Implementing Rules and Regulations (IRR) of the Downstream Oil Industry Deregulation Act of 1996

EN BANC [C.T.A. EB CASE NO. 631 . December 22, 2011.] (C.T.A. Case No. 6678) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .STEELASIA MANUFACTURING CORPORATION , respondent . [C.T.A. EB CASE NO. 632 . December 22, 2011.] (C.T.A. Case No. 6678) STEELASIA MANUFACTURING CORPORATION ,petitioner, vs. COMMISSIONER OF INTERNAL REVENUE ,respondent. DECISION FABON-VICTORINO , J p : Before the Court En Banc are the Petitions for Review filed by the Commissioner of Internal Revenue (CIR) and Steelasia Manufacturing Corporation (SAMC) on June 7, 2010 1 and June 11, 2010, 2 respectively, assailing the Amended Decision 3 of the Court in Division dated April 30, 2010 in CTA Case No. 6678 entitled Steelasia Manufacturing Corporation vs. Commissioner of Internal Revenue. The CIR as well assails the original Decision 4 promulgated on October 9, 2009. THE FACTS AND THE PROCEEDINGS The pertinent facts, as found by the Court in Division based on the record of the case are as follows: SAMC is a duly organized domestic corporation whose purpose is to operate, conduct and maintain the business of manufacturing, importing and exporting, buying and selling of different steel products. Its office address is at B:2, Bonifacio High Street, Bonifacio Global City, Taguig City. On the other hand, the CIR is the government official mandated by law to enforce and implement the National Internal Revenue Code (NIRC)and related tax statutes and their respective implementing rules and regulations. She holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City. On February 12, 2001, CIR issued to SAMC a Preliminary Assessment Notice (PAN) finding the latter liable for deficiency VAT of Php107,402,404.11 and deficiency withholding tax of Php24,034,502.14. 5 On February 27, 2001, SAMC received from the CIR an undated Final Assessment Notice 6 (FAN). Attached with it was a Formal Letter of Demand with Details of Discrepancies 7 dated February 26, 2001, demanding payment of the above mentioned deficiencies in VAT and withholding tax in the total of Php131,436,907.15, inclusive of interest. 8 The Details of Discrepancies, justified the assessment on the following grounds: a) Miscellaneous Income amounting to P124,207.61 were not subjected to Value-Added Tax in violation of Section 105 of the National Internal Revenue Code, giving rise to a deficiency output taxes of P12,420.76; b) An Input taxes of P1,515,265.00 were disallowed for failure to comply with the invoicing and accounting requirements for VAT-Registered Persons as provided for in Section 113 of the NIRC; DHcSIT c) Investigation reveals that [SAMC] acquired Tax Credit Certificates (TCC), issued by the One-Stop Shop Tax Credit and Duty Drawback Center to Board of Investments (BOI)-registered firms, from different Textile companies at a discount. The disallowance stemmed from the utilization of these TCC. The Commissioners of Internal Revenue in BIR Rulings 181-94, 165-98 and 164-98, taking into consideration Rule IX of the Rules and Regulations issued by the BOI to implement P.D. 1789 and B.P. Blg. 391, ruled that TCCs issued by the BOI is limited to one transfer by the grantee to its domestic suppliers of raw materials and/or components who are likewise BOI-registered. The records show that although [SAMC is] BOI-registered, [it] is not a domestic supplier of the raw materials and/or component product of the textile companies, therefore the TCC cannot be used in payment of tax liability; d) Verification disclosed that [SAMC] failed to withhold a 10% Withholding Tax on Interest Expense as required in Revenue Regulations (RR) No. 14-77, amending RR No. 10-76; and e) It should be noted that the investigation were based on evidence best obtainable and other pertinent documents provided by the taxpayer as the taxpayer refuses/fails to present the complete books of accounts as required by the National Internal Revenue Code. 9 On March 29, 2001, SAMC filed with the CIR a protest letter dated March 26, 2001, claiming that it had no tax liabilities for the taxable year 1997. On October 9, 2002, SAMC received from the CIR a Preliminary Collection Letter dated October 8, 2002, demanding payment of the aforesaid tax liabilities in the aggregate amount of P131,436,907.15, inclusive of interest. 10 On March 9, 2003, the CIR sent SAMC a Final Notice Before Seizure (FNBZ) dated October 15, 2002. 11 Treating the FNBZ as final denial of its protest letter dated March 26, 2001, SAMC filed a Petition for Review before the Court in Division on April 21, 2003. On May 19, 2003, respondent filed a Motion to Dismiss for want of jurisdiction, to which respondent filed an Opposition on June 27, 2003. On July 16, 2003, petitioner filed an Amended Petition for Review dated June 27, 2003. On August 26, 2003, CIR filed his Answer 12 reiterating the grounds justifying the assessment indicated in the Details of Discrepancies. On February 18, 2008, while the proceeding was in progress, SAMC filed a "Motion for Partial Withdrawal of the Petition for Review" 13 insofar as the deficiency VAT assessment was concerned having availed of the Government's Tax Amnesty Program under Republic Act No. 9480, as implemented by Department of Finance (DOF) Order No. 29-07. Finding merit, the Court, in its Resolution dated March 17, 2008, granted SAMC's motion and ordered withdrawal of the Petition for Review insofar as the FAN for deficiency VAT for the taxable year 1997 in the amount of Php107,402,405.01, inclusive of interest, was concerned. On October 27, 2007, the case was submitted for decision with the lone issue of whether SAMC was liable for the 10% withholding tax on interest expense for the taxable year 1997 in the amount of Php24,034,502.14, inclusive of interest. On October 9, 2009, the Court in Division partially granted SAMC's Petition for Review in this wise: "WHEREFORE, the petition for review is partially GRANTED. Respondent's deficiency tax assessment issued against petitioner-SAMC is hereby partially CANCELLED and reduced to the amount of P2,836,303.80. Petitioner-SAMC is hereby ordered to pay the amount of P2,836,303.80 with interest from January 11, 1998. SO ORDERED." The Court in Division emphasized in its Decision that SAMC failed to adduce enough evidence to substantiate its claim that it withheld and remitted the 10% FWT on interest payments under Revenue Regulations (RR) No. 10-76, as amended by RR No. 14-77, which applies to foreign currency loans. Both aggrieved, SAMC and CIR filed their "Motion for Partial Reconsideration" on October 29, 2009 and October 30, 2009, respectively. On April 30, 2010, the Court in Division denied the CIR's Motion for Partial Reconsideration for lack of merit but partially granted that of SAMC. Thus, the Amended Decision promulgated on April 30, 2010, to wit: "WHEREFORE, premises considered, respondent-CIR's Motion for Partial Reconsideration is hereby DENIED for lack of merit. Petitioner-SAMC's Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. Accordingly, petitioner-SAMC is hereby ORDERED to pay the reduced amount of P2,720,102.40 as its deficiency Final Withholding Tax, with interest from January 11, 1998. SO ORDERED." Still not convinced, the CIR and SAMC filed their respective Petitions for Review with the Court En Banc on June 7, 2010 and June 11, 2010, respectively. On June 23, 2010, the two petitions were consolidated pursuant to Section 1, Rule 31 of the Revised Rules of Court. On January 11, 2011, the Petitions for Review were deemed submitted for decision after the parties filed their respective Comments on each other's petition. THE ISSUES The CIR claims that: I. THE SPECIAL FIRST DIVISION OF THE HONORABLE COURT ERRED IN RULING THAT STEELASIA MANUFACTURING CORPORATION MAY PRESENT EVIDENCE FOR THE FIRST TIME ON AN ISSUE OF FACT AFTER COMPLETELY FAILING TO SUBMIT DOCUMENTS ON THE SAME ISSUE DURING THE ADMINISTRATIVE PROCEEDINGS IN VIOLATION OF SECTION 228 OF THE TAX CODE OF 1997 AND THE DOCTRINE OF PRIMARY JURISDICTION. On the other hand, SAMC raises the following issues, to wit: I. WHETHER OR NOT RESPONDENT OBSERVED THE MANDATORY PROCEDURE REQUIRED IN THE ISSUANCE OF PRELIMINARY ASSESSMENT NOTICE (PAN) AND FORMAL ASSESSMENT NOTICE (FAN). II. WHETHER OR NOT THE SUBJECT DEFICIENCY WITHHOLDING TAX ASSESSMENT ISSUED AGAINST SAMC IS INVALID BECAUSE CIR FAILED TO OBSERVE THE PROVISIONS OF BIR REVENUE REGULATIONS NO. 12-99 AND SECTION 228 OF THE 1997 TAX CODE. III. WHETHER OR NOT THE CIR INFORMED SAMC OF THE FACTUAL AND LEGAL BASES OF THE SUBJECT ASSESSMENT. IV. WHETHER OR NOT SAMC IS LIABLE TO THE DEFICIENCY FINAL WITHHOLDING TAX IN THE AMOUNT OF PHP2,720,102.40, AS WELL AS ITS INCREMENTS. The CIR claims that the Court in Division erred in ruling that SAMC could present for the first time before the Court in Division evidence on factual issue which were not submitted in the administrative proceeding without violating Section 228 of the NIRC of 1997 and the doctrine of primary jurisdiction. SAMC, on the other hand, insist that the subject assessment is invalid on the ground that the CIR failed to observe the mandatory 15-day period from receipt, for it to challenge the PAN as provided under BIR Rules and Regulations No. 12-99 14 and Section 228 of the NIRC of 1997. Only after the lapse of the said 15-day period without any protest shall the taxpayer be considered in default, justifying the issuance of a formal letter of demand and assessment. Petitioner complains that respondent sent an undated and unnumbered FAN to petitioner on February 27, 2001 or barely eleven (11) days from its receipt of the PAN. Moreover, the CIR was unable to justify the premature issuance of the FAN prompting SAMC to presume that it was designed to avoid prescription to set in and for fishing expedition. SAMC also claims that its right to due process has been violated since it was not informed of the factual and legal bases of the subject assessment. As testified by witness Bernadette P. Narciso, the CIR failed to inform SAMC of the reason for the referral of the case to the BIR Tax Fraud Division. The said BIR office can take cognizance of tax assessments against taxpayers only upon proof that fraud was employed in the Filing of tax returns which the CIR failed to establish. The CIR did not even mention this matter in its Memorandum. SAMC states that fraud is a question of fact and that the circumstances constituting it must be sufficiently established. 15 Lastly, SAMC maintains that it is not liable to the deficiency FWT in the amount of Php2,720,102.40, including its increments. Allegedly, the Court in Division erred in not considering and giving evidentiary weight to the letters-certifications marked as Exhibits "W","X","Y" and "Z" issued by its banks-creditors indicating that its loan as evidenced by promissory notes are peso-denominated. Although Exhibits "D-13","D-16","D-17","D-18","D-19" and "D-20" were denied admission, SAMC nonetheless presented testimonies and documents on rebuttal to prove that the subject interest payments of Php28,363,038.00 refer to peso-denominated loans. THE RULING OF THE COURT EN BANC A judicious examination of the argument set forth by the CIR in her Petition for Review readily shows that the ground relied upon as well as the matter raised therein are mere reiteration of her arguments before the Court in Division, which were exhaustively considered and determined in the assailed Decision of October 9, 2009 and in the subsequent Amended Decision of April 30, 2010. In fact, the present issue was taken almost verbatim from her Motion for Partial Reconsideration filed on October 30, 2009. TcSHaD Be that as it may, and if only to disabuse the mind of the CIR, let it be repeated that the need for the submission of the supporting documents lies on the taxpayer-protester. As correctly pointed out by the Court in Division, "the submission of supporting documents on the protest cannot be left to the discretion of the BIR for in doing so would leave the taxpayer's case at the mercy of the whims of the BIR. Otherwise stated, it is for the taxpayer to decide whether or not supporting documents are required to support its protest, because the taxpayer is in the best position, being the affected party to the assessment, to determine which documents are necessary and essential to garner a favourable decision from the BIR." 16 If the CIR finds that additional documents are wanting for the complete determination of the protest and of the propriety of the assessment, she needs only to inform the taxpayer-protester of the same so that she may act accordingly on the protest. 17 The record is clear that the CIR did not inform or notify SAMC on the need for additional documents after the latter filed its protest letter. Further, the Court cannot subscribe to the CIR's claim that due to SAMC's failure to submit pertinent documents in support of its protest, the factual basis of the assessment became final. This has been resolved by the Court En Banc in the case of Commissioner of Internal Revenue vs. Solidbank Corporation 18 when it quoted with approval the disquisition of the Court in Division in the case of Standard Chartered Bank-Philippine Branch vs. Commissioner of Internal Revenue , 19 to wit: '...In other words, the finality of the assessment, as worded in the provision of law, simply means that where the taxpayer decides to forego with its opportunity to present the documents in support of its claim within sixty (60) days from the filing of its protest, it merely lost its chance to further contest the assessment. Effectively, its non-compliance with the submission of the necessary documents would either mean that the petitioner no longer wishes to further submit any document for the reason that its protest letter filed was more than enough to support its claim, or that the petitioner failed to comply thus it can no longer give justification with regard to its objections as to the correctness of the assessment notices. Nonetheless, the necessity of the submission of the supporting documents lies on the petitioner. It cannot be left to the discretion of the respondent for in doing so would leave the petitioner's case at the mercy of the whims of the respondent. In other words, it is for the petitioner to decide whether or not supporting documents are necessary to support its protest, for it is in the best position, being the affected party to the assessment, to determine which documents are necessary and essential to garner a favorable decision from the respondent." The complaint that she was effectively deprived of the opportunity to act on the protest and correct the errors she allegedly committed by SAMC's failure to submit supporting documents is simply a limp and a lame excuse. Although the submission of complete supporting documents is desirable for total determination of the relief sought, the non-submission of the same with the CIR is not fatal to SAMC's cause as to render the administrative proceeding invalid. Besides, cases filed with the Court in Division are litigated de novo where the parties are given full opportunity to present their evidence accordingly. Party litigants have to present their cases anew and if so desire, adduce additional evidence in support thereof. Under Section 8 of RA 1125, the CTA is described as a court of record and as such cases filed before it are litigated de novo. In other words, party litigants are obliged to prove every minute aspect of their cases. 20 HTASIa As regards SAMC's petition, the Court En Banc also finds that issues raised are a mere rehash of its Motion for Partial Reconsideration 21 dated October 29, 2009, thus it does not present new arguments nor new matters which have not been considered and passed upon by the Court in Division in the assailed Decision and the Amended Decision promulgated on October 9, 2009 and April 30, 2010, respectively. Nevertheless, the Court En Banc will discuss them in seriatim. The subject assessment is valid. On the allegation that the CIR failed to observe the 15-day period for any taxpayer to contest the PAN before a FAN is issued mandated under RR No. 12-99 and Section 228 of the NIRC of 1997 in violation of its right to due process, suffice it to say that due process in our jurisdiction refers to the right of the taxpayer to be informed of the legal and factual findings of the BIR as regards its deficiency taxes, and the opportunity to be heard through protest. 22 Note that a preliminary assessment notice preparatory to the issuance of a formal or final assessment notice is not, legally speaking, an assessment even if it contains a computation of the tax liabilities of a taxpayer and a demand for payment of the computed tax liabilities was made in such preliminary assessment notice. 23 Section 228 of the NIRC of 1997 clearly refers to the Final Assessment Notice that should be formally protested to by SAMC; else, the same becomes final and executory. 24 It cannot be denied that SAMC was duly informed of the assessment issued against it as it was able to intelligently contest the subject assessment via its protest letter 25 dated March 26, 2001. Thus, SAMC was afforded due process. As regards, SAMC's claim that the issuance of the subject PAN and FAN was designed by the CIR to avoid the setting in of "prescription" and to engage in a fishing expedition, the contention is at best a presumption which cannot be considered and countenanced by the Court in the absence of sufficient evidence in support thereof. The same is true insofar as the allegation that the CIR used the Tax Fraud Division of the BIR to impute fraud upon it and to engage in a "fishing expedition" to avoid the setting in of "prescription of assessment". The Court in Division is correct in not considering and giving evidentiary weight to the letters-certifications (Exhibits "W","X","Y" and "Z") issued by the respective banks-creditors of SAMC SAMC posits that while its Exhibits "D-13","D-16","D-17","D-18","D-19" and "D-20",representing the total interest expense in the amount of Php28,363,038.00, were denied, it nonetheless presented rebuttal testimonies and documents which proved that the subject interest payments of Php28,363,038.00 refer to peso-denominated loans. A close examination of the letters-certifications reveals that the banks certifies that SAMC had loans with them, as evidenced by the attached promissory notes, that were "peso-denominated". ISCaDH But as correctly observed by the Court in Division that while SAMC presented rebuttal testimonies and documentary exhibits to prove the subject interest payments of Php28,363,038.00 refer to peso-denominated loans, only Exhibit "X" corresponds with Exhibit "D-13".The other promissory notes attached to Exhibits "X","Y",and "Z" do not, in any way, pertain to the previously marked denied Exhibits "D-16","D-17","D-18","D-19" and "D-20".For easy reference, the pertinent portion of the Decision is hereby reproduced below: "Upon a careful review of the pieces of evidence submitted by the petitioner, the Court partly reconsiders its denial of the above-mentioned documents. Records show that petitioner-SMAC filed a Supplemental Offer of Evidence on April 30, 2008, which covers the following documents, to wit: 1. Exhibit "W" Certification dated October 11, 2007 issued by PCI Capital Corporation through its Manager, Mr. Henry S. Santos. 2. Exhibit "X" Letter-Certification dated October 10, 2007 issued by Banco de Oro, through its VP & Head-Loan Operations Department, Ms. Belinda Abad with attached eight (8) certified true copies of the Promissory Notes (PN) executed on different dates with different amounts by the Petitioner in favor of the said bank, namely: PN No. 630/95; PN No. 631/95, PN No. 934/95; PN No. 933/95; PN No. 1123/95; PN No. 1390/95; PN No. 1919/95; and PN No. 1040/97. 3. Exhibit "Y" Letter-Certification dated October 10, 2007 issued by Banco de Oro, through its VP & Head-Loan Operations Department, Ms. Belinda Abad, with attached eight (8) certified true copies of the Promissory Notes (PN) executed on different dates with different amounts by the petitioner in favor of the said bank, namely: PN No. TL# 095121; PN No. TL# 095120; PN No. TL# 095153; PN No. TL# 095152; PN No. TL# 095186; PN No. TL# 095187; PN No. TL# 095217; and PN No. TL# 095269. 4. Exhibit "Z" Letter-Certification dated October 8, 2007 issued by Allied Banking Corporation through its Manager/KLTC (Kaloocan Loan & Trade Center) Head, Mr. Noel U. Go, with attached certified true copies of: a) five (5) Loan Payment Manifold issued on different dates; b) one (1) Peso-denominated Promissory Note with PN No. 0024-96-16052 in the amount of 17 Million Pesos; c) three (3) US Dollars Promissory Notes issued on different dates in the amount of 1 Million US Dollars each with PN Nos. 96-10496, 97-02498 and 97-02714. As borne by the records of this case, the above-mentioned exhibits were not contested by the respondent and were subsequently granted admission by this Court in a Resolution dated June 24, 2008. Notwithstanding such admission, the Court does not totally agree with the petitioner's contention that the foregoing documents prove that the amount of P28,363,038.00 was not from foreign currency loans thus, the deficiency withholding tax of P2,836,303.80 has no factual and legal basis. A close scrutiny of the exhibits and their attached promissory notes would show that only the certified true copy of PN No. 1040/97 9 (attached to Exhibit "X") corresponds with Exhibit "D-13".Petitioner-SAMC was able to prove that Exhibit "D-13",with face value of Ten Million Pesos (P10,000,000.00),was peso-denominated loan. The other promissory notes attached to Exhibits "X","Y" and "Z" do not, in any way, pertain to the previously denied Exhibits "D-16","D-17","D-18","D-19" and "D-20".Thus, their denial for failure of petitioner to present the originals thereof for comparison remains." It should be emphasized that when tax assessment is assailed, the burden of proof is upon the taxpayer to clearly show that the assessment was erroneous in order to relieve him from it. Failure to present proof of error in the assessment will justify the judicial affirmance of the same as obtaining in this petition filed by SAMC. In view of the foregoing discussions, the Court En Banc finds no cogent reason to modify much more reverse the assailed Decision and Amended Decision of the Court in Division respectively dated October 9, 2009 and April 30, 2010. WHEREFORE ,the Petitions for Review filed by Steelasia Manufacturing Corporation and the Commissioner of Internal Revenue on June 11, 2010 and June 7, 2010, respectively, are hereby DENIED ,for lack of merit. Accordingly, the assailed Decision and Amended Decision promulgated on October 9, 2009 and April 30, 2010, respectively, are AFFIRMED in toto. SO ORDERED. ACcTDS (SGD.) ESPERANZA R. FABON-VICTORINO Associate Justice Juanito C. Castaeda, Jr.,Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Olga Palanca-Enriquez, Cielito N. Mindaro-Grulla and Amelia R. Cotangco-Manalastas, JJ., concur. Ernesto D. Acosta, P.J., is on leave. Footnotes 1. Docket, CTA EB No. 631, pp. 6-16. 2. Docket, CTA EB No. 632, pp. 6-23. 3. Docket, CTA EB No. 631, pp. 18-34. 4. Docket, CTA EB No. 631, pp. 35-41. 5. 7th Par. of Joint Stipulation of Facts and Issues ("JSFI"),Docket, pp. 257-260. 6. Exhibit "3". 7. Exhibit "2". 8. 8th Par., Ibid. 9. 9th Par., Ibid. 10. 10th Par., Ibid. 11. Ibid. 12. Docket, pp. 208-211. 13. Docket, pp. 541-544. 14. Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty. 15. Santiago S. Ong, et al. v. Commissioner of Internal Revenue, CTA Case No. 4648, July 20, 1994. 16. Decision dated October 9, 2009, p. 9. 17. Standard Chartered Bank-Philippine Branches vs. Commissioner of Internal Revenue, CTA Case No. 5696, August 16, 2001 . 18. CTA EB No. 114, February 22, 2007. 19. CTA Case No. 5696, August 16, 2001. 20. G.R. No. 153204, August 31, 2005 and G.R. No. L-49298, April 26, 1990 . 21. Docket, pp. 733-746 . 22. Standard Chartered Bank vs. Commissioner of Internal Revenue, CTA Case No. 7253, June 25, 2010. 23. Tax Rights and Remedies by Victorino C. Mamalateo, p. 758. 24. Direct Container Line Phils., Inc. vs. Commissioner of Internal Revenue, CTA Case No. 7616, September 10, 2009. 25. Docket, pp. 29-32.