Ishida Philippines Tube Co., Inc., v. Commissioner of Internal Revenue

SECOND DIVISION [C.T.A. CASE NO. 9729. October 8, 2020.] ISHIDA PHILIPPINES TUBE CO.,INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION BACORRO-VILLENA , J p : At bar is a Petition for Review 1 seeking to nullify the Final Decision on Disputed Assessment ( FDDA ) issued against Ishida Philippines Tube Co.,Inc. ( petitioner/Ishida ),finding it liable for deficiency Income Tax ( IT ),Value-Added Tax ( VAT ),Expanded Withholding Tax ( EWT ),Final Withholding Tax ( FWT ),including penalties and interests, in the total amount of Eight Million Eight Hundred Seventy-Eight Thousand Six Hundred Twenty-Nine Pesos and 89/100 (P8,878,629.89),covering taxable year ( TY ) ended 31 December 2012. FACTS OF THE CASE Petitioner Ishida is a domestic corporation duly organized and existing under Philippine laws and registered with the Securities and Exchange Commission 2 ( SEC ) and with the Bureau of Internal Revenue ( BIR ),with Taxpayer Identification No. ( TIN ) 202-935-083. It is primarily engaged in the manufacturing, importing, exporting, buying, selling or otherwise dealing in (at wholesale) such goods as stainless steel pipes and tubings, ordinary steel pipes and tubings, structural steel, and other metallic goods of similar nature. Likewise, in equipment, materials, supplies used or employed in or related to the manufacture of such finished products. Petitioner is categorized as one of the Top 10,000 corporations. 3 Respondent Commissioner of Internal Revenue ( respondent/CIR ),on the other hand, is vested with the authority to assess and collect all internal revenue taxes, fees, charges and the enforcement of all forfeitures, penalties and fines connected therewith, including the execution of judgments in all cases decided in its favor. On 24 April 2014, petitioner received a Letter of Authority ( LOA ) No. SN-eLA201100033485/LOA-54A-2014-00000040 4 from the BIR to examine the books of accounts and other accounting records for all internal revenue taxes for the calendar year 01 January 2012 to 31 December 2012 ( CY 2012 ). CAIHTE On 03 November 2015, petitioner received the Preliminary Assessment Notice 5 ( PAN ) and filed its reply 6 thereto on 18 November 2015. On 26 January 2016, petitioner received the Formal Letter of Demand 7 ( FLD ) dated 08 December 2015, assessing it for deficiency taxes amounting to P8,878,629.89. On 24 February 2016, petitioner filed its protest 8 to the FLD, attaching thereto the copy of its Service Agreement 9 with Ishida Ironworks Co.,Ltd. ( IICL ). On 06 November 2017, petitioner received the FDDA 10 that denied its protest and reiterated the assessment against it for deficiency taxes as detailed below: Tax Type Deficiency Tax Interest Surcharge Compromise Total Income tax 1,928,384.33 1,013,326.34 - 25,000.00 2,966,710.67 VAT 1,797,341.71 1,023,253.71 - 25,000.00 2,845,595.42 EWT 193,002.71 110,936.90 - 16,000.00 319,939.61 FWT 1,505,037.50 865,087.31 376,259.38 - 2,746,384.19 Total 5,423,766.25 3,012,604.26 376,259.38 66,000.00 8,878,629.89 Aggrieved, on 06 December 2017, petitioner filed a Petition for Review before this Court appealing respondent's FDDA. After thrice moving for extension of time, respondent filed his Answer 11 on 12 March 2018. PROCEEDINGS BEFORE THE COURT The Pre-Trial Conference 12 proceeded after both parties filed their respective Pre-Trial Briefs. During the Pre-Trial Conference, 13 the parties were given time to file their Joint Stipulation of Facts and Issues 14 ( JSFI ),which the Court thereafter approved and adopted in its Pre-Trial Order. 15 The pre-trial was then terminated accordingly. When trial ensued subsequently, petitioner presented two witnesses, namely: ( 1 ) its accountant, Ms. Annielee Tapawan 16 ( Tapawan );and, ( 2 ) the Court-Commissioned Independent Certified Public Accountant, Mr. Sonny S. Bonilla 17 ( ICPA Bonilla ),who both executed their Judicial Affidavits, in lieu of their direct testimony. On the witness stand, Tapawan identified documents relating to petitioner's registration with the SEC and the BIR, as well as the receipt of the assessment notices and the protest to the PAN and FLD filed. On cross-examination, Tapawan confirmed that petitioner submitted additional documents in support of its protest to the FLD. However, she failed to recall if they were submitted after the filing of petitioner's protest. 18 ICPA Bonilla, on the other hand, testified as to his ICPA Report. Likewise, as to the procedures he observed in evaluating the documents contained in his report. He was not subjected to cross-examination. 19 After the presentation of its last witness, petitioner filed its Formal Offer of Evidence 20 ( FOE ) and the Court admitted all of its offered exhibits. 21 For his part, respondent presented his lone witness, Revenue Officer Romanito Guiuan ( RO Guiuan ),who likewise testified by way of Judicial Affidavit 22 in lieu of his direct testimony. On the witness stand, RO Guiuan declared that he was among the ROs that conducted the audit investigation of petitioner's books of accounts. As a result of his investigation, he recommended the issuance of the PAN and Final Assessment Notice ( FAN ) for petitioner's tax deficiency on IT, VAT, EWT and FWT. He also identified the documents pertaining to the audit investigation of petitioner. On cross-examination, RO Guiuan was asked whether he was able to check if the contract contained an automatic renewal clause. When shown with the original copy of the contract, while he stated that the said contract was executed in September 2008, he confirmed that the clause therein was not an automatic renewal clause. 23 DETACa On the same cross-examination, RO Guiuan also testified that the basis for his findings of discrepancy on petitioner's VAT and EWT liability were mainly petitioner's audited financial statements and other documents. 24 When asked which provision in the RP-Japan Treaty he used for his FWT assessment on the management fees, he retorted that he could no longer recall which provision was actually used as basis. Thereafter, respondent filed an FOE 25 and the Court admitted all of his exhibits in its 06 August 2019 Resolution. 26 The Court then ordered the parties to file their respective memoranda. Later, respondent filed a Manifestation 27 stating that he was adopting his arguments in his Answer as his Memorandum, while petitioner filed its Memorandum 28 on 07 October 2019. With the filing of the parties' memoranda, the Court submitted the case for decision in a Resolution dated 15 October 2019. 29 ISSUES As the parties so stipulated in their JSFI, 30 the issues for this Court's resolution are: I. WHETHER THE COURT HAS JURISDICTION OVER THE CASE. II. WHETHER PETITIONER IS LIABLE TO PAY THE DEFICIENCY TAXES AMOUNTING TO P8,878,629.89, REPRESENTING THE ALLEGED DEFICIENCY TAXES FOR INCOME TAX, VALUE-ADDED TAX, EXPANDED WITHHOLDING TAX, FINAL WITHHOLDING TAX, PLUS PENALTIES AND INTEREST. ARGUMENTS As to jurisdiction, petitioner is firm on its stand that this Court has jurisdiction over its petition as it timely filed the appeal within thirty (30) days from receipt of respondent's FDDA. With respect to its alleged failure to submit relevant supporting documents before the BIR within sixty (60) days from the filing of the protest, petitioner maintains that the "relevant supporting documents" that must be submitted within sixty (60) days is for it to determine and decide on. According to it, the BIR can only inform the taxpayer to submit additional documents but it is without choice as to what specific documents should be submitted. In opposing the assessment issued against it, which it insists has not attained finality, petitioner forwards the following specific justifications below for every item assessed (against it). As to deficiency IT ,it appears from Details of Discrepancies attached to the FLD that respondent disallowed the deduction of the management fee amounting to P6,020,150.00, pursuant to Section 34 (A) 31 of the National Internal Revenue Code ( NIRC ) of 1997, as amended, as it arose from a service agreement with IICL that was outdated and should thus not apply to its 2012 operations. Petitioner explains that the Service Agreement providing for the payment of management fee contains an automatic renewal clause for the successive periods beyond the initial one-year contract period. The payments made qualify as an allowable deduction for IT purposes as it originated from a valid contract, and were incurred during the TY and were directly attributable in the conduct of its business. Additionally, as for the tax credit of P122,339.70 that was disallowed (for being unsupported with BIR Form No. 2307),petitioner concedes to the ICPA's findings that there was an unsubstantiated portion but only to the extent of P66,528.11 and not P122,339.70 as respondent had so found. aDSIHc As regards the assessed VAT deficiency ,the respondent's findings of VAT deficiency resulted from two items: ( 1 ) scrap sales amounting to P1,945,156.00; and, ( 2 ) interest income from loan receivable totaling to P2,520,000. Both items were apparently not included in the VAT returns, thus, were considered as undeclared sales. In refutation, petitioner contends that the scrap sales were included in the VAT returns and were accordingly subjected to VAT. Moreover, the interest income from loan receivable is not subject to VAT as it cannot be considered as incidental to its business. It argues that it is not engaged in the business of lending, dealing in securities, or financing services for it to qualify under Revenue Regulations (RR) No. 12-2003 32 or performing similar functions. With respect to the EWT ,petitioner again yields to the ICPA's findings that there is deficiency EWT but only to the extent of P87,016.53, exclusive of interest and surcharge. According to petitioner, as regards the EWT, the right of respondent to assess the same has already prescribed for the most part of 2012 as the FLD was issued only on 08 December 2015 or beyond the three-year prescriptive period pursuant to Section 203 33 of the NIRC of 1997, as amended. Under Section 2.58 (A) (2) of RR 2-98, 34 as amended, the monthly remittance of EWT and FWT shall be made within ten (10) days after the end of each month, except for taxes withheld in December (which shall be filed on or before 15 January of the following year).However, for taxpayers enrolled in the BIR's Electronic Filing and Payment System ( eFPS ), the filing of the withholding tax shall be five (5) days later than the deadline set in RR 2-98. Anent the FWT , petitioner also contends that this assessed item is unsupported either in the RR 2-98 or under the RP-Japan Tax Treaty. The IICL's scope of provided services pertains primarily to management and sales support, and not to payment of royalties. In relation thereto, it distinguishes royalties from business profits, pointing out that its services should be considered business profits considering that there was no transfer of "know-how." As the services are considered business profits, the management fee should be exempt from FWT absent any showing that IICL has a permanent establishment in the Philippines. The absence of permanent establishment was supported by the Certificate of Non-Registration issued by the SEC, Certificate of Tax Residency and IICL's Articles of Incorporation. Further, the Service Agreement provides that the services are to be rendered outside the Philippines. Lastly, as to the Compromise Penalty ,petitioner insists on its cancellation as there was no mutual agreement or compromise with respondent. Respondent, for his part, counters that the Court has no jurisdiction over the case mainly because the assessment has already become final, executory and unappealable for petitioner's failure to submit the relevant supporting documents within sixty (60) days from filing of protest. Anent the issue of prescription, respondent contends that the period to assess EWT has not yet prescribed. The three-year prescriptive period allegedly extends only to internal revenue taxes and does not apply to penalties imposed on withholding agents for failure to remit the taxes withheld. The amount sought to be collected from a withholding agent is a form of penalty and not a tax imposition. Moreover, respondent argues that the assessment issued against petitioner has factual and legal bases, and presumption of the correctness of assessment remains on his side. It is up to petitioner to discharge its burden to provide contrary evidence (in contesting the validity or correctness of the assessment) and prove that he erred. ETHIDa RULING OF THE COURT After a careful examination of the parties' contrasting arguments, the Court finds partial merit in petitioner's claims. Before the Court proceeds to tackle the items of assessment assailed, it deems propitious to first settle respondent's attack on its jurisdiction over the case. As the records show, respondent assails the jurisdiction of the Court on the basis that the assessment has attained finality for petitioner's failure to submit relevant documents within sixty (60) days from the filing of the protest. Respondent considered petitioner's protest as one for reinvestigation and advised taxpayer to submit relevant supporting documents within sixty (60) days pursuant to Section 228 35 of the NIRC of 1997, as amended, and as implemented by RR 12-99 36 and subsequently RR 18-2013. 37 Thus, respondent is of the view that the assessment against petitioner has attained finality and no longer open for appeal. We disagree. Petitioner's protest actually had its Service Agreement with IICL appended to it. If respondent had deemed the same as not compliant, jurisprudence has settled that it is the taxpayer that decides what documents it will submit to support its protest. Although, admittedly, petitioner did not submit additional documents within the sixty (60) days, this does not affect the validity of the protest. In Commissioner of Internal Revenue v. First Express Pawnshop Company, Inc. , 38 the Supreme Court already rejected the argument that an assessment attains finality and becomes unappealable by a taxpayer's mere failure to submit supporting documents, thus: xxx xxx xxx We reject petitioner's view that the assessment has become final and unappealable. It cannot be said that respondent failed to submit relevant supporting documents that would render the assessment final because when respondent submitted its protest, respondent attached the GIS and Balance Sheet .Further, petitioner cannot insist on the submission of proof of DST payment because such document does not exist as respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription. The term "relevant supporting documents" should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. xxx xxx xxx Considering further that the instant Petition for Review has been filed within thirty (30) days from petitioner's receipt of the FDDA, the Court has jurisdiction over the case. Proceeding to the merits of the assessment, the Court shall discuss the assessment for each tax item, in seriatim . I. INCOME TAX The deficiency assessment for IT resulted from the: (1) disallowance of management fee as expense; and, (2) disallowance of tax credits, detailed as follows: xxx xxx xxx Taxable income (loss) per ITR P11,578,293.00 Add: Disallowed Expenses-Management Fee 6,020,150.00 Total Taxable Income P17,598,443.00 Tax Due (30%) P5,279,532.90 Less: Payments P1,271,358.45 Creditable Withholding Tax 2,202,129.82 Total 3,473,488.27 Unsupported Creditable Less: Withholding Tax 122,339.70 3,351,148.57 Basic Deficiency Tax P1,928,384.33 Interest (4.16.13 to Add: 12.01.15) 1,013,326.34 Total Amount Due P2,941,710.67 ============ xxx xxx xxx A. DISALLOWED MANAGEMENT FEE P6,020,150.00 Respondent's verification disclosed that the management fee amounting to P6,020,150.00 arose from a Service Agreement between petitioner and IICL (petitioner's parent company) that was outdated and could not apply to petitioner's 2012 operations. On that basis, respondent disallowed the said expense pursuant to Section 34 (A) 39 of the NIRC of 1997, as amended. cSEDTC A perusal of the contract, however, shows that the Service Agreement contains an automatic renewal clause, to wit: xxx xxx xxx Article 8. Term This Agreement shall be effective for a period of twelve (12) months commencing from the date it is signed by the parties, subject to an automatic renewal for successive periods of one (1) year each ,unless either party provides to the Other Party a written notice to the contrary not later than one (1) month prior to expiration of the term, and the same shall apply to any successive extension. 40 xxx xxx xxx From the above, it is clear that the Service Agreement can still be applied to 2012 operation absent any evidence to the contrary. A business expense to be deductible, must comply with the following requisites: xxx xxx xxx The expense must be ordinary and necessary. 41 1. It must be paid or incurred within the taxable year. 42 2. It is connected with the trade or business. 43 3. The tax required to be deducted and withheld therefrom has been paid. 44 4. It must be substantiated by invoices, official receipts (ORs) or other adequate records. 45 5. It must not be contrary to law, morals, public policy or public order. 46 xxx xxx xxx The first, third, and sixth requisites refer to the "ordinary and necessary expense" of the trade or business. RR 9-83 47 defines "ordinary" as an expense that is normal, usual, or customary (in size and character) for the taxpayer's trade or business. On the other hand, "necessary" means an expense that is appropriate, and helps develop and maintain the taxpayer's business. It must be reasonable to expect business benefits to result from the expense. In Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal Revenue , 48 the Supreme Court held that the determination of whether an expense is "ordinary and necessary" depends on the nature of the expenditure itself, as follows: xxx xxx xxx While it is true that there is a number of decisions in the United States delving on the interpretation of the terms "ordinary and necessary" as used in the federal tax laws, no adequate or satisfactory definition of those terms is possible. Similarly, this Court has never attempted to define with precision the terms "ordinary and necessary." There are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered "necessary" where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is "ordinary" when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected . There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure . 49 SDAaTC xxx xxx xxx This Court is convinced that the management fees that petitioner paid, as supported by the RCBC telegraphic transfers 50 to IICL, are ordinary and necessary expenses normally incurred by entities providing goods and services to PEZA-registered and export-oriented enterprises. Likewise, as provided in the Service Agreement between petitioner and IICL, 51 the subject management fees are payments for the advertisement and promotion of petitioner's products manufactured in the Philippines (to potential clients in Japan and other countries outside the Philippines) and assistance in the procurement of raw materials and supplies from Japan, among others. In fact, petitioner is included in IICL's company brochure. 52 In addition, petitioner's products are also advertised in the building facade of IICL in Japan. 53 As regards the fourth requisite, respondent claims that the payments it made to IICL are subject to FWT in accordance with RP-Japan Tax Treaty and pursuant to Section 57 (A) 54 of the NIRC of 1997, as amended. On the contrary, petitioner claims that the management fees paid to IICL are not subject to FWT as they do not constitute royalty payments (there being no undivulged technical information involved or anything capable of being patented or not) and the services do not involve transfer of "know-how." Rather, the payments are in the nature of business profits rendered outside of the Philippines. Even assuming that the fees are Philippine-sourced, it is exempt pursuant to the RP-Japan Tax Treaty since IICL has no "permanent establishment" in the Philippines. We agree with petitioner. While generally, income of non-resident foreign corporations in the Philippines are subject to a 30% FWT, 55 Section 32 (B) (5) of the NIRC of 1997, as amended, recognizes the treaty obligations to which the Philippines is a signatory, viz. : xxx xxx xxx Sec. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines . 56 xxx xxx xxx One of the treaties is the RP-Japan Tax Treaty that provides the types of income that the contracting states may earn with corresponding preferential rate or exemption, as the case may be; primarily to avoid double taxation on both taxing jurisdictions. The RP-Japan Tax Treaty is applicable where the parties are residents of the contracting states. Article 4 of the Tax Treaty provides: xxx xxx xxx Article 4 1) For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of head or main office, place of incorporation or any other criterion of a similar nature .But this term does not include any person who is liable to tax in that Contracting State in respect only of income from sources therein. 57 xxx xxx xxx It is beyond question that petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines. 58 Clearly, it is a national of the Philippines by the definition found in Article 3 (1) (h) (i) of the said RP-Japan Tax Treaty. It reads: acEHCD xxx xxx xxx Article 3 1. For the purposes of this Convention, unless the context otherwise requires: xxx xxx xxx h) the term "nationals" means: (i) in relation to the Philippines, all individuals possessing the citizenship of the Philippines and all juridical persons created or organized under the laws of the Philippines and all organizations without juridical personality treated for the purposes of Philippine tax as juridical persons created or organized under the laws of the Philippines[.] 59 xxx xxx xxx As to IICL, records disclose that it is indeed a resident of Japan within the contemplation of Article 3 (1) of the same treaty, through the following documents: xxx xxx xxx 1. Duly consularized Certificate of Tax Residency of Ishida Ironwork Co.,Ltd. by the office of Philippine Embassy in Japan on 14 August 2013; 60 2. Articles of Incorporation of Ishida Ironwork Co.,Ltd.; 61 and, 3. Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission ("SEC") on 03 June 2013, which certifies that its records do not show the registration of "Ishida Ironworks Co.,Ltd." as a corporation or as a partnership. xxx xxx xxx In the determination of whether IICL's income should have been subjected to FWT, the said income must be properly classified based on the nature of the services rendered. Article 1 of the Service Agreement which enumerates the scope of services to be performed by IICL is reproduced below: xxx xxx xxx Article 1. Scope of Services The Service Provider shall provide the Customer with the following services all of which shall be performed in Japan and/or other areas outside the Philippines, to wit: 1. Advertisement and promotion of the products manufactured by the Customer in the Philippines to potential clients in Japan and other countries outside the Philippines; 2. Assist in the procurement of raw materials and supplies in Japan with regard to quality and specifications; 3. Provide information regarding the status of the steel industry in Japan and other countries outside the Philippines; 4. Review the financial and other aspects of operation; and[,] 5. Formulate marketing and business strategy for the Customer. (Hereinafter collectively referred to as the "Services") The above-enumerated offshore services shall in no case involve the transfer of any of the Service Provider's technology, know-how or other intellectual property rights. The employees and personnel of the Service Provider shall exclusively perform the services for the Customer in Japan or in other countries outside the Philippines. Should it be necessary for the Service Provider to send its employees to the Philippines, the stay of these individuals shall not in any case exceed the period of six (6) months. 62 xxx xxx xxx For the services, petitioner is bound to pay IICL a monthly fee of Nine Hundred Fifty Thousand Japanese Yen (950,000.00).The management fee shall be paid every 25th day of succeeding quarter through bank telegraphic transfer. 63 It is noteworthy that the FLD, FDDA and respondent's Answer are unclear as to the basis of the FWT assessment. From the amount of deficiency FWT, it appears that respondent imposed a 25% rate, 64 thus suggesting that the services were considered as royalties. The relevant provisions of the RP-Japan Tax Treaty, as amended, read: xxx xxx xxx Article 12 1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed : a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 10 per cent of the gross amount of the royalties in all other cases. 65 xxx xxx xxx 4) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 66 HSAcaE 5) The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein ,or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply . 67 xxx xxx xxx Article 7 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on a business in the other Contracting State through a permanent establishment situated therein .If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment. 68 xxx xxx xxx As gleaned from the provisions on royalties and business profits, the former is more restrictive in the sense that it requires a transfer of know-how, whereas the latter is more encompassing. Notably, the Service Agreement stipulates that the offshore services shall in no case involve the transfer of any "technology, know-how or other intellectual property rights." The Commentaries on the 2010 Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital provides a useful guide in distinguishing royalties from business profits, thus: xxx xxx xxx 11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 is referring to the concept of "know-how." Various specialist bodies and authors have formulated definitions of know-how. The words "payments ...for information concerning industrial, commercial or scientific experience" are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights .It generally corresponds to undivulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived .Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer. 11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public .It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party .Payments made under the latter contracts generally fall under Article 7. 11.3 The need to distinguish these two types of payments, i.e. ,payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information . HESIcT In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party . In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material .On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations .For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services. 69 xxx xxx xxx From the foregoing comparison, read parallel with the scope of the services in the Service Agreement, the Court is inclined to rule that the services performed by IICL is in the nature of business profits. Under the RP-Japan Tax Treaty, the payments for business profits are exempt, unless IICL maintains a "permanent establishment" in the Philippines. A permanent establishment under Article 5 of the RP-Japan Tax Treaty is: xxx xxx xxx Article 5 1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2) The term "permanent establishment" includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. 70 xxx xxx xxx The case records are bereft of evidence showing that IICL has a "permanent establishment" here in the Philippines. Moreover, it can be deduced from the Service Agreement itself that there is no intention to keep any "permanent establishment." To assume otherwise would mean that the parties breached their agreement. Likewise, it bears stressing that respondent did not even mention that IICL has a "permanent establishment," hence subject to FWT. In sum, We find that the management fees paid to IICL are not subject to FWT as the services rendered offshore are in the nature of business profits. With respect to the second and fifth requisites, the payment of management fees to IICL amounting to P6,020,150.00 was supported with RCBC telegraphic transfers and invoices issued by IICL, 71 to wit: Invoice Date Exhibit No. Amount in JPY Telegraphic Transfer Date Exhibit No. April 10, 2012 ICPA JINV-1 2,850,000 April 30, 2012 ICPA TL-1 July 10, 2012 ICPA JINV-2 2,850,000 July 31, 2012 ICPA TL-2 October 10, 2012 ICPA JINV-3 2,850,000 October 28, 2011 ICPA TL-3 January 10, 2013 ICPA JINV-4 2,850,000 January 30, 2013 ICPA TL-4 TOTAL 11,400,000 The above documents, including the Service Agreement, are indicative of the actual payments made to IICL amounting to JPY11,400,000 JPY2,850,000 paid in 2011; JPY5,700,000 paid in 2012; and JPY2,850,000 paid in 2013 for the expenses that were accrued in 2012. caITAC Anent the above, Section 11 (2) (f) of RR 6-2006 72 provides that: xxx xxx xxx For foreign currency income and expense items recognized in the reporting period, for each period presented ( i.e. ,including comparatives),translation should be based on exchange rates at the dates of the transactions .For practical reasons, a rate that approximates the actual exchange rates at the dates of the transactions, for example, an average rate for the period may be used to translate foreign currency income and expense items[.] 73 xxx xxx xxx Per this Court's own verification, it finds that petitioner was able to substantiate the amount of P4,397,550.00 in accordance with Section 34 (A) (1) (b) of the NIRC of 1997, 74 as amended, computed as follows: Exhibit No. Telegraphic Transfer Date Amount in JPY Monthly BSP end-of-period (EOP) exchange rate 75 Amount in PHP ICPA TL-1 April 30, 2012 2,850,000 0.5282 1,505,370 ICPA TL-2 July 31, 2012 2,850,000 0.5361 1,527,885 ICPA TL-4 January 30, 2013 2,850,000 0.4787 76 1,364,295 8,550,000 4,397,550 As regards the payment made for the Billing Invoice dated 10 October 2012 77 (relative to the management fees for the third quarter of 2012),the Court cannot verify the actual payment of the said expense. Petitioner's telegraphic transfer pertains to the third quarter of TY 2011 dated 28 October 2011. 78 There is a discrepancy between the handwritten date showing "10/28/12" and the machine validation date of "10/28/2011." Moreover, at the bottom portion of the form, the purpose stated was " Payments for management fee for 3rd Quarter 2011 ." 79 Hence, only the unsubstantiated management fees in the amount of P1,622,600.00 (P6,020,150.00 less P4,397,550.00) should be disallowed as deductions from gross income. B. UNSUPPORTED CREDITABLE WITHHOLDING TAX P122,339.70 Per respondent's verification, tax credits amounting to P122,339.70 were not fully substantiated with BIR Form No. 2307 hence were disallowed in violation of the provision of Section 2.58.3 (B) 80 of RR 2-98. 81 On the other hand, based on the ICPA's examination, out of the total creditable withholding tax ( CWT ) at source claimed in TY 2012 amounting to P2,202,129.00, only P2,135,601.71 were supposedly substantiated by individual CWT certificates. 82 Upon further scrutiny of the submitted CWT certificates, together with the ICPA's report, the Court finds that no valid CWT certificates supported the amounts below: Payor's Name CWT ICPA Exhibit Certificates issued were not signed by the payor/payor's authorized representative CLC Marketing Ventures Corporation 10,135.31 "ICPA CWTQ1-6" Far Eastern Hardware & Furniture Enterprises, Inc. 1,044.65 "ICPA CWTQ1-15" Greyhound Marketing Corporation 898.10 "ICPA CWTQ1-24" Greyhound Marketing Corporation 522.72 "ICPA CWTQ3-17" Subtotal 12,600.78 No payee's TIN is indicated in the certificate Fabricator Phils.,Inc. 867.00 "ICPA CWTQ2-46" Fabricator Phils.,Inc. 2,192.38 "ICPA CWTQ2-70" Fabricator Phils.,Inc. 2,402.71 "ICPA CWTQ3-35" Fabricator Phils.,Inc. 1,306.70 "ICPA CWTQ4-10" Fabricator Phils.,Inc. 895.66 "ICPA CWTQ4-44" Fabricator Phils.,Inc. 879.24 "ICPA CWTQ4-60" Subtotal 8,543.69 Payee's TIN indicated in the certificate is not that of the petitioner Fabricator Phils.,Inc. 278.48 "ICPA CWTQ1-13" Fabricator Phils.,Inc. 2,478.33 "ICPA CWTQ1-82" Fabricator Phils.,Inc. 308.30 "ICPA CWTQ2-12" Valerie Products Mfg.,Inc. 158.00 "ICPA CWTQ3-27" Subtotal 3,223.11 TOTAL 24,367.58 The rule is that "the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor to the payee." 83 Thus, insofar as the CWT certificates that were not signed by the payor or payor's authorized representative/s are concerned, they should be denied for they were not issued in accordance with the said rule. ICHDca With respect to the CWT certificates where the payee's TIN was not petitioner's or that no payee's TIN was indicated therein, denial should be expected in the light of this Court's consistent pronouncements in Zuellig Pharma Corporation v. Commissioner of Internal Revenue , 84 citing Commissioner of Internal Revenue v. Philippine Bank of Communications , 85 where We held: xxx xxx xxx This Court has previously discussed why CWT certificates without the claimant's TIN are properly disallowed .In the case of Commissioner of Internal Revenue vs. Philippine Bank of Communication ,the Court en banc declared: "x x x [A] claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the taxpayer. It must be kept in mind that the TIN serves as identification of taxpayers in relation to their payment with the BIR. Absent this, even with the taxpayer's name, it cannot be verified if indeed the taxpayer paid the correct amount to the government .Well entrenched in our jurisprudence is that tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. Accordingly, the claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Thus, the certificates with corrections not properly countersigned and with incomplete details, such as absence of PBCom's TIN, are properly disallowed ." Thus, We uphold the Court in Division's ruling to disallow petitioner's CWT in the amount of P10,144,896.40 for being supported by CWT certificates with incorrect TIN. 86 xxx xxx xxx Since petitioner was only able to support with duly accomplished CWT certificates the amount of P2,111,234.13 (P2,135,601.71 less P24,367.58) of its CWT for TY 2012, it is to this extent that it may validly claim a tax credit against its IT liability. Consequently, a total of P90,895.69 (P2,202,129.82 less P2,111,234.13) tax credits must be disallowed for IT purposes. In conclusion, petitioner should be held liable for basic deficiency IT in the amount of P577,675.32 ,computed as follows: Taxable income (loss) per ITR P11,578,293.00 Add: Disallowed Expenses-Management Fee 1,622,600.00 Total Taxable Income P13,200,893.00 Tax Due (30%) P3,960,267.90 Less: Payments P1,271,358.45 Creditable Withholding Tax 2,202,129.82 Total 3,473,488.27 Unsupported Creditable Less: Withholding Tax 90,895.69 3,382,592.58 Basic Deficiency Tax P577,675.32 ============ II. VALUE-ADDED TAX Based on the records, petitioner was assessed of deficiency VAT in the amount of P2,820,595.43, with P1,797,341.71 as basic deficiency VAT and P1,023,253.72 as interest, respectively, computed as follows: 87 TCAScE Taxable Sales per VAT Returns filed P166,087,393.00 Add: Undeclared Sales-Scrap Sales P1,945,156.00 Interest Income from Loan Receivable 2,520,000.00 4,465,156.00 Total Revenues subject to VAT P170,552,549.00 Output Tax (12%) P20,466,305.88 Less: Input Tax Claimed per VAT Returns filed P98,708,795.97 Less: Excess input tax carried over to the succeeding quarter 79,908,098.44 Input tax on capital assets 131,733.36 18,668,964.17 Basic Deficiency Tax P1,797,341.71 Add: Interest (1.26.13 to 12.01.15) 1,023,253.72 Total Amount Due P2,820,595.43 ============ Respondent assessed petitioner of deficiency VAT based essentially on these items, to wit: Item Amount Undeclared scrap sales P1,945,156.00 Undeclared interest income from Loan Receivable 2,520,000.00 A. UNDECLARED SCRAP SALES P1,945,156.00 Respondent's verification showed that scrap sales amounting to P1,945,156.00 were not declared in petitioner's VAT returns for TY 2012. Petitioner, on the other hand, contends that the scrap sales were subjected to VAT and were reported in its monthly/quarterly VAT returns. We uphold respondent's assessment. Sections 106 and 108 of the NIRC of 1997, as amended, provide: xxx xxx xxx Sec. 106. Value-Added Tax on Sale of Goods or Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to ten percent (10%) (now 12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor ... xxx xxx xxx The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax .The excise tax, if any, on such goods or properties shall form part of the gross selling price. 88 xxx xxx xxx 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%) (now 12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties ... xxx xxx xxx The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax . 89 cTDaEH xxx xxx xxx Clearly from the foregoing, the VAT on the sale of goods or properties accrues upon the consummation of sale regardless of whether the consideration thereof was actually received. On the other hand, the VAT on the sale of services, use or lease of properties accrues upon actual or constructive receipt of the consideration irrespective of whether the service has been rendered pursuant to Section 108 of the NIRC of 1997, as amended, as quoted above. In other words, for VAT purposes, the accrual method of accounting ( i.e. ,the income is reported in the period it is earned without regard to whether it has been received or not) must be employed in the case of sale of goods or properties while the cash method accounting ( i.e. ,the income is reported based on gross receipts/collection) must be adopted for sale of services, lease or use of properties. 90 In the instant case, it is undeniable that petitioner is engaged in the sale of goods such as stainless steel pipes and tubings, ordinary steel pipes and tubings, structural steel and other metallic goods of similar nature, and any and all equipment, materials, supplies used or employed in or related to the manufacture of such finished products. 91 Petitioner's Audited Financial Statements (AFS) likewise states that its revenue recognition for sale of goods is on accrual basis, such as when the risks and rewards of ownership of the goods have passed to the buyer, i.e. ,generally when the customer has acknowledged delivery of the goods. 92 A careful examination of petitioner's pieces of evidence would reveal the following differences: Per AFS 93 Per Amended VAT Returns 94 Difference Taxable Sales Sale of goods P166,087,393.00 P165,808,174.54 P279,218.46 Scrap Sales 1,945,156.00 - 1,945,156.00 Zero-rated Sales 66,806,233.00 69,032,040.62 (2,225,807.62) Total P234,838,782.00 P234,840,215.16 P(1,433.16) Petitioner claims further that the total amount of taxable sales per Amended VAT Returns of P165,808,174.54 includes the subject scrap sales of P1,945,156.00. However, its pieces of evidence such as the Scrap Sales Receipt, 95 Scrap Sales schedule, 96 Schedule of 2011, 97 2012 98 and 2013 99 VATable Sales Invoices, and Credit Memos 100 are insufficient to prove that the corresponding output VAT on the said scrap sales were indeed declared and remitted in 2012. Petitioner should have presented the Amended Summary Lists of Sales that would tally with the total amount of sales subject to VAT. ITAaHc It is noteworthy that despite petitioner's voluminous documents, there remains an unaccounted variance of P1,433.86 as shown below: 101 Vatables Sales Zero Rated TOTAL Regular Sale of Goods 163,861,584.88 69,032,040.62 232,893,625.51 Scrap Sales 1,945,155.80 - 1,945,155.80 Unaccounted variance 1,433.86 - 1,433.86 TOTAL 165,808,174.54 69,032,040.62 234,840,215.17 Moreover, the Supplementary Information Requirements under RR 15-2010 Disclosure in the AFS (Note 19.1) 102 clearly provides the following: xxx xxx xxx (b) Input VAT The movement of input VAT in 2012 is summarized below: Balance at beginning of year P78,270,263 Goods for resale/manufacture or further processing 17,456,851 Goods other than for resale or manufacture 1,370,742 Capital goods not subject to amortization 759,483 Services lodged under cost of goods sold 823,960 Services lodged under other accounts 1,522,439 Applied against output VAT (20,163,906) 103 Balance at end of the year P80,039,832 xxx xxx xxx Petitioner should have reconciled and substantiated the difference between the amount of Taxable Sales and Zero-Rated Sales as disclosed in its AFS and the amounts reported in the Amended VAT Returns. With the above and with the burden of proof imposed upon the complaining party to show clearly that the assessment is erroneous, failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 104 Accordingly, respondent's assessment finding the amount of P1,945,156.00 subject to VAT shall be sustained. B. UNDECLARED INTEREST INCOME FROM LOAN RECEIVABLE P2,520,000.00 As to the deficiency VAT on assessed on petitioner's interest income from loans extended to Ishida Realty Company, Inc. ( IRCI ), it insists that no legal or factual basis support the same. According to it, it is not incidental to the primary purpose of the company and it is not, in any way, engaged in lending, dealing in securities or financing services or performing similar functions, for it to qualify under RR 12-2003. 105 The Court remains unconvinced. Section 105 106 of the NIRC of 1997, as amended, provides that any person who in the course of trade or business, sell, barter, exchange, lease goods or properties, render services, and any person who import goods is liable to VAT. 'In the course of trade or business' refers to regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto. 107 Thus, transactions undertaken incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business. 108 'Incidental' means subordinate to something of greater importance. 109 In Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue , 110 the Supreme Court explained the meaning of an "incidental" transaction, to wit: xxx xxx xxx Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of its business; hence, it is an isolated transaction that should not have been subject to 10% VAT. CHTAIc xxx xxx xxx Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay) and Imperial v. Collector of Internal Revenue (Imperial) to justify its position. Magsaysay ,decided under the NIRC of 1986, involved the sale of vessels of the National Development Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels was not in the course of NDC's trade or business as it was involuntary and made pursuant to the Government's policy for privatization. Magsaysay ,in quoting from the CTA's decision, imputed upon Imperial the definition of "carrying on business." Imperial ,however, is an unreported case that merely stated that "'to engage' is to embark in a business or to employ oneself therein." Mindanao II's sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions incidental thereto." Mindanao II's business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II's property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II's business which should be liable for VAT . xxx xxx xxx Applying the foregoing jurisprudence, this Court, in the case of CS Garments, Inc. v. Commissioner of Internal Revenue 111 ( CS Garments ) held that, although the primary business of CS Garments is the manufacturing of garments for sale abroad, the sale of motor vehicle to its general manager is considered an incidental transaction subject to VAT for it was purchased and used in carrying out petitioner's business, thus: xxx xxx xxx Here, petitioner's primary business is the manufacturing of garments for sale abroad. In carrying-out its business, petitioner acquired and eventually sold a Mercedes Benz to its General Manager Mr. Sudhoff. Prior to the sale, the motor vehicle formed part of petitioner's capital assets, specifically under the account, "Property, Plant and Equipment." The Rules on International Accounting Standards (IAS) defines Property, Plant and Equipment as follows: "6. Definitions Property, plant and equipment are tangible assets that: (a) are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes ;and (b) are expected to be used during more than one period." Therefore, the sale of the motor vehicle is an incidental transaction because the said vehicle was purchased and used in furtherance of petitioner's business. Once an activity has been identified as a business, any supply[sale] made while carrying it on is likely to be made in the course or furtherance of business. No distinction is made between capital and revenue items. Thus, a supply[sale] in the course or furtherance of business includes: (1) the disposition of the assets and liabilities of a business ,(2) the disposition of a business as going concern; and (3) anything done in connection with the termination or intended termination of a business. 112 xxx xxx xxx Moreover, citing this Court's ruling in CS Garments ,the BIR issued Revenue Memorandum Circular (RMC) No. 15-2011, 113 revoking the prior ruling for Interadent Zahntechnik Phils.,Incorporated ( IZPI ),exempting the sale of its company car from VAT inasmuch as its regular line of business is the manufacturing and export of custom-made dental products (it follows that it may only be subjected to 12% VAT on sales related to this kind of business activity).Further, that there is nothing to indicate that IZPI's sale of its company cars is made on regular basis or even incidental to the manufacturing and/or export of dental products. In the instant case, petitioner's AFS 114 shows that the subject interest income arose from the unsecured loan to IRCI, to wit: EATCcI xxx xxx xxx 16. RELATED PARTY TRANSACTIONS 16.2 Lease Agreement Since 2003, the Company leases land from Ishida Realty Company, Inc. (IRCI),a related party under common control. The lease term is for a period of 15 years up to July 31, 2018, renewable thereafter upon mutual agreement by both parties. The agreed monthly rental is P230,000 for the first three years which is subject to review and renegotiation thereafter. In 2012 and 2011, monthly rental did not change at P230,000. Rental expenses charged to operations amounted to P2,760,000 both in 2012 and 2011 and are shown as part of Cost of Goods Sold and Other Operating Expenses in the statements of income (see Notes 11 and 12).There were no outstanding liabilities from this transaction as of December 31, 2012 and 2011. 16.3 Loan Receivable On September 4, 2003, the Company granted a P21,000,000 unsecured loan to IRCI, which was used by the latter to purchase a parcel of land being leased to the Company .The loan, payable in 15 years ,bears fixed interest of 12% per annum. The loan remained outstanding as December 31, 2012 and 2011 and is presented as Loan Receivable in the statements of financial position. Total interest income earned from this loan, included as part of the Finance Income account in the statements of income amounted to P2,520,000 in 2012 and 2011 (see Note 13).The outstanding interest receivable amounted to P210,000 as December 31, 2012 and 2011 and are presented as part of Others under Trade and Other Receivables account in the statements of financial position (see Note 5). 115 xxx xxx xxx A scrutiny of petitioner's AFS yields that it has no Land and/or Building Account under Non-Current Assets. This implies that petitioner's principal place of business and registered office is situated at the leased land from IRCI. The same is reinforced by the fact that rental payments to IRCI were charged as manufacturing overhead, which is part of the Cost of Goods Sold. 116 Interestingly too, the original lease term and the loan term coincide at fifteen (15) years. These circumstances would indicate that the loan extended to IRCI is incidental to petitioner's business, thus subject to VAT. ISHCcT Even assuming arguendo that the loan is not incidental to its business, the payments received are still subject to VAT. An examination of the documents supporting the interest payments from IRCI reveals that petitioner have receipted them with VAT official receipts ( ORs ). 117 In accordance with Section 113 118 of the NIRC of 1997, as amended, if a VAT-registered person issues a VAT invoice or VAT OR for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words " VAT-exempt sale ," or issue a non-VAT acknowledgement receipt in the case of reimbursable expenses, 119 the transaction shall become taxable and the issuer shall be liable to pay VAT thereon. As found by the ICPA, the total amount of interest payments receipted with VAT ORs and which petitioner received in TY 2012 is P2,730,000.00. 120 Hence, We sustain the assessment for VAT arising from income from loan receivable. Relative to the aforementioned, the Court is, however, constrained to revise the other amounts i.e. ,Taxable Sales per VAT Returns filed and Input Tax Claimed per VAT Returns filed, to reflect the updated amounts per Amended VAT Returns that were filed on 14 February 2014, 121 to wit: Taxable Sales per VAT Returns filed P165,808,174.54 Add: Undeclared Sales-Scrap Sales P1,945,156.00 Interest Income from Loan Receivable 2,730,000.00 4,675,156.00 Total Revenues subject to VAT P170,483,330.54 Output Tax (12%) P20,457,999.66 Less: Input Tax Claimed per VAT Returns filed P99,936,812.74 Less: Excess input tax carried over to the succeeding quarter 79,908,098.44 Input tax on capital assets 131,733.36 19,896,980.94 Basic Deficiency Tax P561,018.72 ============ III. EXPANDED WITHHOLDING TAX Petitioner argues that the period to assess for EWT for the most part of 2012 has already prescribed as the FLD was only issued on 08 December 2015 or more than three (3) years from the filing of the monthly EWT returns. Respondent counters that the assessment for EWT is not covered by the three-year prescriptive period under Section 203 122 of the NIRC of 1997, as amended. Allegedly, the assessment for deficiency EWT from petitioner as withholding agent is in the nature of a penalty rather than a tax. We find respondent's contention specious. In Commissioner of Internal Revenue v. La Flor Dela Isabela, Inc. , 123 the Supreme Court discussed exhaustively the withholding tax system and the classification of withholding taxes, whether as tax or penalty, and the corresponding prescriptive period for assessment: xxx xxx xxx Withholding taxes are internal revenue taxes covered by Section 203 of the NIRC. xxx xxx xxx The CIR, however, forwards a novel theory that Section 203 is inapplicable in the present assessment of EWT and WTC deficiency against La Flor. It argues that withholding taxes are not contemplated under the said provision considering that they are not internal revenue taxes but are penalties imposed on the withholding agent should it fail to remit the proper amount of tax withheld. xxx xxx xxx Under the existing withholding tax system, the withholding agent retains a portion of the amount received by the income earner. In turn, the said amount is credited to the total income tax payable in transactions covered by the EWT. On the other hand, in cases of income payments subject to WTC and Final Withholding Tax, the amount withheld is already the entire tax to be paid for the particular source of income. Thus, it can readily be seen that the payee is the taxpayer, the person on whom the tax is imposed, while the payor, a separate entity, acts as the government's agent for the collection of the tax in order to ensure its payment. CAacTH As a consequence of the withholding tax system, two distinct liabilities arise one for the income earner/payee and another for the withholding agent. xxx xxx xxx It is true that withholding tax is a method of collecting tax in advance and that a withholding tax on income necessarily implies that the amount of tax withheld comes from the income earned by the taxpayer/payee. Nonetheless, the Court does not agree with the CIR that withholding tax assessments are merely an imposition of a penalty on the withholding agent, and thus, outside the coverage of Section 203 of the NIRC. xxx xxx xxx A careful analysis of the above-quoted decision, however, reveals that the Court did not equate withholding tax assessments to the imposition of civil penalties imposed on tax deficiencies. The word "penalty" was used to underscore the dynamics in the withholding tax system that is the income of the payee being subjected to tax and not of the withholding agent. It was never meant to mean that withholding taxes do not fall within the definition of internal revenue taxes, especially considering that income taxes are the ones withheld by the withholding agent. Withholding taxes do not cease to become income taxes just because it is collected and paid by the withholding agent . The liability of the withholding agent is distinct and separate from the tax liability of the income earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding agent fail to deduct the required amount from its payment to the payee, it is liable for deficiency taxes and applicable penalties. In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation ,the Court explained: It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil.,is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under the law . A "person liable for the tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest to bring a suit for refund of taxes he believes were illegally collected from him. Thus, withholding tax assessments such as EWT and WTC clearly contemplate deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a penalty on the withholding agent for its failure to comply with its statutory duty .Further, a holistic reading of the Tax Code reveals that the CIR's interpretation of Section 203 is erroneous. Provisions of the NIRC itself recognize that the tax assessment for withholding tax deficiency is different and independent from possible penalties that may be imposed for the failure of withholding agents to withhold and remit taxes. For one, Title X, Chapter I of the NIRC provides for additions to the tax or deficiency tax and is applicable to all taxes, fees and charges under the tax code. IAETDc In addition, Section 247(b) of the NIRC provides: SEC. 247. General Provisions . xxx xxx xxx (b) If the withholding agent is the Government or any of its agencies, political subdivisions or instrumentalities, or a government-owned or controlled corporation[,] the employee thereof responsible for the withholding and remittance of the tax shall be personally liable for the additions to the tax prescribed herein. On the other hand, Section 251 of the Tax Code reads: SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax . Any person required to withhold, account for and remit any tax imposed by this Code or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted. Based on the above-cited provisions, it is clear to see that the "penalties" are amounts collected on top of the deficiency tax assessments including deficiency withholding tax assessments. Thus, it was wrong for the CIR to restrict the EWT and WTC assessments against La Flor as only for the purpose of imposing penalties and not for the collection of internal revenue taxes. 124 xxx xxx xxx From the foregoing, it is clear that the assessment for EWT for CY 2012 is subject to the three-year prescriptive period. Section 2.58 (A) (2) (a) 125 of RR 2-98, 126 as amended by RR No. 17-2003, 127 requires that the manual filing of the EWT and FWT returns be filed within ten (10) days after the end of each month for the months of January to November and on or before January 15 of the following year for the month of December. Additionally, pursuant to RR 26-2002, 128 for the purpose of filing returns under the eFPS, taxpayers classified under group B, such as herein petitioner, are required to file the monthly withholding tax returns within thirteen (13) days following the end of the month. Applying the foregoing provisions of law and regulations, the period of limitation on respondent's right to assess EWT is shown below: Period covered Date of actual filing Last day prescribed by law to file the return Last day to assess under Section 203 of the NIRC of 1997 January 2012 February 09, 2012 129 February 14, 2012 February 14, 2015 February 2012 March 14, 2012 130 March 14, 2012 March 14, 2015 March 2012 April 12, 2012 131 April 14, 2012 April 14, 2015 April 2012 May 11, 2012 132 May 14, 2012 May 14, 2015 May 2012 June 14, 2012 133 June 14, 2012 June 14, 2015 June 2012 July 09, 2012 134 July 14, 2012 July 14, 2015 July 2012 August 10, 2012 135 August 14, 2012 August 14, 2015 August 2012 September 14, 2012 136 September 14, 2012 September 14, 2015 September 2012 October 12, 2012 137 October 14, 2012 October 14, 2015 October 2012 November 12, 2012 138 November 14, 2012 November 14, 2015 November 2012 December 11, 2012 139 December 14, 2012 December 14, 2015 Amended December 2012 February 13, 2013 140 January 15, 2013 February 13, 2016 As shown, when the FLD was issued on 08 December 2015 , 141 respondent's right to assess petitioner for deficiency EWT for the months of January to October 2012 had already prescribed. Accordingly, only the assessment for deficiency EWT for the months of November and December 2012 was issued within the three-year prescriptive period allowed by law. Notably, however, while this Court finds that respondent's right to assess petitioner for deficiency EWT for the months of January to October 2012 had prescribed, an examination of the pieces of evidence would show that petitioner failed to establish clearly which portion of said deficiency taxes pertain to the prescribed periods. In the absence of proof to the contrary, this Court is thus constrained to impute the entire deficiency EWT assessment to the unprescribed portion for the TY 2012. DcHSEa The records show that petitioner was assessed for alleged deficiency EWT for CY 2012 amounting to P303,939.61, inclusive of interest, computed as follows: 142 Expenses subject to withholding Annex A P185,006,235.72 Total tax due 2,437,464.28 Less: Tax Paid 2,244,461.57 Basic Deficiency Tax 193,002.71 Add: Interest (1.16.13 to 12.01.15) 110,936.90 Total Amount Due P303,939.61 ============= Annex A Amount Tax Due Rentals (5%) 4,058,378.94 202,918.95 Professional Fees (0%) 750,028.42 - Professional Fees (10%) 66,456.00 6,645.60 Professional Fees (15%) 1,312,471.83 196,870.77 Purchase of Materials (1%) 154,534,905.11 1,545,349.05 Purchase of Services (2%) 24,283,995.42 485,679.91 185,006,235.72 2,437,464.28 ============ =========== Petitioner claims that, for EWT on rentals, only the amount of P3,478,211.04 should be subjected to 5% EWT as compared to respondent's findings of P4,058,378.94. Moreover, that for EWT on purchase of materials, the amount that should be subjected to 1% EWT is P147,043,005.54, as opposed to respondent's findings of P154,534,905.11. Lastly, petitioner claims that for EWT on purchase of services, only the amount of P24,118,556.13 should be subjected to 2% EWT as compared to respondent's findings of P24,283,995.42. It is noted that petitioner did not dispute the remaining deficiency EWT of P87,016.53. From the foregoing, the disputed items, in relation to respondent's EWT assessment, are the following: Item Per FLD 143 Per petitioner's claim Tax Base Amount Tax Base Amount Rentals (5%) P4,058,378.94 P202,918.95 P3,478,211.04 P173,910.55 Purchase of materials (1%) 154,534,905.11 1,545,349.05 147,043,005.54 1,470,430.06 Purchase of services (2%) 24,283,995.42 485,679.91 24,118,556.13 482,371.12 Per independent verification of petitioner's Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) or BIR Form No. 1601-E, 144 for the TY 2012, the Court finds that petitioner paid a total amount of P2,244,461.57 withholding taxes, broken down as follows: Income Payments EWT remitted Rentals (5%) P3,478,213.20 P173,910.66 Professional Fees (10%) 66,456.00 6,645.60 Professional Fees (15%) 1,312,471.83 196,870.77 Purchase of Materials (1%) 143,107,420.00 1,431,074.20 Purchase of Services (2%) 21,798,017.00 435,960.34 Total P169,762,578.03 P2,244,461.57 A. RENTALS SUBJECT TO 5% P580,166.80 Allegedly, the following rental payments were not subjected to 5% EWT: Rentals 145 P4,058,380.00 Less: Income payments subjected to 5% EWT 3,478,213.20 DISCREPANCY P580,166.80 =========== The discrepancy is accounted as follows: 146 Particulars Amount Payment for driver services subjected to 2% EWT P432,560.76 Driver's 13th month not subject to EWT 11,000.00 Amortization of prepaid expenses not subjected to EWT 25,000.00 Amortization of prepaid expenses previously subjected to EWT in 2011 111,607.14 Total P580,167.90 A.1 PAYMENT FOR DRIVER SERVICES SUBJECT TO 2% EWT As the ICPA aptly found, the Statement of Accounts, Trip Tickets, Bank Vouchers, and ORs 147 sufficiently prove that the nature of the transaction is a supply of services by Triple A Car Rental Services ('Triple A Car').Triple A Car provides a driver to petitioner and the latter pays for the services rendered by Triple A Car's driver based on the number of hours rendered as reflected on the trip tickets. Relative to the withholding of EWT on purchase of services, Section 2.57.2 (M) of RR 2-98, as amended by RR 6-2009, 148 provides: SCaITA xxx xxx xxx Sec. 2.57.2 . Income Payment 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 twenty thousand (20,000) 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 20,000 private corporations, as determined by the Commissioner, to their local/resident supplier of goods and local/resident supplier of services, including non-resident aliens engaged in trade or business in the Philippines. Provided ,however, that for purchases involving agricultural products in their original state, the tax required to be withheld under, this sub-section shall only apply to purchases in excess of the cumulative amount of Three Hundred Thousand Pesos (P300,000) within the same taxable year. For this purpose, an agricultural product in their original state as used in these Regulations, shall only include corn, coconut, copra, palay, rice, cassava, coffee, fruit, vegetable, marine food product, poultry and livestock. Supplier of goods One percent (1%) Supplier of services Two percent (2%) 149 xxx xxx xxx Undeniably, petitioner is categorized as one of the Top 10,000 Corporations 150 obligated to withhold 2% from income payments it made to Triple A Car. A thorough examination of petitioner's documents, including the "Alphabetical List of Payees from Whom Taxes Were Withheld" (MAP), 151 reveals that petitioner properly subjected the income payments for the services rendered by Triple A Car amounting to P432,560.76 to 2% EWT, in accordance with the aforecited provision and such should not be included as income payments subject to 5% EWT. A.2 DRIVER'S 13TH MONTH NOT SUBJECT TO EWT Clearly from the afore-mentioned Section 2.57.2 (M) of RR 2-98, a top corporation's income payments for a supply of services shall be subjected to 2% EWT. Having established that income payments made to Triple A Car are purchases of services, petitioner is also required to withhold 2% from the income payment made to Triple A Car, representing 13th month pay of the latter's employee. A.3 AMORTIZATION OF PREPAID EXPENSES NOT SUBJECTED TO EWT As the ICPA explained, the subject amount of P25,000.00 represented the one-month amortization of the prepaid rent totalling to P150,000.00 paid on 30 October 2012, as evidenced by OR No. 1514. 152 Petitioner did not submit any evidence to support its argument that the same is not subject to 5% EWT. However, a scrutiny of petitioner's documents yields the following discrepancy: Supplier Per Official Receipt Per MAP Difference OR No. Date Amount Month Amount Jurie E. Entac 1458 153 5/11/12 P142,500 May 2012 154 P150,000 P7,500 155 Jurie E. Entac 1514 156 10/30/12 142,500 - - 142,500 From the above, petitioner did not remit the amount it withheld on 30 October 2012 on its income payment to Jurie E. Entac, (proprietor of Entac Transport Service) as evidenced by OR No. 1514 in the amount of P7,500.00. aTHCSE Per the ICPA's examination of petitioner's documents, the ICPA also found out the non-payment of petitioner of its 5% EWT due on OR No. 1514, to wit: 157 xxx xxx xxx 6. The aforementioned amortization of prepaid rental expense amounting to P25,000.00 represents one month amortization of the paid prepaid rents in the amount of P150,000.00 under Official Receipts No. 1514 shown as Exhibit No. ICPA AMOR-2 that was paid on October 30, 2012. The Petitioner failed to pay the corresponding 5% expanded withholding tax of the said prepaid rent. 158 xxx xxx xxx Section 2.57.4 of RR No. 2-98, as amended by RR 12-2001, 159 provides: xxx xxx xxx Sec. 2.57.4 . Time of Withholding . The obligation of the payor to deduct and withhold the tax under Section 2.57 of these [R]egulations arises at the time an income payment is paid or payable ,or the income payment is accrued or recorded as an expense or asset ,whichever is applicable, in the payor's books, whichever comes first .The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. 160 xxx xxx xxx In the instant case, petitioner only claimed the one-month amortization of P25,000.00 as expense and recorded the difference of P125,000.00 as prepaid expense asset. However, since petitioner had already paid the entire amount of P150,000.00 and in fact, properly withheld the amount of P7,500.00; it should have remitted said amount in 2012. As the same is an assessment covering the October 2012 EWT Return, which had already prescribed, its cancellation will be in order. A.4 AMORTIZATION OF PREPAID EXPENSES PREVIOUSLY SUBJECTED TO EWT IN 2011 Petitioner failed to offer any evidence to substantiate its claim that the prepaid expenses amounting to P111,607.14 were already subjected to EWT in 2011. Hence, respondent's assessment of this particular item must likewise be sustained. AHDacC To summarize, the Court affirms the 5% EWT deficiency on the following item: Description Amount Amortization of prepaid expenses previously subjected to EWT in 2011 P111,607.14 PURCHASE OF MATERIALS SUBJECT TO 1% P11,427,485.11 Petitioner also alleges that the following purchases of materials were not subjected to 1% EWT: 161 xxx xxx xxx Purchase of Materials: Building P502,023.91 Machinery 3,209,457.53 Furniture and fixture 292,613.55 Land improvements 1,673,244.25 Construction in Progress 651,987.19 Purchases 137,940,975.30 Welfare FOH 5,048,929.67 Retirement benefit expenses 410,651.63 Factory Supplies 11,422,851.02 Others and donations 577,496.31 Welfare 2,032,318.27 Entertainment 759,947.96 Travel expense 245,881.52 Subtotal P164,768,378.11 Less: Importations not subject to 1% EWT 10,233,473.00 Total 154,534,905.11 Less: Income payments subjected to 1% EWT 143,107,420.00 DISCREPANCY P11,427,485.11 xxx xxx xxx Petitioner likewise claims that the following should not be included in the above computation because by its nature, these items are not subject to 1% EWT: Description Amount Welfare FOH P5,048,929.67 Retirement benefit expenses 410,651.63 Welfare 2,032,318.27 Total P7,491,899.57 Despite its insistence, petitioner did not present supporting documents and it was only able to show that the above items were presented as part of the Salaries and Employee Benefits account in the AFS. In the determination of a taxpayer's EWT liability, proof of payment/incurrence of the expense, such as invoices and ORs, is necessary for the Court to ascertain the actual nature of the income payment (and rule on the taxability of the same).Unfortunately for petitioner, it did not even present its "Chart of Accounts" that would have shown the nature and description of the assets, the liability elements, the equity structure, the sources of revenue, the expenses (Cost of Sales, Cost of Manufacturing inclusive of Selling and Administrative Expenses) and the summary accounts of an organization. 162 With this, the Court is thus constrained to uphold in toto the respondent's deficiency EWT assessment as regards expenses that should be subject to 1% EWT. B. PURCHASE OF SERVICES SUBJECT TO 2% P2,485,978.42 As regards the purchase of services subject to 2%,the following purchases of services were allegedly not subjected to EWT: 163 xxx xxx xxx Purchase of Services: Light and water P6,866,332.46 Maintenance 85,315.21 Carriage in 1,929,133.30 Up-keep vehicle 2,255,240.41 Association Dues 413,939.12 Light and water 762,925.82 Communication 919,188.37 Carriage out 6,555,098.52 Security 960,000.00 Up-keep office 228,719.62 Advertising Expenses 17,922.00 Interest expense 3,290,180.59 Total P24,283,995.42 Less: Income payments subjected to 2% EWT 21,798,017.00 DISCREPANCY P2,485,978.42 xxx xxx xxx Petitioner maintains that the following should not be included in the above computation because these are not subject to 2% EWT: IDSEAH Description Amount Maintenance P85,315.21 Up-keep vehicle 2,255,240.41 Security 598,000.00 Total P2,938,555.62 In support of petitioner's claims above, it argues that expense account for both "Maintenance" and "Up-keep Vehicle" include its purchases of parts and services. Yet, it failed to forward evidence to show such expenses therefore, the assessment must stand. As regards, the "Security" expense account, petitioner also posits that it should include only the security guards' salaries that have been reimbursed to the agency, hence should not be subject to 2% EWT. Sections IV and V of RMC 39-07, 164 dated 22 January 2007, clarify the tax treatment of the security guards' salaries forming part of the contract price of the security agency's service, to wit: xxx xxx xxx IV. MANNER OF ISSUING RECEIPT FOR THE ENTIRE CONTRACT PRICE. xxx xxx xxx With respect to the security guards' salaries which are mandated by law to be paid by the Client through the Security Agency, the amount so paid representing salaries must be covered by a Non-VAT Acknowledgement Receipt. This document, coupled with the notarized certification of the expanded withholding taxes prescribed in Paragraph V hereunder, shall be a sufficient substantiation for the expense that will be claimed as a deduction from gross income by the Client. V. WITHHOLDING TAX COMPLIANCE. xxx xxx xxx Insofar as the Agency Fee is concerned, the Client is constituted as the withholding agent of the EWT following the rule above-mentioned. However, with respect to the portion of the Contract Price representing the amount segregated and earmarked as salaries of the security guards, the Security Agency shall be the one responsible for the withholding of the tax on compensation income. This is so because while it is the Client who claims the payment as an expense, it is the Security Agency who physically controls the payment to the salaries of the Security Guards. However, in order to comply with the requirement for deductibility under Section 34(K),in relation to Sections 58 and 81, all of the National Internal Revenue Code, as amended, the Security Agency must furnish its Client, on or before January 31 of the year following the year of withholding, a Notarized Certification (see Annex "A") indicating the names of the guards employed by the Client, their respective TINs, the amount of their salaries and the amount of tax withheld from each. This certification together with the covering Non-VAT acknowledgment Receipt must be kept on file by the Client as substantiation for the claim of the expense. 165 xxx xxx xxx In the instant case, petitioner's security agency, JDL Security and Investigation, Inc.,only issued VAT Service Invoices and VAT ORs 166 for the entire amount agency fee and salaries of the security guards. Aside from the VAT ORs breakdown for each, petitioner failed to present a notarized certification from the security agency (certifying that the said agency withheld the proper withholding tax on compensation on the security guards' salaries). Such is not in compliance with the documentation requirements under RMC 39-07. Thus, the EWT assessment on the security guards' salaries amounting to P598,000.00 should likewise be sustained. Below is the revised computation of petitioner's 2% EWT deficiency, as follows: xxx xxx xxx Purchase of Services: Light and water P6,866,332.46 Maintenance 85,315.21 Carriage in 1,929,133.30 Up-keep vehicle 2,255,240.41 Association Dues 413,939.12 Light and water 762,925.82 Communication 919,188.37 Carriage out 6,555,098.52 Security 960,000.00 Up-keep office 228,719.62 Advertising Expenses 17,922.00 Interest expense 3,290,180.59 Subtotal P24,283,995.42 Add adjustments: Payment for driver services subjected to 2% EWT (A.1) 432,560.76 Driver's 13th month not subject to EWT (A.2) 11,000.00 Total income payments subject to 2% EWT P24,727,556.18 Less: Income payments subjected to 2% EWT 21,798,017.00 Income payments not subjected to 2% EWT P2,929,539.18 ============= xxx xxx xxx In sum, petitioner should be held liable for basic deficiency EWT in the amount of P178,445.99, computed as follows: xxx xxx xxx Income payments EWT due Rental payments not subjected to 5% EWT P111,607.14 P5,580.36 Purchase of materials not subjected to 1% EWT 11,427,485.11 114,274.85 Purchase of services not subjected to 2% EWT 2,929,539.18 58,590.78 Basic deficiency EWT P178,445.99 ========== xxx xxx xxx IV. FINAL WITHHOLDING TAX As previously discussed, assessment for withholding taxes are within the purview of the regular three-year assessment period under Section 203 167 of the NIRC of 1997, as amended. A summary of the filing of FWT returns are as follows: Period covered Date of actual filing Last day prescribed by law to file the return Last day to assess under Section 203 of the NIRC of 1997 January 2012 February 09, 2012 168 February 14, 2012 February 14, 2015 February 2012 March 08, 2012 169 March 14, 2012 March 14, 2015 March 2012 April 11, 2012 170 April 14, 2012 April 14, 2015 April 2012 May 11, 2012 171 May 14, 2012 May 14, 2015 May 2012 June 06, 2012 172 June 14, 2012 June 14, 2015 June 2012 July 05, 2012 173 July 14, 2012 July 14, 2015 July 2012 August 15, 2012 174 August 14, 2012 August 14, 2015 August 2012 September 05, 2012 175 September 14, 2012 September 14, 2015 September 2012 October 01, 2012 176 October 14, 2012 October 14, 2015 October 2012 November 09, 2012 177 November 14, 2012 November 14, 2015 November 2012 December 11, 2012 178 December 14, 2012 December 14, 2015 December 2012 January 14, 2013 179 January 15, 2013 January 15, 2016 Notably, since the FLD was issued only on 08 December 2015 or more than three years from the filing of the returns for the months of January to October 2012, the assessment for the said months had prescribed. With this, only the assessment for November and December 2012 will be considered. Respondent also assessed petitioner for alleged deficiency FWT for CY 2012 amounting to P2,746,384.19, inclusive of interest, computed as follows: xxx xxx xxx Income payments subject to withholding Annex A P6,020,150.00 Total tax due 1,505,037.50 Less: Tax Paid - Basic Deficiency Tax 1,505,037.50 Add: 25% Surcharge 376,259.38 Interest (1.16.13 to 12.01.15) 865,087.31 Total Amount Due P2,746,384.19 ============ Annex A IV. FINAL WITHHOLDING TAX Management fee as stated above, was subjected to final tax in accordance to Revenue Regulations 2-98 and RP-Japan tax treaty and assessed pursuant to the provisions of Section 57(A) of the NIRC. xxx xxx xxx It is noteworthy that the FLD failed to provide for the tax rate that respondent used in arriving at the tax due. It is only by working back the equation (tax due divided by the income payment subject to withholding tax) that the rate of 25% as used in the assessment can be arrived at. Based on the Details of Discrepancies (Annex A), 180 the FWT assessment was a result of the management fees paid to IICL and the basis used was the RP-Japan Tax Treaty. A logical assumption is that respondent treated the management fees as royalties. However, the rate of 25% relied upon was prior to the amendment of the RP-Japan Tax Treaty which became effective in 2009. cHaCAS On cross-examination, RO Guiuan also failed to specify the classification of the payments, whether royalties or business profits. He simply mentioned that management fee is one of the fees that is subject to FWT. 181 It is a basic tenet that the FLD should state the facts, law, rules and regulations, or jurisprudence on which it is based, otherwise the assessment is void. 182 Due process dictates that taxpayers should be properly informed of the assessment against it to effectively refute the same and present evidence justifying its claim. Insofar as the assessment for FWT is concerned, the legal basis on which the assessment was based is wanting. Petitioner was left to assume the classification of the income and the corresponding rate. Moreover, as earlier discussed, IICL's rendered services are in the nature of business profits as the same did not include a transfer of "know-how." From the reading of the RP-Japan Tax Treaty, business profits are not subject to tax, unless there is a "permanent establishment" in the Philippines. The Service Agreement is likewise more than clear that the services were to be performed offshore and the parties did not intend to establish a "permanent establishment" in this jurisdiction. Absent any indication that services were actually performed here in the Philippines or that IICL maintained a fixed place of business within the country, the general rule stands that payments for business profits are exempt from tax. The assessment then for FWT for CY 2012 should be cancelled. V. COMPROMISE PENALTY Pursuant to Section 255 of the NIRC of 1997, as amended, respondent assessed petitioner of compromise penalties amounting to P66,000.00, broken down as follows: 183 Nature of Violation Compromise Penalty Late payment of Income Tax P25,000.00 Late payment of Value Added Tax 25,000.00 Late payment of Expanded Withholding Tax 16,000.00 Total Compromise Penalties P66,000.00 Under Revenue Memorandum Order (RMO) No. 01-90, 184 compromise penalties are only amounts suggested in settlement of criminal liability and the same may not be imposed on or exacted from the taxpayer in the event that a taxpayer refuses to pay the same. It is a well-settled rule that the Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because by its very nature, it implies a mutual agreement between the parties in respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer. 185 Absent any showing that herein petitioner consented to the compromise penalty, its imposition should be deleted. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 186 Necessarily, the total compromise penalties of P66,000.00 should be similarly cancelled. WHEREFORE ,premises considered, petitioner Ishida Philippines Tube Co.,Inc.'s Petition for Review is PARTIALLY GRANTED .The assessments for Final Withholding Tax (FWT) and Compromise Penalty amounting to P2,746,384.19 and P66,000.00, respectively, are CANCELLED while the assessments for Income Tax (IT),Value-Added Tax (VAT) and Expanded Withholding Tax (EWT) are hereby AFFIRMED WITH MODIFICATION . Accordingly, petitioner is ORDERED to pay respondent Commissioner of Internal Revenue the amount of P1,304,504.26, P1,292,224.14 ,and P412,031.35 ,representing basic IT, VAT and EWT, respectively, inclusive of the 25% surcharge, 20% deficiency interest and 20% delinquency interest imposed thereon under Sections 248 (A) (3), 187 249 (B) and (C) 188 of the NIRC of 1997, as amended, respectively, computed until 31 December 2017, as determined below: DACcIH IT VAT EWT TOTAL Basic 577,675.32 561,018.72 178,445.99 1,317,140.03 Surcharge (25%) 144,418.83 140,254.68 44,611.50 329,285.01 Deficiency Interest (20%) until November 06, 2017 IT 4/16/13 to 11/6/17 (P577,675.32 x 20% x 1,666 days/365 days) 527,346.35 527,346.35 VAT 1/26/13 to 11/6/17 (P561,018.72 x 20% x 1,746 days/365 days) 536,733.53 536,733.53 EWT 1/16/43 to 11/6/17 (P178,445.99 x 20% x 1,756 days/365 days) 171,699.26 171,699.26 Total Amount Due as of November 6, 2017 1,249,440.50 1,238,006.93 394,756.75 2,882,204.18 Deficiency Interest (20%) from November 7, 2017 to December 31, 2017 IT 11/7/17 to 12/31/17 (P577,675.32 x 20% x 55 days/365 days) 17,409.39 17,409.39 VAT 11/7/17 to 12/31/17 (P561,018.72 x 20% x 55 days/365 days) 16,907.41 16,907.41 EWT 11/7/17 to 12/31/17 (P178,445.99 x 20% x 55 days/365 days) 5,377.82 5,377.82 Delinquency Interest (20%) from November 7, 2017 to December 31, 2017 IT 11/7/17 to 12/31/17 (P1,249,440.50 x 20% x 55 days/365 days) 37,654.37 37,654.37 VAT 11/7/17 to 12/31/17 (P1,238,006.93 x 20% x 55 days/365 days) 37,309.80 37,309.80 EWT 11/7/17 to 12/31/17 (P394,756.75 x 20% x 55 days/365 days) 11,896.78 11,896.78 Total Amount Due as of December 31, 2017 1,304,504.26 1,292,224.14 412,031.35 3,008,759.75 In addition, petitioner is ORDERED to pay delinquency interest at the rate of 12% computed from 01 January 2018 until full payment thereof, pursuant to Section 249 (C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN) and as implemented by RR No. 21-2018, 189 on said deficiency taxes based the following principal amounts: Income Tax P1,249,440.50 Value Added Tax 1,238,006.93 Expanded Withholding Tax 394,756.75 SO ORDERED. aICcHA (SGD.) JEAN MARIE A. BACORRO-VILLENA Associate Justice Juanito C. Castaeda, Jr.,J. ,concurs. Footnotes 1. Pursuant to 2005 Revised Rules of the CTA, as amended . Rule 4. Jurisdiction of the Court. xxx xxx xxx Sec. 3. Cases within the jurisdiction of the Court in Division . The Division shall exercise: (a) Exclusive original over or appellate jurisdiction to review by appeal the following: (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue xxx xxx xxx 2. Exhibit "P-1",Division Docket, Volume I, p. 435. 3. Exhibit "P-2", id. ,p. 446. 4. Exhibit "R-1",BIR Records, p. 305. 5. Exhibit "P-3",Division Docket, Volume I, pp. 447-449. 6. Exhibit "P-4", id. ,pp. 450-452. 7. Exhibit "P-5", id. ,pp. 453-455. 8. Exhibit "P-6", id. ,pp. 456-458. 9. Exhibits "P-11" to "P-11.4", id. ,pp. 500-504. 10. Exhibit "P-7", id. ,pp. 459-461. 11. Id. ,pp. 92-109. 12. Id. ,pp. 131-132. 13. Minutes of the Hearing, held on 21 June 2018, id. ,p. 177. 14. The parties filed their JSFI on 11 July 2018, id. ,pp. 183-189. 15. Issued on 26 July 2018, id. ,pp. 191-194. 16. Judicial Affidavit, id. ,pp. 165-173. 17. Corrected Judicial Affidavit, id. ,pp. 388-422. 18. TSN dated 30 July 2018. 19. TSN dated 23 January 2019. 20. Dated 11 February 2019, Division Docket, Volume I, pp. 423-434. 21. Resolution dated 02 April 2019, id. ,Volume II, pp. 508-511. 22. Judicial Affidavit, id. ,524-531. 23. TSN dated 10 June 2019. 24. Which he claimed he had vouched for randomly yet did not specify what those documents were. 25. Filed on 16 June 2019, Division Docket, Volume II, pp. 539-544. 26. Id. ,pp. 547-549. 27. Id. ,pp. 550-552. 28. Id. ,pp. 562-596. 29. Id. ,p. 597. 30. Stipulation of Issues, JSFI, Division Docket, Volume I, p. 185. 31. Sec. 34 . Deductions from Gross Income . ... (A) Expenses . 32. Amending Certain Provisions of Revenue Regulations No. 18-99 Implementing Section 5 of Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, and other pertinent provisions of the National Internal Revenue Code of 1997 imposing VAT on services of banks, non-bank financial intermediaries and finance companies, beginning January 1, 2003 pursuant to Section 1 of Republic Act No. 9010. 33. Sec. 203 . Period of Limitation Upon Assessment and Collection . Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided ,That in a case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. 34. Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes . 35. Sec. 228 . Protesting of Assessment . ... xxx xxx xxx Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. xxx xxx xxx 36. Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty. 37. Amending Certain Sections of Revenue Regulations No. 12-99 Relative to the Due Process Requirement in the Issuance of a Deficiency Tax Assessment . 38. G.R. Nos. 172045-46, 16 June 2009; Emphasis supplied. 39. Sec. 34 . Deductions from Gross Income . ... xxx xxx xxx (A) Expenses . (1) Ordinary and Necessary Trade, Business or Professional Expenses . (a) In General . There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: xxx xxx xxx (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade ,business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer : Provided ,That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (Underscoring supplied) 40. Emphasis supplied. 41. Section 34 (A) (1) (a), NIRC of 1997, as amended. 42. Id. 43. Id. 44. Sections 57 and 58, id. ; in relation to Section 2.58.5 of Revenue Regulations No. 2-98. 45. Section 34 (A) (1) (b), id. 46. Section 34 (A) (1) (c), id. 47. Supplemental Regulations to Revenue Regulations No. 6-82 . 48. G.R. No. L-26911, 27 January 1981, 102 SCRA 246. 49. Emphasis supplied. 50. Exhibits "ICPA TL-1" to "ICPA TL-4". 51. Article 1 on Scope of Services. Exhibits "P-11" to "P-11.4". 52. Exhibits "ICPA BRO-1" to "ICPA BRO-5". 53. Exhibits "ICPA BIL-1". 54. Sec. 57 . Withholding of Tax at Source . (A) Withholding of Final Tax on Certain Incomes . Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24 (B) (1),24 (B) (2),24 (C),24 (D) (1);25 (A) (2),25 (A) (3),25 (B),25 (C),25 (D),25 (E),27 (D) (1),27 (D) (2),27 (D) (3),27 (D) (5),28 (A) (4),28 (A) (5),28 (A) (7) (a),28 (A) (7) (b),28 (A) (7) (c),28 (B) (1),28 (B) (2),28 (B) (3),28 (B) (4),28 (B) (5) (a),28 (B) (5) (b),28 (B) (5) (c);33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code. 55. Sec. 28 . Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . (1) In General . Except as otherwise provided in this Code ,a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines ,such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),annuities, emoluments or other fixed determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 (c): Provided ,That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).(Underscoring supplied) xxx xxx xxx 56. Emphasis supplied. 57. Emphasis supplied. 58. JSFI, Division Docket, Volume I, p. 184. 59. Emphasis supplied. 60. Exhibits "ICPA RES-1.10" to "ICPA RES-1.19". 61. Exhibits "ICPA RES-1.1" to "ICPA RES-1.9". 62. Emphasis supplied. 63. Article 2. Service Fees of the Service Agreement. 64. Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, effective beginning 01 January 1981. 65. Paragraph 2 of Article 12 was amended in Protocol Amending the Convention Between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ,effective 01 January 2009. (Emphasis supplied and italics in the original text) 66. Emphasis supplied. 67. Emphasis supplied. 68. Emphasis supplied. 69. OECD Model Tax Convention on Income and Capital, Condensed Version, July 2010, pp. 225-226. 70. Emphasis supplied. 71. Supra at note 50. 72. Regulating the Use of Functional Currency Other than the Philippine Peso in Financial Statements that will be Submitted and in the Books of Accounts that will be Maintained for Internal Revenue Tax Purposes. 73. Emphasis supplied. 74. Supra at note 39. (b) Substantiation Requirements. No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. 75. http://www.bsp.gov.ph/statistics/excel/pesocross.xls .per data accessed on 17 August 2020. 76. Using the exchange rate on the last business day of the year it was accrued 2012 .The Audited Financial Statements of petitioner did not disclose the exchange rate used in converting the management fees paid to peso. 77. Exhibit No. "ICPA JINV-3". 78. Exhibit No. "ICPA TL-3". 79. Id. 80. SEC. 2.58.3 . Claim for Tax Credit or Refund . xxx xxx xxx (B) Claims for tax credit or refund of any creditable income tax which was deducted and withheld on income payments shall be given due course only when it is shown that the income payment has been declared as part of the gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. xxx xxx xxx 81. Supra at note 34. 82. Annex A, ICPA Report, Exhibits "P-9" to "P-9.34". 83. Section 2.58.3 (B) of RR 2-98, as amended, supra at note 34. 84. CTA EB Nos. 1793 and 1794, 01 October 2019. 85. CTA EB Nos. 1421 and 1423, 23 May 2017. 86. Citation omitted, emphasis supplied and emphasis in the original text. 87. Exhibit "P-5",Division Docket, Volume I, p. 453. 88. Emphasis supplied. 89. Emphasis supplied. 90. Deutsche Knowledge Services Pte. Ltd. v. Commissioner of Internal Revenue ,CTA E.B. Case No. 1145, 09 June 2015. 91. Exhibits "ICPA CER-1" to "CER-1.13". 92. Exhibit "ICPA AFS-13". 93. Exhibit "ICPA AFS-31". 94. Exhibit "R-16",pp. 348-375. 95. Exhibits "ICPA SSR-1" to "ICPA SSR-40.1". 96. Annex AI, ICPA Report. 97. Exhibits "ICPA S2011" to "ICPA S2011-1". 98. Exhibits "ICPA VSQ1-1" to "VSQ4-253". 99. Exhibits "ICPA S2013" to "ICPA S2013-1". 100. Exhibits "ICPA CMVS-1" to "ICPA CMVS-71". 101. Annex AH, ICPA Report. 102. Exhibit "ICPA AFS-31". 103. Sales 12% VAT Regular Sale of Goods P166,087,393.00 P19,930,487.16 Scrap Sales 1,945,156.00 233,418.72 Total P168,032,549.00 P20,163,905.88 104. Marcos II v. Court of Appeals, et al. ,G.R. No. 120880, 05 June 1997. 105. Supra at note 32. 106. 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. xxx xxx xxx 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 nonstock, 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. xxx xxx xxx 107. Commissioner of Internal Revenue v. Court of Appeals and Commonwealth Management and Services Corporation ,G.R. No. 125355, 30 March 2000, 329 SCRA 237. (Italics supplied) 108. Eufrocina M. Sacdalan-Casasola, National Internal Revenue Code (Annotated),2013 Edition, p. 761. 109. Black's Law Dictionary, 8th ed.,p. 2226. 110. 706 Phil. 48 (2013);Citations omitted and emphasis supplied. 111. CTA EB Case No. 287, 14 January 2008. 112. Citation omitted, emphasis supplied and italics in the original text. 113. Revocation of BIR Ruling DA-563-2006 dated September 19, 2006 pursuant to CTA E.B. Case No. 287 dated January 14, 2008. 114. Exhibit "ICPA AFS-29". 115. Emphasis supplied. 116. Exhibit "ICPA AFS-23". 117. Exhibits "ICPA OR-1" to "ICPA OR-13". 118. Sec. 113 . Invoicing and Accounting Requirements for VAT-Registered Persons . xxx xxx xxx (B) Information Contained in the VAT Invoice or VAT Official Receipt . The following information shall be indicated in the VAT invoice or VAT official receipt: xxx xxx xxx (2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax: Provided ,That: xxx xxx xxx (b) If the sale is exempt from value-added tax, the term 'VAT-exempt sale' shall be written or printed prominently on the invoice or receipt; xxx xxx xxx (D) Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt . xxx xxx xxx (2) If a VAT-registered person Issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term 'VAT-exempt sale,' the issuer shall be liable to account for the tax imposed in Sections 106 or 108 as if Section 109 did not apply . 119. RMC No. 9-2006: Clarifying the Amount Subject to VAT and Expanded Withholding Tax (Income Tax) of Brokers and Others Similarly Situated and the Other Parties with Whom They Transact Business. 120. Annex "INT",ICPA Report. 121. Exhibit "ICPA AFS-23". 122. Supra at note 33. 123. G.R. No. 211289, 14 January 2019. 124. Citation omitted, emphasis and italics in the original text, and underscoring supplied. 125. Sec. 2.58. RETURNS AND PAYMENT OF TAXES WITHHELD AT SOURCE . (A) Monthly return and payment of taxes withheld at source . xxx xxx xxx (2) WHEN TO FILE (a) For both large and non-large taxpayers, the withholding tax return, whether creditable or final (including final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements) shall be filed and payments should be made within ten (10) days after the end of each month, except for taxes withheld for the month of December each year, which shall be filed on or before January 15 of the following year ... xxx xxx xxx 126. Supra at note 34. 127. Amending Further Pertinent Provisions of Revenue Regulations No. 2-98, as Amended, Providing for Additional Transactions Subject to Creditable Withholding Tax; Re-Establishing the Policy that the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Property Classified as Capital Assets Shall be Collected as Final Withholding Tax, Thereby Further Amending Revenue Regulations Nos. 8-98 and 13-99, as Amended by Revenue Regulations No. 14-2000; and for Other Purposes. 128. Amending Further Revenue Regulations No. 9-2001, as Amended by Revenue Regulations No. 2-2002 and Revenue Regulations No. 9-2002, Providing for the Staggered Filing of Returns of Taxpayers Enrolled in the Electronic Filing and Payment System (EFPS) Based on Industry Classification. 129. Exhibit "R-16",p. 469. 130. Exhibit "R-16",p. 466. 131. Exhibit "R-16",p. 464. 132. Exhibit "R-16",p. 462. 133. Exhibit "R-16",p. 460. 134. Exhibit "R-16",p. 458. 135. Exhibit "R-16",p. 456. 136. Exhibit "R-16",p. 454. 137. Exhibit "R-16",p. 452. 138. Exhibit "R-16",p. 450. 139. Exhibit "R-16",p. 448. 140. Exhibit "R-16",p. 446. 141. Exhibit "R-5",BIR Records, pp. 722-728. 142. Exhibit "P-5",Division Docket, Volume I, p. 453. 143. Id. 144. Exhibit "R-16",pp. 446-469. 145. Exhibit "ICPA AFS-24". 146. Division Docket, Volume I, p. 350. 147. Exhibits "ICPA DRI-8.1","ICPA DRI-9.1","ICPA DRI-11.1" and "ICPA DRI-13.1". 148. Amending Further Pertinent Provisions of Revenue Regulations (RR) No. 2-98, as Amended, Providing for an Additional Criteria in the Determination of Top 20,000 Private Corporations, Including the Threshold on their Purchases of Agricultural Products, and Additional Transactions Subject to Creditable Withholding Tax on Income Payments Made by the Top Five Thousand (5,000) Individual Taxpayers Engaged in Trade/Business or Practice of Profession . 149. Emphasis supplied. 150. Joint Stipulation of Facts and Issues, Division Docket, Volume I, p. 185. 151. Exhibits "ICPA MAP-1" to "ICPA MAP-12". 152. Exhibit "ICPA AMOR-2". 153. Exhibit "ICPA AMOR-1". 154. Exhibit "ICPA MAP-5". 155. Amount withheld by petitioner computed as follows: P150,000 (P150,000 x 5% EWT) . 156. Exhibit "ICPA AMOR-1". 157. Supra at note 146. 158. Emphasis in the original text. 159. Amendment to the Pertinent Provisions of Revenue Regulations No. 1-98, as Amended, Revenue Regulations No. 2-98 as Amended, and Revenue Regulations No. 6-2001, Relative to the Revision of Withholding Tax Rates on Certain Income Payments Subject to Withholding Tax, the Deferment of the New Deadline Dates for Filing Selected Tax Returns, the Reporting Requirements for Receipts of Talent Fees, and for Other Purposes . 160. Emphasis and underscoring supplied. 161. Division Docket, Volume I, p. 352. 162. Hedish, Norman D. "Account Classification and Principle Codification." The Accounting Review ,Vol. 34, No. 4, 1959, pp. 660-662. 163. Division Docket, Volume I, p. 354. 164. SUBJECT: Clarifying the Income Tax and VAT Treatment of Agency Fees/Gross Receipts of Security Agencies Including the Withholding of Taxes Due thereon. 165. Emphasis in the original text and underscoring supplied. 166. Exhibits "ICPA SEC-2" to "ICPA SEC-23". 167. Supra at note 33. 168. Exhibit "R-16",p. 444. 169. Exhibit "R-16",p. 442. 170. Exhibit "R-16",p. 440. 171. Exhibit "R-16",p. 438. 172. Exhibit "R-16",p. 436. 173. Exhibit "R-16",p. 433. 174. Exhibit "R-16",p. 431. 175. Exhibit "R-16",p. 429. 176. Exhibit "R-16",p. 427. 177. Exhibit "R-16",p. 425. 178. Exhibit "R-16",p. 423. 179. Exhibit "R-16",p. 421. 180. Exhibit "P-5", id. ,pp. 453-455. 181. Supra at note 22. 182. Section 3.1.4 of RR No. 12-99 or the Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules of Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty . 183. Exhibit "P-5",Division Docket, Volume I, p. 453. 184. Amendments to the Provisions of a "Revised Schedule of Compromise Penalties" for internal revenue violations as prescribed in RMO 26-86. 185. The Philippines International Fair, Inc. v. The Collector of Internal Revenue, et al. ,114 Phil. 710 (1962). 186. Commissioner of Internal Revenue v. Lianga Bay Logging Co., Inc., et al. ,271 Phil. 82 (1991). 187. Sec. 248. Civil Penalties . (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: xxx xxx xxx (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; ... 188. Sec. 249. Interest . (A) In General . There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum ,or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid. (B) Deficiency Interest . A deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. (C) Delinquency Interest . In case of failure to pay: (1) The amount of the tax due on any return required to be filed, or (2) The amount of tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax. 189. Regulations Implementing Section 249 (Interest) of the National Internal Revenue Code (NIRC) of 1997, as amended under Section 75 of the Republic Act (RA) No. 10963 or the "Tax Reform for Acceleration and Inclusion (TRAIN) Law."