PERF RESTAURANTS, INC. AS SUCCESSOR-IN-INTEREST OF PHILKING RESTAURANTS DEVELOPMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAl FIRST DIVISION *** **************** PERF RESTAURANTS, INC. as C.T.A. CASE NO. 7334 successor- in - interest of PHILKING RESTAURANTS DEVELOPMENT CORPORATION, Petitioner, Members: ACOSTA, Chairperson - versus - BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, Respondent. M~; ;D : o5 4 - ~- x---------- ------------- -------- ----- - ----- -----X ! - DECISION -------- BAUTISTA, J.: Before this Court is a Petition for Revi ew, praying for a judgm ent cancel ing and withdra wing th e Warrant of Di straint and Levy dated August 17, 2005, including th e Formal Letter of Demand and Assessment Notice, issued against petitioner for alleged defici ency withholding ta x for ta xabl e year 2000 in the total amount of Pl,091,580.75 . Philking Restaurants Development Corporation (hereinafter referred to as " Phil king Restaurants") is a corporation organized and existing under Philippine I 7 .j, rJ

DECISION C.T.A. Case No. 7334 laws, with current principal place of business located at 2/F Topy Building, No. 3 Economia Street, Bagumbayan, Quezon City. 1 On July 19, 2005, the Securities and Exc hange Commission approved the merger of Philking Restaurants Development Corporation, as the absorbed corporation, and PERF Restaurants, Inc., as th e surviving corporation. PERF Restaurants, Inc. assumed all the rights, interests and liabilities of Philking Restaurants as of the effective date of the merger on July 19, 2005. 2 Sometime in December 2001, Philking Restaurants transferred its principal office from the 18/F JMT Corporate Condominium, ADB Avenue, Ortigas Center, Pasig City, to its new and current principal place of business located at 2/F Topy Building, No. 3 Economia Street, Bagumbayan, Qu ezon City. 3 As a result of the change in the principal place of business, petitioner wrote the Bureau of Internal Revenue (BIR) Pasig Revenue District Office (RDO) a letter dated May 9, 2002, requesting approval of the transfer of petitioner's ta x registration from RDO No. 043 -Pasig City to RDO No. 040-Quezon City. 4 Revenue Officer Renata M. Atos recommended to Mr. Raul Vicente L. Recto, the Revenue District Officer of RDO No. 043-Pasig City, the approval of petitioner's application to transfer its office registration from RDO No. 043-Pasig City to RDO No. 040-Quezon City, considering that petitioner has submitted all the required documents. The said recommendation was duly approved by Revenue District Officer Raul Vicente L. Recto. 5 1 Par. 1, Joint Stipulation of Facts, Joint Stipulation or Facts and Restatement of Issues (JSFRI), docket, p. 119 2 Annex "B", Petition for Review, docket, pp. 29-44; par. 2, Joint Stipulation of Facts, JSFRI, docket, pp. 119- 120 3 ( Par. 3, Joint Stipulation of Facts, JSFRI, docket, p. 120 4 Exhibit " B" 5 Exhibit "(" 7 .jiJr r

DECISION C.T.A. Case No. 73 34 On February 1, 2002, Assistant Revenue District Officer Cesar Charlie C. Lim issued Transfer Confirmation Notice No . OCN 3TR0000023259, confirming the request of Philking Restaurants to transfer its ta x registration from RDO No. 043 to RDO No. 040. 6 On January 20, 2004, respond ent, through Regional Director Nestor S. Valeroso, issued Formal Letters of Demand and Assessment Notice against Philking Restaurants for deficiency withholding ta x in the sum of P939,580.73, plus compromise penalty of P152,000.00, for ta xabl e year 2000. The address in said Formal Letters of Demand and Assessm ent Notice was 18th/F JMT Condominium, ADB Ave., Ortigas Center, Pasig City. 7 On May 12, 2004, Revenue District Officer Raul Vicente L. Recto issued a Preliminary Collection Letter to petitioner, addressed ·at 18th/F JMT Condominium, Ortigas Center, Pasig City. 8 On June 17, 2005, respondent, through Revenue District Officer Romeo E. Naranjo, issued First Notice Before Issuance of Warrant of Distraint and Levy against Philking Restaurants for th e settl ement of its supposed outstanding ta x liability, addressed at No . 3 Topy Building, Economia Street, Bagumbayan, Quezon City. The sam e was received by petition er on June 23, 2005. 9 In response thereto, Mr. Abundio B. Jabines, Jr., Chief Finance Officer of Philking Restaurants, wrote Revenue District Officer Romeo E. Naranjo on June 28, 2005 and pointed out that no Assessm ent Notice or Formal Letter of Demand was received prior to its receipt of the First Notice Before Issuance of Warrant of 6 7 8 9 Exhibits "A" and "C-1" Exhibits " D" 1 "E"1 and " F" Exhibit " H" Exhibits " I " an d " I - 1" I ' .., 7 J,

DECISION C.T.A. Case No. 7334 Distraint and Levy. The letter also protested the Assessment Notice dated January 20, 2004, but received only on June 23, 2005. 10 On Augu st 16, 2005, petitioner received a Final Notice Before Sei zure dated August 11, 2005, issu ed by Revenue District Officer Romeo E. Naranjo. u On August 17, 2005, Revenue Distri ct Officer Romeo E. Naranjo issued a Warrant of Distraint and Levy to collect the purported deficiency withholding ta x of petitioner for ta xable year 2000; which was received by petitioner on September 6, 2005. The address of petitioner stated therein was No. 3 Topy Economia, Bagumbayan, Quezon City. 12 On September 14, 2005, petitioner wrote the Revenue District Officer of Revenue Region No. 7, ROO No. 040-Quezo n City, requesting the cancellation of the alleged defici ency withholding ta x assessment for late remittance in the amount of P1,091,580 .73 and th e cance llation/withdrawal of the Warrant of • Distraint and Levy du e to non -obse rvan ce of due process requirements and prescription. 13 Petition er filed the instant Petition for Review on October 6, 2005, as the administrative appeal remains unresolved. In his An swer filed on January 4, 2006, respondent raised the following Special and Affirmative Defenses : (1) lack of cause of action; (2) assessment is based on th e late remittance of withholding ta xes for ta xable year 2000; (3) assessment is valid and in accordance with law; ( 4) assessment is prima facie presumed correct and mad e in good faith; ( 4) petitioner has th e burden to prove 10 Exhibit " K" 11 Par. 11, Joint Stipulation of Facts, JSFRI, docket, p. 121 12 Exhibit " L" 13 Ann ex " N", Petition for Review, docket, pp. 57-66; par. 13, Joint Stipulation of Facts, JSFRI, docket, pp . 121-1 22 ~ 7:J D

DECISION C. T.A. Case No. 733 4 that the assessment is void; and (5) procedures for th e issuance of pre- assessm ent noti ces and assessment notices were obse rved. 14 Pre-trial conference was held. Thereafter, trial proceeded where the parties presented th eir respective evid ence. The case was submitted for decision on May 7, 2009, after petitioner filed its Memorandum on April 30, 2009 and respondent fail ed to fil e his Memorandum despite notice. 15 Th e issues 16 submitted for this Court's resolution are as follows: " 1. Wh eth er or not th ere wa s a valid assessment notice issued by th e Respondent addressed to Petition er's new and current principal place of busin ess located at 2/F Topy Building, No. 3 Economi a Street, Bagumbayan, Quezon Ci ty within th e prescriptive period allowed by law to assess defi ciency ta xes; 2. Wh eth er or not th e Respondent Commissioner of Internal Revenu e or his duly authorized representative/s observed th e requ irements of 'DUE PROCESS' in notifying th e Petitioner of th e aforementioned defi ciency withholding ta x assessment for year 2000 in accordance with Section 228 of th e Ta x Cod e of 1997 as impl emented by Reve nue Regulations No. 12-99 and other pertin ent laws and regulation s; 3. Wh eth er or not th e right of th e Respond ent to assess defici ency withholding ta x for late remittan ce for year 2000 has prescribed already pursuant to Section 203 and 223 of the Ta x Cod e of 1997; 4. Wh ether or not th e Petition er fil ed a notice or appli cation with th e BIR to transfer its principal place of busin ess from 18/F JMT Corporate Condominium, ADB Ave nu e, Ortigas Center, Pasig City, to its new and current principal place of busin ess located at 2/F Topy Building, No. 3 Economia Street, Bagumbayan, Qu ezon City; 5. Wheth er or not th e Petition er's Ch ief Finance Officer, Mr. Abundio B. Jabin es, Jr. inform ed BIR Revenu e Officer, Ms. Margarita R. Jose of RDO No . 40 during th ei r meeting on June 27, 2005 that Petitioner has not rece ived a copy of th e following docum ents in relation to th e aforemention ed defici ency withholding tax for late I 14 Docket, p. 81 15 Resolution dated May 7, 2009, docket, p. 33 9 16 Docket, pp. 122- 124

DECISION C.T.A. Case No. 7334 remittance for taxable year 2000 at its new and current place of business located at 2/F Topy Building, No. 3 Economia Street, Bagumbayan, Quezon City, vi z.: (a) Preliminary Assessm ent Notice (PAN); (b) Formal Letter of Demand/Final Assessment Notice (FAN); (c) Notice for informal conference . 6. Wh eth er or not during th e aforementioned June 27, 2005 meeting between Petition er's Chief of Finance Officer, Mr. Jabines and BIR Examiner Ms. Jose, th e Petition er informed th e BIR that Petitioner first became aware of th e aforementioned all eged deficiency withholding ta x assessment for late remittance for year 2000 upon Petition er's receipt by registered mail last Jun e 23, 2005 of the 'First Notice Before Issuance of Warrant and Le vy' at its current bu sin ess address at 2/F Topy Building, No. 3 Economia Street, Bagumbayan, Quezon City; 7. Whether or not th e Petitioner secured from th e BIR docket during th e aforementioned June 27, 2005 meeting, copi es of the following documents pertaining to th e alleged defici ency withholding ta x for late remittance for year 2000, vi z. : (a) Assessment Notice dated Jun e 20, 2 004 addressed to th e old busin ess address of th e Petitioner at 18/F JMT Condominium, ADB Avenue, Ortigas Center, Pasig City (Annex 'G' of Petition for Review) ; (b) Formal Letter of Demand dated January 20, 2004 addressed to th e old business address of Petition er (Annex ' H' of Petition for Review); (c) Pre liminary Collection Letter dated May 12, 2004 addressed to th e old bu si ness address of Petition er (Ann ex 'I' of Petition for Revi ew); and (d) BIR letter dated September 14, 2004 issued by Revenue Officer No. 1, Mr. John B. Bajador of Revenue Region No. 7, RDO No. 43- Pasig City (Annex 'J' of Petition for Revi ew) . 8. Wh eth er or not th e Petitioner received a written notice from th e Respondent for informal conference; Preliminary Assessment Notice or Formal Letter of Demand relating to th e aforementioned defi ciency withholding ta x for late remittance (year 2000) at its new and current prin cipal place of business located at 2/F Topy Building, No. 3 Economia Street, Bagumbayan, Quezon City within th e three (3) year prescriptive period to assess under Section 203 of th e Ta x Code, as am end ed and Revenue Regula tions No. 12-99; 9. Wh eth er or not at th e time of th e filing of th e instant Petition for Revi ew, the 180-day peri od from the filing of the pro" /

DECISION C.T.A. Case No. 733 4 allotted by law for the Commissioner to resolve the protest has not yet lapsed. 10. When is the withholding tax withheld by the Petitioner on royalties paid to Petitioner's licensor/franchisor, Burger King Corporation, due to be remitted to the BIR under the existing lawjs7" After weighing the respective arguments of the parties, the evidence on record, and the facts established, this Court rules in favor of petitioner. Due process requires that petitioner must actually receive the Pre- Assessment Notice and the Final Assessment Notice. In the case of Estate of the late Juliana Diez Vd a . De Gabriel vs. Commissioner of Internal Revenue 17 , the Supreme Court ruled: "xxx (D)ue process requires at the very least that such notice actually be received. In Commissioner of Internal Revenue v. Pascor Realty and Development Corporation, we had occasion to say: An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the ta xpayer. To enable the ta xpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. In Republic v. De le Rama, we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estat~. We said: The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any effect. In the c.ase of Bautista and Corrales Tan v. Collector of Internal Revenue ... this Court had occasion to state that 'the assessment is deemed made when the notice to this effect is released, mailed or sent to the ta xpayer for the purpose of giving effect to said 17 G.R. No. 155541, January 27, 2004 ! .,• 't,• 1

DECISION C.T.A. Case No. 7334 assessment.' It appearing that the person liable for the payment of the tax did not receive the assessment, the assessment could not become final and executory. xxx" The above ruling of the High Court corroborates Section 228 of the National Internal Revenue Code (NIRC) of 1997, which· read·s: "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 preassessm ent notice shall not be required in the following cases: (a) When the finding for any deficiency ta x is the result of mathematical error in the computation of the tax as appearing on the face of 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 ta x credit of excess creditab le withholding tax for a ta xable period was determined to have carried over and automatically applied the same amount claimed against the estimated ta x liabilities for the ta xable quarter or quarters of the succeeding ta xable year; or (d) When the excise ta x due on excisable articles has not been paid; or (e) When an 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-exe mpt persons. The ta xpayers 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 ta xpayer fails to respond, the Commissioner or his duly authorized representative sha ll issue an assessment based on his findings. Such assessment may be protested administratively by filing a requ est for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as I .., ,1 0 I i '-

DECISION C.T.A. Case No. 7334 may be prescribed by implementing rules and regulations. Within si xty (60) days from fi ling of the protest all relevant supporting docum ents sha ll have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the ta xpayer adversely affected by the decision or inaction may appeal to the Court of Ta x Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty ( 180)-day period; otherwise, the decision shall become final, executory and demandab le." (Emphasis supplied) In Commissioner of Internal Revenue vs. Pascor Realty and Development Corporation 18 , th e Supreme Court issued the following explanations: "To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency ta x within the time prescribed for its payment in the notice of a·ssessment. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to be coll ected from the date prescribed for its payment until the full payment. The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 of the NIRC provides that internal revenue taxes must be assessed within three years from the la st day within which to file the return. Section 222, on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding th e period within which to make an assessment or to protest the same, or whether interest and penalty may accru e th ereon. It should also be stressed that th e said document is a notice duly sent to the ta xpayer. Indeed, an assessm ent is deemed made 18 G.R. No. 128315, June 29, 1999 74 J

.. DECISION C.T.A. Case No. 7334 only when the collector of internal revenue releases, mails or sends such notice to the ta xpayer." (Emphasis supplied) Section 228 of the NIRC of 1997 operates for the benefit of both the taxpayer and the government. Said Section guarantees a ta xpayer due process before it may be held liable to pay ta x found due. On the other hand, the government is given an opportunity to assess and collect internal revenue ta xes, interests, and penalties from delinquent ta xpayers or ta x evaders within the prescriptive period. It should be emphasized that petitioner properly notified respondent, through BIR Pasig Revenue District Office, of th e change of its principal place of business, and that it requested the approval of th e transfer of its ta x registration from RDO No. 043-Pasig City to RDO No. 040-Quezon City. 19 As stipulated by the parties and supported by evidence, Revenue Officer Renata M. Atos recommended the approval of petitioner's application to transfers its office registration; which was also duly approved by Revenue District Officer Raul Vicente L. Recto. 20 Assistant Revenue District Officer Cesar Charlie C. Lim likewise issued Transfer Confirmation Notice No. OCN 3TR0000023259 dated February 1, 2002, for th e purpose of confirming th e said transfer. 21 Therefore, respondent should have issued and sent the Final Assessment Notice to petitioner's new place of business, not to its old busin ess address. This Court further notes that respondent likewise failed to properly send a Preliminary Assessment Notice 22 to petitioner. 19 Exhibit "B" 20 Exhibit "C" 21 Exhibits "A" and "C-1" 22 Exhibit " 1-B"

DECISION C.T.A. Case No. 7334 In BPI Data Systems Corporation (formerly Filipinas Management and Leasing Services, Inc.) vs. Commissioner of Internal Revenue 23 , t his Court ru led against respondent when he fai led to give the taxpayer a chance to respond to a pre-assessment notice before issuing an assessment, to quote : "One of the most basic and fundamenta l precept of law enshrined in the Constitution is that no person sha ll be deprived of his property without due process of law (Sec. 1, Art. III, 1987 Constitution). The pervasiveness of the right to due process reaches out to both substantive and procedural rights, regardless of t heir source, be it the constitution, or on ly a statute or a rul e of court (Tupas vs. Court of Appeals, 193 SCRA 597). The procedu res granted by law under Sec. 229 of the National Interna l Revenue Code is a statutory right of the taxpayer which ca nnot be wan tonly disregarded without vio lati ng the ta xpayer's right to due process. In the observance of procedura l due process, th is court is always mi ndful that a ta xpayer being made liable with his property be given an opportunity to be heard which is one of its essentia l elements (Banco Espana! vs. Palanca, 37 Phil . 921). With the failure of the respondent to strictly comply with the procedure prescribed by law and for the failure of the petitioner to receive a copy of the alleged assessment, the latter was not afforded its right to be heard for it was denied the opportunity to protest or dispute the alleged assessment. The respo ndent utterly failed to establish that t he assessment it has conducted is a disputed assessment whereby 'the ta xpayer questions an assessment and asks the Co llector to reco nsider or cance l t he same because he believes he is not liable t herefor.' (Morales vs. Collector of Internal Revenue, 17 SCRA 1018). Had the ta xpayer been given the opportunity to dispute the questioned assessment, then t he same may have been given due co nsideration. In the absence of any showing that administrative remedies granted by law has been properly exhausted or that petitioner has failed to file a protest on the assessment within the prescribed period despite receipt thereof, this Court could not bestow the presumption of correctness on the said assessment. xxx" (Emphasis supplied) I 23 C.T.A. Case No. 4530, January 12, 1994 74 :)

.. DECISION C.T.A. Case No. 7334 In Caltex (Philippines), Inc. vs. Commissioner of Internal Revenue 24 , this Court declared that respondent committed an arbitrary act tantamount to a violation of petitioner's right to procedural due process when respondent failed to issue prior notice for an informal conference and a pre- assessment notice. Finally, in A Brown Co., Inc. vs. Commissioner of Internal Revenue 25 , this Court emphasized : "To reiterate, the respondent committed grave violations of the law and regulations when he issued the subject Assessm ents. The above violations go against the values of right to due process held dearly by the judiciary. And this court is not about to exempt this instant case from the sam e principle it has long enshrined." As there were no Preliminary Assessment Notice and Final Assessment Notice sent to petitioner, the subject assessments are void. In Commissioner of . . . . Internal Revenue vs. Azucena T. Reyes 26 ; th e Supreme Court categorically ruled that if there is no valid notice sent, the assessment is void. The reason is that the " law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with ta x collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayers should be abl e to present their case and adduce supporting evidence". A void assessment cannot give rise to an obligation to pay deficiency ta xes, and it divests the ta xing authority of the right to collect them Y In view of the foregoing finding and discussion, the resolution of the other issues is no long er necessary. 24 C.T.A. Case No. 5664, October 4, 2000 25 C.T.A. Case No. 6357, June 7, 2004 26 G.R. Nos. 159694 and 163581, January 27, 2006 27 BASF Coatings + Inks Philippines, Inc. vs . Comm issioner of I ntern al Revenue, citing FMF Development Corporation vs. Commissioner of Internal Revenue, CA-G.R. SP No. 73973, February 23, 2004 74 u

DECISION C.T.A. Ca se No. 7334 WHEREFORE, the in sta nt Petition for Review is hereby GRANTED. Accordingly, th e Warrant of Distraint and Levy dated Augu st 17, 2005 and the Formal Letter of Demand and Assessment Notice dated January 20, 2004, issu ed against petitioner for alleged deficiency withholding ta x for ta xable year 2000 are hereby CANCELLED. SO ORDERED. WE CONCUR: I li___x (.. c;_~ ERNESTO D. ACOSTA Presiding Justice C) N LEAVE CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certifi ed that th e conclusions in the above Decision were reached in cons ultation before the case was assigned to the writer of the opinion of the Court's Division. {_'-"- u· C w-A__ ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division 74 7