REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

QUEZON CITY

FIRST DIVISION
*************

VAN MELLE (PHILS.), INC., C.T.A. CASE NO. 7018

Petitioner,
Members:

- versus - ACOSTA, Chairperson

BAUTISTA, and
CASANOVA, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENUE,
Respondent. APR 2 5 ?.008 ;LJ:~PM
X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

DECISION

BAUTISTA, J.:

The instant Petition for Review seeks the cancellation of an assessment for

deficiency income tax in the amount of P9,264,593 .29 issued for taxable year 1997.

The following pertinent facts are culled from the records :

Van Melle (Phils.) Inc. (petitioner) is a domestic corporation duly organized

and existing under Philippine laws and registered with the Securities and Exchange

Commission (SEC).

Commissioner of Internal Revenue (respondent) is the officer of the Bureau of

Internal Revenue (BIR) duly appointed and empowered to perform the duties of his

office, including, among others, the power to compromise, cancel, and abate tax
DECISION
C.T.A. CASE NO. 701 8
Page 2 of 9

liabilities pursuant to Section 204(B) of the National Internal Revenue Code (NIRC)

of 1997, as amended.

Sometime in 1998, a certain Mario A. Carandang provided information to the

Tax Fraud Division of the BIR that petitioner had fraudulently claimed a deduction of

approximately P15,000,000.00 from its taxable income in its Annual Income Tax

Return for 1997. 1 After verifying the information provided by Mr. Carandang,

respondent issued a Letter of Authority against petitioner on December 3, 1999. 2

On November 4, 2003, petitioner received from respondent a Final

Assessment Notice (FAN) dated October 1, 2003 3 , covering the taxable year 1997,

which states that petitioner had deficiency income tax due to the government in the

total amount of P9,264,593.29, 4 inclusive of surcharge, interest, and compromise

penalty, computed as follows:

Di sallowance Deducti on: In ve ntory Write-O ff

(27,355 cartons of Mentos Pillowpacks 6x300) $ 389,535.20
Existin g Forex Rate in 1996 p 26 .22
Tota l amount in Php p 10,2 13,6 12.94
Income Tax Rate 35 %
Basic Income Tax Defi ciency p 3,574, 762 .69
Add: Surcharge (50%) 1,787,38 1.34
Interest at 20% p.a. 3,902,449.26
TOTAL Income Tax Deficiency p 9,264,593.29

In arriving at the income tax deficiency, respondent's position was that

petitioner erroneously deducted the amount of $389,535.20, or an equivalent of

P10,213,612.94 from its taxable income for the year 1997. 5

On December 4, 2003, petitioner, through its external auditor, filed with BIR

Tax Fraud Division its Protest Letter dated December 4, 2003 which specified its

1
BIR Records, pages 41 -4 5
2
BIR Records, page 60
3
Exhibits "A-1", Docket, page 209
4
Paragraph 1.3, Joint Stipulation of Facts and Issues (JSFI), Docket, pages 166-167
5
Paragraph 1.5, JSFI, Docket, page 167
DECISION
C.T.A. CASE NO. 7018
Page 3 of 9

factual and legal bases and requested that the deficiency tax assessments be

withdrawn and cancelled.

As of June 1, 2004, the BIR had not issued any official action with respect to

the Protest Letter.6 Hence, the instant Petition for Review was filed on July 1, 2004.

In her Answer, respondent alleged the following Special and Affirmative

Defenses: 7

" 4.) The assessment has become final and executory. Petitioner filed
a protest on 4 December 2003. Accordingly, under Section 228
of the NIRC, it had 60 days, or until 2 February 2004 to submit
supporting documents on its protest. Nonetheless, consistent
with petitioner's behavior during the investigation of the case,
no document was submitted in support of the protest. In the
absence of said documents, supporting the protest, said protest
is considered pro-forma, and is worth no more than a scrap of
paper. Thus, it is as if no protest was filed and the assessment
lapsed into finality.

5.) Since the assessment is already final, there is no relief available

to the petitioner from this Honorable Court.

6.) The nature of the falsity of the return of the taxpayer smacks of
fraud . As found by the examiners, petitioner deducted from its
1997 revenues an inventory obsolescence account pertaining to
goods which no longer belong to it. The entire assessment is
premised on petitioner's wrongful change to the expense
account of goods belonging to Van Melle Confectionery
(Schenzhen) China Ltd . By the very nature of said finding, a
design to deceive or mislead on the part of the taxpayer is
apparent.

7.) Thus, the imposition of the surcharge is justified by the finding

of fraud. Likewise, no defense for prescription can be setup as
the assessment was clearly made within 10 years from the
discovery of the falsity of the return .

8.) A circumstance indicative of fraudulent intent on the part of

petitioner was its obstinate refusal to submit any document for
examination for taxable year 1997 during the investigation of
the case. Moreover, even after petitioner had filed its protest, it
6
Paragraph 1.9, JSFI, Docket, page 167
7
Answer, Docket, pages 139-140
DECISION
C.T.A. CASE NO. 7018
Page 4 of 9

still clings on to its determination to bar examination by its

failure to submit documents in support of its allegations in the
protest.

9.) The submissions of petitioner do not prove anything . Petitioner

cannot refute the assessment by mere denials. Destruction of
certain inventories cannot prove that petitioner did not write-off
the 27,355 cartons of Mentos Pillowpack 6 x 300 candies.

10.) Petitioner itself admitted that a 100% allowance for inventory

obsolescence was provided for on the inventory at year-end of
1997 (par. 33 of petition) .

11.) Moreover, it is presumed that tax assessments are correctly and

legally made. The burden of assailing the same rests on the
party alleging irregularity. Absent such showing, the assessment
might be upheld."

During trial, petitioner presented its documentary and testimonial evidence in

support of its stand. The Court, however, declared respondent to have waived her

right to present evidence considering her failure to do so despite the numerous

opportunities she was given .8 Upon termination of the trial, both parties were

ordered to submit their respective Memorandum. Only respondent filed her

Memorandum on October 30, 2007. 9 Thus, the case was submitted for decision on

November 28, 2007 without petitioner's Memorandum.

The following issues 10 were submitted by both parties for this Court's

resolution:

"2.1 Whether or not the assessment has already become final and
executory;

2.2 Whether or not the assessment was issued within the prescriptive
period provided for under the Tax Code;

• Docket, page 326

9
Docket, pages 347-357
10
Statement of the Issues, JSFI, Docket, page 168
DECISION
C.T.A. CASE NO. 70 18
Page 5 of 9

2.3 Whether or not the SIR had proven the factual basis for its finding
of fraud on the part of the petitioner to justify its resort to the
remedy available to it under Section 222 of the Tax Code;

2.4 Whether or not the SIR had proven the factual basis for its finding
of fraud on the part of the petitioner to justify the imposition of
the 50% surcharge;

2.5 Whether or not petitioner had, during the taxable year 1997,
written-off 27,355 cartons of Mentes Pillowpack 6x300 candies, as
identified by the SIR, amounting to US$389,535.20 or the
equivalent of P10,213,612.94;

2.6 Whether or not petitioner was the owner of the 27,355 cartons of
Mentes Pillowpack 6x300 candies, as identified by the SIR, at the
time it expired and became stale on 22 August 1997; and

2.7 Whether or not the said 27,355 cartons of Mentes Pillowpack

6x300 candies, as identified by the SIR, formed part of
petitioner's beginning inventory for the taxable year 1998. "

We shall first discuss the issues involving the prescription of the assessment.

Respondent contends that the applicable period of assessment is ten (10)

years due to petitioner's fraudulent return. Respondent alleges that petitioner

erroneously deducted its sales of 27,355 cartons of Mentos Pillowpacks 6x300

(Mentes) to Van Melle Confectionery (Shenzen) China/ Ltd (VMSC) from gross

income as an inventory write-off or provisions for inventory obsolescence. According

to respondent, such deduction renders the return fraudulent because legal title to

the cartons of Mentes had already transferred to VMSC by virtue of the sale. In

order to bolster its allegation of inventory write-off or fraud, respondent also went to

prove that the cartons of Mentes were not transported to VMSC as it remained in

petitioner's warehouse until August 22, 1997, or up to the time of its expiration . In

other words, respondent contends that though petitioner is no longer the owner of

the cartons of Mentes, the latter nevertheless destroyed the same as if it were its

~~
DECISION
C.T.A. CASE NO. 70 18
Page 6 of 9

own and claimed the destruction thereof as deduction for inventory write-off. In

proving that a sales agreement existed, respondent's examiners based the

assessment on the following documents:

1. Inter-office memos
2. Fax Message Memos
3. Reprocessing Computations
4. Comparative Cost Analysis
5. Facsimile Transmission
6. Inter-company payments
7. Commercial Invoice No. 00063
8. Inter-company Debit Memo
9. Inter-company balance reconciliation
10. Inter-company deliveries reconciliation
11. Regional Headquarters Memos

Respondent's argument has no merit.

Section 203 of the NIRC of 1997, as amended provides for the general rule

on the period of limitation to assess, as follows:

"Section 203. Period of Limitation Upon Assessment and

Collection. - Except as provided in Section 222, internal 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: Provide~ That in a 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."

However, Section 222(a) of the NIRC of 1997, as amended provides for the

instances when such period of limitation to assess is extended to ten ( 10) years, as

follows:

"Section 222. Exceptions as to Period of Limitation of

Assessment and Collection of Taxes. -

(a) In the case of a false or fraudulent return with intent to

evade tax or of failure to file a return, the tax may be assessed,
or a proceeding in court for the collection of such tax may be
DECISION
C.T.A. CASE NO. 70 18
Page 7 of 9

filed without assessment, at any time within ten (10) years

after the discovery of the falsity, fraud or omission: Provided,
That in a fraud assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof." (Emphasis supplied)

Fraud, in its general sense, " is deemed to comprise anything calculated to

deceive, including all acts, omissions, and concealment involving a breach of legal or

equitable duty, trust or confidence justly reposed, resulting in the damage to

another, or by which an undue and unconscionable advantage is taken of another. 11

For purposes of determining fraud in the filing of a tax return, the fraud

contemplated by law must be actual and not constructive., It must be intentional

fraud, consisting of deception willfully and deliberately done or resorted to in order

to induce another to give up some legal right. 12

After carefully sifting through the records of the case, the Court finds no trace

of fraud in the filing of petitioner's return. At the outset, it must be pointed out that

petitioner owns the subject cartons of Mentos. While the sale between petitioner and

VMSC cannot be denied, some of the documents (fax message memos 13 ) on which

respondent's examiners based their assessment also indicated that the same sale

was rescinded by VMSC; as VMSC had already written off these stocks and decided

not to have them shipped to it anymore. In fact, VMSC questioned the warehousing

fees being charged against it by petitioner for "safekeeping" the subject stocks

despite being "written off" by VMSC 14 ; confirming the said rescission. Rescission

creates the obligation to return the things which were the object of the contract,

11
Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr., G.R. No. 147188, September 14, 2004
12
Jose B. Aznar vs. Court of Tax Appeals, eta!., G.R. No . L-20569, August 23, 1974
13
BIR Records, pages 299 and 296
14
BIR Records, page 296
DECISI ON
C.T. A. CASE NO. 7018
Page 8 of 9

together with their fruits, and the price with its interest. 15 Due to the rescission, the

legal title over the said cartons of Mentos belonged to petitioner.

Though petitioner, as owner, could have the cartons of Mentos destroyed due

to expiration, it did not do so. Instead, petitioner considered the option of

reprocessing these Mentos in order to recover the costs.16 Equally noteworthy is the

fact that a scrutiny of the BIR Certificates of Destruction 17 which lists the candies

and package materials that were destroyed reveals that the subject cartons of

Mentos were not included in that list. Hence, petitioner did not deduct the cartons of

Mentos from its gross income as an inventory write-off.

All these circumstances prove that the preparation of the return was not

attended by fraud. Besides, even if the mere deduction would be considered as

erroneous, that per se cannot considered as fraudulent. There must be intent to

evade payment of income tax which respondent failed to prove. The documents

relied upon by respondent's examiners for the assessment also led to their downfall.

Fraud is a question of fact which must be alleged and proved. It is a serious charge

and, to be sustained, it must be supported by clear and convincing proof. 18

There being no fraud, the applicable period of limitation to assess is three (3)

years from the filing of the return as provided in Section 203 of the NIRC of 1997, as

amended . Since the Annual Income Tax Return for 1997 was filed on March 31,

1998, respondent had until March 30, 2001 to assess petitioner. Unfortunately, the

15
16
17
18
Article 1385, New Civil Code
BIR Records, page 295
Exhibits "G", " H" and " I ", Docket, pages 243-290
Republic of the Philippines vs. Ker & Company, Ltd., G.R. No, L-21609. September 29, 1966
I
DECISION
C.T.A. CASE NO. 7018
Page 9 of 9

Final Assessment Notice 19 and Formal Letter of Demand 20 were only issued on

October 1, 2003, beyond the three-year period to assess.

Considering that the assessment had already prescribed, the Court sees no

reason to discuss the rest of the issues relative to the validity of the assessment.

IN VIEW OF THE FOREGOING, the assessment for deficiency income tax

in the amount of P9,264,593.29 for taxable year 1997 is hereby CANCELLED and

WITHDRAWN for having been issued beyond the three-year period to assess.

SO ORDERED.

WE CONCUR:

~ ~- ~. ~
ERNESTO D. ACOSTA
Presiding Justice

CAESAR A. CASANOVA
Associate Justice

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified

that the conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court's Division.

0 - ~. ~
ERNESTO D. ACOSTA
Presiding Justice
Chairperson , First Division

19
Exhibits "A" and "A-1", Docket, pages 208-209
20
Exhibit " B", Docket, pages 210-213