REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

FIRST DIVISION

ICONIC BEVERAGES, INC., CTA CASE NO. 8607

Petitioner, For: Assessment

Members:

-versus - DEL ROSARIO, Chairperson

UY, and
MINDARO-GRULLA, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENUE,
Respondent.

X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

RESOLUTION

MINDARO-GRULLA, J.:

For this Court's resolution are:

1. petitioner's Motion for Reconsideration [of the

Decision dated August 14, 2015], filed on
September 1, 2015, with respondent's Opposition to
Motion for Reconsideration, filed on October 1,
2015; and

2. respondent's Motion for Partial Reconsideration

(Re: Decision dated 14 August 2015), filed
through registered mail on September 1, 2015 and
received by the Court on September 10, 2015, with
petitioner's Comment/Opposition [To
Respondent's Motion for Partial Reconsideration (
RESOLUTION
CfA CASE NO. 8607
Page 2 of 12

(Re: Decision dated 14 August 2015) dated

September 1, 2015], filed on September 30, 2015.

The parties move for the reconsideration of the Decision 1

promulgated on August 14, 2015, the dispositive portion of which
reads:

"WHEREFORE, premises considered, the instant

Petition for Review is PARTIALLY GRANTED. The
compromise penalty assessed by respondent against
petitioner in the amount of P50,000.00 is hereby
CANCELLED. On the other hand, the remaining amount
in the assessment covering deficiency income tax for the
taxable year 2009 is hereby AFFIRMED with some
modifications. Accordingly, petitioner is ORDERED TO
PAY respondent the amount of P88,254,300.60
representing basic deficiency income tax for the taxable
year 2009 inclusive of the twenty-five percent (25°/o)
surcharge imposed under Section 248(A)(3) of the NIRC
of 1997, computed as follows:

Taxable Income p (50,009,617.40)

Add: Royalty income subject to regular 856,063,257.00
income tax
Adjusted Taxable Net Income p 806 053,639.60
Tax Rate 30%
Tax Due p 241,816,091.88
Less: Final Tax of 20% (P856,063,257 x 171,212,651.40
20%)
Deficiency Income Tax p 70,603,440.48
Add: 25% Surcharge 17,650,860.12
Total Amount Due P88,254,300.60

Likewise, petitioner is ORDERED to PAY the

following:

(a) deficiency interest at the rate of twenty percent

(20°/o) per annum on the basic deficiency income tax of
P70,603,440.48 computed from April 15, 2010 until· full
payment thereof pursuant to Section 249(8) of the NIRC
of 1997; andc

1
Docket, pp. 534-554.
RESOLUTION
CfA CASE NO. 8607
Page 3 of 12

(b) delinquency interest at the rate of 20°/o per

annum on the total amount of P88,254,300.60 and on the
20°/o deficiency interest which have accrued as afore-
stated in (a) computed from January 9, 2013 until full
payment thereof pursuant to Section 249(C) of the NIRC
of 1997.

SO ORDERED."

Petitioner anchors its motion on the following grounds:

1. Passive income is income generated by the

taxpayer's assets. Royalty income is by nature passive
income;

2. In any case, the royalty income is not within the

primary purpose of petitioner and the same was derived
not in the active pursuit of its trade or business;

3. Assuming arguendo that petitioner's royalty

income is ordinary income, applying section 34(L) of the
1997 NIRC, which allows a 40°/o optional standard
deduction from the gross income, petitioner is not liable
for any deficiency income tax; and

4. Assuming arguendo that the royalty income is

ordinary income and assuming further that petitioner will
not be allowed to avail of the optional standard
deduction, this Court incorrectly computed the deficiency
income tax and interest.

In the assailed Decision, the Court found that petitioner's

income from royalty is its main source of income for the taxable year
2009 which appears to be in line with its primary purpose, i.e.,
owning, purchasing, licensing and/or acquiring such trademarks and
other intellectual property rights necessary for the furtherance of its
business as stated in petitioner's Articles of Incorporation 2 • The
Court held that there is factual basis to conclude that petitioner
generated its royalty income in the active pursuit and performance of
its primary purpose, and therefore, is not a passive income.<

2
Exhibit P, docket, pp. 348-355.
RESOLUTION
CTA CASE NO. 8607
Page 4 of 12

Accordingly, the Court upheld the findings of the respondent that the
said royalty income is subject to ordinary income tax, and not to final
tax.

Petitioner's allegation
that the royalty
income is in the nature
of passive income,
that it is not within
the primary purpose of
petitioner, and that it
was derived not in the
active pursuit of trade
or business were
already addressed in
the assailed Decision.

Petitioner maintains that Section 27 (D)(1) of the National

Internal Revenue Code (NIRC) of 1997, as amended, does not
distinguish between royalty earned in the active pursuit of the
corporation's primary purpose and one that is earned not in the
active pursuit of its primary purpose specifically because royalty
income is in the nature of a passive income. Petitioner adds that the
mere fact that royalty income was the only income derived by
petitioner for taxable year 2009 does not and should not transform
the royalty income, which is by nature a passive income, to ordinary
income.

Also, petitioner claims that the absence of cost of sales/services

for 2011 is not relevant since the subject of this case is petitioner's
income and activities in 2009. Petitioner further alleges that even
assuming arguendo that the absence of cost of sales/services for
2011 can be considered, the mere fact that petitioner did not actively
pursue a business of manufacturing, buying, selling, or dealing in
alcoholic and non-alcoholic beverages, thereby, leading to the
absence of cost of sales/services for 2011, does not transform the
royalty income earned by petitioner from its intellectual property
rights into ordinary income since said royalty income arose from
petitioner's mere ownership of the intellectual property rights.

Allegedly, no resource was employed by petitioner to promote

the use of its trademarks and other intellectual property rights held
as intangible assets as shown by petitioner's Audited Financial~
RESOLUTION
CfA CASE NO. 8607
Page 5 of 12

Statements. Petitioner claims that no marketing and/or promotional

activities were undertaken by petitioner in order to entice potential
licensees to enter into a licensing agreement with petitioner.

Respondent opposes the foregoing allegations and states that

the royalty fees received by petitioner are in the nature of active
income arising from the active pursuit of its business and must be
subject to the regular corporate income tax under Section 27 of the
NIRC, as amended. Respondent adds that despite petitioner's
insistence claiming that the income derived from San Miguel Brewery,
Inc. and My Philippines Lifestyles, Inc. are passive income,
documents speak otherwise and that mere allegation is not evidence
and is not equivalent to proof.

A perusal of the foregoing shows that they are the same

arguments raised by petitioner in its Memorandum 3 which have been
sufficiently resolved and passed upon by the Court in the assailed
Decision.

To reiterate the Court's ruling, petitioner's evidence failed to

support its claim that the royalties in the taxable year 2009 were
passive income, and not earned in the active pursuit or performance
of its primary purpose.

It must again be pointed out that the tax assessments by tax

examiners are presumed correct and made in good faith. All
presumptions are in favor of the correctness of a tax assessment. It
is to be presumed, however, that such assessment was based on
sufficient evidence. Upon the introduction of the assessment in
evidence, a prima facie case of liability on the part of the
taxpayer is made. If a taxpayer files a petition for review in the
CTA and assails the assessment, the prima facie presumption is that
the assessment made by the BIR is correct, and that in preparing the
same, the BIR personnel regularly performed their duties. This rule
for tax initiated suits is premised on several factors other than the
normal evidentiary rule imposing proof obligation on the petitioner-
taxpayer: the presumption of administrative regularity; the likelihood
that the taxpayer will have access to the relevant information; and
the desirability of bolstering the record-keeping requirements of the
NIRC. 4~

3
Docket, pp. 500-518.
4
Commissioner of Internal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975, March 31,
2005.
RESOLUTION
CTA CASE NO. 8607
Page 6 of 12

The prima facie correctness of a tax assessment does not apply

upon proof that an assessment is utterly without foundation,
meaning it is arbitrary and capricious. 5

When assessments are assailed, the burden of proof is upon

the complaining party (petitioner). It is incumbent upon the latter to
clearly show that the assessment was erroneous, in order to relieve
himself from it. 6

Also, as cases filed before this Court are litigated de novo,

party-litigants must prove every minute aspect of their cases. 7

In the case of Republic Cement Corporation vs. Commissioner

of Internal Revenu#, this Court sitting En Bane ruled that unlike tax
assessments that enjoy the presumption of regularity, taxpayers'
claims of no liability against deficiency taxes should be sufficiently
established x x x.

The evidence presented by petitioner failed to support its claim

that the tax assessment against it is arbitrary and capricious.
Instead, petitioner's evidence supported the basis of the tax
assessment issued by respondent. Thus, the Court correctly upheld
the assessment against petitioner for deficiency income tax on its
royalty income for the taxable year 2009.

The optional standard

deduction under Section 34
(L) of the NIRC of 1997, as
amended, should not be
applied in the computation
of petitioner's tax liability.

Petitioner avers that assuming it is liable to pay the 30°/o tax

rate as prescribed under Section 27(A) and not the final tax rate of
20°/o for passive income under Section 27(0)(1), petitioner submits~

5
Ibid.
6
Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, G.R. No. L-6741, January
31, 1956; Collector of Internal Revenue vs. Bohol Land Transportation Co., G.R. Nos. L-13099
and L-13462, April 29, 1960; Commissioner of Internal Revenue vs. Construction Resources of
Asia, Inc., eta!., G.R. No. L-68230, November 25, 1986.
7
Rafael Arsenio S. Dizon, in his capacity as the Judicial Administrator of the Estate of the
deceased Jose P. Fernandez vs. Court of Tax Appeals, eta/., G.R. No. 140944, April 30, 2008.
8
CTA EB Case No. 821, July 18, 2012.
RESOLUTION
CTA CASE NO. 8607
Page 7 of 12

that the Court should apply the provisions of Section 34(L) on

optional standard deduction.

Petitioner argues that assuming its royalty income for taxable

year 2009 in the amount of P856,063,257 .00 is treated as regular
income and applying the ( 40o/o) optional standard deduction, the
result would show that it is not liable for any deficiency income.

Section 34 (L) of the NIRC of 1997, as amended, provides:

"SEC. 34. Deductions from Gross Income. - xxx

XXX XXX XXX

(L) Optional Standard Deduction. - In lieu of the

deductions allowed under the preceding Subsections, an
individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an
amount not exceeding forty percent (40°/o) of his gross
sales or gross receipts, as the case may be. In the case of
a corporation subject to tax under section 27(A) and
28(A)(l), it may elect a standard deduction in an amount
not exceeding forty percent (40°/o) of it gross income as
defined in Section 32 of this Code. Unless the taxpayer
signifies in his return his intention to elect the
optional standard deduction, he shall be
considered as having availed himself of the
deductions allowed in the preceding Subsections.
Such election when made in the return shall be
irrevocable for the taxable year for which the return is
made: Provided, That an individual who is entitled to and
claimed for the optional standard shall not be required to
submit with his tax return such financial statements
otherwise required under this Code: Provided, further,
That except when the Commissioner otherwise permits,
the said individual shall keep such records pertaining to
his gross sales or gross receipts, or the said corporation
shall keep such records pertaining to his gross income as
defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner." (Emphasis~
supplied)
RESOLUTION
CTA CASE NO. 8607
Page 8 of 12

The foregoing provision dictates that the taxpayer should

signify in its return the intention to elect the optional standard
deduction. Otherwise, it shall be considered to have availed of the
other deductions allowed in Section 34 of the NIRC of 1997, as
amended.

A perusal of petitioner's 2009 Annual Income Tax Return (ITR)9

shows that it declared itemized deductions in the total amount of
P50,009,617.40 which resulted to a net loss in the same amount.
There was nothing in petitioner's ITR which would show that it opted
to avail of the optional standard deduction. Thus, the optional
standard deduction under Section 34 (L) should not be applied in the
computation of petitioner's tax liability.

The Court correctly

computed the deficiency
income tax and interest.

In its attempt to apply Section 249 of the NIRC of 1997, as

amended, on the basis of its own interpretation, petitioner alleges
that considering its failure to pay the tax on April 15, 2010, the date
when the tax should have been timely paid, it became liable for
deficiency interest starting April 16, 2010 up to April 15, 2012, the
alleged date when full payment of the deficiency tax and deficiency
interest should be made as per SIR'S Formal Letter of Demand dated
March 30, 2012.

Furthermore, petitioner mentions that it was required to

immediately pay the alleged deficiency tax as per respondent's Final
Decision on Disputed Assessment dated January 7, 2013 upon receipt
thereof including the 20°/o deficiency interest computed as of
December 15, 2012.

Since petitioner failed to pay within the period set by the

respondent, it allegedly became delinquent. As such, petitioner
insists that the interest to be imposed is no longer deficiency interest,
but instead, the delinquency interest should be imposed under
Section 249 (C)(3) of the NIRC of 1997, as amended.(

9
Exhibit P-4-a, docket, pp. 360-362.
RESOLUTION
CTA CASE NO. 8607
Page 9 of 12

Petitioner contends that there is no legal basis for the

simultaneous imposition of the deficiency and delinquency interest
under Section 249 of the NIRC of 1997 and that imposition of the two
sets of interests would be oppressive and confiscatory.

Likewise, petitioner mentions that the imposition of interest

under Section 249 of the NIRC of 1997, as amended, is
compensatory in nature and not punitive.

On this matter, let it be stressed that the Court computed the

interest on petitioner's tax liability based on the following provisions
of law:

"SEC. 247. General Provisions.-

(a) The additions to the tax or deficiency tax

prescribed in this Chapter shall apply to all taxes, fees
and charges imposed in this Code. The amount so added
to the tax shall be collected at the same time, in the
same manner and as part of the tax."

"SEC. 249. Interest.-

(A) In General. - There shall be assessed and

collected on any unpaid amount of tax, interest at the
rate of twenty percent (20°/o) per annum, or such higher
rate as may be prescribed by rules and regulations, from
the date prescribed for payment until the amount is fully
paid.

(B) Deficiency Interest. -Any deficiency in the tax

due, as the term is defined in this Code, shall be subject
to the interest prescribed in Subsection (A) hereof, which
interest shall be assessed and collected from the date
prescribed for its payment until the full payment thereof.

(C) Delinquency Interest -In case of failure to pay:

( 1) The amount of the tax due on any return to

be filed, or
(2) The amount of the tax due for which no
return is required, or(..
RESOLUTION
CTA CASE NO. 8607
Page 10 of 12

(3) A deficiency tax, or any surcharge or interest

thereon on the due date appearing in the notice and
demand of the Commissioner, there shall be assessed
and collected on the unpaid amount, interest at the rate
prescribed in Subsection (A) hereof until the amount is
fully paid, which interest shall form part of the tax."

Contrary to petitioner's allegation, the foregoing prov1s1ons

show that deficiency interest is different from delinquency interest
and as such, the simultaneous imposition of both types of interest is
not precluded.

It is clear from the above provisions that deficiency interest is

imposed upon any tax that is still due and unpaid to the government,
while delinquency interest is the interest imposed on failure to pay (i)
the amount of tax due on any return required to be filed, or (ii) the
amount of tax due for which no return is required, or (iii) deficiency
tax, or any surcharge or interest thereon on the due date appearing
in the notice and demand of the Commissioner.

Also, Section 249 (B) and (C)(3) of the NIRC of 1997, as

amended, clearly states that the deficiency interest on any deficiency
tax shall be assessed "from the date prescribed for its payment until
the full payment thereof"; while the assessment of the delinquency
interest that is imposed upon failure to pay a deficiency tax, or any
surcharge or interest thereon, shall be reckoned from "the due date
appearing in the notice and demand of the Commissioner until the
amount is fully paid".

In sum, these two (2) interests are different in nature. Also,

there was no indication from the said provisions of law that these
sets of interest cannot be imposed simultaneously.

As clearly stated in the above provisions, both deficiency and

delinquency interests shall be assessed until full payment thereof. At
this juncture, it bears stressing that the first and fundamental duty of
the Court is to apply the law. When the law is clear and free from
any doubt or ambiguity, there is no room for construction or
interpretation. Where the law speaks in clear and categoricalc
RESOLUTION
CTA CASE NO. 8607
Page 11 of 12

language, there is no occasion for interpretation; there is only room

for application. 10

Considering that the Court only applied the abovementioned

provisions and imposed the deficiency and delinquency interest as
mandated therein, petitioner's allegation that it is not liable to pay
deficiency interest, but only the delinquency interest, has no leg to
stand on.

In view of the foregoing, the Court finds petitioner's Motion for

Reconsideration bereft of merit.

Moving on to respondent's Motion for Partial

Reconsideration (Re: Decision dated 14 August 2015),
respondent contends that the deduction as claimed by petitioner
should have been justified by evidence. Considering the alleged
failure of petitioner to prove by sufficient evidence its claim for
deduction in the amount of P50,009,617.40, the same should not be
deducted from its taxable income.

On the contrary, petitioner avers that even prior to the filing of

the Petition for Review, respondent's own documents would show
that she never questioned petitioner's expenses for taxable year 2009
in the amount of P50,009,617.40. Also, petitioner claims that
respondent's judicial admissions in the proceedings before the Court
are conclusive and do not require further evidence to prove them.

The Court disagrees with the respondent.

As correctly argued by petitioner, there is nothing in the

pleadings filed by respondent, in the subject Formal Letter of
Demand 11 or in the Final Decision on Disputed Assessment12 which
would show that respondent questioned the deduction claimed by
petitioner in the amount of P50,009,617.40 as per its 2009 Annual
ITR.[

10
Nippon Express (Philippines) Corporation vs. Commissioner of Internal Revenue, G.R. No.
196907, March 13, 2013, citing the case of Rizal Commercial Banking Corporation vs.
Intermediate Appellate Court and BF Homes, Inc., G.R. No. 74851, December 9, 1999.
11
Exhibit P-9, docket, pp. 376-377.
12
Exhibit P-11, docket, pp. 384-385.
RESOLUTION
CTA CASE NO. 8607
Page 12 of 12

Likewise, the issue on the said deduction was not among the
issues stipulated by the parties pursuant to their Joint Stipulations of
Facts and Issue filed on September 5, 2013 13 •

Accordingly, the Court correctly computed petitioner's tax

liability based on the unquestioned items in petitioner's 2009 Annual
ITR, including its declared deduction in the amount of
P50,009,617.40.

WHEREFORE, finding no cogent reason to reverse the Court's

ruling in the assailed Decision, petitioner's Motion for
Reconsideration (of the Decision dated August 14, 2015),
and respondent's Motion for Partial Reconsideration (Re:
Decision dated 14 August 2015) are DENIED for lack of merit.

SO ORDERED.

~ N. M~~,.c;'~
CIELITO N. MINDARO-GRULLA
Associate Justice

WE CONCUR:

'

Presiding Justice
ER~P.UY
Associate Justice

13
Docket, pp. 267-276.