REPUBLIC OF THE PHILIPPINES

Court of Tax Appeals

QUEZON CITY

FIRST DIVISION

WATERFRONT PHILIPPINES, INC. CTA CASE NO. 8024

Petitioner,

Members:

ACOSTA, PJ,
UY, and,
- versus - FABON-VICTORINO, JJ.

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

Promulgated:

NOV 1 3 2012 ; 3)ooe~·

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~ -- - - - x

DECISION

ACOSTA, PJ:

This Petition for Review seeks the cancellation and withdrawal of

deficiency assessment on the value added tax, amended expanded

withholding tax and compromise penalty for taxable year 2006 in the total

amount P3,260,960.73, inclusive of increments.

DECISION
CTA CASE No. 8024
Page 2 of 19

THE FACTS

As stipulated by the parties in the Joint Stipulation of Facts and Issues and

as borne by the records of this case, the following are the undisputed facts:

Petitioner is a domestic corporation duly organized and existing under the

laws of the Philippines with principal office at IPT Building, Pre-Departure

Area, MCIA, Cebu City.

Respondent is the duly appointed Commissioner of Internal revenue,

vested with authority to act as such, including among others, the power to

authorize the examination of taxpayer's book of accounts, to issue and decide

deficiency assessment of internal revenue taxes.

On November 8, 2007, the Bureau of Internal revenue issued Letter of

Authority No. LOA 2007 00015191 for the investigation of petitioner's

business operations and books of accounts for calendar year 2006.

On January 14, 2009, the Formal Letter of Demand issued by BIR Revenue

Region No. 13 - Cebu City was received by the petitioner. In turn, petitioner

filed its formal written protest with the BIRon February 10, 2009.

In its letters dated February 18 and April 24, 2009, the BIR informed

petitioner that in response to its formal written protest of February 9, 2009,

the docket of the case was referred back to BIR Revenue District Office No.

80 - Mandaue City for reinvestigation, and submission of supporting

documents within 60 days from the filing of the formal written protest.

The BIR issued Tax Verification Notice No. TVN-2003-00110949 dated July

7, 2009 for reinvestigation of petitioner's 2006 internal revenue taxes; and in

DECISION
CT A CASE No. 8024
Page 3 of 19

response, petitioner submitted additional supporting documents in its letter

dated July 23, 2009 that was filed with BIR on July 24, 2009. Thereafter, the

BIR released its Post Reporting Notice that was received by the petitioner on

September 25, 2009 .

Respondent issued its Final Decision on Disputed Assessment (FDDA) on

December 8, 2009 directing petitioner to pay the assessment or to appeal

final decision to the Court of Tax Appeals within 30 days of the receipt of the

decision. The respondent seeks to collect deficiency assessments as follows :

1. Value-Added Tax
(old Assessment No. 80-vat-13-2006-2008-12-223):

Interest Income 11,907,902.00

Output tax due:
((P11,907,902.00/12)* 10%) 9,232 .52
((P11,907,902.00* 11/12)* 12%) 1,309,869. 22 1,409,101.74

Add: 25% Surcharge 352,275.44

20% Interest (01/25/07-01/10/09) 551,115.33
Compromise Penalty 25,000.00
Total deficiency tax P2.337.492.51

The CIR made no adjustment on the deficiency value-added taxes due on

interest income derived from loans granted to Metro Alliance Holdings and

Equities Corporation (MAHEC) and Wellex Group, Inc (TWGI) as per

assessment No. 80-vat-13-2006-2008-12-223 since no BIR ruling exempting

said income from VAT was specifically issued in favor of the petitioner. The

respondent stated that pursuant to Revenue Regulation 16-2005, any person,

who in the course of trade or business, sells or barters, exchanges or leases

goods or properties, or renders services, and any person who imports goods,
DECISION
CTA CASE No. 8024
Page 4 of 19

shall be liable to value-added tax imposed in Section 106-108 of the Tax

Code.

2. Expanded Withholding Tax

(Assessment No. 80-we-13-2006-2008-12-222/amended):

Management Fee 4,060,000.00

Multiply by withholding tax rate 15%
Expanded withholding tax due 609,000.00
Less: Remittances 58,000.00
Basic Deficiency tax 551,000.00
Add: 20% Interest (01/11/07-12/15/09) 322,448.22
Compromise Penalty for non-submission of
Alphalist of payees 25,000.00
Total deficiency tax p 898.448.22

Reinvestigation of the case revealed that management fee of

P4,060,000.00 was recorded in the books as part of Trade and Other

Payables, however, only P58,000.00 was withheld and remitted to the BIR.

On the other hand, no alphalist of payees whose income are subject to

expanding withholding tax was submitted, hence, a compromise penalty was

imposed pursuant to Revenue Memorandum Order No. 19-2007 which

resulted to a deficiency expanded withholding tax of P898,448.22.

3. Compromise Penalty
(Assessment No. 80-it-13-2006-2008-12-222)
(for unauthorized use of computerized accounting system)

Compromise Penalty p 25.000.00

Petitioner received the BIR Final Decision on Disputed Assessment

dated December 8, 2009 on December 18, 2009. Petitioner, however, is

protesting the compromise penalty assessment, deficiency value added tax

DECISION
CTA CASE No. 8024
Page 5 of 19

and amended expanded withholding tax assessments. It has decided to

appeal the final decision of the BIR to the Court of Tax Appeals on the

grounds of lack of legal and factual bases in the issuance of the assessments

that was exhaustively discussed in its formal protest letter of February 9,

2009.

The Petitioner filed the Petition for Review on January 15, 2010 in

compliance with Section 228 of R.A. No. 8424 which mandates that if the

protest is denied in whole or in part, the taxpayer adversely affected by the

decision may appeal to the Court of Tax Appeals within 30 days from the

receipt of the decision; otherwise, the decision shall become final, executory

and demandable.

The respondent in its answer states that:

XXX XXX XXX

3. The petitioner is liable for deficiency value-added tax (VAT). A

substantial portion of the petitioner's income was from interest income

on loans granted to Metro Alliance Holdings and Equities Corporation

(MAHEC) and to Wellex Group, Inc. (WGI) which are related parties to

petitioner. In the ordinary course of its operations, petitioner extends

and obtains cash advances and loans to/from related parties for

working capital purposes as well as to finance the construction and

operation of its hotel projects in furtherance of its primary purpose as

stated in its Articles of Incorporation. Hence, the interest income is

revenue realized from the services rendered by petitioner to its related

DECISION
CT A CASE No. 8024
Page 6 of 19

parties as part of its ordinary course of trade or business. Pursuant to

Revenue Regulations No. 16-2005, any person who, in the course of

trade or business sells, barters, exchanges or leases goods and

properties, or renders service, and any person who imports goods,

shall be liable to VAT imposed in Sections 106 to 108 of the National

Internal Revenue Code of 1997 (NIRC of 1997). Moreover, Section

4.105-3 of the Revenue Regulations No. 16-2005 provides that the

term "in the course of trade or business" shall mean the regular

conduct or pursuit of a commercial or economic activity, including

transactions incidental thereto, by any person regardless of whether or

not the person engaged therein is non-stock, non-profit private

organization or government entity.

4. Petitioner is likewise liable for deficiency Expanded Withholding Tax

(EWT). Pursuant to Section 2.57.2 of Revenue Regulations No. 2-1998,

as amended by Revenue Regulation No. 7-2000, there shall be

withheld creditable income tax at the rates specified for each class of

payee from the enumerated list of items of income payments to

persons residing in the Philippines including director's fees. Withholding

should be done upon payment of expense or upon recognition in the

books. Per verification, a management fee of P4,060,000 was recorded

in the petitioner's books as part of trade and other payables, however ,

only P58,000.00 was withheld and remitted. No alphalist of payees

whose income are subjected to expanded withholding tax has been

DECISION
CTA CASE No. 8024
Page 7 of 19

submitted, hence, a compromise penalty was imposed pursuant to

Revenue Memorandum Order No. 19-2007 which resulted to a total

deficiency expanded withholding tax of P898,448.22.

5. A compromise penalty of P25,000.00 was imposed due to unauthorized

use of computerized accounting system.

6. All presumptions are in favor of the correctness of tax assessments.

The good faith of tax assessors and the validity of their actions are

presumed. They will be presumed to have taken into consideration all

the facts to which their attention was called (CIR vs. Construction Resources

of Asia, Inc. 145 SCRA 671). It is incumbent upon the taxpayer to prove the

contrary (Mindanao Bus Company vs. CIR 1 SCRA 538; CIR vs. Tuazon, Inc. 173

SCRA 397) and failure to do so shall vest legality on respondent's actions

and assessments.

7. Failure to present proof of error in the assessment will justify judicial

affirmation of said assessment (Delta Motors Co. vs. Commissioner, CTA Case

No. 3782, 21 May 1986; Commissioner of Internal Revenue vs. Court of Appeals, et

al ., G.R. Nos. 104151 and 105563, 10 March 1995).

Due execution, authenticity and veracity of the contents of the

following documents were also included in the Joint Stipulation of Facts and

a) BIR Preliminary Assessment Notice and Details of Discrepancy.

b) BIR Formal Letter of Demand and the Details of Discrepancy.

1
Rollo pp 000 13 5-000 13 8.
DECISION
CTA CASE No. 8024
Page 8 of 19

c) BIR Final Decision on Disputed Assessment dated October 30,

2009.

d) BIR Memorandum Report dated 27 November 2006.

e) Petitioner's formal protest letter filed by Manabat San Agustin & Co.

dated February 9, 2009 and submitted to BIR Revenue Region No.

18, Cebu City on February 10, 2009.

On August 28, 2012, with the submission of respondent's

Memorandum on May 23, 2012 and in the absence of the petitioner's

Memorandum despite the opportunity granted, this instant petition was

deemed submitted for decision by this Honorable Court.

THE ISSUES

By agreement of the parties, the issues to be tried and resolved in this

case as enumerated in the Joint stipulation of Facts and Issues are the

following:

I Whether or not Metro Alliance Holdings and Equities

Corporation (MAHEC) and We/lex Group, Inc (TWGI) are

related parties to petitioner.

II Whether or not petitioner is liable for deficiency Value Added

Tax (VAl) in the amount of P2,337,494 for taxable year

2006.

III Whether or not petitioner is liable for deficiency Expanded

Withholding Tax (EW7) in the amount of P898,448.22 for

taxable year 2006.

DECISION
CTA CASE No . 8024
Page 9 of 19

IV. Whether or not petitioner is liable for deficiency compromise

penalty in the amount of P25,000.00.

THE DECISION OF THE COURT

The Court shall discuss the issues in seriatim.

Related Parties to Petitioner.

On the first issue, the controversy basically lies on whether or not Metro

Alliance Holdings and Equities Corporation (MAHEC) and Wellex Group, Inc

(TWGI) are related parties to petitioner.

The purpose of determining whether or not the parties abovementioned

are related parties is to determine whether or not the transaction of the

petitioner on lending funds to MAHEC and TWGI be subjected to Value-Added

Tax as lending investor.

The petitioner submitted the following documents to prove its contention

that they are related parties :

1. Notes to the Parent Company Financial Statements: Note No. 1:

2
Reporting entity: Corporate Information and Note No. 5: Related
3
Party Transactions were presented to establish the Petitioner's

corporate information on its incorporation, holdings and business

operations. This document shows that it is an affiliate company of the

Wellex Group, Inc. and established that Metro Alliance Holdings &

2
Exhibit K-2
3
Exhibit K-3
DECISION
CTA CASE No . 8024
Page 10 of 19

Equities Corp. and the Wellex Group, Inc. to whom loans were granted

are related parties to Petitioner, respectively.

Under the Implementing rules and regulation of RA 8799 or the Securities

Regulation Code (Rule 68) it is stated that related parties and their

transactions should be disclosed in their financial statements, to wit:

(21) Material Related Party Transactions which Affect the

Financial Statements -
A. The financial statements filed shall disclose material related
party transactions other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of
business. Disclosure of transactions that are eliminated in the
preparation of consolidated or combined financial statements is not
required in those statements. This disclosure should include the
following:
1. The nature of the relationship(s) .
2. A description of the transactions (summarized when appropriate)
for the periods for which an income statement is presented,
including amounts, if any, and such other information as is deemed
necessary to an understanding of the effects on the financial
statements.
3. The pesos volume of transactions for each of the periods for
which income statements are presented, and the effects of any
change in the method of establishing the terms from that used in the
preceding period.
4. Amounts due to or from related parties as of the date of each
balance sheet presented, and if not otherwise apparent, the terms
and manner of settlement.
B. In some cases, aggregation of similar transactions by type or
related party may be appropriate . Sometimes, the effect of the
relationship between or among the related parties may be so
pervasive that disclosure of such relationship alone is sufficient.
XXX XXX XXX
C. Transactions involving related parties cannot be presumed to be
carried out on an arm's length basis, as the requisite conditions of
competitive free-market dealings may not exist. Representations
about transactions with the related parties, if made shall not imply
that the related party transactions were consummated on terms
equivalent to those that prevail in arm's length transactions unless
such representations can be substantiated.

Applying the above provision, the disclosure of the petitioner of its

affiliates to its financial statement is a strong indication that the parties are

indeed related parties.

DECISION
CTA CASE No. 8024
Page 11 of 19

2. The General Information Sheet for CY 2006 4 listed the name of The

Wellex Group Inc. as stockholder of petitioner. This proved that Wellex

Group Inc. owns 63% equity in petitioner and that the petitioner is an

affiliated party of the Wellex Group Inc. An "Affiliate" means a

corporation that directly or indirectly, through one or more

intermediaries, is controlled by, or is under the common control of,

another corporation, which thereby becomes its parent corporation.

5
3. BDO Stockholder's Ledger for the Wellex group, Inc. and BDO

Stockholder's Ledger for Metro Alliance Holdings & Equities Corp. 6

showed that Wellex Group Inc. has 14,370,000 shares of stocks

investment in petitioner as of November 19, 2008 and that Metro

Alliance Holdings & Equities Corp. has 1,143,466,800 shares

investment in petitioner as of November 14, 2001, respectively.

4. Original copy of the certification 7 executed by Mr. Arthur R. Ponsaran

as Corporate Secretary of petitioner notarized on January 11, 2011

consisting of 2 pages shows that the Wellex group Inc. owns 63%

equity in petitioner and that petitioner is an affiliated party of the

Wellex group Inc.

After the comprehensive study and scrutiny of the documents presented

by the petitioner and in the absence of any arguments and documents

submitted by the respondent disproving that Metro Alliance Holdings and

4
Exhibit M- 1
5
Exhibit R-1.
6
Exhibit R-2.
7
Exhi bit V.
DECISION
CTA CASE No. 8024
Page 12 of 19

Equities Corporation (MAHEC) and Wellex Group, Inc (1WGI) are related

parties to the petitioner, the documentary evidence proved sufficient and cast

no doubt that they are indeed related parties. Thus, this Court cannot subject

the petitioner to Value Added Tax as lending investors, the lender and the

borrower, being related parties.

Deficiency Value Added Tax (VAT)

After judicial determination that the petitioner and MAHEC and 1WGI are

related parties, consequently, the Court finds the contention of the

respondent as stated on the Final Decision on Disputed Assessment8 without

merit.

VAT is imposed on sale or exchange of services for others for a fee,

remuneration or consideration including those performed or rendered by

lending investors (Section 108 of the Tax Code). A lending investor is defined

under Section 4.108-3 of Revenue Regulation 16-2005 as follows:

"Lending investor includes all persons other than banks, non-bank

financial intermediaries, finance companies and other financial

intermediaries, finance companies and other financial intermediaries

not performing quasi-banking functions who make a practice of

lending money for themselves or others at interest."

In addition, BIR Ruling dated March 31, 1997 provided for the requisites to

be considered in determining who are lending investors. The requisites are as

follows:

8
Rollo pp. 667-672.
DECISION
CTA CASE No. 8024
Page 13 of 19

"1. One must be engaged in the business of lending money for themselves

or others at interest; and

2. The lending of money must be carried on with a view to profit or

livelihood."

This was applied by the BIR in VAT Ruling No. 015-04 dated May 18, 2004

wherein it was held that:

"It is clear from the foregoing facts that TDK is not engaged in

the practice of lending money. It is organized as a manufacturer of

electronic materials and components rather than to engage in

lending activities. The lending of money for an interest which is not

pursued as a business activity but merely to assist someone in need,

will not make the lender a lending investor within the contemplation

of Section 108 of the Tax Code. Accordingly, the interest income

earned or received by TDK from its loan to PTPI is exempt from the

value-added tax."

Before applying the pronouncement, it is imperative that we know WPI's

primary purpose as stated in its Amended Articles of Incorporation and to

quote:

To carry on the business of an investment holding company and for

that purpose either in the name of the said corporation or in the

name of any other corporation in which it shall have an equity

interest, to receive, purchase or otherwise acquire an interest in,

hold, own, pledge, mortgage, assign, dispose and generally deal in

all kinds of securities including but not limited to shares of stock of

corporation which shall include but shall not be limited to financial

services institutions such as banking, insurance, stockbrokering,

DECISION
CT A CASE No. 8024
Page 14 of 19

leasing, hire, purchase, and other forms of financial services as are

found in modern financial market; to acquire and hold real property

(except land) and personal property of all kinds; to purchase,

acquire, convey, lease, mortgage, contract for, manage, administer

and/or operate alone or jointly with others any interest in real or

personal property which includes but not limited to hotels, inns,

restaurants, cafes, bars, stores and offices, barbershops, and beauty

lounges, sports facilities, places of amusement and entertainment of

all kinds; to enter into any lawful arrangement for sharing profits

with any corporation, association, partnership, person or entity,

domestic and foreign, in carrying on or of any business which the

corporation is authorized to carry on; or to grant concessions, rights,

licenses to others to operate, manage or deal with the same; and to

do any and all things necessary, suitable, convenient, proper or

incidental to the accomplishment of the above purposes.

Clearly, there is no indication that the advances provided to its affiliates

are activities within WPI's ordinary course of business. The purpose of the

cash advance granted by WPI is merely to provide financial support to its

affiliates and not to generate income. Based on the definition and requisites

above stated, WPI shall not be considered as a lending investor since it does

not habitually engage itself in lending transactions and it does not extend

cash advances to its affiliates with a view to profit or livelihood. The reason

for imputing interest on the cash advance is to make the transaction at arm's

length.
DECISION
CTA CASE No. 8024
Page 15 of 19

As to who is considered lending investor, BIR defined the term as "as one

who makes practice of lending money for themselves or others at interest".

(BIR Ruling No. 452-88 dated September 15, 1988)

Moreover, in Piso Bank vs. Commissioner of Internal Revenue, CTA Case

No. 4117 dated June 6, 1989, the case of Molo vs. Yatco, 71 Phil. 468, was

cited to read as follows:

"Where it appears that on six occasions a person accepted

mortgages to guarantee loans to be made to different persons at an

interest of 12% and such person does not prove that such

transactions were made accidentally or because of certain peculiar

circumstances, it should be presumed that he in reality made a

practice of lending money at interest, thus becoming a lending

investor under the law. (Emphasis supplied)"

Based on the above-quoted case, a person who has engaged in lending

activities for six times or more shall be presumed as habitually engaged in the

practice of lending money to others and done in pursuit of a business activity.

In the case at hand, the cash advances was done only once which negates

habituality of lending money at interest.

In addition, the grant of cash advance to MAHEC and TWGI by WPI was

not made with intention to practice lending of money to others but exclusively

with its affiliate, thus, WPI cannot be considered as a lending investor. Any

interest derived by WPI from the cash advance transaction shall not be

subject to VAT on lending investors.

DECISION
CTA CASE No. 8024
Page 16 of 19

Deficiency Expanded Withholding Tax (EWT)

A letter9 from SIR Revenue Region No. 13- Cebu City was received by

the petitioner, signed by Jose N. Tan, Regional Director dated February 18,

2009 was received by the petitioner informing him that the docket relative to

the protest letter dated February 9, 2009 has been returned to Revenue

District No. 80, Mandaue City for reinvestigation.

On September 25, 2009, a Post Reporting Notice 10 was sent to the

petitioner. It was stated in the Schedule of Computation that an additional tax

liability which pertains to director's fees shall be assessed, computed as

follows:

Expanded Withholding Tax

Management fee- accounts payable cred it entries P4,060,000.00

Tax due 609,000 .00
Less: rem ittance 58,000 .00
WE tax payable 551,000 .00
Interest 292,030 .00
Total WE payable P 843,030 .00

After further study and analysis of the records of the case, the

petitioner was not able to substantiate its protest on the assessment of

expanded withholding tax on Director's fees. It is worth noting that the

petitioner did not present any witness nor submit any document to contradict

the amended assessment of the respondent on expanded withholding tax.

The petitioner even filed a Motion for Issuance of Order allowing SIR Cebu

RDO No. 80 to Accept Tax Payment on May 18, 2011. In a resolution

9
Rollo 000045 , Annex F.
10
Rollo 000055 , Annex J.
DECISION
CTA CASE No. 8024
Page 17 of 19

promulgated May 26, 2011, this Court denied the abovementioned Motion,

the same being the incorrect remedy under the circumstances.

To end, it is worthy to note that assessment are prima facie presumed

correct and made in good faith . It is the taxpayer and not the BIR who has

the duty of proving otherwise. In the absence of proof of any irregularity in

the performance of official duties, an assessment will not be disturbed. Failure

to present proof of error in the assessment will justify judicial affirmance of

said assessment. 11

Compromise Penalty

In the judicial affidavit of Ann Roussel 0 . Salarda 12 , General Accountant of

the petitioner, it was admitted that the accounting department of the

petitioner, despite repeated search, could not locate the document that may

have been submitted to the BIR relative to the use of computerized

accounting system . It was also admitted that the management of petitioner

has paid the P25,000.00 Compromise Penalty Assessment on March 23, 2011

through the SIR's eFPS system as evidenced payment confirmation from the

BIR 13 • Thus, the respondent alleges that petitioner is liable to pay P25,000.00

comprom ise penalty for the unauthorized use computerized accounting

system.

11
CIR vs. CA, 242 SCRA 313-314
12
Rollo 000402 A4.
13
Rollo 000389.
DECISION
CTA CASE No. 8024
Page 18 of 19

In addition, the Final Decision on Disputed Assessment (Schedule 1) also

indicated therein that the petitioner is liable to pay compromise penalty for

non-submission of alpha list of payees amounting to P25,000.00.

However, in both assessments, no compromise agreement between the

parties was reached. There is no document presented in this Court that would

indicate that both parties agreed to enter into a compromise agreement.

Accordingly, the imposition of a compromise penalty has no basis. As

discussed earlier, "the imposition of the same without the conformity of the

taxpayer is illegal and unauthorized" (Commissioner of Internal Revenue v. Lianga Bay

Logging co., Inc., ). Thus, petitioner should not be subject to compromise

penalties.

WHEREFORE, premises considered, the petitioner's prayer for the

cancellation of the assessment covering deficiency amended expanded

withholding tax for taxable year 2006 are hereby DENIED.

Accordingly, petitioner is hereby ORDERED to pay respondent

deficiency amended expanded withholding tax for the taxable year 2006 in

the amount of P873,448.22, inclusive of 25% surcharge and 20% deficiency

interest imposed pursuant to Section 248 A(3) and 249(8) of the NIRC of

1997.

Likewise, petitioner is ORDERED to pay delinquency interest at the

rate of 20% per annum on the total deficiency taxes of P873,448.22 from

December 15, 2009 until full payment thereof pursuant to Section 249(C)(3)

of the 1997 NIRC.

DECISION
CTA CASE No. 8024
Page 19 of 19

FINALLY, as to the petitioner's prayer for the cancellation of the

assessment on the deficiency value added tax for taxable year 2006 and the

compromise penalty for the unauthorized use of computerized accounting

system and for non-submission of alpha list of payees, this Court finds it

meritorious to cancel the same. Consequently, respondent is hereby

ORDERED to CANCEL the assessment on the deficiency value added tax for

taxable year 2006 and the assessment on the compromise penalty for the

unauthorized use of computerized accounting system and for non-submission

of alpha list of payees.

SO ORDERED.

~~·~
ERNESTO D. ACOSTA
Presiding Justice

WE CONCUR:
,

E~UY
A~J~,~-~~~~tice

CERTIFICATION

I hereby certify that the above decision was reached after due
consultation with the members of the Court of Tax Appeals in accordance
with Section 13, Article VIII of the Constitution.

D__.,r,p. ~­
EliNEsTo D. ACOSTA
Presiding Justice