REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

GOLDSTAR PHILIPPINES SALES

CORPORATION (Now LG COLLINS
ELECTRONICS MANILA, INC.),
Petitioner,

-versus- C.T.A. CASE NO. 5715

COMMISSIONER OF INTERNAL Promulgated:

REVENUE,
Respondent. MAY 1 1 200~
4):J~~~
x---------------------------------------------- -~~~·----- -x

DECISION

This is a judicial appeal from the inaction qf the respondent on petitioner's

protest on deficiency income tax assessment in the aggregate amount of

P267,365,067.41 for the taxable year 1994.

Petitioner is a corporation duly organized and existing under and by virtue of the

laws of the Republic of the Philippines, with principal office address at 15 Francisco

Legaspi Street, Maybunga, Pasig City. It is now known under the corporate name LG

Collins Electronics Manila, Incorporated (paragraph 1, Joint Stipulation of Facts

and Issues).

On March 21, 1998, petitioner received Formal Assessment Notice No. 000004

and Demand Letter both dated February 16, 1998, covering the alleoed deficiency

income tax for taxable year 1994 in the total amount of P267,36 ,067.41. The

deficiency income tax assessment arose from the following: a) disallowance of interest
DECISION
C.T.A. CASE NO. 571 5
Page 2

expense in the amount of P24,515,117.00 for being unsupported; b) disallowance of

salary expense in the amount of P9,586,097.35 for not having been subjected to

withholding tax on compensation; c) imputation of alleged undeclared sales in the

amount of P7,729,388.12; and d) disallowance of brokerage fees in the amount of

P346,091,296.47 for not having been subjected to expanded withholding tax

(paragraphs 3 & 4, Joint Stipulation of Facts & Issues). The said deficiency

income tax was computed by respondent as follows:

Net Business Income P105,639,471.00

Add: Discrepancies
Interest Expense-lack of proofs 24,515,117.00
Salaries Expense-unreconciled 9,586,097.35
Undeclared Sales
Sales per investigation P844,238,605.12
Sales per return 836,509,217.00 7,729,388.12
Brokerage, other charges-not
subjected to EWT 346,091,296.47
Taxable Income P493,561,369. 94
Tax Due P172,746,479.48
Less: Tax Paid 36,235,307.00
Deficiency Tax P136,511,172.48
Add: 25% Surcharge 34,127,793.12
Interest 4-16-95 to 2-16-98 96,701,101.81
Compromise 25,000.00
TOTAL AMOUNT DUE & COLLECTIBLE P267,365,067.41

On April 17, 1998, petitioner, through its external auditor, Sycip Gorres Velayo &

Company (SGV), duly filed with the Bureau of Internal Revenue (BIR) an administrative

protest against the subject income tax assessment (paragraph 5, Joint Stipulation

of Facts and Issues).

Again, on June 16, 1998, petitioner filed with the BIR a supplemental protest,

reiterating its disagreement to the subject deficiency income tax assessment. Petitioner
DECISION
C.T.A. CASE NO. 5715
Page 3

requested for a reconsideration and/or reinvestigation of the assessment alleging that

the same has no factual and legal basis (pages 155-158, SIR Records).

Subsequently, petitioner transmitted to respondent the relevant supporting documents

to support its position against the merit of the income tax assessment (paragraph 6,

Joint Stipulation of Facts and Issues).

Without awaiting for the result of respondent's investigation, on January 11,

1999, petitioner elevated the case through a petition for review pursuant to Section 228

of the Tax Code.

On March 3, 1999, respondent issued a report on the investigation of the tax

liability of petitioner. In the said report, the BIR examiners recommended a lower

deficiency income tax in the amount of P10,557,736.28 (pages 200-203, SIR

Records).

Summons was issued to respondent and in his Answer, he raised the following

Special and Affirmative Defenses:

7. That the amount of P24,515,117.00 claimed by petitioner as

alleged interest expenses are unsupported by sufficient proofs;

8. That the amount of P7,729,388.12 represented undeclared sales by

the petitioner;

9. That the further amount of P346,091,296.47 as brokerage, other

charges were not subjected to Expanded Withholding Tax as
required by Revenue Regulations No. 6-85;

10. That the details in the assessment notice (Annex A-1) substantially
complied with the provisions of Section 228 of the Tax Code of
1997 relative to the taxpayer being informed in writing of the law
and the facts in which the assessment is based;
DECISION
C.T.A. CASE NO. 5715
Page 4

11. That the assessment notice dated February 15, 1998 (Annex A) is
in accordance with law.

After trial on the merits, the case was submitted for decision on July 7, 2003

sans Memorandum of respondent.

The parties mutually agreed the following are the issues to be resolved by this

court:

1. Whether or not Formal Assessment Notice No. 000004 dated

February 16, 1998 covering the alleged deficiency income tax
assessment issued against petitioner for taxable year 1994
sufficiently complies with the requirements of Section 228 of the
NIRC, as amended;

2. Whether or not interest expense in the amount of P24,515,117.00

is sufficiently supported as a valid item of deduction from
petitioner's gross income for taxable year 1994;

3. Whether or not salary expense in the amount of P9,586,097.35,

which amount represents the difference between the salary
expense reported in petitioner's audited financial statements for
taxable year 1994 and the salary expense reported in petitioner's
withholding tax returns for said taxable year, is subject to
withholding tax on compensation and whether the same should be
allowed as a valid item of deduction from petitioner's gross income
for taxable year 1994;

4. Whether or not petitioner has undeclared sales for taxable year

1994 in the amount of P7,729,388.12;

5. Whether or not brokerage and other charges in the amount of

P346,091,296.47 is subject to expanded withholding tax and thus,
should be allowed as a valid item of deduction from petitioner's
gross income for taxable year 1994.

Anent the first issue, petitioner maintains that respondent's Formal Assessment

Notice as well as the Demand Letter violated the provision of Section 228 of the Tax
DECISION
C.T.A. CASE NO. 571 5
Page 5

Code. It is provided in the said law that the law and the facts on which the assessment

was made should be fully stated. Respondent failed to do so. Hence, the assessment

and the demand letter are void.

Petitioner also opines that the said provision of the Tax Code is mandatory. It

does not provide any exception which will make valid a void assessment.

Consequently, Article 5 of the Civil Code, which states that "acts executed against the

provisions of mandatory and prohibitory law shall be void, except when the law itself

authorizes their validity."

We do not agree with petitioner.

Said Section 228 in part provides, viz:

Section 228. Protesting assessment.- When the Commissioner or

his duly authorized representative finds that proper taxes should be
assessed, he shall first notify the taxpayer of his findings: x x x ·

The taxpayer shall be informed in writing of the law and the facts
on which the assessment is a made; otherwise, the assessment shall be
void .

The court took notice that petitioner attacked the validity of the Formal

Assessment Notice and the Demand Letter mainly on the alleged failure of the

respondent to inform petitioner of the facts and the laws upon which the assessment

was based.

The records reveal that respondent substantially complied with the foregoing

requirements of the Tax Code. This court had the occasion to elucidate this point in the

case of Toledo Power Company vs. Commissioner of Internal Revenue, CTA

Case No. 5881, promulgated March 2, 2002, to wit:

DECISION
C.T.A. CASE NO. 5715
Page 6

Prescinding from the above law, it is crystal clear that the

notice being referred to and required to be first sent to the
taxpayer is the pre-assessment notice. This is apparent from the
subsequent sentence which enumerates of the exceptions when no pre-
assessment notice is necessary. Further, the next two paragraphs also
relate to the first paragraph of Section 228. Thus, what the law
mandates of the Commissioner or his duly authorized
representative is to inform the taxpayer of the law and the facts
on which the assessment is made. Undoubtedly, this refer to a
pre-assessment notice because the third paragraph provides that
if the taxpayer fails to respond to such notice, the Commissioner
or his duly authorized representative shall issue an assessment
based on his findings(emphasis supplied).

In the case at bar, we find the Pre-Assessment Notice to have sufficiently

explained the basis for the assessment (pages :1:14-:120, SIR Records). Moreover,

the assessment notice and demand letter, both dated February 16, 1998, were received

by the petitioner on March 21, 1998. Considering so, the court believes that petitioner

was duly informed of the law and the facts, which are the bedrock of the assessment.

It cannot be declared void.

On the second issue, respondent claims that the interest expense in the amount

of P24,515,117.00, should be disallowed because petitioner failed to submit

documentary evidence to support its claim. Respondent anchored his argument on

Section 29 of the Tax Code.

Petitioner holds otherwise. It claims that such interest expense is sufficiently

supported by documents to constitute a valid item of deduction from petitioner's gross

income. According to petitioner, the said interest expense is stipulated in the loan

agreement it entered into with PCI Bank for working capital requirements and its
DE CISION
C.T.A. CASE NO. 57 15
Page 7

application for the opening of letters of credit with various banks in order to facilitate its

importation during the year.

We find petitioner's view without merit.

In the case of Delfin Ma. V. Cruz, Jr. vs. Commissioner of Internal

Revenue, CTA case No. 3806, June 29, 1990 and later on affirmed by the Court of

Appeals in the case entitled Delfin Ma. V. Cruz, Jr. vs. The Court of Tax Appeals

and the Commissiqner of Internal Revenue, CA-G.R. SP No. 25308, April 7,

1992, the court ruled that in order for interest expense to be considered as deduction

from gross income, the foremost requirement is that the obligation must be in writing,

to wit:

"Petitioner in this appeal presents a single issue, that is, "can an

interest payment, where the obligation to pay the same is not evidenced
in writing, be proven by collateral evidence and thus deductible for income
tax purposes?" To which We have a negative answer.

Section 30(b) of the Tax Code, as amended, provides:

"Section 30(b). Interest:

1. In generaL-That amount of interest paid or accrued within a

taxable year on indebtedness incurred in connection with the taxpayer's
profession, trade or business, except on indebtedness incurred or
continued to purchase or carry obligation the interest upon which is
exempt from taxation as income under this Title.

XXX XXX XXX."

Pursuant to the above-cited proviston of the Tax Code, the

following requisites must concur to validly claim deductibility of interest
payment, to wit:

1. There must be an indebtedness;

2. The indebtedness must be that of the taxpayer;
DECl SlO.
C.T.A. CASE NO. 57 15
Page 8

3. The indebtedness must be connected with the business, trade

or profession of the taxpayer;
4. The interest must have been paid or accrued during the
taxable year; and
5. The interest must have been stipulated in writing (Teodoro &
De Leon, The law on Income Taxation, 1987 Edition, p. 82).

From the foregoing, it may be clearly inferred that for interest

payment to be deductible, the same must be supported by a written
agreement of the indebtedness the term of which stipulate for the
payment of an interest. This is in consonance with Article 1956 of the
Civil Code, providing that:

"Article 1956. No interest shall be due unless it has been

expressly stipulated in writing."

In other words, the written agreement of the indebtedness is an

indispensable requirement to support a claim of deductibility of interest
payment. For how could a claimant prove concurrence of all the said
requisites without showing the written agreement of the indebtedness.
Mere certification of the alleged creditor as to the existence of the debt
and/or as to the payment of the interest thereon cannot dispense with
the requisite of written agreement of the indebtedness. Otherwise, the
law could be easily circumvented. (Underlining supplied.)

The court noted that in the report of the independent CPA, the disallowed

interest expense in the amount of P24,515,117.00 was accounted for as follows

(Exhibit E):

Finding Exhibit Amount

a. Interest expenses supported by bank

statements and bank reconciliat ion statements A1 p 37,174.43

b. Interest expenses supported by bank official

Receipts 81 166,476.61

c. Interest expenses supported by bank

confirmation statements C1 582 ,318.98

d. Interest expenses supported by Company's

letter of authority to debit its account 01 2,059,447.40

e. Interest expenses supported by bank debit?

DECISION
C.T.A. CASE NO. 5715
Page 9

Memorandum E1 3,496,187.25

f. Interest expenses supported by bank

statement and Company's letter of authority
to debit its account F1 9,178,556 .89

g. Interest expenses supported by loan

agreement and Company's computation of
interest G1 25,171 ,683.70

h. Subsequent reversal of accrued interest

Expenses H1 (16 ,333,579.81)

I. Interest expenses without supporting

Documents J1 156,851 .55

TOTAL P24.515.117.00

While petitioner submitted documents to substantiate its interest expense by

bank statements, bank debit memoranda and letters of authority to debit its account,

computations of interest and bank reconciliation, it failed to submit in evidence a vital

document, which is the loan agreement. Except for a photocopy of a pre-marked

document (Exhibit A-351), the court is unable to find any document purporting to be

a loan agreement. Consequently, the court is constrained to disallow the deduction

from the gross income the interest expense, which petitioner claims, for the latter's

failure to substantiate its claim by clear and convincing proof.

On the third issue, respondent disallowed salaries and wages in the amount of

P9,586,097 .35 because it was allegedly not subjected to withholding tax on

compensation. The disallowance was arrived at after the examiners compared the

amounts declared in petitioner's 1994 withholding tax returns with that of the amounts

reflected in its 1994 audited financial statements, detailed as follows:

DECISION
C.T.A. CASE NO. 57 15
Page 10

Expense Per WTW Returns Per Audited Difference

Financial Statements

Salaries p 11 ,172,600.00 p 11 ,892,973.00 p (720,373 .00)

Bonus 4,000 ,000.00 10,989,338.00 {6,989,338.00)
Employees Benefits 2,265,028.65 4,140,875.00 {1 ,875 ,846.35'
Subtotal p 17,437,628.65 p 27,023,186.00 p (9,585 ,557.35)
Unaccounted difference 540.00 (540.00'
Total p 17,437,628.65 p 27 ,023,726.00 p (9,586 ,097.35'

Considering the foregoing table, respondent was of the impression that petitioner

over declared its salaries and wages in its 1994 income tax return by P9,586,097.35,

thus, the deficiency tax assessment.

On the other hand, petitioner claims that the disallowed salary expense

represents the difference between the salary expense reported in petitioner's audited

financial statements and the salary expense reported in petitioner's withholding tax

return for taxable year 1994. Petitioner argues that this amount is a valid deduction

from the gross income, since it came from items not subject to withholding tax on

compensation. Petitioner analyzed the said amount as follows:

1. De minimis benefits to promote the goodwill and health of

petitioner's employees, which benefits are exempt from
withholding tax on salaries and SSS, Medicare and EC
contribution of petitioner as employer (Exhibits B-16 to B-
22) ; p 1,875 ,846.35

2. Payments made to messengerial, janitorial and security

agencies which were recorded as part of salaries but which
have already been subjected to the expanded withholding
tax under Revenue Regulations No. 6-85, as amended
(Exhibits B-2 to B-6) ; and 720 ,373.00

3. Accrual of bonus in taxable year 1994 which was paid in

1995-The Income tax on said bonus was withheld in
taxable year 1995 (Exhibit B-7) 6.989,338.00

Total p [Link]
DECISION
C.T.A . CASE 0 :'7 1:'
Page II

Petitioner claims that the amount of P1,875,846.35 represents de minimis

benefits that are exempt from withholding tax as long as the values are relatively small,

are given by the employer as a means of promoting the health, goodwill, contentment,

or efficiency of his employees. In addition, petitioner's payments to SSS, Medicare and

EC are also exempt from withholding tax. They do not form part of employees'

compensation package but are petitioner's share as required by law. They are not

subject to withholding tax and are deductible expense from gross income pursuant to

Section 29 of the Tax Code.

After considering the arguments of the parties as well as the relevant laws and

jurisprudence, we rule to reduce the disallowed item in the amount of P839,220.35.

For one thing, among the documents presented by petitioner to support its de

minimis benefits and SSS, Medicare and EC contributions (Exhibits B-24 to B-357),

only the total amount of P120,985.99 was properly substantiated by invoices and official

receipts for income tax purposes, broken down as follows:

DE MINIMIS BENEFITS
REFERENCE
CV/JV EXHIBIT NO. AMOUNT

CV12493 B-268 S-1052 p 1,581 .82

CV8650 B-261 OR10961 10,380.15
JV65 B-302 OR3160 6,360.00
JV29 B-225 OR7216 379.85
CV11916 B-272 to B-284 various 6,132.13
JV65 B-302 OR3169 6,360 .00
JV48 B-239 126819 2,466 .50
JV28 B-249 OR966 1,600 .00
JV33 B-242 to B-246 various 20,787.28
JV35 B-247 R6620 4,250 .00
JV34 B-338 to B-350 various 51 ,759 .86
JV32 B-259 various 3,928.40
JV21 B-253 PR007 5,000.00
TOTAL ~ 120,985,99
DECISION
C.T.A. CASE NO. 5715
Page 12

The court observed that the independent CPA had already examined the relevant

supporting documents of the vouchers listed in Exhibits B-16 to B-22 and technically

disallowed the amount of P134,397.52 (E2 & F2 of Exhibit E). However, the

documents verified were not offered as evidence.

Well settled is the rule that exhibits presented shall not be considered by this

court if they have not been formally offered {Ty vs. Court of Appeals, 278 SCRA

836; Philippine Associated Smelting and Refining Corporation vs. Hon.

Commissioner of Internal Revenue, CTA Case No. 5377, promulgated March

24, :1999 and Maitland-Smith Cebu, Inc. vs. Commissioner of Internal

Revenue, CTA Case No. 5476, promulgated on September 23, :1998). Hence,

in arriving in the said amount the court considered only the vouchers with their

supporting receipts.

As to the amount of P720,373.00 representing payments to agencies, the court

agrees with petitioner. The taxes required to be withheld from the income payments

can be traced from the lists of payees attached to the Monthly Remittance Returns of

Income Taxes Withheld (Exhibits D-:1308 to D-:1356). However, the aggregate

amount of P2, 138.64 found in the summary list of payments to agencies (Exhibits B-2

to B-6) should be disallowed, since it does not form part of the lists of payees attached

to the Monthly Remittance Returns of Income Taxes Withheld . . Thus, only the amount

of P718,233.36 is allowed as a deduction from gross income.

Thirdly, on the accrued bonuses for taxable year 1994 in the amount of

P6,989,338.00 which petitioner alleged that the income tax was withheld in 1995, the
OFCI SI O~
C.T A CASE NO :'i I :'i
Page 11

court disallows the same for failure of petitioner to withhold the corresponding taxes in

9 in accordance with Section 29(j) of the 1994 Tax Code which provides:

SEmON 29. Deductions from gross income.

XXX XXX XXX

(J) Additional requirement for deductibility of certain payments.-

Any amount paid or payable which is otherwise deductible
from, or taken into account in computing gross income or for
which depreciation or amortization may be allowed under this
section, shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom has
been paid to the Bureau of Internal Revenue in accordance
with this section, Sections 51 and 74 of this Code.

The above proviso was amplified by Section 3 of Revenue Regulations No. 8-90, to wit:

SEmON 3. Section 9 of Revenue Regulations No. 6-85 is hereby

amended to read as follows:

"Sec. 9. (a) Requirement for deductibility. Any

income payment, which is otherwise deductible under
Sections 29 and 54 of the Tax Code, as amended, shall be
allowed as a deduction from the payor's gross income only if
it is shown that the tax required to be withheld has been
paid to the Bureau of Internal Revenue in accordance with
Sections 50, 51, 72, and 74 also of the Tax Code.

Based on the above law and regulations, an expense shall be allowed as a

deduction only if it is shown that the tax required to be deducted and withheld

therefrom has been paid to the Bureau of Internal Revenue whether the same is paid or

payable. Therefore, for failure to withhold income tax on the accrued bonus,

petitioner cannot claim it as a deduction from its gross income.

DECISION
C.T.A. CASE NO. 57 15
Page 14

In sum, out of the total unreconciled amount of P9,586,097.35, only the amount

of P839,220.35 was verified by the court. Apparently, petitioner still failed to

substantiate the amount of P8,746,877.00, computed hereunder:

DISALLOWANCE SUBSTANTIATED
PER EXPENSES
RESPONDENT'S PER COURT'S UNSUPPORTED
EXAMINATION VERIFICATION EXPENSES

Salaries p 720,373.00 p 718,234 .36 p 2,138.64

Bonus 6,989,338.00 6,989,338.00

Employees' Benefits 1,875,846.35 120,985.99 1,754,860 .36

Unaccounted difference 540.00 540 .00

TOTAL SALARIES & WAGES p 9,586,097.35 p 839,220.35 p 8,746,877.00

On the fourth issue of whether or not petitioner under declared its sales for the

taxable year 1994, respondent concluded so after comparing the total· income declared

in its 1994 Income Tax Return and the total sales declared in its 1994 Quarterly VAT

Returns. Respondent found that petitioner under declared its sales in the amount of

P7,729,388.12, computed as follows:

PERITR
Net Sales P 828,490,272.00
Add : Other Income 5,582,115.00
Realized fore ign gain [Link] P 836,509 ,217.00

PER VAT RETURNS 844,238.605 .12

UNDECLARED SALES P 7 729 388 12

The reasons for the discrepancy were confirmed by the commissioned

independent CPA who accounted the alleged undeclared sales, viz.

Prompt payment sales discounts deducted for income tax

purposes but not for VAT purposes p (21 ,784,921 .73)

Reversal of provision for sales discounts

subjected to income tax 7,427 ,686.00
DECISION
C.T.A. CASE NO. 57 15
Page 16

SEC. 6. Computation of output tax on sale of domestic goods and

services.-

(a) X X X
(b) X X X
(c) X X X

In computing the taxable base during a quarter, the following shall

be allowed as deductions from gross selling price or gross receipts:

(a) Discounts granted and determined at the same time of sale

which are expressly indicated in the invoice, and the amount thereof
forms part of the gross sales duly recorded in the books of accounts.

Discounts conditioned upon the subsequent happening of an event

or fulfillment of certain conditions, such as prompt payment or
attainment of sales goals, shall not be allowed as deductions.

(b) Sales returns and allowances for which a proper credit or

refund was made during the quarter to the buyer for sales previously
recorded as taxable sales. (Underlining supplied.)

After a careful scrutiny of the documents offered by petitioner, the court verified

only the amount of P15,926,181.24 as prompt payment discounts contrary to

petitioner's claim of P21,784,921.73. The said amount is broken down as follows:

PROMPT PAYMENT DISCOUNTS

PER OFFICIAL RECEIPTS VERIFIED AMOUNTS

January p 906,633.42
February 881 ,857.96
March 1,031 ,916.63
April 1,526,095.92
May 1,302,631 .61
June
July 989,760.78
August 1,293,172.31
September 1,222,935.59
October 976,579.84
November 1,263,503.94
December 1.435,417.69
Subtotal P12.830.505.69
DECISION
C.T.A. CASE NO. 5715
Page 17

PER CREDIT MEMO

Reference
Exhibit No. Date Amount

C-823 2522 12/30/1994 p 12,980.07

C-825 2523 12/30/1994 14,185.40
C-827 2524 12/30/1994 2,238 .42
C-829 2517 12/30/1994 1,476,190.76
C-834 2520 12/30/1994 526,978 .18
C-836 2521 134,764.11
C-838 2518 12/30/1994 72,643.43
C-840 2519 12/30/1994 6,157.57
C-842 2525 12/30/1994 2,786 .53
C-844 2526 12/30/1994 826.47
C-847 1611 7/31/1994 269,427.77
C-853 1613 7/31/1994 7,425.68
C-855 Covered 7/30/1994 7,418.03
C-857 1575 7/30/1994 1,150.37
C-859 1576 7/30/1994 1,147.50
C-861 1577 7/30/1994 1,961 .70
C-863 1578 7/30/1994 10,533.58
C-865 1579 7/30/1994 2,899 .87
C-867 1580 7/30/1994 .1 ,652.80
C-869 Covered 7/30/1994 43,128 .21
C-871 Covered 7/30/1994 56,124 .74
C-873 Covered 7/30/1994 870 .04
C-875 1512 7/31/1994 166,661 .02
C-878 1508 7/31/1994 232,842 .82
C-881 1509 7/31/1994 10,800.60
C-883 1510 7/31/1994 2,768.40
C-885 1511 7/31/1994 29 111.48
Subtotal p 3,095,675.55
Total P15.926.181 .24

Considering that petitioner's gross sales for income tax purposes are greater than the

gross sales declared in the VAT returns, petitioner will no longer have undeclared sales,

to wit:

PERITR

Net Sales p 828,490,272.00

Other Income [Link] p 834,072,387 .00
Add : prompt payment discount
not allowable for VAT purposes
DECISION
C.T.A. CASE NO. 5715
Page 18

per court's verification 15,926,181 .24

Gross Sales/Other Income (excluding p 849,998,568.24
Forex gain)

PER VAT RETURNS

Vatable Sales/Income (Exhibits F, F-1 to F-3) p 838 ,261,407 .78

Exempt Sales (Exhibits F, F-1 to F-3) 6,342,045 .21
Gross Sales/Other Income p 844,603,452.99
Discrepancy (subject to VAT at 10%) p 5 395 115 25

On the last issue, respondent assessed petitioner for the brokerage fees and

other charges in the sum of P346,091,296.47 for not having been subjected to 5%

expanded withholding tax. The amount of P346,091,296.47 was computed as follows

(page 201, SIR Records):

Importation Cost P492,564,374 .75
Less: Trust Receipts Payable p 97,708,566.38
Import Duty 48,735,262.90
Import Processing Fee 291250 00
o 1461473 1079.28
Brokerage, Others P346 091 296 47

Petitioner asserts that respondent erred in evaluating the whole amount of

P346,091,296.47 as brokerage fees subject to the 5% withholding tax. Petitioner

alleges that its importations have a total cost of P499,838,219.77 which was composed

of the following:

Trust Receipt p 362,199,624 .16

Import duty/processing fee 132,613,696.40
Brokerage, Others 510241899.21
Total p 499 838 219 77

The above breakdown of importations was verified by the independent CPA and was

adopted by the examiners in their amended report (page 201, SIR Records). The

"Brokerage, Others" in the amount of P5,024,899.21 was further accounted for as

follows:
D ECI SION
C.T.A. CA SE 0 . 57 15
Pa ge I Y

Am ount

Brokerage p 4,979,767 .03

Inte rest 40 ,759 .60
Servi ce 4,372 .68
Total p 5 024 899 31

The court examined the schedules of importations (Exhibit D-5) and we

scrutinized petitioner's Monthly Remittance Returns of Income Taxes Withheld

( Exhibits D -1308, D -1313, D-1317, D -1321, D-1325, D-1329, D-1333, D-

1337, D -1342, D-1 3 4 7, D-1352 & D-1356). We found that of the brokerage fees,

only the amount of P687,566 .60 was subjected to 5% withholding tax. Petitioner failed

to fully substantiate the amount of P4,292,200.43 . Hence, we rule to disallow the said

unsubstantiated amount.

Therefore, respondent's assessment for deficiency income tax is upheld in the

red uced amount of P27,181,887.82, computed below:

Net Business Income p 105,639 ,471 .00

Add : Discrepancies
Interest Expense-lack of proofs 24 ,515 ,117.00
Salari es Expense-un recon ci led 8,746,877.00
Broke rage , other charges
not subjected to EWT 4,292,200.43
Taxa ble Income p 143 193 665.43

Tax Due p 50,117,782 .90

Less: Tax Paid 36,235,307.00
Deficiency Tax p 13,882,475.90
Add : 25% Surcharge 3,470,618.98
Interest 4-16-95 to 2-16-98 9,828 ,792 .94
TOTAL AMOUNT DUE & COLLECTIBLE p 27.181 .887.82
DECISION
C.T. A. CASE NO. 57 15
Page 20

Accordingly, petitioner is ORDERED to PAY the respondent Commissioner of

Internal Revenue the amount of P27,181,887.82 representing petitioner's deficiency

income tax for the taxable year 1994, plus 20% delinquency interest from March 18,

1998 until the amount is fully paid pursuant to Section 249(c)(3) of the 1994 Tax Code.

SO ORDERED.

~~<2.~/~
JUANITO C. CASTANEDA, JR..
Associate Justice

WE CONCUR:

0-.~,0~
ERNESTO D. ACOSTA
Presiding Justice

Associate Justice

CERTIFICATION

I hereby certify that the above decision was reached after due consultation with

the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of

the Constitution.

ERNESTO D. ACOSTA
Presiding Justice