Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc.

Tax assessment notices must comply with the mandatory requirement under Section 228 of the NIRC of 1997 and Revenue Regulation No. 12-99 of stating the law and facts on which the assessment is based; otherwise, they are void. While the Court of Tax Appeals is not strictly governed by technical rules of evidence, the formal offer of evidence under Section 34, Rule 132 of the Rules of Court is mandatory, subject only to the exception that the evidence must be duly identified by testimony and incorporated in the records. The three-year prescriptive period for collection of taxes is not suspended by a mere request for reinvestigation; the request must first be granted or acted upon by the Commissioner to interrupt the running of the period.

United Salvage and Towage (Phils.), Inc. (USTP) is engaged in the business of sub-contracting work for service contractors engaged in petroleum operations in the Philippines. During the taxable years in question, it entered into various contracts and sub-contracts with several petroleum service contractors, such as Shell Philippines Exploration, B.V. and Alorn Production Philippines, for the supply of service vessels. The Commissioner of Internal Revenue (CIR), through Bureau of Internal Revenue officials, examined respondent's operations and found it liable for deficiency income tax, withholding tax, value-added tax, and documentary stamp tax for taxable years 1992, 1994, 1997, and 1998.

• Respondent United Salvage and Towage (Phils.), Inc. is engaged in the business of sub-contracting work for service contractors engaged in petroleum operations in the Philippines.
• During the taxable years in question, it entered into various contracts and sub-contracts with several petroleum service contractors, such as Shell Philippines Exploration, B.V. and Alorn Production Philippines, for the supply of service vessels.
• Petitioner, through Bureau of Internal Revenue officials, issued demand letters with attached assessment notices for withholding tax on compensation and expanded withholding tax for taxable years 1992, 1994, and 1998, detailed as follows: Assessment Notice No. 25-1-000545-92 (WTC 1992, P50,429.18), Assessment Notice No. 25-1-000546-92 (EWT 1992, P14,079.45), Assessment Notice No. 034-14-000029-94 (EWT 1994, P48,461.76), and Assessment Notice No. 034-1-000080-98 (EWT 1998, P22,437.01).
• On January 29, 1998 and October 24, 2001, respondent filed administrative protests against the 1994 and 1998 assessments, respectively.
• On February 21, 2003, respondent appealed by way of Petition for Review before the CTA-Special First Division alleging that the Notices of Assessment are bereft of any facts, law, rules and regulations or jurisprudence, rendering the assessments void, and that the right to assess and collect had prescribed.
• During the pendency of the proceedings, respondent moved to withdraw the petition regarding income tax, VAT, and DST deficiencies after availing of the Tax Amnesty Program under Republic Act No. 9480 and complying with all requirements therefor.
• The CTA-Special First Division partially granted the Motion to Withdraw and declared the issues on income tax, VAT, and DST deficiencies closed and terminated, submitting the case for decision covering only the remaining issues on deficiency EWT and WTC for taxable years 1992, 1994, and 1998.
• The CTA-Special First Division found that the Preliminary Assessment Notices for deficiency EWT for taxable years 1994 and 1998 were not formally offered as evidence.
• The CTA-Special First Division also found that the Final Assessment Notices for deficiency EWT for taxable years 1994 and 1998 do not show the law and the facts on which the assessments were based.
• Regarding the 1992 assessments, the CTA-Special First Division declared that the right of petitioner to collect the deficiency EWT and WTC had already lapsed pursuant to the statute of limitations.

• Technical rules of evidence should not be strictly applied in the interest of substantial justice; while petitioner failed to formally offer the Preliminary Assessment Notices for taxable years 1994 and 1998, their existence and due execution were duly tackled during the presentation of witnesses, and the BIR records were forwarded to the CTA and made part of the records.
• The 1994 Expanded Withholding Tax assessment has factual and legal basis because at the time the Preliminary Assessment Notice and Final Assessment Notice were issued on January 19, 1998, Revenue Regulation No. 12-99 was not yet operative, making compliance with Revenue Regulation No. 12-85 sufficient; in any case, scrutiny of the BIR records would show that the details of the factual finding were itemized from the PAN issued.
• The right to collect the 1992 Expanded Withholding Tax and Withholding Tax on Compensation has not prescribed because the five-year prescriptive period was interrupted when respondent filed its request for reinvestigation on March 14, 1997, which was granted on January 22, 2001, and the period should begin to run from the date of the reconsidered or modified assessment.

• The Preliminary Assessment Notices for 1994 and 1998 were not formally offered as evidence; hence, pursuant to Section 34, Rule 132 of the Revised Rules of Court, the Court shall neither consider the same as evidence nor rule on their validity.
• The Final Assessment Notices for 1994 and 1998 do not show the law and the facts on which the assessments were based; therefore, said assessments are void for failure to comply with Section 228 of the 1997 National Internal Revenue Code.
• The right of the government to assess and collect deficiency taxes for taxable year 1992 has prescribed on account of the failure to issue a valid notice of assessment within the applicable period and the failure to collect within the three-year prescriptive period.

• Procedural:
  • Whether the Court of Tax Appeals is governed strictly by technical rules of evidence, particularly regarding the requirement for formal offer of Preliminary Assessment Notices.
• Substantive Issues:
  • Whether the Expanded Withholding Tax Assessment issued by petitioner against respondent for taxable year 1994 was without any factual and legal basis for failure to comply with the requirements of Section 228 of the National Internal Revenue Code.
  • Whether petitioner’s right to collect the creditable withholding tax and expanded withholding tax for taxable year 1992 has already prescribed.

• Procedural:
  • While the Court of Tax Appeals is not governed strictly by technical rules of evidence, the formal offer of evidence is mandatory under Section 34, Rule 132 of the Rules of Court, which provides that the court shall consider no evidence which has not been formally offered.
  • The exception allowing evidence not formally offered to be admitted requires strict compliance with two requisites: (1) the evidence must have been duly identified by testimony duly recorded; and (2) the same must have been incorporated in the records of the case.
  • Petitioner categorically admitted that it failed to formally offer the Preliminary Assessment Notices for 1994 and 1998, and no evidence of positive identification of such notices by petitioner’s witnesses was presented; thus, the general rule requiring formal offer prevails.
  • The presentation of Preliminary Assessment Notices is not mere procedural technicality but a means by which a taxpayer is informed of his liability and by which the court may ascertain the truth of the taxpayer's claims.
• Substantive:
  • The 1994 assessment is void because the Final Assessment Notice failed to state the law and facts on which the assessment was based, violating Section 228 of the 1997 National Internal Revenue Code and Section 3.1.4 of Revenue Regulation No. 12-99.
  • Revenue Regulation No. 12-99 applies retroactively to assessments issued after January 1, 1998, because it is an interpretative regulation that merely implements the law and does not create or take away vested rights; the old requirement of merely notifying the taxpayer was changed in 1998 to informing the taxpayer of both the law and the facts.
  • The 1998 assessment is valid and upheld because the Final Assessment Notice reflected a detailed factual account of why the basic EWT is P14,496.79 and cited the legal basis, Section 57 B of the 1997 NIRC.
  • The right to collect the 1992 taxes has prescribed because the three-year prescriptive period for collection was not suspended; the request for reinvestigation filed on March 14, 1997 was only acted upon on January 22, 2001, beyond the three-year period reckoned from January 9, 1996, and the earliest attempt to collect was the Preliminary Collection Letter issued on February 21, 2002.
  • The request for reinvestigation alone does not suspend the period; the request should first be granted or acted upon before suspension may set in.

• Formal Offer of Evidence — Under Section 34, Rule 132 of the Rules of Court, the court shall consider no evidence which has not been formally offered, with the purpose specified. This requirement is mandatory and ensures that judges rest their findings strictly upon evidence offered by the parties, allows opposing parties to examine and object to evidence, and facilitates appellate review.
• Exception to Formal Offer of Evidence — Evidence not formally offered may be admitted only if the following requirements are strictly complied with: (1) the same must have been duly identified by testimony duly recorded; and (2) the same must have been incorporated in the records of the case. Being an exception, it is strictly construed.
• Validity of Assessment Notices — Under Section 228 of the National Internal Revenue Code of 1997, the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment is void. Revenue Regulation No. 12-99 further mandates that the formal letter of demand and assessment notice shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based.
• Retroactivity of Interpretative Regulations — Administrative rules interpretive of a statute, and not declarative of certain rights and corresponding obligations, are given retroactive effect as of the date of the effectivity of the statute. Revenue Regulation No. 12-99, being interpretive of the provisions of the Tax Code, retroacts to January 1, 1998.
• Prescription of Tax Assessments — Under Batas Pambansa Blg. 700, the Commissioner has three years from the date of actual filing of the tax return to assess national internal revenue taxes or to commence court proceedings for collection without an assessment. When a valid assessment is issued within the three-year period, the Commissioner has another three years to collect the tax due by distraint, levy, or court proceeding.
• Suspension of Prescriptive Period — The request for reinvestigation alone does not suspend the running of the prescriptive period for collection; the request should first be granted or acted upon by the Commissioner before suspension may set in.

• "We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part..." — On judicial deference to the Court of Tax Appeals' expertise.
• "The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified." — Citing Section 34, Rule 132 of the Revised Rules on Evidence regarding the mandatory nature of formal offer.
• "The use of the word 'shall' in these legal provisions indicates the mandatory nature of the requirements laid down therein." — Emphasizing the mandatory requirement that assessment notices state the law and facts on which they are based.
• "In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen's right is amply protected by the Bill of Rights under the Constitution." — On the primacy of constitutional rights over state taxation powers.
• "Taxes are the lifeblood of the government... However, the power to tax has its limits, in spite of all its plenitude." — Acknowledging the necessity of taxation while recognizing its constitutional limitations.

• Compagnie Financiere Sucres Et Denrees v. CIR — Cited for the doctrine that courts will not set aside conclusions reached by the Court of Tax Appeals unless there has been an abuse or improvident exercise of authority, recognizing the CTA's expertise in tax matters.
• Vda. de Oñate v. Court of Appeals — Cited for the distinction between identification of documentary evidence and its formal offer, and for the requirements to admit evidence not formally offered: identification by testimony and incorporation in the records.
• Heirs of Pedro Pasag v. Spouses Parocha — Cited for the principle that a formal offer is necessary because judges are mandated to rest their findings of facts and judgment only upon evidence offered by the parties at the trial.
• Commissioner of Internal Revenue v. Bank of the Philippine Islands — Cited for the rule that the date of issuance of the notice of assessment determines which law applies, and that the old requirement of merely notifying the taxpayer was changed in 1998 to informing the taxpayer of both the law and the facts.
• Commissioner of Internal Revenue v. Enron Subic Power Corporation — Cited for the principle that the advice of tax deficiency and preliminary letters are not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment, which must be stated in the formal letter of demand.
• Commissioner of Internal Revenue v. Reyes — Cited for the ruling that assessments based on estimates that appear to have been arbitrarily or capriciously arrived at cannot be countenanced, and that interpretative regulations are given retroactive effect as of the date of the statute's effectivity.
• Bank of the Philippine Islands v. Commissioner of Internal Revenue — Cited for the rules on prescription of tax assessments, the three-year period for collection, and the requirement that a request for reinvestigation must first be granted to suspend the running of the prescriptive period.
• Commissioner of Internal Revenue v. Philippine Global Communication, Inc. — Cited for the principle that the statute of limitations on the collection of taxes was enacted to benefit and protect taxpayers, and that the government's right to collect prescribes when no warrant of distraint or levy is served nor judicial proceedings initiated within the period.

• Section 8, Republic Act No. 1125 — Provides that the Court of Tax Appeals shall be a court of record and that its proceedings shall not be governed strictly by technical rules of evidence.
• Section 34, Rule 132 of the Revised Rules on Evidence — Mandates that the court shall consider no evidence which has not been formally offered, with the purpose specified.
• Section 228, National Internal Revenue Code of 1997 — Requires that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment is void.
• Section 203, National Internal Revenue Code of 1997 — Provides for the statute of limitations on assessment and collection of taxes, which was shortened from five years to three years by Batas Pambansa Blg. 700.
• Section 223, National Internal Revenue Code of 1997 — Provides that the running of the statute of limitations may be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or proceeding in court.
• Section 249, National Internal Revenue Code of 1997 — Provides for the imposition of surcharges, deficiency interests, and delinquency interests on unpaid taxes.
• Revenue Regulation No. 12-99 — Implements Section 228 of the NIRC, mandating that the formal letter of demand and assessment notice shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based.
• Revenue Regulation No. 12-85 — The old regulation governing the issuance of assessments prior to Revenue Regulation No. 12-99.
• Batas Pambansa Blg. 700 — Shortened the statute of limitations on assessment and collection of national internal revenue taxes from five years to three years.