COMMISSIONER OF INTERNAL REVENUE versus SONY PHILIPPINES, INC.
G.R. No. 178697 November 17, 2010
Facts:
1. the CIR issued Letter of Authority (LOA 19734) authorizing certain revenue officers to examine Sonys books of accounts and other accounting records regarding revenue taxes for the period 1997 and unverified prior years.
2. A preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which Sony protested.
3. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal letter of demand and the details of discrepancies.
4. The CIR assessed a deficiency VAT - P11,141,014.41
Issue:
1. Whether or not he Letter of Authority is Valid
2. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41
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Ruling:
1. 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.
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.
The 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.
It violated also Section C of Revenue Memorandum Order No. 4390 - A Letter of Authority should cover a taxable period not exceeding one taxable year.
2. CIRs argument that Sonys advertising expense could not be considered as an input VAT credit because the same was eventually reimbursed by Sony International Singapore (SIS).
Sonys deficiency VAT assessment stemmed from the CIRs 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. 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.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable.
Insofar as the 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 Sonys advertising expense for it was but an assistance or aid in view of Sonys dire or adverse economic conditions, and was only equivalent to the latters (Sonys) advertising expenses.
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.
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