VALUE-ADDED TAX (Characteristic/Elements of VAT Taxable transaction)

CIR VS. SONY PHILIPPINES

G.R. No. 178697
November 17, 2010

NATURE OF THE CASE: Petition for review on

certiorari seeks to set aside the Decision and the
Resolution of the Court of Tax Appeals En Banc,
affirming the Decision of the CTA-First Division which
partially granted the petition for review of respondent
Sony Philippines, Inc.
FACTS: On November 24, 1998, the CIR issued
Letter of Authority to examine Sonys books of
accounts and other accounting records regarding
revenue taxes for the period 1997 and unverified
prior years.
On
December
6,
1999,
a
preliminary
assessment and demand letter for 1997 VAT, EWT,
FWT1 deficiencies and penalties was issued by the CIR.
The VAT deficiency resulted from its disallowance of
the input VAT tax credit from Sonys advertising
expense. Sony sought a re-evaluation of these tax
deficiency assessments by filing a protest. Acting on
the protest, the CIR issued final assessment notices
with formal letter of demand. Thereafter, Sony filed a
petition for review before the Court of Tax Appeals First
Division.
1 Value-Added Tax (VAT); Extended Withholding Tax
(EWT);Final Withholding Tax (FWT)
Reported by: Clavel A. Tuason, Taxation Law Review

Before the CTA First Division, CIR argued that since

Sonys advertising expense was reimbursed by Sony
Singapore, the former never incurred any advertising
expense. As a result, Sony is not entitled to a tax
credit. At most, the CIR continues, the said advertising
expense should be for the account of Sony Singapore,
and not Sony Philippines.
The CTA-First Division partly granted Sonys
petition by cancelling the deficiency VAT assessment
but upheld a modified deficiency EWT assessment as
well as the penalties.
This finding was later affirmed by the CTA-EB.
Unfazed, the CIR filed the instant petition for review.
ISSUES: 1.) Whether or not the LOA2, although
it states the period 1997 and unverified prior years,
should be understood to mean the fiscal year ending in
March 31, 1998; and
2.) Whether or not the advertising expense, which
amount was reimbursed by Sony-Singapore, is an
income of Sony and thus, VAT-taxable transaction
under the NIRC?
HELD ON ISSUE No. 1: NO, the period 1997
and unverified prior years should not be understood to
mean the fiscal year ending March 31, 1998?

2 Letter Of Authority
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VALUE-ADDED TAX (Characteristic/Elements of VAT Taxable transaction)

As earlier stated, the LOA 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. In the
absence of such an authority, the assessment or
examination is a nullity.
On this point alone, the deficiency
assessment should have been disallowed.

VAT

HELD ISSUE No. 2: NO, the reimbursement for

the advertising expense incurred by Sony Phils., by
Sony Singapore was not an income and was not VAT
taxable.
As aptly founded by the CTA-First Division and
later affirmed by the CTA-EB, 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.
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 Sonys advertising expenses.

Reported by: Clavel A. Tuason, Taxation Law Review

Section 106 of the Tax Code explains when VAT may

be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or
Properties.
(A) Rate and Base of Tax. There shall be
levied, assessed and collected on every sale,
barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%)
of the gross selling price or gross value in
money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller
or transferor.
Thus, 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 Sony Singapore to Sony. It was
but a dole out by Sony Singapore and not in payment
for goods or properties sold, bartered or exchanged by
Sony.
In the present case, the services rendered by
the advertising companies, paid for by Sony using
Sony Singapore dole-out, were for Sony Phils. Sony
Singapore just gave assistance to Sony Phils. in the
amount equivalent to the latters advertising expense
but never received any goods, properties or service in
return.
In view of the foregoing, the Court finds no
reason to disturb the findings of the CTA-EB.
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VALUE-ADDED TAX (Characteristic/Elements of VAT Taxable transaction)

RULING: WHEREFORE, the petition is DENIED.

Reported by: Clavel A. Tuason, Taxation Law Review

SO ORDERED.

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