Littlegiant Steel Pipe Corporation v. Commissioner of Internal Revenue

FIRST DIVISION [C.T.A. CASE NO. 6203. July 19, 2005.] LITTLEGIANT STEEL PIPE CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ACOSTA, E., P.J p : This case involves a judicial review of the final decision 1 of the respondent Commissioner of Internal Revenue regarding two (2) disputed assessments for deficiency income tax and value-added tax in the aggregate amount of P140,958,961.72 for the calendar year ended December 31, 1997. The facts as established by the records and pleadings of the case are as follows: Petitioner Littlegiant Steel Pipe Corporation is a corporation duly organized and existing under the laws of the Republic of the Philippines with office address at JTKC Compound, Cainta, Rizal. 2 On July 20, 1998, petitioner received a Letter of Authority No. 000018424 dated July 17, 1998 authorizing Revenue Officers E. Sandoval, S. Pagdilao, C. Dongon, C. Lee, M. Arias, and C. Floreza to be supervised by Grp. Head S. Camara of Special Team created pursuant to RSO 673-98 to examine its books of accounts and other accounting records for all internal revenue taxes for the period 1997 and unverified prior years. 3 Eventually, on January 20, 2000, petitioner received two (2) undated Assessment Notices issued by the Enforcement Service of the Bureau of Internal Revenue through Assistant Commissioner Percival T. Salazar covering the following 1997 deficiency tax assessments 4 : Basic Interest Compromise Total Deficiency Income Tax (ST-INC-97-0160-2000) P76,635,252.15 P18,476,376.12 P25,000.00 P95,136,628.27 Deficiency Value-Added Tax (ST-VAT-97-0159-2000) 30,196,045.36 15,601,288.09 25,000.00 45,822,333.45 Totals P106,831,297.51 P34,077,664.21 P50,000.00 P140,958,961.72 ============= ============ ========= ============= On January 21, 2000, petitioner received Final Notice 5 of demand requiring it to pay within thirty days upon receipt the deficiency tax assessments the total amount of P140,958,961.72. CAIaHS On February 21, 2000, petitioner posted through registered mail its protest 6 requesting for the cancellation of the aforementioned deficiency tax assessments. On April 24, 2000, petitioner submitted all the relevant supporting documents to refute the merit of the assessments in accordance with Section 228 of the National Internal Revenue Code of 1997. 7 On November 20, 2000, within thirty (30) days from the lapse of one hundred eighty (180) days from the submission of supporting documents with the respondent, petitioner filed the instant Petition for Review with this Court pursuant to Section 228 of the National Internal Revenue Code of 1997. The jointly stipulated issues to be resolved by the Court are the following: 1. Whether the assessment for deficiency income tax in the amount of P95,136,628.27, inclusive of increments, has basis in fact and in law. Such assessment is broken down, as follows: 1.1. Whether there are alleged unrecorded sales of P193,032,000.00 to Milwaukee Industries Corporation. 1.2. Whether the foreign exchange losses totaling P12,444,701.84 sustained by Petitioner during the year are proper deductions from gross income during that year. 1.3. Whether the custom duties paid to the banks for incoming importations of the company should be allowed as deductions from gross income. 1.4. Whether there are undeclared importations which resulted in an alleged untaxed gross profit of P11,264,518.73. 1.5. Whether export sales amounting to P1,727,504.38 are not supported by documents. 2. Whether the assessment for deficiency value-added tax in the amount of P45,822,333.45, inclusive of increments, has basis in fact and in law. Such assessment is broken down, as follows: 2.1. Whether there are alleged unrecorded sales of P193,032,000.00 to Milwaukee Industries Corporation. 2.2. Whether discounts after sales in the amount of P1,245,823.76 are not allowable for VAT purposes. 2.3. Whether there is a substantive discrepancy between total vatable sales per invoices, net of discounts, and total vatable sales declared per return which resulted in unaccounted vatable sales of P35,551,883.56. HITEaS 1. DEFICIENCY INCOME TAX P95,136,628.27 The deficiency income tax of petitioner was computed by the examiners as follows 8 : Taxable Net Income per Return P1,397,215.20 Add/(Less) Adjustments Unrecorded sales to Milwaukee Ind. P193,032,000.00 Disallowed exchange rate differential 12,444,701.84 Disallowed import purchases 1,295,759.00 Untaxed gross profit on unrecorded imported purchases 11,264,518.73 218,036,979.57 Taxable Net Income per Audit P219,434,194.77 Income Tax Due P76,801,968.17 Less: Tax Withheld/Paid per Return 166,716.02 Deficiency Income Tax P76,635,252.15 Add: Interest P18,476,376.12 Compromise 25,000.00 18,501,376.12 TOTAL AMOUNT PAYABLE P95.136,628.27 1.1. Unrecorded sales In September 1997, petitioner delivered to Milwaukee Industries Corporation 21,448 metric tons of hot rolled steel coils valued at P193,032,000.00. The deliveries were paid through local Letters of Credit (LC) opened with Rizal Commercial Banking Corporation (RCBC) and were credited in petitioner's Current Account Number 109-04347-8. However, after evaluation of petitioner's pro-forma sales invoices and delivery receipts, the examiners noted that the sales were not recorded by petitioner. They also found that the proceeds of the letters of credit were not recorded in petitioner's books of accounts. Hence, the latter was assessed of unrecorded sales in the amount of P193,032,000.00. Petitioner does not dispute the deliveries of hot rolled steel coils to Milwaukee Industries Corporation and the drawing of letters of credit with. RCBC for the payment of the goods. However, petitioner argues that there are no unrecorded sales. The delivery and drawing of the LC were erroneous being based on the misunderstanding of the parties. The sales were not recorded because they were eventually cancelled. Milwaukee returned the goods and petitioner paid the equivalent amount of the LCs drawn. And since the sales were not recorded, petitioner also did not record the goods returned by Milwaukee Industries Corporation. Hence, it alleges that the unrecorded sales were already offset against the unrecorded sales returns. Petitioner presented the letter dated October 8, 1997 of Milwaukee Industries Corporation 9 to support its contention that the parties agreed to cancel the sales. For better appreciation, the said letter is hereby fully reproduced: October 8, 1997 LITTLEGIANT STEEL PIPE CORPORATION F.P. Felix Avenue, Cainta, Rizal Attention: Mr. Nazarito Fua Plant Manager Re: Hot Rolled Steel Coils Gentlemen: We write to confirm our agreement on the matter. To prevent litigation and by way of compromise, we agreed on the following: HaECDI (1) Milwaukee will be returning the hot rolled steel coils. Littlegiant delivered under Delivery Receipts Nos. 16872, 17915, 17918, 17952, 17857, 179556, 179652, and 179673 on September 8 to 26, 1997. Milwaukee shall be able for returning the cost of returning the same. Milwaukee confirms receipt through Rizal Commercial Banking Corporation (RCBC) check nos. 651119, 651142, 651143 and 651179 totalling 193,032,000.00 (in pesos) of drawing erroneously made by Littlegiant on RCBC Letters of Credit BFX109LC9700D4233, BFX103LC9700D4236, FBX109LC9700D4238, and BFX109LC9700D4241; (2) Milwaukee and Littlegiant shall release, remiss and forever discharge each other, their officers, employees, agents and successors-in-interest from any action, sum of money or other obligations arising from or in connection with the above-referenced matter. If the foregoing reflects our agreement, kindly signify your signature by signing the space provided below. Very truly yours, (signed) Philip Go Milwaukee Industries Corporation Conforme: (signed) Nazarito Fua Littlegiant Steel Pipe Corporation Likewise, to prove that petitioner returned the proceeds of the LCs in the sum of P193,032,000.00, four checks in favor of Milwaukee Industries Corporation were offered as evidence to the Court, to wit: PAYMENT LETTER OF CREDIT Date Check No. Exh. Amount Date LC No. Exh. Amount 09/26/97 651119 A, A-1 P52,020,000.00 09/26/97 BFX109LC970OD4233 F P52,020,000.00 09/30/97 651142 B, B-1 54,000,000.00 09/30/97 BFX103LC970OD4236 G 54,000,000.00 10/02/97 651143 C, C-1 47,007,000.00 10/02/97 BFX109LC970OD4238 H 47,007,000.00 10/06/97 651179 D, D-1 40,005,000.00 10/06/97 BFX109LC970OD4241 I 40,005,000.00 P193,032,000.00 P193.032,000.00 ============== Moreover, the deliveries of the returned hot rolled steel coils to petitioner by Milwaukee were supported by the following documents: Covered by Weight Date Exh. DR No. in MT Amount 10-13-97 Z 179652 2,222.50 P20,002,500.00 10-16-97 AA 179673 2,222.50 20,002,500.00 10-20-97 BB 16872 2,890.00 26,010,000.00 10-23-97 CC 17857 2,890.00 26,010,000.00 10-27-97 DD 17952 2,611.50 23,503,500.00 10-29-97 EE 179556 2,611.50 23,503,500.00 11-02-97 FF 17918 3,100.00 27,900,000.00 11-05-97 GG 17915 2,900.00 26,100,000.00 Total 21,448.00 P193,032,000.00 ======= ============ We find the above documentary evidence of petitioner sufficient to support its explanation that indeed its sales to Milwaukee Industries Corporation of hot rolled steel coils were cancelled. EAIcCS We are also convinced that the unrecorded sales were cured by the unrecorded sales returns emanating from the cancelled sales. In fact, the examiners additionally noted that the proceeds of sales were not recorded by petitioner. This means that while petitioner drew the LCs, it did not record the amount encashed, denoting petitioner's intention not to reflect the whole cancelled sale transaction. Hence, there is no reason for the petitioner to be assessed for undeclared sales because the said sales were cancelled. The above finding notwithstanding, this Court believes that petitioner should be liable for penalty in violation of Section 6 of Revenue Regulations No. V-1, as amended, otherwise known as the "Bookkeeping Regulations" which provides: Section 6. Transactions to be recorded in the simplified set of bookkeeping records . The amount of sales of goods , wares, or merchandise or the value of services rendered for the day, whether cash or on credit shall be entered in the record of daily sales and cash receipts not later than five o'clock in the afternoon of the day following the date of the transaction . . . . Petitioner admitted that it did not record the sale of hot rolled steel. coils to Milwaukee Industries Corporation in the amount of P193,032,000.00 and the subsequent cancellation thereof. Now, for such violation petitioner should be liable for a fine of three hundred pesos (P300.00) pursuant to "Chapter VI General penal provisions" of the Bookkeeping Regulations, to wit: Chapter VI. General penal provisions A person who violated any provision of this Code or any regulation of the Department (now Ministry) of Finance made in conformity with the same, for which delinquency no specific penalty is provided by laws shall be punished by a fine of not more than three hundred pesos or by imprisonment for not more than six months, or both. (Sec. 352, Commonwealth Act No. 466). 1.2. Foreign Exchange Losses In the Final Decision on Disputed Assessment, the Assistant Commissioner for Enforcement Service, Percival T. Salazar, maintains that petitioner's foreign exchange losses in the amount of P12,444,701.84 for the year 1997 should be disallowed as a deduction from gross income. The reason being: The liabilities under Trust Receipt Payable were restate by debiting Miscellaneous Expense-Exchange Rate Differential and crediting Trust Receipt Payable. This is a mere provision because loss is recognized only upon remittance or payment. Petitioner expounds that the foreign exchange losses arose from nineteen (19) US dollar-denominated Letters of Credit under Trust Receipts (LC/TRs) which were actually sustained by the petitioner during the year 1997. 10 The foreign exchange losses are detailed in the table below: EAIaHD Arising from the 16 dollar-denominated LC/TRs: Payment in 1997 P5,166,802.76 Arising from the 3 dollar-denominated LC/TRs: Payment in 1997 P1,305,828.00 Payment in 1998 after conversion of 2 dollar-denominated LC/TRs to peso-denominated LC/TRs in 1997 5,972,071.00 7,277,899.00 Unlocated difference (0.08) Total Foreign Exchange Losses P12,444,701.84 ============ Petitioner elaborates the above foreign exchange losses in two categories: 1.2.a. Losses from 16 dollar-denominated LC/TRs During the years 1996 and 1997, petitioner on various occasions opened sixteen (16) US dollar-denominated LC/TRs with RCBC, to wit: Entry For Amount Conversion Rate Date Exh. LC/TR No. in US$ at Opening Peso Value 1/24/96 LL 95-4196 1,016,052.55 26.200 26,620,576.81 5/13/96 MM 96-5321 124,349.13 26.190 3,256,703.71 8/29/96 NN 96-5917 114,270.06 26.220 2,996,160.98 12/10/96 OO 96-6516 112,395.38 26.305 2,956,560.47 11/6/96 PP 96-6517 122,516.82 26.270 3,218,516.86 2/3/97 QQ 97-0056 115,310.17 26.360 3,039,576.08 3/21/97 RR 97-0082 183,313.45 26.350 4,830,309.41 3/24/97 SS 97-0365 154,000.00 26.350 4,057,900.00 4/29/97 TT 97-0433 98,345.88 26.390 2,595,347.78 3/25/96 UU 96-4706 201,373.40 26.260 5,288,065.48 9/30/97 W 97-1415 105,000.00 34.420 3,614,100.00 10/15/97 WW 97-1414 105,560.00 34.250 3,615,430.00 7/22/97 XX 97-0968 14,500.00 28.450 412,525.00 7/31/97 YY 97-1252 150,339.86 29.400 4,419,991.88 10/1/97 ZZ 97-1620 156,734.33 34.900 5,470,028.12 3/14/96 AAA 96-4924 120,457.35 26.250 3,162,005.43 Total 2,894,518.30 79,553,798.01 In 1997, petitioner either partially or fully paid the above listed LC/TRs. Due to exchange rate differential of US dollar to Philippine peso from the opening of the LC/TRs to the actual payment thereof, petitioner allegedly incurred foreign exchange losses in the aggregate amount of P5,166,802.76. There is no disagreement between the parties that foreign exchange losses are deductible from gross income. The main reason of respondent for the disallowance is because the account is a mere provision and that the expense was not yet paid or remitted. Hence, the Court is tasked to look upon the deductibility of the expense. The laws applicable are Section 37 and Section 39 of the National Internal Revenue Code of 1993 which provide: SEC. 37. General Rule . The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year as the case may be) in accordance with the method of accounting regularly employed in keeping the books of the taxpayer ; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computations shall be made in accordance with such method as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income. . . . SEC. 39. Period for which deductions and credits taken . The deductions provided for in this Title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred" dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period. . . . ( Both underlining supplied ) Based on the Court's evaluation of the records of the case, petitioner adopts the accrual method of accounting with the calendar year as its accounting period. "Accrual Basis" is defined in Black's Law Dictionary as: [M]ethod of accounting that reflects expenses incurred and income earned for any one tax year. In contrast to the cash basis of accounting, expenses do not have to be paid to be deductible nor does income have to be received to be taxable. (Underlining supplied). EScAID Under the accrual method of accounting, losses are recognized as they are incurred and not when they are paid. Hence, foreign exchange losses incurred during the year must be deducted from gross income in the same year in order to reflect proper income. Of course, when an expense is paid during the year, the expense is also deductible during the year. Records show that in the year 1997, petitioner either partially or fully settled the above listed sixteen (16) LC/TRs as evidenced by either an RCBC Debit Advice or company voucher. Below, is a summary of documents purporting payments for the respective LC/TRs as admitted by the Court: RCBC Littlegiant For LC/ Amount US$-Peso Date Debit Advice Voucher TR No. in US$ Rate Peso Value 01-07-97 QQQ 95-4196 16,000.00 26.305 420,880.00 04-08-97 RRR 96-5321 124,349.13 26.375 3,279,708.30 04-08-97 SSS 96-5917 14,270.06 26.375 376,372.83 04-14-97 TTT 96-5917 100,000.00 26.375 2,637,500.00 11-03-97 UUU 96-6516 112,395.38 35.400 3,978,796.45 07-28-97 VVV 96-6517 70,000.00 28.900 2,023,000.00 07-22-97 WWW 96-6517 52,156.82 28.600 1,501,981.05 11-25-97 XXX 97-0056 60,000.00 34.300 2,064,688.50 10-30-97 YYY 97-0056 310.17 35.000 42,136.50 11-12-97 ZZZ 97-0056 55,000.00 34.250 1,895,566.25 10-22-97 AAAA 97-0082 313.45 34.800 10,908.06 12-15-97 BBBB 97-0082 50,000.00 39.800 1,990,000.00 12-09-97 CCCC 97-0082 50,000.00 35.100 1,755,000.00 12-08-97 DDDD 97-0082 20,000.00 35.250 705,000.00 12-01-97 EEEE 97-0082 30,000.00 35.200 1,056,000.00 11-26-97 FFFF 97-0082 33,000.00 34.670 1,144,110.00 05-02-97 GGGG 97-0365 154,000.00 26.380 4,062,520.00 11-03-97 HHHH 97-0433 28,345.88 35.400 1,00,444.15 11-10-97 IIII 97-0433 70,000.00 34.850 2,439,500.00 03-05-97 JJJJ 96-4706 201,373.40 26.350 5,306,189.09 10-06-97 KKKK 97-1415 18,000.00 35.275 634,950.00 10-20-97 LLLL 97-1414 100,000.00 34.050 1,940,850.00 10-22-97 MMMM 97-1414 43,000.00 34.800 1,496,400.00 09-01-97 NNNN 97-0968 14,500.00 30.500 442,250.00 08-07-97 OOOO 97-1252 60,339.86 28.650 1,728,736.99 07-31-97 PPPP 97-1252 90,000.00 29,400 2,646,000.00 10-20-97 QQQQ 97-1620 100,000.00 34.050 3,405,000.00 02-05-97 RRRR 96-4924 90,457.35 26.345 2,383,098.89 03-11-97 SSSS 96-4924 30,000.00 26.350 790,500.00 Verification of the above documents leads Us to conclude that foreign exchange loss was incurred by petitioner in the year 1997 in the amount of P4,841,888.58 due to foreign exchange rate differential of the sixteen LC/TRs from their opening up to the actual settlement thereof, computed as follows: RCBC Original Payment Exchange Foreign Payment Debit Petitioner LC/TR Amount Exchange Exchange Rate Exchange Date Advice Voucher No. Settled Rate Rate Differential Loss/(Gain) 01/07/97 QQQ 95-4196 $ 16,000.00 26.200 26.305 0.105 P1,680.00 03/05/97 JJJJ 96-4706 201,373.40 26.260 26.350 0.090 18,123.61 02/05/97 RRRR 96-4924 90,457.35 26.250 26.345 0.095 8,593.45 03/11/97 SSSS 96-4924 30.000.00 26.250 26.350 0.100 3,000.00 04/08/97 RRR 96-5321 124,349.13 26.190 26.375 0.185 23,004.59 04/08/97 SSS 96-5917 14,270.06 26.220 26.375 0.155 2,211.86 04/14/97 TTT 96-5917 100,000.00 26.220 20.375 0.155 15,500.00 11/03/97 UUU 96-6516 112,395.38 26.305 35,400 9.095 1,022,235.98 07/22/97 WWW 96-6517 52,516.82 26.270 28.600 2.330 122,364.19 07/28/97 VVV 96-6517 70,000.00 26.270 28.900 2.630 184,100.00 10/30/97 YYY 97-0056 310.17 26.360 35.000 8.640 2,679.87 11/12/97 ZZZ 97-0056 55,000.00 26.360 34.250 7.890 433,950.00 11/25/97 XXX 97-0056 60,000.00 26.360 34.300 7.940 476,400.00 10/22/97 AAAA 97-0082 313.45 26.350 34.800 8.450 2,648.65 12/01/97 EEEE 97-0082 30,000.00 26.350 35.200 8.850 265,500.00 12/08/97 DDDD 97-0082 20,000.00 26.350 35.250 8.900 178,000.00 12!09/97 CCCC 97-0082 50,000.00 26.350 35.100 8.750 437,500.00 12/15/97 BBBB 97-0082 50,000.00 26.350 39.800 13.450 672,500.00 11/26/97 FFFF 97-0082 33,000.00 26.350 34.670 8.320 274,560.00 05/02/97 GGGG 97-0365 154,000.00 26.350 26.380 0.030 4,620.00 11/03/97 HHHH 97-0433 28,345.88 20.390 35.400 9.010 255,396.38 11/10/97 IIII 97-0433 70,000.00 26.390 34.850 8.460 592,200.00 09/01/97 NNNN 97-0968 14,500.00 28.450 30.500 2.050 29,725.00 07/31/97 PPPP 97-1252 90,000.00 29.400 29.400 - - 08/07/97 OOOO 97-1252 60,339.86 29.400 28.650 (0.750) (45,254.90) 10/20/97 LLLL 97-1414 57,000.00 34.250 34.050 (0.200) (11,400.00) 10/22/97 MMMM 97-1414 43,000.00 34.250 34.800 0.550 23,650.00 10/06/97 KKKK 97-1415 18,000.00 34.420 35.275 0.855 15,390.00 10/20/97 QQQQ 97-1620 100,000.00 34.900 34.050 (0.850) (85,000.00) Adjustments: Foreign exchange gains unsupported 11 but were verified by independent CPA in his report (81,990.10) Total P4,841,888.58 1.2.b. Losses tom 3 dollar-denominated LC/TRs Likewise, in 1996 and 1997 another three LC/TRs were opened by petitioner with RCBC on the following dates: aTEHIC Entry For Amount Conversion Rate Date Exh. LC/TR No. in US$ at Opening Peso Value 09-19-96 II 96-7005 1,353,541.75 26.260 35,544,006.36 07-15-97 JJ 97-1080 146,953.35 32.000 4,702,507.20 05-22-97 KK 97-0563 121,565.82 26.385 3,207,514.16 Total 1,622,060.92 43,454,027.72 =========== =========== Petitioner also paid the above listed LC/TRs partially in 1997 as follows: RCBC Payment Debit Littlegiant For LC/ Amount US$-Peso Date Advice Voucher TR No. in US$ Rate Peso Value 5/8/97 BBB 96-7005 53,541.75 26.385 1,412,699.07 5/19/97 CCC 96-7005 200,000.00 26.380 5,276,000.00 5/28/97 DDD 96-7005 100,000.00 26.380 2,638,000.00 6/5/97 EEE 96-7005 75,000.00 26.380 1,978,500.00 6/13/97 FFF 96-7005 75,000.00 26.385 1,978,875.00 6/16/97 GGG 96-7005 75,000.00 26.390 1,979,250.00 6/23/97 HHH 96-7005 40,000.00 26.390 1,055,600.00 6/25/97 III 96-7005 115,000.00 26.385 3,034,275.00 6/30/97 JJJ 96-7005 100,000.00 26.390 2,639,000.00 9/1/97 KKK 96-7005 7,000.00 30.500 213,500.00 10/20/97 LLL 96-7005 13,000.00 34.050 442,650.00 10/28/97 MMM 96-7005 70,000.00 35.450 2,481,500.00 10/22/97 OOO 97-1080 5,953.35 34.800 207,176.58 10/22/97 PPP 97-0563 1,565.82 34.800 54,490.54 931,060.92 25,391,516.19 ========= ============ From the above payment, the foreign exchange loss of petitioner is computed to be at P907,488.47, to wit: RCBC Original Payment Exchange Foreign Payment Debit Petitioner LC/TR Amount Exchange Exchange Rate Exchange Date Advice Voucher No. Settled Rate Rate Differential Loss/(Gain) 05/08/97 BBB 96.7005 53,541.75 26.260 26.385 0.125 6,692.72 05/19/97 CCC 96-7005 200,000.00 26.260 26.380 0.120 24,000.00 05/28/97 DDD 96-7005 100,000.00 26 260 26.380 0.120 12,000.00 06/15/97 EEE 96-7005 75.000.00 26.260 26.380 0.120 9,000.00 06/13/97 FFF 96-7005 75,000.00 26.260 26.395 0.125 9,375.00 06/16/97 GGG 96.7005 75,000.00 26.260 26.390 0.130 9,750.00 06/23/97 HHH 96-7005 40,000.00 26.260 26.390 0.130 5,200.00 06/25/97 III 96-7005 115,000.00 26.260 26.385 0.125 14,375.00 06/30/97 JJJ 96-7005 100,000.00 26.260 26.390 0.130 13,000.00 09/01/97 KKK 96-7005 7,000.00 26.260 30.500 4.240 29,680.00 10/20/97 LLL 96-7005 13,000.00 26.260 34.050 7.790 101,270.00 10/28/97 MMM 96-7005 70,000.00 26.260 35.450 9.190 643,310.00 10/22/97 OOO 97-1080 5.953.35 32.000 34.800 2.800 16,669.38 10/22/97 PPP 97-0563 1,565.82 26.385 34.800 8.415 13,176.38 Total P931,060.92 P907,488.48 ========== ========== On December 29, 1997, the outstanding balance for the two dollar-denominated LC/TR Nos. 96-7005 and 97-0563 in the amounts of US$430,000.00 and US$120,000.00, respectively, was converted into peso-denominated obligation at the exchange rate of P37.90 to US$1.00. 12 The peso equivalent of the said two LC/TRs is P20,845,000.00 (US$550,000.00 x P37.900/US$). The foreign exchange loss in the amount of P6,387,000.00 is thereby computed as follows: Outstanding Original Exchange Foreign LC/TR Balance Exchange Exchange Rate Exchange No. in US$ Rate Rate Differential Loss/(Gain) 96-7005 430,000.00 26.260 37.900 11.640 5,005,200.00 97-0563 120,000.00 26.385 37.900 11.515 1,381,800.00 Total 550,000.00 P6,387,000.00 ========= =========== On the same day, petitioner paid the converted peso-denominated obligation in the sum of P1,297,000.00 for LC/TR No. 96-7005 leaving a peso balance of P15,000,000.00 for the said LC/TR 13 . Thus, the total foreign exchange loss incurred by petitioner during the year 1997 for the above listed three (3) LC/TRs is P1,305,828.36 (P907,188.47 + P398,339.89 [(P34,221.64 x 26.260) less (P34,221.64 x 37.900)]). EcTIDA Hence, pursuant to Section 29(d) of the National Internal Revenue Code of 1993, the amounts of P4,841,888.58 and P1,305,828.36 or a total of P6,147,716.94 which were paid in 1997 as foreign exchange losses from the nineteen (19) LC/TRs are deductible from petitioner's gross income. The controversy now lies with the remaining balance of P6,296,984.90 (P12,444,701.84 less P6,147,716.94) which was allegedly sustained by petitioner during the year 1997 under accrual method. After a careful scrutiny of the documents relative to the claimed deduction, the Court is not convinced that the amount of P6,296,984.90 was sustained during the year 1997. The testimony of petitioner's witness is wanting of corroborative documents. The Certification issued by RCBC as to conversion of US$ to Peso denominated obligation in December 1997 is lacking of details. In addition, as noted by the commissioned independent CPA, the above amount was not supported by Peso Trust Receipts Statements. 14 1.3. Disallowed Import Purchases Respondent disallowed the import purchases in the amount of P1,295,759.00 on the ground stated in the Final Decision on Disputed Assessment as follows: The taxpayer availed of the Voluntary Assessment Program (VAP) by paying value-added tax (VAT) of PhP61,900.00 for sales of PhP619,000.00 and income tax of PhP216,650.00 (35% of PhP619,000.00). In the same series of entries, imported purchases of PhP1,295,759.00 were debited with corresponding credit to cash for the same amount. Obviously, to allow this additional cost adjustment of PhP1,295,759.00 in 1997 against the cost of PhP619,000.00 which was subject of VAT and income tax paid through Voluntary Assessment Program (VAP) would negate the effect of VAP. In fact, the taxpayer would even gain in terms of reduction of the income tax liability in 1997 as a result of said cost adjustment. Petitioner explicates that the amount of P1,295,759.00 represents payment for advance customs duties for importations in 1997 which are duly supported by RCBC's bank debit advices and validated Import Entry Declarations. It is a year-end adjustment to correct the amount of customs duties chargeable to imported goods for sale (which forms part of the cost of inventory and the cost of sales) and for imported machineries and supplies (which forms part of the operating expenses). The expense is allowable deduction from gross income pursuant to Section 29(1)(a) of the National Internal Revenue Code of 1993. We find for the petitioner. The settlement of the present issue lies on the determination of the effect of year-end adjustment to petitioner's availment of VAP. We see no plausible reason why respondent should disallow a year-end adjustment just because petitioner availed of the VAP. While it is true that the customs duties will increase the amount of cost of goods sold and consequently decrease the sales of petitioner of the same amount, however, such adjustment is necessary to correct petitioner's financial record and to reflect proper income. As correctly premised by petitioner, the customs duties are ordinary and necessary business expense deductible from its gross income pursuant to Section 29(1)(a) of the National Internal Revenue Code of 1993. To quote: Sec. 29. Deductions from gross income . In computing for taxable income subject to tax under Sections 21(a); 24(a), (b) and (c); and 25(a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section . . . (a) Expenses . (1) Business expenses . (A) In general . All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in pursuit of a trade, profession or business, rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. DcHaET In fact, respondent did not question the deductibility of the expense but merely concerned himself of the effect of VAP due to the recognition of the expense. We find no direct relation between petitioner's availment of VAP and the recording of customs duties as addition to cost of goods sold. We further observe that the VAP availed by petitioner was for the year 1996 while cost adjustment pertains to 1997 15 . Inasmuch as respondent failed to show what effect of 1996 VAP was negated in the year 1997, this Court holds that 1997 year-end adjustment for customs duties which were duly substantiated by receipts 16 is a proper deduction from gross income. However, the total customs duties that was duly supported by document based on the report of the commissioned independent CPA 17 , amounted only to P1,283,106.00. Therefore, the difference of P12,653.00 (P1,295,759.00 less P1,283,106.00) cannot be allowed as a deduction from gross income for being unsubstantiated. 1.4. Untaxed Gross Profit on Unrecorded Imported Purchases Respondent concludes that petitioner has untaxed gross profit due to undeclared importation in the amount of P11,264,518.73. This comes from the data gathered from the Third Party Information Unit of the Bureau of Internal Revenue which originated from Sociedad Generales de Surveillance (SGS). The documents from SGS disclosed that during the year 1997, petitioner had a total importation of US$3,833,016.57. However, the worth of goods per importation documents presented by petitioner to the respondent amounted only to US$1,902,271.44 leaving an understatement of imported purchases in the sum of US$1,930,745.13. Consequently, the alleged understatement resulted in untaxed gross profit in the amount of P11,264,518.73 derived at as follows: Importation per SGS records US$ 3,833,016.57 Less: Importation per LGSPC records 1,902,271.44 Variance US$ 1,930,745.13 Multiply by conversion rate PhP/US$ 30.63 Peso Equivalent PhP59,138,723.33 Divide by rate of Cost of Sales to Net sales 84% Understatement of imported purchases PhP70,403,242.05 Multiply by gross profit rate 16% Untaxed Gross Profit on Understatement Of Imported Purchases PhP11,264,518.73 Not surprised with the discrepancy noted by the respondent, petitioner clarifies that the amount of importation per SGS records and that of its books of accounts will indeed not reconcile. The data of SGS cover all importation; made by petitioner during the year 1997 whether the goods imported are for sale to its customer or to be used for its business operations. The account "Purchases-Imported" appearing in petitioner's books which was (the only account) examined by respondent is limited to importation of goods for sale to customer. Respondent failed to consider other imported goods purchased by petitioner for its operations which were recorded under the account titles "Machineries", "Supplies", "Prepaid Charges" and other appropriate accounts. 18 We find the explanation of petitioner well taken. TSEAaD In the report of Our commissioned independent CPA 19 the difference between the figures appearing in the importation documents of SGS and that of petitioner's records were reconciled and accounted for. We find the audit procedures adopted by accounting firm, CGM Co., complete and sufficient to come-up with the conclusion that there was no unrecorded imported purchases which should be taxed based on gross profit ratio. The examination, as evaluated by the Court, is carried out meticulously and the findings noted were all supported by documents. We have verified the report against the documents on record and We find the same in order. Hence, there is no basis for imposition of additional income. 1.5. Unsupported Export Sales . The unsupported export sales in the amount of P1,727,504.38 was not among the discrepancies noted for 1997 deficiency income tax but part of the assessment for 1997 deficiency value-added tax of petitioner. Hence, We will tackle the same when We discuss the validity of the assessment for 1997 deficiency value-added tax. Prescinding from the above findings, petitioner is still liable for 1997 deficiency income tax in the amount of P3,140,804.83, computed as follows: Taxable Net Income per Return P1,397,215.20 Add/(Less) Adjustments Disallowed exchange rate differential P6,296,984.90 Disallowed import purchases 12,653.00 6,309,547.90 Taxable Net Income per Audit P7,706,.853.10 =========== Income Tax Due P2,697,398.59 Less: Tax Withheld/Paid per Return 166,716.02 Deficiency Income Tax P2,530,682.57 Add: Interest 610,122.26 TOTAL AMOUNT PAYABLE P3,140.804.83 =========== The compromise penalty of P25,000.00 will not be imposed as compromise implies mutual agreement which is absent in the case under consideration ( H. Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6915, April 11, 2005 ). The imposition of the same without the conformity of the taxpayer is illegal and unauthorized ( Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., G.R. No. 35266, January 21, 1991 ). 2. DEFICIENCY VALUE-ADDED TAX P45,822,333.45 Respondent believes that petitioner is liable for 1997 deficiency value-added tax in the amount of P45,822,333.45. The deficiency was arrived at after respondent held petitioner liable for 10% value-added tax on five (5) items of discrepancies. The assessment 20 is reproduced hereunder for better appreciation, to wit: Taxable Receipts per Return P311,385,470.32 Add/(Less) Adjustments: Unrecorded sales to Milwaukee P193,032,000.00 Disallowed discounts granted after Sales 1,245,823.76 Unsupported export sales 1,727,504.38 Unaccounted vatable sales 35,551,883.56 Undeclared sales traceable to Unrecorded import purchases 70,403,242.05 301,960,453.75 Taxable Receipts per Audit P613,345,924.07 ============= Output Tax Due P61,334,592.41 Less: Creditable Input VAT 13,535,958.31 VAT Due P47,798,634.10 Less: Tax Withheld/Paid Per Return 17,602,588.74 Deficiency Value-Added Tax P30,196,045.36 Add: Interest P15,601,288.09 Compromise 25,000.00 15,626,288.09 TOTAL AMOUNT PAYABLE P45,822,333.45 =========== 2.1. Unrecorded Sales to Milwaukee Earlier, We have discussed that the unrecorded sales of petitioner to Milwaukee Industries Corporation in the amount of P193,032,000.00 were cancelled. Accordingly, there is no taxable transaction. However, We find it appropriate to hold petitioner liable for deficiency interest for the unrecorded sales from the time petitioner should have paid the VAT on such sales up to the dates of their cancellation (the return of the goods). cAHIaE We have noted that the unrecorded sales were made by petitioner from September 8 to 26, 1997 21 but the goods were returned by Milwaukee Industries Corporation on different dates in October and November 1997 22 . Hence, petitioner should pay deficiency interest computed from the time the output VAT on unrecorded sales in September 1997 should have been paid up to the return of goods in October and November 1997. For the unrecorded sales of petitioner in September 1997, the output VAT is due on October 20, 1997 pursuant to Section 110(a) of the National Internal Revenue Code of 1993. Consequently, the deficiency interest is computed from October 21, 1997 to the respective dates of sales returns in October and November 1997, to wit: Should be 20% Payment Date Unrecorded Output VAT Deficiency Date Returned Sales Due Interest 10-20-97 10-13-97 P20,002,500.00 P2,000,250.00 - 10-20-97 10-16-97 20,002,500.00 2,000,250.00 - 10-20-97 10-20-97 26,010,000.00 2,601,000.00 - 10-20-97 10-23-97 26,010,000.00 2,601,000.00 P4,275.62 10-20-97 10-27-97 23,503,500.00 2,350,350.00 9,015.04 10-20-97 10-29-97 23,503,500.00 2,350,350.00 11,590.77 10-20-97 11-02-97 27,900,000.00 2,790,000.00 19,873.97 10-20-97 11-05-97 26,100,000.00 2,610,000.00 22,882.19 Total P193,032,000.00 P19,303,200.00 P67,637.59 ============ =========== ========= Therefore, petitioner is liable to pay deficiency interest in the amount P67,637.59 due to unrecorded sales. 2.2. Disallowed Discounts Granted After Sales There is no dispute that discounts granted after sales is not allowed as deduction from gross sales for purposes of computing output VAT liability pursuant to Section 100(d)(2) of the National Internal Revenue Code of 1993 which provides: Sec. 100. Value-added tax on sale of goods or properties . (a) Rate and base of tax . . . . xxx xxx xxx (d) Determination of the tax . (1) The tax shall be computed by multiplying the total amount indication in the invoices by 1/11. (2) Sales returns, allowances and sales discounts. The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given. (Underlining supplied). Petitioner, however, maintains that it has no discounts granted after sales. The amount disallowed by the respondent of P1,245,823.76 23 actually represents sales transactions wherein sales invoices were issued to customers but no deliveries were made due to non-availability of goods or the goods to be delivered were found defective. 24 After a painstaking verification of the documents supporting the petitioner's cancelled sales 25 the Court is convinced that the amount of P1,255,823.76 actually pertains to cancelled sales and not to discounts granted after sales. However, as reported by the commissioned independent CPA, the amount of P223,291.50 26 was not properly substantiated, broken down as follows: Cancelled sales recorded twice in the Sales Book Local Sales P208,416.76 Cancelled sales partial with no supporting Credit Memorandum 14,874.74 Total P223,291.50 Thus, pursuant to the above-quoted Section 100(d)(2) of the National Internal Revenue Code of 1993 only the amount of P1,032,532.26 (P1,255,823.76 less P223,291.50) is deductible from gross sales. The amount of P223,291.50 is subject to 10% value-added tax. 2.3. Unsupported Export Sales Petitioner declared in its quarterly VAT returns 27 export sales in the aggregate amount of P1,727,504.38. However, respondent subjects the said export sales to 10% VAT for alleged failure of petitioner to substantiate the same. Hence, We have to determine whether the sales of petitioner in the amount of P1,727,504.38 is subject to VAT at 0%. We rule against petitioner. CTDHSE After a careful perusal of the documents presented by petitioner to prove that the amount of P1,727,504.38 represents export sales, 28 We have noted that the commercial invoices of petitioner failed to comply with invoicing requirements under Section 4.108-1 of Revenue Regulations No. 7-95 in relation to Sections 108 and 238 of the National Internal Revenue Code of 1993. Section 4.108-1. Invoicing Requirements . All VAT-registered persons shall, for every sale or lease of goods or properties or service, issue duly registered receipts or sales or commercial invoices which must show: 1. the name, TIN, and address of seller; 2. date of transaction; 3. quantity, unit cost and description of merchandise or nature of service; 4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client; 5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and 6. the invoice value or consideration. xxx xxx xxx SEC. 108. Invoicing and accounting requirements for VAT-registered persons . (a) Invoicing Requirements . A VAT-registered person, shall for every sale, issue an invoice or receipt. In addition to the information required under Section 238, the following information shall be indicated in the invoice or receipt: (1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. xxx xxx xxx SEC. 238. Issuance of receipts or sales or commercial invoices . All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at P25.00 or more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided , That in the case of sales, receipts or transfers in the amount of P100.00 or more, or regardless of amount, where the sale or transfer is made by a person liable to value-added tax to another person also liable to value-added tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client. . . ." The commercial invoices issued by petitioner to support its export sales failed to meet the above standard. Petitioner failed to indicate that it is a VAT-registered person, followed by his taxpayer's identification number. The word "zero-rated" is also not imprinted in the invoices. In addition, there was no indication that the commercial invoices were authorized to be printed by the Bureau of Internal Revenue as required in Section 239 of the National Internal Revenue Code of 1993 which provides: EDISTc SEC. 239. Printing of receipts or sales or commercial invoices . All persons who print receipts or sales or commercial invoices shall, for every job order, secure from the Bureau of Internal Revenue an authority to print said receipts or invoices before printing the same. No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show, among other things, the name, business style, taxpayer account number and business address of the person or entity to use the same. xxx xxx xxx Corollarily, for failure of petitioner to comply with the requisites under the law, the export sales in the amount of P1,727,504.38 cannot be qualified as zero-rated for VAT purposes. Moreover, the commissioned independent CPA noted the said export sales have either no export declaration/permits or supported by photocopied export declaration/permits. 29 Hence, respondent's assessment for 10% value-added tax is sustained. 2.4. Unaccounted Vatable Sales This discrepancy refers to the alleged unaccounted difference between the amount of sales recorded in sales book and the declared vatable sales in the quarterly VAT returns of petitioner, to wit: Sales per Sales Book-Local P346,907,354.06 Less: Sales subject to VAT per Quarterly VAT Return P311,385,470.32 Discrepancy P35,521.883.74 ============ The amount was disallowed by respondent for failure of petitioner to properly account (as the title suggests) for the vatable sales appearing in its local sales book. Petitioner explains that it is its practice to record sales in the sales book inclusive of VAT. 30 However, in the Quarterly VAT returns, the declared sales are net of output VAT. Obviously, the total sales per book (which is inclusive of output VAT) and the total sales reported in the VAT returns (which is net of output VAT) will not tally. After a thorough examination of the records supporting petitioner's stand, We are swayed that petitioner has no unaccounted vatable sales. Worthy to note at this juncture is the report of the commissioned independent CPA with respect to the alleged disparity. 31 Pertinent portions of the said report state that: Based on the procedures we performed, we present below our findings and observation: 1. The amount of the Company's total local sales for the taxable year 1997, as recorded in the Sales Book-Local Sales provided to us by the Company, that we ascertained to be properly substantiated by supporting documents as outlined under the procedures performed is P346,907,354.06 . 2. The Company's total sales net of cancelled sales and VAT for the taxable year 1997 amounting to P313,123,093.28 , which consists of both local and export sales amounting to P311,385,470.28 and P1,737,62 3, respectively, as derived from its Sales Book Local and Export Sales, is equal to the amount presented in the Company's 1997 audited FS. The details are shown in the following table: Table I Per Sales Per Audited Per VAT Accounts Annex Book-Local FS Returns Difference Local Sales: Gross Sales A & B P346,907,354.06 P312,641,294.08 P34,266,059.98 Cancelled Sales A & B 4,383,336.75 1,255,823.76 3,127,512.99 Net Sales-gross of VAT A & B 342,524,017.31 311,385,470.32 31,138,546.99 Output VAT A & B 31,138,547.03 - (31,138,547.03) Net Sales-net of VAT A & B 311,385,470.28 311,385,470.32 (0.04) Export Sales A & B 1,737,623.00 1,727,504.38 10,118.62 Total Sales A 313,123,093.28 313,123,093.31 (0.03) B 313,112,974.70 10,118.58 We noted that it is the Company's practice to record local sales in the Sales Book-Local Sales at the invoice amount, which includes the 10% output VAT. Cancelled sales are recorded as a separate entry under cancelled sales rather than a mere cancellation of the original sales entry. At the end of each month, entries are made to record sales (net of output VAT) and the output VAT. It is in the General Ledger (GL) recording that the invoice amount is segregated into sales and output VAT. The amount of sales that is recorded in the GL is the total sales (per Sales Book) during the month less cancelled sales and output VAT. As illustrated in Table 1 above, the amount declared in the Quarterly VAT returns filed for the taxable year 1997 as gross taxable sales amounting to P311,385,470.32 actually represents the Company's total local sales net of cancelled sales and VAT as derived from the Sales Book Local Sales and that the difference of P31,138,546.99 represents the total output VAT on local sales. SHAcID Moreover, the unaccounted variance per Sales Book Local Sales and per VAT returns amounting to P35,551,883.56 computed by the BIR and included in the assessment is accounted for as follows: Table 2 Annex Description Amount Total Unaccounted variance per Sales Book and per VAT Returns as Assessed by the BIR 35,551,883.56 Accounted for as follows: A & B Cancelled Sales per Sales-Book-Local Sales 4,383,336.75 A Output VAT per Sales Book-Local Sales 31,138,547.03 Difference on Gross Sales between: Per BIR's Computation 346,937,354.06 B Per Sales Book-Local 346,907,354.06 30,000.00 35,551,883.78 Remaining Unaccounted Variance 0.22 The summaries showing the total sales net cancelled sales, at both gross and net of VAT, for taxable year 1997 derived from Sales Book-Local Sales versus the total sales per Company's 1997 audited FS and amounts per Quarterly VAT returns and supporting attachments are presented in Annexes A and B of this Report, respectively. Photocopies of supporting Sis on gross sales are submitted to this Court as Exhibits CCCCCC-1 to CCCCCC-4374 and DDDDDD-1 to DDDDDD-143a and are faithful reproductions of the originals. The above report is explicit and is hereby adopted. We have verified the supporting documents cited therein and We find the same in order. Therefore, the unaccounted vatable sales should be disregarded as explained in the report cited. 2.5. Undeclared Sales Traceable to Unrecorded import purchases Lastly, respondent opines that petitioner has undeclared sales arising from undeclared importation. This particular item stems from the unmatched importation per petitioner's books of accounts and from the data gathered by the Third Party Information Unit of the Bureau of Internal Revenue which originated from Sociedad Generales de Surveillance (SGS). However, We have earlier ruled in issue 1.4 of the deficiency income tax that petitioner has no unmatched importation based on the audit report 32 submitted to Us by the commissioned independent CPA which were duly supported by documents. Hence, We find this particular issue moot and academic for discussion. In sum, petitioner is still liable for 1997 deficiency value-added tax in the reduced amount of P363,508.92, computed as follows: Taxable Receipts per Return P311,385,470.32 Add/(Less) Adjustments Disallowed discounts granted after Sales - Unsupported P223,291.50 Unsupported export sales 1,727,504.38 1,950,795.88 Taxable Receipts per Audit P313,336,266.20 ============ Output Tax Due P31,333,626.62 Less: Creditable Input VAT 13,535,958.31 VAT Due P17,797,668.31 Less: Tax Withheld/Paid Per Return 17,602,588.74 Deficiency Value-Added Tax P195,079.57 Add: Interest on Deficiency VAT 100,791.76 Interest on Unrecorded Sales 67,637.59 TOTAL AMOUNT PAYABLE P363,508.92 The compromise penalty of P25,000.00 should not be imposed in the absence of mutual agreement between the parties ( Collector of Internal Revenue vs. UST, 104 Phil. 1062; Dr. Felisa L. Vda. De San Agustin, in substitution of Jose Y. Feria, in his capacity as Executor of the Estate of Jose San Agustin vs. Commissioner of Internal Revenue, G.R. No. 138485, September 10, 2001 ), WHEREFORE, premises considered, the Petition for Review is hereby DENIED. The deficiency assessments for income and value-added taxes are hereby UPHELD but in reduced amounts, computed as follows: Basic Interest Total Deficiency Income Tax (ST-INC-97-0160-2000) P2,530,682.57 P610,122.26 P3,140,804.83 Deficiency Value-Added Tax (ST-VAT-97-0159-2000) 195,079.57 168,429.35 363,508.92 T o t a l s P2,725,762.14 P778,551.61 P3,504,313.75 ========== ========= ========== Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of P3,504,313.75, plus 20% delinquency interest per annum from February 21, 2000 until fully paid, pursuant to Section 249 of the National Internal Revenue Code of 1993. In addition, a fine of three hundred pesos (P300.00) is imposed for violation of the Bookkeeping Regulations. CHDAaS SO ORDERED. WE CONCUR: (SGD.) LOVELL R. BAUTISTA Associate Justice (SGD.) CAESAR A. CASANOVA Associate Justice Footnotes 1. Exhibits PPPPPP and PPPPPP-1. 2. Per Letter of Authority No. 000018424, Exhibit LLLLLL. 3. BIR Records, p. 438; Summary of Stipulated Facts, par. 3. 4. BIR records, pages 830 and 831. 5. Exhibit OOOOOO. 6. Exhibit QQQQQQ. 7. Exhibit RRRRRR; Summary of Stipulated Facts, par. 7. 8. BIR Records, page 764. 9. Exhibits KKKKKK and KKKKKK-1. 10. Pages 16 to 25, TSN, March 11, 2003. 11. Exhibits TTTT and UUUU were not among the documents admitted by the Court. 12. Exhibit JJJJJJ. 13. Exhibit NNN. 14. Exhibit IIIII-4. 15. (see page 747, BIR records) 16. Exhibit IIIIII, inclusive of submarkings. 17. Exhibit FFFFFF-7. 18. Exhibit FFFFFF-4. 19. Exhibit FFFFFF. 20. BIR records, page 761. 21. Exhibits J to Q. 22. Exhibits Z, AA to GG. 23. Should be P1,255,823.76 per 1997 Quarterly VAT returns. 24. Pages 5 to 6, TSN, December 11, 2001. 25. Exhibits ZZZZZ-1 to ZZZZZ-140 & YYYYY-1 to YYYYY-4, DDDDDD-1 to DDDDDD-143a in relation to the report the commissioned CPA (Exhibit XXXXXX). 26. Exhibits DDDDDD-76, DDDDDD-92, DDDDDD-99, DDDDDD-100, DDDDDD-101 and DDDDDD-122, inclusive of submarkings. 27. Exhibits XXXXX-1 to XXXXX-1. 28. Exhibits EEEEEE-1 to EEEEEE-5, inclusive of submarkings. 29. Exhibit XXXXXX-8. 30. TSN, December 11, 2001, pages 8 to 10. 31. Exhibit XXXXXX. 32. Exhibit FFFFFF, inclusive of submarkings.