1

REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS
Quezon City

FASHION SAVER WAREHOUSE CLUB CORP.

Petitioner

CTA Case No. _________

---versus---

COLLECTOR OF INTERNAL REVENUE,

ANSELMO G. ADRIANO, Acting Regional
Director of the Bureau of Internal Revenue,
Revenue Region No. 8, Makati City
EUSEBIO BRAVO, ARNALDO RASE,
ELENITA QUIMOSING, CESAR ESCALADA
Revenue Officers Revenue District No. 51,
Pasay City
Respondents.
x-------------------------------------------------x

PETITION FOR REVIEW

PETITIONER by counsel to this Honorable Court respectfully avers that:

1. Petitioner Fashion Saver Warehouse Club Corporation (FSWC for

brevity) is a domestic corporation duly organized and existing under Philippine

laws with office address at Savers Square Building, EDSA Extension, Pasay City.

Petitioner is engaged in the business of trading by way of a

department store. It is represented in this act by its Attorney in fact MAY D. GO

pursuant to a Board Resolution attached to the Verification;

2. Respondent Bureau of Internal Revenue is a government agency

tasked to collect taxes. It holds office along Agham road in Quezon City where it

may be served with summons and other court processes.

3. Respondent Anselmo G. Adriano is the Acting Regional Director of

the Bureau of the Internal Revenue Region No. 8 which region has
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administrative/fiscal jurisdiction over Petitioner. He may be served summons and

other court processes at his office address at BIR Revenue Region No. 8, Atrium

Building, Makati Avenue, Makati City;

He is sued in his official capacity.

4. Respondents Cesar Escalada, Eusebio Bravo, Arnaldo R. Rase and

Elenita Quimosing are Revenue Officers of Revenue District No. 51, Pasay City

with office address at KCT Bldg. EDSA Extension, Pasay City where they may be

served with summons.

They are sued in their official capacities;

Averment of Material Dates

5. On 7 January 2005 petitioner FSWC received a Formal Assessment

Notice dated 4 January 2005 from the Bureau of Internal Revenue Region No. 8,

Pasay City. The said Formal Assessment Notice which was signed by the Acting

Regional Director Mr. Anselmo G. Adriano stated to wit: “ In case of failure to

file protest within thirty (30) days from the receipt hereof or pay the tax within the

time prescribed in the notice of assessment, the assessment shall be final and

therefore subject to 25 % surcharge and the interest on the unpaid amount until

fully paid pursuant to RR 12-99 in relation to Sections 228, 248 (A) (3) and 249

(C) (3) of the 1997 NIRC.”

6. On 14 January 2005 petitioner filed a Letter of Protest dated 11

January 2005 which filing is within the thirty days directive of the Acting

Regional Director as quoted in the above paragraph.

7. From 14 January 2005 to 13 July 2005 or one hundred eighty (180)

days after the filing of the Letter of Protest, the same is not resolved by respondent

Acting Regional Director Anselmo G. Adriano. Since 13 July 2005 to date,

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petitioner did not receive any decision from Mr. Anselmo G. Adriano on the matter

of the disputed assessment.

8. Petitioner has thirty days from 13 July 2005 or until August 12,

2005, within which to file a Petition for Review of the decision/inaction of the

Acting Regional Director who issued the Assessment Notice, with the Court of

Tax of Appeals.

9. This petition is therefore filed within the reglementary period.

BASIS OF THE PETITION

10. Disputed assessment. “If the protest is denied in whole or in part, or

is not acted upon within one hundred eighty (180) days from submission of

documents, the taxpayer adversely affected by the decision or inaction may appeal

to the Court of Tax Appeals…” (Section 228 of the 1997 NIRC).

FACTS OF THE CASE

11. On 27 October 2004 Nestor C. Velasco of the Velasco Masilag &

Co. CPAs together with Rowena M. Quinones of petitioner FSWC attended the

informal conference presided by respondents Revenue Officers Mr. Cesar

Escalada and Mr. Eusebio Bravo of the BIR RDO 51, Pasay City. A copy of the

Notice of Informal Conference is attached herewith as Annex “A”;

12. At the said informal conference, Nestor Velasco and Rowena

Quinones presented all the petitioner’s source documents for submission and

examination, however, the Revenue Officers adamantly refused to receive and

examine the same allegedly because petitioner refused to sign a Waiver of the

Defense of Prescription Under the Statute of the National Internal Revenue Code;

13. On 28 October 2005, in response to the Notice of Informal

Conference of 27 October 2004, petitioner through Nestor Velasco sent a Letter

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dated 27 October 2004 addressed to respondent Elenita Quimosing, Revenue

District Officer indicating therein that the original documents for review were

presented at the Informal Conference (please see Annex “B”);

14. On 13 December 2004, Petitioner received a Preliminary Assessment

Notice dated 10 December 2004 issued and signed by Acting Regional Director

Anselmo G. Adriano. Please see Annex “C”.

15. On 28 December 2004, Petitioner filed a Letter of Protest dated 22

December 2004 addressed to Mr. Anselmo Adriano, Acting Regional Director of

the Bureau of Internal Revenue Region no. 8, protesting the Preliminary

Assessment and requesting for reconsideration; Please see Annex “D” and “D-

1”

16. On 7 January 2005, Petitioner received a Formal Assessment Notice

(Annex “E-E-6”) issued on 4 January 2005 and signed by Acting Regional

Director Mr. Anselmo G. Adriano. The Formal Assessment Notice contained an

instruction quoted as follows: “In the case of failure to file protest within thirty

days from the receipt hereof or pay the tax within the time prescribed in the notice

of assessment, the assessment shall become final and therefore subject to 25%

surcharge and interest on the unpaid amount until fully paid pursuant to RR-12-99

in relation to Sections 228, 248 (A) (3) and 249 (C) (3) of the 1997 NIRC.”

Please see Annex “E-6”;

17. On 14 January 2005, Petitioner filed a Letter of Protest addressed to

Mr. Anselmo G. Adriano requesting for reconsideration of the Formal Assessment

(Please see Annex “F”and “F-1”);

18. Since 14 January 2005 when the last document was submitted to 13

July 2005, one hundred eighty (180) days have passed, petitioner did not receive
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any decision from Mr. Anselmo G. Adriano to whom the Letter of Protest was

addressed;

19. Hence this present petition;

ISSUES

I. Whether or not Petitioner did not submit documents necessary for conduct
of investigation prompting the Acting Regional Director Anselmo G.
Adriano to issue a deficiency assessment;
II. Whether or not the amount of P3,787,258.64 reflected in the Formal
Assessment Notice (Annex “E-3”) constitute 50% disallowed expenses
based on best evidence obtainable;
III. Whether or not the Tax Credits claimed are properly substantiated ;
IV. Whether or not the amount of P 1, 746, 563. 79 input tax on domestic
purchases is unsupported by documents .

ARGUMENTS/DISCUSSION

I. Whether or not petitioner

did not submit documents
necessary for conduct of
investigation prompting the
Acting regional director
Anselmo G. Adriano to issue a
deficiency assessment.

Petitioner submits that it presented for submission all the necessary

documents but the Revenue Officers/Examiners refused to receive the same. The

Acting Regional Director himself refuses to resolve the protest if a Waiver of the

Statute of Limitation is not signed by petitioner.

Accountant Nestor Velasco and Mrs. Rowena M. Quinones, bookkeeper of

Petitioner Fashion Saver Warehouse Club Corporation, presented for submission

all the necessary source documents at the Informal Conference of October 27,

2004 to the Revenue Officers/Examiners presiding thereat namely: Mr. Cesar

Escalada and Mr. Eusebio Bravo. The receipt of the same was refused by the said
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Revenue Officers/Examiners for the reason that a Waiver of the Defense of

Prescription Under the Statute of the National Internal Revenue Code should be

signed first. Affidavits about this incident is attached herewith as Annexes “G”

and “H”.

Mr. Nestor Velasco and Mrs. Rowena Quinones negotiated and pleaded that

an examination of the company’s books and accounts be conducted without the

company waiving the Defense of Prescription. The Revenue Officers/Examiners

were not at all amenable but instead adamantly insisted on the Waiver of the

Defense of Prescription.

The Acting Regional Director himself would insist on the Waiver when in

the Preliminary Assessment Notice (annex C) which he issued, it contained the

directive quoted to wit: “In case you disagree to our proposed assessment you or

your authorized representative may protest administratively against the aforesaid

Preliminary Assessment Notice (PAN) within fifteen days from the date of receipt

thereof, stating the facts, the applicable laws, rules and regulations or

jurisprudence in support of your protest pursuant to Revenue Regulation no. 12-99

dated September 6, 1999. In addition, said protest letter should be accompanied

by a duly executed waiver of the Statute of Limitation in relation to Section 203

and 222 of the 1997 NIRC at least six (6) months from date of execution, to give

this office and your company time to resolve/discuss issues involved per Revenue

Regulation (RR) Nos. 12-85 and 12-99 duly signed by authorized official and

delegation order to sign the said waiver per Revenue Memorandum Order No. 20-

90 in relation to RDAO no. 5-2001 dated August 2, 2001, otherwise, it shall be

considered void and without force and effect, accordingly, Formal Assessment

Notice will be issued.”

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The refusal to sign the Waiver is not tantamount to a refusal to submit to an

investigation on the part of petitioner. On the contrary, the Petitioner company

through accountant Mr. Nestor Velasco and Mrs. Rowena Quinones, at the

informal conference, insisted upon Revenue Officers/Examiners Cesar Escalada

and Eusebio Bravo that they receive the documents they brought and examine the

same. In support of this fact are affidavits appended herewith as Annex “G “and

“H.”

The refusal of the Petitioner to sign the said Waiver is perfectly valid, legal,

and reasonable. Petitioner company through its duly authorized officers refused to

sign the said Waiver for the following reasons: (1) the waiver of the Defense of

Prescription will only lengthen the time period within which the company will be

unnecessarily harassed by investigations and examinations by Revenue Officers;

(2) the waiver of the Defense of Prescription will entail that Petitioner company

should preserve for an indefinite period of time their books and accounts for the

year 2001 which is the year in question, and this task is cumbersome and

impossible to do.

It is not the fault of petitioner if the Revenue Officers needed more time to

conduct an investigation. They had so much time to do that, three years to be

exact. The year in question is year 2001. The Bureau of Internal Revenue is

granted by law (Section 203 of the 1997 NIRC) three years within which to

conduct an investigation and issue an assessment.

The refusal is valid and sanctioned by law. It is a fundamental principle in

law that waiver of the benefits/protection of the laws/statutes, such as the

protection and benefit of the statute of limitations, cannot be compelled nor forced

upon the beneficiary of the statute. The waiver of the benefit/protection of the
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laws is a personal right that only the beneficiary citizen can opt to do, and it

cannot be compelled by anyone not even by the government or courts of law. To

compel a citizen to renounce his rights and protection granted by law is clearly a

violation of rights. Petitioner is merely exercising his right to raise, in the future,

the defense of prescription against the State. Moreover, nowhere in the 1997

NIRC is it provided that taxpayers must sign a waiver of defense of statute of

limitations before their protest will be reconsidered by the Commissioner/duly

authorized representative.

II. Whether or not the amount

of P3,787,258. 64 reflected
in the Formal Assessment Notice
(Annex “ E-3“) constitute 50%
disallowed expenses based on
best evidence obtainable;

Petitioner submits that the expenses declared in the income tax return are

deductible. The sum of P 3, 787, 258.64 which constitute the 50% disallowed

expenses are in fact, expenses, and they are supported by documents, hence these

expenses should not be disallowed.

The documents presented in this instant Petition for Review and marked as

Annexes and made an integral part herewith are genuine as certified by an

independent public accountant which certification is appended hereto as Annex

“I”.

The results of petitioner’s operations for the year ended December 2001 are

in conformity with generally accepted accounting principles, as certified by an

independent accountant which certification is attached hereto as Annex “J”.

The Formal Assessment Notice (Annex “E-3“) stated as follows:

Net income / (loss) per return P (5, 784, 103.97)

Add: 50% disallowed expenses based on best
evidence obtainable
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Outside services P 1, 917, 401.04

Rental 1, 140, 000.00
Light and water 527, 837.84
Taxes, Licenses, Fees 104, 973.19
Supplier 49, 060.45
Repair and Maintenance 29,000.00
Communication 18, 986.12

______________ 3, 787, 258. 64

Result of operation per investigation P (1, 996, 845. 33)
Add: Net Operating Loss Carry Over 5, 784, 103. 97
Total taxable income per investigation 3, 787, 258. 64

The Formal Assessment Notice (annex E-5) further stated and we quote:

“50% disallowed expenses based on best evidence obtainable --- Due to your

failure to submit document necessary for conduct of investigation, you were

assessed based on best evidence obtainable pursuant to Section 2.4 of Revenue

Memorandum Circular 23-2000 in relation to Section 6(B) of the 1997 NIRC.”

The issue is substantiation of expenses. It is respectfully posited that the

above-mentioned expenses are properly substantiated.

Outside Services

The expense “Outside Services” refer to manpower services viz. salesclerks,

cashiers, janitors, merchandisers, CRO/security. The payment is made to and
billed by the human resource agency J & J Human Resources. The billings and
payments are cited as follows:

SCHEDULE OF OUTSIDE CHARGES

For the year 2001
(A copy of the schedule of outside charges by
the Accounting Division is reproduced and
attached herewith as Annex “K”)

J & J Human Resources (Jesus H. Manuel – Prop.)

Blk 19 Lot 4 Galatian St. Adelina I, San Pedro, Laguna
TIN: 057-191-045-775 – VAT

(NET)
DATE SI/OR PERIOD GROSS 10% VAT AMOUNT 1% EWT ANNEX/
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COVERED AMOUNT DECLARED MARK

IN THE TAX
RETURN
1/25/01 13683 12/26-1/10 191,955.20 17,450.47 174,504.73 1, 745.05 K-1
2/9/01 13555 1/11- 1/25 120,024.66 10,911.33 109,113.33 1,091.13 K-2
2/28/01 13912 1/26- 2/10 127,234.32 11,566.76 115,667.56 1,156.68 K-3
3/13/01 14133 2/11- 2/25 122,862.12 11,169.28 111,692.84 1,116.93 K-4
3/27/01 14316 2/26-3/10 107,488.61 9,771.69 97,716.92 977.17 K-5
4/6/01 14468 3/11-3/25 113,587.10 10,326.10 103,261.00 1,032.61 K-6
4/23/01 14736 3/26-4/10 144,123.65 13,102.15 131,021.50 1,310.22 K-7
5/3/01 14873 4/11-4/25 128,097.86 11,645.26 116,452.60 1,164.53 K-8
5/28/01 15225 4/26-5/10 160,437.38 14,585.22 145,852.16 1,458.52 K-9
6/5/01 15428 5/11-5/25 162,688.10 14,789.83 147,898.27 1,478.98 K-10
6/20/01 15678 5/26-6/10 206,062.49 18,732.95 187,329.54 1,873.30 K-11
7/7/01 15943 6/11-6/25 216,984.50 19,725.86 197,258.64 1,972.59 K-12
7/27/01 16272 6/26-7/10 199,546.97 18,140.63 181,406.34 1,814.06 K-13
8/8/01 16508 7/11-7/25 195,494.34 17,772.21 177,722.13 1,777.22 K-14
8/24/01 16747 7/26-8/10 207,096.50 18,826.95 188,269.55 1,882.70 K-15
9/7/01 16984 8/11-8/25 193,733.10 17,612.10 176,121.00 1,761.21 K-16
9/29/01 17321 8/26-9/10 211,131.90 19,193.81 191,938.09 3,838.76 K-17
10/11/01 17553 9/11-9/25 191,056.47 17,368.77 173, 687.70 3,473.75 K-18
10/23/01 17739 9/26-10/10 191,080.96 17,371.00 173,709.96 3,474.20 K-19
11/21/01 18212 10/1110/25 192,458.62 17,496.24 174,962.38 3,499.25 K-20
11/28/01 18328 10/2611/10 207,083.23 18,825.75 188,257.48 3,765.15 K-21
12/12/01 18556 11/1111/25 191,141.57 17,376.51 173,765.06 3,475.30 K-22
1/11/01 18911 11/2612/10 218,456.32 19,859.67 198,596.65 3,971.93 K-23
(missing) 12/1112/25 218,456.32 19,859.67 198,596.65 3,971.93 K-24

TOTAL P 3, 834, 802. 08

Petitioner opted to present the billing statements stamped “paid” by and

signed by Yolly Manuel of J&J Human Resources, for a more detailed lay-out of

the expenses incurred and paid. The corresponding official receipts can be

submitted as well, upon request.

The documents annexed and marked “K-1” to “K-22” show the expenses

billed by and paid to J & J Human Resources, which expenses amount to a total of

P3, 834, 802.08 exclusive of VAT. The said amount is exclusive of VAT in

keeping with the generally accepted accounting principles.

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The billing statements for the outside charges incurred from November 26

to December 25 are missing though. Thus, their sums shall be disallowed for

being unsubstantiated: 198,596.65 + 198, 596.65 = P 397,193.3

Only P397, 193. 30 can be disallowed for not being supported by

documents.

Therefore the assessed disallowed expense of P1, 917,401.04 which is 50%

of P3, 834, 802. 08 is without factual basis. The disallowed expense must be

allowed and consequently deductible

Light and water

The expense “Light and water” in the amount of P 527,837.84 is

disallowed. The supporting/substantiating documents are presented as follows:

Date Amount O.R.#

Annex/Mark
February P 70,660.10 O.R. # 0157 L-1
March 72,118.54 0181 L-2
April 81,300.26 0192 L-5
May 90,499.09 0208 L- 4
June 92,292.52 0220 L- 7
July 77,480.03 0243 L- 6
August 68,557.03 0358 L- 9
September 98,697.03 0426 L- 8
October 90,895.21 0549 L- 10
November 95,249.77 0582 L- 11
December 112,981.98 0600 L- 3
(Accrued; pls. see work 104, 944.12
sheet or Annex V-4 )
TOTAL P 1,055,675.68 X 50% = P 527,837.84

Annexes “L-1“ to “L-11 “ show the amount of expenditures for light and

water as billed by the lessor RM Damian Development Corp. at EDSA Extension

Pasay City with TIN 004-778-375-VAT in which building, appellant Fashion Saver

is doing business.
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Having been substantiated, therefore the assessed disallowed expense for

light and water amounting to P527, 837.84 must be struck down. The

disallowance has no basis.

Repair and Maintenance

The expense for Repair and Maintenance in the amount of P 29,000.00 is

disallowed. Annex “M” is the Sales Invoice issued by Phillogix Systems Inc.

with TIN # 205-713-621-0000 VAT reflecting the amount of P58, 000 representing

Equipment Maintenance. Being documented, therefore, the amount 50% of P58,

000 (which is P29, 000) as assessed disallowed expense is without basis.

Consequently, the amount of P58, 000 for equipment maintenance is deductible in

full.

Communication

In the formal assessment notice, the expense “Communication” in the amount of

P 18, 986.12 is disallowed.

The said expense is explained as follows, with the corresponding supporting

documents annexed and marked ----

Philippine Long Distance Expense incurred Official Annex/Mark

Telephone (PLDT) ; month Receipt
number
January 2001 3,610.96 0170 “L”
February 3, 721.26 0157 “L-1”
March 3,012.06 0181 “L-2”
April 3,131.54 0192 “L-5”
May 2, 960.24 0208 “L-4”
June 2, 530. 16 0220 “L-7”
July 2, 884.46 0243 “L-6”
August 3, 591.90 0358 “L-9”
September 2, 961. 68 0426 “L-8”
October 2, 961.68 0549 “L-10”
November 3, 381.76 0582 “L-11”
December 3, 004.54 0600 “L-3”
TOTAL P 37,752.24
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Having shown the supporting documents, the disallowance of 50% of P37,

752.24 communication expenses is therefore not warranted. Therefore the expense

of P37, 752.24 incorporated in the item “deductions” in the Income Tax Return

2001 is deductible in full.

Taxes, licenses, fees

In the Formal Assessment Notice (Annex “E-3) the expense in the amount

of P 104, 973.19 for taxes, licenses, fees, is disallowed.

Such expenses for taxes, licenses and fees are explained as follows:

Date Particulars Official Amount Annex

Receipt # Mark
1/17/01 Corporate Residence Certificate 00133675 8,532.90 “N”
1/19/01 FIRE 6942051 19,181.00 “N-1”
1/19/01 Bldg./Mechanical/Electrical/ 6942050 2,140.00 “N-2”
Permit
1/22/01 Mayor’s Permit & License 6929745 50, 739.62 “N-3”
(1st Quarter)
1/26/01 BIR Annual Registration Fee UCPB 500.00 MISSING
4/20/01 Mayor’s Permit and License 2514186 42,019.62 “N-4”
(2nd Quarter)
7/20/01 Mayor’s Permit and License 0323720 43,419.62 “N-5”
(3rd Quarter)
10/19/01 Mayor’s Permit and License 03655482 43,419.62 “N-6”
( 4th Quarter)
TOTAL P 209,946.38

The amount of 50% of P 209, 946. 38 should not be assessed as disallowed

expense because the expenses for taxes, licenses, and fees are supported by official

receipts. Therefore, the expense in the sum of P 209, 946.38 is deductible in full.

Rental

The BIR disallowed the amount of P1, 140,000 as 50% disallowed rental

expense on the ground that it was not supported by documents. Appellant

respectfully contends that the rental expense is deductible in full because it is

supported by official receipts as follows:

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Date Official Gross Amount Net Amount ANNEX

Receipt (inclusive of (exclusive of
Number VAT) VAT)
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January 2001 0170 277,200 264,000 L

February 0157 189,000 180,000 L-1
March 0181 189,000 180,000 L-2
April 0192 189,000 180,000 L-5
May 0208 189,000 180,000 L-4
June 0220 189,000 180,000 L-7
July 0243 189,000 180,000 L-6
August 0358 189,000 180,000 L-9
September 0426 189,000 180,000 L-8
October 0549 189,000 180,000 L-10
November 0582 207,900 198,000 L-11
December 0600 207,900 198,000 L-3
Total P 2,394,000 2,280,000

The rent expense declared in the amount of P2, 280, 000 being supported

by official receipts, consequently it is deductible in full. Therefore, the

disallowance of 50% of P 2, 280, 000 or P 1,140,000 is without basis.

Supplies

The amount of P49, 060.45 is 50% disallowed (office) supplies expense.

The said amount is explained as follows:

10% Gross Annex/

Date SI/OR Supplier’s Name Net Input Amount mark
Amount VAT
2/12/01 1492 Millenium Access 12,045.45 1,204.55 13,250 “O”
Corp.
3/13 46276 Labelmen 23,409.09 2,340.91 25,750 “O-3”
Enterprises
4/17 1729 Millenium Access 12,045.45 1,204.55 13,250 “O-1”
Corp.
5/3 18852 United Asia Int’l 9,695.45 969.55 10,665 MISSING
Plastic
6/16 48706 Labelmen 17,727.27 1,772.73 19,500 “O-2”
Enterprises
6/18 19391 United Asia Int’l 5,470.91 547.09 6,018 MISSING
Plastic
8/24 50568 Labelmen 17,727.27 1,772.73 19,500 “O-4”
Enterprises
T 98,120.91 9,812.09 107,933
otal
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Being supported by receipts, the total expense amounting to P98, 120.91 must be

deductible in full. The expenses in the sum P16, 683 (10,665 + 6,018) may be

disallowed because of missing receipts.

III. Whether or not the Tax Credits

Claimed are properly substantiated

The Prior Year Excess Tax Credit of P 66,528. 87 are supported by Income

Tax Return for the prior year (taxable year 2000).

The Formal Assessment Notice, in its Annex A, stated to wit: “Verification

disclosed that your claimed prior year excess tax credit amounting to P 66, 528.87

was not supported by Income Tax Return for the said prior year (taxable year

2000) hence, said amount was disallowed as tax credit pursuant to Section 2.58.3

(B) of RR 2-98.”

The Income Tax Return for the year 2000 in which the said tax credit

appears is attached herewith as Annex “P” and made an integral part hereto.

The Creditable Tax Withheld in the amount of P3, 976.81 is supported by

documents or is properly substantiated. The Creditable Tax Withheld in the

amount of P 16, 882.67 as per Income Tax Return (pls. see Annex “Q”) is

explained/ substantiated as follows:

Tax Withheld for the Quarter BIR FORM NO. 2307

01/01/2001-03/31/2001 Annex/mark
57.33 “R
27.86 “R-1”
86 “R-2”
374.16 “R-3”
96.83 “R-4”
2,549.40 “R-5”
3,263.36 “R-6”
1,284.10 “R-7”
216.15 “R-8”
448.32 “R-9”
4,771.80 “R-10”
2,716.70 “R-11”
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386.51 “R-12”
37.24 “R-14”
59.31 “R-16”
9.15 “R-18”
89.15 “R-20”
91.98 “R-22”
37.38 “R-24”
85.67 “R-26”
TOTAL 16, 688.40 P 16, 882.67 less 16,
688. 40 = P194.27
deficiency

Therefore only P194.27 and not P 3, 976.81 is unsupported creditable tax

withheld. The document supporting the said P194.27 is missing.

The deduction of the amount of P83, 463.21 (representing Minimum

Corporate Income Tax) from the Tax Credits is error or procedurally

incorrect.

The formal assessment notice in its Annex “A” explained the deduction to

wit: “Minimum Corporate Income Tax per return in the amount of P83, 463.21

was deducted from the total allowable tax credit taking into account that allowing

said amount will result to double benefit since this will be carried forward on an

annual basis and credited against the normal income tax for the three (3)

immediately succeeding taxable years as provided under Section 27 (E) (2) in

relation to RR 9-98”

The amount of P83, 463.21 MCIT should not be deducted from the tax

credits. The said amount is the current MCIT for the year ended 2001, and being

so, it is the amount of tax payable. Please refer to the Income Tax Return for 2001

(Annex “Q”) and the amount of P83, 463.21 appears as the MCIT which is the tax

payable. It also appears in the said return that the P83, 463.21 MCIT was

deducted of Prior Year’s Excess Credits in the amount of P66, 528.87 and

Creditable Tax Withheld in the sum of P16, 882.67. The deduction resulted to the
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amount of only P51.67 which is now the tax payable. Annex “Q-1” is the receipt

showing that the amount of P51.67 has been paid.

IV. Whether or not the amount of

P 1, 746, 563. 79 input tax on domestic
purchases is unsupported;

Petitioner submits that the suppliers of merchandise of petitioner are

VAT-registered.

In the Annex A of the formal assessment notice (annex E-5), it is stated:

“Verification of your submitted schedule of input tax disclosed that the suppliers

whom you purchased your goods/services were not registered as VAT taxpayer

hence, claimed input amounting to P1, 746,563.79 was disallowed pursuant to

Section 110 in relation to Section 113 both of the 1997 NIRC.” Annexes “S” to

“S-11” are the summary list of purchases from various suppliers who are

numerous in number. It is incredible that the Revenue Officers found all these

suppliers to be unregistered for VAT purposes. If that is true, then the Bureau of

Internal Revenue is not doing a good job.

The only issue posed by the Acting Regional Director in his formal

assessment notice is the VAT registration of the suppliers. There is no problem

with the substantiation or documentation of the VAT input of petitioner. In fact,

the schedule of monthly purchases for the year 2001 with original invoices were

already submitted to the BIR Legal Division Revenue Region no. 8 and was

received by Atty. Mylene Arzadon on December 13, 2004. The invoices/official

receipts bear the VAT registration number of the supplier who issued the

invoice/receipt. Of course, the amount of the input tax can be deduced from the

gross amount appearing in the invoice/official receipt.

 19

Petitioner had complied with the basic requirement of substantiation which

is to ask for VAT registered invoices and official receipts for any purchases made

in order to be able to claim and charge the input tax against the output tax and

acted in good faith that the suppliers invoices issued to them are duly VAT

registered with the BIR as shown by information in their sales invoices as required

in Section 110 in relation to Section 113(A) and 237 of the NIRC, as amended by

RA 8424 and Section 4.108-1 of RR-7-95 hence, the petitioner company is not

liable for said VAT deficiency. Section 110 (A) (1) was already complied with

when petitioner presented the monthly schedule of purchases with suppliers

original VAT invoices during the initial meeting. The original sales invoices and

official receipts were already submitted to the BIR Legal Division. The suppliers

should be responsible for the alleged VAT deficiency if proven that they have

indeed violated the VAT provisions of the NIRC. Burden of proof on the

authenticity of sales invoices issued is the responsibility of the supplier or issuer,

not the buyer or petitioner in this case.

In the following cases decided by the Court of Tax Appeals to wit:

Magellan Cogeneration v. Commissioner, May 28, 2002; PLDT v. Commissioner,

June 27, 2002; and KBP Real Estate Corporation v. Commissioner, May 15, 2002,

---- the Court of Tax Appeals ruled that supporting documents such as VAT

invoices or official receipts are already sufficient evidence for substantiation

purposes in claiming refund/deductibility of input tax.

“A perusal of the records would reveal that petitioner’s accumulated input

VAT arising from petitioner’s purchases of goods and services as well as its

importation of goods are substantiated by pertinent documentary evidence.

Petitioner’s domestic purchases of goods and services of the period July 1 to

 20

December 31, 1997 were supported by various check vouchers with supporting

VAT invoices and/or official receipts (exhibits A-1-A-776) while its importations

were supported by import entry declarations, bills of lading, air waybills, packing

lists, suppliers commercial invoices (exhibits B-2-B-71) and a certification from

Philbank of petitioner’s VAT payments (exhibit B-1).” (Magellan Cogeneration

Inc. v. Commissioner of Internal Revenue, May 28, 2002, CTA Case no. 5938)

“Anent the second issue, petitioner presented Sales invoice no. 008 to prove

that the input VAT paid in the subject transaction was US$743,400 (exhibit H).

Under Revenue Memorandum Order no. 1-99, for purposes of input VAT

recognition, purchases of goods or properties shall be evidenced by a VAT invoice

duly issued by the supplier of goods or properties while purchase of service shall

be evidenced by a VAT official receipt.” (KBP Real Estate Corporation v.

Commissioner of Internal Revenue May 15, 2002, CTA Case no. 6035)

From the foregoing premises, the amount of P1, 746, 563.79 input tax of

petitioner, therefore, is properly documented and substantiated by invoices and

official receipts issued by its suppliers, consequently it should not be removed or

deducted from the Tax Credits/Overpayments account. Consequently, the output

tax of P1,511,909.59 should be offset by the said input tax of P1, 746, 563.79,

resulting in zero/negative deficiency VAT.

The adjustment per December 2001 1601-C is incorrect. The amount of

P 9,526.19 - appearing in BIR Form no. 1601-C should be added as an over-

remittance. The adjustment per January 2001 1601-C is supported by the

alpha list.

The alpha list annexed and marked as Annex “T” and “T-1” and made an

integral part herewith shows that the amount of P4, 120.85 in question was
 21

actually withheld. The alpha list was submitted to the BIR RDO on January 31,

2001 which is the stamp appearing on its face.

It is clear from the BIR Form no. 1601-C (please see Annex “U”) that the

amount of P9, 526.19 represents over-remittance. Being an over-remittance it

constitutes overpayment. Consequently it should be added as an over-remittance

i.e. P (9,526.19) to the amount of P (5,405.34) overpayment per investigation in

the formal assessment notice.

The correct computation should be as follows:

Total amount of tax withheld per alpha list P 51, 776.17

Less: Adjustment and Payment
Monthly remittance per return P 57, 181.51
Adjustment per January 2001 1601-C 4, 120.85
___________
P 61,302.36
___________
Payable (Overpayment) per investigation P (9,526.19)
Add: Adjustment per December 2001 1601-C (9,526.19)
__________
Payable/ (Overpayment) P (19, 052.38)

Deficiency withholding tax on compensation P ---0---

THE CORRECT ASSESSMENT

From all the foregoing premises, and with all the necessary source

documents annexed and made an integral part of this instant petition and submitted

before this Honorable Court for examination and consideration, the following

should be the correct assessment:

 22

Income Tax

Net income/(loss) per return P (5, 784, 103. 97)

(because they are supported by
documents or are properly substantiated,
the 50% disallowed expense have been
added back to the expenses incorporated
in the item “deductions” in the Income Tax
Return 2001, making the expenses
deductible in full)
Add: disallowed expenses because the
supporting documents are missing
Outside charges: P 198,596.65
198,596.65
Taxes, license, fees 500.00
Supplies 10, 665.00
6,018.00 414376.30
___________
Taxable income P (5, 369,727.60)

MCIT per return P 83, 463. 21

Less:
Prior Year’s Excess Credits (66, 528.87)
Creditable Tax withheld per BIR Form no. 2307
 23

For the 4th quarter (16, 688.40)

Total Tax Credits/Payments (83, 217.27)
___________
Tax Payable/(Overpayment) P 245.94
Tax paid (please see annex Q-1) (51.67)
__________
Deficiency income tax P 194.27

Value Added Tax

Vatable sales per return P 15, 119, 095. 26

Output tax due at 10% P 1, 511, 909. 59

Less: Tax Credits/Payments

Input tax from domestic purchases P 1, 746, 563. 79

(this is already net of P8,726.97 excess
input tax carried over from previous
period: input tax of P 1, 755, 290. 76 (see
worksheet or annex V-4) less
P 8, 726. 97 equals P 1, 746, 563. 79.)

Less:
Excess input tax carried forward
to succeeding period ( 243, 381.22) 1, 503, 182.50

Deficiency Value Added Tax P 8,726.97

Add: 20% Interest (1-26-02-2-4-05) 6353.23
_________
Total amount due and collectible P 15, 080.20

Withholding Tax on Compensation

Total amount of tax withheld per alpha list P 51, 776.17

Less: Adjustment and Payment
Monthly remittance per return P57, 181.51
Adjustment per January 2001 1601-C 4,120.85 61, 302.36
Payable/(Overpayment) P ( 9, 526.19)
Add: Adjustment per December 2001 1601-C
which reflects P(9526.19) ( 9, 526. 19)
(Please see Annex “U")
___________
Payable/(Overpayment) P (19, 052.38 )

Deficiency withholding tax on compensation P ---0----

 24

WHEREFORE, premises considered, petitioner respectfully prays of the

Honorable Court of Tax Appeal, that after due notice and hearing set aside the

Formal Assessment Notice issued by respondent Acting Regional Director

Anselmo G. Adriano.

Petitioners pray for such other reliefs just and equitable under the premises.

Quezon City 10 August 2005.

DUMLAO MORALEDA TAVERA

ANTONANO VERZOSA
& ASSOCIATES LAW OFFICES
Counsel for Petitioners
3rd Floor, Vargas Building
103 Kalayaan Avenue
Diliman, Quezon City
Tel No. 920-8550/926-9066

By:

BENJAMIN A. MORALEDA, JR.

Roll Number 34885
PTR # 6011887/01-03-05; Q. C.
IBP # 617529/01-03-05; Q. C.

SOCORRO MARICEL N. NEPOMUCENO

Roll Number 50756
PTR # 6535642;05-21-05; Q. C.
IBP # 650268/04-19-05; Q. C

Copy furnished:

BUREAU OF INTERNAL REVENUE

Agham Road Quezon City

MR. ANSELMO G. ADRIANO

Acting Regional Director
BIR Region No. 8
Atrium Bldg., Makati Avenue,
Makati City
 25

MR. CESAR ESCALADA

MR. EUSEBIO BRAVO
MR. ARNALDO R. BASE
MS. ELENITA QUIMOSING
Revenue Officers
BIR District 51-Pasay City
KCT Bldg., EDSA Extension Pasay City

E X P LA N AT I O N

The copies for BIR, Mr. Adriano and for the Revenue Officers were served
through registered mail due to distance and lack of messengerial personnel.

BENJAMIN A. MORALEDA, JR.