Prime Steel Mill, Incorporated vs. Commissioner of Internal Revenue

An assessment issued by the BIR without strict compliance with the procedural due process requirements under Section 228 of the Tax Code and Revenue Regulations No. 12-99, specifically the 15-day period for the taxpayer to respond to a Preliminary Assessment Notice, is void and produces no legal effect.

Prime Steel Mill, Incorporated received a Preliminary Assessment Notice (PAN) from the BIR on January 7, 2009, assessing deficiency taxes for 2005. The taxpayer protested the PAN on January 22, 2009. However, the BIR had already issued the Final Assessment Notice (FAN) and Formal Letter of Demand (FLD) on January 14, 2009, prior to the lapse of the 15-day reglementary period for responding to the PAN. The taxpayer contested the assessment through administrative protests and eventually appealed to the Court of Tax Appeals (CTA). The CTA Third Division cancelled the deficiency VAT assessment on prescription grounds but upheld the deficiency income tax assessment. Both parties appealed to the CTA En Banc, which affirmed the lower division. The taxpayer then elevated the case to the Supreme Court, primarily contesting the validity of the income tax assessment on due process grounds.

• Nature of the Action: The case is a Petition for Review on Certiorari assailing the CTA En Banc's affirmation of a deficiency income tax assessment.
• Assessment Process: On January 7, 2009, petitioner received a PAN dated December 19, 2008. It filed a protest letter on January 22, 2009. On February 12, 2009, it received a FAN and FLD dated January 14, 2009, which reiterated the PAN's findings.
• Administrative Protest and Final Decision: Petitioner disputed the FAN and FLD. The BIR issued a Final Decision on Disputed Assessment (FDDA) on April 14, 2014, maintaining the liability for deficiency income tax and VAT.
• CTA Proceedings: Petitioner filed a Petition for Review with the CTA, arguing prescription and lack of basis for the assessments. The CTA Third Division cancelled the VAT assessment on prescription but upheld the income tax assessment. On appeal, the CTA En Banc affirmed.
• New Arguments on Appeal: Before the CTA En Banc, petitioner raised new arguments in a Supplemental Memorandum, including the lack of a Letter of Authority (LOA) and the premature issuance of the FAN (violation of due process). The CTA En Banc admitted the memorandum but rejected these arguments.
• Premature Issuance of FAN: The undisputed timeline showed the FAN was issued on January 14, 2009—only seven days after the PAN was received and before the 15-day response period expired. The CTA En Banc deemed this a substantial compliance with due process since petitioner was later able to protest.

• Prescription: Petitioner argued that the BIR's right to collect the assessed deficiency taxes had prescribed because its protest was a mere request for reconsideration that did not toll the five-year prescriptive period for collection.
• Due Process Violation: Petitioner contended that its right to due process was violated because the BIR issued the FAN and FLD before the 15-day period to reply to the PAN had lapsed, as mandated by revenue regulations.
• Invalid Assessment: Petitioner asserted that the FAN and FLD were infirm because they did not fix the final tax liability, as the interest and total amount due were still subject to modification.

• Timeliness of Assessment: Respondent countered that the assessments were issued within the three-year prescriptive period under Section 203 of the Tax Code.
• Presumption of Correctness: Respondent invoked the principle that tax assessments are presumed correct and made in good faith.
• Substantial Compliance: Respondent argued that the requirements of due process were substantially complied with because petitioner was afforded an opportunity to be heard through its subsequent protest.

• Due Process in Assessment: Whether the issuance of the Final Assessment Notice before the lapse of the 15-day period to respond to the Preliminary Assessment Notice violates the taxpayer's right to due process and renders the assessment void.
• Prescription of Collection: Whether the BIR's right to collect the assessed deficiency income tax had prescribed.

• Due Process in Assessment: The assessment is void. The BIR's issuance of the FAN on January 14, 2009, without awaiting the taxpayer's reply to the PAN received on January 7, 2009, constituted a blatant violation of the mandatory 15-day response period prescribed by Revenue Regulations No. 12-99. Strict compliance with this procedural safeguard is a prerequisite for a valid assessment. Subsequent opportunities to protest do not cure the initial defect. A void assessment produces no legal effect.
• Prescription of Collection: In light of the declaration that the assessment is void, the Court found no compelling reason to resolve the issue of prescription. A void assessment cannot be the basis for any collection, rendering the prescriptive period question moot.

• Strict Compliance with Due Process in Tax Assessment — The issuance of a deficiency tax assessment is a quasi-judicial function that must adhere strictly to the procedural due process requirements enshrined in Section 228 of the Tax Code and its implementing regulations. A critical step is the issuance of a Preliminary Assessment Notice, which grants the taxpayer a mandatory 15-day period to respond. Failure to observe this period before issuing the Final Assessment Notice renders the assessment void ab initio. The doctrine emphasizes that substantial compliance is insufficient; the taxpayer's right to be heard at the earliest possible stage must be fully respected.

• "There can be no substantial compliance with the due process requirement when the BIR completely ignored the 15-day period by issuing the FAN and FLD even before petitioner was able to submit its Reply to the PAN." — This passage rejects the lower court's and respondent's theory of substantial compliance, establishing a strict standard.
• "Well-settled is the rule that an assessment that fails to strictly comply with the due process requirements set forth in Section 228 of the Tax Code and Revenue Regulations No. 12-99 is void and produces no effect." — This excerpt succinctly states the controlling legal consequence of the due process violation.

• Commissioner of Internal Revenue v. Yumex Philippines Corp., G.R. No. 222476, May 5, 2021 — Applied analogously. The Court reiterated that the 15-day period to respond to a PAN must be strictly observed and that the subsequent filing of a protest to the FAN is of no moment.
• Commissioner of Internal Revenue v. Metro Star Superama, Inc., 652 Phil. 172 (2010) — Cited as the oft-cited authority mandating strict BIR compliance with assessment procedures to uphold taxpayer's constitutional rights.
• Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corp., 835 Phil. 875 (2018) and Commissioner of Internal Revenue v. Unioil Corp., G.R. No. 204405, August 4, 2021 — Cited for the principles that a valid assessment is a prerequisite for collection and that a void assessment bears no valid fruit.

• Section 228, National Internal Revenue Code of 1997 — Provides the authority for the BIR to assess deficiency taxes and mandates that the taxpayer be informed in writing of the law and facts on which the assessment is based, forming the statutory basis for the procedural due process requirements.
• Revenue Regulations No. 12-99, Section 3.1.2 — Explicitly grants the taxpayer fifteen (15) days from receipt of the PAN to file a response. The Court held this period must be strictly observed.

• Justice Caguioa (Chairperson)
• Justice Inting
• Justice Gaerlan
• Justice Singh

• Presiding Justice Roman G. Del Rosario — Issued a Concurring and Dissenting Opinion in the CTA En Banc Decision. While the specific points of dissent are not detailed in the Supreme Court's decision, it is noted that he maintained this separate opinion in the resolution denying reconsideration.