'

'
;

REPUBliC OF THE PHiliPPINES

Coon at Tax Appeals
QUEZON CITY

SPECIAL FIRSTDIVISION

SAN ROQUE POWER CTA CASE NO. 7787

CORPORATION,
Petitioner,
Members:
-versus-
Uy, Chairperson, and
Fabon-Victorino, 11.
COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondent. APR 3 0 013 ; 2 ;:JO ._,_.

X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

DECISION
UY,}.:

The instant Petition for Review was filed by petitioner San

Roque Power Corporation, against respondent Commissioner of
Internal Revenue, praying that, after due hearing, judgment be
rendered setting aside the Formal Letter of Demand dated January
14, 2008 and Assessment Notice Nos. WE-04-06-005-017-501-000
for deficiency expanded withholding tax; WF-04-06-005-017-501-000
for deficiency final withholding tax; and FBT-04-06-005-017-501-000
for deficiency fringe benefits tax, all dated January 15, 2005, in the
total amount of P118,619,729.22 issued by respondent for taxable
year 2004.

• THE FACTS

Petitioner is a domestic corporation engaged in the operation of

a hydroelectric power generating plant located at Barangay San
Roque, San Miguel, Pangasinan. 1 It is registered with the Board of j\
1
Respondent's Memorandum , Docket, p. 2339.
DECISION
CTA Case No. 7787
Page 2 of32

Investments on a pioneer status as new operator of hydroelectric

power generating plant under Certificate of Registration No. 97-356. 2

On February 7, 2006, petitioner received Letter of Authority

("LOA'') No. 00027833 dated February 22, 2006 issued by Revenue
District Office (RDO) No. 06 of the Bureau of Internal Revenue (BIR),
authorizing Revenue Officers Rodelio SJ Dacanay, Gregorio Z. Nipal,
Almira Navarro, and Jinky Lim to examine its books of accounts and
other accounting records relative to all internal revenue taxes for the
period covering January 1, 2004 to December 31, 2004. 3

Thereafter on April 4, 2007, petitioner received a Notice of

Informal Conference dated April 3, 2007 issued by BIR RDO No. 06,
finding petitioner to have deficiency withholding tax on
compensation, expanded withholding tax (EWT), value-added tax,
and final withholding tax (FWT), inclusive of applicable increments,
for taxable year 2004 on the basis of the investigation of the
aforesaid Revenue Officers,4 as follows:

Withholdinq Tax on Compensation p 4 287.333.80

Expanded Withholding Tax 3,625,338.56
Final Withholdinq Tax 98,234,867.07
Value-Added Tax 4.614 888.03
Total p 110,762,427.46

Although petitioner by then is under the jurisdiction of the BIR

Large Taxpayer Services, petitioner opted, without objection from the
BIR Large Taxpayer Services, that the examination of its books of
accounts and other accounting records for all internal taxes for
taxable year 2004 be continued by BIR RDO No. 06 as the latter has
all the records pertinent to such examination. 5

In response to the issues raised by petitioner in its letter dated

April 27, 2007, BIR RDO No. 06 conducted a re-investigation as
contained in its letter dated August 6, 2007. 6

On November 21, 2007, petitioner received a second Notice of

Informal Conference dated November 15, 2007, wherein BIR RDO t
2
Exhibits "TTT-1" and "TTT-3".
3
Docket, p. 1143.
4
Docket, p. 1143.
'Docket, p. 1143.
6
Docket, p. 1144.
DECISION
CTA Case No. 7787
Page 3 of32

No. 06 amended its assessment for alleged deficiency taxes for

taxable year 2004, as follows:

Deficiency Expanded Withholding Tax p 3.241.714.71

Deficiency Frinqe Benefits Tax 6,109,673.68
Deficiency Final Withholdinq Tax 106,688,374.79
Total p 116,039.763.187

Thereafter, on December 27, 2007, petitioner received a letter

of even date from BIR RDO No. 06 informing petitioner that it will
pursue the assessments reflected in the Notice of Informal
Conference. 8

Subsequently on January 2, 2008, petitioner received a copy of

the Preliminary Assessment Notice (PAN) dated December 28, 2007
issued by BIR Revenue Region No. 1, enumerating the following tax
deficiencies (inclusive of interest and late payment charges):

Expanded Withholding Tax p 3,530,629.68

Deficiency Final Withholdinq Tax 107,699,106.77
Deficiency Fringe Benefits Tax 6.167 554.80
Total P117,397,291.2SY

On January 24, 2008, petitioner received copies of the Formal

Letter of Demand and Assessment Notices dated January 14 and 1S,
2008, respectively, which were issued or mailed by the BIR on
January 1S, 2008, for deficiency taxes under Assessment Notice Nos.
WE-04-06-00S-0 17-SO 1-000, WF-04-06-00S-0 17-SO 1-000, and FBT-
04-06-00S-017-S01-000, as follows:

Expanded Withholding Tax p 3,365,719.78

Final Withholdinq Tax 108,822,142.29
Fringe Benefits Tax 6.231.867.15
Total P118,619,729.22w

In its letter dated February 21, 2008 to BIR Revenue Region

No. 1, petitioner protested the assessment and collection of
purported deficiency taxes under Assessment Notice Nos. WE-04-06-
00S-017-S01-000, WF-04-06-00S-017-S01-000, and FBT-04-06-00S!\

7
Docket, p. 1144.
8
Docket, p. 1144.
9
Docket, pp. 1144 to 1145
10
Docket, p. 1145.
DECISION
CTA Case No. 7787
Page 4 of32

017-501-000 dated January 15, 2008 and Formal Letter of Demand

dated January 14, 2008, for being barred by prescription and bereft
of factual and legal bases. 11

In a letter dated April 3, 2008 of BIR Revenue Region No. 1,

petitioner was informed that the letter of demand and assessment
notices still stand and its request for cancellation was denied with
finality. 12

Thus, on May 22, 2008, petitioner filed the instant Petition for
Review to assail the aforesaid denial of its protest against
respondent's Formal Letter of Demand dated January 14, 2008 and
Assessment Notice Nos. WE-04-06-005-017-501-000, WF-04-06-005-
017-501-000, and FBT-04-06-005-017-501-000, all dated January 15,
2005 issued by BIR Revenue Region No. 1, of Calasiao, Pangasinan.

In her Answer 13 filed on November 3, 2008, respondent

interposes the following special and affirmative defenses:

"6. Respondent adopts the abovementioned

admissions and denials as part of his special and
affirmative defenses.

7. The assessments for Withholding Tax on

Compensation, Expanded Withholding Tax, Final
Withholding Tax and Value-Added Tax respectively, were
issued in accordance with law. In the Formal Letter of
Demand, respondent clearly stated petitioner's tax
liabilities, to wit:

'Please be informed that after review of the

investigation reports on your income, withholding
and business tax liabilities the taxable year 2004
submitted by Revenue Officers Jinky Lim, Rodelio
Dacanay and Gregorio Nipal under Letter of
Authority No. 00027833 dated February 22, 2006,
there have been found still due from you deficiency
taxes as shown thereunder: ~

II Exhibit ''J".
12
Exhibit "K".
13
Docket, pp. 1085 to 1090.
DECISION
CTA Case No. 7787
Page 5 of32

Assessment No.: WE-04-06-005-017-501-000

Deficiency Expanded Withholding Tax P3,565,719.78

Assessment No.: WF-04-06-005-017-501-000

Deficiency Final Withholding Tax P108,822,142.29

Assessment No.: FBT-04-06-005-017-501-000

Deficiency Fringe Benefits Tax P 6,231,142.29

TOTAL p 118.619.729.22

Please note that the interest will be adjusted

if paid beyond February 12, 2008.

The twenty-five percent (255) surcharge and

twenty percent (20%) interest per annum was based
on the provisions of Section 248 (A) and Section 249
(B) of the 1997 NIRC, while the compromise penalty
was in accord with RMO 1-90 and Section 250 of the
1997 NIRC.

The narrative details covering the

aforementioned discrepancies and the detailed
computation of the deficiency taxes are shown at
the back hereof as Annex A.'

Based on the foregoing, the assessment issued

against petitioner is valid being supported by factual and
legal bases.

An assessment contains a computation of tax

liabilities and a demand for payment of such liability
within a prescribed period. It is worthy to note that
assessment notices need not be a full narration of facts
and laws on which the assessment is made. It is enough
that the petitioner be substantially informed of the
law and the facts on which the assessment for a tax
liability is made. The Preliminary Assessment Notices
received by petitioner indicated the amount of deficiency
tax liability and a demand to pay within a prescribed
period. The Supreme Court held that assessments simply
required a computation of tax liabilities, the amount the
taxpayer was to pay and a demand for payment within a A
prescribed period. \" •
DECISION
CTA Case No. 7787
Page 6 of32

8. The right of respondent to assess petitioner for

withholding taxes did not prescribe because the
investigation upon petitioner's books and records has yet
to conclude. That being the case, the right of respondent
to assess petitioner is not barred by prescription and the
filing of the Petition for Review is premature, pending the
conclusion of the investigation.

In paragraph I(B) under the heading 'DISCUSSION',

petitioner ratiocinated that it did not ask for a re-
investigation and yet respondent's revenue officers
conducted a re-investigation anyway. The truth is, the
claimed 're-investigation' is a continuation of the
investigation on petitioner's books and records. This fact
is highlighted when petitioner said that, 'In sum, we
respectfully object to the assessment for lack of factual
and legal bases contrary to pertinent Bureau of Internal
Revenue (BIR) rulings on the matter. We manifest that
we reserve our right to submit additional documents
should the need arises. Should you require the
submission of additional documents, please let us know.
By its own words, petitioner agreed that the
investigation has not yet terminated, and that it shall
comply with any request for the submission of documents
should respondent's examiners deem it necessary. The
use of the word 're-investigation' in this case did not
denote the usage of a technical or legal term. It simply
means to study again by close examination and
systematic inquiry. At most, it is but a misnomer for
continuing the investigation. The offer of petitioner to
give additional documents so requested is but part of the
investigation. The law allows the BIR access to all
relevant or material records and data in the person of the
taxpayer. It places no limit or condition on the type or
form of the medium by which the record subject to the
order of the BIR is kept. The purpose of the law is to
enable the BIR to get at the taxpayer's records in
whatever form they may be kept. Thus, contrary to
petitioner's belief, assessment on its books and records is
not barred by prescription. The hurried resort to judicial
remedy has only led to premature filing of the instant A
Petition for Review.' ~ •
DECISION
CTA Case No. 7787
Page 7 of32

9. In the absence of evidence to the contrary,

assessments are presumed correct. In the case of
Commissioner of Internal Revenue vs. Bank of the
Philippine Islands, the Supreme Court held:

'Tax assessments by tax examiners are

presumed correct and made in good faith.
The taxpayer has the duty to prove
otherwise. In the absence of proof of any
irregularities in the performance of duties, an
assessment duly made by a Bureau of
Internal Revenue examiner and approved by
his superior officers will not be disturbed. All
presumptions are in favor of the correctness
of tax assessments.'

The burden of proof (sic) is on the taxpayer

contesting the validity or correctness of an assessment to
prove not only that the Commissioner of Internal
Revenue is wrong, but also that the taxpayer is right.
The presumption in favor of the correctness of tax
assessments stands where evidence to the contrary is
wanting."

After pre-trial held on December 4, 2008, the parties filed their

Joint Stipulation and Facts and Issues14 on July 1, 2009. This was
approved by the Court in the Resolution 15 dated July 6, 2009.

Before the scheduled date of petitioner's initial presentation of

evidence, petitioner filed a Motion to Set Case for Preliminary Hearing
to Resolve Issue of Prescription on July 16, 2009. 16 In line therewith,
both parties manifested that they will not present evidence on the
issue of prescription. 17 In compliance with the Resolution 18 dated
August 24, 2009, respondent filed her Memorandum 19 on September
28, 2009 while petitioner filed its Memorandum [Re: Issue of$!
Prescriptionf0 on October 1, 2009. ~

14
Docket, pp. 1236 to 1239.
15
Docket, p. 1244.
16
Docket, pp. 1250 to 1254.
17
Docket, pp. 1258 and 1266.
18
Docket, p. 1271.
19
Docket, pp. 1272 to 1283.
20
Docket, pp. 1285 to 1308.
DECISION
CTA Case No. 7787
Page 8 of32

In the Resolution 21 dated November 13, 2009, the Former

Second Division of this Court resolved the issue of prescription.
Assessment Notice Nos. WE 04-06-005-017-501-000 and WF-04-06-
005-017-501-000 for deficiency expanded withholding tax and
deficiency final withholding tax covering the period of January to
November 2004, and Assessment No. FBT 04-06-005-017-501-000
for deficiency fringe benefits tax for taxable year 2004 were
CANCELLED AND SET ASIDE for having been issued beyond the
prescriptive period. As to the remaining assessment for deficiency
Expanded Withholding Tax and deficiency Final Withholding Tax for
December 2004, the Court set the initial presentation of evidence for
the petitioner on January 20, 2010.

A Motion for Reconsideration of the foregoing Resolution was

filed by respondent on December 8, 200922, but the same was denied
in the Resolution 23 dated April 14, 2010 for lack of merit.

Meanwhile, respondent assailed the Court's Resolutions dated

November 13, 2009 and April 14, 2010 before the Court of Tax
Appeals En Bane by way of a Petition for Review, docketed as CTA EB
No. 626, pursuant to Rule 8 of the Revised Rules of the Court of Tax
Appeals. The Court En Bane, in its Decision promulgated on August
31, 2011, denied respondent's Petition for Review and affirmed in
toto the Court's Resolutions dated November 13, 2009 and April 14,
2010. 24 Respondent's Motion for Reconsideration on the Decision of
the Court En Bane was likewise denied in the Resolution dated
January 2, 2012. 25

During the trial of this case with respect to the rema1mng

assessment for deficiency Expanded Withholding Tax and deficiency
Final Withholding Tax for December 2004, both parties presented
and offered their respective evidence. Petitioner's formally offered
pieces of documentary evidence, as contained in its Offer of
Documentary Evidence26 , were admitted in the Resolutions dated
August 11, 2011 and October 10, 2011Y Thereafter, respondent's
formally offered evidence, as stated in her Formal Offer of Evidence28
filed on February 29, 2012, were admitted in the Resolution 29 dated
21
22
23
Docket, pp. 1406 to 1416.
Docket, pp. 1417 to 1425.
Docket, pp. 1457 to 1459.
r
24
Docket, pp. 1774 to 1796.
25
Docket, pp. 1943 to 1946.
26
Docket,pp.1657to 1755.
27
Docket, pp. 1651 to 1653 and 1851 to1853.
28
Docket, pp. 2187 to2195.
29
Docket, pp. 2331 to 2332.
DECISION
CTA Case No. 7787
Page 9 of32

April 13, 2012. With the submission of respondent's Memorandum

on May 23, 2012 30 and petitioner's Memorandum on August 10,
2012, the instant Petition for Review was submitted for decision
in the Resolution dated August 23, 201231 •

Hence, this Decision.

THE ISSUES

The parties submitted the following stipulated issues32 for this

Court's resolution, to wit:

"1. Whether or not respondent's right to assess has

prescribed.

2. Assuming arguendo that respondent's right to

assess has not prescribed, whether or not the assessment
notices have factual and legal bases.

3. Whether or not petitioner is liable for alleged

deficiency in Expanded Withholding Tax (EWT), Final Tax
(FT) and Fringe Benefit Tax (FBT) and increments for the
taxable year 2004."

THE COURT'S RULING

The first issue on prescription had been extensively discussed

in the Court's Resolution dated November 13, 2009, wherein it was
held that the three (3)-year period of prescription under Section 203
of the National Internal Revenue Code (NIRC) of 1997, as amended,
applies to this case. The Court also found that there was no
allegation in respondent's Answer pertaining to petitioner's filing of
fraudulent or false returns or non-filing of returns, which could have
been considered as an exception to the period of limitation to assess
and collect tax as provided in Section 222 of the NIRC; and that
neither petitioner requested for any reinvestigation, nor executed any
waiver of the statute of limitations, which could have suspended the
running of the prescriptive period. rf\
30
Docket, pp. 2338 to 2348.
31
Docket, p. 2450.
32
Docket, p. 1238.
DECISION
CTA Case No. 7787
Page 10 of32

Thus, taking into consideration the filing dates of the EWT and
FWT returns for the months of January to November 2004, and
fringe benefits tax (FBT) for the whole year of 2004 vis-a-vis the date
of issuance of the Formal Letter of Demand, the assessments, except
the alleged deficiency EWT and FWT for the month of December
2004, are already barred by prescription. The dispositive portion of
this Court's November 13, 2009 Resolution states:

"WHEREFORE, as prayed for, petitioner's motion

to cancel the subject assessments on the ground of
prescription is hereby GRANTED. Accordingly,
Assessment Notice No. WE 04-06-005-017-501-000 and
Assessment No. WF-04-06-005-017-501-000 for
deficiency Expanded Withholding Tax and deficiency Final
Withholding Tax, respectively, covering the period of
January to November 2004 are hereby CANCELLED and
SET ASIDE for having been issued beyond the
prescriptive period. Likewise, Assessment No. FBT 04-06-
005-017-501-000 for deficiency Fringe Benefits Tax for
taxable year 2004 is hereby CANCELLED and SET
ASIDE for having been issued beyond prescriptive
period.

As to the remam1ng assessment for deficiency

Expanded Withholding Tax and deficiency Final
Withholding Tax for December 2004, let the initial
presentation of evidence for the petitioner be set on
January 20, 2010 at 9:00a.m."

To reiterate, the deficiency EWT and FWT assessments

covering the period of January to November 2004 and deficiency FBT
for 2004 were issued beyond the 3-year prescriptive period.
Therefore, respondent's right to assess the said taxes had prescribed.
The portion of respondent's assessment which was assessed within
the 3-year prescriptive period involves the alleged deficiency EWT
and FWT covering the month of December 2004. Consequently, the
resolution of the second and third jointly stipulated issues will cover
only the said assessed deficiency EWT and FWT for December 2004.

I. Expanded Withholding Tax

The assessment of the BIR for deficiency EWT actually pertains

to two components. First is for the amount of P1,407,735.85,( '
 DECISION
CTA Case No. 7787
Page II of32

inclusive of increments, allegedly representing unremitted taxes

withheld for the months of February to September. Second is for the
amount of P2,157,983.93 relative to the income payments subject to
10% and 15% EWT. The said assessed amounts are computed as
follows:

Late
Basic Interest Payment Total

p 769,212.61 p 558 023.24 p 80,500.00 P1,407,735.85

EWT
1,336,212.96 821,770.97 2,157,983.93

P2,105,425.57 P1,379,794.21 p 80,500.00 p 3,565,719.78

A. EWT- P1,407,735.85

Respondent computed the deficiency expanded withholding tax

of P1,407,735.85 33, with a basic tax of P769,212.61 for the year
2004, as follows:

Remittance
PerBIR Form Per Difference 20% Late Total
Month 1601-E34 Attachments35 Unremitted Interest Payment Amount Due
January p 704,590.33 p 704,590.33 p - p - p - p -
February 337,723.22 360,956.82 23,233.60 18,199.66 6 000.00 47,433.26
March 620 714.77 622,794.77 2,080.00 1,594.67 1 000.00 4,674.67
April 273 861.19 473 861.19 200 000.00 150 000.33 16 000.00 366,000.33
Mav 616 219.09 816 219.26 200 000.17 146 666.34 16 000.00 362 666.51
June 930,204.16 1,130,204.16 200 000.00 143 333.00 16 000.00 359 333.00
July 381,969.05 425,867.92 43,898.87 30,729.21 8 500.00 83,128.08
August 556 668.29 606,668.26 49,999.97 34,166.70 8 500.00 92,666.67
September 612 966.77 662 966.77 50 000.00 33 333.33 8 500.00 91 833.33
October 744 998.64 744 998.64 - - - -
November 608,257.93 608,257.93 - - - -
December 379,423.80 379,423.80 - - - -
TOTALS P6,767,597.24 P7,536,809.85 P769,212.61 P558,023.24 P80,500.00 P1,407,735.85

From the comparison of the amounts between BIR Forms 1601-

E and per schedule of income payments to payees (referred to as
"Attachments''), the deficiency EWT in the basic amount of
P769,212.61 pertains to the discrepancies in the EWT due for the
months of February to September 2004. Likewise, as can be gleaned
from the above schedule, the amount of EWT due per BIR Form
1601-E for the month of December 2004 tallies with the amount{'
33
Exhibit "4-B", BIR Records, p. 2628; Exhibit "E", Docket, p. 760.
34
Exhibits "0" to "Z-1 ".
35
Exhibits "000-2-a" to "000-2-1".
DECISION
CTA Case No. 7787
Page 12of32

remitted per attachment. Inasmuch as the assessment for the first

component in the total amount of P1,407,735.85 refers to the
months of February to September, which are already barred by
prescription, the same should be cancelled.

B. Subject to 10% and 15% EWT- P2,157,983.93

Respondent's examiner computed the deficiency EWT subject

to 10% and 15% for taxable year 2004 in the amount of
P2,157,983.93 36 as follows:

EWT
Rate EWTDue

Legal Fees- Makati (Per Trial Balance) P34 500,882.17

Legal Fees - 0 & M (Per Trial Balance) 41,984.99

Audit Expenses - Makati (Per Trial Balance) 2,499,612.02

Total p 37 042 479.18

Less: Payment to 5GV (Refer to attached schedule) 6 227 999.20

Legal & Audit Fee Subject to EWT P30 814 479.98 15% P4,622,172.00

0 & M Consultancy Fees Expense - Makati (Per Trial

Balance) P42 150 066.57

Consultancy Fees - Makati 22 471 649.57

Consultancy Fees- Land 9 628 189.S1

Consultancy Fees - 0 & M 2 074 645.01

Consultancy Fees - Outside Special Services 269 800.00

Total P76 594 350.66

Less Payments to:

SHKPSL (subject to Final Tax) (Notes to F5 17) Pl3 912,812.00

KPIC (subject to Final Tax (Notes to FS 17) 35 313,747.00

Total P49 226,559.00

Consultancy Fees subiect to EWT P27 367 791.66

Mat., Services - Surveying Services - O&M RASA
Surveying P1 686 363.68
Mat., Services - Dam Monitoring - O&M RASA
Consultants 1 379 280.00

Total P3 065 643.68

36
Exhibit "4-C", BIR Records, p. 2626; Exbibit "E", Docket, p. 761; Exhibit "000-1-b".
DECISION
CTA Case No. 7787
Page 13 of32

Total Consultancy Fees subject to EWT P30,433,435.34

Payees with more less than gross receipts of

P720 000.00 per year:
Various Consultants: per attachments to 1601-E
January_ 543 040.30
February 428,167.00
March 544,778.50
April 503,934.50
May 522 823.10
June 510 342.80
July 499,635.00
August 526,629.10
September 533,915.00
October 530 088.70
November 547 839.10

December 592 096.70 P6 283 289.80 10% 628 328.98

Payees with more than the gross receipts of
P720 000.00 per year: P24 150 145.54 15% 3 622 521.83

Total P30 433 435.34 P4,250,850.81

Total Expanded Withholding Tax Due P8,873,022.81

Less: 2004 Expanded Withholding Tax Remittance 7,536,809.85
Expanded Withholding Tax Still Due p 1 336 212.96
20% Interest 821,770.97
Expanded Withholding Tax Still Due P2,157,983.93

A scrutiny of the Detailed General Ledger (GL) 37, the Summary

of Monthly Balances per GL38, and the Independent Certified Public
Accountant (CPA) Report39 shows that of the alleged Professional,
Consultancy, and Legal Fees of P116,434,236.04 for taxable year
2004 only the amount of P13,882,244.24 pertains to the month of
December 2004, thus:

Expense Account Exhibit Total perGL December

Legal Fees - Makati QQQ-1-6.7.1 p 34 500 882.17 p 4 682 504.36
Legal Fees - 0 & M 000-2-6.2.2 41 984.99 -
Audit Expenses- Makati QQQ-3-6.4.2 2,499 612.02 574 611.92
0 & M Consultancy Fees Expense
- Makati QQQ-4-6.4.1 42 150 066.57 4,741 795.00
Consultancy Fees - Makati 000-6-6.6.1 22 471 649.57 2 724 874.45
Consultancy Fees - Land QQQ-5-6.5.1 9,628 189.51 619,296.73
Consultancy Fees - 0 & M QQQ-7-6.4.3 2 074 645.01 176 516.32
Mat., Services Surveying Services
- O&M RASA Surveying 000-8-6.4.2 1 686 363.68 254 545.46

37
Exhibits "QQQ-1-6.1" to "QQQ-1-6.7", "QQQ-2-6.1" to"QQQ-2-6.2", "QQQ-3-6.1" to "QQQ-3-6.4",
"QQQ-4-6.1" to "QQQ-4-6.4", "QQQ-5-6.1" to "QQQ-5-6.5", "QQQ-6-B.l" to "QQQ-6-6.6", "QQQ-
f'
7-6.1" to "QQQ-7-6.4", "QQQ-8-6.1" to "QQQ-8-6.4", "QQQ-9-6.1" to "QQQ-9-6.4" and "QQQ-1 0-
A" to "QQQ-1 0-J".
38
Exhibits "QQQ-1", "QQQ-2", "QQQ-3", "QQQ-4", "QQQ-5", "QQQ-6", "QQQ-7'', "QQQ-8" and "QQQ-9".
39
Exhibit "WWW", No.4, pp. 10 to II.
DECISION
CTA Case No. 7787
Page 14 of32

Mat., Services • Dam Monitoring · QQQ-9·6.4.3 I

O&M RASA Consultants 000·9·6.1.2 1 380 842.52 108 100.00
Subtotal p 116,434,236.04 P13,882,244.24
Consultancy Fees · Outside
Specia I Services 269 800.00
Total p 116,704,036.04

The Consultancy Fees - Outside Special Services amounting to

P269,800.00 per BIR Computation Sheet cannot be traced from
petitioner's record, hence, cannot be verified as to the nature of such
expense. A perusal of the Trial Balance40 and Audited Financial
Statements41 confirms no similar expense account with the same
amount. Consequently, the assessment for the same is improper and
should be cancelled.

Of the total fees of P13,882,244.24, pertaining to the month of

December 2004, the Independent CPA ascertained that the total
Professional Fees only amount to P13,877,444.2442 as hereunder
summarized:

Exhibit
Findings Amount "WWW"
Professional fees accrued and/or paid to GPP,
hence exempt from 10%/15% EWT p 4 9651252.46 Annex "8~1"
Professional fees accrued and/or paid to non·
residents, hence, exempt from 10%/15%
EWT 11,628,588.07 Annex "B-2"
Professional fees accrued based on estimated
amounts, hence not subjected to EWT 1,000,000.00 Annex "B-3"
Reclassification of input VAT to expense
accounts 609 694.14 Annex "B-4"
Others unverified amount 7 533.00 Annex "B-5"
Professional fees subiect to EWT 1 522 864.01 Annex "B-6"
Consultancy fees subjected to withholding
tax on compensation 1,406 425.00 Annex "B-7"
Reversals of professional fees previously
recorded in November 2004 (7 262,912.44) Annex "B-8"
Total for the month of December 2004 p 13,877,444.24 Annex "B"

Evidently, there is a difference of P4,800.0043 between the

Detailed General Ledger versus the Independent CPA's summary.
The Independent CPA noted that this pertains to the "Mat. Services-
Dam Monitoring-Land'144 account which formed part of the total
amount of P108,100.00 for "Mat. Services-Dam Monitoring-O&M

40
41
Exhibit "000-3".
Exhibit "000-4".
f'
42
Exhibit "WWW", p. 25.
43
1'13,882,244.24 less 1'13,877,444.24.
44
Exhibit "WWW", p. II, and Exhibit "QQQ-9".
DECISION
CTA Case No. 7787
Page 15 of32

RASA Consultants" account for December 2004. Petitioner did not

offer any evidence to support the said expense; thus, the assessment
should remain.

1. Professional fees accrued and/or paid to GPP -

P4,965,252.4645

Petitioner avers that Professional Fee in the amount of

P4,965,252.46, as presented below, refers to payments and accruals
to general professional partnerships (GPPs) which are exempt from
creditable withholding tax, in accordance with the prov1s1on of
Section 2.57.5 of Revenue Regulations No. 2-98, as amended by
Revenue Regulations No. 14-2002:

Professional fees
accrued &/or paid to Actually billed Accrued based
GPP and/or paid on estimates Total
p 3,343,288.10 P750,000.00
Legal Fees - Makati
P4,262,311.10
- 169,023.00

Audit Expenses - Makati 459,339.26 243,602.10 702,941.36

Total p 3,802,627.36 P1,162,625.10 P4,965,252.46

Section 22(B) of the NIRC of 1997 defines general professional

partnerships as partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business. Corollary
thereto, Section 26 of the same NIRC provides that a general
professional partnership shall not be subject to income tax. Its
partners are the ones liable in their individual capacity for the
payment of income tax.

The Supreme Court, in the case of Tan vs. Ramon R. del

Rosario Jr., et a/.46 , had the occasion to rule that the income tax is
imposed not on the professional partnership, which is tax exempt,
but on the partners themselves in their individual capacity computed
on their distributive shares of partnership profits. Considering that
general professional partnerships are exempt from income tax,
payments made to these partnerships are not subject to withholding
tax pursuant to Section 2.57.5 of Revenue Regulations No. 2-98. 47
45
Exhibit "WWW" Annex "B-1"
46
G.R. Nos. 10928cl and 109446, October 3, 1994.
47
Sec. 2.57.5. Exemption from withholding.- The withholding of creditable withholding tax prescribed in
these Regulations shall not apply to income payments made to the following:
DECISION
CTA Case No. 7787
Page 16of32

Thus, the Professional Fees in the amount of P3,802,627.3648 ,

which are duly substantiated by accounts payable vouchers49 ,
together with supporting statement of accounts50 or official receipts51
billed by various GPPs, shall not be subject to EWT.

Anent the Professional Fees accrued based on estimates in the

amount of P1,162,625.10, the Independent CPA ascertained that it is
petitioner's practice to accrue the estimated Professional Fee expense
incurred for the month based on previous month's billings and/or
based on contracts. As the accrual is based only on the estimated
amount, petitioner did not subject the same to withholding tax. 52

However, petitioner did not present additional documents other

than its journal vouchers 53 and Summary of Accruals 54 , which are
self-serving, to support its allegation that the amount of
P1,162,625.10 is due to GPPs. Therefore, it may be subjected to
EWT.

Section 2.57.4 of Revenue Regulations No. 2-98, as amended

by Revenue Regulations No. 12-01, provides when the obligation to
withhold the tax arises, to wit:

"SEC. 2.57.4. Time of Withholding. - The

obligation of the payor to deduct and withhold the
tax under Section 2.57 of these Regulations arises
at the time an income payment is paid or payable,
or the income payment is accrued or recorded as
an expense or asset, whichever is applicable, in the
payor's books, whichever comes first. The term 'payable'
refers to the date the obligation becomes due,
demandable or legally enforceable.

Provided, however, that where income is not yet

paid or payable but the same has been recorded as an
expense or asset, whichever is applicable, in the payor's

(A) XXX
(B) Persons enjoying exemption from payment of income taxes pursuant to the provision of any law,
general or special, such as but not limited to the following: xxx
48
Exhibits "QQQ-l-A.5" and "QQQ-3-A.3".
49
Exhibits "QQQ-l-C.6", "QQQ-l-C.7", "QQQ-1-C.S", "QQQ-3-C.l ",and "QQQ-3-C.2".
50
Exhibits "QQQ-l-C.7.2", "QQQ-l-C.7.3", "QQQ-3-C.l.3", and "QQQ-3-C.2 to "QQQ-3-C.4".
51
Exhibits "QQQ-l-C.6.1 ", "QQQ-1-C.S. I", and "QQQ-3-C.l.4".
52
Exhibit "WWW", p. 12.
53
Exhibits "QQQ-l-C.5", "QQQ-4-C.2", and "QQQ"3-A.2".
54
Exhibits "QQQ-l-C.5.1" and "QQQ-4-C.2.2".
DECISION
CTA Case No. 7787
Page 17 of32

books, the obligation to withhold shall arise in the last

month of the return period in which the same is claimed
as an expense or amortized for tax purposes." (Emphasis
supplied)

Based on the foregoing prov1s1on, the duty of petitioner to

withhold arises when the Professional Fees are paid, becomes
payable, or are accrued/recorded as expense in petitioner's books,
whichever comes first. After which, the corresponding return and
remittances must be made within 10 days after the end of each
month, except for taxes withheld for the month of December of each
year, which shall be filed on or before January 25 of the following
year. 55

Applying the above prov1s1ons in the present case, it is

necessary to evaluate the case records as to the date when
petitioner's obligation to withhold arose.

First, it must be determined when petitioner accrued or

recorded the Professional Fees in its books and when was it claimed
as expense for tax purposes.

Petitioner's Annual Income Tax Return (ITR) for year 2004

shows that it claimed the accruals in the amount of P1,162,625.10 as
expense for the year 2004, though there was no income tax benefit
derived thereon as petitioner is exempt from paying tax on its income
from operation. However, the same cannot be given probative value
as it was not formally offered as evidence in the present case.
Consequently, what is left for determination is when did the income
payments of petitioner become payable, i.e., due, demandable or
legally enforceable, or has actually been paid.

Records, however, reveal that no supporting documents were

presented by petitioner to enable this Court to determine when the
amount was due for payment or actually paid. Thus, the same is
subject to 15% EWT.

"Section 2.58(A)(2) of Revenue Regulations 2-98, as amended by Revenue Regulations No. 12-01, Annex
"B"(2).
DECISION
CTA Case No. 7787
Page 18 of32

In sum, the total amount of P1,162,625.10 shall be subjected

to 15% EWT.

2. Professional Fees accrued and/or paid to non-residents-

P11,628,588.07 56

Petitioner claims that Professional Fees in the amount of

P11,628,588.07 pertains to payments and accruals to non-residents,
hence, exempt from EWT.

Based on the evidence presented, the Court finds the following:

Service Rendered Billing

Payee Reference for the month of: Date Amount
A. Exempt- 0 l!r. M ConsultanCY Fees Expense-Makati
November 2004
KPIC QQQ-4-A.4 QQQ-4-C.4. 2 ($50 000 at 56.097) 6-Dec-04 p 2 804 850.0
December 2004
KPIC QQQ-4-A.2 QQQ-4-C.2.2d ($50 000 at 56.341) none 2 817 050.00

Sub-total P5 621 900.00

B. Billed Prior to December 2004

Sept to Oct 2004
($1,455.46 at 56.349)-
Milbank QQQ-1-A.6 QQQ-1-C-10 Legal Fees Makati 17-Nov-04 p 82 013.72
September 2004
($2,000 at 56.341)-
Milbank QQQ-1-A.4 QQQ-4-C.2.2a Legal Fees Makati 17-Nov-04 112 682.00
November 2004
($58.594 at 56.231)-
Consultancy Fees-
Amec QQQ-6-A.3 000-6-C.1.3a Makati 26-Nov-04 3 294 828.45
October 2004
($7,852.12 at 56.319)-
Consultancy Fees-
RW Beck QQQ-6-A.3 QQQ-6-C.3.2a Makati 8-Nov-04 442 223.55
Sub-total P3,931,747.72

C. Billed in December 2004

November 2004
($2,922.75 at 56.312)-
Milbank QQQ-1-A.6 QQQ-1-C-9 Legal Fees-Makati 13-Dec-04 164 585.90
November 2004
($4,909.53 at 56.312)-
Consultancy Fees-
RW Beck QQQ-6-A.3 QQQ-6-C.2.3a Makati 13-Dec-04 276 465.45

Sub-total p 441051.35

D. No Proof of Billing/Payment
December 2004
($2,000 at 56.341)-
Milbank QQQ-1-A.4 QQQ-4-C.2.2a Legal Fees-Makati p 112 682.00

56
Exhibit "WWW", Annex "B-2".
DECISION
CTA Case No. 7787
Page 19 of32

November and
December 2004
($10,000 at 56.341)-
Winthrop Q00-1-A.4 000-4-C.2.2b Legal Fees-Makati 563 410.00
December 2004
($10,000 at 56.341)-
Consultancy Fees-
Amec QQQ-6-A.2 QQQ-4-C.2.2 Makati 563 410.00
December 2004
($7,000 at 56.341)-
Consultancy Fees-
RW Beck Q00-6-A.2 OQQ-4-C.2.2 Makati 394 387.00
Sub-total p 1 633 889.00

TOTAL Pll 628 588.07

Of the Professional Fees of P11,628,588.07, only the amount of

P5,621,900.00 represents payments to non-residents, the services of
which were performed outside the Philippines. Therefore, the said
amount of P5,621,900.00 is exempt from EWT because only income
payments to persons residing in the Philippines are subject to
creditable withholding tax pursuant to Section 2.57.2 of Revenue
Regulations No. 02-98.

The amount of P3,931,747.72 pertains to Professional Fees

billed prior to December 2004. Considering that the obligation of
petitioner to withhold the taxes arose during the periods prior to
December 2004, and though billed in consonance with the provisions
of Section 2.57.4 of Revenue Regulations No. 2-98 as amended by
Revenue Regulations No. 12-01, the same are already barred by
prescription. Thus, the said assessment should be cancelled.

On the other hand, the Professional Fees in the amount of

P441,051.35 should be subjected to EWT as the same refer to billings
made in December 2004 for which, at such time, petitioner is already
obligated to withhold the corresponding taxes.

As regards the remaining amount of P1,633,889.00, it cannot

be ascertained when the same was billed or actually paid; thus, the
assessment shall be sustained.

3. Professional Fees accrued based on estimated amounts -

P1,000,000.00 57

I Legal Fees- Makati P l,OOO,OOO.OQ

57
Exhibit "WWW", Annex "B-3".
DECISION
CTA Case No. 7787
Page 20 of32

The Independent CPA explained that the Legal Fees-Makati in

the amount of Pl,OOO,OOO.OO were Legal Fees accrued due to M.Y.
Chua Law Office58, a professional practitioner. The Independent CPA
noted that the said accrued Legal Fees, which were not subjected to
EWT, were reversed in JV No. 007447 dated January 4, 2005 59 •
Further, on January 27, 2005, petitioner received the actual billing
from M.Y. Chua Law Office amounting to Pl,028,100.0060 ; which was
recorded as Legal Fees per APV No. 02064761 • It appears that said
amount of Legal Fees were subjected to 15% EWT and the taxes due
were remitted to the BIR on February 9, 2005. 62 Considering the
foregoing, the said assessed item must be cancelled.

4. Reclassification of input VAT to expense accounts -

P609,694.1463

Reclassification of input VAT to expense TOTAL

accounts

p 76,665.50
P36,379.64
Legal Fees - Makati (40,285.86)

0 & M Consultancy Fees Expense - Makati 521 520.00 521,520.00

Consultancy Fees - 0 & M 51,794.50 51,794.50

Total p 609,694.14 P609,694.14

The amount of P88,174.1464 shows re-classification of input

VAT to expense account with previous vouchers supporting the
original entry made/transaction taken up in the GL supported by
journal vouchers65 with related billing statements, official receipts or
sales invoices66 • Original transactions and journal entry were taken up
in the books prior to December 2004 and pertains to billing from GPP
and non-resident; hence, not subject to EWT.

The reclassification of input VAT to O&M Consultancy Fees

Expense-Makati amounting to P521,520.0067 for Sithe Philippines _A
58
Exhibit "QQQ-1-C.5-1". i •
59
Exhibit "QQQ-1-C.5.2".
60
Exhibit "QQQ-1-C.5.1 0".
61
Exhibit "QQQ-1-C.5.6".
62
Exhibits "QQQ-1-C.5.13" to "QQQ-1-C.5.14".
63
Exhibit "WWW", Annex "B-4".
64
1'76,665.50 + (1'40,285.86) + 1'51,794.50.
65
Exhibits "QQQ-1-C.11 ", "QQQ-1-C.12" and "QQQ-7-C.1 ".
66
Exhibits "QQQ-!-C.ll.3", "QQQ-!-C.!!.4", "QQQ-!-C.I2.8" and "QQQ-7-C.I.5a" to "QQQ-7-C.I.5g".
67
Exhibits "QQQ-4-A.3" and "QQQ-4-C.3" to "QQQ-4-C.3.4".
 DECISION
CTA Case No. 7787
Page 21 of32

Holdings, Inc. originally billed and paid in year 2003 should, likewise,
not be subjected to EWT since petitioner's obligation to withhold tax
therefrom arose in 2003.

5. Others, unverified amount- P7,533.0068

The unverified amount of P7,533.00 included in the "Legal

Fees-Makati account" remained unaccounted; thus, the same should

still be included in the computation of EWT.

6. Professional Fees subject to EWT- P1,522,864.01 69

Subjected to
PROFESSIONAL FEES
SUBJECTED TO EWT 2% 10% 15% Total
Legal Fees - Makati
p - p - p 21 000.00
- - 50 000.00 P71,000.00
- 454 296.73 -
Consultancy Fees - Land
- 12 500.00 -
- 350 000.00 - P969,296.73
- - 152 500.00
Consultancy Fees - 0 & M 124 721.82 - - 124,721.82
Mat., Serv.-Surveying Serv.-O&M
RASA Survevinq - - 254 545.46 254 545.46
Mat., Serv.-Dam Monitoring-O&M
RASA Consultants - 103 300.00 - 103,300.00

Total P124 721.82 P920,096.73 p 478 045.46 P1 522 864.01

The amount of P124,721.82 included under Consultancy Fees -

O&M refers to purchase of internet services as evidenced by journal
vouchers with related billing statements and official receipts which
was properly subjected to 2% EWT. 70

Professional Fee in the amount of P350,000.00 included under

Consultancy Fees-Land pertains to payment to Smart Managers
Consultancy, Inc. 71 , which was subjected to 10% EWT instead of the
applicable rate of 15% for December 2004. Petitioner claims that it
has no tax deficiency after it made an additional payment in th~

68
Exhibit "WWW", Annex "B-5".
69
Exhibit "WWW", Annex "B-6".
70
Exhibits "QQQ-7-A", "QQQ-7-A.3", "QQQ-7-C.2", "QQQ-7-C.3". "QQQ-7-C.2.4" to "QQQ-7-C.2.5",
"QQQ-7-C.3.6", "QQQ-7-C.3.7", "Z", and "000-2-1".
71
Exhibit "QQQ-5-A.5".
DECISION
CTA Case No. 7787
Page 22 of32

amount of P17,500.00 on February 26, 2008, supported by BIR Form

No. 0605 and BIR official receipt72 •

However, considering that the withholding tax of P17,500.00

was already due for payment on January 15, 2005 but was remitted
only on February 26, 2008, the same shall be imputed with interest
computed from January 15, 2005 until February 26, 2008, pursuant
to Section 249(A) of the NIRC of 1997.

On the other hand, the remaining Professional Fees in the

amount of P1,048,142.19 73, which are duly supported by vouchers,
billing statements and official receipts74 , were properly subjected to
EWT.

7. Consultancy Fees subjected to withholding tax on

compensation - P1,406,425.0075

I O&M Consultancy Fees Expense - Makati I P1,406,425.00 I

The Independent CPA explained that the amount of

P1,406,425.0076 consists of payments to seconded employees which
were subjected to withholding tax on compensation; hence, not
subject to EWT. Examination of cash vouchers with supporting
77
documents and Monthly Remittance Return of Income Taxes
Withheld on Compensation 78 (BIR Form No. 1601-C) proves that
these were properly subjected to withholding tax on compensation.

8. Reversals of Professional Fees previously recorded in

November 2004- P7,262,912.4479

Legal Fees - Makati p (1 730 093.00)

Audit Expenses - Makati (128,329.44)
0 & M Consultancy Fees Expense -
Makati (2,808,050.00)
Consultancy Fees - Makati (2,246,440.00)
Consultancy Fees - Land (350,000.00)
Total p (7,262,912.44)

72
Exhibits "AA" and "AA~l".
73
1'1,522,864.01 less 1'124,721.82 less 1'350,000.00.
74
Exhibits "QQQ·l-A.2", "QQQ·l-A.3", "QQQ-5-A.2", and "QQQ-8-A".
75
Exhibit "WWW", Annex "B-7".
76
Exhibits "QQQ-4-A" and "QQQ-4-A.5".
77
Exhibits "QQQ-4-C.5" to "QQQ-4-C.6".
78
Exhibits "UUU", "UUU-1", and "UUU-2".
79
Exhibit ''WWW", Annex "B-8".
DECISION
CTA Case No. 7787
Page 23 of32

The Independent CPA explained that at the beginning of the

following month, the accrued expenses of immediately previous
month are automatically reversed, i.e., to credit same expense
accounts recorded for the prior month-end accruals. At the end of
the same month, petitioner would again accrue the estimated
expense if actual billing is still pending. However, upon receipt of the
actual billing, the amount of accruals will be reversed and the
expense would be set-up based on the actual billing. 80

Reversals of Professional Fees except reversal for Consultancy

81
Fees-Land of P350,000.00 in the total amount of P6,912,912.44
previously recorded in November 2004 were properly supported by
vouchers82 , showing reversals of previously recorded fee/expense
accounts accrued in November 2004 with attached journal vouchers
prepared in November 2004.

The amount of P350,000.00 is just a reclassification from one

expense account (Consultancy Fees-Land) to another expense
account (Information, Education, Comm Expense)83, already
previously subjected to EWT; hence, no additional EWT due.

In sum, petitioner should be held liable for deficiency EWT for

December 2004, as computed below:

EXPANDED WITHHOLDING TAX AMOUNT

Leqal Fees - Makati

Accrued to GPP p 750 000.00
Accrued to GPP 169 023.00
Actually billed and/or paid to non-residents* 164,585.90
Accrued to non-residents** 112,682.00
Accrued to non-residents** 563,410.00
Others unverified amount 7 533.00 p 1,767,233.90
Consultancy Fees- Makati
Actually billed and/or paid to non-residents* 276 465.45
Accrued to non-residents** 563 410.00
Accrued to non-residents** 394 387.00 1 234 262.45

Audit Expenses - Makati

Accrued to GPP 243,602.10

Mat., Services - Dam Monitoring - O&M RASA
Consultants

80
Exhibit "WWW", p. 12.
81
1'7,262,912.44 less 1'350,000.00.
82
Exhibits "QQQ-1-A.l ", "QQQ-3-A.l ", "QQQ-4-A.l ", and "QQQ-6-A.l ".
83
Exhibits "QQQ-5-A.l" and "QQQ-5-C.5".
DECISION
CTA Case No. 7787
Page 24 of32

Mat. Services-Dam Monitoring-Land -unverified 4 800.00

TOTAL P3,249,898.45

EWT Rate 15%

Basic EWT Due P487 484.77

Add: 25% Surcharge 121,871.19

Total Amount Due p 609,355.96

Deficiency on Increments for Late Remittance

of Withholding Taxes
Smart Managers Consultancy, Inc. [1'350,000.00 x
(15%- 10%)] P17,500.00
Add: 25% Surcharges 4,375.00
20% Interest (01-25-05 to 02-26-08)

[P17 500.00 X 20% X 1128 days+ 365] 10 816.44 15 191.44

Total tax due p 32,691.44

Less: Payments (02-26-08) rP350 00.00 x 5%1 17 500.00

Total Amount Due P15,191.44

* Billed 1n December 2004 totaling to 1'441,051.35.
** No Proof of billing/payment totaling to P1,633,889.00

II. Final Withholding Tax

Petitioner was assessed for deficiency FWT for taxable year

2004 in the amount of P108,822,142.2984 , allegedly for petitioner's
failure to provide the loan agreements so as to verify the veracity of
the payments on loans, as well as the final withholding taxes paid,
computed as follows:

Final Tax- On Foreign Banks and Non-Resident Foreign

Corporation
Accrued Interest Expense Payable - Beginning I
FS p 64,914,248.00
Add: Interest Expense I FS 588,904 471.24
Total p 653,818 719.24
Less: Accrued Interest Expense Payable - Ending I
FS 71,009,131.00
Interest Expense Paid p 582 809,588.24

Final Tax on Interest Expense paid to Foreign Banks 10%

(Section 28(A)(7)(b) of the N.I.R.C., as amended) p 58,280 958.82
Final Tax on dividends declared 32%
(Section 28(B)(5)(b) of the N.I.R.C., as
amended) p 164,053 308.15

84
Exhibit "4-D", BIR Records, p. 2625.
DECISION
CTA Case No. 7787
Page 25 of32

Other Payments to Non-Resident Foreign

Corporations

Consultancy Fee Paid to:

SHKPSL Notes to FS no. 17 P13 912 812.00

KPIC Notes to FS no. 17 35 313 747.00

HARZA Per trial balance 5,770 879.07

Commitment fee paid to KPIC Notes to FS no.
17 8,580 216.00

TOTAL P63 577 654.07

Final Tax on Other payments to non-resident foreign
corporations_132%)
{Section 28(8)(1) of the N.I.R.C., as amended} p 20,344,849.30
Total Final Tax per Audit p 242,679,116.28
Less: Final Tax remitted 175,296,984.83
Balance p 67 382,131.45
20% Interest {Section 249(A) of the N.I.R.C., as
amended} 41,440,010.84

Total Amount Due P108,822,142.29

To summarize, the assessment is composed of the following:

Final Tax on:

Interest Expense paid to Foreign Banks (10%) P58,280,958.82

Dividends declared (32%) 164,053,308.15
Payments to non-resident foreign corporations
(32%) P20,344 849.30

Records indicate that the final tax on dividends declared

amounting to P164,053,308.15 was remitted on September 8, 2004,
as evidenced by BIR Form No. 1601-F for August 200485 • No
dividend declaration or payment was recorded for December 2004;
thus, there are only two components left for discussion, namely: the
final tax on interest expense paid to foreign banks in the amount of
P58,280,958.82 and the final tax on payments to non-resident
foreign corporations in the amount of P20,344,849.30.

A. Final tax on interest expense paid to foreign banks

P58,280,958.82

85
Exhibit "II".
DECISION
CTA Case No. 7787
Page 26 of32

Per Detailed General Ledger'l 6, total interest expense balance

recorded for the month of December 2004 amounts to only
P49,890,550.88, to wit:
Balances Balance for
for the year December
Interest Expense Exhibit 2004 Exhibit 2004
I' I'
Tranche A RRR-2-b 291,223 976.14 RRR-2-a 24,907,333.82
Tranche B RRR-2-d 186 913 781.78 RRR-2-c 15 495 359.19

Tranche C RRR-2-f 110 766 713.30 RRR-2-e 9 487 857.87

I' I'
Total Amount per GL RRR-1 588,904 471.22 49,890,550.88

Computations of interest expense are broken down to Tranches

A, B, and C Credit Agreements to determine the portions which are
exempted from Philippine income taxation and which are subject to
preferential tax rate of 10%.

Petitioner submits that the interest payments made to foreign

banks noted by respondent were for the (a) loans from the Export-
Import Bank of Japan (JEXIM)-Tranche A Senior Loans; (b)
syndicated loans from the private sector guaranteed by JEXIM-
Tranche B Senior Loans; and (c) syndicated loans from the private
Sector-Tranche C Senior Loans. The loans financed or guaranteed by
JEXIM were pursuant to JEXIM Credit Facility Agreement87, JEXIM
Participation AgreementB8 , and Political Risk Guarantee AgreementB 9 •
While, the loans financed by the private sector were pursuant to the
Tranche C Credit Agreement90 •

Of the total interest expense recorded for the month of

December 2004 totaling to P49,890,550.88, P40,402,693.01 pertains
to interest expense on Tranches A and B loans which was not
subjected to FWT caused by petitioner's reliance on BIR Ruling DA-
ITAD No. 113-03 dated August 1, 2003. 91 Only the amount of
P9,487,857.87 interest expense on Tranche C loan agreement for the
month of December 2004 was subjected to 10% final tax, which was~
duly remitted on January 12, 2005. 92 r
86
Exhibits "RRR-2.1" to "RRR-2.12".
87
Exhibits "RRR-4-B" and "RRR-7".
88
Exhibit "RRR-5".
89
Exhibit "RRR-6".
90
Exhibit "RRR-4-C.l" to "RRR-4-C.46".
91
Exhibit "FFF".
92
Exhibits "MM" and "RRR-14-L"
DECISION
CTA
Page 27Caseof32No. 7787
Considering that the facts set out in BIR Ruling No. DA-ITAD
113-03 and those facts uncovered in petitioner's documentary
evidence93 are the same, the opinion of respondent in said BIR Ruling
deserves respect.

Thus, following by analogy the ruling in Commissioner of

Internal Revenue vs. San Roque Power Corporatiorr4 , petitioner can
legally rely on BIR Ruling No. DA-ITAD 113-03 from the time of its
issuance until after it will be reversed. As confirmed in BIR Ruling
No. DA-ITAD 113-03, the interest income derived by petitioner's non-
resident foreign lender-banks from loans financed or guaranteed by
the Export-Import Bank of Japan (JEMIX), being a financial institution
wholly owned by the Japanese government, is exempt from
Philippine income tax.

B. Final Tax on payments made to non-resident foreign

corporations - P20,344,849.30.

1. Consultancy Fees paid to SHKPSL, KPIC and HARZA -

P54,997,438.07

The Independent CPA summarized the Consultancy Fees paid

to SHKPSL (SHKPS or Sithe Hong Kong Power Services, Ltd.), KPIC
(Kansai Power International Corporation), and HARZA (HECI or Harza
Engineering Company International, L.P.) recorded in December 2004
as follows:

Total
Total Amount Transactions
recorded prior recorded in
Total to December December
Consultancy Fee Amount 2004 Exhibit 2004
5H KP5 traced to Note I' I'
17 of AF5 13 912 812.00 13 912 812.50 555-5-A I' (0.50)
KPIC traced to Note
17 of AF5 35 313 747.00 31 102 471.57 555-5-B 4,211 275.43
HECI traced to trial
balance 5 770 879.07 5 296 683.37 555-5-C 474 195.70
p p p
Total 54,997,438.07 50,311,967.44 4,685,470.63

Based on records, there were no consultancy payments to

~~x~:~ . :::_4~:~''R::~,~:R:5'~::::,~:~R~~,~~:.RR=:~D"~~n:~~R:~~~~,~~R-~~
94 G.R. No. 187485, February 12,2013, pp. 39 to 40.
J".
r
DECISION
CTA Case No. 7787
Page 28 of32

SHKPS amounting to P13,912,812.50 pertain to Consultancy Fee for

the period prior to December 2004, which shall be cancelled outright
as the same are already barred by prescription.

As regards the Consultancy Fees in the amount of

P4,685,470.63, the Independent CPA, based on his further
examination of vouchers, invoices, billings and related documents for
the month of December 2004, noted the following: 95

Materials,
O&M Services-
Consultancy Consultants
Findings Fees-Makati (DA-O&Ml Total Exhibit
a. Consultancy fee for
seJVices rendered
offsite from November
1-30, 2004 pursuant to
the O&M Consulting QQQ-4-A.4
Agreement with JV,
invoice from KPIC,
recorded only
December 2004 I' 2,804,850.00 1'2,804,850.00
b. Payments to Mr. Kiyosh i
Washihira seconded to
QQQ-4-A.5,
the Company-subjected
QQQ-4-C.6
to withholding tax on
compensation 656 331.85 656 331.85
c. Payments to Mr. Naoki
Kobayashi seconded to
QQQ-4-A.5,
the Company- subjected
QQQ-4-C.5
to withholding tax on
compensation 750 093.15 750 093.15
d. Payment for
Professional fees
rendered for the offsite
activities relative to the
review of reports as
555-5-C
described in Project
Activities for Period
November 1-30, 2004
recorded only
December 2004 192 490.70 192 490.70
e. Professiona I fees
accrued for December
2004 with JV and
555-5-C
schedule of expense
accrual for offsite
seJVices 281,705.00 281,705.00
I' p
Total 4,211,275.00 474195.70 1'4,685,470.70

The Consultancy Fee for services rendered offsite in the

amount of P2,804,850.00 pursuant to Operation and Maintenance r
95
Exhibit "WWW", pp. 23 to 24.
DECISION
CTA Case No. 7787
Page 29 of32

("O&M'') Consulting Agreement with SHKPS96 , Amended and Restated

Operation and Maintenance Consulting Agreement97 , and Amendment
Agreement with KPIC98 with related supporting documents99 pertains
to payments to non-residents for services rendered outside the
Philippines; hence, exempt from income tax and FWT.

With regard to payments to seconded employees, Mr. Kiyoshi

Washihira and Mr. Naoki Kobayashi, in the amount of
P1,406,425.00 100, the same were properly subjected to withholding
tax on compensation, as evidenced by Monthly Remittance Return of
Income Taxes Withheld on Compensation 101 (BIR Form No. 1601-C).
Accordingly, the said payments are not subject to FWT.

Anent the amount of P192,490.70, which refers to payment to

HECI under Consulting and Professional Services Agreement102, a
scrutiny of the supporting sales invoice103 shows that the services
involved were rendered outside the Philippines. Hence, it should be
considered income derived from sources outside the Philippines and
not subject to Philippine income tax as well as to FWT.

The Professional Fees accrued for HECI's offsite services in the

amount of P281,705.00 (letter "e'') were supported by Consulting and
Professional Services Agreement104, vouchers, schedule of expense
accrual, and invoices 105 ; thus, not subject to FWT.

2. Commitment Fee paid to KPIC - P8,580,216.00

Based on the Schedule of Professional Fees-KPIC106, accounts

payable/journal vouchers, invoices and other relevant supporting
documents 107, Commitment Fee paid to KPIC amounting to
P8,580,216.00 involves transactions prior to December 2004.
Therefore, the assessment pertaining thereto shall be cancelled due}\
to prescription. r
96
Exhibit "SSS-1 ".
97
Exhibit "SSS-2".
98
Exhibit "MMM".
99
Exhibits "QQQ-4-C.4" and "QQQ-4-C.4.2" to "QQQ-4-C.4.4".
100
1'656,331.85 add 1'750,093.15.
101
Exhibits "UUU'', "UUU-1", and "UUU-2".
102
Exhibit "SSS-3".
103
Exhibits "SSS-5-C-12.3a" to "SSS-5-C-12.3c".
104
Exhibit "SSS-3".
105
Exhibits "SSS-5-C" and "SSS-5-C-11" to "SSS-5-C-12".
106
Exhibit "SSS-6".
107
Exhibits "SSS-6-A-1" to "SSS-6-A-6".
DECISION
CTA Case No. 7787
Page 30 of32

To recapitulate, the assessment for the entire FWT shall be

cancelled while the assessment for deficiency expanded withholding
tax for December 2004 shall be reduced to P487,484.77.

Additionally, petitioner is liable to pay surcharge in the amount

of P121,871.19 (P487,484.77 at 25%), pursuant to Section 248(3) of
the NIRC of 1997; interest at the rate of 20% per annum on the
basic deficiency EWT of P487,484.77, computed from January 15,
2005 until full payment thereof, pursuant to Section 249(A) of the
NIRC of 1997; and delinquency interest at the rate of 20% per
annum on the basic deficiency EWT of P487,484.77, computed from
February 14, 2008 until full payment thereof, pursuant to Section
249(C)(3) of the NIRC of 1997.

As regards the late remittance of the balance of the EWT on

the Professional Fees (Consultancy Fees-Land) in the amount of
P17,500.00, petitioner is liable to pay respondent interest thereon at
the rate of 20% per annum from the date prescribed for its payment
(i.e., on January 15, 2005) 108 until the full payment of the said
balance on February 26, 2008, equivalent to the amount of
P 10,902.50, pursuant to Section 249(A) of the NIRC of 1997.

WHEREFORE, in view of the foregoing considerations, the

Petition for Review is PARTIALLY GRANTED. The deficiency final
withholding tax for December 2004 is hereby CANCELLED and SET
ASIDE, while the assessment for basic deficiency EWT for December
2004 is hereby REDUCED to P487,484.77.

Moreover, petitioner is hereby ORDERED to pay respondent

the said basic deficiency EWT, and the following surcharge and
interests, to wit:

1) surcharge in the amount of P121,871.19 (P487,484.77 at

25%), pursuant to Section 248(3) of the NIRC of 1997;

2) interest at the rate of 20% per annum on the basic

deficiency EWT of P487,484.77, computed from January
15, 2005 until full payment thereof, pursuant to Section
249(A) of the NIRC of 1997; and

3) delinquency interest at the rate of 20% per annum on the

_ _ _ _b_a_si_c_d_e_fi_ciency EWT of P487,484.77, computed from~
108
Section 2.58(A)(2), Revenue Regulations No. 2-98, as amended.
DECISION
CTA Case No. 7787
Page31 of32

February 14, 2008 until full payment thereof, pursuant to

Section 249(C)(3) of the NIRC of 1997.

Lastly, as regards the late remittance of the balance of the EWT

on the Professional Fees (Consultancy Fees-Land) in the amount of
P17,500.00, petitioner is hereby ORDERED to pay respondent
interest thereon at the rate of 20% per annum from the date
prescribed for its payment (i.e., on January 15, 2005) 109 until the full
payment of the said balance on February 26, 2008, equivalent to the
amount of P 10,902.50, pursuant to Section 249(A) of the NIRC of
1997.

SO ORDERED.
.
ER~.UY
Associate Justice

I CONCUR:

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.

E~P.UY
Associate Justice
Chairperson

109
Section 2.58(A)(2), Revenue Regulations No. 2-98, as amended.
DECISION
CTA Case No. 7787
Page 32 of32

CERTIFICATION

Pursuant to Section 13 of Article VIII of the Constitution, 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's Division.

Presiding Justice