FIRST FILIPINAS INSURANCE BROKERS CORPORATION v.COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* FIRST FILIPINAS INSURANCE C.T.A. CASE NO. 6569 BROKERS CORPORATION, Members: Petitioner, -versus- ACOSTA, Chairperson BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, ~J:&s Pm Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION ACOSTA, PJ.: The instant petition seeks the cancellation of the disputed assessments covering deficiency income tax in the amount of P10,639,996.39 and deficiency expanded withholding taxes in the amount of P55,138.18, issued against petitioner for taxable year 1997. First Filipinas Insurance Brokers Corporation (Petitioner) is a domestic corporation created and formed under Philippine Laws with business address at 11/F Valero Tower, Valero Street, Salcedo Village, Makati City. The Commissioner of Internal Revenue (Respondent) is the duly appointed officer of the Bureau of Internal Revenue (BIR) authorized to carry all its functions,

DECISION C.T.A. CASE NO. 6569 f'age 2 duties, and responsibilities including, inter alia, the power to decide, cancel, and abate tax liabilities under Section 204(B) of the National Internal Revenue Code (NIRC), as amended. On December 9, 1998, petitioner received Letter of Authority (LA) No. 00007590 dated November 9, 1998 issued by the BIR which authorized its revenue officers to examine for all internal revenue purposes the books of accounts and accounting records of petitioner for the period January 1, 1997 to December 31, 1997. 1 Petitioner received a Preliminary Assessment Notice (PAN) dated January 22, 2001 with Details of Discrepancies issued by respondent, stating that petitioner had alleged deficiency income and expanded withholding taxes for taxable year 1997.2 Within fifteen (15) days from receipt thereof or on February 8, 2001, petitioner presented its side of the case in a letter dated February 7, 2001. 3 Then, petitioner received a Demand Letter and Assessment Notice No. LA#00007590-97-01-801 dated April 6, 2001 with computations, assessing petitioner the amounts of P17,177,363.09 and P65,692.25 as deficiency income and expanded withholding taxes, respectively.4 On April 30, 2001, petitioner protested and requested reinvestigation of the findings which gave rise to that assessment.5 On July 9, 2001, petitioner received a letter dated July 4, 2001 from respondent replying to petitioner's request for reinvestigation and reduced petitioner's deficiency income tax to P13,270,982.63.6 In the same letter, as well as 1Exhibit "1", "1 -a", "1-b", BIR Records, page 31; paragraph 1 of Joint Stipulation of Facts ad Issues (JSFI), Rollo, page 84 2Exhibit "6", "6-1", "7", "7-1", BIR Records, pages 200-202; paragraph 2 of JSFI, Rollo, page 84 3 Exhibit "8", BIR Records, page 306-307 4 Paragraph 3 of JSFI, Rollo, page 84 ~ 5 BIR Records, pages 327-328 ~ 6 BIR Records, pages 335-337

DECISION C.T.A. CASE NO. 6S69 Page 3 in the letters dated August 3, 20017 and September 3, 20018, respondent requested petitioner to submit relevant supporting documents necessary for the conduct of reinvestigation. On November 12, 2001, respondent informed petitioner in a letter dated November 7, 2001 that the report of reinvestigation has been submitted for approval and requested petitioner to verify the details of the assessment so that it may present its side of the case.9 The deficiency income tax was reduced to P9,849,813.74. In a letter dated November 15, 2001, petitioner reiterated its protest against some of the findings made during the reinvestigation. 10 In a letter dated December 21, 2001, replying to petitioner's protest and received by petitioner on December 26, 2001, respondent further reduced petitioner's deficiency income tax to P9,818,784.11 and informed the latter that his assessment shall be forwarded to a higher authority for final disposition. 11 On October 21, 2002, petitioner received the Final Decision on Disputed Assessment dated September 17, 2002 which amended the assessments for deficiency income and expanded withholding taxes to P10,639,996.39 and P55,138.18, respectively. 12 Hence, the instant Petition for Review was filed on November 18, 2002. During trial, both parties presented their documentary and testimonial evidence in support of their respective stands. Upon termination of the trial, both parties were ordered to submit their respective memorandum .13 Only petitioner filed 7 BIR Records, page 339 8 BIR Records, page 444 9 BIR Records, page 448-450 10 BIR Records, pages 470-471 11 Exhi bit "15", "15-1", " 15-2"; BIR Records, pages 501-502 12 Exhi bit " 17", " 17-1"; BIR Records, pages 555-558, paragraph 4 of JSFI; Rollo, page 85 13 Rollo, pages 312-313

DECISION C.T.A. CASE NO. 6S69 Page 4 its Memorandum on July 3, 2006.14 Thus, the case was submitted for decision on July 11, 2006 without respondent's Memorandum. The issues, as jointly agreed by both parties to be resolved by this Court, are the following: "1. Whether or not the January 22, 2001 pre-assessment notice (PAN) is validly issued due to the alleged non-compliance with Section 228 of the 1997 Tax Code on the legal basis of the assessment; 2. Whether or not the January 22, 2001 PAN is void for not stating the details/breakdown and actual facts relative to disallowances of expenses in the amount of P17.763,832.38 as expressly required under Section 228 of the 1997 Tax Code; 3. Whether or not Petitioner was denied of procedural due process for alleged failure of Revenue District Office No. 50 - South Makati, to inform in writing its findings of discrepancies for purposes of holding an informal conference prior to the submission of the case-docket to the Assessment Division for issuance of pre- assessment notice (PAN), in accordance with Section 3.1.1 of Revenue Regulations No. 12-99 dated September 6, 1999; 4. Whether or not Petitioner failed to prove that the disallowed expenses/deductions in its 1997 financial statements are duly supported; 5. Whether or not Petitioner's alleged reimbursable expenses to various affiliates were subject to expanded withholding tax; 6. Whether or not Petitioner is liable for the 1997 deficiency income tax assessment in the amount of P10,639,996.39 covered under Revised Assessment Notice No. IT-7590-97-02-060 dated September 17, 2002, as well as the reduced deficiency expanded withholding tax amounting to P55,138.18 for taxable year 1997, together with the corresponding interest, surcharge and penalties thereto." Validity of the PAN and Due Process Since the first, second, and third issues deal with due process, the Court shall discuss these issues jointly. 14 Rollo, pages 322-347

DECISION C.T.A. CASE NO. 6569 Page 5 Petitioner claims that the PAN is void because it did not comply with Section 228 of the 1997 NIRC, i.e., lack of legal and factual basis. According to petitioner, the assessments contained in the PAN do not have any legal basis because respondent did not specify what provisions of the NIRC are applicable. Petitioner also adds that the disallowed expenses in the amount of P17,763,832.38 contained in the PAN do not have any factual basis because respondent failed to show how the disallowed amount was arrived. The Court disagrees. Before a deficiency tax assessment is issued against a taxpayer, the Commissioner or his duly authorized representative must observe Section 228 of the 1997 NIRC which in part provides: "SEC. 228. Protesting of Assessment. When the Commissioner of his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: x x x The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void . X X X" Contrary to petitioner's claim that the PAN has no legal basis, a perusal thereof shows that respondent indicated the applicable provisions of the NIRC in its Details of Discrepancies attached thereto. 15 The claim that petitioner does not know which NIRC (1977 or 1997 which took effect on January 1, 1998) should apply is simply untenable. Since the taxable year involved is 1997, petitioner ought to know that respondent is clearly referring to none other than the 1977 NIRC. As for the PAN's lack of factual basis, a meticulous search of the records reveals otherwise . Petitioner was informed by respondent of the factual basis of the 15 Exhibit "7" & "7-1", BIR Records, page 200

:'ECISION C.T.A. CASE NO. 6569 Pag e 6 PAN in a letter dated and received on December 12, 2000. 16 To fully apprise petitioner of the basis of his findings, respondent attached to the same letter the Schedule of Disallowed Expenses for the Year 19977 wherein the breakdown of the disallowed expenses in the amount of P17,763,832.38 was shown with clarity. In the same letter, petitioner was even given a chance to refute respondent's findings before the PAN is issued on January 22, 2001 in compliance with Section 3.1.1 of Revenue Regulations No. 12-99, to wit: "SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. - 3.1 Mode of procedures in 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. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the ca se Revenue Reg ional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference, " in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond with in fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Reg ional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. X X X" Based on the foregoing reasons, the PAN issued is not void because it was legally and factually supported . Also, petitioner was afforded due process when it was given a chance to dispute the findings of respondent. 16 Ex hib it "" 33 "- ~"",3B-aIR" R"3e-cbo";d"s3, -pca"~ eBI1R75Reco rds page 175- 177 17 Exhi bit '

DECISION C.T.A. CASE NO. 6569 Page 7 Validity of Income Tax Assessments The fourth and fifth issues shall be jointly discussed because both involve the question of whether or not petitioner is liable to pay deficiency income tax in the amount of P10,639,996.39 for taxable year 1997 covered under Revised Assessment Notice No. IT-7590-97-02-060 dated September 17, 2002. Under Assessment Notice No. LA#00007590-97-01-801 and its corresponding Letter of Demand, both dated April 6, 2001,18 petitioner was assessed deficiency income tax in the amount of P17,177,363.09 for taxable year 1997, computed as follows: DEFICIENCY INCOME TAX Taxable Income Per Retu rn p 3,490,248.00 Add: Di screpancies p 4,374,00 1.47 24,4 79.077. 76 Unreported Commi ss ion Income 147,945.2 1 r____n,26_2 . 32 5_J_J] Unreported Interest Income p 9,789,264.02 Disall owances I 7,763 ,832.38 Unaccoun ted Salari es & Wages I ,230,504.95 I .28 5.886 .00 A d ve rti s in g 360,000.00 p 8,503,378.02 Repairs & Maintenance 117,432.00 Rent 3 5 ,84 7.00 2, 125 ,844.50 Depreciation 449 51 4.75 6,523 , I40 .57 Taxable Net Income 25,000 .00 Income Tax Due (35%) p 17.177.363.09 Less : Tax Paid Per Return Defi ciency Income Tax Add: Surcharge Interest 04- I6-98 to 05- I0-0 I Suggested Compromise Penalty TOTAL AMOUNT DUE However, respondent cancelled some discrepancies and included an additional disallowance of P749,808.41 pertaining to unaccounted salaries and wages as follows: :� BIR Records, pages 322 and 324

DECISION C.T.A. CASE NO. 6569 Page 8 Per Original Per Revised Assessment Assessment Cancelled Retained p 4,374,00 1.47 Discrepancies : 147,945.2 1 p 4,374,001.47 p 14,666,615 .38 Unreported Commission Income 147,945 .2 1 834,699.40 Unreported Interest Income 17,763 ,832.38 Disallowances I ,230,504.95 3,097,2 17.00 Unaccounted Salaries & Wages 360,000.00 395,805 .55 Advertising 117,432 .00 360,000.00 Repairs & Maintenance 35,847 .00 117 ,432.00 Rent 449,514.75 35 ,847.00 Depreciation 449,514.75 Unaccounted Salaries & Wages 749,808.4 1 Total p 24,479,077.76 p 8,977,762.98 p 16,251 ,123.19 As a resu lt of the cancellations, the deficiency income tax assessment was reduced to P10,639,996.39 in his Final Decision on Disputed Assessment and Revised Assessment Notice No. IT-7590-97-02-060, both dated September 17, 2002/9 computed as follows: DEFICIENCY INCOME TAX Taxable Income Per Investigation p 27,969,325.76 Less: Allowed items per reinvesti gation p 4,374,001.47 Commission income Interest income on advances 147,945.2 1 Various accrued expenses Salaries and wages 3,097,2 17.00 Advertising Repairs - maintenance 395,805.55 Rent Depreciation 360,000 .00 Net income Add: Salaries and wages 117,432.00 Net taxable income per reinvestigation Tax due thereon (35%) 35,847 .00 8.988. 763 .0 120 Less: Tax paid per return 449 514.78 Deficiency income tax Add: Interest (04/ 16/98- 09/30/02) p 18,991 ,562.75 TOTAL AMOUNT DUE 749 808.41 ~, 741.371.16 p 6,909,479.9 1 1.285 . 886 .0 0 p 5,623 ,593 .92 5.0 16.402 .47 p 10.639.996.39 19 BIR Records, pages 556 & 563 20 Should be P8,977,763 .01

DECISION C.T.A. CASE NO. 6569 Page 9 Now, the Court shall determine whether the disallowance of the accrued expenses of P14,666,615 .28 and salaries and wages of P1,584,507.81 (sum of P834,699.40 and P749,808.41) were valid . I. Unsupported accrued expenses of P14,666,615.28 Petitioner maintains that it was not informed by respondent of the breakdown of the various disallowed accrued expenses from the original amount of P17,763,832.28 to the reduced amount of P14,666,615.28 as found during re- investigation. The Court disagrees. As earlier discussed, petitioner cannot claim that it was not informed of the factual basis of the disallowed accrued expense in the amount of P17,763,832.28 because it received a Schedule of Disallowed Expenses for the Year 1997 1 from respondent. The expense accounts, its corresponding disallowed amounts, and the reasons for their disallowance were all enumerated in the schedule as shown below: REFERENCE ACCOUNT NAME AMOUNT REASO NS JV# 169 Postage 500,000.00 Unsupported Uti lity Expense 4,600,000.00 Unsupported Advertising I, 140,000.00 Unsupported JV# 169 Postage 500,000.00 Unsupported- add'! accruals Representation I ,055,000.00 Unsupported- add' I accruals Trave llin g 2,500,000.00 Unsupported- add'! accruals Repairs Unsupported- add' ! accruals Stationeries 700,000.00 Unsupported - add' I accru als Miscell a neo us I ,500,000.00 Unsu pported - add' I accruals Fuel & Lubricant I ,000,000.00 Unsupported- add' ! accrua ls 900,000.00 JV# 169 Representation 2,000,000.00 Unsupported - rec lassification entry; adva nces to officers- ROC JV# 172 Represe nta tion 226,779.32 Unsupported- Debit memo dtd 12-24-97 JV# 173 Depreciation 47,727 .2 5 excessive acquired on ly on 12/31 /97 21 Exhibit "3-c", BIR Records, page 175

DECISION C.T.A. CASE NO. 6569 Page 10 JV# I74 Ut i liti es 6 18,400.00 Unsupported- no lega l basis of shared Ex pe nses JV# I74 Re pr ese ntat io n 252,804.20 Unsupported- cash advances of 0 /E RCC JV# I81 Salari es & Wages 223 , 121.6 1 Prior expense; un derstated shared expenses 1994, 1995 , 1996 & 1997 17, 763 ,832.38 Likewise, petitioner cannot claim ignorance of the factual basis of the revised assessment. In reducing the amount of disallowed expenses to P14,666,615.28, respondent clearly laid down his basis in the Final Decision on Disputed Assessment dated September 17, 200222 where respondent explained : "5) Disallowance of Various Accrued Expenses (Pl7,763,832.28) - Verification disclosed that only P3,097,217.00 were properly supported by billing/statements of accounts. Di sallowed accrued expenses per investigation P I,328,417 .20 p 17,763 ,83 2.2 8 Less: Supported expenses paid to the fo ll owing I,500,000 .00 268.800 .00 3,097,2 17.00 a) Quezon Ave nue Auto Center, Inc. Pl4.666.61 5.28" b) Ba1intawak Auto Center, Inc. c) Prestige Cars North , Inc. Unsupported Accrued Ex penses per reinvesti gation Petitioner clearly understood the factual basis of the revised assessment when it alleged in paragraph 24 of its Petition for Review that: "24. Respondent in his final decision revised his previous assessment on disallowed accrued expenses by allowing the deduction of P3,097,217.00 as supported expenses paid to the following : a) Quezo n Avenue A uto Ce nter, Inc. P I,328,4 17.20 b) Balintawak Auto Center, Inc. I,500,000.00 c) Presti ge Cars North , Inc. 26 8 ,800 .00 p 3.097.2 17.20 claiming that per his reinvestigation he found that only said P3,097,217.00 were properly supported by billing/statement of accounts but other various expenses claimed the remaining amount of which is P14,666,615.38, should still be disallowed for being "lacking in proof of payment to be allowed as deductions." 22 Exhibit "17", " 17-1", BIR Reco rds, pages 555-558

DECISION C.T.A. CASE NO. 6569 Page 11 Evidently from the foregoing, petitioner was not left to speculate on how the disallowed expense of P14,666,615.28 was computed. In disallowing the expenses, respondent even invoked Section 29 of the NIRC as its legal basis. Petitioner argues that the provisions of the 1997 NIRC applies in this case because the taxable year under consideration is 1997. Hence, petitioner concludes, Section 29 of the 1997 NIRC cannot be used as legal basis for the disallowance because that provision dwells on the imposition of Improperly Accumulated Earnings Tax, not Allowable Deductions from Gross Income. Petitioner further avers that even assuming arguendo that respondent really meant Section 29 of the 1977 Tax Code, as amended, pertaining to Allowable Deductions from Gross Income, still the legal basis is vague as there are several subsections enumerated therein. The invocation of Section 29 of the 1977 NIRC is allegedly confusing because that provision refers to deductions from gross income while under respondent's Final Decision on Disputed Assessment, the findings under the caption "I. Deficiency Income Tax", Item No. 5 thereof pertains to "Disallowance of Various Accrued Expenses- P14,666,615.28." Petitioner alleges that an Accrued Expense which is strictly a payable or liability account cannot be covered by the deductions mentioned in Section 29 of the 1977 NIRC. Contrary to petitioner's claim, Section 29 of the 1977 NIRC, as amended, governs transactions for taxable year 1997 because the 1997 NIRC (Republic Act No. 8424) took effect only on January 1, 1998. Section 29 of the 1977 NIRC provides: "SECTION 29. Deductions from gross income. - x x x XXX (a) Expenses.-(!) Business expenses.-(A) In generai .-AII ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services

DECISION C.T.A. CASE NO. 6569 Page 12 actually rendered; traveling expenses while away from home in the pursuit of a trade, profession or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity." The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. 23 After carefully verifying the disallowed expenses in the schedule, the Court observed and concluded that: a) Depreciation in the amount of P47,727.25 (JV # 173) disallowed by respondent's examiner for being excessive shall be sustained since petitioner failed to present documents proving otherwise. b) Salaries and wages in the amount of P223,121.61 (JV# 181) disallowed by respondent shall likewise be upheld because petitioner failed to prove that its salaries and wages pertain to taxable year 1997 and not to prior years as found by the examiner. Under Section 29 of the NIRC of 1977, as amended, deductions from gross income are allowed only to those expenses paid or incurred during the taxable year. c) The remaining expenses, namely, postage, utility expense, advertising, representation, traveling, repairs, stationeries, miscellaneous and fuel and lubricant in their total amount of P17,492,983.52, were disallowed by respondent for being 23 Commissioner of Internal Revenue v. General Foods (Ph ils.), I nc. (G.R. No. 143672, Apri l 24, 2003, 401 SCRA 545, 551) as cited in Commissioner of Internal Revenue vs . Isabela Cu ltura l Corporation, (G.R. No. 172231, February 12, 2007)

DECISION C.T.A. CASE NO. 6569 Page 13 unsupported. As found by the examiner, these alleged unsupported expenses were credited to either of the following accounts: 24 Accrued Expenses Payable p 6,895,000.00 Accounts Payable - Others 8, 118,400.00 Advances to Officers 2,252,804.20 Cash 226,779.32 Total PJ 7.492.983.52 To prove that the expenses booked under its "Accrued Expense Payable" account were duly supported, petitioner presented before this Court various billings/statement of accounts, check vouchers, official receipts, temporary receipts, which were summarized by petitioner in its Memorandum, as follows: Ex hibit Date/Pa rticular s Amount p 150,000.00 N May 25 , 1998 - payment to Balintawak 0 and 0- 1 Autocenter, Inc. for January 1997 expenses 150,000.00 May 25, 1998 -payment to Balintawak 15 0 ,0 0 0 . 0 0 P A utocenter, Inc. for February 1997 expenses 450,000.00 Q June 15, 1998-payment to Balintawak 300,000.00 R Autocenter, Inc. for March 1997 expenses 300,000.00 S July 3, 1998- payment to Balintawak 300,000 .00 T A utocenter, Inc. (April , May and Ju ne 1997 expenses) I ,328 ,4 17.20 RR, RR- 1 A ugust II , 1998 -payment to Balintawak Autocenter, Inc. for Ju ly and August 1997 expenses 4 2 0 ,0 0 0 .00 E September 14, 1998 - payment to Balintawak 4 2 0 ,0 0 0 .0 0 F Autocenter, Inc. for Sept and Oct 1997 expenses 420,000.00 G Nov. I 0, 1998- payment to Balintawa k Autocenter, Inc. 80 1,659.74 XX for Nov and Dec 1997 expenses Aug. 3 1, 2000- payment to Quezon Avenue Autocenter, Inc. 1, 137,500.00 YY for 1997 sha red expenses U, U- 1, U-2 Oct. I, 1997-Statement of Account (Prestige Cars Maka ti , 134,400.00 Inc.) and U-3 Nov. I, 1997-Statement of Accou nt (Prestige Cars Makati, Inc.) Dec. I, 1997-Statement of Account (Prestige Cars Ma kati , Inc .) 1997 Statement of Account (Prestige Cars Makati, Inc.) Note: Of th e Pl , 137,500 billing, on ly P80 1,659.75 was booked for 1997 Feb to April 1997 Statement of Account (Prestige Cars Makati, Inc.) May 20, 1998-C heck issued to Prestige Cars North , Inc. 2~ BIR Records, pages 170-171

DECISION C.T.A. CASE NO. 6569 Page 14 V, V- 1 for payment of May, June and Jul y 1997 expenses 134,400.00 May 25, 1998 -payment to Prestige Cars North, Inc. for Aug., W, W- 1 Sept., and Oct., 1997 expenses 16,024.36 Y, Y- 1 Note: Total payments of P268,800.00 to Prestige Cars North, 13 1,963.59 Inc. for 1997 accrued expenses all owed by the BIR per re- 223 , 121.61 ppp investigation a lthough Exhi bits U, U-1 , U-2 and U-3 were not admitted for failure to present the originals thereof. 300,495.49 ZZ,AAA May 6, 1998- payment to Prestige Cars Makati Inc. (Libis 1,11 0,635. 11 Branch), for 1997 advances on shared expenses p 8.378.617.10 zz May 7, 1998- payment to Prestige Cars Makati Inc. (Libis Branch), for 1997 advances on shared expenses Recording of adj ustment of accrued expenses for shared expenses/sa laries and wages with affiliate company sti ll to be reimbursed. Provision for 13th month pay- ( 1996 -P70,782.35; 1997- P229,923 . 14) Various adjustments not yet taken up in other accounts/entries (JV# 165 - P3 ,000 .00; JV# I73- P27,022 .04; JV # l78- P840,613.07, JV# 184 - p 120,000.00) Likewise, payments and adjustment of Accrued Expenses were taken up during the year namely: I) Payment of 13th month pay- p 299,882.42 (Exh . ZZ, AAA) 2) Reversal of accruals 2,000,000.00 3) Payment of accrued expenses 875,062.66 Total P3.174.945.08 Upon scrutiny of these documents, the Court did not consider the official receipt marked as Exhibit ''N'25 as valid support of petitioner's claimed expenses because it was not issued to petitioner but to First Filipinas Capital Corporation (FFCC). However, the official/provisional receipts, statement of accounts covering the following expenses in the total amount of P2,926,666.87 represent petitioner's valid deductions from gross income: Exhibit No. Paid/Payable to Particulars Period Covered p 300,000.00 T Balintawak Autocenter, share of utility expenses Nov- Dec '97 300,000.00 Inc. share of utility expenses Sept - Oct '97 300,000.00 s Balintawak Autocenter, share of utility expenses July - Aug '97 In c. share of utility expenses Apr- June '97 R Balintawak Autocenter, Q In c . Balintawak Autocenter, 25 Rollo, page 211

DE CISI ON C.T.A. CASE NO. 6569 Pag e 15 Inc . 450 ,000 .00 p Balintawak A utocenter, share of uti lity expenses Marc h '97 150,000.00 Inc . share of uti lity expenses Feb '97 150,000.00 0 Balintawak Autocenter, 199 7 1,328,4 17.20 RR- 1 Inc. Oct-97 420,000.00 Nov -97 420,000.00 E Quezon Avenue Center share of uti li ty expenses Dec-9 7 420,000.00 F Jan'97 379, 166.67 G Presti ge Cars Makati , Inc. rental of office space & share in 1, 137,500.00 XX Presti ge Cars Makati , Inc. adv & promo Feb to Apr '97 134,400.00 yy Presti ge Cars Makati , Inc. renta l of office space & share in May - July '97 134 400 .00 U, U- 1 toU- Presti ge Cars Makati , Inc. adv & promo Au g-Oct '9 7 p 6,023 ,883 .87 3 Prestige Cars Makati, Inc. renta l of office space & share in 30972 17.00 V, V- 1 Presti ge Cars North, Inc . adv & promo f 2 226 lilili 87 Prestige Cars North , Inc. rental of offi ce space & share in Total accrued ex penses adv & promo rental of office space & share in adv & promo share on j anitorial and securi ty serv ices share on janitori al and securi ty se rvices Less: Amount all owed by respondent per revised assessment Ne t a llowabl e accrued expenses As previously discussed, the assessment against petitioner was reduced from P17,763,832.38 to P14,666,615.28 because respondent allowed the deduction of some accrued expenses in the amount of P3,097,217.00. Since petitioner was able to support its accrued expenses to the extent of P6,023,883.87 and that the latter amount included the deduction of P3,097,217.00 allowed by respondent in his Final Decision on Disputed Assessment, the amount of P3,097,217.00 shall be deducted therefrom. Thus, petitioner has a net allowable accrued expenses in the amount of P2,926,666.87. As for the other expenses credited to "Accounts Payable - Others", "Advance to Officers", and "Cash" in the amounts of P8,118,400.00, P2,252,804.20, and P226,779.32, respectively, the Court finds the disallowance thereof to be in order because petitioner failed to substantiate the same with proper documents. To recapitulate, the Court finds that out of the total disallowed accrued expenses of P14,666,615.28, petitioner can only claim the amount of P2,926,666.87 as deduction from its gross income as it was duly supported to that amount. Hence,

DECISION C.T.A. CASE NO. 6569 Page 16 petitioner shall be held liable to pay for deficiency tax corresponding to the unsupported accrued expenses of P11,739,948.41. II. Salaries and wages not subjected to withholding tax in the amount of P1,584,507 .81 The deduction for salaries and wages by petitioner in the amount of P1,584,507.81 was disallowed based on the examiner's finding that the salaries and wages were not subjected to withholding tax in violation of Section 73(a) of the NIRC and Section 9 of Revenue Regulations (RR) No. 6-85 dated May 2, 1985, as amended by RR 8-90 dated October 13, 1990. Below is the detailed computation of the disallowance of P1,584,507.81: Salaries & wages per amended income tax return p 3,487,436.43 94,933 .98 Overtime 298,808 .06 13th Month Pay 165 579.39 p 4 ,046,757 .86 Staff Benefits 2,462.250.05 p 1.584 507 81 Total Less: Salaries & wages per Alphali st Salaries & wages not subjected to withholding tax Petitioner counters that P1,584,507.81 represents shared salary expenses with its affiliate, First Filipinas Capital Corporation (FFCC), in the amount of P1,362,629.87 with the balance pertaining to non-taxable staff benefits. Thus, total salaries and wages of P3,487,436.43 composed of the basic pay of P2,124,806.56 and the shared expenses of P1,362,629.87 are summarized below: SHARED EXPENSES MONTH BASIC PAY AMOUNT JV No. Exhibit No. TOTAL Jan uary 142,823.36 95,659. 17 238 ,482.53 February 15 3,9 14.42 103, 152.93 137 "FFF" . "FFF-1" 257,067 .35 March 162,3 00.87 I 02,932.45 265 ,233.32 April 170,447.30 97,388.0 I 141 "GGG" , "GGG- 1" 267,835.3 1 167,492.21 96,709.09 264,20 1.3 0 r~ lay 164 ,940 .94 96,934.07 143 "HHH", "HHH-1 " 261 ,875 .0 I 180 , 172.22 97,233 .52 277,40 5.74 June 145 "Ill", "III-I" Jul y 169,805.62 93,20 1.24 263 ,006.86 244,877.87 89, 162.98 147 "JJJ", "JJJ-1" 334 ,040 .85 August 182,358.45 88 ,603.80 270,962.25 September 149 "KKK", "KKK- I" October 151 "LLL", "LLL-1" 153. 154 "RRR11, "RRR- 1". "QQQ", "QQQ-1" 156 "SSS", "SSS-1 ", "SSS-2" 159 "MMM", "MMM-1" r~

DECISION C.T.A. CASE NO. 6S69 Page 17 November 196,405 .26 89,265 .5 1 162 "NNN", "NNN- 1" 285 ,6 70 .77 Dece mb e r 189,268.04 88 ,976.68 278 ,244.72 223, 121.6 1 165 "000", "000- 1" 223, 121.6 1 TOTAL 2,124,806.56 288.8 1 18 1 "PPP", "PPP- 1" 288.8 1 l ,362,629.87 3 ,487, 436 .4 3 184 "TTT-1" Petitioner points out that the total basic pay of P2,124,806.56 and cost of overtime expenses of P94,933.98 which totalled to P2,219,740.54 when compared with the amount per Alphalist of P2,300,114.48 will result in a difference of P80,373.94 representing the proportionate share of the taxable 13th month pay. Petitioner further explains that the reimbursement of the subject "shared expenses" was a result of the "sharing agreement" of operational expenses between petitioner and First Filipinas Capital Corporation on a "90: 10 basis", with the former bearing 90% burden and the latter for 10% thereof.26 Petitioner clarifies that FFCC initially pays the bill of the operational costs and reflects said costs in its books. FFCC later sends out a statement to petitioner for its proportionate share and in so doing, FFCC becomes responsible for the taxes to be withheld being the original payor. Eventually, a bill is allegedly sent to petitioner for reimbursement of the operational costs, who in turn treats the reimbursement of "shared expenses" to its salaries and wages account. Invoking Section 57(8) of the 1997 NIRC and Sections 2(b) and (3) of Revenue Regulations No. 6-85, petitioner posits that it could not be tasked to do the withholding because not being the payor, it has no direct participation in the income payments to various recipients thereto. The Court finds the disallowance improper and erroneous. Indisputably, the salaries and wages in the amount of P1,584,507.81 was reimbursed by petitioner to FFCC in 1997 as supported by pertinent records or 26 Paragraph 11, JSFI, Rollo, page 66

DECISION C.T.A. CASE NO. 6569 Page 18 documents. The issue now is whether or not the shared salary expenses are subject to withholding tax. Section SO(b) of the NIRC of 1977, as amended, provides as follows: "SEC. 50. Withholding of tax at source. XXX (b) Withholding of creditable tax at source. - The Secretary of Finance may upon the recommendation of the Commissioner of Internal Revenue, require also the withholding of a tax on the items of income payable to persons (natural or juridical) residing in the Philippines by payor- corporation/persons as provided for by law at the rate of not less than 2 112% but not more than 35% thereof which shall be credited against the income tax liability of the taxpayer for the taxable year. Implementing the foregoing provision is Section 7 of Revenue Regulations No. 6-82 which provides: "SEC. 7. Requirement of withholding. - Every employer or any person who pays or controls the payment of compensation to an employee, whether resident citizen or alien, non-resident citizen, or non-resident ali en engaged in trade or business in the Philippines, must withhold from such compensation paid, an amount computed in accordance with these regulations." Clear from the foregoing is that the obligation to withhold rests upon the payor of the income. Under the expense sharing scheme of petitioner with FFCC, the salaries and wages accruing to the individual employees of FFCC do not pass to nor come under petitioner's control. Being the payor in control of the income payment, FFCC, and not petitioner, shall be responsible for withholding the tax on the " shared salary expenses" in question and remitting the same to the BIR. Considering that petitioner is not required to withhold tax on the shared salary expense of P1,584,807.81, the same may be validly deducted from its gross income for taxable year 1997. In fine, petitioner is liable to pay respondent deficiency income tax for taxable year 1997 in the amount of P8,803,916.71, computed as follows:

DECISION C.T.A. CASE NO. 6569 Page 19 Net income per amended return p 3,560,74 1.00 Add: Disallowed accrued expenses 11.739 948.41 Net taxable income Income tax due � 15,3QQ,682 41 Less: Tax paid per return p 5,355,24 1.29 Deficiency income tax Add: 25% Surcharge I ,246,259.00 p 4, I08,982 .29 20% Interest (04/16/98- 09/30/02) TOTAL AMOUNT DUE 1,027,245 .57 3,667,688.85 f 8,803,21 6.:Z1 Validity of Expanded Withholding Tax Assessment In his Final Decision on Disputed Assessment, respondent demanded from petitioner the payment of P55,138.18 allegedly representing deficiency expanded withholding tax for taxable year 1997, computed as follows: Expanded w ithho lding tax due per original investigation p 28 ,652 .28 Allowed items per reinvestigation Rent- ornamental plants & computer (P29,328.00 x I%) 293 .28 p 28,359.00 Deficiency EWT per re investigation Add : Interest (0 1/11 /98- 09/30/02) 26,779. 18 TOTAL AMOUNT DUE p 55,138.18 Petitioner, however, contends that respondent's right to assess deficiency expanded withholding tax for taxable year 1997 had already prescribed when it issued the Formal Letter of Demand and Assessment Notice. The Court agrees with petitioner. Section 203 of the NIRC of 1977, as amended, provides as follows: "SEC. 203. Period of limitation upon assessment and collection. - Except as provided in the succeeding section, internal revenue taxes shall be assessed within three 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- 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."

DECISION C.T.A. CASE NO. 6569 Page 20 In relation thereto, Section 5 of Revenue Regulations No. 6-85, as amended, reads as follows: "SECTION 5. Monthly return and payment of taxes withheld at source.- (a) The taxes herein deducted and withheld shall be paid upon filing a return in duplicate under BIR form - with the Revenue District Officer or the Collection Agent of the City or duly authorized Treasurer of the Municipality where the withholding agent has his legal residence or principal place of business except in cases where the Commissioner of Internal Revenue allows otherwise. The required return shall be filed within ten days (10) after the end of each month. The taxes deducted and withheld by the withholding agents shall be considered trust funds and shall be maintained in a separate account and not commingled with any other fund of the withholding agent and held in trust for the government until paid to the collection officer. xxx" Pursuant to Section 203 of the 1997 NIRC, as amended, the three-year period to assess commences from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later. In the case of expanded withholding taxes, the return is required to be filed within ten (10) days after the end of each month. Hence, if the return was filed earlier than the last day allowed by law, the period to assess shall still be counted from the last day prescribed by law for filing of the return. However, if the return was filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. Petitioner filed its Monthly Remittance Returns of Income Taxes Withheld for the taxable year 1997 on the following dates: 1997 Date of Amount Page No. Ja nu ary Remittance Remitted BIR Records F e b ru a ry p 2,700.38 March I 0-Feb-97 159 Apri l 05-Mar-97 2,58 1.52 158 May 08-Apr-97 3,141.9 1 157 Jun e 13- May-97 2,955. 16 156 10-Jun-97 2,9 15 .29 154 09-Jul-97 3, 133 .73 152 {Z4--

DECISION C.T.A. CASE NO. 6569 Page 21 Jul y 11 -Aug-97 170. 18 150 August 05-Sep-97 167.70 148 September I0-0ct-97 2,846.1 8 146 October 06-Nov-97 2,976.66 144 November 09-Dec-97 2 ,999 . 18 142 December 26-Jan - 98 2 996.73 140 p 22,584.62 The last return filed by petitioner covering its expanded withholding tax payments for taxable year 1997 was for the month of December which was filed on January 26, 1998. Hence, the three-year period for the BIR to assess petitioner of deficiency expanded withholding tax for December 1997 lapsed on January 26, 2001. Since the Formal Demand Letter and the Assessment Notice were issued only on April 6, 2001, the subject assessment for 1997 deficiency expanded withholding tax in the amount of P55,138.18 is already barred under the three-year prescriptive period provided by law. IN VIEW OF THE FOREGOING, the instant Petition for Review is PARTIALLY GRANTED. The amount of P55,138.18 representing deficiency expanded withholding tax assessment for taxable year 1997 is hereby CANCELLED AND/OR WITHDRAWN due to prescription. However, petitioner is ORDERED TO PAY respondent the amount of P8,803,916.71 representing deficiency income tax for taxable year 1997, plus 20% delinquency interest per annum, pursuant to Section 249 of the NIRC, commencing from October 17, 2002 until such time the said amount is fully paid. SO ORDERED. ~---=\(.2� a~ ERNESTO D. ACOSTA Presiding Justice

DECISION C.T.A. CASE NO. 6569 Page 22 ffi CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. L:\.R. ~ ERNESTO D. ACOSTA Presiding Justice Chairman, First Division