COMMISSIONER OF INTERNAL REVENUE v. ALPHA 245, INCORPORATED (FORMERLY, ARC WORLDWIDE PHILIPPINES CO., INC.)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC CTA E B NO. 1875 (CTA Case N o. 9225) COMMISSIONER OF INTERNAL REVENUE, Present: P e titio n er , D el Rosario, P.J., -versus- Castaneda, Jr., Uy, Fabon-Victorino, Mindaro-Grulla, Rin gpis -Lib an, Manahan, Bacorro-Villena, and Modesto-San Pedro, ]] ALPHA245, INCORPORATED Promulgated: (formerly, ARC WORLDWIDE PHILIPPINES CO. INC.), Respondent. X----------------------------------------------------------------------------------------------------------------X DECISION RINGPIS-LIBAN, J.: Before the Court En Bane is a Petition for Review flied by petitioner1 Commissioner o f Internal Revenue (CIR) under Section 11 o f Republic Act (R.A.) No. 1125, as amended by Section 18 of R. A. No. 9282, seeking nullification of the D ecision2 dated April 6, 2018 (Assailed Decision), the dispositive p ortion thereof reads: "WHE REFORE, the instant Petition for Review is PARTIALLY GRANTED . Accordingly, the deficiency income tax, expanded withholding tax (EWT) and documentary stamp tax (DST) assessmen ts are CANCELLED. H owever, p etitioner is liable to p ay for deficiency VAT for the taxable year 2009 in the 1 Respondent in CT t\ Case N o. 9225. ~ 2 Rollo CT r\ 1-:H Case No. 1875, pp. 18-50.

DECISION CTA EB NO. 1875 (CASE NO. 922S) aggregate amount of P10,470,069.30, inclusive of 50% surcharge imposed under Section 248(B) of the NIRC of 1997, as amended, and deficiency and delinquency interest imposed under Section 249(B) and (C) of the NIRC of 1997, as amended, until December 31, 2017, computed as follows: Basic Tax Due p 2,415,687.68 Surcharge (50%) 1,207,843.84 Subtotal Deficiency Interest -1/25/2010 to 12/31/2017 p 3,623,531.53 (2,415,687 x 20% x 7.94 yrs.) Subtotal 3,834,656.01 Delinquency Interest- 12/25/2015 to 12/31/2017 p 7,458,187.54 � (P7,458,187.54 x 20% x 2.02 yrs) TOTAL 3,011,881.76 P10,4 70,069.30 In addition, petitioner is liable to pay delinquency interest at the rate of 12%, which is double the legal interest rate for loans or forbearance of any money, on the total unpaid amount including basic deficiency value-added tax, surcharge, deficiency and delinquency interest as computed above in the aggregate amount of P7,458,187.54, computed from January 1, 2018 until full payment thereof pursuant to Section 249(C) of the NIRC of 19997, as amended by Republic Act No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN). SO ORDERED." and the Resolution3 dated June 4, 2018 of the same Second Division of the Court (Court in Division) denying the respondent's Motion for Partial Recons~deration, the dispositive portion thereof reads: "WHEREFORE, the instant Motion for Partial Reconsideration is DENIED for lack of merit. SO ORDERED." PARTIES Petitioner is the Commissioner of the Bureau of Internal Revenue (BIR), duly appointed to exercise the powers and perform the duties of his office including, inter alia, the power to declare disputed assessments, refunds of internal' revenue taxes, fees, and other charges, and penalties imposed in ~ 'Rollo, pp. 52-57.

DECISION CTA EB NO. 1875 (CASE NO. 9225) relation thereto, or other matters arising under the Tax Code. He holds office at the B1R National Office Building, Agham Road, Dillman, Quezon City. Respondent is a domestic corporation with principal office address at the 25'h Floor, Tower 2, the Enterprise Center, Ayala Avenue corner Paseo de Roxas, Makati City. FACTS The facts as stated in the assailed Decision4 are as follows: "Petitioner5 alleges that sometime 1n October 2010, the ~IR issued Letter of Authority No. LOA-047-2010-00000501 dated October 28, 2010, authorizing Revenue Officer Alwino R. Daga under Group Suprevisor Reynaldo Causapin of Revenue District Office No. 47, East Makati, to examine petitioner's books of accounts and other accounting records for internal revenue taxes covering taxable year 2009. On October 2, 2012, petitioner received a Notice of Informal Conference. On December 10, 2012, petitioner received a Preliminary Notice of Assessment (PAN) issued by the BIR. Then, on January 8, 2013, petitioner received the Formal Assessment Notice (FAN) with attached Details of Discrepancies. On January 28, 2013, petitioner, through its Finance Controller Ms. Ellen Gonzaga, submitted its Protest Letter dated January 22, 2013. On February 12, 2013, the BIR, through Regional Director Nestor S. Valeroso, issued a letter to petitioner requiring it to submit the necessary supporting documents to its Protest. On February 24, 2013, the BIR sent another letter dated February 20, 2013 to petitioner, requesting it to submit all relevant supporting documents within sixty (60) days from filing of the protest. Consequently, on July 8, 2013, the BIR received petitioner's Reply dated April 23, 2013 to the said BIR's Letter, which essentially reiterated the issues in its Protest Letter dated January 22, 2013. Petitioner further requested the availability of BIR personnel to examine their documents. /V 4 CTA Case No. 9445, pp. 1287-1319. Citations omitted. -""Respondent" in this case.

Page 4 of U DECISION CTA EB NO. 1875 (CASE NO. 9225) On September 30, 2013, petitioner received the Final Decision on Disputed Assessment (FDDA) issued by Regional Director Nestor S. Valeroso, where it was found that petitioner failed to submit all relevant supporting documents to its protest. . Thus, on October 30, 2013, petitioner flied a request for reconsideration before respondent. This time, petitioner submitted the following documents, among others: 2009 and 2010 Audited Financial Statements (AFS) and Annual Income Tax Return (ITR), respectively. Allegedly, on November 25, 2015, petitioner received a copy of respondent's assailed Decision on its request for reconsideration. Consequently, on December 28, 2015, petitioner flied the instant Petition before this Court. On February 26, 2016, petitioner ftled its Supplement [To the Petition for Review dated December 16, 2015.] On February 26, 2016, respondent ftled his Answer through registered mail, where he essentially argued that the Court has no jurisdiction over the instant Petition because petitioner is already barred from dispatching the correctness of the assessment by reason of its failure to submit the required supporting documents within sixty (60) days from flling of its Protest Letter. On March 14, 2016, petitioner flied its Reply (To the Answer dated February 26, 2016). On April 11, 2016, petitioner ftled its Pre-Trial Brief Ad Cautelam while on June 14, 2016, respondent flied his Respondent's Pre-Trial Brief. On August 24, 2016, the Court issued a Pre-Trial Order. During the hearing, petitioner presented the following witnesses: (1) Maria Ellen H. Bonzaga - Finance Controller of petitioner; and (2) Emmanuel Y. Mendoza - Court-appointed Independent Certified Public Accountant. Petitioner likewise flied its Offer of Documentary Evidence. On the other hand, respondent presented the following witnesses: (1) Revenue Officer Alwino R. Daga, and (2) Revenue Officer Kristine R. Ami. Respondent likewise flied his Formal Offer of Evidence." � In the Joint Stipulation of Facts and Issues 6 the parties agreed that the , issues to be resolved by the Court in Division are as follows: ~ 6 Piled by the parties on August 5, 2016.

DECISION CTA EB NO. 1875 (CASE NO. 9225) (a) Whether or not petitioner's Protest substantially complied with the requirements prescribed under Section 228 of the National Internal Revenue Code of 1997, Revenue Regulations No. 12- 99, as amended, and relevant case law; (!;)Whether or not respondent correcdy upheld Regional Director's Final Decision on Disputed Assessment dated September 30, 2013 imposing on petitioner alleged deficiency income tax, Value-Added Tax, and surcharges for the taxable year 2009; (c) Whether or not petitioner is liable for the deficiency income tax assessment for taxable year 2009 as stated in respondent's Decision dated November 11, 2015 and in the FDDA; (d) Whether or not petitioner is liable for the deficiency VAT assessment for taxable year 2009 as stated in the Decision and in the FDDA; and (e) Whether or not petitioner is liable for the surcharges stated in the Decision and in the FDDA. On April 6, 2018 and June 4, 2018, the Court in Division rendered the questioned Decision and Resolution respectively. Aggrieved, the CIR filed before the Court En Bane within the extended period to appeal, this Petition for Review7 on July 9, 2018. . In the Resolution8 dated July 31, 2018, respondent Alpha was directed by the Court En Bane to file its comment in this case. On September 9, 2018, respondent Alpha filed its "Comment [on the Petition for Review dated July 4, 2018]." In the Resolution dated October 18, 2018,9 the Court gave due course to the Petition for Review. In view thereof, the instant case was deemed submitted for decision. ASSIGNMENT OF ERRORS � Petitioner CIR raised this issue for resolution of the Court En Bane: Whether or not the Second Division of this Court blatandy erred in partially granting the Petition for Review of respondent Alpha 245, ~ 7 Rollo CTA ER Case No. 1875, pp. 5-17, with Annexes. s Ibid pp. 59-60. 9 Ibid pp. 601-602.

DECISION CTA EB NO. 1875 (CASE NO. 9225) Incorporated, in CTA Case No. 9225, insofar as it cancelled and set aside the assessed deficiency income tax assessment of respondent for taxable year 2009 in the amount ofPhp4,603,454.53 for alleged lack of basis. ARGUMENTS The CIR contends that it was established after investigation that respondent's operation showed a taxable income instead of net operating loss as claimed by respondent in its income tax return for taxable year 2009; that the minimum corporate income tax of respondent was not allowed as tax credit against the computed deficiency income tax for three (3) immediately succeeding taxable years in accordance with the provision imposed under Section E(1)(2) of the Tax Code; that the excess tax credit carried over to succeeding period in the amount of P5,929,429.00 was deducted from the total allowable tax credit considering that the amount has been credited against the estimated quarterly income tax liabilities of respondent for the taxable quarter of the succeeding taxable years pursuant to Section 76 of the Tax Code; that the Court in Division erred when it assumed that respondent has suffered a net operating loss for taxable year 2009 without the latter presenting any concrete evidence during trial that it suffered a net operating loss for taxable year 2009 as well as the succeeding years 2010, 2011 and 2012; and that the deficiency tax assessment issued by the CIR to respondent for taxable year 2009 is prima facie presumed correct and was made in good faith. On the other hand, respondent counter-argues that the instant petition is a mere rehash of petitioner's Motion for Partial Reconsideration before the Court in Division; that it had sufficiently established the invalidity of petitioner's assessment on deficiency income tax; and petitioner failed to substantiate its claim that NOLCO and MCIT were carried over the taxable years subsequent to 2009; and that an income tax return is sufficient evidence to prove net operating loss for a taxable year absent any compelling evidence to the contrary. RULING OF THE COURT TIMELINESS OF THE PETITION On April 11, 2018, the CIR received the Decision of the Court in Division. On April 26, 2018, the CIR ftled a Motion for Partial Reconsideration of the said Decision. On June 4, 2018, the Court in Division issued the assailed Resolution denying the CIR's motion. Said Resolution was received by the CIR on June 8, 2018. From receipt of the said Resolution on June 8, 2018, the CIR has until June 23,2018 within which to ftle the Petition for Review. On June 19,2018, ./'Y'

DECISION CTA EB N0�� 1875 (CASE NO. 9225) the CIR filed before this Court a "Motion for Extension of Time to File Petition for Review," praying for an extension of fifteen (15) days from June 23, 2018 or until July 8, 2018,10 within which to file the Petition for Review. On June 22,2018, the Court En Bane issued a Minute Resolution granting the CIR's motion. On July 9, 2018, the CIR flied the instant Petition for Review. Hence, this Petition for Review was timely filed. The Court shall now proceed to determine the merits of the Petition for Review. After a careful review of petitioner CIR's arguments and the records of the case, the Court En Bane finds no reason to reverse the Decision and Resolution of the Court in Division. The records of the case show that the Court in Division had fully and exhaustively resolved the issues raised in the petition. This Court notes that the arguments presented by the CIR are a mere rehash of the arguments in his Motion for Partial Reconsideration. The cancellation of deficiency income tax assessment of respondent in the amount of P4,603,454.53 is proper The CIR mainly argues that the Court erred in cancelling the deficiency income tax assessment. The CIR insists that based on their investigation, the respondent's operation showed a taxable income instead of net operating loss. However, after consideration, the Court En Bane finds that the cancellation of income tax assessment is proper because there is no basis for such -assessment. The computation of petitioner's taxable income resulted to a net loss ofP7,811,985.76. Records show that the CIR failed to present evidence to support the income tax assessment upon respondent. The Court En Bane reiterates the discussion of the Court in Division in the assailed Decision11 as follows: I. Income Tax The BIR assessed petitioner for deficiency income tax, as follows: I Taxable Income (loss) per ITR I P(22,688,614.00) I 10 July 8, 2018 is a Sunday. 11 Decision, pp. 12-22.

DECISION CTA EB NO. 187S (CASE NO. 9225) Add: Adjustments/Disallowance P6,842,789.0C 15,344,848.44 Undeclared Income (Schedule 1) 468,220.2( p (7,343,765.56) Undeclared income from unaccounted rent expense (Schedule 2) 8,033,839.24 22,688,614.00 Disallowed Expenses for Non- withholding of tax p 15,344,848.44 p 5,206,958.00 (Schedule 3) 847,837.0C p 4,603,454.53 Taxable Income per investigation Add: Net Operating Loss Carry-Over P 6,054,795.0C p 4,603,454.53 Taxable income as adjusted Income tax due 6,054,795.0( Less: Tax credits/payments Prior Year's Excess Credit Creditable Withholding Tax Total p 125,366.00 Less: Minimum Corporate 5,929,429.00 Income Tax Excess Credits Carried Forward to Succeeding Year Basic Tax Due A. Undeclared income in the amount ofP6,842,789.00 XXX XXX XXX B. Undeclared income in the amount of P468,220.20 based on petitioner's rent expense Respondent assessed petitioner for undeclared income in the amount ofP468,220.20 based on petitioner's rent expense, as follows: Rent expense per returns (1601 E) p 5,327,812.20 Less: Rent expense per books/FS 4,859,592.00 Undeclared Income p 468,220.20 Petitioner asserts that the difference in rent expense in its BIR Form No. 1601-E and in its 2009 AFS and Annual ITR did not constitute income. Even if respondent's imputation of taxable income due to undeclared expenses were to be accepted, the imputed income of P468,220.20 would be offset by recording the equivalent amount as expense. The Court agrees with petitioner. It must be emphasized that for income tax purposes, a taxpayer is allowed to claim deductions from its gross income to ~

DECISION CTA EB NO. 1875 (CASE NO. 9225) compute its taxable income subject to income tax. What is prohibited by the income tax law is a deduction beyond the amount authorized therein. Furthermore, it is worthy to note that the imputation of alleged undeclared income is based on a mere presumption that since there are undeclared expenses, there are corresponding undeclared sources of income. Even if these alleged unaccounted expenses are to be treated as undeclared income, the same will be offset by recording the equivalent payments as expenses. As such, no taxable income will result for the said transactions. While it is axiomatic that all presumptions ate in favor of the correcmess of tax assessments, the assessment itself should not be based on presumptions no matter how logical the presumption might be. In order to stand the test of judicial s~.=rutiny, the assessment must be based on actual facts. For lack of factual basis, the deficiency income tax assessment pertaining to the alleged undeclared income from petitioner's rent expenses of P468,220.20 is cancelled. XXX XXX XXX D. Net Operating Loss Carry-Over (NOLCO) in the amount ofP22,688,614.00, Minimum Corporate Income Tax (MCIT) in the amount of P125,366.00 and Excess <;redits Carried Forward to Succeeding Year in the amount ofP5,929,429.00 As a result of respondent's investigation, petitioner's operation showed taxable income instead of net operating loss as claimed in petitioner's 2009 Annual ITR. Respondent added back petitioner's net operating loss of P22,688,614.00 under the presumption that the tax benefit of this amount has already been forwarded to succeeding periods as provided for under Section 34(D)(3) of the NIRC of 1997, as amended. For the same reason, respondent likewise disallowed petitioner's Minimum Corporate Income Tax (MCIT) and the excess creditable withholding taxes at the end of taxable year 2009. The Court finds respondent's argument untenable. /1/

DECISION CTA EB NO. 1875 (CASE NO. 9225) Respondent failed to present the factual basis of the claim that the 2009 net loss was carried over and applied by petitioner as NOLCO and deducted from the gross income of the succeeding taxable periods and that the MCIT and excess credits were carried over and credited by petitioner against its regular corporate income tax. Moreover, the application of the said NOLCO, MCIT, and excess credits in the subsequent taxable periods is beyond the scope of the present assessment. The same can only be the subject of assessment on the taxable year when they are claimed as deductions. On the other hand, petitioner submitted its annual income tax returns for the years 2010, 2011 and 2012, which showed that petitioner suffered net operating losses for each of the taxable period following the year 2009. In 2011, it applied NOLCO from the year 2008 in the amount ofP6,859,010.00, but as shown in the ITR for the year 2012, the net operating loss from the year 2009 in the amount of P22,688,614.00 remained unapplied and has expired. The ICPA likewise reached the same findings. Thus, adding the net loss back to the taxable period per investigation and the disallowance of petitioner's MCIT and excess tax credits, are erroneous. In sum, the Court finds it appropriate to cancel the deficiency income tax assessment for the taxable year 2009 in the amount of P4,603,454.53 for lack of basis, considering that the computation of petitioner's taxable income per investigation results to a net loss ofP7,811,985.76, as shown below: Taxable Income (Loss) per ITR p (22,688,614.00) Add: Adjustments/Disallowance p 6,842,789.00 Undeclared Income Undeclared income from - unaccounted rent expense 8,033,839.24 14,876,628.24 Disallowed Expenses for Non- p (7 ,811,985. 76) withholding of tax Taxable Income per investigation Inasmuch as that the CIR did not offer evidence to prove the basis of the income tax assessment upon respondent, the said assessment is considered a naked assessment. In Commissioner of Internal Revenue vs. Hantex Trading Co., ~

DECISION CTA EB NO. 187S (CASE NO. 922S) Inc.,12 the Supreme Court emphasized the concept of naked assessment vis-a-vis the primafacie correctness of a tax assessment: "We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, a p'rima facie case of liability on the part of the taxpayer is made. If a taxpayer flles a petition for review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitioner- taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC. However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment" i.e., without any foundation character, the determination of the tax due is without rational basis. In such a situation, the U.S. Court of Appeals ruled that the determination of the Commissioner contained in a deficiency notice disappears. Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must � find support in credible evidence." The findings of fact by the CTA in Division are not to be disturbed without any showing of grave abuse of discretion considering that the members of the Division are in the best position to analyze the documents presented by the parties. 13 In view of the foregoing discussions, the Court En Bane finds no reversible error to disturb the assailed Decision and Resolution of the Court in Division. However, in view of the issuance of Revenue Regulations No. 21-2018 on September 14, 2018, which is the implementing rule of Republic Act (RA) ~ 12 G.R. No. 136975, March 31,2005. 13 Repnb/ic ofthe Philippines, represented 1!J the Commis.rioner ofInternal Revenue vs. Team (Phils.) Enew Corporation (formerfy Miron/ (Phil.s.) Energy Corporation), G. R. No. 188016,January 14, 2015, citing Sea-Land Service, Inc. vs. Court of Appeals, G.R. No. 122605, April30, 2001.

DECISION CTA EB NO. 1875 (CASE NO. 9225) No. 10963, otherwise known as the "Tax Reform for Acceleration and Inclusion (TRAIN) Law", a recomputation of the amount of P10,470,069.30 representing respondent's liability for deficiency VAT for taxable year 2009 is warrant~d. As recomputed, the amount of P10,470,069.30 is modified as follows: Basic Tax Due P2,415,687.68 1,207,843.84 Add: 50% Surcharge 20% Deficiency Interest from January 26,2010 to December 2,859,115.28 25,2015 P6,482,646.80 [?2,415,687.68 X 20% X 21601365 dayJj 975,540.72 Total Amount Due, December 25,2015 2,617,923.67 Add: 20% Deficiency Interest from December 26, 2015 to P10,076,111.19 December 31, 2017 [?2,415,687.68 X 20% X 737I 365 dayJj 20.% Delinquency Interest from December 26, 2015 to December 31, 2017 [?6,482,646.80 X 20% X 737I 365 dayJj Total Amount Due, December 31,2017 WHEREFORE, the Petition for Review is hereby DENIED for lack of merit. The Decision dated April 6, 2018 and Resolution dated June 4, 2018 are AFFIRMED, with modification. Accordingly, respondent is ORDERED TO PAY TEN MILLION SEVENTY-SIX THOUSAND ONE HUNDRED ELEVEN AND 19/100 PESOS (P10,076,111.19) representing deficiency VAT for taxable year 2009, inclusive of fifty percent (50%) surcharge imposed under Section 248(B) of the Tax Code, as amended, and twenty percent (20%) deficiency interest and 20% delinquency interest imposed under Section 249(A) and (B), respectively, of the same Code, computed until December 31, 2017. In addition, respondent is ORDERED TO PAY delinquency interest at the rate of twelve percent (12%), which is double the legal interest rate for loans or forbearance of any money, on the total amount due as of December 25, 2015 in the amount of P6,482,646.80, as determined above, computed from January 01,2018 until full payment thereof pursuant to Section 249(C) of the Tax Code, as amended by RA No. 10963, and implemented by Revenue Regulations No. 21-2018. SO ORDERED. (EJ.. ~ ft z_. MA. BELEN M. RINGPIS-LIBAN Associate Justice

DECISION CTA EB N0.187S (CASE NO. 922S) WE CONCUR: Presiding Justice (k~z::c~-~- ~ ~ JffANITO C. CASTAiiimOA,)R. E~A P. UY Associate Justice Associate Justice ON-VICTORINO ~ N.M...:~-&~ CIELITO N. MINDARO-GRULLA Associate Justice ;("~' 1� /Jfri6�-�,(,~--- CATHERINE T. MANAHAN Associate Justice 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. Presiding Justice