Philippine National Oil Company vs. Court of Appeals

A tax compromise agreement entered into without legal basis under the specific statute authorizing it is void for being contrary to law and public policy, and the government is not estopped from collecting the correct tax by the erroneous or unauthorized acts of its agents. The exclusive appellate jurisdiction of the Court of Tax Appeals over matters arising under the National Internal Revenue Code is not repealed by the general administrative settlement mechanism of P.D. No. 242.

P.D. No. 1931, effective 11 June 1984, withdrew all tax exemptions of government-owned and controlled corporations. PNOC had money placements with PNB from which interest earnings were subject to a 15% final withholding tax. PNB failed to withhold the tax, believing PNOC’s tax-exempt status continued while its restoration application was pending. Informed by Savellano, the BIR assessed the deficiency against PNOC and PNB in 1986. PNOC sought to compromise the liability under E.O. No. 44, which permitted settlement of delinquent accounts or disputed assessments pending as of 31 December 1985 for 30% of the basic tax. Then-Commissioner Tan approved a compromise in June 1987. Savellano received a reward based on the compromised amount, but insisted the full assessment be enforced and his reward correspondingly adjusted. A succeeding Commissioner, Jose Ong, revoked the compromise and pursued collection of the balance through garnishment.

• Nature of the Tax Liability: PNOC maintained money placements with PNB from 1984 to 1986. Under P.D. No. 1931, PNOC’s tax exemptions were withdrawn as of 11 June 1984. The interest earnings or yields on those placements were thus subject to a 15% final withholding tax. PNB did not withhold the tax, believing that PNOC’s tax-exempt status remained effective pending resolution of its restoration application with the Fiscal Incentives Review Board.
• The Informant’s Report and Initial Assessment: On 24 June 1986, private respondent Tirso B. Savellano submitted a sworn statement to the BIR disclosing PNB’s failure to withhold the tax. The BIR investigated and, through a letter dated 8 August 1986, requested PNOC to settle its liability. On 8 October 1986, the BIR sent a demand letter to PNB, as withholding agent, for payment of ₱376,301,133.33 covering 15 October 1984 to 15 October 1986. The same day, the BIR informed PNOC of this demand.
• Offers to Compromise: PNOC wrote the BIR on 25 September 1986, offering to compromise. Its first proposal was not a cash payment under E.O. No. 44, but a set-off of its entire tax liability against an alleged receivable from NAPOCOR — a pending claim for tax refund/credit of approximately ₱335 million that PNOC claimed would ultimately belong to it. The BIR rejected the proposal on the grounds that NAPOCOR’s claim was still being processed and that the offer was premature. PNOC reiterated the set-off in a letter dated 14 October 1986. The BIR again denied the proposal on 11 November 1986.
• The Compromise Agreement: On 9 June 1987, PNOC sent a new letter to the BIR offering to pay ₱91,003,129.89, representing 30% of the basic tax assessed, expressly invoking E.O. No. 44. BIR Commissioner Bienvenido A. Tan accepted the offer on 22 June 1987. The BIR collected a total of ₱93,955,479.12 (including a prior payment by PNB). Savellano received 15% of this collected amount as informer’s reward, or ₱14,093,321.89, the last instalment being paid on 1 December 1987.
• The Informant’s Demand: On 7 January 1988, Savellano demanded the balance of his informer’s reward based on the full original assessment of ₱385,961,580.82. Commissioner Tan maintained that the compromise was valid and Savellano had been fully paid. Savellano sought reconsideration, questioning the legality of the compromise, and on 8 April 1988 filed a Petition for Review ad cautelam with the CTA, later amended to implead PNOC and PNB as indispensable parties.
• Revocation of Compromise and Further Collection: A new BIR Commissioner, Jose U. Ong, reviewed Savellano’s pending motion for reconsideration. On 16 January 1991, Commissioner Ong issued a demand letter to PNB for the balance of ₱294,958,450.73, declaring that the compromise had no legal basis because withholding taxes are not taxes but a penalty for failure to withhold, and the obligation was PNB’s personal liability. PNB’s protest was denied as untimely. The BIR then issued a warrant of garnishment against PNB’s demand deposit with the Central Bank. The Central Bank debited ₱294,958,450.73 in September 1992 and credited the same to the Treasurer of the Philippines, who transferred it to the BIR. PNB in turn debited PNOC’s deposit account.
• The CTA and CA Decisions: The CTA held that the compromise agreement was without force and effect because PNOC’s tax liability was not a delinquent account or a disputed assessment pending as of 31 December 1985; the application for compromise was filed beyond the deadline; and the BIR Commissioner’s discretion was not beyond judicial review. The CTA also held that the 16 January 1991 assessment had become final and unappealable, and that Savellano was entitled to additional reward. The Court of Appeals affirmed the CTA decision in both appeals.

• CTA Jurisdiction (PNB): PNB argued that the BIR demand letter of 16 January 1991 was a new assessment, giving rise to a dispute solely between PNB and BIR that should be administratively settled under P.D. No. 242. PNB contended that P.D. No. 242, the later enactment, repealed Section 7(1) of Rep. Act No. 1125 and divested the CTA of jurisdiction over tax disputes between government instrumentalities.
• Validity of the Compromise (PNOC): PNOC maintained that the compromise agreement was in full accordance with E.O. No. 44 and its implementing rules, and was therefore binding. It asserted that its tax liability was a delinquent account eligible for compromise.
• Discretion of the Commissioner (PNB): PNB contended that the CTA had no jurisdiction to review or set aside a compromise agreement entered into by the BIR Commissioner, as the power to compromise is purely discretionary and not subject to judicial interference.
• Finality and Good Faith (PNB): PNB argued that a compromise agreement entered into in good faith has the effect of res judicata and cannot be unilaterally annulled by a succeeding Commissioner.
• Non-entitlement to Additional Reward (PNOC): PNOC asserted that Savellano was not entitled to additional informer’s reward because the collection of the deficiency tax was effected through enforced garnishment, not voluntary payment.
• Notice Requirements (PNB): PNB raised for the first time on appeal that the BIR failed to comply with the pre-assessment notice requirements under RR No. 12-85 before issuing the 16 January 1991 assessment.

• CTA Jurisdiction (Savellano): Savellano maintained that the CTA had exclusive appellate jurisdiction under Section 7(1) of Rep. Act No. 1125 over decisions of the BIR Commissioner, including the acceptance of the compromise and the denial of his claim for additional reward. He argued that P.D. No. 242 is a general law covering administrative settlement of disputes between government entities, which does not repeal the special law, Rep. Act No. 1125. He further argued that his presence as a private citizen removed the controversy from the scope of P.D. No. 242, which requires that disputes be solely between government instrumentalities.
• Invalidity of the Compromise (Savellano): Savellano argued that the compromise was without legal basis because PNOC’s tax liability was neither a delinquent account nor a disputed assessment pending as of 31 December 1985, and therefore not covered by E.O. No. 44. The compromise was also filed out of time and contrary to law.

• CTA Jurisdiction: Whether the Court of Tax Appeals had jurisdiction over Savellano’s petition to annul the compromise and enforce the assessment, given the administrative settlement mechanism for government disputes under P.D. No. 242.
• Validity of the Compromise: Whether the compromise agreement of 22 June 1987 was valid under Executive Order No. 44 and its implementing rules and regulations.
• Finality of Assessment: Whether the deficiency withholding tax assessment against PNB had become final and unappealable, and thus enforceable.
• Prescription: Whether the right of the BIR to assess and collect the deficiency withholding tax had prescribed.
• Additional Informer’s Reward: Whether Savellano was entitled to an additional informer’s reward equivalent to 15% of the entire amount collected by the BIR.

• CTA Jurisdiction: The CTA properly exercised jurisdiction. The 16 January 1991 demand letter was not a new assessment but a continuation of the 1986 collection effort; it expressly referenced the earlier assessment and the compromise. Rep. Act No. 1125, which grants exclusive appellate jurisdiction to the CTA over BIR decisions, is a special law, while P.D. No. 242 is a general law. Under the rule of generalia specialibus non derogant, the special law prevails. Moreover, Section 1 of P.D. No. 242 applies only to disputes solely between government instrumentalities. Savellano is a private citizen whose rights as informer were directly affected; his presence removed the case from the coverage of P.D. No. 242. The CTA’s continuance of proceedings best served the orderly administration of justice, as it could grant comprehensive relief to all four interrelated parties in a single proceeding.
• Validity of the Compromise: The compromise agreement was void for being contrary to law and public policy. PNOC’s tax liability did not qualify as a delinquent account under E.O. No. 44 because: (a) it was not a self-assessed tax — the liability was discovered and assessed by the BIR after investigation; (b) the assessment was issued on 8 August 1986, so it could not have been a final and executory deficiency assessment as of 31 December 1985; and (c) it was not a disputed assessment as of that date. Even if qualifying, PNOC’s first two letters (25 September 1986 and 14 October 1986) proposed a set-off, not payment of 30% in cash, which did not comply with E.O. No. 44’s mode of payment. Only the 9 June 1987 letter offered the statutory compromise amount, and by then the period for availment had expired on 31 March 1987. The BIR Commissioner’s discretion to compromise is not absolute and may be reviewed by courts when exercised with grave abuse of discretion. The compromise resulted in a loss of nearly ₱300 million in tax revenues and was contrary to public policy. The government is not estopped by the erroneous acts of its agents; a successor Commissioner may revoke a legally unfounded compromise.
• Finality of Assessment: The operative assessment was the one issued on 8 October 1986 against PNB. PNB did not protest that assessment within the 30-day period, making it final and unappealable. The 16 January 1991 demand letter merely sought payment of the balance after voiding the compromise; it did not constitute a new assessment, and any question about its notice requirements was raised belatedly and would not alter the finality of the 1986 assessment.
• Prescription: The defense of prescription was never raised by PNOC or PNB in the proceedings below, and is thus deemed waived under Section 1, Rule 9 of the Rules of Court. The pleadings and record lacked the necessary evidence to determine the filing of returns, the date of filing, and whether the prescriptive period had lapsed. Even assuming the defense could be considered, the original assessment against PNB was issued on 8 October 1986, well within the three-year period from the last day for filing the 1985 return. The filing of Savellano’s petition in the CTA on 8 April 1988 either constituted a judicial action for collection stopping the prescriptive period or, at minimum, suspended the running of that period during the pendency of the litigation.
• Additional Informer’s Reward: Savellano was entitled to 15% of the total amount recovered. Section 316(1) of the NIRC of 1977 makes no distinction between voluntary payment and enforced collection. Because the BIR had collected the full ₱294,958,450.73 through garnishment, the informer’s reward must be computed on that amount. The fact that the collection was traced through the information originally supplied by Savellano was sufficient.

• Generalia specialibus non derogant — A general law does not repeal a special law unless the legislative intent to do so is unmistakably clear. Rep. Act No. 1125, specifically Section 7, is a special law conferring exclusive appellate jurisdiction on the CTA. P.D. No. 242, a general law providing for administrative settlement of disputes between government entities, constitutes an exception to the extent of the CTA’s specified jurisdiction. The CTA therefore retains jurisdiction over tax matters enumerated in Rep. Act No. 1125 even if the parties are all government instrumentalities.
• Nature of Self-Assessed Taxes — A self-assessed tax is one where the liability arises by operation of law without need of a prior assessment by the taxing authority. A subsequent BIR investigation and assessment does not retroactively convert the tax into a “BIR-assessed” tax for purposes of determining whether it was self-assessed, though it may determine the precise amount due. However, for E.O. No. 44 purposes, the distinction between a self-assessed delinquent account and a BIR-assessed delinquency mattered because only those where the taxpayer voluntarily came forward without a pre-existing BIR assessment were treated as self-assessed delinquent accounts eligible for compromise.
• Judicial Review of Compromise Agreements in Taxation — The discretionary authority of the BIR Commissioner to enter into tax compromises is not absolute. When exercised in excess of or without statutory authority, or contrary to law and public policy, the compromise may be reviewed and set aside by the courts. A tax compromise that results in a substantial and legally unsupportable diminution of government revenue is contrary to public policy and void.
• Government Not Estopped by Agents’ Errors — The government is not estopped from collecting the correct tax by the mistake, negligence, or omission of its agents. A successor BIR Commissioner may revoke a compromise agreement approved by a predecessor if it is found to have no legal basis.
• Waiver of Prescription Defense — The defense of prescription of the period for assessment and collection of taxes must be pleaded in a motion to dismiss or in the answer; otherwise it is deemed waived. The court may act motu proprio to dismiss on this ground only when the facts demonstrating the lapse are sufficiently apparent from the pleadings or evidence on record.

• “The discretionary power of the BIR Commissioner to enter into compromises cannot be superior over the power of judicial review by the courts. The discretionary authority to compromise granted to the BIR Commissioner is never meant to be absolute, uncontrolled and unrestrained.”
• “As a general rule, the Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents because upon taxation depends the Government ability to serve the people for whose benefit taxes are collected.”
• “A compromise agreement involving taxes would affect not just the taxpayer and the BIR, but also the whole nation, the ultimate beneficiary of the tax revenues collected.”
• “Ubi lex non distinguit nec nos distinguere debemos — when the law does not distinguish, we should not distinguish. Section 316(1) of the NIRC of 1977 … did not make any distinction as to the manner the tax liability was collected.”

• Development Bank of the Philippines v. Court of Appeals, 180 SCRA 609 (1989) — The pronouncement that P.D. No. 242 repealed Section 7(2) of Rep. Act No. 1125 was re-examined; the Court refused to extend the repeal to Section 7(1), applying instead the special-law-over-general-law rule.
• Lichauco & Company, Inc. v. Apostol, 44 Phil. 138 (1922) — Applied to establish the rule that between a general and a special statute, the special law prevails, and repeal by implication is not favored.
• Republic v. Sandiganbayan, 226 SCRA 314 (1993) — Distinguished; unlike the Sandiganbayan compromise which underwent judicial scrutiny, the BIR-PNOC compromise was done without court oversight and was legally baseless, making it susceptible to nullification.
• Tupaz v. Ulep, 316 SCRA 118 (1999) — Cited for the definition of self-assessed taxes; but the Court clarified that a subsequent BIR assessment does not necessarily mean the tax was self-assessed for purposes of E.O. No. 44 eligibility.
• Hilado v. Collector of Internal Revenue, 100 Phil. 288 (1956) — An administrative officer may revoke, repeal or abrogate the acts of a predecessor in office when the latter’s construction of a statute is found to be erroneous.
• Querol v. Collector of Internal Revenue, 116 Phil. 615 (1962) — The burden is on the taxpayer to prove that the full period of limitation has expired; prescription is a defense that must be properly raised and proved.

• Section 7(1), Republic Act No. 1125 — Grants the Court of Tax Appeals exclusive appellate jurisdiction over decisions of the Collector of Internal Revenue involving disputed assessments, refunds, penalties, and other matters under the National Internal Revenue Code. Applied to sustain CTA jurisdiction over Savellano’s petition.
• Section 1, Presidential Decree No. 242 — Prescribes administrative settlement or adjudication of disputes, claims, and controversies solely between or among government departments, bureaus, offices, agencies, and instrumentalities. Construed as a general law that does not repeal Rep. Act No. 1125.
• Section 1, Executive Order No. 44 — Allowed compromise of “any disputed assessment or delinquent account pending as of December 31, 1985” by payment of 30% of the basic tax assessed. Found inapplicable because PNOC’s liability did not meet the cut-off date requirement.
• Sections 268 and 269(c), National Internal Revenue Code of 1977 — Three-year prescriptive period for assessment and collection of internal revenue taxes, with a separate three-year period from the assessment to collect. Assessment was timely issued; collection period was stopped or suspended by the CTA case.
• Section 316(1), National Internal Revenue Code of 1977 — Grants an informer a reward of 15% of revenues, surcharges, or fees recovered and/or fine or penalty imposed and collected. Applied to order payment of additional reward based on the total deficiency tax collected.
• Paragraph 2, Revenue Memorandum Order No. 39-86 — Upheld as valid; it did not extend the effectivity of E.O. No. 44 but merely ensured that applications filed by 31 March 1987 could be processed and paid after that date.
• Section 246, National Internal Revenue Code of 1977 — Grants the Commissioner general authority to compromise taxes on grounds of reasonable doubt as to validity or financial incapacity. The Court noted petitioners failed to invoke or prove entitlement under this provision.

Quisumbing, Sandoval-Gutierrez, Austria-Martinez, Callejo, Sr., Garcia, Puno, Panganiban, and Tinga. (Justice Tinga filed a separate concurring opinion, emphasizing that the application for compromise was filed out of time and that the initial set-off proposal did not constitute a valid application; he stressed that the BIR Commissioner had no authority to extend the effectivity of E.O. No. 44, which was a legislative act; he also underscored the vested right of the informer.)

Separate Concurring Opinion (Tinga, J.): Justice Tinga concurred fully, stressing that the compromise was void ab initio because the application was filed beyond the 31 March 1987 deadline set by E.O. No. 44 itself, a legislative enactment whose effectivity the BIR Commissioner had no power to extend. He also noted that PNOC’s first two offers were not valid applications for compromise because they proposed a set-off — a mode of extinguishment distinct from payment — and were rejected by the BIR. He underscored that the informer’s reward is a vested right designed to compensate the informer for the socio-political risks of divulging information, and that the government should not be a party to forfeiting it.

• Justice Carpio — Dissented on the following main grounds: (1) PNOC’s withholding tax liability was a delinquent account within the coverage of E.O. No. 44 because internal revenue taxes are self-assessing, and the final withholding tax on interest income is a self-assessed tax that does not require a BIR assessment to create liability; (2) PNOC filed its application for compromise on 25 September 1986, well within the 31 March 1987 deadline, and the application culminated in the 22 June 1987 approval after negotiations; (3) the compromise agreement, having been fully implemented in good faith, had the force of res judicata and could not be invalidated except on grounds of mistake, fraud, or similar vitiation of consent, none of which were present; (4) the BIR’s right to collect the foregone tax had prescribed because more than four years had elapsed from the last day for filing the fourth quarter 1985 return (25 January 1986) to the issuance of the 16 January 1991 assessment, and no valid suspension of the prescriptive period occurred; and (5) the Court was bound to dismiss the claim on prescription even if not raised, because the facts on record showed the action was time-barred.