CTA Case No. 4834 (Decision)

/ REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS / QUEZON CITY i' � CARNATION PHILIPPINES, INC., i' (Nor NESTLE PHILIPPINES, INC), Petiti,oner, t'. >, '� . . �.~ . �~. C.T.A. CASE MO. 4834 i" 1. - versus '- PRDJKAUNLG1A6TE1D9�96 ~ COKKISSIOMER OF INTERNAL ~ REVENUE, ------- ----X Respondent. X- - - This is a petition �or review seeking the reversal o� a �inal decision o� respondent Commissioner o� Internal Revenue dated April 6, 1992, denying petitioner's protest o� an assessment �or deficiency income and business taxes �or the �iscal year ending September 30, 1982 amounting to F555,747.20 and P17,520,684.52, respectively. The �acts are as follows: Prior to 1985 petitioner, then known as Carnation Philippines, Inc., was a domestic corporation duly organized under Philippine law, with principal o�fice located at the Araza Building, Paseo de Roxas, l'lakati, l'letro l'lanila. On October 1, 1985, Carnation Philippines, Inc. wa~ ..merged with Filipro, Inc. pursuant to a merger approved by the Securities and Exchange Commission, with Filipro, � � Inc. as the surviving corporation. <On 59

DECISION - C.T.A. CASE NO. 4834 - -2- November 28, 1985, the articles o� incorporation o� Filipro, Inc. was amended, changing ita corporate name to Nestle Philippines, Inc.> It appears that on October 11, 1985, the SEC sent respondent a letter in�orming respondent o� the approval o� the merger between Carnation Philippines and Filipro, Inc., as a consequence o� which all the assets and liabilities o� Carnation Philippines, Inc. were trans�erred to and absorbed by Filipro, Inc. In that same letter, the SEC also in�ormed respondent that the new principal o��ice o� the merged corporation was located at Reliance cor. Pines Sts., Mandaluyong Metro Manila <BIR Records, p. 283>. Similarly, on December 2, 1985, Carnation Philippines, Inc. sent a letter to respondent in�orming the latter that it had ceased ita operations e��ective on September 30, 1985 as a result o� ita merger with Filipro, Inc. <BIR Records, p. 284). Meanwhile, on October 25, 1984, respondent issued Letter o� Authority No. 3643 directing Revenue Examiner Arturo C. Caoile to examine the books o� account o� petitioner to determine petitioner's income and business tax liabilities �or the �iscal year ending September 30, 1982 <Exhibit 3>. Pursuant to this letter, an investigation o� petitioner's books o� account was conducted by Revenue Examiners Caoile and Rodol�o Mendoza <BIR Records, p. 218). 60

.. DECISION - C.T.A. CASE NO. 4834 - -3- On June 15p 1987p Revenue Examiners Caoile and Mendoza submitted to respondent a joint memorandum detail.ing the �indings o� their investigation o� petitioner's books o� accountp and recommending that petitioner be assessed �or de�iciency income tax o� P555,474.00 and de�iciency business tax of P17,104,591.64 �or the fiscal year ending September 30, 1982. This recommendation vas based on the disallowance of petitioner's deduction from its taxable income of the amount of PSS5,474.00 representing bad debts that it had written of in its books during the taxable year in question, as vel.l as petitioner's application of its tax credits on its purchase of raw materials for the manufacture of its milk products to its tax liabilities arising from its manufacture and sale of tin cans <Exhibit 4; BIR Records, pp. 235-240>. Pursuant to the findings of Revenue Examiners Caoile and Mendoza, respondent Commissioner issued a notice of assessment dated October 15, 1987, informing petitioner that it vas being assessed for deficiency income and business taxes amounting to P555,747.20 and P17,520,684.32, respectively, and demanding payment of said assessment within 30 days from petitioner's receipt of said notice of assessment <Exhibits S, S-A and 5-B; BIR Records, pp. 267-270). It appears, however, that this notice of assessment vas sent by respondent to 61

DECISION - C.T.A. CASE NO. 4834 - - 4- petitioner's old address at Araza Building, Paseo de Roxas, Makati, Metro Manila. Consequently, petitioner never received a copy o� said notice o� assessment. Sometime in February 1988, petitioner received a First Tracer dated February 12, 1988 �rom respondent Commissioner, �olloving up petitioner's payment o� the assessed de�iciency income and business taxes pursuant to the notice o� assessment dated October 15, 1987. In a letter dated March 8, 1988 addressed to respondent- Commissioner, petitioner contested the assessment and in�ormed respondent that it had never received the alleged notice o� assessment issued by respondent. Petitioner pointed out that said notice o� assessment vas erroneously sent to petitioner's old address prior to its merger with Filipro, Inc. despite the �act that petitioner had duly in�ormed respondent o� said merger <BIR Records, pp. 285-286>. Subsequently, in a letter to respondent dated August 16, 1988 petitioner supplemented its earlier protest, setting �orth the speci�ic �actual and legal grounds �or its protest <BIR Records, pp. 300-325>. In a letter dated April 6, 1992, respondent denied with �inality petitioner's protest and upheld the validity o� the disputed assessment, and reiterated his previous demand �or the payment o� said assessment. A copy o� the decision vas 62

DECISION - C.T.A. CASE NO. 4834- - 5- received by petitioner on July 17, 1992, and on July 29, 1992 petitioner �iled the instant petition. Meanwhile, on July 13, 1992, respondent issued warrants o� distraint and levy against petitioner to en�orce the payment o� the disputed assessment. Said warrants were served on petitioner on July 23, 1992. On August 13, 1992, upon application by petitioner, We issued a resolution granting petitioner's petition �or the issuance o� a writ o� injunction enjoining respondent �rom en�orcing the warrants o� distraint and levy, upon the �iling by petitioner o� a surety bond amounting to P18,076,431.72. � The petition raises three principal issues, namely: <a> whether or not the disputed assessment �or de�iciency income and business taxes vas made within the �ive-year prescriptive period �or the assessment o� taxes as provided under then Section 318 o� the National Internal Revenue Code; (b) i� the answer to the �irst i�sue is in the a��irmative, whether or not the bad debts claimed by petitioner as deductions �rom its taxable income were properly ascertained to be worthless and there�ore deductible; and <c> again, i� the �irst issue is resolved in the a��irmative in �avor o� respondent <i.e., that the disputed assessment has not yet prescribed>, whether or not petitioner was entitled to apply its excess tax credits 63

DECISION - C.T.A. CASE NO. 4834 - -6- on its milk products to its tax liabilities on its other products. As may be gleaned �rom the �oregoing, the threshold issue that must be resolved in this case is whether or not respondent's right to assess-the alleged de�iciency income and business taxes against petitioner has been barred by prescription. Under then Section 318 <nov Section 203> o� the Tax Code that vas in �orce at the time, respondent had a period o� 5 years �rom the� �iling by petitioner o� its income tax return �or the �iscal year ending September 30, 1982. The records o� this case clearly show that� petitioner's income tax return �or the taxable year in question vas �iled on January lZL 1983 <BIR Records, p. 214>. At the latest, there�ore, respondent had until January 16, 1988 within which to assess petitioner �or any de�iciency taxes �or the taxable year in question. Petitioner argues that the notice o� assessment dated October 15, 1987 that vas purported issued by respondent and sent to petitioner's old address at Araza Building, Paseo de Roxas, Makati, Metro Manila did not produce any binding legal e��ect because petitioner never received the same. According to petitioner, the �irst time it came to know about the disputed assessment vas when it received a copy o� the First Tracer dated February 12, 1988 issued by respondent. Thus, the said 64

DECISION - C.T.A. CASE NO. 4834- .' -7- First Tracer should be deemed to be the "assessment" re�erred to under then Section 318 (now Section 203> o� the Tax Code �or purposes o� determining whether or not respondent's right to make the disputed assessment has prescribed. Accordingly, since the "assessment" was e��ectively made only sometime in February, 1988 a�ter the lapse o� the �ive-year prescriptive period on January 16, 1988 -- respondent's right to issue the disputed assessment had already prescribed. On the other hand, respondent contends that the disputed assessment was timely made because it was issued and released to petitioner's address as appearing in the income tax return �iled by petitioner sometime in October, 1987, well within the �ive-year reglementary period provided under the old Section 318 o� the Tax Code. According to respondent, under then Section 320 <now Section 224> o� the Tax Code~ the running o� the prescriptive period �or the issuance o� an assessment is suspended when the taxpayer cannot be located in the address given by him in the return �iled upon which a tax is being assessed. I� the taxpayer in�orms the Commissioner o� Internal Revenue o� any change in address, the running o� the statute o� limitations shall not be suspended. However, the in�ormation required under Section 320 must be contained in a �ormal letter duly �iled with the Commissioner o� Internal Revenue 65

DECISION - C.T.A. CASE NO. 4834 - -8- in�orming the latter o� the ch~nge in address. In the case at bar, respondent argues, the noti�ication made by petitioner o� its merger with Filipro, Inc. was not legally su��icient since petitioner's December 2, 1985 letter to respondent did not indicate the address o� the surviving corporation where the assessment notice could be sent. Thus, it is as i� there was no "�ormal letter" sent by petitioner to respondent within the meaning o� then Section 320 o� the Tax Code. A�ter a care�ul review o� the records available to the Court, We are o� the opinion that respondent's position is legally untenable. It is not denied that as early as October 1985, respondent already had actual knowledge o� petitioner's change o� address when, in a letter dated October 11, 1985, no less than the Securities and Exchange Commission in�ormed respondent o�. the merger between Carnation Philippines, Inc. and Filipro, Inc. and, more importantly, o� the change in the address o� Carnation Philippines �rom Araza Building, Paseo de Roxas, Makati, Metro Manila to Reliance cor. Pines St., Mandaluyong, Metro Manila <BIR Records, p. 283). In �act, the examination o� petitioner's books o� account conducted by revenue examiners Arturo Cao~le, Rodol�o Mendoza and Benjamin Arriola sometime in May 1986 was not conducted at petitioner's old address but at the administrative 68

DECISION - C.T.A. CASE NO. 4834- -9- o��ices o� Nestle Philippines <the new name o� Filipro, Inc.> at No. 335 Sen. Gil J. Puyat Avenue, Makati, Metro Manila <BIR Records, p. 223>. Likewise, the letter dated June 19, 1987 o� Beethoven Rualo, Chie� o� the Manu�acturing Division o� the Bureau o� Internal Revenue, inviting petitioner �or a pre-assessment con�erence was sent to and received at the address o� Nestle Philippines, Inc. as mentioned above and not at petitioner's old address <BIR Records, p. 241>. As a- matter o� �act, even the First Tracer dated February 12, 1988 issued by respondent Commissioner to petitioner was delivered to and received by petitioner at the corporate o��ices o� Nestle Philippines, Inc. stated above. By any reckoning, it cannot be denied that respondent had actual knowledge o� the change in petitioner's address even be�ore the disputed assessments were issued. Its �eeble protestations that it had su��iciently complied with the requirements o� the law and applicable jurisprudence (c. �. Republic v. Ricarte, G. R. No. L 46893, November 12, 1985) regarding the sending o� assessment notices by sending the disputed assessment to petitioner's address as appearing in its 1982 income tax return is, at best, �rivolous and �lies in the �ace o� the undisputed evidence showing its actual knowledge o� petitioner's new address. Besides, 67

.~ .,' DECISION - C.T.A. CASE NO. 4834 - - 10 - it should be noted that petitioner could not have stated in its 1982 income tax return its new address �or the simple reason that the change in petitioner's address came much later - in 1985 - as a result o� its merger with Filipro, Inc. In any event, respondent's very own records clearly indicate that petitioner had duly in�ormed respondent o� its change o� address, and petitioner's actual knowledge o� this �act appears to be clearly documented. In view o� the �oregoing, We hold that the running o� the �ive-year prescriptive period provided under the old Section 318 <now three years under Section 203> �or the making o� the assessment was not interrupted by the ', I .' II sending o� the assessment notice to petitioner's old address. Even i� We were to consider the First Tracer dated February 12, 1988 as the disputed assessment, such assessment did not produce any legal e��ect since it was made a�ter the lapse o� the �ive-year statute o� limitations. In other words, respondent Commissioner's right to make the assessment had already prescribed when the First Trace~ was issued or sent to petitioner. Having ruled that respondent's right to make the disputed assessment has already prescribed, We �ind it unnecessary to delve into the other issues raised by petitioner. 68

DECISION - C.T.A. CASE NO. 4834 - - 11 - WHEREFORE, premises considered, the petition is hereby GRANTED and the disputed assessment against petitioner �or de�iciency income and business taxes �or the taxable year ending September 30, 1982 are hereby set aside. SO ORDERED. GRUBA Judge WE CONCUR: Pr siding Judge '-� RA~:.~~~ Associate Jud~~ CERTJ:FJ:CATJ:ON I hereby cerrti�y that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~ ��;;;-- CQ. ..~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals S9