November 2010 Philippine Supreme Court Decisions on Tax Law

Here are selected November 2010 rulings of the Supreme Court of the Philippines on tax law:

Court of Tax Appeals; jurisdiction; other matters. The jurisdiction of the Court of Tax Appeals (CTA) over “other matters” is found in number 1 of Section 7 of Republic Act No. 1125, as amended. Under this provision, the CTA exercises exclusive appellate jurisdiction to review by appeal decisions of the Commissioner of Internal Revenue (CIR) in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other law as part of law administered by the Bureau of Internal Revenue (BIR). The term “other matters” is limited only by the qualifying phrase that follows it. The appellate jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or refunds. It covers other cases that arise out of the NIRC or related laws administered by the BIR. The issue of whether or not the BIR’s right to collect taxes had already prescribed is a subject matter falling under the NIRC. In connection therewith, the NIRC also states that the collection of taxes is one of the duties of the BIR. Thus, from the foregoing, the issue of prescription of the BIR’s right to collect taxes may be considered as covered by the term “other matters” over which the CTA has appellate jurisdiction. Commissioner of Internal Revenue vs Hambrecht & Quist Philippines, Inc., G.R. No. 169225, November 17, 2010.

Court of Tax Appeals; petition for review with Court of Tax Appeals en banc; motion for reconsideration mandatory.   Rule 8, Section 1 of the Revised Rules of Court of Tax Appeals (CTA) requiring that “the petition for review of a decision or resolution of the Court in Division must be preceded by the filing of a timely motion for reconsideration or new trial with the Decision” is mandatory. The word “must” clearly indicate the mandatory- not merely directory- nature of a requirement. The rules are clear. Before the CTA En Banc could take cognizance of the petition for review concerning a case falling under its exclusive appellate jurisdiction, the litigant must sufficiently show that it sought prior reconsideration or moved for a new trial with the concerned CTA division. Procedural rules are not to be trifled with or be excused simply because their non-compliance may have resulted in prejudicing a party’s substantive rights. Rules are meant to be followed. They may be relaxed only for very exigent and persuasive reasons to relieve a litigant of an injustice not commensurate to his careless non-observance of the prescribed rules. Commissioner of Customs vs. Marina Sales, Inc., G.R. No. 183868, November 22, 2010.

Court of Tax Appeals; petition for certiorari; requisites. In order for a petition for certiorari to succeed, the following requisites must concur: (a) the writ is directed against a tribunal, a board, or any officer exercising judicial or quasi-judicial functions, (b) such tribunal, board or officer has acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and (c) there is no appeal, or any plain, speedy and adequate remedy in the ordinary course of law. “Without jurisdiction” denotes that the tribunal, board or officer acted with absolute lack of authority. There is “excess of jurisdiction” when the public respondent exceeds its power or acts without any statutory authority. “Grave abuse of discretion” connotes such capricious and whimsical exercise of judgment as to be equivalent to lack or excess of jurisdiction; otherwise stated, power is exercised in an arbitrary or despotic manner by reason of passion, prejudice, or personal hostility; and such exercise is so patent or so gross as to amount to an evasion of a positive duty or to a virtual refusal either to perform the duty enjoined or to act at all in contemplation of law. The grant or denial of a motion for postponement is addressed to the sound discretion of the court which should always be predicated on the consideration that more than the mere convenience of the courts or of the parties, the ends of justice and fairness should be served thereby. Furthermore, this discretion must be exercised intelligently. In this case, the taxpayer was given more than ample time to collate and gather its evidence. Accordingly, its right to due process was not transgressed.  Milwaukee Industries Corporation vs. Court of Tax Appeals and Commissioner of Internal Revenue, G.R. No. 173815, November 24, 2010.

Prescriptive period; suspension; collection of taxes. The validity of the assessment itself is a separate and distinct issue from the issue of whether the right of the Commissioner of Internal Revenue (CIR) to collect the validly assessed tax has prescribed. The following requisites must concur before the period to enforce collection may be suspended: (a) the taxpayer requests for reinvestigation and (b) the CIR grants such request. Consequently, the mere filing of a protest letter which is not granted does not operate to suspend the running of the period to collect taxes. Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines, Inc., G.R. No. 169225, November 17, 2010.

National Internal Revenue Code; assessment; letter of authority; scope. Under the National Internal Revenue Code (Tax Code), a letter of authority (LOA) is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax. There must be a grant of authority before any revenue officer can conduct an examination or assessment. The revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity.LOA 19734 covered “the period 197 and unverified prior years.” Thus, the Commissioner of Internal Revenue (CIR) acting through its revenue officers went beyond the scope of their authority because the deficiency value-added tax assessment they arrived at was based on records from January to March 198 or using the fiscal year which ended in March 31, 1998. The CIR knew which period should be covered by the investigation. If the CIR wanted to or intended the investigation to include the year 1998, it should have done so by including it in the LOA or issuing another LOA. Moreover, the coverage of LOA 19734, particularly the phrase “and unverified prior years,” violated section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, which provides that a LOA should cover a taxable period not exceeding one taxable year.  Commissioner of Internal Revenue vs. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010.

National Internal Revenue Code; input value-added tax; source of payment irrelevant. Taxpayer’s deficiency value-added tax (VAT) assessment stemmed from the Commissioner of Internal Revenue’s (CIR) disallowance of the input VAT credits that should have been realized from the advertising expense of the taxpayer. It is evident under section 110 of the National Internal Revenue Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. There is no denying that taxpayer incurred advertising expense, the advertising companies issued invoices in the name of the taxpayer and the latter paid for the same. The taxpayer incurred and paid for advertising expense/services. Where the money came from is another matter all together but will definitely not change said fact. .  Commissioner of Internal Revenue vs. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010.

National Internal Revenue Code; output value-added tax; subsidy from affiliate.   The subsidy, which was termed by the Commissioner of Internal Revenue (CIR) as reimbursement, which was not even exclusively earmarked for the taxpayer’s advertising expense but was an assistance or aid in view of taxpayer’s dire or adverse economic conditions, and was only “equivalent to the [taxpayer’s] advertising expenses,” is not subject to value-added tax (VAT). Under section 106 of the National Internal Revenue Code, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. There was no such sale, barter or exchange in the subsidy given by its parent to the taxpayer. It was but a dole out by the affiliate and not in payment for goods or properties sold, bartered or exchanged by the taxpayer. The Court has previously ruled that services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. In this case, however, the taxpayer did not render any service to its affiliate at all. The services rendered by the advertising companies, paid for by the taxpayer using its affiliate’s dole-out, were for the taxpayer and not its affiliate. The affiliate just gave assistance to taxpayer in the amount equivalent to the latter’s advertising expense but never received any goods, properties or service from taxpayer.  Commissioner of Internal Revenue vs. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010.

National Internal Revenue Code; royalties; time of withholding; payment or accrual. Under Revenue Regulations 2-98, as amended, taxpayer is required to deduct and withhold final taxes on royalty payments when the royalty is paid or is payable. After which, the corresponding return and remittance must be made within ten (10) days after the end of each month. Under the Manufacturing License Agreement (MLA) between taxpayer and Sony-Japan, taxpayer should pay Sony-Japan within two (2) months after every semi-annual period which ends in June 30 and December 31. However, there was an accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the final withholding taxes should have been paid or remitted by the taxpayer to the Commissioner of Internal Revenue on January 10, 1998 and July 10, 1998, or ten (10) days from its accrual. Commissioner of Internal Revenue vs. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010.

National Internal Revenue Code; value-added tax; invoicing requirements; imprinting of word “zero-rated”.  The issue of whether the word “zero-rated” should be imprinted on invoices and/or official receipts as part of the invoicing requirements has been settled by the Court in previous cases. As the Court stated in the previous case of Panasonic Communications Imaging Corporation of the Philippines vs Commissioner of Internal Revenue, section 4.108-1 of Revenue Regulations No. (RR) 7-95 [which required the imprinting of the word “zero-rated” on the value-added tax (VAT) invoice or receipt] proceeds from the rule-making authority granted to the Secretary of Finance under the National Internal Revenue Code of 1977 for the efficient enforcement of the tax code and its amendments. The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. Following said ruling, section 4.108-1 of RR 7-95 neither expanded nor supplanted the tax code but merely supplemented what the tax code already defined and discussed. In fact, the necessity of indicating “zero-rated” into VAT invoices/receipts became more apparent when the provisions of this revenue regulations was later integrated into Republic Act No. 9337, the amendatory law of the National Internal Revenue Code of 1997. As the taxpayer failed to indicate in its VAT invoices and receipts that the transactions were zero-rated, it failed to comply with the correct substantiation requirement for zero-rated transactions. KEPCO Philippines Corporation vs. Commissioner of Internal Revenue,  G.R. No. 181858, November 24, 2010.

National Internal Revenue Code; value-added tax; invoicing requirements; imprinting of TIN VAT. Section 4.108-1 of Revenue Regulations No. 7-95 specifically requires the value-added tax (VAT) registered person to imprint TIN-VAT on its invoices or receipts. The Court agrees with the Court of Tax Appeals that to be considered a “VAT invoice,” the TIN-VAT must be printed, and not merely stamped. Consequently, purchases supported by invoices or official receipts, wherein the TIN-VAT is not printed thereon, shall not give rise to any input VAT. Likewise, input VAT on purchases supported by invoices or official receipts which are NON-VAT are disallowed because these invoices or official receipts are not considered as “VAT invoices.” KEPCO Philippines Corporation vs. Commissioner of Internal Revenue, G.R. No. 181858, November 24, 2010.

National Internal Revenue Code; input value-added tax; invoices and official receipts. Under the law, a value-added tax (VAT) invoice is necessary for every sale, barter or exchange of goods or properties which a VAT official receipt properly pertains to every lease of goods or properties, and for every sale, barter or exchange of services. The Court distinguished an invoice from a receipt in Commissioner of Internal Revenue vs Manila Mining Corporation. Thus, a “sales or commercial invoice” is a written account of goods sold or services rendered indicating the price charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services.  A “receipt,” on the other hand, is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer. In other words, the VAT invoice is the seller’s best proof of the sale of the goods or services to the buyer while the VAT receipt is the buyer’s best evidence of the payment of goods or services received from the seller. Even though the VAT invoices and receipts are normally issued by the supplier/seller alone, the said invoices and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods sold and their selling price (proof of transaction), and the best means to prove the input VAT payments (proof of payment). Hence, VAT invoice and VAT receipt should not be confused as referring to one and the same thing. Although the Court of Tax Appeals (CTA) is not strictly governed by technical rules of evidence, invoicing and substantiation requirement must be followed because it is the only way to determine the veracity of the taxpayer’s claims. The CTA correctly disallowed the input VAT that did not meet the required standard of substantiation.  KEPCO Philippines Corporation vs. Commissioner of Internal Revenue, G.R. No. 181858, November 24, 2010.

Tariff and Customs Code; Tariff Heading H.S. 2106.90 50; original character of article must be retained. To fall under Tariff Heading H.S. 2106.90 50, which calls for a higher import duty rate of 7%, the imported articles must not lose their original character. The laboratory analysis of importer’s samples yielded a different result. The report supported importer’s position that the subject importations are not yet ready for human consumption. The juice compounds could not be taken in their raw form because they are highly concentrated and must be mixed with other additives before they could be marketed as Sunquick juice products. If taken in their unprocessed form, the concentrates without the mixed additives would produce a sour taste. The concentrates, to be consumable, must have to lose their original character. The importer transforms said juice compounds, being raw materials, into a substance suitable for human consumption. Contrary to the Commissioner of Customs’ assertions, empirical evidence shows that the subject importations would have to undergo a laborious method, as shown by its manufacturing flowchart and manufacturing process, to achieve their marketable juice consistency. Accordingly, the 1% tariff import duty rate under Tariff Heading H.S. 2106.90 10 was correctly applied to the subject importations. Commissioner of Customs vs. Marina Sales, Inc., G.R. No. 183868, November 22, 2010.

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