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CIR v. TRANSITIONS PHILIPPINES

FACTS:

The case involves a Petition for Review on Certiorari filed by the Commissioner of Internal Revenue (petitioner) seeking to nullify the decision of the Court of Tax Appeals En Banc affirming the cancellation of deficiency tax assessments against Transitions Optical Philippines, Inc. (respondent). The case originated from a letter of authority issued by the Bureau of Internal Revenue authorizing the examination of Transitions Optical's books of accounts for the taxable year 2004. Two waivers of the defense of prescription were executed between the parties, extending the prescriptive period for the assessment of internal revenue taxes for the said year. The Commissioner of Internal Revenue issued a preliminary assessment notice and a final assessment notice, demanding deficiency taxes from Transitions Optical. The latter filed a protest, arguing that the assessment was void due to prescription and other defects. Years later, a final decision on the disputed assessment was issued, holding Transitions Optical liable for deficiency taxes. The case was brought before the Court of Tax Appeals, which cancelled the assessments for being issued beyond the prescriptive period. The decision was affirmed by the Court of Tax Appeals En Banc. The Commissioner of Internal Revenue filed a motion for reconsideration, which was denied. Hence, the present petition before the Supreme Court.

The main issues in this case are the validity of the waivers of defense of prescription and whether the assessment of deficiency taxes against respondent had prescribed. Petitioner argues that the waivers should be considered valid and enforceable, while respondent contends that the waivers are defective and void. Petitioner also argues that the assessment should have been issued within the three-year period provided by law, while respondent argues that the assessment served beyond the extended period is void.

The Court of Tax Appeals cancelled the deficiency tax assessments, and the petitioner files this petition to challenge the decision. The Commissioner of Internal Revenue argues that the exceptions stated in Section 222 of the National Internal Revenue Code do not apply and that the assessment should have been issued within the three-year period. On the other hand, respondent argues that the waivers are defective and void, and that the assessment served beyond the extended period is also void.

The Supreme Court denies the Petition and affirms the cancellation of the deficiency tax assessments by the Court of Tax Appeals.

ISSUES:

  1. Whether the waivers executed by the parties are valid and effective.

  2. Whether the respondent is estopped from claiming that the waivers were invalid.

  3. Whether or not the taxpayer is estopped from questioning the validity of the waivers it executed.

  4. Whether or not the assessment is void due to being served beyond the extended period.

  5. Whether or not the taxpayer has the obligation to pay the amount assessed and demanded.

  6. Whether or not penalties and interests begin to accrue against the taxpayer upon the issuance of the notice of assessment.

  7. Whether or not failure to file an administrative protest within 30 days renders the assessment final, executory, and demandable.

RULING:

  1. The Court of Tax Appeals found that the waivers executed by the parties are defective and void for not complying with the requirements for proper execution as provided in RMO No. 20-90 and RDAO No. 05-01. The waivers were not accompanied by a notarized written authority from the respondent authorizing the representatives to act on its behalf, and the acceptance date and respondent's receipt of the Bureau of Internal Revenue's acceptance were not indicated in either document.

  2. Despite the finding of the Court of Tax Appeals, the Presiding Justice in his separate concurring opinion stated that the respondent is estopped from claiming that the waivers were invalid. The respondent's actions induced the Bureau of Internal Revenue to postpone the issuance of the assessment. By filing its protest against the Preliminary Assessment Notice without raising the invalidity of the waivers, and only arguing that it is not liable for the assessed deficiency taxes, the respondent cannot now question the validity of the waivers.

  3. The taxpayer is estopped from questioning the validity of the waivers it executed. Despite the waivers not complying with the requirements, the taxpayer allowed the government to rely on them and did not raise any objection until taxes and penalties were assessed against it. Estoppel is necessary to prevent undue injury to the government.

  4. The assessment is void due to being served beyond the extended period. The validity period of the waiver expired before the assessment was actually mailed. The court rejected the petitioner's claim that the assessment was already delivered to the post office for mailing on an earlier date, as there was insufficient evidence to support it.

  5. The petition was denied. The Court upheld the 25% penalty and the 20% per annum interest imposed by the National Internal Revenue Code for failure to pay the deficiency tax within the prescribed time. It was also ruled that failure to file an administrative protest within 30 days from the receipt of the final assessment notice renders the assessment final, executory, and demandable.

PRINCIPLES:

  • The period to assess and collect taxes may be extended upon a written agreement between the Commissioner of Internal Revenue and the taxpayer, executed before the expiration of the three-year period. (Section 222(b) and (d) of the National Internal Revenue Code)

  • The requirements for the proper execution of a waiver of the defense of prescription must be complied with, such as the notarized written authority from the taxpayer authorizing the representatives to act on its behalf and the indication of the acceptance date and the taxpayer's receipt of the Bureau of Internal Revenue's acceptance. (RMO No. 20-90 and RDAO No. 05-01)

  • The doctrine of estoppel may be applied when both the taxpayer and the Bureau of Internal Revenue were in pari delicto, and the taxpayer impugns its previously executed waivers after benefitting from them. The taxpayer's act of challenging the validity of the waivers after enjoying the benefits thereof is considered an act of bad faith. (Commissioner of Internal Revenue v. Next Mobile, Inc.)

  • Estoppel applies when both parties continued to deal with each other despite knowing and without rectifying defects. This is to prevent abuse by taxpayers hiding behind technicalities.

  • A PAN (Preliminary Assessment Notice) informs the taxpayer of initial findings and does not contain a demand for payment. A FAN (Final Assessment Notice), on the other hand, contains a computation of tax liabilities and a demand for payment. The assessment referred to in the law refers to the service of the FAN.

  • The taxpayer has the obligation to pay the amount assessed and demanded.

  • Penalties and interests begin to accrue against the taxpayer upon the issuance of the notice of assessment.

  • Failure to file an administrative protest within 30 days renders the assessment final, executory, and demandable.