Commissioner of Internal Revenue vs. Meinan Philippines, Inc.

DECISION

CASTANEDA, JR., J.:

Before the Court En Bane is a Petition for Review¹ which seeks the reversal of the Decision dated January 18, 2018,² (assailed Decision) as well as the Resolution dated May 29, 20183 (assailed Resolution) of the First Division (Court in Division)4 of this Court in CTA Case No. 8839 entitled Meinan Philippines, Inc. v. Commissioner of Internal Revenue. J-

CTA EB No. 1873 (CTA Case No. 8839)

The respective dispositive portions of the assailed Decision and Resolution are quoted hereunder:

Assailed Decision:

"WHEREFORE, premises considered, the Petition for Review is GRANTED. Accordingly, the assessment and the Final Decision on Disputed Assessment dated April 1, 2014 for alleged deficiency income tax and fringe benefits tax in the respective amounts ofP2,519,352.27 and P984,180.53 or in the aggregate amount of P³,503,532.80 for calendar year 2007 is CANCELLED.

Assailed Resolution:

"WHEREFORE, premises considered, respondent's

Motion

for

Partial

Reconsideration

(Re:

Decision

promulgated 18 January 2018) is DENIED for lack of merit.

THE FACTS

As found by the Court in Division in its Decision dated January 18, 2018, the facts of the present case are as follows: 5 "Petitioner Meinan Philippines, Inc. is a corporation organized and existing under Philippine laws, with principal office address at 107 East Main Avenue, Laguna Techno Park, Bifian City, Laguna. It is registered with the Philippine Economic Zone Authority (PEZA) pursuant to the provisions of Republic Act (R.A.) No. 7916 as an Export Enterprise under Certificate of Registration No. 95-141 dated December 13, 1995. It is also registered with the Bureau of Internal Revenue (BIR), with Taxpayer's Identification Number (TIN) 004-826- 435-000. J'V

CTAEBNo. I873(CTACaseNo.8839)

Respondent is the duly appointed Commissioner of the BIR who 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 (NIRC) or other laws or portions thereof administered by the BIR. He holds office at 5th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City.

Petitioner filed with the BIR its Annual Corporate Income Tax Return (BIR Form No. 1702) and Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits (BIR Form No. 1603) for CY 2007 on the following dates:

Period Covered

Calendar Year 2007

Period Covered

(Calendar Year 2007)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

Date of Filing of Annual

Income Tax Return

April 15, 2008

Date of Filing of Quarterly

Remittance Return of Final

Income Taxes Withheld on

Fringe Benefits

April 10, 2007 July 9, 2007 October 10, 2007 January 10, 2008 On September 5, 2008, petttioner received Letter of Authority (LOA) No. 2007-00032921 dated August 21, 2008, authorizing BIR Revenue Officers to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for CY 2007.

Respondent issued a Notice for Informal Conference on September 16, 2010, requesting petitioner to appear for an informal conference to present its side of the case. On May 11, 2011, petitioner received a copy of the Preliminary Assessment Notice (PAN) dated May 3, 2011 with Details of Discrepancies issued by Regional Director Rodita B. Galanto, informing petitioner of its alleged tax deficiencies for 1!-

CTA EB No. 1873 (CTA Case No. 8839) income tax and fringe benefit tax in the total amount of P19,876,931.52. Due to the voluminous character of the documents, petitioner requested for a thirty (30)-day extension or until June 10, 2011 within which to file a reply to the PAN on May 18, 2011. On May 31, 2011, petitioner submitted a reply to the PAN.

On June 30, 2011, petitioner received a Formal Letter of Demand (FLD) dated June 23, 2011 with Assessment Notices and Details of Discrepancies for deficiency income tax and FBT for CY 2007 in the total amount of P20,085,116.76. On July 28, 2011, petitioner filed its Protest Letter to the FLD. On

September

15, 2011, petitioner submitted voluminous documents in support of its protest. On May 24, 2014, petitioner received the copy of the FDDA dated April 1, 2014 issued by Regional Director Jose N. Tan, finding petitioner liable for alleged deficiency income tax and fringe benefit tax for CY 2007 in the total amount of P3,503,532.80.

Petitioner then filed the instant Petition for Review on June 23, 2014.

Respondent filed his Answer on September 25, 2014, interposing the following Special and Affirmative Defenses: 'SPECIAL AND AFFIRMATIVE DEFENSES

5. She reiterates and re-pleads the preceding paragraphs of this Answer as part of her Special and Affirmative Defenses.

6. The assessment for deficiency Income Tax in the amount of P2,519,352.27 and Fringe Benefits Tax in the amount ofP984,180.53 for taxable year 2007 was made in accordance with law, rules and jurisprudence.

RESPONDENT

OBSERVED

BOTH AND SUBSTANTIAL

(sic)

DUE

PROCESS

IN

ISSUING THE ASSESSMENT.

7. Respondent accorded procedural and substantial (sic) due process to petitioner in issuing the assessment ~

CTA EB No. I 873 (CTA Case No. 8839) subject of this case. The Letter of Authority (LOA),

Notice

for

Informal

Conference,

Preliminary

Assessment Notice, Formal Letter of Demand with

Audit Result/Assessment Notice and Final Decision

on Disputed Assessment were issued in accordance with law, rules and jurisprudence.

8. Petitioner was also informed of the factual and legal basis of the assessment. The Preliminary Assessment Notice, Formal Letter of Demand with Audit

Result/ Assessment Notice and Final Decision on

Disputed

Assessment

indicated not only the deficiency tax involved, surcharge and interest due thereon, but also sufficiently stated the facts, the law, rules and regulations on which the assessment is based.

9. Petitioner's allegation that the conduct of assessment is not covered by a valid LOA as the Revenue Officers failed to conduct and complete the audit within 120-day period is untenable. On the contrary, the validity of the LOA should not be put in issue as the LOA was revalidated on 20 November 2009 as found on page 554 of the BIR Records.

RESPONDENT/'S] RIGHT TO

ASSESS

PETITIONER

DEFICIENCY INCOME AND

FRINGE BENEFIT TAX DID

NOT LAPSE.

10. Anent petitioner's allegation that the assessment for deficiency income and fringe benefit tax has already prescribed; the same is manifestly misplaced. 10.1 First, petitioner alleged that it filed its Annual Income Tax Return for calendar year 2007 on 15 April 2008 and that respondent has until 15 April 2011 within which to assess for deficiency income tax;

while the Formal Letter of Demand/Formal Assessment Notice was issued on 23 June 2011 and supposedly received on 30 June 2011.

10.2 Second, petitioner further alleged these dated pertaining to Fringe Benefit Tax, quoted herewith to wit: Cf'v

CTA EB No. I873 (CTA Case No. 8839)

Fringe Benefits Tax

Quarter

Date of Filing

Prescription

Date of

Assessment

First Quarter

10 April 2007

25 April 2010

23 June 2011

Second Quarter

09 July 2007

25 July 2007

23 June 2011

Third Quarter

10 October

25 October

23 June 2011

2007 2010

Fourth Quarter

10 January

25 January

23 June 2011

2008 2011 10.3 However, a

Waiver of the

Defense

of Prescription under the Statute of Limitations of

the National Internal Revenue

Code was executed extending the period to assess petitioner until31 December 2011.

10.⁴ Assuming that the

Formal

Letter

of Demand/Final Assessment Notice were issued on 23 June 2011 and supposedly received on 30 June 2011, the aforesaid assessment was clearly received before 31 December 2011.

10.⁵ Thus, the period of respondent to assess petitioner for deficiency income and fringe benefit tax did not lapse.

THE ASSESSMENT ISSUED

AGAINST PETITIONER

IS

VALID AND LAWFUL.

11. Assessments are presumed correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. (Marcos II vs. Court of Appeals, G.R. No. 120880, June 5, 1997)

12. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but the taxpayer is right. Otherwise the presumption of correctness of tax assessment stands (Commissioner of Internal Revenue vs. Hantex ?'--

CTA EB No. I873 (CTA Case No. 8839)

Trading Co., Inc., G.R. No. 136975, March 31, 2005). The presumption in favor of the correctness of tax assessment stands where evidence to the contrary is wanting. Hence, the assessment issued against petitioner is imbued with factual and legal bases.

13. All presumptions are in favor of the correctness of tax assessments (Sy Po vs. Court of Tax Appeals, 164 SCRA 524). Dereliction on the part of petitioner to satisfactorily overcome the presumption of regularity and correctness of the assessment will justify the judicial upholding of said assessment notice.

PETITIONER IS LIABLE TO

PAY

FOR

DEFICIENCY

INCOME

TAX

IN

THE

AMOUNT OF P2,519,352.27

AND FRINGE BENEFIT TAX

IN

THE

AMOUNT

OF

P984,180.53 FOR TAXABLE YEAR 2007.

14. Respondent posits that the deficiency income tax assessment issued against petitioner must stand as supported by the following factual and legal basis as stated in the Final Decision on Disputed Assessment dated 01 April2014, portion of which is incorporated hereunder, to wit:

I.

INCOME TAX

Additional Taxable Income

P29,340,592.27

Tax Due

P1,467,029.61 Add: Interest from 04-16-08 to I 0-15-

II

Pl,027,322.66

Compromise Penalty

25,000.00

Total Amount Payable

P2,519,352.27 II. FRINGE BENEFIT TAX

Grossed-up Monetary Value

P2,678,411.97

FBT Rate

32%

Fringe Benefit Tax Due Per Audit

p 857,091.83

Less: FBT Paid

306,174.65

Deficiency FBT

550,917.18 Add: interest from 01-16-08 to 10-15-

II

413,263.35

Compromise Penalty

20,000.00

Total Amount Payable

p 984,180.53 '1-

CTA EB No. 1873 (CTA Case No. 8839)

The aforesaid assessments are premised on the following: 1.

INCOME TAX

-Disallowed Cost of Sales (16,063,373.00) - In relation to Section 24 of R.A. 7916 'five percent (5%) of the gross income earned by all business and enterprises within the ECOZONE shall be remitted to the national government'. As implemented by Section 3 of RR No. 11-2005, 'gross income earned shall refer to gross sales or gross revenue derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus cost of the sales or direct costs but before any deduction is made for administrative, marketing, selling/or operating expenses incidental losses during a given taxable period.' (emphasis and italics supplied). Audit disclosed that your various expenses were included in the aggregate amount of cost of sales, hence, disallowed pursuant to R.A. No. 7916 and RR No. 11-2005.

Employee Benefits

Rental Expenses

Repairs and Maintenance

Outside Services

Retirement Benefits

Transportation and Travel

Total Disallowed Expenses

p 11,022,852.00 1,004,245.00 1, 758,902.00 1,709,415.00 463,257.00 104,702.00 P16,063,373.00 -Salaries and wages not subjected to withholding tax (Pl3,277,219.27). Verification disclosed that the portion of the salaries and wages (direst [sic] cost) were not subjected to withholding tax in violation of the provision of Section 34(k) of the National Internal Revenue Code, hence, disallowed.

Salaries and Wages Claimed per ITR

Less: Salaries and Wages per Alphalist

Discrepancy

Less: Allocated to Operating Expenses

Net Discrepancy

2. FRINGE BENEFIT TAX P 46,5 I 5,748.00 29,142,485.73 17,373,262.27 4,096,043.00 13,277,219.27 - Verification disclosed that various expenses were not subjected to fringe benefit tax, hence, assessed pursuant to the provision of Section 33(B) and (C) of 1997 [National Internal Revenue Code].

Fringe Benefit Expenses (Per Return) Value of Benefits GMV Factor

Grossed-up Monetary Value

Interest on

p 1,358.00 100% p 1,358.00 ~

CTA EB No. I 873 (CTA Case No. 8839)

Loans

Condo Rentals

House Rentals

I, I 09,052.64 189,473.64 I ,299,844.28

Additional Fringe Benefit per Audit

50% 554,526.32 50% __ ___c:9..cc4•c.c73::..:6o:..:;. 8""2'- 650,621.14 113/2007

PV

19812

Southern Sky Travel & Tours

24,093.00 100% 24,093.00 1/23/2007

PV

19089

Southern Sky Travel & Tours

43,671.50 100% 43,671.50 2/1/2007

PV

19173

Canlubang Golf & Country Club

2,600.00 100% 2,600.00 2/7/2007

PV

19214

Southern Sky Travel & Tours

33,623.50 100% 33,623.50

XXX

XXX

XXX

12/13/2007

PV

21709

Southern Sky Travel & Tours

5,490.00 100% 5,490.00

Total Additional

Total Value of Fringe Benefit per Audit

1,170.699.00 1,170.699.00 1,821.320.14 The records of this case disclosed that you have not introduced any evidence to overthrow the validity of our findings despite the notice/letter dated November 23, 2012 issued by our Revenue District Office No. 57 -Binan City.

DEFICIENCY INCOME TAX

15. The enumeration of direct costs under Revenue Regulations No. 11-2005 is an exclusive list of expenses which can be deducted from the gross revenue for the purpose of computing the five percent ( 5%) of gross income earned.

16. Revenue Regulations No. 11-2005 (Regulations

Defining 'Gross Income Earned' to Implement the

Tax Incentive Provision in Section 24 of Republic

Act No. 7916, otherwise known as 'The Special Economic Zone Act of 1995' Revoking Section 7 of Revenue Regulations No. 2-2005, and Suspending

the Effectivity of Certain Provisions of Revenue

Regulations No. 2-2005) provides, to wit: 'Section 3. Gross Income Earned- for purposes of implementing the tax incentive of registered Special Economic Zone (ECOZONE) enterprises in Section 24 of Republic Act No. 7916, the term 'gross income earned' shall refer to gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and r

CTA EB No. 1873 (CTA Case No. 8839) minus cost of sales or direct cost but before any deduction is made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period.

For purposes of computing the total five percent (5%) tax rate imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned for specific types of enterprise:

1. ECOZONE

Export

Enterprises,

Free

Trade

Enterprises and Domestic Market Enterprises:

Direct salaries, wages or labor expenses Production supervision salaries Raw materials used in the manufacture of products

Decrease in Goods in Process Account

(Intermediate goods)

Decrease in Finished Goods Account

Supplies and fuels used in production Depreciation of machinery and equipment used in production, and of that portion of the building owned or constructed that is used exclusively in the production of goods Rent and utility charges associates (sic) with building, equipment and warehouse used in production Financing charges associated with fixed assets used in production the amount of which were not previously capitalized

2. ECOZONE Developer/Operator, Facilities, Utilities

and Tourism Enterprises:

Direct salaries, wages or labor expense Service supervision salaries Direct materials, supplies used Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the building owned or constructed that is used exclusively in the rendition of registered service Rent and utility charges for building and capital equipment used in the rendition of registered services Financing charges associated with fixed assets used in the registered service business the amount of which were not previously capitalized.'

17. The above stated statute is clear and categorical. To arrive at the Gross Income Earned subject to the preferential tax rate of five percent (5%), these are 'r-

DECISION

CTA EB No. I873 (CTA Case No. 8839)

Page II of23

explicitly enumerated direct costs which can be deducted from the gross sales or revenues of respondent. These enumerations are exclusive and cannot be enlarged or extended to include deductions not indicated therein.

18. Petitioner deducted expenses from its gross sales/revenues which were not enumerated as direct costs. As a result, the Revenue Officers disallowed expenses amounting to Pl⁶,063,373.00 pursuant to R.R. No. 11-2005.

19. It must be stressed that the BIR Rulings cited by petitioner do not apply in the instant case since these are based only on a set of facts as represented by a taxpayer and made applicable only to the facts and circumstances thereto. Thus, it is not a bar on the government to enforce its power to tax.

20. Likewise,

Salaries

and

Wages

amounting to Pl3,277,219.27 were also not subjected to the required withholding tax. Hence, it was disallowed as deduction pursuant to Section 34 (K) of the NIRC.

DEFICIENCY

BENEFIT TAX

FRINGE

21. With regard to the deficiency Fringe Benefit Tax, the total value per audit amounted to P1,821,320.14 divided by the grossed up monetary factor of 68% which is equivalent to P2,678,411.97 grossed up monetary value.

22. A more detailed computation of which IS stated herewith, to wit:

FRINGE BENEFIT TAX

Fringe Benefit per Schedule of Quarterly Returns

Add: Expenses per Audit

Value of Fringe Benefits

Divided by: Grossed up Monetary Factor

Grossed-up Monetary Value

FBT Rate

Fringe Benefit Tax Due Per Audit

Less: FBT Paid

Deficiency FBT

Add: interest from 01-16-08 to I 0-15-11

Compromise Penalty

p 650,621.14 1,170,699.00 1,821,320.14 68% p 2,678,411.97 32% p 857,091.83 306,174.65 550,917.18 413,263.35 ----=2-'-'0,.o.c00-'-0 .-'-00'--- tft.-

CTA EB No. I873 (CTA Case No. 8839)

Total Amount Payable

p 984,180.53

23. Various expenses not subjected to Fringe Benefit Tax were assessed pursuant to Section 33 (B) and (C) of theNIRC.

24. Thus, petitioner is liable to pay for deficiency income tax in the amount of P2,519,352.27 and Fringe Benefit Tax in the amount ofP984,180.53 for taxable year 2007.

25. As decreed by the Honorable Supreme Court: 'Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.'

26. Well settled in the field of taxation - the burden of proof is on the taxpayer to present evidence to show the incorrectness of the assessment. Petitioner miserably failed to provide any concrete proof to justify its claim in assailing the assessments issued against it.' The case was scheduled for Pre-Trial Conference on May 7, 2015. Petitioner's Pre-Trial Brief was filed on January 22, 2015; while respondent's Pre-Trial Brief was filed on April 20, 2015.

The parties filed their Joint Stipulation of Facts and Issues on May 27, 2015, which was approved by the Court via Resolution dated June 8, 2015.

Petitioner presented witnesses Evelyn Villaroya and Loraine Padilla on October 20, 2015, Salvador Fontilo, Jr. on November 24, 2015, and Independent Certified Public Accountant George V. Villaruz on February 18, 2016. On February 26, 2016, petitioner filed its Formal Offer of Exhibits, offering Exhibits 'P-1 ', 'P-2', 'P-4', 'P-4a', 'P-5 ', 'P- 7z-

CTA EB No. 1873 (CTA Case No. 8839)

6’, ‘P-7°, ‘P-9’, ‘P-10’, ‘P-11’, ‘P-12’, ‘P-13’, ‘P-14’, ‘P-16’, ‘P-17’, ‘P-18’, ‘P-19’, ‘P-19-a’, ‘P-19-b’, ‘P-20’, ‘P-21’, ‘P- 22’, ‘P-23’, ‘P-24’, ‘P-25.1’ to ‘P-25.474’, ‘P-26.1’, ‘P-27.1” to *P-27.88’, ‘P-28.1" to ‘P-28.10’, ‘P-29.1’, ‘P-34’, ‘P-34-1’, ‘P- 35’, ‘P-35-1’, ‘P-36’, ‘P-36-1’, ‘P-37’, ‘P-37-a’, ‘P-38’, ‘P-38- 1’, ‘P-39’, and ‘P-39-1’ as its documentary evidence. Respondent filed his Comment (Re: Formal Offer of Exhibits) on March 7, 2016.

In the Resolution dated April 14, 2016, the Court admitted Exhibits ‘P-2’, ‘P-4’, ‘P-4a’, ‘P-5’, ‘P-6’, ‘P-7’, ‘P-9’, ‘P-10’, ‘P-11’, ‘P-12’, ‘P-13’, ‘P-14’, ‘P-16’, ‘P-17’, ‘P-18’, ‘P- 19-b’, ‘P-20’, ‘P-21’, ‘P-24’, ‘P-25.1’ to ‘P-25.474’, ‘P-26.1’, ‘P-27.1’ to ‘P-27.88’, ‘P-28.1’ to ‘P-28.10’, ‘P-29.1’, ‘P-34’, *P-34-1’, ‘P-35’, ‘P-35-1’, ‘P-36’, ‘P-36-1’, ‘P-37’, ‘P-37-a’, ‘P-38’, ‘P-38-1’, ‘P-39’, and ‘P-39-1’, but denied the admission of Exhibits ‘P-1’, ‘P-19’, ‘P-19-a’, ‘P-22’, and ‘P-23’.

Petitioner filed a Motion for Reconsideration on May 4, 2016; while respondent filed his Comment/Opposition (Re: Motion for Reconsideration dated 03 May 2016) on May 24, 2016. The Court granted petitioner's Motion for Reconsideration and admitted Exhibits ‘P-1’, ‘P-19’, ‘P-19-a’, ‘P-22’, and ‘P-23’ in the Resolution dated June 22, 2016.

Petitioner's documentary exhibits are as follows:

Exhibit: Description:

Secretary’s Certificate duly notarized on 20

Po June 2014

P-2 Meinan Philippines, Inc.’s BIR Certificate of Registration No. 1RC0000505954 PEZA-ERD Form No. 97-01 dated 09 January

Po 2007

PEZA-ERD Form No. 03-01 dated 09 January

P-4a 2007

BIR Form No. 1702Q electronically filed on P-5 24 May 2007 covering the Ist Quarter of

FY2007

BIR Form No. 1702Q electronically filed on P-6 24 May 2007 covering the 2nd Quarter of

FY2007

BIR Form No. 1702Q electronically filed on P-7 26 November 2007 covering the 3rd Quarter of FY2007 $e

CTA EB No. !873 (CTA Case No. 8839)

P-9

P-10

P-11

P-12

P-13

P-14

P-16

P-17

P-18

P-19

P-19-a

P-19-b

P-20

P-21

P-22

P-23

P-24

P-25.1 toP- 25.474 P-26.1 P-27.1 toP- 27-88 P-28.1 toP- 28.10 BIR Form No. 1603 electronically filed on 10 Apri12007 covering the 1st Quarter ofFY2007 BIR Form No. 1603 electronically filed on 09 July 2007 covering the 2nd Quarter ofFY2007 BIR Form No. 1603 electronically filed on 10 October 2007 covering the 3rd Quarter of

FY2007

BIR Form No. 1603 electronically filed on 10 January 2008 covering the 4th Quarter of

FY2007

Letter of Authority No. 2007 00032921 dated

21 August 2008

Notice oflnformal Conference dated 16

September 20 10

Preliminary Assessment Notice (PAN) dated

03 May 2011

Petitioner's Request Letter for extension of time to file PAN filed on 18 May 2011 Petitioner's Reply to PAN filed on 31 May 2011 Audit Results/Assessment Notice OCN No. A57-0190-0191-ll amounting to Phpl9,138,066.54 Audit Results/ Assessment Notice OCN No. A 57-0190-0191-11 amounting to Php947,050.22 Formal Letter of Demand dated 23 June 2011

Petitioner's Protest Letter to the Formal Letter

ofDemand (FLD/FAN) filed on 28 July 2011

Petitioner's Transmittal Letter of the

supporting documents filed on 15 September 2011 Notice oflnformal Conference dated 28

September 20 11

Petitioner's Transmittal Letter filed on 02

January 2012

Final Decision on Disputed Assessment dated

01 April2014

Payment vouchers, request for payment, purchase orders, official receipts, payroll register, SSS, Pag-Ibig and Phi!Health remittance forms and debit advices related to

the 'Employee Benefits' and/or

'Salaries/Wages'

Lease contracts/agreements Payment vouchers, request for payments, sales invoices, delivery receipts, official receipts related to 'Repairs and maintenance' Payment vouchers, accounts payable vouchers, sales invoices and fund transfer forms related to 'Outside services'pv

CTA EB No. 1873 (CTA Case No. 8839)

2003 actuarial report prepared by E.M.

P-29.1 Zalamea Actuarial Services, Inc.

Amended Judicial Affidavit of Evelyn

P-34 .

Villaroya

P-34-] Signature of Evelyn Villaroya

P-35 Amended Judicial Affidavit of Loraine Padilla

P-35-1 Signature of Loraine Padilla

Amended Judicial Affidavit of Salvador

P-36 .

Fontillo, Jr.

P-37 Judicial Affidavit of George V. Villaruz dated

26 October 2015

P-37-a Signature of George V. Villaruz P-38 Judicial Affidavit of George V. Villaruz dated

09 February 2016

P-38-a Signature of George V. Villaruz

Report on Examination and Verification

Documents Supporting the Company’s Protest

P-39 against BIR’s Tax Assessments for the Period covered 01 January 2007 - 31 December 2007 per CTA Case No. 8839 P-39-1 Signature of George V. Villaruz Respondent presented his witnesses Jimmy E. Belen, Jr. and Teresita D. Tibayan on July 26, 2016, Sonny Boy G. Lambarte on August 23, 2016, and May C. Gimeno on September 27, 2016.

On September 29, 2016, respondent filed his Formal Offer of Documentary Evidence offering Exhibits ‘R-1’, ‘R-2’, *R-3’, ‘R-4’, ‘R-5’, ‘R-6’, ‘R-6-a’, ‘R-7’, ‘R-8’, ‘R-9’, ‘R-10", *R-11’, ‘R-12’, ‘R-13’, ‘R-13-a’, ‘R-13-b’, ‘R-14’, ‘R-15’, ‘R- 16’, ‘R-17’, ‘R-18’, ‘R-19’, ‘R-20’, ‘R-21’, ‘R-22’, ‘R-23’, ‘R- 24’, ‘R-25’, ‘R-26’, ‘R-27’, ‘R-27-a’, ‘R-28’, ‘R-28-a’, ‘R-29’, ‘R-29-1’, ‘R-30’, and ‘R-30-1’ as his documentary exhibits. Petitioner filed its Comments/Objections (To Respondent's Formal Offer of Evidence) on October 17, 2016.

In the Resolution dated December 13, 2016, the Court admitted Exhibits ‘R-1’, ‘R-2’, ‘R-3’, ‘R-4’, ‘R-5’, ‘R-6’, ‘R-6- a’, ‘R-7’, ‘R-8’, ‘R-9’, ‘R-10’, ‘R-11’, ‘R-12’, ‘R-13’, ‘R-13-a’, ‘R-13-b’, ‘R-14’, ‘R-15’, ‘R-16’, ‘R-17’, ‘R-18’, ‘R-19’, ‘R- 20’, ‘R-21’, ‘R-22’, ‘R-23’, ‘R-24’, ‘R-25’, ‘R-26’, ‘R-27’, ‘R- 27-a’, ‘R-28’, ‘R-28-a’, ‘R-29’, ‘R-29-1’, ‘R-30’, and ‘R-30-1’ as respondent's evidence. #-

CTA EB No. 1873 (CTA Case No. 8839)

The documentary evidence filed by the respondent are as follows:

Exhibit:

R-1

R-2

R-3

R-4

R-5

R-6

R-6-a

R-7

R-8

R-9

R-10

R-11

R-12

R-13

R-13-a

R-13-b

R-14

R-15

R-16

R-17

R-18

R-19

Description:

Letter of Authority dated 21 August 2008 Notice for Presentation of Records dated September 01, 2008

Checklist of Requirements

Second Notice for Presentation of Records and Documents

Memorandum dated October 26, 2009

Final Request for Presentation of Records

dated April 21, 2010 Registry Receipt No. 2178 Notice for Informal Conference dated September 16, 20 1 0 with attached Proposed

Tax Assessments

Waiver of the Defense of Prescription

under the Statute of Limitations Memorandum dated October 21,2010 Indorsement Letter dated October 21, 2010 Assignment Slip with No. OR-LA-57-11- 004-10 dated November 10, 2010 Preliminary Assessment Notice dated May 03, 2011 with attached Details of

Discrepancies

Formal Letter of Demand dated June 23, 20 11 with attached Details of Discrepancies

Audit Result/ Assessment Notice for

deficiency Income Tax

Audit Result/ Assessment Notice for

deficiency Fringe Benefit Tax Letter dated August 03, 2011 Memorandum dated August 03, 2011 Memorandum of Assignment No. 057-LA- 00179-8/10/2011 dated August 10, 2011 Letter dated September 02, 2011

Revised Notice for Informal Conference

dated September 28, 2011 with attached

Summary of Audit Findings

Letter dated November 23, 2012 ~

CTA EB No. I873 (CTA Case No. 8839)

R-20

Memorandum Report dated November 29, 2012

R-21

2nd Indorsement dated November 29,2012

R-22

Docket Information Sheet and Action Slip

R-23

Return Memorandum dated February 26, 2013

R-24

Indorsement Letter dated April 03, 2013

R-25

Final Decision on Disputed Assessment

dated April 01, 2014

R-26

Letter dated July 01, 2014

R-27

Judicial Affidavit of Revenue Officer

Jimmy E. Belen, Jr.

R-27-a

R-28

R-28-a

R-29

R-29-1

R-30

R-30-1

Signature of Affiant Revenue Officer

Jimmy E. Belen, Jr.

Judicial Affidavit of Revenue Officer

Teresita D. Tibayan

Signature of Affiant Revenue Officer

Teresita D. Tibayan

Judicial Affidavit of Revenue Officer

Sonny Boy M. Lambarte

Signature of Affiant Revenue Officer

Sonny Boy M. Lambarte

Judicial Affidavit of Revenue Officer May

C. Gimeno

Signature of Affiant Revenue Officer May

C. Gimeno The Memorandum (For Respondent) was filed on January 3, 2017; while the Memorandum [For the Petitioner] was filed on January 18, 2017. Hence, the case was declared submitted for decision."

On January 18, 2018, the Court in Division rendered the assailed Decision granting respondent's Petition for Review. The Court in Division had ruled that the waiver executed by the parties was defective as it did not indicate the date of acceptance by the BIR. As such, the said waiver did not validly extend the original three-year prescriptive period. Aggrieved, petitioner filed a Motion for Partial Reconsideration on February 6, 2018 which the Court in Division denied in the assailed Resolution.

On June 29, 2018, petitioner filed the present Petition for Review. ~

CTA EB No. 1873 (CTA Case No. 8839)

On August 2, 2018, respondent filed its Comment/Opposition (To the Petition for Review dated 27 June 2018).6 In a Resolution dated August 16, 2018,⁷ the Court En Bane gave due course to the present Petition for Review. In the same Resolution, the present case was submitted for decision.

THE ISSUES

Petitioner filed the present Petition for Review based on the following grounds: 8 "I

THIS

CASE

INVOLVES

THE

APPEAL

OF

AN

ADMINISTRATIVE

DECISION.

THUS,

JUDICIAL

REVIEW SAHOULD (sic) BE LIMITED TO THE ISSUES

RAISED IN THE ADMINISTRATIVE PROCEEDINGS AND

THE ASSIGNED ERRORS TO THE ADMINISTRATIVE

DECISION.

II

THE FIRST DIVISION OF THE HONORABLE COURT

ERRED IN GRANTING A RELIEF THAT WAS NOT

PRAYED FOR BY RESPONDENT. PETITIONER'S BASIC

RIGHT TO FAIR PLAY AND DUE PROCESS WAS

VIOLATED.

III

ASSUMING THE COURT MAY SUDDENLY DECIDE THE

CASE BASED ON AN ISSUE THAT WAS NEVER RAISED BY RESPONDENT, NEVER JOINED BY THE PLEADINGS, NEVER RAISED AT THE PRE-TRIAL ORDER, NEVER

DEFINED BY THE COURT IN THE PRE-TRIAL ORDER

AND NEVER TRIED BY THE PARTIES -

STILL THE

WAIVER

WAS

ACCORDED

VALIDITY

BY

THE

PARTIES." 9"

CTA EB No. 1873 (CTA Case No. 8839)

THE COURT EN BANC'S RULING

In his Petition, the CIR maintains that since it rendered a Final Decision on Disputed Assessment, the jurisdiction of the Court in Division shifts from a trial court to an appellate tribunal.9 Thus, petitioner posits that it was an error for the Court in Division to rule on a matter that was never made an issue in the administrative level, i.e., the validity of the waiver. 10 According to petitioner, the Court in Division should have confined itself to the issues raised in the administrative protest to the deficiency assessment. 11 On this matter, petitioner cited as legal basis the Supreme Court case of Pilipinas Total Gas, Inc. v. Commissioner of Internal RevenueY Petitioner also claims that its basic right to fair play and due process was violated when the Court in Division granted a relief that was never prayed for by respondent. 13 Considering that the said issue on the validity of the waiver was never joined in the pleadings nor raised by the parties during the pre-trial conference and the parties were never heard nor given the opportunity to be heard therefor, petitioner submits that he was denied of his procedural and substantive due process rights. 14 Finally, petitioner argues that the waiver subject of the present case was validly executed to toll the running of the prescriptive period. 15 The Petition for Review lacks merit. After careful evaluation of the facts, issues, and arguments presented by the parties, the Court En Bane finds that petitioner CIR failed to raise any new or substantial matter let alone any compelling reason to warrant the modification much less reversal of the Assailed Division and Resolution. At any rate, if only to put petitioner's mind to rest as well as to reinforce the discussion in the Assailed Decision and Resolution, the Court En Bane will address the matters herein raised.

It bears stressing that Pilipinas Total Gas does not apply largely because the facts of the said case are different from the facts of the present case. The Court En Bane notes that in Pilipinas Total Gas, the Supreme Court held that when the taxpayer failed to prove that it had submitted the complete supporting documents in support of its administrative claim for refund, its Petition for Review before the CT A is dismissible not due to lack ~ 9 /d., pp. 15-16.

10 id II Id.

12 G.R. No. 207112, December 8, 2015, 776 SCRA 395 ("Piilpinas Tata/ Gas"). 1J /d .• pp. 18-21.

14Jd.

CTA EB No. 1873 (CTA Case No. 8839) of jurisdiction but for failure to substantiate the claim at the administrative level. The relevant statements of the Supreme Court in Pilipinas Total Gas were clearly made within the context of a refund case. In contrast, the present case involves an assessment for deficiency income tax, fringe benefits tax (FBT) and compromise penalty which was deemed prescribed by the Court in Division due to the failure of the defective waiver to validly extend the original three-year prescriptive period. Truth be told, the portions of Pilipinas Total Gas as quoted by petitioner CIR in his Petition do not, in any way, support his view that when an FDDA was issued, this Court should only confine itself to the issues raised in the administrative protest to the assessment.

It must be remembered that under Section 8 of Republic Act (RA) No. 1125, as amended, this Court is categorically described as a court of record. 16 Cases filed before this Court are litigated de novo and as such, party-litigants are mandated to prove every minute aspect of their cases. 17 More importantly, in the case of Commissioner of Internal Revenue v. Lancaster Philippines, Inc., 18 the Supreme Court emphatically held that this Court can resolve an issue which was not raised by the parties. It held that: "On whether the CT A can resolve an issue which was not raised by the parties, we rule in the affirmative. Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax Appeals, the CT A is not bound by the issues specifically raised by the parties but may also rule upon related issues necessary to achieve an orderly disposition of the case. The text of the provision reads:

SECTION 1. Rendition ofjudgment. -

x x x

In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may also rule upon related issues necessary to achieve an orderly disposition of the case.

The above section is clearly worded. On the basis thereof, the CT A Division was, therefore, well within its authority to consider in its decision the question on the scope of 'fr.-

CTA EB No. 1873 (CTA Case No. 8839) authority of the revenue officers who were named in the LOA even though the parties had not raised the same in their pleadings or memoranda. The CT A En Bane was likewise correct in sustaining the CTA Division's view concerning such matter."

The deficiency assessment issued by petitioner was deemed void by the Court in Division because of prescription. In this regard, the Court En Bane holds that the Court in Division correctly resolved the issue of prescription of petitioner CIR's right to assess respondent as it clearly appears from the records that the deficiency assessment was issued more than three (3) years counted from the last day prescribed by law for the filing of the return, or the date of actual filing thereof, whichever comes later. Section 1, Rule 9 of the Rules of Court is applicable, mutatis mutandis, to the present case. The said provision states: "SEC. 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject matter, that there is another action pending between the same parties for the same cause, or that the action is barred by a prior judgment or by statute of limitations, the court shall dismiss the claim." (Emphasis and underscoring supplied) As explained by the Supreme Court in the case of Gicano v. Gegato, 19 to wit:

"[T]rial courts have authority and discretion to dismiss an action on the ground of prescription when the parties' pleadings or other facts on record show it to be indeed time- barred; (Francisco v. Robles, Feb. 15, 1954; Sison v. McQuaid, 50 O.G. 97; Barnbao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v. NDC, Feb. 28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so on the basis of a motion to dismiss, or an answer which sets up such ground as an affirmative defense; or even if the ground is alleged after judgment on the merits, as in a motion for reconsideration; or even if the defense has not been asserted at all, as where no statement thereof is found in the pleadings, or where a defendant has been declared in default. What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive period, be )1--

CTA EB No. 1873 (CTA Case No. 8839) otherwise sufficiently and satisfactorily apparent on the record: either in the averments of the plaintiff's complaint, or otherwise established by the evidence." (Emphasis supplied and citations omitted) Given that the issue of the validity of the waiver executed by the parties is essentially intertwined with the resolution of the issue of prescription of the deficiency assessment, the Court in Division correctly took cognizance ofthe said matter.

With regard to the issue of the validity of the waiver, the Court En Bane finds the discussions of the Court in Division in the assailed Decision and Resolution to be in order and that the same had sufficiently addressed the matters raised by petitioner. There is simply no reason to disturb or modify the same. Along the same lines, the Court En Bane holds the doctrine laid down by the Supreme Court in the case of Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly Nextel Communications Phils., Inc,Y0 finds no application in the present case considering the substantial variance in their respective factual milieu. The in pari delicto rule necessarily applies only in each and every case where facts and circumstances akin to those in Next Mobile are present. The same thing goes with the application of the doctrine of estoppel.

WHEREFORE, the present Petition for Review is DENIED for lack of merit.

WE CONCUR:

Presiding Justice

f).-...·1, c.. Q..Lo~., I Q .

JUANITO c. CASTANEDK, JR.

Associate Justice

ER~P.UY

Associate Justice

CTA EB No. 1873 (CTA Case No. 8839) r.:, 1- N. Mk:~,(~ ~0 N. MINDARO-GRULLA

Associate Justice

~. ~ ./'v~ L....' MA. BELEN M. RINGPIS-LIBAN

Associate Justice

c~·; .40-··-... 4~~--­ CATHERINE T. MANAHAN

Associate Justice

CERTIFICATION

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

Presiding Justice