CHAILEASE FINANCE CORP. v. COMMISSIONER OF INTERNAL REVENUE

REPUBliC OF THE PHiliPPINES Coon Ol ToIDPIIIS QUEZON CITY SECOND DIVISION CHAILEASE FINANCE C.T.A. CASE NO. 7021 CORPORATION, Members: Petitioner, CASTANEDA, JR., Chairperson -versus- UY, and PALANCA-ENRIQUEZ, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, JUN 0 5 2008/ Respondent. ~ ~;(fl}r-1'11. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X RESOLUTION This resolves petitioner's "Motion to Resolve Issue of Prescription" filed on July 14, 2006; without any comment/opposition from respondent despite due notice. In its Motion , petitioner prays for the Court to resolve the issue of prescription, cancel the subject assessments, and declare/absolve petitioner from any tax liability. A perusal of the records shows the following : On September 12, 2003, the Bureau of Internal Revenue (BIR) Revenue Region No. 8, Makati City, issued the following Final Assessment Notices (FANs) for taxable year 1999 against petitioner:

RES O LU TION C.T.A. CASE NO. 702 1 Page 2 of9 Exhibits Assessment Notice Tax Assessed Amount of ,, No. Deficiency Tax I~ .T IT-4 760-99-03-384 30 ,855 ,560.45 A PT-4 760-99-03- 384 Income Tax 1,300 ,379.45 WE-4 760 - 99-03-384 Percentage Tax 407 ,220 .69 8 DS-4 760-99-03-384 Expanded Withholding Tax 4 ,503 ,099.03 Documentary Stamp Tax c D For the following internal revenue taxes , petitioner filed the corresponding returns: INCOME TAX Exhibit Period Covered Date Filed J Calendar Year April 28, 2000 1999 PERCENTAGE TAX Exhibit � Period Covered Date Filed K 1st Quarter 1999 April 26 , 1999 L 2"a Quarter 1999 July 20 , 1999 M 3ra Quarter 1999 October 25, 1999 N 4"' Quarter 1999 January 14, 2000 WITHHOLDING TAX ' Exhibit Period Covered Date Filed 0 January 1999 February 10, 1999 p February 1999 March 4, 1999 Q March 1999 April 12, 1999 R April1999 May 7, 1999 s May 1999 June 3, 1999 T June 1999 July 7, 1999 u July 1999 August 6, 1999 v August 1999 September 9, 1999 w September 1999 October 8, 1999 X October 1999 November 8, 1999 y November 1999 December 8, 1999 z December 1999 January 10, 2000 January 25 , 2000 AA DOCUMENTARY STAMP TAX Exhibit Period Covered Date Filed CC, DD , EE January 7, 1999 FF, GG , HH January 1999 February 1, 1999 II March 11 , 1999 KK, LL February 1, 1999 MM , SS February 12, 1999 PP, QQ February 18, 1999 TT February 1999 February 18, 1999 February 24 , 1999 888 w ww February 26, 1999 July 15, 1999 YY, ZZ, AAA March 11 , 1999 DOD , EEE, GGG , March 1999 March 2, 1999 HHH JJJ March 25 , 1999 MMM , NNN , 000 March 17, 1999 PPP, UUU , WV March 23 , 1999 QQQ, WWW March 24 , 1999

RESOLUT ION C.T.A. CASE NO. 702 1 Page 3 of9 KKK, SSS , TTT April1999 March 25, 1999 RRR May 1999 May 5, 1999 DODD April 6, 1999 April21 , 1999 YYY, ZZZ April 27, 1999 AAAA May 5, 1999 May 13, 1999 EEEE, FFFF, HHHH May 25 , 1999 GGGG May 5, 1999 1111 May 7, 1999 GGGGG May 13, 1999 May 14, 1999 KKKK, LLLL May 18, 1999 NNNNN May 19, 1999 May 21 , 1999 NNNN , 0000 , JJJJJ May 25, 1999 QQQQ , RRRR TTTT, UUUU May 26, 1999 May 27, 1999 wwww. xxxx June 3, 1999 ZZZZ, AAAAA, HHHHH , IIIII , KKKKK SDDDD FFFFF, MMMMM LLLLL In addition to the foregoing exhibits, petitioner likewise presented the following exhibits of the independent certified public accountant (CPA) representing petitioner's documentary stamp tax payments, as follows : a. For Documentary Stamp Tax Returns and Payments covering June 1999 up to and including December 1999- Summaries on petitioner's monthly loan releases for purposes of the documentary stamp taxes on loan releases : CPA Exhibits Nos. "8 " - "8-5" - January 1999 CPA Exhibits Nos. "C" - "C-8" - February 1999 CPA Exhibits Nos. "0 " to "D-10'' - March 1999 CPA Exhibits Nos. "E" to "E-7"- April 1999 CPA Exhibits Nos. "F" to "F-15" - May 1999 CPA Exhibits Nos. "G" to "G-9" - June 1999 CPA Exhibits Nos. "H" to "H-17"- July 1999 CPA Exhibits Nos. "I" to "1-12" - August 1999 CPA Exhibits Nos. "J" to "J-15" - September 1999 CPA Exhibits Nos. "K" to "K-11 " - October 1999 CPA Exhibits Nos. "L" to "L-5" - November 1999 CPA Exhibits Nos. "M" to "M-14" - December 1999 (as detailed out and specifically described in the List entitled "Loan Releases, Annex "A" of petitioner's "Motion to Adopt Certain Exhibits of the Independent CPA" dated 14 July 2006) Summaries on the petitioner's monthly DST payments on its loan releases : CPA Exhibits Nos. "V" - "V-47" and "G-0-1" - June 1999 CPA Exhibits Nos. "W ' to "W-79 ", "H-0-1 " to "H-2-1" and "H-6-1" to "H-9-1" - July 1999 CPA Exhibits Nos. "X" to "X-62" and "1-0-1" to "1-8-1" -August 1999

RESOLUTION C.T.A. CASE NO. 702 1 Page 4 of9 CPA Exhibits Nos. "Y" to "Y-73", "J-9-1 ", "J-11 -1" to "J-14-1 " - September 1999 CPA Exhibits Nos. "Z" to "Z-56", "K-0-1" to "K-1-1 ", "K-3-1 " to "K-6-1 " - October 1999 CPA Exhibits Nos . "AA" to "AA-53", "AA-56" to "AA-74 ", "L-0-1", "L-2- 2", and "L-3-1" - November 1999 CPA Exhibits Nos. "88" to "88-94", "M-5-1" to "M-10-1 " and "M-12-1" to "M-14-1 " - December 1999 (as detailed out and specifically described in the List entitled "Loan Releases , Annex "8" of petitioner's "Motion to Adopt Certain Exhibits of the Independent CPA" dated 14 July 2006) b. DST Returns and Payments regarding the petitioner's Real and Other Personal Property Owned and Acquired ("ROPOA") Accounts- For the period 1999 CPA Exhibits Nos. "TTT" to "TTT-1 " and "XXX" to "XXX-1 " - BMG Trading CPA Exhibits Nos. "UUU" and "YYY" -Gene Urbano de Leon CPA Exhibits Nos. "VW" and "ZZZ" to "ZZZ-2 " - Metro Tours/Huang , Margaret Tee CPA Exhibits Nos. "WWW" and "AAAA" to "AAAA-4" - Federal Builders (as detailed out and specifically described in the List entitled Real and Other Personal Property Owned and Acquired ("ROPOA") for the period 1999, Annex "C" of petitioner's "Motion to Adopt Certain Exhibits of the Independent CPA" dated 14 July 2006) For the period prior to 1999 CPA Exhibits Nos. "ZZ" to "ZZ-1 " and "JJJ" to "JJJ-1" - A. Paguio Junk Shop CPA Exhibits Nos. "AAA" to "AAA-1" and "KKK" to "KKK-1" - Citybook Supply CPA Exhibits Nos. "BBB" and "LLL" to "LLL-1 " -Energym Fitness Club CPA Exhibits Nos. "CCC" to "CCC-4" and "MMM" to "MMM-3" - Jessan Metal Works CPA Exhibits Nos. "DOD" and "NNN"- Jorge Vistan CPA Exhibits Nos. "EEE" to "EEE-2" and "000" - Larew International Trade and Manufacturing , Inc. CPA Exhibits Nos. "FFF" to "FFF-1" and "PPP" - Miracle Air-Sea International Corporation CPA Exhibits Nos. "GGG" to "GGG-1 " and "QQQ" - R.U . Transport Forwarders CPA Exhibits Nos. "HHH" and "RRR" - AMV Enterprises CPA Exhibits Nos. "Ill " and "SSS" to "SSS-1 " - Kaung Shaing Lin (as detailed out and specifically described in the List entitled Real and Other Personal Property Owned and Acquired ("ROPOA") for the period prior to 1999, Annex "D" of petitioner's "Motion to Adopt Certain Exhibits of the Independent CPA" dated 14 July 2006) c. DST filing of returns and payment on petitioner's original issuance of shares - Exhibit Nos . "W ", "WW', and "XX" (as detailed out and specifically

RESOLUTION C.T.A. CASE NO . 7021 Page 5 of9 described in the List entitled "DST on Original Issuance of Shares, Annex "E" of petitioner's "Motion to Adopt Certain Exhibits of the Independent CPA" dated 14 July 2006) Upon a careful examination and evaluation of the foregoing exhibits, the Court agrees with petitioner that the disputed assessments were issued beyond the three (3)-year prescriptive period , provided under Section 203 of the Tax Reform Act of 1997 ("Tax Code"), to wit: "Section 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 return was filed. For purposes of this Section , a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." In the case at bar, petitioner filed its Annual Income Tax Return , the last return for taxable year 1999, on April 28, 2000. All other returns were filed earlier than the said date. Thus, the last day to assess petitioner of income tax deficiency falls on April 28, 2003; while the last day to assess petitioner of percentage, withholding and documentary stamp taxes is earlier than the said date. Since respondent issued the disputed assessments on September 12, 2003, it is clear that all the assessments issued against petitioner had already prescribed. Respondent does not deny that the disputed assessments were issued beyond the three (3)-year prescriptive period , but argues that the period to assess was extended to September 30, 2003 when petitioner's Assistant Vice-President executed a Waiver of the Defense of Prescription under the

RESOLUTION C.T.A. CASE NO. 702 1 Page 6 of9 Statute of Limitations of the National Internal Revenue Code (Waiver) on August 26, 2002.1 On rebuttal , petitioner presented the testimony of its witness , Ms. Feliciana C. Servidad , Records Officer II of the Regional Trial Court- Office of the Clerk of Court (RTC-OCC) Notarial Section of Makati City, and a certified true copy of the Waiver from the Notary Public, Atty. Albert C. Arpon .2 To resolve the issue of whether or not the prescriptive period was extended by the waiver, We deem it necessary to examine the following documents : Exhibit "PPPPP" - petitioner's copy of the Waiver which extended the period to assess until September 30, 2002. It was not signed or accepted by the Commissioner of Internal Revenue or his duly authorized representative , Simplicio A. Madulara . Exhibit "1" - respondent's copy of the Waiver which extended the period to assess until September 30, 2003. It was signed/accepted by Simplicio A. Madulara . Exhibit "Y5" - certified true copy of the Waiver submitted by the Notary Public, Atty. Albert C. Arpon , to the RTC- OCC, Notarial Section of Makati City. It does not contain the date when the period to assess is extended . Neither does it contain any signature by the Commissioner of Internal Revenue or his duly authorized representative , Simplicio A. Madulara. The Court shall use Exhibit "Y-5" as basis considering that the same is the official copy of the Notary Public, Atty. Albert C. Arpon , who notarized the same. Upon a careful examination of Exhibit "Y5" , the Court finds that the same is defective due to the following grounds: a) The waiver did not contain the date when the period to 1 EExxhhiibbiitt ""Y1"S";" 1D-ao"~k"e1t-,bp"~g"e11-c3"l6a.nd " 1-d"� Docket page 1270 ' ' . 2

RESOLUTION C.T.A. CASE NO . 702 1 Page 7 of9 assess is extended ; and b) The waiver was not signed by the Commissioner of Internal Revenue considering that the assessed amount exceeds P1 ,000,000.00. In Bank of the Philippine Islands vs. Commissioner of Internal Revenue3, the Supreme Court laid down the requisites for a valid waiver, as follows : "A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended , must be: (1) in writing ; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection ; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection . The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be strictly followed , and any revenue official who fails to comply therewith resulting in the prescription of the right to assess and collect shall be administratively dealt with ." Corollary thereto, pertinent portion of Paragraph 3 (A) of Revenue Memorandum Order (RMO) No. 20-1990 issued on April 4, 1990 provides: "3. The following revenue officials are authorized to sign the waiver. A. In the National Office 1. ACIRS for Collection, Special For tax cases Operations , National involving not Assessment, Excise and Legal more than on tax cases pending before P500 ,000 .00 their respective offices. In the absence of the ACIR , the Head Executive Assistant may sign the waiver. 2. Deputy Commissioner For tax cases 3 G.R. No. 139736, October 17, 2005, 473 SCRA 205.

RESOLUTION C.T.A. CASE NO. 702 1 Page 8 of9 involving not more than P500,000.00 but not more than P1M 3. Commissioner For tax cases involving more than P1M X X x [Emphasis supplied]" In Philippine Journalists, Inc. vs. Commissioner of Internal Revenue ,4 the Supreme Court ruled : "The waiver is 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 SIR, but is a bilateral agreement between two parties to extend the period to a date certain. The conformity of the SIR must be made by either the Commissioner or the Revenue District Officer. This case involves taxes amounting to more than One Million Pesos (P1 ,000,000.00) and executed almost seven months before the expiration of the three-year prescriptive period . For this , RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the SIR." The instant case involves an assessment of deficiency income, percentage, withholding and documentary stamp taxes in the aggregate amount of P37,066,259.62. Considering that the case involves more than P1 ,000,000.00 pursuant to the above-quoted Supreme Court's ruling , the Waiver should be signed by the Commissioner. Since the Waiver was not signed , it is clear that the same is null and void. The Court further finds that the Waiver does not contain the date when the period to assess is extended . Hence, this Court cannot determine the extended prescriptive period of limitation within which the Bureau of Internal Revenue may validly assess and collect the deficiency taxes. 4 G.R. No. 162852, December 16, 2004, 447 SCRA 2 14.

RESOLUT ION C.T.A. CASE NO. 702 1 Page 9 of9 WHEREFORE, premises considered , the petitioner's motion is hereby GRANTED. Accordingly, the instant Assessments for deficiency income, percentage, withholding and documentary stamp taxes for taxable year 1999 are hereby CANCELLED for having been issued beyond the prescriptive period . SO ORDERED. AEs:~~~UstiYce ~~c.~~ 9--c. S"UANrro c. CASTANEDA, CdR. Associate Justice ~~~QUEZ Associate Justice