Commissioner of Internal Revenue v. Enron Subic Power Corp.

SPECIAL FORMER FIRST DIVISION [CA-G.R. SP No. 82966. December 21, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ENRON SUBIC POWER CORPORATION , respondent . D E C I S I O N SALAZAR-FERNANDO , J p : Before this Court is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure, assailing the Decision 1 dated November 4, 2003 and the Resolution 2 dated March 1, 2004 of the Court of Tax Appeals 3 in C.T.A. Case No. 6029 entitled " Enron Subic Power Corporation, Petitioner, versus Commissioner of Internal Revenue, Respondent ", the decretal portions of which read: Decision dated November 4, 2003 "IN VIEW OF THE FOREGOING, the assessments issued against petitioner for deficiency 5% tax in the amount of P1,288,649.00 and deficiency expanded withholding tax in the amount of P102,520.00 covering the year 1993 are hereby CANCELLED and SET ASIDE. SO ORDERED." Resolution dated March 1, 2004 "Considering that no other argument is raised by the respondent, his motion filed on November 25, 2003 is hereby DENIED for lack of merit. SO ORDERED." The facts as culled from the findings of the CTA are: Petitioner Enron Subic Power Corporation (Enron for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC), and with the Subic Bay Metropolitan Authority (SBMA for brevity) as a Subic Bay Freeport (SBF for brevity) enterprise. As a SBF enterprise, Enron is entitled to the 5% preferential tax rate under Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992. Pursuant to an Energy Conversion Agreement (ECA for brevity) with the National Power Corporation (NAPOCOR), Enron operates and maintains in the SBF two power plants which are owned by and leased from the SBMA. Under the ECA, Enron is obliged and required to secure insurance coverage, which must be acceptable to NAPOCOR, for the power plant facilities. NAPOCOR is named as the insured while Enron is merely permitted to be named as co-insured. Enron also entered into an O & M Supervision Agreement with the Batangas Power Corporation (BPC for brevity) for the operation and maintenance of the BPC power plant facilities. Payments, were made representing reimbursements from BPC for actual costs incurred by Enron in the performance of its obligation under the agreement. aCHDST On July 26, 1999, Enron received from the Commissioner of Internal Revenue (Commissioner for brevity) two (2) Formal Assessment Notices 4 dated July 6, 1999 covering the year 1993, for deficiency 5% tax amounting to P1,288,649.00 and expanded withholding tax (EWT for brevity) amounting to P102,520.00. On August 23, 1999, Enron filed with the Commissioner through the Regional Director, Revenue Region No. 4, San Fernando, Pampanga, its protest letter dated August 19, 1999. On March 16, 2000, due to the Commissioner's inaction on the protest, Enron filed a Petition for Review 5 with the CTA, and raised the following defenses: the BIR's right to assess has prescribed; it filed its Amended Return and Final Corporate Income Tax Return on September 20, 1994, hence, the BIR had only until September 20, 1997 to make the assessment; the corresponding assessment notice for deficiency 5% tax, which it received on July 26, 1999, was issued only on July 6, 1999, or more than one (1) year beyond the three-year prescriptive period set by law; in the same regard, it filed its Consolidated Expanded Withholding Tax Return on March 1, 1994, hence, the BIR had only until March 1, 1997 to make the assessment; like the assessment notice for deficiency 5% tax, the corresponding assessment notice for EWT was issued only on July 6, 1999 or more than two (2) years beyond the three-year statute of limitations; the assessment notices are likewise void because they merely indicated the basic tax due, surcharges, interests and penalties due thereon, without any explanation on how the amounts were arrived at, nor was there mention of any specific provision of law which supports the assessment; there were no factual or legal bases for the assessments on deficiency 5% tax and EWT; the Commissioner's disallowance of the plant insurance expense as a deduction is improper because such expense is a direct cost, hence, a deductible expenditure; the reimbursements, which were likewise disallowed by the Commissioner, do not comprise taxable income because there is no mark-up or profit element, as they merely represent reimbursement of actual costs it incurred in the operation of the BPC; the foreign exchange gain which was merely reflected for accounting purposes is unrealized income, hence, not taxable: it is not liable for deficiency expanded withholding tax since the recipients have already reported the same in their income tax returns and have paid the tax due thereon. By way of an Answer, 6 the Commissioner raised the following special and affirmative defenses: on February 10, 1997, Enron, through its authorized representative, Rebecca B. Palo, had executed a waiver of the statute of limitations 7 under the National Internal Revenue Code (NIRC), for the purpose of affording the Commissioner ample time to finish the investigation and likewise giving the taxpayer sufficient time within which to complete the required documents that are needed in the conduct of the investigation; the issuance of the Formal Assessment Notices on July 6, 1999 is therefore within the time allowed under the waiver executed by Enron; it complied with the requirement of notice and information prior to the issuance of the assessment; in fact, Enron had, on several occasions, filed its comments/opposition to the proposed findings of the BIR examiners; plant insurance expense should be disallowed because it is not a direct cost or expenditure that go into production nor is it one of those expressly allowable under Revenue Regulation No. 1-95; "reimbursable income" were collectibles from BPC representing charges for services rendered by Enron; the inclusion of the unrealized portion of the foreign exchange gain was made due to Enron's failure to record such gain upon realization; and all presumptions are in favor of the correctness of the assessment. The parties stipulated on the following issues for resolution by the CTA: 1. Whether or not the assessment has prescribed under Section 203 of the NIRC; 2. Whether or not the assessment is void under Section 228 of the NIRC; and 3. Whether or not Enron is liable for the deficiency 5% tax amounting to P1,288,649.00 and EWT amounting to P102,520.00 for the taxable year 1993. HSaIET On November 4, 2003, the CTA rendered the assailed decision canceling and setting aside the deficiency assessment for 5% tax and EWT. It held that the assessment notices were issued beyond the three-year prescriptive period, hence, the same are not valid. Brushing aside the Commissioner's claim that the three-year statute of limitations has been extended by Enron's waiver, the CTA noted that the written waiver of the statute of limitations did not indicate the expiry date of the period agreed upon to assess the tax after the regular three-year period of prescription as required under Section 222(b) of the NIRC and Revenue Memorandum Order No. 20-90. It stated thus: "In other words, the three-year period to assess is merely extended when the Commissioner and the taxpayer execute a Waiver of the Statute of Limitations. It is not therefore valid when the waiver totally removes the limit within which to assess a taxpayer of deficiency taxes. Hence, the waiver executed by petitioner's authorized representative and the Commissioner's alleged representative is not valid. . . ." 8 xxx xxx xxx "In the case at bar, Section 222(b) requires that a period be specified in the written agreement or waiver signed by the Commissioner and the taxpayer before the lapse of the three-year period to effect assessment. We found no such agreed period in the subject waiver. Therefore, the same is null and void." 9 It further noted that the written waiver was signed in behalf of the Commissioner by an unidentified person whose name or designation was not even indicated, hence, it cannot be really ascertained whether such person was an authorized representative of the Commissioner. The Commissioner thereafter filed a motion for reconsideration which was denied by the CTA in its Resolution dated March 1, 2004. Hence, this petition for review raising the following issue and ground: ISSUE "WHETHER OR NOT THE ASSESSMENTS WERE ISSUED BEYOND THE PRESCRIPTIVE PERIOD." GROUND FOR THE PETITION "THE TAX COURT ERRED IN HOLDING THAT THE PRESCRIPTIVE PERIOD TO ASSESS WAS NOT WAIVED BY RESPONDENT DESPITE ITS EXECUTION OF THE WAIVER OF THE STATUTE OF LIMITATIONS." The petition is not meritorious. The conclusion reached by the Court of Tax Appeals, which by the very nature of its function is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, binds this Court, unless there has been a clear abuse or improvident exercise of authority. 10 This Court agrees with the CTA that the written waiver of statute of limitations under Section 222(b) 11 of the NIRC must specify a period within which the Commissioner may assess the tax beyond the regular three-year period of prescription. Without a specified period for the waiver, the assessment of the tax could take forever, to the prejudice of the taxpayer. Precisely, such injustice is being avoided by Section 222(b), in requiring a period within which the waiver is to take effect. While the stability of tax collection is ideal, taxpayers, on the other hand, are entitled to an assurance that they will not be forever subjected to harassment and investigation for tax purposes. Thus, the waiver must not constitute a total abdication of the statute of limitations but only for a specified period , which must be stated in the written waiver signed by both the taxpayer and the Commissioner. A general waiver of the statute of limitations finds no legal basis under the NIRC, hence, it is not valid. The Commissioner's reliance on the case of Commissioner of Internal Revenue vs. Philippine Journalists Inc . dated August 5, 2003 and docketed as CA-G.R. SP No. 72128 before this Court, is not well-taken. As stated therein, the prescription issue in the said case was merely discussed for its academic value and as such, is a mere obiter dictum and cannot be utilized as judicial precedent. A closer scrutiny of the cited case of Alca vs. CTA 12 likewise reveals dissimilar factual antecedents from this case. Therein, the issue was the propriety of the waiver executed by the taxpayer after the expiration of the prescriptive period. Thus, the Supreme Court stated: " But then, it is argued that for a written agreement extending the prescriptive period to be valid, it is necessary that the same be made before the period to be extended has expired . The rule would not apply in this case. Note that petitioner's waiver was of the period of prescription beginning January 20, 1956. It is not just an extension, therefore, of the period of limitation, but a renunciation of her 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 waivable." It also worthy to note that in the said case, the taxpayer's waiver in fact specified a period, i.e., from the period " beginning January 20, 1956 . . . but not after December 31, 1966 ". Thus, a waiver ad infinitum of the statute of limitations really finds no support in the cited jurisprudence. ATHCac This Court also concurs with the CTA's finding that the waiver was formally defective in that it failed to indicate the name or designation of the alleged authorized representative of the Commissioner. As the CTA noted, it cannot be ascertained whether or not the signatory in the waiver was an "authorized representative" of the Commissioner. The Commissioner's stance that the waiver is a unilateral act of Enron cannot be sustained. To be valid, the NIRC requires that such be executed with the concurrence of the taxpayer and the Commissioner or his authorized representative. 13 The waiver not being valid, the three-year prescriptive period to assess the tax was not therefore tolled. Clearly, the assessment issued by the Commissioner on July 6, 1999 was out of time. In fairness to the taxpayer, government should be estopped from collecting the tax where it failed to make the assessment in due time. 14 WHEREFORE, premises considered, this petition for review is DENIED and ordered DISMISSED, and the assailed decision dated November 4, 2003 and the Resolution dated March 1, 2004 of the CTA in C.T.A. Case No. 6029 are hereby AFFIRMED. SO ORDERED. Abdulwahid and Santiago-Lagman, JJ ., concur. Footnotes 1. Rollo , pp. 21-31, Annex A 2. Rollo , pp. 32-34, Annex B 3. Composed of Judges Ernesto D. Acosta ( Presiding ), Juanito C. Castaeda Jr. ( Ponente ), and Lovell R. Bautista 4. Both numbered 018-34-93-00004 5. Rollo , pp. 38-55, Annex C 6. Rollo , pp. 89-92, Annex D 7. Rollo , p. 93 8. Rollo , p. 26, page 6 of CTA Decision 9. Rollo , p. 28, page 8 of CTA Decision 10. Sea-Land Service, Inc. vs. CA , 357 SCRA 441 11. The provision states: "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." 12. 26 SCRA 137 13. Section 222(b), NIRC, CIR vs. CA, CTA & Carnation Philippines Inc ., 303 SCRA 614 14. Republic vs. Ablaza , 108 Phil 1105