BASF PHILIPPINES, INC., v. THE COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION BASF PHILIPPINES, INC., CTA CASE NO. 8128 Members: Petitioner, -versus- CASTANEDA, JR., CASANOVA, MINDARO-GRULLA, JJ. Promulgated: COMMISSIONER OF INTERNAL NOV 2 2 2011 REVENUE, / Respondent. )(- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - )( DECISION CASANOVA, J.: The instant Petition for Review seeks the cancellation of the assessment notices issued by the Commissioner of Internal Revenue holding petitioner BASF Philippines, Inc. liable for deficiency Value-Added Tax (VAT) and Income Tax for taxable year 2002 in the aggregate amount of P100,319,246.85. The facts of the case, as culled from the records, are as follows: Petitioner is a corporation duly organized and existing under the laws of the Philippines, with principal office at the 11th Floor, Hanjinphil~

DECISION CTA CASE NO. 8128 Corporation Building, 1128 University Parkway, North Bonifacio, Global City, Taguig, Metro Manila1. Petitioner is a wholly owned subsidiary of BASF SE, the world's leading chemical company, based in Germany2. Respondent is the duly appointed Commissioner of Internal Revenue who holds office at the Bureau of Internal Revenue, National Office, Diliman, Quezon City. 3 A Preliminary Assessment Notice (PAN) dated October 25, 20054 was issued by respondent, through the BIR Assessment Division Revenue Region No. 9 - San Pablo City stating that, in connection with Letter of Notice No. 056-1M-02-00-00783, petitioner is liable for deficiency income tax and VAT for taxable year 2002 in the amounts of P75,410,788.26 and P24,081,747.57, respectively: 5 I. VALUE ADDED TAX Discrepancy on Purchases P386,965,246.70 Divide by Cost Ratio 76.68% Additional sales based on 504,649,513.17 discrepancy Multiply by Gross Profit Rate 23 .32% Additional gross profit 117,684,266.47 Multiply by tax rate 10% VAT deficiency 11,768,426.65 Add: 50% Surcharge P5,884,213.32 Interest 6,429,107.60 12,313,320.92 Total Amount Due P24,081,747 .57 .f ? ' 1 Par. I , Summary of Admitted Facts, Amended Joint Stipulation of Facts (AJSF), Docket, Vol. II , p.606 2 Par. 3, Petition for Review, Docket, Vol. I, p. 4 3 Par. 2, Ibid 4 Exhibit " A" 5 Par. I, Stipulation ofFacts, ASJF, Docket, Vol. II, p. 609

DECISION CTA CASE NO. 8128 II. INCOME TAX p Taxable income per annual P18,829,482.64 117,684,266.47 income tax return 18,922,340.36 117,684,266.47 Add: Additional gross profit 37,658,965.27 Adjusted Taxable Income Tax due 37,751,822.99 Add: 50% surcharge P75,410,788.26 Interest Total Amount Due The PAN states that the computerized matching conducted by the SIR disclosed that petitioner has undeclared importation based on a comparison between the records of the Bureau of Customs and the petitioner's VAT Returns. 6 The Computation Sheet (SIR Form 2112-C/ attached to the PAN showed a VAT Amount Payable of only P1,171,525.82 and an Income Tax Amount Payable of only P207,920.55, to wit: 8 VALUE ADDED TAX A. SOC data is higher than the declaration per VAT return: Discrepancy on Importation p 21,038,415.37 Divide by Cost Ratio 766,824.00 Additional Sales based on P 27,435,781.05 discrepancy 233,176.00 Multiply by Gross Profit Rate Additional Taxable Sales (Figure 1) p 6,397,365.68 Multiply by tax rate 10 Deficiency Tax p 639,736.57 B. SOC data is lower than the declaration per VAT return:v- 6 Par. 6, Petition, Docket, Vol. I, p. 6 7 Exhibit " A-3 " 8 Par. 3, Summary of Admitted Facts, Docket, Vol. II , pp. 606-607

DECISION CTA CASE NO. 8128 Discrepancy on Importation p Multiply by tax rate % Deficiency tax Deficiency Tax (A or B) p 639,736.57 Add: Surcharge, if applicable P159,934.14 Interest 351,855.11 Compromise Penalty, if 20,000.00 531,789.25 applicable Amount Payable P1,171,525.82 INCOME TAX A. BOC data is higher than the declaration per VAT return: Gross Income per Return p 363,060,986.00 Add: Figure 1 in Schedule 1A 6,397,365.68 Adjusted gross income p 369,458,351.68 Multiply by normal income tax 2 rate/MCIT Income tax rate/MCIT due p 7,389,167.03 Less: Income tax or MCIT per 7,261,220.00 return Deficiency Income Tax/MCIT 127,947.03 B. BOC data is lower than the declaration per VAT return: Discrepancy on Importation p (Overclaimed deductions) % p Multiply by normal income tax rate Deficiency income tax Deficiency Income Tax/MCIT (A or B) 63,973.52 p 127,947.03 Add: Surcharge, if applicable 16,000.00 79,973.52 Interest Compromise Penalty, if applicable Amount Payable p 207,920 .55 ~

DECISION CfA CASE NO. 8128 According to petitioner, the PAN was received by Ms. Villa Tolentino, an accounting staff who is not authorized to sign tax returns nor represent petitioner before the BIR. Since the PAN was not addressed to a particular officer, Ms. Tolentino did not refer the PAN to her superiors.9 A Formal Letter of Demand dated November 24, 2005 with attached Assessment Notices10 for income tax and VAT in the amounts of P76,040,982.68 and P24,278,264.17, respectively, was issued by the BIR Assessment Division Revenue Region No. 9 through Acting Regional Director Merlinda L. Orodoyo. 11 Ms. Tolentino wrote a letter to Ms. Orodoyo dated December 13, 2005 12 which she filed with Revenue Region No. 9 on 22 December 2005, , requesting that it be provided with the "list of undeclared importations you mentioned in your letter for us to verfy (sic) them on our end."13 In a letter of Corazon C. Pangcog, OIC Regional Director dated February 15, 200614 sent to the attention of Ms. Tolentino, the BIR provided the requested list of importations called the Details of Importation with Return Information Matching (DIRIM). 15 In a letter dated April 21, 200616, Ms. Tolentino replied to Ms. Corazon Pangcog, requesting for "revalidation of the deficiencies in payment being raised to our concern" and asserting that "our company outrightly settles~ 9 Par. 7, Petition, Docket, Vol. I, p. 6 10 Exhibit " 8 " 11 Par. 4, Summary of Admitted Facts, Docket, AJSF, Vol. II , pp . 607-608 12 Exhibit "C" 13 Par. 6, Stipu lation of Facts, AJSF, Docket, Vol. II , p. 610 14 Exhibit " D" 15 Par. 6, Stipulation of Facts, AJSF, Docket, Vol. II , p. 608 16 Exhibit " E"

DECISION CTA CASE NO. 8128 import taxes and duties." Ms. Tolentino attached a Certification from the Philippine Bonded Warehouse Services, Inc., Memorandum from the Port of Manila dated August 27, 2001, 3rd Indorsement dated August 24, 2001 from the Port of Manila with its attached Annexes. 17 On July 3, 2006 petitioner received from respondent a letter dated June 26, 2006 addressed to Ms. Villa Tolentino and signed by Oscar A. Aguilar, OIC Chief, Legal Division, Revenue Region No. 9 stating that petitioner should settle the amount of P100,319,246.85. 18 On June 17, 2010, Ms. Antoinette Molleno received two subpoenas dated April 30, 2010 and May 21, 201019 from the Department of Justice (DOJ) in connection with a preliminary investigation based on a complaint dated March 18, 201020 filed by the respondent for violation of Section 255 of the National Internal Revenue Code on account of the alleged failure to pay deficiency income tax and VAT for taxable year 2002. The complaint was based on an Affidavit of Oscar Aguilar alleging that tax assessments are final and demandable because no timely protest was filed by petitioner against the deficiency tax assessments arising from the Letter Notice Y Petitioner considered the criminal complaint filed against Ms. Antoinette Molleno dated March 18, 2010, which was signed by Commissionere>- 17 Par. 7, Stipu lation of Facts, AJSF, Docket, Vol. II , p. 608 18 Par. 7, Stipu lation ofFacts, AJSF, Docket, Vol. ll , p. 610 19 Exhibit " L" 20 Exh ibit " L-1 " 21 Par. 8, Summary of Admitted Facts, AJSF, Docket, Vol. II , p. 608

DECISION CTA CASE NO. 8128 of Internal Revenue Joel Tan-Torres, as the constructive denial of petitioner's protest dated July 18, 2006 and August 25, 2010. 22 According to petitioner in an Indorsement dated June 3, 2010, respondent is preparing, and is about to issue a Warrant of Distraint and Levy/Garnishment against it for the amount of P100,319,246.85.23 Hence, this instant Petition for Review with Urgent Motion for Suspension of the Collection of Tax filed on July 6, 2010. In her Answer24 filed on September 17, 2010, respondent averred the following Special and Affirmative Defenses: "4. Respondent hereby repleads the foregoing admissions and denials as part of her special and affirmative defenses. 5. Petitioner's deficiency Value-Added Tax (VAT) and Income Tax (IT) assessments were determined through computerized matching of records pursuant to existing laws, rules and regulations. 5.1 The purpose and method by which the deficiency VAT and IT of petitioner has been determined in accordance with Section 6(A) of the National Internal Revenue Code of 1997 (NIRC of 1997). Quoted hereunder is the said provision of law: Examination of Returns and Determination of Tax Due. - After a retunr (sic) has been filed as required under the provisions of this Code, the Commissioner or hiu (sic) duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the~ 22 Par. 25 , Petition, Docket, Vol. I, p. 11 23 Par. 26, Petition, Docket, Vol. I, p. 11 24 Docket, Vol. I, pp. 196-206

DECI SION CTA CASE NO. 81 28 Commissioner from authorizing the examination of any taxpayer. The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or form (sic) his duly authorized representative. Any return, statement or declaration filed in any office authorized to receive the same shall not be withdrawn: Provided, That within three (3) years from the date of such fi ling, the same may be modified, changed or amended: Provided, further, That no notice for audit or investigation of such return, statement or declaration has in the meantime been (sic) actually served upon the taxpayer. 5.2 The matching of petitioner's records with the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) database was done pursuant to Revenue Memorandum Order (RMO) No. 42-200325 in relation to RMO No. 30-200326 and Revenue Regulations (RR) No. 12-200227 � Under Letter Notice (LN) No. 056-IM- 02-00-00783, a computerized matching conducted by respondent's officers on importation data furnished by the BOC against imported purchases declared in petitioner's VAT returns disclosed the following discrepancy for taxable year 2002: Importation per BOC Data 37,383,261.00 Importation per VAT returns filed Discrepancy in imported purchases 16,344 845.63 21,038,415.37 �eJI- 25 Prescribing Additional Guidelines Governing the Rules on Assessment ofNational Internal Revenue Taxes Covered by a Letter Notice (LN) issued under the RELIEF System as Defined in Revenue Memorandum Order (RMO) No. 30-2003 and other data matching processes. 26 Guidelines and Procedures in the Extraction, Analysis, Disclosure/Dissemination, Utilization and Monitoring of RELIEF Data for Audit and Enforcement Purposes. 27 Regulations Providing for the Policies, Procedures and Guidelines in the Implementation of the Voluntary Assessment and Abatement Program (VAAP) for Taxpayers with Underdeclared Sales/Receipts/Income for the Calendar and Fiscal Years 2000, and 2001, and the First and Second Quarter ending June 30, 2002, Pursuant to the RELIEF Program of the Bureau of Internal Revenue and the Consequences for Non-Availment thereof.

DECISION CTA CASE NO . 81 28 I Percentage (%)of Discrepancy 5.3 Based on the Formal Letter of Demand (FLOD) received by petitioner on 24 November 2005, verification by respondent's officer disclosed that per computerized marching (sic), petitioner has undeclared importation for taxable year 2002. The discrepancy was discovered through comparison per BOC records against petitioner's importation per tax return. The Details of Importation with Return Information Matching (DIRIM) from BOC indicates that petitioner has a total importation of P550,413,703.00 against P163,448,456.30 as reflected in their returns. Hence, the discrepancy of P386,965,246. 70. 6. Petitioner was afforded due process and ample opportunity to contest the findings of respondent's officers. 6.1 In LN No. 056-IM-02-00-00783 dated 18 August 2004, respondent invited petitioner to a conference to validate the findings of her officers. The invitation embodied in the LN serves as a Notice of Informal Conference akin to that of the process detailed in RR No. 12-9929 for assessment pursuant to a Letter of Authority. 30 6.2 On 08 November 2004, petitioner received a letter dated 06 October 2006 from respondent with subject "Letter Notice No. 056-IM-02-00-00783". The letter indicates in part: To date, yo (sic) have not taken any positive action to refute the validity of our finding and/or present any documentary evidence to reconcile the variances so indicated therein. We made it clear to you that your failure to# 28 LN No. 056-JM-02-00-00783 dated August 18,2004, Page 31 ofthe BIR Records. 29 Implementing the Provisions of the National Internal Reve nue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and Extra-Judicial Settlement of a Taxpayer's Criminal V iolation of the Code Through Payment of a Suggested Compromise Penalty. 30 Paragraph 5, II I. Gu ide li nes of RMO No. 42-03: The LN shall serve as a d iscrepancy notice to taxpayer simi lar to a Notice for Informa l Conference to the concerned taxpayer, thus, the procedures defined in RR 12-99 shou ld likewise be observed.

DECISION CTA CASE NO. 8128 respond within fifteen (15) days from receipt thereof will consider you in default and, as a matter of course, the Bureau shall conduct an appropriate review and issuance of Preliminary Assessment Notices (PAN) and Final Assessment Notice (FAN), as the case may be. Please consider this letter as reminder and final notice to you that there has been a previous finding upon which we will base our forthcoming review/assessment. Henceforth, any further action on your part is deemed as an admission to the validity and accuracy of the discrepancy indicated in the subject LN. 6.3 Petitioner received a Preliminary Assessment Notice (PAN) dated 25 October 2005 as to deficiency VAT and IT for taxable year 2002 broken down as follows: I. VALUE ADDED TAX Discrepancy on P386,965,346. 70 Purchases 76.68% 504,649,266.47 Divide by Cost Ratio 23.32% Additional sales based 117,684,266.47 on discrepancy 10% 11,768,426.65 Multiply by Gross Profit 12,313,320.92 Rate P24,081,747 .57 Additional gross profit Multiply by tax rate VAT deficiency Add: 50% Surcharge P5,884,213.32 6,429,107.60 Interest Total Amount Due II. INCOME TAX p 117,684,266.47 Taxable income per .P' annual income tax return Add: Additional gross

DECISION CTA CASE NO. 81 28 profit Adjusted Taxable 117,684,266.47 Income 37,658,965.27 Tax due 37,751,822.99 Add: 50% surcharge P18,829,482.64 P75,410,788.26 18,922,340.36 Interest Total Amount Due 6.4 Petitioner received an (sic) FLOD with attached assessment notices dated 24 November 2005 which petitioner received on even date as to deficiency VAT and IT for taxable year 2002 broken down as follows: I. VALUE ADDED TAX Discrepancy on Purchases P5,884,213.32 P386,965,346.70 Divide by Cost Ratio 6,625,624.20 76.68% Additional sales based on discrepancy 504,649,513 .17 Multiply by Gross Profit Rate Additional gross profit 23.32% Multiply by tax rate 117,684,266.47 VAT deficiency Add: 50% Surcharge 10% 11,768,426.65 Interest 12,509,837.52 Total Amount Due P24,278,264.17 III. INCOME TAX Taxable income per annual p - income tax return Add: Additional gross profit 117,684,266.47 Adjusted Taxable Income 117,684,266.47 Tax due Add: 50% surcharge 37,658,965.27 Interest P18,829,482.64 38,382 017.41 Total Amount Due 19,552 534.77 P76,040,982.68 6.5 At that point, petitioner had the opportunity to contest the findings of respondent's officers by filing a protest against the FLOD within thirty (30) days from~

DECISION CfA CASE NO. 8128 receipt thereof or until 24 December 200531 � Petitioner did not file a protest within the reglementary period. Instead, petitioner requested for a copy of the list of undeclared importations as stated in the DIRIM. Even so, respondent's officers provided petitioner with a copy of the DIRIM. Due to petitioner's own actions, it had failed to file a protest within the reglementary period provided by law. 31 Section 228 of the NJRC of 1997 . Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed , he shall first notify the taxpayer of his findings : Provided, however, That a pre-assessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of tax as appearing on 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 determ ined to have carried over and automatically 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) When the article locally purchased or imported 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 taxpayer shall be informed in writing 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 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 reinvestigation with in 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 subm itted : 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.. a;-

DECISION CTA CASE NO. 8128 6.6 The assessment being final, executory and demandable, petitioner's case was referred to the Collection Division of Revenue Region No. 9, San Pablo City, Laguna on 11 May 2006. On 31 May 2006, respondent issued a Final Notice Before Seizure (FNBS) against petitioner. 7. The assessment borne of LN No. 056-IM-02-00-00783 had become final, executory and demandable. 7.1 The law under Section 228 of the NIRC of 1997 is unequivocal when it stated that an assessment is final and executory if the taxpayer failed to file a protest thereon within thirty (30) days from receipt thereof. 32 7.2 In the case of Protector's Services vs. Court of Appeals, et a/. 33 the Supreme Court observed the effect of failure to file an administrative protest within the reglementary period: We note that indeed on December 10, 1987, petitioner received the BIR's assessment notices. On January 12, 1988, petitioner protested the 1983 and 1984 assessments and requested for reinvestigation. From December 10, 1987 to January 12, 1988, thirty three days had lapsed. Thereafter petitioner may no longer dispute the correctness of the assessments. (emphasis supplied) 7.3 In this case, petitioner received the FLOD with attached assessment notices on 24 November 2005. Applying the rules of Section 228 of the NIRC of 1997, a protest should have been filed by petitioner not later than 24 December 2005. The days went by nary a peep from petitioner. 7.4 As sound practice of tax administration, respondent's officers sent a Final Demand Letter dated 26 June 2006 to petitioner as a reminder that it should settle its tax liabilities in the aggregate amount o~~ 32 Asian Auctioneers, Inc . vs . Commissioner of Internal Revenue, CTA EB No. 276 , August 3, 2007. 33 G.R. No. 118176, Apri l 12,2000.

DECISION CTA CASE NO. 8128 P100,319246.85 (sic) not later than 12 July 2006. As though disturbed from lethargy, petitioner filed a position paper contesting the assessment. Alas, the time for misgivings had come to pass. Plain as day, the assessment is final, executory and demandable. 7.5 Petitioner points out that the letter it sent to respondent on 22 December 2005 serves as a protest on the assessment and is well-within the 30-day period for filing a protest. This argument holds no water. Quoted hereunder are the contents of the said letter: This is in connection with your Formal Letter of Demand which we recevied (sic) on 24 November 2005, informing us that we have deficiency Income tax and Value-added tax for the year 2002 amounting to Php76,040,982.68 and Php24,278,264.17 respectively inclusive of surcharge, interest and penalty. Kindly provide us with the list of undeclared importations you mentioned in your letter for us to verfy (sic) them on our end. A cursory reading of the above-quoted letter readily reveals that by no stretch of the imagination can it be inferred that petitioner is protesting the assessment. 7.6 A protest on assessment should contest the findings of respondent's officers. Furthermore, a valid protest should contain the following: (a) Name of the taxpayer and address for the immediate past three (3) taxable year. (b) Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence he intends to present if it is a request for investigation. (c) The taxable periods covered . (d) Assessment number..~

DECISION CTA CASE NO. 8128 (e) Date of receipt of assessment notice or letter of demand. (f) Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first. (g) The itemized schedule of the adjustments with which the taxpayer does not agree. (h) A statement of facts and/or law in support of the protest. 34 7.7 Suffice it to say, the said letter doesn't even qualify as a pro forma protest. 8. All told, petitioner is liable for deficiency VAT and IT in the respective amounts of P24,278,264.17 and P75,410,788.26 for taxable year 2002. " On August 3, 2010, this Court issued a Resolution35 restra ining respondent from enforcing any Warrant of Distraint and Garnishment and/or Levy against petitioner and immediately suspending the collection of disputed VAT and income tax assessments. On January 21 , 2011, the parties submitted their Amended Joint Stipulation of Facts and Issues, which was approved in a Resolution36 dated January 25, 20 11. During trial, both parties presented their evidence, testimonial and documentary, to prove their respective case.. ~ 34 Section 6, Revenue Regulations No. 12-85: Procedure covering administrative protests on assessments of the Bureau of Internal Revenue 35 Docket,Vol. I, pp. 157-158 36 Docket, Vol. ll, p. 620

DECISION CTA CASE NO. 8128 On June 28, 201137, this Court ordered the parties to file their respective Memorandum within thirty (30) days from receipt of the said Resolution. In a Resolution dated August 8, 2011, the case was submitted for decision, taking into consideration respondent's Memorandum filed on July 14, 201138 and petitioner's Memorandum filed on August 1, 201139. The following are the stipulated issues40 for our resolution: 1. Whether or not respondent observed due process in the issuance of the deficiency income tax and VAT assessments. 2. Whether or not the deficiency income tax and VAT assessments are valid. 3. Assuming that the deficiency income tax and VAT assessments are valid, whether or not the assessments have factual basis. 4. Whether or not petitioner filed a timely protest. 5. Whether or not deficiency VAT assessment had prescribed. Petitioner asserts that the PAN and the FAN are void because they do not state the facts on which the assessments were based in violation of Section 228 of the National Internal Revenue Code (NIRC) of 1997. To illustrate, petitioner argues that the PAN and FAN simply stated that " per computerized matching [that] was conducted by the Bureau, [petitioner has] an undeclared importation for the year, which is a result of comparing_ ~ 37 Docket, Vo l. rr, pp. 1043- 1044 38 Docket, Vo l. fl , pp. 1045- 1057 39 Docket, Vol. II, pp. I059- 1099 40 Amended Joint Stipul ation of facts and Iss ues, Docket, Vol. II, pp. 608-609

DECISION CTA CASE NO. 8128 [petitioner's] importation per Bureau of Customs (BOC) records as against [petitioner's] importation per tax return." However, the list of importations from the BOC used by the BIR for its comparison was not provided by the BIR. Moreover, petitioner points out that the figures appearing in the Computation Sheet attached to the PAN have no bearing on the figures appearing in the deficiency income tax and VAT assessment on the face of the PAN. Further, petitioner stressed that the amounts assessed in the PAN and FAN are totally and inexplicably different from the amount assessed in the Computation Sheet. Based on the foregoing, petitioner submits that the PAN and the FAN are void ab initio and without legal effect. Consequently, petitioner contends that it cannot give rise to an enforceable tax liability. This Court gives credence to petitioner's arguments. Section 228 of the NIRC of 1997 specifically provides that: "SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provide~ however, That a pre-assessment notice shall not be required in the following cases: XXX XXX XXX The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. XXX XXX xxx'' (boldfacing supplied) . . ~

DECISION CTA CASE NO. 8128 To implement this provision, the BIR issued Revenue Regulations (RR) No. 12-99, Section 3 of which states: "Section 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. - XXX XXX XXX 3.1.2. Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized 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 xxx xxx. XXX XXX XXX 3.1.4 Formal Letter of Demand and Assessment Notice. - The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The 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 formal letter of demand and assessment notice shall be void xxx xxx xxx." (boldfacing supplied) It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. The use of the word "shall" in these legal provisions indicates the mandatory nature of the requirements laid down therein41 : ~ 4 1 Commissioner of Internal Revenue vs. Enron Subic Power Corporation, G.R. No. 166387, January 19,2009.

DECISION CfA CASE NO. 8128 A review of the records of the case would reveal that respondent did not inform petitioner in writing of the law and facts on which the assessments of the deficiency VAT and Income Tax were made. In the Preliminary Assessment Notice as well as the Formal Letter of Demand with Details of Discrepancies and Assessment Notice issued against petitioner, respondent merely stated that "per computerized matching conducted by the Bureau, you have an undeclared importation for the year, which is a result of comparing your importation per Bureau of Customs (BOC) records as against your importation per tax return". Further, there is an alarming discrepancy in the amounts specified in the PAN vis-a-vis the amounts appearing in the computation sheet attached to the PAN. For that alone, it would already be difficult for petitioner to determine how the deficiency assessments for VAT and Income Tax were arrived at by respondent. Moreover, as correctly pointed out by petitioner, respondent failed to provide petitioner with the list of the alleged undeclared importations which has given rise to the deficiency assessments issued against it. In fact, it is undisputed that the list of importations called as Details of Importation with Return Information Matching (DIRIM) had only become available to petitioner after its former employee, Ms. Tolentino, wrote and requested for a copy from Acting Regional Director Merlinda L. Orodoyo, after having received the PAN. d-'

DECISION CTA CASE NO. 8128 Based on the foregoing, this Court is convinced that the assessment notices issued against petitioner are not valid. The details stated therein are not sufficient to afford petitioner the opportunity to intelligently answer the assessment as well as prepare documentary evidence for its protest. Said notices failed to state the legal and factual bases of the assessment for deficiency VAT and income tax arising from the alleged undeclared importation of petitioner. As held by the Supreme Court in the case of Commissioner of Internal Revenue vs. Enron Subic Power Corporation42, to wit: "The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12- 99 would be rendered nugatory. The alleged 'factual bases' in the advice, preliminary letter and 'audit working papers' did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice." (boldfacing supplied) Finally, a void assessment cannot give rise to an obligation to pay deficiency taxes, and it divests the taxing authority of the right to collect them. 43 In view of the foregoing, the resolution of the other issues is no longer necessary.~ 42 Supra 43 FMF Development Corporation vs. Co mmiss ioner of Internal Revenue, CA-G R SP No. 73973 , February 23 , 2004

DECISION CTA CASE NO. 8128 WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly, the deficiency Value-Added Tax (VAT) and Income Tax assessments issued against petitioner for taxable year 2002 in the aggregate amount of P100,319,246.85 are cancelled and considered withdrawn for lack of legal and factual basis. Respondent is permanently enjoined from collecting said assessments. SO ORDERED. $- CAESAR A. CASANOVA Associate Justice WE CONCUR: a-~c.~~.~ Jt1'ANITO c. CASTANEDA( JR: Associate Justice ~ N .M ~ , C~ CIELITO N. MINDARO-GRULLA Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~~ 0.,. a;r-~ Q. i'UANITO C. CASTANEDA( .fR. � Associate Justice Chairperson, Second Division

DECISION CTA CASE NO. 81 28 CERTIFICATION Pursuant to Article VIII, Section 13 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, ERNESTO D. ACOSTA Presiding Justice