[ G.R. Nos. 249239 and 250286. February 10, 2025 ] THIRD DIVISION
[ G.R. Nos. 249239 and 250286. February 10, 2025 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER VS. TELSTAR MANUFACTURING CORPORATION, RESPONDENT. [G.R. Nos. 249241-42] TELSTAR MANUFACTURING CORPORATION, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. D E C I S I O N
DIMAAMPAO, J.:
These consolidated[1] petitions for review on certiorari[2] under Rule 45 of the Rules of Court seek to set aside the Decision[3] and the Resolution[4] of the Court of Tax Appeals (CTA) sitting en banc in CTA EB Nos. 1797 and 1879. In the impugned Decision, the CTA En Banc affirmed with modifications the Decision[5] and the Resolution[6] of the CTA Second Division, which ordered Telstar Manufacturing Corporation (Telstar) to pay deficiency income tax, value-added tax, and expanded withholding tax for the year 2009. The challenged Resolution, on the other hand, denied the Motion for Partial Reconsideration[7] filed by Telstar. The salient facts follow. On May 14, 2010, the Bureau of Internal Revenue (BIR) Large Taxpayers Service Regular served upon Telstar Letter of Authority No. 116-2010-00000096[8] in line with Revenue Memorandum Order No. 36-2010[9] on the conduct of special investigation and enforcement activities of interrelated companies, conglomerates, their affiliates and subsidiaries for taxable year 2009. Consequently, Telstar submitted its documents, books and records to the BIR.[10] Nevertheless, Divina A. Puyo (Puyo), Telstar’s President and General Manager, executed a Waiver of the Defense of Prescription under the Statute of Limitations of the National Internal Revenue Code[11] (first waiver) requesting more time to submit the required documents. Subsequently, Puyo signed a second waiver extending the period of assessment until December 31, 2013. Both waivers were accepted by the Commissioner of Internal Revenue (CIR) through OIC-Assistant Commissioner Alfredo V. Masajon of the Large Taxpayers Service.[12] On June 18, 2013, Telstar received from the BIR a Preliminary Assessment Notice[13] for deficiency income tax, improperly accumulated earnings tax, value-added tax, expanded withholding tax, and documentary stamp tax for the year 2009. In response, Telstar, through Puyo, explained that the findings of the BIR revenue officers were due to time recognition differences, remuneration to Mercury Group of Companies, Inc., and difference in costing method used, among others.[14] As it happened, CIR issued on October 16, 2013 a Formal Letter of Demand[15] assessing Telstar for the following deficiency taxes:
Income Tax
[PHP] 255,371,069.77
Improperly Accumulated Earnings Tax
[PHP] 341,327.08
Value-Added Tax
[PHP] 114,939,336.31
Expanded Withholding Tax
[PHP] 2,861,287.15
Documentary Stamp Tax
[PHP] 420,276.22
Annexed to the Formal Letter of Demand was a document detailing the discrepancies.[16] Reiterating its earlier explanations, Telstar filed a protest on the assessment.[17] Partly convinced, CIR issued a Final Decision on Disputed Assessment[18] cancelling in full the assessments on improperly accumulated earnings tax and documentary stamp tax, but partially affirming the final assessments on income tax, value-added tax, and expanded withholding tax. Attached to the Final Decision on Disputed Assessment was the document entitled “Details of Discrepancy."[19] Disgruntled, Telstar lodged a Petition for Review[20] before the CTA, mainly insisting that the waivers executed by Puyo were not valid. The case, docketed as CTA Case No. 8900, was raffled off to the CTA Second Division.
The CTA Second Division Ruling
On August 18, 2017, the CTA Second Division rendered the August 18, 2017 Decision[21] pronouncing that both Telstar and the CIR were estopped from questioning the validity of the waivers since they were in pari delicto. Likewise, Telstar was adjudged liable for deficiency income tax, value-added tax, and expanded withholding tax, thusly—
WHEREFORE, the present Petition for Review is DENIED. [Telstar] is ORDERED to pay basic deficiency income tax, value-added tax and expanded withholding tax for the year 2009 in the aggregate amount of [PHP] 18,061,826.06, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, detailed as follows:
Tax Type
Basic Deficiency
Surcharge
Total
Income tax
[PHP] 2,891,062.57
[PHP] 722,765.64
[PHP] 3,613,828.21
Value-added tax
11,525,666.27
2,881,416.57
14,407,082.84
WT-Expanded
32,732.01
8,183.00
40,915.01
TOTAL
[PHP] 14,449,460.85
[PHP] 3,612,365.21
[PHP] 18,061,826.06
In addition, [Telstar] is ORDERED to pay:
(a)
Deficiency interest at the rate of 20% per annum on the basic deficiency income tax, value-added tax and expanded withholding tax, computed from April 15, 2010, January 25, 2010 and January 15, 2010, respectively, until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
(b)
Delinquency interest at the rate of 20% per annum on the total amount of [PHP] 18,061,826.06, representing the sum of the basic deficiency income tax, value-added tax and expanded withholding tax in the aggregate amount of [PHP] 14,449,460.85 and 25% surcharge of [PHP] 3,612,365.21, and on the deficiency interest which have accrued as aforestated in (a), computed from August 29, 2014 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended.
SO ORDERED.[22] (Emphasis in the original)
Unflustered, Telstar moved for a partial reconsideration[23] of the above disposition, which the CTA Second Division partly granted in its February 8, 2018 Resolution.[24] While the validity of the waivers was upheld by the CTA Second Division, Telstar’s deficiency income tax, deficiency value-added tax, and deficiency expanded withholding tax were reduced for a total sum of PHP 5,964,053.62, distributed as follows: a) PHP 2,804,113.22 deficiency income tax; b) PHP 3,127,208.39 deficiency value-added tax; and c) PHP 32,732.01 deficiency expanded withholding tax.[25] CIR moved for the reconsideration of the February 8, 2018 Resolution, which the CTA Second Division denied.[26] Both parties sought recourse before the CTA En Banc, with Telstar’s petition docketed as CTA EB No. 1797[27] and that of the CIR as CTA EB No. 1879.[28] The cases were eventually consolidated considering that they appealed from the same issuances of the CTA Second Division.[29]
The CTA En Banc Ruling
In the impugned Decision, the two petitions separately lodged by Telstar and CIR were denied. In effect, the findings of the CTA Second Division were affirmed. However, the computation of deficiency interest and delinquency interest was modified in view of the effectivity of Republic Act No. 10963[30] and the issuance of Revenue Regulations No. 21-2018.[31] The CTA En Banc disposed of the petitions in this wise:
WHEREFORE, premises considered, the Petitions for Review are hereby DENIED for lack of merit. Accordingly, the Resolution dated February 8, 2018 is hereby AFFIRMED with MODIFICATIONS in the computation of deficiency interest and delinquency interest in view of the effectivity of Republic Act No. 10963 (TRAIN Law) on January 1, 2018 and the issuance of Revenue Regulations No. 21-2018 and shall read as follows:
“WHEREFORE, petitioner’s Motion for Partial Reconsideration is PARTLY GRANTED. Accordingly, the dispositive portion of the assailed Decision of this Court dated August 18, 2017 is MODIFIED as follows:
“WHEREFORE, the present Petition for Review is PARTLY GRANTED. [Telstar] is ORDERED to pay basic deficiency income tax, value-added tax and expanded withholding tax for the year 2009 in the aggregate amount of [PHP] 25,348,408.53, inclusive of the 25% surcharge and deficiency and delinquency interests imposed under Sections 248(A)(1)(3) and 249(B) and (C) of the NIRC of 1997, as amended, respectively computed until December 31, 2017 as follows:
Income Tax
Value-Added Tax
Expanded Withholding Tax
Total Due
Basic Tax
2,804,113.22
3,127,208.39
32,732.01
5,964,053.62
25% surcharge
701,028.31
781,802.10
8,183.00
1,491,013.41
20% Deficiency Interest
April 16, 2010 to August 29, 2014 (1596 days) (basic tax x .20 x 4.372 years)
2451916.6
2,451,916.60
January 26, 2010 to August 29, 2014 (1676 days) (basic tax x .20 x 4.5917 years)
2871840.553
2,871,840.55
January 16, 2010 to August 29, 2014 (1687 days) (basic tax x .20 x 4.6219 years)
30256.8154
30,256.82
Total Amount due as of August 29, 2014
5,957,058.12
6,780,851.04
71,171.83
12,809,080.99
Add:
20% Deficiency Interest
August 30, 2014 to December 31, 2017 (1219 days) (basic tax x .20 x 3.3397 years)
1,872,979.384
2,088,787.572
21,863.01876
3,983,629.975
20% Delinquency Interest
August 30, 2014 to December 31, 2017 (1219 days) (total amount due as of August 29, 2014 x .20 x 3.3397 years)
3,978,957.404
4,529,201.644
47,538.51073
8,555,697.558
Total Amount due as of December 31, 2017
11,808,994.91
13,398,840.26
140,573.36
25,348,408.53
In addition, [Telstar] is liable to pay delinquency interest at the rate of 12% on the total unpaid basic deficiency tax, surcharge and deficiency interest as of August 29, 2014 amounting to [PHP] 5,957,058.12 for Income Tax, [PHP] 6,780,851.04 for VAT, and [PHP] 71,171.83 for Expanded Withholding Tax, or in the aggregate amount of [PHP] 12,809,080.99, computed from January 1, 2018 until full payment thereof pursuant to Section 249(C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN). Petitioner’s Manifestation with Motion for Correction of Dispositive Portion of Decision is NOTED.”
SO ORDERED.[32] (Emphasis in the original)
Both parties’ bids for partial reconsideration of the above disposition were denied by the CTA En Banc in the assailed Resolution.[33]
Issues
Resolute on their incongruent positions, Telstar and CIR are now before this Court, each ascribing errors upon the CTA En Banc and the CTA Second Division. In G.R. Nos. 249241-42, Telstar asserts that the CTA gravely erred in ruling that—
The right of the BIR to assess its deficiency internal revenue taxes for taxable year ending December 31, 2009 through the subject Formal Letter of Demand and Final Decision on Disputed Assessment has not prescribed. Both Telstar and the CIR were in pari delicto in the execution of the waivers. Telstar was estopped from questioning the validity of the waivers. The Final Assessment Notice and the Final Decision on Disputed Assessment are void for having been issued beyond the prescriptive period allowed by law. There was a valid categorical demand for Telstar to pay the assessed deficiency internal revenue taxes for taxable year ending December 31, 2009. Telstar was liable for: a) deficiency income tax on overclaimed salaries/expenses of PHP 7,020,352.18; b) deficiency expanded withholding tax of PHP 32,732.01; c) deficiency income tax on related disallowed expense of PHP 2,326,691.88; d) deficiency value-added tax on proceeds from sale of property cash flow of PHP 5,610.71; and e) deficiency value-added tax on disallowed input tax of PHP 2,918,401.80. Telstar was liable for 25% surcharge of the assessed deficiency income tax, value-added tax, and expanded withholding tax; and Telstar was liable for deficiency interest on the assessed deficiency expanded withholding tax and deficiency value-added tax.[34]
In sum, Telstar avows that the right of the BIR to assess it for deficiency internal revenue taxes for taxable year ending December 31, 2009 had already prescribed.[35] The waivers executed are void and did not validly extend the prescriptive period for assessment.[36] Moreover, the Formal Letter of Demand and the attached Final Assessment Notice are void for lack of a valid demand.[37] Furthermore, Telstar maintains that it is not liable for deficiency income tax,[38] expanded withholding tax,[39] and value-added tax,[40] as well as the concomitant surcharge[41] and deficiency interest.[42] Refuting Telstar’s avowals, CIR contends that one, the CTA En Banc correctly upheld the questioned deficiency internal revenue taxes assessed against Telstar, including surcharge and deficiency interest; and two, it is barred from questioning the execution of the validity of the waivers.[43] In G.R. Nos. 249239 and 250286, CIR anchors its petition on the sole ground of reversible error committed by the CTA En Banc when it held that the CTA Second Division erred not in cancelling the tax assessments it had issued.[44] While CIR adamantly insists that the assessment against Telstar bears factual and legal support, Telstar, for its part, negates such argument. It posits that the CTA correctly cancelled the assessments against it for deficiency income tax and deficiency value-added tax on discrepancy on sales,[45] and deficiency income tax on disallowed 2008 creditable withholding tax.[46] In the same vein, the Formal Letter of Demand and the attached Final Assessment Notice are void for lack of a valid demand.[47] Void, too, are the Preliminary Assessment Notice, Final Assessment Notice, and Final Decision on Disputed Assessment for having been issued beyond the 120-day period of the BIR to complete its audit.[48]
The Court’s Ruling
The Court shall traverse the sea of legal controversies surrounding the case at bench sequentially. First, did the BIR act within its right when it issued the assessment against Telstar? The Court rules in the negative. The right of the CIR to assess Telstar for deficiency taxes for taxable year 2009 had already prescribed when it assessed it for deficiency taxes and issued the Formal Letter of Demand/Final Assessment Notice on October 16, 2013. Sections 203 and 222(b) of the Tax Code, as amended, are apropos, viz.:
SEC. 203. Period of Limitation Upon Assessment and Collection. – Except as provided in Section 222, interval revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in the case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. . . . . SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. –
. . . . (b) If before expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.
Corollarily, waivers extending the prescriptive period of tax assessments must be compliant with Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01 dated August 2, 2002.[49] In the case of La Flor Dela Isabela, Inc. v. Commissioner of Internal Revenue,[50] this Court invalidated waivers that did not strictly comply with the provisions of Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01 such as, but not to:
Failure to state the specific date within which the BIR may assess and collect revenue taxes;
Failure to sign by the CIR as mandated by law or by his duly authorized representative;
Failure to indicate the date of acceptance to determine whether the waiver was validly accepted before the expiration of the original three-year period;
Failure to furnish the taxpayer of a copy of the waiver;
Failure to indicate on the original copies of the waivers the date of receipt by the taxpayer of their file copy;
Execution of the waivers without the written authority of the taxpayer’s representative to sign the waiver on their behalf;
Absence of any proof that the taxpayer was furnished a copy of the waiver;
A waiver signed by the Assistant Commissioner-Large Taxpayers Service and not by the CIR;
Failure to specify the kind and amount of tax due; and
A waiver which refers to a request for extension of time within which to present additional documents and not for reinvestigation and/or reconsideration of the pending internal revenue case.[51]
Generally, when a waiver fails to comply with the requisites under Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01, it is invalid and ineffective to extend the prescriptive period to assess-taxes.[52] However, the Court recognized exceptions to this general rule following the equitable principles of in pari delicto or “in equal fault” and estoppel.[53] Thusly, the Court applied the doctrine of estoppel in cases where the taxpayer failed to raise the invalidity of the waivers at the earliest opportunity and where the taxpayer benefited from the waiver.[54] In the present case, CIR had until April 15, 2013 for income tax, January 25, 2013 for value-added tax, and January 28, 2013 for expanded withholding tax, within which to assess Telstar for deficiency taxes covering taxable year 2009. If valid, the waivers would have effectively extended such period to June 30, 2013 for the first waiver and December 31, 2013 for the second waiver. This Court thus proceeds to test the waivers executed by Telstar through the prism of Revenue Memorandum Order No. 20-90, Revenue Delegation of Authority Order No. 05-01, and relevant jurisprudence. Upon scrutiny, the executed waivers suffer from several defects. First, the request made was for an extension of time within which to present additional documents, and not for the reinvestigation and/or reconsideration of the pending internal revenue case as required under Revenue Memorandum Order No. 20-90. Second, the subject waivers failed to specify the kind and amount of taxes due. Logically, there can be no agreement if the kind and amount of the taxes to be assessed or collected .were not indicated. Hence, specific information in the waiver is necessary for its validity.[55] Third, the subject waivers were not signed by the Commissioner but by Assistant Commissioner Masajon, the officer-in-charge of the Large Taxpayers Service. The requirement in Revenue Memorandum Order No. 20-90 clearly specifies that it is the Commissioner who should sign for the BIR such waivers where the taxes exceed PHP 1,000,000.00.[56] Notably, on the part of Telstar, the waivers were signed by Puyo without any notarized written authority to do so. However, in signing the correspondence[57] with the CIR (including the reply to the Preliminary Assessment Notice and the protest to the Formal Letter of Demand), Puyo effectively held herself out as authorized by Telstar to act on its behalf. Nevertheless, it was ultimately the responsibility of the BIR to ensure that the waivers executed by Telstar strictly complied with the legal requirements for their validity before accepting them. In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Inc.,[58] this Court edifyingly explicated—
The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90, as they have the burden of securing the right of the government to assess and collect tax deficiencies. This right would prescribe absent any showing of a valid extension of the period set by the law. To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by conforming to or by disagreeing with the extension. A waiver of the statute of limitations, whether on assessment or collection, should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not imply that the taxpayer relinquishes the right to invoke prescription unequivocally.[59] (Emphasis supplied).
True, Telstar failed to present the notarized authority of its president and general manager who signed the waivers on its behalf, which is a clear violation of Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01. However, the BIR did not ensure that all supporting documents were attached before accepting the waivers, including the notarized written authority of Telstar’s representative to sign them on the corporation’s behalf. Thus, the BIR’s inaction was the proximate cause of the defects in the waiver, thereby preventing the extension of the period to assess or collect taxes against Telstar.[60] To be sure, Telstar did not derive any benefit from the defective waiver, as it did not require additional time to submit the necessary documents. Prior to the execution of the first waiver in September 2012, Telstar had already provided the BIR with substantially all the required records. Notwithstanding this, the Preliminary Assessment Notice was issued to Telstar on June 13, 2013, three years after its initial submission of documents on June 11, 2010.[61] Accordingly, the equitable principles of in pari delicto or “in equal fault”, as an exception to the general rule, are inapplicable in this case,[62] given that Telstar did not rely on the defective waivers to postpone or delay its tax obligations. Moreover, Telstar was not estopped from invoking the defense of prescription. In this regard, it bears emphasis that the doctrine of estoppel cannot be applied as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver. As the Court clarified in Commissioner of Internal Revenue v. Kudos Metal Corp.[63]—
The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow. As we have often said, the doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is justice according to natural law and right. As such, the doctrine of estoppel cannot give validity to an act that is prohibited by law or one that is against public policy. It should be resorted to solely as a means of preventing injustice and should not be permitted to defeat the administration of the law, or to accomplish a wrong or secure an undue advantage, or to extend beyond them requirements of the transactions in which they originate. Simply put, the doctrine of estoppel must be sparingly applied. Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01, which the BIR itself issued. As stated earlier, the BIR failed to verify whether a notarized written authority was given by the respondent to its accountant, and to indicate the date of acceptance and the receipt by the respondent of the waivers. Having caused the defects in the waivers, the BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the statute of limitations, being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.[64] (Emphasis supplied; citations omitted)
At this juncture, it must be emphasized that there is nothing vague or difficult to understand about the procedural guidelines. CIR and the revenue officials knew fully well the drastic consequences of noncompliance with Revenue Memorandum Order No. 20-90 and Revenue Delegation of Authority Order No. 05-01 and yet, they utterly failed to faithfully follow these BIR issuances. Clearly, the BIR is not entitled to the mantle of protection accorded by the doctrine of estoppel. Having caused the defects in the waivers, the BIR must bear the consequence of its own negligence.[65] With the foregoing disquisitions, the Court rules and so holds that the waivers were void and as such, did not extend the prescriptive period to assess Telstar for deficiency taxes. Accordingly, the Formal Letter of Demand and the Final Assessment Notice issued by the CIR on October 13, 2013 are void and of no legal effect. Second, was there a valid categorical demand for Telstar to pay the deficiency taxes for taxable year 2009? An assessment “refers to the determination of amounts due from a person obligated to make payments.” In the context of national internal revenue collection, it refers to the determination of the taxes due from a taxpayer under the National Internal Revenue Code of 1997.[66] Section 228 of the Tax Code and Revenue Regulations No. 12-99[67] outline the procedure in tax assessment. Section 228 reads:
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: Provided, however, That a preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax 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 tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax 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-exempt persons.
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. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall 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 taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax 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 demandable. (Emphasis in the original)
On the other hand, Section 3 of Revenue Regulations No. 12-99, which implements Section 228 of the Tax Code, provides for the due process requirement in the issuance of a deficiency tax assessment, viz.:
SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. — 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer’s records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer’s submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer’s payment of his internal revenue taxes, for the purpose of “Informal Conference,” in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (See illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer’s deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:
(i)
When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or
(ii)
When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
(iii)
When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(iv)
When the excise tax due on excisable articles has not been paid; or
(v)
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-exempt persons.
3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand 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 formal letter of demand and assessment notice shall be void (See illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. 3.1.5 Disputed Assessment. — The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof. If there are several issues involved in the formal letter of demand and assessment notice but the taxpayer only disputes or protests against the validity of some of the issues raised, the taxpayer shall be required to pay the deficiency tax or taxes attributable to the undisputed issues, in which case, a collection letter shall be issued to the taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and/or interest. No action shall be taken on the taxpayer’s disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to the said undisputed issues. The prescriptive period for assessment or collection of the tax or taxes attributable to the disputed issues shall be suspended. The taxpayer shall state the facts, the applicable law, rules and regulations, or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect. If there are several issues involved in the disputed assessment and the taxpayer fails to state the facts, the applicable law, rules and regulations, or jurisprudence in support of his protest against some of the several issues on which the assessment is based, the same shall be considered undisputed issue or issues, in which case, the taxpayer shall be required to pay the corresponding deficiency tax or taxes attributable thereto. The taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable. The phrase “submit the required documents” includes submission or presentation of the pertinent documents for scrutiny and evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall state this fact in his report of investigation. If the taxpayer fails to file a valid protest against the formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof, the assessment shall become final, executory and demandable. If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable. In general, if the protest is denied, in whole or in part, by the Commissioner or his duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable: Provided, however, that if the taxpayer elevates his protest to the Commissioner within thirty (30) days from date of receipt of the final decision of the Commissioner’s duly authorized representative, the latter’s decision shall not be considered final, executory and demandable, in which case, the protest shall be decided by the Commissioner. If the Commissioner or his duly authorized representative fails to act on the taxpayer’s protest within one hundred eighty (180) days from date of submission, by the taxpayer, of the required documents in support of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable. 3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the Commissioner or his duly authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence on which such decision is based, otherwise, the decision shall be void (See illustration in ANNEX C hereof), in which case, the same shall not be considered a decision on a disputed assessment; and (b) that the same is his final decision. 3.1.7 Constructive Service. — If the notice to the taxpayer herein required is served by registered mail, and no response is received from the taxpayer within the prescribed period from date of the posting thereof in the mail, the same shall be considered actually or constructively received by the taxpayer. If the same is personally served on the taxpayer or his duly authorized representative who, however, refused to acknowledge receipt thereof, the same shall be constructively served on the taxpayer. Constructive service thereof shall be considered effected by leaving the same in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least two (2) revenue officers other than the revenue officer who constructively served the same. The revenue officer who constructively served the same shall make a written report of this matter which shall form part of the docket of this case (see illustration in ANNEX D). (Emphasis in the original; emphasis supplied)
The Formal Letter of Demand/Final Assessment Notice provides for the tax due with a demand for payment. In Commissioner of Internal Revenue v. Fitness by Design, Inc.,[68] this Court explicated—
The word “shall” in Section 228 of the Tax Code and Revenue Regulations No. 12-99 means the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory. The law requires that the bases be reflected in the formal letter of demand and assessment notice. This cannot be presumed.[69] (Citation omitted)
In fact, this Court has enjoined strict observance by the BIR of the prescribed procedure for the issuance of assessment notices in order to uphold the taxpayer’s constitutional rights.[70] Stated differently, the final assessment is a notice to the effect that the amount therein 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 the remedies.[71] The Court, in Fitness by Design, Inc., invalidated the disputed Final Assessment Notice for lack of definite amount of tax liability and defective demand for payment, viz.:
The disputed Final Assessment Notice is not a valid assessment. First, it lacks the definite amount of tax liability for which respondent is accountable. It does not purport to be a demand for payment of tax due, which a final assessment notice should supposedly be. An assessment, in the context of the National Internal Revenue Code, is a “written notice and demand made by the [Bureau of Internal Revenue] on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed.” Although the disputed notice provides for the computations of respondent’s tax liability, the amount remains indefinite. It only provides that the tax due is still subject to modification, depending on the date of payment. Thus:
The complete details covering the aforementioned discrepancies established during the investigation of this case are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended. Please note, however, that the interest and the total amount due will have to be adjusted if prior or beyond April 15, 2004.
Second, there are no due dates in the Final Assessment Notice. This negates petitioner’s demand for payment. Petitioner’s contention that April 15, 2004 should be regarded as the actual due date cannot be accepted. The last paragraph of the Final Assessment Notice states that the due dates for payment were supposedly reflected in the attached assessment:
In view thereof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities through the duly authorized agent bank in which you are enrolled within the time shown in the enclosed assessment notice.
However, based on the findings of the Court of Tax Appeals First Division, the enclosed assessment pertained to remained unaccomplished. Contrary to petitioner’s view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not the due date for payment of tax liabilities. The total amount depended upon when respondent decides to pay. The notice, therefore, did not contain a definite and actual demand to pay. Compliance with Section 228 of the National Internal Revenue Code is a substantive requirement. It is not a mere formality. Providing the taxpayer with the factual and legal bases for the assessment is crucial before proceeding with tax collection. Tax collection should be premised on a valid assessment, which would allow the taxpayer to present his or her case and produce evidence for substantiation.[72] (Emphasis in the original)
In the case at bench, a plain reading of the Formal Letter of Demand/Final Assessment Notice readily reveals that no demand for payment of the assessed taxes was made:
Pursuant to the provision of Section 228 of the aforesaid Code and its Implementing revenue regulations, you are hereby given the opportunity to present in writing your side of the case within fifteen (15) days from receipt hereof. However, if you are amenable, you may pay the above assessment through the Electronic Filing and Payment Section (EFPS). Afterwards, submit proof of payment thereof to the Regular Large Taxpayers Audit Division 1 located at Rm 216, National Office Building, Diliman, Quezon City for updating of your records. If we fail to hear from you within the said period, you shall be considered in default, in which case, a formal letter of demand and assessment notice shall be issued by this Office calling for payment of your aforesaid deficiency taxes, inclusive of civil penalty and interest.[73] (Emphasis in the original)
To recapitulate, the Formal Letter of Demand/Final Assessment Notice must contain a categorical demand for payment of assessed tax with factual and legal bases. This is because an obligation to pay the tax is being imposed upon the taxpayer. Such obligation must be stated in a clear and plain language to properly apprise the taxpayer. Moreover, based on the document title itself, the Formal Letter of Demand/Final Assessment Notice is a demand for payment of taxes. Perceptibly, it must contain a demand for payment of assessed taxes. Absent such demand, it is rendered defective. A subsequent demand contained in the Final Decision on Disputed Assessment does not cure the defective Formal Letter of Demand/Final Assessment Notice. The law, rules and regulations require the demand for payment of assessed tax to be made in the Formal Letter of Demand/Final Assessment Notice and not in the Final Decision on Disputed Assessment. The Formal Letter of Demand/Final Assessment Notice and Final Decision on Disputed Assessment have divergent functions. The first one calls for the payment of the taxpayer’s deficiency tax while the second one informs the taxpayer of respondent’s final decision on any protest filed. Surely, a subsequent demand contained in the Final Decision on Disputed Assessment does not cure the lack of any demand in the Formal Letter of Demand/Final Assessment Notice. Well-settled is the rule that an assessment that fails to strictly comply with the due process requirements set forth in Section 228 of the Tax Code and Revenue Regulations No. 12-99 is void and produces no effect.[74] It follows, therefore, that absent a categorical demand for payment, the Formal Letter of Demand/Final Assessment Notice is not a valid assessment. With the foregoing disquisitions, the Court finds no reason to resolve the other matters raised by the parties. ACCORDINGLY, the Court RESOLVES TO:GRANT the Petition for Review on Certiorari in G.R. Nos. 249241-42 filed by Telstar Manufacturing Corporation; DENY the Petition for Review on Certiorari in G.R. Nos. 249239 and 250286 lodged by the Commissioner of Internal Revenue; REVERSE and SET ASIDE the April 15, 2019 Decision and the September 10, 2019 Resolution of the Court of Tax Appeals En Banc in CTA EB Nos. 1797 and 1879; and DECLARE NULL AND CANCELLED the deficiency tax assessments issued against Telstar Manufacturing Corporation for taxable year 2009. SO ORDERED. Inting, J., concur. Caguioa, J., see concurring opinion. Gaerlan,* J., on official business but left his concurring vote. Singh,** J., on leave.