Ishida Philippines Tube Co., Inc. vs. Commissioner of Internal Revenue

DECI S ION

ACOSTA, P.J.:

This is a Petition for Review filed before the Court of Tax Appeals on May 11, 2007, seeking the cancellation and setting aside of the Warrant of Distraint and/ or Levy No. 0307-01 dated J\tfarch 23, 2007 1 issued by respondent for the collection of alleged deficiency income tax, fringe benefit tax, final withholding tax, value-added tax, documentary stamp tax, expanded withholding tax, withholding tax on compensation, and final tax of petitioner covering taxable year 2003 totaling P31,676,634.65.

I Exhibit "L ".

197 )

The facts of the case are as follows:

y Petitioner is a wholly owned subsidiary of Ishida Co., Ltd. of Japan and is principally engaged in the business of manufacturing stainless and ordinary steel pipes and tubings, structural steel and other metallic goods. It is duly registered wid1 the Bureau of Internal Re\~enue with Tax Identification Number 202-935- 083-000.2 Its principal place of business is at First Cavite Industrial Estate, Brgy. Langkaan, Damariiias, Cavite.

On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue, the government agency charged with d1e assessment and collection of all national internal revenue taxes, fees, and charges, as well as the enforcement of all forfeitures, penalties, al1d fines connected therewith. He holds office at the BIR National Office, Diliman, Quezon City. Sometime during the fourth quarter of the year 2005, petitioner received a "PrelinUnary Fifteen (15) Day Letter" dated October 3, 2005 from respondent. It states that upon investigation, deficiency taxes were found against petitioner and that the latter had fifteen days from receipt thereof to submit a reply or arrange for a conference where its objections may be raised. The said letter furd1er states that petitioner's failure to respond will result in the issuance of the corresponding assessn1en t notice. 3 On October 18, 2005, petitioner requested for an extension of time within which to file its position paper in relation to the preliminary fmdings of d1e

I

respondent. 4 On October 27, 20051, petitioner was ~ ble to flle the said position paper. 5

1 Exhibit "D"

3 Exhibit "E"

'Exhibit "F"

5 Exhibit "G "

19S

In reply, respondent wrote petitioner on N ovember 7, 2005, requesting for an informal conference on N ovember 14, 200.5. 0 On May 22, 2006, a "Prelin:Uoary Assessment N otice" (PAN) was issued against petitioner. Among others, it informed petitioner that pursuant to Section 228 of the National Internal Revenue Code (NIRC) and its Implementing Rules and Regulations (IRR); petitioner is given the opportunity to present its side in . writing and that failure to respond will resul t to d1e issuance of ilie formal letter of demand and assessment notice.7 Then, sometime the first quarter of 2007, petitioner received from respondent a "Final N otice Before Seizure" dated January 2, 2007.8 And on April 11 , 2007, respondent served upon petitioner a "Warrant of Distraint and/ or Levy No. 0307-01 dated March 23, 2007, ordering seizure of its properties.9 Thus, on May 11, 2007, ilie instant Petition for Review was flied seeking the cancellation of ilie Warrant of Distraint and/ or :j:.,evy dated N(arch 23, 2007. The sole issue for this Court's rbolution 1s whether d1e Warrant of Distraint and/ or Levy is valid and enforceable, even if no formal assessment notice and prelirninary collection letter were ever received by petitioner. Petitioner der:Ues receipt of the Final Assessment Notice and Prelinllnary Collection Lett~r allegedly issued by .respondent on July 14, 2006 and November 22, 2006, respectively. It claims that it even went to Revenue District 54 after its receipt of ilie Warrant of Distraint and/ or Levy to get a copy of ilie alleged Final

6 Exhibit "H "

7 Exhibit "/"

8 Exhibit "K"

if Supra.

199

Assessment Notice and Preliminary Collection Letter. Petitioner claims that it even attempted to obtain information from the Dasmariiias Postal Office on whether the Formal Letter of Demand was duly served and received by any duly authorized representative of petitioner.

However, since respondent's District Office cannot locate its records on petitioner, the alleged Postal Registry Receipt Number cannot likewise be found.

Petitioner maintains that a mail matter is deemed received by the addressee in the ordinary course of mail is merely a disputable presumption. The moment the addressee-taxpayer denies bavi.tig rec~iveJ the letter-assessment notice, the burden shifts to the sender-respondent to prove receipt thereof by the former. Petitioner also argues that is was denied due process when respondent issued the Warrant of Distraint a t~d / or Levy i.n question without ftrst issuing a Formal Assessment Notice or at least serving the same to petitioner. Petitioner was therefore not g-iven a chance to refute the allegations that it has unpaid deficiency taxes and was caught by surprise when the Final Notice Before Seizure and the Warrant of Distraint and/ or Levy were served upon it. Petitioner avers that the due process requirements 111 the issuance of a deficiency tax assessment are laid down i.n Section 3 of Revenue Regulations No. 12-99, which provides the need for (1) a notice of informal. conference, (2) a preillTlinary assessment notice, (3) a formal letter of demand and assessment notice sent to the taxpayer. Evidently, respondent failed to comply witl1 the third requirement. According to petitioner, this fa~ure is fatal to the validity of the Warrant of Distraint and/ or Levy, since it can only be issued upon the expiration of the time required to pay the delinquent tax, which in turn presupposes tl1e existence of a formal letter of demand or assessment notice. Further, even assuming for the sake of argum~;1t that tl1ere is really a formal letter of demand (FAN), both tl1e FAN and the warrant should remain i.twalid because of fL- 20 0 t respondent's failure to comply with the requirement of servmg them to the taxpayer.

Petitioner claims that it cannot be said to be a delinquent taxpayer when it was not informed of any tax liabilities clue from it. When there is no FAN, there should also be no failure on ~:e part of p~titioner to pay the tax at the time required pursuant to Section 207 of the National Internal Revenue Code of 1997. It also asserts that the fmal notice before seizure issued by respondent is not sufficient to be treated as the assessment notice to inform petitioner of the I · .

factual and legal bases of the internal revenue tax liabilities being assessed against it.

The Court finds merit in tl1is Petition.

Section 228 of the National Internal Revenue Code (NIRC) does not only require that there must be an investigation and deterrnination of taxpayer's liability; but also requires tl1e Commissioner or his duly authorized representative to send a notice of assessment to the taxpayer, to give the latter the opportunity to file a protest.

An assessment is deemed made, only when the same is actually received by the taxpayer. In Commission er of Internal Revenue vs. Az ucena T R eyes, 10 the Supreme Court categoricaUy ruled that if there is no valid notice sent, the assessment is void.

The reason being: "[tjhe law imposes a substantive, not

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merely a formal, requirement. To 1:>roceed heedlessly with tax collection witl1out first establishing a valid assessment is eviclenLly violative of the cardiqal principle in admiriistrative investigations: that taxpayers should be able to present t~eir case d dd · ·d , r~ l\U a uce supporung ev1 ence.

· .10 G.R. Nos. 159694 and 163581, JamtGI)' 27. 2006 (480 SCRA 382).

Page 7 of I4

upon petitioner on April 11, 2007, beyond the ten (10) day period within which the warrant must be served after its issuance. ·rt also states that petitioner tried to obtain a copy of the alleged Final Assessment Notice (FAN) and the Preliminary Collection Letter, but the docket containing the FAN and the said letter, could not be found in BIR Revenue District Office No. 54. She also testified that petitioner could not even verify with the Postal Office whether there was indeed a Formal Letter Demand duly served and received by any duly authorized representative of petitioner, since it could not get hold of the Postal Registry · ~eceipt Number covering the mailing of the FAN, as it was allegedly in the docket that could not be found. Further, she testified that petitioner did not execute any Waiver of the Defense of Prescription for its tax liabilities for the year 2003.14 On March 28, 2008, petitioner ftled the Judicial Affidavit of Mamoru Hirabayashi its company presiden1t since 2003.

He. corroborated the above testimony of Annielee Tapawa regarding petitioner's non-receipt of the FAN. He stated that he is certain that no FAN or Prelinunary Collection Letter was received by the company because all letters addressed to petitioner are given to its Head Accountant, who in turn is dixectly accouqtable to him. The Head Accountant, according to Mr. Hirabayashi, informs him of all urgent matters such that there is no possibility that the former received such letter and did not refer the same to 11.im.15 On May 29, 2008, another Judicial Affidavit of Annielee Tapawan was ftled by petitioner.

In tlus affidavit, she stated that petitioner wrote to inform respondent that it was surprised to have received a Final Notice before Seizure because it has not received any Formal Letter of Demand or a Final Assessment Notice; even with the protest was filed against the Preliminary Assessment Notice. 16 14 Exhibits "M" and "N".

Jj Exhibit "0".

16 Exhibit "Q".

203 . ' . .

Page 8 of I4

Under Sections 207 (A) and (B) of the National Internal Revenue Code (NIRC), distraint of P,ersonal property and levy on real property shall be done upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required. And Section 228 of the NJRC provides for the " ' procedure of assessing taxes which results in the taxpayer's delinquency. Section 228 provides:

"SEC. 228.

Protesting of Assessment. -

When the

Commissioner or his dul'y . ~uth6rized representative finds that proper taxes should be assessed, he sha.ll first notify the taxpayer of his findings: Provider/, hoJJJever, That a pre-assessment notice shall not be required in the following cases:

(a) Wh~n the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) W~en an article locally purchased or in1poi:ted by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non- exempt persons.

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

Within a period to be prescribed by implementing rules and regulations, the ta?Cpayer shall be requiJ:ed to respond to said notice. If the . taxpayer fails to respond, the Commissioner or his duly authorized representative shall 1ssue an assessment based on his Endings.

Such assessment m~y be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become flnal.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely' affected by the decision or inaction may appeal to the Court of Ta.x Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become flnal, executory and demandable." (Empbasis Supplied) From the language of the law, when the respondent or his duly authorized representative flnds that proper taxes should ~e assessed, a written notice to the taxpayer informing him of the law and the facts upon which the assessment is based is necessary.

The law imposes a substantive, not merely a formal, ' requirement. The essence of Section 228 is due process, that is, the taxpayer shall be accorded the opportunity to present his side and prove his defenses. · Reading Section 228 with Sections 207(A) and (B), no taxpayer should be considered delinquent unless there has been a. previous demand to pay taxes which remained unheeded. The taxpayer should be informed of its as?essed deficiency taxes. This has been settled in Commissioner of Intemal R evenue vs. PASCOR R ealty and Dev't. Corp., et al. 17, where the Supreme Court held that: "An assessn1ent contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the tirne when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to deterrnine t~ 17 G.R. No. 1283 15, June 29, /999. · 205 his remedies thereon, due process requires that it must be served on and received by the taxpayer. Xxx To start with, assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to be coUected from the date prescribed for its payment until the fuU payment.

The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was s ubnu ~ ted or in case of failure to ftle a return. Also, Section 228 of the same law states that said assessment may be protested only within thirty days from receipt thereof. N ecessarily, the taxpayer must be .certain that a: specific document constitutes an assessmen t.

O therwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accm e thereon.

It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such noti'ce to the taxpayer." (Emphasis

Supplied)

The above is further bolstered by the process of the assessment of taxes as set forth in Revenue Regulations 12-99 18:

..

"SECTION 3.

Due Pmcess Requirement 111 the

Issuance of a Deficiency Tax Assessment. - •.

18 Implementing the Provisions of the Nationallnternall?et•enue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Ta'res, Ci1•il Penalties and Interest and the Extra-judicial Selllement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested

Compromise Penalty

3.1 Mode of procedures tn 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 taxpayei' is liable for'cleficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, tl1e 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' cliscreJ1a:Ocy or discrepancies in t11e taxpayer's payment of his internalrever:ue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer witl1 an opportunity to present his side of the case. If tl1e taxpayer fails to respond within fifteen (15) clays 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 the Revenue H .. egional Office, or the Chief of Division in ilie 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 tl1e 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 tl1e 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 (see illustration in ANNEX A hereof). If t11e taxpayer fails to respond witlun fifteen

(15) clays from date of receipt of ilie PAN, he shall be considered in default, in which case, a formal leuer 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.

3.1.3 Exceptions to Prior Notice of the Assessment. - The notice for inf~rmal conference ati.d the preliminary assessment 207 notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency ta~ liability shall be sufficient: xxx 3.1.4 Formal Letter of D em and . and Assessm ent N otice. - The formal letter of demand and assessment notice shall be issued by the Comm.issioner 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 xxx. The same shall be sent to the taxpayer only by registered mail or by personal ~elivery . If sent by p,ersonal delivery, the taxpayer or his duly autlio1:ized rei)resentative shall acknowledge receipt thereof in tl1e duplicate copy . of the letter of demand, showing tl1e following: (a) His nam.e; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other tl1an tl1e taxpayer himself; and (d) date of receipt thereof."

The Commissioner or his duly autl1orized representative is required to send · a notice of the assessment against the taxpayer in order to give the latter an opportunity to ftle a protest. Ancf that an a sse ~ sment is only deemed made when it has been actually received by the taxpayer. Clearly, there is a need to inform the taxpayers of the assessment against them. The receipt of the assessment against tl1em will commence tl1e entire process in Section 228 of tl1e National Internal Revenue Code. Without the assessment, the taxpayer cannot be considered in default so as to serve basis for tl1e issuance of a Warrant of Distraint and/ or Levy. This assessment should be taken to mean the Final Assessment Notice and the Formal Letter of Demand which demands payment of tl1e taxpayer's deficiency tax ass.essment. The PAN, which was issued against petitioner is only a proposed assessment, and even if the taxpayer failed to respond thereto, such failw:e will at most, only lead to tl1e issuance of tl1e Final Assessment Notice (FAN) together with ilie Formal Letter of Demand.

It is tl1e FAN nr the Formal Letter of ' · Demand which should be protested and which shall, absent any protest, attain 208 finality, and which can setve as basis for the issuance of the Warrant of Distraint and/ or Levy.

This Court ftnds merit 111 petitioner's argument that the meanll1g of procedural due process is that a party to a case must be given sufficient opportunity to be heard. Its very essence is to allow all parties the opportunity to present evidence.

In sum, having been declared in default, respondent failed to clischarge its duty of proving receipt by petitioner of the Fonnal Letter of Demand and Assessment Notice. The Court holds that since there is no assessment to begin with, petitioner cannot be considered a delinquent taxpayer. Consequently, there is no basis for the issuance of the Warrant of Distraint and/ or Levy. ACCORDINGLY, tl1e instant Petition for Review is hereby GRANTED. The Warrant of Distraint and/ or L~vy dated1vfarch 23; 2007 for the collection of the alleged internal revenue tax liabilities of petitioner for 2003 is hereby CANCELLED and SET ASIDE.

Presiding Justice

JZ-

CAESAR A. CASANOVA

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII 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. 210

L~-

o~- ERNEsro D . ACOSTA

Presiding Justice