AYALA HOTELS, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY THIRD DIVISION AYALA HOTELS, INC., CTA CASE NO. 8438 For: Cancellation o f Tax Petitioner, Assessment -versus- Members: BAUTISTA, Chairperson; FABON-VICTORINO, RINGPIS-LIBAN, JJ COMMISSIONER OF INTERNAL REVENUE Promulgated: Respondent. MAR 3 1 2015 x----------------- --- ------------------------------------ ----- ---------~ - ~-~(~~2-~_:________________x DECISION RINGPIS-LIBAN, J: Before the Court is a Petition for Review 1 ftled by petitioner Ayala Hotels, Inc. (AHI) on January 25, 2012, assailing the Final Decision on Disputed Assessment (FDDA) 2 issued by the Commissioner of Intern~ Revenue (CIR) directing AHI to pay the following taxes: Deficiency Income Tax (IT) p 9,930,231.89 Deficiency Value-Added Tax (VAT) 4,354,5 18.91 Deficiency Documentary Stamp Tax (DST) 1,674,99 7.00 AHI seeks the cancellation of the above-enumerated deficiency tax assessments for the calendar year (CY)-ending December 31 , 2008 amounting to an aggregate amount of FIFTEEN MILLION, NINE HUNDRED FIFTY NINE THOUSAND SEVEN HUNDRED FORTY SEVEN PESOS and 80/100 (P15,959,747.80), inclusive of interest and compromise penaltiesr 1 Petition for Review dated March 6, 20 12 pursuant to Section 3(a), Rule 4 of the 2005 Revised Rules of the Court of Tax Appeals; Docket, pp. 6 to 33 with Attachments. 2 Final Decision of Disputed Assessment dated January 25, 2012; Docket, pp. 28 to 30 marked as Exhibit "7" by respondent; pp. 703 to 708 of BIR Records. �

DECISION CTA CASE NO. 8438 Page 2 of23 THE PARTIES Petitio ner Ayala Ho tels, Inc. is a domestic corporation duly organized and existing under the Philippine laws primarily engaged in the business of owning, acquiring, selling, transferring or otherwise disposing o f real and personal properties, including shares o f stock, securities and to engage in the general business o f a ho tel, resort, apartment and other allied businesses. P etitioner is duly registered with the Bureau of Internal Revenue (BIR) 3 with principal office address at 19th Floor, T ower O ne & Exchange Plaza, Ayala T riangle, Ayala Avenue, Makati City. Respo ndent is the duly appointed Commissioner o f In ternal Revenue (CIR) with the exclusive and original jurisdiction: (1) to in terpret the provisions of Republic Act No. 8424 o therwise known as the "Tax Reform 1\ ct of 1997", as amended ("Tax Code") , and o ther tax laws subject to review o f the Secretary of Finance; and , (2) to decide disputed assessments and claim for refunds o f internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the Tax Code and other laws administered by the BIR subject to the exclusive appellate jurisdiction of the Court of Tax A p p eals 4 � STATEMENT OF FACTS T he factual antecedents o f this case reveal that on ovember 22, 2011, petitioner received a Formal Letter o f D emand (FLD) 5 and Assessment Notices from the BIR Large Taxpayers District Office (LT DO) - Makati City assessing the company with a number o f de ficiency taxes covering the CY 2008 in the aggregate amount o f P1 5,369,262.24, inclusive of surcharges, interest and compromise penalty, broken down as follows: DEFICIENCY TAX AMOUNT ASSESSM E N T (Tax Type) NOTICE No. p 9,677,869.29 LT D 0 -122-rl'-2008-00004 Income Tax (IT) 3, 804,35 9. 05 LTDO -122-\'T-2008-00004 Value-Added Tax (VAT) 155,460.48 L T D 0 - 122-WE-2008-00005 Withholding Tax - E xpanded (EWT) 56, 576 .42 LTD 0-122-WR-2008-00001 Fringe Benefit Tax (FBT) 1,674,997.00 LTD 0-122-DS-2008-00002 Documentary Stamp Tax (DS]J TOTAL P15,369,262.24 3 Registered TIN 000-437-612-000 (Marked as Exhibit " A-1") as per BIR Certificate of Registration (COR) N o. OCN 8RC0000018227 dated January 1, 1997 (Marked as Exhibit "A"); Docket, p. 283. 4 Joint Stipula tion s of Facts, paragraph 2; Docket, p. 140 to 147. 5 Formal Letter Demand d ated November 9, 2011, BIR Records, pp. 660 to 671 marked as Exhibit " 6" by respondent, w ith Compu tation of Deficiency Tax Due (Exhibi t "6-a") and Annexes as well as Details of Discrepancies (Exhibit "6-b" ).

DE C I SI ON CTA CASE NO. 8438 T hereafter, petitioner filed its Letter-Protest 6 on December 20, 2011 opposing the deficiency IT, V T and DST assessments issued by respondent. Likewise, petitioner admitted the revenue examiners' findings in connection with the issued deficiency EWT and FBT assessments and voluntarily paid the assessed amount of P1 55,460.48 7 and P 56,576.42 8, respectively (total amount of P212,036.90) through the BIR's Electronic Filing and Payment System (EFPS) . O n February 6, 2012, petitioner received by way of personal delivery a copy of the FDDA issued by respondent dated January 25, 2012 denying the protest and directing petitioner to pay deficiency taxes amounting to an aggregate amount of P1 5,959,747.80, inclusive of interests and compromise penalty, summarized as fo llows: TAX BASIC INTEREST COMPROMISE TOTAL TYPE p 6,309,064.90 p 3,596,166.99 PENALTY p 9,930,231.89 IT 2,391,999.40 1,937,5 19.5 1 p 25,000.00 4,354,518.91 VAT 549,999.00 1,099,998.00 1,674,997.00 DST 25,000.00 Total p 9,251,063.30 p 6,633,684.50 p 15,959,747.80 25,000.00 p 75,000.00 O n February 17, 2012, despite the issuance of the PDD , petitioner still submitted to the BIR LTDO - Makati City, the documents in support of its protest. O n March 6, 2012, petitioner flied the instant Petition for Review. The Court gave due course to the Petition for Review and set the same for Pre-Trial Conference on June 22, 2012.9 O n March 22, 2012 and prior to the scheduled Pre-Trial Conference, petitioner decided to pay through EFPS the correct deficiency DST due on i~s Lease Contracts with Manila Peninsula Hotel Inc. (MPHI) and Manila Mandarin Hotel Inc. (MMHI) taking into consideration the actual land lease income for CY 2008. Petitioner paid an aggregate amount of TWO HUNDRED THIRTEEN THOUSAND NINE HUNDRED E IGHTY ONE AND 91/ 100 (P 213,981.91), inclusive of interest and penalty, distributed as follows~ 6 Letter-Protest da ted December 19, 2011; BIR Records, pp. 693 to 698. 7 EFPS Payment Tran saction No. 113485297 da ted December 6, 2011 with BIR Form No. 0605, BIR Records, pp. 684 to 686. s EFPS Payment Transaction No. 113485313 da ted December 6, 2011 with BIR Form No. 0605; BIR Records, pp. 680 to 682. 9 Pre-trial Conference

DECISION CTA CASE NO. 8438 MPHI p 107,496.80 10 MMHI 106,485.11 11 Total p 213,981.91 Similarly on March 27, 2012, petitioner paid under protest the basic deficiency VAT as stated in the l'DDA amounting to TWO MILLION THREE HUNDRED NINETY ONE THOUSAND NINE HUNDRED NINETY NINE PESOS AND 40 / 100 (P2,391,999.40) . The following day, petitioner sent a letter 12 to the BIR LTDO - Makati City directed to the OIC-Assistant Commissioner, Large Taxpayer Service, informing the said office about petitioner's decision to pay under protest the basic deficiency VAT assessment 13 amounting to P2,391,999.40. In her Answer 14 respondent interposed the following Special and , Affirmative Defenses, to wit. "7. Under Section 228 of the 1997 Tax Code, partly it provides as follows: "SEC. 228. Protesting ofAssessment. - XXX XXX XXX Such assessment may 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 of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final." Implementing the aforesaid provision, Section 3, 3.1.5 of Revenue Regulation No. 12-99 d ated September 6, 1999, provides that the taxpayer shall submit the required documents in support of his protest within sixty (60) days from the date of filing of his letter o f protest, otherwise, the assessment shall become final, executory, and demandable. The phrase "submit the required documents" include submission or presentation of the pertinent documents for scrutiny and evaluation by the Revenu~ 10 Exhibits "S", "S-1" and "S-2" n Exhibits "T", "T-1" and "T-2" 12 Letter dated March 28, 2012 13 Joint Stipulation of Facts, par. 11; 14 Docket; pp. 38 to 45

DECISION CTA CASE NO. 8438 Page 5 of23 Officer conducting the audit and the said Revenue Officer shall state this fact in his report of investigation. In this instant case, petitioner was found to have failed to submit the required documents in support of its protest against the subject BIR Formal Assessment Notice (FAN) and Letter of D emand, flied on D ecember 20, 201 1. Hence, the assessed deficiency income tax, value-added tax, and documentary stamp tax for the taxable year D ecember 31, 2008 has already become final, executory and demandable. As such, this Honorable Court has no jurisdiction to act on the petition. 8. Well-settled is the rule that if the Court has no jurisdiction over the nature of an action, its only jurisdiction is to DISMISS the case. The Court could not decide the case on the merits (De Guzman, et al. vs. Escalana, et al. G.R . No. L-51773, May 16, 1980). The Court of Tax Appeals, being a court of Special Jurisdiction, can take cognizance only of matters that are clearly within its jurisdiction (Allied Banking Corporation vs. Commissioner ofInternal Revenue, G.R. 175097, February 5, 2010 citing Rizal Commercial B anking Corporation vs. Commissioner of Intemal Revenue, G.R . No. 168498, 522 SCRA 144, 150). "Such assessment may be protested administratively by filing a request for reconsideration and 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 of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final." (Emphasis supplied) 9. The Supreme Court in the case of Ker & Company, Ltd., vs. CTA, et al. L-12396, J anuary 31, 1962 and Commissioner of Intemal R evenue vs. Joseph, et al. L-14034, August 30, 1962, has ruled that: "If a statutory remedy provides as condition precedent that the action to enforce must be commenced within a prescribed time, suc h requirement is jurisdictional and failure to comply therewith may be raised in a motion to dismiss." Moreover, in the case of Yao vs. Court of Appeals, et al., G.R. No. 132428, October 24, 2000, the Supreme Court held and we quote~

DECISION CTA CASE NO. 8438 " The right to appeal is not constitutional, natural and inherent nght It is a statutory privilege of statutory origin and, therefore available only if granted or provided by statute. Since the right to appeal is not a natural right nor part of due process. It may be exercised only in the manner and in accordance with the ..vrovisions of law. Corollary, its requirements must be strictly com..vlied with. . That an a....v..v. eal must be v.... erfected in the manner and within the veriod fixed bv Jaw is not .... only mandatory but junsdictional Non- compliance with such legal requirement is fatal, for it renders the decision sought to be appealed final and executory, with the end result that no court can exercise appellate jurisdiction to review the decision." XXX XXX XXX 11. On the other hand, assuming without admitting that this Honorable Court has jurisdiction to act on the instant petition, petitioner were assessed for deficiency income tax, value-added tax, and documentary stamp tax for taxable year December 31, 2008, for the reason that during the administrative investigation of this tax case by the BIR, petitioner failed to substantiate or controvert by substantial evidence the BIR factual findings, as shown under the Details of Discrepancies attached to the Formal Assessment Notice (FAN) and Letter of Demand, Preliminary Assessment Notice (PAN) and Final Decision on Disputed Assessment (FDDA) dated January 25, 2012, which are briefly discussed hereunder, viz.: A.) Income T ax 1. Petitioner failed to declare in its protest the discrepancy on salaries and wages reflected in the financial statement as against the declared alpha-list in the amount of P140,300.39, hence, said expense claimed by petitioner was disallowed. 2. The taxes and licenses by petitioner in the amount of P1 ,062,500.00 pertains to the documentary stamp tax on the original issuance of shares of stock on investment was made, remitted and paid by Greenhaven Property Ventures, Inc. as evidenced by BIR Form 2000. Greenhaven Property Ventures, Inc. will be the one who should claim the expense and not herein petitioner, Ayala ~

DECI SIO N CTA CASE NO. 8438 Hotels, Inc. since the cost of the imposition was borne by the corporation originally issuing the stock certificate. Hence said expense claimed by petitioner was disallowed. 3. The system cost expense claimed by petitioner in the amount of P16,823,096.1 7 was disallowed since petitioner failed to submit the management contract between Ayala Hotels, Inc. and Ayala Land, Inc. which would determine the basis of the management fee that ALI charged to AHI on a monthly basis. Further, the system cost expense is not necessary and ordinary in the nature o f business of petitio ner AHI which is rental and holding company and it does not need technical consultancy services to maximize it operations. B.) Value Added T ax 1. The input tax claimed by pctltloncr which arc supported by various invoices and receipts are not compliant with the invoicing requirements under Section 113 (A) of the 1997 Tax Code thus provides that aside from making it mandatory for VAT regis tered person to issue an invoice or receipts for every sale transaction, it also requires said perso n, in addition to the information required under Section 237 o f the IRC of 1997, to reflect the information that the seller is a VAT registered person followed by his T IN and the total amount which the purchaser pays or is obliged to pay the seller with the indication that such amount includes the value-added tax. Hence said input tax credits claimed by petitioner were disallowed. C.) Documentary Stamp T ax: 1. Contracts/ Agreements covering I Jease Contracts with Manila Peninsula H otels, Inc. and Manila fandarin Hotel, Inc. was subjected to D ocumentary Stamp Tax covering the whole term o f the contract of lease, pursuant to Section 194 of the N IRC. The DST on lease contract was based on petitioner's submitted schedule of rent income and indicating therein the minimum ren t income of P1 ,000,000.00 per month o f Manila Peninsula Hotels, Inc. and Manila Mandarin H otels, Inc. Pe titioner also failed to submit the Contract of Lease to veri fy the lease hiring agreements. D ocumentary stamp tax is collected on lease, agreements, memorandum or contract for hire, usc or rent o f any lands or tenements, or portions thereof, a documentary stamp ta for each year of the term of the said /Y

DE CI SI O N CTA CASE NO. 8438 contract or agreement which means on the total term of the contract and not on a yearly basis. 12. Respondent fully complied wi th the due process requirement mandated und er Section 228 of the 1997 Tax Code, as implemented by Revenue Regulations o. 12099, when the disputed Preliminary Assessment Notice (PAN) and Formal ssessment Notice (P ) and Letter of D emand and Final D ecision on Disputed ssessment (FDDA) dated January 25, 2012 were issue to herein petitioner. Records clearly show that petitioner was duly afforded an opportunity to controvert the factual findings o f the respondent CIR on its deficiency taxes for taxable year 2008 through the issuance of a Notice of Tnfo rmal Co11ference, PAN and FA I and FLD. Likewise, petitioner was duly appraised by respondent of the factual and legal basis on how and why he arrived at such a deficiency income tax, vat and dst for 2008 through the issuance of details o f discrepancies attached to the FAN, PAN, N IC, as well as the FDD and other BIR correspondence which are found in the BIR Records o f the case. 13. This Honorable Court in the case of IDL Logistics (Phil's), Inc. vs. CIR, CTA Case no. 7540, May 20, 2010, citing the ruling in BPI vs. CIR, CTA Case No. 7397 April 9, 2008, thoroughly discussed the due process rule in taxation, as follows: " Revenue Regulation No. 12-85 provides fo r the procedure covering the Administrative Protest on Assessments of the BIR. Under the said BIR RR, a post- reporting no tice is sent to the taxpayer for an informal conference when there are findings of deficiency taxes. Subsequent to this notice if the issuance of the PAN upon finding of the Commissioner that an assessment for deficiency taxes should be issued. However, such pre- assessment notice may or may not be protested by the taxpayer. In fact, Section 5, o f the same RR provides th at "in the event that the taxpayer fails to respond to the PA within the prescribed period... he should be in formed of such fac t and the report o f investigation shall be given due course." T he essential elements of due process arc notice and opportunity to present one's side. To begin with, petitioner had knowledge o f the investigation being conducted by the BIR on its tax liabilities for the taxable year 1982-1986 as evidence by the letter of respondent addressed to petitioner dated September 25, 1986 and received by petitioner o~

DECISION CTA CASE NO. 8438 September 26, 1986. The said letter, in fact, requested for an informal conference on the matter and requested further that petitioner submits documentary evidence to support its stand. As the facts would demonstrate, petltloner was never devrived ofdue ..v. rocess as it was fuDv a..v....vraised ..... ~ ofthe legal and factual basis ofthe assessment issued against it,� which enabled petitioner to substantially protest the arguments and issues raised. It is . sufficient that there is notice to the tax...va ver of the legal and factual bases of the assessments, and to the Court, this is substantial com.v. Hance of wh at is mandated by Section 228 ofthe NIRC. Thus. so long as the parties are given the opportunity to explain their side, the requirements ofdue process are sau"sfacton1y compHed with." (Emphasis supplied) 14. The assessment issued against petitioner for deficiency income tax, vat and DST for taxable year December 31, 2008 were wade in accordance with law and regulations. 15. All presumptions arc in favor of the correctness of tax assessments issued by the respondent." During the scheduled Pre-Trial Conference on June 22, 2012, petitioner raised to the attention of this Court the circumstances in connection with the payment of the deficiency DST and payment under protest of deficiency VA f assessments, and manifested its intention to amend its Petition for Review. O n July 9, 2012, petitioner ftled before the Court a "Motion for Leave of Court to Amend Petition for Review" stating as ground the occurrence of subsequent events that affects the allegations as well as the reliefs prayed for in the original petition for review i.e. payment of D ST and VAT and considering that the VAT payment was made under protest, petitioner likewise amended its prayer by seeking a claim for refund once deficiency tax assessments are cancelled and withdrawn. In a Resolution promulgated July 12, 2012, this Court granted petitioner's motion to amend its Petition for Review. In a Resolution issued September 25, 2012, this Court required the parties to submit their Joint Stipulation of Facts and Issues which shall include the list of their respective documents and witnesses for approval hereof. On September 10, 2012, the parties submitted their "Joint Stipulation" which was approved by this Court in a Resolution dated October 2, 201~

DECISION CTA CASE NO. 8438 In the course of trial, petltloner presented the tes timony of its first witness, Ms. enita A. Lo r bis 1 its former Chief 1\ ccountant. Ms. Lorbis \ attes ted that petitioner was deprived o f procedural due process and identified various documentary exhibits to prove that petitioner is not liable to the assessed deficiency Income T ax amounting to P9,930,231.89. Thereafter, p e titio n er p rese n ted the testimony of Ms. Luisa D. C hi o n g 16 , its Chief Finance O fficer (CFO) . Similar to the firs t witness, i\fs. Chiong identified various documentary exhibits (1) in support of the cancellation of the deficiency D ST assessment and (2) in support of the claim for refund m connection with the payment o f the basic deficiency VAT assessment. O n April 22, 201 2, petitioner flied its "Formal Offer o f Evidence" 17 Thereafter, the parties flied a "Joint Manifes tation and Mo tion" dated April 23, 201 3 for the purpose o f correcting some details in the records of this case as well as in the markings of the petitioner's documentary ex hibi ts 18 O n May � 22, 201 3, this Court issued a Resolution admitting all of the documentary exhibits duly identified by the two (2) witnesses. The resolution likewise set the initial presentation of respondent's evidence. O n the other hand, respond ent presented, Ms. eriza M. Manuel 19 , Revenue Officer III of the Large Taxpayer's D ivison (LTD), BIR Makati City, as her lone witness. Ms. Manuel testified and outlined the conduct of the tax audit investigation in connection with petitioner's books of accounts and the issuance of the alleged deficiency tax assessments on the basis o f the said inves tiga ti o n . O n November 5, 2013, Respond ent flied her "Formal Offer of Exhibits". Respond ent's exhibits were admitted by this Court in a Resolution dated January 3, 2014. In this respect, respondent having deemed to have rested her case, this Court required the parties to submit their respective Me mo rand a. Considering the Court's Resolution dated March 24, 2014, denying respondent's Motion for a Final Extension of time to Submi t Memorandum flied on March 18, 2014, and the Court's Resolu tion dated April 11 , 2014, admitting petitioner's Memorandum dated March 12, 2014, the above- captioned case is deemed submitted for decision~ 1s Sworn Statem en t of Ms. Nenita A. Lorbis dated November 27, 2012 and marked as Exhibit " U"; Docket, pp. _ 16 Sworn Sta tement of Ms. Luisa D. Chiong d ated February 22, 2013 and marked as Exhibit "V"; Docket, pp. 711 to 735. 17 Docke t, pp. 252 to 282 18 Granted by this Court in a Resolution da ted April 30, 2013 19 Sworn Statement of Ms. Neriza M. Manuel da ted August 2, 2013 and marked as Exhibit "_"; Docket, pp. __

DECISION CTA CASE NO. 8438 Page 11 of23 THE ISSUES The parties jointly raised the following issues 20 for the resolution of this Court, as follows: I. Whether or not the FDDA was hastily issued by the Respondent within the sixty (60) day period after the filing of the Petitioner's Protest? II. Whether or not Petitioner was deprived of its statutory right to submit the relevant supporting documents when the FDDA was issued on January 25, 2012? III. Whether or not Petitioner can claim as deduction for income tax purposes the amount of O ne Million Six Hundred Sixty Two Thousand Five Hundred Pesos (Pl ,062,500.00) pertaining to the D ST payment on the original issuance of shares o f stocks of GPVI? IV . Whether or not Petitioner can claim as deduction for income tax purposes the amount o f Sixteen Million E ight Hundred Twenty Three Thousand Ninety Six Pesos and 17/100 (P16,823,096.1 7) pertaining to th e System Cost/ Management Fees paid to Ayala Land Inc. (ALI)? V. Whether or not P etitioner can claim as input VAT credits the amounts reflected in the VAT invoices/official receipts (issued by its supplier o f goods and services) despite the lack and / or absence of Petitioner's own TIN imprinted thereon? VI. Whether or not the deficiency D ST assessment issued against the Petitioner in the amount o f P 1,674,997.00 has legal and factual bases? VII. Whether or not Petitioner is entitled to a refund in the total amount of P 2,391 ,999.40 corresponding to the basic deficiency VAT assessment PAID UND E R PROT EST for CY 2008? VIII. Whether or not the assessed deficiency IT, VAT and DST for CY 2008 has already become final and executory for failure of the Petitioner to submit the required documents in supp ort of the protest, pursuan t to Section 228 of the Tax Code, as implemented by Section 3 of Revenue Regulations 12-99 dated Sep tember 6, 1999, hence, thi~ 2o Joint Stipula tion of Facts and Issues dated Sep tember 10, 2012; Docket, pp. 144 to 145.

DECISION CTA CASE NO. 8438 H onorable Court has no jurisdiction to act on the instant p e titi on? Whether or not Respondent fully complied with the due process requirements mandated under Section 228 o f the Tax Code, as implemented by Revenue Regulations N o . 12- 99 relative to the issuance o f the disputed deficiency IT, VAT and DST for CY 2008? IX . Whether or not Petitioner is liable to pay the assessed deficiency IT, VAT and DST for CY 2008? T he foregoing may however be summed up in to the following issues, to wit: I. Whether or not there is factual basis for the issuance of the Final Decision on Disputed Assessment; II. Whether or petitioner is liable to pay the assessed deficiency Income Tax, Value-Added Tax and Documentary Stamp Tax for the CY-ending December 31, 2008. III. Whether or not petitioner is entitled to a refund amounting P2,391,999.40 representing payment of basic deficiency VAT under protest." THE COURT'S RULING Respondent's Final Decision on Disputed Assessment is devoid of factual and �Jegal basis and therefore null and void. Section 228 o f the ational In ternal Revenue Code of 1997, as amended ("Tax Code"), as implemented by Section 3, 3.1.5 of Revenue Regulation (R.R.) No. 12-99 21 outlines the process o f disputing a tax assessment within a certain period o f time, thus: "SEC. 228. Protesting of Assessment. When the Commissioner or his duly authorized representatives fmds that proper taxes should be assessed, he shall first notify the taxpayer o~ 21 September 6, 1999

DECISION CTA CASE NO. 8438 Page 13 of23 his findings: Provided, however, That a pre-assessment no tice shall not be required in the following cases: XXX XXX XXX The taxpayer shall be informed in writing of the law and 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 taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinves tigation within thirty (30) days from the receipt of the assessment in such form anc.l manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest. all relevant supporting documents shall have been submitted; otherwise. the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable." (Underscoring ours) Relative thereto, Revenue Regulatio n (RR) o. 12-99 22 more particularly, Section 3.1.5, provides for the administrative remedies available to a taxpayer in disputing assessment. Section 3.1.5 is quoted hereunder: "3.1 .5. Disputed Assessment - The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from day of receipt thereof. .. XXX XXX XXX The taxpayer shall state the facts, the applicable law, rules and regulations, or jurisprudence on which his protest is basedy 22 Dated September 6, 1999 issued by the Secretary of Finance, upon recommenda tion of the Commissioner of Internal Revenue to implement the provision of the NIRC on assessment of the National Internal Revenue Taxes.

DECISION CTA CASE NO. 8438 otherwise, his protest shall be considered void and without force and effect. If there arc several iss ues involved in the dispute and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some o f the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. T he taxpayer shall submit the required documents in support of his protest within sixty (60) days from the filing of his letter o f protest. otherwise. the assessment shall become final, executory and demandable. T he phrase "submit the required documents" includes submission or presentation of the pertinent documents for scrutiny and evaluation of the Revenue Officer conducting the audit. T he said Revenue Officer shall state this fact in his report o r investigation. If the taxpayer fails to ftle a valid protest against the formal letter demand and assessment notice within thirty (30) days from date o f receipt thereof, the assessmen t shall become final, executory and demandable. If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decisio n, otherwise, the assessment shall become final and executory and demand able. xxx xxx xxx" (Underscoring ours) Based o n the afore-quoted proVlslOns, 1t 1s clear that a taxpayer is granted a period of 60 days within which to submit all relevant documents in order to substan tiate its claim embodied in the protest. Respond ent, citing Section 228 o f the Tax Code and R.R. No. 12-99, argued that petitioner failed to submit within the 60-day period the documents in support of its administrative protest against the subject deficiency tax assess m en ts em b o died in the FAN and Final Letter of Demand 23 Hence, . respond ent posits that the assessed deficiency IT, VAT and DST has already become final and executory. On the other hand, petitioner anchors its case upon the same provisions cited by respondent. Petitioner maintains that its right to make usc of the period expressly granted by Section 228 to submit documents in support of its ~ 23 Filed December 20, 2011.

DECISION CTA CASE NO. 8438 Page 15 of23 Letter-Protest against the FAN has been violated since the FDDA was issued thirty five (35) days after the filing o f the administrative protest or less than the sixty (60) days within which the submission of the said documents can be made. Petitioner argues that the determination of the deficiency tax assessments are not limited to legal issues but also involves factual issues which can be resolved through submission o f relevant documents within the period allowed by law. For failure to consider factual issues, petitioner claims that the FDDA issued by respondent is null and void because it is devoid of fac tual and legal bases other than the assertions made in the letter-protest, thus null and void. It is undisputed that petitioner flied its Letter-Protes t on D ecember 20, 2011 contesting the validity of FLD and Assessment No tices issued by the respondent on November 9, 2011. Petitioner then has sixty (60) days or until February 18, 2012 within which to submit relevant documents in support of its administrative protest. Respondent, for unspecified reasons, issued the FDDA on January 25, 2012 or thirty five (35) days before the lapse of the 60-day period. Petitioner's witness, its former Chief Accountant Ms. Nenita 1\ . Lorbis, stated in her swo rn statement 24 that the pro test can be resolved only through the submission of relevant documents and that both petitioner and respondent had an ongoing discussion on the remaining iss ues to be resolved and they agreed on what documents to submit in ord er to shorten the evaluation of the case 25 The pertinent portion o f Ms. Lorbis' tes timo ny, as follows: � Qll What happened, if any, after the filing of the Protest Letter? All fter the filing o f the Protes t Letter, there had been an ongoing discussion between AHI's representatives and th e revenue examiners about the remaining de ficiency tax assessments. We told the examiners that we would be submitting the relevant supporting documents to the Protes t Letter for their reference and in order to expedite the disposition o f the case. Q12 What is the reason or reasons, if any, for the submission of the relevant supporting documents to the Protest Letter? A12 The deficiency tax assessments issued against A HI involved not only legal issues and but. more importantly. factual issues that can be resolved only through the presentation of relevant supporting documents. For / 24 Ibid. 25 Exhibit " U", p. 2; Docket, p . 694.

DECISION CTA CASE NO. 8438 instance, in contesting the deficiency IT assessment, 1\ HI needs to submit the DST D eclaratio n/ Return (BIR Form 2000) to prove it was the one that prepared the BIR tax return and paid the tax due on the transaction. Likewise, in contes ting the deficiency VAT assessment, r\ HI should submit the Quarterly VAT returns for CY 2008 together with the Summary List o f Purchases for each quarter in order to validate the transactions between the Company and its sellers of services. Pinally, in contesting the deficiency DST assessment, AHI would still need to submit the Contract o f Lease between the Company and its two (2) lessees and the respective Renewal Contract to determine the actual D ST due on the transactions. (Underscoring ours) The existence of the factual issues and the need to submit the relevant documents in order to resolve the same was thereafter confirmed by no other than respondent's witness, Ms. eriza M. Manuel, Revenue Officer III, BIR Large Taxpayer's Division, City o f Makati, when she testified 26 that: "Atty. Reyes: Q. Going back to the 3 tax types that you mentio ned a while ago, do you agree with me that this assessment can be resolved through the submissio n of supp orting documents, meaning, the issues involved are factual? Ms. Manuel: A. Yes, s1.r." On cross-examinatio n 27 Ms. Manuel stated that: , "Atty. Reyes Q. And in question no. 26, you mentioned that after the receip t of the Protest Letter, you requested on several occasions from the petitioner to submit the supporting documents in support of the protest? Ms. Manuel A. Yes, sir. Atty. Reyes ~ 26 Transcript of Stenographic Notes, October 24, 2013, p.S. 27 Transcript of Stenographic Notes, October 24, 2013, pp. 4 to 5.

DECISION CTA CASE NO. 8438 Page 17 of23 Q. Do you have proof to show that you made such request from the petitioner? Ms. Manuel A. Actually, the request is only through the telephone and on various meetings with the accountant. Atty. Reyes Q. So you are saying that you do not have any written request from the petitioner? Ms. Manuel A. N one, su. ." It can be discerned from Ms. Manuel's testimony that she asked for the submission of supporting documents. Thus, it is imperative for the respondent to wait for the expiration of the 60-day period prescribed by law within which petitioner may submit the said relevant supporting documents. As explained by the Supreme Court in the case of Commissioner of Intemal R evenue vs. First Express Pawnshop Co., Inc. 28 the term , "relevant supporting documents" should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. T he BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type o f supporting documenLS should be submitted. Otherwise. a taxpayer will be at the mercy of the BIR. which may require the production of documents that a taxpayer cannot submit. In Tutuban Properties, Inc. vs. Commissioner ofInternal Revenue 29, this Court stated that the BIR should inform the taxpayer to submit whatever documents are lacking in order that a complete determination of the proprietary of the assessment may be had. Further, this Court reiterates that the requirement on the submission of all the relevant supporting documents within the 60-day period from filing protes t is merely Directory." (Underscoring ours) Resp ondent's issuance o f the FDDA before the expiration of the 60-day period prescribed by law is deemed premature. Petitioner may still utilize the remaining 25-day period to gather documents deemed to be relevant to support their claim and thereafter submit the same to the BIR./ 2s G.R. Nos. 172045- 46, June 16, 2009. 29 CTA Case No. 7536, December 13, 2010, citing Standard Chartered Bank - Philippine Branches vs. Commissioner of Internal Revenue, CTA Case No. 5696, Au gust 16, 2001.

DECISION CTA CASE NO. 8438 To the mind of this Court, the law grants the taxpayer the option of submitting the necessary documents in support of its administrative protest within 60-days from filing thereof. Where the taxpayer decides to forego with its opportunity to present such documents, it merely loses its chance to further contest the assessment. Non-compliance with the submission would mean that the taxpayer no longer wishes to further submit any document or that the taxpayer has failed to comply with mandate o f the law. T herefore, it is incumbent upon the taxpayer to advice the BIR that it no longer seeks to present any document in support of its claim. On the other hand, it is the BIR's duty to remain passive until the lapse of the 60-day period, as provided under Section 228 and R.R. No. 12-99, where the taxpayer has clearly failed to submit any documents for the BIR examiner's scrutiny. In the present petition, it should be the responsibility of the revenue o fficers to notify the taxpayer of the fact that it has yet to submit the agreed documents witlun the period prescribed. Pailure to observe the same, respondent has violated petitioner's right to due process when it prematurely issued the FDDA thus rendering the deficiency assessments null and void for failure to inform petitioner o f the facts and the laws to which the assessment is based. This Court would like to emphasize that the mandatory requirement of Section 228 regarding deficiency tax assessments 30 "that the taxpayer shall be informed in writing of the law and facts on which the assessment was made,� otherwise, the assessment shall be void" is also relevant in determining the validity of the FDDA issued by respondent since ttltimate!J, at the administrative level, it is the FDDA which will determine the final tax liability of the taxpayer and which may be the suiject of appeal before this Court 31 . This is in line with the provision of Section 3.1.6 of RR No. 12-99, which provides: ''Section 3. Due process requirement in the Issuance ofa D eficiency Tax Assessment. - 3.1.6. Adminzstrative Decision on Disp11ted Assessment. - The decision of the Commissioner or his duly authorized representatives shall (a) state the facts. the applicable law, rules and regulations, or jut'isptudence on which such decision is based. otherwise, the decision shall be void, in which case, the same shall not be considered a decision on a disputed assessment; and (b) the same is his final decision." (Underscoring ours)/ 30 In reference to the Preliminary Assessment Notice (PAN) and Formal Assessment Notice (FAN). 31 Liquigaz Philippines Corporation vs. Commissioner of Internal Revenue, CTA Case No. 8141, February 20, 2013.

DECISION CTA CASE NO. 8438 Page 19 of23 This is also consistent with provisions of Section 3.1.5 of RR o. 18- 2013, which states: "3.1.5. Final Decision on a Disputed Assessment (FDDA). - The decision of the Commissioner or his duly authorized representative shall state the (i) facts. the applicable law, rules and regulations. or jurisprudence on which such decision is based. otherwise. the decision shall be void xxx xxx xxx, and (ii) that the same is his final decision." The importance of complying with the mandatory due process requirements under Section 228 is adequately explained by the Supreme Court in the case of Commissioner of Internal R evenue vs. Metro Star Su.v. erama, Inc. 32 stated as follows: , "It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law. In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen's right is amply protected by the Bill o f Rights under the Constitution. Thus, while "taxes are the lifeblood of the government," the power to tax has its limits, in spite o f all its plenitude. Hence in Commissioner of Intemal Revenue v. Algue, Inc., it was said - Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. XXX XXX XXX It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing authorities, every person who is able to must contribute his share in the running o f the government. The government fo y 32 G.R. No. 185371, December 8, 2010.

DECISION CTA CASE NO. 8438 Page 20 of23 its part is expected to respond in the form o f tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary meth od of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is no t, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate ... that the law has not been observed." Based on the foregoing, pet1t10ner was denied due process for respondent's failure to consider the factual bases upon which the decision on the deficiency tax assessments were based. Stated differently, respondent violated due process by her failure to fully comply with the requirements of Section 228 and allow petitioner to submit the relevant documents agreed upon and consider the same in rendering a sound and informed decision. InsteaJ, respondent blankly issued the FDDA with nothing but petitioner's assertions and representations in its Letter-Protest. This Court therefore finds the decision on the assessed deficiency IT, VAT and DST null and void following the mandate o f Section 3.1.6 o fRR No. 12-99. Verily, the 60-day period must be utilized in full for the benefit of both the petitioner and respondent and any limitation to do so shall be regarded as a violation of due process. In Perf R estaurants Inc. vs. Commissioner of Intemal Revenue 33 this Court ruled that "Section 228 of the N IRC of 1997 , operates for the benefit of both the taxpayer and the government. Said section guarantees "a taxpayer due process" before it may be held liable to pay tax found due. On the other hand, the government is given an opportunity to assess and collect internal revenue taxes, interests, and penalties from delinquent taxpayers or tax evaders within the prescriptive period." In view of the foregoing, the Court find s that is it no longer necessary to dwell on the merits of the assessments. / 33 CTA Case No. 7334, March 5, 20 I0.

DECI SION CTA CASE NO. 8438 Page 21 of23 PETI TIONER 'S RIGHT T O A CLAIM FOR R E F U ND AMOUNTING TO P2,391, 999.40 AROSE FROM TH E N ULLI TY OFTH EFDDA. Section 229 34 of the Tax Code provides that all suits or proceedings shall be flied before the expiration of the 1:\vo (2) years from the date of payment o f the tax or penalty, regardless of supervening cause that may arise after payment. T his finds supported in the case o f Commissioner of Internal Revenue vs. Aichi Forging Compaf!J ofAsia, Inc., 35 where the Supreme Court stated that - "A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or illegally collected. In both cases. a taxpayer must prove not only his entitlement to a refund but also his compliance with the procedural due process as non- observance of the prescriptive periods which will file the administrative and judicial claims would result in the denial of his claim." (Underscoring ours) H owever, the circumstances in the present petition demand a different treatment. In Commissi on er ofInternal R evenue vs. Philippine American Life Insuran ce Co. 36 the Supreme Court ruled that "The prescriptive period , of 1:\vo (2) years should commence to run only from the time that the refund is ascertained which can only be determined after a final adjusted return is accomplished, regardless of any supervening cause that may arise thereafter." (Underscoring ours) Applying the afore-mentioned ruling, this Court has determined that the FDDA issued by respondent is null and void for being in violation of the~ 34 "SEC. 229. Recovery of Tax Erroneously or Il legally Collected. - No suit or proceedings shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expira tion of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided however, That the Commissioner may, even without a written claim therefore, refund or credit any tax, where on the face of the return upon which payment was made, such paym ent appears clearly to have been erroneously fsaid." (Underscoring ours). 5 G.R. No. 184823, October 6, 20 I0. 36 244 SCRA 447 (1995).

DECISION CTA CASE NO. 8438 provisio ns o f Section 228 and has finally ascertained petitioner's right to a claim for refund o n account of its payment of basic deficiency VAT assessment. Equity as the complement o f legal jurisdiction seeks to reach and do complete justice where courts o f law, through the inflexibility of their rules and want of power to adopt their judgments to the special circumstances of cases, are incompetent to do so. 37 Thus, the interpretation on the law on prescription may be relaxed for equitable ends and allow petitioner to claim for refund paid under protest. WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. The Final Decision o n Disputed 1\ ssessment issued by respondent on January 25, 2012 set aside and hereby declared null and void and of no legal effect precluding respondent from collecting the P15,959,747.80 assessed deficiency taxes for the CY-ending D ecember 31, 2008. Accordingly, respo ndent is hereby ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the amount of P2,391,999.40 corresponding to the basic deficiency VAT paid under protest. SO ORDERED. ~-~ ~-\.- MA. BELEN M. RINGPIS-LIBAN Associate Justice WE CONCUR: 37 Manila Electric Company vs. Commissioner of Internal Revenue; CTA Case No. 7242, December 6, 2010, citing Tamio vs. Ticson, G.R. No. 154895, November 18, 2004

DECISION CTA CASE NO. 8438 ATTESTATION I attest that the conclusions in the above decision were reached in consultt'ltion before the case was assigned to the writer of the opinion of the Court's Division. LOVELL !.!:uTISTA Associate Justice Chairperson CERTIFICATION Pursuant to Section 13 of Article VIII of the Constitution, it is hereby certified that the above Decision has been reached in consultation with tb.e members of the Court in Division before the case was assigned to the writer of the opinion of this Court. Presiding Justice