Makati Agro Trading, Inc. v. Commissioner of Internal Revenue

SECOND DIVISION [C.T.A. CASE NO. 9735. October 31, 2019.] For: Assessment MAKATI AGRO TRADING, INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION MINDARO-GRULLA , J p : Submitted for decision on May 16, 2019 is a Petition for Review filed on December 19, 2017 praying for the cancellation of the assessment issued by respondent Commissioner of Internal Revenue (CIR) against petitioner Makati Agro Trading, Inc. (MATI) for alleged deficiency income tax and value added tax (VAT) in the total amount of P822,369.39 for the taxable year (TY) 2007. Petitioner MATI is a corporation organized and existing under Philippine laws, engaged in the business of trading of agricultural products, 1 with registered address at 4/F Corinthian Plaza Bldg., Paseo de Roxas, Makati City. 2 On the other hand, respondent CIR heads the Bureau of Internal Revenue (BIR) and is empowered to perform the duties of the office, including among others, the power to decide on administrative protest/s filed against Final Assessment Notice (FAN) under Section 228 of the National Internal Revenue Code (NIRC). 3 On December 10, 2008, Revenue District Officer Mahinardo G. Mailig issued a Tax Verification Notice (TVN) 4 authorizing Revenue Officer (RO) Michael T. Felipe to verify the supporting documents and/or pertinent records pertaining to the revenue tax liabilities covering TY 2007. Petitioner alleged that it did not receive the TVN. On February 3, 2017, petitioner received a Preliminary Assessment Notice (PAN) 5 from respondent assessing it for deficiency income tax and VAT totaling to P802,557.69 and P15,282.07, respectively. On February 17, 2017, petitioner MATI filed with the BIR a written protest to the PAN 6 dated February 15, 2017. On March 14, 2017, petitioner received the Final Assessment Notice (FAN) 7 from BIR Revenue Region (RR) No. 8 dated March 9, 2017, assessing it for deficiency income tax and VAT amounting to P807,003.99 and P15,365.40, respectively, inclusive of increments for taxable year 2007. Petitioner MATI received a notice 8 dated March 29, 2017 from BIR RR No. 8 acknowledging receipt and approval of the Request for Reinvestigation. In the same notice, petitioner was allowed to submit additional documents to support the claim/request for reinvestigation within sixty (60) days from the date of the filing of the protest. On April 4, 2017, petitioner MATI disputed the deficiency tax assessment and filed its Request for Reinvestigation 9 of the FAN before respondent CIR, attaching the supporting documents to refute the alleged deficiency taxes. Petitioner filed the supporting documents on June 1, 2017. Without receiving a decision from respondent within 180 days, it filed the instant Petition for Review on December 19, 2017. Respondent filed his Answer 10 through registered mail on February 23, 2017, 11 interposing the following special and affirmative defense: xxx xxx xxx 2. The assessments issued against petitioner has not yet prescribed. 3. Assessment are prima facie 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. (Aban, Law of Basic Taxation in the Philippines, 1st Edition, p. 109) 4. Finally, Petitioner should be reminded that taxes are important because it is the lifeblood of the government and so should be collected without unnecessary hindrance (Commissioner vs. Algue, Inc. L-28896, 17 February 1988) . Taxes are enforced proportional contribution from persons and properly levied by the state, thus no one is considered entitled to recover that which he must give up to another Non videtur quisquam id capere quod ei necesse est alii restitutere . A Notice of Pre-Trial Conference 12 was issued on March 8, 2018, setting the case for Pre-Trial Conference on April 26, 2018. Accordingly, petitioner filed its Pre-Trial Brief 13 on March 22, 2018, while respondent filed his Pre-Trial Brief 14 through registered mail on even date. Pre-trial ensued. The parties' filed their Joint Stipulation of Facts and Issues (JSFI) 15 on June 19, 2018. The Court issued the Pre-Trial Order 16 on July 9, 2018 approving and adopting the parties' JSFI, and the pre-trial was deemed terminated. During trial, petitioner presented as its lone witness its Director and Treasurer, Ms. Natalie T. Yap. Thereafter, petitioner by counsel filed his written Formal Offer of Exhibits dated August 29, 2018, to which respondent by counsel filed his Comment/Opposition (Petitioner's Formal Offer of Evidence) dated September 21, 2018. On November 5, 2018, the Court admitted all the documentary exhibits of the petitioner, to wit: Exhibit: Description: P-1 Preliminary Assessment Notice (PAN) issued by BIR Revenue Region Office (RRO) No. 8 on 25 January 2017, for taxable year (TY) 2007 P-2 Protest to PAN (dated 09 March 2017) P-3 Assessment Notice for TY 2007 (dated 9 March 2007) P-4 Reply to Protest (dated 29 March 2017) P-5 Request for Reinvestigation (dated 4 April 2017) P-6 Approval of Request for Reinvestigation dated 05 May 2017 P-7 Letter attaching additional documents (dated 01 June 2017) P-8 Report of Taxpayers that Cannot be Located for quarter ending 30 September 2011 P-8-A and P-8-A-1 Relevant page and line/excerpt relevant for petitioner MATI, whereby its address was erroneously indicated at " 5/F Corinthian Plaza Bldg., Paseo de Roxas, Makati City" P-9 2007 Business Permit P-9-1 2009 Business Permit P-9-2 2010 Business Permit P-9-3 2011 Business Permit P-9-4 2012 Business Permit P-9-5 2013 Business Permit P-9-6 2014 Business Permit P-9-7 2015 Business Permit P-9-8 2016 Business Permit P-10 MATI's Cover Sheet P-10-1 Report on Examination as of 31 December 2007 and 2006 P-10-2 Report of Independent CPA to Accompany Income Tax Return P-11 2007 Annual Income Tax Return P-11-1 2009 Annual Income Tax Return P-12 Judicial Affidavit of Natalie T. Yap P-12-A Signature of Ms. Yap on Judicial Affidavit P-13 to P-13-D Revenue Officer Ryan Dagalangit's Audit Report dated February 2018 on MATI's Income and Value Added Taxes for TY 2007 P-14 Tax Verification Notice (TVN) dated 10 December 2008 P-15 "List of Corporations who Could Not be Located" for Revenue Region No. 08, Revenue District Office No. 47 (East Makati) for Quarter ending 30 September 2011 P-16 "Report on TP's Delinquent Account" for MATI, showing "no delinquency account" On January 28, 2019, respondent by counsel submitted his Formal Offer of Evidence. On March 21, 2019, the Court admitted the documentary evidence enumerated as follows: Exhibit: Description: R-1 Entire BIR Records R-2 Certification dated May 8, 2009 of the City Treasurer's Office of Makati Business Permits Office R-3 Undated Memorandum Report of RO Michael T. Felipe R-3-a Name and specimen signature of RO Michael T. Felipe R-4 Undated Memorandum of RO Michael T. Felipe R-4-a Name and specimen signature of RO Michael T. Felipe R-5 BIR Preliminary Assessment Notice (PAN) dated January 25, 2017 R-5-a Name and specimen signature of Clavelina S. Nacar, Officer-in-Charge, RR8-Makati R-5-b Details of Discrepancies dated January 25, 2017 attached to the said BIR Preliminary Assessment Notice (PAN) dated January 25, 2017 R-5-c Name and specimen signature of Clavelina S. Nacar, Officer-in-charge, RR8-Makati R-6 BIR Formal Assessment Notice (PAN) dated March 9, 2017 R-6-a Name and specimen signature of Glen A. Geraldino, Regional Director, RR8-Makati R-6-b Details of Discrepancies dated March 9, 2017 attached to the said BIR Formal Assessment Notice (PAN) dated March 9, 2017 R-6-c Name and specimen signature of Glen A. Geraldino, Regional Director, RR8-Makati R-7 Judicial Affidavit dated November 26, 2018 of RO Michael T. Felipe R-7-a Name and specimen signature of RO Michael T. Felipe Petitioner filed its Memorandum 17 on April 12, 2019. Respondent filed his Manifestation and Motion 18 on May 2, 2019 stating that he is adopting all the factual and legal arguments in his Answer, as well as the documentary and testimonial pieces of evidence found in the records of this case as his Memorandum. In the May 16, 2019 Resolution, 19 the Court noted and granted respondent's Manifestation and Motion and considered the case submitted for decision. The parties stipulated on the following: ISSUES 20 1. Whether or not the deficiency assessment for Income Tax and Value Added Tax by the BIR against petitioner MATI for taxable year 2007 has prescribed; and 2. Whether petitioner is liable for the deficiency income tax in the amount of P807,003.99 and value-added tax in the amount of P15,365.40 for taxable year 2007. After a careful perusal of the records of this case and the pieces of evidence proffered, the Court rules that the assessment for deficiency income tax and VAT against petitioner for TY 2007 is void for lack of a Letter of Authority (LOA) issued by the Regional Director authorizing Revenue Officer (RO) Michael T. Felipe to conduct examination on petitioner's books of accounts. While the absence of a LOA was not raised as an issue by any of the parties, this Court can take cognizance of such issue especially since a void assessment bears no fruit. 21 In Commissioner of Internal Revenue v. Lancaster Philippines, Inc. , 22 the Supreme Court opined, viz. : From the foregoing, it is clear that the issue on whether the revenue officers who has conducted the examination on Lancaster exceeded their authority pursuant to LOA No. 00012289 may be considered as covered by the terms "other matters" under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 9282. The authority to make an examination or assessment, being a matter provided for by the NIRC, is well within the exclusive and appellate jurisdiction of the CTA . (Emphasis ours) Further, in the above-cited case, it was ruled that the Court can resolve an issue albeit not raised by the parties, thus: Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax Appeals, the CTA 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 of Judgment . xxx xxx xxx 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 CTA Division was, therefore, well within its authority to consider in its decision the question on the scope of 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 CTA En Banc was likewise correct in sustaining the CTA Division's view concerning such matter. (Emphasis supplied) It can be gleaned from the records of this case that the assessment against petitioner issued in 2017 sprung from a Tax Verification Notice dated December 10, 2008. In the Judicial Affidavit (JA) of RO Michael T. Felipe, he answered that he conducted the examination pursuant to the TVN, to wit: Q: What is your participation in the said examination? A: I am the Revenue Officer who conducted an examination of petitioner's business establishment, pursuant to Tax Verification Notice (TVN) No. 00104261 dated December 10, 2009 (sic) in relation to the selection criteria prescribed under RMO 19-2007, to determine all its internal revenue tax liabilities for taxable year 2007. The audit process normally commences with the issuance by the CIR of a Letter of Authority. The LOA gives notice to the taxpayer that it is under investigation for possible deficiency tax assessment; at the same time it authorizes or empowers a designated revenue officer to examine, verify, and scrutinize a taxpayer's books and records, in relation to internal revenue tax liabilities for a particular period. 23 Thus, settled is the rule that the issuance of a valid LOA is a pre-requisite to commence the audit investigation. It is the LOA that vests in the revenue officer the authority to examine the books of the taxpayer. Pursuant to Section 6, in relation to Sections 10 and 13 of the NIRC, as amended, the power to examine books of taxpayer lies with the Commissioner of Internal Revenue or his duly authorized representatives. Section 6 of the NIRC, as amended provides: Sec. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement . (A) Examination of Returns and Determination of Tax Due After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however , That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x Section 10 bestows upon the Regional Director the authority to issue Letters of Authority, to wit: Section 10. Revenue Regional Director . Under rules and regulations, policies and standards formulated by the Commissioner, with the approval of the Secretary of Finance, the Revenue Regional Director shall, within the region and district offices under his jurisdiction, among others: xxx xxx xxx (c) Issue Letters of Authority for the examination of taxpayers within the region; xxx xxx xxx The authority of the Revenue Officer, on the other hand, is provided under Section 13, viz. : Sec. 13. Authority of a Revenue Officer . Subject to the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a Revenue Officer assigned to perform assessment functions in any district may, pursuant to a Letter of Authority issued by the Revenue Regional Director, examine taxpayers within the jurisdiction of the district in order to collect the correct amount of tax, or to recommend the assessment of any deficiency tax due in the same manner that the said acts could have been performed by the Revenue Regional Director himself. From the foregoing provisions, it is clear that a LOA is mandatory in order to clothe the revenue officer with authority to examine the books of the taxpayers. A TVN issued by the Revenue District Officer cannot take the place of a valid LOA to satisfy the due process requirement. The absence of a LOA inevitably results in a void assessment for deficiency taxes. The Supreme Court in the case of Medicard Philippines, Inc. vs. Commissioner of Internal Revenue 24 emphasized the importance of a LOA as a requirement for due process, thus: An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax. An LOA is premised on the fact that the examination of a taxpayer who has already filed his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of the NIRC clearly provides as follows: xxx xxx xxx Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or surveillance among others has nothing to do with the LOA. These are simply methods of examining the taxpayer in order to arrive at the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives, other tax agents may not validly conduct any of these kinds of examinations without prior authority. xxx xxx xxx In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. , the Court said that: Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority, the assessment or examination is a nullity. xxx xxx xxx Hence, RO Michael T. Felipe was not armed with authority to conduct the examination of the books of petitioner and the assessment for deficiency taxes that resulted therefrom is void. The Supreme Court in Commissioner of Internal Revenue vs. Metro Star Superama, Inc . 25 is enlightening, thus: It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on the one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen's right is amply protected by the Bill of Rights under the Constitution. Thus, while "taxes are the lifeblood of the government," the power to tax has its limits, in spite of all its plenitude. Hence, in Commissioner of Internal Revenue v. Algue, Inc. , it was said Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx It is said that taxes are what they pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to achieve and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat in power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed. Considering that there was no valid assessment for deficiency taxes for TY 2007, the Court finds no cogent reason to belabor on the issues presented by the parties. WHEREFORE , in view of the foregoing, the instant Petition for Review is GRANTED . Accordingly, the deficiency income tax and value-added tax assessments issued by respondent against petitioner covering taxable year 2007 are CANCELLED AND SET ASIDE . SO ORDERED. (SGD.) CIELITO N. MINDARO-GRULLA Associate Justice Juanito C. Castaeda, Jr. and Jean Marie A. Bacorro-Villena, JJ. , concur. Footnotes 1. Paragraph (Par.) I., Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket, p. 208. 2. Par. II, Id . 3. Par. 3, The Parties, Petition for Review, Docket p. 10. 4. Exhibit "P-14", BIR Records p. 6. 5. Docket, pp. 25-28. 6. Docket, pp. 35-37. 7. Docket, pp. 45-48. 8. Docket, p. 52. 9. Docket, pp. 54-61. 10. Docket, pp. 174-176. 11. Received by the Court on March 5, 2017. 12. Docket, p. 178. 13. Docket, pp. 180-186. 14. Docket, pp. 187-189. 15. Docket, pp. 208-209. 16. Docket, pp. 218-221. 17. Docket, pp. 462-474. 18. Docket, pp. 475-477. 19. Docket, p. 479. 20. II. Issues, Joint Stipulation of Facts and Issues, Docket p. 209. 21. Commissioner of Internal Revenue v. Metro Star Superama, Inc. , G.R. No. 185371, December 8, 2010. 22. G.R. No. 183408, July 12, 2017. 23. Supra , note 8. 24. G.R. No. 222743, April 5, 2017. 25. Supra , note 21.