REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

ENBANC
COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,
-versus-

C.T.A. EB No. 250

(C.T.A. Case No. 6577)

NIDEC COPAL PHILIPPINES

CORPORATION,
Respondent.
)(-

- - - - - - - - - - - - - - - - - - - - - - - - -)(

NIDEC COPAL PHILIPPINES

CORPORATION,
Petitioner,

C.T.A. EB No. 255

(C.T.A. Case No. 6577)

-versusPresent:

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

Acosta, P.J.,
Castaneda, Jr.,
Bautista,

Uy,
Casanova,
Palanca-Enriquez, JJ.:
Promulgated:

OCT 012007 /fP.I;p~~

)(---------------------------------------------------------------------------------------------)(
DECISION
BAUTISTA,~.:

The Case

Before the Court En Bane are two Petitions for Review filed pursuant to

Section 18 of Republic Act ("RA") 1125, as amended by Section

0)

DECISION
E B Nos 250 & 255 (C T A. Case No 6577)
Page 2 of 25

9282 .

The first petition docketed as C.T.A. EB No. 250 filed by the

Commissioner of Internal Revenue seeks the partial reversal of the Decision

dated September 25 , 2006 and the Resolution dated January 3, 2007 of the
Second Division of this Court ("Court in Division ") in C.T.A. Case No. 6577
captioned "Nidec Copal Philippines Corporation vs. Commissioner of Internal

Revenue," which cancelled deficiency income and documentary stamp tax

assessments , including increments on the late payment of expanded
withholding tax on interest, in the total amount of P,2 ,034 ,711 .17 for the fiscal
year ended March 31 , 1999, but ordered Nidec Copal Philippines Corporation
to pay to the Commissioner of Internal Revenue the amount of P,8 ,060 ,874 .94
representing income, final withholding and fringe benefits taxes , inclusive of
increments, plus 20% delinquency interest from May 20, 2002 until fully paid.
On the other hand , the second petition docketed as C.T.A. EB No. 255
was filed by Nidec Copal Philippines Corporation praying that this Court
render judgment finding it not liable for the amount of P,8 ,060,874 .94 , and for
the 20% delinquency interest imposed thereon .
Since both Petitions for Review involve the same parties and subject
matter, this Court deemed it necessary to consolidate the petitions.

Antecedent Facts

As summarized by the Court in Division , the facts are :

"In their Joint Stipulation of Facts and Issues, the parties stipulated
as follows :

'1.
Petitioner is a domestic corporation duly licensed by the
Securities and Exchange Commission ("SEC") and registered with
the Philippine Economic Zone Authority ("PEZA") with PEZA
Registration Certificate No. 91-019 dated July 5, 1991 . It has office

DECISION
E. B. Nos. 250 & 255 (C.T.A. Case No. 6577)
Page 3 of 25

address at main Avenue corner Binary Street, Light Industry &

Science Park of the Philippines I, Special Economic Zone, Bo.
Diezmo, Cabuyao, Laguna .
Petitioner may be served with papers , orders , and other
processes of this Honorable Court through undersigned counsel.
2.
Respondent is the Commissioner of Internal Revenue (CIR),
duly appointed to perform the duties of his office, including , inter alia ,
the power to decide disputed assessments , subject to the exclusive
appellate jurisdiction of this Honorable Court, pursuant to Section 4 of
the Tax Code .
3.
Respondent holds office and , hence, may be served with all
papers , orders , and other legal processes of this Honorable Court at
the 51h Floor, Bureau of Internal Revenue ("BIR") National Office
Building, BIR Road , Diliman , Quezon City.
4.
On April 29 , 2002 , Petitioner received copies of the Formal
Letter of Demand and the Final Assessment Notice (Assessment
Notice No. 57 -99) both dated April 19, 2002 issued by Respondent. In
the said letter of demand and assessment notice, Respondent
assessed petitioner for deficiency income, fringe benefits , expanded
withholding , and documentary stamp taxes and compromise penalty
in the aggregate amount of P,10 ,713 ,749 .74, inclusive of increments,
for fiscal year ended March 31, 1999, computed as follows :

I.
II.
Ill.
IV.

v.
VI.
VII.
VIII.

Tax Type
Income Tax - Unregistered Activity
Income Tax- Special Tax Rate
Income Tax- Disallowance
Documentary Stamp Tax - Loan
Agreements , Instruments and Paper
Final Withholding Tax Roya lty
Expense
Increments - Late Payment of EWT on
Interest
Documentary Stamp Ta x - Loan and
Lease Agreements
Fringe Benefits Tax- Rental (Housing)
Total

Total Tax Due

~2 . 168,639 .65
657,278 .39
613,165.16
1,095,622.77

5,592,789.05
220,411 .00
61,399.01
304 444.71
P10,713,749.74

=============

5.
Pursuant to Section 228 of the Tax Code , Petitioner made a
timely protest thereof in a letter dated May 29 , 2002 filed with the
Revenue Region No. 9 of the Bureau of Internal Revenue ("BIR") on
May 29 , 2002 . Said protest letter specified and discussed the factual
and legal bases of the protest against the assessment and requested
that the same be cancelled and , consequently, the case against
Petitioner be considered closed and terminated . Section 228 of the
Tax Code is applicable since the assessments were issued when the
1997 Tax Code is already in effect.
6.
The 180-day period within which Respondent is mandated by
law to render a decision on the protest filed by a taxpayer lapsed on
November 25 , 2002 , but Respondent failed to act on Petitioner's
protest. Hence, petitioner has thirty (30) days from said date, or until

DECISION
E. B. Nos. 250 & 255 (C .T.A. Case No. 6577)
Page 4 of 25

December 26 , 2002 (December 25 , 2002 being a holiday) , within

which to appeal to this Honorable Court.
7.
This Honorable Court has exclusive appellate jurisdiction to
take cognizance of the instant Petition pursuant to Section 228 of the
Tax Code in conjunction with Section 4 of the same Code , as well as
Section 7 of Republic Act No. 1125, otherwise known as "An Act
Creating the Court of Tax Appeals." '

In his amended answer, respondent alleged by way of special and

affirmative defenses that there were income/adjustments from
unregistered activities which were excluded in the computation of taxable
income and these consist of rework charges (.J2276,329.90) , Vishay losses
(.J27,803,456.74) and selling price adjustment (.J2232,302.00) ; that a
deficiency income tax in the amount of .J2387,342 .00 resulted from the
disallowance of the inventory written- off and communication expense;
Revenue Regulations No. 16-99 allowing Subic Special Economic and
Freeport Zone (SSEFZ) entities to deduct communication expenses, does
not state that the same is applicable to PEZA registered entities; SSEFZ
and PEZA registered entities are similar only insofar as the 5%
preferential tax is concerned ; petitioner's Loan Agreements with Copal
Co. Ltd. ($7,400,000.00 and JPY250,000,000.00) and Temic Telefunken
($480,000.00) were not subjected to DST of .J21 ,095,622.77 pursuant to
Section 180 of the Tax Code; petitioner did not pay DST of .J261, 196.95,
inclusive of increments and surcharge, on its Lease Contract
(.J22,390, 160.00) and Loan Agreement (.J214,442 ,278.00) with its affiliate,
El Nuevo Diezmo Realty, Inc., pursuant to Sections 194 and 180 of the
Tax Code ; petitioner's royalty expense charge on operations amounted to
.J217 ,550, 137.00 with an additional adjustment of .J276,069.31 ; however,
the total remittance of final withholding tax on royalty payments amounted
only to .f21 ,370,500.85 resulting to a discrepancy of .J23 ,017 ,033.00 and
.J219,767.32 , excluding increments and surcharges; petitioner failed to
remit to the BIR within the prescribed period a final withholding tax on
interest in the amount of .J2316,018.00, resulting to the imposition of
increments in the amount of .J2220,411 .00, pursuant to Revenue
Regulations 2-98; and the fringe benefit tax assessment was issued within
the prescribed period .
Petitioner presented Wilfreda Onag , as witness , and submitted its
'Formal Offer of Evidence', which was admitted by the Court, except for
Exhibits 'W ', 'W-1 ', 'W-2 ', 'X', and 'X-1 ' for failure of the petitioner to
present the originals for comparison .
Upon petitioner's 'Motion For Partial Reconsideration ', the Court
admitted Exhibits 'W' and 'X', inclusive of their submarkings .
On the other hand , respondent Commissioner of Internal Revenue
presented Wilma Enrique , as witness , and submitted his Formal Offer of
Evidence, which was all admitted by the Court.
Both parties were ordered to file their simultaneous memoranda ,
within thirty (30) days from notice. Upon their respective motions ,

DECISION
E B. Nos 250 & 255 (C .T.A. Case No 6577)
Page 5 of 25

petitioner was granted thirty (30) days from July 25, 2005 or until August
24, 2005, and respondent was granted a total extension of forty five (45)
days from July 27 , 2005 or until September 10, 2005 , within which to file
their respective memoranda .
On August 31 , 2005 , petitioner filed a 'Motion To Admit', which the
Court granted and the 'Memorandum For the Petitioner' was admitted .
On the other hand , respondent filed his 'Memorandum For the
Respondent' on September 12, 2005.
Thereafter, the case was deemed submitted for decision ."

The Ruling of the Court in Division

In a Decision promulgated on September 25 , 2006 , the Court in Division
ruled as follows :
1. Petitioner's income from scrap sales and from other activities is subject
to the 34% income tax 1 unde r Section 27 , in relation to Sections 31 and
32 of the National Internal Revenue Code ("NIRC") of 1997, as
amended ;
2. Petitioner's rework charges , vishay losses , and selling price adjustment
were already included in the computation of petitioner's gross income
earned for the fiscal year end ing March 31 , 1999 and subjected to the
5% final tax on its Gross Income Earned ("GIE") for PEZA-registered
enterprises ;
3. Petitioner's Inventory written-off and communication expenses are
proper disallowances from petitioner's claimed deduction for cost of
sales for the fiscal year 1999;
4. Petitioner is not liable for deficiency documentary stamp tax ("DST") on
its loan agreements with its Japanese licensor and a non-resident
1

34% effective Janu ary I , 1998 and 33% effective January I, 1999, pursuant to RA 8424.

DECISION
E B Nos. 250 & 255 (C. T.A Case No 6577)
Page 6 of 25

German corporation since petitioner's 5% final tax on its GIE as a

PEZA-registered enterprise, is in lieu of all local and national taxes;
5. The formal letter of demand and assessment notice issued on April 19,
2002

is beyond the three-year prescriptive period within which

respondent could make an assessment for deficiency final withholding

tax ("FWT") for the months of April 1998 to February 1999;
6. Petitioner is liable for deficiency FWT on Royalty expense for the month
of March 1999 for failure to explain the discrepancy between the FWT
remittances and the royalty expenses claimed by petitioner, plus 25%
surcharge and interest;
7. The assessment for deficiency increments for late payment of FWT on
the accrued interest on petitioner's foreign loan from Copai-Japan is
without factual and legal basis as petitioner timely remitted the FWT due
within the prescribed period ;
8. Petitioner is not liable for deficiency DST on its loan agreement and
lease contract with its affiliate , El Nuevo Diezmo Realty, Inc. since
petitioner's 5% final tax on GIE is in lieu of all local and national taxes;
9. Except for the fourth quarter, respondent's right to assess deficiency
fringe benefits tax ("FBT") for the fiscal year ending March 31 , 1999 is
already barred by prescription ; and
10. Petitioner is liable for deficiency FBT on its rental expense for three
residential properties, plus 25% surcharge and interest.
The dispositive portion of the Decision reads as follows :

DECISION
E B Nos. 250 & 255 (C T A. Case No 6577)
Page 7 ol 25

"WHEREFORE , in view of all the foregoing , the Petition for Review

is hereby PARTIALLY GRANTED. The following deficiency tax
assessments in the total amount of ~2 . 034 , 711 . 17 are hereby
CANCELLED and WITHDRAWN for lack of merit:
INCOME TAX - SPECIAL TAX RATE
DOCUMENTARY STAMP TAX - LOAN AGREEMENTS ,
INSTRUMENT & PAPER
INCREMENTS - LATE PAYMENT OF EWTON INTEREST
DOCUMENTARY STAMP TAX - LOAN &
LEASE AGREEMENTS

TOTAL

P-2,034,711 17

657 ,278.39

1,095 ,622.77
220,411 .00
61 ,399 .01

However, petitioner is hereby ORDERED TO PAY to respondent

the following deficiency tax assessments for fiscal year 1999 in the total
amount of P8,060,874.94, broken down as follows :
TOTAL TAX DUE
(WI INCREMENTS)

TYPE OF TAX

INCOME TAX - UNREGISTERED ACTIVITY

INCOME TAX- DISALLOWANCE
FINAL WITHHOLDING TAX- ROYALTY EXPENSE
FRINGE BENEFITS TAX - HOUSING

~1 . 812 , 636.48

TOTAL AMOUNT OF DUE

P-8.060.874.94

597,165.16
5,577 ,995.30
73 ,078 .00

In addition , petitioner is ORDERED TO PAY to respondent 20%

delinquency interest on ~8 . 060 , 874 . 94 computed from May 20, 2002 until
fully paid , pursuant to Section 249(C)(3) of the NIRC of 1997, as
amended.
SO ORDERED."

Nidec Copal Philippines Corporation filed a Motion for Reconsideration

of the aforementioned Decision of the Court in Division on October 23 , 2006 .
The Commissioner of Internal Revenue likewise filed his Motion for Partial
Reconsideration on October 26, 2006 .
In a Resolution dated January 3, 2007 , the Court in Division denied both
Motions for Reconsideration for lack of merit.
Hence , both

petitioner Nidec Copal

Philippines Corporation and

respondent Commissioner of Internal Revenue filed their Petitions for Review

with the Court of Tax Appeals En Bane (hereafter "this Court") on January 24 ,

DECISION
E 8 Nos 250 & 255 (C T.A Case No 6577)
Page 8 of 25

2007 and February 7 , 2007 , respectively. The appeal by the Commissioner of

Internal Revenue was docketed as C.T.A. EB No. 250 while Nidec Copal
Philippines Corporation's appeal was docketed as C.T.A. EB No. 255 .

In a

Resolution dated April 24 , 2007 , this Court ordered the consolidation of C.T.A.
EB No. 250 with C.T.A. EB No. 255.

Considering that both parties are

petitioners and respondents at the same time , they shall be referred to by their
respective names throughout the rest of this Decision .

Thus, the term

"Commissioner" shall refer to the Commissioner of Internal Revenue and the

name "Nidec" shall refer to Nidec Copal Philippines Corporation.

The Issues

The following are the issues raised by the parties in their respective
Petitions for Review:

C.T.A. EB No. 250

Commissioner of Internal Revenue vs.
Nidec Copal Philippines Corporation

"WHETHER OR NOT RESPONDENT IS LIABLE FOR DEFICIENCY

DOCUMENTARY STAMP TAX (DST) ON ITS LOAN AGREEMENTS
AND LEASE CONTRACTS"

C.T.A. EB No. 255

Nidec Copal Philippines Corporation vs.
Commissioner of Internal Revenue
"1. WHETHER PETITIONER'S SALE OF SCRAP IS SUBJECT TO 34%
INCOME TAX INSTEAD OF THE 5% PREFERENTIAL TAX RATE FOR A
PEZA ENTERPRISE; AND

DECISION
E B Nos. 250 & 255 (C T A Case No. 6577)
Page 9 of 25

2. WHETHER
PETITIONER'S
INVENTORY WRITE-OFF
AND
COMMUNICATION EXPENSES ARE VALID EXPENSES UNDER
THE PEZA RULES;
3. WHETHER PETITIONER IS LIABLE FOR DEFICIENCY FWT ON
ROYALTY EXPENSE; AND
4. WHETHER PETITIONER IS LIABLE FOR DEFICIENCY FRINGE
BENEFITS TAX. "

The Ruling of the Court En Bane

Both Petitions for Review are unmeritorious.
This Court shall tackle the issues in the order presented.

First Issue:
DST on loan agreements and lease contracts
The Commissioner argues that Nidec should be held liable for DST on
its Loan Agreements with Copal Co . Ltd . in the amounts of $7,400 ,000 .00 and
JPY250 ,000 ,000 .00 ,

with

Temic

Telefunken ,

non-resident

German

corporation , in the amount of $480 ,000 and with its affiliate El Nuevo Diezmo
Realty, Inc. in the amount of P-14,442 ,278.40 , pursuant to Section 180 of the
1997 NIRC , which reads in part:
"SEC. 180. Stamp Tax on All Bonds, Loan Agreements ,
Promissory Notes, Bills of Exchange, Drafts , Instruments and Securities
Issued by the Government or Any of its Instrumentalities, Deposit
Substitute Debt Instruments, Certificates of Deposits Bearing Interest and
Others Not Payable on Sight or Demand . - On all bonds, loan
agreements , including those signed abroad , wherein the object of the
contract is located or used in the Phil ippines , ... xxx ... , there shall be
collected a documentary stamp tax of Thirty centavos (P0.30) on each
Two hundred pesos (P200) , or fractional part thereof, of the face value of
any such agreement, xxx." (Emphasis supplied)
The Commissioner likewise contends that Nidec should be held liable
for DST on its Lease Contract in the amount of P-2 ,390 , 160.00 with its affiliate ,

DECISION
E 8 Nos. 250 & 255 (C T A. Case No 6577)
Page 10 of 25

EL Nuevo Realty, Inc., pursuant to Section 194 of the 1997 NIRC , which
states :
"SEC . 194. Stamp Tax on Leases and Other Hiring Agreements .
-On each lease, agreement, memorandum , or contract for hire, use or
rent of any lands or tenements , or portions thereof, there shall be
collected a documentary stamp tax of Three pesos (P3.00) for the
first Two thousand pesos (P2,000), or fractional part thereof, and an
additional One peso (P1.00) for every One thousand pesos (P1 ,000)
or fractional part thereof, in excess of the first Two thousand pesos
(P2,000) for each year of the term of said contract or agreement. "
(Emphasis supplied)

According to the Commissioner, the exemption of a PEZA-registered

entity from payment of DST in the BIR Rulings relied upon by Nidec refers to
exemption of payment from DST on either original issue of stock certificates
to their respective stockholders or sale of a factory building located within the
Ecozone and the buyer is a PEZA-registered company. Nowhere in those BIR
Rulings was there a mention of exemption of payment from DST on loan
agreements and lease contracts. Hence, the Nidec's reliance on those BIR
rulings is misplaced .
Nidec, in its Comment, asserts that as a PEZA-registered enterprise , it
is exempt from all national and local taxes , including the DST. In lieu thereof,
it shall pay a preferential tax of 5% on GIE. The aforesaid BIR Rulings are
illustrative and not a limitation on the rule that PEZA-registered entities are
exempt from DST in view of the imposition of the 5% preferential tax rate on
GIE. Stated otherwise , a PEZA-registered enterprise's exemption from DST is
not only limited to stock certificates and deeds of sale of real property but to
all types of documents that are normally subject to DST under the NIRC .
What is important is the ratio decidendi of the cited opinions .

DEC1S10N

E.B. Nos. 250 & 255 (C .T.A. Case No 6577)

Page 11 of 25

This Court agrees with Nidec.

2

It is undisputed that Nidec is a PEZA-registered enterprise . As such , it

is exempt from all national and local taxes under RA 7916 .3 In lieu thereof, it
shall pay a preferential tax of 5% on GIE pursuant to Section 24 of RA 7916 ,
which provides in part:
"SEC. 24.
Exemption from Taxes Under the National Internal
Revenue Code. -Any provision of existing laws, rules and regulations to
the contrary notwithstanding, no taxes, local and national, shall be
imposed on business establishments operating within the
ECOZONE. In lieu of paying taxes , five percent (5%) of the gross income
earned by all businesses and enterprises within the ECOZONE shall be
remitted to the national government.xxx."

This exemption from the payment of national internal revenue taxes is

reiterated in Section 1, Rule XX , Part VII of the Rules and Regulations to
Implement RA 7916 ("PEZA Rules"), which states :
"Rule XX - Gross Income Taxation
SECTION 1. Special Tax Rate. - Pursuant to Section 24 of the Act,
ECOZONE Enterprises , except ECOZONE Service Enterprises , shall in
lieu of payment of national and local taxes , be liable to the payment of a
five percent (5%) final tax on gross income earned xxx."
The Supreme Court has confirmed the rule under RA 7916 that the 5%
preferential tax rate on GIE under RA 7916 is in lieu of all taxes . No other
national or local tax may be imposed on a PEZA-registered enterprise availing
of this particular fiscal incentive , not even an indirect tax like VAT.

When RA

8748 was enacted to amend RA 7916 , the same prohibition applied , except
for real property taxes that presently are imposed on land owned by
2

Par. I , Joint Stipulation of Facts and Issues, page I 06, CTA Records.
An Act Providing for the Legal Framework and Mechanisms for the Creation, Operation, Administration, and
Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic
Zone Authority (PEZA), and for other purposes, otherwise known as The Special Economic Zone Act of 1995 .
4
Commissioner of Internal Revenue v. Toshiba Information Equipment (Phi is.), Inc ., G.R. No. 150 154, August
3

9, 2005, 466 SCRA 211.

&

DECISION
E. B. Nos. 250 & 255 (C T A. Case No. 6577)
Page 12 of 25

developers. This similar and repeated prohibition is an explicit ratification of

the law's intent in not imposing local or national taxes on business enterprises
within the ecozone .5 Since the law does not exclude the DST from the
prohibition , it is deemed included . Exceptio firmat regulam in casibus non
exceptis. An exception confirms the rule in cases not excepted ; that is, a thing
not being excepted must be regarded as com ing within the purview of the
general rule .
In addition , the BIR itself has consistently ruled that a PEZA-registered
enterprise subject to the preferential tax of 5% on its GIE is exempt from the
payment of all other national taxes including the DST.6
In the same vein , the BIR has also ruled that a PEZA-registered
enterprise subject to the 5% tax is exempt from the payment of DST on the
sale and/or lease of its PEZA-registered lots to PEZA-reg istered and nonPEZA locators.7
It is settled that the interpretation of an administrative government
agency like the BIR , which is tasked to implement a statute , is generally
accorded great respect and ordinarily controls the construction of the courts ,
unless such construction is clearly shown to be in sharp conflict with the
governing statute or the Constitution and other laws.8 No such conflict is
present in this case .

Commissioner of Internal Revenue v. Seagate Technology (Philippines), G.R. No. I 53866, February II , 2005 ,
451 SCRA 132.
6
BIR Rulin g No. DA-1 07-0 I dated June I , 200 1; BIR Ruling No . DA-570-04 dated Nove mber I 0, 2004.
7
BIR Ruling No. DA-067-04 dated February 12, 2004.
8
Nestle Philippines, Inc. v. Court of Appeals and Securities and Exchange Commi ssion, G.R. No. 86738,

Nmmbec 13, 1991 , 203 SCRA 504.

tJ

DECISION
E 8 Nos 250 & 255 (C T A Case No 6577)
Page 13 ol 25

It is clear therefore that the DST, which is a national tax, cannot likewise
be imposed on a PEZA-registered enterprise availing of the 5% preferential
tax rate . Thus , the Court in Division correctly ruled that Nidec's exemption
from the payment of local and national taxes includes the DST on its loan
agreements and lease contracts imposed under the afore-quoted Sections
194 and 180 of the 1997 NIRC . This is consistent with the pronouncement of
the Supreme Court that the incentives offered to PEZA-registered enterprises
such as tax exemptions , "ultimately redound to the benefit of the national
economy, enticing as they do more enterprises to invest and do business
within the zones , thus creating more employment opportunities and infusing
more dynamism to the vibrant interplay of market forces. "9

Second Issue:
Tax Rate on Sale of Scrap Materials

Nidec contends that under PEZA Memorandum Circular No . 2005032 ,10 its sale of scrap materials , which arose from the manufacture of its
registered products , is subject to the 5% preferential tax rate and not to the
normal corporate income tax.
The Commissioner, on the other hand , posits that since Nidec's sale of
scrap materials is not one of its registered activities , it is subject to the

Intel Technology Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 166732, April 27, 2007
citing Commissioner of Customs v. Philippine Phosphate Fertili::.er Corporation, G.R. No. 144440, September I,
2004, 43 7 SCRA 452, 457.
1
Clarification of the Tax Treatment of (a) Gains on Foreign Exchange Transactions ; and (b) Sales of
Production " Rejects" and "Seconds", Scrap, Raw Materi als, Packaging Material s and Other Production

S" ppl;", d"od Soptomboc 15,2005.

DECIS ION

E.B. Nos 250 & 255 (C T A Case No. 6577)

Page 14 of 25

ordinary income tax rate , pursuant to RA 7916 and Section 1 of Revenue

Regulations ("RR") 20-2002 .

11

This Court quotes with approval the ruling of the Court in Division on
this issue as follows :
'" Scrap ' is a term used to describe manufactured articles or parts
rejected or discarded and useful only as material for reprocessing :
especially waste and discarded metal (Webster's New Collegiate Dictionary,
1977 edition) . In other words , these scrap materials are recoverable wastes ,
where the proceeds derived from the sale thereof shall be taxed in
accordance with the applicable provisions of the NIRC of 1997 referred to
under Section 8, Rule VIII, Part V of the PEZA Rules, to wit:
'PARTV
Tax Treatment of Merchandise in the ECOZONES
RULE VIII
Tax Treatment of Merchandise in the Restricted Areas of the
ECOZONES
SEC. 8.
Rejects, Seconds and Recoverable Wastes. Subject to the provisions of Section 3 of th is Rule , rejects , seconds
and recoverable wastes shall , when taken from the restricted areas of
the ECOZONES to the customs territory , or to the non-restricted
areas of the ECOZONE , be taxed in accordance with the
applicable provisions of the customs and internal revenue laws
and regulations of the Philippines .'

While it is true that the income accruing from petitioner's sale of

scrap materials is incidental to petitioner's registered activity, it is
specifically provided under the afore-quoted PEZA Rules that the same
shall be taxed under the normal circumstances .
Clearly, the scrap sales amounting to P4,069,919.36 qualify as
gross income subject to normal corporate income tax rate (34%
effective January 1, 1998 and 33% effective January 1, 1999) under
Section 27, in relation to Sections 31 and 32 of the NIRC of 1997, as
amended, which provide, as follows :
XXX

XXX

XXX

As regards petitioner's other income in the amount of P24,657 .63,

the same shall also be taxed at the normal rate pursuant to the provisions
of the NIRC of 1997 considering that it does not fall under petitioner's
registered activity. As correctly pointed out by the respondent, the
11

Clari fyi ng the Tax Treatment of Inco me Earned fro m Unregistered Activ ities by Enterprises Registered Under
the Bases Conversion and Development Act of 1992 and the Phili ppi ne Eco nomi c Zone Act of 1995 dated

Ootob<' 14, 2002.

f)

DECISION
E. B. Nos 250 & 255 (C T A. Case No 6577)
Page 15 of 25

preferential tax rate of 5% applies only to petitioner's registered activity,

as provided for under Part VII , Rule XIII of the PEZA Rules, thus:
'Part VII
Incentives to ECOZONE Enterprises
Application and Entitlement
XXX

XXX

XXX

SEC . 5.
Limitation of Entitlement to Incentives . - Incentives
granted by the PEZA shall apply only to registered operations of the
ECOZONE Enterprises and only during the period of its registration
with PEZA."' (Emphasis supplied)

The Court in Division aptly applied Section 8, Rule VIII of the PEZA
Rules as it is the pertinent provision . It specifically applies to rejects , seconds
and recoverable wastes taken from restricted ECOZONE areas to customs
territory and non-restricted areas , and has not been amended . The PEZA
Rules prevail over PEZA Memorandum Circular 2005-32 issued by the
Director General of PEZA.
On the retroactivity of administrative rules , the Supreme Court has
ruled that "an administrative rule interpretative of a statute and not declarative
of certain rights and corresponding obligations , is given retroactive effect as
of the date of effectivity of the statute ." 12 Here , the Circular provided a
different rule in taxing the sale of rejects or scraps . It deleted from the taxation
coverage of the NIRC , the sale of rejects or scraps and subjected them to the
5% GIE. In effect, the Circular vests a new right to establishments in the
ECOZONE which was not previously granted in the PEZA Rules . Hence,
being declarative of a new right , said Circular cannot be given retroactive
effect.
12

Commissioner of Intern al Revenue v. Azucena T. Reyes and vice versa, G.R. Nos. 159694 and 16358 1,
January 27, 2006, 480 SCRA 385, citing Agpalo, Statutory Construction, (4'" ed, 1998) p. 375.

DECISION
E 8 Nos. 250 & 255 (C T.A. Case No 6577)
Page 16 of 25

Third Issue:
Deductibility of Inventory written-off
Nidec avers that the requirements of prior BIR approval and/or
presence

of a

representative

from

the

BIR

are

mere

administrative

requirements which should not abrogate the substantive right of the taxpayer
to claim the inventory written-off as a deduction . Otherwise, formalities will
defeat the taxpayer's substantive rights .
The Commissioner, in his Comment, argues that the inventory write-off
was invalid because it was done without prior approval by or any witness from
the BIR. Moreover, Nidec did not present competent documentary evidence to
establish that the amount written-off actually pertained to destroyed obsolete
inventories.
This Court quotes with approval the ruling of the Court in Division on
this issue:
"The Court finds the disallowance proper.
Inventory write-offs refer to losses resulting from the destruction of
inventory which cannot be sold even at reduced prices due to
obsolescence or deterioration of the inventory (BIR Ruling DA-476-03,
December 10, 2003). The fact that inventory write-offs are deductible from
gross sales for purposes of computing the 5% tax on gross income
earned is not disputed . The respondent's examiner disallowed petitioner's
claimed inventories written-off in the amount of P5,530,136.33 for being
unsubstantiated, there being no prior BIR approval nor the presence of a
representative from the BIR. While a certification from the BIR of the
actual destruction of the claimed obsolete inventories is not necessary in
order that the cost thereof may be written-off and claimed as deduction,
petitioner should have presented competent documentary evidence
to establish that the amount of P5,530, 136.33 actually pertained to
destroyed obsolete inventories. For failure of the petitioner to
substantiate the inventory written-off amounting to P5,530, 136.33,
this Court sustains the disal lowance of the same."13 (Emphasis supplied)

13

Pages 20 to 2 1, Assailed Decision.

DECISION
E B. Nos 250 & 255 (C .T.A. Case No 6577)
Page 17 of25

It is incumbent upon the taxpayer to prove and substantiate his claim for
deduction for obsolete inventories in its income tax return . Nidec having failed
to justify and substantiate the deductibility of this expense , the same was
properly disallowed.

Fourth Issue:
Deductibility of Communication expenses

Nidec asserts that the same are properly deductible from gross income
for purposes of computing the 5% preferential tax. These expenses have been
included in the cost of sales because they form part of expenses incurred by
Nidec as one of the necessary incidents of its manufacturing process . Also,
since enterprises registered with the Subic Special Economic and Freeport
Zone ("SSEFZ") are allowed to claim communication expenses as a deduction
under RR 16-99, it follows that PEZA-registered enterprises also enjoy the
same privilege or benefit and may properly claim their communication
expenses as a deduction pursuant to Section 51 of RA 7916.
Nidec further posits that the Court in Division erred in ruling that RR 1699 is not applicable because RR 2-05 amended RR 16-99 by excluding
communication expenses as one of the allowable deductions, since to apply
RR 2-05 retroactively will be prejudicial to Nidec.
The Commissioner, on the other hand , submits that communication
expenses are not allowed as deduction because it is not among the allowable
deductions available to companies availing of the 5% special tax rate under
RA 7916. Also , SSEFZ and PEZA-registered entities are similar only insofar
as the 5% preferential tax is concerned .

DECIS ION
E.B Nos. 250 & 255 (C T A. Case No 6577)
Page 18 of 25

Deductions for income tax purposes partake of the nature of tax

exemptions; hence , if tax exemptions are to be strictly construed , then it
follows that deductions must also be strictly construed.
PEZA-registered

enterprises

are

similar

14

to

SSEFZ-registered

enterprises created under RA 7227 , which are also subject to the 5%

preferential tax rate , in that the privileges, benefits , advantages or exemptions
granted to SSEFZ-registered enterprises equally apply to PEZA-registered
entities pursuant to Section 51 of RA 7916 , wh ich states :
All privileges, privileges,
"51 . Ipso-Facto Clause.
advantages or exemptions granted to special economic zones under
Republic Act No. 7227, shall ipso-facto be accorded to special
economic zones already created or to be created under this Act. The
free port status shall not be vested upon the new special economic
zones." (Emphasis supplied)
However, as correctly pointed out by the Court in Division , under
Section 57(A) of the Implementing Rules and Regulations of RA 7227 ,
communication expense is not listed as one of the allowable deductions for
purposes of computing the 5% tax on GIE by SSEFZ-registered enterprises.
Thus:
"SECTION 57.

Obligations and Liabilities .

a.
Pursuant to Section 12 (c) of the Act, BSF Enterprises within
the SBF shall , in lieu of paying local and national taxes, pay a five (5%)
percent final tax on their gross income earned in the following
percentages:
XXX

XXX

XXX

b.
"Gross Income Earn ed " for purposes of these Rules refers
to gross sales or gross revenues derived from any business activity, net of
returns , discounts and allowances, less costs of sales, cost of production
or direct costs of services (depending on the nature of business) but
14

Subi c Power Corporati on v. Commi ss ioner of Internal Revenue, C.T.A . Case No. 6059, May 8, 2003.

f)

DECISION
E.B. Nos. 250 & 255 (C T A. Case No 6577 )
Page 19 of25

before any deduction for administrative expenses and incidental losses

during a given taxable period .
In arriving at the base for which the five (5%) percent final tax
stated in the proceeding section shall be applied , the following deductions
shall be allowable/unallowable:
1.
For Manufacturing , Trading and Infrastructure Development
Enterprises:
Allowable Deductions
- Direct salaries , wages or labor expense
-Production supervision salaries
- Raw materials
- Intermediate goods
- Finished goods
- Supplies and fuels used in production
- Depreciation , lease payments or other expenditures on buildings
and equipment
- Financing charges associated with fixed assets
- Rent and utility charges associated with buildings and equipment,
warehousing or handling of goods
Unallowable Deductions
-Administrative salaries
- Corporate management salaries
- Marketing and sales salaries
- Interest & financial charges on working capital
- Loss on disposal of assets
-Advertising
-Insurance
- Miscellaneous supplies and expenses
Entertainment expense
XXX

XXX

xxx"

Neither is it included in Section 2 , Rule XX , Part VII of the PEZA Rules ,

which provides :
"SECTION 2. Gross Income Earned ; Allowable Deductions . - For
purposes of these Rules , Gross Income earned shall be as defined in
Section 2(nn) , Rule I of these Rules subject to the following allowable
deductions for specific types of enterprises :
1.
ECOZONE Export Enterprises , Free Trade Enterprises and
Domestic Market Enterprises
Direct salaries, wages or labor expenses
Production supervision salaries
Raw materials used in the manufacture of products
Goods in process (intermediate goods)
Finished goods
Supplies and fuels used in production

DEC IS ION
E.B Nos 250 & 255 (C T A Case No 6577 )
Page 20 of 25

Depreciation of machinery and equipment used in production , and

buildings owned or constructed by an ECOZONE Enterprise
Rent and utility charges associated with building, equipment and
warehouses , or handling of goods
Financing charges associated with fixed assets
XXX

While RR 16-99 15

XXX

xxx"

included communication expense as one of the

allowable deductions, it was issued only on September 27 , 1999, which is

after the taxable year covered by the subject assessment - fiscal year ending
March 31 , 1999. As previously discussed , an administrative rule interpretative
of a statute , and not declarative of certain rights and corresponding
obligations , is given retroactive effect as of the date of the effectivity of the
statute. However, RR 16-99 is declarative of a right or it creates a new right
i.e. the right to deduct a particular type of expense and not merely
interpretative of a law. Consequently, it cannot be applied retroactively.
This Court notes that RR 02-05 16 subsequently repealed the provisions
of RR 16-99 and excluded communication expense as one of the allowable
deductions.

Fifth Issue:
FWT on Royalty Expense
Nidec points out that the computation by the Court in Division for
deficiency FWT is erroneous. It also submits that the Court in Division had no
15

Amendi ng Revenue Regulations No. 1-95, as amended, and other related rules and regulations to implement
the provisions of paragraphs [b] & [c] of Section 12 of RA 7227, otherwise known as the " Bases Conversion
and Development Act of 1992" relative to the tax incentives granted to enterprises registered in the Subi c
Special Economi c and Freeport Zone, dated September 27, 1999.
1
Consolidated Revenue Regulations Impl ementing Relevant Provisions of Republic Act No. 7227 otherwise
known as "Bases Convers ion and Development Act of 1992", Republic Act 7916 as amended otherwise known
as "Special Economic Zone Act of 1995" , Rep ubli c Act No. 7903 otherwise known as "Zamboanga City Specia l
Economic Zone Act of 1995" and Republic Act No. 7922 otherwi se known as "Cagayan Special Economic
Zone Act of 1995" Thereby Amending Revenue Regulations No . 1-95 as amended by Revenue Regulations No.
16-99, dated February 8, 2005 .

DECISION
E 8 Nos 250 & 255 (C T A. Case No 6577)

Page 21 of 25

legal

and

factual

basis

to

assume

that the

alleged

discrepancy of

P,3 ,921 ,684.41 pertains to royalty payments for the month of March 1999.
The Commissioner maintains that Nidec failed to show convincing proof
to contradict the findings of the BIR examiners.
The Court in Division correctly ruled as follows :
"Having resolved that only the assessment for deficiency final
withholding tax on royalty expense for the month of March 1999 was
issued within the period allowed by law, We now proceed to the issue of
whether or not petitioner is liable for any deficiency final withholding tax
for said month.
A comparison of the royalty payments of P13 ,707 ,521.90 upon
which the final withholding tax remittances in the amount of
P1 ,370 ,788.19 was based and the royalty expenses claimed by petitioner
for the fiscal year 1997 in the amounts of P17 ,550,137.00 and P79,069.31
totalling P17 ,629 ,206 .31 reveals a discrepancy of P3 ,921 ,684.41. Since
petitioner did not present any document to prove that the difference
of P3,921 ,684.41 represents royalty payments for any of the months
of April 1998 to February 1999, the same shall be considered as
payment for the month of March 1999. Petitioner is therefore liable for
the corresponding deficiency final withholding tax in the amount of
P5 ,577 ,995.30, computed as follows :
Total Royalty Expense for the year
Multiplied by FWT Rate

17,629 ,206 .31

25%

Final Withholding Tax Due for the year

Less : Payments made

P4 ,407 ,301 .58

1,370 ,501 .00

Deficiency Basic Final Withholding Tax

Add : Surcharge (25%)

P3 ,036 ,800 .58

759 ,200.14
1,781 ,994 .58

Interest (58 .68%) (4/26/99-3/31/02)

Total Amount Due

(Emphasis supplied)

P5 ,577 ,995 .30"

-----------

Well-settled is the rule that assessments 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 . All

DECISION
E.B. Nos. 250 & 255 (C T A Case No. 6577)
Page 22 of 25

presumptions are in favor of tax assessments. Failure to present proof of error

in the assessment will justify judicial affirmance of said assessment.

17

Records reveal that Nidec failed to present documentary evidence that

would show its monthly royalty expense for 1999. It also failed to identify the
actual amount of its deficiency final withholding tax which has or has not
prescribed . Without

the

required

supporting

documents

and

proper

identification of each of the portion which has prescribed , the findings of the
BIR was correctly upheld by the Court in Division .

Sixth Issue:
Fringe Benefits Tax
Nidec contends that the three (3) real properties located in 288 Garcia
Village St. , 240 Calatagan St. , Ayala Alabang Village and 69 A San Gregorio
St. , Magallanes Village , respectively, are used as dormitories for its transient
employees and charges a monthly rental from the employees who stay
therein. Hence, the rental payments for the lease of said properties cannot be
considered as fringe benefits subject to FBT.
The Commissioner agrees with the ruling made by the Court in Division
as follows :
"As shown in the exam iner's computations, petitioner rented the
following residential properties for the fiscal yea r 1999 for a total amount
of R2 ,241 ,914.10:

17

28 B. Garcia Village St.

240 Calatagan St. , Ayala-Aiabang Village
69A San Gregorio St. , Magallanes Village

R 798 ,741 .65

730 ,075.45
713,097 .00

Total Rental Expense

R2 ,241 ,914 .10

Commissioner of Internal Revenue v. Court of Appeal s, 242 SCRA 313-3 14.

(0

DECISION
E.B Nos. 250 & 255 (C T A. Case No 6577)
Page 23 of 25

The fact that the rental payments for the residential properties
located at 28 B. Garcia Village St. and 240 Calatagan St. , Ayala-Aiabang
Village qualify as fringe benefits subject to FBT under Section 33 of the
NIRC of 1997 is uncontroverted. What is being objected to by petitioner is
that the rental payments for the residential property located at 69A San
Gregorio St. , Magallanes Village , cannot be considered as fringe benefits
subject to FBT under Section 2.33(8) of RR No. 3-98 because the
transient employees who stayed therein were subsequently charged the
corresponding dormitory fees , as shown by the sample journal voucher
and statement of account for the month of June 1998, marked as Exhibits
W", "W-1", "X" and ''X-1".
Petitioner's contention cannot be sustained .
The sample journal voucher and statement of account referred to
by petitioner do not at all prove that the rental payments were
subsequently charged to and paid by petitioner's employees. Petitioner
should have presented competent documentary evidence to prove actual
receipt of rental payments from the employees. For failure to refute the
examiner's findings , petitioner is liable to pay deficiency FBT for the fourth
quarter of fiscal year ending March 31 , 1999 in the amount of ~73 , 078 . 00 ,
computed as follows :
28 B. Garcia Village St.
240 Calatagan St. , Ayala Alabang Village
69A San Gregorio St. , Magallanes Village

p, 204 ,750 .00

189,000 .00
178,274 .25

Total Rental - fourth quarter of FY 1999

Less : 50% Privilege

p, 572 ,024 .25

286 ,012 .13

Rental Expense subject FBT

Divided by FBT divisor

p, 286 ,012 .13

67%

Gross-up Monetary Value

FBT Rate

p, 426 ,883 .77

33%

FBT Due
Less : Payment

P.140 ,871 .64

101 ,131 .58

FBT Balance
Add : 25% Surcharge
Interest (58 .89%) (4/26/99-3/31/02)

p, 39 ,740 .06
9,935 .02
23 ,402 .92

Total Amount Due

p 73,078.00"

We concur with foregoing ruling of the Court in Division. A perusal of the

sample journal voucher and statement of account submitted by Nidec shows
that such documents are inconclusive proof that the rental payments were

DECISION
E.B Nos. 250 & 255 (C .T.A. Case No 6577)
Page 24 of 25

subsequently charged to and paid by Nidec's employees . Nidec should have

presented competent documentary evidence to prove actual receipt of the
alleged rental payments from the employees .
In fine , this Court finds no compelling reason to reverse the assailed
Decision promulgated on September 25 , 2006 and the Resolution dated
January 3, 2007.
WHEREFORE , both Petitions for Review are DISMISSED . Accordingly,

the assailed Decision and Resolution are hereby AFFIRMED .

SO ORDERED .

Associate Justice

WE CONCUR:

L--(1 ! . ~
ERNESTO D. ACOSTA
Presiding Justice

~~Jb Q_ ~~~I~

JtJANITO C. CASTANEDA, JR.

Associate Justice

CAESAR A. CASANOVA
Associate Justice

P.UY

o~KtAL~RIQUEZ
Associate Justice

DECISION
E B. Nos. 250 & 255 (C .T A. Case No 6577)
Page 25 of 25

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution , it is hereby

certified that the above Decision has been reached in consultation with
the members of the Court En Bane before the case was assigned to the
writer of the opinion of this Court.

G-Q. .~
ERNESTO D. ACOSTA
Presiding Justice