Warner Lambert Philippines, Inc. vs. Commissioner of Internal Revenue

DECISION

BAUTISTA, J.:

The instant petition seeks to dispute respondent's Final Decision on Disputed Assessment finding petitioner liable for deficiency income tax in the amount of P65,471,465.25 for the year 1999.

Pfizer, Inc. (Petitioner) is a corporation organized and existing under Philippine laws with office address at 23'd Floor, Ayala Life-FGU Center, 6811 Ayala Avenue, Makati City 1200.1 Warner Lambert Philippines, Inc. (Warner Lambert) merged with petitioner on January 18, 2001, with the latter as the surviving entity. All assets and liabilities of Warner Lambert were transferred to, and absorbed by petitioner.

C.T.A. CASE NO. 692S

Petitioner is engaged in the business of manufacturing, preparing, buying, acquiring, owning, processing, selling, distributing, exporting and importing goods of every kind, including, but not limited to, chemical, pharmaceutical, medicinal, and biological products.2 Commissioner of Internal Revenue (Respondent) is the officer of the Bureau of Internal Revenue (BIR) vested with 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 (NIRC) or other laws or portions thereof administered by the BIR.

On April 14, 2000, Warner Lambert filed its Annual Income Tax Return (ITR) for taxable year 1999, reflecting net losses in the amount of P110,218,381.00. 3 On June 4, 2003, petitioner received a Preliminary Assessment Notice (PAN) dated April 2, 2003 together with the Details of Discrepancies. In the PAN, the BIR informed petitioner that it has an alleged internal revenue tax liability of P208,876,361.00 representing deficiency income, value-added, and expanded withholding taxes, inclusive of interest and compromise penalties, computed as follows: 4

INCOME TAX

Taxable Income Per Return

(110,218,381.00)

Add:

Severance and Termination Cost Accrued in 1998

156,000,000.00

Provision for Inventory Obsolescence

46,718,185.28

Disallowed Expenses-Prior Period/Others

16,704,158.8 1 Additional Income Arising from Discrepancy in Sales

Report

Per VAT

I ,657,613,646.55

Per Financial Statement

Net Sales

1,563,836,809.00 Proceeds from Sale of PPE 41,935,847.00

Sale of Scrap

37,989.56 1,605,8 10,645.56 51 ,803,000.99

Building Written Off

66,224,000.00

Income Payment Not Subjected to EWT

19,986,956.91 19,986,956.9 1 Adj usted Taxable Income 357,436,301.99

Tax Rate

33%

Tax Due

Add Disallowed Tax Credit

Total

Add

Interest from Apri I 16, 2000 to May 16, 2003

Compromise Penalty

Total Amount Due

VALUE-ADDED TAX(VAT)

117,953,979.66 8,025,993.62 125,979,973.28 78,107,583.43 25,000.00 204,112,556.71 Taxable sales per VAT returns 1,651,374,804.60

Value-Added Tax @ 10%

165, 137,480.46

Less:

VAT input 117,581 ,527.90 Disallowed input (1 ,812,796.71) Input allocated to exempt sales (442,547.37) Monthly payments 23,882,763 .67 Quarterly payments 20, 123,238.81 Tax credit certificate 3,549,950.00 162,882,136.30

Deficiency VAT

2,255,344. 16

Add:

Interest from January 25, 2000 to May 25, 2003 1,5 11,080.59

Compromise Penalty

25,000.00

Total Amount Due

3,791 ,424.75

Expanded Withholding Tax (EWT)

Tax Due

9,3 14,885.35

Tax Remitted

8,744,598.20

Basic Tax Due

570,287.15 Add: Interest from Januar)' 25, 2000 to May_ 25, 2003 382,092.39

Compromise

20,000.00 402,092.39

Total Amount Due

972,379.54 On June 19, 2003, petitioner protested the PAN in a letter dated June 16, 2003.5 On June 23, 2003, four days after the protest was filed, petitioner received Final Assessment Notice Nos. 99-000063, 99-000070 and 99-000077, together with the corresponding Formal Letters of Demand and Details of Discrepancies, all dated June 15, 2003. The assessments are summarized as follows: 6

Tax Type

Income Tax

EWT

VAT

Total

Assessment Notice No.

99-000063 99-000070 99-000077

Basic

125,979,973.28 570,287. 15 2,255,344. 16

Interest

82,932,616.41 399,201.01 1,578,740.91

Compromise Penalty

25,000.00 20,000.00 25,000.00 208,937,589.69 989,488.16 3,859,085.07 213,786,162.92

On July 18, 2003, petitioner protested these assessments via protest letter7 and on September 15, 2003, petitioner submitted its relevant documents in support of the protest.8 After one hundred eighty (180) days from petitioner's submission, or on March 13, 2004, respondent had not issued a final decision on petitioner's disputed assessments. Hence, petitioner filed a Petition for Review with this Court on April 12, 2004 praying for the cancellation of the assessments in the aggregate amount of P213,786,162.92.9 Ten days after the filing of the Petition for Review, or on April 22, 2004, petitioner received respondent's Final Decision on Disputed Assessment (FDDA) dated March 29, 2004 which reduced petitioner's deficiency tax as follows: 10

Type of Tax

Income Tax

VAT

EWT

Total

Amount

65,873,014.69 215,864.62 132,358.43 66,221 ,237.74 A breakdown of respondent's computation of petitioner's deficiency tax is provided as follows:

Type of Tax

Income Tax

VAT

EWT

Total

For Collection

401,549.44 215,864.62 132,358.43 749,772.49

For Assessment

65,471,465 .25 65,471,465.25

Total

65,873,014.69 215,864.62 132,358.43 66,221,237.74 On April 30, 2004, petitioner paid a total amount of P749,772.49 to Land Bank of the Philippines - East Avenue Branch for the amounts declared in the FDDA as subject "For Collection. "11 In view of the developments that have taken place after the filing of the Petition, on May 17, 2007, petitioner filed its Supplement (To Petition for Review, dated 29 March 2004), which only questions the deficiency income tax assessment in the amount of P65,471,465.25.

After trial on the merits, the case was submitted for decision on July 20, 2007. The issues12, jointly stipulated by the parties for this Court's resolution, are the following:

1. Whether the right of the Government to assess deficiency income tax for the taxable year 1999 has prescribed.

2. Assuming the right of the Government to assess deficiency income tax for the taxable year 1999 has not prescribed, whether the deficiency income tax assessment has factual and legal bases.

3. Whether Respondent correctly disallowed the amount of P43,955,234.43 as deductible inventory write-off.

First Issue:

Prescription and Validity of Waiver

The general rule on the prescription of the right to assess taxpayers is provided in Section 203 of the NIRC as follows:

"Section 203. Period of Limitation Upon Assessment. - Except as provided in Section 222, internal revenue taxes shall be assessed within three

(3) years after 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 counted from the day the return was filed. For purposes of this Section, a return filed after the last day prescribed by law for the filing thereof shall be considered as filed on such last day." The period to assess, however, may be extended in the case of waivers executed by the taxpayer as stated in Section 222(b) of the NIRC which provides: "Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

XXX

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have (?iJ) /

C.T.A. CASE NO. 692S agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon."

Since petitioner filed its Annual ITR for taxable year 1999 on April 14, 2000, respondent had until April 15, 2003 to assess petitioner. However, petitioner executed a waiver which extended respondent's right to assess to June 30, 2003. 13 Now, the Court must determine whether the waiver complied with the requirements provided by law and jurisprudence. In the event that the waiver is found to be valid, the assessment issued will not have prescribed. Otherwise, the assessment will be null and void for having been issued beyond the period prescribed by law.

The requisites for a valid waiver are laid down by the Supreme Court in Bank of the Philippine Islands vs. Commissioner of Internal Revenue14 as follows: "A valid waiver of the statute of limitations under paragraphs (b) and

(d) of Section 223 of the Tax Code of 1977, as amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be strictly followed, and any revenue official who fails to comply therewith resulting in the prescription of the right to assess and collect shall be administratively dealt with."

Upon carefully studying the waiver executed by petitioner, this Court finds the same valid because it was (1) in writing; (2) agreed to by both respondent and petitioner; (3) before the expiration of the ordinary prescriptive period for assessment on April 15, 2003; and ( 4) for a definite period beyond the ordinary prescriptive period for assessment or until June 30, 2003. Moreover, the execution of the waiver complied with RMO No. 20-90 as regards the indication of the date of acceptance, viz., December 9, 2002.

Second and Third Issues:

Validity of Assessment

The deficiency income tax assessment of P65,471,465.25, as contained in the FDDA, was computed by respondent as follows:

Income Tax

Taxable Income Per Return

Provision for inventory obsolescence

Total

Claim duly supported by BIR Cert

Disallowed

Building Written Off

Total

Tax Rate

Tax Due

Add:

Interest from April 16,2000 to April 15,2004

Compromise Penalty

Total

46,725,970.15 2,769,735.72 43,955,234.43 (11 0,218,381.00) 43,955,234.43 66,224,000.00 11 0,179,234.43 33% 36,359, 147.36 29,087,317.89 25,000.00 65,4 71,465.25 A simple perusal of the foregoing immediately shows that respondent erroneously computed the deficiency income tax. In computing the deficiency, respondent completely ignored petitioner's net loss of P110,218,381.00. Thus, the assessment shall be re- computed to include the net loss as follows:

Income Tax

Taxable Income Per Return

Provision for inventory obsolescence

Total

Claim duly supported by BIR Cert Disal lowed

Building Written Off

Total

46,725,970. I 5 2,769,735.72 43,956,234.43 66,224,000.00 (II 0,2I8,381.00) II 0,180,234.43 (38, I46.57) Even with the disallowance of the provision for inventory obsolescence and write-off, petitioner would still be in a net loss position. As a result of the re-computation, petitioner owes no deficiency tax to respondent. Thus, respondent's assessment of deficiency income tax against petitioner should fall for lack of factual and legal basis. Considering that there is no deficiency tax to speak of, this Court sees no reason to dwell on the merits of the assessment.

/ ~)

IN VIEW OF THE FOREGOING, the instant Petition for Review is hereby GRANTED.

WE CONCUR:

~\a . c~ ERNESTO D. ACOSTA

Presiding Justice

CAESAR A. CASANOVA

Associate Justice

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's Division. ~~- ct-v'-- ERNESTO D. ACOSTA

Presiding Justice

Chairperson, First Division