ISHIDA PHILIPPINES TUBE CO., INC, v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF TI-IE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************ ISHIDA PHILIPPINES TUBE CTA Case No. 7633 CO., INC., Members: Petitioner, -versus- ACOSTA, Chaitperson, BAUTlSTA, and CASANOVA,]]. COMMISSIONER OF INTERNAL REVENUE, DECI S ION ACOSTA, P.J.: T his is a Petition for Review fi led before the Court of Tax Appeals on May 11, 2007, seeking the cancellation and setting aside of the Warrant of Distraint and / or Levy No. 0307 -01 dated J\tfarch 23, 2007 1 issued by respondent for the collection of alleged deficiency income tax, fringe benefit tax, final withholding tax, value-added tax, documentary sta mp tax, expanded withholding tax, withholding tax on compensation, and final tax of petitioner covering taxable year 2003 totaling P31,676,634.65. I Exhibit "L ". 197

) y DECISION CTA Case No. 7633 Page 2 of14 The facts of the case are as follows: Petitioner is a wholly owned subsidiary of Ishida Co., Ltd. of Japan and is principally engaged in the business of manufacturing stainless and ordinary steel pipes and tubings, structural steel and other metallic goods. It is duly registered wid1 the Bureau of Internal Re\~enue with Tax Identification Number 202-935- 083-000.2 Its principal place of business is at First Cavite Industrial Estate, Brgy. Langkaan, Damariiias, Cavite. On the other hand, respondent is the duly appointed Commissioner of the Bureau of Internal Revenue, the government agency charged with d1e assessment and collection of all national internal revenue taxes, fees, and charges, as well as the enforcement of all forfeitures, penalties, al1d fines connected therewith. He holds office at the BIR National Office, Diliman, Quezon City. Sometime during the fourth quarter of the year 2005, petitioner received a "PrelinUnary Fifteen (15) Day Letter" dated October 3, 2005 from respondent. It states that upon investigation, deficiency taxes were found against petitioner and that the latter had fifteen days from receipt thereof to submit a reply or arrange for a conference where its objections may be raised. The said letter furd1er states that petitioner's failure to respond will result in the issuance of the corresponding assessn1en t notice.3 On October 18, 2005, petitioner requested for an extension of time within which to file its position paper in relation to the preliminary fmdings of d1e I respondent. 4 On October 27, 20051, petitioner was ~ ble to flle the said position paper. 5 1 Exhibit "D" 3 Exhibit "E" 'Exhibit "F" 5 Exhibit " G " 19S

DE CIS I O N CTA Case No . 7633 In reply, resp ondent wro te petitioner on N ovember 7, 2005, requesting for an informal conference on N ovember 14, 200.5. 0 On May 22, 2006, a " Prelin:Uoary Assessment N o tice" (PAN) was issued against petitioner. A m ong o thers, it inform ed petitio ner that pursuant to Section 228 o f the National Internal Revenue Code (N IRC) and its Implementing Rules and Regulations (IRR); petitio ner is give n the opportunity to present its side in . writing and that failure to resp ond will res ul t to d1 e issuance o f ilie formal letter of dem and and assessm ent no tice.7 T hen, som etim e the first quarter of 2007, petitioner received from respo nd ent a "Final N o tice Before Seizure" dated January 2, 2007.8 A nd on April 11 , 2007, respondent served upon petitioner a "Warrant o f Distraint and / or Levy N o. 0307-01 dated March 23 , 2007, ordering seizure o f its properties.9 Thus, on May 11, 2007, ilie in stant P etition for Review was flied seeking the cancellation of ilie Warrant of Distraint and / or :j:.,evy dated N(arch 23, 2007. The sole issue for thi s Court's rbo lution 1s whether d1e Warrant of Distraint and / or Levy is valid and enforcea ble, even if no fo rmal assessment notice and prelirninary collectio n letter were ever received by petitioner. P etitio ner der:Ues receip t o f the Fin al Assessm ent Notice and Prelinllnary Collection Lett~r allegedly issued by .respo ndent on July 14, 2006 and N ovember 22, 2006, resp ectively. It claims th at it even we nt to Reven ue District 54 after its receipt o f ilie Warrant o f Di straint and / or Levy to ge t a copy of ilie alleged Final 6 Exhibit "H " 7 Exhibit "/" 8 Exhibit "K" if Sup ra. 199

DECISION CTA Case No. 7633 Page 4 of14 Assessment Notice and Preliminary Collection Letter. Petitioner claims that it even attempted to obtain information from the Dasmariiias Postal Office on whether the Formal Letter of Demand wa s duly served and received by any duly authorized representative of petitioner. However, since respondent's District Office cannot locate its records on petitioner, the alleged Postal Registry Receipt Number cannot likewise be found. Petitioner maintains that a mail matter is deemed received by the addressee in the ordinary course of mail is merely a disputable presumption. The moment the addressee-taxpayer denies ba vi.tig rec~iveJ th e letter-assessment notice, the burden shifts to the sender-respondent to prove receipt thereof by the former. Petitioner also argues that is was denied due process when respondent issued the Warrant of Distraint a t~d / or Levy i.n question without ftrst issuing a Formal Assessment Notice or at least serving the same to petitioner. Petitioner was therefore not g-iven a chance to refute the allegations that it has unpaid deficiency taxes and was caught by surprise when the Final Notice Before Seizure and the Warrant o f Distraint and / or Levy were served upon it. Petitioner avers that the due process requirements 111 the issuance of a deficiency tax assessment are laid down i.n Section 3 of Revenue Regulations No. 12-99, which provides the need for (1) a notice of informal . conference, (2) a preillTlinary assessment notice, (3) a formal letter of demand and assessment notice sent to the taxpayer. Evidently, respondent failed to comply witl1 the third requirement. According to petitioner, this fa~ure is fatal to the validity of the Warrant of Distraint and/or Levy, since it can only be issued upon the expiration of the time required to pay the delinquent tax, which in turn presupposes tl1e existence of a formal letter of demand or assessment notice. Further, even assuming for the sake of argum~;1t that tl1 ere is really a formal letter of demand (FAN), both tl1e FAN and the warrant should remain i.twalid because of fL- 20 0

DECISION CTA Case No. 7633 Page 5 of14 t respondent's failure to comply with the requirement of servmg them to the taxpayer. Petitioner claims that it cannot be said to be a delinquent taxpayer when it was not informed of any tax liabilities clue from it. When there is no FAN, there should also be no failure on ~:e part of p~titioner to pay the tax at the time required pursuant to Section 207 of the National Internal Revenue Code of 1997. It also asserts that the fma l notice before seizure issued by respondent is not sufficient to be treated as the assessment notice to inform petitioner of the I� . factual and legal bases of the internal revenue tax liabilities being assessed against it. The Court finds merit in tl1is Petition. Section 228 of the National Internal Revenue Code (NIRC) does not only require that there must be an investigation and deterrnination of taxpayer's liability; but also requires tl1e Commissioner or his duly authorized representative to send a notice of assessment to the taxpayer, to give the latter the opportunity to file a protest. An assessment is deemed made, only when the same is actually received by the taxpayer. In Commission er ofInternal Revenue vs. A z ucen a T R eyes,10 the Supreme Court categoricaUy ruled that if there is no valid notice sent, the assessment is void. The reason being: "[tjhe law imposes a substantive, not I merely a formal, requirement. To 1:>roceed heedlessly with tax collection witl1out first establishing a valid assessment is eviclenLly violative of the cardiqal principle in admiriistrative investigations: that taxpayers should be able to present t~eir case l\Ud adduce supporu�ng ev1�dence., � r~ 10 G.R. Nos . 159694 and 163581 , JamtGI)' 2 7. 2006 (4 8 0 S C RA 382) . .

DECISION CTA Case No. 7633 Page 7 ofI4 upon petitioner on April 11, 2007, beyond the ten (10) day period within which the warrant must be served after its issuance. �rt also states that petitioner tried to obtain a copy of the alleged Final Assessment Notice (FAN) and the Preliminary Collection Letter, but the docket containing the FAN and the said letter, could not be found in BIR Revenue District Office No. 54. She also testified that petitioner could not even verify with the Postal Office whether there was indeed a Formal Letter Demand duly served and received by any duly authorized representative of petitioner, since it could not get hold of the Postal Registry � ~eceipt Number covering the mailing of the FAN, as it was allegedly in the docket that could not be found. Further, she testified that petitioner did not execute any Waiver of the Defense of Prescription for its tax liabilities for the year 2003.14 On March 28, 2008, petitioner ftl ed the Judicial Affidavit of Mamoru Hirabayashi its company presiden1t since 2003. He. corroborated the above testimony of Annielee Tapawa regarding petitioner's non-receipt of the FAN. He stated that he is certain that no FAN or Prelinunary Collection Letter was received by the company because all letters addressed to petitioner are given to its Head Accountant, who in turn is dixectly accouqtable to him. The Head Accountant, according to Mr. Hirabayashi, informs him of all urgent matters such that there is no possibility that the former received such letter and did not refer the same to 11.im.15 On May 29, 2008, another Judicial Affidavit of Annielee Tapawan was ftled by petitioner. In tlus affidavit, she stated that petitioner wrote to inform respondent that it was surprised to have received a Final Notice before Seizure because it has not received any Formal Letter of Demand or a Final Assessment Notice; even with the protest was filed against the Preliminary Assessment Notice. 16 14 Exhibits "M" and "N". Jj Exhibit "0". 16 Exhibit "Q". 203

DECISION CTA Case No. 7633 Page 8 of I4 Under Sections 207 (A) and (B) o f the National Internal Revenue Code (NIRC), distraint of P,ersonal property and levy on real property shall be done upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required . And Section 228 of the NJRC provides for the " ' procedure of assessing taxes which results in the taxpayer's delinquency. Section 228 provides: . ' .. "SEC. 228. Protesting of Assessment. - When the Commissioner or his dul'y . ~uth6rized representative finds that proper taxes should be assessed, he sha.ll first notify the taxpayer of his findings: Provider/, hoJJJever, That a pre-assessment notice shall not be required in the following cases: (a) Wh~n the finding for an y deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face o f the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automaticall y applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on excisable articles has not been paid; or (e) W~en an article locally purchased or in1poi:ted by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non- exempt persons. The taxpayers shall be informed in \Vriting of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the ta?Cpayer shall be requiJ:ed to respond to said notice. If the .taxpayer fails to respond, the Commi ssioner or his duly

DECISION CTA Case No. 7633 Page 9 of14 authorized representative shall 1ssue an assessment based on his Endin gs. Such assessment m~y be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing o f the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become flnal. If the protest is denied in whole or in part, or is not ac ted up on within o ne hundred eighty (180) days from submission of documents, the taxpaye r adversely ' affec ted by the de cision or inaction may appeal to the Court of Ta.x Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become flnal, executory and demandable." (Empbasis Supplied) From the language of the law, when the respondent or his duly authorized representative flnd s that proper taxes should ~e assessed, a written no tice to the taxpayer informing him of the law and the facts upon which the assessment is based is necessary. The law imposes a su bstantive, not merely a formal, ' requirement. The essence of Section 228 is due process, that is, the taxpayer shall be accorded the opportunity to present his sid e and prove his defenses. � Reading Section 228 with Sections 207(A) and (B), no taxpayer should be considered delinquent unless there has been a. previou s demand to pay taxes which remained unheeded . The taxpayer should be informed of its as?essed deficiency taxes. This has been settled in Commission er of Intemal R evenue vs. PASCOR R ealty and D ev't. Corp., et al. 17, where the Supreme Court held that: "An assessn1ent contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the tirne when penalties and interests begin to accrue against the taxpayer. To enable the ta xpayer to deterrnine t~ 17 G.R. No. 1283 15, June 29, /9 99. � 205

DECISION CTA Case No. 7633 Page 10 of14 his remedies thereon, due pro cess requires th at it must be served on and received by the taxpayer. Xxx To start with, assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in ad di tio n to the tax due, in case the taxpayer fail s to pay the deficiency tax within the time prescribed for its paym ent in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rate as m ay be prescribed by rules and regulations, is to be coUected fro m the date prescribed for its paym ent until the fuU paym ent. The issuance o f an assessm ent is vital in determining the period of limitatio n regarding its proper issuance and the period within which to pro tes t it. Section 203 of the NIRC provides that internal revenue taxes must be assessed within three years from the las t day within which to fil e the return. Sectio n 222, on the other hand, sp ecifies a period o f ten years in case a fraudulent return with intent to evad e was s ubnu ~ted or in case o f failure to ftle a return. Also, Sec tion 228 o f the same law states that said assessment m ay be pro tes ted only within thirty days from receipt thereo f. N ecessarily, the taxpayer mu st be .certa in that a: specific document constitutes an assess men t. O therwise, con fusion would arise regarding the period within which to make an assessm ent or to pro test the sam e, or whether interest and p enalty may accm e thereon . It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such noti'ce to the taxpayer." (Emphasis Supplied) Th e above is furth er bolstered by th e process o f the assessment o f taxes as set forth in Revenue Regulation s 12-99 18: .. "SECTION 3. Due Pmcess Requirement 111 the Issuance ofa Deficiency Tax Assessment. - �.. 18 Implementing the Provisions of the Nationallnternall?et�enue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Ta'res, Ci1�il Penalties and Interest and the Extra-judicial Selllement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Pe nalty

DECISION CTA Case No. 7633 Page 11 of14 3.1 Mode of procedures tn the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. - The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayei' is liable for'cleficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, tl1e taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case ma y be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National �office) of the ' cliscreJ1a:Ocy or discrepancies in t11e taxpayer's payment of his internalrever:ue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer witl1 an opportunity to present his side of the case. If tl1e taxpayer fails to respond within fifteen (15) clays from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue H. egional Office, or the Chief of Division in ilie National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to th e Commissioner or his duly authorized representative, as tl1 e case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by tl1e Commissioner or his duly authori zed representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes,� the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If t11e taxpayer fails to respond witlun fifteen (15) clays from date of receipt of ilie PAN, he shall be considered in default, in which case, a formal leuer of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpa yer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. - The notice for inf~rmal conference ati.d the preliminary assessment 207

DECISION CTA Case No . 7633 Page 12 of14 notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency ta~ liability shall be sufficient: xxx 3.1.4 Formal L etter of D em and . and Assessm ent N o ti ce. - The formal letter of demand and assessment notice shall be issued by the Comm.issioner or his duly authorized representative . T he letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations,.or jurisprudence on which the assessment is based, otherwise, the fo rmal letter of demand and assessment notice shall be void xxx. The same shall be sent to the taxpayer only by registered mail or by persona l ~elivery . If sent by p,ersonal delivery, the taxpayer or his du ly autlio1:ized rei)resentative shall acknow ledge receipt thereof in tl1e duplicate copy . of the letter of demand, showing tl1e following: (a) His nam.e; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other tl1an tl1e taxpayer himself; and (d) date of receipt thereof." The Commissioner or his duly autl1orized representative is required to send � a notice of the assessment against the ta xpayer in order to give the latter an opportunity to ftle a protest. Ancf that an a sse~ sment is only deemed made when it has been actually received by the taxpayer. Clearly, there is a need to inform the taxpayers of the assessm en t against them. The receipt of the assessment against tl1em will commence tl1 e entire process in Section 228 of tl1e National Internal Revenue Code. Without the assessment, the taxpayer cannot be considered in default so as to serve basis for tl1e issuance of a Warrant of Distraint and/or Levy. This assessment should be taken to mean the Final Assessment Notice and the Formal Letter of Demand which demands payment of tl1e taxpayer's deficiency tax ass.essment. The PAN, which was issued against petitioner is only a proposed assessment, and even if the taxpayer failed to respond thereto, such failw:e will at most, only lead to tl1e issuance of tl1e Final Assessment Notice (FAN) together with ilie Formal Letter of Demand. It is tl1e FAN nr the Formal Letter of ' � Demand which should be protested and which shall, absent any protest, attain 208

DECISION CTA Case No. 7633 Page 13 of14 finality, and which can setve as basis for the issuance of the Warrant of Distraint and/or Levy. This Court ftnds merit 111 petitioner's argument that the meanll1g of procedural due process is that a party to a case must be given sufficient opportunity to be heard. Its very essence is to allow all parties the opportunity to present evidence. In sum, having been declared in default, respondent failed to clischarge its duty of proving receipt by petitioner of the Fonnal Letter of Demand and Assessment Notice. The Court ho lds that since there is no assessment to begin with, petitioner cannot be considered a delinqu ent taxpayer. Consequently, there is no basis for the issuance of the Warrant of Distraint and/or Levy. ACCORDINGLY, tl1e insta nt Petition for Review is hereby GRANTED . The Warrant of Distraint and/or L~vy dated1vfarc h 23; 2007 for the collection of the alleged internal revenue tax liabiliti es o f petitioner for 2003 is hereby CANCELLED and SET ASIDE. SO ORDERED . ~~- c: ~ ERNESTO D . ACOSTA Presiding Justice JZ- CAESAR A. CASANOVA Associate J ustice 209

DECISION CTA Case No. 7633 Page 14 of14 CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified 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. L~- o~- ERNEsro D . ACOSTA Presiding Justice 210