Commissioner of Internal Revenue vs. Telstar Manufacturing Corporation

A waiver of the statute of limitations on tax assessment must strictly comply with the requirements of Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01; failure to comply renders the waiver void and ineffective to extend the prescriptive period. The BIR bears the burden of ensuring compliance with these requirements, and the doctrines of in pari delicto and estoppel cannot be invoked to validate defective waivers where the taxpayer did not benefit from them or act in bad faith. A Formal Letter of Demand/Final Assessment Notice that lacks a categorical demand for payment of the assessed tax is not a valid assessment and produces no legal effect.

Telstar Manufacturing Corporation is a domestic corporation subject to the Bureau of Internal Revenue's Large Taxpayers Service. The BIR conducted a special investigation and enforcement activity under Revenue Memorandum Order No. 36-2010, which established a conglomerate audit program for interrelated companies, conglomerates, their affiliates, and subsidiaries for taxable year 2009. The assessment of deficiency taxes is governed by Sections 203 and 222(b) of the National Internal Revenue Code of 1997, which prescribe a three-year period for assessment and allow extension only through valid written waivers executed in accordance with BIR issuances.

Telstar Manufacturing Corporation is a corporation subject to the Bureau of Internal Revenue's Large Taxpayers Service. On May 14, 2010, the BIR served upon Telstar Letter of Authority No. 116-2010-00000096 pursuant to Revenue Memorandum Order No. 36-2010, which authorized a special investigation and enforcement activity of interrelated companies, conglomerates, their affiliates, and subsidiaries for taxable year 2009. Telstar thereafter submitted its documents, books, and records to the BIR.

Divina A. Puyo, Telstar's President and General Manager, executed a Waiver of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code (first waiver) requesting more time to submit the required documents. Puyo subsequently signed a second waiver extending the period of assessment until December 31, 2013. Both waivers were accepted by the Commissioner of Internal Revenue through OIC-Assistant Commissioner Alfredo V. Masajon of the Large Taxpayers Service.

On June 18, 2013, Telstar received a Preliminary Assessment Notice for deficiency income tax, improperly accumulated earnings tax, value-added tax, expanded withholding tax, and documentary stamp tax for the year 2009. Telstar, through Puyo, responded by explaining that the BIR revenue officers' findings were due to time recognition differences, remuneration to Mercury Group of Companies, Inc., and difference in costing method used, among others. On October 16, 2013, the CIR issued a Formal Letter of Demand assessing Telstar for deficiency income tax of PHP 255,371,069.77, improperly accumulated earnings tax of PHP 341,327.08, value-added tax of PHP 114,939,336.31, expanded withholding tax of PHP 2,861,287.15, and documentary stamp tax of PHP 420,276.22, with an annexed document detailing the discrepancies.

Telstar filed a protest reiterating its earlier explanations. The CIR issued a Final Decision on Disputed Assessment cancelling in full the assessments on improperly accumulated earnings tax and documentary stamp tax, but partially affirming the final assessments on income tax, value-added tax, and expanded withholding tax, with an attached "Details of Discrepancy" document. Telstar then lodged a Petition for Review before the CTA, mainly insisting that the waivers executed by Puyo were not valid.

The CTA Second Division rendered its Decision on August 18, 2017, pronouncing that both Telstar and the CIR were estopped from questioning the validity of the waivers since they were in pari delicto, and adjudging Telstar liable for deficiency income tax, value-added tax, and expanded withholding tax. On partial reconsideration, the CTA Second Division reduced the total assessment to PHP 5,964,053.62. Both parties appealed to the CTA En Banc, which denied both petitions but modified the computation of deficiency interest and delinquency interest in view of the effectivity of Republic Act No. 10963 (TRAIN Law) and Revenue Regulations No. 21-2018. Both parties' motions for partial reconsideration were denied.

• Prescription of Assessment: Telstar asserted that the right of the BIR to assess its deficiency internal revenue taxes for taxable year ending December 31, 2009 through the Formal Letter of Demand and Final Decision on Disputed Assessment had already prescribed.
• Invalidity of Waivers: Telstar argued that the waivers executed were void and did not validly extend the prescriptive period for assessment, and that the CTA gravely erred in ruling that both Telstar and the CIR were in pari delicto in the execution of the waivers.
• Estoppel: Telstar maintained that it was not estopped from questioning the validity of the waivers.
• Void Assessment: Telstar contended that the Final Assessment Notice and the Final Decision on Disputed Assessment were void for having been issued beyond the prescriptive period allowed by law.
• Lack of Valid Demand: Telstar argued that the Formal Letter of Demand and the attached Final Assessment Notice were void for lack of a valid categorical demand for payment.
• Substantive Tax Liabilities: Telstar maintained that it was not liable for deficiency income tax on overclaimed salaries/expenses of PHP 7,020,352.18, deficiency expanded withholding tax of PHP 32,732.01, deficiency income tax on related disallowed expense of PHP 2,326,691.88, deficiency value-added tax on proceeds from sale of property cash flow of PHP 5,610.71, and deficiency value-added tax on disallowed input tax of PHP 2,918,401.80.
• Surcharge and Interest: Telstar argued that it was not liable for the 25% surcharge on the assessed deficiency taxes nor for deficiency interest on the assessed deficiency expanded withholding tax and deficiency value-added tax.

• Validity of Assessment: The CIR contended that the CTA En Banc correctly upheld the questioned deficiency internal revenue taxes assessed against Telstar, including surcharge and deficiency interest.
• Estoppel: The CIR argued that Telstar was barred from questioning the execution and validity of the waivers.
• Factual and Legal Support: In its own petition, the CIR insisted that the assessment against Telstar bears factual and legal support, and that the CTA En Banc erred in holding that the CTA Second Division erred in cancelling the tax assessments it had issued.

• Prescription of Assessment: Whether the BIR's right to assess Telstar for deficiency taxes for taxable year 2009 had prescribed when it issued the Formal Letter of Demand/Final Assessment Notice on October 16, 2013.
• Validity of Waivers: Whether the waivers executed by Telstar validly extended the prescriptive period for assessment.
• Application of In Pari Delicto and Estoppel: Whether the equitable principles of in pari delicto and estoppel bar Telstar from questioning the validity of the waivers.
• Validity of Demand: Whether there was a valid categorical demand for Telstar to pay the assessed deficiency taxes for taxable year 2009.

• Prescription of Assessment: Yes, the right to assess had prescribed. The BIR had until April 15, 2013 for income tax, January 25, 2013 for value-added tax, and January 28, 2013 for expanded withholding tax, within which to assess Telstar for taxable year 2009, and the FLD/FAN was issued on October 16, 2013, beyond these periods.
• Validity of Waivers: No, the waivers were void. They failed to comply with Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01 in several respects, including the wrong purpose, failure to specify the kind and amount of taxes, and signing by an Assistant Commissioner rather than the CIR.
• Application of In Pari Delicto and Estoppel: No, these doctrines did not apply. Telstar did not benefit from the defective waivers and did not act in bad faith; the BIR's own negligence caused the defects, and it cannot hide behind estoppel to cover its failure to comply with its own issuances.
• Validity of Demand: No, the Formal Letter of Demand/Final Assessment Notice was defective. It lacked a categorical demand for payment of the assessed taxes, violating Section 228 of the NIRC and Revenue Regulations No. 12-99, and a subsequent demand in the Final Decision on Disputed Assessment did not cure the defect.

• Prescription of Assessment: Under Section 203 of the NIRC, internal revenue taxes shall be assessed within three years after the last day prescribed by law for filing the return. Section 222(b) allows extension only if both the Commissioner and the taxpayer have agreed in writing before the expiration of the period. The CIR had until April 15, 2013 for income tax, January 25, 2013 for value-added tax, and January 28, 2013 for expanded withholding tax. Since the waivers were void, the FLD/FAN issued on October 16, 2013 was beyond the prescriptive period and therefore void and of no legal effect.

• Validity of Waivers: The Court applied the requisites for valid waivers under RMO No. 20-90 and RDAO No. 05-01 as summarized in Commissioner of Internal Revenue vs. Systems Technology Institute, Inc. The waivers suffered from several defects: (1) the request was for an extension of time to present additional documents, not for reinvestigation and/or reconsideration of the pending internal revenue case; (2) they failed to specify the kind and amount of taxes due; (3) they were not signed by the Commissioner but by Assistant Commissioner Masajon, despite the requirement that the Commissioner sign waivers where taxes exceed PHP 1,000,000.00; and (4) Puyo signed without notarized written authority. The BIR had the burden of ensuring compliance with these requirements before accepting the waivers, as emphasized in Commissioner of Internal Revenue vs. The Stanley Works Sales (Phils.), Inc.: "The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90, as they have the burden of securing the right of the government to assess and collect tax deficiencies."

• Application of In Pari Delicto and Estoppel: The equitable principles of in pari delicto and estoppel, recognized as exceptions to the general rule in cases like Commissioner of Internal Revenue vs. Next Mobile, Inc., were inapplicable. Telstar did not derive any benefit from the defective waivers, as it had already provided the BIR with substantially all the required records before the first waiver was executed in September 2012. The Preliminary Assessment Notice was issued on June 13, 2013, three years after Telstar's initial submission of documents on June 11, 2010. The BIR's inaction was the proximate cause of the defects in the waiver. Citing Commissioner of Internal Revenue vs. Kudos Metal Corp.: "The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow." The BIR cannot hide behind estoppel to cover its failure to comply with its own issuances.

• Validity of Demand: Section 228 of the NIRC and Revenue Regulations No. 12-99 require that the formal letter of demand and assessment notice state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based; otherwise, the assessment shall be void. Citing Commissioner of Internal Revenue vs. Fitness by Design, Inc.: "The word 'shall' in Section 228 of the Tax Code and Revenue Regulations No. 12-99 means the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory." A plain reading of the FLD/FAN revealed that no demand for payment was made; it merely gave Telstar the opportunity to present its side within fifteen days and stated that if amenable, it may pay through the Electronic Filing and Payment Section. The FLD/FAN and FDDA have divergent functions — the first calls for payment of the taxpayer's deficiency tax while the second informs the taxpayer of the Commissioner's final decision on any protest filed. A subsequent demand in the FDDA does not cure the defective FLD/FAN. An assessment that fails to strictly comply with due process requirements is void and produces no effect.

• Strict Compliance with Waiver Requirements — A waiver of the statute of limitations on tax assessment must strictly comply with the requirements of Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01. The requisites include: (1) the waiver must be in the proper form prescribed by RMO 20-90 with the expiry date filled up; (2) it must be signed by the taxpayer or duly authorized representative, with written and notarized delegation if signed by a representative; (3) it must be duly notarized; (4) the CIR or authorized revenue official must sign indicating acceptance, with the date of acceptance indicated; (5) both the date of execution and acceptance must be before the expiration of the prescriptive period; and (6) the waiver must be executed in three copies with the fact of receipt by the taxpayer indicated in the original. Failure to comply with any requisite renders the waiver defective and ineffectual.

• In Pari Delicto as Exception — The equitable principle of in pari delicto ("in equal fault") may bar a taxpayer from questioning the validity of defective waivers where both parties were at fault in causing the deficiencies. However, this exception applies only where the taxpayer benefited from the waiver, such as by gaining additional time to submit documents or postponing payment of taxes. Where the taxpayer did not benefit from the defective waiver and did not act in bad faith, the doctrine is inapplicable.

• Estoppel as Exception — The doctrine of estoppel cannot be applied as an exception to the statute of limitations on the assessment of taxes where there is a detailed procedure for the proper execution of the waiver that the BIR must strictly follow. Estoppel, being predicated on equity, cannot give validity to an act that is prohibited by law or against public policy. The BIR cannot hide behind estoppel to cover its failure to comply with its own issuances, and having caused the defects in the waivers, the BIR must bear the consequence of its own negligence.

• Categorical Demand Requirement — A Formal Letter of Demand/Final Assessment Notice must contain a categorical demand for payment of the assessed tax with factual and legal bases. The word "shall" in Section 228 of the NIRC and Revenue Regulations No. 12-99 means that informing the taxpayer of both the legal and factual bases of the assessment is mandatory and cannot be presumed. An assessment that fails to strictly comply with the due process requirements is void and produces no effect. A subsequent demand in the Final Decision on Disputed Assessment does not cure the defective FLD/FAN, as the two documents have divergent functions.

• "The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90, as they have the burden of securing the right of the government to assess and collect tax deficiencies. This right would prescribe absent any showing of a valid extension of the period set by the law." — This passage from Commissioner of Internal Revenue vs. The Stanley Works Sales (Phils.), Inc. establishes that the BIR bears responsibility for ensuring waivers comply with requirements, and was quoted by the Court to explain why the BIR's inaction was the proximate cause of the defects in the waivers.

• "The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow." — This passage from Commissioner of Internal Revenue vs. Kudos Metal Corp. articulates the rule that estoppel cannot validate defective waivers where the BIR itself failed to comply with its own detailed procedures, and was cited to reject the CIR's estoppel defense.

• "The word 'shall' in Section 228 of the Tax Code and Revenue Regulations No. 12-99 means the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory. The law requires that the bases be reflected in the formal letter of demand and assessment notice. This cannot be presumed." — This passage from Commissioner of Internal Revenue vs. Fitness by Design, Inc. establishes the mandatory nature of the due process requirements in tax assessment, and was cited to support the invalidation of the FLD/FAN for lack of a categorical demand.

• Commissioner of Internal Revenue vs. The Stanley Works Sales (Phils.), Inc., 749 Phil. 280 (2014) — Cited as controlling authority for the proposition that the BIR has the burden of ensuring compliance with RMO No. 20-90 requirements, and that a waiver is not a unilateral act of the taxpayer but an agreement between the taxpayer and the BIR.

• Commissioner of Internal Revenue vs. Kudos Metal Corp., 634 Phil. 314 (2010) — Cited as controlling authority for the rule that estoppel cannot be applied as an exception to the statute of limitations on tax assessment where there is a detailed procedure for the proper execution of the waiver that the BIR must strictly follow.

• Commissioner of Internal Revenue vs. Fitness by Design, Inc., 799 Phil. 391 (2016) — Cited as controlling authority for the mandatory nature of the due process requirements under Section 228 of the NIRC and Revenue Regulations No. 12-99, and for the invalidation of a Final Assessment Notice lacking a definite amount of tax liability and defective demand for payment.

• Commissioner of Internal Revenue vs. Next Mobile, Inc., 774 Phil. 428 (2015) — Distinguished as an exception to the general rule that defective waivers are void, where the taxpayer benefited from the waivers and acted in bad faith by impugning them after enjoying their benefits.

• Commissioner of Internal Revenue vs. Systems Technology Institute, Inc., 814 Phil. 933 (2017) — Cited for the outline of the procedure for the proper execution of a valid waiver under RMO 20-90 and RDAO 05-01, and for the principle that specific information on the kind and amount of taxes is necessary for a waiver's validity.

• La Flor Dela Isabela, Inc. vs. Commissioner of Internal Revenue, 910 Phil. 11 (2021) — Cited for the enumeration of defects that invalidate waivers for failure to strictly comply with RMO No. 20-90 and RDAO No. 05-01.

• Commissioner of Internal Revenue vs. Standard Chartered Bank, 765 Phil. 102 (2015) — Cited for the requirement that the Commissioner sign waivers where taxes exceed PHP 1,000,000.00.

• Universal Weavers Corporation vs. Commissioner of Internal Revenue, 903 Phil. 160 (2021) — Cited for the proposition that the BIR must bear the consequence of its own negligence in causing defects in waivers and cannot shift the blame to the taxpayer.

• Section 203, National Internal Revenue Code of 1997 — Provides the period of limitation upon assessment and collection of internal revenue taxes: three years after the last day prescribed by law for filing the return. The Court applied this provision to determine that the BIR's right to assess Telstar had prescribed.

• Section 222(b), National Internal Revenue Code of 1997 — Provides the exception to the period of limitation, allowing assessment within an extended period if both the Commissioner and the taxpayer have agreed in writing before the expiration of the period. The Court applied this provision to test the validity of the waivers executed by Telstar.

• Section 228, National Internal Revenue Code of 1997 — Governs the protesting of assessments and requires the Commissioner to notify the taxpayer of findings and inform the taxpayer in writing of the law and facts on which the assessment is made; otherwise, the assessment shall be void. The Court applied this provision to invalidate the FLD/FAN for lack of a categorical demand.

• Revenue Memorandum Order No. 20-90 — Prescribes the proper execution of waivers of the statute of limitations under the NIRC. The Court applied this issuance to determine the validity of the waivers, finding multiple violations.

• Revenue Delegation of Authority Order No. 05-01 — Delegates authority to sign and accept waivers of the defense of prescription under the statute of limitations. The Court applied this issuance to determine the validity of the waivers.

• Revenue Regulations No. 12-99 — Implements the provisions of the NIRC governing the rules on assessment of national internal revenue taxes, including the due process requirement in the issuance of a deficiency tax assessment. The Court applied Section 3.1.4 of this regulation to require that the formal letter of demand state the facts, law, rules and regulations, or jurisprudence on which the assessment is based.

• Republic Act No. 10963 (TRAIN Law) — Amended Section 249 of the NIRC regarding interest rates. The Court noted the CTA En Banc's modification of the computation of deficiency and delinquency interest in view of this law's effectivity on January 1, 2018, though the Court ultimately found no reason to resolve the other matters raised by the parties.

• Inting, J. — concurred.
• Caguioa, J. — submitted a Concurring Opinion expounding on the first ground (defective waivers) and underscoring that Telstar and the BIR were never in pari delicto and that Telstar was not estopped from questioning the validity of the waivers. The concurrence emphasized that the BIR, as the government agency responsible for enforcing tax laws, bears the responsibility to ensure that waivers strictly comply with the prescribed requirements before signing and accepting them. It distinguished Next Mobile on the ground that Telstar did not benefit from the waivers, had no practical need for additional time, and did not act in bad faith.
• Gaerlan, J. — on official business but left his concurring vote.
• Singh, J. — on leave.

N/A — No dissenting opinion was noted in the provided text. The CTA En Banc had a Concurring and Dissenting Opinion by Presiding Justice Roman G. Del Rosario, but no dissenting opinion at the Supreme Court level was included in the text.