Commissioner of Internal Revenue vs. Transitions Optical Philippines, Inc.

A taxpayer that benefits from defective waivers and fails to question them at the earliest opportunity is estopped from assailing their validity, but an assessment served beyond the extended period agreed upon in the waivers is void for having prescribed. The controlling assessment for purposes of Sections 203 and 222 of the National Internal Revenue Code is the Final Assessment Notice, not the Preliminary Assessment Notice.

The Commissioner of Internal Revenue exercises authority to examine books of accounts and assess internal revenue taxes, while Transitions Optical Philippines, Inc. is a taxpayer subject to income tax, value-added tax, expanded withholding tax, and final tax for taxable year 2004. Under Section 203 of the National Internal Revenue Code, assessment must generally be made within three years from the last day prescribed for filing the return, extendible by written agreement under Section 222(b) and (d) executed before expiration of the period.

On April 28, 2006, Transitions Optical received Letter of Authority No. 00098746 dated March 23, 2006 from Revenue Region No. 9, San Pablo City, signed by then Officer-in-Charge-Regional Director Corazon C. Pangcog, authorizing Revenue Officers Jocelyn Santos and Levi Visaya to examine its books of accounts for internal revenue tax purposes for taxable year 2004.

On October 9, 2007, the parties allegedly executed a Waiver of the Defense of Prescription extending the prescriptive period for assessment of internal revenue taxes for 2004 to June 20, 2008. The document was signed by Finance Manager Pamela Theresa D. Abad for Transitions Optical and by Revenue District Officer Myrna S. Leonida for the Bureau of Internal Revenue. This was followed by another supposed Waiver dated June 2, 2008 extending the period to November 30, 2008.

Thereafter, Regional Director Jaime B. Santiago issued a Preliminary Assessment Notice dated November 11, 2008 for deficiency taxes for taxable year 2004, which Transitions Optical protested in writing on November 26, 2008. Director Santiago subsequently issued a Final Assessment Notice and Formal Letter of Demand dated November 28, 2008 for deficiency income tax, value-added tax, expanded withholding tax, and final tax for taxable year 2004 amounting to ₱19,701,849.68. According to Transitions Optical, the demand had already prescribed when the Final Assessment Notice was mailed on December 2, 2008, and its Supplemental Protest added that the Final Assessment Notice was void because it indicated 2006 as the return period although covering calendar year 2004.

Years later, Regional Director Jose N. Tan issued a Final Decision on the Disputed Assessment dated January 24, 2012 holding Transitions Optical liable for ₱19,701,849.68, broken down as income tax ₱3,153,371.04, value-added tax ₱1,231,393.47, expanded withholding tax ₱175,339.51, final tax on royalty ₱14,026,247.90, and final tax on interest income ₱1,115,497.76. On March 16, 2012, Transitions Optical filed a Petition for Review before the Court of Tax Appeals. In her Answer, the Commissioner maintained that the waivers extended the period and that posting of the Final Assessment Notice and Formal Letter of Demand was within the San Pablo City Post Office's exclusive control, the November 28, 2008 documents having been processed only on December 2, 2008 because November 28 fell on a Friday and December 1 was declared a Special Holiday.

The Court of Tax Appeals First Division found the waivers not accompanied by notarized written authority for the representatives, and without the Revenue District Office's acceptance date or the taxpayer's receipt of acceptance indicated. It further found, for lack of adequate supporting evidence, that the envelope containing the Final Assessment Notice and Formal Letter of Demand bore December 4, 2008 as mailing date, beyond the November 30, 2008 extended period, rejecting as self-serving and uncorroborated the testimony that the matter was brought to the post office on November 28, 2008.

• Substantial Compliance: Petitioner argued that the two Waivers executed October 9, 2007 and June 2, 2008 substantially complied with Sections 203 and 222 of the National Internal Revenue Code.
• Liberal Application of Administrative Rules: Petitioner maintained that technical rules of procedure of administrative bodies, such as Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05-01, must be liberally applied to promote justice.
• Estoppel: Petitioner argued that respondent is estopped from questioning the validity of the waivers since their execution was caused by delay occasioned by respondent's own failure to comply with Bureau of Internal Revenue orders to submit documents for audit and examination.
• Nature of Assessment Within Period: Petitioner maintained that the assessment required to be issued within the three-year period under Sections 203 and 222 refers to actual issuance of the Preliminary Assessment Notice, not the Final Assessment Notice issued if the taxpayer files a protest.

• Defective Waivers: Respondent contended that the Court of Tax Appeals properly found the waivers defective and void, the three-year prescriptive period primarily benefiting the taxpayer so that any waiver must be strictly scrutinized under laws and rules.
• Non-Technical Requirements: Respondent posited that requirements for valid waivers are not mere technical rules of procedure that can be set aside.
• No Estoppel: Respondent asserted that it is not estopped as it raised objections at the earliest opportunity, while the duty to ensure compliance with Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05-01, including proper authorization of the representative, fell primarily on petitioner and her revenue officers.
• Lack of Authority: Respondent insisted that there was no clear showing that the signatories in the waivers were duly sanctioned to act on its behalf.
• Prescription Even If Waivers Valid: Respondent argued that even assuming validity, the assessment was void as the Final Assessment Notice was served only on December 4, 2008, beyond the November 30, 2008 extended period.
• Final Assessment Notice as Assessment: Respondent countered that the assessment required to be served within the prescriptive period is the Final Assessment Notice and Formal Letter of Demand, not just the Preliminary Assessment Notice, since it is the Final Assessment Notice and Formal Letter of Demand that formally notify the taxpayer and categorically demand payment of deficiency tax.

• Validity of Waivers: Whether the two Waivers of the Defense of Prescription entered into October 9, 2007 and June 2, 2008 were valid.
• Prescription of Assessment: Whether the assessment of deficiency taxes against respondent Transitions Optical Philippines, Inc. for taxable year 2004 had prescribed.

• Validity of Waivers: Yes, by estoppel. Although defective under Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05-01, respondent impliedly admitted their validity and benefited from the extended time, and is thus barred from impugning them after allowing petitioner to rely thereon.
• Prescription of Assessment: Yes, prescription had set in. The Final Assessment Notice and Formal Letter of Demand were mailed December 4, 2008, beyond the November 30, 2008 extended period, and the controlling assessment under Sections 203 and 222 is the Final Assessment Notice, not the Preliminary Assessment Notice.

• Validity of Waivers: The three-year period under Section 203 may be extended by written agreement under Section 222(b) and (d) executed before expiration of the period previously agreed upon. The Court of Tax Appeals found non-compliance with Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05-01 for lack of notarized written authority and absence of acceptance date and receipt of acceptance. Nevertheless, estoppel applied following Commissioner of Internal Revenue vs. Next Mobile, Inc., where impugning defective waivers after benefiting therefrom was deemed bad faith. Here, respondent never raised invalidity in its Protest to the Preliminary Assessment Notice, Protest to the Final Assessment Notice, or Supplemental Protest, and its December 8, 2008 protest even acknowledged a waiver valid until November 30, 2008. Respondent did not dispute repeated failure to submit books and records and to attend an informal conference on discrepancies, making the waivers necessary to afford compliance time. Having induced delay and benefited from postponement, contest, and negotiation, respondent could not avoid liability by hiding behind technicalities it caused.
• Prescription of Assessment: Even with valid extended period until November 30, 2008, the assessment was served beyond it. The envelope bore December 4, 2008 as mailing date. Petitioner's claim of delivery to the post office November 28, 2008 with processing December 2, 2008 was unsupported; the witness testimony was self-serving and uncorroborated, and the certification of delivery to the Administrative Division did not prove actual mailing date. No clear and convincing reason warranted overturning these factual findings. Moreover, the assessment contemplated in Sections 203 and 222 is the Final Assessment Notice, not the Preliminary Assessment Notice. A Preliminary Assessment Notice merely informs of initial findings, states the proposed assessment and its bases, requires reply within 15 days, and serves due process by allowing early settlement. A Final Assessment Notice contains computation and demand for payment, creates the obligation to pay upon service, triggers 25% penalty and 20% per annum interest, and becomes final, executory, and demandable if not protested within 30 days from receipt.

• Estoppel against taxpayer assailing defective waivers — A taxpayer that executes defective waivers, allows the Bureau of Internal Revenue to rely on them, benefits by gaining time to submit documents, postponing payment, and contesting and negotiating the assessment, and fails to object until after assessment, is estopped from impugning their validity on the ground of defects it caused. Applied here to bar respondent, which acknowledged the waivers in its protests and benefited from extended audit compliance time, from belatedly alleging lack of authority and formal defects.
• Prescription of tax assessment — Under Section 203 of the National Internal Revenue Code, internal revenue taxes shall be assessed within three years after the last day prescribed for filing the return, except as provided in Section 222. Under Section 222(b), if before expiration of the Section 203 period both the Commissioner and taxpayer agree in writing to assessment after such time, the tax may be assessed within the period agreed upon, extendible by subsequent written agreement made before expiration of the period previously agreed upon. Applied here where the extended period ended November 30, 2008, so mailing on December 4, 2008 rendered the assessment void.
• Preliminary Assessment Notice vs. Final Assessment Notice — A Preliminary Assessment Notice merely informs the taxpayer of initial findings, contains the proposed assessment with facts, law, rules and jurisprudence, demands no payment but requires reply within 15 days, and forms part of due process to allow early settlement. A Final Assessment Notice contains computation of liabilities plus demand for payment within a prescribed period, creates the obligation to pay upon service, starts accrual of penalties and interests, and becomes final, executory, and demandable if not administratively protested within 30 days. Hence the assessment that must be served within the prescriptive or extended period is the Final Assessment Notice.
• Factual findings of the Court of Tax Appeals — Findings of the Court of Tax Appeals on the date of mailing and sufficiency of evidence to prove timely issuance are accorded respect and will not be overturned absent clear and convincing reason. Applied in sustaining the finding that December 4, 2008 was the mailing date and that self-serving, uncorroborated testimony and an internal transmittal certification did not prove November 28, 2008 mailing.

• "Estoppel applies against a taxpayer who did not only raise at the earliest opportunity its representative's lack of authority to execute two (2) waivers of defense of prescription, but was also accorded, through these waivers, more time to comply with the audit requirements of the Bureau of Internal Revenue. Nonetheless, a tax assessment served beyond the extended period is void." — States the dual ratio decidendi on estoppel and prescription that disposes of the case.
• "A PAN merely informs the taxpayer of the initial findings of the Bureau of Internal Revenue." — Defines the limited function of a Preliminary Assessment Notice as basis for holding it is not the assessment under Sections 203 and 222.
• "On the other hand, a FAN contains not only a computation of tax liabilities but also a demand for payment within a prescribed period." — Defines the Final Assessment Notice as the demand that creates the payment obligation and triggers penalties and interest.
• "In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused to avoid the tax liability determined by the BIR during the extended assessment period." — Articulates the bad-faith rationale borrowed from Commissioner of Internal Revenue vs. Next Mobile, Inc. to justify estoppel.

• Commissioner of Internal Revenue vs. Next Mobile, Inc., 774 Phil. 428 (2015) — Controlling precedent for estoppel; followed to bar a taxpayer that executed successive defective waivers, benefited from delay and opportunity to substantiate claims, and challenged validity only after adverse assessment.
• Commissioner of Internal Revenue vs. Menguito, 587 Phil. 234 (2008) — Cited for the function and contents of a Preliminary Assessment Notice under Section 228 of the Tax Code.
• Commissioner of Internal Revenue vs. Metro Star Superama, Inc., 652 Phil. 172 (2010) — Cited for the proposition that the Preliminary Assessment Notice is part of due process affording opportunity to settle at the earliest time without a Final Assessment Notice.

• Section 203, National Internal Revenue Code — Provides the three-year limitation upon assessment and collection; applied as the general rule from which extension by waiver is an exception.
• Section 222(b) and (d), National Internal Revenue Code — Authorizes extension of assessment and collection periods by written agreement before expiration of the prior period; applied to measure validity of the October 9, 2007 and June 2, 2008 extensions to June 20, 2008 and November 30, 2008.
• Section 228, National Internal Revenue Code — Governs protesting of assessment including Preliminary Assessment Notice procedure; cited for Preliminary Assessment Notice functions.
• Section 248(A)(3), National Internal Revenue Code — Imposes 25% penalty for failure to pay deficiency tax within time prescribed in notice of assessment; cited to show effects flowing from service of Final Assessment Notice.
• Section 249, National Internal Revenue Code — Imposes 20% per annum interest from date prescribed for payment until full payment; cited for same purpose.
• Revenue Memorandum Order No. 20-90 and Revenue Delegation Authority Order No. 05-01 — Prescribe requirements for proper execution of waiver including notarized written authority and indication of acceptance and receipt dates; applied by Court of Tax Appeals to find waivers defective, though estoppel later barred challenge.
• Sections 3.1.2 and 3.1.4, Revenue Regulation No. 12-99 — Define contents of Preliminary Assessment Notice and Final Assessment Notice; relied upon to distinguish proposed assessment from demand for payment.

Lucas P. Bersamin, Associate Justice (Acting Chairperson), Samuel R. Martires, Associate Justice, and Alexander G. Gesmundo, Associate Justice concurred. Presbitero J. Velasco, Jr., Associate Justice, was on official leave.