Holiday Inns (Phils.), Inc. v. Commissioner of Internal Revenue

SPECIAL FORMER SECOND DIVISION [CA-G.R. SP No. 78828. September 9, 2004.] HOLIDAY INNS (PHILS.) INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N SALAZAR-FERNANDO , J p : Before this Court is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, assailing the Decision 1 dated April 21, 2003 and the Resolution 2 dated August 7, 2003 of the Court of Tax Appeals 3 in C.T.A. Case No. 5929 entitled "Holiday Inns (Phils.) Inc., Petitioner, versus Commissioner of Internal Revenue, Respondent" , the decretal portions of which read: Decision dated April 21, 2003 "IN THE LIGHT OF ALL THE FOREGOING, the deficiency assessments on income, VAT, expanded withholding and branch profit remittance taxes issued against petitioner covering the period from October 1, 1994 to September 30, 1995 are hereby UPHELD. Accordingly, petitioner is ORDERED to PAY the respondent the amount of P5,293,012.59, computed as follows: DEFICIENCY INCOME TAX P4,771,705.74 DEFICIENCY VAT 43,194.88 DEFICIENCY WITHHOLDING TAX 56,886.51 DEFICIENCY BRANCH PROFIT REMIT TAX 421,225.46 TOTAL AMOUNT PAYABLE P5,293,012.59 Petitioner is likewise ORDERED to PAY the 20% delinquency interest to be computed from April 16, 1996 until full payment thereof. SO ORDERED." Resolution dated August 7, 2003 "WHEREFORE, in view of all the foregoing, the instant Motion for Reconsideration is hereby DENIED for lack of merit. SO ORDERED." The facts as culled from the findings of the Court of Tax Appeals (CTA for brevity) are: Petitioner Holiday Inns (Phils.) Inc. (HIPI for brevity) is a duly organized and existing domestic corporation engaged in the hotel business. On January 15, 1996, HIPI filed its Corporate Annual Income Tax Return for the year ended September 30, 1995. On October 17, 1996, Letter of Authority No. 107937 was issued by the Revenue District Officer (RDO for brevity), Revenue District No. 33, Revenue Region No. 6, authorizing Eleuterio Voluntad as Examiner and Vivencio Gapasin as Group Supervisor, to examine the books and accounts and other accounting records for all internal revenue taxes for the period commencing October 1, 1994 to September 30, 1995. On December 8, 1998, HIPI received from respondent Commissioner of Internal Revenue (CIR for brevity) a Pre-assessment Notice dated November 13, 1998 stating HIPI's liability for deficiency income tax in the amount of P3,120,022.85, deficiency value-added tax of P26,996.80, expanded withholding tax on royalty of P377,787.88 and branch profit remittance tax of P421,225.00. ISHaCD In a letter dated December 22, 1998, HIPI objected to the proposed deficiency assessment. HIPI received from the CIR several assessment notices bearing No. 33-1-000078-95 and No. 33-1-000778-95, which are summarized as follows: Kinds of Basic Tax Due Interest Amount Due Exh. Compromise Exh. Total Tax Due Tax Penalty Income P3,120,022.18 P1,663,908.18 P4,783,931.03 B; 15 P25,000 17 P4,808,931.03 EWT 377,787.88 226,672.73 604,460.61 21 25,000 23 629,460.61 Branch 274,787.36 146,507.30 421,225.66 24 20,000 26 441,225.66 Profit VAT 26,996.80 16,198.08 43,194.88 18 8,500 20 51,694.88 Total P3,799,525.22 P2,053,286.29 P5,852,812.18 P78,500 P5,931,312.18 HIPI likewise received letters from the CIR demanding payment of the alleged deficiency assessments. On January 4, 1999, HIPI filed with the CIR a protest and/or request for reconsideration of the aforementioned assessment, receipt of which was acknowledged in a letter dated January 22, 1998 by the RDO, which directed HIPI to submit the necessary documents to refute the assessments. On February 15, 1999, HIPI complied to such directive. On July 26, 1999, the CIR issued a Final Notice Before Seizure giving HIPI the last opportunity to settle the adverted assessments, otherwise it would resort to summary remedies of Warrant of Levy on Real Property, Distraint of Personal Property or Warrant of Garnishment and/or simultaneous court action. On September 13, 1999, unable to obtain an affirmative response from the CIR on its protest, HIPI elevated the case to the CTA through a petition for review. The CIR filed its Answer and subsequently a Motion to Dismiss alleging that the petition is barred by the Statute of Limitations, pursuant to Section 229 of the Tax Code. In a Resolution dated January 12, 2000, the CTA denied said motion to dismiss. Pending review with the CTA, the parties jointly stipulated on the following issues for resolution: a) Whether or not Revenue Regulations No. 16-86 dated September 26, 1986, insofar as it prescribes the manner of apportionment of home office expense, is applicable; b) Whether or not the withholding taxes on royalty payments amounting to P1,888,939.40 have been remitted to the BIR; c) Whether or not the HIPI paid VAT in the amount of P269,968.00; d) Whether or not the HIPI's operation in 1995 incurred a loss; e) Whether or not the Assessment Notice No 33-1-000078-95 dated December 9, 1998 is valid. IDETCA On April 21, 2003, the CTA rendered the assailed decision upholding the CIR's deficiency assessments on income, VAT, expanded withholding and branch profit remittance taxes against HIPI. Anent the P8,680,685.00 deduction on gross income representing home office expense paid by HIPI to its mother company, Holiday Inns-Hongkong Inc. (HIKI for brevity), the CTA ruled that while authentication of the External Auditor's certificate as mandated under Section 160(b) of Revenue Regulations No. 16-86 is not required, the same should be disallowed because of HIPI's failure to substantiate the said deduction. It observed that the "Report on Factual Findings" dated November 10, 1995 which was issued by Deloitte Touche Tohmatsu , an accounting firm from Hongkong, "was a disclaimer of an opinion on HIPI's expenses." As regards the deficiency assessment on the withholding taxes on royalty payments made by HIPI to its mother company, the CTA found that HIPI accordingly withheld and remitted the withholding taxes for the taxable year 1995 except for the withholding tax for the royalty payment in November 1994 amounting to P177,770.36. The CTA brushed aside HIPI's claim that it did not remit the said royalty fee to its mother company because HIPI apparently declared the same in its Income Tax Return as deduction from its gross income. With regard to the deficiency assessment of VAT, the CTA affirmed the CIR's view that HIPI under-declared its VAT liability by P269,967.02, as can be shown by the discrepancy in its declared gross income from sale of services as appearing in its Annual Income Tax Return, from the taxable sales reported in its VAT returns. As to whether or not HIPI incurred a net operating loss, the CTA held that a consequence of the disallowance of HIPI's deductions from miscellaneous expenses, home office expense and VAT from management fees, is in fact appeared to have operated with a gain, and should therefore be liable for deficiency income tax. As in the home office expense, the CTA justified the disallowance on the miscellaneous expenses and VAT on the ground that HIPI failed to amply substantiate the said deductions. As regards the deficiency assessment on branch profit remittance tax, the CTA found the same proper, explaining that HIPI indeed debited from its retained earnings, remittances to home office, as shown in its Income Tax Return for 1995. On the timeliness of Assessment Notice No. 33-1-000078-95, the CTA ruled in the affirmative stating that it was filed within the three-year period of limitation as provided under Section 203 of the Tax Code. On August 7, 2003, HIPI's motion for reconsideration of the April 27, 2003 decision was denied. Hence, this petition for review raising the following grounds: I. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT ASSESSMENT NOTICES ISSUED BY RESPONDENT TO PETITIONER ARE VALID. II. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER'S CLAIMED DEDUCTION IN THE AMOUNT OF P8,680.685.00 REPRESENTING ITS RATABLE PORTION OR ALLOCATED SHARE OF HOME OFFICE EXPENSE IS NOT A VALID DEDUCTION AND SHOULD BE DISALLOWED. III. THE COURT OF TAX APPEALS ERRED IN HOLDING THAT VALUE ADDED TAX ASSESSMENT ISSUED BY RESPONDENT HAS NOT PRESCRIBED DUE TO ALLEGED FALSE VAT RETURNS FILED BY PETITIONER. The petition lacks merit. It is worth stressing that the findings and conclusions reached by the Court of Tax Appeals, which by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, binds this Court, unless there has been a clear abuse or improvident exercise of authority. 4 It is HIPI's position that the assessment notices issued against it were void for want of legal and factual bases, and for having been issued without authority. HIPI contends that the said notices failed to comply with Section 228 of the NIRC, which requires that the taxpayer shall be informed in writing of the law and the facts upon which the assessment is made. It also maintains that the Chief of the Assessment Division of BIR Manila Regional Office had no authority to sign the assessment notices because such is vested with the CIR, and while the latter may delegate the said authority as provided in Section 6(a) of the NIRC, he can only so delegate in the form of a clear and express directive. TCaSAH In its Comment, 5 the CIR through the Office of the Solicitor General (OSG) countered that the issue on the validity of the assessment notices was never raised at the administrative level or on appeal with the CTA, but was only raised for the first time in HIPI's motion for reconsideration of the CTA decision. The delegated authority of the CIR to issue assessment notices is not confined to the Revenue Regional Director. HIPI cannot claim that it was not informed of the facts and the law upon which the assessments were based, as in fact it filed its protest which only indicates that it had actual knowledge of the bases of the assessments. This Court finds for the CIR. The Chief of the Assessment Division of the Bureau of Internal Revenue (BIR) has the authority to make assessments. Such authority is plainly deducible from the provisions of the Tax Code, to wit: "SEC. 6 Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement . (A) Examination of Returns and Determination of Tax Due. After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative ." (Emphasis supplied) xxx xxx xxx "SEC. 7. Authority of the Commissioner to Delegate Power. The Commissioner may delegate the powers vested in him under the pertinent provisions of this Code to any or such subordinate officials with the rank equivalent to a division chief or higher , subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner . . ." (Emphasis supplied) The contention that the delegation is limited only to the Regional Director is not correct. The term " duly authorized representative " under Section 6 of the Tax Code is amplified by Section 7 of the same Code, which expressly indicates the "division chief" as one of those subordinate officials to which the CIR may delegate his powers. This Court cannot also subscribe to the argument that the assessment notices were void because they allegedly failed to state the facts and the law upon which the assessments were made. Perusal of the said notices 6 reveals that the requirements under Section 228 of the Tax Code were substantially complied with. Likewise, this Court agrees with the CTA and the CIR that HIPI had actual knowledge of the facts and the law on which the assessments were based because of the subsequent filing of a protest. Had HIPI been ignorant of the bases of the assessments, it could not have intelligently filed and explained in detail its opposition. DAEcIS Contrary to the CTA and CIR's position, HIPI insists that the Report on Factual Findings which was submitted by the accounting firm from Hongkong is not strictly "a disclaimer of an opinion", because it was based on "agreed-upon procedures of engagement" based on International Standards on Auditing (ISA) No. 920. HIPI explains that since the scope of the engagement is relatively limited to a segment of expense account in a profit and loss statement, it is but proper that such report is not a typical audit or review of the entire financial statements in a given period because precisely, the task is to pinpoint the allocation of general and administrative expenses by Holiday Inns (Asia Pacific) Limited Inc. to HIPI for the year ended September 29, 1995. This Court is not persuaded. A closer examination of Section 160 of Revenue Regulations 16-86 precisely underscores the deficiency in the certification submitted by HIPI. The said provision is quoted as follows: "Section 160. (a) Apportionment of deductions . From the items specified in Section 37(a) as being derived specifically from sources within the Philippines, there shall be deducted the expenses, losses, and other deductions properly allocated thereto and ratable part of any other expenses, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income. The remainder shall be included in full as net income from sources within the Philippines. The ratable part shall be based upon any of the following ratios consistently followed from year to year: 1. Gross income from sources within the Philippines to the total gross income. 2. Net sales in the Philippines to total net sales. 3. If any other method of allocation is adopted, a written permission from the Commissioner of Internal Revenue shall first be secured. (b) External Auditor's Certificate. The income tax return to be filed should be accompanied by a certification from an independent and reputable Certified Public Accountant containing the following information; 1. The home office deductions for the year involved have been examined in accordance with generally accepted auditing standards and accordingly included such tests of accounting records and such other auditing procedures as were considered necessary in the circumstances. 2. The deductions pro-rated to the Philippine branch do not include a. net losses of any operating unit or branch; b. income tax payment; c. capital expenditures; and d. expenses directly chargeable to any branch. 3. The amount of allocable overhead expenses used in the pro-rata allocation to the Philippine branch is the same amount used in the pro-ration to all branches worldwide and the amount disallowed in other countries because of governmental requirement is not added back to the allocable amount. 4. Should there be an exception or qualification on the above-requested certification, an explanation with supporting documents should be submitted." The aforequoted provision requires that the certificate from the External Auditor must contain the following information: (1) the home office deductions have been examined in accordance with generally accepted auditing standards and accordingly included such test of accounting records; (2) the pro-rated deductions do not include net losses of any operating unit or branch, income tax payment, capital expenditures and expenses directly chargeable to any branch; (3) the amount of allocable overhead expenses is the same amount used in the pro-ration to all branches worldwide, and such amount does not include amounts disallowed in other countries because of governmental requirement. In this case, the Report failed to state that the amount of allocable home office expenses claimed by HIPI as deduction is the same amount used in the pro-ration to all Holiday Inns branches worldwide. Also, the Report categorically stated that no evidence was found that the deductions pro-rated to HIPI do not include net loss of any operating unit or branch, income tax payment, capital expenditures, expenses directly chargeable to any branch and amounts disallowed in other countries because of government requirements. Without the foregoing information, it cannot be said that the apportionment of the allocable home office expense pro-rated to HIPI is based on the parameters prescribed by Section 160. The information required under the said provision is important because it segregates those expenses or amounts incurred by the mother company which cannot be definitely allocated or identified with the operations of the Philippine branch , from those amounts or expenses which are clearly related to the production of Philippine-derived income. In the latter case, the expense can be deducted from the gross income acquired in the Philippines without resorting to apportionment. On the other hand, in the case of the home office expenses or overhead expenses incurred by the parent company in connection with finance, administration, research and development, which directly benefit its branches all over the world, the branch ( i.e. HIPI) can only claim a ratable part thereof. 7 The parameters set forth under Section 160 thus ensure that the deduction for home office expenses as claimed by the Philippine branch is not bloated. Since the information upon which the deductions were based is not readily available to the BIR, strict compliance with Section 160 is required. As correctly held by the CTA, HIPI failed to sufficiently substantiate its deduction for home office expenses. Exclusions or deductions from gross income are in the nature of tax exemptions, and it behooves the taxpayer to establish them convincingly. In this connection, the issue regarding the authentication of the Report finds relevance also. While Section 160 did not expressly require the authentication of the External Auditor's certificate, this Court is of the view that since substantiation of the deduction is evidentiary, the law on evidence is applicable. Thus, in the case of documents emanating from foreign country, to be admissible in evidence, such must be authenticated by the certificate of the secretary of the embassy or legation, consul-general, consul, vice-consul, or consular agent or by any officer in the foreign service of the Philippines stationed in the foreign country, with the corresponding seal of the office. 8 Indisputably, the Report was not authenticated in accordance with Section 24, Rule 132, hence, it should not be given due faith and credit. caTESD As to whether or not the deficiency assessment for VAT had already prescribed, HIPI argues that the VAT assessment had indeed prescribed following the three-year period of limitation under Section 203 of the Tax Code. It faults the CTA for applying the ten-year period of limitation under Section 222, contending that there was not even an allegation on the part of the CIR that it filed a false or fraudulent return, as in fact it did not even impose the 50% surcharge. Furthermore, HIPI points out that it did not declare the amount of P269,967.02 which corresponds to its management fee, because it believed in good faith that it was not subject to the VAT. As such, there was really no deliberate attempt or malicious intent to evade payment of the tax. Besides, the return cannot be considered as false or fraudulent because the amount of P269,967.02 which was not declared in the VAT return is not even 5% of its total sales subject to VAT and is way below the 30% underdeclaration threshold under Section 248(B) of the Tax Code. This Court agrees with the CTA that the ten-year period of limitation should apply. The falsity of the VAT return filed by HIPI is established by the fact that in its 1995 Annual Income Tax Return, HIPI's declared gross income from sale of services representing management fees was higher than the taxable sales reported in its VAT returns by P269,967.02. This was not denied by HIPI albeit it claimed good faith in not declaring the said amount. That notwithstanding, this Court is not inclined to sustain HIPI's defense of good faith, otherwise, any taxpayer filing a false return can easily escape liability. While there may be truth to HIPI's claim that it had no malicious intent to evade payment of the tax, this does not preclude a finding of a false return. This is because while a fraudulent return implies a malicious and deliberate intent to evade the payment of the tax, a false return merely implies a deviation from the correct amount of the tax. That the 50% surcharge was not imposed does not mean that the return filed by HIPI was correct. In fact, the 30% threshold on substantial underdeclaration under Section 248(B) of the Tax Code is but a mere prima facie presumption of the filing of a false or fraudulent return. Thus, the fact that HIPI underdeclared 5% only of its total sales does not mean that it did not file a false return. To sustain HIPI's interpretation would certainly be absurd. WHEREFORE, premises considered, this petition for review is DENIED and ordered DISMISSED, and the assailed decision dated April 21, 2003 and the Resolution dated August 7, 2003 of the Court of Tax Appeals in C.T.A. Case No. 5929 are hereby AFFIRMED. SO ORDERED. Carandang and Mendoza, JJ . , concur. Footnotes 1. Rollo , pp. 2842, Annex "A" 2. Ibid. , pp. 4352, Annex "B" 3. Composed of Judges Ernesto D. Acosta (Presiding), Juanito C. Castaeda Jr., and Lovell R. Bautista 4. Sea-Land Service, Inc. vs. CA , 357 SCRA 441 5. Rollo , pp. 103143 6. Rollo , pp. 5665, Annexes "E" to "N" 7. CIR vs. CTA and Smith Kline & French Overseas Co. (Philippine Branch) , 127 SCRA 9 8. Rule 132, Section 24