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CIR v. SONY PHILIPPINES

FACTS:

The petitioner, Commissioner of Internal Revenue (CIR), issued a deficiency assessment against respondent Sony Philippines, Inc. (Sony) for Value Added Tax (VAT), expanded withholding tax (EWT), and penalties for late remittance of internal revenue taxes. After trial, the Court of Tax Appeals - First Division (CTA-First Division) canceled the deficiency assessment for VAT but upheld the deficiency assessment for EWT and the penalties for late remittance. Dissatisfied with the decision, the CIR filed a motion for reconsideration, but it was denied by the CTA-First Division.

The CIR then filed a petition for review with the Court of Tax Appeals En Banc (CTA-EB) to reverse the decision of the CTA-First Division. The CIR raised several issues in its petition, including the liability of Sony for deficiency VAT, the proper withholding tax rate on commission expense, the assessment on the 5% withholding tax on rental deposit, and the timeliness of the remittance of final withholding tax on royalties. However, the CTA-EB dismissed the CIR's petition and denied its motion for reconsideration.

Undeterred, the CIR filed a petition for review before the Supreme Court, repeating the same grounds it had raised in the previous proceedings. Sony filed its comment, and the Court ordered the CIR to file a reply. However, the CIR informed the Court that it would no longer file a reply.

Considering the petition, the Court found no merit and disagreed with the CIR's interpretation of the Letter of Authority (LOA) 19734. The LOA was granted to the CIR to examine Sony's books of account and determine the correct amount of tax due. The Court underlined that a grant of authority is explicitly required by the Tax Code before any revenue officer can examine and assess a taxpayer.

ISSUES:

  1. Whether the Commissioner of Internal Revenue (CIR) had the authority to conduct an examination and assessment of the taxpayer's records.

  2. Whether the deficiency Value Added Tax (VAT) assessment based on unverified prior years is valid.

  3. Whether the taxpayer is entitled to input VAT credit for its advertising expenses.

  4. Whether the subsidy received by the taxpayer should be subject to VAT.

  5. Whether the services rendered by advertising companies, paid for by Sony, are subject to value-added tax (VAT).

  6. Whether the deficiency expanded withholding tax (EWT) assessment on Sony's commission expense should be subject to the 10% or 5% rate.

  7. Whether the deficiency EWT assessment on Sony's rental deposit is valid.

  8. Whether Sony is liable for penalties for the belated remittance of final withholding tax (FWT) on royalties.

  9. The issue in this case is whether the FWT for the royalty from January to March 1998 was filed within the prescribed period.

RULING:

  1. The CIR had the authority to conduct an examination and assessment of the taxpayer's records, provided that there is a grant of authority and the revenue officer does not go beyond the scope of the authority given.

  2. The deficiency VAT assessment based on unverified prior years is invalid because it goes beyond the coverage specified in the Letter of Authority (LOA) and is in violation of the Revenue Memorandum Order prohibiting LOAs covering audits of unverified prior years.

  3. The taxpayer is entitled to input VAT credit for its advertising expenses because it is a legitimate business expense duly covered by a VAT invoice.

  4. The subsidy received by the taxpayer should not be subject to VAT because there was no sale, barter, or exchange of goods or properties. The subsidy was an assistance or aid given due to the taxpayer's dire economic conditions and was not payment for goods or services sold.

  5. The services rendered by advertising companies, paid for by Sony, are not subject to VAT because Sony did not render any service to the related company. SIS only provided assistance to Sony by giving an equivalent amount to Sony's advertising expense, but did not receive any goods, properties or services from Sony.

  6. The deficiency EWT assessment on Sony's commission expense should be subject to the 5% rate. The applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which specifies a 5% withholding tax rate for payments made to brokers and agents.

  7. The deficiency EWT assessment on Sony's rental deposit is not valid. In the absence of an appropriate Letter of Authority (LOA) specifying the coverage, the assessment from January to March 1998 cannot be enforced.

  8. Sony is liable for penalties for the belated remittance of FWT on royalties for December 1997 but not for the period from January to March 1998. The royalty payments become payable within two months after every semi-annual period which ends in June 30 and December 31, as stated in the Manufacturing License Agreement (MLA) between Sony and Sony-Japan. Therefore, the FWTs should have been paid or remitted within 10 days after the end of the applicable months.

  9. The Court held that the FWT for the royalty from January to March 1998 was filed within the prescribed period. It ruled that although the royalty was payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998, which Sony complied with when it remitted the payment on July 8, 1998. Thus, the Court found no reason to disturb the findings of the CTA-EB and denied the petition.

PRINCIPLES:

  • The Commissioner of Internal Revenue has the power to grant authority to examine and assess a taxpayer.

  • The revenue officer must not go beyond the scope of the authority given.

  • A deficiency VAT assessment based on unverified prior years is invalid.

  • Advertising expenses duly covered by a VAT invoice are legitimate business expenses eligible for input VAT credit.

  • Subsidies or assistance given due to dire economic conditions and not in payment for goods or services sold are not subject to VAT.

  • Services rendered for a fee, even on a reimbursement-on-cost basis without realizing profit, are subject to VAT.

  • The withholding tax rate for commission expenses is 10% if the recipient is a natural person, but if the payment is made to a broker or agent, the rate is 5%.

  • The applicable revenue regulation is the one in effect during the examination and assessment period specified in the LOA.

  • Deficiency EWT assessments must be supported by an appropriate LOA specifying the coverage to be valid.

  • Royalty payments become payable within the period agreed upon in the license agreement, and the FWTs on these payments should be remitted accordingly.

  • Compliance with prescribed deadlines for filing and remittance of taxes is necessary to avoid penalties and sanctions.

  • The court will generally uphold the findings of administrative tribunals, such as the Court of Tax Appeals, in the absence of any compelling reason to disturb them.