Abacus Distribution Systems Phils., Inc. v. Commissioner of Internal Revenue

SECOND DIVISION [C.T.A. CASE NO. 8678. July 19, 2017.] ABACUS DISTRIBUTION SYSTEMS PHILS., INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION CASTAEDA, JR. , J p : THE CASE In this Petition for Review, petitioner Abacus Distribution Systems Phils., Inc. seeks the cancellation of respondent's Final Decision on Disputed Assessment (FDDA) dated May 2, 2013, assessing petitioner of deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), withholding tax on compensation (WTC), final withholding tax (FWT), final withholding VAT (FWVAT) and documentary stamp tax (DST) for the taxable year 2009 in the aggregate amount of P94,405,463.27, inclusive of surcharges and interests, broken down as follows: Tax Type Basic Surcharge Interest Total Income Tax P28,324,809.39 - P15,132,432.42 P43,457,241.81 VAT 21,576,991.51 - 12,473,274.55 34,050,266.06 EWT 509,731.84 - 296,063.42 805,795.26 WTC 102,575.34 - 59,578.00 162,153.34 FWT 6,213,282.86 P1,553,320.72 3,608,810.87 11,375,414.45 FWVAT 2,485,313.15 621,328.29 1,443,524.35 4,550,165.78 DST 2,407.00 601.75 1,417.82 4,426.57 Total P59,215,111.08 P2,175,250.76 P33,015,101.43 P94,405,463.27 THE FACTS Petitioner is a corporation duly organized and existing under and by virtue of Philippine laws, with principal office address at 3F Trafalgar Plaza Building, H.V. Dela Costa Street, Salcedo Village, Makati City 1227. It is duly registered with the Bureau of Internal Revenue (BIR) under Revenue District No. 50 with Tax Identification Number 000103491000. 1 Respondent is the duly appointed Commissioner of Internal Revenue who holds office at the BIR National Office Building located at Diliman, Quezon City. 2 On May 31, 2010, petitioner received a Letter of Authority (LOA) dated May 14, 2010 from the BIR authorizing the examination of its books of accounts and other financial records for the year ending December 31, 2009. 3 On March 9, 2012, petitioner received a Notice of Informal Conference dated February 21, 2012 with attached Summary Findings from the Large Taxpayers Service of the BIR. 4 On March 27, 2012, petitioner through its president, Demetrio C. Silverio, executed a Waiver of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code (NIRC) and agreed to extend the period to conduct audit/investigation until December 31, 2012. 5 On September 20, 2012, petitioner received a Preliminary Assessment Notice (PAN) dated July 31, 2012, for deficiency Income Tax, VAT, EWT, WTC, FWT, FWT-VAT and DST for the year ending December 31, 2009. 6 Petitioner protested the PAN in a letter dated October 3, 2012, which was received by the BIR on October 4, 2012. 7 On November 29, 2012, petitioner received the Formal Letter of Demand (FLD) with Details of Discrepancies and Final Assessment Notice (FAN) Nos. LTEAD II-IT-09-0003, LTEAD II-VT-09-0002, LTEAD II-WG-09-0004, LTEAD II-WC-09-0004, LTEAD II-WE-09-0004, LTEAD II-WF-09-0001 and LTEAD II-DS-09-0001 dated November 12, 2012. 8 On December 20, 2012, petitioner filed a protest against the FAN through a letter dated December 19, 2012. 9 On June 27, 2013, petitioner received the Final Decision on Disputed Assessment (FDDA) dated May 2, 2013 which denied its protest for lack of factual and legal basis. 10 On July 26, 2013, petitioner filed a Petition for Review with the Court of Tax Appeals under Section 228 of the NIRC of 1997 to appeal the FDDA. 11 On October 3, 2013, respondent filed his Answer 12 with the following pertinent Special and Affirmative Defenses: " SPECIAL & AFFIRMATIVE DEFENSES xxx xxx xxx Income Tax xxx xxx xxx 11. In the instant case, petitioner's deduction for Forex Loss in the amount of Php2,431,607 was not shown to have been actually sustained and no considerable proof was introduced to buttress its claim. 12. Moreover, records bear that the sales figures derived from creditable taxes withheld by petitioner's customers when reconciled with the sales per Summary List of Sales reveal a discrepancy amounting to Php570,130.98. Hence, petitioner's gross income based on Section 32 of the Tax Code was found to be understated. 13. Also, the computerized audit technique that reconciled petitioner's purchases as sources of input tax credits against the income payment subjected to expanded withholding tax unveil an understatement in purchases amounting to Php16,764,878.70, which is indicative of unaccounted source of cash. xxx xxx xxx 15. Upon further examination of the records, it was also revealed that, reconciliations to determine compliance with the additional requirements of deductibility required under section 34(K) of the Tax Code indicate that petitioner's deductions, in the amount of Php20,710,942.88, did not fully cover the required withholding on deductions subject to final withholding tax. Likewise, the Php2,989,649.32 which was subjected to expanded withholding tax and Php410,746.03 on deductions subject to withholding tax on compensation, did not as well comply with the required deductibility as provided for in Section 34(K). xxx xxx xxx 17. Records also disclose that there were unaccounted remittances. Petitioner's principal source of revenue was commissions from Abacus International Pte. Ltd. (AIPL), and related to the commissions earned by petitioner are expenses for communication and marketing. Under an offsetting agreement, only the net amount shall be remitted inwardly. The reconciliation of the net amount due against the inward remittances reveal that there were unaccounted remittances by the petitioner in the amount of Php50,538,076.40. Value-Added Tax 18. Petitioner was assessed by the Bureau for deficiency VAT on its alleged zero rated sales in the amount of Php111,154,286.12. Petitioner contends that its purported zero rated sales represent revenues arising from services rendered to AIPL, a non-resident foreign corporation, and that the consideration for which is paid for in foreign currency so much so that the said sales were supposedly subject to VAT at zero percent (0%). 19. However, the findings of no less than three examiners indicate otherwise. The revenues generated by petitioner consisting of rentals of equipment by the subscribers (travel agencies) and the fees paid through AIPL is subject to VAT at the rate of twelve percent (12%). xxx xxx xxx 22. In the instant case, however, there was no service(s) rendered to a non-resident. The fees were paid on bookings by the subscribers. Essentially, petitioner did not render any service to AIPL, since the fees were payable based on the number of access made by the travel agencies in the Philippines using the abacus system. Seeing that the transaction in this particular case does not comply with the requirement for zero-rating, therefore, the income of Php111,154,286.12 is subject to VAT. Expanded Withholding Tax xxx xxx xxx 24. Respondent respectfully submits that the deficiency withholding tax was the result of reconciling the deductions claimed subject to EWT against the income payments per alpha list supporting 1604-E using the provisions of Revenue Regulations No. 2-98, and further amplified by Revenue Memorandum Circular 72-04 as well as the provisions of Revenue Regulations No. 12-01. Withholding Tax on Compensation xxx xxx xxx 27. Accordingly, records reveal that the above-mentioned audit procedure yielded a deficiency in withholding tax on compensation since the withheld taxes on salaries and wages claimed by petitioner as deductions are higher compared to the total based on the alpha list, then it is safe to conclude that, there were deductions made by petitioner which were not subjected to the required withholding tax. Final Withholding VAT xxx xxx xxx 29. Petitioner in this case provides a computerized reservation in the Philippines, the Abacus System, a system that performs various functions, including real time airline seat reservations, schedule displays, booking for a variety of air, car and hotel services, automated ticketing and fare quote displays. The abacus system is an intellectual property owned by a non-resident foreign corporation (AIPL). 30. In connection with the use of the Abacus System in the Philippines, marketing fees and communication expenses are being charged by AIPL. Since the charges are income of a non-resident in connection with the use of its property and property rights in the country, the same is subject to final withholding of VAT as required under RR 16-05 as amended by Revenue Regulations No. 4-2007. Final Withholding Tax xxx xxx xxx 32. Records disclose that the petitioner did not introduce any iota of evidence to prove that the foregoing services were rendered abroad. On the contrary, review of the documents supporting the communication expense showed that AIPL billed petitioner based on the bookings and number of access by travel agencies in the Philippines. Given that the source of income where the deductions were derived are from the database access by subscribing travel agencies in the Philippines, the same is therefore within the taxing authority of the BIR based on the situs of taxation theory. Thus, such income is subject to final withholding tax. Documentary Stamp Tax xxx xxx xxx 35. Records disclose that, petitioner was properly assessed for deficiency documentary stamp tax, the same being derived from deductions made by petitioner for the lease of real property as found under Mktg.-Rent and Mktg.-Purchased Services account in the total amount of Php4,286.77, inclusive of penalties. xxx xxx xxx" 13 On September 29, 2014, the parties filed their Joint Stipulation of Facts and Issues. 14 On October 2, 2014, the Court issued a Pre-Trial Order. 15 During the hearing, petitioner 16 and respondent 17 presented their pieces of evidence and their witnesses. On March 18, 2016, 18 the Court required the parties to submit their memoranda. On June 6, 2016, petitioner filed its Memorandum for the Petitioner 19 while on June 27, 2016, respondent filed through registered mail his Memorandum. 20 On July 19, 2016, 21 the case was deemed submitted for decision. Hence, this Decision. THE ISSUES The issues to be resolved by the Court are: (1) Whether the FAN sufficiently informed the taxpayer of the assessments' factual and legal bases; and (2) Whether petitioner is liable for the subject deficiency assessments. THE RULING The Court partially grants the instant Petition. Petitioner was sufficiently informed of the bases of the subject assessments Petitioner contends that the subject FANs violated their right to be informed of the facts and the law from which the deficiency assessments were based. However, the Court observes that the questioned FAN with attached Details of Discrepancies 22 contained the necessary bases from which the assessments were based. Hence, the Court finds petitioner's contention untenable. The Court shall now proceed to determine the correctness of the subject assessments. For an orderly discussion, the following subject assessments shall be discussed in this sequence: Deficiency Tax Total Amount I. EWT P805,795.25 II. WTC 162,153.34 III. FWVAT 4,550,165.79 IV. FWT 11,375,414.45 V. Income Tax 43,457,241.81 VI. VAT 34,050,266.06 VII. DST 4,426.57 P94,405,463.27 I. DEFICIENCY EWT P805,795.25 Respondent assessed petitioner of deficiency EWT for taxable year 2009 in the amount of P805,795.25, computed as follows: 23 Particular Per FS Per Withholding Tax Return Discrepancy Rate Deficiency EWT Services P7,698,787.96 P8,022,767.56 P(323,979.60) - - Goods 16,798,186.88 11,604,087.00 5,194,099.88 1% P51,941.00 Rental 23,007,769.62 14,526,206.31 8,481,563.31 5% 424,078.17 Professional Fees 1,998,400.00 1,773,648.87 224,751.13 15% 33,712.67 Total P49,503,144.46 P35,926,709.74 P13,576,434.72 P509,731.83 Add: Interest 296,063.42 Total amount due P805,795.25 The assessment resulted from respondent's finding that there were income payments made by petitioner in the year 2009 comprising of purchases of goods in the amount of P5,194,099.88, rental payments in the amount of P8,481,563.31 and professional fees in the amount of P224,751.13 that were not subjected to 1%, 5% and 15% EWT, respectively, as required under Revenue Regulations (RR) No. 02-98, as amended. A. Purchases of Goods The deficiency EWT on purchases of goods of P51,941.00 was derived by respondent as follows: Particular Per FS Per Withholding Tax Return Discrepancy Rate Deficiency EWT Petrol/Oil & Car Registration P740,834.85 Stationery & Supplies 574,318.68 Magazines/periodicals 23,527.01 Social Activities 406,297.41 Repairs & Maintenance 3,203,989.38 Entertainment & Representation 938,454.55 Acquisition of PPE 10,910,765.00 Total P16,798,186.88 P11,604,087.00 P5,194,099.88 1% P51,941.00 The Court-commissioned Independent CPA (ICPA), Navarro Amper & Co., through its Partner, Atty. Fredieric B. Landicho, ascertained that out the amount of P16,798,186.88 classified by the BIR as income payment for goods purchases, the amounts of P8,782,945.30 and P1,628,357.73 were subjected to 1% and 2% EWT, respectively, in the year 2009. However, with regard to the amount of P3,829,804.77, the ICPA was not able to determine whether the same was subjected to or exempted from EWT, while the remaining amount of P2,577,079.08 could not be accounted for due to lack of supporting documents. The details of the ICPA findings are shown below: 24 Particular Per FAN Purchases subjected to EWT Total Purchases not subjected to EWT Unaccounted 1% 2% Petrol/Oil & Car Registration P740,834.85 P- P- P- P708,728.03 P32,106.82 Stationery & Supplies 574,318.68 286,200.70 - 286,200.70 26,252.64 261,865.34 Magazines/Periodicals 23,527.01 3,510.00 - 3,510.00 11,000.00 9,017.01 Social Activities 406,297.41 - 39,658.50 39,658.50 301,800.00 64,838.91 Repairs & Maintenance 3,203,989.38 965,523.05 430,159.23 1,395,682.28 575,191.83 1,233,115.27 Entertainment & Representation 938,454.55 13,749.57 - 13,749.57 20,000.00 904,704.98 Acquisition of PPE 10,910,765.00 7,513,961.98 1,158,540.00 8,672,501.98 2,186,832.27 51,430.75 Total P16,798,186.88 P8,782,945.30 P1,628,357.73 P10,411,303.03 P3,829,804.77 P2,557,079.08 RR No. 02-98, as amended by RR No. 17-03, mandates the withholding of 1% and 2% EWT on purchases of goods and services as follows: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (M) Income payments made by the top ten thousand (10,000) private corporations to their local/resident supplier of goods and local/resident supplier of services other than those covered by other rates of withholding tax. Income payments made by any of the top ten thousand (10,000) private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident alien engaged in trade or business in the Philippines. Supplier of goods One percent (1%) Supplier of services Two percent (2%)" Based on the Court's examination of the reconciliation schedule 25 detailing the individual transactions covering the above purchases/income payments and the related check vouchers, journal vouchers, statements of accounts, invoices and official receipts 26 as well as petitioner's Summary List of Purchases (SLP) 27 and EWT Alphalist 28 for taxable year 2009, only the EWT corresponding to the following income payments totaling P8,349,080.00 was verified to have been actually withheld and remitted to the BIR in accordance with Section 2.57.2 (M) of RR No. 02-98, as amended: CV No. Date Account Code Income Payment EWT Rate STATIONERY AND SUPPLIES Minerva Printing Corporation 5984 30-Jan-09 1740464 P893.00 1% 5994 30-Jan-09 1740264 9,000.00 1% 6057 19-Feb-09 1740464 12,500.00 1% 6062 19-Feb-09 1740264 400.00 1% 1740764 1,200.00 1% 6179 23-Mar-09 1740064 400.00 1% 1740264 800.00 1% 1740464 30,000.00 1% 1740664 400.00 1% 6182 24-Mar-09 1740464 22,500.00 1% 6349 21-May-09 1740064 139.00 1% 1740264 464.00 1% 1740364 418.00 1% 1740864 279.00 1% 6488 26-Jun-09 1740064 56.00 1% 1740164 37.00 1% 1740264 9,185.00 1% 1740364 167.00 1% 1740464 93.00 1% 1740564 74.00 1% 1740664 204.00 1% 1740764 56.00 1% 1740864 111.00 1% 1740964 19.00 1% 6553 24-Jul-09 1740864 750.00 1% 6565 24-Jul-09 1740464 2,679.00 1% 6570 29-Jul-09 1740064 506.00 1% 1740164 337.00 1% 1740264 2,887.00 1% 1740364 2,087.00 1% 1740464 675.00 1% 1740564 675.00 1% 1740664 1,855.00 1% 1740764 506.00 1% 1740864 1,012.00 1% 1740964 169.00 1% 6669 28-Aug-09 1740364 17,500.00 1% 1740464 8,500.00 1% 1740664 6,500.00 1% 6794 30-Sep-09 1740264 2,400.00 1% 6797 30-Sep-09 1740464 37,500.00 1% 6870 22-Oct-09 1740064 156.00 1% 1740264 520.00 1% 1740364 468.00 1% 1740864 312.00 1% 6896 30-Oct-09 1740464 7,969.00 1% 6892 20-Nov-09 1740664 17,875.00 1% 6940 12-Nov-09 1740264 9,000.00 1% 6992 20-Nov-09 1740064 800.00 1% 1740264 800.00 1% 1740564 400.00 1% 1740664 800.00 1% 1740964 800.00 1% 7138 29-Dec-09 1740064 284.00 1% 1740164 189.00 1% 1740264 946.00 1% 1740364 2,994.00 1% 1740464 284.00 1% 1740564 714.00 1% 1740664 1,398.00 1% 1740864 1,282.00 1% 1740964 95.00 1% Compucare 6667 28-Aug-09 1740064 1,558.00 1% 360 System Solutions, Inc. 6211 31-Mar-09 1740264 2,754.00 1% Dan Daryl Phils., Inc. 6568 29-Jul-09 1740664 1,188.00 1% 6695 14-Sep-09 1740664 1,781.00 1% 6885 28-Oct-09 1740664 5,938.00 1% 6996 24-Nov-09 1740264 5,938.00 1% Minuteman Printers, Inc. 6184 25-Mar-09 1740664 13,393.00 1% P&L Gifts, Inc. 6928 11-Nov-09 1740664 10,714.00 1% PC Planet Corp. 6352 21-May-09 1740664 3,280.00 1% HP Philippines Corp. 6269 24-Apr-09 1740764 773.00 1% Zenshin Systems Corp. 6495 02-Jun-09 1740664 1,875.00 1% SUBTOTAL (1%) 273,211.00 Copyhigh-V Digital System 6579 31-Jul-09 1740464 6,250.00 2% Lacercom Business Machine Trading 6410 28-May-09 1740464 3,482.00 2% Microcore System Technology 6461 17-Jun-09 1740664 2,420.00 2% SUBTOTAL (2%) 12,152.00 TOTAL STATIONERY AND SUPPLIES 285,363.00 MAGAZINES AND PERIODICALS People's Independent Media, Inc. 7045 01-Dec-09 1740141 3,510.00 1% TOTAL MAGAZINES AND PERIODICALS 3,510.00 SOCIAL ACTIVITIES Gold Venture Lease Management & Services 6999 25-Nov-09 1740465 33,036.00 2% TOTAL SOCIAL ACTIVITIES 33,036.00 REPAIRS AND MAINTENANCE 360 System Solutions, Inc. 5988 30-Jan-09 1710150 10,192.00 1% 6059 19-Feb-09 1710150 13,196.00 1% 6067 24-Feb-09 1710150 12,196.00 1% 6118 27-Feb-09 1710150 4,674.00 1% 6202 27-Mar-09 1710150 7,527.00 1% 6266 24-Apr-09 1710150 29,241.00 1% 6285 29-Apr-09 1710150 17,093.00 1% 6273 24-Apr-09 1710150 25,446.00 1% 6353 21-May-09 1710150 45,384.00 1% 6554 24-Jul-09 1710150 16,714.00 1% 6556 24-Jul-09 1710150 24,174.00 1% Casa De Moda, Inc. 6521 13-May-09 1710150 1,786.00 1% Checon Industries 6311 12-May-09 1710150 28,571.00 1% Columbia Technologies, Inc. 6942 12-Nov-09 1710150 8,196.00 1% Compucare 6562 24-Jul-09 1710150 13,594.00 1% 6661 28-Aug-09 1710150 9,629.00 1% Compumedics 6061 19-Feb-09 1710150 15,379.00 1% 6286 29-Apr-09 1710150 2,009.00 1% 6561 24-Jul-09 1710150 1,764.00 1% 7136 29-Dec-09 1710150 2,009.00 1% DCTech Micro Service, Inc. 6054 18-Feb-09 1710150 3,348.00 1% DTYH Enterprises 6580 31-Jul-09 1710150 5,848.00 1% 7130 29-Dec-09 1710150 18,214.00 1% 7137 29-Dec-09 1710150 29,777.00 1% Emerson Network Power Phils., Inc. 6663 28-Aug-09 1710150 14,068.00 1% Gigahertz Computer System 5983 30-Jan-09 1710150 10,179.00 1% Ironfront, Inc. 6943 12-Nov-09 1710150 3,571.00 1% 6990 20-Nov-09 1710150 30,357.00 1% 7128 29-Dec-09 1710150 59,241.00 1% Joir Enterprises 6166 18-Mar-09 1710150 10,714.00 1% Maximum Solutions Corp. 6177 23-Mar-09 1710150 9,107.00 1% 6952 14-Nov-09 1710150 7,411.00 1% Micro Pacific Technologies and Systems 6559 24-Jul-09 1710150 26,339.00 1% 6871 22-Oct-09 1710150 12,500.00 1% 6937 12-Nov-09 1710150 6,696.00 1% Microbase, Inc. 7132 29-Dec-09 1710150 24,107.00 1% Netmarks Philippines, Inc. 6339 20-May-09 1710150 69,196.00 1% PC Planet Corporation 6203 27-Mar-09 1710150 9,576.00 1% 6271 24-Apr-09 1710150 2,232.00 1% 6275 24-Apr-09 1710150 9,723.00 1% 6350 21-May-09 1710150 9,300.00 1% Power Shield Technologies, Inc. 6309 07-May-09 1710150 5,964.00 1% Thinking Tools 6301 04-May-09 1710150 3,214.00 1% 6576 29-Jul-09 1710150 11,116.00 1% 6728 23-Sep-09 1710150 4,911.00 1% 6974 19-Nov-09 1710150 3,214.00 1% 7076 18-Dec-09 1710150 3,920.00 1% Unisource Marketing 6056 19-Feb-09 1710150 5,357.00 1% 6872 22-Oct-09 1710150 13,527.00 1% Whole Works Enterprises 6405 26-May-09 1710150 4,686.00 1% Zenshin Systems Corporation 5989 30-Jan-09 1710150 1,786.00 1% 6069 24-Feb-09 1710150 8,036.00 1% 6348 21-May-09 1710150 37,500.00 1% 6563 24-Jul-09 1710150 27,679.00 1% 6577 30-Jul-09 1710150 7,813.00 1% 6662 28-Aug-09 1710150 78,839.00 1% 6666 28-Aug-09 1710150 16,741.00 1% 6796 30-Sep-09 1710150 56,429.00 1% 6865 22-Oct-09 1710150 9,152.00 1% 6998 24-Nov-09 1710150 7,143.00 1% SUBTOTAL (1%) 967,305.00 128 Tech Consulting, Inc. 5947 22-Jan-09 1710150 54,000.00 2% Matco Computer Center 6859 21-Oct-09 1710150 8,840.00 2% 6959 18-Nov-09 1710150 5,357.00 2% 7115 28-Dec-09 1710150 8,929.00 2% MGE UPS Systems Philippines, Inc. 7077 16-Dec-09 1710150 2,946.00 2% Trends & Technologies, Inc. 6322 13-May-09 1710150 60,000.00 2% 6687 09-Sep-09 1710150 30,000.00 2% Edgardo C. Garcia 6539 17-Jul-09 1710150 12,500.00 2% 7108 22-Dec-09 1710150 11,000.00 2% Emerson Network Power Phils., Inc. 5906 07-Jan-09 1710150 6,667.00 2% 6235 15-Apr-09 1710150 10,003.00 2% 6493 30-Jun-09 1710150 10,003.00 2% Microbase, Inc. 6936 12-Nov-09 1710150 3,571.00 2% Microcore System Technology 6028 12-Feb-09 1710150 22,589.00 2% 6046 18-Feb-09 1710150 4,241.00 2% 6106 26-Feb-09 1710150 25,798.00 2% 6139 04-Mar-09 1710150 8,923.00 2% 6167 18-Mar-09 1710150 1,964.00 2% 6248 22-Apr-09 1710150 15,395.00 2% 6445 10-Jun-09 1710150 19,643.00 2% 6485 26-Jun-09 1710150 4,643.00 2% 6610 12-Aug-09 1710150 9,924.00 2% 6688 09-Sep-09 1710150 11,652.00 2% 6961 18-Nov-09 1710150 25,980.00 2% 7000 25-Nov-09 1710150 3,670.00 2% Mystic Electronics Repair Center 6342 20-May-09 1710150 1,786.00 2% 6691 09-Sep-09 1710150 3,125.00 2% Nelsen System, Inc. 6408 27-May-09 1710150 7,098.00 2% 6575 29-Jul-09 1710150 13,839.00 2% 6643 26-Aug-09 1710150 10,000.00 2% 6703 15-Sep-09 1710150 4,286.00 2% 6886 28-Oct-09 1710150 7,098.00 2% 7081 16-Dec-09 1710150 2,902.00 2% SUBTOTAL (2%) 428,372.00 TOTAL REPAIRS AND MAINTENANCE 1,395,677.00 EQUIPMENT & REPRESENTATION Casa Flores, Inc. 6099 26-Feb-09 1740123 5,179.00 1% 6448 10-Jun-09 1740123 2,366.00 1% 6690 09-Sep-09 1740123 2,232.00 1% 6854 21-Oct-09 1740123 3,973.00 1% TOTAL ENTERTAINMENT AND REPRESENTATION 13,750.00 ACQUISITION OF PPE ACW Distribution Phils., Inc. 6213 31-Mar-09 1120138 21,786.00 1% Alpha Steel Office 6490 30-Jun-09 1120160 25,357.00 1% Columbia Technologies, Inc. 6989 20-Nov-09 1120110 142,857.00 1% 7133 29-Dec-09 1120110 114,286.00 1% 7134 29-Dec-09 1120110 142,857.00 1% Compucare 6661 28-Aug-09 1120110 6,853.00 1% Cosmotech Philippines, Inc. 6799 30-Sep-09 1120110 12,946.00 1% 6868 22-Oct-09 1120170 2,031.00 1% 6555 24-Jul-09 1120170 26,777.00 1% DTYH Enterprises 6063 19-Feb-09 1120120 3,839.00 1% 6274 24-Apr-09 1120110 3,839.00 1% 6287 29-Apr-09 1120110 1,920.00 1% 6489 06-Jun-09 1120110 3,839.00 1% Gigahertz Computer System 6265 24-Apr-09 1120110 6,652.00 1% 6457 17-Jun-09 1120170 13,393.00 1% HP Philippines Corp. 5986 30-Jan-09 1120110 2,061,381.00 1% 6119 27-Feb-09 1120110 137,425.00 1% 6269 24-Apr-09 1120110 39,950.00 1% 6545 22-Jul-09 1120110 824,552.00 1% 6569 29-Jul-09 1120110 133,500.00 1% 6665 28-Aug-09 1120110 44,500.00 1% 6800 30-Sep-09 1120110 89,286.00 1% 7139 29-Dec-09 1120110 192,396.00 1% 6269 24-Apr-09 1120170 39,950.00 1% Maximum Solutions Corp. 6866 22-Oct-09 1120110 14,107.00 1% 6882 27-Oct-09 1120110 28,214.00 1% Micro Pacific Technologies and Systems 6064 19-Feb-09 1120170 71,429.00 1% 6068 24-Feb-09 1120170 71,429.00 1% 7135 29-Dec-09 1120170 59,415.00 1% 6895 30-Oct-09 1120180 156,250.00 1% Microbase, Inc. 6557 24-Jul-09 1120110 125,446.00 1% Office Republic Multi-Ventures, Inc. 6141 09-Mar-09 1120141 7,923.00 1% 6186 25-Mar-09 1120141 2,732.00 1% PC Chain Superstore 5987 30-Jan-09 1120120 217,054.00 1% 6058 19-Feb-09 1120120 6,384.00 1% 6212 21-Mar-09 1120110 6,964.00 1% 6270 24-Apr-09 1120110 6,964.00 1% Phil.-Data Business Systems, Inc. 6615 12-Aug-09 1120110 261,607.00 1% 7035 27-Nov-09 1120131 252,679.00 1% Precept Commercial Corporation 6343 20-May-09 1120141 28,571.00 1% Technicom Electronics Trading 6901 05-Nov-09 1120180 9,911.00 1% Ultra Modular Concepts, Inc. 6316 13-May-09 1120160 29,107.00 1% Zenshin Systems Corporation 6796 30-Sep-09 1120110 4,223.00 1% SUBTOTAL (1%) 5,452,581.00 Ana Luzzette L. Lareza 6065 20-Feb-09 1112130 50,000.00 2% 6149 11-Mar-09 1112130 50,000.00 2% Jupiter Systems, Inc. 6335 20-May-09 1120138 6,600.00 2% 7053 03-Dec-09 1120138 44,000.00 2% Millennium Carpets and Interiors 6037 18-Feb-09 1112130 15,402.00 2% 6112 26-Feb-09 1112130 15,402.00 2% 6036 18-Feb-09 1112130 111,607.00 2% 6113 26-Feb-09 1112130 111,607.00 2% 6035 18-Feb-09 1112130 376,961.00 2% 6114 26-Feb-09 1112130 376,961.00 2% SUBTOTAL (2%) 1,158,540.00 TOTAL ACQUISITION OF PPE 6,611,121.00 GRAND TOTAL P8,349,080.00 Hence, out of the amount of P16,798,186.88 classified by the BIR as income payments for goods purchases, petitioner failed to prove that the amount of P8,449,106.88, detailed below, was subjected to or is exempted from EWT: Particular Per FAN Purchases subjected to EWT Total Income Payments Subjected to EWT Total Income Payments not Subjected to EWT 1% 2% Petrol/Oil & Car Registration P740,834.85 - P740,834.85 Stationery & Supplies 574,318.68 P273,211.00 P12,152.00 P285,363.00 288,955.68 Magazines/Periodicals 23,527.01 3,510.00 - 3,510.00 20,017.01 Social Activities 406,297.41 - 39,659.00 39,659.00 366,638.41 Repairs & Maintenance 3,203,989.38 967,305.00 428,372.00 1,395,677.00 1,808,312.38 Entertainment & Representation 938,454.55 13,750.00 - 13,750.00 924,704.55 Acquisition of PPE 10,910,765.00 5,452,581.00 1,158,540.00 6,611,121.00 4,299,644.00 Total P16,798,186.88 P6,710,357.00 P1,638,723.00 P8,349,080.00 P8,449,106.88 Thus, the income payments of P8,449,106.88 shall be considered as subject to 1% EWT as prescribed under Section 2.57.2 (M) of RR 2-98, as amended by RR 17-03. However, the amount of P84,491.07 representing 1% EWT due on the above income payments of P8,449,106.88 is higher than the EWT of P51,941.00 assessed by respondent. In the consolidated cases of Commissioner of Internal Revenue vs. Transnational Plans, Inc. and Transnational Plans, Inc. vs. Commissioner of Internal Revenue , 29 the CTA En Banc held that the Court cannot go beyond the contested assessment per FDDA, to wit: "In as much as this Court's jurisdiction is appellate in nature, it is essential that matters taken up in the appeal should be included in the contested assessment. It must be realized that with respect to the deficiency VAT of TPI, the appealed amount before this Court's jurisdiction is only with respect to the P67,446,873.00, as what is indicated in the FDDA. As stated in the case of Commissioner of Internal Revenue vs. Guerrero, et al. : 'Although these charges and taxes are not included in the original and revised assessments made in this case, petitioner herein maintains that Guerrero may nevertheless be held liable therefor x x x Petitioner's contention is untenable. x x x In short, it refers to a point in issue. In the case at bar, the additional [amount] under consideration were not included in the contested assessments. Since the jurisdiction of the Court of Tax Appeals is purely appellate, said Court correctly declined to make an award thereon, for lack of jurisdiction over the same.' Section 228 of the Tax Code clearly states that 'the taxpayer shall be informed in writing of the facts and the law on which the assessment is made; otherwise, the assessment shall be void.' As thus worded, the respondent has the bounden duty to inform the taxpayer not only of the law but more importantly, the surrounding circumstances supporting the assessment, for it is only through a detailed appraisal of its basis that the taxpayer may be able to dispute the imposition or agree with it. 30 The underlying reason of the law is the basic constitutional requirement that 'no person shall be deprived of his property without due process of law.' 31 Thus, the amount to be collected from TPI should not go beyond what is stated in the assessment. In excess of such stated therein, TPI was not informed in writing of the facts and law on which the amount is made, thus, the taxpayer has no opportunity to dispute the said amount, in violation of due process. Furthermore, as the said excess amount was not indicated in the FAN, it should be considered as not assessed by the CIR, hence, already beyond the prescriptive period for it to be included only at this time of judicial trial. Consequently, the findings of the BIR as that stated in the assessment should be the basis for the deficiency VAT, i.e., only the amount of P67,446,873.00." Considering that the power to assess is lodged in the respondent and is not within the province of this Court, the Court is constrained to limit its findings based on respondent's assessment. Hence, petitioner is liable only to the extent of the assessment in the amount of P51,941.00. B. Rental Section 2.57.2 (C) (1) and (2) of RR No. 02-98, as amended by RR No. 14-02, prescribes the withholding of 5% tax on rentals as follows: " Sec. 2.57.2. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (C) Rentals (1) Real properties. On gross rental for the continued use or possession of real property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity Five percent (5%); (2) Personal properties. On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) per payment for the continued use or possession of personal property used in business which the payor or obligor has not taken or is not taking title, or in which he has no equity which include, but not limited to the following: land transport equipment, water transport equipment, air transport equipment, industrial equipment, commercial equipment, scientific equipment, agricultural machinery and equipment, construction/civil engineering machinery and equipment, telecommunication equipment, office furniture/machines/equipment, main frame computer and all other computer machines/equipment, materials handling equipment and auxiliary equipment Five percent (5%); However, the Ten Thousand Pesos (P10,000.00) threshold shall not apply when the accumulated gross rental or lease paid by the lessee to the same lessor exceeds or is reasonably expected to exceed P10,000.00 within the year. In which case, the lessee shall withhold the five percent (5%) withholding tax on the entire amount." Respondent assessed petitioner of 5% deficiency EWT in the amount of P424,078.17 on the following accounts: Particular Per FS Per Withholding Tax Return Discrepancy Rate Deficiency EWT Communication Exp.-Rentals of Equip. P39,579,622.90 Less: Comm. Exp. Subj to FWT (AIPL-SINGAPORE) (18,976,877.84) Other-Rent 201,600.00 Storage Rental 2,203,424.56 Total P23,007,769.62 P14,526,206.31 P8,481,563.31 5% P424,078.17 1. Communication Expense, Rentals of Equipment P20,602,745.06 (P39,579,622.90 less P18,976,877.84) Out of the assessed Communication Expense of P20,602,745.06, only the amount of P16,301,831.19 which pertains to service charges for leased lines and telephone lines was verified by the ICPA to have been subjected to 5% and 2% EWT, respectively. Further, the ICPA, found that the input VAT of P1,968,115.46 related to said transactions were also charged to the same expense account. Hence, it resulted to a discrepancy in the tax base reflected per EWT Alphalist and the purchased cost lodged in the Communication Expense account. Since petitioner was not able to provide proof for the remaining Communication Expense of P2,332,798.41, the ICPA was not able to verify whether the said amount was properly subjected to EWT, as summarized below: 32 Supplier Per ICPA's Communication Cost Account Analysis [A] Per EWT Alphalist Input VAT [E] Income Payment not Subjected to EWT F=[A-D-E] Amount subjected to 5% [B] Amount subjected to 2% [C] Total D=[B+C] Bayantel P3,011,309.55 P2,718,292.61 - P2,718,292.61 P338,233.22 P(45,216.28) Eastern Telecom 3,339,088.57 2,981,329.09 - 2,981,329.09 357,758.57 0.91 Innove Comm., Inc. 1,806,026.85 1,613,388.16 - 1,613,388.16 193,606.60 (967.91) PLDT 11,164,784.18 7,942,173.66 - 7,942,173.66 953,060.90 2,269,549.62 PLDT 889,217.89 - P776,864.92 776,864.92 93,223.79 19,129.18 Bell Telecom Phils. 18,373.02 - 16,389.17 16,389.17 1,966.70 17.15 Mozcom, Inc. 283,800.00 - 253,393.58 253,393.58 30,265.68 140.74 Smart Broadband 90,145.00 - - - - 90,145.00 Total P20,602,745.06 P15,255,183.52 P1,046,647.67 P16,301,831.19 P1,968,115.46 P2,332,798.41 The Court finds the ICPA findings in order. Without the related invoices and/or official receipts, the actual nature of the income payments of P2,332,798.41 and their appropriate tax implications cannot be ascertained. Consequently, these income payments of P2,332,798.41 shall be considered as rentals of communication equipment as found by respondent which are subject to 5% EWT as prescribed under Section 2.57.2 (C) (2) of RR No. 02-98, as amended by RR No. 14-02. It bears stressing that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 33 Hence, respondent's deficiency 5% EWT assessment in the amount of P116,639.92 on the Communication Exp.-Rentals of Equip. in the amount of P2,332,798.41 is upheld. 2. Other Rent P201,600.00 As aptly noted by the ICPA, the amount of P201,600.00 charged under the account "DVO-Rent" relates to payments made by petitioner to Plaza De Luisa Development, Inc. for the lease 34 of premises designated as Commercial B11 of the Plaza de Luisa Complex, which payments were verified to have been properly subjected to 5% EWT per alphalist 35 pursuant to Section 2.57.2 (C) (1) of RR No. 02-98, as amended by RR No. 14-02. Below is the breakdown of the rental amount of P201,600.00: Exhibit CV No. Date Particular Income Payment Subjected to EWT per Check Voucher and traced to EWT Alphalist P-74 5910 07-Jan-09 Rental Fee-Jan. 2009 P16,000.00 P-74.3 5998 02-Feb-09 Rental Fee-Feb. 2009 16,000.00 P-74.6 6131 04-Mar-09 Rental Fee-Mar. 2009 16,000.00 P-74.9 6222 01-Apr-09 Rental Fee-Apr. 2009 16,000.00 P-74.12 6300 04-May-09 Rental Fee-May 2009 16,000.00 P-74.15 6434 03-Jun-09 Rental Fee-June 2009 16,000.00 P-74.18 6524 15-Jul-09 Rental Fee-July 2009 17,600.00 P-74.22 6601 06-Aug-09 Rental Fee-Aug. 2009 17,600.00 P-74.25 6671 02-Sep-09 Rental Fee-Sep. 2009 17,600.00 P-74.28 6819 08-Oct-09 Rental Fee-Oct. 2009 17,600.00 P-74.29 6902 05-Nov-09 Rental Fee-Nov. 2009 17,600.00 P-74.32 7048 01-Dec-09 Rental Fee-Dec. 2009 17,600.00 Total P201,600.00 Considering that petitioner's "Other-Rent" of P201,600.00 were properly subjected to EWT, the relevant assessment must be stricken down for lack of factual basis. 3. Storage Rental P2,203,424.56 Based on the Court's validation and review of the ICPA's Supplemental Report 36 and petitioner's supporting documents, 37 the assessed storage rental of P2,203,424.56 pertains to the transactions lodged under Outside Purchased Services, of which the amount of P1,118,823.94 refers to income payments for advertisement and to agencies on account of the agency fees and salaries of personnel for the janitorial services and liaison personnel. Considering that the income payments were made to contractors, the services amounting to P1,118,823.94 were properly subjected to 2% EWT pursuant to Section 2.57.2 (E) (4) and (M) of RR No. 02-98, as amended by RR No. 30-03. The said income payments of P1,118,823.94 and the remittance of the related 2% EWT can be traced to the petitioner's EWT returns and alphalist, as follows: Supplier Particulars CV No./ Reference Exhibit Amount subjected to 2% EWT per Return and Alphalist Acct. Code: 1740354 TSO-Purchase Services Nobility Collection Agency, Inc. Services Rendered Ref. A P-63.52 to P-63.88 P4,478.40 Superior Maintenance Services, Inc. Services Rendered 6264 P-63.24 1,190.43 Nobility Collection Agency, Inc. Services Rendered Ref. K P-63.312 to P-63.349.13 299,096.29 Subtotal P304,765.12 Acct. Code: 1740454 FAD-Purchase Services Star Special Corporate Security Mgt., Inc. Security Guard Salaries Ref. G P-63.218 to P-63.244; P-63.517 to P-63.535 P(7,493.08) Superior Maintenance Services, Inc. Janitorial Services Ref. C P-63.100 to P-63.117 9,509.42 Nobility Collection Agency, Inc. Messenger and Drivers Ref. B P-63.89 to P-63.99 (2,247.62) Nobility Collection Agency, Inc. Driver's Fee Ref. M P-63.368 to P-63.405.13 126,350.19 Star Special Corporate Security Mgt., Inc. Security Guard Salaries Ref. N P-63.406 to P-63.441.9 301,010.27 Superior Maintenance Services, Inc. Janitorial Services Ref. O P-63.442 to P-63.447.12 321,490.74 Subtotal P748,619.92 Acct. Code: 1740554 CEBU-Purchase Services Pacubas General Services, Inc. Janitorial Services Ref. H P-63.245 to P-63.260; P-63.536 to P-63.550 P109.42 Pacubas General Services, Inc. Janitorial Services Ref. P P-63.478 to P-63.513.3 56,819.48 Subtotal P56,928.90 Acct. Code: 1740654 CST-Purchase Services Manila Bulletin Classified Advertisement 5918 P-63.30 P8,510.00 Subtotal P8,510.00 Total P1,118,823.94 The remaining amount of P1,084,600.62 (P2,203,424.56 less P1,118,823.94) , consisted of the following: (1) payments to Trafalgar Plaza Condominium Corporation (TPCC) for storage rental in the amount of P21,696.48; (2) payments to Alternative Network Resources Unlimited Multi-Purpose Cooperative (ANR Unlimited) for customer/technical support services rendered in the amount of P1,057,294.89; and (3) payment to Manila Bulletin in the amount of P6,129.30; (4) payment to Allied Banking Corporation for safety deposit box rental in the amount of P1,500.00 and (5) unaccounted difference of P(2,020.05), detailed as follows: Supplier Particulars CV No./ Reference Exhibit Amount not subjected to EWT Acct. Code: 1740354 TSO-Purchase Services Trafalgar Plaza Condominium Corp. Storage Rental-Jan. '09 5902 P-63.118 P1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Feb. '09 5995 P-63.121 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Mar. '09 6130 P-63.124 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Apr. '09 6221 P-63.127 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-May '09 6299 P-63.130 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Jun. '09 6423 P-63.133 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Jul. '09 6497 P-63.136 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Aug. '09 6602 P-63.140 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Sep. '09 6672 P-63.144 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Oct. '09 6802 P-63.147 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Nov. '09 6900 P-63.150 1,808.04 Trafalgar Plaza Condominium Corp. Storage Rental-Dec. '09 7049 P-63.153 1,808.04 Subtotal P21,696.48 Acct. Code: 1740254 SALES-Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6658 P-63 P5,249.46 Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6708 P-63.3 (1,604.68) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6636 P-63.6 (1,416.00) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6572 P-63.9 2,108.85 Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6958 P-63.12 (11.96) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 7119 P-63.15 (1,063.13) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6839 P-63.18 (2,158.17) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6932 P-63.21 (531.56) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered Ref. I P-63.261 34,907.74 Acct. Code: 1740354 TSO-Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered Ref. E P-63.156 to P-63.202; P-63.200 253,201.91 Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered Ref. J P-63.276 to P-63.111 593,346.90 Acct. Code: 1740454 FAD-Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered Ref. F P-63.203 to P-63.217 10,900.48 Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered Ref. L P-63.350 to P-63.367 154,235.85 Acct. Code: 1740654 CST-Purchase Services Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 5972 P-63.46 6,337.51 Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 5491 P-63.49 (15.69) Alternative Network Resources Unlimited Multi-Purpose Cooperative Customer and technical support services rendered 6123 P-63.37 3,807.38 Subtotal P1,057,294.89 Acct. Code: 1740654 CST-Purchase Services Manila Bulletin - Trial Balance P-63.34 to P-63.36.6 P(15.69) Manila Bulletin - Trial Balance P-63.40 to P-63.42.6 6,611.28 Manila Bulletin - Trial Balance P-63.43 to P63.45 (466.29) Subtotal P6,129.30 Acct. Code: 1740454 FAD-Purchase Services Allied Banking Corporation Safety deposit box rental 6126 P-63.27 to P-63.29 P1,500.00 Subtotal P1,500.00 Unaccounted Difference 38 P(2,020.05) Total P1,084,600.62 With regard to the payments for customer and technical support services rendered by ANR Unlimited in the total amount of P1,057,294.89, the same were validly not subjected to EWT. ANR Unlimited, being an entity registered with the Cooperative Development Authority, 39 is exempt from income tax and consequently from EWT pursuant to Republic Act No. 9520. 40 With regard to the storage rental fees paid to TPCC in the amount of P21,696.48, petitioner is liable to pay 5% deficiency EWT in accordance with Section 2.57.2 (C) (1) of RR No. 02-98, as amended by RR No. 14-02. As to the income payments made by petitioner to Manila Bulletin in the amount of P6,129.30 and Allied Banking Corporation in the amount of P1,500.00, petitioner is liable to pay 2% deficiency EWT thereon pursuant to Section 2.57.2 (M) of RR No. 02-98, as amended by RR No. 17-03. Thus, the deficiency tax assessment on Outside Purchased Services is upheld but in the reduced amount of P1,237.41, computed as follows: Outside Purchased Services P2,203,424.56 Less: (1) Purchase of Services subjected to EWT 1,118,823.94 (2) Purchase of Services exempt from EWT 1,057,294.89 (3) Unaccounted Difference (2,020.05) Income Payments not subjected to EWT P29,325.78 With Breakdown as follows : Rate Deficiency EWT (1) Storage rental fees paid to TPCC P21,696.48 5% P1,084.82 (2) Purchase of Services from a.) Manila Bulletin 6,129.30 2% 122.59 b.) Allied Banking Corporation 1,500.00 2% 30.00 Income Payments not subjected to EWT P29,325.78 P1,237.41 C. PROFESSIONAL FEES Relative to the withholding EWT on professional fees, Section 2.57.2 of RR No. 2-98, as amended by RR No. 30-03, provides as follows: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. x x x. A) Professional fees, talent fees, etc., for services rendered by individuals . On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; xxx xxx xxx (9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors. xxx xxx xxx (B) Professional fees, talent fees, etc., for services of taxable juridical persons . On the gross professional, promotional and talent fees, or any other form of remuneration enumerated in the preceding subparagraph for the services of taxable juridical persons Fifteen percent (15%), if the gross income for the current year exceeds P720,000 ; and Ten percent (10%), if otherwise; Furthermore, in order to determine the applicable tax rate (10% or 15%) to be applied/withheld by the withholding agent, every individual professional/talent/corporate directors herein enumerated, shall periodically disclose his gross income for the current year to the Bureau of Internal Revenue (BIR) by submitting a notarized sworn declaration attached as Annex "A" hereof in three (3) copies (two (2) copies for the BIR and one (1) copy for the taxpayer), copy furnished all the current payors of the declaration duly stamped received by the BIR (Collection Division of the Regional Office having jurisdiction over the place where the income earner is registered/Large Taxpayers Collection Division for large taxpayers in Metro Manila/LTDO for large taxpayers outside Metro-Manila). Sworn declaration may likewise be filed by the income payor on behalf of the professionals/talents/directors whose services were being rendered exclusively to the aforesaid payor. The disclosure should be filed on June 30 of each year or within fifteen (15) days after the end of the month the professional/talent/director's income reaches P720,000, whichever comes earlier. In case his total gross income is less than P720,000 as of June 30, he/she shall submit a second disclosure within fifteen (15) days after the end of the month that his/her gross income for the current year to date reaches P720,000. The payee professional/talent/director shall furnish each payor a copy of the BIR duly stamped received sworn declaration not later than five (5) days from the date of receipt by the BIR. In case of failure to submit the June 30 annual declaration/disclosure to the BIR, and to furnish the payor/s a copy thereof, the payor shall withhold the tax at the rate of 15% ." (Emphasis supplied) Respondent's deficiency EWT assessment on professional fees was based on the following accounts: Particular Per FS Per Withholding Tax Return Discrepancy Rate Deficiency EWT Joint Marketing fee P1,100,000.00 Board Honorarium 556,000.00 Mktg.-Professional fees 342,400.00 Director's Fees P746,203.87 Professional Fees 1,027,445.00 Total P1,998,400.00 P1,773,648.87 P224,751.13 15% P33,712.67 In light of Section 2.57.2 (A) and (B) of RR No. 02-98, as amended, we shall now determine whether the above expenses are subject to EWT. 1. Joint Marketing Fee P1,100,000.00 The ICPA's verification of the check voucher and supporting documents 41 and general ledger of the Joint Marketing Agreement account 42 showed that the entire amount of P1,100,000.00 pertains only to a single transaction with Philippine Airlines, Inc. (PAL) representing the extension of the Joint Marketing Agreement 43 dated November 5, 2004 entered into by both entities. Pursuant to the said agreement, PAL agreed, among others, to promote the Abacus System to travel agencies. In consideration thereof, petitioner paid PAL a marketing fee of P1,000,000.00, net of all applicable taxes, charges, withholdings and other fees. Petitioner remitted to the BIR an amount of P100,000.00 EWT on the said transaction as can be traced to the petitioner's EWT return 44 and alphalist. 45 However, considering that petitioner claimed the entire amount of P1,100,000.00 as deductible expense, petitioner should have withheld and remitted the corresponding 15% EWT in the amount of P165,000.00 instead of P100,000.00 as required under Section 2.57.2 of RR No. 02-98, as amended by RR No. 30-03. Thus, petitioner is liable to pay deficiency EWT in the amount of P65,000.00 on the Joint Marketing Fees of P1,100,000.00. 2. Board Honorarium P556,000.00 The ICPA found that out of the assessed amount of P556,000.00 board honorarium, the amount of P486,000.00 was subjected to 15% EWT, while the remaining P70,000.00 was paid to John Lim Cheng Chua, a non-resident alien representing AIPL Singapore, hence not subjected to EWT. The assessment is partially upheld. Indeed, the 15% EWT due on the amount of P486,000.00 board honorarium was withheld and remitted to the BIR as can be traced to the supporting check vouchers 46 and EWT alphalist of petitioner for the year 2009, detailed as follows: Payee Particular C.V. No. Amount Subjected to EWT EWT Rate Tax Withheld Lucio C. Tan Honorarium-Jan.'09 5922 P5,000.00 15% 750.00 Henry So Uy Honorarium-Jan.'09 5923 5,000.00 15% 750.00 Harry C. Tan Honorarium-Jan.'09 5924 5,000.00 15% 750.00 Jose P. Magno Honorarium-Jan.'09 5925 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-Jan.'09 5926 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Jan.'09 2957 3,000.00 15% 450.00 Henry So Uy Honorarium-Feb.'09 6005 5,000.00 15% 750.00 Harry C. Tan Honorarium-Feb.'09 6006 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-Feb.'09 6007 5,000.00 15% 750.00 Jose P. Magno Honorarium-Feb.'09 6008 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Feb.'09 6009 3,000.00 15% 450.00 Lucio C. Tan Honorarium-Feb.'09 6010 5,000.00 15% 750.00 Henry So Uy Honorarium Excom Meeting-Feb.'09 6109 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Mar.'09 6132 5,000.00 15% 750.00 Henry So Uy Honorarium-Mar.'09 6133 5,000.00 15% 750.00 Harry C. Tan Honorarium-Mar.'09 6134 5,000.00 15% 750.00 Jose P. Magno Honorarium-Mar.'09 6135 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-Mar.'09 6136 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Mar.'09 6137 3,000.00 15% 450.00 Henry So Uy Honorarium-Joint Regular BOD/Annual Stockholders Meeting Mar.'09 6189 10,000.00 15% 1,500.00 Harry C. Tan Honorarium-Joint Regular BOD/Annual Stockholders Meeting Mar.'09 6190 10,000.00 15% 1,500.00 Jose P. Magno Honorarium-Joint Regular BOD/Annual Stockholders Meeting Mar.'09 6192 10,000.00 15% 1,500.00 Lucio C. Tan Honorarium-Apr.'09 6215 5,000.00 15% 750.00 Henry So Uy Honorarium-Apr.'09 6216 5,000.00 15% 750.00 Harry C. Tan Honorarium-Apr.'09 6217 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-Apr.'09 6218 5,000.00 15% 750.00 Jose P. Magno Honorarium-Apr.'09 6219 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Apr.'09 6220 3,000.00 15% 450.00 Lucio K. Tan Jr. Honorarium-Apr.'09 6225 5,000.00 15% 750.00 Michael G. Tan Honorarium-Apr.'09 6226 5,000.00 15% 750.00 Lucio C. Tan Honorarium-May'09 6291 5,000.00 15% 750.00 Henry So Uy Honorarium-May'09 6292 5,000.00 15% 750.00 Harry C. Tan Honorarium-May'09 6293 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-May'09 6294 5,000.00 15% 750.00 Jose P. Magno Honorarium-May'09 6295 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-May'09 6296 3,000.00 15% 450.00 Lucio K. Tan Jr. Honorarium-May'09 6297 5,000.00 15% 750.00 Michael G. Tan Honorarium-May'09 6298 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Jun.'09 6426 5,000.00 15% 750.00 Henry So Uy Honorarium-Jun.'09 6427 5,000.00 15% 750.00 Harry C. Tan Honorarium-Jun.'09 6428 5,000.00 15% 750.00 Jose P. Magno Honorarium-Jun.'09 6429 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-Jun.'09 6430 5,000.00 15% 750.00 Lucio K. Tan Jr. Honorarium-Jun.'09 6431 5,000.00 15% 750.00 Michael G. Tan Honorarium-Jun.'09 6432 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Jun.'09 6433 3,000.00 15% 450.00 Harry C. Tan Honorarium-Jul.'09 6499 5,000.00 15% 750.00 Mariano Tanenglian Honorarium-Jul.'09 6500 5,000.00 15% 750.00 Jose P. Magno Honorarium-Jul.'09 6503 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Jul.'09 6504 3,000.00 15% 450.00 Lucio K. Tan Jr. Honorarium-Jul.'09 6505 5,000.00 15% 750.00 Michael G. Tan Honorarium-Jul.'09 6506 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Jul.'09 6507 5,000.00 15% 750.00 Henry So Uy Honorarium-Jul.'09 6508 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Aug.'09 6587 5,000.00 15% 750.00 Henry So Uy Honorarium-Aug.'09 6588 5,000.00 15% 750.00 Michael G. Tan Honorarium-Aug.'09 6589 5,000.00 15% 750.00 Lucio K. Tan Jr. Honorarium-Aug.'09 6590 5,000.00 15% 750.00 Jose P. Magno Honorarium-Aug.'09 6591 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Aug.'09 6592 3,000.00 15% 450.00 Mariano Tanenglian Honorarium-Aug.'09 6593 5,000.00 15% 750.00 Harry C. Tan Honorarium-Aug.'09 6594 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Sep.'09 6675 5,000.00 15% 750.00 Michael G. Tan Honorarium-Sep.'09 6677 5,000.00 15% 750.00 Lucio K. Tan Jr. Honorarium-Sep.'09 6678 5,000.00 15% 750.00 Jose P. Magno Honorarium-Sep.'09 6679 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Sep.'09 6680 3,000.00 15% 450.00 Mariano Tanenglian Honorarium-Sep.'09 6681 5,000.00 15% 750.00 Harry C. Tan Honorarium-Sep.'09 6682 5,000.00 15% 750.00 Henry So Uy Honorarium-Sep.'09 6683 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Oct.'09 6807 5,000.00 15% 750.00 Henry So Uy Honorarium-Oct.'09 6808 5,000.00 15% 750.00 Michael G. Tan Honorarium-Oct.'09 6819 5,000.00 15% 750.00 Lucio K. Tan Jr. Honorarium-Oct.'09 6811 5,000.00 15% 750.00 Jose P. Magno Honorarium-Oct.'09 6812 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Oct.'09 6813 3,000.00 15% 450.00 Mariano Tanenglian Honorarium-Oct.'09 6814 5,000.00 15% 750.00 Harry C. Tan Honorarium-Oct.'09 6815 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Nov.'09 6907 5,000.00 15% 750.00 Henry So Uy Honorarium-Nov.'09 6908 5,000.00 15% 750.00 Michael G. Tan Honorarium-Nov.'09 6909 5,000.00 15% 750.00 Lucio K. Tan Jr. Honorarium-Nov.'09 6910 5,000.00 15% 750.00 Jose P. Magno Honorarium-Nov.'09 6911 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Nov.'09 6912 3,000.00 15% 450.00 Mariano Tanenglian Honorarium-Nov.'09 6913 5,000.00 15% 750.00 Harry C. Tan Honorarium-Nov.'09 6914 5,000.00 15% 750.00 Henry So Uy Honorarium Execom Meeting-Nov.'09 6934 5,000.00 15% 750.00 Jose P. Magno Honorarium BOD Meeting-Nov.'09 6981 5,000.00 15% 750.00 Henry So Uy Honorarium BOD Meeting-Nov.'09 6982 5,000.00 15% 750.00 Harry C. Tan Honorarium BOD Meeting-Nov.'09 6983 5,000.00 15% 750.00 Michael G. Tan Honorarium BOD Meeting-Nov.'09 6985 5,000.00 15% 750.00 Lucio C. Tan Honorarium-Dec.'09 7036 5,000.00 15% 750.00 Henry So Uy Honorarium-Dec.'09 7037 5,000.00 15% 750.00 Michael G. Tan Honorarium-Dec.'09 7038 5,000.00 15% 750.00 Lucio K. Tan Jr. Honorarium-Dec.'09 7039 5,000.00 15% 750.00 Jose P. Magno Honorarium-Dec.'09 7040 5,000.00 15% 750.00 Enrique Antonio J. Esquivel III Honorarium-Dec.'09 7041 3,000.00 15% 450.00 Mariano Tanenglian Honorarium-Dec.'09 7042 5,000.00 15% 750.00 Harry C. Tan Honorarium-Dec.'09 7043 5,000.00 15% 750.00 Total P486,000.00 P72,900.00 With regard to the remaining honorarium of P70,000.00 allegedly paid to a non-resident alien, petitioner submitted the related Credit Notes which show the following details: Credit Note No. Date Particular Amount Exhibit 1351 25-Mar-09 Q1 2009 Honorarium (Jan-Mar 2009) P15,000.00 Honorarium-Joint Regular Board of Directors & Annual Stockholders' Meeting 10,000.00 P-82.102 1359 30-Jun-09 Q2 2009 Honorarium (April to June 2009) 15,000.00 P-82.103 1362 09-Oct-09 Q3 2009 Honorarium (July to September 2009) 15,000.00 P-82.104 1365 16-Dec-09 Q4 2009 Honorarium (October-December 2009) 15,000.00 P-82.105 Total P70,000.00 While the EWT mandated under Section 2.57.2 in relation to Section 2.57.2 (A) (9) of RR No. 02-98, as amended by RR No. 30-03, applies only to income payments to persons residing in the Philippines, the Court cannot ascertain whether the honorarium of P70,000.00 was actually paid to an alleged non-resident alien named John Lim Cheng Chua, notwithstanding that the Credit Notes supporting the said payment were addressed to AIPL, Singapore. For lack of sufficient evidence, the deficiency 15% EWT assessment on the amount of P70,000.00 is sustained. 3. Mktg.-Professional Fees P342,400.00 Per the ICPA's verification, the assessed amount of P342,400.00 consisted of professional fees paid to the following: 47 Supplier Professional Fees Professional Fees subjected to EWT E.M. Zalamea Actuarial Services P50,000.00 P27,445.00 SGV & Co. 292,400.00 Total P342,400.00 An examination of the supporting check vouchers and related official receipts, statements of account and billing statements 48 shows that the professional fees of P292,400.00 were paid for auditing services rendered by SGV & Co., a general professional partnership, as indicated in its Articles of Incorporation. 49 The remaining professional fees of P50,000.00 were paid to E.M. Zalamea Actuarial Services, Inc. for the actuarial valuation of petitioner's retirement plan. Section 22 (B) of the NIRC of 1997, as amended, defines general professional partnerships (GPPs) as partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Corollary thereto, Section 26 of the same NIRC provides that a general professional partnership shall not be subject to income tax. Its partners are the ones liable in their individual capacity for the payment of income tax. Pertinent hereto is Section 2.57.5 of RR No. 2-98, as amended by RR No. 14-02, which states: "Sec. 2.57.5. Exemption from Withholding . The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: xxx xxx xxx (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: (4) General professional partnerships xxx xxx xxx" Petitioner has satisfactorily shown that it made payments to a GPP in the amount of P292,400.00. Hence, the deficiency EWT assessment on this item must be cancelled. As to the P50,000.00 professional fees which were paid to E.M. Zalamea Actuarial Services, Inc., it was verified that the amount of P27,445.00 n was subjected to 10% EWT. However, absent of proof that E.M. Zalamea's gross income for the year 2009 did not exceed P720,000.00, the said income payment of P27,445.00 shall be subjected to 15% EWT pursuant to Section 2.57.2 (B) of RR No. 02-98, as amended by RR No. 17-03. Thus, petitioner is liable for the under-withholding of 5% EWT in the amount of P1,372.25 on its income payments to E.M. Zalamea of P27,445.00. As to the remaining income payments to E.M. Zalamea of P22,555.00, petitioner shall likewise be liable to pay the corresponding 15% deficiency EWT in the amount of P3,383.25. To recapitulate, petitioner is liable for basic deficiency EWT for taxable year 2009 in the amount of P250,073.83, computed as follows: Particulars Amount not subjected to EWT Rate Deficiency EWT Purchases of Goods P5,194,099.88 1% P51,941.00 Rent Communication Exp.-Rentals of Equip. 2,332,798.41 5% 116,639.92 Storage Rental 21,696.48 5% 1,084.82 Outside Purchased Services Manila Bulletin 6,129.30 2% 122.59 Allied Banking Corporation 1,500.00 2% 30.00 Professional Fees Joint Marketing Fees 433,333.33 50 15% 65,000.00 Board Honorarium 70,000.00 15% 10,500.00 Mktg.-Professional Fees Underwithholding of 5% EWT on the P27,445.00 prof. fees paid to E.M. Zalamea 9,148.33 51 15% 1,372.25 Non-withholding of 15% on the P22,555.00 prof. fees paid to E.M. Zalamea 22,555.00 15% 3,383.25, Total P8,091,260.73 P250,073.83 II. DEFICIENCY WTC P162,153.34 52 Respondent assessed petitioner of deficiency WTC for taxable year 2009 in the amount of P162,153.34, computed as follows: A-Under Remittance Total Per Alphalist P4,871,438.91 Less: Tax Remitted Per 1604-CF 4,871,438.91 Under Remittance P- B-Under Withholding Acct. Code Description 1740006 MKTG.-BOARD HONORARIUM P556,000.00 1740007 MKTG.-BONUS/13TH MO. PAY 3,443,284.24 1740011 MKTG.-CAR LEASE - 1740012 MKTG.-CONFERENCE - 1740022 MKTG.-EMERGENCY/BENEFITS 406,085.00 1740026 MKTG.-GROUP HOSPITALIZATION 980,698.29 1740031 MKTG.-INCENTIVES 1,480,212.29 1740042 MKTG.-MEDICAL 102,856.77 1740047 MKTG.-OVERTIME 303,634.83 1740050 MKTG.-PAG-IBIG FUND CONTRI 64,600.00 1740051 MKTG.-PERSONNEL RECRUITMENT 18,000.00 1740058 MKTG.-RETIREMENT 1,865,110.00 1740059 MKTG.-RICE ALLOCATION 763,200.00 1740061 MKTG.-SALARIES & WAGES 20,575,917.55 1740062 MKTG.-SICK LEAVE 1,016,846.92 1740063 MKTG.-SSS/MEDICARE PREMIUMS 852,292.20 1740081 MKTG.-UNIFORMS 44,229.33 1740086 MKTG.-VACATION LEAVE 556,846.70 Total Deductions per Books P33,029,814.12 Less: Non Taxable Items 1740022 MKTG.-EMERGENCY/BENEFITS P406,085.00 1740026 MKTG.-GROUP HOSPITALIZATION 980,698.29 1740031 MKTG.-INCENTIVES 1,480,212.29 1740042 MKTG.-MEDICAL 102,856.77 1740050 MKTG.-PAG-IBIG FUND CONTRI 64,600.00 1740051 MKTG.-PERSONNEL RECRUITMENT 18,000.00 1740058 MKTG.-RETIREMENT 1,865,110.00 1740059 MKTG.-RICE ALLOCATION 763,200.00 1740063 MKTG.-SSS/MEDICARE PREMIUMS 852,292.20 1740081 MKTG.-UNIFORMS 44,229.33 1740086 MKTG.-VACATION LEAVE 556,846.70 Total Non-Taxable Items P7,134,130.58 Deductions Subject to WTC P25,895,683.54 Less: Gross Payments per Alphalist 25,484,937.51 Deductions not subjected to WTC P410,746.03 Tax Rate: Tax Due/alphalist 4,871,438.91 Taxable Compensation Less Exemption 19,506,874.08 0.2497 Deficiency WTC P102,575.34 Add: Interest (2010-01-20 to 2012-12-15) 0.58082 59,578.00 TOTAL AMOUNT DUE P162,153.34 In arriving at the deficiency withholding tax on compensation, respondent identified petitioner's claimed deductions for salaries and wages which are subject to WTC and then matched the figure total with the amount declared per alphalist. The total deductions not subjected to WTC as found by respondent amounted to P410,746.03. The Court cancels the assessment. As correctly observed by the ICPA, 53 respondent's computation included the Mktg.-Board Honorarium amounting to P556,000.00 as compensation income subject to WTC. As earlier discussed under the deficiency EWT assessment, the amount of P486,000.00 of the transactions lodged under the Board Honorarium account was already subjected to EWT, while the remaining P70,000.00 was not subjected to EWT as the same was allegedly paid to a non-resident alien named John Lim Cheng Chuan. Considering that the members of the board of directors of petitioner who were paid the honorarium of P486,000.00 were not, at the same time, employees of petitioner as can be seen from the Alphalist of Employees 54 supporting its Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR Form No. 1604-CF) 55 for the year 2009, the 15% EWT was properly withheld thereon by petitioner as provided for under Section 2.57.2 (A) (9) of RR No. 02-98, as amended by RR No. 30-03, to wit: "Sec. 2.57.2. Income payments subject to creditable withholding tax and rates prescribed thereon. x x x (A) Professional fees, talent fees, etc., for services rendered by individuals . Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%), if otherwise; xxx xxx xxx (9) Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in the meetings of the board of directors." Obviously, the amount of P486,000.00 representing Board Honorarium will offset the alleged P410,746.03 deductions not subjected to WTC and will not result to any deficiency WTC, as shown below: Deductions not subjected to WTC as found by respondent P410,746.03 Less: Deductions subjected to EWT Board Honorarium 486,000.00 Amount not Subjected to WTC (P75,253.97) Clearly, the subject assessment, being a mere result of respondent's erroneous computation, must be cancelled. III. DEFICIENCY FWVAT P4,550,165.78 IV. DEFICIENCY FWT P11,375,414.45 Respondent assessed petitioner of deficiency FWVAT and FWT on the amounts of P18,976,877.84 and P1,734,065.04 representing communication expense and marketing fees paid to the non-resident/Singapore-based AIPL. Respondent's computations of the assessments for deficiency FWVAT of P4,550,165.78 and deficiency FWT of P11,375,414.45 are reproduced as follows: III. DEFICIENCY FWVAT Communication Expense payable to AIPL (Singapore) P18,976,877.84 Marketing Fees 1,734,065.04 Total Deductions Payable to AIPL (Singapore) P20,710,942.88 Tax Rate 0.12 Deficiency Final VAT Withheld P2,485,313.15 Add: Surcharge 621,328.29 Interest (1/20/2010 to 12/15/2012) 1,443,524.35 TOTAL AMOUNT DUE P4,550,165.79 IV. DEFICIENCY FWT Communication Expense payable to AIPL (Singapore) P18,976,877.84 Marketing Fees 1,734,065.04 Total Deductions Payable to AIPL (Singapore) P20,710,942.88 Tax Rate 0.30 FWT Due P6,213,282.86 FWT Paid - Deficiency FWT P6,213,282.86 Add: Surcharge 1,553,320.72 Interest (2010-01-20 to 2012-12-15) 3,608,810.87 TOTAL AMOUNT DUE P11,375,414.45 According to respondent, petitioner provides computerized reservation system in the Philippines, the Abacus System, a system that performs various functions, including real time airline seat reservations, schedule displays, booking for a variety of air, car and hotel services, automated ticketing and fare quote displays. The Abacus System is an intellectual property owned by AIPL, a non-resident foreign corporation. Respondent further states that in connection with the use of the Abacus System in the Philippines, marketing fees and communication expenses are being charged by AIPL. Respondent posits that since the charges are income of a non-resident in connection with the use of its property and property rights in the country, the same are subject to final withholding VAT as required under RR No. 16-05 as amended by RR No. 04-07. Respondent likewise argues that in the absence of an ITAD Ruling, such income is subject to 30% FWT pursuant to Section 28 (B) (1) of the NIRC of 1997, as amended. Petitioner counter-argues that the payments are mere reimbursement of expenses incurred by AIPL, which in turn were charged by Sabre Holdings, a foreign corporation based in the USA and the licensor of the Abacus System. As such, the payments it made to AIPL did not arise from an activity, the income of which is derived from the operation of the Abacus System, hence, is not subject to FWVAT and FWT. The Court rules in favor of respondent. To determine whether the payments are subject to FWVAT, Section 114 (C) of the NIRC of 1997, as amended, provides: " SEC. 114. Return and Payment of Value-Added Tax. xxx xxx xxx (C) Withholding of Value-Added Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent." In relation thereto, Section 4.114-2 of RR No. 16-05 prescribes the withholding of 12% final VAT on the lease or use of properties or property rights owned by non-residents. Verily, before subjecting the subject payments to FWVAT, the source of such payments must proceed from a VATable transaction. In this regard, Section 105 of the same Code provides: " SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Corollary thereto, Section 108 (A) (1) states: SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the value-added tax to twelve percent (12%), after any of the following conditions has been satisfied : xxx xxx xxx x x x The phrase "sale or exchange of services" shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right;" The Court finds, however, that petitioner failed to adduce sufficient evidence to overturn the presumption of correctness of respondent's treatment of the subject payments as income on the part of AIPL. While the amounts of P18,976,877.84 and P1,734,065.04 representing communication expense and marketing fees were traced to the Tax Invoices 56 issued by AIPL to petitioner, there were no indications even in the schedules attached to the said invoices that the said expenses were initially billed by Sabre Holdings and paid by AIPL in behalf of the petitioner. In other words, petitioner failed to convince the Court through sufficient evidence that the subject expenses were mere reimbursements. Verily, the Court is constrained to uphold respondent's assessment in treating the subject payments remitted to AIPL as income pertaining to the operation of Abacus System in the Philippines. Since it is an income arising from the privilege to use the computer system in the Philippines, it necessarily follows that there is a sale of service by AIPL in the course of trade or business, hence, subject to VAT under Section 105 in relation to Section 108 (A) (1) of the NIRC of 1997, as amended. Consequently, the supposed withholding of the VAT is in order pursuant to Section 114 (C) of the same Code. Also, considering that the subject payments represent income derived by AIPL in the Philippines, the same are subject to 30% FWT pursuant to Section 28 (B) (1) of the NIRC of 1997, as amended. Therefore, petitioner is liable for the basic deficiency FWVAT in the amount of P2,485,313.15 and deficiency FWT in the amount of P6,213,282.86 for taxable year 2009. V. DEFICIENCY INCOME TAX P43,457,241.81 Respondent found petitioner liable for deficiency income tax for taxable year 2009 in the amount of P43,457,241.81, computed as follows: 57 Taxable Income per return P11,194,801.00 Adjustments: (1) Unaccounted AIPL remittances: Due from AIPL-Beg P1,148,664.00 Add/Deduct Transactions for the year Booking Commission P111,154,286.00 Communication Expense (18,976,877.84) Marketing Fee (1,734,085.04) Net Transactions for the year P90,443,323.12 Total Due from AIPL P91,591,987.12 Less: Due from AIPL-End 348,856.00 Remittances per FS P91,243,131.12 Actual Remittances per Bank Certification 141,781,207.52 P50,538,076.40 (2) Forex Loss claimed/ITR-Substantiation Requirement Forex loss/Trial Balance P3,064,340.00 Unrealized Forex Loss 2009 (896,963.00) Forex Loss in 2008 realized in 2009 264,230.00 2,431,607.00 (3) Undeclared income (SLS<SAWT) RMO 14-2011 570,130.98 (4) Unaccounted Source (SLP<EWT) RMO 14-2011 16,764,878.70 (5) Expenses Failing Additional Requirement of Deductibility Final Withholding Tax P20,710,942.88 Expanded Withholding Tax (Less Capital Goods-P10,910,765) 2,989,649.32 Withholding Tax on Compensation 410,746.03 24,111,338.23 Total Adjustments P94,416,031.31 Taxable Income per Audit P105,610,832.31 Computation of Tax Due (A) Regular-30% P31,683,249.69 (B) MCIT Gross Income per ITR P23,765,248.00 Add: Adjustments Unaccounted Remittance 50,538,076.40 Undeclared Income 570,130.98 Unaccounted Source 16,764,878.70 Gross Income per Audit P91,638,334.08 Tax Rate 0.02 P1,832,766.68 Income Tax Due per Audit P31,683,249.69 Less: Unexpired MCIT P974,575.00 Tax Payments 1st three qtrs. 254,004.00 Tax Credits 4th qtr. 59,310.00 Tax Payment Final Return 2,070,551.30 3,358,440.30 Deficiency Income Tax P28,324,809.39 Add: Interest (4/15/2010 to 12/15/2012) 15,132.432.42 TOTAL AMOUNT DUE P43,457,241.81 In order to determine whether or not the assessment is correct, we shall look into the propriety of each of the following items: A. Unaccounted Remittances P50,538,076.40 B. Forex Loss Claimed 2,431,607.00 C. Undeclared Income 570,130.98 D. Unaccounted Source of Cash 16,764,878.70 E. Disallowed Expenses Due to Non-withholding of FWT P20,710,942.88 Disallowed Expenses Due to Non-withholding of EWT 2,989,649.32 Disallowed Expenses Due to Non-withholding of WTC 410,746.03 24,111,338.23 A. UNACCOUNTED REMITTANCES P50,538,076.40 Respondent imputed against petitioner an alleged amount of P50,538,076.40 unaccounted foreign currency inward remittances received from AIPL, Singapore, computed as follows: 58 Due from AIPL-Beg P1,148,664.00 Add/Deduct Transaction for the year Booking Commission P111,154,286.00 Communication Expense (18,976,877.84) Marketing Fee (1,734,085.04) Net Transaction for the year P90,443,323.12 Total Due from AIPL P91,591,987.12 Less: Due from AIPL-End 348,856.00 Remittances per FS P91,243,131.12 Actual Remittances per Bank Certification 141,781,207.52 Unaccounted Remittances P50,538,076.40 As can be seen from the above computation, respondent compared the movement of petitioner's "Due from AIPL" accounts receivable account, together with the amount of "Booking Commission," net of related expenses, against the actual remittances made by AIPL to petitioner. The resulting difference was treated by respondent as unaccounted remittances of AIPL to petitioner. Petitioner posits that based on the ICPA's reports, there were several inaccuracies in the figures picked-up by the respondent and that the actual remittances received by petitioner per Bank Certification were fully accounted for. A perusal of petitioner's Audited Financial Statements (AFS) 59 as of and for the year ended December 31, 2009 and 2008 Lead Schedule, 60 shows that petitioner's Receivables comprised of the following: Receivables Trade P13,324,773.42 AR Trade Domestic P754,208.03 AR Trade AIPL (1112120) 12,570,565.39 Due from Abacus International Pte. Ltd. 348,855.99 Claims AIPL (1112150) 348,855.99 Others 222,609.80 Total Receivables P13,896,239.21 Note 7 61 of the Notes to FS reveals that petitioner earned booking commissions from AIPL in the amount of P111,154,286.00 in 2009 and that Commission receivables were included as part of "Receivables-Trade" account in the balance sheet, which amounted to P12,570,565.00 and P9,962,099.00 as of December 31, 2009 and 2008, respectively while the amounts lodged in the "Due from AIPL" account were reimbursements due from AIPL. The findings of the Court-commissioned ICPA 62 confirmed that the transactions lodged in the "Due from AIPL/Claims-AIPL" account pertain to reimbursements due from AIPL such as fares guarantee and promotional and advertising activities. Fares guarantee 63 pertains to payment made to travel agencies due to system errors on the use of the Abacus System while promotional and advertising expenses 64 pertain to expenses incurred by petitioner, being the marketing arm or national marketing company (NMC) of AIPL in the Philippines. The amounts in this account, being mere reimbursements, are not subject to income tax. The Court agrees with the ICPA. Based on petitioner's "AR Trade-AIPL," the booking commissions it received from AIPL during the year amounted to P108,545,820.00, as computed below: AR Trade-AIPL, beg P9,962,099.00 Add: Booking Commissions during the year 111,154,286.00 Total 121,116,385.00 Less: AR Trade-AIPL, end 12,570,565.00 Booking Commissions collected/received from AIPL during the year per review P108,545,820.00 On the other hand, actual foreign currency inward remittances received by petitioner per Bank Certification 65 amounted to P141,781,207.52, broken down as follows: Date Amount (in USD) Service charge (in USD) Net amount (in USD) BSP Exchange Rate Peso equivalent 1/23/2009 133,359.78 20.00 133,339.78 47.363 6,315,372.00 2/25/2009 195,351.00 20.00 195,331.00 48.232 9,421,204.79 3/24/2009 224,121.27 20.00 224,101.27 48.210 10,803,922.23 4/27/2009 203,237.28 20.00 203,217.28 48.559 9,868,027.90 5/25/2009 503,505.04 20.00 503,485.04 47.054 23,690,985.07 6/23/2009 159,124.66 20.00 159,104.66 48.421 7,704,006.74 7/24/2009 127,691.15 20.00 127,671.15 48.095 6,140,343.96 8/24/2009 148,805.31 20.00 148,785.31 48.486 7,214,004.54 9/28/2009 481,061.92 20.00 481,041.92 47.393 22,798,019.71 10/27/2009 147,599.95 20.00 147,579.95 46.967 6,931,387.51 12/1/2009 409,828.62 20.00 409,808.62 47.132 19,315,099.88 12/23/2009 248,620.85 20.00 248,600.85 46.576 11,578,833.19 Total 2,982,306.83 240.00 2,982,066.83 141,781,207.52 The gross remittances (in USD) per Bank Certificate tally with the remittances (in USD) per the monthly electronic mail advice prepared and sent by AIPL to petitioner, as follows: Exhibit 66 Booking Commission NMC (DN) Fares Guarantee Incentive AIPL INV Total P-13 140,866.76 2,799.87 609.30 31,000.00 (41,916.15) 133,359.78 P-14 68,773.36 3,042.68 280.00 154,778.45 (31,523.49) 195,351.00 P-15 248,245.72 12,765.44 1,369.50 - (38,259.39) 224,121.27 P-16 244,041.11 257.76 - - (41,061.59) 203,237.28 P-17 239,692.08 8,887.55 215.50 301,386.05 (46,676.14) 503,505.04 P-18 197,928.70 2,032.15 1,445.16 - (42,281.35) 159,124.66 P-19 164,963.65 - 697.00 - (37,969.50) 127,691.15 P-20 180,550.09 - 536.35 86.36 (32,367.49) 148,805.31 P-21 199,216.97 18,620.56 129.90 296,744.92 (33,650.43) 481,061.92 P-22 179,426.16 600.00 2,283.73 (34,709.94) 147,599.95 P-23 196,829.64 2,188.03 3,670.40 241,662.00 (34,521.45) 409,828.62 P-24 197,347.41 762.99 625.80 85,909.10 (36,024.45) 248,620.85 2,257,881.65 51,957.03 11,862.64 1,111,566.88 (450,961.37) 2,982,306.83 The peso equivalent of the above amounts as booked by petitioner is shown hereunder: Exhibit Booking Commission NMC Fares Guarantee Incentive AIPL INV Forex G(L) Net Amount P-42.487 to P-42.488 6,675,675.76 133,049.82 28,874.72 1,469,090.00 (1,991,855.45) 5,085.12 6,319,919.97 P-42.489 to P-42.490 3,259,169.53 144,192.61 13,664.00 7,553,188.36 (1,538,346.31) 100,284.62 9,532,152.81 P-42.491 to P-42.494 11,796,638.62 622,395.70 66,187.94 - (1,849,076.32) 194,659.04 10,830,804.98 P-42.495 to P-42.498 11,794,506.85 12,457.34 - - (1,985,327.87) 3,919.18 9,825,555.50 P-42.499 to P-42.501 11,589,112.07 429,713.04 10,203.93 14,270,629.47 (2,210,115.23) (249,526.63) 23,840,016.65 P-42.502 to P-42.504 9,371,923.94 96,222.30 69,555.56 - (2,035,001.38) 155,006.87 7,657,707.29 P-42.505 to P-42.507 7,811,028.82 - 33,547.58 - (1,825,953.26) 121,111.31 6,139,734.45 P-42.508 to P-42.510 8,689,875.83 - 26,173.88 - (1,575,319.14) 119,992.56 7,260,723.13 P-42.511 to P-42.514 9,580,344.09 908,683.33 6,155.96 14,062,741.76 (1,594,693.88) (165,706.87) 22,797,524.39 P-42.515 to P-42.518 8,503,005.72 28,434.00 108,774.06 - (1,653,234.44) 42,230.28 7,029,209.62 P-42.521 to P-42.523 9,295,308.71 101,086.99 169,572.48 11,164,784.40 (1,594,890.99) (202,703.34) 18,933,158.25 P-42.521, P-42.524 to P-42.525 9,315,784.49 35,250.14 28,911.96 3,969,000.42 (1,664,329.59) (199,258.15) 11,485,359.27 107,682,374.43 2,511,485.27 561,622.07 52,489,434.41 (21,518,143.86) (74,906.01) 141,651,866.31 A comparison between the net amount of P141,651,866.31 per petitioner's books and the net amount of P141,781,207.52 per Certificate of Inward Remittances reveals a difference of P129,341.21, which is due to the difference in rates used in converting the dollar remittances, particularly, BSP exchange rate per inward remittance as against the Philippine Dealing and Exchange (PDEX) closing rate 67 per books. From the foregoing, the remittances received by petitioner from AIPL represent not only booking commissions but also other items, namely, promotional and advertising expenses or NMC expenses, fares guarantee, and incentives which are not income payments subject to income tax. With regard to the booking commissions, there appears a difference of P863,445.57 68 between commission remittances per review of P108,545,820.00 and the remitted amount of P107,682,374.43. This difference pertains to the amount of restatement/revaluation of the "AR Trade-AIPL" as per the Journal Vouchers examined by the ICPA. 69 As explained by the ICPA, the NMC and fare guarantees are in the nature of reimbursements due from AIPL. The incentives 70 or pass-through costs are, likewise, not income payments but advances payable to travel agencies either as quarterly bonus for reaching a certain quota on the use of the Abacus System or sign-on bonuses for first time users of the Abacus System. All of these reimbursements were accounted for by petitioner using the Claims AIPL account and no disbursements relating to the transactions were accounted using a nominal/expense account. 71 The ICPA's examination also revealed that the remittances made by AIPL were net of the Intercompany Payables (AIPL INV) lodged under the "ABACUS-AIPL" 72 account. The Tax Invoices 73 issued by AIPL disclosed that the latter billed petitioner for communication expenses and marketing fees. Moreover, the foreign exchange gain/loss recognized was due to the change in the recognized peso valuation of the commission receivables, NMC and AIPL charges for communication expenses and marketing fees recorded in petitioner's books against the peso valuation of said transactions upon receipt of remittance. 74 Thus, among the amounts remitted, only the booking commissions are subject to income tax. However, respondent cannot assess petitioner of income tax based merely upon the receipt of remittances. Based on its Notes to FS, 75 petitioner employs the accrual method of accounting wherein its commission income is recognized upon acceptance of bookings through the reservation system and not when cash is received. Thus, the remitted commissions, being part of its Trade Receivables, were already recorded as part of its income during or prior to the year 2009 but were only received in 2009. Petitioner's commission income that should be subjected to income tax is that which was earned or recognized during the year 2009 in the amount of P111,154,286.00, and not the amount received as payment for receivables. Accordingly, petitioner reported its commission income of P111,154,286.00 in its Annual Income Tax Return for 2009, 76 and, thus, was properly subjected to income tax. In sum, the deficiency income tax assessment on the alleged unaccounted remittances of P50,538,076.40 is cancelled for lack of merit. B. FOREX LOSS CLAIMED P2,431,607.00 Respondent alleged that petitioner's foreign exchange (forex) loss in the amount of P2,431,607.00, as computed below, was not shown to have been actually sustained, thus, was disallowed as deduction from gross income. 2009 Forex Loss, net of gain P3,064,340.00 2009 Unrealized Forex Loss, net of gain (896,963.00) 2008 Unrealized Forex Loss realized in 2009 264,230.00 Realized Forex Loss, net of gain P2,431,607.00 Pursuant to Section 34 (D) of the NIRC of 1997, as amended, losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deduction from gross income. What is needed to be entitled to a loss deduction is for the taxpayer to prove that a closed and completed transaction sets the loss in the taxable year or in the year claimed and it is not compensated by insurance or otherwise. A closed and completed transaction is one in which the facts indicate the transaction sufficiently final to ascertain that a loss has occurred. 77 To prove its claimed forex loss, petitioner submitted its General Ledgers, 78 journal vouchers, 79 and other related source documents, such as, NMC Debit Notes, 80 bank books 81 and bank statements, 82 which were all examined by the ICPA. Based on the ICPA's examination, it was found that the total forex loss actually sustained by petitioner was P474,353.24, broken down as follows: 83 2009 Forex Loss, net of gain P3,081,548.37 2009 Unrealized Forex Loss, net of gain (2,810,043.27) 2008 Unrealized Forex Loss realized in 2009 202,848.13 Realized Forex Loss, net of gain P474,353.23 According to the ICPA, 84 the said realized forex gain or loss pertains to the change in peso valuation of the dollar denominated inter-company transactions from the time the cost was billed or recognized in the books, to the time the actual cash was received or paid. Realized forex gain or loss also includes change in peso valuation of dollar investments subsequently converted to peso and bank charges on remittances charged to forex loss. On the other hand, the unrealized forex loss relates to monthly revaluations of time deposits, Foreign Currency Deposit Units (FCDUs) or revaluation of accrued inter-company dollar denominated transactions. The details of the ICPA's findings are summarized below: Forex (Gain) Loss Realized Forex Gain Realized Forex Loss Unrealized Forex Gain Unrealized Forex Loss Exhibit Commissions from AIPL P899,285.62 P(532,150.60) P1,272,390.30 P159,045.92 P-64-a.1 Disbursements (44,357.51) (44,357.53) 0.02 P-64-a.4; P-42.487 to P-42.525 NMC 31,401.28 31,401.28 P-64-a.2; P-64-a.5 to P-64-a.6 Bank Charges 11,542.40 11,542.40 P-64-a.3 Other Bank Transactions (5,451.89) P(5,451.89) P-64-a.7; P-52 to P-52.18; P-53 to P-53.6 Money Placements 2,189,128.47 (467,320.77) 2,656,449.24 P-64-a.8 to P-64-a.10 Total P3,081,548.37 P(1,043,828.90) P1,315,334.00 P(5,451.89) P2,815,495.16 Net Loss 271,505.10 2,810,043.27 2008 unrealized forex Loss realized in 2009 202,848.13 P-64-a.1 Realized Forex Loss, net of gain P474,353.23 In the present case, petitioner's foreign exchange loss was actually sustained, ascertained and determined in the subject taxable year 2009 when the transaction was closed and terminated by the payment/remittance of its receivables, net of disbursements (payable) and conversion of its dollar denominated time deposits to Philippine Peso. Said loss was incurred due to the exchange rate differential of US dollar to Philippine Peso from booking to actual remittance or conversion thereof. Meanwhile, further verification of the ICPA's report, together with the supporting documents, shows that the P474,353.23 forex loss found by the ICPA as actually sustained for the year 2009 should be increased by P42,180.20 for the reasons stated hereunder: Reason for adjustment Amount Exhibit Disbursements No loss incurred since amount booked per supporting JV is equal to the amount disbursed P(0.01) P-64-a.4; P-42.490 No loss incurred since amount booked per supporting JV is equal to the amount disbursed (0.01) P-64-a.4; P-42.503 No loss incurred since amount booked per supporting JV is equal to the amount disbursed (0.01) P-64-a.4; P-42.509 No resulting gain since amount booked is equal to amount disbursed per supporting JV 4,214.37 P-64-a.4; P-42.509 No resulting gain since the amount booked using 46.2 forex rate per supporting JV is equal to the amount disbursed 1,210.02 P-64-a.4; P-42.522 No resulting gain since the amount booked using 46.2 forex rate per supporting JV is equal to the amount disbursed 33,333.29 P-64-a.4; P-42.522 No resulting gain since the amount booked using 46.2 forex rate per supporting JV is equal to the amount disbursed 150.75 P-64-a.4; P-42.522 Bank Charges Difference of bank charge booked at 947.80 as against 976.00 as used by ICPA (28.20) P-64-a.7; P-42.526 to P-42.527 Money Placements Loss incurred by petitioner in the amount of P1,650.00 from conversion of USD to PHP was considered as gain by the ICPA, thus, should be added twice 3,300.00 P-64-a; P-420.706 to P-42.710 Total P42,180.20 Considering the foregoing, petitioner's net forex loss actually realized and sustained in taxable year 2009 that is to be allowed as deduction from gross income amounts to P516,533.43 (P474,353.23 plus P42,180.20). Consequently, for petitioner's failure to prove otherwise, the disallowance on the remaining forex loss claim of P1,915,073.57 (P2,431,607.00 less P516,533.43) shall remain. C. UNDECLARED INCOME P570,130.98 Respondent's reconciliation of petitioner's Summary List of Sales (SLS) and Summary Alphalist of Withholding Taxes (SAWT) disclosed a variance of P570,130.98, thus, was assessed by respondent as understatement of petitioner's gross income pursuant to Section 32 of the NIRC of 1997, as amended. 85 Per BIR Records, 86 the variance of P570,130.98 was determined by respondent in this manner: SLS SAWT Registered Name Taxable Sales Registered Name Income SLS<SAWT Legendary Tours P24,000.00 Legend Hotel Int'l. Corp. P25,000.00 P1,000.00 AT Phil., Inc. 24,000.00 AT Phil., Inc. 26,000.00 2,000.00 Refund DAB Class (5,803.57) - 5,803.57 Friendship tours and Resorts Corp. 15,000.00 Friendship Tours and Resorts Corp. 21,000.00 6,000.00 Tourlandia, Inc. 16,000.00 Tourlandia, Inc. 30,000.00 14,000.00 La Consolacion College Manila (18,000.00) - 18,000.00 Smartravel and Tour Exchange, Inc. 24,000.00 Smartravel and Tour Exchange, Inc. 55,000.00 31,000.00 ITEX Integrated Solutions, Inc. 29,500.00 ITEX Integrated Solutions, Inc. 62,500.00 33,000.00 Hasslefree Philippines ITEX Integrates Solutions 24,000.00 Hasslefree Philippines ITEX Integrated Solutions 60,000.00 36,000.00 Mobilair Travel, Inc. 24,000.00 Mobilair Travel, Inc. 60,000.00 36,000.00 Universal Travel Corporation 41,580.00 Universal Travel Corporation 103,950.00 62,370.00 Voyager Travel & Tours 42,000.00 Voyager Travel & Tours 105,000.00 63,000.00 Far Eastern Travel Agency 106,085.09 Far Eastern Travel Agency 234,114.00 128,028.91 La Sallian Educational Innovators Foundation 133,928.50 133,928.50 Total Variance P570,130.98 Based on the ICPA's reconciliation, 87 some of the sales per SLS are higher or equal to the amount of sales per SAWT while the remaining discrepancy amounts to only P55,500.00, which consisted of the following: Registered Name TIN Income payment per SAWT Gross Sales per SLS Difference SLS<SAWT Blue Horizons Travel 211-996-533 P430,500.00 P426,000.00 P4,500.00 Friendship Tours 000-120-082 21,000.00 15,000.00 6,000.00 Itex Integrated Solutions, Inc. 251-976-833 25,000.00 - 25,000.00 People Support Philippines, Inc. 205-394-448 20,000.00 - 20,000.00 Total P55,500.00 However, except for the discrepancies of P6,000.00 and P25,000.00 pertaining to sales to Friendship Tours and Itex Integrated Solutions, Inc., the other amounts shall be excluded in the reconciliation since these pertain to sales to clients, which were not included in respondent's basis of computation. A review of the documents submitted by petitioner shows that there exists a discrepancy of P139,928.50 from its sales to certain clients per Certificates of Withholding Taxes (CWT) as against per SLS. The details of comparison are presented hereunder: Per CWT Certificates Per SLS 88 Payor's Name Income Payments Exhibit Name Income Payments SLS>SAWT SLS<SAWT AT Phil., Inc. P24,000.00 P-55 to P-55.11 Asia International Corp. P65,700.00 P41,700.00 La Sallian Educational Innovators Foundation (DLS-CSB), Inc. 133,928.50 P-55.52 not found in SLS P(133,928.50) Far Eastern Travel Agency 93,645.80 P-55.53 to P-55.64 FETA Travel 106,085.09 12,439.29 Friendship Tours and Resorts Corp. 21,000.00 P-55.76 to P-55.81 Friendship Tours 15,000.00 (6,000.00) Hasslefree Philippines, Inc. 24,000.00 P-55.82 to P-55.83 Hasslefree Philippines 24,000.00 - ITEX Integrated Solutions, Inc. 25,000.00 P-55.84 to P-55.93 Int'l. Travel Exchange 29,500.00 4,500.00 Legend Hotel Int'l. Corporate 20,000.00 P-55.106 to P-55.109 Legendary Tours 24,000.00 4,000.00 Mobilair Travel, Inc. 24,000.00 P-55.126 to P-55.129 Mobilair Travel 24,000.00 - Smartravel and Tours Exchange, Inc. 22,000.00 P-55.157 Smartravel and Tours 24,000.00 2,000.00 Tourlandia, Inc. 12,000.00 P-55.163 to P-55.168 Tourlandia, Inc. 16,000.00 4,000.00 Universal Travel Corporation 41,580.00 P-55.176 to P-55.179 Universal Travel Corporation 41,580.00 - Voyager Travel & Tours, Inc. 42,000.00 P-55.180 to P-55.183 Voyager Travel 42,000.00 - Total P483,154.30 P411,865.09 P68,639.29 P(139,928.50) Based on the table above, only the sales to La Sallian Educational Innovators Foundation and Friendship Tours resulted to a higher amount per SAWT than per SLS, while all the other sales per CWT Certificates were declared per petitioner's SLS. According to the ICPA, 89 the amount of P133,928.50, was included in the amended SLS for the 4th quarter lumped amount of P234,000.00 under the registered name "Training Fees as of December 2009." The breakdown schedule 90 of and official receipts (ORs) 91 on training fees were presented in support thereof. Although the ORs prove the existence of the P234,000.00 (inclusive of VAT) training fees, the said documents were not under the name of La Sallian Educational Innovators Foundation. Moreover, petitioner failed to prove that the entire amount was indeed included in its SLS. Per the SLS, only the amount of P84,000.00 (inclusive of VAT) was declared under the registered name "Training Fees as of December 2009." 92 Also, no amended SLS was provided indicating the alleged lumped amount of P234,000.00. Thus, the undeclared amount of P133,928.50 93 (exclusive of VAT) shall also be considered as part of the remaining discrepancy, together with the P6,000.00 difference pertaining to sales to Friendship Tours as properly found by the ICPA. Since petitioner failed to reconcile the remaining discrepancy of P139,928.50, the same shall be treated as petitioner's undeclared income for 2009. Consequently, petitioner shall be held liable to pay the corresponding deficiency income tax. D. UNACCOUNTED SOURCE OF CASH P16,764,878.70 Respondent's reconciliation of petitioner's domestic purchases as sources of input tax credits (Summary List of Purchases "SLP") against the income payments which the petitioner subjected to expanded withholding tax (EWT Alphalist), disclosed an understatement in purchases amounting to P16,764,878.70, indicative of unaccounted source of cash. The breakdown of the said amount can be found in the BIR records 94 remarked as "ordinary and necessary expenses paid during the taxable year in carrying on and directly attributable in the operation or conduct of the business not subject to VAT," to wit: Registered Name Income Payment (Per EWT Alphalist) Total Purchases (Per SLP) Discrepancy Bayantel 2,725,781.80 - 2,725,781.80 Bell Telecom Phils. 16,389.00 - 16,389.00 Eastern Telecom 2,981,329.60 - 2,981,329.60 Great Union Travel Services, Inc. 39,000.00 - 39,000.00 Innove 1,624,165.20 - 1,624,165.20 Mozcom, Inc. 253,394.00 - 253,394.00 PLDT 9,082,819.10 - 9,082,819.10 Shroff International Travel Care, Inc. 42,000.00 - 42,000.00 Total P16,764,878.70 - P16,764,878.70 Based on the ICPA's comparison of the EWT Alphalist and SLP, the ICPA was able to account for a discrepancy of P16,765,543.08, that is, the difference between the amount reflected per EWT Alphalist of P17,380,786.39 and the taxable amount under the SLP of P615,243.31, detailed as follows: Registered Name Per EWT Alphalist Per SLP Difference Ana Luzzette L. Lareza P50,000.00 - Lareza, Ana Luzzette L. 50,000.00 P100,000.00 Bayantel 483,780.23 Bayantel 2,242,001.50 2,725,781.73 Bell Telecom Phils. 13,810.50 - Bell Telecom Phils. 2,578.67 16,389.17 Copyhigh V. Digital System 6,250.00 - 6,250.00 Crown Executive Travel 42,800.00 P38,978.57 3,821.43 DHL Express Philippines Corp. 490.00 30.00 460.00 Eastern Telecom 510,516.43 - Eastern Telecom 2,470,813.10 2,981,329.53 Financial Executives Institute of the Phils. 2,500.00 - 2,500.00 Garcia, Edgardo C. 23,500.00 - 23,500.00 Great Union Travel Services, Inc. 33,000.00 - Great Union Travel Services, Inc. 6,000.00 39,000.00 Innove 326,802.01 - Innove 1,297,363.20 1,624,165.21 Nobility Collection Agency, Inc. 241,991.00 359,357.21 Nobility Collection Agency, Inc. 79,640.13 Nobility Services, Inc. 111,747.29 74,021.21 Pacubas General Services, Inc. 17,649.87 50,375.50 Pacubas General Services, Inc. 32,377.50 Pacubas General Services, Inc. 9,330.59 8,982.46 Peoples Independent Media, Inc. 3,510.00 - 3,510.00 PLDT 7,513,442.73 - PLDT 1,569,376.50 9,082,819.23 Shroff International Travel Care, Inc. 42,000.00 - 42,000.00 Star Special Watchman & Detective Agency 15,476.50 75,447.07 Star Special Watchman & Detective Agency 51,962.66 Star Special Watchman & Detective Agency 33,296.50 25,288.59 U-Bix Corporation 56,788.50 91,054.96 U-Bix Corporation 12,196.65 U-Bix Corporation 23,108.33 1,038.52 Wholeworks Enterprises 4,686.00 - 4,686.00 Total P17,380,786.39 P615,243.31 P16,765,543.08 As represented by petitioner to the ICPA, said discrepancies were due to unreported purchases in the VAT returns on purchases directly related to its zero-rated sales and non-VATable purchases per SLP, understated purchases per SLP and erroneous tax base used per SLP. Although the ICPA made a full comparison of the income payments per EWT Alphalist and SLP per individual payee, the Court, however, deemed it proper to focus on the amounts picked up by the respondent and exclude all other income payments despite having a discrepancy. Hence, only the amount of P16,764,878.70 should be the subject of examination on whether or not this is related to an unaccounted source of funds. Upon examination of the ICPA report and the related documents submitted by the petitioner, the Court found that all of the purchases were reported as assets or expenses in the petitioner's AFS by tracing the specific transactions from the Check Vouchers to the Disbursement by Account Suppliers, 95 which indicated the account title under which it was recorded. From the monthly disbursement schedule, the amount of purchases can be traced to the specific GL Account for the year 2009. 96 Since the total amount of P16,764,878.70 can be accounted in the records of the petitioner, it is established that the latter has no unaccounted source of cash. Hence, the respondent's assessment on the said amount should be cancelled. E. EXPENSES FAILING ADDITIONAL REQUIREMENT OF DEDUCTIBILITY P24,111,338.23 Pursuant to Section 34 (K) of the NIRC of 1997, as amended, respondent disallowed petitioner's claimed deductions totaling P24,111,338.23 due to non-withholding of the corresponding taxes. Said provision provides: "(K) Additional Requirements for Deductibility of Certain Payments . Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, sections 58 and 81 of this Code." 1. Disallowed expenses due to non-withholding of FWT P20,710,942.88 As discussed under the deficiency FWT assessment, petitioner failed to withhold the corresponding 30% FWT on the income payments it made to AIPL Singapore, in the amounts of P18,976,877.84 and P1,734,065.04 representing communication expense and marketing fees, respectively, totaling P20,710,942.88. Thus, the same cannot be validly deducted by petitioner against its taxable gross income for the year 2009. 2. Disallowed expenses due to non-withholding of EWT P2,989,649.32 Based on the same finding under the deficiency EWT assessment that were certain income payments per petitioner's AFS which were not subjected to EWT as required under RR No. 02-98, respondent disallowed the sum of P2,989,649.32 as petitioner's deductible expenses, computed as follows: Particular Per AFS Per Withholding Tax Return Discrepancy Goods P16,798,186.88 P11,604,087.00 P5,194,099.88 Rental 23,007,769.62 14,526,206.31 8,481,563.31 Professional Fees 1,998,400.00 1,773,648.87 224,751.13 Total P41,804,356.50 P27,903,942.18 P13,900,414.32 Less: Capital Goods 10,910,765.00 Disallowed Expenses due to non-withholding of EWT P2,989,649.32 Note that in arriving at the disallowed expenses of P2,989,649.32, respondent deducted the amount of P10,910,765.00 pertaining to capital goods purchases from the total amount of P13,900,414.32 discrepancies relating to petitioner's goods purchases, payments for rental and professional fees. If we are to adopt respondent's computation and deduct the amount of P10,910,765.00 pertaining to capital goods purchases from the valid discrepancies we have found earlier under the deficiency EWT assessment amounting to P8,091,260.73, there would be no more expenses left that would be the subject for disallowance from petitioner's taxable gross income, as follows: Particulars Amount not subjected to EWT Rate Deficiency EWT Purchases of Goods P5,194,099.88 1% P51,941.00 Rent Communication Exp.-Rentals of Equip. 2,332,798.41 5% 116,639.92 Storage Rental 21,696.48 5% 1,084.82 Outside Purchased Services Manila Bulletin 6,129.30 2% 122.59 Allied Banking Corporation 1,500.00 2% 30.00 Professional Fees Joint Marketing Fees 433,333.33 15% 65,000.00 Board Honorarium 70,000.00 15% 10,500.00 Mktg.-Professional Fees Underwithholding of 5% EWT on the P27,445.00 prof. fees paid to E.M. Zalamea 9,148.33 15% 1,372.25 Non-withholding of 15% on the P22,555.00 prof. fees paid to E.M. Zalamea 22,555.00 15% 3,383.25 Total P8,091,260.73 P250,073.83 Less: Capital Goods Purchases 10,910,765.00 P(2,819,504.27) 3. Disallowed expenses due to non-withholding of WTC P410,746.03 This assessment item shall be cancelled for lack of factual basis as we have discussed under the deficiency WTC assessment. In sum, petitioner is liable to pay basic deficiency income tax for taxable year 2009 in the amount of P6,829,783.49, computed as follows: Taxable Income per Return P11,194,801.00 Adjustments: (1) Forex Loss claimed/ITR P1,915,073.57 (2) Undeclared Income (SLS<SAWT) 139,928.50 (3) Disallowed Communication Expense and Marketing Fees due to non-withholding of corresponding FWT 20,710,942.88 Total Adjustments P22,765,944.95 Taxable Income per Audit P33,960,745.95 Computation of Tax Due (A) Regular 30% P10,188,223.79 (B) MCIT Gross Income per ITR P23,765,248.00 Add: Adjustments Undeclared Income 139,928.50 Gross Income per Audit P23,905,176.50 Tax Rate 0.02 P478,103.53 Income Tax Due per Audit P10,188,223.79 Less: Unexpired MCIT 974,575.00 Tax Payments 1st Three Qtrs. 254,004.00 Tax Credits 4th Qtr. 59,310.00 Tax Payment Final Return 2,070,551.30 3,358,440.30 Deficiency Income Tax P6,829,783.49 VI. DEFICIENCY VAT P34,050,266.06 Respondent found petitioner liable for deficiency VAT for taxable year 2009 in the amount of P34,050,266.06, computed as follows: 97 Taxable Sales/VAT Return P17,546,815.08 Adjustments: (1) Discrepancy in Taxable Sales Equipment Rental P13,037,315.00 Others 4,433,299.00 Total Revenues P17,470,614.00 Other Income/ITR 684,955.00 Proceeds from Disposal of Assets (P107,447) 95,934.82 Total Taxable Sales per Audit P18,251,503.82 Taxable Sales per Return 17,546,815.08 P704,688.74 (2) Unaccounted Remittances 50,538,076.40 (3) Zero-rated Sales subject to VAT 111,154,286.12 (4) Undeclared Income (SLS<SAWT) RMO 14-2011 570,130.98 (5) Unaccounted Source of funds (SLP<EWT) RMO 14-2011 16,764,878.70 Total Adjustments P179,732,060.94 Taxable Sales/Audit P197,278,876.02 Output Tax P23,673,465.12 Creditable Input Tax/VAT Return P6,073,492.20 Less: Adjustments - Creditable Input Tax/Audit P6,073,492.20 VAT Payable per Audit P17,599,972.92 Less: VAT paid per return - Total Less: Excess Credit Carried Forward (3,977,018.59) (3,977,018.59) Deficiency VAT P21,576,991.51 Add: Interest (25 Jan 10 to 15 Dec 2012) 0.578082 12,473,274.55 TOTAL AMOUNT DUE P34,050,266.06 (1) Discrepancy in taxable sales P704,688.74 The discrepancy is computed by comparing the amount of taxable sales as declared in petitioner's VAT returns with the taxable sales per audit, to wit: 98 Taxable sales per return P17,546,815.08 Taxable sales per audit: Equipment rental P13,037,315.00 Others 4,433,299.00 Other Income per ITR 684,955.00 Proceeds from disposal of assets (P107,447) 95,934.82 P18,251,503.82 Discrepancy P704,688.74 Other Income per ITR Examination of petitioner's Other Income per ITR shows that it is in the amount of P684,455.00, 99 not P684,955.00. This allegedly represents its reversal of accrued expenses incurred in prior years. Consequently, the same is not subject to VAT because it did not arise from the sale, barter, exchange or lease of goods or properties and services or importation of goods into the Philippines. 100 The ICPA reported that the Other Income in petitioner's ITR indeed pertains to expenses incurred in the years 2005 to 2008 but were only recognized as expenses and accrued in the books of petitioner in the year 2008 based on billings received on July 25, 2008. These charges were contested by petitioner with the supplier and were subsequently written-off from the books in 2009, resulting in a reversal of the accrued expenses which appeared as a negative amount under the Communication Expense account. 101 As proof, petitioner submitted the Statements of Account from Mozcom, Inc., 102 and petitioner's Journal Voucher (JV) 12/19 103 that shows the reversal of the accrued expenses. Petitioner has satisfactorily proven that its Other Income in the amount of P684,455.00 is a mere reversal of accrued expenses, thus respondent's assessment should be cancelled. Proceeds from disposal of assets Respondent's examiner picked up from petitioner's Statement of Cash Flows the proceeds from disposal of property and equipment 104 amounting to P107,447.00, then computed the tax base subject to VAT, thus: Proceeds from disposal of property and equipment P107,447.00 Divided by 1.12 Assessed proceeds from disposal P95,934.82 Petitioner argues that the actual proceeds on sale/disposal of assets for the year 2009 amount to P76,201.00, the breakdown of which is listed below with petitioner's official receipts as supporting documents: 105 Particulars Exhibit Amount Proceeds from sale of used carpet P-71 P4,000.00 Proceeds from sale of defective power supply UPS P-71.1 3,500.00 Proceeds from sale of used cellphone #10 units 3,000.00 P10,500.00 Disposal of fixed assets: 2009-04-01 P-71.2 P3,470.00 2009-06-02 P-71.3 35,500.00 2009-09-03 P-71.4 13,500.00 2009-12-04 P-71.5 12,631.00 HP Monitor #1 P-71.6 600.00 65,701.00 Balance per book P76,201.00 The remaining amount of P31,246.00 pertains to the book value of the disposed and retired assets in the year 2009 as shown in Note 5 of petitioner's audited financial statements: 106 Cost of Disposals & retirements for the year 2009 P17,118,864.00 Less: Accumulated depreciation 17,087,618.00 Book value of disposals & retirement for the year 2009 P31,246.00 Nonetheless, the ICPA reported that the total proceeds from disposal of assets of P107,447.00 were not subjected to 12% VAT. 107 The Court finds that petitioner recognized a gain on sale of property in its ITR for the taxable year 2009 in the amount of P76,201.00. 108 Taking into consideration the book value of the assets disposed and retired of P31,246.00, the proceeds from disposal of property and equipment reported in its Statement of Cash Flows in the amount of P107,447.00 is correct. It should be reiterated that VAT is imposed on the gross selling price or gross receipts derived from the sale or exchange of goods or services, including importation of goods and the use or lease of properties. 109 Hence, respondent's VAT assessment is in order. (2) Unaccounted remittances P50,538,076.40 As previously found in the discussion of petitioner's deficiency income tax assessment, petitioner has no unaccounted remittances. (3) Zero-rated sales subject to VAT P111,154,286.12 Respondent alleged that petitioner's booking commissions received from AIPL, a Singapore-based entity, cannot be classified as zero-rated sales but subject to VAT at the rate of 12% for the reason that there is no service rendered to AIPL, as the fees were payable based on the number of access made by the travel agencies in the Philippines using the Abacus System. 110 Petitioner countered that it executed a Sub-Distribution Agreement with AIPL 111 wherein petitioner was engaged to be the national marketing company or NMC of the Abacus System in the Philippines. As such, petitioner became the exclusive distributor and marketer of the said system. In consideration for the air and non-air bookings made by the subscribers through the Abacus System, AIPL pays to petitioner a monthly sum equivalent to 25% of the net bookings fees received by AIPL and recorded by petitioner as booking commissions. Petitioner further explains that the Sub-Distribution Agreement provides that AIPL grants exclusive sub-license to operate the Business in the Territory under the Tradename, "business" meaning the marketing and distribution of the Abacus Services to Subscribers within the Territory. Corollary thereto, petitioner shall formulate and carry out marketing strategies to secure a wide distribution network in the Philippines. Furthermore, petitioner shall provide AIPL all the necessary services and support infrastructure to ensure that the utilization levels of the Abacus System and Abacus Services are optimized in the Territory. 112 Thus, petitioner is correct in stating that the booking commissions are in consideration for the marketing and distribution services rendered by petitioner to AIPL. Pursuant to Section 108 (B) (2) of the NIRC of 1997, as amended, the subject services are subject to VAT at zero percent (0%) rate: "SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)"; Nevertheless, petitioner must comply with the requisites set forth by the Supreme Court in the case of CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. , 113 to wit: 1) the services must be other than processing, manufacturing or repacking of goods; 2) payment for such services must be in acceptable foreign currency accounted for in accordance with the BSP rules and regulations; and 3) the recipient of such services is doing business outside the Philippines. Petitioner submitted the following documents as evidence, among others: Sub-Distribution Agreement with AIPL 114 Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC) 115 Memorandum and Articles of Association of Abacus International Pte. Ltd. (AIPL) 116 Certificate of Inward Remittances 117 VAT Zero-rated receipts 118 As petitioner provides marketing and distribution services to AIPL, it complied with the first requisite. Further, the third requisite is complied with by the Memorandum and Articles of Association of AIPL, Certification of Non-Registration of Company issued by the SEC and petitioner's Sub-Distribution Agreement with AIPL. The ICPA found that per official receipts issued to AIPL, petitioner had zero-rated sales in the aggregate amount of US$2,529,971.81. 119 The same are reported in petitioner's VAT returns in the total amount of P111,154,286.12, as follows: Exhibit Quarter Zero-rated Sales P-58.2 1st P33,309,054.46 P-58.5 2nd 26,433,014.89 P-58.8 3rd 28,492,282.66 P-58.11 4th 22,919,934.11 TOTAL P111,154,286.12 Scrutiny of the official receipts issued by petitioner shows that zero-rated sales amounting to US$719,552.85 are supported by undated official receipts or dated outside of the year 2009: Exhibit OR No. OR Date USD 1.) Undated official receipts P-65.8 50035 - 248,245.72 P-65.33 52812 - 199,216.97 Subtotal 447,462.69 2.) Dated outside the taxable period P-65.49 54949 1/27/2010 158,254.65 P-65.53 55262 3/1/2010 113,835.51 Subtotal 272,090.16 TOTAL 719,552.85 In addition, petitioner failed to reconcile the inward remittances it received from AIPL with the corresponding official receipts it issued for the marketing and distribution services performed. The certification of inward remittances received by the Philippine National Bank (PNB) only shows a list of fund wire transfers from AIPL to petitioner's USD bank account in the total amount of US$2,982,306.83. 120 Thus, petitioner failed to prove that its sales to AIPL qualify as zero-rated sales. Consequently, the assessment must be upheld. (4) Undeclared income (SLS<SAWT) P570,130.98 Per discussion of petitioner's deficiency income tax assessment regarding petitioner's undeclared income of P570,130.98, petitioner failed to reconcile the remaining discrepancy of P139,928.50. Accordingly, petitioner shall be liable to pay the corresponding deficiency VAT. (5) Unaccounted source of funds (SLP<EWT) P16,764,878.70 Respondent's examiner compared petitioner's Summary List of Purchases (SLP) with the income payments made which are subjected to expanded withholding tax (EWT) and found a discrepancy of P16,764,878.70. Respondent considered it as an understatement in purchases indicative of unaccounted source of cash subject to income tax. Petitioner protested that the breakdown of the discrepancy were not provided with the Formal Letter of Demand (FLD). 121 The Court finds this assessment bereft of factual basis. Aside from respondent's failure to provide the details of the alleged undeclared purchases, it appears that respondent merely relied on the assumption that the discrepancy on purchases automatically means unaccounted source of income without obtaining any factual basis corroborating such findings. The Supreme Court has ruled that for income tax to be imposed, the following elements must be present: 122 1. There must be gain or profit; 2. That the gain or profit is realized or received, actually or constructively; and 3. It is not exempted by law or treaty from income tax. Presumption of the foregoing is contrary to the doctrine laid down in the case of Collector of Internal Revenue vs. Benipayo , 123 wherein it was held that: "x x x An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be x x x. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption x x x" (Emphasis supplied.) Thus, the deficiency income tax assessment arising from the discrepancy on purchases should be cancelled. (6) Excess input tax carried forward The Court notes that in its VAT assessment, respondent added back petitioner's excess input taxes for the year 2009 amounting to P3,977,018.59 which were carried forward to the succeeding taxable period. This is not proper as the application of the said excess credits in the subsequent taxable periods is beyond the scope of the present assessment. The same can only be the subject of assessment on the taxable year when they are offset from the output tax due. In fine, petitioner is liable for basic deficiency VAT for taxable year 2009 in the amount of P9,389,799.41, as computed hereafter: Taxable sales per VAT Return P17,546,815.08 Adjustments: (1) Equipment rental P13,037,315.00 Others 4,433,299.00 Total Revenues P17,470,614.00 Proceeds from disposal of assets 95,934.82 Total taxable sales per audit P17,566,548.82 Taxable sales per return (17,546,815.08) P19,733.74 (2) Unaccounted remittances - (3) Zero-rated sales subject to VAT 111,154,286.12 (4) Undeclared income (SLS<SAWT) 139,928.50 (5) Unaccounted source of funds (SLP<EWT) - Total adjustments P111,313,948.36 Taxable sales per audit P128,860,763.44 Output tax P15,463,291.61 Less: Creditable input tax (6,073,492.20) Deficiency VAT P9,389,799.41 VII. DEFICIENCY DST P4,426.57 124 Invoking Section 194 125 of the NIRC of 1997, as amended, respondent imposed DST on the alleged deductions claimed by petitioner for lease of real properties under the "Rent Exp-Mktg" and "Storage Rentals" accounts amounting to P201,600.00 and P2,203,424.56. Below is the computation of the deficiency DST assessment of P4,426.57: Rent Exp-Mktg P201,600.00 Storage Rentals 2,203,424.56 Total Rental pertaining to Real Prop P2,405,024.56 Tax Base P2,406,000.00 Tax Rate (Sec. 194, NIRC) .001+1 DST Due P2,407.00 DST Paid - Deficiency DST P2,407.00 Add: Surcharge 601.75 Interest (1/5/2010 to 12/15/2012) 1,417.82 TOTAL AMOUNT DUE P4,426.57 The Court partially upholds the assessment. A. Rent Exp-Mktg P201,600.00 As earlier discussed under the deficiency EWT assessment, this pertains to the Contract 126 of Lease entered into by the petitioner and Plaza De Luisa Development, Inc. for the period July 1, 2009 to June 30, 2012. Since petitioner did not provide proof that the related documentary stamp tax was remitted to the BIR, the assessment on this item shall remain. B. Storage Rental P2,203,424.56 Likewise, as discussed under the deficiency EWT assessment, the Storage Rental of P2,203,424.56 pertains to the transactions lodged under Outside Purchased Services. It was ascertained that out of the said amount, only the amount of P21,624.48 actually pertains to Storage Rental, as shown below: Outside Purchase Services P2,203,424.56 Less: (1) Purchase of Services subjected to EWT 1,118,823.94 (2) Purchase of Services exempt from EWT 1,057,294.89 (3) Unaccounted Difference (2,020.05) Income Payments not subjected to EWT P29,325.78 With Breakdown as follows: (1) Storage rental fees paid to TPCC P21,696.48 (2) Purchase of Services from a.) Manila Bulletin 6,129.30 b.) Allied Banking Corporation 1,500.00 Income Payments not subjected to EWT P29,325.78 Hence, for petitioner's failure to prove that the DST due on the storage rental of P21,696.48 had been paid to the BIR, the Court sustains the deficiency DST assessment thereon. In sum, petitioner is liable for basic deficiency DST only in the amount of P225.00, computed as follows: Rent Exp-Mktg P201,600.00 Storage Rentals 21,696.48 Total Rental Pertaining to Real Property P223,296.48 DST Due P3.00 for the first P2,000.00 or fractional part thereof P3.00 Additional P1.00 for every P1,000.00 or fractional part thereof, in excess of the first P2,000.00 per year 222.00 Total Basic Deficiency DST Due P225.00 WHEREFORE , the assessment issued by respondent against petitioner for taxable year 2009 covering deficiency WTC in the amount of P162,153.34 is CANCELLED AND WITHDRAWN . However, the assessments for deficiency EWT, FWVAT, FWT, income tax, VAT and DST are PARTIALLY UPHELD . Accordingly, petitioner is ordered to pay respondent the amount of THIRTY-ONE MILLION FOUR HUNDRED SIXTY THOUSAND FIVE HUNDRED NINETY-SEVEN PESOS AND 17/100 (P31,460,597.17) representing basic deficiency EWT, FWVAT, FWT, Income Tax, VAT and DST and the 25% surcharge imposed under Section 248 (A) (3) of the NIRC of 1997, as amended, computed as follows: Tax Type Basic Deficiency 25% Surcharge Total EWT P250,073.83 P62,518.46 P312,592.29 FWVAT 2,485,313.15 621,328.29 3,106,641.43 FWT 6,213,282.86 1,553,320.72 7,766,603.58 INCOME TAX 6,829,783.49 1,707,445.87 8,537,229.36 VAT 9,389,799.41 2,347,449.85 11,737,249.26 DST 225.00 56.25 281.25 Total P25,168,477.73 P6,292,119.43 P31,460,597.17 In addition, petitioner is liable to pay: a) Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency EWT, FWVAT, FWT, Income Tax, VAT and DST computed from the dates indicated below until full payment thereof pursuant to Section 249 (B) of the NIRC of 1997, as amended: Tax Type Basic Tax Due 20% Deficiency Interest Computed from: EWT P250,073.83 15-Jan-10 FWVAT 2,485,313.15 10-Jan-10 FWT 6,213,282.86 15-Jan-10 INCOME TAX 6,829,783.49 15-Apr-10 VAT 9,389,799.41 25-Jan-10 DST 225.00 5-Jan-10 Total P25,168,477.73 b) Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of P31,460,597.17 and on the deficiency interest which have accrued as afore-stated in (a) computed from June 27, 2013 until full payment thereof pursuant to Section 249 (C) of the NIRC of 1997, as amended. SO ORDERED. (SGD.) JUANITO C. CASTAEDA, JR. Associate Justice Caesar A. Casanova and Catherine T. Manahan, JJ. , concur. Footnotes 1. Summary of Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket, Vol. II, par. 1, p. 883. 2. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 2, p. 883. 3. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 3, p. 883. 4. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 4, p. 884. 5. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 5, p. 884. 6. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 6, p. 884. 7. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 7, p. 884. 8. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 8, p. 884. 9. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 10, p. 884. 10. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 11, pp. 884-885. 11. Summary of Admitted Facts, JSFI, Docket, Vol. II, par. 12, p. 885. 12. Docket, Vol. I, pp. 209-222. 13. Docket, Vol. I, pp. 210-216. 14. See Note 1, pp. 883-895. 15. Docket, Vol. II, pp. 896-902. 16. Petitioner's Formal Offer of Evidence, Docket, Vol. III, pp. 1085-1125. 17. Formal Offer of Evidence, Docket, Vol. III, pp. 1352-1361. 18. Resolution, Docket, Vol. III, pp. 1370-1371. 19. Docket, Vol. III, pp. 1392-1442. 20. Docket, Vol. III, pp. 1443-1457. 21. Resolution, Docket, Vol. III, p. 1460. 22. Exhibit "P-10", Docket, Vol. I, pp. 466-483. 23. Exhibit "P-10", Docket, Vol. I, pp. 471-472. 24. Exhibit "P-64", p. 21, Docket, Vol. II, p. 998. 25. Exhibit "P-64-d". 26. Exhibit "P-62". 27. Exhibits P-59 to P-59.17. 28. Exhibits P-60 to P-60.11. 29. CTA EB Nos. 1337 and 1339 (CTA Case No. 8291), March 27, 2017. 30. Ima Land Holdings, Inc. v. Commissioner of Internal Revenue , CTA Case No. 6389, October 7, 2004, citing Abbott Laboratories, Inc. v. Commissioner of Internal Revenue , CTA Case No. 5718, February 16, 2001. 31. Ibid. , citing Subic Power Corporation v. Commissioner of Internal Revenue , CTA Case No. 6059, May 8, 2003. 32. Exhibit "P-64", pp. 22-23, Docket, Vol. II, pp. 999-1000 and Exhibit "P-64-h". 33. Marcos II vs. Court of Appeals, et al. , G.R. No. 120880, June 5, 1997. 34. Exhibits "P-87" to "P-87.12". 35. Exhibit "P-64", p. 23, Docket, Vol. II, p. 1000. 36. Exhibit "P-64", pp. 23-24, Docket, Vol. II, pp. 1000-1001. 37. Exhibits "P-59", "P-63", "P-75", and "P-76". 38. Exhibit "P-64-e". 39. Exhibit "P-75". 40. "ART. 61. Tax and Other Exemptions . Cooperatives transacting business with both members and non-members shall not be subject to tax on their transactions with members. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members' deposits and documentary tax. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with non-members shall enjoy the following tax exemptions: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry (DTI). All tax-free importations shall not be sold nor the beneficial ownership thereof be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the imposed tax and/or duties. (2) Cooperatives with accumulated reserves and undivided net savings of more than Ten million pesos (P10,000,000.00) shall pay the following taxes at the full rate: (a) Income Tax On the amount allocated for interest on capitals: Provided, That the same tax is not consequently imposed on interest individually received by members: Provided, further, That cooperatives, regardless of classification, are exempt from income tax from the date of registration with the Authority; 41. Exhibit "P-77". 42. Exhibit "P-78". 43. Exhibits "P-77.1" to "P-77.5". 44. Exhibit "P-61". 45. Exhibit "P-59". 46. Exhibits P-82 to P-82.100. 47. Exhibit "P-64", p. 25, Docket, Vol. II, p. 1002. 48. Exhibits "P-84", "P-84.1" to "P-84.9". 49. Exhibit "P-85". 50. Claimed Joint Marketing Fees P1,100,000.00 Less: Amount subjected to P100,000.00 EWT (P100,000.00 15%) 666,666.67 Joint Marketing Fees not subjected to 15% EWT P433,333.33 51. Professional fees paid to E.M. Zalamea P50,000.00 Less: Amount subjected to 10% EWT (P2,744.50 15%) 18,296.67 Professional fees paid to E.M. Zalamea not subjected to 15% EWT P9,148.33 52. Exhibit "P-10", Docket, Vol. I, pp. 469-470. 53. Exhibit "P-64", p. 27, Docket, Vol. II, p. 1004. 54. BIR records, pp. 143-144. 55. BIR records, p. 145. 56. Exhibit "P-50". 57. Exhibit "P-10", Docket, Vol. I, pp. 466-467. 58. Exhibit "P-10", Docket, Vol. I, p. 466. 59. Exhibit "P-27", Docket, Vol. III, p. 1237. 60. Exhibits "P-39.14", "P-39.16" & "P-39.17". 61. Exhibit "P-27", Docket, Vol. III, p. 1254. 62. Exhibit "P-37", Docket, Vol. II, pp. 941-942. 63. Exhibits "P-38" to "P-38.1", "P-40" to "P-40.329", "P-40.337" to "P-40.483". 64. Exhibits "P-41.1" to "P-41.241". 65. Exhibits "P-43.1" to "P-43.25". 66. Docket, Vol. I, pp. 1174-1224. 67. Exhibits "P-44" to "P-44.16". 68. With a discrepancy of P1.35 as against the ICPA's amount per report (P863,444.22), this may be due to rounding-off. 69. As summarized in Exhibit "P-37-b.1". 70. Exhibits "P-45", "P-46" to "P-46.65", "P-46.67" to "P-46.631". 71. Exhibits "P-40" and "P-42". 72. Exhibits "P-49" to "P-49.1". 73. Exhibits "P-50" to "P-50.72.1". 74. Exhibits "P-42.488", "P-42.490", "P-42.492", "P-42.496", "P-42.500", "P-42.503", "P-42.506", "P-42.509", "P-42.512", "P-42.516", "P-42.522", "P-42.524". 75. Exhibit "P-27", Docket, Vol. III, p. 1249. 76. Exhibit "P-56.3". 77. MERTENS Law of Federal Income Taxation, Chapter 28, Page 3, as cited in CTA Case No. 5238, The Coca-Cola Export Corporation vs. Commissioner of Internal Revenue , December 19, 1997. 78. Exhibits "P-38" to "P-38.1", "P-47" & "P-49" to "P-49.1". 79. Exhibits "P-42" to "P-42.1513". 80. Exhibits "P-41.1" to "P-41.241". 81. Exhibits "P-52" to "P-52.20". 82. Exhibits "P-53" to "P-53.6". 83. Exhibit "P-64", Docket, Vol. II, p. 993. 84. Ibid. 85. Exhibit "P-12", Docket, Vol. I, p. 500. 86. p. 517. 87. Exhibits "P-64-b" to "P-64-b.1". 88. Exhibits "P-57" to "P-57.102". 89. Exhibit "P-64", Docket, Vol. II, p. 994. 90. Exhibit "P-64-f". 91. Exhibits "P-66" to "P-66.12". 92. Exhibit "P-57.102". 93. P133,928.50=P150,000.00/1.12; P150,000.00=P234,000.00-P84,000. 94. Page 1211. 95. Exhibits P-68 to P-68.69. 96. Exhibits P-69 to P-69.20. 97. Exhibit "P-10", Docket, Vol. I, p. 468. 98. Ibid. 99. Exhibit "P-56.3", Schedule 4. 100. Memorandum for the Petitioner, par. 73, Docket, Vol. III, pp. 1411-1412. 101. Exhibit "P-64", p. 19. 102. Exhibits "P-70" to "P-70.60". 103. Exhibits "P-42.1242", "P-42.1244" and "P-42.1244" to "P-42.1246". 104. Exhibit "P-27". 105. Exhibit "P-64-g". 106. Exhibit "P-27", Note 5. 107. Exhibit "P-64", p. 19. 108. Exhibit "P-56.3", Schedule 4. 109. Sections 106 (A) and 108 (A) of the NIRC of 1997, as amended. 110. Exhibit "P-10", Details of Discrepancies, p. 2. 111. Exhibit "P-3". 112. Ibid. 113. G.R. No. 153205, January 22, 2007. 114. Exhibit "P-3". 115. Exhibit "P-29". 116. Exhibit "P-2". 117. Exhibits "P-43" to "P-43.25". 118. Exhibits "P-65" to "P-65.56". 119. Exhibit "P-64-k". 120. Exhibit "P-43". 121. Exhibits "P-10" and "P-11". 122. CIR vs. CA, CTA and A. Soriano Corporation, G.R. No. 108576, January 20, 1999. 123. G.R. No. L-13656, January 31, 1962. 124. Exhibit "P-10", Docket, Vol. I, p. 472. 125. "SEC. 194. Stamp Tax on Leases and Other Hiring Agreements . On each lease, agreement, memorandum, or contract for hire, use or rent of any lands or tenements, or portions thereof, there shall be collected a documentary stamp tax of Three pesos (P3.00) for the first Two thousand pesos (P2,000), or fractional part thereof, and an additional One peso (P1.00) for every One thousand pesos (P1,000) or fractional part thereof, in excess of the first Two thousand pesos (P2,000) for each year of the term of said contract or agreement. 126. Exhibits "P-87" to "P-87.12". n Note from the Publisher: Written as "P27,445.000" in the original document.