STANDARD CHARTERED BANK v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court Of Tax Appeals QUEZON CITY SECOND DIVISION STANDARD CHARTERED C.T.A. CASE NO. 7165 BANK, Petitioner, Members: -versus- CASTANEDA, JR., Chairperson UY, and PALANCA-ENRJQUEZ, JJ. COMMISSIONER OF Promulgated: INTERNAL REVENUE, FEB 2 7 2009 Respondent. V,v:Sl> ~�"' � X------------------------------------------------------------------------------------X D E C� I S I O N PALANCA-ENRIQUEZ, J.: The�validity of a Formal Letter of Demand and Assessment Notice issued beyond the prescriptive period rests on the existence and validity of the Waivers of the Statute of Limitations, considering that it would have the effect of extending the prescriptive period within which the Bureau of Internal Revenue (BIR) could validly issue an assessment against the taxpayer. ~!}9 202

C.T.A. CASE NO. 7165 2 DECISION THE CASE This is a Petition For Review filed on March 9, 2005 by Standard Chartered Bank (hereafter "petitioner"), which seeks to declare null and void the Formal Letter of Demand dated June 24, 2004 and to cancel the Assessments issued by the BIR for deficie. n.cy income tax, fina.l income tax - Foreign Currency Deposit Unit (F<:;DU), withholding tax - compensation (WTC), expanded withholding tax (EWT), and final withholding tax (FWT) in the aggregate amount of P33,326,211.37, including increments covering taxable year 199,8. THE PARTIES Petitioner Standard Chartered Bank is the Philippine Branch of Standard Chartered Bank, a corporation organized and existing under the laws of England, duly authorized to engage business in the Philippines. Respondent Commissioner of Internal Revenue, on the other hand, 1s the official authorized under Section 4 .of the National Internal Revenue Code (NIRC) of1997, as amended, to assess and collect internal revenue taxes, as well as to decide disputed assessments, subject to the exclusive appellate jurisdiction of this Cou~ 203

C.T.A. CASE NO. 7165 3 DECISION . THEFACTS On July 14, 2004, petitioner received respondent's Formal Letter of Demand dated June 24, 2004, for alleged deficiency income tax, final income tax- FCDU, WTC, EWT, FWT, and increments for taxable year 1998 in the aggregate amount of P33 ,326,211.37, broken down as follows : .I Compromise Tax Basic Tax Interest Penalty Total Income Tax 3 594 272.00 3 803 936.67 25,000.00 7 423 208.67 Final Income Tax - FCDU 11 748 483.99 12 433 808.31 25 000.00 24 207 292.30 Withholding Tax-Compensation 50 282.59 55 450.48 12 000.00 117,733.07 Expanded Withholding Tax 678 361.62 748 081.59 20 000.00 1446,443.21 Final Withholding Tax 56 845.84 62 688.28 12 000.00 131 534.12 TOTAL 161128 246.04 17 10 3,965.33 94 000.00 33,326 211.37 On August 12, 2004, petitioner protested the said assessment by filing a letter-protest dated August 9, 2004 addressed to the BIR Deputy Commissioner for Large Taxpayers' Service stating the factual and legal bases of the assessment, and requested that it be withdrawn and cancelled. As of the date of filing of this Petition for Review, respondent has not rendered a decision on petitioner's protest. In view of respondent's inaction on petitioner's protest, on March . (yt 9, 2005, petitioner filed the present Petition For Review. 204

C.T.A. CASE NO. 7165 4 DECISION On June 7, 2005, respondent filed his Answer alleging the following special and affirmative defenses: "4. On the issue of deficiency income tax assessment in the amount of Php: 7,423,208.67, resulting from the adjustments in commission and miscellaneous income, petitioner argued that in making such adjustment, respondent merely considered the credits to the trial balance, without taking into account the debits indicated in the trial balance �. or the adjustment �as verified by petitioner's audited Financial Statement. We disagree. Relative to the difference of Commission Income per Trial B' alance as against audited Financial Statement, petitioner failed to adduce or submit clear and convincing documents to explain the discrepancy. Such being the case, the assessment must stand. As to the discrepancy in the Miscellaneous Income per Trial Balance as against the audited financial statement, considering that petitioner was able to submit actual entries in its allegation regarding adjustments to its provisions for probable losses in the amount of Php: 12,483,177.54, said amount can be considered as allowable deduction from the amount ofPhp: 17,698,295.95; 5. On the issue of Final Income Tax-Foreign Currency . Deposit Unit .(FCDU) in the amount of Php:,,, 24,207,292.30, according to petitioner, respondent's reliance on Revenue Regulations No. 2-98 and Revenue Regulations No. 10-76 is misplaced because, according to it, the liability of the payment of the tax rests primarily on the payor/withholding agent (petitioner's client) and not upon the payee-petitioner, Standard Chartered Bank. We disagree. Be it noted that no Certificate of Tax Withheld and documents have been presented to show that said amount has been paid to herein respondent. In addition, no names of the withholding agent, address, etc., have been adduced in order to obtain information if indeed the &I 205

C.T.A. CASE NO. 7165 5 DECISION tax was remitted. It is in this regard that the provisions of Revenue Regulations 10-98 find application, requiring the info rmation and details as contained in Sections 2.27 and 2.28 paragraph (D) thereof, to wit: 'It shall also declare thereunder all other incomes derived during the taxable period which are subject to the final withholding taxes, the fact that such fmal withholding taxes have been withheld therefro~ti by the payor notwithstanding, indicating the following information: (a) Name of the withholding agent; (b) His/its address; (c) His/its Taxpayer Identification Number (TIN) ; (d) Period covered; (e) Gross Income; (f) Rate of final withholding tax applied; and (g) Amount of final withholding tax withheld." With petitioner's failure to comply with the requirements above-stated, the subject assessment relative to its final income tax, on FCDU, must stand; 6. While it is true that the payor-borrower is constituted by law to withhold and remit the 10% tax on onshore income, the obligation of paying the 10% final tax on onshore income rests on petitioner being the one directly liable for it, pursuant to Section 24(e)(3) [now 28(A)(7)(b)] of the Tax Code (ING Bank, N. V. Manila Branch vs. Commissioner of Internal Revenue, C. T.A. EB No. 52, April 5, 2005); 7. With regard to the deficiency withholding tax on compensation, petitioner argued that respondent based said assessment on the assumption that it did not properly withhold taxes on compensation. We 20G

) C.T.A. CASE NO. 7165 6 DECISION disagree. During the informal conference, petitioner alleged that the above disctepancy was due to lack of alpha list of officers. The alleged alpha list and the corresponding remittances of taxes were requested for admission but were not submitted. Hence, the amount of Php: 286,739.25, which represents the discrepancy of gross amount of compensation per alpha list vis-a- vis its Financial Statement, should1stand; 8. On the issue . of expanded withholding tax in the amount Php: 1,446,443.21, petitioner argued that it is not liable for said deficiency assessment since it has appropriately withheld taxes on its income payments and that petitioner did not have to withhold taxes on items not subject to expanded withholding tax. We disagree. This assessment was based on the individual expense account that should have been covered by the withholding tax as computed corresponding to the applicable rate per account pursuant to Revenue Regulations No. 6-85, now Revenue Regulations 2-98, as amended. The amount assessed pertains to the four items of expenses, such as, maint~nance-non-premises in the amount ofPhp: 4,471,606.30, travel expenses in the amount of Php: 5,149,866.02, GTS costs in the amount of Php: 37,150,236.34 and Miscellaneous in the amount ofPhp: 12,410,187.15, on which petitioner was required to supply information and proof as to the nature and breakdown, but it failed to provide the same. Hence, the subject assessment should stand; 9. Also, on the issue of Final Withholding Tax relative to petitioner's regular banking unit in the amount ofPhp: 131,534.12, it argued that petitioner has already withheld and remitted the correct amount of taxes on its interest expense. While petitioner was able to provide some reconciliation of final withholding tax payments to its RBU, however, there still exists a discrepancy which petitioner failed to remit or explain. Hence, the deficiency final withholding tax pertains to those not yet covere<j by the remittances ~ 207

J C.T.A. CASE NO. 7165 7 DECISION noted in its reconciliation pursuant to Section 57(A) in relation to Section 27(D)(1) of the Tax Code, as amended; 10. Lastly, petitioner argued that respondent's right to assess has already prescribed. We disagree. Admitted is the fact that herein respondent issued the subject assessments on 24 JuJ.?.e 2004. However, on 06 June �2004, petitioner, thru, its representative, executed a Waiver of the Statute of Limitations under the National Internal Rev~nue Code, extending the period of prescription until 30 September 2004. Therefore, the contention of petitioner that the subject.assessment has already prescribed is without merit; 11. The assessments were issued in accordance with law and regulations; 12. Finally, it is a well settled rule in taxation that assessments 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." 1 On October 14, 2005, petitioner filed a Motion for Leave of Court to Serve Supplemental Petition, with attached Supplemental Petition for Review, pursuant to Rule 10 of the 1997 �Rules of Civil Procedure, as amended, in view of the alleged payments made by petitioner through the BIR's Electronic Filing and Payment System (eFPS) as regards its deficiency withholding tax on compen~ation and final withholding tax assessments in the amounts of P1 24,967.73 and P139,713.11 , respectively. In its Supplemental Petition f or Review, petitioner see~~~~ 20 8 wvv

) C.T.A. CASE NO. 7165 8 DECISION be fully credited of the payments it made to cover the deficiency withholding tax on compensation and final withholding tax. Thus, the remaining assessments cover only the deficiency income tax, final income tax- FCDU, and expanded withholding tax in the modified total amount ofP33,076,944.18, computed as follows: Tax Basic Tax Interest Compromise Total Income Tax 3 594 272.00 3 803 936.67 Penalty 7 423 208.67 Final Income Tax - FCDU 12 433 808.31 25 000.00 24 207 292.30 'Expanded Withholding Tax 11 748 483.99 25 000.00 1446 443.21 678 361.62 748 081.59 20 000.00 TOTAL 16 985,826.57 33 076,944.18 16,021,117.61 70 OOQ.OO Finding merit in petitioner's motion, the same was granted and the Supplemental Petition for Review was admitted in a Resolution dated December 12, 2005. Petitioner presented Chona G. Reyes, its Vice-President, as witness, and documentary exhibits which were admitted by the Court in its Resolutions dated October 1, 2007, and January 31, 2008. On the other hand, respondent presented Juan M. Luna, Jr., Revenue Officer .II of the BIR LTAID I, as witness, and documentary evidence marked as Exhibits "1" to "4". Thereafter, the parties were ordered to file their simultaneous memoranda, within thirty (30) days from notice, afterwhich the case shall be deemed submitted for decision. ~' 20D

C.T.A. CASE NO. 7165 9 DECISION Respondent's "Memorandum" was filed on August 4, 2008, while petitioner's Memorandum was filed on October 24, ?008 after a series of motions for extension of time to file memorandum were granted by the Court. The case was deemed submitted for decision on November 12, 2008. Hence, this decision. ISSUES As stipulated by the parties, the Issues for this Court's consideration are: I WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY INCOME TAX IN THE AMOUNT OF P7,423,208.67. II WHETHER OR NOT PETITIONER IS LIABLE FOR FINAL -INCOME TAX - FOREIGN CURRENCY DEPOSIT UNIT (FT-FCDU) IN THE AMOUNT OF P24,207,292.30. III WHETHER OR NOT PETITIONER IS LIABLE FOR DE. FICIENCY . WITHHOLDING . TAX ON COMPENSATION (WTC) IN THE AMOUNT OF Plll,733.07 CONSIDERING THAT RESPONDENT � HAS ADMITTED THE FACT OF PAYMENT. 210

J C.T.A. CASE NO. 7165 10 DECISION IV WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY EXPANDED WITHHOLDING TAXES (EWT) IN THE AMOUNT OF Pl ,446,443.21. v WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY FINAL WITHHOLDING TAX ON RBU IN THE AMOUNT OF Pl31,534.'12 CONSIDERING THAT RESPONDENT HAS ADMITTED THE FACT OF PAYMENT. VI WHETHER OR NOT RESPONDENT' S RIGHT TO ASSESS PETITIONER DEFICIENCY INCOME, FT- FCDU, WTC, EWT, AND FWT HAS PRESCRIBED UNDER SECTION,203 OF THE TAX CODE. THE COURT'S RULING The petition is impressed with merit. The ultimate purpose of an assessment is to ascertain the amount that each taxpayer must pay (Tupaz vs. Ulep,316 SCRA 118). It is a notice to the effect that the amount therein stated is due as tax and a demand for payment thereof (Moreno, Philippine Law Dictionary, 3rd Ed p. 75). However, like any demand for payment, an assessment is subject to a statute of limitation, which fixes the time within which parties may take judicial action, or else be thereafter barred from enforcing them (Barron's Law Dictionary, 2003 Edition, pp. 492-493). Therefore, an assessment made ~ 211

C.T.A. CASE NO. 7165 11 DECISION beyond the prescribed period would not be binding on the taxpayer (Commissioner v. Ayala Securities Corporation, eta/., 70 SCRA 204). Pursuant to the foregoing doctrine, We deal first with the procedural question - the timeliness of the issuance of the Fom1al Letter of Demand and Assessment Notice against petitioner. The Statute of Limitations upon assessment and collection of national internal revenue taxes is provided in Section 203 of the NIRC of 1997, as amended, as follows: "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 \etum was filed. For purposes of this Section, a retum fileq before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." (Emphasis supplied) Pursuant to the foregoing provision, intemal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of retum or from the day the retum was filed. In the instant case, records show that petitioner's income tax retum for .taxable year 1998 was filed on April 15, 1999. Counting three years �. 212

C.T.A. CASE NO. 7165 12 DECISION from this date, respondent had until April 15, 2002 within which to issue an assessment notice on deficiency income tax. As regards petitioner's Quarterly Income Tax Returns for its Foreign Currency Deposit Unit which were filed on May 28, 1998 (First Quarter), August 31 , 1998 (Second Quarter), December 1, 1998 (Third I Quarter), and April 15, 1999 (Fourth Quarter), respondent had until April 15, 2002, at the latest, within which to issue an assessment notice for any deficiency tax on its FCDU for the fourth q�uarter of taxable year 1998. Anent its monthly remittance of withheld income taxes, hereunder are the dates of filing of the returns (BIR Form No. 1743W/1601) and the corresponding dates within which respondent may issue assessment notices (Exhibits "Y ", "Z ", "AA ", "BB ", "CC", "DD ", "EE ", "FF ", "GG ", "HH", "II ", "JJ", and "KK") , to wit: 1998 Monthly Return (BIR Date of Filing I Last day of Issuance of Assessment Form No.1743W/1601) 25-Feb-98 I February 25 2001 January 25-Mar-98 I March 25 2001 February March 27-Aor-98./ April 27 2001 April May 25-Mav-98 1Mav 25 2001 June 24-Jun-98 I June 24, 2001 July 27-Jul-98 I July 27, 2001 August 25-Auo-98 1August 25, 2001 September 24-Sep-98 I September 24, 2001 October 26-0ct-98 I October 26 2001 November 25-Nov-98 1 November 25, 2001 December 28-Dec-98 I December 28 2001 25-Jan-99 I January 25, 2002 213 �

C.T.A. CASE NO. 7165 13 DECISION As regards petitioner's monthly remittance of taxes withheld for its Cebu and Iloilo branches (Exhibits "LL ", 1 "MM", "NN", "00 ", "PP ", "QQ ", and " RR" to VV-1 "), the dates of their filing and corresponding last days within which respondent .may issue assessment notices are enumerated below: 1998 Monthly Return (BIR !t "� Forin No. 1743W/1601) Iloilo Date of Filing f Last Day of Issliance of Assessment January February 16-Feb-98/February 16,2001 March 12-Mar-98 I March 12, 2001 April 7-Apr-98 I April 7 2001 May 12-May-98 1.May 12, 2001 June 8-Jun-98 I June 8, 2001 9-Jul-98 I July 9, 2001 . 1998 Monthly Return (BIR �. Form No. 1743W/1601) Cebu ,., Date of Filing I Last Day of I!iSilance of Assessment January 5-Feb-98 I February1 [ 2001 l February 12-Mar-98 I March { �~2001 ..(~ 12-Mar-98 I March 1 ir:2001 II t� February March 6-Apr-98 I April 6, 2001 March 8-Apr-98 I April 8, 2001 April 12-May-98 I May 12 200l April 12-May-981 May 12, 2001 May 5-Jun-98 I June 5 2001 May 10-Jun-98 I June 10, 2001 Petitioner likewise filed its Monthly Remittance Returns of Final Income Taxes Withheld for its Makati Branch on the following dates, with the corresponding last days within wbich respondent may issue assessment notices (Exhibits "BBB " to "PPP "): 1998 Monthly Return (BIR Form Date of Filing I Last� Day of Issuance of Assessment No. 1743W/1601) Makati 24-Feb-98 I February 24 2001 January -Trade Services February - Trade Services 24-Mar-98 I March 24 2001 March - Trade Services 27-Apr-98 I April 27 2001 214

.,1 ? C.T.A. CASE NO. 7165 14 DECISION April - Trade Services 25-Mav-98 I Mav 25. 2001 January - Credit Operations February - Credit Operations 23-Feb-98 I Februarv 23, 2001 March - Credit Operations 19-Mar-98 I March 19, 2001 Aoril - Credit Ooerations May - Credit Operations 14-Apr-98 I Aoril14, 2001 January - Personal Bankino Ooerations February - Personal Bankino Ooerations 12-Mav-98 I Mav 12. 2001 - March - Personal Bankino Operations � April - Personal Bankino Ooerations 25-Jun-98 I June 25 2001 May - Personal Bankino Ooerations 10-Feb-98 I Februarv 10 2001 9-Mar-98 I March 9, 2001 10-Apr-98 I April10, 2001 12-May-98 I May 12 2001 16-Jun-98 I June 16 2001 However, record further shows that respondent' s Formal Letter of Demand and Assessment Notices for deficiency income tax, final income tax - foreign currency deposit unit, withholdifig tax - compensation, expanded withholding tax, and final withholding tax for taxable year 1998, were issued on June 24, 2004 and received by petitioner on July 14, 2004. Accordingly, when the Formal Letter of Demand and Assessment Notices were issued on June 24, 2004, the right of respondent to assess petitioner for any deficiency internal revenue taxes was already barred by prescription. Respondent however contends that his right to issue subject Assessment Notices has not yet prescribed, invoking Section 222(b) of the NIRC of1997, as amended, which provides: "SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. - XXX XXX w I 215

C.T.A. CASE NO. 7165 15 DECISION (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 agreem~nt made before the expiration of the period previously agreed upon." Respondent offered ih evidenee copies of the Waivers of the I Statute of Limitations executed by the parties, namely: the First Waiver executed on July 20, 2001 extending the period within which the BIR may assess any deficiency taxes until June 30, 2002 (Exhibit "4", BIR Records, p. 466); the Second Waiver executed on April 4, 2002 extending the period of limitation to December 30, 2002 (Exhibit "5", BIR Records, p. 472); the Third Waiver executed on December 5, 2002 extending the period of limitation to April 15, 2003 (Exhibit "6", BIR Records, p . 478); the Fourth Waiver executed on March 27, 2003 extending the period of limitation until September 30, 2003 (Exhibit "7", BIR Records, p. 480); the Fifth Waiver executed on September 16, 2003 extending the period to assess until March 31, 2004 (Exhibit "8", BIR Records, p. 638); the Sixth, Seventh, and Eighth Waivers executed on January_14, 2004 (Exhibit "9", :~ BIR Records, p. 638), March 19, 2004 (Exhibit diD", BIR Records, p. " �639), and July 6, 2004 (Exhibit "II", BIR Records, p. 792), extending the 21C

C.T.A. CASE NO. 7165 16 DECISION period to assess until June 30, 2004, July 31, 2004, and September 30, 2004, respectively. On the other hand, petitioner counters that said waivers are null and void because they do not conform with the .provisions of Revenue Memorandum Order (RMO) No. 20-90 dated April 4, 1990, which prescribes' the procedure for a proper and valid execution of a Waiver of the Statute of Limitations, to wit: "1. The waiver must be in the form identified hereof. This form may be reproduced by the Office concerned but there should be no deviation from such form . The phrase 'but not after 19 should be filled up. This indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription. The period agreed upon shall constitute the time within which to effect the assessment/collection of the tax in addition to the ordinary prescriptive period. 2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. 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 bas accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before the 217 .

C.T.A. CASE NO. 7165 17 DECISION lapse of the period agreed upon in case a subsequent agreement is executed. 3. The following revenue officials are authorized to sign the waiver. A. In the National Office 1. ACIRs for Collection, For tax cases involving Special Operations, not more National Assessment, .tha' n P500,000.00 Excise and Legal on tax cases pending before their respective offices. In the absence of the ACIR, the Head Executive Assistant may sign the waiver. 2. Deputy Commissioner For tax cases involving more than P500,000.00 but not more than PlM 3. Commissioner For tax, cases involving more than PlM B. In the Regional offices XXX XXX 4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy. 5. The foregoing procedures shall be strictly followed. Any revenue official found not to have 218

C.T.A. CASE NO. 7165 18 DECISION complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with." (Emphasis supplied) Petitioner points out that the Waivers of the Statute of Limitations are void because they suffer from the following infim1ities: 1. The First Waiver violated the requirements indicated in RMO No. 20-90 since it was (a) signed only by the Assistant Commissioner for Largy Taxpayers Service and not by respondent Commissioner; (b) did not indicate the date of acceptance by respondent; (c) did not specify the amount of taxes due; and (d) deviated from the prescribed format in RMO No. 20-90; 2. .The Second Waiver which was supposed to extend the prescriptive period to December 20, 2002 has the same defects as the First Waiver; 3. Since both the First and Second Waivers failed to extend the period to assess, the assessments issued against petitioner were clearly issued beyond the 3- year prescriptive period to assess; and 4. Since the First and Second Waivers are void from their inception, the subsequent waivers are also void. We agree with petitioner. The validity of the Formal Letter of Demand and Assessment Notices issued by respondent against petitioner rests primarily on the validity of the execution of the Waivers of the Statute of Limitations, especially, the First and Second Waivers, which were allegedly executed (9i 219 �

C.T.A. CASE NO. 7165 19 DECISION on July ~0, 2001 and April 4, 2002, respectively, within the period to issue the subject Assessment Notices. The First Waiver reads, as follows: WAIVER OF THE STATUTE OF LIMITATIONS ( UNDER THE NATIONAL INTERNAL REVENUE CODE .f � I, Sanjay .Uppal, repr~senting STANDA:RD CHARTERED BANK in consider~tion of the approval by the Commissioner of Internal Revenue of our request for extension of time within which to present the required documents in connection with the investigation and/or consideration of our pending internal revenue tax liabilities for the taxable year 1998, hereby waive the ntnning of the prescriptive period provided for in Sections 203 and 223 and other relevant provisions of the National Internal Revenue Code, and consent to the assessment and collections of the taxes which may be found due after investigation and consideration at any time before or after the lapse of the period of limitations fixed by said Sections 203 and 223 and other relevant provisions of the National Internal Revenue Code, but not later than June 30, 2002. � The intent apd purpose of this waiver is to afford the Commissioner of Internal Revenue .ample time to car.efully consider the instant prot~st of the undersigned taxpayer against the assessment. It is unders~ood, however, that the undersigned taxpayer does not, by th1 execution of this waiver, admit in advance the correctness of the assessment which may be made against him for the period abovementioned; nor does he waive his right to use any legal remedies afforded by law to secure a credit or refund on such tax that may be assessed and paid Jor the same period pursuant to Sections 204 and 230 of the National Internal Revenue Code. The period of suspension' agreed upon herein may be extended by subsequent agreement in writing made before the expiration of said period of extension. 220

j.. ,. C.T.A. CASE NO. 7165 20 DECISION However, prescnptwn, which has already accrued in our favor, shall not be deemed waived. Executed this 20th day of July 2001 m Makati City, Philippines. (SGD.) Sanjay Uppal Chief Finance Officer ACCEPTED AND AGREED TO: (SGD.) RENE G. BANEZ Commissioner of Internal Revenue By: (SGD.) VIRGINIA L. TRINIDAD Assistant Commissioner Large Taxpayers Service Date:" (Exhibit "4 ") On the other hand, the Second Waiver executed on April 4, 2002 reads: "WAIVER OF THE STATUTE OF LIMITATIONS UNDER TIIE NATIONAL INTERNAL REVENUE CODE I, Carlos Borromeo representing STANDARD CHARTERED BANK in consideration of the approval by the Commissioner of Internal Revenue of our request for eXtension of time within which to present additional documents involving the investigation of all Internal Revenue Tax tax liabilities for the period 1998, hereby waive the running of the prescriptive.period provided for in Sections 203 and 223 and other relevant provisions of the National Internal Revenue Code, and consent to the assessment and collection of the tax or taxes of the said period which may be found due after investigation at any time before or after the lapse of the period of limitations fixed by said Sections 203 and 223 and other relevant provisions of the National Internal Revenue Code, as amended, but not later than December 30, 2002, provided (jjjJ 221

J C.T.A. CASE NO. 7165 21 DECISION that any prescnptwn that might have already set 1S not hereby deemed waived. The intent and purpose of this Waiver is to afford the Commissioner of Internal Revenue ample time to carefully consider the legal and/or factual questions involved in he determination of the aforesaid liabilities. It is understood, however, that the undersigned taxpayer does not, by the execution of this waiver, admit in advance the correctness of the assessment which may be made against him for the period above mentioned; nor does he waive his right to use any of the legal remedies afforded by law to secure a credit or refund on such tax that may be assessed and paid for the same period pursuant to Section 204 and 230 of the National Internal Revenue Code. The period of suspension agreed upon herein may be extended by subsequent agreement in writing made before the expiration of said period of extension. Executed this 4th day of April 2002 m Makati City, Philippines. (SGD.) Carlos Borromeo ACting Chief Finance Officer ACCEPTED AND AGREED TO: RENE G. BANEZ Commissioner of Internal Revenue By: (SGD.) EDWIN R. ABELLA Assistant Commissioner Large Taxpayers Service Date:" (Exhibit "5 ") Pursuant to Revenue Memorandum Order No. 20-90, the waiver must be in the following tenor: "WAIVER OF THE STATUTE OF LIMITATIONS 222

C.T.A. CASE NO. 7165 22 !, DECISION UNDER THE NATIONAL INTERNAL REVENUE CODE m consideration of the approval by the Commissioner of Internal Revenue of my request for re-investigation and/or reconsideration of my pending internal � revenue case involving the assessment of the sums of as for the years _ _ _ _ _ _ _, hereby w~ive , the running of t~e prescriptive period provided for in Sections 203 and 223 and other relevant provisions of the National Internal Revenue Code, and consent to the assessment and collection of the taxes which may be found due after reinvestigation and reconsideration at any time before or after the lapse of the period of limitations fixed by said Sections 203 and 223 and other relevant provisions of the National Internal Revenue Code, but not after , 19 The intent and purpose of this waiver is to afford the Commissioner of Internal Revenue ample time to carefully consider the instant protest of the undersigned taxpayer against the assessment. It is understood, however, that the undersigned taxpayer does not, by the execution of this waiver, admit in advance the correctness of the assessment which may be made against him for the periods above mentioned; nor does he waive his right to use any of the legal remedies afforded by law to Secure a credit or refund on such tax that may be assessed and paid for the same period pursuant to Sections 204 and 230 of the National Internal Revenue Code. The period of ~suspension agreed upon herein may be extended by subsequent agreement in writing made before the expiration of said period of extension. Executed this day of _ _ __ _ 19 - 'Ill Quezon City, Philippines. �(Taxpayer or Authorized Representative) 223

C.T.A. CASE NO. 7165 23 DECISION ACCEPTED AND AGREED TO: Commissioner of Internal Revenue - Date " In addition, Section 1 of RMO No. 20-90 requires that the waiver must be in the form identified therein and that there should be no deviation from such form. Section 2 there<;>f requires that soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, shall sign the waiver indicating that the BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. Both the date of execution by the taxpayer and date of acceptance by the BIR should be before the expiration of the period of prescription; and that the waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. Likewise, the fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy (Section 4, RMO No. 20-90). ...- In the case at bar, a careful examination of the subject waivers reveals the following defects: 1) This case involves assessment amounting to more �than Pl,OOO,OOO.OO. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the BIR. A 224 (QJJJ'

C.T.A. CASE NO. 7165 24 DECISION perusal of the First and Second Waivers of the Statute of Limitations shows that they were signed by Assistant Commissioner-Large Taxpayers Service Virginia L. Trinidad and Assistant Commissioner-Large Taxpayers Service Edwin R. Abella respectively, and not by the Commissioner of Internal Revenue; 2) The date of acceptance by the Assistant Conunissioner- Large Taxpayers Service Virginia L. Trinidad of the First �waiver was not indicated therein;� 3) The date of acceptance by the Assistant Commissioner- Large Taxpayers Service Edwin R. Abella of the Second Waiver was not indicated therein; 4) The First and Second Waivers of Statute of Limitations did not specify the kind and amount of the tax due; and 5) The tenor of the Waiver of the Statute of Limitations signed by petitioner's authorized representative failed to comply with the prescribed requirements of RMO No. 20-90. The subject waiver speaks of a request for extension of time within which to present additional documents, whereas the waiver provided under RMO No. 20-90 pertains to the approval by the Commissioner of Internal Revenue of the taxpayer's request for re- investigation and/or reconsideration of his/its pending internal revenue case. In the case of Philippine Journalists, Inc. vs. Commissioner of Internal Revenue (447 SCRA 2I 4), the Supreme Court laid down the requisites of a valid Waiver of the Statute of Limitations, to wit: :'A waiver of the statute of limitations under the NIRC, to a � certain extent, is a derogation of the taxpayers' right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. The waiver of the statute of limitations is not a waiver of the (� 225

I~ C.T.A. CASE NO. 7165 25 DECISION right to invoke the defense of prescription as erroneously held by the Court of Appeals. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measur~, should be liberal'Iy construed in order to afford such pro,tection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed. RMO No. 20-90 explains the rationale of a wa1ver: The phrase 'but not after _ _ _ _ __ 19_ ' should be filled up. This indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription. The p eriod agreed upon shall constitute the time within which to effect the assessment/collection of the tax in addition to the ordinary prescriptive p eriod. (Emphasis supplied) As found by the CTA, the Waiver of Statute of Limitations, signed by petttioner's comptroller on September 22, 1997 is not valid and binding because it does not conform with the provisi~ns of RMO No. 20-90. It did not specify a defmite agreed date between the BIR and p~tit~oner, within which the former may assess and collect revenue taxes. Thus, I petitioner's waiver became unlimited in time, violating Section 222(b) of the NIRC. The waiver is also defective from the government side because it was signed only by a revenue district officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to 22G

C.T.A. CASE NO. 7165 26 DECISION extend the period to a date certain. The conformity of the BIR must be made by either the Commissioner or the Revenue District Officer. This case involves taxes amounting to more than One Million Pesos (Pl,OOO,OOO.OO) and executed almost seven months before the expiration of the three-year prescription period. For this, RMO No. 20-90 requires the Commissioner of Intemal Revenue to sign for the BIR." A careful perusal of the First and Second Waivers of the. Statute of Limitations shows that they did not specify the date of acceptance by respondent. This defect makes it difficult to resolve the issue of whether the waivers were actually agreed or executed before the expiration of the three-year prescriptive period. The date of acceptance is material because it determines whether or not the acceptance was made within the prescriptive period; that if the acceptance was made after the prescriptive period, the same is ineffectual since there is no more period to extend. Thus, in the case of Philippine Journalists, Inc. (supra) , the Supreme Court categorically declared: "The other defect noted in this case is the date of acceptance which makes it difficult to fix with certainty if the waiver was actually agreed before the expiration of the three-year prescriptive period. The Court of Appeals held that the date of the execution of the waiver on September 22, 1997 could reasonably be understood as the same date of acceptance by the BIR. Petitioner.points out however that Revenue District Officer Sarmiento could not have accepted the waiver yet because she was not the Revenue District Officer of RDO No. 33 on such date. Ms. Sarmiento's transfer and assignment to RDO No. 33 was �only signed by the BIR 227

C.T.A. CASE NO. 7165 27 DECISION Commissioner on January 16, 1998 as shown ' by the Revenue Travel Assignment Order No. 14-98. The Court of Tax Appeals noted in its decision that it is unlikely as well that Ms. Sarmiento made the acceptance on January 16, 1998 because 'Revenue Officials normally have to conduct first an inventory of their pending papers and property responsibilities'." As regards the defect that the subj ect waivers did not indicate the kind and amount of tax due, the same is a clear violation ofRMO No. 20- 90. The purpose of stating the specific kind of tax and the amount of tax due is for the petitioner to pinpoint which among the proposed tax assessments may subsequently be issued without the petitioner invoking the defense of prescription. If the amount and kind of tax were not indicated in the said waiver, logically, there was no agreement to speak I of. It should be emphasized that RMO No. 20-90 requires specific information. Hence, to substitute the same with general statements is a clear violation of RMO No. 20-90. Consider~ng that the First and Second Waivers of the Statute of Limitations are invalid, it necessarily follows that the subsequent waiv.ers did not in any way cure these defects. Neither did they extend the prescriptive period to assess. Hence, the assailed Formal Letter �� of Demand and Assessment Notices are void for having been issued beyond the reglementary period. 228

C.I.A. CASE NO. 7165 28 DECISION In view of the foregoing discussion, the Court finds it no longer necessary to discuss the other issues raised by petitioner. WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly, the Formal Letter of Demand and Assessment Notices dated June 24, 2004 for deficiency income tax, final income tax-FCDU, and ex'panded withholding,tax in the total amount of P33,076,944.18 for taxable year 1998, issued by respondent Commissioner of Internal Revenue against the petitioner, are hereby ORDERED CANCELLED and SET ASIDE. SO ORDERED. ~~~ / OLGA PALANCA-ENRf6UEZ Associate Justice WE CONCUR: ,.. ~~.~/a. EA-~s~t.iUceY fuANITO C. CASTANEDA:', JR. Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to.the writer of the opinion of the Court's Division. ~:tkC . G.i/-~ol.c /. ~ . .fUANITO C. CASTANEDAfJR. � A~sociate Justice Chairperson, Second .Division 229