Commissioner of Internal Revenue v. Modern Imaging Solutions, Inc.

EN BANC [C.T.A. EB CASE NO. 1676. July 27, 2018.] (C.T.A. Case No. 8987) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .MODERN IMAGING SOLUTIONS, INC. , respondent . DECISION RINGPIS-LIBAN , J p : The Case Before the Court is a Petition for Review seeking the nullification of the Decision 1 dated March 21, 2017 ("Assailed Decision") and Resolution 2 dated June 06, 2017 ("Assailed Resolution") of the Court of Tax Appeals Second Division ("Second Division"), cancelling the assessments Petitioner issued against Respondent for deficiency income tax, expanded withholding tax ("EWT") and documentary stamp tax ("DST") for taxable year 2009 in the total amount of Php3,104,954.00, inclusive of surcharge, interests and compromise penalty. The Facts The facts as found by the Second Division are as follows: "[Respondent] is a Philippine Branch Office of Modern Imaging Solutions, Inc.,a corporation organized and existing under the laws of the United States of America and is duly licensed by the Securities and Exchange Commission 'to engage in the operation of a call center for the sale and distribution of business supplies.' [Respondent's] office is located at Unit B, 5/F One World Square Building, Upper Mckinley Road, Mckinley Tower Center, Fort Bonifacio, Taguig City. On the other hand, [Petitioner] is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR) vested under appropriate laws with the authority to carry out the functions, duties and responsibilities of said office, including, but not limited to, the power to decide disputed assessments and cancel and abate tax liabilities. He is represented by the Legal Division of Revenue Region No. 8, with office located at the 2nd Floor BIR Building, 313 Gil Puyat Avenue, Makati City. On January 19, 2011, [Petitioner] issued a Letter of Authority No. 050-2011-00000028, authorizing the examination of the books of accounts and other accounting records of [Respondent] covering taxable year 2009, which [Respondent] received on January 25, 2011. CAIHTE Thereafter, [Petitioner] sent a Preliminary Assessment Notice (PAN) dated May 5, 2014, which was received by [Respondent] on May 20, 2014. It was stated in the said PAN that the period of prescription was extended up to June 30, 2014 due to several waivers of defense of prescription executed by [Respondent] on September 28, 2012, April 30, 2013 and September 13, 2013, respectively. On June 24, 2014, [Petitioner] issued a Formal Assessment Notice (FAN),which was received by [Respondent] on June 25, 2014, finding petitioner liable for deficiency Income Tax, EWT, and DST for taxable year 2009 in the total amount of P3,104,954.00, inclusive of surcharge, interests and compromise penalty, broken down as follows: Tax Type Basic Surcharge Interest Total Amount Due Income Tax Php1,481,083.73 - Php1,270,891.57 Php2,751,975.30 EWT 163,236.90 - 148,120.72 311,357.62 DST 17,394.00 Php4,348.50 15,878.58 37,621.08 Compromise Penalty - - - 4,000.00 Total Php1,661,714.63 Php4,348.50 Php1,434,890.87 Php3,100,954.00 [Respondent] filed its Protest Letter to the FAN on July 23, 2014 with a Request for Reinvestigation. There being no action on the part of the [Petitioner] on its protest, [Respondent] filed the instant Petition for Review on February 18, 2015." 3 The Ruling of the Second Division On March 21, 2017, the Second Division promulgated the Assailed Decision granting the Petition for Review, the dispositive portion of which reads: " WHEREFORE ,the instant Petition for Review is GRANTED .Accordingly, the Final Assessment Notice dated June 24, 2014 assessing [Respondent] for deficiency Income Tax, EWT, and DST for taxable year 2009 in the total amount of [Php]3,104,954.00, inclusive of surcharge, interests and compromise penalty, is CANCELLED for lack of legal and factual bases. SO ORDERED. " 4 Aggrieved, Petitioner filed a "Motion for Reconsideration" 5 on March 31, 2017 via registered mail, which the Second Division denied in the Assailed Resolution on June 06, 2017, thus: " WHEREFORE ,premises considered, [Petitioner's] Motion for Reconsideration is DENIED for lack of merit. SO ORDERED. " 6 On June 20, 2017, Petitioner filed a "Motion for Extension of Time to File Petition for Review" 7 via registered mail, which the Court granted in a Minute Resolution dated July 07, 2017. 8 On July 07, 2017, Petitioner filed the present "Petition for Review" 9 via registered mail. On August 01, 2017, the Court issued a Resolution 10 which ordered Respondent to comment on the Petition for Review within ten (10) days from receipt thereof. On September 04, 2017, Respondent filed a "Motion for Extension of Time to File Comment" 11 via registered mail, which the Court granted in a Minute Resolution dated September 14, 2017. 12 Consequently, on September 14, 2017, Respondent filed its "Comment" 13 via registered mail. On October 04, 2017, the Court issued a Resolution 14 submitting the case for decision. The Issues Petitioner raises the following arguments in support of his petition: 1. Whether or not the disallowance [by Petitioner] of rental expense is correct; 2. Whether or not the amount received from Respondent's Home/Head Office under the "Due to Home Office" Account is subject to DST; 3. Whether or not the Certification issued on December 04, 2014 [by Petitioner] is inadmissible in evidence for being hearsay; and 4. Whether or not Respondent is subject to 2% tax on withholding for payment made to its contractors. 15 The Ruling of the Court The petition is bereft of merit. At the outset, Petitioner presents no new argument to persuade Us that it has a meritorious case. It merely reiterates the arguments it raised in its Motion for Reconsideration which have been extensively addressed by this Court in the Assailed Resolution. The arguments advanced by Petitioner are merely rehashed from his previous pleadings before the Court in Division. Each and every issue has been extensively discussed, sufficiently determined and passed upon in the Assailed Decision and Assailed Resolution. Nevertheless, We shall discuss them anew if only to reinforce the earlier disquisition of the Court in Division. Petitioner erroneously disallowed Respondent's rental expense amounting to Php11,116.75. According to Petitioner, the rental expense of Php11,116.75 must be disallowed for two (2) reasons: (1) Respondent did not present the prescribed BIR Form No. 2307 or the Withholding Tax Remittance Return (BIR Form No. 1606) which is essential in establishing the withholding by the payor and the remittance/payment thereof to the Bureau of Internal Revenue ("BIR"),and (2) the BIR examiner's finding that rent payments were neither accounted for nor reflected in Respondent's Financial Statement ("FS")/Income Tax Return ("ITR"),as a result of the comparison of the Alphalist and the FS/ITR. DETACa The Court En Banc is not persuaded. First ,the rental expense was disallowed not because of non-withholding but due to the fact that it was treated by Petitioner as undeclared income from unaccounted source of cash ( i.e .,unaccounted rent),as clearly discussed in the Details of Discrepancies in Petitioner's Formal Assessment Notice dated June 24, 2014 ("FAN"). 16 Hence, this Court sees no reason why Petitioner insists that Respondent should have presented its BIR Form No. 2307 or the Withholding Tax Remittance Return (BIR Form No. 1606) to establish the fact of withholding. The Second Division postulates that Petitioner must have confused the instant case with a claim for refund of excess creditable withholding taxes where presentation of BIR Form No. 2307 is indispensable. In any event, the said doctrine is not applicable in a case for assessment: "Moreover, [Petitioner] must have confused this case with that of a claim for refund of excess creditable withholding taxes where presentation of BIR Form No. 2307 is essential. In a claim for refund of excess creditable withholding taxes, the Supreme Court held that the certificate of creditable tax withheld at source (or BIR Form No. 2307) is the competent proof to establish the fact that taxes are withheld. It is not necessary for the person who executed and prepared the certificate of creditable tax withheld at source to be presented and to testify personally to prove the authenticity of the certificates. As this case involves an assessment, the said ruling is not applicable to the instant case." 17 Second ,unreflected sources of funds not accounted for in the taxpayer's tax returns do not lead to the inference that part of the income has not been reported. While there is a presumption of correctness of assessment issued by Petitioner, it is an elementary rule that being a mere presumption, the same cannot be made to rest on another presumption. 18 Petitioner's presumption that there are allegedly unaccounted rent ( i.e .,not reported) should not translate and would not automatically result in profit or undeclared income which would in turn increase Respondent's income tax. We agree when the Second Division held: "While it is axiomatic that all presumptions are in favor of the correctness of tax assessments, the assessment itself should not be based on mere presumptions no matter how logical the presumption might be. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption." 19 Indeed, there are three (3) elements for the imposition of income tax: (1) there must be gain or profit, (2) the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. Income tax is assessed on income received from any property, activity or service. 20 Such being the case, Petitioner can only impose or assess income tax when there is an income, and such income was received or realized by the taxpayer. In the case at bar, Petitioner failed to prove the existence of the alleged income. HEITAD The DST assessment on Respondent's Home/Head Office under the "Due to Home Office" Account is without merit. To justify its imposition of the DST assessment on Respondent's Home/Head office under the "Due to Home Office" account, Petitioner cited the cases of Commissioner of Internal Revenue v. Filinvest Development Corporation 21 ("Filinvest") , Marubeni Corporation v. Commissioner of Internal Revenue and Court of Tax Appeals 22 ("Marubeni") and the CTA En Banc case of E.E. Black Ltd.-Philippine Branch v. Commissioner of Internal Revenue 23 ("E.E. Black Ltd.") . Yet, as discussed by the court a quo ,the reliance of Petitioner on these cases is misplaced. In Filinvest ,the parties involved are affiliated corporations with separate juridical personalities. An affiliate pertains to a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation. 24 Thus, the Supreme Court held therein that advances made by a corporation to its affiliates need not be covered by debt instruments in order to be subjected to DST on loans under Section 179 of the 1997 National Internal Revenue Code, as amended ("NIRC"). In the case at bar, Respondent is a Philippine Branch Office of a foreign corporation. The branch office and Home/Head Office ( i.e. ,foreign corporation) do not have separate juridical personalities. 25 As pointed out by the Second Division in the Assailed Decision, funds received by Respondent from its Home/Head Office are not loans, to wit: "x x x Notably, the 'Due to Home Office,' appears in the 'Equity' section of the Balance Sheet, which is a separate item from the Liabilities section of the Balance Sheet. Moreover, the 'Funds received from Home Office,' used as basis in the deficiency DST assessment, was lifted from the 'Statements of Assets, Liabilities and Due to Home Office,' a component of [Respondent's] FS. It should be noted that the components of the FS of a Philippine Branch Office is different with that of a subsidiary or affiliate in the Philippines. A Philippine Branch Office does not have a 'Statement of Changes in Equity' in its FS as subsidiaries and affiliates do, understandably because it has no capital stock, but in lieu thereof, it has the Statement pertaining to the 'Home Office' account, where transactions between the home office and branch are recorded, which is an intracompany account." 26 Similarly, in E.E. Black Ltd. , the parties involved were the parent company and affiliates which had separate legal personalities. Moreover, there were cash and journal vouchers evidencing intercompany advances and intercompany trade payables and receivables that can be considered as debt instruments under Section 179 of the NIRC. Lastly, unlike in Marubeni ,Respondent's Home/Head Office did not transact business in the Philippines independently from its branch that would set aside the principal-agent relationship, thus treating them as separate entities. The transaction in the case at bar was between the Home/Head Office and the branch office in the Philippines. The Certification issued on December 04, 2014 by Petitioner stating that Respondent is not included in the List of Top 20,000 Corporations is admissible. Petitioner, in an attempt to defend the propriety of Respondent's disallowed expenses due to the alleged non-withholding pursuant to Revenue Regulations ("RR") No. 14-2008, 27 as amended by RR No. 6-2009, 28 belatedly asserts that the Certification issued on December 04, 2014 29 ("Certification") by Petitioner, stating that Respondent is not included in the List of Top 20,000 Corporations, is inadmissible for being hearsay. The Certification was included by Respondent in its Formal Offer of Evidence 30 which was filed via registered mail on October 13, 2015. Moreover, all of Respondent's documentary exhibits were admitted by the Court a quo in its Resolution 31 dated November 25, 2015. Hence, Petitioner cannot object now that the same should not have been admitted. Moreover, we agree with the Second Division that the Certification is an exception to the hearsay rule, admissible even if the officer or person who made them was not presented in court, thus: "Furthermore, considering that the Certification was issued by a public officer in the performance of his official duty, the same is an exception to the hearsay rule by virtue of Section 44, Rule 130 of the Rules of Court. In Fullero vs. People of the Philippines ,the Supreme Court held that: 'The law, however, provides for specific exceptions to the hearsay rule. One of the exceptions is the entries in official records made in the performance of duty by a public officer. In other words, official entries are admissible in evidence regardless of whether the officer or person who made them was presented and testified in court, since these entries are considered prima facie evidence of the facts stated therein. Other recognized reasons for this exception are necessity and trustworthiness. The necessity consists in the inconvenience and difficulty of requiring the official's attendance as a witness to testify to innumerable transactions in the course of his duty. This will also unduly hamper public business. The trustworthiness consists in the presumption of regularity of performance of official duty by a public officer.'" 32 Petitioner's assessment for deficiency EWT is void for failure to inform Respondent of the legal and factual bases of the tax assessment against him. Finally, Petitioner argues that Respondent is subject to two (2%) withholding tax for payments made to contractors. It claims that the mistake in the citation of the revenue examiner of the applicable BIR regulation should not prejudice the government, and that the mistake was not raised in Respondent's protest during the administrative proceedings before the BIR. Petitioner's arguments must perforce fail. We note that Petitioner cited Section 2.57.1 of RR No. 2-98 as the justification for the EWT assessment in the Details of Discrepancies in Petitioner's FAN. 33 We also note that as early as July 22, 2014, Petitioner raised in its Protest Letter to the FAN ("Protest") 34 the argument that the EWT assessment on the listed purchase of services/contractors pursuant to Section 2.57.1 of RR No. 2-98 has no basis. Failure to inform the taxpayer in writing of the law and the facts on which the assessment is made, shall make the assessment void. 35 ATICcS Thus, the Court En Banc agrees with the Second Division in disposing the issue in the following fashion: "Indeed, the transactions covered by Section 2.57.1 (Income Payments subject to Final Withholding Tax) of R R No. 2-9 8 subject to withholding tax do not include the foregoing expenses incurred by petitioner. Clearly, respondent's deficiency EWT assessment is without legal basis considering that the cited provision is inapplicable to the above-enumerated expenses. Section 228 of the N IRC of 199 7, as amended, provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made. It is clear from Section 228 that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. The use of the word 'shall' in these legal provisions indicates the mandatory nature of the requirements laid down therein. Moreover, the Court cannot simply assume that based on the above tabulation and rates used, respondent might have inadvertently or unintentionally cited Section 2.57.1 instead of Section 2.57.2 of R R No. 2-9 8, where withholding of taxes may be required on the foregoing expenses as its basis for the deficiency EWT assessment. The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed . From the foregoing, the basic deficiency EWT assessment in the amount of [Php]163,236.90, including the related interest imposed, shall be cancelled. .." 36 WHEREFORE , finding no cogent reason to disturb the findings and conclusions reached by the Second Division in the Assailed Decision dated March 21, 2017 as well as in the Assailed Resolution dated June 06, 2017, the same are AFFIRMED .Accordingly, the Petition for Review filed with the Court En Banc on July 07, 2017 via registered mail is DENIED for lack of merit. SO ORDERED. (SGD.) MA. BELEN M. RINGPIS-LIBAN Associate Justice Roman G. del Rosario, P.J.,Juanito C. Castaeda, Jr.,Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla and Catherine T. Manahan, JJ. ,concur. Footnotes 1. Penned by Associate Justice Caesar A. Casanova, with Associate Justices Juanito C. Castaeda, Jr. and Catherine T. Manahan concurring. Docket, pp. 480-499. 2. Penned by Associate Justice Caesar A. Casanova, with Associate Justices Juanito C. Castaeda, Jr. and Catherine T. Manahan concurring. Docket, pp. 534-541. 3. Id .,pp. 498. 4. Id .,p. 1255. 5. Id .,pp. 500-506. 6. Id .,p. 541. 7. Rollo ,pp. 1-3. Record shows that petitioner received the Assailed Resolution on June 09, 2017; Docket, p. 533. 8. Id .,p. 4. 9. Id .,pp. 5-14. 10. Id .,pp. 54-55. 11. Id .,pp. 56-60. 12. Id .,p. 61-A. 13. Id .,pp. 62-79. 14. Id .,pp. 84-85. 15. Id .,pp. 6-11. 16. Docket, Formal Assessment Notice, Exhibit "P-5",pp. 307-310. 17. Id .,p. 537. 18. Collector of Internal Revenue v. Alberto D. Benipayo ,G.R. No. L-13656, January 31, 1962. 19. Docket, p. 490. 20. Commissioner of Internal Revenue v. Court of Appeals ,G.R. No. 108576, January 20, 1999. 21. G.R. Nos. 163653 and 167689, July 19, 2011. 22. G.R. No. 76573, September 14, 1989. 23. CTA EB Case No. 1196, November 11, 2015. 24. Republic Act No. 9856, The Real Estate Investment Trust (REIT) Act of 2009, Section 3 (b), Lapsed into law on December 17, 2009. 25. Philippine Deposit Insurance Corporation (PDIC) v. Citibank, N.A. and Bank of America, S.T. & N.A. ,G.R. No. 170290, April 11, 2012. 26. Docket, p. 496. 27. Amending Further Section 2.57.2 (M) of Revenue Regulations No. 2-98, as Amended, Increasing the Coverage of Withholding Tax Agents Required to Withhold 1% from Regular Suppliers of Goods and 2% from Regular Suppliers of Services from the Top 10,000 Private Corporations to Top 20,000 Private Corporations, November 26, 2008. 28. 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, June 3, 2009. 29. Docket, Certification dated December 04, 2014, Exhibit "P-7",p. 324. 30. Id .,pp. 284-293. 31. Id .,pp. 392-393. 32. Id .,p. 539. 33. Docket, Formal Assessment Notice, Exhibit "P-5",pp. 307-310. 34. Id .,Protest to the Formal Assessment Notice, Exhibit "P-6",pp. 370-376. 35. Section 228 of the 1997 National Internal Revenue Code, as amended. 36. Docket, p. 492; Emphasis and underscoring supplied .