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SUPREME COURT REPORTS ANNOTATED VOLUME 635
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on 30 March 2006 is REVERSED
and SET ASIDE. The decision of
Branch 139 of the Regional Trial
Court of Makati City in Civil Case
No. 00-787, as well as the decision of
Branch 61 of the Metropolitan Trial
Court of Makati City in Civil Case
No. 52400 against the spouses
Bienvenido and Editha Broqueza,
are AFFIRMED. Costs against
respondents.
SO ORDERED.
Nachura, Peralta, Abad and
Mendoza, JJ., concur.
Petition granted, judgment
reversed and set aside.
Note.·It has been held that in a
business establishment, an
identification card is usually
provided not just as a security
measure but to mainly identify the
holder thereof as a bona fide
employee of the firm who issues it.
(Television and Production
Exponents, Inc. vs. Servaña, 542
SCRA 578 [2008])
··o0o··
G.R. No. 178697. November 17,
2010.*
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. SONY
PHILIPPINES, INC., respondent.
Taxation; Assessment; Letter of
Authority (LOA); A Letter of
Authority or (LOA) is the authority
given to the appropriate revenue
officer assigned to perform
assessment functions.·Based on
Section 13 of the Tax Code, a Letter
of Authority or 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. The very
provision of the Tax Code that the
CIR relies on is unequivocal with
_______________
* SECOND DIVISION.
235
VOL. 635, NOVEMBER 17, 235
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
regard to its power to grant
authority to examine and assess a
taxpayer.
Same; Same; Same; In the
absence of such an authority, the
assessment or examination is a
nullity.·There must be a grant of
authority before any revenue officer
can conduct an examination or
assessment. Equally important is
that 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.
Same; Same; It is evident under
Section 110 of the 1997 Tax Code
that an advertising expense duly
covered by a Value Added Tax (VAT)
invoice is a legitimate business
expense.·The Court is not
persuaded. As aptly found by the
CTA-First Division and later
affirmed by the CTA-EB, SonyÊs
deficiency VAT assessment stemmed
from the CIRÊs disallowance of the
input VAT credits that should have
been realized from the advertising
expense of the latter. It is evident
under Section 110 of the 1997 Tax
Code that an advertising expense
duly covered by a VAT invoice is a
legitimate business expense. This is
confirmed by no less than CIRÊs own
witness, Revenue Officer Antonio
Aluquin. There is also no denying
that Sony incurred advertising
expense. Aluquin testified that
advertising companies issued
invoices in the name of Sony and the
latter paid for the same. Indubitably,
Sony incurred and paid for
advertising expense/
services. Where the money came
from is another matter all together
but will definitely not change said
fact.
Same; Same; Value Added Tax
(VAT); Services rendered for a fee
even on reimbursement-on-cost basis
only and without realizing profit are
also subject to Value Added Tax
(VAT).·In the case of CIR v. Court
of Appeals (CA), 329 SCRA 237
(2000), the Court had the occasion to
rule that services rendered for a fee
even on reimbursement-on-cost basis
only and without realizing profit are
also subject to VAT. The case,
however, is not applicable to the
present case. In that case,
COMASERCO rendered service to
its affiliates and, in turn, the
affiliates paid the former
reimbursement-on-cost which means
that it was paid the cost or expense
that it incurred although without
profit. This is not true in the present
case. Sony did not render any service
to SIS at all. The services rendered
by the advertising companies, paid
for by Sony using SIS dole-out, were
for Sony and not SIS. SIS just gave
assistance to Sony in the amount
equiva-
236
236 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
lent to the latterÊs advertising
expense but never received any
goods, properties or service from
Sony.
PETITION for review on certiorari
of the decision and resolution of
the Court of Tax Appeals.
The facts are stated in the opinion
of the Court.
Amado Paolo C. Dimayuga for
respondent.
MENDOZA, J.:
This petition for review on
certiorari seeks to set aside the May
17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax
Appeals – En Banc1 (CTA-EB), in
C.T.A. EB No. 90, affirming the
October 26, 2004 Decision of the
CTA-First Division2 which, in turn,
partially granted the petition for
review of respondent Sony
Philippines, Inc. (Sony). The CTA-
First Division decision cancelled the
deficiency assessment issued by
petitioner Commissioner of Internal
Revenue (CIR) against Sony for
Value Added Tax (VAT) but upheld
the deficiency assessment for
expanded withholding tax (EWT) in
the amount of P1,035,879.70 and the
penalties for late remittance of
internal revenue taxes in the
amount of P1,269,593.90.3
The Facts:
On November 24, 1998, the CIR
issued Letter of Authority No.
000019734 (LOA 19734) authorizing
certain revenue officers to examine
SonyÊs books of accounts and other
accounting records regarding
revenue taxes for „the period
_______________
1 Penned by Associate Justice Lovell
R. Bautista with Presiding Justice
Ernesto D. Acosta and Associate Justices
Juanito C. Castañeda, Erlinda P. Uy,
Caesar A. Casanova and Olga Palanca-
Enriquez, concurring.
2 Penned by Presiding Justice Ernesto
D. Acosta with Associate Lovell R.
Bautista, concurring.
3 Rollo, pp. 9-10.
237
VOL. 635, NOVEMBER 17, 237
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
1997 and unverified prior years.‰
On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes
and penalties was issued by the CIR
which Sony protested. Thereafter,
acting on the protest, the CIR issued
final assessment notices, the formal
letter of demand and the details of
discrepancies.4 Said details of the
deficiency taxes and penalties for
late remittance of internal revenue
taxes are as follows:
DEFICIENCY VALUE -ADDED TAX
(VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax P
Due 7,958,700.00
Add:
Penalties
Interest up P
to 3-31-2000 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency P
VAT Due 11,141,014.41
DEFICIENCY EXPANDED
WITHHOLDING TAX (EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax P
Due 1,416,976.90
Add:
Penalties
Interest up P
to 3-31-2000 550,485.82
Compromise 25,000.00 575,485.82
Deficiency P
EWT Due 1,992,462.72
DEFICIENCY OF VAT ON ROYALTY
PAYMENTS
(Assessment No. ST-LR1-97-0126-2000)
Basic Tax
Due
Add:
Penalties
Surcharge P
359,177.80
Interest up 87,580.34
to 3-31-2000
Compromise 16,000.00 462,758.14
Penalties P 462,758.14
Due
_______________
4 Id., at pp. 60-61.
238
238 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
LATE REMITTANCE OF FINAL
WITHHOLDING TAX
(Assessment No. ST-LR2-97-0127-2000)
Basic Tax P
Due
Add:
Penalties
Surcharge P
1,729,690.71
Interest up 508,783.07
to 3-31-2000
Compromise 50,000.00 2,288,473.78
Penalties P 2,288,473.78
Due
LATE REMITTANCE OF INCOME
PAYMENTS
(Assessment No. ST-LR3-97-0128-2000)
Basic Tax P
Due
Add:
Penalties
25 % P 8,865.34
Surcharge
Interest up 58.29
to 3-31-2000
Compromise 2,000.00 10,923.60
Penalties P 10,923.60
Due
GRAND P
TOTAL 15,895,632.655
Sony sought re-evaluation of the
aforementioned assessment by filing
a protest on February 2, 2000. Sony
submitted relevant documents in
support of its protest on the 16th of
that same month.6
On October 24, 2000, within 30
days after the lapse of 180 days from
submission of the said supporting
documents to the CIR, Sony filed a
petition for review before the CTA.7
After trial, the CTA-First Division
disallowed the deficiency VAT
assessment because the subsidized
advertising expense paid by Sony
which was duly covered by a VAT
invoice resulted in an input VAT
credit. As regards the EWT, the
CTA-First Division maintained the
deficiency EWT as-
_______________
5 Id.
6 Id., at p. 62.
7 Id.
239
VOL. 635, NOVEMBER 17, 239
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
sessment on SonyÊs motor vehicles
and on professional fees paid to
general professional partnerships. It
also assessed the amounts paid to
sales agents as commissions with
five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations
No. 6-85. The CTA-First Division,
however, disallowed the EWT
assessment on rental expense since
it found that the total rental deposit
of P10,523,821.99 was incurred from
January to March 1998 which was
again beyond the coverage of LOA
19734. Except for the compromise
penalties, the CTA-First Division
also upheld the penalties for the late
payment of VAT on royalties, for late
remittance of final withholding tax
on royalty as of December 1997 and
for the late remittance of EWT by
some of SonyÊs branches.8 In sum,
the CTA-First Division partly
granted SonyÊs petition by cancelling
the deficiency VAT assessment but
upheld a modified deficiency EWT
assessment as well as the penalties.
Thus, the dispositive portion reads:
„WHEREFORE, the petition for
review is hereby PARTIALLY
GRANTED. Respondent is
ORDERED to CANCEL and
WITHDRAW the deficiency
assessment for value-added tax for
1997 for lack of merit. However, the
deficiency assessments for expanded
withholding tax and penalties for
late remittance of internal revenue
taxes are UPHELD.
Accordingly, petitioner is
DIRECTED to PAY the respondent
the deficiency expanded withholding
tax in the amount of P1,035,879.70
and the following penalties for late
remittance of internal revenue taxes
in the sum of P1,269,593.90:
1. VAT on
Royalty P
429,242.07
2. Withholding Tax on Royalty
831,428.20
3. EWT of PetitionerÊs
Branches 8,923.63
Total P
1,269,593.90
Plus 20% delinquency interest from
January 17, 2000 until fully paid
pursuant to Section 249(C)(3) of the
1997 Tax Code.
_______________
8 Id., at p. 42.
240
240 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
SO ORDERED.‰9
The CIR sought a reconsideration
of the above decision and submitted
the following grounds in support
thereof:
A. The Honorable Court committed
reversible error in holding that
petitioner is not liable for the
deficiency VAT in the amount of
P11,141,014.41;
B. The Honorable court committed
reversible error in holding that
the commission expense in the
amount of P2,894,797.00 should
be subjected to 5% withholding
tax instead of the 10% tax rate;
C. The Honorable Court committed
a reversible error in holding that
the withholding tax assessment
with respect to the 5%
withholding tax on rental deposit
in the amount of P10,523,821.99
should be cancelled; and
D. The Honorable Court committed
reversible error in holding that
the remittance of final
withholding tax on royalties
covering the period January to
March 1998 was filed on time.10
On April 28, 2005, the CTA-First
Division denied the motion for
reconsideration. Unfazed, the CIR
filed a petition for review with the
CTA-EB raising identical issues:
1. Whether or not respondent
(Sony) is liable for the deficiency
VAT in the amount of
P11,141,014.41;
2. Whether or not the commission
expense in the amount of
P2,894,797.00 should be subjected
to 10% withholding tax instead of
the 5% tax rate;
3. Whether or not the withholding
assessment with respect to the 5%
withholding tax on rental deposit
in the amount of P10,523,821.99
is proper; and
_______________
9 Id., at pp. 83-84.
10 Id., at p. 86.
241
VOL. 635, NOVEMBER 17, 241
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
4. Whether or not the remittance of
final withholding tax on royalties
covering the period January to
March 1998 was filed outside of
time.11
Finding no cogent reason to
reverse the decision of the CTA-First
Division, the CTA-EB dismissed
CIRÊs petition on May 17, 2007.
CIRÊs motion for reconsideration was
denied by the CTA-EB on July 5,
2007.
The CIR is now before this Court
via this petition for review relying
on the very same grounds it raised
before the CTA-First Division and
the CTA-EB. The said grounds are
reproduced below:
GROUNDS FOR THE
ALLOWANCE OF THE
PETITION
I
THE CTA EN BANC ERRED IN
RULING THAT RESPONDENT IS
NOT LIABLE FOR DEFICIENCY
VAT IN THE AMOUNT OF
PHP11,141,014.41.
II
AS TO RESPONDENTÊS
DEFICIENCY EXPANDED
WITHHOLDING TAX IN THE
AMOUNT OF PHP1,992,462.72:
A. THE CTA EN BANC ERRED
IN RULING THAT THE
COMMISSION EXPENSE IN
THE AMOUNT OF
PHP2,894,797.00 SHOULD BE
SUBJECTED TO A
WITHHOLDING TAX OF 5%
INSTEAD OF THE 10% TAX
RATE.
B. THE CTA EN BANC ERRED
IN RULING THAT THE
ASSESSMENT WITH
RESPECT TO THE 5%
WITHHOLDING TAX ON
RENTAL DEPOSIT IN THE
AMOUNT OF
PHP10,523,821.99 IS NOT
PROPER.
_______________
11 Id., at p. 43.
242
242 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
III
THE CTA EN BANC ERRED IN
RULING THAT THE FINAL
WITHHOLDING TAX ON
ROYALTIES COVERING THE
PERIOD JANUARY TO MARCH
1998 WAS FILED ON TIME.12
Upon filing of SonyÊs comment,
the Court ordered the CIR to file its
reply thereto. The CIR subsequently
filed a manifestation informing the
Court that it would no longer file a
reply. Thus, on December 3, 2008,
the Court resolved to give due course
to the petition and to decide the case
on the basis of the pleadings filed.13
The Court finds no merit in the
petition.
The CIR insists that LOA 19734,
although it states „the period 1997
and unverified prior years,‰ should
be understood to mean the fiscal
year ending in March 31, 1998.14
The Court cannot agree.
Based on Section 13 of the Tax
Code, a Letter of Authority or 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.15 The very provi-
_______________
12 Id., at pp. 16-17.
13 Id., at p. 253.
14 Id., at pp. 17-18.
15 National Internal Revenue Code;
SEC. 13. Authority of a Revenue
Officer.·Subject to the rules and
regulations to be prescribed by the
Secretary of Finance, upon
recommendation of the Commissioner, a
Revenue Officer assigned to perform
assessment functions in any district may,
pursuant to a Letter of Authority
issued by the Revenue Regional Director,
examine taxpayers within the
jurisdiction of the district in order
to collect the correct amount of tax,
or to recommend the assessment of
any deficiency tax due in the same
manner that the said acts could have
been performed by the Revenue Regional
Director himself. (emphasis supplied)
243
VOL. 635, NOVEMBER 17, 243
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
sion of the Tax Code that the CIR
relies on is unequivocal with regard
to its power to grant authority to
examine and assess a taxpayer.
„SEC. 6. Power of the
Commissioner to Make
Assessments and Prescribe
Additional Requirements for Tax
Administration and
Enforcement.·
(A) Examination of Returns and
Determination of Tax Due.·After a
return has been filed as required
under the provisions of this Code,
the Commissioner or his duly
authorized representative may
authorize the examination of
any taxpayer and the
assessment of the correct
amount of tax: Provided, however,
That failure to file a return shall not
prevent the Commissioner from
authorizing the examination of
any taxpayer.‰ x x x [Emphases
supplied]
Clearly, there must be a grant of
authority before any revenue officer
can conduct an examination or
assessment. Equally important is
that 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.
As earlier stated, LOA 19734
covered „the period 1997 and
unverified prior years.‰ For said
reason, the CIR acting through its
revenue officers went beyond the
scope of their authority because the
deficiency VAT assessment they
arrived at was based on records from
January to March 1998 or using the
fiscal year which ended in March 31,
1998. As pointed out by the CTA-
First Division in its April 28, 2005
Resolution, the CIR knew which
period should be covered by the
investigation. Thus, if CIR wanted
or intended the investigation to
include the year 1998, it should have
done so by including it in the LOA or
issuing another LOA.
Upon review, the CTA-EB even
added that 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, the pertinent portion of
which reads:
244
244 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
„3. A Letter of Authority should
cover a taxable period not
exceeding one taxable year. The
practice of issuing L/As covering
audit of „unverified prior years is
hereby prohibited. If the audit of a
taxpayer shall include more than
one taxable period, the other periods
or years shall be specifically
indicated in the L/A.‰16 [Emphasis
supplied]
On this point alone, the deficiency
VAT assessment should have been
disallowed. Be that as it may, the
CIRÊs argument, that SonyÊs
advertising expense could not be
considered as an input VAT credit
because the same was eventually
reimbursed by Sony International
Singapore (SIS), is also erroneous.
The CIR contends that since
SonyÊs advertising expense was
reimbursed by SIS, the former never
incurred any advertising expense. As
a result, Sony is not entitled to a tax
credit. At most, the CIR continues,
the said advertising expense should
be for the account of SIS, and not
Sony.17
The Court is not persuaded. As
aptly found by the CTA-First
Division and later affirmed by the
CTA-EB, SonyÊs deficiency VAT
assessment stemmed from the CIRÊs
disallowance of the input VAT
credits that should have been
realized from the advertising
18
expense of the latter. It is evident
under Section 11019 of the 1997 Tax
Code that an advertising expense
duly covered by a VAT invoice is a
legitimate business ex-
_______________
16 Revenue Memorandum Order No.
43-90 dated September 20, 1990,
amending Revenue Memorandum Order
No. 37-90 prescribing revised guidelines
for Examination of Returns and Issuance
of Letters of Authority to Audit, Rollo, p.
46.
17 Id., at p. 21.
18 Id., at p. 64.
19 National Internal Revenue Code;
SEC. 110. Tax Credits.·
A. Creditable Input Tax.·
(1) Any input tax evidenced
by a VAT invoice or official
receipt issued in accordance
with Section 113 hereof on the
following transactions shall be
creditable against the output tax:
245
VOL. 635, NOVEMBER 17, 245
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
pense. This is confirmed by no less
than CIRÊs own witness, Revenue
Officer Antonio Aluquin.20 There is
also no denying that Sony incurred
advertising expense. Aluquin
testified that advertising companies
issued invoices in the name of Sony
and the latter paid for the same.21
Indubitably, Sony incurred and paid
for advertising expense/services.
Where the money came from is
another matter all together but will
definitely not change said fact.
The CIR further argues that Sony
itself admitted that the
reimbursement from SIS was income
and, thus, taxable. In support of
this, the CIR cited a portion of
SonyÊs protest filed before it:
„The fact that due to adverse
economic conditions, Sony-Singapore
has granted to our client a subsidy
equivalent to the latterÊs advertising
expenses will not affect the validity
of the input taxes from such
expenses. Thus, at the most, this is
an additional income of our client
subject to income tax. We submit
further that our client is not subject
to VAT on the subsidy income as this
was not derived from the sale of
goods or services.‰22
_______________
(a) Purchase or importation of
goods:
x x x.
(b) Purchase of services on
which a value-added tax has
been actually paid.
x x x.
The term Âinput taxÊ means the
value-added tax due from or paid by
a VAT-registered person in the
course of his trade or business on
importation of goods or local purchase of
goods or services, including lease or use
of property, from a VAT-registered
person. It shall also include the
transitional input tax determined in
accordance with Section 111 of this Code.
x x x. (emphasis supplied)
20 Rollo, p. 66; TSN, February 27,
2003, pp. 33-34 and 36.
21 Id., at p. 68; TSN, February 27,
2003, pp. 55-58.
22 Id., at p. 22.
246
246 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
Insofar as the above-mentioned
subsidy may be considered as income
and, therefore, subject to income tax,
the Court agrees. However, the
Court does not agree that the same
subsidy should be subject to the 10%
VAT. To begin with, the said subsidy
termed by the CIR as
reimbursement was not even
exclusively earmarked for SonyÊs
advertising expense for it was but an
assistance or aid in view of SonyÊs
dire or adverse economic conditions,
and was only „equivalent to the
latterÊs (SonyÊs) advertising
expenses.‰
Section 106 of the Tax Code
explains when VAT may be imposed
or exacted. Thus:
„SEC. 106. Value-added Tax
on Sale of Goods or Properties.·
(A) Rate and Base of Tax.·
There shall be levied, assessed and
collected on every sale, barter or
exchange of goods or properties,
value-added tax equivalent to ten
percent (10%) of the gross selling
price or gross value in money of the
goods or properties sold, bartered or
exchanged, such tax to be paid by
the seller or transferor.‰
Thus, there must be a sale, barter
or exchange of goods or properties
before any VAT may be levied.
Certainly, there was no such sale,
barter or exchange in the subsidy
given by SIS to Sony. It was but a
dole out by SIS and not in payment
for goods or properties sold, bartered
or exchanged by Sony.
In the case of CIR v. Court of
Appeals (CA),23 the Court had the
occasion to rule that services
rendered for a fee even on
reimbursement-on-cost basis only
and without realizing profit are also
subject to VAT. The case, however, is
not applicable to the present case. In
that case, COMASERCO rendered
service to its affiliates and, in turn,
the affiliates paid the former
reimbursement-on-cost which means
that it was paid the cost or expense
that it incurred although without
profit. This is not true in the present
case. Sony did not render any
_______________
23 Commissioner of Internal Revenue
v. Court of Appeals, 385 Phil. 875; 329
SCRA 237, 245 (2000).
247
VOL. 635, NOVEMBER 17, 247
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
service to SIS at all. The services
rendered by the advertising
companies, paid for by Sony using
SIS dole-out, were for Sony and not
SIS. SIS just gave assistance to Sony
in the amount equivalent to the
latterÊs advertising expense but
never received any goods, properties
or service from Sony.
Regarding the deficiency EWT
assessment, more particularly SonyÊs
commission expense, the CIR insists
that said deficiency EWT
assessment is subject to the ten
percent (10%) rate instead of the five
percent (5%) citing Revenue
Regulation No. 2-98 dated April 17,
1998.24 The said revenue regulation
provides that the 10% rate is applied
when the recipient of the
commission income is a natural
person. According to the CIR, SonyÊs
schedule of Selling, General and
Administrative expenses shows the
commission expense as
„commission/dealer salesman
incentive,‰ emphasizing the word
salesman.
On the other hand, the
application of the five percent (5%)
rate by the CTA-First Division is
based on Section 1(g) of Revenue
Regulations No. 6-85 which
provides:
„(g) Amounts paid to certain
Brokers and Agents.·On gross
payments to customs, insurance,
real estate and commercial brokers
and agents of professional
entertainers·five per centum
(5%).‰25
In denying the very same
argument of the CIR in its motion
for reconsideration, the CTA-First
Division, held:
„x x x, commission expense is
indeed subject to 10% withholding
tax but payments made to broker is
subject to 5% withholding tax
pursuant to Section 1(g) of Revenue
Regulations No. 6-85. While the
commission expense in the schedule
of Selling, General and
Administrative expenses submitted
by petitioner (SPI) to the BIR is
captioned as „commission/dealer
salesman incentive‰ the same does
not justify the automatic imposition
of flat 10% rate. As itemized by
_______________
24 Rollo, p. 24.
25 Id., at p. 75.
248
248 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
petitioner, such expense is composed
of „Commission Expense‰ in the
amount of P10,200.00 and ÂBroker
DealerÊ of P2,894,797.00.‰26
The Court agrees with the CTA-
EB when it affirmed the CTA-First
Division decision. Indeed, the
applicable rule is Revenue
Regulations No. 6-85, as amended by
Revenue Regulations No. 12-94,
which was the applicable rule during
the subject period of examination
and assessment as specified in the
LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted
in April 1998 and, therefore, cannot
be applied in the present case.
Besides, the withholding tax on
brokers and agents was only
increased to 10% much later or by
the end of July 2001 under Revenue
Regulations No. 6-2001.27 Until
then, the rate was only 5%.
The Court also affirms the
findings of both the CTA-First
Division and the CTA-EB on the
deficiency EWT assessment on the
rental deposit. According to their
findings, Sony incurred the subject
rental deposit in the amount of
P10,523,821.99 only from January to
March 1998. As stated earlier, in the
absence of the appropriate LOA
specifying the coverage, the CIRÊs
deficiency EWT assessment from
January to March 1998, is not valid
and must be disallowed.
Finally, the Court now proceeds to
the third ground relied upon by the
CIR.
The CIR initially assessed Sony to
be liable for penalties for belated
remittance of its FWT on royalties (i)
as of December 1997; and (ii) for the
period from January to March 1998.
Again, the Court agrees with the
CTA-First Division when it upheld
the CIR with respect to the royalties
for December 1997 but cancelled
that from January to March 1998.
_______________
26 Id., at p. 88.
27 Id., at p. 52.
249
VOL. 635, NOVEMBER 17, 249
2010
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
The CIR insists that under
Section 328 of Revenue Regulations
No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29 of Revenue
Regulations No. 2-98, Sony should
also be made liable for the FWT on
royalties from January to March of
1998. At the same time, it
downplays the relevance of the
Manufacturing License Agreement
(MLA) between Sony and Sony-
Japan, particularly in the payment
of royalties.
The above revenue regulations
provide the manner of withholding
remittance as well as the payment of
final tax on royalty. Based on the
same, Sony 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 10 days after
the end of each month. The question
now is when does the royalty become
payable?
Under Article X(5) of the MLA
between Sony and Sony-Japan, the
following terms of royalty payments
were agreed upon:
_______________
28 Revenue Regulations No. 5-82
Section 3. Time of Withholding.·
The obligations of the payor to deduct
and withhold under these regulations
arises at time income which subject to
withholding under Section 1 hereof is
payable or paid.
29 Revenue Regulations No. 2-98
Section 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 is paid or payable, whichever
comes first. The term „payable‰ refers to
the date of the obligation become due,
demandable or legally enforceable.
Section 2.58. Returns and Payment
of Taxes Withheld at Source.·
(A) Monthly return and payment of
taxes withheld at source.
xxx
(2) When to File·
250
250 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
„(5) Within two (2) months
following each semi-annual period
ending June 30 and December 31,
the LICENSEE shall furnish to the
LICENSOR a statement, certified by
an officer of the LICENSEE,
showing quantities of the MODELS
sold, leased or otherwise disposed of
by the LICENSEE during such
respective semi-annual period and
amount of royalty due pursuant this
ARTICLE X therefore, and the
LICENSEE shall pay the royalty
hereunder to the LICENSOR
concurrently with the furnishing of
the above statement.‰30
Withal, Sony was to pay Sony-
Japan royalty within two (2) months
after every semi-annual period
which ends in June 30 and
December 31. However, the CTA-
First Division found that there was
accrual of royalty by the end of
December 1997 as well as by the end
of June 1998. Given this, the FWTs
should have been paid or remitted
by Sony to the CIR on January 10,
1998 and July 10, 1998. Thus, it was
correct for the CTA-First Division
and the CTA-EB in ruling that the
FWT for the royalty from January to
March 1998 was seasonably filed.
Although the royalty from January
to March 1998 was well within the
semi-annual period ending June 30,
which meant that the royalty may be
payable until August 1998 pursuant
to the MLA, the FWT for said
royalty had to be paid on or before
July 10, 1998 or 10 days from its
accrual at the end of June 1998.
Thus, when Sony remitted the same
on July 8, 1998, it was not yet late.
In view of the foregoing, the
Court finds no reason to disturb the
findings of the CTA-EB.
WHEREFORE, the petition is
DENIED.
SO ORDERED.
Carpio (Chairperson), Leonardo-
De Castro,** Peralta and Abad, JJ.,
concur.
_______________
30 Rollo, p. 81.
** Designated as additional member
in lieu of Justice Antonio Eduardo B.
Nachura per raffle dated April 14, 2010.
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