NESIC PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City EN BANC NESIC PHILIPPINES, INC., Petitioner, CTA EB CASE NO. 524 (CTA Case No . 7012) -versus- Present: A COST A P.J ., CASTANEDA JR . BAUTISTA UY CASA NOVA PALANCA-EN RIQU EZ FASON-VICTORINO MINDARO-GR ULLA COMMISSIONER OF INTERNAL COTANGCO-MANALASTAS, JJ . REVENUE, Respondent. Promulgated: MAY O 6 2010 3 1Hf; X--------------------------------------------------------------------------------------X DECISION MINDARO -GRULLA, _L: Submitted for decision is a Petition for Review for the Court en bone under Section 18 of Republic Act No. 1125 1, as amended by Republic Act No. 92822 of the Decision3 dated March 13, 2009 , rendered by the former 1 An Act Creat ing the Court of Tax Appeals. 2 An Act Expanding the Jurisdic tion of the Court of Tax Appeals (CTA), Eleva ting its Rank to th e Level o f a Collegiate Court with Special Jurisdiction and Enlarg ing its Membership, Amending for th e Purpose Certain Sec tions or Republic Act No. 1125, as amended. otherwise known as th e Law Creating the Court of Tax Appeals . and for Other Purposes. 3 En Bane Docket, pp. 70- 109. Penn ed by Associate Justice Erlinda P. Uy, conc urred in by Associa te Jus tice Juanita C. Cas taneda . .Jr. and Associate Jus tice O lga Polanco-Enriquez.

Nesic Philippines vs. Commissioner o f Internal Revenue Page 2 o f 22 CTA EB Case No. 524 DECISION Second Division of this Court in CTA Case No. 7012, and its Resolution 4 dated August 6, 2009. Petitioner seeks a reversal of both the aforesaid Decision and Resolu tion, the dispositive portions of which, respectively, read as follows: Decision dated March 13, 2009: "WHEREFORE, premises considered, the Petition for Review is PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED to PAY deficiency value-added tax, expanded withholding tax, and fringe benefit tax in the sum of FOUR MILLION SEVEN HUNDRED TWENTY FIVE THOUSAND FIFTY TWO and 72 / 100 PESOS (P4, 725,052.72) , computed as follows : VAT EWT FBT Total Basic Tax 2,291,941.38 28,6 4 5.97 192,50 4 . 18 2,5 13,091.53 Interest 2,015,652.56 25,428.20 170,880.43 2,2 11 ,9 61.19 Total p 4 ,307 , 593 . 94 p 54 ,074 . 17 p 363 ,384 . 61 p 4 , 725 ,052 . 72 In addition, petitioner is hereby ORDERED to PAY twenty percent (20%] delinquency interest on the total amount of P4,725,052.72, counted from September 15, 2003 until full payment thereof, pursuant to Section 249(C] (3) of the NIRC of 1997. SO ORDERED. "(Italics supplied) Resolution dated August 18, 2009: "WHEREFORE, premises considered, petitioner's Motion for Partial Reconsideration (Re: Decision dated 13 March 2009) and Supplemental Motion for Reconsideration (To Petitioner' s Motion for 4 1bid., pp. 111 - 11 3. [

Nesic Philippines vs . Commissio ne r o f Interna l Revenue Page 3 o f 22 CTA EB C ase No. 524 DE C ISION Reconsideration Dated April 2, 2009) are hereby DENIED for lack of merit. SO ORDERED." (Italics supplied) The facts quoted from the Decision of the former Second Division of this Court ore undisputed, as follows: "Petitioner, Nesic Philppines, Inc. , is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office address at 15th Floor, BPI Buendia Center, Sen. Gil Puyat Avenue, Makoti City. Petitioner is primarily engaged in the business of providing specialty and technical services, including consultation services availing local skills, technical competence and know-how in the process, and providing technology applications in respect of planning, management, procurement, construction, evaluation, estimation, supervision, inspection, maintenance and operation, including testing and supervising them for quality purposes and other activities related, connected or incidental thereto, offering and selling on wholesale basis completed and finished products for use and consumption in the international market other than the Philippines"s Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue, ve sted with authority to act as such, including, among others, to d e cide disputed assessments of internal revenue taxes and penalties imposed against taxpayers, pursuant to the provisions of the National Internal Revenue Code {NIRC). He holds office at the 5th Floor, Bureau of internal Revenue (BIR) National Office Building, Agham Road, Quezon City.6 On August 29, 2003, p e tition er re ceived an undated Formal Letter of Demand covering th e fis c al year ending March 31 , 1999 for alleged deficiency VAT, EWT, and FBT, summarized a s follows: 7 s Par. 1, Admit ted Fa c ls, Join I Stipula ti on o f Fac ls a nd Issues (JSF I) , 2nd Division Docket, p. 11 3. 6 Par. 2, Admitte d Fac ts, JSFI. 2nd Division Doc ke t, p . 114. 7 Exhibit " B" , 2nd Di vision Doc ke t, pp . 3 15-3 17; Pars. 3 an d 6, Admitt e d Fa c ts , JSFI, 2nd Division Doc ket, pp . 114- 11 6.

Nesic Philippin es vs. Commissioner o f Internal Revenue Page 4 of 22 CT A EB Case No. 524 DECISION VAT E WT FBT Total Ba sic Tax 3,3 4 8,362.04 116,876.89 1' 133,263.8 1 4 ,598,502.74 Intere st 2,939, 192.20 103,56 4 .6 1 1,004 , 185.06 4 ,046,941.87 Co rnprornise 25,000.00 16,000.00 25,000.00 66,000.00 Total p 6 , 312 , 554 . 24 p 236 , 441.50 p 2 . 162, 448 .87 p 8_711_444 . 61 Petitioner accepted the validity of some of the disallowed items of the foregoing a ssessments and made partial payments on September 26. 2003 amounting to P 1,291 ,858. 13, including increments, detailed below: VAT EWT FBT Total Basic Tax 323.044.90 64.355.26 273. 145.94 660.546. 10 Inte r es t 285.872 .61 57.478.94 2 4 3.960.48 587.312.03 Cornprornise 16.000.00 12,000.00 16,000.00 44 .000.00 Total p 624 , 917. 51 p 133, 834 . 20 p 533 , 106 .42 p 1, 291 , 858.13 On September 29, 2003, petitioner, through its tax consultant SGV & Company, filed with the BIR Large Taxpayers District Office- Makoti City an administrative protest on the remaining a ssessments, on the ground that there was no factual and legal basis to support the same. The remaining amount of P7,419,568.58 is broken down as follows: VAT EWT FBT Total Basic Tax 3.025,3 17. 14 52,52 1.63 860,117.87 3, 937,956.64 Intere s t 2,653,3 19.59 46.085.67 760,224.58 3,459,629.84 Cornprornise 9,000.00 4,000.00 9,000.00 22,000. 00 Total p 5 . 687, 636.73 p 102,607. 30 p 1, 629, 342.45 p 7_4 19,586.48 Based on the details of discrepancies attached to the Formal Letter of Demand, petitioner 's input VAT credits in the amount of P3,348,362 .04 were disallowed due to alleged violations of Section 110(A) (Creditable Input Tax) of the NIRC, in relation to Section 113 {Invoicing and Accounting requirements for VAT- registered persons) and Section 237 {Issuance of Receipts or Sales or Commercia/Invoices) of the same Code, and Section 4. 108-1 of

Nesic Philippines vs. Commissioner of lnlernal Revenue Page 5 of 22 CT A EB Case No. 524 DECISION the Revenue Regulations No. 7-958. Respondent disallowed the said input VAT credits on th e following grou nds9: Reason for Disallowance Payment Slip Journal Slip Total Amount N o So les Invo ice/ OR 664,278.71 126,424.26 790,702.97 N o address 860,535.39 860.535.39 N o TIN per 51/0R 267,847.50 1, 106.231 .28 1.374,078.78 Purcha se frorn Non -VAT 766,685.28 65,467.68 232, 752.96 St ornped TIN 67,451.19 67.451.19 Unregistered invoices/OR 19,202.78 19,202.78 Exernpt purcha ses 2,674.80 2.674.80 Not in taxpayer 's norne 1.402.42 1,402.42 N o Supporting OR 160.75 160. 75 2 , 050, 238 . 82 1 , 298 , 123 .22 3 , 348, 362 . 04 While petitioner accepted the validity o f th e disallowance o f some o f the input VAT credits mentioned above, petitioner disputed the validity of the disallowance o f the following input tax credits Ia: Reason for Disallowa nce Amount No Sales Invoices/ OR 790,702.97 No Address 860,535.39 No TIN per Sf/OR 1,374,078. 78 Total-Protested VAT 3,025,317.14 Assessment (Basic Tax) Respondent alleged that the sa id input VAT credits may not be allowed for the reason that: ( 1} the y are not supported by sales invoice/official receipts; (2} petitioner's address was not indicated in the invoices issued by petitioner's suppliers; and/or (3} th e se ller/s failed to indicate petitioner 's tax identification number (TIN} in the supporting invoices/official receipts issued to petitioner. 11 With re spect to the EWT assessments under the Formal Letter of Demand, petitioner accepted the va lidity of the assessment of deficiency EWT, excep t for three (3} items, namely: 12 B Also known as Consolidated Value-Added Tax Regulations. 9 Par. 11 , Admitted Facts, JSFI , Second Division Dockel, pp. 117-118. 10 Par. 12, Admi tted Facts, JSFI , Second Division Docket, p . 118. II Par. 13, Admi tted Facts, JSFI , Second Division Docket, p. 118. 12 Par. 14, Admitted Facts, JSFI , Second Division Docket, p. 119.

Nesic Philippines vs. Commissioner of Internal Revenue Page 6 of 22 CTA EB Case No. 524 DECISION Account Title EWT Due Subcontractor's payroll-cosh advance 23,499.40 Cor rental 27,419.05 Seminar & other educational courses 1,603. 17 Total 52,521 .62 Lastly, as to the FBT assessments under the Formal Letter of Demand, petitioner accepted the validity of the assessment of the deficiency FBT, except for five (5) items of alleged fringe benefits, particularly1 3: Fringe Benefit FBT Due For the period April to December 1998: Car rental 341,483.58 Playing rights 113,333.33 Telephone expenses 117,340.99 Plane tickets 50,813.31 Visa/Immigration processing 11 ,276.67 p 634,247.88 For the period January to Marc h 1999: Car rental 170,887.5 1 Telephone expenses 43,756.57 Visa/Immigration processing 11,225.91 225,869.99 Total p 860, 117.87 On November 28, 2003, petitioner submitted additional documents in support of its protest. Due to the respondent's inaction and before it could be barred by prescription in accordance with Section 228 of the NIRC of 1997, petitioner filed a Petition for Review before this Court on June 25, 2004 . Respondent filed through registered mail an Answer on September 24, 2004, duly received by this Court on October 7, 2004,xxx." (Italics supplied) 13 Por. 27, Admitted Facts, JSFI, Second Division Docket. p. 119.

Nesic Philippines vs. Com missio ner of Internal Revenue Page 7 of 22 CTA EB Case No. 524 DECISION After trial on the merits. this Court 's former Second Division rendered the assailed Decision 14 • Not satisfied, petitioner filed a Motion for Partial Reconsideration with a Supplemental Motion for Reconsideration , which was denied in a Resolution 1s doted August 06, 2009. Hence , petitioner filed the instant Petition for the Court en bone . Petitioner submits the following grounds 16 in support of the Petition for Review: 1. "Petitioner substantially complied with the invoicing requirements regarding VAT; 2. Petitioner is not liable for deficiency EWT on cor rental payments and on seminars and other educational courses; 3. Petitioner is not liable for deficiency FBT on playing rights, airplane tickets. and visa and immigration processing for lock of legal basis; and 4. The assessments ore in valid for failure of the Respondent to state the factual and legal basis for the some." 14 Supra. Note 3. 1s Supra. Note 4. 16 En Bone Docket. pp. 338 c..

Nesic Philippines vs. Com missioner of Internal Revenue Page 8 o f 22 CTA EB Case No. 524 DECISION On January 4, 2010, this case was submitted 17 for decision . However, on April 5, 2010, petitioner filed a motion to defer resolution 18 on this case, pending approval of petitioner's application for abatement with respondent CIR, and which application if approved would render this case moot and academic. Suffice it to say that this case stemmed from respondent's assessment for the fiscal year ending March 199919 . To defer resolution thereon would only further prolong the already protracted case both in the administrative and judicial level. Besides, there is no valid reason for this Court to allow further delay. We discuss the grounds in seriatim . 1. Petitioner claims that there was substantial compliance with the invoicing requirements regarding Value Added Tax (VAT). Petitioner argues that this Court's former Second Division disallowed the amount of ~47 , 150.95 out of the ~58,735 .39 because it was supported by an undated OR's and by documents other than an invoice. Thus, the difference of ~11 ,584.44, which is supported by documents not found to have any omission, should not be included in the deficiency VAT assessment for FY 1999. 17 Ibid. p. 447 18 Ibid. pp. 448-456 19 Supra , Note 8.

Nesic Philippines vs. Commissioner of Int ernal Revenue Page 9 of 22 CTA EB Case No. 524 DECISION Simply stated, pe titioner states that this Court's former Second Division erred in disallowing the amount of ~11 ,584.44 when only the amount of ~47, 150.95 was validly disallowed. We quote: "xxx. A perusal of the documents however reveals that although the input tax in the amount of P58,735.39 are actually supported by sales invoices and/or official receipts, the following exceptions were found: Ex h. Supplier Input VAT 1. Purchase of services CYO International supported by on undated OR T-12 p 34.753.31 2. Purchase of goods Jupiter Systems, Inc. supported by documents other than on invoice T29 to T39 12,397.64 TOTAL p 47, 150. 95 "20 Petitioner's claim has no merit. There is no issue on the disallowance of ~47, 150.95. Admittedly, this Court's former Second Division disallowed the total amount of ~58.735.39 despite a finding of fact that only ~47, 150.95 was actually disallowed because those were the items supported by on undated official receipts and by documents o ther than on invoice. But a scrutiny of the records reveals that the amoun t o f ~ 11,584.44 should indeed be disallowed on the 20 Ibid. p . 81

Nesic Philippines vs. Commissioner o f lnlernal Revenue Page 10 of 22 CTA EB Case No. 524 DE CI S I ON ground that it was also supported by an undated official receipt2 1• Input tax, when supported by an undated offic ial receipt/in voice cannot be credited to an output tax. Aside from the fact that it violates the mandatory invoicing requirements prescribed by law, in an undated OR, it cannot be ascertained as to when or what period the transaction occurred . Thus , it was properly disallowed and included in the deficiency VAT assessment for FY 1999. Anent the disallowance of ~859 , 127. 21 and ~1 ,374.078.78 as input VAT on the ground that the invoices/official receipts have no addresses and Tax Identification Numbers (TIN) , re spectively, petitioner argues that the disallowance of input vat for violation of the in voicing requirements is a penalty not sanctioned by the NIRC. This is totally without merit. For an input ta x to be creditable to output tax, the input tax should be evidenced by a VAT invoice or o ffic ia l receipt issued in a ccordance with Sec. 11 O(A) ( 1) , Sec. 113 and Sec . 237 of the NIRC of 199722, a mandatory requirement by law. This Court ' s former Second Division correctly held that: 21 Former Second Division Docket, p. 719 22 SEC . 11 0. Tax Credits- (A) C reditable Input Tax.- ( 1) Any inpu t tax evidence d by a VAT invoice or officia l receipt issued in accorda nce w ith Sec tion 11 3 hereo f on th e following tra nsactions shall be c reditable against the output tax. SEC. 113. Invoic ing a nd Accoun ling Requiremenls fo r V AT-Regislered Persons,- (A) Invoicing Requ iremen ts.- A VAT-registered person shall, fo r every sale, issue a n invoice or receip t. In addition to the information sha ll be ind ica ted in the in voice or receip t: ( 1) A statemen t tha t the se ller is a VAT-registered person, fo llowed by his taxpayer's identi fication number (TIN) ; and

Nesic Philippines vs . Commissioner of lnlernal Revenue Page 11 o f 22 CTA EB Case No. 524 DECISION " The Court notes that Section 113 (A) of the NIRC of 1997, aside from making it mandatory for a VAT registered person to iss ue an invoice or receipt for every sale transaction. it also requires said person. in addition to the information required under 237 of the NIRC of 1997, to reflect the information that the seller is a VAT- registered person. followed by his TIN and the total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. The information referred to under Section 237 pertains to the following : the name. business style, if any and address of the purchaser, customer or client, and where the purchaser is a VAT- registered person, in addition thereto, the invoice or receipt shall further show the Taxpayer 's Identification Number (TIN) of the purchaser. XXX XXX XXX Clearly from the tenor of the aforequoted legal provisions pertaining to VAT invoicing and accounting requirements. compliance therewith is mandatory as the word "shall" is used. The word "shall " is imperative, commonly operating to impose an obligation or duty which may be enforced; it is a word of command that must be given a compulsory meaning. Thus. the purchaser-taxpayer. petitioner in this case. is duty bound to ensure full compliance with the aforementioned invoicing requirements and petitioner 's failure in this regard is thus fatal to its claim for the recognition of its input tax credits. "23 (Italics Supplied) In the instant case, the alleged input VAT on purchases supported by invoices or official receipts with no address and TIN was properly disallowed because these purchases were not supported by "VAT (2) The total amount which the purchaser pays or is obl igated to pay to the se ller with th e indica tio n that suc h amount includes th e value-added tax. SEC. 237. Issuan ce o f Receipts or Sales or Com mercial Invoices.- All persons subject to an internal revenue tax shall , xxx. issue duly registered receipts or sales or commercial invoices.xxx. Provided. however. that in the case of sa les. receipts or trans fer is made by a person liabl e to value added tax to another person also liable to value added tax. xxx. receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser. cus tomer or c lien t: Provided. furth er. that where th e purchaser is a VAT-registered person. in addition to lhe information herein required. the invoice or receipt shall furth er show the Ta xpayer's Identification Number (TIN) o f th e purchaser. 23 Former Second Division's Decision , pp. l 7- 18. c..

Nesic Philippin es vs. Com missio ner of lnlernal Revenue Page 12 o f 22 CTA EB Case No. 524 DECISION Invoices" under the contemplation of the mandatory invoicing requirements as provided by Section 113 and 237 of the NIRC. The VAT method of taxation, is invoice-based, thus, it necessitates mandatory compliance with the invoicing requirements which we find reasonable and in accord for the efficient collection of VAT. 2 4 Petitioner failed to comply with invoicing requirements regarding VAT. 2 . Petitioner claims that it is not liable for deficiency EWT on car rental payments because only payments for the transportation of goods and merchandise are properly subject to EWT and not payments for transportation of passengers. Petitioner states that Section 2.57 .2(E) (4) (e) of RR no. 2-98 is clear that only payments to transportation contractors of goods and merchandise are subject to 1% EWT. We quote: "Section 2.57.2. Income payments subject to c reditable withholding tax and rates prescribed thereon .- Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines : XXX XXX XXX (E) Income payments to certain contra c tors - On gross payments to the following contractors, whether individual or corporate- One percent ( 1%) XXX XXX XXX (4) Other contractors- XXX XXX XXX 2 4 Panosonic Co mmunica lions Imaging Corpora lion of n1e Pr1ilippin es vs. CIR, G .R. No. 178090, February 8, 20 10;

Nesic Philippines vs. Commissioner of Internal Revenue Page 13 of 22 CT A EB Case No. 524 DECISION (e) Transportation contractors which include common carriers for the carriage of goods and merchandise of whatever kind by land, air or wa ter, where the gross payments by the payor to the same payee amounts to at least two thousand pesos (P2,000) per month, regardless of the number of shipments during the month; A careful reading of the above-quoted provision reveals that it does not limit itself to payments for the transportation of goods and merchandise. As aptly discussed by this Court's former Second Division, the term "transportation contractors", whether for carriage of goods/merchandise or passengers, is the item subject to expanded withholding tax and the subsequent phrase "which include common carriers for the carriage of goods and merchandise" is a point of clarification that the payments thereto must "at least be two thousand pesos (P2,000.00) per month regardless of shipments during the mon th". We quote: "Section 2.57.2(E)(4)(e) of RR No. 2-98 speaks of "transportation contractor" in the general sense as an item subject to expanded withholding tax. The phrase "which include common carriers for the carriage of goods and merchandise of whatever kind " was added to expand the scope or coverage of "transportation contractors" to ensure the inclusion of the contract of goods and merchandise of whatever kind. As defined in Black 's Law Dictionary, " transportation" is the movement of goods or persons from one place to another, by a carrier. The word "include " is also explained therein as follows: "term may, according to context, express an enlargement and have the meaning of and or in addition to, or merely specify a particular thing already included within general words theretofore used. Including within a statute is interpreted as a word of enlargement or of illustrative application as well as a word of limitation " Clearly from the foregoing definition, transportation contract is not limited to the carriage or movement of goods, but it c.

Nesic Philippin es vs. Commissioner of Internal Revenue Page 14 of 22 CT A EB Case No. 524 DECISION also refers to movement of persons, from one place to another. In other words, the phrase "transportation contractors" is a generic term, while the phrase "which include" is a point of clarification. Correspondingly, the phrase "common carriers for the carriage of goods and merchandise" does not restrict, but expands, the meaning of "transportation contractors". (Italics and emphasis supplied) Section 2.57.2(E) (4) (e) of RR No. 2-9825 is an exact replication of RR No. 13-86 26 . Likewise, both in RR No. 8-85 27 and RR No.13-86 which amended Sec. 1(e) (2) (e) of RR No. 6-8528, "transportation contractors" in general is the subject of expanded withholding tax. We quote: RR No. 8-85 "(e) Transportation contractors, WHICH INCLUDE COMMON CARRIERS, for the carriage of goods and merchandise of whatever kind by land, air or water, PROVIDED THAT THE FREIGHT PAYMENT FOR SUCH SHIPMENT IS FIVE THOUSAND PESOS (P5,000) OR MORE." RR No. 13-86 "(e) Transportation contractors which include common carriers for the carriage of goods and merchandise of whatever kind by land, air, or water where the gross payment by the payor to the some payee amounts to at least Two Thousand Pesos (P2,000.00) per month , regardless of the number of shipments during the month." 25 Implementing Republic Act No . 8424, "An Acl Amending The Notional Internal Revenue Code, as Amended" Relative lo the Withholding on Income Subjec t to the Expanded Withholding Tax and Final Withholding Tax, Withholding of In come Tax on Compensation, Withholding of Creditabl e Value-Added Tax and Other Percentage Taxes. 26 Amending Revenue Regulolions No. 6-85, as amended by Revenue Regulations No. 8-85. 27 Amending Revenue Regulolions No. 6-85 28 Revised and Consol idoled Expanded Wilhholc:Jing fox Regulolions "(e) Transportation con troc lors for the carriage of goods and merchandise of whatever kind by land, air. or water;" c..

Nesic Philip pines vs. Commissioner of lnlernal Revenue Page 15 o f 22 CTA EB Case No . 524 DECISION Based on these previous Revenue Regulations, we can infer the intent not to limit said provision to the carriage of goods and merchandise. The subject matter "transportation contra c tors" includes both carriage of goods/merchandise or passengers, as the said Re venue Regulations merely set a point of clarification with regard to common carriers for carriage of goods/merchandise. As to the assessment of 1% Expanded Withholding Tax (EWT) on "seminars and other educational courses, petitioner alleges that a scrutiny of the documents presented would show that they presented documents to support the entire assessment of ~ 1,603.17. Petitioner also states that supporting docume nts were prese nted to prove payment in the total amount of ~15 7,3 00.00 whic h is m ore or less 1% of the total amount spent on Niponggo tutorial course . Petitioner argues then that Niponggo Tutorial Course s are not subjec t to 1% EWT. Indeed, payments subject to 1% EWT pertain to certain contractors 29 . Therefore, payments to Niponggo Tutorial Courses or 29 Section 2.57 .2 (E) (4) of RR No. 2-98 SECTION 2.57 .2. Income Paymenl Subjecl lo Credi lable Wi thholding Tax and Ra tes Prescribed Thereon. - Excep l as herein olherwise provided, lhere shall be wi thheld a c reditable income lax a l the rates herein specified for each class o f payee from the following items of incom e payments to persons residing in the Phili ppines: XXX XXX XXX

Nesic Philippines vs. Com missioner of In ternal Revenue Page 16 o f 22 CTA EB Case No. 524 DECISION seminars and or other educational courses which are akin to payments to professors/teachers/lecturers/instru c tors/resource persons as professional fees, teaching or lecture fees, are not subject to 1%EWT. Petitioner alleges further that documents were presented to support the entire assessment of~ 1,603.1 7. But an e xamination of the records show that petitioner presented supporting documents only for the amount of ~37 6. 25 or income payments made to Mocom International for Niponggo tutorial courses. The findings of this Court's former Second Division on the deficiency EWT of ~1 ,226.92 is therefore upheld . 3. Petitioner claims that it is not liable for deficiency fringe benefits tax on playing rights, airplane tickets, and visa and immigration processing because payments made th ere o n w ere legitimate bu siness expenses. Petitioner argues that the playing rights at Sta . Elena Golf Club were used in entertaining clients and these did not benefit any particular managerial employee. As to the plane tickets, for Messrs. Katsumi Nagatsuna and Toshihiko Hashimoto, petitioner corporation 's President and Vice-President, respecti vely, p e titioner al so argues that these plane tickets were solely for business m e etings required by petitioner's parent E. Income paymen ts to certain con trac tors- On g ross paymen ts to th e fo llowing con trac tors, whether individual or corpora te - One percent (1%).

Nesic Philippines vs . Commissioner o f Internal Revenue Pag e 17 o f 22 CTA EB Case No. 524 DE C ISION company in Japan while the visa and immigration processing were solely for the convenience of petitioner. The crux of the controversy as regards the deficiency fringe benefit tax on playing rights, airplane tickets, and visa and immigration processing of petitioner is whether these are legitimate business expenses or intended for the benefit of its managerial employee. Suffice it to say that the intended beneficiary of these playing rights, airplane tickets , and visa and immigration processing of the expatriates families are the managerial employees or the expatriates, among whom are Messrs. Katsumi Nagatsuna and Toshihiko Hashimoto, petitioner corporation's President and Vice-President, respectively. Indeed, petitioner failed to present sufficient evidence to prove that the playing rights at Sta. Elena Golf Club are used by petitioner primarily in entertaining prospective clients. Contrarily, it appears that it was petitioner corporation's President, Katsumi Nagatsuna, 30 who benefited in the playing rights at Sta. Elena Golf Club. While the playing rights are in the name of the petitioner, it appears that its managerial employees were the actual beneficiaries thereof. 30 Former Second Division Docket, p. 732

Nesic Philippines vs . Commissio ner o f Intern a l Revenue Page 18 o f 22 CTA EB C ase No. 524 DE C I S ION We find merit in the former Second Division's conclusion, which reads: " xxx. While the sample co ntract sho ws that the playing rights were registered in the name of petitioner, howe ver, the said contract was valid for the period fro m July 16, 2003 to July, 16, 2008, which is outside the period covered b y the assessment, that is from April I, 1998 to Marc h 3 1, 1999. Moreover, the said contract provides for the transferability of the rights to a third party. Thus, even granting that the c ontract pertained to the fiscal year under assessment, this Court cannot determine whether the playing rights were transferred to a third party or petitioner's employee. Hence, respondent 's assessment shall stand 31 ." (1talics supplied) The foregoing is true with the visa and immigration processing expenses incurred by petitioner for the families of its employees. These expenses, by their nature, are personal expenses for the sole benefit of the employee concerned. Moreover, the plane tickets allegedly incurred for expatriate employees to attend business meetings abroad were bereft of proof and substantiation that the same is in furtherance of the petitioner's business interests. Petitioner failed to present evidence that its managerial employees (President Katsumi Nagatsu na and Vic e-President Toshihiko Hashimoto) attended business meetings in their home country. We quote with approval the findings by this Court's former Second Division: 31 Former Second Division's Decision, pp. 29-30.

Nesic Philippines vs. Commissio ner of Intern al Revenue Page 19 o f 22 CTA EB Case No. 524 DECISION " The payment slips, o ffic ial re ceipts iss ued by the travel agencies, and billing statements/request for official dispatch and allowances, did not coincide with the meetings scheduled in the notices issued to petitioner' s president. Further, petitioner failed to prove that the said business meetings actually occurred and that its officers indeed attended the meetings. A certificate of appearance or a certificate of participation issued by NEC-Japan would have sufficed.32" Assessments ore prima facie presumed correct and mode in good faith. It is on elementary rule that absent the proof of irregularity in the performance of official duties, on assessment will not be disturbed. All presumptions ore in favor of ta x assess ments . Certainly, failure to present proof of error in the assessment will justify judicial affirmance. (Commissioner of Internal Revenue vs. Court of Appeals , 242 SCRA 289). The former Second Division's findings on the deficiency fringe benefit tax on playing rights, airplane tickets, and visa and immigration processing ore upheld. 4. Lastly, petitioner claims that the assessments ore invalid for failure of respondent to state the factual and legal basis of his assessment. pursuant to Section 228 of the NIRC which provides that : "Se ction 228. Protesting of Assessme nt. - xxx XXX XX The taxpayer shall be informed in writing of the law and the facts on which the assessm en t is made; otherwise, the a ssessment shall be void. XXX XXX xxx" 32 Former Second Division's Decision, pp. 33-34.

Nesic Philippines vs . Commissioner o f lnlernal Reven ue Page 20 of 22 CTA EB Case No. 524 DE CISI ON Petitioner states that the details of discrepancies attached to the Formal Letter of Demand did not specify the reasons why EWT and FBT were assessed. Petitioner states further that while respondent cited the deficiency as violations of Section 2.57.2 of the RR No. 2-98 and 3-98, respondent did not specify with particularity the specific provision thereof since Section 2.57.2 of the RR No . 2-98 is very broad and covers a wide range of services/payments. We find that the formal letter of demand 33 details of discrepancies 34 and the attachment thereto (schedule of expenses subject to FBP 5 ) have sufficiently informed petitioner of the facts and law upon which the assessment was made. Although Section 2.57.2 of the RR No. 2-9836 is very broad and covers a wide range of services/payment, respondent indicated the percentage on which the EWT ta x was based . By such indication , the taxpayer can infer the specific services/payments covered by the EWT to which petitioner can intelligently dispute said assessment. Said assessment was neither vague nor confusing, but rather specific enough to apprise petitioner of the facts and law which served as 33 Fo rmer Seco nd Division Doc ke t, pp. 37-39 34 Former Second Division Doc ke t, pp . 40-4 1 35 Fo rm e r Second Division Docke l. p. 42 36 Supra. Note 22 .

Nesic Philippines vs. Commissioner of lnlernal Revenue Page 21 o f 22 CTA EB Ca se No. 52 4 DECIS I ON basis for the assessment. Petitioner discussed exhaustively with particularity every point of the asse ssment in its protest letter37 . In fine, we find no cogent reason to reverse the findings of the former Second Division. WHEREFORE, the instant Petition for Review is DENIED . The Decision of the former Second Division of this Court in CTA Case No. 7012, dated March 13, 2009, and its Resolution dated August 6, 2009, are AFFIRMED . No pronouncement as to costs. SO ORDERED. ~ . M ~d~ · ~vt.J.L,. CIELITO N. MINDARO-GRULLA Assoc iate Justice WE CONCUR: L-~. L ERNESTO D. ACOSTA Presiding Justic e 37 f orm er Second Division Doc ke t. pp. 43-51.

Nesic Philippines vs. Commissioner of Internal Revenue Page 22 of 22 CT A EB Case No. 524 DECISION 9.C.r2~ Q. JU~ITO c. CASTANEDA0 R. Associate Justice ON LEAVE ER~·y CAESAR A. CASANOVA Ass~~~ice Associate Justice ~,2: (.~_ -'t-z/ OLGA ~~NRIQlfEZ ESPER Associate Justice AMELIA R. COTANGCO-MANALASTAS Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation among the members of the Court En Bane before the case was assigned to the writer of the opinion of the Court En Bane. L.::: "' . \).._~ ERNESTO D. ACOSTA Presiding Justice