Commissioner of Internal Revenue v. Next Mobile, Inc. (2015)

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, -versus-. NEXT MOBILE, INC. (FORMERLY NEXTEL COMMUNICATIONS PHILS., INC.), RESPONDENT. G.R. No. 212825, DECEMBER 7, 2015

FACTS: 

Respondent filed with the BIR its Annual Income Tax Return (ITR) for taxable year ending December 31, 2001. Respondent also filed its Monthly Remittance Returns of Final Income Taxes Withheld, its Monthly Remittance Returns of Expanded Withholding Tax and its Monthly Remittance Return of Income Taxes Withheld on Compensation for year ending December 31, 2001. Later on, respondent received a copy of the Letter of Authority authorizing the Revenue Officer 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. 

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). 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, FWT, EWT, increments for late remittance of taxes withheld, and compromise penalty for failure to file returns/late filing/late remittance of taxes withheld, in the total amount of P313, 339,610.42 for the taxable year ending December 31, 2001. 

Respondent filed its protest against the FLD and requested the reinvestigation of the assessments. On July 28, 2009, respondent received a letter from the BIR denying its protest. Thus, on August 27, 2009, respondent filed a Petition for Review before the CTA docketed as CTA Case No. 7965. The former First Division of the CTA 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declared the FLD dated October 17, 2005 and Assessment Notices/Demand No. 43-734 dated October 17, 2005 cancelled and withdrawn for being issued beyond the three-year prescriptive period provided by law.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 tax court also rejected petitioner's claim that this case falls under the exception as to the three- year prescriptive period for assessment and that the 10-year prescriptive period should apply on the ground of filing a false or fraudulent return. The CTA First Division held that the Waivers executed by Sarmiento did not validly extend the three-year prescriptive period to assess respondent for deficiency income tax, FWT, EWT, increments for late remittance of tax withheld and compromise penalty, for, as found, the Waivers were not properly executed according to the procedure in Revenue Memorandum Order No. 20-90 (RMO 20-90) and Revenue Delegation Authority Order No. 05-01 (RDAO 05-01). 

Petitioner's Motion for Reconsideration was denied on March 14, 2013. Petitioner filed a Petition for Review before the CTA En Banc. The CTA En Banc rendered a Decision denying the Petition for Review and affirmed that of the former CTA First Division. 

It held that the five (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 three (3) to ten (10) years does not apply. 

ISSUE: 

Whether or not the CIR's right to assess respondent's deficiency taxes had already prescribed? 

RULING: 

NO. Section 203 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 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. RMO 20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 provide the procedure for the proper execution of a waiver. 

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. 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 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. 

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 hands would 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.