G.R. No. 186155 - Lapanday Foods Corp. vs. Commissioner of Internal Revenue

Title: Lapanday Foods Corp. vs. Commissioner of Internal Revenue

Case: G.R. No. 186155

Decision Date: Jan 17, 2023

Lapanday contested BIR's VAT assessment on interest income from affiliate loans; SC ruled loans isolated, not VATable, and first-quarter assessment prescribed.

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Case Digest (G.R. No. 186155)
Legal Reasoning Model

Facts:

Background of the Parties

Petitioner Lapanday Foods Corporation is a domestic corporation duly organized under Philippine law engaged in rendering management services.

Respondent is the Commissioner of Internal Revenue, who is legally authorized to issue deficiency assessments pursuant to the National Internal Revenue Code (NIRC).

Initiation of Tax Assessments and Administrative Proceedings

On January 21, 2004, the Bureau of Internal Revenue (BIR) assessed Lapanday for deficiency taxes covering the taxable year 2000, which included:

Value-Added Tax (VAT) amounting to PHP 8,561,775.88;

Expanded Withholding Tax (EWT) amounting to PHP 374,749.21;

Final Withholding Tax (FWT) amounting to PHP 5,815,233.36; and

Documentary Stamp Tax (DST) amounting to PHP 1,578,579.59.

Lapanday protested the assessment, and following due administrative proceedings, the BIR rendered a Final Decision on Disputed Assessment (FDDA) which:

Cancelled the FWT;

Maintained the assessments for VAT, DST, and EWT with specified adjustments in basic tax, surcharge, and interest.

Proceedings Before the Court of Tax Appeals (CTA)

Lapanday filed an appeal before the CTA, which was docketed as CTA Case No. 7097.

The CTA First Division, as part of its review, cancelled the assessments for deficiency EWT and DST but sustained the deficiency VAT assessment based on:

The interpretation of Section 105 of the NIRC that renders VAT applicable on transactions “in the course of trade or business” including those incidental to it;

The finding that Lapanday’s management services business entailed incidental transactions such as the granting of inter-company loans.

On prescription, the CTA Division noted that the deficiency VAT assessments for certain quarters (specifically, the second and third quarters) had prescribed, while only the first and fourth quarters were deemed timely.

Notably, the filing of two types of returns (a monthly VAT declaration, BIR Form 2550M, and a quarterly return, BIR Form 2550Q) raised a dispute regarding the proper reckoning of the prescriptive period.

Proceedings Before the CTA En Banc and Issues Raised by Lapanday

After the denial of a motion for partial reconsideration by the CTA Division, Lapanday elevated the case to the CTA En Banc.

Lapanday raised three principal issues:

Whether the deficiency VAT assessment for the first quarter of 2000 had already prescribed;

Whether the interest on the loans granted to its affiliates is subject to VAT; and

Whether the VAT deficiency should be computed using a 10% rate on gross receipts as opposed to using a 1/11 multiplier per Section 108(C) of the NIRC.

The CTA En Banc, prior to the Supreme Court’s review, had:

Affirmed the timeliness of the first quarter assessment based on the filing of the quarterly return, arguing that the two returns filed by Lapanday are distinct;

Held that interest on the inter-company loans is subject to VAT because, in its view, such transactions were incidental to Lapanday’s regular management services; and

Upheld the computation of deficiency VAT based on the 10% assessment of gross receipts due to the absence of official receipts indicating the VAT-inclusive nature of the loan transactions.

Contentions of the Petitioner and Counterarguments

Lapanday contended that:

The amendment from a monthly declaration to a quarterly return was not “substantial” since both returns showed identical VAT payable for March 2000, and therefore, had no effect on the prescriptive period which should be reckoned from April 25, 2000 (the date of the original filing).

The interest income on the occasional inter-company loans (granted only on a few occasions during 2000) is merely passive in nature and not derived from a regular commercial or economic activity, and hence, should not be subjected to VAT.

If interest were taxable, it should be conclusively presumed to be inclusive of VAT (computed by multiplying by 1/11) rather than applying a 10% rate over the amount received.

The Commissioner and the CTA argued that:

For VAT purposes, it is more practical to consider the filing of the quarterly VAT return as the reckoning date for the prescriptive period, a view reinforced by established jurisprudence;

The nature of the transactions—even if isolated—falls within the ambit of “incidental” transactions subject to VAT under Section 105 of the NIRC; and

Without issuance of proper official receipts, the computation must assume the 10% VAT rate on the gross receipts.

Issue:

Whether the deficiency VAT assessment for the first quarter of 2000 is barred by prescription.

The dispute centers on whether the prescriptive period should be reckoned from the date of the original monthly VAT declaration (April 25, 2000) or from the filing of the quarterly VAT return (September 4, 2001).

Whether the interest on the loans granted by Lapanday to its affiliates is subject to VAT.

This issue involves determining if the occasional and isolated inter-company loan transactions, given as financial assistance, are sufficiently connected or “incidental” to Lapanday’s main business of providing management services.

The proper method of computing the deficiency VAT on interest income.

Whether deficiency VAT should be computed using a rate of 10% on the gross receipts or by multiplying the interest by 1/11 as provided under Section 108(C) of the NIRC.

Ruling:

(Subscriber-Only)

Ratio:

(Subscriber-Only)

Doctrine:

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