Level Up v. Commissioner of Internal Revenue
REITERATIONFacts
1. The Antecedents: Petitioner Level Up, Inc. (Level Up) received a Letter of Authority on May 14, 2014, authorizing the Bureau of Internal Revenue (BIR) to examine its books for Value-Added Tax (VAT) for the taxable period of January 1, 2013, to June 30, 2013. On November 5, 2015, the Commissioner of Internal Revenue (CIR) issued a Preliminary Assessment Notice (PAN) for deficiency VAT, which Level Up received on November 10, 2015. The PAN cited undeclared receipts based on third-party information (Summary List of Purchases or SLP from Uniwiz Trade Sales, Inc., Power House Distribution, and Veritas Systems Solutions, Inc.) and unsupported input taxes not compliant with Section 113 of the National Internal Revenue Code (NIRC). Level Up responded to the PAN on December 17, 2015, arguing that the undeclared receipts pertained to services rendered by Playweb Games, Inc. (Playweb), and that customers erroneously used Level Up's Tax Identification Number (TIN) instead of Playweb's. Level Up submitted an affidavit from Playweb's Finance Department head and a certification from Uniwiz's accountant to support its claim of clerical error. 2. Procedural History: On December 16, 2015, BIR Makati issued a Formal Assessment Notice (FAN) finding Level Up liable for deficiency VAT, with details substantially identical to the PAN. Level Up filed an administrative protest via a request for reinvestigation, which BIR Makati granted, directing Level Up to submit additional documents. Level Up submitted additional evidence on March 15, 2016. On July 12, 2016, the CIR issued a Final Decision on Disputed Assessment (FDDA) denying Level Up's protest, finding it liable for deficiency VAT. Level Up then filed a Petition for Review with the Court of Tax Appeals (CTA) Special Second Division (CTA Division), which found Level Up liable for PHP 23,473,511.49, inclusive of surcharges and interests. The CTA Division denied Level Up's motion for reconsideration on April 16, 2019. Level Up elevated the case to the CTA En Banc, arguing a deprivation of due process, citing Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc., and reiterating its defenses. The CTA En Banc affirmed the CTA Division's findings on January 6, 2021, ruling that Level Up was not deprived of due process as it had the opportunity to be heard and its evidence was considered in the FDDA, and noting Level Up's belated reply to the PAN. The CTA En Banc denied Level Up's motion for reconsideration on February 21, 2024. 3. The Petition: Level Up filed the present Petition for Review on Certiorari under Rule 45 of the Rules of Court before the Supreme Court. It insisted that it was denied due process, arguing that the FAN being an exact copy of the PAN proved BIR Makati did not consider its evidence, and that the FDDA could not cure a void FAN. Level Up further contended it was not liable for the undeclared receipts, asserting they pertained to Playweb's transactions, and that its Summary Lists of Purchases (SLPs) sufficiently supported its claimed input taxes. The CIR, through the Office of the Solicitor General, countered that Level Up was not deprived of due process because it failed to timely file its Reply to the PAN within the 15-day reglementary period under Section 3.1.2 of Revenue Regulations No. 12-99. The CIR argued that Avon Products was inapplicable as Level Up's arguments and evidence were duly considered in the FDDA, and that Level Up failed to establish that the undeclared receipts belonged to Playweb or that SLPs were adequate proof for input tax credits.
Issue(s)
Whether the CIR, in issuing the assessment, violated Level Up's right to due process. Whether the CTA En Banc erred in finding Level Up liable for deficiency VAT arising from undeclared receipts. Whether the CTA En Banc erred in finding Level Up liable for deficiency VAT arising from unsupported input tax.
Ruling
The Petition for Review on Certiorari is DENIED. The Decision dated January 6, 2021, and the Resolution dated February 21, 2024, of the Court of Tax Appeals En Banc in CTA EB Nos. 2069 and 2070 are AFFIRMED.
Ratio Decidendi
On Issue 1 (Due Process): The Court held that Level Up's right to due process was not violated. The essence of due process in administrative proceedings is the opportunity to be heard, which was fully granted to Level Up. While the Formal Assessment Notice (FAN) was identical to the Preliminary Assessment Notice (PAN), this was a direct consequence of Level Up's failure to file its Reply to the PAN within the mandatory 15-day period prescribed by Section 3.1.2 of Revenue Regulations No. 12-99, rendering it in default. The BIR could not have reviewed evidence that had not yet been submitted when the FAN was prepared. Crucially, Level Up was subsequently afforded the opportunity to protest the FAN through a request for reinvestigation, submitted additional evidence, and these were duly considered and discussed in the Final Decision on Disputed Assessment (FDDA), thereby distinguishing this case from Commissioner of Internal Revenue v. Avon Products Manufacturing, Inc., where the taxpayer's evidence was disregarded at all stages. On Issue 2 (Deficiency VAT Liability - Undeclared Receipts): The Court affirmed Level Up's liability for deficiency Value-Added Tax (VAT) arising from undeclared receipts. Level Up failed to discharge its burden of proving that the assessment was erroneous or invalid. The factual findings of the Court of Tax Appeals (CTA), which the Supreme Court accords high respect, indicated that Level Up did not sufficiently demonstrate that the discrepancies noted by the tax authorities pertained to Playweb Games, Inc.'s (Playweb) transactions and not its own. Specifically, the aggregate amount of Playweb's invoices submitted by Level Up did not tally with the purchases reported by the customer in its Summary List of Purchases (SLP). Tax assessments are prima facie valid and lawful, and Level Up did not present substantial evidence to overcome this presumption. On Issue 3 (Deficiency VAT Liability - Unsupported Input Tax): The Court upheld the disallowance of input taxes claimed by Level Up. Input taxes may only be allowed as credits against output taxes if they are supported by VAT invoices or official receipts issued in strict accordance with Section 110(A)(1) and Section 113 of the National Internal Revenue Code (NIRC), as further clarified by Section 4.113-1 of Revenue Regulations No. 16-05. Summary Lists of Purchases (SLPs) alone are not regarded as sufficient substantiation for input tax credits, as they merely provide a summary and do not dispense with the need for proper VAT invoices or official receipts. Level Up failed to provide adequate proof in the form of appropriate VAT invoices or official receipts to substantiate its claimed input tax credits, thus the Commissioner of Internal Revenue (CIR) was correct in disallowing them.
Main Doctrine
The primary legal doctrine established or applied by this case is the strict adherence to due process requirements in tax assessments, particularly the mandatory reglementary periods for taxpayers to respond to a Preliminary Assessment Notice (PAN) under Revenue Regulations No. 12-99. The Court emphasized that a taxpayer's failure to timely respond to a PAN, leading to a Formal Assessment Notice (FAN) that mirrors the PAN, does not constitute a due process violation if the taxpayer is subsequently given an opportunity to be heard and submit evidence, which is then considered in the Final Decision on Disputed Assessment (FDDA). Furthermore, the case reiterates that tax assessments are prima facie valid and that the burden of proof lies with the taxpayer to demonstrate the assessment's error, especially regarding the strict substantiation requirements for input tax credits, which necessitate proper Value-Added Tax (VAT) invoices or official receipts, not merely Summary Lists of Purchases (SLPs).