Commissioner of Internal Revenue vs. Yumex Philippines Corp.

Factual Background

The Bureau of Internal Revenue (BIR) issued a Notice of Informal Conference to respondent on March 4, 2010 after auditing respondent’s 2007 accounting records. Respondent informed the BIR that it was a Philippine Economic Zone Authority (PEZA) registered enterprise and asserted entitlement to special tax treatment. The BIR sent a letter and Summary of Deficiencies in August 2010, and thereafter issued a PAN dated December 16, 2010 with attached Details of Discrepancies. The BIR issued a FLD dated January 10, 2011 assessing deficiency income tax, fringe benefits tax, improperly accumulated earnings tax (IAET) in the amount of P9,077,695.05, and a compromise penalty. Respondent protested the FLD on January 20, 2011, reiterating its PEZA status and its contention that IAET did not apply. Respondent paid the basic deficiency income tax, fringe benefits tax, and compromise penalty but did not pay the assessed IAET. A reinvestigation produced a July 25, 2011 letter by the Revenue District Officer acknowledging payment of some deficiencies while standing by the IAET assessment and forwarding the case for collection. Respondent filed a petition for review with the CTA Division on September 7, 2011.

CTA Division Ruling

On November 28, 2013 the CTA Special Second Division granted respondent’s petition and set aside the IAET assessment. The CTA Division found that the BIR issued the FLD and Final Assessment Notice (FAN) without affording respondent the opportunity to answer the PAN within the period prescribed by Section 228, NIRC, and Revenue Regulations No. 12-99, thus violating procedural due process. The Division further found that the assessment lacked factual basis because the BIR computed IAET by applying the IAET rate to income arising from activities enjoying Income Tax Holiday (ITH) without identifying unregistered activities or otherwise establishing the prima facie instances of improper accumulation required to sustain an IAET assessment. The Division denied the BIR’s motion for reconsideration on March 3, 2014.

CTA En Banc Ruling

The CTA En Banc denied the Commissioner’s petition in its August 11, 2015 Decision and denied reconsideration in its January 19, 2016 Resolution. The En Banc agreed that the CTA Division properly considered the validity of the PAN and FLD/FAN, invoking Sec. 1, Rule 14 of the RRCTA to rule upon related issues necessary for orderly disposition. The En Banc held that Revenue Regulations No. 12-99, in particular Sec. 3.1.2, gave a taxpayer fifteen days from receipt of the PAN to respond before a FLD/FAN could be issued. The En Banc found that respondent received the PAN and the FLD/FAN simultaneously on January 18, 2011 and thus was deprived of an opportunity to respond. The En Banc also concluded that Revenue Regulations No. 2-2001, Sec. 4(g), exempted PEZA-registered enterprises from IAET without qualification as to whether the enterprise enjoyed ITH or a five percent special tax regime, and that the BIR had failed to establish the factual basis required under Section 29, NIRC and its implementing regulations.

Issues Presented

The Supreme Court identified three issues for resolution: (1) whether the CTA Division could take cognizance of the contention that the IAET assessment was invalid for denial of due process even if respondent did not expressly raise that issue in its petition; (2) whether the PAN and FLD/FAN were invalid for having been issued in violation of respondent’s right to due process under Revenue Regulations No. 12-99 and Section 228, NIRC; and (3) whether respondent could be validly assessed for deficiency IAET under Section 29, NIRC and Revenue Regulations No. 2-2001.

Petitioner’s Contentions

The Commissioner argued that the CTA erred in deciding an issue that respondent did not raise during trial or in its pleadings. Petitioner maintained that the PAN and FLD/FAN were properly issued in compliance with Revenue Regulations No. 12-99, invoking Sec. 3.1.7 to support constructive service by registered mail and pointing to registry return cards allegedly in the BIR records. Petitioner asserted that the PAN was mailed December 17, 2010 and that no response arrived within fifteen days, thereby justifying issuance of the FLD/FAN on January 10, 2011. In the alternative, petitioner argued that respondent had an adequate opportunity to protest and obtain reinvestigation, and had voluntarily paid most assessed items, which evidenced acceptance of the assessment process. On the merits of IAET, petitioner relied on Section 29(C)(2), NIRC, and contended that the BIR properly imposed IAET on income derived from registered activities enjoying ITH but not on activities under the five percent special rate. Petitioner asserted respondent did not contest the BIR’s factual findings and that tax assessments enjoy presumptions of correctness.

Respondent’s Contentions

Respondent maintained that the CTA correctly found denial of due process because the PAN and FLD/FAN were received simultaneously and the BIR thus did not afford the mandatory fifteen-day period to answer the PAN. Respondent argued that it had raised the invalidity of the notices in its petition and proved simultaneous receipt by testimony and documentary evidence. Respondent criticized the BIR’s reliance on constructive service, noting the PAN and FLD/FAN in the record did not include registry return cards. Respondent insisted that subsequent protest and partial payment did not cure the initial nullity of the assessment notices. On the merits of IAET, respondent relied on Revenue Regulations No. 2-2001, Sec. 4(g), to assert categorical exemption from IAET for PEZA-registered enterprises. Respondent further asserted a clear preponderance of evidence that retained earnings were for bona fide business needs, specifically funding a new PEZA-registered project, and emphasized that petitioner did not cross-examine its witness nor present contrary evidence.

The Court’s Ruling

The Supreme Court denied the petition for lack of merit and affirmed the CTA En Banc. The Court held that the CTA Division properly entertained the due process issue under Sec. 1, Rule 14 of the RRCTA and that the issue had been sufficiently pleaded and tried. The Court applied Section 228, NIRC, and Revenue Regulations No. 12-99 to the facts. The record showed that the PAN dated December 16, 2010 was posted by registered mail on December 17, 2010 and that the FLD/FAN mailed January 10, 2011 were both received by the Dasmariñas, Cavite Post Office on January 17, 2011 and served on respondent on January 18, 2011. Under these circumstances, the Court found that respondent received no effective preliminary notice and therefore was deprived of the opportunity to respond within the fifteen-day period. The Court reaffirmed the rule that the BIR must strictly observe statutory and regulatory procedures that protect the taxpayer’s constitutional right to due process. The Court rejected petitioner’s reliance on general constructive service provisions, reasoning that Sec. 3.1.2, the specific provision governing PANs, controls over the more general provision on constructive service, and that the BIR failed to verify receipt dates with the post office before issuing the FLD/FAN.

Legal Basis and Reasoning

The Court reiterated that Section 228, NIRC, and Revenue Regulations No. 12-99 impose mandatory procedural prerequisites in tax assessment: a taxpayer must be given written notice of facts and law supporting an assessment and an opportunity to respond. The Court invoked Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc., and Commissioner of Internal Revenue v. Metro Star Superama, Inc., to emphasize that failure to comply with PAN and FLD requirements renders an assessment void. The Court applied the maxim generalia spec