G.R. No. 197515, July 02, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. UNITED SALVAGE AND TOWAGE (PHILS.), INC., Respondent.
D E C I S I O N
Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court which seeks to review, reverse and set aside the Decision1 of the Court of Tax Appeals En Banc (CTA En Banc), dated June 27, 2011, in the case entitled Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc. (USTP), docketed as C.T.A. EB No. 662.
The facts as culled from the records:
Respondent is engaged in the business of sub-contracting work for service contractors engaged in petroleum operations in the Philippines.2 During the taxable years in question, it had entered into various contracts and/or sub-contracts with several petroleum service contractors, such as Shell Philippines Exploration, B.V. and Alorn Production Philippines for the supply of service vessels.3
In the course of respondent’s operations, petitioner found respondent liable for deficiency income tax, withholding tax, value-added tax (VAT) and documentary stamp tax (DST) for taxable years 1992, 1994, 1997 and 1998.4 Particularly, petitioner, through BIR officials, issued demand letters with attached assessment notices for withholding tax on compensation (WTC) and expanded withholding tax (EWT) for taxable years 1992, 1994 and 1998,5 detailed as follows:
Assessment Notice No. Tax Covered Period Amount 25-1-000545-92 WTC 1992 P50,429.18 25-1-000546-92 EWT 1992 P14,079.45 034-14-000029-94 EWT 1994 P48,461.76 034-1-000080-98 EWT 1998 P22,437.016
WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, Assessment Notice No. 25-1-00546-92 dated January 9, 1996 for deficiency Expanded Withholding Tax and Assessment Notice No. 25-1-000545 dated January 9, 1996 for deficiency Withholding Tax on Compensation are hereby CANCELLED.
WHEREFORE, premises considered, the Petition is PARTLY GRANTED. The Decision dated March 12, 2010 and the Resolution dated July 15, 2010 are AFFIRMED with MODIFICATION upholding the 1998 EWT assessment. In addition to the basic EWT deficiency of P14,496.79, USTP is ordered to pay surcharge, annual deficiency interest, and annual delinquency interest from the date due until full payment pursuant to Section 249 of the 1997 NIRC.
- Whether or not the Court of Tax Appeals is governed strictly by the technical rules of evidence;
- Whether or not the Expanded Withholding Tax Assessments issued by petitioner against the respondent for taxable year 1994 was without any factual and legal basis; and
- Whether or not petitioner’s right to collect the creditable withholding tax and expanded withholding tax for taxable year 1992 has already prescribed.22
We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part, which is not present here.24
SEC. 34. Offer of evidence. – The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified.
From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385, 388-389 (1990)], we had the occasion to make a distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403 (1989)] citing People v. Mate [103 SCRA 484 (1980)], we relaxed the foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial court provided the following requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second, the same must have been incorporated in the records of the case.34
x x x. A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would "condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the efficient, effective, and expeditious dispensation of justice. x x x.39
The date of issuance of the notice of assessment determines which law applies- the 1997 NIRC or the old Tax Code. The case of Commissioner of Internal Revenue v. Bank of Philippine Islands is instructive:In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). In CIR v. Reyes, we held that:
In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law. (Emphasis ours.)
In the instant case, the 1997 NIRC covers the 1994 and 1998 EWT FANs because there were issued on January 19, 1998 and September 21, 2001, respectively, at the time of the effectivity of the 1997 NIRC. Clearly, the assessments are governed by the law.43
3.1.4. Formal Letter of Demand and Assessment Notice. – The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. x x x44
The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During the pre-assessment stage, the CIR advised Enron’s representative of the tax deficiency, informed it of the proposed tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed to inform Enron of the laws and facts on which the deficiency tax assessment was based.
We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a taxpayer. The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was made.
The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged “factual bases” in the advice, preliminary letter and “audit working papers” did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice.
We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts on which the assessment is made. Such amendment is in keeping with the constitutional principle that no person shall be deprived of property without due process. In view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question was void. x x x.48
Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of basis for -- not to mention the insufficiency of -- the gross figures and details of the itemized deductions indicated in the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and collection “should be made in accordance with law as any arbitrariness will negate the very reason for government itself.”50
x x x x.
Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment, considering that it merely implements the law.
A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code. While it is desirable for the government authority or administrative agency to have one immediately issued after a law is passed, the absence of the regulation does not automatically mean that the law itself would become inoperative.
At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must be informed of both the law and facts on which the assessment was based. Thus, the CIR should have required the assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new law. The old regulation governing the issuance of estate tax assessment notices ran afoul of the rule that tax regulations -- old as they were -- should be in harmony with, and not supplant or modify, the law.
It may be argued that the Tax Code provisions are not self-executory. It would be too wide a stretch of the imagination, though, to still issue a regulation that would simply require tax officials to inform the taxpayer, in any manner, of the law and the facts on which an assessment was based. That requirement is neither difficult to make nor its desired results hard to achieve.
Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute. RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was issued only on September 6, 1999, this regulation was to retroact to January 1, 1998 -- a date prior to the issuance of the preliminary assessment notice and demand letter.51
On the other hand, the 1998 EWT FAN reflected the following: a detailed factual account why the basic EWT is P14,496.79 and the legal basis, Section 57 B of the 1997 NIRC supporting findings of EWT liability of P22,437.01. Thus, the EWT FAN for 1998 is duly issued in accordance with the law.52
The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIR’s claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax.61
In BPI v. Commissioner of Internal Revenue, the Court emphasized the rule that the CIR must first grant the request for reinvestigation as a requirement for the suspension of the statute of limitations. The Court said:In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all examined. Considering the given facts, this Court pronounced that—
x x x The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949…
In Republic of the Philippines v. Acebedo, this Court similarly found that –x x x T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. "A"). There is no evidence that this request was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. "D"), but there was follow-up of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for collection. [Emphasis in the original]62
x x x The report submitted by the tax commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).68
* Designated Acting Member, per Special Order No. 1691 dated May 22, 2014.
1 Penned by Associate Justice Juanito C. Castañeda, Jr.; Annexes "G" to Petition, rollo, pp. 185-200.
2Rollo, p. 50.
5 Supra note 1, at 186.
7 Id. at 187.
10 G.R. No. 170574, January 30, 2009, 577 SCRA 366.
11 Annexes "B" to Petition, rollo, p. 143.
12Rollo, p. 147.
15 Id. at 148.
17 Id. at 139-149.
18 Id. at 149. (Emphasis in the original)
19 Annexes "D" to Petition, id. at 162-164.
20Rollo, p. 13.
21 Supra note 1, at 199. (Emphasis in the original)
22 Rollo, p. 18.
23 531 Phil. 264 (2006).
24 Compagnie Financiere Sucres Et Denrees v. CIR, supra, at 269.
25 Rollo, pp. 18-19.
26 Id. at 19.
27 Id. at 19-20.
28 Section 8. Court of record; seal; proceedings. - The Court of Tax Appeals shall be a court of record and shall have a seal which shall be judicially noticed. It shall prescribe the form of its writs and other processes. It shall have the power to promulgate rules and regulations for the conduct of the business of the Court, and as may be needful for the uniformity of decisions within its jurisdiction as conferred by law, but such proceedings shall not be governed strictly by technical rules of evidence.
29 Dizon v. Court of Tax Appeals, 576 Phil. 110, 128 (2008).
30 Supra note 28.
33 320 Phil. 344 (1995).
34Vda. de Oñate v. Court of Appeals, supra, at 349-350 citing People v. Napat-a, G.R. No. 84951, November 14, 1989, 179 SCRA 403 and People v. Mate, G.R. No. L-34754, March 27, 1981, 103 SCRA 484 (1981) (Emphasis supplied).
35Dizon v. Court of Appeals, supra note 29, at 130.
36Commissioner of Internal Revenue v. Manila Mining Corporation, 505 Phil. 650, 669 (2005).
38 550 Phil. 571 (2007).
39 Id. at 578-579. (Emphasis supplied)
403.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (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 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.
x x x.
3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency 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 (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof.
41SECTION 2. Notice of proposed assessment. When the Commissioner or his duly authorized representative finds that taxes should be assessed, he shall first notify the taxpayer of his findings in the attached prescribed form as Annex "B" hereof. The notice shall be made in writing and sent to the taxpayer at the address indicated in his return or at his last known address as stated in his notice of change of address. In cases where the taxpayer has agreed in writing to the proposed assessment, or where such proposed assessment has been paid, the required notice may be dispensed with.
42Rollo, p. 27.
43 Supra note 1, at 193-194.
45 Supra note 1, at 196.
47 G.R. No. 166387, January 19, 2009, 576 SCRA 212.
48Commissioner of Internal Revenue v. Enron Subic Power Corporation, supra, at 217-218. (Emphasis ours; citations omitted)
49 516 Phil. 176 (2006).
50 Commissioner of Internal Revenue v. Reyes, supra, at 190.
51 Id. at 188-189. (Emphases ours; citations omitted)
52 Rollo, p. 196.
53 Id. at 35.
55 Bank of the Philippine Islands v. Commissioner of Internal Revenue, 571 Phil. 535, 542-543 (2008).
56 Id. at 543.
59 Supra note 11, at 148.
60 536 Phil. 1131 (2006).
61Commissioner of Internal Revenue v. Philippine Global Communication, Inc., supra, at 1140.
62Bank of the Philippine Islands v. Commissioner of Internal Revenue, supra note 55, at 544-545. (Emphases in the original)
63Rollo, p. 36.
64Commissioner of Internal Revenue v. Metro Star Superama, Inc., G.R. No. 185371, December 8, 2010, 637 SCRA 633, 647.
66Commissioner of Internal Revenue v. Algue, Inc., 241 Phil. 829, 836 (1988).
67 Supra note 60, at 1140.