Commissioner of Internal Revenue v. Eva Airways Corp.

FORMER SIXTEENTH DIVISION [CA-G.R. SP No. 71050. October 27, 2003.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . EVA AIRWAYS CORPORATION , respondent . D E C I S I O N COSICO , J p : The law, (Section 228 of the National Internal Revenue Code, as amended) specifically requires that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment is void. Such requirement aims to apprise the taxpayer of the facts, circumstances and reasons why it is being called to pay further tax liabilities to the government, and to assist him in preparing his reply. The right of the taxpayer to be informed should be respected by the BIR. The Case For decision is this petition for review, filed under Rule 43 of the 1997 Rules of Civil Procedure, by the Commissioner of Internal Revenue, assailing the Decision, dated September 20, 2001 and Resolution, dated March 12, 2002, rendered by the Court of Tax Appeals in C.T.A. Case No. 5692. Petitioner Commissioner assails the aforesaid rulings inasmuch as it granted the respondent Eva Airways Corporation's petition for review assailing the Pre-assessment Notices, dated March 27, 1998, and Assessment Notices/Letters of Demand, dated April 15, 1998, issued by the office of the petitioner against the respondent. By doing so, the Tax Court cancelled the said Pre-Assessment Notices and the Assessment Notices which had determined the respondent Eva Airways Corporation (Eva Airways, for brevity) liable to pay deficiencies in Percentage taxes, Income taxes and Documentary Stamp Taxes for the year 1994. The dispositive portion of the assailed September 20, 2001 Decision reads: 'WHEREFORE, in view of the foregoing, the instant petition is hereby GRANTED. Accordingly, the Pre-Assessment Notices dated March 27, 1998 and the Assessment Notices/Letters of Demand dated April 15, 1998, particularly LA # 26868-94-419 for income tax, 02-191-94B-98-B2-419 for percentage tax and 02-191-94B-98-B2-419 for documentary stamp tax, issued by the Respondent against the Petitioner in the aggregate amount of P21,978,474.19 for the taxable year 1994 are hereby CANCELLED and WITHDRAWN. "SO ORDERED." (p. 146, CTA Records) The March 12, 2002 Resolution of the Court of Tax Appeals, on the other hand, holds: AcSCaI "WHEREFORE, In view of the foregoing, Respondent's Motion for Reconsideration is hereby DENIED for lack of merit. "SO ORDERED." (p. 190, CTA Records) The Facts The facts, as described by the Tax Court, are hereby restated: Respondent Eva Airways is a resident foreign corporation engaged in the airline business, and granted landing rights in the country. Being an international carrier, it is subject to tax on its gross Philippine billings for the year 1994 pursuant to Section 25(2) of the National Internal Revenue Code, as amended. On April 17, 1995, respondent filed its 1994 Corporate Annual Income Tax Return, declaring a taxable income of P403,230,110.19 and the tax due thereon in the amount of P10,080,752.75. Likewise, for the same taxable year, respondent filed its Quarterly Percentage Tax Returns, as follows: Period Date Filed Gross Sales Common Covered Receipts/Earnings Carrier's Tax (3%) ___________________________________________________________ 1st Qtr. April 20, 1994 P102,302,386.00 P3,069,071.58 2nd Qtr. July 20, 1994 129,989,541.00 3,899,686.23 3rd Qtr. October 19, 1994 101,684,942.33 3,050,548.27 4th Qtr. January 20, 1995 90,924,625.33 2,727,738,76 Pursuant to Letter of Authority No. 26868 dated November 27, 1995 and received by respondent on November 29, 1995, the latter's books of accounts and other pertinent records were subjected to investigation by Revenue District Office No. 48, West Makati. As a result thereof, Revenue Officer Ramila Columna and Group Supervisor Jaime Marzan submitted the following audit results: On Income Tax Undeclared Income P360,841,680.87 On Percentage Tax Undeclared Income (Flown Revenue) P152,403,926.48 On Documentary Stamp Tax Total Cargo Manifests 4,484 x P3.00/document P13,452.00 On March 27, 1998, pre-assessment notices were issued by Revenue Region No. 8 of the Bureau of Internal Revenue (BIR) informing private respondent of the aforestated report of investigation together with the corresponding deficiency income, percentage and documentary stamp tax assessments amounting to P14,763,035.97, P7,178,224.95 and P16,815.00, respectively. The pre-assessment notices gave private respondent ten (10) days to present its side, failing in which it will be presumed that it concurs with the findings of the review of the Assessment Division of the BIR and that final assessments will then follow. On April 1, 1998, respondent received the subject pre-assessment notices, and on April 3, 1998, protested the findings contained in the said notices. In its letter, respondent alleged that the legal issues it raised on the findings of the investigation conducted by BIR, West Makati have already been resolved by the Legal Division. Respondent further argued that under Section 3 (a) of Revenue Regulation No. 12-85, a taxpayer is given fifteen (15) days from receipt of the Pre-Assessment Notice to present its side and an extension of a period not to exceed ten (10) days may even be granted in meritorious cases upon written request of the taxpayer. Thus, according to the respondent, petitioner arbitrarily shortened the period accorded to it by the said regulation, violative of its right to due process. Through a letter dated April 6, 1998, received by respondent on April 14, 1998, the Assessment Division of Revenue Region No. 8 explained that the functions of its Legal Division are only recommendatory and its recommendations are still subject to the approval of the Regional Director. The said letter, however, admitted the BIR's mistake in giving respondent only ten (10) days to respond to its pre-assessment notice and accordingly changed its tan-day notice to fifteen (15) days. The following day, April 15, 1998, Letters of Demand/Assessment Notices Nos. LA # 26868-94-419 for income tax, 02-191-94B-98-B2-419 for percentage tax and 02-191-94B-98-B2-419 for documentary stamp tax were issued against respondent, demanding payment for the total amount of P21,978,474.19 on or before May 15, 1998. On April 21, 1998, respondent filed with the BIR its protest letter of April 20, 1998, denying its alleged tax liabilities due to the following defects/reasons: SDHAEC "1. The percentage tax deficiency amounting to P7,527,991.96 has already prescribed because your assessment notice issued on April 15, 1998 is past the three (3) year period from the last day for your office to assess under Section 203 of NIRC as amended. Since the last day to file and pay our 1994 percentage tax return for the fourth (4th) quarter was on January 20, 1995, then the last day period of limitation if we count three (3) years therefrom is January 20, 1998. Clearly, the assessment notice issued is no longer effective and should be cancelled. "2. Assuming for the sake of argument that there is no prescription yet, please be informed that the assessments do not indicate with clarity the facts on which they are based. Please note that Section 228 of the 1997 Tax Code is very specific stating that 'the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment shall be void.' (emphasis supplied) Absent in your notices are the facts on which our alleged deficiency taxes were taken from. . . . "3. Further, you did not comply with RR 12-85 regarding the 15-day period from receipt of the pre-assessment notice for the taxpayer to file its protest. . . . (p. 60, CTA Records) There being no action on the part of the BIR, respondent filed a petition for review with the Court of Tax Appeals on November 16, 1998. In his Answer, petitioner Commissioner claimed by way of special and affirmative defenses that: "8. Respondent has sufficiently complied with the requirements under Section 228(e) of the National Internal Revenue Code of 1997 (1997 NIRC) by informing the petitioner in writing and indicating therein that the basis of the assessment is the petitioner's undeclared income which is subject to tax under Section 25(2) of the old Tax Code [now Section 28(e)], hence, the assessments are valid; "9. Respondent likewise sufficiently complied with the provisions of Revenue Regulations No. 12-85 as shown by to facts stated in the petition; "10. The petition is likewise premature on the ground that the respondent has not yet issued a final decision on the petitioner's protest; "11. The one hundred eighty (180)-day period under Section 228(e) of the 1997 NIRC is counted from the submission of the relevant supporting documents, which under the same section, are to be submitted within sixty (60) days from the filing of the protest, thus, in effect literally expanding the period of inaction to a maximum of two hundred forty (240) days and so, has also rendered the petition (filed on November 16, 1998) likewise premature since the same was filed within a period of only one hundred ninety six (196) days from the date of the protest letter; "12. No documents were submitted by the petitioner to the respondent but instead attached as annexes in the petition several quarterly tax returns which could have been vital in its protest against the assessments had petitioner bothered to scrutinize the details of the said assessment as contained in the Revenue Officer's Audit Report; "13. All presumptions are in favor of the correctness of the tax assessment (Interprovincial Autobus, Inc. vs. Collector of Internal Revenue, 68 Phil 290)" (p. 25, CTA.Records) The Lower Court's Ruling In ruling to grant the respondent's petition, the Court of Tax Appeals made the following observations: First, the proper period of reference in determining the respondent's 30-day period to file its petition for review under Section 228 of the Tax Code of 1997 is not 240 days of inaction by the BIR, but 180 days, since the arguments raised by respondent are legal and it may not be expected to submit documents in support of its protest. The petition for review filed by the respondent, therefore, was timely filed, i.e ., within thirty (30) days from the lapse of the 180-day period mandated by Section 228(e) of the 1997 NIRC. Secondly, the assessments for delinquent percentage tax made by the BIR have already prescribed, having been sent to respondent more than three (3) years from the filing by respondent of its fourth quarterly percentage tax return on January 20, 1995, as prescribed under Section 203 in relation to Section 125 the previous Tax Code. Thirdly, the BIR had violated Section 3 of Revenue Regulations No. 12-85, which gives the taxpayer a period of fifteen (15) days from receipt of the pre-assessment notice within which to reply. In this case, the respondent was given by the BIR only ten (10) days to present its side. Even as the BIR sought to correct this mistake by belatedly granting respondent its fifteen (15) days as granted under Section 3 of Revenue Regulation No. 12-85 in a letter received by respondent on April 14, 1998, the BIR gave respondent no real time to answer as the assessment notices were issued by the BIR on the very next day, or on April 15, 1998. And lastly, the BIR failed to adequately inform respondent in the pre-assessment and assessment notices of the facts and provisions of law on which the assessments were being made, as mandated under Section 228 of the previous Tax Code. The BIR specifically failed to inform the respondent how it came upon its computation of undeclared income which were made the basis of its assessments. Respondent filed a motion for reconsideration of the said decision. The Court of Tax Appeals, however, denied the said motion for reconsideration for lack of merit. The Petition Unhappy with the aforesaid ruling of the Tax Court, the Commissioner of Internal Revenue is now before us on a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, reiterating the grounds presented to the Tax Court in his motion for reconsideration, to wit: ECaSIT I. The percentage tax assessment has not prescribed. II. Minor violation of Revenue Regulations No. 12-85 does not render void Pre-Assessment Notices (PANs) issued on March 27, 1998. III. The Assessment Notices/Letters of Demand, or even the Pre-Assessment Notices substantially complied with the requirements under Section 228 of the Tax Code According to petitioner, the assessment percentage taxes on the respondent has not prescribed, considering that on January 30, 1997 and July 30, 1997, the respondent executed waivers of the statute of limitations, which suspended the prescriptive period for a total of twelve (12) months, or until December 31, 1998 within which to assess the deficiency percentage taxes. Also, petitioner believes that the alleged violations of Revenue Regulation No. 12-85 are very minor in nature, and were in fact immediately rectified when respondent was given an additional period which complies with Revenue Regulation No. 12-85. Respondent was not deprived of due process because respondent was timely notified of the extension. In any case Government is not estopped by the mistakes of its agents. Also, petitioner submits that the pre-assessment and assessment notices sent to the respondent have substantially met the requirements of Section 228 of the 1997 Tax Code, inasmuch as it substantially set forth the facts and law on which the same were based. For its part, respondent Eva Airways propounds that the instant petition should be dismissed because of the following substantive reasons: (1) that the percentage tax assessment by the BIR has been rendered inutile by prescription; (2) that respondent's right to due process disregarded when the BIR failed to comply with Revenue Regulation No. 12-85; and (3) petitioner violated Section 228 of the previous tax code when it did not state with particularity the law and the facts on which the assessments were made. The Court's Ruling On the issue of prescription of the assessment measures for percentage taxes of the respondent undertaken by the BIR, the Court disagrees with the findings of the Court of Tax Appeals that the government's right to assess and collect said deficiency taxes against the respondent had already lapsed when it sent the pre-assessment and assessment notices to respondent. Respondent filed its fourth quarterly percentage tax return on January 20, 1995. Petitioner, ordinarily, therefore had until January 20, 1998, or three years to assess the respondent of its percentage tax liabilities, pursuant to Section 203 in relation to Section 125 of the previous Tax Code. Evidence on record, however, has amply shown that the respondent, through authorized representatives, and with the concurrence of the office of the petitioner, had executed waivers of the statute of limitations provided for under Sections 203 and 223 of the NIRC that would have ran against the petitioner. 1 Such waivers were made by the respondent after it requested an extension of time within which to present the required documentation needed to determine its tax liability for the year 1994. Respondent cannot disregard and disown the said waiver now after it had actively subscribed to the same in exchange for its own prayer for extension to submit the documents required by the BIR. Furthermore, it has been ruled as a valid act where the taxpayer had signed a waiver as to the running of the prescriptive period that would have prevented the Tax bureau from assessing and collecting its tax liabilities. 2 "Said waiver is not just an extension of the period of limitation, but a renunciation of petitioner's right to invoke the defense of prescription which was then already available to her. There is nothing unlawful nor immoral about this kind of waiver; just like any other right, the right to avail of the defense of prescription is available is waivable." (Ibid.) On the matter of the alleged deprivation of due process in view of the BIR's violation of Revenue Regulation No. 12-85 which gives the taxpayer a period of fifteen (15) days from receipt of a pre-assessment notice within which to file a reply, and not ten (10) days as was initially granted to the respondent by the petitioner, the Court sees no merit in the same. Available records bear out that even as the BIR had indeed given the respondent only ten days to reply to its re-assessment notices, 3 the mistake was rectified on April 6, 1998 when the BIR granted petitioner the full fifteen days provided under the revenue regulation, 4 In any case, it does not appear at all that respondent was denied due process, considering that it was able to file a reply to the pre-assessment notices as early as April 3, 1998, where it raised the reasons why it disagreed with the pre-assessment notices sent by the BIR. 5 Thus, the violation of the revenue regulation cited by the respondent is a mere procedural lapse, which as previously demonstrated had no adverse effect on respondent's right to due process, and which had been corrected with dispatch, and in time by the BIR. However, the Court agrees with the Court of Tax Appeals on the more substantial aspect of its decision, affecting the respondent's right to be fully informed of the factual and legal bases of the assessments for tax liabilities against it. Records, or the absence of it, adequately show that the pre-assessment notices and assessment notices sent by the BIR to the respondent did not contain any factual basis for the tax liabilities of the respondent set forth therein, in violation of pertinent law. Section 228 of the Tax Code, as amended, states in relevant part: "Section 228. Protesting of Assessment . When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, that a pre-assessment notice shall not be required in the following cases: a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or d) When the excise tax due on excisable articles has not been paid; or EHaDIC e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. " The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void . (Emphasis supplied by the Court) "xxx xxx xxx" The law, as it was phrased at the time the subject pre-assessments and assessments were made, specifically requires that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment is void. Such requirement undoubtedly aims to apprise the taxpayer of the facts, circumstances and reasons why it is being called to pay further tax liabilities to the government, and to assist him in preparing his reply. The right of the taxpayer to be informed should be respected by the BIR. In the instant case, the pre-assessment notices 6 sent by the BIR to the respondent merely set forth certain amounts determined by the BIR that constitute the respondent's tax delinquency, without basis in fact or law as to how the said amounts were reached, leaving the respondent taxpayer in the dark why he is being assessed for taxes, which in his mind, he has already paid. A reading of the assessment notices 7 that followed offers no clearer basis for the said assessments. The reason why there are no details accompanying the BIR's assessments, it appears, is that the records upon which the said assessments were reached have been "misplaced" somehow by the BIR at the time the assessments were about to be submitted, which is why BIR Regional Director Antonio I. Ortega was constrained to direct the Chief of the BIR Regional Assessment Division to issue the pre-assessment notices and final assessment notices against the respondent, even though the records of the proposed assessment were currently lost, 8 and, the Chief of the BIR Regional Special Investigation Division, to ascertain the culpability of the BIR personnel who are responsible for the loss of the missing records. 9 It is unfortunate that by negligence or incompetence, the revenue generation efforts of the government are thwarted by the very employees of the Bureau of Internal Revenue entrusted to pursue the same. The Fallo WHEREFORE, premises considered, the instant petition is hereby DISMISSED. The assailed Decision, dated September 20, 2001 and Resolution, dated March 12, 2002 of the Court of Tax Appeals are AFFIRMED. SO ORDERED. Enriquez, Jr. and Abdulwahid, JJ ., concur. Footnotes 1. Exhibits "7", "7-A" and "7-B", and Exhibits "8", "8-A" and "8-B", (pp. 129132, CTA Records) 2. Alca v. Court of Tax Appeals , 26 SCRA 137 (1968) 3. pp. 7677, BIR Records Folder No. 3 4. p. 80, BIR Records Folder No. 3 5. p. 79, BIR Records Folder No. 3 6. pp. 5051, CTA Records 7. pp. 5459, CTA Records 8. p. 75, BIR Records Folder 3 9. pp. 2932, BIR Records Folder 3