FORD GROUP PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION FORD GROUP PHILIPPINES, CTA CASE N0.10805 INC., Members: Petitioner, -versus- RINGPIS-LIBAN, Chairperson, MODESTO-SAN PEDRO, and FERRER-FLORES, JJ COMMISSIONER OF Promulgated: INTERNAL REVENUE, Respondent. )( ------------------------------------ ---!'~ ~ ~ ~ ~ -----)( DECISION MODESTO-SAN PEDRO, J.: The Case The Petition for Review prays that the Court render judgment: 1. Reversing and setting aside respondent's Final Decision on Disputed Assessment holding petitioner liable for alleged deficiency value-added ta)( ("VAT") assessment in the aggregate amount ofP81 ,838,576.34; 2. Declaring as void the disputed deficiency assessment for VAT for ta)(able year 2018; and 3. Declaring petitioner as not liable for any deficiency VAT for ta)(able year 2018;, Statement of the Case, Pre-Trial Order, Docket- Vol. I, p. 30 I.

DECISION CT A CASE NO. I 0805 Page~ of 13 The Parties Petitioner Ford Group Philippines, Inc. is registered with the Securities and Exchange Commission ("SEC") as the Philippine Branch Office of FGP, Inc. ("Head Office"), a foreign corporation organized and existing under the laws of the State of Delaware, United States of America. Its principal place of business is located at 8th Floor, Filinvest One Building, Northgate Cyberzone, Filinvest City, Alabang, Muntinlupa City.2 Respondent Commissioner of Internal Revenue ("CIR") is empowered to perform the duties of his office, including acting upon on protests cases and approval of claims for refund or tax credit as provided by law and implementing regulations. He can be served with pleadings, notices, and other processes to respondent's counsel office at Litigation Division, Room 703, BIR National Office Bldg., BIR Road, Diliman, Quezon City .3 The Facts On July 12, 2019, the petitioner received from the BIR Large Taxpayer Service the Letter of Authority ("LOA") with No. eLA2016000973434 signed by Teresita M. Dizon, OIC-Assistant Commissioner for Large Taxpayers Service, authorizing Revenue Officers Mary Kristine De Castro and Librado Atienza and Group Supervisor Prescila Pagayonan of the Large Taxpayers Service to examine the petitioner's books of accounts and other accounting records for value-added tax for the period January 1, 2018 to December 31, 2018. 5 On April 20, 2021, the petitioner received from the BIR a copy of the Preliminary Assessment Notice ("PAN") of even date for deficiency VAT6 in the amount ofP153,327,706.49, inclusive of interest, and compromise penalty for the taxable year 2018.7 On May 7, 2021, a Waiver of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code8 ("Waiver") was executed extending the audit until November 15, 2021.,; Par. 2.1, Petition for Review, Docket- Vol. I, p. 7. Par. 3, Admitted Facts, Joint Stipulation of Facts and Issue (JSFI), id at p. 302. 4 Exhibit "P-4", Docket- Vol. II, p. 512. Par. 4, id. Exhibit "P-5", Docket- Vol. II, p. 516 to 527. Par. 5, id. at p. 303. Exhibit "P-7", Docket- Vol. II, p. 538.

DECISION CTA CASE NO. 10805 Page~ of 13 On June 16, 2021, petitioner received from the BIR a Formal Letter of Demand ("FLD") dated June 14, 2021,9 together with the Details of Discrepancy, in the amount of P81,870,910.56, inclusive of interest and compromise penalties for the taxable year 2018. 10 On July 16, 2021, petitioner filed its Protest Letter against the FLD11 with a request for reinvestigation, disputing the assessment finding for lack of factual and legal basis. On July 21, 2021, the BIR through Noemi D. Castro, Chief ofLTVAT Audit Unit, issued a reassignment notice 12 stating that the case was re- assigned to Revenue Officer Librado Atienza under Group Supervisor Alfred B. Manodon due to the transfer of the original group supervisor to another audit division. 13 On July 28, 2021, petitioner received a copy of the LOA dated July 19, 2021 with No. eLA201900015967 14 signed by Manuel V. Mapoy, Ole- Assistant Commissioner for Large Taxpayers Service, authorizing Revenue Officer Librado Atienza and Group Supervisor Alfred Manodon of the Large Taxpayers Service to examine the petitioner's books of accounts and other accounting records for value-added tax for the period January 1, 2018 to December 31,2018. 15 On February 8, 2022, petitiOner received the Final Decision on Disputed Assessment ("FDDA") dated February 7, 2022, 16 which denied the petitioner's protest against the merit of the assessment and assessed the petitioner in the aggregate amount of Eighty-One Million Eight Hundred Thirty-Eight Thousand Five Hundred Seventy-Six and 34/100 Pesos (P81 ,838,576.34), inclusive of interest, for the taxable year 2018. 17 Petitioner thus filed a Petition for Review ("Petition") before this Court on March 10, 2022, 18 On the other hand, respondent's Answer was filed on June 7, 2022.y Exhibit "P-8", Docket- Vol. II, pp. 539 to 552. 10 Par. 7, Docket- Vol. I, p. 303. 11 Exhibit"P-9", Docket- Vol. II, pp. 553 to 559. 12 Exhibit"P-4-1", Docket- Vol. II, p. 514. 13 Par. 8, id. 14 Exhibit "P-4-2", Docket- Vol. II, p. 515. 15 Par. 9, id. 16 Exhibit "P-I 0", Docket- Vol. II, pp. 560 to 564. 17 Par. I, id. at p. 302. 18 Docket- Vol. I, pp. 6 to 43. 19 /d. at pp. 212 to 225.

DECISION CTA CASE NO. 10805 Page~ of 13 The parties did not agree to mediate after being referred to the Philippine Mediation Center- Court of Tax Appeals.20 The case proceeded to pre-trial and was eventually terminated with the issuance of the Pre-Trial Order on January 6, 2023.21 Trial thus ensued, with the parties presenting and offering their respective documentary and testimonial evidence. Petitioner filed its Memorandum on March 20, 2024,22 while respondent's Memorandum was submitted on April 1, 2024.23 Thus, in a Minute Resolution, dated April 4, 2024, the case was deemed submitted for decision. Hence, this Decision. The Issue The parties stipulated on the following issue to be resolved in this case: Whether or not petitioner is liable for deficiency value-added tax amounting to Eighty-One Million Eight Hundred Thirty-Eight Thousand Five Hundred Seventy-Six and 341100 Pesos (P81,838,576.34), inclusive of interest, for the taxable year 2018.24 Arguments of the Parties Petitioner's Arguments: Petitioner argues that the Waiver is not valid and, thus, could not have extended the period to assess petitioner; that its sales of goods qualify for VAT zero-rating under Section 106(A)(2) ofthe National Internal Revenue Code of 1997, as amended ("NIRC'); and that the FDDA merely requested for payment of petitioner's alleged deficiency VAT liability and, thus, is null and void.( 20 !d. at pp. 210 to 211 and 235 to 237. 21 !d. at pp. 301 to 310. 22 Docket- Vol. II, pp. 638 to 679. 23 !d. at pp. 681 to 700. 24 Stipulated Issue, JSFI, Docket- Vol. I, p. 303.

DECISION CTA CASE NO. 10805 Page? of 13 Respondent's Counter-arguments: Respondent counter-argues that the Waiver is valid pursuant to Revenue Memorandum Order ("RMO ')No. 14-2016 thus, validly extended his period to assess petitioner; the revenue officers assigned to investigate the instant case were granted authority to investigate; and that the FDDA and the entire assessment is valid. The Ruling of the Court The Petition is GRANTED. The Waiver is valid Petitioner argues that the Waiver executed on May 7, 2021 25 is invalid as it failed to comply with the requirements of RMO No. 20-90 on the proper execution of a valid waiver. In particular, the Waiver does not indicate the date of acceptance by respondent. Consequently, petitioner asserts that the Waiver is void and did not validly extend respondent's right to assess petitioner. Respondent counters that petitioner's invocation of RMO No. 20-90 is already misplaced as the Waiver was executed in the advent of RMO No. 14- 2016 where the BIR laid down new rules relaxing the stringent requirements of RMO No. 20-90. Respondent is correct. The Waiver was executed on May 7, 2021 and must thus follow RMO No. 14-2016, which lays down the most recent rules in the proper execution of a Waiver. RMO No. 14-2016, dated April 4, 2016 states that there shall only be two material dates that need to be present on the waiver: a) The date of execution of the waiver by the taxpayer or its authorized representative; and b) The expiry date of the period the taxpayer waives the statute of limitations/ 25 Exhibit "P-7", Docket- Vol. II, p. 538.

DECISION CT A CASE NO. I 0805 Indeed, the Waiver is compliant with said RMO as the two material dates are present-the date of execution on May 7, 2021, and the expiry date of the Waiver on November 15, 2021. Contrary to petitioner's assertion, the date of acceptance of the Waiver by respondent is no longer a material date which can affect the validity of the Waiver. Accordingly, the Waiver executed on May 7, 2021, is valid and rightfully extended respondent's right to assess petitioner until November 15, 2021. Hence, the FLD, dated June 14, 2021, was accordingly issued before respondent's right to assess prescribed. Nevertheless, petitiOner asse11s that at the time the Waiver was executed, on May 7, 2021, respondent's right to assess VAT for the first quarter of 2018, with filing due date on April 25, 2018,26 already prescribed on April 25, 2021.27 However, petitioner did not present any evidence to show what extent of the assessed items pertain to the first quarter of 2018. Thus, the Court is constrained to consider the entire assessed amount as pertaining to the remaining periods upon which respondent's right to assess had not yet prescribed. The revenue officers are duly authorized to investigate and examine petitioner's books Petitioner argues that at the time the FLD was issued on June 14, 2021, the Group Supervisor Alfred Manodon ("GS Manodon") was not yet authorized to investigate as the LOA authorizing him to do so was issued only on July 19, 2021. However, respondent explains that it was still Group Supervisor Prescila Pagayonan ("GS Pagayonan") who was assigned when the FLD was issued, not GS Manodon. GS Manodon was only assigned for the reinvestigation prior to the issuance of the FDDA. Again, respondent is correct. Records show that there are two (2) LOAs issued in this case:y 26 Actual filing is on April24 2025, Exhibit "P-16-1", Docket- VoL II, p. 578 to 580. 27 SEC. 203. Period of Limitation Upon Assessment and Collection.- l�:xcept as provided in Section 2:2:2. internal n~l�enuc' luxes shu// he a\scssed 11 it!lin thre,� !3) n�urs u/ier the lust dm� fJI'cscrihed hv !uH'jor thejiling o(Lhe rerum. and no proceeding in court wit.lwut assessment for the collection of such taxes shall he lxg.un <Iller the c'.pir:JtiPil pf',llch p,:rit;d: i'r<lvidcd. Th<ll in <1 C<1Se ''here <l return is filed beyond till' pl'riod prescribed h: Ia\\. the three(:;)-: cc:r pcriod shall be COUll led rrom the da;, the return \HIS filed. For purposcs of this Sectitlll. u !\'/lim !ilcd hdore the lu1t dur r>rcs,�rihcd hv lm1�(or thcjilin~ thereof shall he cuusidercd mjilcd on such lu�,f doL (iw/i,�s, Ours.)

DECISION CTA CASE NO. 10805 1.) LOA No. eLA201600097343, received by petitioner on July 12, 2019, assigning Prescila Pagayonan as the group supervisor; and 2.) LOANo.No.eLA201900015967,datedJuly 19,2021 and received by petitioner on July 28, 2021, assigning Alfred Manodon as the new group supervisor. It is GS Pagayonan who signed in the Memorandum recommending issuance of the FLD/FAN and Revenue Officer's Audit Report.28 Thus, contrary to petitioner's claim, the FLD, issued on June 14, 2021, is in accordance with the audit findings of duly authorized revenue officers, particularly the group supervisor, at that time. Meanwhile, the reassignment notice, dated July 21, 2021, and second LOA, dated July 19, 2021, were notably issued after petitioner filed its Protest Letter against the FLD on July 16, 2021. Notably, the intention of the reassignment and new LOA was for the continuation of audit of petitioner's alleged tax liabilities in consideration of petitioner's request for investigation in its Protest Letter against the FLD and not for the purpose of issuing the FLD, as petitioner claims. Verily, the issuance of the FLD is found to be in order as the revenue officers at that time were properly armed with a valid LOA. The FDDA indicates a final demand for payment Petitioner argues that the FDDA is void as it has no demand or requirement to pay the taxes dues but merely requested for payment, thus negates the imperative nature and assertion of a legal right of an assessment. Accordingly, it lacks a due tax liability that is there definitely set and fixed. We find this incorrect. Commissioner of Internal Revenue v. Fitness by Design, Inc. 29 ("Fitness by Design") defines a final assessment as a notice "to the effect that the amount therein stated is due as tax and a demand for payment thereof." This demand for payment signals the time "when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies[.]" Thus, it must be "sent to and received by the taxpayer, and must demand payment of the taxes described therein within a specific period.'f/ 28 Exhibits "R-6" and "R-6-1", BIR Records, pp. 1294 to 1296. 29 G.R. No. 215957, November 9, 2016.

DECISION CTA CASE NO. 10805 Page~ of 13 The mere usage of the term "request" does not loosen the effect of a demand for payment. As set forth in Fitness by Design, the primary purpose of a demand is to signal the time when penalties and interest begin to accrue. This is why there must be a period prescribed for payment. We find the FDDA compliant with the concept of a demand for payment as elaborated in Fitness by Design as it clearly indicates that the deficiency VAT due stated therein must be paid "immediately upon receipt". Contrary to petitioner's assertion, it is already obligated to pay the assessment, otherwise penalties and interest shall run against it from the due date indicated therein. The deficiency VAT assessment must be cancelled The FDDA shows the following computation ofpetitioner's deficiency VAT for the taxably year 2018: Receipts subjected to VAT per VAT Returns P30,518,890, 751.49 Add: Adjustments/Disallowances 483,463,466.63 Unsupported Zero-Rated Sales (Sch. 1) 31,002,354,218.12 Adjusted Sales Subjected to VAT Output Tax due thereon (12%) 3 '720,282,506.17 Less: Allowable Input Tax 3,661 '751 ,230.20 Net VAT Payable Less: Payment per VAT Return 58,531,275.98 Basic Deficiency VAT 515,659.98 Add: 12% interest p.a. from 01/26/2019 to 06/30/2022 Total Amount Due 58,015,616.00 23,822,960.34 P81,838,576.34 Our examination of the FDDA shows that it upheld two (2) assessment items in the FLD, as follows: 1.) Unsupported zero-rated sales amounting to P483,463,466.63; and 2.) Excess input tax carried over to succeeding period amounting to P929,514,016.37, which was effectively disallowed by respondent in computing the Allowable Input Tax amounting to P3,661,751,230.20y

DECISION CTA CASE NO. 10805 Page? of 13 Petitioner's sales amounting to ?483,463,466.63 qualifies for VAT zero-rating Respondent finds that petitioner's sales to Westcoast Automotive Corporation ("Ford Subic") amounting to P482, 135,036.92 and Autofield Car Corporation ("Ford Clark") amounting to Pl,328,429.71, aggregating P483,463,466.63, do not qualify for VAT zero-rating pursuant to Revenue Memorandum Circular ("RMC") No. 25-99, which states that "sales of ordinary automobiles to PEZA, SBMA and other ECOZONE registered enterprises are not entitled to VAT zero-rating". Petitioner refutes said finding, asserting that Section 106(A)(2)(a)(5) of the NIRC provides that sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rating. Pursuant thereto, Section 4.106-5 ofRevenue Regulations ("RR ')No. 16-05, as amended by RR No. 04-07, provides that the enumeration ofVAT zero-rated sales of good or properties clearly includes sales of goods or property to persons or entities who are tax-exempt under special laws, e.g. sales to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority ("SBMA") pursuant to Republic Act No. 7227 and sales to enterprises duly registered and accredited with the Philippine Economic Zone Authority ("PEZA"). Further, petitioner points out that respondent's application of RMC No. 25-99 in its case is misplaced and unfounded, since while the items sold to Ford Subic and Ford Clark are automobiles, they are nevertheless pursuant to the registered ECOZONE activities of said entities, and hence must be entitled to VAT zero-rating in accordance with the NIRC and its regulations. We find for petitioner. There is no dispute that Ford Subic and Ford Clark are ECOZONE- registered entities entitled to VAT zero-rating. What remains disputed herein is whether petitioner's sales of automobiles to said two entities are entitled to VAT zero-rating. To this, respondent posits in the negative, as RMC No. 25-99 provides that Section 2(ii) of R.A. No. 7916 defines "Merchandise or Goods" as that which shall collectively refer to raw materials, supplies, equipment, machineries, spare parts, packaging materials, or wares of every description to be used in connection with the registered activity of an ECOZONE enterprise. The use of the phrase "to be used in connection with the registered activity of an ECOZONE enterprise" in describing what comprises merchandise or goods imparts the presumption that the same are somehowy'

DECISION CTA CASE NO. 10805 Page )0 of 13 utilized in the production activity of an ECOZONE enterprise. However, it would now appear that cars or automobiles could not be possibly embraced within the classification of goods or merchandise entitled to the benefit of tax exemption. Respondent, in applying RMC No. 25-99 to assess petitioner's sales, merely relied on the fact that what were sold by petitioner to Ford Subic and Ford Clark are automobiles and spare parts, without taking into consideration the two entities' registered activities within their respective ECOZONEs. It must be emphasized that the operative characteristic which entitles sales to ECOZONE-registered entities with VAT zero percent is that the merchandise or goods sold thereto is "to be used in connection with the registered activity". Ford Subic's Certificate of Registration and Tax Exemption with SBMA states that its purpose is "to engage in the business of sale and distribution of motor vehicles, spare parts, accessories, tires, batteries, and other related products."30 While Ford Clark's Certificate of Registration and Tax Exemption with Clark Development Corporation, the authority which implements R.A. 7227, as amended by R.A. 9400, states that it is "exclusively operating a FORD automotive dealership and related services."31 Since Ford Subic and Ford Clark are both engaged in automotive dealership, its purchases of automobiles and spare parts from petitioner indeed qualifies for VAT zero-rating as these are to be used in connection with their respective registered activities. Petitioner's excess input tax carried over to succeeding period amounting to P929,514,016.37, which was effectively disallowed by respondent, is void It was noted in the FLD that petitioner's input tax claimed per return was reduced by P929,514,016.37, thereby leading to the Total input tax claimed per return ofP3,661 ,751 ,230.20, computed as follows: Input Tax carried over from previous period P407,680,086.33 Current input tax 4,183,585,160.24 Excess input tax carried over to succeeding period (929,514,0 16.3 7) Total Input tax claimed per Return P3,661,751,230.20 y 30 Exhibits "P-I I" to "P-12, Docket- Vol. II, pp. 565 to 568. 31 Exhibits "P-13", Docket- Vol. II, p. 569.

DECISION CTA CASE NO. I0805 Page ,II of 13 In effect, respondent disallowed the foregoing excess input tax carried over to succeeding period, which consequently led to a deficiency VAT in his computation. A perusal of the FLD and the attached Details of Discrepancy, however, shows that he did not provide any legal basis thereof. This amount of'P3,661,751,230.20 was eventually upheld and retained as the Allowable Input Tax in the FDDA. We cancel said assessment item. Section 228 of the NIRC, as amended, strictly provides that the taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. The foregoing is implemented by RR No. 12-99, as amended by RR No. 18-13, particularly Section 3.1. 3 thereof, which states that the Formal Letter ofDemand and Final Assessment Notice ("FLD/FAN") shall be issued by the Commissioner or his duly authorized representative. The FLD/FAN 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 assessment shall be void. In Commissioner of Internal Revenue v. Enron Subic Power Corporation32 ("Enron"), the High Court explained that Section 228 of the Tax Code requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Accordingly, "[t]here 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.... In view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question was void." Enron was later upheld by Fitness By Design in this wise: .... The requirement enables the taxpayer to make an effective protest or appeal ofthe assessment or decision. The rationale behind the requirement that taxpayers should be informed of the facts and the law on which the assessments are based conforms with the constitutional mandate that no person shall be deprived of his or her property without due process of law. Between the power ofthe State to tax and an individual's right to due process, the scale favors the right ofthe taxpayer to due processy 32 G.R. No. 166387 (Resolution), January 19, 2009.

DECISION CT A CASE NO. I 0805 Page )2 of 13 The purpose of the written notice requirement is to aid the taxpayer in making a reasonable protest, if necessary. Merely not?fjJing the taxpayer ofhis or her tax liabilities without details or particulars is not enough. (Italics, Ours.) Providing the factual and legal bases of the assessment is a baseline principle in all assessments and respondent cannot escape compliance therewith as the underlying purpose is to accord the taxpayer its right to due process by having the opportunity and capability to intelligently protest the assessment. Since respondent did not provide the legal basis in disallowing the excess input tax carried over to succeeding period amounting to P929,514,016.37, petitioner was not able to protest the same and fatally violated its right to due process. Consequently, this assessment is null and void. With this, petitioner's allowable input tax should remam at P4,591,265,246.57,33 without any deduction. Proceeding therefrom, a re-computation of petitioner's alleged deficiency VAT shows that it even incurred VAT overpayment, not a VAT payable, as demonstrated below: Receipts subjected to VAT per VAT Returns P30,518,890,751.49 Add: Adjustments/Disallowances 483,463,466.63 Unsupported Zero-Rated Sales (Sch. 1) 31,002,354,218.12 Adjusted Sales Subjected to VAT Output Tax due thereon (12%) 3,720,282,506.17 Less: Allowable Input Tax 4,591,265,246.57 Net VAT Payable (870, 982,7 40.39) Less: Payment per VAT Return VAT Overpayment 515,659.98 P(871 ,498,400.37) Accordingly, petitioner does not have any deficiency VAT liability for the taxable year 2018. FOR THESE REASONS, the Petition for Review is GRANTED. Accordingly, the deficiency VAT assessment for the taxable year 2018 is CANCELLED and SET ASIDE. Respondent is thus ENJOINED and PROHIBITED from collecting the said amount against petitionery 33 Input tax carried over from previous period amounting to P407,680,086.33 plus Current input tax amounting toN, 183,585,160.24.

DECISION CT A CASE NO. I 0805 p Page of 13 ; SO ORDERED. WE CONCUR: ~-~ I'-----_ MA. BELEN M. RINGPIS-LIBAN Associate Justice c~!~~ES 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. 7 '--------� MA. BELEN M. RINGPIS-LIBAN Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 ofthe Constitution and the Division Chairperson's Attestation, it is hereby cetiified 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. Presiding Justice