G.R. No. 178797, November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SONY PHILIPPINES, INC., Respondent.

FACTS

The Commissioner of Internal Revenue (CIR) issued a Letter of Authority (LOA) to examine Sony Philippines, Inc.’s books for “the period 1997 and unverified prior years.” Following an audit, the CIR issued final deficiency assessments against Sony for Value Added Tax (VAT), Expanded Withholding Tax (EWT), and penalties for late remittance of taxes. Sony protested and, after the CIR failed to act within the prescribed period, filed a petition for review with the Court of Tax Appeals (CTA).
The CTA First Division partially granted Sony’s petition. It cancelled the entire deficiency VAT assessment, finding that Sony’s claim for input VAT credit on its subsidized advertising expenses was valid as the expense was covered by a proper VAT invoice. However, it upheld a modified deficiency EWT assessment on specific items like commissions and professional fees, and affirmed most penalties for late remittance. Both parties appealed aspects of this decision to the CTA En Banc, which affirmed the First Division’s ruling.

ISSUE

The core issues were: (1) whether the CIR’s deficiency VAT assessment was valid; and (2) whether the CTA correctly upheld the modified EWT assessment and penalties.

RULING

The Supreme Court denied the CIR’s petition and affirmed the CTA En Banc’s decision. On the VAT issue, the Court upheld the cancellation of the assessment. It ruled that Sony validly claimed an input VAT credit for its subsidized advertising expense. The legal logic is grounded in Section 110 of the Tax Code, which allows a VAT-registered person to credit input tax paid on local purchases of services against its output tax liability. Since Sony presented a valid VAT invoice for the advertising service, the claimed input tax credit was proper, thereby negating the alleged deficiency.
Regarding the EWT, the Court sustained the CTA’s findings. It agreed that commissions paid to sales agents were subject to a 5% withholding rate under the applicable regulations, not the 10% rate asserted by the CIR. Furthermore, the Court concurred that the assessment on rental deposits was correctly cancelled because the LOA was limited to 1997, and the rental expense in question was incurred in 1998, placing it outside the audit’s authorized scope. The penalties for late remittance were also upheld as the CIR sufficiently proved Sony’s delay in remitting withheld taxes, creating a valid obligation to pay the surcharges and interest imposed by law.