Re: Proposed Guidelines in the Disposition and/or Destruction of Court Records, Papers, and Exhibits

THIRD DIVISION [C.T.A. CASE NO. 8573. April 2, 2014.] ASALUS CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION FABON-VICTORINO , J p : This Petition for Review 1 seeks to nullify the Final Decision on Disputed Assessment (FDDA) dated October 16, 2012, issued by respondent Commissioner of Internal Revenue (CIR), against petitioner Asalus Corporation finding it liable for value-added tax (VAT) for taxable year 2007 in the amount of One Hundred Six Million Seven Hundred Sixty-One Thousand Twenty-Five Pesos and 17/100 (P106,761,025.17), inclusive of surcharge and interest, and compromise penalty in the amount of Twenty-Five Thousand Pesos (P25,000.00). cAHIaE THE FACTS Petitioner is a domestic corporation, with principal office at the 7th Floor, Feliza Building, VA Rufino Street, Legaspi Village, Makati City. 2 Respondent, on the other hand, is the Commissioner of the Bureau of Internal Revenue (BIR), with authority to decide disputed assessments and enforce the provisions of the National Internal Revenue Code (NIRC) and other tax laws. She holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City. Petitioner states that on December 16, 2010, it received a Notice of Informal Conference 3 from Revenue District Office (RDO) No. 47 East Makati, inviting it to an informal conference, within fifteen (15) days from notice, to discuss the investigation report on its internal revenue tax for 2007 submitted by Revenue Officer (RO) Fidel M. Baares II pursuant to the Letter of Authority No. 00001478. On December 30, 2010, petitioner filed its letter-reply 4 dated December 29, 2010, disputing the basis of the VAT deficiency computation made by RO Baares. On January 10, 2011, a Preliminary Assessment Notice 5 (PAN) was issued finding petitioner liable for deficiency taxes for taxable year 2007 in the amount of P413,378,058.11, inclusive of surcharge and interest. Petitioner was granted fifteen (15) days or until January 25, 2011 to refute the PAN. On January 24, 2011, petitioner protested 6 the PAN. On April 4, 2011, petitioner received a letter 7 from respondent dated March 29, 2011, directing it to submit additional documents and information in support its protest. On April 12, 2011, petitioner received a letter 8 of even date, denying its protest. In a letter dated April 18, 2011 received by respondent on April 26, 2011, petitioner requested for reconsideration. 9 On August 26, 2011, petitioner received a Formal Assessment Notice 10 (FAN) of even date, with attached Details of Discrepancies and Assessment Notices, 11 finding petitioner liable for deficiency VAT for taxable year 2007 in the amount of P95,681,988.64, inclusive of surcharge and interest. 12 On September 7, 2011, petitioner protested 13 the FAN. A supplemental protest 14 was subsequently filed on November 4, 2011 stating that the subject tax deficiency had prescribed, pursuant to Section 203 of the National Internal Revenue Code (NIRC) of 1997. 15 In respondent's letter 16 dated November 4, 2011, petitioner was notified that its protest would be forwarded to RDO No. 47-East Makati under 3rd Indorsement for further evaluation and appropriate action. On June 18, 2012, petitioner received a letter from Revenue District Officer (RDO) Gerry O. Dumayas recommending the issuance of the FDDA. 17 On October 16, 2012, petitioner received the FDDA, 18 finding it liable for deficiency VAT in the amount of P106,761,025.17 and a compromise penalty of P25,000.00, as follows: I. VALUE-ADDED TAX VATable Sales per return P262,295,885.07 Add: Receipts not subjected to VAT (Schedule 1) 401,175,429.68 Adjusted gross receipts subject to VAT 663,471,314.75 Output Tax Due 79,616,557.77 Less: Input Tax Credits Input Tax carried over from previous period P286,007.00 Input Tax Claimed during the period 24,735,276.60 25,021,283.60 VAT Due 54,595,274.17 Less: Payments per Return 6,454,222.61 Deficiency VAT 48,141,051.66 Add: Surcharge (25%) P12,035,262.89 Interest (1/26/08 to 11/26/12) 46,584,710.72 58,619,973.63 TOTAL AMOUNT STILL DUE P106,761,025.17 II. COMPROMISE PENALTY P25,000.00 In addition, the subject FDDA stated as follows: This is our final decision. If you are not agreeable, you may appeal this final decision with the Court of Tax Appeals (CTA) within thirty (30) days from date of receipts hereof, otherwise this decision shall become final, executory and demandable. HCITDc Hence, petitioner filed the instant Petition for Review on November 15, 2012. In her Answer 19 filed on January 17, 2013, respondent interposed the following special and affirmative defenses: 5. The assessments in question were made and issued in accordance with law, rules and regulations; 6. In the case of Philippine Health Care Providers, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6166, April 5, 2002 , this Honorable Court already settled that gross receipts of HMOs in computing the VAT shall be the payments for medical plans and application fees actually received from the members, undiminished by any amount paid or payable to owners/operators of hospitals, clinics and medical and dental practitioners. 7. The assessment was issued within the prescriptive period allowed by law. The assessment notices sent to the petitioner are still valid even if the three (3)-year period had already lapsed because the applicable period of limitation within which to assess the petitioner is ten (10) years on the ground that it filed false VAT returns for taxable year 2007. The Supreme Court has already ruled that in case of false return, as in the subject case, the ten (10)-year period is applicable. The Highest Magistrate opined in the case of Aznar vs. Court of Tax Appeals and Collector of Internal Revenue, G.R. No. L-20569, August 23, 1974 , that Aznar's returns were false because the underdeclaration of income constituted deviation from the truth, thus, the application of the ten-year prescriptive period. Thus, the intent to evade is immaterial in case of filing of false returns. As long as there is some deviation from the truth, whether it is due to mistake, ignorance or carelessness; falsity arises. In the instant case, petitioner failed to declare in its VAT returns the taxable income amounting to P401,175,429.68. This falsity arising in petitioner's VAT returns provides ample basis for the application of the 10-year prescriptive period. 8. All presumptions are in favor of the correctness of the tax assessment (Interprovincial Autobus vs. Collector of Internal Revenue, 98 Phil. 290) . In its Reply 20 dated January 28, 2013, petitioner mainly questioned the application of the ten (10)-year prescriptive period in the issuance of the subject assessment. According to petitioner neither the FAN nor the FLD was premised on petitioner's act of filing a "false" or "fraudulent return" or the "failure to file a return". Hence, Section 222 (A) of the NIRC, allowing the ten-year period to assess, was inapplicable. On April 10, 2013, the parties filed their Joint Stipulation Facts and Issues 21 which the Court approved on April 17, 2013. 22 During the initial presentation of evidence for petitioner on May 15, 2013, 23 respondent's counsel manifested that he would not be presenting any evidence since only legal issues were involved in the present case. Petitioner proceeded to present its lone witness Orlando L. Siglos , who by way of a Judicial Affidavit, 24 testified that among his duties as the Assistant Vice-President (AVP) for Accounting of petitioner are the preparation of financial statements, overseeing the accounting personnel and accounting processes; and preparation of electronic filing of petitioner's tax returns. According to him, petitioner is enrolled with the BIR to use the Electronic Filing and Payment System (EFPS), which process he described to the Court. The monthly VAT return is filed through the EFPS on/or before the 20th day of the following month, while quarterly VAT return is filed on/or before the 25th day of the month following the end of every quarter. He confirmed that petitioner is a Health Maintenance Organization (HMO) and admitted that not all the membership fees collected from members applying for healthcare services are reported in petitioner's VAT return. Only the service income recorded in their book is reported for VAT purposes and the amount intended or payable to medical practitioners or hospitals are not included. Per Resolution 25 dated July 30, 2013, petitioner rested its case. In compliance with the Court's directive, petitioner filed its Memorandum 26 on August 30, 2013. Respondent did not file any. THE ISSUES The parties submitted the following issues 27 for this Court's resolution, viz. : cIHDaE 1. Whether respondent's authority to issue an assessment against petitioner for deficiency VAT for taxable year 2007 has prescribed; and 2. Whether the applicable prescriptive period on the part of respondent to assess petitioner of the purported deficiency VAT is ten (10) years. RULING OF THE COURT The crux of the controversy is the alleged prescription of respondent's right to assess petitioner for VAT deficiency. Sections 203 and 222 of the NIRC of 1997, as amended provide: SEC. 203. Period of Limitation Upon Assessment and Collection. 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 before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphases supplied) SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission : Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (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 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. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5)-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. (Emphases supplied) As provided above, respondent ordinarily has a period of three (3) years within which to assess internal revenue taxes counted from the last day prescribed by law within which to file the necessary return or the actual date of filing of such return, whichever comes later. Any assessment notice issued beyond the three-year prescriptive period shall not be valid. Thus, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time. 28 Section 114 (A) of the NIRC of 1997, as amended, prescribes the period within which to file VAT returns, to wit: SEC. 114. Return and Payment of Value-added Tax. (A) In General. Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter prescribed for each taxpayer : Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis. Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches. (Boldfacing supplied) HcACTE Thus, a taxpayer must file the VAT return within twenty-five days following the close of each taxable quarter. Given that petitioner uses the calendar year method of accounting, 29 it must file its VAT return on or before April 25th, July 25th, October 25th of the taxable year of the pertinent taxable year and January 25th of the succeeding year, to wit: VAT Return Last Day to File Actual Date of Last Day to Date of FAN 30 Return Filing Assess First Quarter April 25, 2007 April 25, 2007 31 April 25, 2010 August 26, 2011 Second Quarter July 25, 2007 July 25, 2007 32 July 25, 2010 August 26, 2011 Third Quarter October 25, 2007 Oct. 25, 2007 33 Oct. 25, 2010 August 26, 2011 Fourth Quarter January 25, 2008 Jan. 25, 2008 34 Jan. 25, 2011 August 26, 2011 Evident from the table that the FAN was issued only on August 26, 2011 for all the pertinent quarters and since the taxable year was 2007, respondent had only until January 25, 2011, at the latest, within which to issue the FAN against petitioner. In fine, respondent's right to assess petitioner within the three-year prescriptive period had prescribed. Respondent however argues that under the obtaining circumstances, the ten (10)-year prescriptive period under Section 222 (a) of the NIRC of 1997, as amended, should apply. But neither the FAN nor the FDDA 35 indicates that petitioner filed a false VAT return for taxable year 2007 to warrant the application of the ten-year prescriptive period under Section 222 (a) of the NIRC of 1997. It was only in the PAN that allegation of such filing of a false or fraudulent return in relation to the imposition of surcharge appeared. 36 Note that the PAN is only a proposed assessment, and even if the taxpayer failed to respond to it, such failure will at most lead to the issuance of the FAN or the Formal Letter of Demand which must be protested, lest it will attain finality. 37 Significantly, after petitioner protested the PAN, respondent never indicated in both the FAN and the FDDA that the applicable prescriptive period would be ten (10) years. Moreover, while the application of the ten (10)-year period was invoked in her Answer, respondent failed to present any evidence to establish the justification for the application of the ten (10)-year prescriptive period pursuant to Section 222 (a) of the NIRC of 1997. Also as pointed out by petitioner, respondent failed to present evidence regarding her allegation of fraud or falsity in the preparation of petitioner's returns. The three instances where the three-year prescriptive period will not apply must always be alleged and established by clear and convincing evidence and should not be anchored on mere conjectures and speculations. Also not to be ignored is the fact that petitioner did not execute a waiver authorizing the extension of the three-year period for respondent to issue an assessment. 38 Petitioner filed its tax returns for the subject tax within the prescribed period as shown earlier. However, the FAN was issued only on August 26, 2011 or seven (7) months late reckoned from January 25, 2011, the last day for the issuance of the assessment covering the VAT for the fourth quarter of taxable year 2007. There were no attending circumstances that would prevent respondent from issuing an assessment within the period prescribed by law. There was no request for reinvestigation from petitioner, neither was there a valid waiver executed by the same petitioner. In fine, the assessment issued on August 26, 2011 is deemed to have been issued after the prescribed period, consequently, invalid. In Republic of the Philippines vs. Ablaza , 39 the Highest Tribunal explained that the statute of limitations of actions for the collection of taxes is justified by the need to protect law-abiding citizens from possible harassment, to wit: The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law. The Supreme Court reiterated the foregoing guideline in the case of Commissioner of Internal Revenue vs. FMF Development Corporation , 40 in this wise: EDISaA Under Section 203 of the NIRC, internal revenue taxes must be assessed within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. This mandate governs the question of prescription of the government's right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time . (Emphasis supplied) All said and since respondent failed to demonstrate clearly that petitioner had filed a false return to warrant the application of the ten (10)-year prescriptive period, the applicable regular period of three (3) years for assessment had obviously prescribed. Such negligence or oversight on the part of respondent cannot prejudice the taxpayers, considering that the prescriptive period is precisely intended to give them peace of mind and free them from any harassment. Finally, it must be stressed that for the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the assessment of taxes. Thus, the exceptions to the law on prescription should perforce be strictly construed. 41 WHEREFORE , the instant Petition for Review is hereby GRANTED . Accordingly, the deficiency VAT assessment for taxable year 2007 and the compromise penalty are hereby CANCELLED and WITHDRAWN , on ground of prescription. SO ORDERED . (SGD.) ESPERANZA R. FABON-VICTORINO Associate Justice Ma. Belen M. Ringpis-Liban, J., concurs. Lovell R. Bautista , J., is on leave. Footnotes 1. Docket, pp. 6-26. 2. Par. 1.1, Joint Stipulation of Facts, Joint Manifestation, docket, p. 320. 3. Pars. 1.6-1.8, Joint Stipulation of Facts, Joint Manifestation, docket, p. 321; Exhibit "B". 4. Exhibit "C". 5. Par. 1.11, Joint Stipulation of Facts, Joint Manifestation, docket, p. 322; Exhibit "D". 6. Exhibit "E". 7. Par. 1.13, Joint Stipulation of Facts, Joint Manifestation, docket, p. 322; Exhibit "F". 8. Exhibit "G". 9. Par. 1.15, Joint Stipulation of Facts, Joint Manifestation, docket, p. 322; Exhibit "H". 10. Exhibit "I". 11. Exhibits "I-1" to "I-4". 12. Pars. 1.16-1.17, Joint Stipulation of Facts, Joint Manifestation, docket, p. 322. 13. Exhibit "J". 14. Exhibit "K". 15. Pars. 1.18-1.20 and 1.30, Joint Stipulation of Facts, Joint Manifestation, docket, pp. 322-324. 16. Exhibit "L". 17. Pars. 1.21-1.22, Joint Stipulation of Facts, Joint Manifestation, docket, p. 323. 18. Pars. 1.23-1.25, Joint Stipulation of Facts, Joint Manifestation, docket, p. 323; Exhibit "A". 19. Docket, pp. 92-94. 20. Docket, pp. 98-109. 21. Docket, pp. 320-327. 22. Docket, pp. 329-330. 23. May 15, 2013 Hearing. 24. Exhibit "O"; docket, pp. 417-424. 25. Docket, pp. 446-447. 26. Docket, pp. 448-467. 27. Pars. 2.1-2.2, Issue for Resolution, Joint Manifestation, docket, p. 324. 28. Commissioner of Internal Revenue vs. FMF Development Corporation, G.R. No. 167765, June 30, 2008. 29. Par. 1.28, Joint Stipulation of Facts, Joint Manifestation, docket, p. 323. 30. Exhibit "I". 31. Exhibits "M-1", "M-1-a", and "M-1-b". 32. Exhibits "M-2", "M-2-a", and "M-2-b". 33. Exhibits "M-3", "M-3-a", and "M-3-b". 34. Exhibits "M-4", "M-4-a", and "M-4-b". 35. Exhibit "A". 36. Exhibit "D" and Annex "A" (Details of Discrepancies) of Exhibit "D". 37. Ishida Philippines Tube Co., Inc. vs. Commissioner of Internal Revenue , CTA Case No. 7633, February 6, 2009. 38. Par. 1.31, Joint Stipulation of Facts, Joint Manifestation, docket, p. 324. 39. G.R. No. L-14519, July 26, 1960. 40. G.R. No. 167765, June 30, 2008. 41. Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., et al. , G.R. No. 104171, February 24, 1999.