The Supreme Court clarified the application of forum shopping rules in tax cases. It held that while the Commissioner of Internal Revenue (CIR) was indeed guilty of forum shopping by filing two petitions before the Court of Tax Appeals (CTA) En Banc involving the same issues, dismissing both petitions was too harsh. The Court emphasized that the CIR should still have the opportunity to seek redress from an unfavorable judgment, and thus, only one of the petitions should have been dismissed. This ruling ensures a balance between preventing abuse of court processes and upholding the right to appeal.

Navigating Tax Assessments: When Multiple Appeals Lead to Forum Shopping

This case, Commissioner of Internal Revenue v. Norkis Trading Company, Inc., arose from a deficiency income tax assessment issued by the CIR against Norkis Trading Company, Inc. (Norkis) for the taxable year ending June 30, 2007. The assessment amounted to P285,927,070.68, inclusive of interest and penalties. Norkis contested this assessment by filing a judicial protest before the CTA, leading to CTA Case No. 8862. The CTA Division ruled in favor of Norkis, canceling the assessment. The Division cited two main reasons: first, the CIR failed to prove that Norkis entered into an Indemnity Agreement with Yamaha Motors Co. Ltd. (Yamaha), and second, the assessment was issued beyond the three-year prescriptive period.

The CIR, dissatisfied with the CTA Division’s decision, filed a Motion for Reconsideration, followed by a Supplemental Motion for Reconsideration seeking to introduce additional documents. The CTA Division denied both motions. Undeterred, the CIR filed a Petition for Review Ad Cautelam before the CTA En Banc, docketed as CTA EB No. 1766, challenging the Main Decision and the denial of its motions. Subsequently, the CIR filed another Petition for Review, docketed as CTA EB Case No. 1845, seeking the same relief. The CTA En Banc consolidated the two cases but ultimately dismissed both petitions on the ground of litis pendentia, concluding that the CIR had engaged in forum shopping.

The Supreme Court’s analysis hinged on the principle of forum shopping, which occurs when a party files multiple cases based on the same cause of action and with the same prayer, while a previous case remains unresolved. The Court agreed with the CTA En Banc that the CIR’s actions constituted forum shopping because both petitions sought the same relief: reversal of the CTA Division’s decision canceling the assessment. The Court emphasized that the petitions shared identical causes of action and subject matter, as both stemmed from the same assessment and sought to overturn the same CTA Division ruling. Thus, a favorable judgment in either case would effectively result in res judicata in the other.

The requisites of litis pendentia are: (a) identity of parties, or at least such as representing the same interests in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c) identity in the two preceding particulars such that any judgment which may be rendered on the other action will, regardless of which party is successful, amount to res judicata in the action under consideration.

The Court cited Lajave Agricultural Management and Development Enterprises, Inc. v. Spouses Javellana, G.R. No. 223785, November 7, 2018; Zamora v. Quinan, et al., 821 Phil. 1009 (2017).

However, the Supreme Court found that dismissing both petitions was an overly harsh penalty. While the CIR was indeed guilty of forum shopping, the Court reasoned that the CIR should still be afforded an opportunity to seek redress. The Court distinguished between the act of forum shopping and the right to appeal, asserting that the law should not completely bar a party from seeking a remedy for an unfavorable judgment. The Court noted that only one of the pending actions should be dismissed, as the second action becomes unnecessary and vexatious.

The Court took litis pendentia literally to mean “a pending suit.” It may be invoked to dismiss another pending action between the same parties involving the same cause of action because “the second action becomes unnecessary and vexatious.” The dismissal of any one of the two pending actions would logically lead to the cessation of litis pendentia. When the parties finally confine themselves to one suit in litigating similar issues between them, the former evil caused by a multiplicity of suits ceases to exist.

The Supreme Court underscored the principle that while multiple appeals are prohibited, the right to seek redress from an unfavorable judgment remains. As such, the Court directed the CTA En Banc to reinstate the petition in CTA En Banc No. 1766 and proceed with the case, while affirming the dismissal of the petition in CTA En Banc No. 1845. This decision clarifies the appropriate remedy in cases of forum shopping involving tax appeals, balancing the need to prevent abuse of court processes with the right to seek judicial review.

FAQs

What is forum shopping?	Forum shopping occurs when a party files multiple cases based on the same cause of action and with the same prayer, hoping to obtain a favorable outcome in one of the courts. It is considered an abuse of court processes and is generally prohibited.
What is litis pendentia?	Litis pendentia means a pending suit. It is invoked to dismiss another pending action between the same parties for the same cause. This prevents unnecessary and vexatious litigation.
Why did the CTA En Banc dismiss both petitions?	The CTA En Banc dismissed both petitions because it found that the CIR was engaged in forum shopping. The two petitions involved the same parties, rights, and reliefs, with any resolution in one amounting to res judicata in the other.
What was the Supreme Court’s ruling on the dismissal of both petitions?	The Supreme Court agreed that the CIR was guilty of forum shopping, but it deemed dismissing both petitions too harsh. It ruled that the CIR should still have the opportunity to seek redress, so only one petition should have been dismissed.
Which petition did the Supreme Court order to be reinstated?	The Supreme Court directed the CTA En Banc to reinstate the petition in CTA En Banc No. 1766 and proceed with the case. The dismissal of the petition in CTA En Banc No. 1845 was affirmed.
What was the basis for the tax assessment against Norkis?	The tax assessment against Norkis was for alleged deficiency income taxes amounting to P285,927,070.68, inclusive of interest and penalties, for the taxable year ending June 30, 2007. The CIR claimed Norkis had underdeclared its gross sales.
What was the CTA Division’s reason for canceling the assessment?	The CTA Division canceled the assessment because the CIR failed to prove that Norkis entered into an Indemnity Agreement with Yamaha and because the assessment was issued beyond the three-year prescriptive period.
What did the CIR try to introduce in its Supplemental Motion for Reconsideration?	The CIR sought to introduce copies of an agreement between Norkis and Yamaha, as well as a letter from the National Tax Agency of Japan, as prima facie evidence of an Indemnity Agreement.

This case provides essential guidance on the application of forum shopping rules in tax litigation. It underscores the importance of preventing abuse of court processes while safeguarding a party’s right to seek judicial review of adverse decisions. The Supreme Court’s decision ensures that taxpayers and the CIR are afforded a fair opportunity to litigate tax disputes within the bounds of established legal principles.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: COMMISSIONER OF INTERNAL REVENUE, VS. NORKIS TRADING COMPANY, INC., G.R. Nos. 251306-07, June 16, 2021