FORT BONIFACIO DEVELOPMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OF TAX APPEALS Quezon City FIRST DIVISION *****.... ********f * FORT BONIFACIO DEVELOPMENT C.T.A. CASE NO. 7531 CORPORATION Pe t itioner, Me'mbers : - versus - ACOSTA, Chairperson :BAUTISTA,. and CASANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated : REVENUE, - ~ ~ Respondent. � - - - - -X X� - �� - � - - - - �� - - - - � - - � - - � - � - - - - � - � DECI S I ON CASANOVA/ J.: For decision is tile instant Petition for Review seeking that judgment be rendered setting aside and cance ling the final deficiency income ta x assessment covered by Assessment Notice No. LTS-LN -116-R-02-04-S-01607-IT-05-00236 1 dated December 28, 2005 issued by the Bureau of Intern al Reve nue findin g petitioner liable for P683,265 .02. Fort Bonifacio Development Corporation (petitioner) is a domestic corporation du ly registered with the Securities and Exchange Commission, existing under and by virtue of the laws of the Republic of the Phi lippines, with ~ 16 �1

" Decision CTA Case No. 75 31 principal office address at 2nd Floor, Bonifacio Technology Centre, 31st St., corner 2nd Ave., Bonifacio Global City, Taguig City, Metro Manila1. Respondent is the duly appointed head of th e Bureau of Internal Revenue (BIR), empowered, among others, to decide on disputed deficiency internal revenue tax assessments, with office address at the Office of the Commissioner of Internal Revenue, BIR National Office Building, Agham Road, Diliman, Quezon .City, Metro Manila 2� On February 3,� 20 06 petitioner received a Formal Letter of Demand3 and Assessment Notices4 stating that it is liable for deficiency Income Ta x and Value� Added Tax (VAT) arising from the discrepancy based from the computerized matching conducted by the BIR of petitioner's sales and its customer's purchases for the 4th quarter of 2002. The demand letter showed the amounts of P683,265.02 and P236,779.59 as petitioner's deficie ncy income ta xes and VAT, respectively, or a total of P920,044.6 1 whi ch is inclusive of interests and penalties . On March 6, 2006, petitioner filed a letter of protest5 stating that the assessment notices and the corresponding formal letter of demand are null and void for failure to state clearly th e law and facts on which the assessments were made contrary to due process requirements. With respect to the deficiency income tax assessment, petitioner argued it to be without basis while the .a., deficiency VAT assessment was argued to have prescribed . 1 Petition for Rev iew, par. I , Rollo. p. I . 2 Ibid .. Par. 2, p 2. 3 Exhihit " A��. Rollo p. 187. 4 Exl1ibit s ''8'. and '�C, Rollo, pp. 190- 19 1. 5 Annex ''D" of Petiti on for Rev iew, Rollu, pp. 20-29.

Decision CTA Case No. 753 1 On May 5, 2006, petitioner submitted documents to the BIR in support of its arguments6 . Come September 14, 2006, petitioner received a Final Decision on Disputed Assessmene dated Augu st 18, 2006 from respondent. The decision cancelled the deficiency VAT assessment of .P236,779.59 and sustained the deficiency income tax assessment of P683,265.02 . With the partial denial of its protest, petitioner filed the instant case before Us on October 16, 2006.8 In response to the Petition for, Revi ew, respondent filed an Answer9 on December 27, 2006 with the following Special and Affirmative Defenses: "4. The assessment was issued in acco rdance with law and regulati o ns. 5. The assessmef!t was issued under the objective of Revenue Memorandum Order (RMO) No. 42-03, which supplements the procedures and guidelines in handling assessments against taxpayers covered by Letter Notices (LNs) issued under the RELIEF System defined as RMO 30-2003 and other data matching processes intended to intensify the Bureau's enforcement efforts through the 'no-contact-audit approach'. 6. In the sa id RMO No. 42-03, it provides that: 1. Sec 6(A) of th e Tax Code provid es, among others, that 'after a return has been fil ed as required under .the pertinent provisions of the said Code, the Commissioner or his duly authorized representative may authorize the examination of any' taxpayer and the assessment of the correct amount of tax,' and that 'the tax or any deficiency tax so assessed shall be paid upon notice an~ 6 Atmex "E" of Petition fo r Rev iew, Rollo. pp . 30-4 I. 7 Annex " f " of Petition for Rev iew, Rollo. p. 4:2 Exhibit '� D'', Rollo. p 192. 8 Rollo, p. 1. 9 .Rollo, pp. 76-82. 16 G

... Decision CTA Case No. 7531 demand from the Commissioner or from his duly authorized representative .' 2. In order to intensify enforce ment, the power of the Commissioner to authori ze any exa mination of taxpayer and the assessment of th e co rrect amount of tax is hereby ordered done through the so-called 'no-contact- audit-a pproach'. 3. The 'no-contact-audit-approach' includes the process of computerized matching of sales and purchases data contained in the Schedules of Sales and Domestic Purchases, and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8- 2002. This may also incluqe the matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholdin_g Taxes . 4. Even without co nducting a detailed exa mination of taxpayer's books and records, the com puterized/manual matching of sales and purchases/expenses will reveal discrepancies which shall be communicated to the concerned taxpayer through the issuance of Letter Notice (LN) by the Commi ssioner. 5. LNs being served by the Bureau upon taxpayers found to have under-declared their sa les or over claimed their purchases/expenses ca n be considered notice of audit or investigation in so far as the amendment of any return is concerned which is the subject of such LN. A .taxpayer is therefore disqualified from amending his return once an LN is served upon him. I 7. Its guidelines also provid e that: 'The following guidelines sha ll be observed in handling computati on of tax payment/assessments of taxpayers covered by LNs: 1. As provided for under RMQ 30-2003, taxpayers with under-declared sales and over-claimed purchases shall be notified of such findings of discrepancy through the issuance of Letter Noti ces (LNs) herein attached as Ann ex 'A' and Ann ex 'B' . Th e LN s shall be generated$-- 16 7

Decis ion CTA Case No. 7531 automatically together with the Details of Taxpayer's Customer/Supplier : Records (DTCS) by the BIR computer system . The same shall be forwarded to the RDO/LTDO/LTAID for service to ta xpayers concerned. 2. Letter Notices (LNs) under the Relief System shall cover only th e tax indicated th erein on a given particular period or quarter (e.g. VAT liabilities for 3rd quarter 2002)[.] . 3. However, taxpayers who wil l be issued LNs may voluntarily pay the tax indicated in the LN and likewise pay the resulting deficiency income or other ta xes as a r~s wlt of such under or over declaration of sales or purchases/expenses:� as . � the case may be. Th e computation of the defi ciency tax(es) should be based on herein Annex 'C'. 4. Th e issuance of an LN will not preclude the Commissioner from issuing a Letter of Authority covering th e comprehensive audit of a ta xpayer's tax liability and is not a waiver of the Commissioner's right to look into the re�asonablene'ss of taxpayer's operating and administrative expenses. 5. Th e LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal Conference to the concerned taxpayer, thus, the procedures defined in RR 12-99 should likewi se be observed . 6. The concerned ta xpayer wi ll be given an opportunity to reconcile the discrepa ncy. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the LN, the RDO/LTDO/LTAID sha ll issue a follow-up letter giving th e ta xpayer ten (10) days to [respond]. If despite the additional ten (10) days, ta xpayer still fails to respond, th e RDO/LTDO/LTAID shall indorse the case w ith least possibl e delay to the Assessment Division of the Region or the appropriate office authorized to revi ew report of investigation, for the issuance of a Preliminary Assessment Notice and Final Assessment Notice, as the case may be, following the guidelines and proced ures provided by RR 12-99.:@... 16 8

Decision In preparing assessments against tax payers covered by CTA Case No. 7531 LNs, the RDO/LTDO/LTAIS should prepare the Page 6 of 16 computations in accordance vyith herein Annex 'C'. 7. 8. Based on the foregoing, respondent issued to petitioner Assessment Notice Nos. LTS-LN-116-R-02-04-S-0160- IT-05 -00236 and LTS-LN -L116 -R-02-04-S-01607 -VT- 05-00237 both dated December 28, 2005, wherein respond ent conducted co mputer matching that revealed under declared sales on petitioner's reported sales and purchases with customers for the 4tl1 quarter of 2002. 9. Respondent issued a Forma l Letter of Demand and Assessment Notice both dated December 28, 2005 which petitioner receive? on Februar~ 3, 2006 with respect to the contested assessment. with complete details accompanying the said Formal Letter of Demand and Assessment NI otice that indicated the specific provisions of the law on which the assessment was based. Hence, petitioner was duly informed of the factual and legal basis of the assessment. 10. Petition er had been given ample time to refute the validity of the assessments. However, petitioner's documentary evidence were found insufficient, hence th e assessments were maintained pursuant to Section 27 and 32 and in relati on [to] Sections 105, 106 and 108, all of the NIRC of 1997, as amended. 11. The compromise penalty as imposed under to the (sic) provisions of the Revised Schedule of Compromise Penalties pursuant [to] Revenue Memorandum Circular No. 1-90. 12. Finally, it is a well-settled rule in ta xation that assessments are prima facie [p]resumed correct and made in good faith. The ta xpayer has the duty of proving otherwise, and in the absence of proof of any irregularities in the performance of official duties, an assessment will not be di st urbed.~

Decision CTA Case No. 7531 Respondent fi led her pre-trial bri ef10 on March 7, 2007, while petitioner filed its brief11 on March 14, 2007. Thereafter, til e case was scheduled for pre- trial several times but respondent fail ed to appear. Hence, on June 29, 2007, respond ent was declared in defau lt in open co urt and petitioner was allowed to present its evid ence ex parte12. Respondent filed a Motion for Reconsideration 13 on July 26, 2007 praying that the Order of Default be lifted. Pending resolution thereof, petitioner was . schedul ed to present its initial evid ence . However, after several postponements on petitioner's instance, petitioner instead manifested during a hearing that it is considering amicable settlement of the instant case. The manifestation was denied and petitioner was deemed to have waived its right to present evidence due to its repeated postponements14 . In a co nfirming 15 dated Resolution December 04, 2007, the instant Petiti on was di smissed and t he case was deemed closed and terminated. 16 On January 2, 2008, petition er fil ed its Moti on for Reconsideration of the Resolution dated December 4, 2007 dismissing the case. Respondent, for her �part, filed an Opposition Re: Motion for Reconsideration 17 on January 22, 2008 . I I In the Court's Resolution 18 promulgated on February 5, 2008, petitioner's motion was deemed submitted for resolution without taking into consideratio~ 10 Rollo, pp. 97 - I0 I. 11 Rollo, pp. 107- 11 7. . 12 Confirmed via a Reso lution dated July I I , 2007. Rollo, p. 129: Tran script of Stenographi c Notes (TSN), Ju ne 29,2007, p. 4 . 170 13 Rollo. pp . 132- 134. 14 TSN, November 20, 2007, pp . 3-5 . 15 Rollo, p. 160. 16 Rollo. pp . \6 1- 163. 17 Rollo, pp . 169- 172. 18 Reso lutio n, Rollo, p . 176 .

DeCision ITA Case No. 7531 I respondent's Opposition thereto as she was rendered in default in the Court's Resolution19 dated July 11, 2007. On April 4, 2008, petitioner's Motion for Reconsideration was granted and the Resolution dated December 4, 2007 dismissing the case for failu~e to prosecute was set aside20� During the hearing, petitioner presented evidence proving that the deficiency income tax assessment was without basis. It offered its documentary ~xhibits through a Formal Offer of Evidence filed on May 16, 2008 21 � In a R~solution22 promulga~ed on June ;4~ �200.8,� this Court resolved to deny some exhibits from petitioner's offer. Petitioner filed a Motion for Reconsideration on the partial denial on July 17, 200823. On July 23, 2008 and July 24, 2008, petitioner filed two Manifestations with Motion for Reconsideration 24 stating that '' " , its Motion for Reconsideration filed on July 17, 2008 was without a date of hearing. In an August 29, 2008 Resolution25, petitioner's Motion for Reconsideration was denied while its Manifestations were noted. On September 23, 2008, a Tender of Excluded Evidence26 was filed by petitioner. On October 8, 2008, petitioner filed its Memorandum27 � On October 29, 2008, the Court, ruling on petitioner's Tender, issued a Resolution28 which ordered the attachment of.a_ 19 Rollo, p. 129. 20 Resolution, Rollo, pp. 178- 179. 21 Rollo, pp. 183- 186. 22 Rollo, pp. 200-20 I . 23 Rollo, pp. 203-204. 24 Rollo, pp. 209-2 11 and pp. 2 18-2 19. 25 Rollo, pp. 232-234. 26 Rollo, pp. 236-239. 27 Rollo, pp. 296-3 05. 28 Rollo, pp. 307-308. 171

Decision CTA Case No. 7531 excluded evidence as part of the records of the case deemed the case submitted for decision. Hence, this decision. In its pre-trial brief, petitioner submitted the following issues: 1. Whether or not petitioner was sufficiently informed in writing of the law and facts on which the alleged deficiency income tax assessment was made? 2. Whether or not the alleged deficiency income tax assessment has factual and legal bases? 3. Whether or not petitioner is liable for the compromise penalty? I I 4. Whether or not petitioner would be liable for deficiency income tax for taxable year 2002 even assuming without conceding that it had an undeclared sales amounting to P6,621,206.58? The Formal Letter of Demand29 shows the breakdown of the assessment to be as follows: A. INCOME TAX 32% 58,426,473.38 Per Summary List of Purchases by Customers 51 ,805 ,266.80 Less: Sales per Tax Returns Under-declared Sales 6,621,206 .58 Gross Profit Rate 20 .38% Gross Profit Rate Basic Tax Deficiency 1,349,401 .90 Add : Interest 431 ,808.61 226,456.41 Compromise Penalty 25,000 .00 Total Income Tax Deficiency 683,265.02 B. VAT Gross Profit 1,349,401 .90 10% VAT Rate " ' 134,940.19 Basic VAT Deficiency 76,839.40 25 ,000 .00 Add: Interest 236,779.59 Compromise Penalty 920,044.61 Total VAT Deficiency TOTAL DEFICIENCY TAXES �- 29 Supra, note 3. 17 2

Decision CTA Case No. 7531 The deficiency VAT assessment, having been cancelled by respondent in her Final Decision on Disputed Assessment30, is no longer an issue. What remains disputed is the alleged incQ(lle tax defh:iency of petitioner amounting to P683,265.02. From the evidence presented by the petitioner ex parte, the Court rules as follows: Whether or not petitioner was � sufficientlv informed in writing of the law and facts on which the alleged deficiencv income tax assessment was made? Petitioner states that the formal letter of demand merely provided the computation of the supposed tax deficiency, interest and compromise penalty due thereon and that he Assessment Notice issued by the respondent did not provide the petitioner with the written bases of the law and facts on which the 31 subject assessment was based in violation of its right to due process � This Court does not agree. From the Details of Discrepancies attached to respondent's Formal Letter of Demand, We find that respondent sufficiently informed petitioner that the ~ �. 1 bases of the assessment were the computerized matching conducted on the purchases of petitioner's customers and its filed Income Tax Return and that the assessment was made pursuant to Sections 27 and 32 of the 1997 National Internal Revenue Code (1997 NIRC)~ 30 Supra, note 7. 31 Petition for Review; Pars. 4.04 and 4.06, Rollo, pp. 7-8 . .173

Decision CfA Case No. 7531 It is also wise to note that petitioner was given the chance to protest the Formal Letter of Demand. Petitioner even submitted documents to respondent in support of its claim 32 . The essential elemen,ts of due process are notice and an opportunity to present one's side. As the facts would demonstrate, petitioner was never deprived of due process. So long as the parties are given the opportunity to � explain their side, the requi'rements of due process are satisfactorily complied with33 . Hence, the first issue is resolved against the petitioner. Whether or not the alleged deficiencv income tax assessment has factual and legal bases? The Details of Discrepanci es34 attached to respondent's Formal Letter of Demand reads as follows: " DETAILS OF DISCREPANCIES LN No. 116- R-0 2- 0 4- S- 01607 INCOME TAX Assessment No. _ _ _ _ _ _ _ _ __ Computerized matching conducted by this office on the purchases by your customers for th e fourth quarter of 2002 against Sales per your Income Tax Return resulted in the discrepancy; this is assessed pursuant to Sections 27 and 32 of the Tax Code. XXX XXX XXX" 35 In response thereto, petitioner repli ed through a Protest Letter dated March 6, 2006 arguing that the assessment is erroneous and lacks factual basi~ 32 Supra, note 6. 33 Calma vs. Court o(.4ppeals, G .R. No. I ?.2787 , fe bru my 9. I C)qq_ 302 SCRA 682. 34 Rollo, p. 189.

Decision CfA Case No. 7531 and that the finding is merely based on assumptions which cannot be sanctioned as valid assessments under the law. Petitioner, in support of its claim, submitted to the respondent its Annual Income Tax Return for taxabl e year ended December 31, 2002 showing excess tax credits in the amount of P339,075,150. 64 and Quarterly VAT Return for the 4th Quarter of 2002 filed on January 24, 2003 in support of its claim. Respondent replied to petitioner's Protest in the following manner: " xxx With respect to your income tax liability[,] it appears that you have not complied with th e documentary justifications as I required under RMO No., 46-,2004 and other related issuances. Thus, we maintain that the Incom e Tax assessment based on the Formal Letter of Demand in the amount of Pesos: 683, 265 .02 inclusive of interest and penalties thereon up to January 10, 2006 is hereby upheld subject to adjustment of interest on the actual date of payment." We agree with petitio'ner. Section 5 of the 1997 National Internal Revenue Code (1997 NIRC) states that: "SECTION 5 . Power of th e Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons . - In ascertaining the correctness of any return/ or in making a return when none has been made/ or in determining the liability of any person for any internal revenue ta0 or in collecting any such liabili~ or in evaluating tax compliance/ the Commissioner is authorized: XXX XXX XXX (C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear befor~ 35 Supra, note 5. 17 5

Decision CfA Case No. 7531 the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; and x x x" Pursuant to such authority, respondent asse�ssed petitioner through a "no- contact-audit app.roach" which is implemented by Revenue Memorandum Order (RMO) 46-2004. Under such RMO, respondent must comply with the following guid~lines to ascertain .the veracity of the information is derived from the "no- contact-audit approach": "III. PROCEDURES36 Action on LNs that remain Unserved XXX XXX XXX Action on Protested LNs due to TPI discrepancy The Revenue Officer assigned to handle the Letter Notice shall: XXX XXX XXX 3. Obtain Sworn Statements from TPI sources (Annexes 'B' and 'C') attesting to the veracity of the data provided. 3.1 If the TPI source is registered in the RDO/LTDO/LTAID having jurisdiction over the subject 1 taxpayer, the RO .shall: 3.1.1 Prepare 'Confirmation Requests' (using the format prescribed in Annex 'C' of RMO No. 30-2003 to be signed by the heads of the concerned � RDO/LTDO/LTAID) for purposes of verifying the accuracy of the figures appearing in the 3.1.2 If the TPI source agrees with the figures in the 'Confirmation Requests' (CR), secure a Swor~ 36 Supra, note 7. 17G

Decision CTA Case No. 7531 Statement from the JPI source to allow the RO to build a case against the taxpayer. 3.2 If the TPI source is outside the jurisdiction of the RDO/LTDO/LTAID where the taxpayer is registered, the RO shall: 3.2.1 Coordinate with the RDO/LTDO/LTAID where the TPI source is registered, in order to: a. Prepare a CR to be transmitted and signed by the RDO/lTDO/lTAID having jurisdiction over TPI source (CRs should be coursed thru the RDO/lTDO/lTAID where the taxpayer is registered); b. Secure a sworn statement from the TPI source thru the RDO/lTDO/lTAID having jurisdiction over the same; and, � c. Assist the heads of the concerned RDO/LTDO/LTA'ID in the ' preparation of Monthly Status Report on Confirmation Requests Transmitted (Annex 'D') outside the RDO/LTDO/LTAID of the TPI source and submit the same to the SCG, for monitoring purposes." (Emphasis Supplied) True, that assessments are prima facie presumed correct and made in good faith; that the taxpayer has the duty of proving otherwise; and, in the absence of proof of any irregularities in the performance of _official duties, an assessment will not be disturbed 37 in the present case, however, the assessment , of respondent has failed to comply with the guidelines implementing the procedure it adapted. Since respondent was not able to present to Us such certifications and statements necessary to support the audit, We cannot verify the veracity of the assessment. With the failure to present other supporting documents, We believ~ 37 Interprovincial Autobus Co., ln c. vs. (' JR , 9R Phil. 290: SF Po vs. CTA. eta!. , G. R. No . 8 1446, Aug 18, 1988; Dayrit eta!. vs. Cruz, eta!., L-399 10, Sept. 26, 1988, Aug 18, 1988; Answer, Par. 12, Rollo, p. 80. 177

Decision CTA Case No. 753 1 that, the assessment, though possibly meritorious, ca nnot hold water due to unconfirmed data gathered and is co ncluded to be mere presumptions. Therefore, We agree with petitioner when it cited Collector of Internal Revenue vs. Benipayc/8 which ru led that assessments should be based on facts and not mere presumptions. � As such, th e income ta x deficiency assessment can not be enforced against petitioner; otherwise, the Court stands to tax petitioner arbitrarily. In Roxas vs. Court of Appeals9, the Supreme Court eloquently ruled that: I "The power of ta xation iG sometimes called also the power to destroy. Th erefore it should be exercised with caution to minimize injury to the proprietary rights of a ta xpayer. It must be exercised fairly, equally and uniformly, lest the ta x co llector ki ll the 'hen that lays the golden egg.' And, in the order to maintain the general public's trust and confidence in the Government this power must be used justly a~d not treach erously." Having found respondent's assessment without basis, the other issues of this case are now rendered moot. WHEREFORE , in view of the foregoing, the instant Petition for Review is hereby GRANTED . The defi ciency income ta x assessment covered by Assessment Notice No. LTS-LN-116-R-0 2-04-S-01607-IT-05-00236, dated December 28, 2005, in the amount of P683, 265.02, is hereby CANCELLED . SO ORDERED. ~ CAESAR A. CASANOVA Associate Justice 38 G.R. No. l.-11656. Jilnuar' ' 1 1. !9o2. .:.1 SCRA I !\2. l o, 39 G.R. No. L- 25 0.:.1 3, Ap ril 1968. 23 SC RA 276. 282. 178

Decision UA Case No. 753 1 WE CONCUR: Q~ \C - D~ ERNESTO D. ACOSTA CERTIFI C A TI ON Pursuant to Arti cle VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in th e above Decision were reached in consu ltation before the case was assigned to the writer of the opinion of the Court's Division. ~~~- Q..._-'\- ERNESTO D. ACOSTA . Presiding Justice � Chairperson, First Division 17 G