Commissioner of Internal Revenue v. Mirant Navotas Corp.

FOURTH DIVISION [CA-G.R. SP. No. 78126. June 17, 2005.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .MIRANT NAVOTAS CORPORATION, (formerly Southern Energy Navotas, Inc.) , respondent . D E C I S I O N TRIA TIRONA , J p : This is a petition for review filed by the Commissioner of Internal Revenue seeking to reverse and set aside the decision 1 of the Court of Tax Appeals (CTA) dated February 3, 2003, which ordered the cancellation and withdrawal of deficiency income, expanded withholding tax (EWT),value added tax (VAT) and documentary stamp tax (DST) assessments issued by the petitioner against herein respondent in the total amount of P22,037,114.97 for the fiscal year ended June 30, 1995. Also assailed in this petition is the resolution 2 dated June 11, 2003 which denied petitioner's motion for reconsideration. The undisputed facts of the case as stated in the decision of the CTA are as follows: "Petitioner is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines with principal address at Suite 202 CTC Building 2232, Roxas Boulevard, Pasay City, Metro Manila. It is principally engaged in the business of power generation and the subsequent sale thereof to the National Power Corporation under a Build, Operate and Transfer (BOT) scheme ( pars. 1 and 3, Joint stipulation of facts ). Petitioner is registered with the Board of Investments as a pioneer enterprise for the operation of a power generating plant under the provisions of Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987." Under the terms of its registration, petitioner is entitled to an income tax holiday for six (6) years or until June 30, 1996 ( par. 4, Joint Stipulation of Facts ). On December 17, 1998, petitioner received from the Bureau of Internal Revenue (BIR) Pre-Assessment Notices dated December 8, 1998 which were unnumbered and issued by the Assessment Division of Revenue Region No. 8, Makati City. On the same day, petition received Formal assessment Notices Nos. 000584-FY95-B2-98-457, 02-251-FY95B-98-B2-457 and 02-252-FY95B-98-B2-457, all dated December 14, 1998 and issued by the Assessment Division of Revenue Region No. 8, Makati City ( pars. 6 and 7, Joint Stipulation of facts ),the details of which were jointly stipulated by the parties to be as follows: I. Formal Assessment Notice No. 000584-FY95-98-B2457 issued by the respondent against petitioner pertains to an alleged deficiency income tax assessment for fiscal year ended June 30, 1995 in the amount of P13,295.996.24, computed as follows: Tax Due P6,502,202.96 Add: Surcharge 1,625,550.74 Interest 5,143,242.54 Compromise 25,000.00 Total Amount Due P13,295,996.24 The income tax assessment of P13,295,996.24 resulted from the BIR examiner's findings as follows: a. Petitioner had discrepancies between the other income reported per tax audit investigation (P7,526,448.96) and the other income reported in the tax return (P5,145,850.00); b. Petitioner had discrepancies in the amount of P12,657,062.80 between the total revenues per books of accounts (P273,088,165.77) and the total fees per income tax return (P262,036,892.00); c. Petitioner has realized income from the provision or major maintenance cost in the amount of P8,297,728.40; d. Petitioner had realized income from the provision for uncollectible account expense in the amount of P15,679,478.67; e. Petitioner had unrealized foreign exchange loss in the amount of P452,241.94; f. Petitioner had deficiency income tax in the amount of P13,295,996.24, inclusive of P6,793,793.28 as surcharge, interest and compromise penalty. II. Formal Assessment Notice No. 000584-FY95-98-B2-457 ( Exhibit E ) issued against petitioner pertains to an alleged deficiency expanded withholding tax (EWT) assessment for fiscal year ended June 30, 1995 in the amount of P240,741.68, computed follows: EcICSA Tax Due P112,332.94 Add: Surcharge 28,083.24 Interest 96,325.50 Compromise 4,000.00 Total Amount Due P240,741.68 The EWT assessment of P240,741.68 resulted from the BIR examiner's findings as follows: a. There is a discrepancy of P112,332.94 between the income payments reported per books of accounts in the amount of P302,770.81 and per alpha list in the amount of P190,437.87 b. Petitioner did not withhold the proper amount of income taxes due in the amount of P112,332.94, inclusive of P128,408.74 as surcharge, interest and compromise penalty. III. Formal Assessment Notice No. 02-251-FY95-98-B2-457 ( Exhibit F ) issued against petitioner pertains to an alleged value-added tax (VAT) deficiency assessment for fiscal year ended June 30, 1995 in the amount of P5,530,377.05, computed as follows: Tax Due P2,622,700.91 Add: Surcharge 655,675.23 Interest 2,227,000.91 Compromise 25,000.00 Total Amount Due P5,530,377.05 The VAT assessment of P5,530,377.05 resulted from the BIR Examiner's findings as follows: a. There is a discrepancy of P26,227,009.13 between the sales reported per VAT returns in the amount of P306,290,058.95 and the total sales per books of accounts in the amount of P332,517,067.98. b. Petitioner did not pay the VAT due in the amount of P5,530,377.05, inclusive of P2,907,676.14 as surcharge, interest and penalty. IV. Formal Assessment Notice No. 12-252-FY95-98-B2-457 ( Exhibit G ) issued against petitioner pertains to an alleged deficiency documentary stamp tax (DST) assessment for fiscal year ended June 30, 1995 in the amount of P2,970,000.00, computed as follows: Tax Due P2,376.000.00 Add: Surcharge 594,000.00 Interest 0 Compromise 0 Total Amount Due P2,970.000.00 The DST assessment of P2,970.000.00 resulted from the BIR Examiner's findings as follows: a. Petitioner has subscribed to the original issuance of its share of stock in the total amount of P237,600.000.00 which should be subject to DST at the rate of P200 per 200 under Section 175 of the Tax Code. b. Petitioner did not pay the DST due on the original issuance of its share of stock amounting to P2,970,000.00, inclusive of P594,000.00 as surcharge. On January 15, 1999, petitioner filed a letter-protest against the various unnumbered pre-assessment notices, all dated December 8, 1998, and the Formal assessment Notices, all dated December 14, 1998, issued by the Assessment Division of Revenue Region No. 8, Makati City and requested that the said deficiency tax assessments be withdrawn and cancelled for the reasons stated therein and after reinvestigation ( Exhibit H ). On March 16, 1999 or within 60 days from the filing of the protest, petitioner submitted a supplemental protest letter in support of its protest against the subject assessment pursuant to Section 228 of the National Internal Revenue Code of 1997 ( Exhibit I ). On June 17, 1999, the Securities and exchange Commission issued the certificate of filing of amended articles of incorporation in favor of petitioner. One of the amendments related to the change of the corporate name of the petitioner from Hopewell Energy (Philippines),Corp. to Southern Energy Navotas, Inc. On September 12, 1999, or 180 days from March 16, 1999, petitioner did not receive any written or verbal communication from the respondent regarding any action of the latter on the protest of the petitioner. The inaction of the respondent on petitioner's letter-protest protest the petitioner to elevate the matter before this court by way of a Petition for Review on October 8, 1999. On November 29, 1999 respondent filed an Answer to the instant petition for review ( pages 42-44, CTA docket )...." 3 After trial on the merits, the CTA rendered its Decision 4 on February 3, 2003. The dispositive portion of said decision reads as follows: "WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby GRANTED. Accordingly, Formal Assessment Notice No. 000584-FY95-98-B2457 for deficiency income tax assessment in the amount of P13,295,996.24, Formal Assessment Notice No. 000584-FY95-98-B2-457 for deficiency expanded withholding tax (EWT) in the amount of P240,741.68, Formal Assessment Notice No. 02-251-FY95-98-B2-457 for deficiency value added tax (VAT) in the amount of P5,530,377.05 and Formal Assessment Notice No. 02-252-FY95-98-B2-457 for deficiency documentary stamp tax (DST) in the amount of P2,970,000.00, all issued by the respondent on December 14, 1998 for the fiscal year ended June 30, 1995, are hereby CANCELLED and WITHDRAWN. SO ORDERED." Petitioner filed a motion for reconsideration but the same was denied by the CTA in its Resolution 5 dated June 11, 2003. Hence, the instant petition, wherein petitioner assigns the following as grounds for the allowance of its petition, to wit: HAaDcS I. THE TAX COURT ERRED IN NOT HOLDING THAT THE WAIVER OF THE DEFENSE OF PRESCRIPTION UNDER THE STATUTE OF LIMITATIONS OF THE NATIONAL INTERNAL REVENUE CODE EXECUTED BY RESPONDENT ON SEPTEMBER 23, 1998 IS VALID, HENCE. THE INCOME TAX ASSESSMENT WAS ISSUED WITHIN THE PRESCRIBED PERIOD. II. THE TAX COURT ERRED IN NOT HOLDING THAT RESPONDENT'S REALIZED GAIN ON FOREIGN CURRENCY TRANSACTIONS ARE NOT DIRECTLY DERIVED FROM ITS REGISTERED OPERATIONS WHICH IS THE SALE OF POWER GENERATION SERVICES, HENCE, THE GAIN THEREOF IS NOT COVERED BY THE INCOME TAX HOLIDAY. The basic issue here is whether or not the waiver signed by the respondent is valid and binding as to toll the running of the prescriptive period for assessment and not bar the Government from issuing subject deficiency tax assessments. Section 203 of the National Internal Revenue Code reads: "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." (Emphasis supplied) The decision of the CTA established that subject assessments dated December 14, 1998 were issued outside the statutory prescriptive period Records show that respondent filed its Annual Income Tax Return for the fiscal year ending June 30, 1995 on October 16, 1995. 6 As to its Expanded Withholding Tax (EWT),which is filed on a monthly basis, records disclosed that it was filed on July 10, 1995. With regard to its Value Added Tax (VAT),the same was filed on July 20, 1995. 7 In accordance with the above-quoted provision, respondent's 1995 income, expanded withholding and value added taxes could have been validly assessed only until October 15, 1998, July 9, 1998 and July 19, 1998, respectively. However, respondent's income expanded withholding and value added taxes were assessed only on December 14, 1998, beyond the three (3)-year prescriptive period. Petitioner contends that on September 23, 1998, respondent executed a waiver of the statute of limitations extending the period of assessment of taxes until December 15, 1998, which was accepted by they Revenue District Officer on behalf of the petitioner. Hence, petitioner maintains that the deficiency tax assessments dated December 14, 1998 were all issued within the extended period agreed upon. However, in the assailed decision, the CTA held that the waiver of the statute of limitations executed by respondent on September 23, 1998 was defective and invalid since the latter did not comply with the requirement of Section 222 (b) of the National Internal Revenue Code (NIRC),which provides that the waiver must be agreed upon and signed by both the Commissioner and the taxpayer. In the present case, the CTA observed that the waiver, while signed by the respondent, was merely attested to by the petitioner through Revenue District Officer Anselmo G. Adriano. It further argued that an agreement is different from an attestation. To agree means to give assent while to attest means to bear witness. Section 22 (b) of the NIRC requires that the waiver be agreed upon and not attested to only. The provision of the NIRC on the matter is quoted hereunder, to wit: "SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. a. ... 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." RMO No. 30-90 implements the above provisions of the NIRC relating to the period of prescription for the assessment and collection of taxes. A reading of the Order shows that the RMO must be strictly followed, thus: "...In the execution of said waiver, the following procedures should be followed: SO ORDERED. 1. The waiver must be in the form identified as Annex "A" hereof. This form may be reproduced by the Office concerned but there should be no deviation from such form. ... 2. ... Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. ... 3. ... 4. ... 5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the taxpayer's right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. 8 As correctly found by the CTA, the waiver executed by the respondent on September 23, 1998 was defective and invalid because it does not conform with the provisions of RMO No. 20-90. The waiver was defective on the government side because it was not accepted and agreed to by the Revenue District Officer, as mandated by the NIRC and RMO No. 20-90. The signature of the Revenue District Officer merely attested to the existence of the waiver. His signature could not in any way indicate that the Bureau has accepted and agreed to the waiver. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain. 9 Under RMO No. 20-90, there is perfection of the agreement only upon acceptance of the waiver by the BIR. aAHDIc Hence, we rule that the waiver in this case is invalid and defective and the three (3)-year prescriptive period was not tolled or extended. However, as correctly pointed out by the CTA, even on the assumption that the waiver is valid, the deficiency income tax assessment against respondent is still bereft of any legal basis. As records show, under the terms of its registration, respondent is entitled to an incentive of income tax holiday for six (6) years or up to June 30, 1996. Petitioner's income tax return for the fiscal year ending June 30, 1995 indicates that said income tax holiday was availed of. We also agree with the CTA that the waiver executed on September 23, 1998 cannot be applied with respect to the assessment of deficiency expanded withholding and value added taxes since the period to assess these taxes has already prescribed on July 9, 1998 and July 19, 1998, respectively, long before the execution of the waiver. As regards the deficiency assessment for documentary stamp tax, we uphold the ruling of the CTA that the same was already paid by the respondent. On the second issue, petitioner argues that the income of the respondent that was entitled to income tax holiday shall be confined to income directly derived from its registered operations which is power generation and the subsequent sale thereof to the National Power Corporation under a Build, Operate and Transfer (BOT) scheme. According to petitioner, the contract price between the respondent and NAPOCOR was in peso currency, but NAPOCOR'S payment was made in dollars, and therefore, there will be foreign exchange gain derived in the conversion of dollar to peso. Petitioner maintains that the gain realized by the respondent from its foreign currency transactions are merely incidental to its power generation business. Therefore, said gains are not covered by the respondent's income tax holiday and are income subject to tax. Petitioner's argument is misplaced As correctly pointed out by the CTA, if the respondent received foreign currency payment for the sale of its power generation services, it is still directly connected to its main business which is, power generation and the sale thereof. The fact that payment was made in dollars which could result to a gain if the value of peso depreciates will not transform the gain into income not directly connected with petitioner's business. WHEREFORE, premises considered, the instant petition is hereby DENIED. The assailed decision of the Court of Tax Appeals dated February 3, 2003 as well as its resolution dated June 11, 2003, are AFFIRMED. SO ORDERED. Vidallon-Magtolis and Reyes, Jr.,JJ., concur. Footnotes 1. Annex "A",Petition, Rollo ,pp. 21-35. 2. Annex "B",Petition, Rollo ,pp. 36-41. 3. pp. 1-6, Decision, Rollo ,pp. 21-26. 4. Annex "A",Petition, Rollo ,pp. 21-35. 5. Annex "H",Petition, Rollo ,pp. 30-11. 6. page 8, Decision, Rollo ,p. 28. 7. page 9, Decision, Rollo ,p. 29. 8. Philippine Journalists, Inc. vs. Commissioner of Internal Revenue , G.R. No. 162852 December 16, 2004. 9. Ibid .