WARNER LAMBERT PHILIPPINES, INC. (NOW PFIZER, INC.) v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* WARNER LAMBERT PHILIPPINES, INC., C.T.A. CASE NO. 6925 (now, Pfizer, Inc.) Members: Petitioner, -versus- ACOSTA, Chairperson BAUTISTA, and COMMISSIONER OF INTERNAL CASANOVA, JJ. REVENUE, Promulgated: Respondent. DEC 14 2007 . IO : ~ X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION BAUTISTA, J.: The instant petition seeks to dispute respondent's Final Decision on Disputed Assessment finding petitioner liable for deficiency income tax in the amount of P65,471,465.25 for the year 1999. Pfizer, Inc. (Petitioner) is a corporation organized and existing under Philippine laws with office address at 23'd Floor, Ayala Life-FGU Center, 6811 Ayala Avenue, Makati City 1200.1 Warner Lambert Philippines, Inc. (Warner Lambert) merged with petitioner on January 18, 2001, with the latter as the surviving entity. All assets and liabilities of Warner Lambert were transferred to, and absorbed by petitioner. 1 Paragraph 1, Joint Stipulation of Facts and Issues (JSFI); Rollo, page 164

DECISION C.T.A. CASE NO. 692S Petitioner is engaged in the business of manufacturing, preparing, buying, acquiring, owning, processing, selling, distributing, exporting and importing goods of every kind, including, but not limited to, chemical, pharmaceutical, medicinal, and biological products.2 Commissioner of Internal Revenue (Respondent) is the officer of the Bureau of Internal Revenue (BIR) vested with the power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other laws or portions thereof administered by the BIR. On April 14, 2000, Warner Lambert filed its Annual Income Tax Return (ITR) for taxable year 1999, reflecting net losses in the amount of P110,218,381.00. 3 On June 4, 2003, petitioner received a Preliminary Assessment Notice (PAN) dated April 2, 2003 together with the Details of Discrepancies. In the PAN, the BIR informed petitioner that it has an alleged internal revenue tax liability of P208,876,361.00 representing deficiency income, value-added, and expanded withholding taxes, inclusive of interest and compromise penalties, computed as follows: 4 INCOME TAX (110,218,381.00) Taxable Income Per Return Add: 15 6,000 ,000 .00 46,718, 185.28 Severance and Termination Cost Accrued in 1998 16,704, 158.8 1 Provision for Inventory Obsolescence Disall owed Expenses-Prior Period/Others I,657,6 13,646.55 Additional Income Ari sing from Discrepancy in Sales Report 1,563,836,809.00 51 ,803 ,000.99 Per VAT 4 1,9 35 ,847 .00 66,224,000.00 Per Financial Statement 37,989.56 19,986,956.9 1 Net Sales 357,436,301.99 Proceeds from Sale of PPE 1,605,8 10,645 .56 Sale of Scrap 33% 19,986,956.9 1 Building Written Off Income Payment Not Subj ected to EWT Adj usted Taxable Income Tax Rate 2 Paragraph 3, JSFI, Rollo, page 165 3 Exhibit "A"; Paragraphs 4 and 5, JSFI, Rollo, page 164 4 Paragraphs 6 and 7, JSFI; Rollo, pages 165-166; BIR Records, pages 7S1-754 (i/?1

DECISION C.T.A. CASE NO. 6925 Tax Due 117 ,953,9 79.66 Add Di sall owed Tax Credit 8,025,993 .62 Tota l Add 125,979,973.28 Interest from Apri I 16, 2000 to May 16, 2003 Compromise Penalty 78, 107,583.43 Total Amount Due 25 ,000.00 204,112,556.71 VALUE-ADDED TAX(VAT) 1,651 ,374,804.60 Taxable sales per VAT returns 165, 137,480.46 Value-Added Tax @ 10% Less: 117,581 ,527.90 VAT input (1 ,812,796.71) Di sallowed input Input all ocated to exempt sales (4 42 ,547 .37) 162,882, 136.30 Month ly payments 23 ,882,763 .67 2,255 ,344. 16 Quarterly payments 20, 123,238.81 Tax credit certificate Deficiency VAT 3,549,950.00 Add: Interest from January 25, 2000 to May 25, 2003 1,5 11 ,080.59 Compromise Penalty 25 ,000.00 Total Amount Due 3,791 ,424.75 Expanded Withholding Tax (EWT) 382,092 .39 9,3 14,885.35 Tax Due 20,000.00 8,744,598.20 Tax Remitted Basic Tax Due 570,287.15 Add: Interest from Januar)' 25 , 2000 to May_25 , 2003 402 ,092 .39 Compromise 972,379.54 Total Amount Due On June 19, 2003, petitioner protested the PAN in a letter dated June 16, 2003.5 On June 23, 2003, four days after the protest was filed, petitioner received Final Assessment Notice Nos. 99-000063, 99-000070 and 99-000077, together with the corresponding Formal Letters of Demand and Details of Discrepancies, all dated June 15, 2003. The assessments are summarized as follows: 6 Tax Type Income Tax EWT VAT Total Assessment Notice No. 99-000063 99-000070 99-000077 213,786,162.92 Basic 125,979,973 .28 570,287. 15 2,255,344. 16 Interest 82,932,6 16.41 399,20 1.01 1,578, 740.91 Compromise Penalty 25,000.00 20,000.00 25,000 .00 208,937,589.69 989,488.16 3,859,085.07 5 Paragraph 8, JSFI, Rollo, page 166 6 Paragraph 9, JSFI, Rollo, page 166; BIR Records, pages 810-817

DECISION C.T.A. CASE NO. 6925 On July 18, 2003, petitioner protested these assessments via protest letter7 and on September 15, 2003, petitioner submitted its relevant documents in support of the protest.8 After one hundred eighty (180) days from petitioner's submission, or on March 13, 2004, respondent had not issued a final decision on petitioner's disputed assessments. Hence, petitioner filed a Petition for Review with this Court on April 12, 2004 praying for the cancellation of the assessments in the aggregate amount of P213,786,162.92 .9 Ten days after the filing of the Petition for Review, or on April 22, 2004, petitioner received respondent's Final Decision on Disputed Assessment (FDDA) dated March 29, 2004 which reduced petitioner's deficiency tax as follows: 10 Type of Tax Amount Income Tax 65 ,873 ,0 14.69 VAT EWT 2 15,864.62 Total 132,358.43 66,221 ,237.74 A breakdown of respondent's computation of petitioner's deficiency tax is provided as follows: Type of Tax For Collection For Assessment Total Income Tax 40 1,549.44 65 ,47 1,465 .25 65 ,873 ,0 14.69 VAT 2 15,864.62 EWT 132,358 .4 3 65,471 ,465.25 2 15,864 .62 Total 749,772.49 132,358.43 66,221 ,237.74 On April 30, 2004, petitioner paid a total amount of P749,772.49 to Land Bank of the Philippines - East Avenue Branch for the amounts declared in the FDDA as subject " For Collection. "11 In view of the developments that have taken place after the filing of the Petition, on May 17, 2007, petitioner filed its Supplement (To Petition for Review, dated 29 March 2004), which only questions the deficiency income tax assessment in the amount of P65,471,465.25. 7 Paragraph 11, JSFI, Rollo, page 167; BI R Records, pages 818-842 8 Paragraph 13, JSFI, Rollo, page 167 9 Pa rag raphs 15, 16, and 17, JSFI, Rollo, page 167- 168 10 BIR Records, pages 1720-1727 11 Pa ragraph 31, JSFI, Rollo, page 171 (; )

DECISION C.T.A. CASE NO. 6925 After trial on the merits, the case was submitted for decision on July 20, 2007. The issues 12 jointly stipulated by the parties for this Court's resolution, are the , following: 1. Whether the right of the Government to assess deficiency income tax for the taxable year 1999 has prescribed. 2. Assuming the right of the Government to assess deficiency income tax for the taxable year 1999 has not prescribed, whether the deficiency income tax assessment has factual and legal bases. 3. Whether Respondent correctly disallowed the amount of P43,955,234.43 as deductible inventory write-off. First Issue: Prescription and Validity of Waiver The general rule on the prescription of the right to assess taxpayers is provided in Section 203 of the NIRC as follows: "Section 203. Period of Limitation Upon Assessment. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)- year period shall be counted from the day the return was filed. For purposes of this Section, a return filed after the last day prescribed by law for the filing thereof shall be considered as filed on such last day." The period to assess, however, may be extended in the case of waivers executed by the taxpayer as stated in Section 222(b) of the NIRC which provides: "Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. XXX (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have 12 JSFI, Rollo, page 173 / (?iJ)

DECISION C.T.A. CASE NO. 692S agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon . The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon." Since petitioner filed its Annual ITR for taxable year 1999 on April 14, 2000, respondent had until April 15, 2003 to assess petitioner. However, petitioner executed a waiver which extended respondent's right to assess to June 30, 2003. 13 Now, the Court must determine whether the waiver complied with the requirements provided by law and jurisprudence. In the event that the waiver is found to be valid, the assessment issued will not have prescribed. Otherwise, the assessment will be null and void for having been issued beyond the period prescribed by law. The requisites for a valid waiver are laid down by the Supreme Court in Bank of the Philippine Islands vs. Commissioner of Internal Revenue14 as follows: "A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be strictly followed, and any revenue official who fails to comply therewith resulting in the prescription of the right to assess and collect shall be administratively dealt with. " Upon carefully studying the wa iver executed by petitioner, this Court finds the same valid because it was (1) in writing; (2) agreed to by both respondent and petitioner; (3) before the expiration of the ordinary prescriptive period for assessment on April 15, 2003; and (4) for a definite period beyond the ordinary prescriptive period for assessment or until June 30, 2003. Moreover, the execution of the waiver complied with RMO No. 20-90 as regards the indication of the date of acceptance, viz., December 9, 2002. 13 Exhi bit " B", BIR Records, page 737 14 G.R. No. 139736. October 17, 2005 {iiq)

.. DECISION C.T.A. CASE NO. 6925 Second and Third Issues: Validity ofAssessment The deficiency income tax assessment of P65,471,465.25, as contained in the FDDA, was computed by respondent as follows: Income Tax (11 0,218,381.00) Taxable Income Per Return Provision for inventory obsolescence 46,725 ,970. 15 43 ,955,234.43 2,769,735.72 66,224,000 .00 Total 11 0, 179,234.43 Claim duly supported by BIR Cert 43 ,955,234.43 Di sa llo we d 33 % Building Writte n Off 36,359, 147.36 Total Tax Rate 29,087,3 17.89 Tax Due 25,000.00 Add : Interest from Apri l 16,2000 to Apri l 15,2004 65,471 ,465.25 Compromise Penalty Total A simple perusal of the foregoing immediately shows that respondent erroneously computed the deficiency income tax. In computing the deficiency, respondent completely ignored petitioner's net loss of P110,218,381.00. Thus, the assessment shall be re- computed to include the net loss as follows : Income T ax (II 0,2I8,381.00) Taxable Income Per Return Provision for inventory obsolescence 46,725 ,970. I5 II 0,180,23 4.43 2,769,735.72 (38, I46.57) Total Claim du ly supported by BIR Cert 43 ,956,234.43 Disal lowed 66 ,224 ,000 .00 Building Written Off Total Even with the disallowance of the provision for inventory obsolescence and write-off, petitioner would still be in a net loss position . As a result of the re-computation, petitioner owes no deficiency tax to respondent. Thus, respondent's assessment of deficiency income tax against petitioner should fall for lack of factual and legal basis. Considering that there is no deficiency tax to speak of, this Court sees no reason to dwell on the merits of the assessment. / ~)

DECISION C.T.A. CASE NO. 6925 IN VIEW OF THE FOREGOING, the instant Petition for Review is hereby GRANTED. SO ORDERED. WE CONCUR: ~\a . c~ ERNESTO D. ACOSTA Presiding Justice CAESAR A. CASANOVA Associate Justice 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. ~~- ct-v'-- ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division