Protector's Services, Inc. vs. Court of Appeals and Commissioner of Internal Revenue

An assessment not protested within 30 days from receipt becomes final and unappealable, and the CTA acquires no jurisdiction over a late petition for review. For contractor's percentage tax, gross receipts include the salaries paid to security guards and the employer's SSS, SIF, and Medicare contributions.

Protector's Services, Inc. (PSI) is a contractor engaged in recruiting security guards for clients. The Commissioner of Internal Revenue is the respondent public officer. The governing statute is the National Internal Revenue Code of 1977, particularly its protest and prescriptive-period provisions, as amended by BP Blg. 700, which reduced the period for assessment and collection of internal revenue taxes from five to three years beginning taxable year 1984.

Protector's Services, Inc. (PSI) was a contractor engaged in recruiting security guards for clients. After a BIR audit investigation, PSI was assessed for deficiency percentage taxes, including surcharges, penalties, and interests, for 1983 in the amount of P503,564.59 under Demand Letter No. 18-452-83B-87-B2, for 1984 in the amount of P831,464.30 under Demand Letter No. 18-451-84B-87-B2, and for 1985 in the amount of P1,514,047.86 under Demand Letter No. 18-450-85B-87-B2.

On December 7, 1987, the Commissioner sent by registered mail demand letters for payment of the assessments. PSI alleged that on December 10, 1987, it received only Demand Letter Nos. 18-452-83B-87-B2 and 18-451-84B-87-B2 for 1983 and 1984, respectively, and denied receiving any notice of deficiency percentage tax for 1985. PSI sent a protest letter dated January 2, 1988 to the BIR regarding the 1983 and 1984 assessments, claiming that its gross receipts subject to percentage taxes should exclude the salaries of the security guards and the corresponding employer's share of SSS, SIF, and Medicare contributions.

Without formally acting on the protest, the BIR sent a follow-up letter dated July 12, 1988 ordering settlement of taxes based on its computation. The letter included additional documentary stamp taxes of P2,025.00 on PSI's capitalization for 1983 and 1984 and P703.41 as deficiency expanded withholding tax, bringing the total unsettled tax to P2,851,805.16. On July 21, 1988, PSI paid the P2,025.00 documentary stamp tax and the P703.41 deficiency expanded withholding tax. The following day, July 22, 1988, PSI filed its second protest on the 1983 and 1984 percentage taxes and, for the first time, protested the 1985 assessment.

On November 9, 1990, BIR Deputy Commissioner Eufracio Santos sent PSI a letter denying with finality its protests against the assessments. The letter stated that the salaries paid to security guards formed part of PSI's taxable gross receipts for the 3% and 4% contractor's tax under Section 191 of the Tax Code prior to its amendment by Executive Order No. 273, because the security guards were actually PSI's employees and not those of its clients; it cited Avecilla Building Corporation vs. Commissioner, et al., G.R. L-42395, January 17, 1985, and Resty Arbon Singh vs. Commissioner, CTA Case No. 1901, December 5, 1970.

On December 5, 1990, PSI filed a petition for review before the CTA. It contended that the documentary stamp tax and expanded withholding tax assessments had no basis because they were paid on July 22, 1988; that the period for collection of the 1985 percentage tax had prescribed because PSI denied receiving any assessment letter for that year; that the percentage taxes for the first three quarters of 1984 were filed on April 23, 1984, July 20, 1984, and October 19, 1984, and the three-year prescriptive period to collect them had prescribed because the BIR sent an assessment letter only on December 10, 1987; and that the base amount for computing the percentage tax was erroneous because the BIR included the salaries of the security guards and the employer's corresponding remittances to SSS, SIF, and Medicare, which were earmarked for other persons and should not form part of PSI's receipts.

The CTA found that the final return for 1984 was filed on January 20, 1985. It also found that PSI could not deny receipt of the 1985 assessment on December 10, 1987 because BIR personnel testified that the assessment letters for 1983, 1984, and 1985 were included in one envelope and mailed together by registered mail, and that PSI's protest letter dated January 2, 1988 was filed on January 12, 1988, or thirty-three days from December 10, 1987.

• Jurisdiction of the CTA: Petitioner maintained that the assessments only became final on November 9, 1990, when the CIR denied its request for reconsideration, so the CTA had jurisdiction over the petition for review filed on December 5, 1990; it argued that the CTA wrongly treated the assessments as final after thirty days from receipt without a reconsideration.
• Prescription of Assessment and Collection: Petitioner argued that the government's right to assess and collect the 1983, 1984, and 1985 taxes had prescribed; relying on BP Blg. 700, it asserted that the government was barred from reviewing the 1983 tax starting December 10, 1987, and that the reckoning period should start from the date the quarterly percentage taxes were paid, not from the filing of the final annual percentage tax return; it also denied receiving the 1985 assessment. As a subsidiary defense, it claimed that the CIR failed to commence collection by judicial action or by distraint and levy, so the right to collect had prescribed under Section 219 of the NIRC.
• Erroneous Tax Base: Petitioner contended that the assessments were erroneous because the BIR included in the gross receipts subject to contractor's tax the salaries of the security guards and the employer's share in SSS, SIF, and Medicare, amounts it claimed were earmarked for other persons or institutions and from which it did not benefit.

• Tax Base: Respondent denied the protests with finality, maintaining that the salaries paid to security guards formed part of PSI's taxable gross receipts for the 3% and 4% contractor's tax under Section 191 of the Tax Code prior to its amendment by Executive Order No. 273, because the security guards were actually PSI's employees and not those of its clients.

• Jurisdiction of the CTA: Whether the CTA had jurisdiction to act on the petition for review filed before it.
• Prescription of Assessment for 1983 and 1984: Whether the assessments against petitioner for deficiency percentage tax for taxable years 1983 and 1984 were made after the lapse of the prescriptive period.
• Receipt and Finality of the 1985 Assessment: Whether petitioner received the 1985 deficiency percentage tax assessment and whether it became final and unappealable for failure to protest within the reglementary period.
• Prescription of Collection for 1983, 1984, and 1985: Whether the period for collection of taxes for taxable years 1983, 1984, and 1985 had already prescribed.
• Correctness of Assessments: Whether the assessments are correct.

• Jurisdiction of the CTA: No. The CTA correctly dismissed the petition for lack of jurisdiction because the 1983 and 1984 assessments became final and unappealable when PSI protested 33 days after receipt, beyond the 30-day period under Section 270 of the 1977 NIRC.
• Prescription of Assessment for 1983 and 1984: No. The 1983 assessment was still within the five-year period because BP Blg. 700's three-year period applied only beginning taxable year 1984; the 1984 assessment was made within three years from the filing of the final annual percentage tax return on January 20, 1985.
• Receipt and Finality of the 1985 Assessment: Yes, the 1985 assessment is presumed received. It became final and unappealable because PSI failed to protest it within the reglementary period.
• Prescription of Collection for 1983, 1984, and 1985: No. The running of the statute of limitations on collection was suspended by PSI's CTA petition and appeal to the SC under Section 271.
• Correctness of Assessments: Yes. Gross receipts for contractor's percentage tax include the salaries of security guards and the employer's SSS, SIF, and Medicare contributions.

• Jurisdiction of the CTA: Section 270 of the 1977 NIRC required a taxpayer to protest an assessment administratively by filing a request for reconsideration or reinvestigation within 30 days from receipt; otherwise, the assessment became final and unappealable. If the protest was denied, the taxpayer could appeal to the CTA within 30 days from receipt of the denial. The SC noted that PSI received the BIR's assessment notices on December 10, 1987. On January 12, 1988, PSI protested the 1983 and 1984 assessments and requested reinvestigation. From December 10, 1987 to January 12, 1988, thirty-three days had lapsed. Thereafter PSI could no longer dispute the correctness of the assessments, so the CTA correctly dismissed the appeal for lack of jurisdiction.
• Prescription of Assessment for 1983 and 1984: BP Blg. 700 amended Sections 318 and 319 of the NIRC and reduced the period for assessment and collection from five to three years. Section 1 provided that internal revenue taxes shall be assessed within three years after the last day prescribed by law for filing the return; if the return was filed beyond the prescribed period, the three-year period was counted from the day the return was filed; a return filed before the last day was considered filed on that last day. Section 3 made the three-year period apply to assessments beginning taxable year 1984. BP Blg. 700 was approved on April 5, 1984. RMC No. 33-84, published on November 12, 1984, provided that assessments made on or after April 5, 1984 would still be governed by the original five-year period if the taxes assessed covered taxable years prior to January 1, 1984. Thus, the December 10, 1987 assessment for 1983 was still covered by the five-year statutory prescriptive period. For 1984, Section 2 of Revenue Regulation No. 6-81 provided for quarterly percentage returns and a final annual percentage tax return. The SC held in Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 115712, February 25, 1999, that the three-year prescriptive period for contractor's tax is computed at the filing of the final annual percentage tax return when it can be finally ascertained if the taxpayer still has an unpaid tax, not from the tentative quarterly payments. The final return for 1984 was filed on January 20, 1985, so the December 10, 1987 assessment was within the three-year period.
• Receipt and Finality of the 1985 Assessment: PSI denied receiving the 1985 assessment. The CTA found that respondent introduced documentary evidence showing the assessment was mailed by registered mail. Witness Arnold C. Larroza, Chief Administrative Branch Mailing Section, Rev. Region No. 4B-1, Quezon City, testified that the 1983, 1984, and 1985 assessments were placed in one envelope when mailed by registered mail. The presumption is that a letter properly addressed with postage prepaid and mailed was received by the addressee as soon as it could have been transmitted in the ordinary course of the mails. The CTA could not believe that the 1985 assessment, which had a substantially greater amount involved, was not received by PSI. Hence, the 1985 assessment was also final and unappealable for failure to protest within the reglementary period. In reviewing administrative decisions, the reviewing court cannot re-examine the factual basis and sufficiency of the evidence; findings of fact must be respected so long as they are supported by substantial evidence, as held in Villanueva vs. Court of Appeals and Baliwag Transit Inc. vs. Court of Appeals.
• Prescription of Collection for 1983, 1984, and 1985: Petitioner interposed as a subsidiary defense that since the CIR failed to commence collection of the 1983, 1984, and 1985 deficiency tax, the right to collect had prescribed under Section 219 of the NIRC. Section 271 of the 1986 Tax Code, however, provides for suspension of the running of the statute of limitations on assessment and collection when the Commissioner is prohibited from making the assessment or beginning distraint, levy, or a court proceeding, and for sixty days thereafter. In this case, PSI filed a petition before the CTA to prevent collection; when the CTA dismissed the case, PSI elevated the case to the SC. The actions taken by PSI before the CTA and the SC suspended the running of the statute of limitation. In Republic of the Philippines vs. Ker and Company, Ltd., the SC held that the pendency of the taxpayer's appeal in the CTA and in the SC had the effect of temporarily staying the hands of the Commissioner, and the running of the prescriptive period was suspended.
• Correctness of Assessments: Petitioner contended that the assessments were erroneous because they included in gross receipts the salaries of security guards and the employer's share in SSS, SIF, and Medicare, amounts it claimed were earmarked for other persons or institutions and from which it did not benefit. Contractor's tax on gross receipts imposed on business agents, including private detective watchman agencies, was a tax on the sale of services or labor, imposed on the exercise of a privilege. The term "gross receipts" means all amounts received by the prime or principal contractor as the total price, undiminished by the amount paid to the subcontractor under a subcontract arrangement. Hence, gross receipts could not be diminished by employer's SSS, SIF, and Medicare contributions. The BIR had consistently ruled that salaries paid to security guards form part of taxable gross receipts for the 4% (formerly 3%) contractor's tax under Section 205, because the salaries are the liability of the agency and the guards are considered its employees; for percentage tax purposes, the salaries are includible in gross receipts. These rulings were made by the CIR in the exercise of his power to make judgments or opinions in connection with the implementation of the internal revenue code, and opinions and rulings of officials called upon to execute or implement administrative laws command respect and weight, as held in Regalado vs. Yulo. The SC saw no compelling reason to rule otherwise.

• Finality of Assessment for Failure to Protest — Under Section 270 of the 1977 NIRC, a taxpayer must protest an assessment within 30 days from receipt; otherwise the assessment becomes final and unappealable, and the CTA has no jurisdiction over a late petition for review. Applied: PSI received the 1983 and 1984 assessments on December 10, 1987 but protested only on January 12, 1988, 33 days later.
• BP Blg. 700 and the Five-Year Period for Pre-1984 Taxes — BP Blg. 700 reduced the period for assessment and collection from five to three years, but the three-year period applies only to assessments beginning taxable year 1984; taxes for years prior to January 1, 1984 remain under the five-year period. Applied: the December 10, 1987 assessment for 1983 was still within the five-year period.
• Reckoning of the Three-Year Period for Contractor's Percentage Tax — The three-year prescriptive period for assessment of contractor's tax is computed from the filing of the final annual percentage tax return, not from the tentative quarterly payments, because only then can the unpaid tax be finally ascertained. Applied: the 1984 assessment was timely because the final return was filed on January 20, 1985 and the assessment was made on December 10, 1987.
• Presumption of Receipt of Mailed Assessment — When a letter is properly addressed with postage prepaid and mailed, the presumption is that it was received by the addressee as soon as it could have been transmitted in the ordinary course of the mails. Applied: the 1985 assessment was placed in the same envelope as the 1983 and 1984 assessments and mailed by registered mail, so it was presumed received.
• Suspension of the Statute of Limitations on Collection — Under Section 271, the running of the statute of limitations on collection is suspended when the Commissioner is prohibited from beginning distraint, levy, or a court proceeding, including during the pendency of the taxpayer's CTA and SC appeals. Applied: PSI's CTA petition and SC appeal suspended the collection period.
• Gross Receipts for Contractor's Percentage Tax — "Gross receipts" means all amounts received by the contractor as the total price, undiminished by amounts paid to a subcontractor; salaries of security guards and the employer's SSS, SIF, and Medicare contributions form part of the taxable gross receipts because the guards are employees of the agency. Applied: the assessments correctly included those amounts.
• Weight of Administrative Rulings — Opinions and rulings of officials called upon to execute or implement administrative laws command respect and weight. Applied: the SC upheld the BIR's consistent rulings that security guards' salaries are includible in gross receipts.

• "Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by the implementing regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final, and unappealable." — Section 270's 30-day protest rule, applied to hold PSI's January 12, 1988 protest 33 days after receipt ineffective.
• "Clearly, the tax assessment made on December 10, 1987, for the year 1983 was still covered by the five-year statutory prescriptive period." — The SC applied BP Blg. 700's effectivity to keep pre-1984 taxes under the five-year period.
• "the three-year prescriptive period of tax assessment of contractor's tax should be computed at the time of the filing of the "final annual percentage tax return," when it can be finally ascertained if the taxpayer still has an unpaid tax, and not from the tentative quarterly payments." — The SC adopted its holding in Commissioner of Internal Revenue vs. Court of Appeals for reckoning the 1984 assessment from the final annual return.
• "The reason is that the salaries of the security guards are actually the liability of the agency and that the guards are considered their employees; hence, for percentage tax purposes, the salaries of the security guards are includible in its gross receipts." — The SC quoted the BIR ruling to uphold the inclusion of security guards' salaries in PSI's taxable gross receipts.

• Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 115712, February 25, 1999 — Controlling precedent; followed for computing the three-year prescriptive period for contractor's tax from the filing of the final annual percentage tax return, not from quarterly payments.
• Republic of the Philippines vs. Ker and Company, Ltd., 124 Phil. 822 (1966) — Controlling precedent; followed for suspending the running of the prescriptive period to collect deficiency taxes during the pendency of the taxpayer's CTA and SC appeals.
• Villanueva vs. Court of Appeals, 205 SCRA 537, 545 (1992) — Followed for the rule that a reviewing court cannot re-examine the factual basis and sufficiency of evidence in administrative decisions.
• Baliwag Transit Inc. vs. Court of Appeals, et al., 147 SCRA 82 (1987) — Cited with Villanueva for the rule that findings of fact supported by substantial evidence must be respected.
• Regalado vs. Yulo, 61 Phil. 173, 179 (1935) — Followed for the rule that opinions and rulings of officials implementing administrative laws command respect and weight.

• Section 270, National Internal Revenue Code of 1977 — Required a taxpayer to protest an assessment within 30 days from receipt; otherwise the assessment became final and unappealable, and an appeal to the CTA from a denial of the protest had to be filed within 30 days from receipt of the denial. Applied to hold PSI's 33-day-late protest ineffective and the CTA without jurisdiction.
• Sections 1 and 3, Batas Pambansa Blg. 700 — Amended Sections 318 and 319 of the NIRC, reducing the period for assessment and collection from five to three years; Section 3 made the three-year period apply to assessments beginning taxable year 1984. Applied to keep the 1983 assessment under the five-year period and the 1984 assessment under the three-year period.
• Section 318, National Internal Revenue Code, as amended by BP Blg. 700 — Required assessment within three years after the last day prescribed by law for filing the return; if the return was filed beyond the prescribed period, the three-year period was counted from the day the return was filed; a return filed before the last day was considered filed on that last day. Applied to the 1984 assessment.
• Section 2, Revenue Regulation No. 6-81 — Provided for the quarterly percentage return and the final annual percentage tax return, the latter to be filed on or before the twentieth day of the second month following the close of the taxable year. Applied to determine that the three-year period ran from the final annual return filed on January 20, 1985.
• Section 271, 1986 Tax Code — Suspended the running of the statute of limitations on assessment and collection when the Commissioner is prohibited from making the assessment or beginning distraint, levy, or a court proceeding, and for sixty days thereafter. Applied to suspend the collection period during PSI's CTA and SC proceedings.
• Section 191 (renumbered to Section 205, then Section 170), Tax Code — Imposed the contractor's tax on gross receipts of business agents, including private detective watchman agencies, as a tax on the sale of services or labor and on the exercise of a privilege. Applied to uphold the assessments on PSI's gross receipts.
• Paragraph 2, Section 205, 1977 Tax Code — Defined "gross receipts" as all amounts received by the prime or principal contractor as the total price, undiminished by the amount paid to the subcontractor under a subcontract arrangement. Applied to include the salaries of security guards and employer SSS, SIF, and Medicare contributions in PSI's taxable gross receipts.
• Revenue Memorandum Circular No. 33-84 — Provided that assessments made on or after April 5, 1984 would still be governed by the original five-year period if the taxes assessed covered taxable years prior to January 1, 1984. Applied to the 1983 assessment.