Altimax Broadcasting Co. Inc. vs. Commissioner of Internal Revenue

DECISION

MODESTO-SAN PEDRO, J.:

The Case

This Petition for Review ("Petition") filed by petitioner, AL TIMAX BROADCASTING CO., INC., against respondent, COMMISSIONER OF INTERNAL REVENUE ("CIR"), pursuant to Section 7 (¹) of Republic Act No. 1125, as amended by Section (7) (a) (1) of Republic Act No. 9282 ("RA 1125 "), seeks to reverse and set aside the Final Decision on Disputed Assessment ("FDDA"), dated February 26, 2020, issued by the Bureau of Internal Revenue ("BIR") which assessed petitioner with deficiency income tax and value added tax ("VAT") in the total amount of Php69,785,169.96, inclusive of interest. 1

The Parties

Petitioner is a domestic corporation existing under and by virtue of the laws of the Philippines, with principal office located at 3F, Globe Telecom Tower 1, Pioneer Highlands corner Madison Streets, Mandaluyong City. It is registered with the BIR under Tax Identification Number ("TIN") 272-993- 967-000. It is registered with the Securities and Exchange Commission ("SEC"), and is primarily engaged in the following: "[t]o own, acquire, carry on, lease, maintain and operate the business of television and radio network,_

CTA CASE NO. I 0285 of all kinds and types (such as but not limited to VHF-TV, UHF-TV, AM radio, FM radio, direct to user broadcast via satellite, HDTV, CATV, LMDS, MMDS) using microwave, satellite, or whatever means including the use of any and all new technologies in television and broadcast systems, religious, educational and commercia1."2 Respondent is the head of the BIR, the government agency tasked to perform among others, collect all national internal revenue taxes. As CIR, respondent has the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto or other matters arising under the National Internal Revenue Code of 1997, as amended ("NIRC''), other tax laws, and rules and regulations. 3

The Facts

BIR - Revenue District Office No. 43A issued a Letter of Authority ("LOA"), with LOA No. 43A-2012-00001 050, dated October 23,2012, which authorized Group Supervisor ("GS") Roummel A. Bernos and Revenue Officer ("RO") Teresita A. Florendo to conduct the audit and investigation of petitioner's books of accounts for calendar year ("CY") 2011.4 The ROs then proceeded with the audit of petitioner. On February 4, 2013, respondent issued a Notice of Informal Conference against petitioner informing the latter of discrepancies noted in the audit that may result in the assessment of deficiency income tax. 5 After petitioner presented additional documents to the BIR, the latter, on June 11, 2013, issued an Amended Notice ofinformal Conference, for the assessment of petitioner's deficiency income tax and VAT.6 On June 28, 2013, petitioner filed a Reply to the Amended Notice of Informal Conference alleging that the proposed assessment lacks basis considering that the management fees they claimed as a deduction from taxable income, and from which input taxes have been incurred, is an ordinary and necessary expense, arose in the course of petitioner's trade or business and unquestionably a regular activity conducted in pursuit of petitioner's commercial or economic activity, and as such, should be properly allowed as an ordinary and necessary expense to be used as a deduction to taxable income, and from which input taxes incurred must be allowed as a deduction to output taxes.~ See Statement of Facts and Issue in the Pre-Trial Order, !d., p. 446. Ibid.

4 !bid; Exhibit "R-l ", BIR Records, p. I.

5 Exhibit "R-4", BIR Records, pp. 240-242.

6 Statement of the Case in the Pre-Trial Order, Records, Vol. I, p. 447: Exhibit "R-6", BIR Records, pp. 268-271.

CTA CASE NO. 10285

Afterwards, respondent issued a Preliminary Assessment Notice (“PAN”), dated 8 January 2015, with Assessment Notice No. 43A-B224-1 l, according to which, petitioner is allegedly liable for deficiency income tax and VAT, inclusive of interest, in the amount of Php39,000,251.78 and Php12,486,843.33, respectively.’ Particularly, following details:

HG OBO PEEL ONES

DE PATLEMEEALT O12 FINANCE

WURDAL! OU INTERNAL HEVYENCE Hevenne ergion No, 7

Qeesan Cly

OLMICE OF TUE REGIONAL DIRECTOR

PRELIMINARY ASSESSMENT NOTICE

LASTING EO. INE eed Chagas ya Sas Yuet . seat cease Poorest ELUTE as chown He peaerdes Aanenument Na, WANAH22bIL t DBERLICIENCY INTOMD TAN ie fer taper.

Vanabke insnete per investsgasion mata Eau theteen sass Mieka ian crake cy gitiet: per anit Maa peep Subst Date, ELE

TOTAL AMOUNT DUE

Ho DEFICNENCY VALUE-ADDED TAX

nyo oreenota eee AG turn

Sd

Tarshic saics/ receipts per investigation the PAN contained the |

JAN 08 20%

“A ‘ sx Kemer) Pol

JUN 0 9 2022

his ONWENG Paes IN mifeaat ste atcems typist tc fiae bisa Gord cli fens year defen inuetas eet and talue auhlok rs _—

FAL) S256 Fer

OM 5

P 4,763,579.00

PCO DAR Ba

aSuinang r Wi Rada gM P 90.000,000.90 i Der Reine eat SMU5 564.07 p * rr

Lae

Pr 12,496.853.15 « KIM JACINTO. HENARES

Commisionet of Intconal Revenue

.

Sass De alhowed inpret fay TScess tax ehilite i atti sar

Ile Tas

pe dette dase ite

TOTAL AMOUNT DUE

= Please note that de interest and the toni! antuant due will Ace to be adjusted if paid beyond December 19, 2214. fe desads cuvermy the facnnd and legal amy Cty afurement ined dectepanci.s Gaablyhed dusing the inestyagen ofthe cave ate vent ANNEX "A' af fits femes vig 2+ Teer ger wnat Ba been npn d purwant te thy provisume a Sectin 2490) af the Vas Cente oF 0797, as amended Muruaet i die wi the Lan Leake ot 199 as amencel ania amplemeniny Revenue Reyulatuas, yer arc hen by piven the Sep PeeiUMTy be peeeent case satin TS has fron eceei hercef Ii we fad to hear grat sane ithin hig sant penal, you shail be aonsiered in dedault, an ve pa eed ore sleadetited anal avscysenent nduive stall be meocd fn the Office calling for payment of your atorcaniad elon tye indbace of a aa) auterest Ye bape drat you wll ave tits martes peut pict rentigd aca Very truly purr, . :

Mn T1 Mi ul » . 5 we Designatipn NAD & "jo

AM

Tesanti -- a we ate inbp

Va SRP SH

* Statement of the Case in the Pre-Trial] Order, Records, Vol. 1, p. 322-323, 447; Exhibit “R-12”, BIR Records, pp.

CTA CASE NO. 10285

ALTIMAX BROADCASTING CO., INC.

Fapan place tf Chetgas fr Rovsl, Sat Anteater aiet, Pasay Cite 2p) G2 tea

DETAILS OF DISCREPANCIES

Angessment No. 043A-13224-1

4. DETICIBNCY INCOME TAX &. Disallowed Management foes expense { POSAI F000) Venticaion disclustal that Inanaggnent fees amoanting to PARGELSZMA ts nee neces eeperpc amd nar rclacd thy natuee of yout buses trhactun , chs, diaalleacal as deducteune from Hut fats INCOME PunuaANt ft Svetons 2 and SF af the Pas Calee! 157) as nwimded Managaneni fis Po AVI SD in Disallowed Mangement tres eapense I 68,630,523,00

——S—

»

b. Dreaitoteed prior your's excess tae credits (PASSLOSNOS — Venientens Uoclosed that yon farled te substanuate sur daimed prea year's esven Ta tedkts, heater, esatfowed prea ts RR Nes 41H, oy ansanded $l DEFICIENCY VALUE-ADDED TAX Disallowed Input tax {P 8,23 5,662.76} ~ Vinficaton shschoed that inpot VAT eg conmechen te the dirvallowed Management fees EXPENSE, as discussed ct ham La sbore, was disallowed ponsant ts Secron IEA, af the Tas Code of 137, a. arnended Poswast m the proves nf Sccten 228 af the Natoma intemal Revenue Cede af 1707 anal ats ampler neateag Revenue Regulanans, pou ate pron he apps montis tr peescog in wnting fsctaul and legal Lasts) yeuur side of the case wadlne Eats 39) days from tecape futeuf, cherwise, our acer: Gakts awessntent shail Lecce final esecutors and db manilable Veer truly airs, KIM §. JACINTO. HENARES Cammasenee of fnternal Revenue

Ms

a pat ring

NPe

RADY

AKL!

feo aaitic mip ted 15 un

1 Uetende

Printed Name & Signature

Designation

i) ‘x at CTA CASE NO. 10285 On 22 January 2015, petitioner filed before the BIR its Reply to the PAN contesting the income tax and VAT assessments contained therein. This Reply was only referred to the BIR Revenue Region No. 7's Assessment Division on 23 January 2015.9 Further, the Reply stated that management fees paid by petitioner to Bethlehem Holdings, Inc. constitute an ordinary and necessary expense. Thus, the same must be allowed as a deduction to taxable income for purposes of determining the income tax due to petitioner. 10 Moreover, the Reply noted that the management fees were incurred in the course of petitioner's trade or business. As such, any input tax due from the management fees must be allowed as a credit to petitioner's output tax. 11 To support these contentions, petitioner cited various jurisprudence and presented documentary evidence in the Reply. 12 On January 23, 2015, respondent issued a Formal Letter of Demand ("FLD") with corresponding Final Assessment Notices ("FAN") assessing petitioner once more of deficiency income tax and VAT, inclusive of interest, in the amounts ofPhp39,919,215.22 and Php12,772,702.38, respectively, and thereby retaining his assessments contained in the PAN, which were only increased by additional interest. 13 The FLD specifically provided, as follows: ;<- 9 BIR Records, pp. 325-366.

10 Ibid.

II Ibid.

" Ibid.

CTA CASE NO. 10285

WP LELAC CHOI PEE PES

DEPAQTMEN EOF FENANCE

BUREAU OB DRELEINAL (EV INUE

Kevende Region No, 7

Quest Cty

OFEICK OF THE REGIONAL DHUICTOR i al iat

Pansat Pas GASA-B2U4-

Viste raued _Janaans 2 2h m5 Thue Date he Tehran 2 3, 2s .

FORMAL LETTER OF DEMAND h

SAH

ALTIMAN BROADCASTING CO., INC, AN g mt 7 fami Thy Darpee pla db OQeteae ie Keand, Sunt Antiani in “ncn Ceniee hey. On we (yl oN

— GINAL

(heatlonn wi Plewe be fora thapalter meesmtaan these has bon fount dog (ram pea deficeestey aecome bay dead value added tas for the calendar veal urding Devcasier V4, sii etna hervunder

1 DEPICIENCY INCOME TAN

n e BAL 32 5400 shastincs por any esthicaltat sali aved Mangeaant fers expen, Eee Taxable income per investigation P__86.763.479.00_ Tree tax due theteon e 26S Lea. Mlow ed tax cnt parinants pet aur Bay ?

' be va atthe Adee tax i :

i paliaved pros soars excens ta cscdity Delawnrs iacers “Yas ue Add 3h Intererpar (US iT Qeldae 22h s a eal , TOTAL AMOUNT DUE phon li. DEFICJENCY VALUE-ADDED TAN fasabk sais receyas por ¥ VL ret ” Aisa abseuaial Adj. \dicoment perm cstagean Taxable sales/eeceipis pe: investigation e 90,000,009,00 (arput tan due theres P LaSehinah int Base Input tases, pacineits

RR IT ORS

DALI

P11 16S,190.49 Law Distal pat ees aches etined os Seu i27 2 dded bas b 7 2 Iitetest yp 1 bln ltdn 232415: ash 2h6 woe TUTAL AMOUNT DLE P 12,772,702.38 * * Please mute that the interest and toe tutal amwvint due will beve to be adjusted tf paid before/hquond February 23, 2015, We ch detule cee: ie factoal ind eyo! basis of the afosimenteoute dd Shcrepancies « statdishud dunn the anes station of they cae are shiva nm the acc vig SCHPDULE I af thes teres the Sev anterest pee angum har bega imp ised pursustil fo the pert eqins af Sevtray 2s ef the Oy Cade of 197, « amunded facies thereof, seu ite firebs tquested te pas dhe atiresaid detseney tas hives through the duly authoneed carallgd sothan the amy shake in the cnelised asicsunent netee r » We hope that you wil give thi. matter your prelerennal attentian Vers muy yauts, «

KIM JACINTO- HENARES

Commuswnce of lntemal Revenue Ce =e aE nary en na

Printed Name & Signature

KR

RE Is ; ]

vee Designation Be

SADR

ABI t D anne ate aby K dha Mts ayise : R q :

Wea ™ nent ; HON ‘b Farende ty ® DECISION .

CTA CASE NO. 10285

Page 7 of 21

SCHEDOLE 1

ALTIMAN BROADCASTING CO., INC, {nn S47, The faipan place F Ortigas fe Read, Sans Antenne Oftyns Contes, Pag Cary TES) 272.993 967.1ma)

DETAILS OF DISCREPANCIES

1. DEFICIENCY INCOME TAX

a. Disallowed Management fees expense ( P68,630,523.29} Venfieanun dive!

Tecessary expense and wot related in the nature of sour business transaction , thus, disallowed as deductions from YOUE BTM ss MCOME pursuant te Scetans 32 and 51 of the Tay Cade af VOT as amended.

fosed that management tees amounting to POS,630, 523.04 pot Management fees Po O8GUES23.0n ao Disallowed Mangement fees expense P __ 68,630,523.00 =

b. Disailowed prior year's excess tex credits (P 3,881,688, 86) - Verifcauon disclosed that Excens fay credits, hence, disallowed Pursuant io RR Ny, 4.3) vou faded to substannate Sour chimed prior year's 112, ay amended,

Lt DEFICIENCY VALUE-ADDED TAX

Disallowed Input tax (P 8,235,662. 76} -\:

enticaton disck Stowssed in teem | a above, was ahsath sed that input VAT in connection to the dhsailowed Manavement fees expense, as owed pepuant th Section [Tt (Ap of the” Hu Unde af 1997, ax amended, Pusscant to the Prosisions of Nectiein 238 at the ‘ational foternal Revenue ( eel 1887 and ay implementing :

ase vathin chert (314) days OPP STUnHy lo present ay wating (factual xed Feyeal basis; tenge ctde of the Revenue Repulationss, 1U ate assessment shall becuse final, escutery and duman lable:

fom receipt henad, | sthenwise, cur Very andy Yours, KIMS. JACINTO. HENARES

Commustonee of Internal Revenue

’ By.

RR in ps net, BADR.

ARLD +

ton wany mabe ia a4y Pris:

isda hi Tod herende

Printed Name & Signature

| D

esignation ee

DECISIO~

CT A CASE NO. I 0285

Page 8 of2J

On February 25, 2015, petitioner filed its Protest to the FLD/FAN seeking the reinvestigation of the assessments contained therein. Petitioner likewise submitted relevant supporting documents within 60 days from submission of the Protest. 14 A Memorandum of Assignment was then issued transferring the dockets of the instant case to RO Verjun Solomon Catapia to perform the reinvestigation requested in the Protest. 15 On February 27, 2020, petitioner received a copy of the FDDA, dated February 26, 2020, assessing petitioner with deficiency income tax and VAT in the total amount ofPhp69,785,169.96, inclusive of interest. 16 Accordingly, petitioner filed the instant Petition on June 25, 2020, with the Judicial Affidavit of its witness, Mr. James Kenneth Venta. 17 On September 16, 2020, this Court issued Summons to respondent to file an Answer to the Petition. 18 On December 2, 2020, respondent filed through registered mail his Answer, 19 before elevating the entire BIR Records appurtenant to the case on December 11, 2020.20 In a Resolution, dated January 4, 2021, the case was referred to mediation. 21 On March 4, 2021, the Philippine Mediation Center reported that the case was unsuccessfully mediated.22 In a Resolution, dated March 10, 2021, this Court issued a Notice of Pre-Trial Conference setting the Pre-Trial on July 8, 2021.23 On July 1, 2021, respondent filed his Pre-Trial Brief.24 Respondent also submitted the Judicial Affidavit of his witness, GS Roummel A. Bernas, on same date.~ 14 Ibid; BIR Records, pp. 379-438 and pp. 446-525. 15 Exhibit"R-18", BIR Records, p. 444.

" See Statement of Facts and Issue in the Pre-Trial Order, Records, Vol. I, p. 447; Exhibits "R-22", BIR Records, pp. 552-555.

17 Records, Vol. I, pp. 7-266; Exhibit "P-14", !d., pp. 145-266. 18 !d., pp. 278-281.

19 /d., pp. 286-296.

20 !d., p. 284.

21 !d., pp. 298-300.

22 !d., p. 30 l.

23 /d., pp. 302-304.

" !d., pp. 305-308.

CT A CASE NO. I 0285

Meanwhile, petitioner filed its Pre-Trial Brief on July 2, 2021.26 Pre-Trial ensued on July 8, 2021.27 On July 28, 2021, petitioner filed a Motion to Commission an Independent Certified Public Accountant ("ICP A"), attaching thereto the Judicial Affidavit of its proposed ICPA, Glenn Ian D. Villanueva, attesting to his competence as an ICPA and submitting documents in support thereof.28 Mr. Villanueva was commissioned as the ICP A for the instant case on October 5, 2021.29 On November 9, 2021, the parties submitted their Joint Stipulation of Facts and Issue30 which then te1minated the Pre-Trial. 31 Thereafter, a Pre-Trial Order was issued by the Court on November 24, 2021.32 An Amended Pre- Trial Order was subsequently issued on March 14, 2022, after petitioner requested that certain corrections be made on the original Pre-Trial Order.33 On November 22, 2021, an ICPA Report was submitted before this Court?4 The Judicial Affidavit of Mr. Villanueva in relation to the ICPA Report was submitted by petitioner on December 1, 2021.35 Mr. Villanueva was cross-examined in relation to the ICPA Report on December 9, 2021.36 On the other hand, petitioner's witness, James Kenneth Venta, was placed on the witness stand on November 25, 2021.37 On December 20, 2021, petitioner filed its Formal Offer ofEvidence.38 Petitioner, then, on March 14, 2022, filed an Amended Formal Offer of Evidence.39 Respondent interposed no objections on such Fonnal Offer of Evidence.:!

26 /d., pp. 358-370.

"/d.,pp.381-384.

28 !d., pp. 388-400.

29 !d., pp. 405-410.

30 !d., pp. 411-419.

31 See Resolution, dated 18 November 2021, !d., pp. 420-423. 32 !d., pp. 445-453 .

• l.) !d, pp. 647-656.

34 !d., pp. 424-442.

35 !d., pp. 457-478.

" !d., pp. 587-589.

37 /d., pp. 454-456.

38 /d., pp. 488-586.

39 !d., pp. 602-645.

40 !d., pp. 663-664.

DECISION

CT A CASE NO. I 0285

Page 10of2J

In a Resolution, dated June 30, 2022, this Court admitted all of petitioner's Exhibits subject to this Court's final evaluation and/or appreciation of their purposes, materiality, relevancy, and probative value to the issues involved in the present case. 41 On October 4, 2022, respondent placed its witness, GS Bernos, on the witness stand. 42 Subsequently, on October 18, 2022, respondent filed its Formal Offer of Evidence,43 to which petitioner filed a Comment.44 The Court, in a Resolution, dated December 6, 2022, admitted all of respondent's offered Exhibits.45 On February 3, 2023, petitioner filed its Memorandum.46 On the other hand, respondent did not file a Memorandum.47 Thus, on February 27, 2023, this Court issued a Resolution submitting the instant case for Decision.48 Hence, this Decision.

The lssues49 "WHETHER OR NOT RESPONDENT'S RIGHT TO

ASSESS DEFICIENCY VAT FOR CY 2011 HAS ALREADY

PRESCRIBED IN VIEW OF THE LAPSE OF THE THREE-

YEAR PRESCRIPTIVE PERIOD UNDER SECTION 20 OF

THENIRC"

, "WHETHER OR NOT RESPONDENT'S ISSUANCE

OF THE ASSESSMENTS FOR DEFICIENCY INCOME TAX

AND VAT AGAINST PETITIONER FOR CY 2011 IS NOT IN ACCORDANCE WITH LAW AND REGULATIONS, IN VIOLATION OF PETITIONER'S DUE PROCESS;" AND "WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY TAXES FOR CY 2011.;, 41 ld, pp. 670-671.

42 Records, Vol. 2, pp. 670-672.

43 /d., pp. 673-680.

" /d., pp, 682-687.

45 /d., pp. 689-692.

46 /d., pp. 693-723.

47 ld, p. 724.

" /d., p, 726.

49 See Issue in the Pre-Trial Order, Records, Vol. I, p. 448.

DECISION

CTA CASE NO. 10285

Page II of21

Arguments of the Parties

Petitioner's Arguments50

Petitioner avers the following in its Memorandum: a) Respondent's right to assess petitioner's alleged deficiency VAT for the 1 ",2nd and 3'd quarters ofCY 2011 has already prescribed. b) Respondent's assessments for deficiency income tax and VAT against petitioner for CY 2011 are not in accordance with law and regulation which is in violation of petitioner's due process; 1.

The ROs had no valid authority to conduct and continue the audit without a properly revalidated LOA;

11.

The assessment notices did not properly state the law and the facts on which the assessment is based;

111.

Respondent hastily issued the FLD without even considering petitioner's Reply to the PAN;

IV.

The FDDA is based on presumption;

c) The alleged deficiency income tax and VAT assessments lack legal and factual basis; and 1.

Management fees are ordinary and necessary in petitioner's trade or business.

Respondent's Counter-Arguments51

Respondent counter argues the following in his Answer: a) Respondent's right to assess petitioner for deficiency VAT for the first three quarters of 2011 has not yet prescribed; b) Respondent's issuance of the deficiency income tax and VAT assessments does not violate petitioner's right to due process; ~

CTA CASE NO. I 0285 c) The management fees are not ordinary and necessary expense of petitioner; and d) The assessments issued against petitioner have factual and legal bases.

The Ruling of the Court

The instant Petition is impressed with merit.

The Court has jurisdiction over the present Petition.

Jurisdiction by this Court over the instant case is conferred by Section 7 (1) ofRA 1125, to wit:

"SEC 7. Jurisdiction. -The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided-

(1) Decisions o( the Commissioner of!nternal Revenue in cases involving disputed assessments. refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other laws or part of law administered by the Bureau oflnternal Revenue;" (Emphasis, Ours) Here, petitioner is appealing the assessment contained in the FDDA. In totality, the FDDA is a decision of the CIR pertaining to deficiency tax assessments referred to in the above cited provision that may be appealed before this Court. Accordingly, the said subject matter is within the jurisdiction of this Court and it may validly try the same as long as the appeal has been timely made.

In the present case, it is unquestioned that petitioner received the FDDA on February 27, 2020. Under Section 3, Rule 8 of the Revised Rules of the Court of Tax Appeals ("RRCTA '), "[a] pmiy adversely affected by a decision ... of the Commissioner of Internal Revenue ... may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision." Following this, petitioner had thirty (30) days from receipt of the FDDA, or until March 28, 2020, within which to file a judicial appeal before this Court. However, due to the COVID-19 pandemic, the Supreme Court issued Administrative Circular Nos. 31-2020 to 41-2020 extending the deadline to file pleadings which fell due from March 15, 2020 to May 31, 2020 before the Courts which were placed under community quarantine for 30 days counting from June I, 2020, or until June 30, 2020. As petitioner filed the instant Petition on June 25,2020, this Court properly assumed jurisdiction over the present case._,

DECISION

CT A CASE NO. I 0285 Page !3 of21 The VAT assessment for the first three

(3) taxable quarters of CY 2011 has already prescribed.

Petitioner asserts that the deficiency VAT assessment for the first three taxable quarters of CY 2011 has already prescribed. On the other hand, respondent is arguing that its right to assess petitioner for deficiency VAT for the aforementioned taxable quarters has not yet prescribed. We agree with the petitioner.

Section 203 of the N1RC provides a three-year prescriptive period to assess deficiency taxes, viz.:

"SEC. 203. Period of Limitation Upon Assessment and Collection. -Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years ajier the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be countedji·om the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law .for the filing thereof shall be considered as filed on such last day." (Emphasis, Ours) Accordingly, the prescriptive period to assess taxes is three years from the deadline to file a tax return, or if the same has been belatedly filed, on the actual date of filing.

Applying the said provision, petitioner's Income Tax and VAT Returns had the following deadlines for assessment, viz.:

VAT Returns· 52

Taxable Quarter

Due Date for

Actual Date of

ofCY 2011

Filing VAT

Filing

Return

I st Quarter

25 April 20 II

20 April 2011

2nd Quarter

25 July 2011

22 July 2011

3'd Quarter

25 October 2011

24 October 2011

4th Quarter53

25 January 2012

24 January 2012

Income Tax Return:~

52 Exhibits "P-I 1-1", "P-11-2" and "P·II-3".

53 See Petitioner's Memorandum, Records, Vol. 2, p. 703; Exhibit "P-20". 54 Exhibit "P-17".

Last day to

Assess

25 April 2014

25 July 2014

25 October 2014

25 January 2015

DECISIOJ\

CT A CASE NO. I 0285

Page 14of21

Taxable Year

CY 2011

Due Date for Filing Income Tax

Last day to

Return

Assess

15 April2012

15 April2015

The date of issuance of the FLD/F AN determines whether or not respondent was able to issue an assessment within the prescriptive period. In the present case, it is undenied that respondent issued the FLD/F AN on 23 January 2015.

Accordingly, the VAT assessment for the first three taxable quarters of CY 2011 is void because the same were issued beyond the three year period to assess counted from the deadline to file a VAT return, or if the same has been belatedly filed, on the actual date of filing of a VAT return. The FLD violated petitioner's right to due process as it failed to consider the arguments set forth in the Reply to PAN.

It cannot be stressed enough that an assessment must state the facts and the law upon which it is based. From this basic tenet of taxation springs the requirement that, in issuing final deficiency tax assessments, the BIR is duty bound to take into account and address the explanations, arguments and evidence posited and adduced by a taxpayer against such assessment during pre-assessment proceedings to ensure that a taxpayer has the ability to rebut such conclusions made by the BIR should it further choose to question the assessment.

In Commissioner of Internal Revenue v. Unioil Corporation55 ("Unioil") the Supreme Court had the occasion to rule that, to comply with due process in assessment proceedings, due consideration must be given to the explanations and evidence proffered by a taxpayer, and that it is not enough that the CIR will simply go through the motions of computing the taxes he wants to assess against a taxpayer without taking into account the arguments provided by the taxpayer, viz.:

"The Formal Letter of Demand and F43- I 28 are void; they did not state the factual and legal bases for the assessment.

The CIR's ample powers under the tax code should be exercised with due regard to the taxpayer's constitutional rights . ..... 55 G.R. No. 204405, 4 August 2021.

DECISIOJ\

CT A CASE NO. I 0285

Page 15 of21

In Commissioner of Internal Revenue v.

Avon Products

Manufacturing, Inc. (Avon Products) the Court expounded on the contemplation of administrative due process as exemplified 111 jurisprudence:

Administrative due process is anchored on fairness and equity in procedure. It is satisfied if the party is properly notified of the charge against it and is given a fair and reasonable opportunity to explain or defend itself. Moreover, it demands that the party's defenses be considered by the administrative body in making its conclusions, and that the party be sufficiently informed of the reasons for its conclusions. What we can refract from our ruling in A von Products is that the CIR, in exercising its power to assess and collect taxes if these are owed, ought to give due consideration to the arguments and evidence submitted by the qffected party.

In the case before us, the CIR only perfunctorily assessed Unioil for deficiency withholding tax on compensation and expanded withholding tax and went through just the motions without due consideration. This is apparent from the haste in which the Formal Letter of Demand and the FAN were issued on January 14, 2009 in order to ostensibly beat the three-year prescriptive period which set after January 15,2009. Moreover, Section 228 of the NIRC and its implementing rule and regulation, Section 3 of RR No. 12-99, mandate the contents for an assessment: '[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.' Section 3 of RR No. 12-99, on the other hand, prescribes the due process requirement for the four (4) stages of the assessment process: Section 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment.- 3.1 Mode of procedures 111 the issuance of a deficiency tax assessment:

3.1.1 Notice for informal conference. - The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of 'Informal Conference,' in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of_..

DECISION

CT A CASE NO. I 0285 Page !6 of21 the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). -

If

after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based ... If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.

xxxx 3.1.4 Formal Letter of Demand and Assessment Notice. - The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void ... 3 .1.5 Disputed Assessment. - The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof. ... xxxx The taxpayer shall submit the required documents in support of his protest within sixty ( 60) days from date of filing of his letter of protest, otherwise, the assessment shall become fmal, executory and demandable. The phrase 'submit the required documents' includes submission or presentation of the pertinent documents for scrutiny and evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his report of investigation.

If the taxpayer fails to file a valid protest against the formal letter of demand and assessment notice within thirty

(30) days from date of receipt thereof, the assessment shall become final, executory and demandable)" CT A CASE NO. I 0285 xxxx 3.1.6 Administrative Decision on a Disputed Assessment. - The decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void ... in which case, the same shall not be considered a decision on a disputed assessment; and (b) that the same is his final decision.

Once again, A von Products is illuminating. Petitioner therein (Avon) stacked indicators of the CIR's feigned compliance to the mandatory provisions of the law and regulation, i.e. Section 228 of the NIRC and Section 3 ofRR No. 12-99 which the CIR could not rebut. The Court agreed with A von and categorically pronounced that the latter was demonstrably deprived of due process by the CIR:

The facts demonstrate that Avon was deprived of due process. It was not fully apprised of the legal and factual bases of the assessments issued against it. The Details of Discrepancy attached to the Preliminary Assessment Notice, as well as the Formal Letter of Demand with the Final Assessment Notices, did not even comment or address the defenses and documents submitted by Avon. Thus, Avon was left unaware on how the Commissioner or her authorized representatives appreciated the explanations or defenses raised in connection with the assessments. There was clear inaction of the Commissioner at every stage of the proceedings. First, despite A von's submission of its Reply, together with supporting documents, to the revenue examiners' initial audit findings, and its explanation during the informal conference, the Preliminary Assessment Notice was issued. The Preliminary Assessment Notice reiterated the same audit findings, except for the alleged under-declared sales which ballooned in amount from Pl5,700,000.00 to P62,900,000.00, without any discussion or explanation on the merits of Avon's explanations. Upon receipt of the Preliminary Assessment Notice, Avon submitted its protest letter and supporting documents, and even met with revenue examiners to explain. Nonetheless, the Bureau oflnternal Revenue issued the Final Letter of Demand and Final Assessment Notices, merely reiterating the assessments in the Preliminary Assessment Notice. There was no comment whatsoever on the matters raised by Avon, or discussion of the Bureau of Internal Revenue's findings in a manner that Avon may know the various issues involved and the reasons for the assessments. Under the Bureau of Internal Revenue's own procedures, the taxpayer is required to respond to the Notice oflnformal Conference and to the Preliminary Assessment Notice within I 5 days from receipt. Despite A von's timely submission of a Reply to the Notice of Informal Conference and protest to the Preliminary Assessment Notice, together with supporting documents, the Commissioner and her agents violated their own procedures by refusing to answer or even acknowledge the submitted Reply and protest. The Notice oflnformal Conference and the Preliminary Assessment Notice are a part of due process. They give both the taxpayer and the Commissioner the opportunity to settle the case at the earliest possible time without the need for the issuance of a Final Assessment Notice. However,r

CT A CASE NO. I 0285 this purpose is not served in this case because of the Bureau of Internal Revenue's inaction or failure to consider Avon's explanations. Upon receipt of the Final Assessment Notices, Avon resubmitted its protest and submitted additional documents required by the revenue examiners, including the original General Ledger for 1999. As testified by Avon's Finance Director, Mildred C. Emlano, the Bureau of Internal Revenue examiners were convinced with Avon's explanation during the meeting on August 4, 2003, particularly, that there was no underdeclaration of sales. Still, the Commissioner merely issued a Collection Letter dated July 9, 2004, demanding from Avon the payment of the same deficiency tax assessments with a warning that should it fail to do so within the required period, summary administrative remedies would be instituted without further notice. This Collection Letter was based on the May 27, 2004 Memorandum of the Revenue Officers stating that ' [A von] failed to submit suppmiing documents within 60-day period.' This inaction on the part of the Bureau of Internal Revenue and its agents could hardly be considered substantial compliance of what is mandated by Section 228 of the Tax Code and the Revenue Regulations No. 12-99.

It is true that the Commissioner is not obliged to accept the taxpayer's explanations, as explained by the Court of Tax Appeals. However, when he or she rejects these explanations, he or she must give some reason for doing so. He or she must give the particular facts upon which his or her conclusions are based, and thosefacts must appear in the record Indeed, the Commissioner's inaction and omzsszon to give due consideration to the arguments and evidence submitted before her by Avon are deplorable transgressions of Avon's right to due process. The right to be heard, which includes the right to present evidence, is meaningless if the Commissioner can simply ignore the evidence without reason. Similarly, in this case, despite Avon's submission of its explanations and pieces of evidence to the assessments, the Commissioner failed to acknowledge these submissions and instead issued identical Preliminary Assessment Notice, Final Letter of Demand with the Final Assessment Notices, and Collection Letter, the latter being premised on A von's alleged failure to submit supporting documents to its protest. Had the Commissioner performed her functions properly and considered the explanations and pieces of evidence submitted by Avon, this case could have been settled at the earliest possible time. For instance, all the evidence needed to settle the issue on under-declared sales, which constituted the bulk of the deficiency tax assessments, have been submitted to the Bureau oflnternal Revenue. Indeed, from these same submissions, the Court of Tax Appeals concluded that there was no under-declaration of sales. As aptly pointed out by Avon, 'The [Commissioner could not] feign simple mistake or misappreciation of the evidence ... because [the issue was] plain and simple.' The requirement set by law to state in writing the factual and legal bases for the assessment is not a hollow exhortation. The law imposes a substantive, not merely a formal, requirement~

DECISIOI\

CT A CASE NO. I 0285

Page 19 of21

Commissioner of Internal Revenue v. Reyes (Reyes) is instructive. In Reyes, the Court emphasized that 'failure to comply with Section 228 does not only render the assessment void, but also finds no validation in any provision in the Tax Code:'" (Emphasis, Ours) In the case at bar, the BIR issued identical assessments for income tax and VAT against petitioner in both the PAN and the FLD/FAN. As shown above, the contents of the PAN and the FLD/F AN are the same except for interest. This only proves that respondent failed to consider the arguments and evidence adduced and presented by petitioner against such assessments for income tax and VAT in the Reply to PAN.

As in Unioil, both the PAN and the FLD/F AN simply provided a computation of the deficiency income tax and VAT assessment. These documents did not address the valid contentions of petitioner, and the evidence presented in support thereof, that the management fees paid by petitioner to Bethlehem Holdings, Inc. constitute an ordinary and necessary expense, thus, the same must be allowed as a deduction to taxable income for purposes of determining the income tax due to petitioner; and that the said management fees were incurred in the course of petitioner's trade or business, as such, any input tax due from the management fees must be allowed as a credit to petitioner's output tax. 56 Respondent simply went through the motions of issuing assessment notices without even giving due consideration to petitioner's explanations and evidence to show feigned compliance to the mandatory provisions of the NIRC. Further proof of this matter is the fact that when the Reply to PAN was filed on January 22, 2015 and subsequently forwarded to the BIR Revenue Region No.7's Assessment Division on January 23, 2015, the issuance and service of the FLD/FAN immediately followed on January 23,2015, hinting that the issuance of the FLD/FAN was merely perfunctory. The BIR seemingly wanted to issue an immediate assessment to beat the prescriptive period, but, as shown above, failed to even comply with such periods in relation to the VAT assessment for the first three taxable quarters of CY 2011 . This is a clear violation of petitioner's right to due process in tax assessment proceedings as its arguments and evidence were not even considered by respondent before the issuance of the final assessment. Indeed, while respondent is not duty bound to accept petitioner's explanations and evidence, he should still endeavor to explain to petitioner why such explanations and evidence have not been accepted as sufficient basis to cancel an assessment. The right to be heard includes the right to receive an explanation for a denial of the prayed recourse)- " BIR Records, pp. 325-366.

CT A CASE NO. l 0285

As petitioner's right to due process was violated, the instant assessments are undoubtedly null and void. Thus, no collection can proceed from such income tax and VAT assessments.

Given the above discussions, the Court deems it unnecessary to tackle the other issues raised in the Petition.

FOR THESE REASONS, the instant Petition for Review is GRANTED. The PAN, FLD/F AN and FDDA issued against petitioner are declared NULL AND VOID. Accordingly, the deficiency income tax and VAT assessments issued against petitioner for CY 2011, in the aggregate amount ofPhp69,785,169.96, inclusive of interest, are hereby CANCELLED and SET ASIDE, and respondent is ENJOINED and PROHIBITED from collecting the said amount against petitioner.

WE CONCUR:

MARIARO

ustice ~.~ .... "' MA. BELEN M. RINGPIS-LIBAN

Associate Justice

ORES

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

~. ~ ""7 '---- MA. BELEN M. RINGPIS-LIBAN

Associate Justice

Chairperson

DECISION

CTA CASE NO. 10285 Page2l of21

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court.

Presiding Justice