[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal place of business at Aboitiz Corporate Center, Banilad, Cebu City.
The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru Revenue Officer Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency income, value-added [tax] (VAT) and withholding tax liabilities.
As a result of the investigation, the following assessment notices were issued against [PMFC]:
- Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998, demanding payment for deficiency withholding taxes for the year 1996 in the sum of P384,925.05 (inclusive of interest and other penalties);
- Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998, demanding payment of deficiency value-added tax in the sum of P5,017,778.01 (inclusive of interest and other penalties); and
- Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998, demanding payment of. deficiency income tax for the year 1996 in the sum of P4,359,046.96 (inclusive of interest and other penalties).
The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On December 29, 1998, [PMFC] filed a protest letter against the aforementioned deficiency tax assessments through the Regional Director, Revenue Region No. 13, Cebu City.
In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the deficiency tax liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30, broken down as follows:
- Deficiency withholding tax from P384,925.05 to P197,780.67;
- Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and
- Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.
On the basis of the foregoing facts, PMFC filed its Petition for Review on August 9, 2000. In the “Joint Stipulation of Facts” filed on March 7, 2001, the parties have agreed that the following are the issues to be resolved:
- Whether [PMFC] is liable for the payment of deficiency income, value-added, expanded withholding, final withholding and withholding tax (on compensation).
- On the P1,180,382.84 deficiency income tax
- Whether or not the P5,895,694.66 purchases of raw materials are unsupported;
- Whether the cancelled invoices and expenses for taxes, repairs and freight are unsupported;
- Whether commission, storage and trucking charges claimed are deductible; and
- Whether the alleged deficiency income tax for the year 1996 was correctly computed.
- Whether [CIR’s] decision on the 1996 internal revenue tax liabilities of [PMFC] is contrary to law and the facts.
After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming the assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency interest) representing [PMFC’s] Income, VAT and Withholding Tax deficiencies for the taxable year 1996 plus 20% delinquency interest per annum until fully paid.
The [CTA] in Division ruled as follows:
However, [PMFC’s] contention that the NIRC of 1977 did not impose substantiation requirements on deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237 of the National Internal Revenue Code of 1997] provides:
SEC. 238. Issuance of receipts or sales or commercial invoices. – All persons, subject to an internal revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the case of sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount, where the sale or transfer is made by persons subject to value-added tax to other persons, also subject to value-added tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer, or client.
The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve the same in his place of business for a period of three (3) years from the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of business for a like period.
From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices because of [PMFC’s] failure to present said invoices.
A scrutiny of the invoices supporting the remaining balance of P4,613,426.45 (P5,893,694.64 less P1,280,268.19) revealed the following:
- In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods Corporation was erased and on top of it the name [PMFC] was inserted but with a counter signature therein;
- For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as Exhibits B-7 and B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7 is a photocopy thereof. Both exhibits contained the word Mauri which was inserted on top and between the words Pilmico and Foods.
The only difference is that in the original copy (Exhibit B-11), there was a counter signature although the ink used was different from that used in the rest of the writings in the said invoice; while in the photocopied invoice (Exhibit B-7), no such counter signature appeared. [PMFC] did not explain why the said countersignature did not appear in the photocopied invoice considering it was just a mere reproduction of the original copy.
The official receipts presented by [PMFC] x x x, cannot be considered as valid proof of [PMFC’s] claimed deduction for raw materials purchases. The said receipts did not conform to the requirements provided for under Section 238 of the NIRC of 1977, as amended.
First the official receipts were not in the name of [PMFC] but in the name of Golden Restaurant. And second, these receipts were issued by PFC and not the alleged seller, JTE.
Likewise, [PMFC’s] allegations regarding the offsetting of accounts between [PMFC], PFC and JTE is untenable.
Considering that the official receipts and sales invoices presented by [PMFC] failed to comply with the requirements of Section 238 of the NIRC of 1977, the disallowance by the [CIR] of the claimed deduction for raw materials is proper.
PMFC filed a Motion for Partial Consideration on January 21, 2005 but PMFC’s Motion for Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit.
PMFC then filed a petition for review before the CTA en banc, which adopted the CTA First Division’s ruling and ratiocinations.
Whether Sec. 29 of the 1977 NIRC and not by Sec. 238 of the 1977 NIRC will governed in determining the deductibility of the purchase of raw materials from gross income.
NIRC of 1977
Section 29 as last updated by RA 7497 (1992) Deductions from gross income- n computing taxable income subject to tax under Sections 21(a); 24(a), (b), and (c); and 25(a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That, in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions:
a. Raw materials, supplies and direct labor; xxx
NIRC of 1997
SEC. 34. Deductions from Gross Income. – Except for taxpayers earning compensation income- xxx
b) Substantiation Requirements. – No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.
NIRC of 1977
SEC. 238. Issuance of receipts or sales or commercial invoices.-
All persons, subject to an internal revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or more, issue receipts or sales or commercial invoices…xxx
NIRC of 1997
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: xxx
NO. The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together, and not for one provision to be accorded preference over the other.
It is undisputed that among the evidence adduced by PMFC on it behalf are the official receipts of alleged purchases of raw materials. Thus, the CTA cannot be faulted for making references to the same, and for applying Section 238 of the 1977 NIRC in rendering its judgment. Required or not, the official receipts were submitted by PMFC as evidence. Inevitably, the said receipts were subjected to scrutiny, and the CTA exhaustively explained why it had found them wanting.
It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from substantiating claims for deductions. While official receipts are not the only pieces of evidence which can prove deductible expenses, if presented, they shall be subjected to examination. PMFC submitted official receipts as among its evidence, and the CTA doubted their veracity. PMFC was, however, unable to persuasively explain and prove through other documents the discrepancies in the said receipts. Consequently, the CTA disallowed the deductions claimed, and in its ruling, invoked Section 238 of the 1977 NIRC considering that official receipts are matters provided for in the said section.
WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and Resolution dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No. 97 are AFFIRMED. However, MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the finality of this Resolution until full satisfaction, is here imposed upon the amount of P2,804,920.36 to be paid by Pilmico-Mauri Foods Corporation to the Commissioner of Internal Revenue.
credit to: Rhiz Bantillo