G.R. No. L-46644. September 11, 1987
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ISLAND GARMENT MANUFACTURING CORPORATION AND THE COURT OF TAX APPEALS, RESPONDENTS.
PADILLA, J.:
This is a petition for review on certiorari of the
decision* of the Court of Tax Appeals, dated 22 June 1977, in
CTA Case no. 2070, reversing the decision of the Commissioner of Internal
Revenue which found private respondent Garment Manufacturing Corporation liable
for the payment of advance sales
tax deficiency income tax, surcharges interest and compromise penalties, totaling P627,189.94.
Private respondent Island Garment Manufacturing
Corporation (respondent corporation, for short),
a corporation organized and existing under the laws of the Philippines,
is duly licensed and operating under Republic Act no. 3137, commonly known as the Embroidery Law[1]. It imports
raw materials, such as, textile fabrics and cotton piece goods for manufacture
into finished garments which it then re-exports back to its foreign suppliers
under the supervision of the Embroidery and Apparel Control and Inspection
Board (Embroidery Board, for short) and the Bureau of customs. In turn, it receives from its foreign
suppliers an amount representing labor costs, overhead
expenses and margin profits[2].
Pursuant to Republic Act no. 3137, all importations of textile fabrics
received by respondent corporation are exempt from
duties and special import taxes.
However, its net income
as embroidery contractor consisting of payments received from foreign suppliers
is subject to income tax.
On 21
October 1964 and 24
February 1965,
petitioner Commissioner of Internal Revenue, through his agents, had the
respondent corporation investigated for tax liabilities for the years 1962 and
1963. Respondent corporation was
subsequently assessed P335,787.93 representing
deficiency income tax for 1962 and
1963, and P291,402.01 representing advance sales tax, for textiles allegedly
sold in the local market instead of being re-exported back to respondent corporation’s
foreign suppliers as finished goods, in accordance with said Rep. Act no.
3137. The assessments were contained in
demand letters dated 25 October 1965,
and 27 October 1965[3].
Respondent corporation protested the
assessments in letters dated 11
November 1965 and 27
September 1966[4]. In view of the said protest, the case was
heard by the Appellate Division of the Bureau of Internal Revenue, after
which, the Hearing Officer recommended the cancellation of assessments against respondent corporation.
The petitioner, however, denied the protests, despite this
recommendation, and reiterated his demand for payment in a letter dated 8 August 1969[5]. The respondent corporation received a copy of
said letter on 23 September 1969
and on 9 October 1969, the corporation wrote the petitioner a letter, disputing
the letter dated 8 August 1969[6]. Then, on 18 February 1970, the respondent corporation received from
the petitioner a Final Notice Before Seizure, dated 20 November 1969[7],
and on 26 February 1970, it
filed with the respondent Court of Tax
Appeals a petition for review, disputing the petitioner’s assessments.
After hearing, the respondent court reversed the petitioner’s
decision and absolved the respondent corporation from liability[8]. Hence, the present recourse.
The issues, for
resolution, are:
1) whether or not respondent corporation filed its appeal with
the Court of Tax Appeals within the thirty-day period prescribed in Section 11
of Rep. Act no. 1125, the Act Creating the Court of Tax Appeals; and
2) whether or not respondent corporation
is liable to pay the sum of P335,787.93 and P291,402.01, or a total of
P627,189.94, deficiency income tax and advance sales tax on importations made in
1962-1963 allegedly not re-exported back totally as finished garments and
embroidered goods to its foreign suppliers, as required by law.
As to the
first issue –
Sec. 11, Rep. Act no.
1125 provides:
“Sec. 11. Who may appeal; effect of appeal. – Any
person, association or corporation adversely affected by a decision or ruling
of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment
Appeals may file an appeal in the Court of Tax Appeals within thirty days after
the receipt of such decision or ruling.
“No appeal
taken to the Court of Tax Appeals from the decision of the Collector of
Internal Renevue or the Collector of Customs shall
suspend the payment, levy, distraint, and/ or sale of
any property of the taxpayer for the satisfaction of his tax liability as
provided by existing law: Provided, however, That when in the opinion of the
Court the collection by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the interest of
the Government and/or the taxpayer the court at any stage of the proceeding
may suspend the said collection and require the taxpayer either to
deposit the amount claimed or to file a surety bond for not more than double the
amount with the Court.”
The parties do not disagree that the decision of the Commissioner of Internal Revenue from
which an appeal can be taken to the Court of Tax Appeals is his letter
dated 8 August 1969,
received by respondent corporation on 23 September 1969, which denied
respondent corporation’s protest. They
differ, however, as to whether respondent corporation’s letter dated 23
September 1969 questioning, among other things, petitioner’s use of “mathematical computation” to
ascertain respondent corporation’s re-exports and justify his assessments, amounted to a motion for
reconsideration which interrupted the running of the thirty-day period for
appeal. The letter is reproduced, as
follows:
“September 23, 1969
The Honorable,
The Commissioner, Bureau of Internal
Revenue
M a n i l a
Dear Sir:
We have on hand today your letter of August 8th relative to the
alleged Income Tax deficiency and penal
liabilities inuring to our firm for the years 1962 and 1963 which have
been a subject of proceedings in the Bureau of Internal Revenue since June 15, 1967.
“The facts of this case have been well stated and the Legal
Department of the Bureau of Customs have cleared us of
liabilities for our importations during the years 1962 and 1963.
“The Examiners of the Bureau of Internal Revenue however, contends that
our exportations for those years above mentioned our overstated, being
impossible, based on mathematical computation to export those quantities of raw
materials but that on incomplete copies of our
export papers which we then have on our office files, those they were able to
secure from the Bureau of Customs and from the Embroidery Board,
which taken together does not reflect from the complete papers and documents for our exports in the years 1962 and 1963. Their findings was
never based on actual physical
counting of stocks or occular inspection of representative stocks and its packaging in cartoons
and boxes.
“There was no
question however, that our exportation have
been duly and regularly passed upon and have been done in the manner within
the requirement of law, rules and regulations of the Embroidery Board, for
short, and of the Bureau of Customs, in the course of the proceedings.
“The question then
that will arise is whether the Bureau of Internal Revenue, its agents or
examiners, could question the prerogative and legitimate acts of the
Embroidery and Apparel Control & Inspection Board especially as to exports
of embroidery firms duly registered with it under the provisions of RA
3137. The last paragraph of Sec. 2, RA
3137 reads and we quote:
“The Board shall have the over all control and shall
administer the checks and
counterchecks of consigned textiles, leather gloves raw materials and or
supplies to Embroidery and Apparel manufacturers and corresponding checks for liquidate of goods prior to
exportation. No other governments
instrumentality or agency shall be authorized to qualify or question the
validity of license so issued by the
Board. Questions of legality and or
questions of validity and interpretation of any license so issued shall be decided exclusively
by the Board subject to appeal
to courts of competent jurisdiction”.
and Sec. 1603 of
RA 3137 reads and we quote:
“Finality of liquidation-When articles
have been entered and passed upon free of duty or final adjustment of duties
made, with subsequent delivery, such entry and passage free of duty or
settlement of duties will, after the expiration of one year will, from date of final payment of duties in the absence of
fraud or protest be final and conclusive upon all parties unless the
Liquidation of the import entry was merely tentative.”
“Viewed from the context of those two controlling legal
provisions of law, it is clear that nowhere could it be said that the Bureau of Internal Revenue, its agents or
examiners, have such authority to question the propriety of actions of the
Embroidery Board and the Bureau of Customs, if the same were preceeded within their legitimate powers as in this instant case nor to question
the validity of exportation if the same have been made
after the expiration within one year period have been made
but which was never done in this instant case.
“From the foregoing therefore, with a heavy heart, much to our
regret, we can not accede to your request under the rules of law. We have always been most vocal for a plea of
developing this infant garment export trade among our national and we do
believe as advocated by this
administration that we deserve some encouragement, incentives but not
harassment as we are in now.
“We close with the hope that you will see our way clear and
find this to merit your utmost consideration, we are.
Very truly yours,
(SGD.)
ENRIQUE G. JOCSON
President”[9]
The petitioner contends
that the afore-quoted letter is pro forma, while the respondent
corporation maintains that it was a valid request for the reconsideration of
the petitioner’s letter dated 8 August 1969 and, therefore, suspended the
period for the filing of an appeal.
We find the letter dated
23 September 1969 to the petitioner a valid request for the reconsideration of
the letter dated 8 August 1969 since it raises new and valid issues. We quote with approval the following
disquisition of the respondent Court of Tax Appeals:
“A request for reconsideration of the decision of respondent
is pro forma if it merely reiterates the ground already stated in
the first request for cancellation or withdrawal of the assessment. (Filipinas Investment and
Finance Corporation vs. Commissioner of Internal Revenue, No. L-23501, May 6, 1967, 20 SCRA 50). In the
instant case, it will be noted that in requiring petitioner to pay alleged
advance sales tax and deficiency income tax for 1962 and 1963, respondent in his original letter-assessment of October 25, 1965 and October 27, 1965 merely
stated that upon investigation, the former willfully failed to export all its
finished articles and willfully neglected to declare the income from the sale
thereof. In contesting and disputing
the said assessments in his letters of November 11, 1965 and September 24,
1966, petitioner raised the issues of: (1) correctness of the figures or
amounts appearing therein; (2) authority of respondent to question the
validity or propriety of the official acts of the Bureau of Customs and the
Embroidery and Apparel Control and Inspection Board; (3) finality of the cancellation
of all the bonds filed to guaranty [sic] exportation of the finished products
and liquidation of import entries pursuant to Section 1603 of the Tariff and
Customs Code; (4) efficacy of the certification and/or reports of the agents
and/or Examiners of respondent that raw materials imported in 1962 and 1963,
the years under question, were all accounted for; (5) failure of respondent’s
examiner to find evidence showing violation of the provisions of the National
Internal Revenue Code, after a search of petitioner’s premises pursuant to a
search warrant issued by Judge Amado G. Roan of the City
Court of Manila was conducted; and (6) regularity of petitioner’s inventories
of raw and finished materials. After a
protracted hearing of the case, respondent in his letter of August 8, 1969
rendered a decision denying petitioner’s protest and unwrapped for the first
time the “mathematical computation” theory as the method employed by
his examiners in ascertaining the quantity of finished products manufactured
and exported by petitioner. Respondent
also adduced for the first time the issue that since the documents presented by
petitioner to prove liquidation of its import entries were only photostatic or carbon copies of
originals, the same did not constitute evidence to prove actual exportation.
“On September 23, 1969 petitioner disputed for the first time
the “mathematical computation” theory of respondent the ground it “is
based merely on incomplete copies of our export
papers which we then have on our office files, those they were able to secure from the Bureau of Customs and from
the Embroidery Board, which taken together does
not reflect the complete papers and documents far our exports the years 1962
and 1963. Their (examiners of the Bureau
of Internal Revenue) findings was (were) never based on actual physical counting
of stocks in occular inspection of representative stcks and its packaging in cartons and boxes”. x x x While petitioner also reiterated in this request for
reconsideration the issue it raised in its petition for the cancellation or
withdrawal of the original assessments as to whether respondent could still
question the prerogative of the Embroidery and Apparel Control and Inspection
Board and the Bureau of Customs in clearing petitioner of liabilities for its
importations in 1962 and 1963, and the finality of the liquidations of its import
entries pursuant to Section 1603 of the Tariff and Customs Code, the same were
disregarded, if not completely ignored, by respondent in its decision on the
disputed assessments dated August 8, 1969.
“Since petitioner’s
request for reconsideration of September 23, 1969 did not merely reiterate the
grounds stated in its first request for cancellation of the assessments but
also called attention to those facts or arguments which have been disregarded
in the decision of respondent dated August 8, 1969, it can not be considered pro forma. (Filipinas Investment & Finance
Corporation vs. Commissioner of Internal Revenue, supra: Surigao Electric Co. Inc. vs. Court of Tax Appeals, No. L-25289, June 28, 1974, 57 SCRA 523.) Consequently,
considering that petitioner consumed only a total of twenty four (24) days out
of the thirty (30) days prescribed under Sections 7 and 11 of Republic Act No.
1126, the instant petition for review was filed
seasonably with this Court”.
Being a valid request for
reconsideration, the letter of 23 September 1969 suspended the running of the
period for the perfection of an appeal.
As stated in Section 11 of Rep. Act no. 1125, the period for the
perfection of an appeal to the Court of Tax Appeals is thirty (30) days from
receipt of an adverse decision
or ruling of the Commissioner of
Internal Revenue, Collector of Customs or any provincial or city Board of
Assessment Appeals. In the instant case,
the appealable decision is the letter of the petitioner dated 8 August 1969. The
respondent corporation received this letter on 23 September 1969, and, on 9 October 1969, or after the lapse of sixteen (16) days,
the corporation filed the written request for reconsideration, also dated 23
September 1969. Since the time during which a motion for new
trial or reconsideration has been pending, is deducted from the period for
perfecting an appeal, the period to appeal began to run again on 18
February 1970, when
the respondent corporation received a copy of the Final Notice Before Seizure, dated 20 November 1969. From
18 February 1970 to 26 February 1970, when the respondent corporation filed its
petition for review with the Court of Tax Appeals, only eight (8) days had elapsed.
Tacking these eight (8) days to the sixteen (16) days previously used,
only twenty-four (24) days, out of the thirty (30) days period, had been
consumed. The appeal was, therefore, timely filed.
As to the second issue –
The basis of respondent corporation’s deficiency income and advance
sales taxes for 1962 and 1963 was held by petitioner to be the overdeclaration of its re-exportation of finished
embroidered goods, computed as follows:
(a)
Overdeclared
exportations in 1962 – 657,076.66 yds.
(b) Overdeclared exportations in 1963 – 227,140.76 yds.
(c)
Unsupported exportations in 1963 – 494,223.40 yds.
TOTAL DISCREPANCY – – – – – – – 1,378,440.82 yds.[10]
This discrepancy was
arrived at by the petitioner after an inspection of the boxes in which
the finished goods were packed and
concluding through
“mathematical computations” that it was impossible for respondent
corporation to re-export back in said boxes the total number of pieces it
claims to have manufactured.
In disposing of petitioner’s contention, respondent Court
held:
“By alleging that he employed mathematical computations in
ascertaining the quantity of finished products actually manufactured and exported
by petitioner, respondent concedes at least that his assessments were based on
mere inferences and presumptions. Likewise, by stating that it was physically
impossible for such number of cartons with such volume capacity to contain such
exportation, or for petitioner to have manufactured and exported such finished
garments, respondent admits that his assessments were not based on actual
facts but merely on approximations and calculations. And [in averring] that the raw material
discrepancies in yards, [were] arrived at by mere inferences and presumptions,
[and] subsequently became the basis of the assessments for advance sales tax
and for income tax, respondent failed to indicate his nebulous position how the
advance sales tax or the undeclared income from sales of embroidery textile
materials in pesos and centavos were arrived at. Moreover, since fraud is imputed to petitioner,
fraudulent intent was deduced from surmises and conjectures, unsupported by
clear and [convincing] proof to this effect.”
“An assessment fixes and determines the liability of a
taxpayer. As soon as it is served, an
obligation arises on the part of the taxpayer concerned to pay the amount assessed
and demanded. Hence, assessment should
not be based on mere presumptions no matter how reasonable or logical said
presumptions may be. The assessment must be based on actual
facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another
presumption. (Collector
of Internal Revenue vs. Benipayo L-13656, January 31, 1962, 4
SCRA 182). x x x x” Likewise,
it is already a well established doctrine that fraud cannot
be presumed but must be proven. (Aznar vs. Court of Tax Appeals, L- 20569, August 23, 1974, 58 SCRA 519).
“Assuming that it was physically impossible for the 636 cartons with a
total volume of only 2,200 cubic feet to contain exportation of 37, 973.33
dozens of finished garments, the same does not give rise to the inference, even
by mathematical computation, that with the use of said 636 cartons, petitioner
has actually manufactured and exported not more than 6,925 dozens of imported
textiles, consuming not more than 160,367.44 yards of imported fabrics.
Likewise, granting that it was physically impossible for petitioner to
have manufactured and exported 13,564.73 dozens of finished garments,
using 313,576 yards of imported fabrics and packed them in only 260 cartons
with a total volume of only 985 cubic feet, the same does not give rise to the
presumption that the 260 cartons could have accommodated not more than 2,573.1
dozens of finished garments requiring not more than 86,435.25 yards of imported
fabrics and resulting in a discrepancy of 227,140.75 yards of imported
textiles, which is the difference between 313,576 yards, and 86,435. – 35 yards. And based
on these presumptions and inferences, the same will not bring forth the
conclusion that the Government was cheated and defrauded of advance sales tax
and income tax in the sums of P291,402.01 and
P335,787.93, respectively, because
petitioner channelled to the local markets the
discrepancy in yards between what was declared
for export and what was presumed to be actually exported as finished products.
“Of importance here is
the kind and nature of the garments manufactured and exported by petitioner. They consists, among others, of ladies
blouses, ladies pajamas, children’s dresses, men’s and boy’s polo shirts and neglegee, of different sizes and, of course, consuming per
piece varying number of yards of imported textiles. And by their very nature, these clothing
apparels are generally flimsy and can be compressed. The fact that a dozen of the same or similar
finished garments consumes so much
number of yards of imported textiles and occupies a certain volume of space in
a carton does not therefore provide a sufficient inference that a dozen of
other or different kind or kinds
of finished apparels also consumes the same number of yards of imported textiles and occupies the same
volume of space inside the same carton.
“At any rate, it
bears emphasis that the import
entries covering the importations of textiles of petitioner in 1962 and 1963, the years in question, had already been completely and finally
liquidated. Petitioner was granted on February
8, 1962 by the Embroidery and
Apparel Control And Inspection Board authority to manufacture embroidery
apparels and garments for export
under Republic Act No. 3137. It made a total of 32 importations in 1962 and 54 importations in 1963 consisting
of 1,174,021 yards and 1,423,426.25 yards, respectively, of various textile
materials. For these importations, surety
bonds were filed by various surety firms in the total amounts of P2,020,563.00 for 1962 and P3,981,008.00 for 1963 to guarantee
their exportations. (Exhs. “A” & “B”, pp. 134-136
and 137-138 CTA, Records; pp. 389-392, BIR Records) Subsequently,
the warehousing entries covering said importations were finally and fully liquidated and cancelled.
“In the absence of any showing to the contrary,
and none has been presented by respondent there is no valid reason for this
Court not to believe that the imported textile materials were all manufactured
into embroidery apparels and garments and actually exported to the foreign
suppliers as proven by the following evidence presented by petitioner”.
We find respondent
Court’s reasoning to be well-taken. As
held in Collector of Internal Revenue vs. Benipayo[11]:
“An assessment fixes and determines the tax liability of a
taxpayer. As soon as it is served, an
obligation arises on the part of the tax paper concerned to pay the amount assesed and demanded.
Hence, assessments should not be based on mere presumptions no matter
how reasonable or logical said presumptions may be x x
x“.
“In order to stand the
test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment
being a mere presumption cannot be made to rest on another presumption x x x“.
WHEREFORE, the petition is dismissed.
The decision appealed
from is hereby affirmed. No costs.
SO ORDERED.
Yap, (Chairman), Melencio-Herrera, Paras, and Sarmiento, JJ., concur.
* Penned by Judge Amante Filler, with the concurrence of Judge Constante C. Roaquin
[1]
Rep. Act No. 3137 (1961), “An Act
Creating an Embroidery and Apparel Control and Inspection Board Covering
Control, Issuance of Embroidery Permits, and Inspection of Conditionally
Tax-Free Raw Material Importations By Local Embroidery Apparel Manufacturers
and the Corresponding Liquidation of Re-Exportations thereof as
Philippine-Made Embroideries and Apparels”.
[2]
Rollo, p. 10
[3]
Id. pp. 47, 48
[4]
Id., pp. 50, 52
[5]
Id., p. 61
[6] Id., p. 65
[7]
Id., p. 67
[8]
Id., p. 75
[9]
Id., p. 65
[10]
Rollo, p. 23
[11]
G.R. No. L-13656, 31 January 1962, 4 SCRA 182, 185