Levi Strauss Inc, II vs. Commissioner of Internal Revenue

DECISION

RING PIS-LIB AN,].:

The Petition for Review filed on August 20, 2020, prays that the Final Decision on Disputed Assessment (FDDA) dated May 20, 2020 issued by the respondent Commissioner of Internal Revenue against petitioner, for its allege deficiency income tax, final withholding value-added tax (FWV AT), expanded withholding tax (EWT), value-added tax (VAT), and improperly accumulated earnings tax (IAET), in the aggregate amount of P138,776,697.88, inclusive of penalties and interests, for taxable year 2012, be declared null and void. 1

THE PARTIES

Petitioner Levi Strauss (Phil.) Inc. II is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines/ with office address at 20F Tower II, The Enterprise Center, Ayala Avenue, Makati City.3 It is registered with the Securities and Exchange Commission ~

primarily to engage in, operate, conduct and maintain the business of manufacturing textile, fabrics, garments, wearing apparel, accessories and other articles of clothing, as well as buying, selling or otherwise dealing, at wholesale, in such goods, and any equipment, materials, supplies used or employed in or related to the manufacture of such finished products.4 Respondent is the duly appointed Commissioner of Internal Revenue who is tasked to collect all national internal revenue taxes, fees and charges, and enforce all forfeitures, penalties, and fines connected therewith. He holds office at the Bureau of Internal Revenue (BIR) National Office Building, BIR Road, Diliman, Quezon City. 5

ANTECEDENTS (ADMINISTRATIVE LEVEL)

On May 23, 2014, petitioner received the Letter of Authority (LOA) SN: eLA201100077676 (LOA-116-2014-00000044) dated May 9, 2014,6 authorizing Revenue Officers Aurora Pelayo, Josa Gomez, Felina Guimbao, Olivia Sison and Group Supervisor Olivia Aviles of Large Taxpayer Regular Audit Division 1, to examine petitioner's books of accounts and other accounting records for all internal revenue taxes including documentary stamp tax and other taxes (miscellaneous tax), for the period from December 1, 2011 to November 30, 2012.

Petitioner executed three (3) Waivers of the Defense of Prescription Under the Statute of Limitations of the National Internal Revenue Code (Waiver), notarized on December 16,2015,7 November 8, 2016,8 and May 3, 2017.9 Thereafter, on December 7, 2017, petitioner received a Preliminary Assessment Notice (PAN) (Parts 1 and II) of even date,10 with attached Details of Discrepancies, signed by OIC - Asst. Commissioner Large Taxpayer Service Teresita M. Angeles, finding due from petitioner deficiency income tax, EWT, FWVAT, withholding tax on compensation (WTC), VAT, IAET, documentary stamp tax (DST), and compromise penalties, for fiscal year ending November 30, 2012,11 in the aggregate amount of P198,738,467.86, detailed as follows: / 4 Annex A of Exhibit P-6, Note I, Audited Financial Statements for the years ended November 30, 2012 and 2011 , Docket- Vol. III, p. 1086; Exhibit P-6 was admitted per Resolution dated November 18, 2022, Docket- Vol. IV, p. 1537.

5 Par. 3, Summary of Admitted Facts,JSFI, Docket- Vol. II, p. 803. 6 Par. 4(a), Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 803; Exhibit "P-3", Docket- Vol. III, p. 1046; Exhibit "R-1", BIR Records (Exhibit "R-8"), p. 89 7 Exhibit "P-4", Docket- Vol. III, p. 1047; Exhibit "R-2", BIR Records (Exhibit "R-8"), p. 565. 8 Exhibit "P-4-A'', Docket- Vol. Ill, p. 1 048; Exhibit "R-2-1 ", BIR Records (Exhibit "R-8"), p. 566. 9 Exhibit "P-4-B", Docket- Vol. Ill, p. 1049; Exhibit "R-2-2", BIR Records (Exhibit "R-8"), p. 567. IU Par. 4(b), Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 803.

Tax Type

Basic

25% Surcharge

Interest

Total

Income tax P72,502,237.75 P68,272,940.54 P140,775, 178.29

Ewr

803,891.35 810,587.77 1,614,479.12

FWVAT

331.85 331.85 663.71 wrc 3,400,278.44 3,400,278.44 6,800,556.88

VAT

13,297,232.30 13,297,232.30 26,594,464.60

IAET

10,564,708.84 12,149,415.17 22,714,124.01

DST

12,445.00 P3,111.25 12,445.00 28,001.25

Total

P100,581,125.53 P3,111.25 P97 ,943,231.07 P198,527 ,467.86

Compromise Penalties

211,000.00

Grand Total

P198, 738,467.86 On December 22, 2017, petitioner flied its Reply to the PAN of even date, with corresponding supporting documents, which opposed the assessments contained in the P AN.12 On December 27, 2017, petitioner received the Formal Letter of Demand (FLD) (Part 1 and II) with Details of Discrepancies of even date,13 with Audit Result/Assessment N otice (FAN) Nos. IT-116-LOA-00000044-12-17-786, WE-

116-LOA-00000044-12-17-787

FWVT-116-LOA-00000044-12-17-788 WC-

' ' 116-LOA-00000044-12-17-789, VT-116-LOA-00000044-12-17-790,

IAET-

116-LOA-00000044-12-17-791, DST-116-LOA-00000044-12-17-792, and MC- 116-LOA-00000044-12-17-793, signed by OIC -

Assistant Commissioner

Large Taxpayer Service Teresita M. Angeles, finding petitioner liable for the same deficiency income tax, EWT, FWVAT, WTC, VAT, IAET, DST and compromise penalties in the aggregate amount of P198,738,467.87,14 for fiscal year ending November 30, 2012, details as follows: 15

Tax Type

Basic

25% Surcharge

Interest

Total

Income tax P72,502,237.75 P68,272,940.54 P140,775, 178.29

Ewr

803,891.35 810,587.77 1,614,479.12

FWVAT

331.86 331.86 663.72 wrc 3,400,278.44 3,400,278.44 6,800,556.88

VAT

13,297,232.30 13,297,232.30 26,594,464.60

IAET

10,564,708.84 12,149,415.17 22,714,124.01

DST

12,445.00 P3,111.25 12,445.00 28,001.25

Total

P100,581,125.54 P3,111.25 P97 ,943,231.08 P198,527 ,467.87

Compromise Penalties

211,000.00

Grand Total

P198, 738,467.87 On January 26, 2018, petltloner flied its Protest L etter and Request for Reinvestigation of even date to the FLD /F AN.16 Thereafter, on March 26, 2018, ,_,. 12 Par. 5, Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 803; Exhibit "P-6", Docket - Vol. III, pp. 1068 to 1143.

13 Par. 4(c), Summary of Admitted Facts, JSFI, Docket- Vol. TT, p. 803. 14 Difference ofP0.01 with the PAN.

15 Exhibit "P-7", Docket- Vol. III, pp. 1144 to 1160; Exhibits "R-5" to "R-5-2", BIR Records (Exhibit "R-8"), pp. 689 to 705.

.

petitioner flied the letter of even date, submitting its additional supporting documents in relation to its ProtestY The next day, on March 27, 2018, petitioner flied another letter of even date, submitting additional supporting documents in relation to its Protest. 18 On July 9, 2020, petitioner received through registered mail,19 the FDDA dated May 20, 2020,20 with Details of Discrepancies and Audit Result/ Assessment Notice Nos. IT-116-LOA-0000044-12-19-0143, FWVT-116-LOA-0000044-12- 19-0144

WE-116-LOA-0000044-12-19-0145

VT -116-LOA-0000044-12-19-

, ' 0146, and IAET-116-LOA-0000044-12-19-0147, signed by respondent, stating that after considering petitioner's Protest, it has been found that petitioner is still liable for deficiency income tax, FWV AT, EWT, VAT and IAET, in the aggregate amount of P138,776,697.88, for fiscal year ending November 30, 2012, details as follows: 21

Tax Type

Basic

20% Interest

12% Interest

Compromise

Total

Penalty

Income tax P43,654,916.89 P41,472,171.04 P9,604,081.72 P5o,ooo.oo P94,781,169.65

FWVAT

EWT

VAT

IAET

Total

331.86 339.42 73.89 1,000.00 1,745.17 1,089,072.04 1,089,072.04 261,377.29 20,000.00 2,459,521.37 7,385,541.32 7,385,541.32 1,624,819.09 50,000.00 16,445,901.73 10,564,708.84 12,149,415.17 2,324,235. 95 50,000.00 25,088,359.96 P62,694,570.95 P62,096,538. 99 P13,814,587.94 P171,000.00 P138, 776,697.88

PROCEEDINGS BEFORE THIS COURT

Petitioner flied its Petition for Review on August 20, 2020.22 The case was initially raffled to this Court's former Second Division. On November 3, 2020, respondent filed his Answer/3 interposing the following special and affirmative defenses, to wit: (¹) the Court's power of judicial review over decisions of respondent on disputed assessment is by nature exclusive and appellate, and this Court should not rule on matters that were never substantiated in the administrative level and petitioner may not be allowed to raise new issues on appeal; (²) petitioner should not be allowed to attack the validity of the Waivers for the first time on appeal; (³) assuming the Court may rule on issues raised for the first time on appeal, respondent's right to assess has not prescribed; ( 4) the ten (1 0)-year period for assessment under Section 222 of the National Internal Revenue Code (NIRC) of 1997, as 17 Exhibit "P-9", Docket- Vol. III, pp. 1179 to 1181. IH Exhibit "P-10", Docket- Vol. III, pp. 1182 to 1183. 19 Par. 1, Summary of Admitted Facts,JSFI, Docket- Vol. II, pp. 802 to 803. 20 Par. 4(d), Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 803. ~ 21 Exhibit "P-1", Docket- Vol. I, pp. 94 to 106; Exhibits "R-7" to "R-7-2", BIR Records (Exhibit "R-8"), pp. 754 to 792.

amended, is applicable; (5) Waivers executed by petitioner are valid and binding;

(6) petitioner was accorded due process of law; and (7) petitioner is liable for the assessed deficiency income tax, EWT, WTC, IAET, and compromise penalty.

The Pre-Trial Conference was initially set on February 8, 2021,24 but during the said conference, upon agreement of both parties, the case was referred to Mediation.25 Accordingly, the parties were ordered to immediately proceed and to personally appear, or through their authorized representative, at the Philippine Mediation Center-Court of Tax Appeals (PMC-CTA) on February 22, 2021. However, the PMC-CTA issued a N o Agreement To Mediate dated March 19, 2021,26 stating that the parties decided not to have their case mediated.

Thus, the Pre-Trial Conference was held on June 23, 2021 ,27 where the Court approved the parties' Joint Stipulation of Facts and Issue previously submitted on June 21, 2021,28 thereby terminating the Pre-Trial. Prior thereto, the Pre-Trial Brief for Petitioner was flied on February 3, 2021,29 while Respondent's Pre-Trial Brief was submitted on February 4, 2021.30 The Pre-Trial Order dated December 11, 2021 was then issued. 31 Respondent transmitted the BIR Records of the present case on February 24, 2022, consisting of 809 pages in one (1) folder. 32 Trial then ensued, with both parties presenting and offering their respective documentary and testimonial evidence. Petitioner offered the testimonies of the following individuals, namely:

(1) Atty. Gilbert Raymund T. Reyes,33 its Corporate Secretary; (2) Ms. Maria Esperanza R. Cortero,34 its Finance Manager; and (3) Ms. Ma. Criselda S. Oplas,35 the Court-commissioned Independent Certified Public Accountant (ICPA).~ 24 Notice of Pre-Trial Conference dated ovember 9, 2020, Docket- Vol. II, pp. 771 to 772. 25 Minutes of hearing held on, and O rder dated, February 8, 2021 , Docket- Vol. II, pp. 792 to 793; Resolution dated February 8, 2021, Docket- Vol. II, p. 795 26 Docket- Vol. II, p. 796.

27 Resolution dated May 26, 2021, Docket- Vol. II, p. 798; Minutes of hearing held on, and Order dated, June 23, 2021, Docket- Vol. II, pp. 813 to 814.

28 Docket - Vol. II, pp. 802 to 812.

29 Docket- Vol. II, pp. 774 to 786.

3° Docket- Vol. II, pp. 787 to 790.

The Report of the said ICPA was submitted to the Court on March 28, 2022. 37 Petitioner's Formal Offer of Evidence was posted on May 30, 2022,38 to which respondent flied his Comment (Re: Petitioner's Formal Offer of Evidence) on June 10, 2022.39 In the Resolution dated November 18, 2022,40 the Court admitted petitioner's offered exhibits except Exhibits "P-44-u-6418", "P-44-u- 6572 to P-44-u-6573" "P-44-u-7368" "P-44-u-7741" and "P-45-b-5" for not ' ' ' ' being found in the records.

Upon petitioner's Motion for Partial Reconsideration (Re: Resolution dated November 18, 2022) flied on December 7, 2022,41 and respondent having failed to file comment,42 the Court, in the Resolution dated April 4, 2023;43 granted petitioner's Motion, and accordingly admitted Exhibits "P-44-u-6418", "P-44-u- 6572 to P-44-u-6573", "P-44-u-7368", and "P-44-u-7741 ". In the Order dated June 29, 2022,44 the present case was transferred to the Third Division of this Court.

For his part, respondent offered the testimony of Revenue Officer (RO) Olivia Sison.45 In the Notice of Resolution dated June 14, 2023,46 the present case was transferred to the Second Division of this Court. Respondent's Formal Offer of Evidence was flied on July 26, 2023,47 to which petitioner's Comment and/ or Opposition (To Respondent's Formal Offer of Evidence dated 26 Ju!J 2023) was submitted on August 7, 2023.48 In the Resolution dated December 20, 2023,49 the Court admitted all of respondent's offered exhibits. ~ 37 Offered as Exhibit "P-34" (but marked as Exhibit "P-34-A", Refer to Resolution dated November 18, 2022, Docket- Vol. IV, p. 1539), 3 Binders.

38 Docket- Vol. III, pp. 1009 to 1029.

39 Docket- Vol. III, pp. 1005 to 1007.

40 Docket- Vol. IV, pp. 1536 to 1544.

41 Docket- Vol. IV, pp. 1545 to 1549.

42 Records Verification Report dated February 10, 2023 issued by the Judicial Records Division of this Court, Docket- Vol. IV, p. 1561.

43 Docket- Vol. IV, pp. 1565 to 1567.

+~ Docket- Vol. IV, p. 1533.

Petitioner's Memorandum was flied on February 13, 2024. 50 Respondent, however, failed to flie a memorandum. 51 The present case was considered submitted for decision on March 5, 2024. 52

THE STIPULATED ISSUE

As stipulated by the parties, the issue for this Court's resolution is as follows:

"1. Whether or not Petitioner is liable for deficiency taxes for the taxable year 2012 (period 1 December 2011 to 30 November 2012)."53 Petitioner's arguments:

Petitioner argues that the period to assess it has already prescribed pursuant to Section 203 of the NIRC as the Waivers are invalid for failure to indicate the nature and amount of the tax due; that ultimately, the period to assess deficiency EWT and VAT has already prescribed even before the First Waiver has been completed; that there is no valid acceptance of the Waivers as they were not fully signed by the OIC-Assistant Commissioner; that there is no Board Resolution to prove the authority to execute the said Waivers; that the FLD-F AN and the FDDA are invalid and consequently, assessments for deficiency taxes therein are void; that the assessment is void due to respondent's violation of the procedural due process requirements in deficiency tax assessment; that the blatant disregard of the petitioner's arguments and substantiations in its Reply to PAN and Protest to Assessment is a clear violation of its right to due process; that the irregularity in dates indicated in the FDDA is a violation of petitioner's right to due process; and that petitioner is not liable for the alleged deficiency taxes.

Respondent's arguments:

Respondent contends that the Court's power of judicial review over his decisions on disputed assessment is by nature exclusive and appellate, hence, this Court should not rule on matters that were never substantiated in the administrative level, and petitioner may not be allowed to raise new issues on appeal; that petitioner should not be allowed to attack the validity of the Waivers /V" 5o Docket - Vol. IV, pp. 1613 to 1675.

for the first time on appeal; that assuming the Court may rule on issues raised for the first time on appeal, respondent's right to assess has not prescribed; that the ten (1 0)-year period for assessment under Section 222 of the NIRC of 1997, as amended, is applicable; that the Waivers executed by petitioner are valid and binding; that petitioner was accorded due process of law; and that petitioner is liable for the assessed deficiency income tax, EWT, WTC, IAET, and compromise penalty.

THE COURT'S RULING

The present Petition for Review is meritorious. Petitioner points out that respondent's blatant disregard of its arguments and substantiations found in the Rep!J to PAN" and Protest to Assessment is a clear violation of its right to due process.

When respondent issued the PAN on December 7, 2017 and petitioner timely flied its Rep!J to PAN" on December 22, 2017, which was a Friday. However, petitioner was surprised when on, December 27, 2017, the following Wednesday, respondent was able to issue the FLD-FAN to it, notwithstanding that between December 22, 2017 and December 27, 2017, there were no working days within which the BIR could have possibly reviewed petitione~'s assessment. Petitioner contends that considering the holidays and non-working days, it is baffling to think how the BIR could have possibly had the time to review, evaluate, and discuss the Rep!J to PAN" issued by petitioner. In addition, petitioner avers that upon perusal of the FLD-FAN issued by respondent, it is evident that it made neither rebuttals nor references to the arguments and evidence provided by the petitioner in its Reply to the PAN, defeating petitioner's statutory right to explain itself and introduce supporting evidence. Petitioner highlights the fact that the FLD-FAN issued by respondent merely copied verbatim the alleged tax deficiencies and their respective legal bases and explanations found in the PAN and practicai!J retained all disputed items in the assessment. There was no acknowledgment at all of the arguments made by petitioner in the Rep!J to PAN" on the FLD-FAN. A plain reading of the PAN and FLD-FAN readily reveals that the latter is a convenient reiteration of the former. Furthermore, petitioner notes that the lack of valid identification and reference to the Memorandum recommending the issuance of FLD-FAN was evident during the cross-examination of RO Olivia Sison. A comparison of the items and amounts assessed in the PAN with those in the FLD-FAN strengthens the veraciry petitioner's contentions: ~

PAN

Tax Type 25% Surcharge

Income tax P72,502,237.75| P68,272,940.54 P140,775,178.29 803,891.35; 810,587.77 | 1,614,479.12 331.85| 331.85 663.71 3,400,278.44 | 3,400,278.44 6,800,556.88 13,297,23230} 13,297,232.30 26,594,464.60 a | Six es |

Total

FAN-FLD

Tax Type | Basic | 25% Surcharge | Interest | Total Income tax PP 72,502,237.75 | | P68,272,940.54 | P140,775,178.29 | g03,891.35[ 810,587.77 | 1,614,479.12 | P8886 P88 BG 663,72 | | 3,400,278.44 [| 3,400,278.44 | 6,8 00,556.88 | 13,297,232.30 | 3,111.25 | bd AO |< td il | rf

Fy

52073930 a.

10564-70884 [in apatst22,714,12401 |

CuI

As can be seen from the comparison of the two, the searly identical amounts retained and tabulated in both assessments show that the opportunity given by law to the petitioner in order defend itself by refuting the items of assessment with the objective of reducing if not canceling the same was rendered Juiile contrary to the /eiter and spirit of the lam.

Section 228 of the NIRC of 1997 reads, in part:

“SEC. 228. Protesting of Assessment. — When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: xxx

XXX EX XXX

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.

XXX XXX xxx.” (Emphasis added) 4

To implement the above-quoted Section 228, Section 3 of Revenue Regulations (RR) No. 12-99,54 as amended by RR No. 18-2013,55 provides, in part, as follows:

"SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. - 3.1 Mode of procedure in the issuance of a deficiency tax assessment: 3.1.1 Preliminary Assessment Notice (PAN). - If after review and evaluation 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 a Preliminary Assessment Notice (PAN) for the proposed assessment.

It shall show in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX 'A' hereof).

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 Final Assessment Notice (FLD /FAN) shall be issued calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.

If the taxpayer, within fifteen (15) days from date of receipt of the PAN, responds that he/it disagrees with the findings of deficiency tax or taxes, an FLD /FAN shall be issued within fifteen (15) days from filing/ submission of the taxpayer's response, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.

XXX

XXX

XXX

3.1.3 Formal Letter of Demand and Final Assessment Notice (FLD IF AN). -The Formal Letter of Demand and Final Assessment Notice (FLD /FAN) shall be issued by the Commissioner or his duly authorized representative. The FLD /FAN 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 assessment shall be void (see illustration in ANNEX 'B' hereof).

XXX

XXX

XXX

3.1.5 Final Decision on a Disputed Assessment (FDDA).- The decision of the Commissioner or his duly authorized representative shall state the (i) facts. the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void (see illustration in ANNEX 'C' hereof), and (ii) that the same is his final decision." (Emphases and underscoring addedy

54 SUBJECT:

55 SUBJECT:

Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of N:nion:~ l Internal Revenue T:~xes, Civil Pen:~lties and Interest and the Extra-) uclicial Setdement of a Taxpayers Criminal Violation of the Code Through

Payment of a Suggested Compromise Penalty

Amending Certain Sections of Revenue Regulations No. 12-99 Relative to the Due Process Requirement in the Issuance of a Deficiency Tax Assessment.

The foregoing provisions prescribe, as kry components of due process in the issuance of tax assessments, that the PAN, FLD/FAN and FDDA must, respectively, state, among others, the facts and the law on which the assessment is based. Otherwise, the FLD /FAN and/ or FDDA shall be void. In Commissioner of Internal Revenue vs. Avon Products Mantifacturingy Inc.) et seq. (Avon), 56 the Supreme Court voided the income tax assessment of Avon because of due process violation. Specifically, the Supreme Court said that the Tax Code and revenue regulations allow a taxpayer to file a reply or otherwise to submit comments or arguments with supporting documents at each stage in the assessment process. Due process requires the BIR to consider the defenses and evidence submitted by the taxpayer and to render a decision based on these submissions. Thus, failure to adhere to these requirements constitutes a denial of due process and taints the administrative proceedings with invalidity: "Tax assessments issued in violation of the due process rights of a taxpayer are null and void. While the government has an interest in the swift collection of taxes, the Bureau of Internal Revenue and its officers and agents cannot be overreaching in their efforts, but must perform their duties in accordance with law. with their own rules of procedure, and always with regard to the basic tenets of due process. The 1997 National Internal Revenue Code, also known as the Tax Code, and revenue regulations allow a taxpayer to file a reply or otherwise to submit comments or arguments with supporting documents at each stage in d1e assessment process. Due process requires the Bureau of Internal Revenue to consider the defenses and evidence submitted by the taxpayer and to render a decision based on these submissions. Failure to adhere to these requirements constitutes a denial of due process and taints the administrative proceedings with invalidity.

XXX

XXX

XXX

The Bureau of Internal Revenue is the prunary agency tasked to assess and collect proper taxes, and to adtninister and enforce the Tax Code. To perform its functions of tax assessment and collection properly, it is given ample powers under the Tax Code, such as the power to examine tax returns and books of accounts, to issue a subpoena, and to assess based on the best evidence obtainable, among others.

However, these powers must 'be exercised reasonably and [under] the prescribed procedure.' The Commissioner and revenue officers must strictly comply with the requirements of the law, with the Bureau of Internal Revenue's own rules, and with due regard to taxpayer's constitutional rights.

XXX

XXX

XXX

In carrying out these quasi-judicial functions, the Commissioner is required to 'investigate facts or ascertain the existence of facts, hold hearings. weigh evidence, and draw conclusions from them as basis for their official action and exercise of discretion in a judicial nature.' Tax investigation and assessment ~

necessarily demand the observance of due process because they affect the proprietary rights of specific persons.

XXX

XXX

XXX

In Ang Tibay v. The Court of Industrial Re/ations,57 this Court observed that although quasi-judicial agencies 'may be said to be free from the rigidity of certain procedural requirements[, it] does not mean that it can, in justiciable cases coming before it, entirely ignore or disregard the fundamental and essential requirements of due process in trials and investigations of an administrative character.' It then enumerated the fundamental requirements of due process that must be respected in administrative proceedings:

(1) The party interested or affected must be able to present his or her own case and submit evidence in support of it.

(2) The administrative tribunal or body must consider the evidence presented.

(3) There must be evidence supporting the tribunal's decision.

(4) The evidence must be substantial or 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'

(5) The administrative tribunal's decision must be rendered on the evidence presented, or at least contained in the record and disclosed to the parties affected.

(6) The administrative tribunal's decision must be based on the deciding authority's own independent consideration of the law and facts governing the case.

(7) The administrative tribunal's decision is rendered in a manner that the parties may know the various issues involved and the reasons for the decision.

XXX

XXX

XXX

The last requirement relating to the form and substance of the decision is the decision-maker's 'duty to give reason' to enable . the affected person to understand how the rule of fairness has been administered in his [or her] case, to expose the reason to public scrutiny and criticism, and to ensure that the decision will be thought through by the decision-maker.

XXX

XXX

XXX

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.

XXX

XXX

XXX

The importance of providing the taxpayer with adequate written notice of his or her tax liability is undeniable. Under Section ~ 57 69 Phil. 635 (1940) [Per]. Laurel, En Bam] .

228, it is explicitly required that the taxpayer be informed in writing of the law and of the facts on which the assessment is made; otherwise, the assessment shall be void. Section 3.1.258 of Revenue Regulation No. 12-99 requires the Preliminary Assessment Notice to show in detail the facts and law, rules and regulations, or jurisprudence on which the proposed assessment is based. Further, Section 3.1.459 requires the Final Letter of Demand must state the facts and law on which it is based; othe!Wise, the Final Letter of Demand and Final Assessment Notices themselves shall be void. Finally, Section 3.1.660 specifically requires that the decision of the Commissioner or of his or her duly authorized representative on a disputed assessment shall state the facts and law, rules and regulations, or jurisprudence on which the decision is based.

Failure to do so would invalidate the Final Decision on Disputed Assessment. 'The use of the word 'shall' in Section 228 of the [National Internal Revenue Code) and in [Revenue Regulations] No. 12-99 indicates that the requirement of informing the taxpayer of the legal and factual bases of the assessment and the decision made against him [or her] is mandatory.' This is an essential requirement of due process and applies to the Preliminary Assessment Notice, Final Letter of Demand with the Final Assessment Notices, and the Final Decision on Disputed Assessment.

XXX

XXX

XXX

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 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.

XXX

XXX

XXX

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 conclusion are based, and those facts must appear in the record.

XXX

XXX

XXX

The Commissioner's total disregard of due process rendered the identical Preliminary Assessment Notice, Final Assessment Notices, and Collection Letter null and void, and of no force and effect. ss Now Section 3.1.1 of RR

o. 12-99, as amended by RR No. 18-2013. 59 Now Section 3.1.3 of RR

o. 12-99, as amended by RR No. 18-2013. 6° Now Section 3.1.5 of RR No. 12-99, as amended by RR No. 18-2013. /""" This Court has, in several cases, declared void any assessment that failed to strictly comply with the due process requirements set forth in Section 228 of the Tax Code and Revenue Regulation No. 12-99.

XXX

XXX

XXX

In Commissioner of Internal Revenue v. Rryes,61 this Court ruled as void an assessment for deficiency estate tax issued by the Commissioner for failure to inform the taxpayer of the law and the facts on which· the assessment was made, in violation of Section 228 of the Tax Code.

XXX

XXX

XXX

Compliance with strict procedural requirements must be followed in the collection of taxes as emphasized in Commissioner of Internal Revenue v. A{gue, Inc.: 62 Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

XXX

XXX

XXX

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate ... that the law has not been observed. (Emphasis supplied) xxx. [The Commissioner of Internal Revenue's! disregard of the standards and rules renders the deficiency tax assessments null and void. xxx." (Emphases and underscoring added) As worded, the law requires that the taxpayer be informed in writing of the law and of the facts on which the assessment is made; if not, the assessment shall be void.63 This requirement is mandatory. As a due process requirement, this rule allows the taxpayer to make an effective protest. 64 To be sure, 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, 61 516 Phil. 176 (2006) [Per C.J. Panganiban, First Division]. 62 241 Phil. 829 (1988) [Per J. Cruz, First Division]. /

not merely a formal, requirement."65 Because the requirement is mandatory, 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.66 Based on the holding in A von, the law commands the respondent in this case or his duly authorized representative to perform assessment functions with strict adherence to the law, and their own rules of procedure and always with due regard to the basic tenets of due process. Due process requires respondent to consider the taxpayer's defenses and evidence at each stage in the assessment process and to render a decision based on these submissions. The requirement must be embodied in the PAN, FLD/ FAN, and FDDA. Thus, when respondent rejects the taxpayer's explanations. the reason for doing so and the particular facts and law upon which his conclusion were based must be stated. As a corollary to this requirement, the concerned taxpayer must not be left uninformed or clueless on how the respondent appreciated the explanations or defenses raised in connection with the assessment. As shown in the facts earlier, the PAN dated December 7, 201767 found due from petltloner deficiency taxes 1n the aggregate amount of P198,738,467.86. Further details of the PAN are shown below: I. INC0 1vffi TAX Net income per ITR

Add: Discrepancies/ Disallowances

1 Undeclared Sales per TPI

Schedule 1

P1 05,484,597.38

2 Overclaimed Importations per TPI

Schedule 2

34,424,581.38 3 Unsupported sales returns and discounts 42,324,309.00 4 Income payments not subjected to Expanded \'\IT

Schedule 3

39,707,796.84 5 Unaccounted payment subjected to 1%

Schedule 3

3,486,911.34 6 Income payments not subjected to F\'V'VT

Schedule 4

2,765.49

7 Other Income

Schedule 5

1,478,622.93 8 Disallowed Bad debts - unsupported 3,884,560.80 9 Disallowed Miscellaneous expenses- (FS vs ITR)

Schedule 6

4,266,11 8.42 10 Realized foreign exchange loss unsupported 4 31 0 956.70 Net income per audit

Corporate Income Tax Due Thereon

Less Corporate Income tax paid P34,922,350.89 Income tax credits P7,284,125.66 Less: Disallowed tax credit - out of period 690,902.32 6,593,223.34

Deficiency Income Tax Due

Add Interest from March 16, 2013 to December 31, 2017

Total DEFICIENCY INCOME TAX DUE

II. EXPANDED WITHHOLDING TAX Def. WE Add: Interest up to December 31, 2017 Total Def. WE III. FINAL WITHHOLDING VAT

Basic Tax FWVT

Add: Interest up to December 16, 2017 65 Commissioner oflnternal Revenue vs. Unioil Corporation, G.R. No. 204405, August 4, 2021. 66 I d., citing Commissioner of Internal Revenue vs. Rryes, 51 6 Phil. 176, 189 (2006). p 140,688,152.97 239,371,220.28 p 380,059,373.25 p 114,017,811.98 p 41 515 574.23 p 72,502,237.75 68 272 940.54 P140,775,178.29 p 803,891:35 810 587.77 p 1,614,479.12 p 331.85 331.85

Page16of1 9

Total Def. F\'V'VT IV. WITHHOLDING TAX ON CO!viPENSATION Def. WC Due Add: Interest from December 16, 2012 to December 16, 2017 TOTAL DEF. WC V. VALUE ADDED TAX Vatable sales per returns Local Taxable sales Zero rated sales Vatable sales per audit:

Sales of good per ITR Add: Other income subject to VAT (Schedule 1 0)

Undeclared Sales per TPI (Schedule 1)

Unaccounted income payment (Schedule 3) Less: Vatable sales per returns Taxable sales Zero rated sales Total sales per audit:

Less Zero rated sales Subject to 12% VAT per audit Output tax due thereon Less: Allowable input taxes:

Input tax carried over from previous quarters Current purchases:

Input tax on CG Input tax on GOTCG Input tax on Importation Input tax on services Input tax on services rendered by Non resident Less: Input tax deferred to succeeding period

VAT Payable

Less: VAT Paid

Deficiency VAT

Add Interest from December 26, 2012 to December 26, 2017

Total Deficiency VAT Due

VI. I!viPROPERL Y ACCUMULATED EARNINGS

TAX

IAETDue

Add: Interest from March 16, 2012 to December 16, 2012 to December 16, 2017

Total IAET Due

VII. DOCUMENTARY STA!viP TAX DEFICIENCY DOCUMENTARY STA!viP TAX

Add: 25% Surcharge

Interest from March 6, 2012 to December 16, 2012 to December 16,2017 TOTAL DEF. DST DUE

Compromise Penalties for Late Payment

Def. Income Def. VAT Def. WE Def. WC Def. FTVT Def. IAET Def. DST

Total

P663.71 p 3,400,278.44 3,400,278.44 P6,800,556.88 P1 ,004,348,789.83 16,279,768.95 P1 ,020,628,558.78 P1 ,019,264,808.00 3,202,511.22 105,484,597.38 3 486 911.34 P1 ,131,438,827.94 P1,004,348,789.83 16,279,768.95 1 020,628,558.78 110,810,269.16 P1, 131,438,827.94 16 279 768.95 P1 ,115,159,058.99 p 133,819,087.08 p 613,384.20 78,214.29 1,298,012.41 49,753,154.81 12,119,353.09 14 216 935.61 P78,079,054.40 411 751.44 77 667 302.96 p 56,151,784.12 42,854,551.82 p 13,297,232.30 13,297,232.30 P26,594,464.60 p 10,564,708.84 121 49 415.17 P22, 714,124.01 p 12,445.00 3,11 1.25 12 445.00 P28,001.25 p 50,000.00 50,000.00 30,000.00 25,000.00 1,00(}.00 50,000.00 5 000.00 P211,000.00

In petitioner's Rep!J to the PAN dated December 22, 2017,68 it raised legal and factual arguments, citing pertinent provisions of the law and revenue regulations, and even submitted supporting documents. However, in spite of the Rep!J to the PAN, petitioner was still assessed a near!J identical aggregate amount of P198,738,467.87, save for the P0.01 difference69, in the FLD dated December 27, 2017.70 As reviewed by the Court, the FLD and attached Details of Discrepancies merely copied verbatim the discussion that was already written in the PAN and the attached Details of Discrepancies, without adding more by addressing any of petitioner's defenses in its Rep!J to the PAN. In other words, when respondent perfunctorilY and hasti!J issued the subject FLD on December 27, 2017, even after receiving Rep!J to the PAN merely five (5) days before, on December 22, 2017,71 respondent did so without considering the points raised by the petitioner. Finally, the FLD did not even acknowledge or mention petitioner's submission of the Rep!J to the PAN, which is another clear sign that the same was totally ignored by the BIR.

Accordingly, based on Avon, the Court finds the subject tax assessments void for violation of petitioner's right to administrative due process. Again, tax assessments issued in violation of the due process rights of a taxpayer are null and void.72 A void assessment bears no valid fruit. 73 Such being the case, the subject tax assessments cannot be enforced against petitioner, and respondent or the BIR has no right to collect the same. In view of the finding that the subject tax assessments are invalid, it becomes unnecessary to address the other arguments raised by the patties.

WHEREFORE, in light of the foregoing considerations, the present Petition for Review is GRANTED.

~ 68 Exhibit "P-6", Docket- Vol. III, pp. 1068 to 1143. 69 The P0.01 difference can be traced to the deficiency FWV AT, to wit: III. FINAL \V'ITHHOLDING VAT

Final Withholding VAT on Royalties

P331.86 Add: Interest from 12-16-12 to 12-31-17 331.86 Def. Final WVT P663.72 70 Exhibit "P-7", Docket- Vol. III, pp. 1144 to 1160; Exhibits "R-5" to "R-5-2", BIR Records (Exhibit "R-8"), pp. 689 to 705.

71 Par. 5, Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 803; Exhibit "P-6", Docket- Vol. III, pp. 1068 to 1143.

72 Commissioner of Internal Revenue vs. Avon Products Manujal'lun'ng, Inc., et seq., supra. 73 S amar-I Elet·tn'c Cooperative vs. Commissioner of Internal Revenue, G.R.

o. 193100, December 10, 2014.

Accordingly, the FLD and Assessment Notices, all dated December 27, 2017, assessing petitioner for deficiency taxes for fiscal year ended November 30, 2012 is CANCELLED and SET ASIDE.

Finally, the FDDA dated May 20, 2020, and Assessment Notices, assessing petitioner for deficiency income tax, FWV AT, EWT, VAT and IAET, for fiscal year ended November 30, 2012, in the aggregate amount of P138,776,697.88, inclusive of interests and compromise penalties, are REVERSED and SET ASIDE.

WE CONCUR:

~.~ ),"-- MA. BELEN M. RINGPIS-LIBAN

Associate Justice

~VI~~·

COHfPON G~ERRE -FLO

Associate Justice

ATTESTATION

s 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.

~. ~ -?'----.

MA. BELEN M. RINGPIS-LIBAN

Associate Justice

Division Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's attestation, 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