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Facts: Petitioner is a domestic corporation affiliated with Sony International.

On November 24, 1998, petitioner received Letter of Authority No. 000019734
issued by then BIR Commissioner to be supervised by Group created
pursuant to RSO 673-98, to examine its books of accounts and other
accounting records for all internal revenue taxes for the period 1997 and
unverified prior year.

As a result of the investigation made under such Letter of Authority, On

December 6, 1999 petitioner received a preliminary assessment notice for the
proposed assessments for 1997 deficiency taxes and penalties in the gross
amount of P15,462,527.51 which included deficiency assessments for 10%
VAT in the amount of P11,141,014.41 and deficiency under the Expanded
Witholding tax of P1,992,462.72. Petitioner protested the aforesaid proposed
assessments on December 21, 1999. Such deficiency tax was duly protested
administratively and a petition to review was likewise filed in the CTA in
Division. The Court in Division partially granted the petition of Sony, ruling that
the subsidized advertising expense paid by Sony and covered by a VAT
invoice yielded an input VAT credit and assuming arguendo that it doesn¶t
amount to an input VAT the deficiency will still not prosper since the revenue
examiners went beyond the authority conferred by the Letter of Authority. The
Court in Division, however; upheld Sony¶s Expanded Witholding Tax Liability.
The Commissioner now filed this instant petition with the Court en banc
assailing the decision of the Court in Division contending that although the LA
covered the period 1997 the defect, if any, was cured when the respondent
Sony in response to a request by the revenue officers submitted those for the
period April 1, 1997 to March 31, 1998. Moreover, the respondent never
questioned in its protest letter filed with the BIR and in its Petition for Review
the LA.

Issues:
Whether or not the deficiency tax may be assessed on the basis of the Letter
of Authority

Held: No. The Revenue examiners acted without prior authority when it
assessed deficiency taxes for taxable year 1998 which is beyond the scope of
the LA. It is of no moment that the taxpayer was willing, and in fact they
submitted, to present documents for the taxable year 1998 since voluntary
presentation of documents beyond the allowed period in the LA will not cure
the defect in the LA since a void act cannot be validated or ratified. Hence,
the deficiency assessments issued outside the one-year period allowed under
the LA are invalid.

A Letter of Authority to examine taxpayer¶s books of accounts and other

accounting records for all internal revenue taxes for 1997 and ³unverified prior
years´ blatantly violated RMO No. 43-90 which prohibits Las covering a
taxable period exceeding one year.

Despite the finding that the deficiency tax cannot be assessed, however; due
to the invalid LA the Court en Banc still made a pronouncement as to the
deficiency VAT liability of Sony and held that advertising expenses which are
paid and evidenced by a VAT Invoice gives rise to input VAT credits though
subsequently reimbursed by the parent company for economic reasons.
Advertising expenses are legitimate business expense which, once incurred
and evidenced with a VAT invoice, gives rise to input VAT credits. Since the
advertising expenses were evidenced by invoices under the name of SP Co.,
then the respondent should be entitled to input VAT credits, notwithstanding
that the advertising expenses were subsequently reimbursed by the parent of
SP Co., SI Co. Also, the subsidized advertising expense of SP Co., which was
reimbursed by its parent company, SI Co., is not subject to VAT since it does
not involve a sale, barter or exchange of goods or properties or the
performance of services in the course of trade or business.??
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