China Banking Corporation vs. Commissioner of Internal Revenue

The government's right to collect an assessed internal revenue tax prescribes if no distraint, levy, or judicial collection proceeding is initiated within three years from the date the assessment notice is released, mailed, or sent to the taxpayer, and a mere request for reinvestigation does not toll that period unless the CIR actually grants the request. Prescription may be raised for the first time on appeal when the facts showing the lapse of the prescriptive period are apparent on the record, and the government may be estopped from invoking the procedural bar against late-raised prescription where it failed to object despite being given the opportunity to do so.

China Banking Corporation (CBC) is a universal bank organized under Philippine law. For the taxable years 1982 to 1986, CBC engaged in SWAP transactions — sales of foreign exchange to the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas) — on which no documentary stamp tax returns were filed or tax paid. The applicable prescriptive regime at the time of assessment was Section 319(c) of the National Internal Revenue Code of 1977, as amended, which fixed a three-year period for collection of assessed taxes reckoned from the date the assessment notice is mailed, released, or sent to the taxpayer. Prior to the effectivity of Republic Act No. 9282 on 23 April 2004, the Court of Tax Appeals did not have jurisdiction over judicial actions for collection of internal revenue taxes; such actions fell under the jurisdiction of the regular trial courts.

China Banking Corporation is a universal bank duly organized and existing under the laws of the Philippines. For the taxable years 1982 to 1986, CBC was engaged in transactions involving sales of foreign exchange to the Central Bank of the Philippines, commonly known as SWAP transactions. Petitioner did not file tax returns or pay tax on the SWAP transactions for those taxable years.

On 19 April 1989, CBC received an assessment from the Bureau of Internal Revenue finding it liable for deficiency documentary stamp tax on the sales of foreign bills of exchange to the Central Bank. The total deficiency DST amounted to ₱11,383,165.50, comprising ₱8,280,696.00 for the years 1982 to 1985 and ₱2,481,975.60 for calendar year 1986, plus a surcharge of ₱620,493.90. On 8 May 1989, CBC, through its vice-president, sent a letter of protest to the BIR. CBC raised five defenses: double taxation, absence of liability on the ground that DST on sales of foreign exchange through telegraphic transfers falls on the buyer, due process violation for lack of formal examination of the bank's records, invalidity of the assessment for failure to state its factual basis, and exemption under PD Nos. 1177 and 1931. In the same protest, the taxpayer requested a reinvestigation to substantiate its assertions.

More than twelve years later, on 6 December 2001, the Commissioner of Internal Revenue rendered a decision reiterating the deficiency DST assessment and ordering payment thereof plus increments within 30 days from receipt. On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed an Answer containing a demand for CBC to pay the assessed DST — the BIR's first attempt to collect the tax since the assessment was issued. After trial on the merits, the CTA Second Division denied CBC's Petition on 23 February 2005, ruling that a SWAP arrangement should be treated as a telegraphic transfer subject to documentary stamp tax. The CTA En Banc affirmed on 1 December 2005.

CBC then elevated the case to the Supreme Court via a Rule 45 Petition, reiterating the arguments raised at the CTA level and invoking for the first time the defense of prescription. Petitioner asserted that the government had three years from 19 April 1989 — the date CBC received the assessment — to collect the tax, and that within that period neither a warrant of distraint or levy was issued nor a collection case filed in court. The CIR filed a Comment on 17 October 2006 that contained no discussion on the question of prescription. When the Court directed both parties to file their respective memoranda, the CIR merely filed a Manifestation adopting the allegations and authorities in its Comment in lieu of the required Memorandum, again remaining silent on the issue of prescription.

• Prescription: Petitioner argued that the government's right to collect the assessed DST had prescribed, the three-year prescriptive period under Section 319(c) of the 1977 NIRC having lapsed without the BIR issuing any warrant of distraint or levy or filing any collection case in court within that period.
• Double Taxation: Petitioner maintained that it had previously paid the DST on all its transactions involving sales of foreign bills of exchange to the Central Bank.
• Absence of Liability: Petitioner argued that liability for DST on a sale of foreign exchange through telegraphic transfers to the Central Bank falls on the buyer — the Central Bank — not on the bank.
• Due Process: Petitioner contended that its records were never formally examined by the BIR examiners, constituting a due process violation.
• Validity of Assessment: Petitioner asserted that the assessment was invalid because it did not include the factual basis therefor.
• Exemption: Petitioner claimed exemption on the ground that neither the tax-exempt entity nor the other party was liable for the payment of DST before the effectivity of PD Nos. 1177 and 1931 for the years 1982 to 1986.

• Prescription of Collection: Whether the right of the BIR to collect the assessed deficiency DST from CBC is barred by prescription.
• Tolling by Reinvestigation: Whether CBC's request for reinvestigation suspended the running of the three-year prescriptive period for collection.
• Prescription Raised on Appeal: Whether the defense of prescription may be raised for the first time before the Supreme Court.
• Estoppel of the Government: Whether the government is estopped from invoking the rule against raising prescription for the first time on appeal.

• Prescription of Collection: Yes. The government's right to collect the assessed DST had prescribed, no distraint, levy, or judicial collection proceeding having been initiated within three years from 19 April 1989 as required by Section 319(c) of the 1977 NIRC.
• Tolling by Reinvestigation: No. The request for reinvestigation did not toll the prescriptive period because there was no showing that the CIR granted the request, as required by Section 320 of the 1977 Tax Code.
• Prescription Raised on Appeal: Yes. When the pleadings or evidence on record show that the claim is barred by prescription, the court is mandated to dismiss the claim even if prescription is not raised as a defense, pursuant to Section 1, Rule 9 of the Rules of Court.
• Estoppel of the Government: Yes. The government was deemed to have waived its right to object to the late raising of prescription by remaining silent on the issue despite two opportunities to address it, and the no-estoppel rule is not absolute.

• Prescription of Collection: Under Section 319(c) of the 1977 NIRC, as amended by Batas Pambansa Blg. 700, the government had three years from the date the assessment notice was released, mailed, or sent to the taxpayer to collect the assessed tax by distraint or levy and/or court proceeding. Although the records did not show when the assessment notice was mailed, released, or sent, the latest possible date was 19 April 1989 — the date CBC received it. Reckoning from that date, the BIR had until 19 April 1992 to collect. The records showed that no warrant of distraint or levy was served on CBC's properties and no collection case was filed in court within that period. The BIR's earliest attempt to collect was through its Answer filed before the CTA on 11 March 2002, almost thirteen years after the reckoning date. That attempt did not qualify as a collection case under Section 319(c) because, prior to the effectivity of Republic Act No. 9282 on 23 April 2004, the CTA did not have jurisdiction over judicial actions for collection of internal revenue taxes — such actions fell under the jurisdiction of the regular trial courts. The claim was therefore forever lost.

• Tolling by Reinvestigation: Section 320 of the 1977 Tax Code provides that the running of the statute of limitations on collection is suspended "when the taxpayer requests for a re-investigation which is granted by the Commissioner." The provision requires the concurrence of two elements: a request for reinvestigation and the CIR's grant of that request. Following BPI vs. Commissioner of Internal Revenue and the cases cited therein (Republic vs. Gancayco, Collector vs. Suyoc Consolidated, Republic vs. Ablaza, Republic vs. Acebedo), the act of requesting a reinvestigation alone does not suspend the prescriptive period; the request must first be granted. The burden of proving that the request was granted rests on the CIR, and such grant may be express or implied from the CIR's action in response to the request. In this case, nothing in the records indicated, expressly or impliedly, that the CIR had granted CBC's request for reinvestigation. The CIR's inaction — treating CBC's letters as mere protests — did not constitute a grant. The three-year prescriptive period was therefore not suspended.

• Prescription Raised on Appeal: The general rule in remedial law, applied also to tax cases, is that the defense of prescription must be raised at the trial court or administrative level, and failure to do so prevents the taxpayer from raising it at the appeal stage. This rule is not absolute. Section 1, Rule 9 of the Rules of Court provides that when it appears from the pleadings or the evidence on record that the claim is barred by the statute of limitations, the court shall dismiss the claim. The Court in BPI vs. Commissioner of Internal Revenue (G.R. No. 181836, 9 July 2014) established the exception: prescription may be raised for the first time on appeal when the facts demonstrating the lapse of the prescriptive period are sufficiently and satisfactorily apparent on the record. In the present case, the date of receipt of the assessment notice was not disputed, and the date of the BIR's attempt to collect was determined by merely checking the records as to when the CIR's Answer containing the demand was filed. The conclusion that prescription had set in was arrived at using the evidence on record.

• Estoppel of the Government: The general rule in taxation is that estoppel does not prevent the government from collecting taxes, as the state is not bound by the mistakes or negligence of its agents — a doctrine rooted in the political law concept that "the king can do no wrong." This no-estoppel rule is not absolute. In Republic vs. Ker & Co. Ltd., the Supreme Court applied estoppel against the government where the Republic, instead of objecting to the taxpayer's invocation of prescription, litigated on the issue and submitted it for resolution. The same ingredients — procedural matter and injustice — obtained in the present case. The procedural matter was the failure to raise prescription at the lower court or administrative level; the injustice consisted in the BIR's undue delay of more than twelve years before taking steps to collect the assessed tax, keeping CBC in the dark as to whether it was liable and for how much. The BIR was given two opportunities to address the issue of prescription — first in its Comment and again when the Court directed both parties to file memoranda — but remained silent on both occasions, the CIR ultimately filing only a Manifestation adopting its Comment in lieu of a Memorandum. That silence constituted a waiver of the right to object to prescription being raised for the first time on appeal.

• Three-Year Prescriptive Period for Collection of Assessed Taxes — Under Section 319(c) of the 1977 NIRC (now Section 222(c)), an assessed internal revenue tax must be collected by distraint or levy and/or court proceeding within three years from the date the assessment notice is released, mailed, or sent to the taxpayer. The assessment is deemed made and the period begins to run on that date. In this case, no collection remedy was employed within three years of CBC's receipt of the assessment on 19 April 1989, rendering the government's claim forever barred.

• Reinvestigation Does Not Toll Prescription Absent CIR's Grant — Section 320 of the 1977 Tax Code requires two concurrence elements to suspend the prescriptive period: (1) the taxpayer must request a reinvestigation, and (2) the CIR must grant the request. A request alone does not suspend the period. The burden of proving that the request was granted rests on the CIR, and the grant may be express or implied from the CIR's action. In this case, the CIR's silence and inaction did not constitute a grant.

• Prescription May Be Raised for the First Time on Appeal When Apparent on Record — Pursuant to Section 1, Rule 9 of the Rules of Court, when the pleadings or evidence on record show that the claim is barred by prescription, the court is mandated to dismiss the claim even if prescription is not raised as a defense. This exception to the general rule against raising prescription for the first time on appeal applies when the facts demonstrating the lapse of the prescriptive period are sufficiently and satisfactorily apparent on the record.

• Estoppel May Apply Against the Government in Tax Collection — The no-estoppel rule in taxation — that the government is not bound by the mistakes or negligence of its agents — is not absolute. Where the government fails to object to the invocation of prescription despite having the opportunity to do so, and where its undue delay has caused prejudice to the taxpayer, estoppel or waiver may be applied against it, as established in Republic vs. Ker & Co. Ltd. and applied in this case.

• "If the pleadings or the evidence on record show that the claim is barred by prescription, the court is mandated to dismiss the claim even if prescription is not raised as a defense." — This passage, drawn from the Court's discussion of Section 1, Rule 9 of the Rules of Court and BPI vs. Commissioner of Internal Revenue, articulates the exception allowing prescription to be raised for the first time on appeal when the time-bar is apparent on the record.

• "The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension." — This quotation, originally from Republic vs. Gancayco as cited in BPI vs. Commissioner of Internal Revenue, states the canonical formulation of the rule that both a request and a grant must concur to toll the prescriptive period under Section 320 of the Tax Code.

• "The no-estoppel rule is not absolute." — This statement marks the Court's recognition that the doctrine barring estoppel against the government in tax matters admits of exceptions, particularly where procedural fairness and the government's own inaction or waiver are concerned.

• BPI vs. Commissioner of Internal Revenue, G.R. No. 181836, 9 July 2014 — Controlling precedent with substantially identical facts. The Court there ruled that the BIR could no longer collect assessed DST due to prescription, established the exception allowing prescription to be raised for the first time on appeal when the time-bar is apparent on record, and held that a request for reinvestigation does not toll prescription absent the CIR's grant. The present case followed and applied BPI directly.

• Republic vs. Ker & Co. Ltd., 124 Phil. 822 (1966) — Followed. The Court there treated the government's act of litigating on the issue of prescription without objecting to its invocation as a waiver, effectively applying estoppel against the government. The present case found the same ingredients — procedural matter and injustice — warranting application of estoppel.

• Republic vs. Gancayco — Cited within BPI for the rule that a request for reinvestigation alone does not suspend the prescriptive period; the request must first be granted.

• Republic vs. Acebedo — Cited within BPI for the proposition that where there is no evidence that a reinvestigation request was considered or acted upon, the request did not suspend the running of the prescriptive period.

• Aguinaldo Industries Corp. vs. CIR, 197 Phil. 822 (1982) — Cited for the general rule that the defense of prescription must be raised at the trial court level in tax cases, which the Court acknowledged but found subject to exceptions.

• Heirs of Valientes vs. Ramas — Cited for the proposition that an appellate court may motu proprio dismiss a case on the ground of prescription despite failure to raise this ground on appeal.

• Section 319(c), National Internal Revenue Code of 1977, as amended — Fixed the three-year prescriptive period for collection of assessed internal revenue taxes, reckoned from the date the assessment notice is released, mailed, or sent to the taxpayer. Collection must be by distraint or levy and/or court proceeding within that period. Applied to determine that the BIR's right to collect the deficiency DST from CBC had prescribed.

• Section 320, National Internal Revenue Code of 1977 — Governed the suspension of the running of the statute of limitations on assessment and collection. Applied to determine that CBC's request for reinvestigation did not toll the prescriptive period because the CIR never granted the request.

• Section 1, Rule 9, Rules of Court — Provides that defenses and objections not pleaded are deemed waived, but that when it appears from the pleadings or evidence on record that the claim is barred by the statute of limitations, the court shall dismiss the claim. Applied as the basis for allowing prescription to be raised for the first time on appeal.

• Batas Pambansa Blg. 700 — Approved on 5 April 1984, shortened the statute of limitations on the assessment and collection of national internal revenue taxes from five years to three years. Noted as the amendment reducing the prescriptive period applicable to the case.

• Republic Act No. 9282 — Took effect on 23 April 2004, expanding the jurisdiction of the CTA to include original jurisdiction over collection cases involving one million pesos or more. Applied to show that at the time the CIR filed its Answer in the CTA on 11 March 2002, the CTA did not yet have jurisdiction over collection cases, rendering the Answer an ineffective attempt at judicial collection.

Teresita J. Leonardo-De Castro, Lucas P. Bersamin, Jose Portugal Perez, and Estela M. Perlas-Bernabe concurred.