COMPOSITE MATERIALS, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY THIRD DIVISION COMPOSITE MATERIALS, INC., Petitioner, CTA CASE NO. 8306 -versu s- Members: BAUTISTA, Chairperson; FABON-VICTORINO, and RINGPIS-LIBAN,J.l. COMMISSIONER OF INTERNAL REVENUE, Respondent. Promulgated: OCT 1 0 2014 ~ f,'/Of>�~� X-----------------------------------------------------------------------------------------------X DECISION RINGPIS-LIBAN, J. STATEMENT OF THE CASE This is a Petition for Review flied by Composite Materials, Inc. on July 4, 2011 praying for the cancellation and withdrawal of the assessment issued against it for alleged deficiency income tax and expanded withholding tax (EWT) covered by Formal Letter of Demand (FLD) No. 043-B32-071 dated June 28, 2010 in the amount of P4,093,805.74, inclusive of interest, for calendar year 2007';/ 1 Exhibit " A", docket, volum e (vol.) I , pp . 441-443.

DECISION CTA CASE NO. 8306 STATEMENT OF FACTS Petitioner Composite Materials, Inc. is a domestic corporation duly organized and existing under Philippine laws, with principal office at 11 Joe Borris St., Bo. Bagong Ilog, P asig City and duly registered with the Bureau of Internal Revenue (BIR) under Tax Identification Number (TIN) 005-581-218. 2 On the other hand, respondent is the duly appointed Commissioner of the BIR vested under appropriate laws with the authority to carry out the functions, duties and responsibilities of said Office, including, inter alia) the power to decide disputed assessments, and cancel and abate tax liabilities pursuant to the provisions of the ational Internal Revenue Code (NIRC) of 1997 and other tax laws, rules and regulations. On July 1, 2010, petitioner received respondent's Formal Letter of Demand (Demand No. 043-B32-07) dated June 28, 2010, with attached Details of Discrepancies and accompanying Assessment Notices,3 assessing petitioner of deficiency income tax and EWT in the total amount of P4,093,805.74, inclusive of interest, for calendar year ending December 31, 2007.4 Petitioner flied its protest letter to the Formal Letter of Demand on July 7, 2010 and the same was duly received by respo ndent. 5 However, respondent denied petitioner's protest by issuing the Final Notice Before Seizure6, which was received by petitioner on June 2, 2011.7 Petitioner then appealed the l=<'inal Notice by filing the instant Petition for Review on July 4, 2011.8 On July 8, 2011, petitioner filed an Urgent Omnibus Motion (I) To Quash Warrant of Distraint and / or Levy, and (II) To Enjoin Collection of Taxes, praying, among others, for the suspension of collection of petitioner's alleged deficiency inco me tax, expanded withholding tax and interests for calendar year 2007 until the case is resolved with finality~ 2 Par. 2, Stipulated Facts, Joint Stipulation of Facts and Issues (JSFI), docket, val. I, p. 160. 3 Par. 3, Stipulated Facts, JSFI, docket, val. I, p. 160. 4 Exhibit "A", docket, val. I, pp. 441-445. 5 Par. 5, Stipulated Facts, JSFI, docket, val. I, p. 160; Exhibit "B", docket, val. I, pp. 449-451. 6 Par. 7, Stipulated Facts, JSFI, docket, val. I, p. 160; Exhibit " C", docket, val. I, p. 452. 7 Par. 6, Stipulated Facts, JSFI, docket, val. I, p. 160. 8 Petition for Review, docket, val. I p. 1.; The last day prescribed for filing the instant Petition for Review, which was on July 2, 2011, fell on a Saturday; See Section 1, Rule 22, The 1997 Rules of Civil Procedure. 9 Docket, val. I, pp. 25-30.

DECISION CTA CASE NO. 8306 The omnibus motion was granted by this Court via Resolution 10 dated August 11, 2011, requiring petitioner to file a surety bond equivalent to double the amount sought to be collected by respondent. Respondent filed her Answer11 on August 26, 2011, interposing the following special and affirmative defenses: 4. Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any 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 the assessments. (Commissioner rif Internal Revenue vs. Bank rif the Philippine Islands, G.R No. 134062, Apri117, 2007); 5. The Formal Letter of Demand and Assessment Notices (FAN) dated 28 June 2010 for calendar year ending 31 December 2007 against the petitioner was issued in compliance with the provisions of Section 228 of the National Internal Revenue Code (NIRC) and in accordance with existing Revenue Rules and Regulations relative to the right of the petitioner to be informed of the factual and legal bases upon which the assessment was made. Petitioner was informed in writing of the law and the facts on which the assessment is made, otherwise, they would not have flied their protest on July 7, 201 0; 6. Petitioner was assessed deficiency income tax because it failed to substantiate with sufficient evidence the deductibility of commissions and professional fees from gross income in violation of Section 34 (A) of the NIRC of 1997, as amended. In addition, petitioner's claimed purchases per Income Tax Return (ITR) is greater than the actual expenses incurred, therefore, the overstatement is added back to their taxable income pursuant to Section 34 of the aforesaid law; 7. Petitioner was assessed deficiency withholding tax because it failed to fully withhold and remit the expanded withholding tax on income payments for commissions as required under Revenue Regulations No. 2-98, as amended~ 10 Docket, val. I, pp. 46-51. 11 Docket, val. I, pp. 52-55.

DECISION CTA CASE NO. 8306 8. The 20% per annum has been imposed pursuant to the provisions of Section 249(B) of the NIRC of 1997, as amended; and 9. The 25% surcharge has been imposed pursuant to the provisions of Section 248(A) of the NIRC of 1997, as amended. The case was set for pre-trial conference on September 23, 2011.12 Petitioner's Pre-Trial Brief13 and respondent's Pre-Trial Brief14 were both filed on September 20, 2011. On October 17, 2011, pet1t10ner filed its Compliance with the Resolution dated August 11, 2011, granting petitioner's Motion for Suspension of Collection of Taxes .15 T hus, a Resolution was issued on October 25, 2011, which approved the surety bond attached to the said Compliance.16 On the same date, an Amended Pre-Trial Brief was likewise ftled by petitioner.17 As a result, another Pre-Trial Brief was ftled by respondent on October 20, 2011. 18 On November 29, 2011, the parties filed with this Court their Joint Stipulation of Facts and Issues 19 which was approved in a Resolution20 dated , December 1, 2011. Thereafter, a Pre-Trial Order21 was issued by the Court on January 5, 2012. Trial ensued, glVmg both parties the opportunity to present their respective documentary and testimonial evidence. On March 13, 2012, respondent submitted the BIR Records in the instant case, consisting of two hundred seventy-nine (279) pages representing the complete BIR Records of p etitioner for calendar year 2007. 22 After presentation, marking, identification and offer, the Court admitted as part of petitioner's documentary evidence Exhibits "A" to "X-1", with the exception of tEox"hSi-b1it1s8""S; -w7h0i"chtow"eSr-e7d5e"n' i"eSd-7a4d-ma"is' s"iSon-8f1o-ra"p'e"tSit-i7o6n"ert'so f"aSil-u1r0e7t'o' ' and "S-1 08" present the originals for comparison./ 12 Notice of Pre-Trial Conference issued on September 1, 2011, docket, vol. I, p. 86. 13 Docket, vol. I, pp. 93-105. 14 Docket, vol. I, pp. 89-92. 15 Docket, vol. I, pp. 115-117. 16 Docket, vol. I, p. 155. 17 Docket, vol. I, pp. 140-152. 18 Docket, vol. I, pp. 118-121. 19 Docket, vol. I, pp. 159-169. 20 Docket, vol. I, p. 171. 21 Docket, vol. I, pp. 173-181. 22 Docket, vol. I, pp. 253-254. 23 Resolution dated November 9, 2012, docket, vol. II, pp. 757-758.

DECISION CTA CASE NO. 8306 When it was respondent's turn to present her evidence, she moved for the withdrawal of the BIR Records of the instant case, which was subsequently granted during the hearing held on January 22, 2013.24 Respondent then proceeded to present, mark and identify her exhibits and thereafter returned the BIR Records of the instant case on June 26, 2013. 25 An offer of respondent's exhibits was subsequently made. The Court, in a Resolution dated August 14, 2013, admitted as part of respondent's evidence Exhibits "1" to "15-a", with the exception of Exhibit "5"; which was denied admission for petitioner's failure to present its original for comparison.26 Petitioner submitted its Memorandum (\Vith Manifestation Regarding the Pending Compromise Discussion Between the Parties/ 7 on October 16, 2013; while respondent submitted her Memorandum28 on October 21, 2013. Accordingly, the case was submitted for decision on October 25, 2013.29 On November 21, 2013, the parties flied their Joint Motion (For Withdrawal of BIR Records), praying that respondent be allowed to temporarily withdraw the BIR Records for this case for purposes of processing petitioner's payment of the compromise settlement amounts and tl1e subsequent approval of its application for compromise.30 This Joint Motion was granted by the Court in the Resolution dated January 14, 2014, giving a period of fifteen (15) days from notice to temporarily withdraw the BIR Records of this case. After which, respondent was directed to immediately return the BIR Records to the Court.31 STATEMENT OF ISSUES The parties submitted the following issues32 for this Court's disposition: A. Whether tl1e right of Respondent to make an assessment for expanded withholding tax for taxable year 2007 has prescribed. B. Whether Petitioner was denied due process of law~ 24 Docket, vol. II, pp. 779-780. 25 Docket, vol. II, pp. 857-858. 26 Docket, vol. II, pp. 938-939. 27 Docket, vol. II, pp. 964-1004 28 Docket, vol. II, pp. 954-963. 29 Docket, vol. II, p. 1006. 30 Docket, vol. II, pp. 1008-1010. 31 Docket, vol. II, pp. 1012-1013. 32 Stipulated Issues, JSFI, docket, val. I, p. 163.

DECISION CTA CASE NO. 8306 C. Whether or not Petitioner failed to substantiate with sufficient evidence the claimed deductions. 1. Whether Petitioner's comrmss10ns and professional fees 1n the total amount of Php4,350,185. 93 were supported with sufficient evidence. ii. Whether or not Petitioner's purchases was overstated by Php2,693,487.55. w. Whether Petitioner's payments of commissions amounting to Php3,341 ,091.33 were not subjected to EWT. THE COURT'S RULING As to the first stipulated issue concerning prescription of the period to assess petitioner's deficiency EWT for calendar year 2007, petitioner alleged that respondent's right to issue an assessment for the alleged deficiency EWT for the period of January to May 2007 is already barred by prescription considering that the assessment was issued only on June 28, 2010. Section 203 of the IRC of 1997, as amended, specifically provides that respondent has three (3) years to assess and collect an internal revenue tax, to wit: SEC. 203. Period ofLimitation 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 flied beyond the period prescribed by law, the three (3)- year period shall be counted from the day the return was flied. 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. Pursuant to Section 203 of the NIRC of 1997, as amended, internal revenue taxes must be assessed within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. Tlus rule governs the question of prescription of the government's right to assess internal revenue taxes primarily to safeguard thy

DECISION CTA CASE NO. 8306 interests o f taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time. 33 Thus, in determining the last day for respondent to assess petitioner of deficiency EWT for calendar year 2007, this Court shall apply the relevant provisions of Section 2.58 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 06-01 and RR No. 17-03, which require the filing of the creditable withholding tax return and payment to be made within ten (10) days after the end of each month for the months of January until November, while for the month of December, the creditable withholding tax return should be filed and payment to be made on or before January 15 of the following year. Since resp ondent issued the Formal Letter of D emand/ Assessm ent Notices34 on June 28,2010, respondent's right to assess petitioner of deficiency EWT from January to May 2007 has already prescribed, illustrated as follows: Month Date of Filing of Last Day to File Last Day to Date of Remarks Covered BIR Form No. BIR Form No. Assess Issuance of P rescrib ed 1601-E as required P r e sc rib e d (2007) 1601-E35 2/ 10/ 2010 FLD/ P resc ribed January bylaw 3/ 10/ 2010 Assessment Prescribed February 02/ 12/ 07 2/ 10/ 2007 4/ 10/ 2010 Prescribed March 03 / 09 / 07 3/ 10/ 2007 5/ 10/ 2010 Notices No t Prescribed April 04/ 10/ 07 4/ 10/ 2007 6/ 10/ 2010 Not Prescribed 05 / 10/ 07 5/ 10/ 2007 7/ 10/ 2010 6/ 28 / 2010 Not Prescribed i\Iay 06 / 07 / 07 6/ 10/ 2007 8/ 10/ 2010 Not Prescribed June 07 / 10/ 07 7/ 10/ 2007 9/ 10/ 2010 Not Prescribed July 08/ 07/07 8/ 10/ 2007 10/ 10/ 2010 No t Prescribed August 09 / 10/ 07 9/ 10/ 2007 11 / 10/ 2010 Not Prescribed September 10/ 10/ 07 10/ 10/ 2007 12/ 10/ 2010 October 11 / 12/ 07 11 / 10/ 2007 1/ 25 / 2011 November 12/ 10/ 07 12/ 10/ 2007 December 01 / 09 / 08 1/ 25 / 2008 In the Details of Discrepancies, respondent stated that petitioner failed to fully withhold and remit the EWT on income payments for commissions, computed as follows : Commissions Per FSI Audit Per Return Difference P464,781.40 P3,341 ,091.33 P3,805,872.73 33 Commissioner of Internal Revenue vs. FMF Development Corporation, G.R. No. 167765, June 30, 2008. 34 Exhibit "A", docket, vol. I, pp. 441-445. 35 BIR Records, pp. 50-65.

D ECISION CTA CASE NO. 8306 Based on the vouchers submitted by petitioner, the claimed commissions in the am ount of P 3,805,872.73 pertain to the following dates: Exhibit D ate Payee Referen ce Amount "R-7 1" N o. (in Php) "R-72 " 2/ 2/ 2007 Bendeline/ Jose i\fanu el Buenavista p 53,355.34 "R-7 3" 07-023 "R-74" 2/ 26 / 2007 Rand y Centeno 07-041 9,047.75 "R-7 5" 07 -068 23, 107. 59 "R-7 6" 4/ 3/2007 Rand y Centeno 07-075 18,731 .46 "R-77 " 07-077 "R -78 " 4/ 12/ 2007 J ose Manuel Buenavista 07-11 8 9,591.07 "R-7 9 " 07 -120 15,845.35 "R-80 " 4/23/2007 Bendeline Buenavista 07 -123 16, 171.76 "R-81" 07 -131 21,581.74 "R-82" 6/ 12/ 2007 Jose Manuel Buenavista 07-135 20,039 .75 "R-83" 07- 152 13,829.99 "R-84" 6/ 16/ 2007 Bendeline Buena vista 07 -168 11,353.17 "R-85 " 07- 169 21 ,197. 27 "R-86 " 6/2 1/2007 Rand y Centeno 07- 170 "R-87 " 07 -174 1,947.42 "R-88 " 6/ 27/2007 Jose i\Ianuel Buenavista 07 -214 3,050.59 "R-8 9" 07-232 20,359.22 TOTAL 7/ 12/ 2007 Jose Manuel Buenavista 07-246 21,612.74 J V-15 3,051.1 3 7/27/2007 Bendeline Buena vista 1,1 69.50 3,520,829 .89 8/ 28/ 2007 Jose i\ Ianuel Buena vista P 3 , 805 ,8 72. 73 8/28/ 2007 Bendeline Buenavista 8/ 28/ 2007 Rand y Centeno 9/7/ 2007 J ose Manuel Buenavista 11 / 12/2007 Jose Manuel Buenavista 11 / 29 / 2007 Rand y Centeno 12/ 18/ 2007 Carlos i\ Iontialto 12/ 31/ 2007 ;\ ccrued Commissions O n the other hand, the commissions per return in the amount of P464,781.40 deducted by respondent in arriving at the commissions of P3,341,091.33 subject to deficiency ten percent (10%) EWT, comprised of the fo llowing:36 Payee Amount of Income Amount ofTax Buenavista, Jose Manuel P ayment Withheld and Coloma, Bendeline p 158,694.09 Centeno, Randy 65,340.49 Remitted Montialto , Carlo 59,838.82 p 15,869.42 Vertex Mercantile Services, Inc. 1,169.50 6,534.05 RNQ Customs Brokerage 47,839.80 5,9 83.88 Seaglobe Marine Surveyors 114,398.70 116.95 Total 17,500.00 4, 783 .98 P464,781.40 11,439.87 1,750.00 P46,478 .15 36 Per petitioner's Alphalist of Payees Subject to Expanded Withhold ing Tax attached to its Annual Information Return of Creditable Income Taxes Withheld (Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No. 1604-E) for calendar year 2007, BIR Records, pp. 97-98.

Page 9 of24 DECISION CTA CASE NO. 8306 From the foregoing, respondent erroneously deducted the income payments to Vertex Mercantile Services, Inc. (P47,839.80), RNQ Customs Brokerage (P114,398.70) and Seaglobe Marine Surveyors (P1 7,500.00) totaling P179,738.50, as these do not form part of the claimed commissions of P3,805,872. 73. However, the remaining income payment of P285,042.84 (P464,781.40 less P179,738.50) for which the 10% EWT of P28,504.30 was remitted to the BIR is properly deductible against the commissions of P3,805,872.73. Consequently, the commission expense of P3,341,091.33 subject of the 2007 deficiency EWT assessment actually pertains to the accrued commissions in December 2007 in the amount of P3,520,829.89 reduced by the amount of P179,738.50 income payments to Vertex Mercantile Services, Inc., RNQ Customs Brokerage and Seaglobe Marine Surveyors. In other words, while respondent's right to assess petltloner of deficiency EWT for January to May 2007 has already prescribed,37 no part of the subject deficiency EWT assessment pertains to the said period. Thus, respondent's assessment against petitioner for basic deficiency EWT for calendar year 2007 in tl1e amount of P334,109.13 shall be upheld: PerFS/ Audit Per Return Difference !>464,781.40 !>3,341,091.33 Comm..issions !>3,805,872. 73 10% Tax Rate P334,109.13 Deficiency Expanded Withholding Tax As to the second issue, pet1t10ner avers that respondent violated petitioner's right to due process of law when she issued the assessment for alleged deficiency income tax and EWT for calendar year 2007. On the item "non-deductible expense" which is part of the computation of deficiency income tax, petitioner alleged that respondent did not disclose which specific commissions and professional fees were not supported by evidence and during which month/ quarter these fees were supposedly incurred. Petitioner further asserts that the assessment also failed to disclose which purchases were considered and which were found to be overstated. The assessment likewise failed to state which type of purchases (as petitioner had made various purchases of goods and services) were considered and audited for purposes of, and as bases for, the assessment. As regards the assessment for deficiency EWT, the basis for the deficiency EWT was the purported failure of petitioner to fully withhold an~ 37 Also alleged by petitioner in paragraph 55 of its Memorandum, docket, vol. II, p. 981.

DECISION CTA CASE NO. 8306 remit the EWTon income payments and commissions as required under RR No. 2-98, as amended. Petitioner opposed the assessment, arguing that respondent did not list in sufficient detail the payees of these commissions. Respondent also allegedly failed to disclose when these commissions were paid and which particular EWT return of petitioner was found deficient. In view thereof, petitioner insisted that respondent did not provide sufficient information and opportunity to petitioner to intelligently answer respondent's findings. Perusal of the assailed assessment with the Details of Discrepancies38 shows tlut petitioner was duly informed of the factual and legal bases of the computation of its deficiency income tax and deficiency EWT liabilities. It is true that the law requires tl1at the taxpayers should be informed of the legal and factual bases of tl1e assessment. However, the assessment notice is not required to be a full narration of the facts and laws on which the assessment is based. Thus, so long as the parties are notified and given the opportunity to explain their side, the requirements of due process are satisfied. 39 Applying the foregoing, the mere fact that respondent failed to provide petitioner the details which it believes are necessary for it to be sufficiently informed of the factual basis of the assessment does not make the assessment null and void. Furthermore, the Court cannot sustain petitioner's claim that respondent failed to provide sufficient information and opportunity to intelligently answer the assessment sm. ce the l.tems "comrru.ss.10ns" ad n "pro� ess1.01 na �ee"s indicated in the computation of petitioner's deficiency income tax liability refer to the amounts which petitioner itself claimed as deduction from its gross income, while the item "overstatement of purchases" pertaining to the same computation was arrived at by computing the difference between petitioner's purchases as indicated in its own income tax return (ITR) and the purchases as stated in respondent's audit. Clearly, petitioner could have easily substantiated by evidence the said commissions and professional fees which petitioner itself claimed as deduction from its gross income, as well as the purchases which petitioner declared in its ITR in order to answer the assessment issued by respondent. The same holds true with regard to the assessment for deficiency EWT, wherein petitioner could have established by substantial evidence that it fully /V 38 Exhibit "A", docket, val. I, 441-445. 39 Calma, eta/. vs. Court ofAppeals, eta!., G.R. No. 122787, February 9, 1999.

DECISION CTA CASE NO. 8306 withhold and remit the EWT on income payments and comnuss10ns for calendar year 2007 in order to disprove the subject EWT assessment. Similarly, a review of the records would show that petitioner was informed of the result of the tax audit conducted by respondent from which the deficiency tax assessment was based through the Notice for an Informal Conference, attaching thereto respondent's detailed findings on all of its internal revenue tax liabilities pursuant to Letter of Authority No. 0008746 dated September 9, 2008.40 Considering the foregoing, it cannot be said that petitioner was not given sufficient information to intelligently answer the assessment issued by respondent against it. The Court will now address the third 1ssue pertaining to petitioner's substantiation of its claimed deductions. I. DEFICIENCY INCOME TAX- P3,590,536.70 Respondent computed the deficiency income tax assessment in the amount of P3,590,536.70, by adding adjustments to petitioner's taxable income per ITR for the year 2007, consisting of (1) non-deductible expense amounting to P4,350,185.93, and (2) overstatement of purchases amounting to P2,693,487.55, as shown below: Taxable income per ITR P4,350,185.93 p 1,316,760.03 Add: Adjustments per investigation 2,693,487.55 7,043,673.48 Non-deductible expense p 118,506.24 p 8,360,433.51 Overstatement of purchases 342,359.76 Taxable income per investigation p 2,926,151.73 Income Tax due thereon 460,866.00 Less: Allowable payments /tax credit p 2,465,285.73 Payments 1,125,250.97 Creditable Tax Withheld per ITR P3,590,536. 70 Deficiency Income Tax Add: 20% interest p.a. (04.16.08 to 07.28.1 0) TOTAL AMOUNT DUE The Court shall determine the validity of the assessment by looking into the propriety of each of the said adjustment?v' 40 Exhibit "3", BIR Records, pp. 178-181.

D EC ISION CTA CASE NO. 8306 A. Non-deductible Expenses- P4,350,185.93 Per the Details of Discrepancies attached to respondent's FLD41 , the Non-deductible Expenses consisted of the following: Commissions p 3,805,872.73 Professional Fees 544,313.20 Non-deductible Expenses P 4 , 3 5 0 ,185. 93 Respondent disallowed the aforesaid expenses based on the examiner's findings as stated in Exhibit "3", to wit: (1) DISALLOWED COMMISSION EXPENSES P3,805,872 .73 Verification disclosed that the taxpayer is an importer of resin and auxiliaries primarily used in the production of cleaning aids and chemicals. That 97% of its total sales were derived from its affiliate, POLYMER PRODUCTS PHILS., INC. where the taxpayer share the same office. There were no beginning and ending inventories which signify that all imported purchases were sold readily to its customers. Apparently, there is no need to employ tl1e services of companies and/ or individuals to market and promote its goods and pay for commission based on percentage of sales. The taxpayer accrued Commission amounting to P3,520,829.89 at the end of 2007 without any valid explanation for such accrual. Allegedly, the payments for the payees were made in 2008. Examination of 2007 vouchers disclosed that tl1e taxpayer paid for commission of various individuals. The sample of documents attached were detailed as follows: D ate l'aycc Sales InYoicc No. Cust1>1TitT Rem arks 211117 flu c�n aYista, .J o'L'/ Va ri o us S. l. StTH:s Vario us custolnt:rs o f 2(>,277.110 Cl Hll lll iSS H )1l ranging fron1 722114- I' OLYI\ 11-:JZ I'ROD. l'cb. 2 Coloma, Hcndd im� 722H(, issued in O ct & I'III LS., INC. 27.117~!.:\4 fo r sales of Nm�. 2011(, c usto dial s urr lics & chemical rroducts o f I'OJ .YM I-:JZ I'ROD UC'J'S I'IIILS. INC. No\� 12 Bu cnaYis ta, lose \'a rio us S. l. scm �s \'arious custonl<.Ts of 2 1,(>1 2.74 5�u & 1 ()11 o ranging frm H(J l H4-H6 1'! 1 I'O LYM J�: R I'R()l ). issued in August 2007 I'III LS.. INC. (e.g. Cf)lll lll !SS H )tl ,\tl�nco, Sogo) fo r sale:-\ of c u s t o d ia l s ur rli c�s & 41 Exhibit "A", docket, val. I, pp. 441-443.

DECISION CTA CASE NO. 8306 chemica l proJucts of I'OI .Y~ II-:R l'ltC)[) UC' l"S I'IIII.S. INC. Commission payments in 2007 totaling P285,042.90 including the above examples were erroneously and intentionally charged to the taxpayer even if it was clear that the services of these individuals were made for its affiliate, POLYMER PRODUCTS PHILS., I C. Section 34 of the Tax code provides that in order that a business expense to be deductible, it must (1) be ordinary & necessary expense; (2) it must be paid or incurred during the taxable year in carrying on or directly attributable to operation and / or conduct of its trade or business; (3) it must be reasonable in amount and sustained by adequate proof; (4) & not contrary to law, morals & public policy or public order. The taxpayer failed to meet the standard set forth under this section, thus, its accrued and paid commission expenses amounting to P3,520,829.89 and P285,042. 90 respectively, were disallowed. (2) DISALLOWED PROFESSIONAL FEES P544,313.20 The taxpayer paid professional fees to individuals amounting to P544,313.20. There were no explanation why the company needs the services and for what legal purpose. The payment of 10% expanded withholding tax for such services is not sufficient to justify that tl1e payments can be claimed as part of deductible expenses. The rule set forth under Section 34 shall also be applied. Petitioner disagreed with the disallowance of its comrruss10n expenses and professional fees for calendar year 2007, arguing that these were valid expenses incurred in the ordinary course of its business during the said year and are duly supported by vouchers. Petitioner explained that its business involves trading in goods such as resin, fiberglass, and auxiliaries on wholesale or retail basis pursuant to its primary purpose stated in its Amended Articles of Incorporation. Since petitioner needs to sell its products in order to survive, it requires the services of agents who can convince customers to buy its products rather than those of its competitors, negotiate on the price and coordinate with customers on matters such as the volume of the order and time of delivery. Without these agents, petitioner might suffer serious financial losses due to insufficient sales. ~

Page 14 of24 DECISION CTA CASE NO. 8306 These agents are paid comrruss10ns for their selling activities to petitioner's clients. 42 Invoking the case of Rightjield Properry Ventures, Inc. (now known as Universal Rightjield Properry Holdings, Inc:) vs. Commissioner of Internal Revenue43(Rightjield Property tase), petitioner maintained that its claimed commissions and professional fees for calendar year 2007 in the total amount of P4,350,185.93 are valid business expenses.44 The Court finds the disallowance proper. Section 34(A)(1)(a)(i) of the NIRC of 1997, as amended, provides: SEC. 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 Nec-essary Trade, Business or Professional Expenses.- (a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and / or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid; (Emphasis supplied~ 42 Exhibit "U", docket, vol. I, p. 696. 43 CfA Case No. 5972, October 16, 2003. 44 Petitioner's Memorandum, docket, vol. II, p. 986.

Page 15 of24 DECISION CTA CASE NO. 8306 The foregoing provtswns clearly allow compensation for personal services actually rendered such as commissions and professional fees as deductible business expe?ses provided the following conditions are met: 1. that the expenses are ordinary and necessary; 2. that they must be paid or incurred within the taxable year; 3. that they must be paid or incurred in carrying on a trade or business; and 4. that they are supported by pertinent records or documents.45 The fact that the disallowed comrrusswns and professional fees were paid or incurred and supported by proper evidence is not disputed. However, respondent contended that the subject commissions are not directly attributable to petitioner but to the latter's affiliate-corporation and thus, not "ordinary and "necessary" in the conduct of petitioner's business. The same holds true with the disallowed professional fees. Respondent alleged that petitioner failed to establish the maintenance of professionals or consultants in the promotion of its goods or the importation of purchased goods or in its business operations. The Supreme Court, in the case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue46, explained that ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's business and "ordinary" when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. As borne by the records of this case, it is evident that the commission expense is not ordinary and necessary since petitioner's main customer was just its own affiliate company, Polymer Products (Phils.), Inc. to whom it sold 97% of its products. As can be seen in its ITR for calendar year 2007, petitioner's net sales amounted to P35,208,298.9347, which consisted of the following:~ 45 Esso Standard Eastern, Inc. (formerly Standard-Vacuum Oil Company) vs. The Commissioner ofInternal Revenue, G.R. Nos. L-28508-9, July 7, 1989. 46 G.R. Nos. L-26911 and L-26924, January 27, 1981. 47 Exhibit "4", line 15C, BIR Records, p. 15. 48 BIR Records, p. 126.

Page 16 of24 Amount ofTaxable DECISION Sales CTA CASE NO. 8306 r 5,431,071.43 Name of Customer Polymer Products (Phils.) Inc. 486,160.71 RI Chemical Corporation 1,855,053.57 Polymer Products (Phils.) Inc. 6,191,026.79 Polymer Products (Phils.) Inc. Polymer Products (Phils.) Inc. 691,607. 14 Polymer Products (Phils.) Inc. 3,901,63 7.50 RI Chemical Corporation Polyrner Products (Phils.) Inc. 486,160.71 Polymer Products (Phils .) Inc. 1,127,892.86 Polymer Products (Phils.) Inc. 1,647,250. 00 Polymer Products (Phils.) Inc. 8,751,125.72 Polymer Products (Ph.ils.) Inc. 3,139,312.50 Total 1,500,000.00 P35,208,298. 93 Clearly, out of the P35,208,298.93 total sales, only 3% in the amount of P972,321.4249 pertains to RI Chemical Corporation; while the remaining 97% in the amount of P34,235,977.51 pertains to Polymer Products (Phils.) Inc., petitioner's affiliate company. As correctly pointed out by respondent, there is no reason for petitioner to employ agents to sell to a "customer" which happens to be its affiliate and which even shares the same office with petitioner. Correspondingly, the mere fact that petitioner does not have any ending or beginning inventorl 0 proves that it has the capacity to sell all of its imports within the year it was bought, and thus, not in the danger of having excessive stocks due to a scant sales volume requiring the employ of agents or brokers. Furthermore, other tlun the vouchers and a journal entry 5 1 petitioner , did not provide any information as to which sales these commissions and professional fees pertain. It also did not specify in those vouchers what percentage was used in computing these commissions. Inasmuch as the records do not show that the comnuss10ns 1n the amount of P3,805,872. 73 and professional fees in the amount of P544,313.20 totaling P4,350,185.93 were appropriate and helpful in the realization of petitioner's income for calendar year 2007, the said expenses cannot be deemed "ordinary" and "necessary" in carrying on of petitioner's trade or business as contemplated under Section 34(A)(1)(a)(i) of the NIRC of 1997, as amended/ 49 The sum of 486,160.71 and 486,160.71. 50 Petitioner's claimed purchases in the amount of P28,896,877.07 was also reflected as cost of sales in its 2007 ITR, Exhibit "4", line 16C., BIR Records, p. 15. 51 Exhibits "R-71" to "R-89", docket, val. I, pp. 531 -548.

DECISION CTA CASE NO. 8306 .i\!Ioreover, this Court cannot sustain petitioner's application of the decision in the Righifield Properry c-ase52 to the instant case. In the said case, there was a finding that the commissions and management fees paid are ordinary and necessary expense. T hus the Court stated: After a careful evaluation of the evidence and arguments of the parties, this court is convinced that the commissions and management fees paid to its stockholders, SPL Capital Markets Corp. (SPL) and DMC Urban Property Developers, Inc. (DMC) in 1995 are ordinary and necessary expenses normally incurred by entities engaged in real estate business. Likewise, it was established that the subj ect commissions and management fee expenses were reasonable considering the actual efforts exerted or services rendered by SPL and DMC. (Emphasis supplied) Unlike in the Righifield Property c-ase, herein petitioner was not able to establish that its commissions and professional fees were ordinary and necessary in the carrying on of its trade or business, making the present case incomparable with the aforesaid case. T herefore, a ruling similar to the case invoked by petitioner may not be adopted by this Court in the resolution of iss ues in the present case. Accordingly, petitioner's claimed commissions and professional fees in the total amount of P4,350,185.93 shall be disallowed as deductions from its gross income for calendar year 2007 and petitioner shall be liable for deficiency income tax thereon. B. Overstatement of Purchases - P2,693,487.55 This amount was arrived at by respondent by computing the difference between the purchases as indicated in petitioner's ITR and the purchases as stated in respondent's audit, as shown below:53 Purchases per ITR P28,896,877 .0754 Purchases per Audit 26,203,389.52 Overstatement of Purchases p 2,693,487.55 Respondent considered this as an overstatement on the ground that petitioner failed to substantiate the claimed purchases with proper supportin~ 52 Supra. 53 Exhibit "A", docket, vol. I, pp. 441-443. 54 The same amount was reflected as petitioner's cost of sales, Exhibit "4", line 16C, BIR Records, p. 15.

DECISION CTA CASE NO. 8306 documents as mandated under Section 34(A)(l)(b) of the NIRC of 1997, as amended. 55 In response, petltloner formally offered the following as supporting evidence of its purchases for calendar year 2007 in the total amount of P28,896,877 .07:56 1. Schedule (Imports Transaction Reconciliation of Listing for Enforcement) which summarizes and shows the breakdown of the costs of petitioner's purchases for calendar year 2007;57 2. Official receipts evidencing petitioner's payment of insurance, broker's and surveyor's fees for calendar year 2007;58 3. Commercial invoices issued by petitioner's suppliers evidencing petitioner's payments for raw materials imported in calendar year 2007;59 and 4. Import Entry and Internal Revenue Declarations (IERDs) showing petitioner's payment of customs duties and import processing fees for calendar year 2007.60 However, some of the aforesaid exhibits were denied by the Court due to the following reasons: 1. failure to present the original copies as evidence or even just for comparison;61 2. failure to establish to the satisfaction of the Court the loss, destruction, or unavailability of the orig-inal documents;62 and 3. lack of effort on the part of petitioner to secure even certified true copies of the denied exhibits.63 Thus, based on the exhibits admitted by the Court, petitioner was able to substantiate its claimed purchases for calendar year 2007 only in the amount of P17,196,796.17, detailed as follows: Amount of Purchases Per Official Receipt/ Net ofVAT, if there Exhibit Particulars Debit Advice is any S-3 insurance premium p 7,534.62 p P6,72 7.34 55 Respondent's Memorandum, vol. II, docket, p. 961. 56 Petitioner's Memorandum, vol. II, docket, p. 988. 57 Exhibit "S", docket, vol. I, p. 549. 58 Exhibits "S-3" to "S-69", docket, vol. I, pp. 550-608. 59 Exhibits "S-70" to "S-93", docket, vol. I, pp. 609-650. 60 Exhibits "S-94" to "S-118", docket, vol. I, pp. 651-689. 61 Resolution, November, 9, 2012, docket, vol. II, p. 757. 62 Resolution, March 19, 2013, docket, vol. II, p. 842. 63 Resolution, March 19, 2013, docket, vol. II, p. 842.

DECISION CTA CASE NO. 8306 S-4 brokerage fees 6,2 18.82 5,552.52 S-5 brokerage fees 9,390.00 9,390.00 S-6 survey fees 2,967.00 2,649. 11 S-8 insuran ce p remiu m 7,295.80 6,514. 11 S-9 brokerage fees 66,275.90 59,174.91 S-10 survey fees S-11 survey fees 989.00 883 .04 S-12 brokerage fees 989.00 883 .04 S-13 brokerage fees 26,280 .00 26,280.00 S-15 insurance prenuum 11,876.72 10,604.21 S-16 brokerage fees 3,95 6.37 3,532.47 S-17 brokerage fees 6,793.48 6,065.61 S- 19 survey fees 42,090.00 42,090.00 S-21 brokerage fees 989.00 883.04 S-22 brokerage fees 6,25 4.49 5,584.37 S-25 brokerage fees 9,390.00 8,383 .93 S-26 brokerage fees 27,590.00 24,633.93 S-28 smvey fees 6,207.36 5,542.29 S-30 insurance prenuum 989.00 883.04 S-31 insurance prenuurn 3,956. 11 3,532.24 S-32 brokerage fees 1,736.36 1,550.32 S-33 brokerage fees 34,299 .65 34,299.65 S-34 brokerage fees 34,590.00 34,590.00 S-35 survey fees 7,087.28 6,327.93 S-36 stuvey fees 989.00 883.04 S-37 insuran ce prenumn 989.00 883.04 S-38 su1vey fees 4,678.33 4,177.08 S-39 brokerage fees 989.00 883.04 S-40 brokerage fees 6,240.59 5,571 .96 S-41 smvey fees 27,590.00 27,590.00 S-42 insuran ce p remiurn 989.00 883 .04 S-43 brokerage fees 1,363. 15 1,217.10 S-44 brokerage fees 6,294.20 5,6 19.82 S-45 insura nce premiu m 27,590.00 27,590.00 S-46 survey fees 2,03 1.53 1,813.87 S-47 brokerage fees 989.00 883.04 S-48 brokerage fees 5,589 .80 4,990.89 S-49 insurance prenumn 16,890.00 16,890.00 S-50 smvey fees 465.45 415.58 S-51 survey fees 989 .00 883.04 S-52 survey fees 989.00 883.04 S-53 survey fees 989.00 883 .04 S-54 smvey fees 989.00 883 .04 S-55 brokerage fees 989.00 883 .04 S-56 brokerage fees 31,336.62 31,336.62 S-57 brokerage fees 6,161.97 5,501.76 S-58 brokerage fees 28,590.00 28,590.00 6,295.81 5,621.26

Page 20 of24 DECISION CTA CASE NO. 8306 S-59 brokerage fees 9,390.00 9,390.00 S-60 insurance prem..ium 12,240.65 10,929.15 S-61 brokerage fees 11,390.00 11,390.00 S-62 brokerage fees 6,267.83 S-63 survey fees 5,596.28 S-64 survey fees 989.00 883.04 S-65 brokerage fees 989.00 883.04 S-66 survey fees 30,117.04 S-67 smvey fees 989.00 30,117 .04 S-68 insurance premium 989.00 883.04 S-69 brokerage fees 4,120 .76 883.04 S-70-a importation of goods 30,298.37 S-70-a bank charges 745,362.00 3,679.25 S-71 -a importation of goods 4,050.10 30,298.37 S-71 -a bank charges 2,889,954.72 745,362.00 S-72-a importation of goods 9,438.44 S-72-a bank charges 736,383.60 4,050.10 S-73-a importation of goods 4,022.08 2,889,954.72 S-73-a bank charges 714,711.60 S-75 -a importation of goods 3,463.19 9,438.44 S-75 -a bank charges 3,464,294.40 736,383.60 S-7 6-a importation of goods 10,544.37 S-7 6-a bank charges 833,429.82 4,022.08 S-79-a importation of goods 4,292. 79 714,711.60 S-79-a bank charges 860,808.00 S-83-a importation of goods 3,865.11 3,463 .19 S-83-a bank charges 839,710.08 3,464,294.40 S-84-a importation of goods 43,520.92 S-84-a bank charges 883,685.38 10,544.37 S-85-a importation of goods 3,932.11 833,429.82 S-85-a bank charges 339,066.11 S-86-a irnportation of goods 3,010.00 4,292.79 S-86-a bank charges 355,589.76 860,808.00 S-87-a in1portation of goods 3,251.60 S-87 -a bank charges 767,379.20 3,865.11 S-88-a importation of goods 4,107.32 839,710.08 S-88-a bank charges 749,088.00 S-89 -a importation of goods 4,066.76 43,520.92 S-89 -a bank charges 878,136.75 883,685.38 S-91 -a importation of goods 3,414.67 S-91-a bank charges 701,883.00 3,932.11 S-92-a importation of goods 3,930.35 339,066.11 S-92-a bank charges 737,130.24 4,028.11 3,010.00 TOTAL p 17,224,084.64 355,589.76 3,251.60 767,379.20 4,107.32 749,088.00 4,066.76 878,136.75 3,414.67 701,883.00 3,930.35 737,130.24 4,028.11 p 17,196,796.17

Page 21 of24 DECISION CTA CASE NO. 8306 Since petitioner failed to fully substantiate its claimed purchases for calendar year 2007 in the amount of P28,896,877.07, the overstatement of purchases as found by respondent in the amount of P2,693,487.55 shall be upheld and disallowed as deduction from petitioner's calendar gross income for the same year pursuant to Section 34(A)(1)(b) of the NIRC of 1997, as amended, which states: SEC. 34. Deductionsfrom Gross Im�ome.- xxx (A) Expen.res. - (1) Ordinary and Necessary Trade, Bttsiness or Professional Expenses.- XXX XXX XXX (b) Sttbstantiation Reqttirements. - 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, management, operation and/or conduct of the trade, business or profession of the taxpayer. In sum, petitioner 1s liable to pay basic deficiency income tax for calendar year 2007 in the amount ofP2,465,285.73, computed as follows: Taxable income per ITR p 1,316,760.03 Add: Adjustments per investigation P4,350, 185.93 7' 0 43 '6 7 3. 48 Non-deductible expense 2,693,487.55 p 8,360,433.51 Overstatement of purchases Taxable income per investigation p 2,926,151.73 Income Tax due thereon p 118,506.24 460,866.00 Less: Allowable payrnents/ tax credit 342,359.76 p 2,465,285.73 P a ym e n t s Creditable Tax withheld per ITR D eficiency Income Tax II. DEFICIENCY EXPANDED WITHHOLDING TAX Finding that petltloner failed to withhold and remit the EWT on its income payments for commissions amounting to P3,341,091.33 as requir~

Page 22 of24 DECISION CTA CASE NO. 8306 under Revenue Regulations No. 2-98, as amended, respondent assessed petitioner of deficiency EWT for calendar year 2007 in the amount of P503,269.04, inclusive of interest, computed as follows: 64 PerFS/ Audit Per Return Difference P464,781.40 P3,341 ,091.33 Commissions P3,805,872.73 10% p 334,109.13 Tax Rate 169,159 .91 p 503,269.04 Deficiency Expanded Withholding Tax Add: 20% Interest p.a. (01.16.08 to 07.28.1 0) Total Amount Due Petitioner stated in its Memorandum65 that it withheld and remitted EWT in the amount of P352,082. 99 for its commission payments totaling P3,520,829.90 as seen in its BIR Form No. 1601 -E ftled on June 10, 2008. It further stated that the difference between the commission payments for calendar year 2007 as per its vouchers (P3,805,872.73) and the commission payments of P3,520,829.90 as p er its BIR Form No. 1601-E filed on June 10, 2008 is only due to timing difference. A portion of petitioner's commission payments for calendar year 2007 as per its vouchers pertains to commissions earned during calendar year 2006 but remitted only in calendar year 2007. However, given the fact that the only Monthly Remittance of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601- E)66 provided as evidence was dated June 10, 2008 with a description "For the Month OS 2008" and that petitioner did not provide any proof that this truly represents commissions for calendar year 2007, the Court affirms respondent's findings as guided by the Supreme Court's ruling in the case of Commissioner of Internal Revenue vs. Gonzalez, et al 67, to wit: Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise. Accordingly, respondent's assessment against petitioner for basic deficiency EWT for calendar year 2007 in the amount of P334,109.13 shall be upheld: PerFS/ Audit Per Return Difference P464,781.40 P3,341 ,091.33 Commissio ns P3,805,872. 73 10% Tax Rate P334,109.13 Deficiency Expanded Withholding Tax 64 Exhibit "A", docket, val. I, pp. 441-443. 65 Petitioner's Memorandum, docket, val. II, p. 1000. 66 Exhibit "T", docket, val. I, p. 691. 67 G.R. No. 177279, October 13, 2010.

Page 23 of24 DECISION CTA CASE NO. 8306 WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. The assessments issued by respondent against petitioner covering deficiency income tax and EWT for calendar year 2007 are hereby AFFIRMED. Accordingly, petitioner is ORDERED to PAY respondent the amount of P3,499,243.57, inclusive of the twenty-five percent (25%) surcharge imposed under Section 248(A) (3) of the IRC of 1997, as amended, computed as follows: Deficiency Tax Basic Surcharge Total Income Tax p 2,465,285.73 p 616,321.43 p 3,081,607.16 Expanded Withholding Tax Total 334,109.13 83,527.28 417,636.41 P2,799,394.86 P699,848.71 P3,499,243.57 In addition, petitioner is ORDERED to PAY the following: (a) Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency income tax of P2,465,285.73 computed from April 15, 2008 and on the basic deficiency EWT of P334,109.13 computed from January 15, 2008 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and (b) Delinquency interest at the rate of 20% per annum on the total deficiency taxes of P3,499,243.57 and on the 20% deficiency interest which have accrued as afore-mentioned in (a), computed from July 28, 201068 until full payment thereof pursuant to Section 249(C)(3) of the NIRC of 1997, as amended. SO ORDERED. Q:AA� ~ ~ '-...: MA. BELEN M. RINGPIS-LIBAN Associate Justice WE CONCUR: 68 Due Date per FLD/Assessment Notices, Exhibit "A", docket, val. I, pp. 441 -443.

Page 24 of24 D ECISION CTA CASE NO. 8306 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 R. B UTISTA Associat ustice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, is it hereby certified that the conclusion in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. Presiding Justice