SUMMARY OF SIGNIFICANT CTA DECISIONS (May 2016)

Linde Philippines, Inc.v. Commissioner of Internal Revenue

CTA EB No. 8724 May 4, 2016

The taxpayer received the Preliminary Assessment Notice (PAN) on January 2, 2013 while the
Formal Letter of Demand and Final Assessment Notice (FLD/FAN) was received on December
27, 2012 or six (6) days before the taxpayer received the PAN.

The CTA ruled for the taxpayer. Upon receipt of the PAN, the taxpayer is given fifteen (15) days
to make a Reply and is permitted to examine the records and present his arguments in writing. If
the taxpayer fails to respond to the PAN, the taxpayer shall then be sent a FLD/FAN Failure to
give the taxpayer a chance to file a response or reply to the PAN constitutes violation of the due
process requirements in the issuance of a deficiency tax assessment.

Metro Pacific Investments Corporation v. Commissioner of Internal Revenue

CTA EB No. 1288 May 4, 2016

Metro Pacific Corporation (MPC) sold common shares of Bonifacio Land Corporation (BLC) to
Columbus Holdings Inc. (CHI). MPC requested from the BIR confirmation that the transfer
should not be subject to donors tax pursuant to Section 100 of NIRC considering that the
transaction was at arm's length and for a legitimate business purpose entered into by the parties
sans any donative intent. A BIR Ruling was issued confirming that the BLC shares sales
transaction between MPC and CHI was not subject to donors tax. Subsequently, the CIR
assessed MPC for deficiency capital gains tax on the transaction pertaining to the sale of shares
of stock.

The Court ruled for the CIR. Citing Philippine American Life and General Insurance Company
vs. The Secretary of Finance and The Commissioner of Internal Revenue, G.R. No. 210987,
November 24, 2014, the absence of donative intent, if that be the case, does not exempt the
sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that
the amount by which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift. Thus, even if there is no actual donation, the difference in
price is considered a donation by fiction of law. The taxpayer cannot rely on the BIR Ruling
issued as (1) it was issued only by an Assistant Commissioner and not the CIR herself; (2) the
same contravenes Section 100 of the Tax Code; and (3) it was revoked by RMC No. 25-11.

Benguet Electric Cooperative v. The Municipality of La Trinidad, Benguet

CTA EB No. 1091, May 6, 2016

The Benguet Electric Cooperative (BENECO) was assessed by the Municipality of La Trinidad
with deficiency business taxes. BENECO protested the same, claiming it is not engaged in
business as it is a non-stock, non-profit entity. The Municipality denied the protest, and issued
another assessment notice. BENECO protested the same again. Thereafter, the municipality
issued a demand letter to BENECO. It also sent BENECO a notice of seizure. BENECO filed a
Petition for Prohibition with the Regional Trial Court. The RTC dismissed the same for lack of
jurisdiction, as BENECO failed to follow the procedure as outlined in Section 195 of the Local
Government Code. BENECO elevated the case to the CTA. The CTA in Division dismissed the
case, affirming the findings of the RTC. BENECO then appealed to the CTA En Banc.

The CTA ruled against the taxpayer. Section 195 of the Local Government Code provides that
the taxpayer shall have thirty (30) days from the receipt of the denial of the protest or form the
lapse of the sixty (60) day period within which to appeal with court of competent jurisdiction
otherwise the assessment becomes conclusive and unappealable. The taxpayer unfortunately
failed to file an appeal with the RTC within thirty (30) days from receipt of the denial. Instead of
filing an appeal with the RTC, the taxpayer opted to write another letter. Since no appeal was
made, the assessment of the Municipality has attained finality. Since the decision of the
Municipality on the protest could have been appealed before the RTC within the period provided
under Section 195 of the LGC, the remedy of prohibition cannot be resorted to by the taxpayer
for the purpose of questioning the legality of the assessment. Special civil actions of certiorari
and prohibition do not lie where the remedy by appeal has been lost because said special civil
actions cannot take the place of an appeal.

One Network Bank, Inc. v. Commissioner of Internal Revenue

CTA Case no. 8826 May 13, 2016

One Network Bank, Inc. is the result of two rural banks that merged. The bank sought the refund
of the Gross Receipts Tax (GRT) it paid, invoking Republic Act (RA) 7353, otherwise known as
the Rural Bank Act. The said law exempts rural banks from most taxes, including GRT. The
refund was denied by the BIR, invoking RMC 66-2012. The said issuance limits the application
of RA 7353, that the tax exemption therein is only for a period of five (5) years, and may only be
applied to consolidated rural banks if the constituent rural banks were unable to claim the said
tax benefit. Also, if any or both of the constituent banks have not fully utilized the five years,
then the consolidated bank may only claim the tax benefit for the remaining balance. Upon
denial, the bank elevated the same to the CTA, arguing that RMC 66-2012 contravenes RA
7353.

The Court ruled for the CIR. The purpose, as stated in RMC 66-2012, is to prevent rural banks
that have already claimed the five (5) year benefit from claiming another five years through
consolidating with other rural banks. Also, since rural banks are mandated by law to be
incorporated, then the Corporation Code applies to it. As the surviving corporation, the entity
also has all the rights, privileges, immunities of the constituent banks, including tax benefits.
Thus, once used up, the consolidated bank may not claim such anymore. In addition, the
Commissioner is given power by the law to interpret tax laws. RMC 66-10 is merely an
interpretation of law.

Petron Corporation v. Commissioner of Internal Revenue, Commissioner of Customs,

and Collector of Customs (Port of Limay, Bataan)
CTA Case No. 8544, May 17, 2016

Petron filed a Petition for Review, questioning the legality of Customs Memorandum Circular
No. 164-2012, which implements a letter from the BIR stating that alkylate is subject to excise
tax. The CIR filed a Motion to Dismiss for lack of jurisdiction, arguing that the proper remedy to
question the issuance is with the Secretary of Finance.
The CTA was of the opinion that the questioned BIR Letter contains the CIR's interpretation of
Section 148(e) of the NIRC of 1997, as amended. The BIR Letter is in the nature of a BIR
Ruling considered as the present and official stand of the BIR to queries raised by taxpayers
and other stakeholders relative to clarification and interpretation of tax laws. BIR Rulings fall
under the quasi-legislative power under the first paragraph of Section 4 of the NIRC of 1997, as
amended, and not in the second paragraph under other matters. The Court opined that to
classify the BIR Ruling as other matters will render inoperative the first paragraph of Section 4.
The CTA has jurisdiction to rule not only as to the propriety of an assessment or tax treatment of
a certain transaction, but also on the validity of the revenue regulation or revenue memorandum
circular on which the said assessment is based. In other words, before the CTA may rule on the
propriety of CMC No. 164-2012, it must first be determined if it is in connection with an
assessment. In the instant case, the BIR neither issued a final assessment which can be the
proper subject of a protest. Hence, there is nothing to dispute.

Urbano Velasco v. Commissioner of Internal Revenue

CTA Case No. 8497, May 17, 2016

Velasco sold his shares of stock in Gervel Inc. and Metropolitan Management Corporation
(MMC). The sales resulted in a loss due to the selling price being lower than its book value.
Subsequently, the BIR questioned the sale and noted that the respondent should be liable for
donors tax on the difference of the book value and the selling price of the shares of stock.
Velasco argued that the sale was without donative intent as it was a result of an ongoing dispute
with the management of Gervel Inc. and MMC and that the sale was the resolution decided by
the board of the respective corporations.

The Court ruled for the CIR. Citing Philippine American Life and General Insurance Company
vs. The Secretary of Finance and The Commissioner of Internal Revenue, G.R. No. 210987,
November 24, 2014, the absence of donative intent, if that be the case, does not exempt the
sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that
the amount by which the fair market value of the property exceeded the value of the
consideration shall be deemed a gift

Aegis People Support Inc. v. Commissioner of Internal Revenue

CTA EB No. 1231, May 17, 2016

Aegis is a registered PEZA locator. It filed for a refund of erroneously paid taxes with the BIR. It
claimed that its income from foreign exchange gains should be covered by its Income Tax
Holiday benefit. The said foreign exchange gains were realized from its Hedging Contract with
Citibank, where the taxpayer enters into an agreement with the said bank as to a particular date
of sale, and a set selling price of the taxpayers US Dollars. Due to the inaction of the CIR, the
taxpayer filed a case for refund with the CTA. The Court in Division dismissed the same for lack
of merit.

The CTA En Banc ruled that while it be maybe true that the US Dollars earned by the taxpayer
as a contact center were used to purchase Pesos, through its hedging contract with Citibank, in
order to pay for its ordinary and necessary expenses of its customer support business, the fact
remains that the subject forex gains were derived from the foreign exchange contract it entered
into with Citibank and not from its registered activity as a contact center or any activity
necessarily related or attributable to it. The taxpayers hedging contract, which involve the sale
of specified amounts of dollar to Citibank on predetermined dates and at pre-determined
exchange rates, is certainly not within the ambit of the taxpayers registered activity with PEZA
and/or BOI. And since the taxpayers hedging activity is outside of its registered trade or
business, i.e. as a contact center, the income tax holiday on its registered activity cannot be
possibly stretched to cover its forex gains.

Commissioner of Internal Revenue v. The Hong Kong Shanghai Banking Corporation

Limited Philippine Branch
CTA EB No. 1257, May 17, 2016

HSBC spun-off its Merchant Acquiring Business in accordance with Section 40(C)(2) of the Tax
Code. In exchange for shares of stock of the new corporation, HSBC transferred its equipment
pertaining to the business. HSBC thereafter sold the shares of the resulting corporation to a
non-resident foreign corporation. In valuing the shares sold, the parties took into consideration
the value of the goodwill of the corporation being sold. HSBC then paid for the Capital Gains
Tax incurred from the transaction. The CIR thereafter assessed HSBC for deficiency income
tax. The CIR contended that the goodwill of HSBCs Merchant Acquiring Business is an ordinary
asset. The spinning-off of the business was done as a means of evading the regular income tax
rate from the sale of the goodwill.

The CTA, citing a previous Supreme Court Decision, defined goodwill as the reputation of good
name of an establishment. If the good will, that is, the good reputation of the business is
acquired in the course of its management and operation, it does form part of the capital with
which it was established. It is an intangible moral profit, susceptible of valuation in money,
acquired by the business by reason of the confidence reposed in it by the public. It is an
intangible asset, cannot exist independently of the business, nor can it be sold, purchased or
transferred separately without carrying out the same transactions for the business as a whole.
Thus, goodwill is tagged to a company or business and cannot be sold or purchased
independently. It is considered as part of capital. The Court ruled that goodwill is not an ordinary
asset as it is not among the exceptions under the definition of capital assets. The sale of the
Merchant Acquiring Business of HSBC is (1) not a stock in trade or other property included in
the taxpayer's inventory; (2) nor a property primarily for sale to customers in the ordinary course
of his trade or business; (3) nor a property used in the trade or business of the taxpayer and
subject to depreciation allowance; and (4) nor a real property used in trade or business. Hence,
goodwill is a capital asset subject to capital gains tax.

Splash Corporation v. Commissioner of Internal Revenue

CTA Case No. 8530, May 19, 2016

Splash was assessed for deficiency income tax, among others. The CIR argues that while the
taxpayer claims that its net taxable income is exempt under Republic Act (RA) No. 7459,
otherwise known as the Inventors and Invention Incentives Act of the Philippines, the person
entitled to the said exemption is the inventor under whose name the patent is registered. She
added that the exemption applies to the sale of the inventions by the inventor himself and not on
the sale of the invention by other parties and thus, the tax incentive applies to the sale of
invention by Dr. Rolando B. Hortaleza, and not the sale by Splash Corporation.

The Court ruled for the taxpayer. Section 6 of RA No. 7459 provides that any income derived
from these technologies shall be exempted from all kinds of taxes during the first ten (10) years
from the date of first sale Accordingly, the Court ruled that it is Splash Corporation, who is
the manufacturer and seller of the inventions of Dr. Rolando B. Hortaleza, that is entitled to tax
incentives under RA No. 7459.
Macario Lim Gao v. Commissioner of Internal Revenue
CTA EB No. 1247, May 20, 2016

A Warrant of Distraint and/or Levy followed by Notices of Tax Liens and Notices of Levy on Real
Property were issued by the CIR against the taxpayer. The Taxpayer filed an Extreme Urgent
Verified Motion for Suspension of Collection of Taxes before Court in Division. The Court
granted the motion, conditioned upon the taxpayers filing of cash bond, and directed the CIR to
cease and desist from collecting the alleged tax deficiency of the taxpayer and enforcing the
Warrant of Distraint and/or Levy. However, a public sale was done on the taxpayers real
property by the BIRs auction committee to satisfy the deficiency tax liability of the taxpayer. The
taxpayer filed a Motion to Nullify the Auction Sale which was denied for lack of merit. A Motion
for Reconsideration was filed by the taxpayer which was denied by the Court in Division for lack
of merit. A Petition for Review was filed by the taxpayer before the Court En Banc. The CIR
argues that the CTA En Banc does not have jurisdiction over the assailed Resolutions of the
CTA in Division.

The Court ruled for the CIR. Only final judgments or orders of the Court in Division may be
elevated on appeal to the CTA En Banc by way of petition for review. The two Resolutions by
the Court in Division denying the Motion to Nullify the Auction Sale and the Motion for
Reconsideration which were denied due to lack of merit are not final orders or judgments which
dispose of the case but merely interlocutory orders which the CTA En Banc has no jurisdiction.

Commissioner of Internal Revenue v. Doosan Heavy Industries and Construction

CTA EB No. 1255, May 27, 2016

Doosan Heavy Industries filed an administrative claim for issuance of a tax credit certificate of
excess and unutilized creditable withholding tax for taxable year 2010.A judicial claim was filed
by the taxpayer. The same was granted by the CTA in Division. The CIR filed a Motion for
Reconsideration, which was denied. On appeal to the CTA En Banc, the CIR argues that the
taxpayer failed to comply with the documentary requirements as listed in RMO No. 53-98 as
well as RR No. 2-2006 since it was only before the CTA that the taxpayer submitted its
evidence, in effect it failed to exhaust administrative remedies with a consequence of no claim
for refund was deemed filed in the administrative level.

The CTA ruled for the taxpayer. The Court ruled that it is not precluded from accepting the
taxpayers evidence assuming these were not presented at the administrative level. Cases filed
in the CTA are litigated de novo. Thus, the taxpayer-claimant must prove every minute aspect of
its case by presenting, formally offering and submitting to the Court all evidence in supports of
its claim. Noteworthy in this case is the application of the Supreme Courts ruling in Pilipinas
Total Gas v. Commissioner of Internal Revenue, G.R. No. 207112, December 8, 2015. Applying
this ruling, the Court stressed that when what is on appeal is the inaction of the CIR, there is in
effect no decision for review. As a result, the Court may give credence to all the evidence
presented by the taxpayer, including those no presented at the administrative level. The Court
added that while Pilipinas Total Gas pertains to a claim for refund of excess and unutilized input
VAT, there is no reason not to apply the same to the instant case.