PILMICO-MAURI FOODS CORP. v. CIR, , GR No.

175651, 2016-09-14

Facts:

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal
place of business at Aboitiz Corporate Center, Banilad, Cebu City.The books of accounts of
[PMFC] pertaining to 1996 were examined by the [CIR] thru Revenue Officer Eugenio D.
Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency income, value-
added [tax] (VAT) and withholding tax liabilities.

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On
December 29, 1998, [PMFC] filed a protest letter against the aforementioned deficiency tax
assessments through the Regional Director, Revenue Region No. 13, Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the deficiency tax
liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30

PMFC] filed its Petition for Review on August 9, 2000.

After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming the
assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency
interest) representing [PMFC's] Income, VAT and Withholding Tax deficiencies for the taxable
year 1996 plus 20% delinquency interest per annum until fully paid.

rendered... rendered... date... date... date

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion
thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices
because of [PMFC's] failure to present said invoices.

The sales invoices contain alterations particularly in the name of the purchaser giving rise to
serious doubts regarding their authenticity and if they were really issued to [PMFC].

Exhibit B-11 does not even have any date indicated therein, which is a clear violation of Section
238 of the NIRC of 1977 which required that the official receipts must show the date of the
transaction.

Besides, in order to support its claim, [PMFC] should have presented the following vital
documents, namely, 1) Written Offsetting Agreement; 2) proof of payment by [PMFC] to
Pilmico Foods Corporation; and 3) Financial Statements for the year 1996 of Pilmico Foods
Corporation to establish the fact that Pilmico Foods Corporation did not deduct the amount of
raw materials being claimed by [PMFC].Considering that the official receipts and sales invoices
presented by [PMFC] failed to comply with the requirements of Section 238 of the NIRC of
1977, the disallowance by the [CIR] of the claimed deduction for raw materials is proper.
PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x [PMFC's]
Motion for Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit

Unperturbed, PMFC then filed a petition for review before the CTA en banc

CTA en banc denied the motion for reconsideration

Issues:

The Honorable CTA First Division deprived PMFC of due process of law and the CTA assumed
an executive function when it substituted a legal basis other than that stated in the assessment
and pleading of the CIR, contrary to law.

Since the legal basis cited by the CTA supporting the validity of the assessment was never raised
by the CIR, PMFC was deprived of its constitutional right to be apprised of the legal basis of the
assessment.

Ruling:

The Court affirms but modifies the herein assailed decision and resolution.

Due process was not violated.

CIR and PMFC both agreed that among the issues for resolution was "whether or not the
P5,895,694.66 purchases of raw materials are unsupported."

CIR had stated the material facts and the law upon which they were based.

The CTA, on the other hand, is not bound to rule solely on the basis of the laws cited by the CIR.
Were it otherwise, the tax court's appellate power of review shall be rendered useless.

PMFC was at the outset aware that the lack or inadequacy of supporting documents to justify the
deductions claimed from the gross income was among the issues raised for resolution before the
CTA.

The Court recognizes that the CTA, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority.

MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the
finality of this Resolution until full satisfaction, is here imposed upon the amount of
P2,804,920.36 to be paid by Pilmico-Mauri Foods Corporation to the Commissioner of Internal
Revenue.

Principles:
when a taxpayer claims a deduction, he must point to some specific provision of the statute in
which that deduction is authorized and must be able to prove that he is entitled to the deduction
which the law allows.

statutory test of deductibility where it is axiomatic that to be deductible as a business expense,

three conditions are imposed, namely: (1) the expense must be ordinary and necessary; (2) it
must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying
on a trade or business. In addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction.
CASE DIGEST: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEXT
MOBILE, INC. (FORMERLY NEXTEL COMMUNICATIONS PHILS., INC.),
Respondent. (G.R. No. 212825, December 07, 2015)

PRINCIPLE: Section 203 of the 1997 NIRC mandates the BIR to assess internal revenue taxes
within 3 years from the last day prescribed by law for the filing of the tax return or the actual
date of filing of such return, whichever comes later. Hence, an assessment notice issued after the
three-year prescriptive period is not valid and effective. Exceptions to this rule are provided
under Section 222 of the NIRC.

FACTS: After submission of its returs for the year 2001, NM received a copy of the LOA given
by the BIR to Revenue Officer (RO) NLC, covering January to December of 2001. 5 waivers
were signed by NM's finance director to extend the prescriptive period of assessment.

In 2005, BIR sent NM a Preliminary Assessment Notice (PAN) to which the latter replied. Later,
NM received a Formal Letter of Demand (FLD) to pay various tax deficiencies amounting to 313
million pesos.

On November 23, 2005, NM filed its protest against the FLD and requested the reinvestigation.
BIR denied the protest. NM filed a Petition for Review before the CTA.

In the CTA, NM argued that the CIR's right to assess NM's deficiency taxes had already
prescribed, invoking the lack of authority on the part of the person who signed the waviers. The
CTA ruled in favor of NM and said that the 5 waivers of the statute of limitations were not valid
and binding; thus, the three-year period of limitation within which to assess deficiency taxes was
not extended. It also held that the records belie the allegation that respondent filed false and
fraudulent tax returns; thus, the extension of the period of limitation from 3 to 10 years does not
apply.

ISSUE #1: Had the CIR's right to assess respondent's deficiency taxes already prescribed?

No, the CIR's right to assess NM's deficiency taxes had NOT yet prescribed.

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be
extended upon a written agreement between the CIR and the taxpayer executed before the
expiration of the three-year period. This is a waiver.

RMO No. 20-90 and RDAO 05-01 must be strictly complied with in order for such a waver to be
valid. Thus, a waiver of assessment period is invalid if, for example:

[1] It does not specify a definite agreed date between the BIR and the taxpayer within which the
former may assess and collect revenue taxes;
[2] It has been signed only by a revenue district officer, not the Commissioner;
[3] It has no date of acceptance;
[4] The taxpayer was not furnished a copy of the BIR-accepted waiver;
[5] The person who executed the waivers had no notarized written board authority to sign the
waivers in behalf of the corporation; or
[6] The fact of receipt by the taxpayer of its file copy was not indicated in the original copies of
the waivers.

In this case, both are at fault because NM deliberately executed defective waivers and raised the
same problem to avoid its tax liablity. On the other hand, the BIR's negligence or failure to
comply with the abovementioned regulations is so gross that it amounts to malice and bad faith.

Although it is true that waivers of this kind must be carefully and strictly construed because they
are in derogation of the taxpayer's right to security against prolonged and unscrupulous
investigations, there are 5 reasons why the CTA's decision should be reversed.

[1] The parties in this case are in pari delicto or "in equal fault." In pari delicto connotes that the
two parties to a controversy are equally culpable or guilty and they shall have no action against
each other.
[2] To uphold the validity of the waivers parties must come to court with clean handswould be
consistent with the public policy embodied in the principle that taxes are the lifeblood of the
government.
[3] Parties must come to court with clean hands. NM should not be allowed to benefit from the
defects in its own waivers.
[4] NM is estopped from questioning the validity of its own waivers. It allowed the government
to rely on the defective waivers without raising them as soon as possible. In fact, in its protest, it
did not mention this.
[5] Finally, this is a highly suspicious situation. The BIR miserably failed to exact from NM
compliance with its own rules while NM raised the same invalidity it caused to avoid its tax
liability. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend
to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.

ISSUE #2: Is the 10-year period of limitation for assessments of false and fraudulent returns
applicable in this case?

No, the longer 10-year period is not applicable. Applicable is the normal 3-year period.

Records failed to establish, even by prima facie evidence, that NM filed false and fraudulent
returns on the ground of substantial under-declaration of income in respondent Next Mobile's
Annual ITR for taxable year ending December 31, 2001.

SUMMARY: Next Mobile (NM) lost the case. The CIR succeeded in convincing the Supreme
Court that the CTA was wrong in invalidating the waivers.
CIR v. NEXT MOBILE, GR No. 212825, 2015-12-07

Facts:

respondent filed with the Bureau of Internal Revenue (BIR) its Annual Income Tax Return (ITR)
for taxable year ending December 31, 2001.

respondent received a copy of the Letter of Authority... authorizing Revenue Officer Nenita L.
Crespo of Revenue District Office 43 to examine respondent's books of accounts and other...
accounting records for income and withholding taxes for the period covering January 1, 2001 to
December 31, 2001.

Ma. Lida Sarmiento (Sarmiento), respondent's Director of Finance, subsequently executed

several waivers of the statute of limitations to extend the prescriptive period of assessment for
taxes due in taxable year ending December 31, 2001 (Waivers)

On September 26, 2005, respondent received from the BIR a Preliminary Assessment Notice
dated September 16, 2005 to which it filed a Reply.

On October 25, 2005, respondent received a Formal Letter of Demand (FLD) and Assessment
Notices/Demand No. 43-734 both dated October 17, 2005 from the BIR, demanding payment of
deficiency income tax, final withholding tax (FWT), expanded withholding tax (EWT),
increments for... late remittance of taxes withheld, and compromise penalty for failure to file
returns/late filing/late remittance of taxes withheld

P313,339,610.42 for the taxable year ending December 31, 2001.

November 23, 2005, respondent filed its protest against the FLD and requested the
reinvestigation of the assessments.

respondent received a letter from the BIR denying its protest.

the former First Division of the CTA (CTA First Division) rendered a Decision granting
respondent's Petition for Review and declared the FLD dated October 17, 2005 and Assessment
Notices/Demand No. 43-734 dated October 17, 2005 cancelled and withdrawn for... being issued
beyond the three-year prescriptive period provided by law.

the adverted FLD and the Final Assessment Notices both dated October 17, 2005 were issued
beyond the... three-year prescriptive period provided under Section 203 ot the 1997 National
Internal Revenue Code (NIRC), as amended.

the CTA First Division held that the Waivers executed by Sarmiento did not validly extend the
three-year prescriptive period to assess respondent... the Waivers were not properly executed
according to the procedure in Revenue Memorandum Order No. 20-90 (RMO 20-90)[1] and
Revenue Delegation Authority Order No. 05-01 (RDAO 05-01).
without any notarized written authority from respondent's Board of Directors.

the respective dates of their acceptance by RDO Recto are not indicated therein.

records of this case reveal additional irregularities... the CTA held that estoppel does not apply in
questioning the validity of a waiver of the statute of limitations. It stated that the BIR cannot hide
behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01.

the CTA En Banc rendered a Decision denying the Petition for Review and affirmed that of the
former CTA First Division.

Issues:

whether or not the CIR's right to assess respondent's deficiency taxes had already prescribed.

Ruling:

Section 203[3] of the 1997 NIRC mandates the BIR to assess internal revenue taxes within three
years from the last day prescribed by law for the filing of the tax return or the actual date of
filing of such return, whichever comes later.

Hence, an... assessment notice issued after the three-year prescriptive period is not valid and
effective. Exceptions to this rule are provided under Section 222[4] of the NIRC.

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be
extended upon a written agreement between the CIR and the taxpayer executed before the
expiration of the three-year period.

The Court has consistently held that a waiver of the statute of limitations must faithfully comply
with the provisions of RMO No. 20-90 and RDAO 05-01 in order to be valid and binding.

The deficiencies of the Waivers in this case are the same as the defects of the waiver in Kudos.
In the instant case, the CTA found the Waivers because of the following flaws: (1) they were
executed without a notarized board authority; (2) the dates of acceptance by the

BIR were not indicated therein; and (3) the fact of receipt by respondent of its copy of the
Second Waiver was not indicated on the face of the original Second Waiver.

Vis-a-vis the five Waivers it received from respondent, the BIR has failed, for five times, to
perform its duties in relation thereto: to verify Ms. Sarmiento's authority to execute them,
demand the presentation of a notarized document evidencing the same, refuse acceptance of...
the Waivers when no such document was presented, affix the dates of its acceptance on each
waiver, and indicate on the Second Waiver the date of respondent's receipt thereof.

Both parties knew the infirmities of the Waivers yet they continued dealing with each other on
the strength of these documents without bothering to rectify these infirmities.
The BIR's negligence in this case is so gross that it amounts to malice and bad faith. Without
doubt, the BIR knew that waivers should conform strictly to RMO 20-90 and RDAO 05-01 in
order to be valid.

The general rule is that when a waiver does not comply with the requisites for its validity
specified under RMO No. 20-90 and RDAO 01-05, it is invalid and ineffective to extend the
prescriptive period to assess taxes. However, due to its peculiar circumstances, We shall treat...
this case as an exception to this rule and find the Waivers valid for the reasons discussed below.

the parties in this case are in pari delicto or "in equal fault."

Here, to uphold the validity of the Waivers would be consistent with the public policy embodied
in the principle that taxes are the lifeblood of the government, and their prompt and certain
availability is an imperious need.[19] Taxes are the nation's... lifeblood through which
government agencies continue to operate and which the State discharges its functions for the
welfare of its constituents.[20] As between the parties, it would be more equitable if petitioner's
lapses were allowed to pass and... consequently uphold the Waivers in order to support this
principle and public policy.

the Court has repeatedly pronounced that parties must come to court with clean hands.

Parties who do not come to court with clean hands cannot be allowed to benefit from their own
wrongdoing.[22] Following the... foregoing principle, respondent should not be allowed to
benefit from the flaws in its own Waivers and successfully insist on their invalidity in order to
evade its responsibility to pay taxes.

respondent is estopped from questioning the validity of its Waivers.

Verily, the application of estoppel in this case would promote the administration of the law,
prevent injustice and avert the accomplishment of a wrong and undue advantage. Respondent
executed five Waivers... and delivered them to petitioner, one after the other. It allowed
petitioner to rely on them and did not raise any objection against their validity until petitioner
assessed taxes and penalties against it.

the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on the one
hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same
defects it caused.

the BIR miserably failed to... exact from respondent compliance with its rules.

Such a situation is... dangerous and open to abuse by unscrupulous taxpayers who intend to
escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.

It is true that petitioner was also at fault here because it was careless in complying with the
requirements of RMO No. 20-90 and RDAO 01-05. Nevertheless, petitioner's negligence may be
addressed by enforcing the provisions imposing administrative liabilities upon the officers...
responsible for these errors.[23] The BIR's right to assess and collect taxes should not be
jeopardized merely because of the mistakes and lapses of its officers, especially in cases like this
where the taxpayer is obviously in bad faith.[24]

While the Court rules that the subject Waivers are valid, We, however, refer back to the tax court
the determination of the merits of respondent's petition seeking the nullification of the BIR
Formal Letter of Demand and Assessment Notices/Demand No. 43-734.