The Supreme Court in Protector’s Services, Inc. vs. Court of Appeals underscored the importance of adhering to prescribed timelines for tax protests. The ruling emphasizes that failure to file a protest within the statutory period renders an assessment final and unappealable. Further, the Court clarified that gross receipts, for the purpose of computing contractor’s tax, include all amounts received, irrespective of whether portions are allocated for specific expenses such as employee salaries and benefits.

Timely Protests or Taxing Consequences: Understanding Assessment Finality

This case revolves around Protector’s Services, Inc. (PSI), a security agency, contesting deficiency percentage tax assessments made by the Commissioner of Internal Revenue (CIR) for the years 1983, 1984, and 1985. The core legal question is whether PSI validly protested the assessments within the prescribed period, and whether the CIR correctly computed the tax base by including employee salaries and benefits in PSI’s gross receipts. The resolution of this case hinged on procedural compliance and the interpretation of ‘gross receipts’ under the tax code.

The factual backdrop involves the BIR’s audit investigation revealing tax deficiencies, leading to demand letters sent to PSI. While PSI acknowledged receiving notices for 1983 and 1984, it denied receiving the 1985 assessment. Critically, PSI’s initial protest was filed 33 days after receiving the assessment notices, exceeding the 30-day period stipulated under Section 270 of the National Internal Revenue Code of 1977 (NIRC 1977). This delay formed the basis for the Court of Tax Appeals (CTA) to dismiss PSI’s petition for lack of jurisdiction, a decision later affirmed by the Court of Appeals (CA) and eventually upheld by the Supreme Court.

The Supreme Court’s analysis commenced with the jurisdictional issue. It firmly stated that the 30-day period to protest an assessment is mandatory. The NIRC 1977, specifically Section 270, dictates the procedure for protesting assessments, stating:

“Section 270. Protesting of assessment. –When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by the implementing regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final, and unappealable.”

Building on this principle, the Court emphasized that PSI’s failure to lodge its protest within the stipulated timeframe rendered the assessments final and unappealable, thereby depriving the CTA of jurisdiction. The Court highlighted the significance of adhering to statutory deadlines in tax matters. This underscores the need for taxpayers to diligently monitor deadlines and act promptly upon receiving assessment notices.

Addressing the issue of prescription, PSI argued that the government’s right to assess and collect taxes for 1983, 1984, and 1985 had already lapsed. PSI relied on Batas Pambansa (BP) Blg. 700, which reduced the prescriptive period from five to three years. However, the Court clarified that BP 700 applied to assessments beginning taxable year 1984. Thus, the 1983 assessment remained subject to the original five-year prescriptive period. The Court’s interpretation aligns with the explicit provisions of BP 700 and the Revenue Memorandum Circular (RMC) No. 33-84, which provided guidelines on its application.

Furthermore, the Court clarified that the prescriptive period for assessing contractor’s tax commences upon the filing of the final annual percentage tax return, and not from the quarterly payments. This ruling is consistent with the principle that the final annual return provides a comprehensive overview of the taxpayer’s liability for the entire year. As the Court stated in Commission of Internal Revenue vs. Court of Appeals:

“…the three-year prescriptive period of tax assessment of contractor’s tax should be computed at the time of the filing of the “final annual percentage tax return,” when it can be finally ascertained if the taxpayer still has an unpaid tax, and not from the tentative quarterly payments.”

Moreover, the Court addressed PSI’s denial of receiving the 1985 assessment. The CTA found, based on documentary evidence and witness testimony, that the assessment was mailed via registered mail. Consequently, a presumption of receipt arose. The Supreme Court deferred to the factual findings of the CTA, recognizing that reviewing courts cannot re-examine the factual basis of administrative decisions supported by substantial evidence. The Court stated:

“In reviewing administrative decisions, the reviewing court cannot re-examine the factual basis and sufficiency of the evidence. The findings of fact must be respected, so long as they are supported by substantial evidence.”

Turning to the issue of tax collection, PSI argued that the CIR’s failure to initiate collection proceedings had caused the right to collect to prescribe. The Court, however, cited Section 271 of the 1986 Tax Code, which suspends the running of the statute of limitations during periods when the CIR is prohibited from initiating collection proceedings. PSI’s petition before the CTA, and subsequent appeal to the Supreme Court, effectively suspended the prescriptive period for collection. The Court cited Republic of the Philippines vs. Ker and Company, Ltd.:

“Under Section 333 (renumbered to 271 during the instant case) of the Tax Code the running of the prescriptive period to collect deficiency taxes shall be suspended for the period during which the Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in court, and for sixty days thereafter… Under the circumstances, the running of the prescriptive period was suspended.”

The final contention raised by PSI concerned the inclusion of security guard salaries and employer contributions to SSS, SIF, and Medicare in the computation of gross receipts. PSI argued that these amounts should be excluded, as they were earmarked for other parties. The Court dismissed this argument, emphasizing that the contractor’s tax is imposed on the gross receipts derived from the sale of services or labor. The term ‘gross receipts’ encompasses all amounts received, without any deduction for amounts paid to subcontractors or allocated for specific expenses.

The Court reinforced this point by citing BIR rulings consistently holding that security guard salaries are part of a security agency’s taxable gross receipts. This interpretation, according to the Court, commands respect. The Court reiterated:

“This Office has consistently ruled that salaries of security guards form part of the taxable gross receipts of a security agency for purposes of the 4% [formerly 3%] contractors tax under Section 205 of the Tax Code, as amended. The reason is that the salaries of the security guards are actually the liability of the agency and that the guards are considered their employees; hence, for percentage tax purposes, the salaries of the security guards are includible in its gross receipts.”

The Court also emphasized that gross receipts could not be diminished by employer’s SSS, SIF and Medicare contributions. The decision in Protector’s Services, Inc. vs. Court of Appeals provides critical guidance on tax assessment, protest procedures, and the definition of gross receipts, thereby shaping the administrative and judicial interpretation of tax laws in the Philippines.

FAQs

What was the key issue in this case?	The key issues were whether Protector’s Services, Inc. (PSI) filed its tax protest within the prescribed period and whether the Commissioner of Internal Revenue (CIR) correctly included employee salaries and benefits in PSI’s gross receipts for tax computation.
What is the prescriptive period for protesting a tax assessment?	Under Section 270 of the National Internal Revenue Code of 1977, a taxpayer has 30 days from receipt of the assessment to file a protest, otherwise the assessment becomes final and unappealable.
When does the prescriptive period for tax assessment begin?	The prescriptive period for assessing contractor’s tax begins at the time of filing the final annual percentage tax return, not from the quarterly payments.
What constitutes ‘gross receipts’ for contractor’s tax purposes?	‘Gross receipts’ include all amounts received by the contractor, undiminished by the amount paid to subcontractors or allocated for specific expenses like employee salaries and benefits.
How does filing a petition in the Court of Tax Appeals affect the prescriptive period for tax collection?	Filing a petition in the Court of Tax Appeals suspends the running of the statute of limitations for tax collection, as the CIR is prohibited from initiating collection proceedings during the pendency of the case.
Did Batas Pambansa Blg. 700 affect the assessment for 1983 taxes in this case?	No, Batas Pambansa Blg. 700, which reduced the prescriptive period for tax assessment from five to three years, applies to assessments beginning taxable year 1984. The 1983 assessment was subject to the original five-year period.
What happens if a taxpayer denies receiving an assessment letter?	If the BIR can prove that the assessment letter was properly addressed, with postage prepaid, and mailed, a presumption of receipt arises, and the assessment is considered final and unappealable if not protested within the reglementary period.
Are salaries of security guards included in the gross receipts of a security agency for tax purposes?	Yes, the Supreme Court affirmed the BIR’s consistent ruling that salaries of security guards form part of the taxable gross receipts of a security agency for purposes of the contractor’s tax.

In conclusion, Protector’s Services, Inc. vs. Court of Appeals serves as a crucial reminder of the stringent requirements for protesting tax assessments and the broad scope of ‘gross receipts’ in computing contractor’s tax. Taxpayers must adhere to prescribed timelines to preserve their right to contest assessments, and must recognize that all amounts received are generally included in the tax base.

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: Protector’s Services, Inc. vs. Court of Appeals, G.R. No. 118176, April 12, 2000