G.R. No. 197515 , July 2, 2014.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. UNITED SALVAGE AND TOWAGE (PHILS.), INC., Respondent.

FACTS

Respondent United Salvage and Towage (Phils.), Inc. (USTP) is engaged in sub-contracting work for petroleum service contractors. The Commissioner of Internal Revenue (CIR) assessed USTP for deficiency taxes, including Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC), for taxable years 1992, 1994, and 1998. USTP filed administrative protests against the 1994 and 1998 EWT assessments and later appealed to the Court of Tax Appeals (CTA). During proceedings, USTP availed of the Tax Amnesty Program under R.A. No. 9480 , leading the CTA-Special First Division to close issues on income tax, VAT, and DST, leaving only the EWT and WTC deficiencies for 1992, 1994, and 1998. The CTA-Special First Division found the Preliminary Assessment Notices (PANs) for 1994 and 1998 EWT were not formally offered as evidence and thus could not be considered. It also held the Final Assessment Notices (FANs) for 1994 and 1998 EWT void for failing to state the facts and legal basis as required by Section 228 of the 1997 Tax Code. It upheld the 1992 assessments but ruled the government’s right to collect had prescribed under Section 203 of the Tax Code. The CTA En Banc affirmed with modification, upholding the 1998 EWT assessment. The CIR appealed to the Supreme Court.

ISSUE

1. Whether the Court of Tax Appeals is strictly governed by technical rules of evidence.
2. Whether the Expanded Withholding Tax assessment for taxable year 1994 was without factual and legal basis.
3. Whether the CIR’s right to collect the withholding taxes for taxable year 1992 has prescribed.

RULING

1. The CTA is not strictly governed by technical rules of evidence, but the general rule requiring formal offer of evidence under Section 34, Rule 132 of the Revised Rules of Court applies. Exceptions allow evidence not formally offered to be admitted if duly identified by testimony recorded and incorporated in the case records. Here, the CIR failed to formally offer the PANs for the 1994 and 1998 EWT assessments and did not meet the exception requirements, as the PANs were not duly identified by testimony or incorporated into the records. Thus, the CTA correctly disregarded them.
2. The 1994 EWT assessment is void. The FAN for 1994 EWT did not comply with Section 228 of the 1997 Tax Code and Revenue Regulations No. 12-99, as it failed to state the facts and legal basis for the assessment. A void assessment cannot be validated by mere testimony or reference to audit documents. Therefore, the assessment lacked factual and legal basis.
3. The right to collect the deficiency EWT and WTC for 1992 has prescribed. The assessments were issued on January 9, 1996. Under Section 203 of the 1997 Tax Code, the government has three years from the last day prescribed by law for filing the return (April 15, 1993, for 1992) to assess. The three-year period ended on April 15, 1996. The warrants of distraint and levy were served only on February 10, 1999, beyond the three-year period. Since the assessment was not made within the prescriptive period, the right to collect prescribed.