CLASSIC FINE FOODS PHILIPPINES INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals QUEZON CITY FORMER SECOND DIVISION CLASSIC FINE FOODS C.T .A. CASE NO . 7363 PHILIPPINES, INC. (FORMERLY ANGLISS Members: PI-IlLS., INC.), Petition er, CASTANEDA, JR., Chairperson, UY, and PALANCA-ENRIQUEZ, JJ. -versus- P r omul gated: COMMISSIONER OF INTERNAL REVENUE, JUN 0 9 2010 Respondent. X --------------------------------- --------------------------------------------------- X DECISION PALANCA-ENRIQUEZ, J. : Acceptance of payment by the Bureau of Internal Revenue of the basic assessed amount does not constitute the Termination Letter contemplated by Revenue Regulations No. 15-2006, which is meant to evidence approval of the taxpayer's application to avail of the abatement program. 54 7

C.T.A. CASE NO. 7363 2 DECISION THE CASE This a Petition for Review filed by Classic Fine Foods Philippines, Inc. (hereafter "petitioner") pr~ying for the cancellation of assessments and Formal Letter of Demand for payment of deficiency income tax, value-added tax (VAT) , and expanded withholding tax (EWT) for taxable year 2001 issued against petitioner. THE PARTIES Petitioner Classic Fine Foods Philippines, Inc. is a corporation duly organized and existing under and by vi1iue of the laws of the Republic of the Philippines, with principal office located at 26 1h Floor, Yuchengco Tower, RCBC Plaza, Ayala Avenue, corner Sen. Gil Puyat Avenue, 1226 Makati City. Petitioner's main business is the importation and sale of frozen meat and meat products, although it also imports/trades dairy products and other processed food products (Exhib its "B ", "B-1 ", "B-3 ", and "E- 1 "). On the other hand, respondent Commissioner of Internal Revenue (CIR) is the official authorized under Section 4 of the National Internal Revenue Code (NIRC) of 1997, as amended, to assess and collect internal revenue taxes, as well as to decide disputed assessments, subject to the exclusive appellate jurisdiction of this Court, with office address at the 5111 @m 54 8

,· C.T.A. CASE NO. 7363 3 DECISION Floor, Bureau of Internal Revenue (BIR) National Office Building, BIR Road, Diliman, Quezon City. THE FACTS On January 19, 2005, petitioner received Assessment Notices (Exhibits "0" to "R") and Formal Letter ofDemand No. 45306 (Exhibit "S"), all dated January 14, 2005, assessing it for various deficiency taxes, summarized as follows: ASSESSMENT NOTICE Income Tax VAT EWT Failure to keep books Tax Due P43 ,585,8 14.96 P40,111 ,143.14 P148 ,272 .39 Add: 50% Surcharge 21,792,907.48 20,055,57 1.57 P25,000 Interest 24,625,985.45 24,467,797.31 91 ,187.52 Subtotal P90,004, 707.89 P84,634,512.02 P239,459.91 25,000 Total Amount Payable P174,903,679.82 On February 18, 2005, petitioner administratively protested said Assessment Notices by submitting its Protest Letter, dated February 17, 2005 (Exhibit " V"). On November 7, 2005, petitioner, having failed to receive respondent's decision on its administrative protest, instituted the instant Petition for Review in order to protect its right and prevent said Assessment Notices from becoming final, executory, and demandable. In his Answer filed on January 4 , 2006, respondent by way of Special and Affirmative Defenses, raised the following: 54 [1

C.T.A. CASE NO . 7363 4 DECISION "6. The herein Petitioner was fully appraised of the facts and the law on which the Final Assessment was issued. The Final Assessment Notice, Demand Letter and Details of Discrepancies which were all together sent at the same time to the Petitioner, contained, in detail, the manner of computation, the facts on which the assessment was based and the provisions of the law used m arnvmg at such deficiency tax assessments; 7. The disallowance of the various business expenses claimed by the Petitioner is attributable to Petitioner's failure to submit suppmiing documents to completely support or rebut the assessment issued against the herein Petitioner and for Petitioner's failure to show the direct connection or relation of the expense claimed to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. In this regard, the Respondent was constrained to use the Best Evidence Obtainable Rule pursuant to Revenue Memorandum Circular No. 23- 2000, under such the 50% of the claimed deductions of the Petitioner was disallowed. Petitioner failed to show proof that it had timely submitted the documents required ofthe corporation; 8. The Petitioner is now precluded from submitting the supporting documents which were required of it since it has defied the mandate of the subpoena duces tecum which Respondent validly issued. The assessment had become final in view of the failure of the Petitioner to submit all the required supporting documents, pursuant to Section 228 of the National Internal Revenue Code of 1997; 9. Petitioner did not subject to withholding tax the claimed expenses, hence, the said expenses were disallowed as items of deduction from gross income pursuant to Revenue Regulations No. 2-98;

C.T.A. CASE NO . 7363 5 DECISION 10. Petitioner failed to show the breakdown of its VATable and VAT-exempt sales, a condition necessary in the computation of Petitioner's VAT liability. Petitioner failed to show proof that the transactions that it entered into are actually VAT- exempt transactions;" At the scheduled hearing on July 9, 2007, petitioner manifested that it availed of the One-Time Administrative Abatement under Revenue Regulations No. 15-2006 (Exhibit "QQQ ") on June 28, 2007, by paying the basic deficiency expanded withholding tax assessment in the amount of Pl48,272.39 (Exhibits "RRR" and "SSS "). On November 20, 2007, in addition to its availment of the abatement program, petitioner availed. of the benefits of the tax amnesty under RA 9480 and paid with the BIR the amount of P250,000.00. Petitioner submitted the fo llowing documentary evidence: (1) Notice of Availment of Tax Amnesty; (2) Tax Amnesty Return (BIR Form No. 2116); (3) Statement of Assets, Liabilities and Networth (SALN); (4) Tax Amnesty Payment Form (BIR Form No. 0617); and (5) BIR Tax Payment Deposit Slip (Exhibits "TTT" to "WWW ") . Petitioner presented Brenda M. Ramos, the General Manager of petitioner, Pacifico R. Cruz, the Comi-Commissioned Independent CPA, and Luzviminda Ruaro, the Finance and Accounting Manager of petitioner, as witnesses, and documentary evidence, marked as Exhibits 55 1

C.T.A. CASE NO. 7363 6 DECISION "A" to "XXX'"", inclusive of their submarkings, which were admitted by the Court in a Resolution dated January 9, 2009, except for Exhibits "W- 2", "BBB-1" to "BBB-2", "CCC-I" to "CCC-2", "SSS-4417", "SSS- 4451", "SSS-4467", "SSS-4566 ", "SSS-4609", "SSS-4786", "SSS- 4933" to "SSS-4945 ", "SSS-4949 ", "SSS-4977" to "SSS-4979 ", "SSS- 4984 ", "SSS-5001" to "SSS-5600 ", "SSS-5658 ", "SSS-5794 ". "SSS- 5831 ", "SSS-5855 ", "SSS-6070 ", "SSS-6078 ", "SSS-6094" to "SSS- 6100", "SSS-6198" to "SSS-6200", "SSS-623 7", "SSS-6246" to "SSS- 6247 ", "SSS-62 70 ", "SSS-63 79 ", "SSS-6432 ", "SSS-6485 ", "SSS- 6489 ", "SSS-6530 ", "SSS-6562 ", "SSS-6567 ", "SSS-6598 ", "SSS- 6660" to "SSS-6661 ", "SSS-6668 ", "SSS-6730 ", "SSS-6740 ", "SSS- 6750" "SSS-6880" "SSS-6922 ", "SSS-6959" "SSS-6975" "SSS- ' ' ' ' 69 79" "SSS-700 7" to "SSS- 7008" "SSS-7033 ", "SSS- 7036 ", "SSS- ' ' 7039 ", "SSS-7091 " "SSS-7 096" "SSS- 7120" "SSS-7125" "SSS- ' ' ' ' 7158"' "SSS-7247" "SSS-73 76 ", "SSS-7413" "SSS-7576" "SSS- ' ' ' 7643" "SSS-7745 ", "SSS-7787" "SSS- 7806" "SSS-7830" "SSS- ' ' ' ' 7846 ", "SSS-7876" "SSS- 7886" "SSS-7913" "SSS-8002 ", "SSS- ' ' ' 8015", "SSS-8023", "SSS-8057", "SSS-8195 ", "KKKK-1030", "KKKK- 1032" to "KKKK-2024" "LLLL-1004 " "LLLL-1010 " "LLLL-1015" J . ' ' ' and "LLLL-1032 ", which were denied admission for petitioner's failure to submit the duly marked documents. 55 2

C.T.A. CASE NO . 7363 7 DECISION On the other hand, for respondent CIR counsel's repeated failure to appear despite notice for the initial presentation of evidence for the respondent, upon motion of counsel for petitioner, respondent was deemed to have waived his right to present evidence. Thereafter, petitioner was granted thirty (30) days from May 20, 2009, within which to file its memorandum, while respondent was granted twenty (20) days from notice, within which to file his memorandum. On April 8, 2009, petitioner filed a "Motion to Partially Withdraw Petition for Review" praying for the withdrawal of the petition insofar as the assessments against petitioner for deficiency income tax and VAT, inclusive of surcharge and interests are concerned, solely on the ground of its availment of the tax amnesty, which the Com1 granted in a Resolution dated May 20, 2009. Due to the pendency of petitioner's application for availment of the tax abatement program, the other assessments, namely: expanded withholding tax and penalty for failure to keep/preserve books or records remain for this Com1's consideration. Petitioner having filed its "Memorandum" on July 8, 2009, without respondent's Memorandum, the case was deemed submitted for decision on July 14, 2009. Hence, this decision.

C.T.A. CASE NO. 7363 8 DECISION ISSUES As stipulated upon by the parties, the following are the issues for this Court's consideration: I WHETHER OR NOT TI-IE RIGHT OF THE GOVERNMENT TO ASSESS VAT LIABILITY HAD ALREADY PRESCRIBED. II WHETHER OR NOT TI-IE ASSESSMENT HAS BECOME FINAL ON THE GROUND THAT PETITIONER FAILED TO SUBMIT ALL DOCUMENTS IN SUPPORT OF ITS PROTEST. III WHETHER OR NOT PETITIONER WAS ABLE TO TIMELY SUBSTANTIATE BY DOCUMENTARY EVIDENCE THE EXPENSES CLAIMED AS DEDUCTION. IV WHETHER OR NOT PETITIONER IS LIABLE FOR THE ASSESSED DEFICIENCY INCOME TAX AND RELATED SURCHARGE AND INTEREST THEREON, IN THE AGGREGATE AMOUNT OF PHP90,004,707.89. v WHETHER OR NOT PETITIONER INCLUDED IN ITS GROSS SALES/RECEIPTS . FOR TAXABLE YEAR 2001 THE SALES IT MADE TO INTERNATIONAL FAMILY SERVICES, INC. 55 -1

C.T.A. CASE NO . 7363 9 DECISION VI WHETHER OR NOT PETITIONER IS LIABLE FOR THE ASSESSED DEFICIENCY VAT AND RELATED SURCHARGE AND INTEREST THEREON, IN THE AGGREGATE AMOUNT OF PHP84,634,512.02. VII WHETHER OR NOT THE EXPENSES CLAIMED BY PETITIONER IS SUBJECT TO THE IMPOSITION OF WITHHOLDING TAX PURSUANT TO REVENUE REGULATIONS NO. 2-98. VIII WHETHER OR NOT PETITIONER SHOULD BE ASSESSED WITH SURCHARGE OF 50% WHICH IS APPLICABLE IN CASES OF FRAUD. THE COURT'S RULING The petition is partly meritorious. Being procedural, we will first resolve the second issue. Respondent contends that the assessments have become final for failure of petitioner to submit all the required supporting documents, pursuant to Section 228 of the NIRC of 1997, as amended. We do not agree. In the case of Commissioner of Internal Revenue vs. First Express Pawnshop Company, Inc., 589 SCRA 275 ("First Express Pawnshop case"), the Supreme Court ruled that "the term 'relevant supporting 55 5

C.T.A. CASE NO. 7363 10 DECISION 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." Records show that as early as March 4, 2004, petitioner already submitted the following documents: Quarterly Income Tax Returns/Payments, Monthly and Quarterly VAT Returns, Annual Income Tax Returns, Articles of Incorporation, Audited Financial Statement- 2001, photocopies of contracts entered into by petitioner - Lease Contract with 1M Cold Storage, Schedule of Input Taxes Claimed, and Alpha List of Employees (Withholding Tax on Wages) and Alpha List of Income Payments subject to Withholding Tax (Exhibit "1-I-1 "). Thereafter, on April 23, 2004, petitioner submitted the following documents to respondent CIR: BIR Form 1905, Annual Fee for 2003, BIR Form No. 2303 Angliss Phils., In c., SEC Registration - Classic Fine Foods, Phils., Inc., BIR Memorandum - recommending approval for our request of change of business name from Angliss Philippines, Inc., to Classic Fine Foods, Phils., Inc. , BIR Forms 1702, BIR Forms 2550M and MP55 G

C.T.A. CASE NO . 7363 I1 DECISION 2550Q for the months of October and November 2000 and Fourth Quarter of 2000, and Summary of Importation for 2001 (A nnex "E ", Petition for Review). Also, in a Letter dated July 28, 2004, petitioner reiterated that it already submitted and made available for respondent's review documents demanded in the Subpoena Duces Tecum issued by respondent (Exhibits "K" and "K-1 "). Finally, in reply to respondent's Final Opportunity to submit documents, petitioner, in a Letter dated July 23, 2004, attached various letter-transmittal to respondent in compliance with respondent's request for submission of pieces of documentary evidence to show that there is no basis in respondent's claim that petitioner continuously failed to comply with respondent's request (Exhibit "M ') . Considering that petitioner submitted the foregoing documentary evidence, which it considered necessary to support the legal basis in disputing the assessment, then petitioner has complied with the requirement of submitting documentary evidence prescribed in Section 228 of the NJRC of 1997, as amended, pursuant to First Express Pawnshop case. Hence, the assessments issued against petitioner have not become final. 55 7

C.T.A. CASE NO . 7363 12 DECISION First, Third, Fourth, Fifth, Sixth and Eight Issues: As regards the first, third, fomih, fifth, sixth and eight issues, considering that petitioner availed of the tax amnesty under RA 9480, complied with the prescribed requisites thereof, and filed a "Motion to Partially Withdraw Petition for Review", praying for the withdrawal of the petition, insofar as the assessments against petitioner for deficiency income tax and VAT, inclusive of surcharge and interests, are concerned, which the Court granted in its Resolution dated May 20, 2009, then the resolution of said issues is now rendered moot. Seventh Issue: Defi ciency Expanded Wi thh olding Tax Petitioner avers that it is no longer liable for the remammg assessments on expanded withholding tax and penalty for failure to keep/preserve books for the following reasons: (1) said assessments have no basis in fact and in law; and (2) it paid the assessed basic EWT amounting to Pl48,272.39, pursuant to its availment of the One-Time Administrative Abatement Program under Revenue Regulations No. 15- 2006. It has been consistently held by this Court that before an abatement IS recognized before this Court, petitioner mu st comply with the 55 8

C.T.A. CASE NO. 7363 13 DECIS ION requ irements of the abatement program provided in Section 4 of Revenue Regulations No. 15-2006, which states: "SEC. 4. Who May Avail. - Any person/taxpayer, natural or juridical, may settle thru this abatement program any delinquent account or assessment which has been released as of June 30, 2006, by paying an amount equal to One Hundred Percent (100%) of the Basic Tax assessed with the Accredited Agent Bank (AAB) of the Revenue District Office (RDO)/Large Taxpayers Service (LTS) Large Taxpayers District Office (LTDO) that has jurisdiction over the taxpayer. In the absence of an AAB, payment may be made with the Revenue Collection Officer/Deputized Treasurer of the RDO that has jurisdiction over the taxpayer. After paym ent of th e basic tax, th e assessment for penalties/surcha r ge a nd inter es t sha ll be cancelled by th e concerned BIR Office following existing ru les and procedures. T he r eafter, th e d ocket of th e case s ha ll be forw a rd ed to th e Office of th e Co mmissioner , thru the Deputy Commissioner for Operations Group, for iss uance of T ermin a tion Letter." (Emphasis supplied) In the instant case, there is no termination letter issued by respondent CIR. As admitted by petitioner, its application for abatement is still under evaluation by the BIR National Office (TSN, February 4, 2008, p . 3), which explains the lack of Termination Letter issued to petitioner. While it may be argued that petitioner paid the BIR the amount of Pl48,272.39, which represents the basic assessed EWT, the acceptance of said amount by the BIR is not the same as the Termination Letter contemplated by law. Hence, this Court cannot consider the same as basis to cancel the assessment for EWT issued against petitioner. In fact, 55D

C.T.A. CASE NO. 7363 14 DECISION for petitioner's failure to pay the assessed deficiency EWT within the time prescribed for its payment, petitioner is also liable of the 25% surcharge under Section 248(3) of the NIRC of 1997, as amended. However, since petitioner already paid the basic tax in the amount of Pl48,272.39 on June 28, 2007, as evidenced by machine validated Payment Form (Exhibit "RRR "), and PNB BTR-BIR Payment Slip (Exhibit "SSS"), the amount of Pl48,272.39 shall be deducted from the assessed deficiency EWT, computed as follows: Basic Tax P148 ,272 .39 Surcharge: 25% P37,068.1 0 Deficiency Interest (from 01-16-02 to 02-14-05) P91 ,187.52 (from 02-15-05 to 06-28-07) 70,195.81 Sub-total surcharge and interest P198,451.43 198,451.43 Total EWT Due P346,723.82 Less: Payment made on June 28, 2007 148,272.39 Amount Payab le P198,45 1.43 Accordingly, petitioner is still liable for surcharge and interest of deficiency EWT in the total amount ofP198,451.43. As regards the assessment for compromise penalty, this Court cannot sustain the same. Said compromise penalty incident to failure to register books of accounts, failure to keep/preserve records, and failure to make/file returns or supply information may be imposed only in lieu of criminal prosecution. This is clearly provided under Revenue Memorandum Order (RMO) No. 1-90, Section 111(5) , which reads: &11 560

C.T.A. CASE NO. 7363 15 DECISION "III. Guidelines and Instructions: XXX XXX (5) Since compromise penalties are only amounts suggested in the settlement of criminal liability and may not therefore be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the suggested compromise penalty, the violation shall be referred for criminal action as heretofore mentioned." It is well-settled that compromise penalties are amounts collected by the Bureau of Internal Revenue in lieu of criminal prosecution for violations committed by taxpayers, the payment of which is based on a compromise agreement validly entered into between the taxpayer and Commissioner of Internal Revenue (Collector of Internal Revenue vs. UST, 104 Phil. 1 062). A compromise implies mutual agreement. Absent any showing that petitioner consented to the compromise penalty, its imposition should not be allowed. As already established, the imposition of the same without the conformity of the taxpayer is illegal and unauthorized (Commissioner of Internal Revenue vs. Lianga Bay Logging Co. , Inc., 193 SCRA 92- 93). Since conviction for failure to register books of accounts, failure to keep/preserve records, and failure to make/file returns or supply information are wanting in the instant case, and since there is no showing -6 .i1 :J

C.T.A. CASE NO. 7363 16 DECISION that petitioner voluntarily entered into a compromise agreement with respondent, the compromise penalty of P25,000.00 is hereby ordered cancelled. WHEREFORE, premises considered, the instant Petition for Review is hereby PARTLY GRANTED. Accordingly: 1) the deficiency income tax and value-added tax assessments are hereby ordered CANCELLED, solely in view of petitioner's availment of the tax amnesty under R.A. 9480; 2) petitioner Classic Fine Foods Philippines, Inc. is liable for surcharge and interest of deficiency expanded withholding tax assessment, pursuant to Sections 248(3) and 249(B) of the NIRC of 1997, as amended. Acco~dingly, petitioner is hereby ORDERED TO PAY respondent Commissioner of Internal Revenue the amount of ONE HUNDRED NINETY EIGHT THOUSAND FOUR HUNDRED FIFTY ONE AND 431100 PESOS (Pl98,451.43), representing surcharge and interest of deficiency expanded withholding tax for taxable year 2001; 3) In addition, petitioner IS hereby ordered to pay delinquency interest: 56 2

C.T.A. CASE NO . 7363 17 DECISION 1) On the basic expanded withholding tax ofP148,272.39 from February 14, 2005 up to June 28, 2007, pursuant to Section 249 (C) of the NIRC of 1997, as amended; and 2) On the surcharge and interest ofP198,451.43 from February 14, 2005 until full payment thereof, pursuant to Section 249(C) of the NIRC of 199 7, as amended. SO ORDERED. ~~RIQUEZ Associate Justice WE CONCUR: ~~h> Q~ c2if'~~ 'l, ' mANITO C. CASTANEui\,~JR. Associate Justice E~P.UY Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~~ Cl.a.:T'~ Q . JUANITO c. CASTANED)(, JR. Associate Justice Chairperson t::6 \) J"

C.T.A. CASE NO. 7363 18 DECISION CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. L;{o - ("~ ERNESTO D. ACOSTA Presiding Justice 56 4