REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

SECOND DIVISION

CONTEX CORPORATION,
Petitioner, CTA CASE NO. 8493
Members:
-versus-
Castafieda,Jr., Chairperson
Casanova, and
Cotangco-Manalastas, JJ.
COMMISSIONER OF INTERNAL Promulgated:
REVENUE, APR ZZ 2015
Respondent. /
}{- - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - ~- - - - - }{

DECIS I0 N I t: I r l "'·

COTANGCO-MANALASTAS,J.:

This resolves the Petition for Review filed on May 17,

2012 by Conte}{ Corporation seeking the cancellation and
withdrawal of the assessments issued against it for alleged
deficiency income ta}{, value-added ta}{, e}{panded withholding
ta}{, withholding ta}{ on compensation, fringe benefit ta}{, and
final ta}{ on dividends for ta}{able year 2007 in the total
amount of P41 ,262,629.86, broken down as follows:

Income Tax p 662,912.59

Value-added Tax 14,744,475.64
Expanded Withholding Tax 18,303.25
Withholding Tax on Compensation 2,921.21
Fringe Benefit Tax 327,141.15
Final Tax on Dividends 25,506,876.02
Total P41,262,629.86

STATEMENT OF FACTS

Petitioner Conte}{ Corporation is a corporation duly

organized and e~sting under and by virtue of Philippine laws,
with principal office located at Subic, Philippines. 1 /r
1
Exhibit "K", docket, pp. 461-468.
DECISION
erA CASE NO. 8493
Page 2 of 33

On the other hand, respondent Commissioner of Internal

Revenue is the government officer charged with, among others,
the responsibility of assessing and collecting all internal
revenue taxes. She holds office at the Bureau of Internal
Revenue (BIR) National Office Building, Agham Road, Diliman,
Quezon City.

On June 29, 20 11, petitioner received a Preliminary

Assessment Notice (PAN) dated June 10, 2011, issued by
Regional Director Romulo L. Aguila, Jr., with attached Details
of Discrepancies and Audit Sheets prepared by the
Investigating Officer, informing petitioner of its deficiency
taxes for taxable year 2007 in the total amount of
P39,559,445.42.2

On July 12, 2011, petitioner filed its request to submit

its reply to the PAN on or before July 31, 2011.3

In response to the said request, a letter was issued by

Regional Director Romulo L. Aguila, Jr. informing petitioner
that it may not be necessary considering that a Formal Letter
of Demand (FLD) and an Assessment Notice were already
issued. 4

Still, petitioner filed its reply to the PAN on August 1,

2011 to refute the findings and support its objections against
the alleged deficiency taxes. s

On August 26, 20 11, petitioner received the FLD with

attached Details of Discrepancies and Audit
Result/ Assessment Notices, dated July 15, 2011, issued by
Regional Director Romulo L. Aguilar, Jr., assessing petitioner
of deficiency taxes in the total amount of P40,054,946.19. 6 ~

2
Par. c, Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), docket, p. 229; Exhibit "A", docket,
p. 402.
3
Exhibit "B", docket, p. 411.
4
Exhibit "C", docket, p. 412.
5
Exhibit "D", docket, pp. 413-417.
6
Exhibit "E", docket, pp. 418-435.
DEOSION
CfA CASE NO. 8493
Page 3 of 33

On September 23, 2011, petitioner filed its protest letter

assailing the assessment contained in the FLD. 7 Petitioner
also sent a letter to respondent on November 21, 2011, stating
that it is submitting the documents enumerated therein to
support its letter dated September 23, 2011. 8

Subsequently, a letter was received by petitioner from

Revenue District Officer Rey Roberto Y. Manalili on February
7, 20 12, informing petitioner of the revised deficiency taxes
pursuant to petitioner's request for re-investigation. 9

A Final Decision on Disputed Assessment (FDDA) was

later issued by Regional Director Araceli L. Francisco on April
17, 2012, stating the basis of the assessment.1°

Accordingly, petitioner flied the instant Petition for

Review on May 17, 2012.

Respondent filed her Answer 11 on July 19, 2012,

interposing the following special and affirmative defenses:

4. Respondent observed both procedural and

substantial due process in issuing the assessment subject
of this case. The Preliminary Assessment Notice, Formal
Letter of Demand with Audit Result/ Assessment Notice
and Final Decision on Disputed Assessment were issued in
accordance with law, rules and jurisprudence.

5. It is quite illogical for petitioner to assert that

respondent failed to observe due process. Contrary to its
claim that it was outright denied due process when it
pointed out in its own Petition for Review that it received
the Preliminary Assessment Notice, Formal Letter of
Demand and Final Decision on Disputed Assessment
issued by respondent.

6. Petitioner was informed of the factual and legal

basis of the assessment. The Preliminary Assessment
Notice, Formal Letter of Demand and Final Decision on
Disputed Assessment indicated not only the deficiency
taxes involved, compromise penalties and interest due~
7
Exhibit "F", docket, pp. 436-441.
8
Exhibit "G", docket, pp. 442-444.
9
Exhibit "H", docket, pp. 445-453.
10
Exhibit "1", docket, pp. 454-457.
11
Docket, pp. 179-187.
DECISION
CTA CASE NO. 8493
Page 4 of 33

thereon, but also sufficiently stated the facts, the law,

rules and regulations on which the assessment is based.

7. The Revenue Officer performed comprehensive

audit procedures and techniques. Petitioner's Financial
Statements and books of accounts were analyzed,
comprehensive study of petitioner's pertinent accounting
records disclosed that it is liable to pay deficiency tax
assessments.

8. The basis for the assessment of deficiency Income

Tax came from disallowed operating expenses particularly
telephone charges and discrepancy in the depreciation
expense account.

9. The Telephone Expense was disallowed because

the Cost Sharing Agreement between petitioner and its
affiliates is not notarized and no billing statements
covering such expense were furnished to petitioner in
relation to the alleged Cost Sharing Agreement.

10. Furthermore, petitioner failed to reconcile its

Depreciation Account. The disallowed Depreciation refers
to a write-off made as of December 21, 2006, which has
nothing to do with the Depreciation Expense of 2007.

XXX XXX XXX

12. With regard to deficiency Value Added Tax, all of

petitioner's sales were made to Unet Distributor
Corporation, a non-locator. Evidence as to payments of
VAT on transfer of goods to the customs territory prior to
release was not presented. Thus, all sales were subjected
to VAT pursuant to Sections 106 and 113 of the National
Internal Revenue Code of 1997.

XXX XXX XXX

14. The deficiency Withholding Tax on Wages arose

from the item of Salary Account which was not reconciled
and subsequently subjected to an effective rate of 15% per
audit pursuant to the provisions of Sections 78, 80, 81 and
83 of the NIRC of 1997. Petitioner likewise failed to submit
documentary evidences to refute the findings of
respondent.

XXX XXX XXX

16. Petitioner has deficiency Expanded Withholding

Tax on Insurance Expense because the Insurance Account
is directly billed to Contex based from the documents
submitted. In addition, pursuant to Section 57 of the V
DECISION
erA CASE NO. 8493
Page 5 of 33

NIRC in relation to Section 2.57.2 of Revenue Regulations

No. 2.98 Income Payments are subjected to Withholding
Tax. Petitioner, as one of the top 10,000 corporations, is
required in its Income Payments to withhold the Expanded
Withholding Tax.

XXX XXX XXX

18. The deficiency Fringe Benefit Tax assessment

arose from accommodation expenses of officers which were
imposed pursuant to Section 33 of the NIRC of 1997, as
amended and Revenue Regulation No. 3-98. Petitioner also
failed to submit documentary evidence to controvert the
findings of respondent.

XXX XXX XXX

20. With regard to the Final Tax on Dividends, Cash

Dividends declaration of P35,199,723.01 are subject to
final withholding of 35% and 25% pursuant to Section 28
(B) (1) and 25 (B) of the NIRC of 1997, as amended.
Verification of the General Information Sheet of Contex
Corporation disclosed that Medtecs International
Corporation Limited, Bermuda, USA is the major
stockholder of the former. Hence, Dividends to the latter
are subject to withholding tax.

XXX XXX XXX

22. Petitioner must also prove that the Petition for

Review with Court of Tax Appeals was filed within thirty
(30) days from receipt of the Final Decision of Disputed
Assessments.

23. Assessments are presumed correct and made in

good faith. The taxpayer has the duty of proving otherwise.
In the absence of proof of any irregularities in the
performance of official duties, an assessment will not be
disturbed. Even an assessment based on estimates is
prima facie valid and lawful where it does not appear to
have been arrived at arbitrarily or capriciously.

24. The burden of proof is on the taxpayer contesting

the validity or correctness of an assessment to prove not
only that the Commissioner of Internal Revenue is wrong
but the taxpayer is right. Otherwise the presumption of
correctness of tax assessment stands.

25. Based on the foregoing, the finding of deficiency

tax liabilities against petitioner is proper in all respects.
Worthy of note, are the words of the Supreme Court in the /.-r
DECISION
CTA CASE NO. 8493
Page 6 of 33

case of Commissioner of Internal Revenue vs. Bank of

Philippine Islands:

"Tax assessments by tax exammers 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 favour of the
correctness of tax assessments." (Citations
omitted)

Thereafter, the case was set for pre-trial conference on

September 27, 2012.12 Respondent's Pre-Trial Briefl3 was filed
on September 20, 2012; while the Pre-trial Brief (For the
Petitioner)1 4 was filed on September 21, 2012.

On October 12, 2012, the parties filed their Joint

Stipulation of Facts and Issues1s; which was later approved in
this Court's Resolution 16 dated October 16, 2012. In the same
Resolution, the pre-trial was considered terminated.

During trial, both parties presented their respective

documentary and testimonial evidence.

After presentation, marking and identification, the Court

admitted Exhibits "A" to "U" 17 as part of petitioner's
documentary evidence· while Exhibits "6" "9" "11" to "11-f'
' "14" to "21-a"19' were
"12", "13", "13-A" 18 and ' admitted as'
respondent's documentary evidence.

The case was submitted for decision on May 13, 2014,20

after petitioner submitted its Memorandum2 1on March 25, {

12
Notice of Pre-Trial Conference issued on August 29,2012, docket, p. 201.
13
Docket, pp. 202-211.
14
Docket, pp. 213-221.
15
Docket, pp. 229-231.
16
Docket, p. 232.
17
Resolution dated December 27, 2012, docket, pp. 563-564.
18
Resolution dated February 26,2014, docket, p. 708.
19
Resolution dated September 13, 2013, docket, pp. 649-650.
20
Resolution dated May 13, 2014, docket, p. 749.
21
Docket, pp. 709-732.
DEOSION
CTA CASE NO. 8493
Page 7 of 33

2014 and respondent filed her Memorandum22 on May 8,

2014.

STATEMENT OF ISSUES

The parties submitted the following issues 23 for this

Court's disposition:

1. Whether the deficiency tax assessments

against petitioner complied with the due
process requirements under the National
Internal Revenue Code (NIRC) of 1997, as
amended, and Revenue Regulations No. 12-
99;and

2. Whether petitioner is liable for deficiency tax

liabilities representing income tax, value-
added tax, withholding tax on compensation,
expanded withholding tax, fringe benefit tax,
and final tax on dividend in the aggregate
amount of P41 ,262,629.86 for taxable year
2007, as well as penalty, deficiency and
delinquency interests as provided in Sections
248 and 249 of the NIRC of 1997, as
amended.

DISCUSSION/RULING

As to the issue pertaining to respondent's failure to

comply with the due process requirements under the NIRC of
1997 and Revenue Regulations No. 12-99, petitioner alleges
that it was advised by respondent that an administrative
protest against the PAN is no longer necessary since
respondent already issued the FLD even prior to the expiration
of the period for petitioner to protest the PAN. Petitioner
further avers that respondent failed to consider the
documentary evidence submitted in support of its
administrative protests. Thus, petitioner concludes that the
deficiency tax assessments issued by respondent are void and
should be cancelled or withdrawn. ~
22
Docket, pp. 738-747.
23
Statement oflssues, JSFI, docket, p. 230.
DECISION
CTA CASE NO. 8493
Page 8 of 33

According to petitioner, when it received the PAN on June

29, 2011, it had until July 14, 2011 within which to file an
administrative protest. When petitioner allegedly wrote to
respondent two days before the deadline for filing a protest to
ask for an extension of time, respondent supposedly told
petitioner that it already issued the FLD and that protest
against the PAN is no longer necessary.

Petitioner further alleges that respondent's revenue

officer denied under oath that he advised petitioner that
protesting the PAN is no longer necessary. Such denial,
according to petitioner, is contrary to the letter received by
petitioner; which letter was offered as Exhibit "C".

In opposition, respondent contends that a considerable

amount of time had lapsed from the issuance of the PAN to
petitioner by registered mail. Respondent insists that the BIR
deemed petitioner to have constructively received the PAN
considering that more than a month have passed since the
same was sent through registered mail on June 10, 2011
pursuant to Section 3.1.7 of Revenue Regulations (RR) No. 12-
99. Accordingly, the BIR believed that the former had been
sufficiently given ample time to protest the PAN. Respondent
therefore submits that the issuance of FAN was legally due
since no protest was received from petitioner within the fifteen
(15)-day period from date of posting thereof in the mail.

Respondent further notes that petitioner's response to

the PAN was not even a protest but a mere request for an
extension of time to file the same. Nevertheless, Ms. Luisa San
Antonio was allegedly clear in her response to petitioner's
letter dated July 12, 2011 that it was not denied the right to
protest the assessment as it may do so in its protest against
the FAN. Respondent points out that petitioner's protest to
the FAN is similar in every way to its belatedly filed protest to
the PAN.24

Section 228 of the NIRC of 1997, as amended, and

Revenue Regulations No. 12-99 provide the procedural~

24
Respondent's Memorandum, docket, p. 742.
DECISION
CTA CASE NO. 8493
Page 9 of 33

requirements that must be followed in order for an assessment

to be valid.

Section 228 of the NIRC of 1997, as amended, reads:

"SEC. 228. Protesting Assessment. - When the

Commissioner or his duly authorized representative finds
that proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a
preassessment notice shall not be required in the following
cases:

XXX XXX XXX

The taxpayers shall be informed in writing of the

law and the facts on which the assessment is made;
otherwise, the assessment shall be void.

Within a period to be prescribed by implementing

rules and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall
issue an assessment based on his findings.

Such assessment may be protested administratively by

filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such form
and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not

acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected by
the decision or inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty (180)-
day period; otherwise, the decision shall become final,
executory and demandable." (Emphasis supplied)

Relevantly, Section 3 of RR No. 12-99 states:

"SECTION 3. Due Process Requirement in the Issuance

of a Deficiency Tax Assessment. -

3.1 Mode of procedures in the issuance of deficiency

tax assessment: ~
DECISION
erA CASE NO. 8493
Page 10 of 33

XXX XXX XXX

3.1.2 Preliminary Assessment Notice (PAN). - If after

review and evaluation by the Assessment Division or by the
Commissioner or his duly authorized representative, as the
case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes,
the said Office shall issue to the taxpayer, at least by
registered mail, a Preliminary Assessment Notice (PAN) for
the proposed assessment, showing in detail, the facts and
the law, rules and regulations, or jurisprudence on which
the proposed assessment is based xxx If the taxpayer fails
to respond within fifteen (15) days from date of receipt
of the PAN, he shall be considered in default, in which
case, a formal letter of demand and assessment notice
shall be caused to be issued by the said Office, calling for
payment of the taxpayer's deficiency tax liability,
inclusive of the applicable penalties.

XXX XXX XXX

3.1.4 Fonnal Letter of Demand and Assessment Notice.

-The formal letter of demand and assessment notice shall be
issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of
the taxpayer's deficiency tax or taxes shall state the facts,
the law, rules and regulations, or jurisprudence, on which
the assessment is based, otherwise, the formal letter of
demand and assessment notice shall be void xxx The same
shall be sent to the taxpayer only by registered mail or by
personal delivery. If sent by personal delivery, the taxpayer
or his duly authorized representative shall acknowledge
receipt thereof in the duplicate copy of the letter of demand,
showing the following: xxx" (Emphasis supplied)

In other words, the taxpayer is given fifteen days to make

a Reply and is also permitted to examine the records and
present his arguments in writing. If the taxpayer fails to
respond to the PAN, the taxpayer shall then be sent a Formal
Letter of Demand and Assessment Notice, which shall state
the facts and the law on which the assessment was based.
The taxpayer may file a protest within thirty days. After filing
the protest, the taxpayer must submit the relevant supporting
documents within sixty days, otherwise the assessment shall
become final.~
DECISION
CfA CASE NO. 8493
Page 11 of 33

Applying the above-quoted provisions of law and rules to

the instant case, this Court finds that respondent has
substantially complied with the requirements of due process.

As admitted by petitioner, it only had until July 14, 2011

within which to file an administrative protest or reply to the
PAN. Instead of filing its reply to the PAN before the expiration
of the said period, petitioner wrote to respondent two days
before the deadline to ask for an extension of time. In a letter
dated July 15, 2011, respondent supposedly told petitioner
that she already issued the FLD on even date and that a
protest against the PAN is no longer necessary.

The contents of the letter issued by respondent in reply

to petitioner's request for extension of time are quoted as
follows:

"This is in connection with the letter of your plant

controller, Ms. Anita P. Sabado, dated July 11, 2011,
requesting for extension to reply to our Preliminary
Assessment Letter dated June 10, 2011.

In reply, please be informed that it may not be

necessary at this point of time considering that a Formal
Letter of Demand and Assessment Notice were already
issued on even date. However, the same can still be
protested within thirty (30) days from receipt thereof. Your
protest letter should conform with the required detailed
presentation of applicable laws, rules and regulations and
statement of facts under Section 3.15 of Revenue
Regulations No. 12-99 so that the same can be acted upon
favorably. "25

From the foregoing, it appears that the letter does not

prohibit petitioner from filing its reply to the PAN within the
15-day period provided by law. The statement in the letter
saying that "it may not be necessary at this point of time
considering that a Formal Letter of Demand and Assessment
Notice were already issued on even date" appears to be the
response to the letter requesting for an extension of time to
reply to the PAN. Clearly, what is unnecessary is not the filing
of a reply to the PAN within the 15-day period but the request
for extension of time to file the said reply. {--

25
Exhibit "C".
DEOSION
CTA CASE NO. 8493
Page 12 of 33

Respondent's advice that it is unnecessary to file an

extension of time to file reply to the PAN considering that an
FLD was already issued on July 15, 2011 does not deprive
petitioner of the opportunity to file its reply to the PAN within
the 15-day period provided under the Revenue Regulations.

It has been held that the essence of due process is found

in the reasonable opportunity to be heard and submit any
evidence one may have in support of one's defense. What the
law proscribes is the lack of opportunity to be heard. As long
as the party is given the opportunity to defend his interests in
due course, he would have no reason to complain, for it is this
opportunity to be heard that makes up the essence of due
process.26

Furthermore, while petitioner claims that it was deprived

of its right to file the reply within the 15-day period provided
by Revenue Regulations, records indicate that petitioner was
able to file its reply to the PAN, though belatedly. It is likewise
significant to note that the reply to the PAN27 had the same
allegations as those contained in petitioner's reply to the FAN,
which respondent's revenue officer considered in arriving at
the revised assessment.

To be clear, after the filing of petitioner's protest28 against

the FLD on September 23, 2011 and the submission of
documents to support the said protest on November 21,
2011 29 , Revenue District Officer Rey Roberto Y. Manalili issued
a letter addressing petitioner's request for re-investigation of
its internal revenue taxes for taxable year 2007. In the said
letter, it was stated that after review and evaluation of the
documents that petitioner submitted, they arrived at the
revised deficiency taxes. Thus, in the FDDA, the expanded
withholding tax assessment was reduced from P707,135.01 to
P18,050.14. Accordingly, petitioner cannot claim that it was
denied due process in this case.

Petitioner also avers that the revenue examiner, Ma.

Gracita D. Agaton, whose findings became the basis for the{
26
Spouses Estares vs. Court ofAppeals, eta/., G.R. No. 144755, June 8, 2005.
27
Exhibit "D".
28
Exhibit "F".
29
Exhibit "G".
DECISION
CTA CASE NO. 8493
Page 13 of 33

issuance of the PAN, failed to consider the evidence submitted

to Revenue Officer Leilanie Arellano who started the audit of
petitioner. Petitioner maintains that the revenue officer's
partial consideration of the evidence submitted by petitioner is
arbitrary in nature and makes the assessment without any
factual basis. Petitioner likewise observes that the revenue
officer lied under oath in her judicial affidavit when she said
that petitioner did not submit supporting documents. In view
thereof, petitioner asserts that the revenue examiner's findings
which became the basis of the PAN have no factual and legal
bases, and thus, the deficiency tax assessment should be
cancelled and withdrawn.

As to the allegation that Revenue Officer Agaton lied

under oath when she said that petitioner did not submit
supporting documents, petitioner failed to present evidence to
support such allegation. Consequently, the same is
considered bereft of merit.

With respect to petitioner's allegation that the revenue

officer's partial consideration of the evidence submitted by
petitioner is arbitrary in nature which makes the assessment
without any factual basis, let it be stressed that 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. Upon the introduction of the assessment
in evidence, a prima facie case of liability on the part of the
taxpayer is made. If a taxpayer files 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 taxpayer
initiated suits is premised on several factors other than the
normal evidentiary rule imposing proof obligation on
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 Tax Code. 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. Hence, the determination by this~
DEOSION
CTA CASE NO. 8493
Page 14 of 33

Court must rest on all the evidence introduced and its

ultimate determination must find support tn credible
evidence. 3°

Accordingly, the Court shall determine whether petitioner

can overturn the presumption of correctness of respondent's
assessment and prove that the subject tax assessment is
without foundation for respondent's alleged failure to consider
the evidence presented by petitioner during the administrative
proceedings. Such determination shall likewise address the
issue on whether petitioner is liable for deficiency tax liabilities
representing income tax, value-added tax, withholding tax on
compensation, expanded withholding tax, fringe benefit tax,
and final tax on dividend and increments for taxable year
2007.

On April 17, 2012, petitioner received the BIR's FDDA

informing petitioner of its deficiency income tax, value-added
tax, and withholding taxes for taxable year 2007 in the
amount of P41,262,629.86 (inclusive of increments), broken
down as follows:

Income Tax p 662,912.59

Value-added Tax 14,744,4 75.64
Expanded Withholding Tax 18,303.25
Withholding on Compensation 2,921.21
Final Withholding Tax (Dividends) 25,506,876.02
Fringe Benefit Tax 327,141.15
TOTAL P41,262,629.86

The foregoing tax assessments stem from the

Memorandum dated June 2, 2011 prepared by Revenue
Officer Gracita D. Agaton, which recommended the issuance of
a Preliminary Assessment Notice in view of the findings that
petitioner has deficiency taxes due for taxable year 2007. 31

Notably, the Memorandum mentions that petitioner is a

taxpayer registered with the Subic Bay Metropolitan Authority
(SBMA) and is enjoying the five percent (So/o) preferential tax{-

3
° Commission
31
ofInternal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975, March 31,2005.
Exhibit "12".
DEOSION
CTA CASE NO. 8493
Page 15 of 33

rate on gross income, net of allowable deductions under

Republic Act (RA) No. 7227.

Nevertheless, the findings in the Memorandum further

states that regular taxation was applied for the year under
audit, quoting the provisions of RR No. 1-95.

Bearing in mind the foregoing uncontroverted findings of

respondent's revenue officer, the Court shall now determine
the propriety of each of the tax assessments subject of the
instant Petition for Review.

I. INCOME TAX

The deficiency income tax assessment was computed by

respondent as follows:

Net income per return p 5,887,209.14

Add: Disallowance per audit
Telephone charges of affiliated company p 989,179.05
Depreciation 42,442.58 1,031,621.63
Taxable Income per audit p 6,918,830.77
Tax Due p 2,421,590.77
Less: Tax paid 2,060,523.28
Income Tax Deficiency p 361,067.49
Add: Interest (April 16, 2008 to March 30, 2012) 285,845.10
Compromise penalties 16,000.00
TOTAL DEFICIENCY INCOME TAX p 662,912.59

a. Telephone charges of affiliated company - P989, 179.05

The FLD states that respondent allowed all of petitioner's

operating expenses except for telephone charges amounting to
P989, 179.05 and depreciation in the amount of P42,442.58.
Respondent alleges that the telephone charges pertain to cost
of an affiliate company. 32

Petitioner assails the said item of assessment and avers

that the telephone expenses pertained to its affiliate based on {

32
Exhibit "E".
DECISION
erA CASE NO. 8493
Page 16 of 33

a Cost Sharing Agreement33 and as such, portions of the

telephone charges are not petitioner's expense. In its protest
against the FLD I FAN, petitioner explained that the said
affiliate paid the telecom service provider and subsequently
billed petitioner. 34

On the other hand, respondent contends that the said

Cost Sharing Agreement is not even notarized; hence, she
concludes that there was no valid agreement reached with
petitioner's affiliates. Even assuming there was such an
agreement, the contract is self-serving considering petitioner's
failure to attach competent supporting evidence.

The amount of discrepancy was derived by respondent

from the following computation:3s

Per Return Per Audit Difference

Communication, light and
water P2, 102,264.00 P1, 113,084.95 P989, 179.05

Section 34(A)(l)(a)(b) of the NIRC of 1997, as amended,

provides that:

"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 Necessary 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, ~

33
Exhibit "0".
34
Exhibit "F".
35
Exhibit "11-A".
DECISION
CTA CASE NO. 8493
Page 17 of 33

management, operation and/ or conduct of the trade,

business or exercise of a profession, including:

XXX XXX XXX

(b) Substantiation Requirements. - No deduction from

gross income shall be allowed under Subsection (A) hereof
unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate
records: (i) the amount of the expense being deducted,
and (ii) the direct connection or relation of the expense
being deducted to the development, management,
operation and/ or conduct of the trade, business or
profession of the taxpayer." (Emphasis supplied)

From the foregoing, petitioner must substantiate with

sufficient evidence, all its ordinary and necessary expenses
that were claimed as deductions from its gross income for the
year under consideration, not only the amount thereof, but
also the direct connection or relation of the same to the
development, management, operation and/ or conduct of
respondent's trade, business or profession.

However, records show that petitioner failed to offer and

submit evidence to prove the direct connection or relation of
the said telephone expenses to the development, management,
operation and/ or conduct of its trade or business.

Furthermore, petitioner failed to sufficiently substantiate

by evidence its claim that the amount of disallowed telephone
expense actually pertains to its affiliate pursuant to a Cost
Sharing Agreement3 6 ; that the said affiliate paid the telecom
service provider; and that the said affiliate subsequently billed
petitioner.

Clearly, there is non-compliance with the substantiation

requirements laid down by Section 34(A)(l)(b) of the NIRC of
1997. As a result, the Court upholds the deficiency income tax
assessment relating to the telephone expense. V

36
Exhibit "0".
DECISION
CTA CASE NO. 8493
Page 18 of 33

b. Depreciation- P42,442.58

The Memorandum dated June 2, 2011 mentions that

depreciation of P4 2, 44 2. 58 was disallowed because of the
difference between costs claimed per financial statement and
the schedule submitted by petitioner to the BIR. The Analysis
of Income Tax37 presented by respondent as part of the BIR
Records shows that the discrepancy in the depreciation was
computed as follows:

Per Return Per Audit Difference

Depreciation P5,512,207.31 P5,469,764.73 P42,442.58

The amount of depreciation per audit was derived from

the amount of depreciation per petitioner's own schedules, to
wit:38

Depreciation per schedule:

Building P3,579,050.28
Building improvements 629,080.77
Machinery and Equipment 1,261,633.68
Total P5,469,764.73

On this matter, petitioner claims that the discrepancy in

the depreciation pertains to the write-off of fully depreciated
equipment by the same amount. According to petitioner, the
write-off did not involve any expense, thus, there is nothing to
disallow in the first place and, consequently, there is no
deficiency income tax to speak of. Petitioner's journal voucher
on the write-off of the fully depreciated factory machine and
equipment in the amount of P42,442.63 was offered in
evidence as Exhibit "P".

Petitioner also offered in evidence Exhibit "Q", which is

petitioner's Schedule of Fixed Asset-Machinery and Equipment
for the year 2007, where the following fixed assets were
written -off: f
37
Exhibit "11-A".
3s Id.
DECISION
CTA CASE NO. 8493
Page 19 of 33

Steam Iron (TS-1600) P11,846.68

Strapping Machine 2,638.00
Carton Slider 16,844.55
Juki Sewing Machines 8,400.00
Juki Sewing Machines 2,713.40
Total P42,442.63

Respondent opposes the foregoing allegations and

contends that the said journal voucher on the write-off of fully
depreciated assets and the schedule of fixed assets merely
show accumulated depreciation of factory machines and
equipment without being substantiated by competent evidence
such as official invoices, receipts or the like. The documents
presented by petitioner allegedly failed to reconcile the
discrepancies found in the cost per book and per financial
statement. Respondent then concludes that the deficiency
assessment on income tax must perforce be upheld.

While the journal voucher on the write-off of fully

depreciated assets and the Schedule of Fixed Assets-
Machinery and Equipment for the year 2007 may prove the
accumulated depreciation of petitioner's factory machines and
equipment, the said documents, however, failed to explain why
the said amount formed part of the depreciation expense
claimed as deduction to petitioner's gross income. As already
mentioned, the taxpayer should substantiate with sufficient
evidence, such as official receipts or other adequate records,
the amount of the expense being deducted and 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.

Clearly, petitioner failed to overcome by sufficient

evidence the presumption of correctness of the deficiency
income tax assessment relating to the disallowed depreciation
expense.
r
Thus, this item on the deficiency income tax
assessment is upheld.
DECISION
CTA CASE NO. 8493
Page 20 of 33

II. VALUE-ADDED TAX

The deficiency value-added tax assessment against

petitioner was computed as follows:39

Taxable Sales p 61,483.161.67

Output Tax p 7,377,979.40
Add: 25% Surcharge 1,844,494.85
Interest (July 26, 2008 to March 31, 2012) 5,472,001.39
Compromise penalties 50,000.00
TOTAL DEFICIENCY VALUE-ADDED TAX P14, 744,475.64

The FLD shows the assessment of deficiency VAT in the

amount of P7,377,979.40 on petitioner's sales to customs
territory customer. Respondent claims that all of petitioner's
sales were made to Unet Distributor Corporation, a non-
locator. Respondent explains that "evidence as to payments of
VAT on transfer of goods to customs territory prior to release
were not presented, thus all sales were subjected to Value
Added Tax. "40

According to petitioner, this assessment has no basis

since respondent already made a contrary ruling in 1999 in
the query of Toyota Autoparts, Inc. (TAPI). Petitioner points
out that respondent, in VAT Ruling No. 118-99 dated
December 10, 1999, held that sales of Toyota Autoparts
Philippines, Inc., an entity registered with the Philippine
Economic Zone Authority, to Toyota Motor Philippines (TMP), a
corporation located in the customs territory, is considered
"constructive importation by TMP'' and as such, it is TMP and
not TAPI which is liable to remit the VAT. Petitioner thus
maintains that in the instant case, it is petitioner's customer
in the customs territory which should remit and pay the VAT
and not petitioner.

On this matter, let it be noted that the ruling cited by

petitioner is not a ruling issued in its favor but in favor of
another taxpayer. Furthermore, while petitioner alleges that
the transactions subjected to VAT by respondent is considered
as "constructive importation", the circumstances under which ~
39
Exhibit "I".
40
Exhibits "E" and "I".
DECISION
CfA CASE NO. 8493
Page 21 of 33

the transactions were made were not supported by evidence.

What is only clear from the records is that VAT was assessed
on petitioner's sales to Unet Distributor Corporation.

Let it be stressed that in the determination of the tax

liability of petitioner, the Court is guided by the rule that tax
assessments 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 the BIR examiner and approved by
his superior officers will not be disturbed.41

Since petitioner failed to present and offer evidence to

prove that it is not liable to pay the assessed deficiency VAT,
the presumption of correctness of the subject tax assessment
remruns.

III. WITHHOLDING TAX ON COMPENSATION

Respondent assessed petitioner of deficiency withholding

tax on compensation based on the following computation:

Taxable basis per retum P191,956.90

Add: Taxable amount of salaries found untaxed per audit 8,114.00
Taxable amount of salaries per audit P200,070.90
Tax due p 16,978.13
Less: Remittances 15,761.03
Deficiency Withholding Tax on Compensation p 1,217.10
Add: Interest (January 21, 2008 to March 31, 2012) 1,004.11
Compromise penalty 700.00
TOTAL DEFICIENCY WITHHOLDING TAX ON COMPENSATION p 2,921.21

From the foregoing, respondent found "untaxed salaries"

in the amount of P8,114.00 per her audit. Respondent's
revenue officer found a minor difference upon reconciling the
salaries per alphalist as compared against per financial
statement. Since petitioner failed to reconcile such difference,
the item of salary account not reconciled was subjected to an
effective rate of lSo/o per audit pursuant to the provisions of V
41
Commissioner ofInternal Revenue vs. Bank ofthe Philippine Islands, G.R. No. 134062, April17, 2007,
citing Sy Po vs. Court ofTax Appeals, G.R. No. L- 81446, August 18, 1988.
DECISION
CTA CASE NO. 8493
Page 22 of 33

Sections 78, 80, 81, and 83 of the NIRC of 1997, as

amended. 42

Petitioner, on the other hand, maintains that the said

assessment has no basis since the alleged "untaxed salaries"
pertain to 13th month pay which is not taxable. Petitioner
notes that the 13th month pay to petitioner's employee is
P11,195.00 as compared to respondent's untaxed salary of
P8, 114.00. Respondent purportedly failed to explain the basis
for the untaxed salary ofP8,114.00.

Respondent counters that the document presented by

petitioner is a mere voucher not supported by competent
evidence; hence, it deserves no consideration by this Court.

Section 2.78.1(B)(11) of RR No. 2-98 reads:

"(B) Exemptions from withholding tax on

compensation. - The following income payments are
exempted from the requirement of withholding tax on
compensation:

XXX XXX XXX

(11) Thirteenth (13th) month pay and other

benefits.-

(a) Thirteenth (13th) month pay equivalent to the

mandatory one (1) month basic salary of officials and
employees of the government, (whether national or local),
including government-owned or controlled corporations, and
or private offices received after the twelfth (12th) month pay;
and

(b) Other benefits such as Christmas bonus,

productivity incentive bonus, loyalty award, gifts in cash or
in kind and other benefits of similar nature actually received
by officials and employees of both government and private
offices.

The above stated exclusions (a) and (b) shall cover

benefits paid or accrued during the year provided that the
total amount shall not exceed thirty thousand pesos
(P30,000.00) which may be increased through rules and
regulations issued by the Secretary of Finance, upon {

42
Exhibit "12".
DEOSION
CTA CASE NO. 8493
Page 23 of 33

recommendation of the Commissioner, after considering,

among others, the effect on the same of the inflation rate at
the end of the taxable year." (Emphasis supplied)

While it is true that payments on account of 13th month

pay and bonuses not exceeding thirty thousand pesos
(P30,000.00) are exempt from withholding tax as provided in
the above-quoted provision, it is incumbent upon petitioner to
prove that the amount of discrepancy found by respondent
actually pertains to payments on account of the said 13th
month pay and bonuses exempted from withholding tax.

In this case, petitioner failed to establish by evidence that

the amount of discrepancy found by respondent relates to
13th month pay, which is not taxable. Petitioner's Accounts
Payable Voucher No. 295743 on the alleged 13th month pay
payment to its employee, together with a schedule, BIR Form
No. 1604 CF for the year 2007 and Alphalist of Employees as
of December 31, 2007, merely show that the 13th month pay
payments to petitioner's employee is P11, 195.00. Without any
other evidence to support it, the said documents are
insufficient to prove that the said discrepancy is not subject to
withholding tax.

As to the allegation that respondent failed to explain the

basis of the assessment, the Analysis of Withholding Taxes on
Compensation 44 presented by respondent as part of the BIR
Records and fumished to petitioner as annex to the FLD
shows how the so-called "untaxed salary" was computed. The
said computation is illustrated hereunder:

Per Financial Statements

Salaries, Wages and Benefits P200,070.90
Per Alphalist
Non-Taxable
13th Month Pay & Other Benefits p 21,035.19
SSS, GSIS, PHIC & Pag-ibig Contributions 8,616.60
Salaries & Other Forms of compensation -
Total p 29,651.79
Taxable
13th Month Pay & Other Benefits -

43
Exhibit "R".
44
Exhibit "11-b"; Annexed in Exhibit "E" (FLD sent to petitioner), docket, p. 424.
DECISION
CTA CASE NO. 8493
Page 24 of 33

Salaries & Other Forms of Compensatior 162,305.11

Total p 162,305.11 191,956.90
Difference p 8,114.00
Effective Tax Rate 15%
Tax due on the unreconciled difference p 1,217.10

Thus, petitioner's claim that respondent failed to explain

the basis of the assessment is bereft of merit.

Also, even assuming that the amount of discrepancy

concerns the 13th month pay payments made by petitioner, the
above computation shows that the 13th month pay payments
made by petitioner were already considered in respondent's
determination of petitioner's tax liability. Nevertheless,
respondent still found the above discrepancy upon audit and
examination of petitioner's books. Accordingly, to reconcile
the discrepancy, evidence should have been presented by
petitioner to explain why the amount of salaries and wages per
alphalist, which already includes the 13th month pay
payments made by petitioner, is lesser than the amount of
salaries and wages reflected in petitioner's financial statement
(trial balance).

For petitioner's failure to explain by substantial evidence

the discrepancy found by respondent, the item of deficiency
withholding tax on the untaxed salaries remains.

IV. EXPANDED WITHHOLDING TAX

Respondent assessed petitioner of deficiency expanded

withholding tax amounting to P8,933.29, broken down as
follows: 45

Insurance Expense P492,901.92

Withholding Tax Due p 9,858.04
Less: remittance 924.75
Deficiency Expanded Withholding Tax p 8,933.29
Add: Interest (January 21, 2008 to March 31, 2012) 7,369.96
Compromise Penalty 2,000.00
TOTAL DEFICIENCY EXPANDED WITHHOLDING TAX P18,303.25

45
Exhibit "I".
DECISION
CTA CASE NO. 8493
Page 25 of 33

Petitioner alleges that the above findings have no bases

since petitioner actually withholds and remits the expanded
withholding tax on the insurance expense. Petitioner's
Accounts Payable Voucher No. 2907 with supporting
documents, and the Monthly Remittance Return on Creditable
Income Taxes Withheld for the Month of January 2009 were
submitted as Exhibit "S".

However, respondent opposes the foregoing allegations

and contends that the document presented by petitioner is a
mere voucher not supported by competent evidence, deserving
no consideration by this Court.

U pan verification of the Analysis of Expanded

Withholding Tax attached to the FLD issued to petitioner,46 the
Court finds that the amount of insurance expense was picked
up by respondent from the amount per financial statement, to
wit:

Income PerFS Per 1601e Difference Rate Tax Due

Payment
Insurance P492,901.92 P46,237.75 P446,664.67 2% P8,933.29

A review of the said financial statement (Trial Balance As

of December 31, 2007) 47 in the BIR Records shows that
respondent mistakenly picked up the amount of P492,901.92,
which actually corresponds to "Amortization of Leasehold Rig"
listed just above the item of insurance.

Considering that the basis of the assessment for

deficiency expanded withholding tax on insurance expense is
incorrect, the said assessment must accordingly be cancelled
for lack of factual basis.

V. FRINGE BENEFIT TAX

Respondent computed the assessed deficiency fringe

benefit tax as follows:48 V
46
Exhibit "E".
47
BIR Records, p. 277.
48
Exhibit "I".
DECISION
CTA CASE NO. 8493
Page 26 of 33

Gross up monetary value

Guest house expenses p75,111.28
Utilities 27,264.09
Rental payments 366,210.68 p 468,586.05
Tax due 149,947.54
Add: 25% surcharge 37,486.89
Interest (January 21, 2008 to March 31, 2012) 123,706.72
Compromise penalty 16,000.00
TOTAL DEFICIENCY FRINGE BENEFITS TAX P327,141.15

In the FDDA 49, respondent mentions that the fringe

benefit tax on accommodation expenses of officers was
imposed pursuant to Section 33 of the NIRC of 1997, as
amended, and Revenue Regulations No. 3-98.

Petitioner explains that in 2007, due to business

reversal, it had only one employee, a driver. Thus, the
staffhouse expense where the deficiency fringe benefit tax
assessment was based was allegedly used by petitioner's
affiliate personnel. Consequently, there is no basis for
respondent's assessment of deficiency fringe benefit tax.

"SEC. 33. Special Treatment of Fringe Benefit.-

(A) Imposition of Tax. - A final tax of thirty-four percent

(34%) effective January 1, 1998; thirty-three percent (33%)
effective January 1, 1999; and thirty-two percent (32%)
effective January 1, 2000 and thereafter, is hereby imposed
on the grossed-up monetary value of fringe benefit furnished
or granted to the employee (except rank and file employees
as defined herein) by the employer, whether an individual or
a corporation (unless the fringe benefit is required by the
nature of, or necessary to the trade, business or profession
of the employer, or when the fringe benefit is for the
convenience or advantage of the employer). The tax herein
imposed is payable by the employer which tax shall be paid
in the same manner as provided for under Section 57(A) of
this Code. The grossed-up monetary value of the fringe
benefit shall be determined by dividing the actual monetary
value of the fringe benefit by sixty-six percent (66%) effective
January 1, 1998; sixty-seven percent (67%) effective January
1, 1999; and sixty-eight percent (68%) effective January 1,
2000 and thereafter: Provided, however, That fringe benefit
furnished to employees and taxable under Subsections (B),
(C), (D) and (E) of Section 25 shall be taxed at the applicable ~

49 !d.
DECISION
CTA CASE NO. 8493
Page 27 of 33

rates imposed thereat: Provided, further, That the grossed-up

value of the fringe benefit shall be determined by dividing the
actual monetary value of the fringe benefit by the difference
between one hundred percent (100%) and the applicable
rates of income tax under Subsections (B), (C), (D), and (E) of
Section 25.

(B) Fringe Benefit defined. - For purposes of this

Section, the term Jringe benefit' means any good, service or
other benefit furnished or granted in cash or in kind by an
employer to an individual employee (except rank- and-file
employees as defined herein) such as, but not limited to,
the following:

( 1) Housing;

XXX XXX XXX

(C) Fringe Benefits Not Taxable. -The following fringe

benefits are not taxable under this Section:

XXX XXX XXX

(3) Benefits given to the rank and file employees,

whether granted under a collective bargaining agreement or
not; and xxx" (Emphasis supplied)

While it is clear from the foregoing that benefits given to

rank- and-file employees, such as accommodation expenses of
non-officers, are not subject to fringe benefit tax, petitioner,
however, failed to prove by evidence its claim that the
staffhouse expense was used by the personnel of its affiliate
and not by its officers. Since petitioner failed to overcome the
presumption of correctness of the deficiency fringe benefit tax
assessment, the Court sustains the said assessment.

VI. FINAL WITHHOLDING TAX

Respondent assessed petitioner of deficiency final tax on

dividends derived from the following computation: 50

Amount of Tax Due

I Dividends I
Dividend declaration subjected to 35% and 25%
Medtecs International Corp. Ltd. (Bermuda) I P34,804,914.25 I p 12,181,719.99

50
Exhibits "H" and "1".
DECISION
CTA CASE NO. 8493
Page 28 of 33

Yang Su Chin I 394,808.76 98,702.19

Total Amount Due 12,280,422.18
Add: 25% Surcharge 3,070,105.54
Interest (January 21, 2008 to March 31, 2012) 10,131,348.30
Compromise penalty 25,000.00
TOTAL DEFICIENCY FINAL WITHHOLDING TAXES 25,506,876.02

In the FLD and the Details of Discrepancies5 1 , the share

of Medtecs International Corp. Ltd-Bermuda in the dividends
amounting to P34,804,914.25 was subjected to 35o/o final
withholding tax pursuant to Section 28(B)( 1) of the NIRC of
1997, as amended. Likewise, the share ofYang Su Chin in the
cash dividends in the amount of P394,808.76 was subjected to
25o/o final tax in accordance with Section 25(B) of the NIRC of
1997, as amended.

Respondent assessed petitioner of deficiency final

withholding tax amounting to P12,280,422.18 on the accrual
of dividends payable to Medtecs International Corporation
Limited-Philippine Branch (MICL) as a resident foreign
corporation, and to Yang Su Chin, as a resident foreign
individual.

Petitioner assails this item of assessment and contends

that the same has no basis in law and fact. Petitioner alleges
that its books reveal that all dividends were paid to Medtecs
International Corporation Limited-Philippine Branch. Section
28(A)(7)(d) of the Tax Code provides that dividend income
received by a resident foreign corporation is not subject to
final withholding tax, which in this case is allegedly evidenced
by petitioner's journal voucher submitted as Exhibit "T".

However, the Court agrees with respondent's contention

that the document presented by petitioner is a mere voucher
not supported by competent evidence; hence, deserves no
consideration by this Court.

As already mentioned, petitioner's books allegedly show

that all dividends were paid to Medtecs International
Corporation Limited- Philippine Branch. Yet, to prove its
allegation, petitioner only presented a mere voucher which is~
51
Exhibit "E".
DECISION
CTA CASE NO. 8493
Page 29 of 33

insufficient to prove that the dividends were paid to Medtecs

International Corporation Limited-Philippine Branch and not
to Medtecs International Corp. Ltd-Bermuda.

The evidence presented by petitioner is insufficient to

overcome the presumption of correctness of this assessment.
It must be emphasized that there is a presumption that the
BIR personnel regularly performed their duties in preparing
the assessment. 52 Since petitioner failed to present evidence
to prove that the deficiency final withholding tax assessment is
without foundation, the Court upholds the same.

VII. COMPROMISE PENALTY

Respondent assessed petitioner of compromise penalties

in the following amounts:

Compromise penalties for: Amount

Income tax deficiency p 16,000.00
Value-added tax deficiency 50,000.00
Deficiency withholding tax on compensation 700.00
Deficiency expanded withholding tax 2,000.00
Deficiency fringe benefit tax 16,000.00
Deficiency final withholding tax 25,000.00
TOTAL P109, 700.00

It must be stressed that a compromise penalty is

imposed to avoid prosecution for violation of the provisions of
the Tax Code. 53 Pursuant to Revenue Memorandum Order
(RMO) No. 01-90, as amended by RMO No. 19-07, compromise
penalties are only suggested in settlement of criminal liability,
and may not be imposed or exacted on a taxpayer in the event
that a taxpayer refuses to pay the same. Clearly, the
compromise penalty implies a mutual agreement between the
parties in respect to the thing or subject matter which is so
compromised. The imposition of the compromise penalty

r
without the conformity of the taxpayer ts illegal and
unauthorized. 54

52
Commission ofInternal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975, March 31,2005.
53
The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, eta/., G.R. Nos. L-12928
andL-12932,March31, 1962.
54
Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., eta/., G.R. No. 35266, January 21,
1991.
DECISION
CfA CASE NO. 8493
Page 30 of 33

In this case, there is nothing in the records which would

show that petitioner consented to the compromise penalty. As
a consequence, the compromise penalty should not be
imposed and must be cancelled.

At this juncture, it must be reiterated that when

assessments are assailed, the burden of proof is upon the
complaining party (petitioner). It is incumbent upon the
complaining party to clearly show that the assessment was
erroneous, in order to relieve himself from it. 5 5 Also, as cases
filed before this Court are litigated de novo, party-litigants
must prove every minute aspect of their cases. 56

In the case of Republic Cement Corporation (as surviving

corporation in a merger involving FR Cement Corporation) vs.
Commissioner of Internal Revenue57 , this Court sitting En Bane
ruled that journal vouchers, being a document used for
internal purposes, is unverifiable and self-serving. Absent any
other document to corroborate the allegations it presented, the
Court cannot subscribe to the submissions of petitioner. It is
the obligation of petitioner to fully substantiate its claim before
this Court. Unlike tax assessments that enjoy the
presumption of regularity, taxpayers' claims of no liability
against deficiency taxes should be sufficiently established and,
by that, clear and convincing evidence should be presented to
support such claims.

While the pieces of evidence presented by petitioner,

consisting mainly of vouchers and schedules, were already
considered, these evidence, however, failed to sufficiently
explain and reconcile all of the discrepancies found by
respondent relating to the deficiency income tax, value-added
tax, withholding tax on compensation, fringe benefit tax, and
final withholding tax for taxable year 2007 which were derived
by respondent upon her audit and examination of petitioner's
books of accounts. Consequently, the presumption of
correctness of the said deficiency tax assessments should be
upheld. V
55
Commissioner of Internal Revenue vs. Construction Resources of Asia, et a/., G.R. No. L-68230,
November 25, 1986.
56
Dizon vs. Court ofTax Appeals, eta/., G.R. No. 140944, April30, 2008.
57
CTA EB No. 821, July 18,2012.
 DEOSION
CfA CASE NO. 8493
Page 31 of 33

On the other hand, considering the Court's findings that

the deficiency expanded withholding tax assessment and the
compromise penalties lack factual basis, the same should be
cancelled.

WHEREFORE, premises considered, the instant Petition

for Review is hereby PARTIALLY GRANTED. Accordingly, the
deficiency expanded withholding tax assessment and the
compromise penalties for taxable year 2007 are hereby
CANCELLED AND WITHDRAWN. However, the deficiency
income tax, value-added tax, withholding tax on
compensation, fringe benefit tax, and final withholding tax
assessments for taxable year 2007 are hereby AFFIRMED.
Accordingly, petitioner is hereby ORDERED TO PAY
respondent the amount of P25,213,292.14 representing
deficiency income tax, value-added tax, withholding tax on
compensation, fringe benefit tax, and final withholding tax for
taxable year 2007, inclusive of the twenty-five percent (25%)
surcharge imposed under Section 248(3) of the NIRC of 1997,
as amended, computed as follows:

Deficiency Tax Basic Tax 25% Surcharge Total

Income Tax p 361,067.49 p 90,266.87 p 451,334.36
Value-added Tax 7,377,979.40 1,844,494.85 9,222,474.25
Withholding Tax on Compensation 1,217.10 304.28 1,521.38
Fringe Benefits Tax 149,947.54 37,486.89 187,434.43
Final Withholding Tax 12,280,422.18 3,070,105.55 15,350,527.73
Total P20, 170,633.71 P5,042,658.43 P25,213,292.14

In addition, petitioner is hereby ORDERED TO PAY:

a) Deficiency interest at the rate of twenty percent (20o/o)

per annum on the basic deficiency income tax, value-added
tax, withholding tax on compensation, fringe benefit tax, and
final withholding tax computed from the dates indicated below
until full payment thereof pursuant to Section 249(B) of the
NIRC of 1997, as amended;

Deficiency Interest
Tax Type Basic Tax computed from
Income Tax p 361,067.49 April 15, 2008
Value-added Tax 7,377,979.40 January 25, 2008
Withholding Tax on 1,217.10 January 15, 2008
DEOSION
CTA CASE NO. 8493
Page 32 of 33

Compensation
Fringe Benefits Tax 149,947.54 January 10, 2008
Final Withholding Tax 12,280,422.18 January 15, 2008

b) Delinquency interest at the rate of 20°/o per annum on

the total amount of P25,213,292.14 and on the 20o/o deficiency
interest which have accrued as afore-stated in (a), computed
from April 17, 2012 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997, as amended.

SO ORDERED.

~/.~--4/-
AMELIA R. COTANGCO-MANALASTAS
Associate Justice

WE CONCUR:

<;k~~z> c.~(~.
JU"ANITO C. CASTANEDA, JR.
Associate Justice
CAESAR~SANOVA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were

reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division.

Q~-~ C. 0-:Y-~--.,4, ~
~UANITO C. CASTANElYK~' JR.
Associate Justice
Chairperson
DECISION
CTA CASE NO. 8493
Page 33 of 33

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution

and the Division Chairperson's Attestation, it is hereby
certified that the conclusions in the above Decision were
reached in consultation before the case was assigned to the
writer of the opinion of the Court's Division.

ROMAN G. DEL ROSARIO

Presiding Justice