67 Id., p. 47. 68 /d., p. 46. 69 Id., p. 45. 7o Id., p. 44. 71 Id., p. 43. 72 Id., p. 42.

DECISION CTA CASE NO. 8698 Page 22 of35 April Remittance Return May 9,2007 Mav 10, 2007 Mav 9,2010 Mav Remittance Return June 8, 2007 June 10, 2007 June 8, 2010 June Remittance Return Julv 10, 2007 julv 10, 2007 Julv 10, 2010 july Remittance Return August 6, 2007 Auo:ust 10, 2007 Auo:ust 6, 2010 August Remittance Return September10,2007 September 10, 2007 September 10, 2010 September Remittance Return October 8, 2007 October 10,2007 October 8, 2010 October Remittance Return November 8, 2007 November 10, 2007 November 8, 2010 November Remittance Return December 5, 2007 December 10, 2007 December 5, 2010 December Remittance Return January 9, 2008 January15,2008 January 9, 2011 Based on the records, the FANs73 and the FLD74 issued by respondent on January 7, 2011, were received by petitioner on January 17, 2011. Since assessment is deemed made when notice to this effect is released, mailed or sent to the taxpayer,75 the three (3)-year period within which to assess petitioner shall be based on January 17, 2011. Looking into the last dates to assess on the table above, only the Income Tax, the VAT for the 4th quarter, and the EWT for the month of December can be the proper subjects of respondent's assessments, while respondent's right to assess all the others have already prescribed. Petitioner is liable for deficiency Income Tax, VAT and EWT. The Court shall now proceed with the determination of the amount of alleged deficiency taxes pertaining to the unprescribed 2007 Annual Income Tax Return, the 4th Quarter VAT Return and the December CWT/EWT Remittance Return. On January 17, 2011, petitioner received the FANs and the FLO, all issued on January 7, 2011, imposing deficiency taxes, with the following summary of discrepancies:76 1. Income Tax ansmg from salaries and related expenses not subjected to withholding tax, undeclared sales, disallowed expenses and income payments not subjected to withholding tax; 2. VAT arising from disallowed input taxes; and " Records, pp. 422-424. I 74 !d., pp. 425-427. 75 Basilan Estates, Inc. vs. Commissioner ofInternal Revenue, et. al., G.R. No. L-22492, September 5, 1967, 21 SCRA 17. 76 Records, pp. 422-427.

DECISION CTA CASE NO. 8698 Page23of35 3. EWT arising from income payments on direct labor and manufacturing overhead not subjected to EWT. The total amount of taxes assessed are as follows: TAX TYPE BASIC TAX INTEREST TOTALS Income Tax 385,403.04 216,881.60 602,284.64 Value-added Tax 69,112.31 41,959.69 111,072.00 Exp_anded Withholding Tax 11,905.19 GRAND TOTAL 7,382.59 4,522.60 725,261.83 Deficiency Income Tax Based on the FLD77, the deficiency income tax of petitioner was computed as follows: I. DEFICIENCY INCOME TAX - Taxable Income per ITR Add: Adjustments per investigation 162,882.72 a) Salaries and related expenses not subjected to withholding tax 31,260.20 b) Undeclared sales 582,801.92 c) Disallowed expenses 369,129.65 d) Income payments not subjected to withholding tax Taxable Income per Investigation 1,146,074.49 Income tax due thereon (35%) 9,686.0( 401,126.07 Less: Tax credits/payments 12,828.21 22,514.21 15,723.03 Payments 385,403.04 Creditable Withholding Tax 6,791.2!: 216,881.60 Total 602,284.64 Less: Excess credit to be carried over next period Deficiency Income Tax Add: 20% Interest (April16, 2008 to February 7, 2011) TOTAL AMOUNT DUE a) Salaries and related expenses not subjected to withholding tax Based on the Details of Discrepancies78, petitioner failed to subject part of the salaries and related expenses to withholding tax on 77 Id., pp. 422-424. / "BIR Records, Exhibit "R-15 b."

DECISION CTA CASE NO. 8698 Page 24 of35 compensation, thus, should be disallowed as a deduction from gross income pursuant to Section 34(K) ofthe 1997 NIRC79, as amended: ITEMS PERAFS PER ALPHALIST/ DIFFERENCE RETURNS 162,882.72 Salaries and Wages Fringe Benefits - Rank and file 285,671.52 Rice Subsidy (Food Subsidy) 79,135.68 SSS & Philhealth Contributions 45,514.52 HDMF (Pagibig) Contributions 33,790.00 TOTALS 2,400.00 283,629.00 446,511.72 On the outset, it must be noted that petitioner failed to disclose any material information in its Notes to the Audited Financial Statements ("AFS") to explain how the items were arrived at. Careful examination of the returns and documents, per BIR Forms 1601-CBO and 1601-CFBl, revealed that Salaries and Wages is broken down, as follows: 13th Month Pay 19,113.00 SSS/HDMF PHC 35,160.00 Taxable Salaries 229,356.0()i TOTAL (per Alphalist attached to 1604CF) 283,629.00 Comparing the two tables above, it is evident that the Salaries and Wages in the AFS 82 is overstated because it already includes SSS/HDMF PHC contributions, which were also treated as separate expense items in the same AFS, leading to double deductions from gross income. While SSS, Philhealth and HDMF (Pagibig) contributions should be excluded from gross income pursuant to 79 SECTION 34. Deductionsfrom Gross Income. - Except for taxpayers earning compensation income ./ arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income: XXX (K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, Sections 58 and 81 of this Code. so BIR Records, pp. 69-80. " Id., pp. 81-82. 82 Id., pp. 31-47.

DECISION CTA CASE NO. 8698 Page 25 of35 Section 32(B)(7)(f) of the 1997 NJRCS3, they should only be deducted once. Fringe Benefits granted to rank-and-file employees are treated as part of their compensation income, subject to income tax and withholding tax on compensation income.B4 Also, it is necessary that the related tax be withheld pursuant to Section 34(K) of the 1997 NIRC before the same may be validly deducted from the gross income. However, petitioner failed to provide sufficient proof that the same is exempt from withholding tax. Thus, the disallowed deduction relating to Fringe Benefits for the rank and file employees of petitioner should be upheld. With respect to the Rice Subsidy (or Food Subsidy), there was no additional information provided in the Notes to the AFS, which would explain the nature and computation thereof. No other documents or evidence were provided that may lead this Court to believe that it is a de minimis benefit under RR No. 2-98, as amended by RR No. 5-201185, which is not subject to withholding tax. Consequently, the Rice Subsidy expense item may be treated as an allowance to employees that should be subjected to withholding tax before it can be allowed as a deduction to the gross income for the period, pursuant to Section 34(K) of the 1997 NIRC. Consequently, the disallowed deduction relating to Salaries and Related Expenses not subjected to withholding, in accordance with Section 34(K) of the 1997 NIRC, should be upheld but amended as to how the total amount was arrived at, viz.: '' SECTION 32. Gross Income. - 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 (7) Miscellaneous Items. - XXX (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals. "Mamalateo, V.C., (2010), Philippine Income Tax, p. 442. 85 The following shall be considered as "de minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees: XXX (d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than Pl,SOO; XXX / (j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; xxx

DECISION PERFS PER DIFFERENCE ALPHALIST/ crA CASE NO. 8698 RETURNS Page 26 of35 285,671.52 248,469.00 37,202.52 ITEMS 79,135.68 79,135.68 45,514.52 - 45,514.52 Salaries and Wages - Fringe Benefits - Rank and file Rice Subsidy (Food Subsidy) 33,790.00 SSS & Philhealth Contributions HDMF (Fagibig) Contributions 2,400.00 35,160.00 1,030.00 TOTAL SALARIES AND RELATED EXPENSES NOT SUBJECTED TO WITHHOLDING TAX 446,511.72 283,629.00 162,882.72 b) Undeclared sales Based on the Details of Discrepancies,86 undeclared sales should be assessed pursuant to Section 31, in relation to Section 32, of the 1997 NIRC, as amended, based on the finding that the sales reported in 2007 was understated by Php31,260.20, viz.: Sales per ITR 1,929,159.02 Receipts per VAT Returns 1,960,419.22 UNDECLARED SALES 31,260.20 In its Protest Letter,s7 petitioner alleged that the above discrepancy represents sales discounts not considered in the VAT returns. However, upon review of the Annual Income Tax Retum88 ("ITR") for the year 2007, it appears that the Sales in the ITR per BIR Investigation amounting to Phpl,929,159.02 was already net of the sales discount amounting to Php62,688.4889, computed as follows: Sale of Goods/Property 1,991,847.50 Less: Sales Returns/Discounts 62,688.48 Net Sales 1,929,159.02 On the other hand, receipts in the VAT Returns represent the sales receipts declared in the Third and Fourth Quarter VAT Returns net of sales discounts, broken down as follows: " BIR Records, Exhibit "R-15 b." "Id., p. 139. "Id., pp. 27-30. "Id., Schedule 1 of BIR Form No. 1702, p. 29.

DECISION 1,076,221.7090 CTA CASE NO. 8698 884,197.5291 Page 27 of35 1,960,419.22 Third Quarter per BIR Form 2550-Q Fourth Quarter per BIR Form 2550-Q Total Vatable Sales per VAT Returns Accordingly, petitioner's explanation that the understatement of Php31,260.20 pertains to sales discounts is untenable because sales in the ITR was already presented net of sales discounts before it was compared to the receipts per VAT Returns to arrive at the said difference. Thus, for petitioner's failure to support its allegation, the assessment for undeclared sales is upheld. c) Disallowed Expenses Based on the Details of Discrepancies,92 certain expenses amounting to Php582,801.92 were not supported by sufficient evidence or documents, in violation of Section 34(A)(l)(b) of the 1997 NIRCJ3� Therefore, they were disallowed as a deduction from petitioner's gross income. The said amount pertains to petitioner's purchases in the VAT Returns for the Third and Fourth Quarters of 2007, broken down as follows: PERIOD PURCHASES Third Quarter 328,256.47 Fourth Quarter 254,545.48 TOTAL 582,801.95 "'Id., p. 87. " Id., p. 83. "Id., Exhibit "R-15 b." " SECTION 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the following deductions from gross income: (A) Expenses. - (1) Ordinary and Necessary Trade, Business or Professional Expenses. - XXX (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the, development, f/ management, operation and/ or conduct of the trade, business or profession of the taxpayer.

DECISION CTA CASE NO. 8698 Page 28 of35 While petitioner submitted a schedule of VAT Input (Annex B) for the year 2007, containing a breakdown of sales invoices and official receipts received for purchases and rent payments, it did not submit any copy of the alleged invoices and official receipts, which the Court may use as reference to determine whether the information provided in the schedule matches the actual invoices and receipts. For petitioner's failure to support its allegation, the assessment on disallowed expenses is upheld. d) Income Payments not subjected to withholding tax According to the Details of Discrepancies,94 petitioner failed to subject the following income payments to withholding tax, in accordance with RR No. 2-9895, as amended, thus, should be disallowed as deductions from gross income pursuant to Section 34(K) of the 1997 NIRC, as amended, to wit: ITEMS PER AFS PER ALPHALIST DIFFERENCE 208,383.00 Direct Labor 208,383.00 - 160,746.65 369,129.65 Manufacturing Overhead 160,746.65 - INCOME PAYMENTS NOT SUBJECT TO WITHHOLDING TAX According to petitioner, both Direct Labor and Manufacturing Overhead are not subject to withholding tax since the former represents minimum wages paid to extras; and petitioner is not among the top 5,000 corporations under RR No. 12-94; or top 10,000 corporations under RR No. 17-2003; or top 20,000 corporations under RR No. 14-2008 for it to be mandated to withhold 1% on local purchases of goods and 2% for local purchases of services on its manufacturing overhead. Although petitioner's contention that minimum wage earners should not be subject to withholding tax under RR No. 2-98, as amended by RR No. 01-0696 is correct, it failed to provide sufficient proof to 94 BIR Records, Exhibit "R-15 b." '' SECTION 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon. - Except as herein otherwise provided, there shall be withheld a creditable income tax / at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines. 96 SECTION 2.78.1. Withholding of Income Tax on Compensation Income. -

DECISION CTA CASE NO. 8698 Page 29 of35 support its allegation that the Direct Labor relates to the income of its minimum wage earners. In fact, no payroll of minimum wage earners (as supported by check payments made to them) was provided. Neither did the Notes to the AFS shed any light on this matter. As to the Manufacturing Overhead, the basis of the assessment is Section 2.57.2 of RR No. 2-98, as amended by RR No. 06-0197, which requires petitioner to withhold 2% on income payments made to certain contractors. However, petitioner did not provide any reason or supporting document that would lead the Court to believe that the assessment is invalid. Therefore, the assessment on the above income payments are upheld. Based on the foregoing and taking into consideration the Taxable Income of petitioner in the amount of (Php210,705.92), the Court finds that the deficiency income tax should be computed as follows: Taxable Income per ITR (Php210,705.92) Add: Adjustments per investigation 162,882.72 Salaries and related expenses not subjected to withholding tax 31,260.20 Undeclared sales 582,801.92 Disallowed expenses 369,129.65 Income payments not subjected to withholding tax 935,368.57 Taxable Income per Investigation Income tax due thereon (35%) Php327,379.00 Less: Tax credits/payments Php9,686.00 Tax Payments for the First Three Quarters 9,621.21 Creditable Withholding Tax for the First Three Quarters Creditable Withholding Tax for the Fourth Quarter 3,207.07 Total Deficiency Income Tax 22,514.28 304,864.72 XXX XXX XXX (B) Exemptions from withholding tax on compensation. - The following income payments are exempted from the requirement of withholding tax on compensation: XXX XXX XXX (13) COMPENSATION INCOME OF INDIVIDUALS THAT DO NOT EXCEED THE STATUTORY MINIMUM WAGE OR FIVE THOUSAND PESOS (PHPS,OOO.OO) PER MONTH (SIXTY THOUSAND PESOS [PHP60,000.00] A YEAR), WHICHEVER IS HIGHER 97 Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon.- XXX (E) Income payments to certain contractors - On gross payments to the following contractors, whether individual or corporate - Two percent (2%)

DECISION CTA CASE NO. 8698 Page 30 of35 Add: 25% Surcharge I I 76,216.18 BASIC DEFICIENCY INCOME TAX INCLUSIVE OF SURCHARGE Php381,080.90 Deficiency Value-Added Tax Based on the FL098, the deficiency VAT of petitioner was arrived at in the following manner: Taxable sales/receipts per returns 111,843.35 1,960,419.22 Add: Adjustments per investigation 69,936.23 Taxable sales/receipts per Investigation 30,787.92 - 23,506.73 Output tax due thereon (12%) 236,074.23 1,960,419.22 Less: Tax Credits/Payments 69,936.23 235,250.31 Payments 166,138.00 Input tax claimed for the year 69,112.31 Creditable VAT 41,959.69 Other Credits 111,072.00 Total credits/payments Less: Disallowed input tax claimed Deficiency Value Added Tax Add: 20% Interest p.a (01.26.08 to 2.7.11) TOTAL AMOUNT DUE The information on Sales/Receipts, Output VAT and Input VAT were all based on the Third and Fourth Quarter VAT Returns, summarized as follows: PERIOD SALES/RECEIPTS OUTPUT VAT PURCHASES INPUT VAT Third Quarter 1,076,221.70 129,146.60 328,256.47 39,390.78 Fourth Quarter 884,197.52 106,103.71 254,545.48 30,545.45 TOTAL 1,960,419.22 235,250.32 582,801.95 69,936.23 It must be noted that respondent erroneously disallowed the full amount of Php69,936.23 input VAT pertaining to the third and fourth quarters.99 As already discussed, respondent may only assess VAT for the fourth quarter and its right to assess the other quarters of the year, including the third quarter, have lapsed. Thus, she may only question the input VAT in the amount of Php30,545.45, relating to the fourth quarter. / "BIR Records, Exhibit "R-15." 99 Id., p. 159.

DECISION CfA CASE NO. 8698 Page 31 of35 Based on the records, no supporting invoices and official receipts were submitted by petitioner to support its Input VAT claim, as required by Section 4.110-1 oJRR No. 16-05100. Therefore, the input VAT of Php30,545.45 is disallowed, and the VAT deficiency for the fourth quarter is computed as follows: Taxable Sales/Receipts per returns Php884,197.52 Add: Adjustments per investigation - Taxable Sales/Receipts per investigation 884,197.52 Output due thereon Php106,103.71 Less: Tax Credits/Payments 75,558.26 Php30,545.45 Payments Php67,861.28 (Php28,515.30+Php39,345.98) 30,545.45 7,636.36 Input VAT Php38,181.81 Creditable VAT Withheld 7,696.98 Total 106,103.71 Less: Input VAT 30,545.45 VAT Still Payable Add: 25% Surcharge BASIC VAT DEFICIENCY INCLUSIVE OF SURCHARGE Deficiency Expanded Withholding Tax Based on the FLDtot, the deficiency EWT of petitioner was computed as follows: ITEM AMOUNT TAX RATE TAX DUE Direct Labor 4,167.66 Manufacturing Overhead 208,383.00 2% 3,214.93 Deficiency Expanded Withholding Tax 7,382.59 160,746.65 2% 100 SECTION 4.110-1. Credits For Input Tax. - "Input tax" means the VAT due on or paid by a VAT-registered person on importation of goods or local purchases of goods, properties, or services, including lease or use of properties, in the course of his trade or business. It shall also include the transitional input tax and the presumptive input tax determined in accordance with Sec. 111 of the Tax Code. It includes input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. Any input tax on the following transactions evidenced by a VAT invoice or official / receipt issued by a VAT-registered person in accordance with Sees. 113 and 237 of the Tax Code shall be creditable against the output tax: xxx 101 BIR Records, Exhibit "R-15."

DECISION I I 4,522.60 crA CASE NO. 8698 11,905.19 Page 32of35 I Add: 20% Interest p.a. (01.16.08 to 2.7.11) TOTAL AMOUNT DUE The defense of petitioner is the same one used to invalidate the assessment of income payments not subject to withholding tax amounting to Php369,129.65 [see discussion on Deficiency Income Tax (d)]. Due to failure to provide sufficient proof that the assessment was improper and that the same should not be subject to EWT, the assessment is upheld and should be computed as follows: ITEM AMOUNT TAX RATE TAX DUE 2% 4,167.66 Direct Labor 208,383.00 2% 3,214.93 Manufacturing Overhead 160,746.65 Php7,382.59 1,845.65 Deficiency Expanded Withholding Tax Php9,228.24 Add: 25% Surcharge BASIC EWT DEFICIENCY INCLUSIVE OF SURCHARGE It must be noted that tax assessments are presumed correct and prepared in good faith, and all presumptions are in favor of the correctness of a tax assessment.l02 WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED. Petitioner is hereby ORDERED TOPAY deficiency Income Tax, Value-Added Tax and Expanded Withholding Tax for the taxable year ended December 31, 2007, in the modified amount of FOUR HUNDRED TWENTY EIGHT THOUSAND FOUR HUNDRED NINETY PESOS AND 95/100 (Php428,490.95), inclusive of the 25% surcharge imposed under Section 248(A)(3) of the 1997 NIRC1�3, broken down as follows: TYPE OF TAX BASIC TAX 25% TOTAL SURCHARGE Income Tax 304,864.72 381,080.90 Value Added Tax 30,545.45 76,216.18 38,181.81 7,636.36 102 Commissioner of Internal Revenue v. Han. Gonzales, et. al., G.R. No. 177279, October 13, 2010. 103 SECTION 248. Civil Penalties. - (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: XXX J f (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; xxx

DECISION 7,382.59 1,845.65 9,228.24 CTA CASE NO. 8698 342,792.76 85,698.19 428,490.95 Page 33 of35 Expanded Withholding Tax TOTAL In addition, petitioner is liable to pay: (a) Deficiency interest at the rate of twenty percent (20%) per annum pursuant to Section 249(B) of the 1997 NIRCW4, as amended, viz.: TAX TYPE BASIC TAX DEFICIENCY INTEREST Income Tax 304,864.72 COMPUTED Value-Added Tax 30,545.45 FROM Expanded Withholding Tax Apri115, 2008 7,382.59 January 25, 2008 January 15, 2008 (b) Delinquency interest at the rate of twenty percent (20%) per annum on the total amount due of Php428,490.95 representing deficiency Income Tax, Value-Added Tax and Expanded Withholding Tax, and on the 20% deficiency interest, which have accrued as aforestated in (a), computed from February 11, 2011, until full payment thereof, pursuant to Section 249(C) of the 1997 NIROD5, as amended. SO ORDERED. 104 SECTION 249. Interest. - (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for 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 full payment thereof. 10s SECf!ON 249. Interest. - (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid. XXX (C) Delinquency Interest. -In case of failure to pay: (1) The amount of the tax due on any return required to be filed, or (2) The amount of the tax due for which no return is required, or (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.

DECISION crA CASE NO. 8698 Page 34 of35 LOVELL . BAUTISTA WE CONCUR: [ON OFFICIAL BUSINESS] . FABON-VICTORINO MA. BELEN M. RINGPIS-LIBAN Associate Justice 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. LOVELL . BAUTISTA Asso iate Justice Chairperson CERTIFICATION Pursuant to Section 13 of Article VIII of the Constitution and the Division 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's Division. Presiding Justice

DECISION CTA CASE NO. 8698 Page 35 of35 PERIOD TAXABLE WITHHOLDING TAX ON COMPENSATION COMPENSATION (PER 1601-C) January February 19,113.00 1,858.74 March 19,113.00 1,858.74 April 19,113.00 1,858.74 May 19,113.00 1,858.74 June 19,113.00 1,858.74 July 19,113.00 1,858.74 August 19,113.00 1,858.74 September 19,113.00 1,858.74 October 19,113.00 1,858.74 November 19,113.00 1,858.74 December 19,113.00 1,858.74 19,113.00 1,857.26 TOTAL 22,303.40 229,356.00 /