G.R. No.

212825, December 07, 2015

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEXT MOBILE,

INC. (FORMERLY NEXTEL COMMUNICATIONS PHILS., INC.), Respondent.

FACTS:

On April 15, 2002, respondent filed with the Bureau of Internal Revenue (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 (BIR Form No. 1601-F), its Monthly Remittance Returns of Expanded
Withholding Tax (BIR Form No. 1501-E) and its Monthly Remittance Return of
Income Taxes Withheld on Compensation (BIR Form No. 1601-C) for year ending
December 31, 2001.

On September 25, 2003, respondent received a copy of the Letter of Authority

dated September 8, 2003 signed by Regional Director Nestor S. Valeroso
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, in the total amount of P313,339,610.42 for the
taxable year ending December 31, 2001.

On November 23, 2005, 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.
Ruling of the CTA Former First Division

On December 11, 2012, 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.

On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition for
Review and affirmed that of the former CTA First Division.

Issue:

Petitioner has filed the instant petition on the issue of whether or not the CIR's
right to assess respondent's deficiency taxes had already prescribed.

Ruling:

The petition has merit.

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.

In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found
ineffective to extend the period to assess or collect taxes because: (1) the
accountant who executed the waivers had no notarized written board authority
to sign the waivers in behalf of respondent corporation; (2) there was no date of
acceptance indicated on the waivers; and (3) the fact of receipt by respondent of
its file copy was not indicated in the original copies of the waivers.

The Court rejected the CIR's argument that since it was the one who asked for
additional time, Kudos should be considered estopped from raising the defense
of prescription. The Court held that the BIR cannot hide behind the doctrine of
estoppel to cover its failure to comply with its RMO 20-90 and RDAO 05-01.
Having caused the defects in the waivers, the Court held that the BIR must bear
the consequence.10 Hence, the BIR assessments were found to be issued beyond
the three-year period and declared void.11 Further, the Court stressed that there
is compliance with RMO 20-90 only after the taxpayer receives a copy of the
waiver accepted by the BIR, viz:

The flaw in the appellate court's reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an
agreement between the taxpayer and the BIR. When the petitioner's comptroller
signed the waiver on September 22, 1997, it was not yet complete and final
because the BIR had not assented. There is compliance with the provision of
RMO No. 20-90 only after the taxpayer received a copy of the waiver accepted
by the BIR. The requirement to furnish the taxpayer with a copy of the waiver is
not only to give notice of the existence of the document but of the acceptance by
the BIR and the perfection of the agreement.12 ChanRoblesVirtualawlibrary

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.

To be sure, both parties in this case are at fault.

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. In fact, in its Letter Protest to the BIR, respondent did not even
question the validity of the Waivers or call attention to their alleged defects.

In this case, respondent, after deliberately executing defective waivers, raised

the very same deficiencies it caused to avoid the tax liability determined by the
BIR during the extended assessment period. It must be remembered that by
virtue of these Waivers, respondent was given the opportunity to gather and
submit documents to substantiate its claims before the CIR during investigation.
It was able to postpone the payment of taxes, as well as contest and negotiate
the assessment against it. Yet, after enjoying these benefits, respondent
challenged the validity of the Waivers when the consequences thereof were not
in its favor. In other words, respondent's act of impugning these Waivers after
benefiting therefrom and allowing petitioner to rely on the same is an act of bad
faith.

On the other hand, the stringent requirements in RMO 20-90 and RDAO 05-01
are in place precisely because the BIR put them there. Yet, instead of strictly
enforcing its provisions, the BIR defied the mandates of its very own issuances.
Verily, if the BIR was truly determined to validly assess and collect taxes from
respondent after the prescriptive period, it should have been prudent enough to
make sure that all the requirements for the effectivity of the Waivers were
followed not only by its revenue officers but also by respondent. The BIR stood
to lose millions of pesos in case the Waivers were declared void, as they
eventually were by the CTA, but it appears that it was too negligent to even
comply with its most basic requirements.

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. In fact, the mandatory nature of the
requirements, as ruled by this Court, has been recognized by the BIR itself in its
issuances such as Revenue Memorandum Circular No. 6-2005,16 among others.
Nevertheless, the BIR allowed respondent to submit, and it duly received, five
defective Waivers when it was its duty to exact compliance with RMO 20-90 and
RDAO 05-01 and follow the procedure dictated therein. It even openly admitted
that it did not require respondent to present any notarized authority to sign the
questioned Waivers.17 The BIR failed to demand respondent to follow the
requirements for the validity of the Waivers when it had the duty to do so, most
especially because it had the highest interest at stake. If it was serious in
collecting taxes, the BIR should have meticulously complied with the foregoing
orders, leaving no stone unturned.

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.

First, 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. However, although the
parties are in pari delicto, the Court may interfere and grant relief at the suit of
one of them, where public policy requires its intervention, even though the result
may be that a benefit will be derived by one party who is in equal guilt with the
other.18

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.

Second, the Court has repeatedly pronounced that parties must come to court
with clean hands.21 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.

Third, respondent is estopped from questioning the validity of its Waivers. While
it is true that the Court has repeatedly held that the doctrine of estoppel must be
sparingly applied as an exception to the statute of limitations for assessment of
taxes, the Court finds that the application of the doctrine is justified in this case.
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. Moreover, the application of estoppel is necessary to prevent the
undue injury that the government would suffer because of the cancellation of
petitioner's assessment of respondent's tax liabilities.

Finally, 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. On the other hand,
the BIR miserably failed to exact from respondent compliance with its rules. The
BIR's negligence in the performance of its duties was so gross that it amounted
to malice and bad faith. Moreover, the BIR was so lax such that it seemed that it
consented to the mistakes in the Waivers. 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

As regards petitioner's claim that the 10-year period of limitation within which to
assess deficiency taxes provided in Section 222(a) of the 1997 NIRC is applicable
in this case as respondent allegedly filed false and fraudulent returns, there is no
reason to disturb the tax court's findings that records failed to establish,
even by prima facie evidence, that respondent Next Mobile filed false
and fraudulent returns on the ground of substantial underdeclaration of
income in respondent Next Mobile's Annual ITR for taxable year ending
December 31, 2001.25 cralawred

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.