G.R. No.

198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY,
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS
DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,

vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE,
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF
TREASURY, Respondent.

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the 35 billion worth of 10-
year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty
Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring
that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the
Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds
upon their payment at maturity on October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules of Court
seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued by BIR of similar
tenor and import, for being unconstitutional and for having been issued without jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction ... ;

b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT from the payment of the face
value of the Government Bonds upon their maturity;

c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government Bonds upon
maturity ... ; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining Respondents,
particularly the BIR and the BTr, from withholding or collecting 20% FWT on the Government Bonds and the respondent
BIR from enforcing the assailed 2011 BIR Ruling, as well asother related rulings issued by the BIR of similar tenor and
import, pending the resolution by [the court] of the merits of [the] Petition.3

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the assistance of its
financial advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and
Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc. (SEED),"5 requested an approval from the Department of
Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-notes
would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to
investors as the PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund
(Hanapbuhay Fund) to finance meritorious activities and projects of accredited non-government organizations (NGOs)
throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds were
also presented by banks and financial institutions, such as First Metro Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security Bank Corporation and SB Capital Investment
Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest
income or discount earned on the proposed zerocoupon bonds would be subject to the prevailing withholding tax."13

A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep discount), with the
face value repaid at the time of maturity.14 It does not make periodic interest payments, or have socalled "coupons," hence
the term zero-coupon bond.15 However, the discount to face value constitutes the return to the bondholder.16

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGOs letters dated May 10, 15, and 25, 2001, issued
BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then
Commissioner ofInternal Revenue Ren G. Baez confirmed that the PEACe Bonds would not be classified as deposit
substitutes and would not be subject to the corresponding withholding tax:

Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20) or more
individuals or corporate lenders at any one time. In the light of your representation that the PEACe Bonds will be issued
only to one entity, i.e., Code NGO, the same shall not be considered as "deposit substitutes" falling within the purview of
the above definition. Hence, the withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR Ruling No.
035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001
Rulings). In sum, these rulings pronounced that to be able to determine whether the financial assets, i.e., debt instruments
and securities are deposit substitutes, the "20 or more individual or corporate lenders" rule must apply. Moreover, the
determination of the phrase "at any one time" for purposes of determining the "20 or more lenders" is to be determined
at the time of the original issuance. Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer
Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle considering that the latter was
not a Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza recommended that the issuance of the
Bonds "be done through the ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated October 9,
2001, the Bureau of Treasury announced that "30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on
October 16, 2001[.]"26 The notice stated that the Bonds "shall be issued to not morethan 19 buyers/lenders hence, the
necessity of a manual auction for this maiden issue."27 It also required the GSEDs to submit their bids not later than 12
noon on auction date and to disclose in their bid submissions the names of the institutions bidding through them to ensure
strict compliance with the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19 lenders and while taxable
shall not be subject to the 20% final withholding [tax]."29

On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-Coupon Bond." The memo
stated inpart that the formula (in determining the purchase price and settlement amount) "is only applicable to the zeroes
that are not subject to the 20% final withholding due to the 19 buyer/lender limit."31

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction Guidelines for the 10-
year Zero-Coupon Treasury Bond to be Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines
reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding tax as the issue will be limited to a
maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001)." 33The Auction
Guidelines, for the first time, also stated that the Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No.
1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also on the same date,
the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal
Revenue concerning the Bonds exemption from 20% final withholding tax and the opinion of the Monetary Board on
reserve eligibility.37

During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as 12.248% to as
high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having tendered
the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued 35 billion worth of Bonds at yield-to-
maturity of 12.75% to RCBC for approximately 10.17 billion,43 resulting in a discount of approximately 24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement44 with CODE-NGO, whereby RCBC Capital
was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.45RCBC Capital agreed to
underwrite46 on a firm basis the offering, distribution and sale of the 35 billion Bonds at the price of
11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll income derived
from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all forms of
taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively."48

RCBC Capital sold the Government Bonds in the secondary market for an issue price of 11,995,513,716.51. Petitioners
purchased the PEACe Bonds on different dates.49

BIR rulings

On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and
directing the BTr to withhold said final tax at the maturity thereof, [allegedly without] consultation with Petitioners as
bond holders, and without conducting any hearing."50

"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the proper
tax treatment of the discount or interest income derived from the Government Bonds."51 The Bureau of Internal Revenue,
citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR Ruling
No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest income
from deposit substitutes. It is now settled that all treasury bonds (including PEACe Bonds), regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit substitutes. In the case of zero-coupon
bonds, the discount (i.e. difference between face value and purchase price/discounted value of the bond) is treated as
interest income of the purchaser/holder. Thus, the Php 24.3 interest income should have been properly subject to the
20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .

....

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final tax on the
discount/interest income realized by RCBC as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No.
007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by stating that the [1997] Tax Code is
clear that the "term public means borrowing from twenty (20) or more individual or corporate lenders at any one time."
The word "any" plainly indicates that the period contemplated is the entire term of the bond, and not merely the point of
origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and exempting
it from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created when no such exemption is found in
the law.55

On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System Holdings
Corporation and Subsidiaries ("PDS Group"). The Memo provides that in view of the pronouncement of the DOF and the
BIR on the applicability of the 20% FWT on the Government Bonds, no transferof the same shall be allowed to be recorded
in the Registry of Scripless Securities ("ROSS") from 12 October 2011 until the redemption payment date on 18 October
2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall
be treated by the BTr asthe beneficial owners of such securities for the relevant [tax] payments to be imposed thereon."56

On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR
Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount or interest earned on the PEACe
Bonds should "be imposed and withheld not only on RCBC/CODE NGO but also [on] all subsequent holders of the
Bonds."58

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application for
a temporary restraining order and/or writ of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the implementation of BIR Ruling
No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on interest income
there from shall be withheld by the petitioner banks and placed in escrow pending resolution of [the] petition."61

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-
intervention62 dated October 27, 2011, which was granted by this court on November 15, 2011.63

Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TRO."64 They alleged that on the same day that the temporary restraining order was
issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts representing the face value of the
Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20% final withholding tax.65On November 15,
2011, this court directed respondents to: "(1) SHOW CAUSE why they failed to comply with the October 18, 2011
resolution; and (2) COMPLY with the Courts resolution in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."66

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention with
comment on the petitionin-intervention of RCBC and RCBC Capital).67 The motion was granted by this court on November
22, 2011.68

On December 1, 2011, public respondents filed their compliance.69 They explained that: 1) "the implementation of [BIR
Ruling No. 370-2011], which has already been performed on October 18, 2011 with the withholding of the 20% final
withholding tax on the face value of the PEACe bonds, is already fait accompli . . . when the Resolution and TRO were
served to and received by respondents BTr and National Treasurer [on October 19, 2011]";70 and 2) the withheld amount
has ipso facto become public funds and cannot be disbursed or released to petitioners without congressional
appropriation.71 Respondents further aver that"[i]nasmuch as the . . . TRO has already become moot . . . the condition
attached to it, i.e., that the 20% final withholding tax on interest income therefrom shall be withheld by the banks and
placed in escrow . . .has also been rendered moot[.]"72

On December 6, 2011, this court noted respondents' compliance.73

On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed by RCBC and
RCBC Capital and On November 27, 2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To Direct
Respondents to Comply with the Temporary Restraining Order)."75

On December 4, 2012, this court: (a) noted petitioners manifestation with urgent reiterative motion (to direct
respondents to comply with the temporary restraining order); and (b) required respondents to comment thereon.76

Respondents comment77 was filed on April 15,2013, and petitioners filed their reply78 on June 5, 2013.

Issues
The main issues to be resolved are:

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under the 1997
National Internal Revenue Code. Related to this question is the interpretation of the phrase "borrowing from twenty (20)
or more individual or corporate lenders at any one time" under Section 22(Y) of the 1997 National Internal Revenue Code,
particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the Bureau of Internal Revenue is
estopped from imposing and/or collecting the 20% final withholding tax from the face value of these Bonds

a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of rulings?

Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO

Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is obligated . . .
to pay the face value amount of Ph35 Billion upon maturity without any deduction whatsoever."79 They add that "the
Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably imposing the
withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after several, consistent
categorical declarations that such bonds are exempt from the 20% FWT, without violating due process" 80 and the
constitutional principle on non-impairment of contracts.81 Petitioners aver that at the time they purchased the Bonds,
they had the right to expect that they would receive the full face value of the Bonds upon maturity, in view of the 2001
BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on]
good faith thereon."83

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the 1997
National Internal Revenue Code because there was only one lender (RCBC) to whom the Bureau of Treasury issued the
Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings "erroneously interpreted that the number of investors that
participate in the secondary market is the determining factor in reckoning the existence or non-existence of twenty (20)
or more individual or corporate lenders."85 Furthermore, they contend that the Bureau of Internal Revenue unduly
expanded the definition of deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding
that "the mere issuance of government debt instruments and securities is deemed as falling within the coverage of
deposit substitutes[.]"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of administrative
legislation[.]"87

Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from income tax. 88They
insist that "[t]hey are not lenders whose income is considered as interest income or yield subject to the 20% FWT under
Section 27 (D)(1) of the [1997 National Internal Revenue Code]"89 because they "acquired the Government Bonds in the
secondary or tertiary market."90

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the collection
of the final tax was barred by prescription.91 They point out that under Section 7 of DOF Department Order No. 141-
95,92 the final withholding tax "should have been withheld at the time of their issuance[.]"93 Also, under Section 203 of the
1997 National Internal Revenue Code, "internal revenuetaxes, such as the final tax, [should] be assessed within three (3)
years after the last day prescribed by law for the filing of the return."94

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was in
violation of their property rights,95 their constitutional right to due process96 as well as Section 246 of the 1997 National
Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also have "an adverse effect of colossal
magnitude on the investors, both localand foreign, the Philippine capital market, and most importantly, the countrys
standing in the international commercial community."98 Petitioners explained that "unless enjoined, the governments
threatened refusal to pay the full value of the Government Bonds will negatively impact on the image of the country in
terms of protection for property rights (including financial assets), degree of legal protection for lenders rights, and
strength of investor protection."99 They cited the countrys ranking in the World Economic Forum: 75th in the world in its
20112012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among ASEAN
countries in terms of Strength of Investor Protection, and 105th worldwide and last among ASEAN countries in terms of
Property Rights Index and Legal Rights Index.100 It would also allegedly "send a reverberating message to the whole world
that there is no certainty, predictability, and stability of financial transactions in the capital markets[.]"101 "[T]he integrity
of Government-issued bonds and notes will be greatly shattered and the credit of the Philippine Government will
suffer"102 if the sudden turnaround of the government will be allowed,103 and it will reinforce "investors perception that
the level of regulatory risk for contracts entered into by the Philippine Government is high," 104 thus resulting in higher
interestrate for government-issued debt instruments and lowered credit rating.105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue "gravely and
seriously abused her discretion in the exercise of her rule-making power"106 when she issued the assailed 2011 BIR Ruling
which ruled that "all treasury bonds are deposit substitutes regardless of the number of lenders, in clear disregard of the
requirement of twenty (20)or more lenders mandated under the NIRC."107 They argue that "[b]y her blanket and arbitrary
classification of treasury bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC, but
effectively imposed a new tax on privately-placed treasury bonds."108Petitioners-intervenors RCBC and RCBC Capital
further argue that the 2011 BIR Ruling will cause substantial impairment of their vested rights109 under the Bonds since
the ruling imposes new conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax
notwithstanding the fact that the terms and conditions thereof as previously represented by the Government, through
respondents BTr and BIR, expressly state that it is not subject to final withholding tax upon their maturity."110 They added
that "[t]he exemption from the twenty percent (20%) final withholding tax [was] the primary inducement and principal
consideration for [their] participat[ion] in the auction and underwriting of the PEACe Bonds."111

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of Internal
Revenue violated their rights to due process when she arbitrarily issued the 2011 BIR Ruling without prior notice and
hearing, and the oppressive timing of such ruling deprived them of the opportunity to challenge the same.112

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC Capital claim
that respondents Bureau of Treasury and CODE-NGO should be held liable "as [these] parties explicitly represented . . .
that the said bonds are exempt from the final withholding tax."113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011 assailed BIR Ruling
and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of existing securities, which is contrary to the
State policies of stabilizing the financial system and of developing capital markets."114

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are "invalid because they
contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the applicability of the 20 or more lender
rule to government debt instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the secondary market instead of holding
them until maturity, [it] derived . . . long-term trading gain[s], not interest income, which [are] exempt . . . under Section
32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes
of a contractual commitment granted by the Government in exchange for a valid and material consideration [i.e., the issue
price paid and savings in borrowing cost derived by the Government,] thus protected by the non-impairment clause of the
1987 Constitution"[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings since no
notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR
administrative guidance issued and published[.]"118CODE-NGO additionally argues that impleading it in a Rule 65 petition
was improper because: (a) it involves determination of a factual question;119 and (b) it is premature and states no cause
of action as it amounts to an anticipatory third-party claim.120

Arguments of respondents
Respondents argue that petitioners direct resort to this court to challenge the 2011 BIR Ruling violates the doctrines of
exhaustion of administrative remedies and hierarchy ofcourts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, "the jurisdiction to review the rulings of the [Commissioner of Internal
Revenue], after the aggrieved party exhausted the administrative remedies, pertains to the Court of Tax Appeals."122 They
point out that "a case similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as]
CTA Case No. 8351 [and] entitled, Rizal Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner
of Internal Revenue, et al."123

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention.124 They argue
that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR
Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings
was filed way out of time pursuant to Rule 65, Section 4.125

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but interest
income subject to income tax.126 They explain that "[w]ith the payment of the Ph35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about Ph24.8 Billion as payment for interest. Such
interest is clearly an income of the Petitioners considering that the same is a flow of wealth and not merely a return of
capital the capital initially invested in the Bonds being approximately Ph10.2 Billion[.]"127

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an impairment
of the obligations of contract, respondents aver that: "The BTr has no power to contractually grant a tax exemption in
favour of Petitioners thus the 2001 BIR Rulings cannot be considered a material term of the Bonds"[;]128 "[t]here has been
no change in the laws governing the taxability of interest income from deposit substitutes and said laws are read into
every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term "deposit substitute" in accordance with the letter
and spirit of the Tax Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the Government as the
latter performed its obligations to the bondholders in full"[;]131 and "[i]f there was a breach of contract or a
misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds."132

Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe Bonds does not
amount to a deprivation of property without due process of law."133 Their imposition of the 20% final withholding tax is
not arbitrary because they were only performing a duty imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative rule
which merely interprets the meaning of deposit substitutes [and upheld] the earlier construction given to the termby the
2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there was no need to observe the requirements of notice,
hearing, and publication[.]"136

Nonetheless, respondents add that "there is every reason to believe that Petitioners all major financial institutions
equipped with both internal and external accounting and compliance departments as wellas access to both internal and
external legal counsel; actively involved in industry organizations such as the Bankers Association of the Philippines and
the Capital Market Development Council; all actively taking part in the regular and special debt issuances of the BTr and
indeed regularly proposing products for issue by BTr had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly,
"the sudden and drastic drop including virtually zero trading for extended periods of six months to almost a year in
the trading volume of the PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that
market participants, including the Petitioners herein, were aware of the ruling and its consequences for the PEACe
Bonds."138

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal Revenues
rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes
by creating an unwarranted exception to the requirement of having 20 or more lenders/purchasers;140 and the word "any"
in Section 22(Y) of the National Internal Revenue Code plainly indicates that the period contemplated is the entire term
of the bond and not merely the point of origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice
petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners would be liable topay a 20% final withholding tax just
the same because the PEACe Bonds in their possession are legally in the nature of deposit substitutes subject to a 20%
final withholding tax under the NIRC."143 Section 7 of DOF Department Order No. 141-95 also provides that incomederived
from Treasury bonds is subject to the 20% final withholding tax.144 "[W]hile revenue regulations as a general rule have no
retroactive effect, if the revocation is due to the fact that the regulation is erroneous or contrary to law, such revocation
shall have retroactive operation as to affect past transactions, because a wrong construction of the law cannot give rise
to a vested right that can be invoked by a taxpayer."145

Finally, respondents submit that "there are a number of variables and factors affecting a capital market."146 "[C]apital
market itself is inherently unstable."147 Thus, "[p]etitioners argument that the 20% final withholding tax . . . will wreak
havoc on the financial stability of the country is a mere supposition that is not a justiciable issue."148

On the prayer for the temporary restraining order, respondents argue that this order "could no longer be implemented
[because] the acts sought to be enjoined are already fait accompli."149 They add that "to disburse the funds withheld to
the Petitioners at this time would violate Section 29[,] Article VI of the Constitution prohibiting money being paid out of
the Treasury except in pursuance of an appropriation made by law[.]"150 "The remedy of petitioners is to claim a tax
refund under Section 204(c) of the Tax Code should their position be upheld by the Honorable Court."151

Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code in relation to
Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which prohibits courts, except
the Court of Tax Appeals, from issuing injunctions to restrain the collection of any national internal revenue tax imposed
by the Tax Code."152

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when it declared
that all government debt instruments are deposit substitutes regardless of the 20-lender rule; and

2. The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;

It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented by the
government as an inducement and important consideration for the purchase of the Bonds;

b) It constitutes deprivation ofproperty without due process because there was no prior notice to bondholders and hearing
and publication;

c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;

d) It violates the constitutional provision on supporting activities of non-government organizations and development of
the capital market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the challenged 2011
BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal Revenues power
to interpret the provisions of the 1997 National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in previously issued BIR
Ruling Nos. 007-2004, DA-491-04,and 008-05, which have already effectively abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessors rulings especially when the latters rulings
are not in harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested right.
Therefore, the 2011 BIR Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary course
of law:

a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege to have been
wrongfully collected; and

b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.

Courts ruling

Procedural Issues
Non-exhaustion of
administrative remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary of
Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to interpret the provisions
of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review
by the Secretary of Finance. (Emphasis supplied)

Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions are
generally not entertained."153 The remedy within the administrative machinery must be resorted to first and pursued to
its appropriate conclusion before the courts judicial power can be sought.154

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the peculiarity
and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded (1) when there is a violation
of due process, (2) when the issue involved is purely a legal question,155 (3) when the administrative action is patently
illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of the administrative agency
concerned,(5) when there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter
ego of the President bears the implied and assumed approval of the latter, (7) when to require exhaustion of
administrative remedies would be unreasonable, (8) when it would amount to a nullification of a claim, (9) when the
subject matter is a private land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate
remedy, (11) when there are circumstances indicating the urgency of judicial intervention.156 (Emphasis supplied, citations
omitted)

The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely: (a) the
interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under the 1997 National
Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the PEACe Bonds upon maturity
violates the constitutional provisions on non-impairment of contracts and due process. Judicial intervention is likewise
urgent with the impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an exercise
in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise because
it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue.
It appears that the Secretary of Finance adopted the Commissioner of Internal Revenues opinions as his own.158 This
position was in fact confirmed in the letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to withhold
the amount corresponding to the 20% final withholding tax on the interest or discounts allegedly due from the
bondholders on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains
to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with
the implementation of the 1997 National Internal Revenue Code on the taxability of the interest income from zero-coupon
bonds issued by the government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, 160such
rulings of the Commissioner of Internal Revenue are appealable to that court, thus:

SEC. 7.Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction
of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade
and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may
file an appeal with the CTA within thirty (30) days after the receipt of such decision or rulingor after the expiration of the
period fixed by law for action as referred toin Section 7(a)(2) herein.

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National
Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein
provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the
provisions of this Act.

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction of
the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the
jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the
RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing
the Tax Code on the taxability of pawnshops.. . .

....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement
of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax
under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of the
Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the provisionsof
internal revenue laws, including ruling on the classification of articles of sales and similar purposes." (Emphasis in the
original)

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to
nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that, accordingly, this case is
not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and
license fees to adhere strictly to the interpretation given by the defendant tothe statutory provisions abovementioned, as
set forth in the Circular. The same incorporates, therefore, a decision of the Collector of Internal Revenue (now
Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the administration of which is
entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125, Section
7 of which provides that the Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal . . .
decisions of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code or other
law or part of the law administered by the Bureau of Internal Revenue."163

In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare and the
advancement of public policy, or demanded by the broader interest of justice, or the orders complained of were found to
be patent nullities, or the appeal was considered as clearly an inappropriate remedy."164

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and Local
Government,165 this court noted that the petition for prohibition was filed directly before it "in disregard of the rule on
hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and decide the same
on its merits in viewof the significant constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the matter."166

Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a definitive
declaration of whether government debt instruments are deposit substitutes under existing laws, and the novelty thereof,
constitute exceptional and compelling circumstances to justify resort to this court in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or
product that may be issued and traded in the market. Due to the changing positions of the Bureau of Internal Revenue on
this issue, there isa need for a final ruling from this court to stabilize the expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been
rendered moot by this courts issuance of the temporary restraining order enjoining the implementation of the 2011 BIR
Ruling. The temporary restraining order effectively recognized the urgency and necessity of direct resort to this court.

Substantive issues

Tax treatment of deposit

substitutes

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholdingtax at the
rate of 20% is imposed on interest on any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements. These provisions read:

SEC. 24. Income Tax Rates.

....

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest fromany currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; . . . Provided, further, That interest income from long-term
deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of
the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

....

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent
(7 1/2%) of such interest income. (Emphasis supplied)

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the
Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however,
That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such
interest income. (Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977
National Internal Revenue Code through Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree No.
1959, effective on October 15, 1984, formally added the definition of deposit substitutes, viz:

(y) Deposit substitutes shall mean an alternative form of obtaining funds from the public, other than deposits, through
the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of
relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or
dealer.These promissory notes, repurchase agreements, certificates of assignment or participation and similar instrument
with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial intermediaries
or by the Securities and Exchange Commission of the Philippines for commercial, industrial, finance companies and either
non-financial companies: Provided, however, that only debt instruments issued for inter-bank call loans to cover
deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks shall not be
considered as deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same definition
and specifically identified the following borrowings as "deposit substitutes":

SECTION 2. Definitions of Terms. . . .

(h) "Deposit substitutes" shall mean

....

(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasi-banking
functions evidenced by deposit substitutes instruments, except interbank call loans to cover deficiency in reserves against
deposit liabilities as evidenced by interbank loan advice or repayment transfer tickets.

(b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the
Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar
instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust
companies, including the trust department of banks and investment houses, evidenced by deposit substitutes
instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the addition of
the qualifying phrase for public borrowing from 20 or more individual or corporate lenders at any one time. Under
Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When used in this Title:

....

(Y) The term deposit substitutes shall mean an alternative form of obtaining funds from the public(the term 'public'
means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through
the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of
relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or
dealer. These instruments may include, but need not be limited to, bankers acceptances, promissory notes, repurchase
agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP)
and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse:
Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to
cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not
be considered as deposit substitute debt instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty (20) or more
individual or corporate lenders at any one time." Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject to the 20% final withholding tax.

20-lender rule

Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the Government Bonds."169 On
the other hand, respondents theorize that the word "any" "indicates that the period contemplated is the entire term of
the bond and not merely the point of origination or issuance[,]"170 such that if the debt instruments "were subsequently
sold in secondary markets and so on, insuch a way that twenty (20) or more buyers eventually own the instruments, then
it becomes indubitable that funds would be obtained from the "public" as defined in Section 22(Y) of the NIRC."171 Indeed,
in the context of the financial market, the words "at any one time" create an ambiguity.

Financial markets

Financial markets provide the channel through which funds from the surplus units (households and business firms that
have savings or excess funds) flow to the deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and provide the means by which the lenders
transform their funds into financial assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund suppliers earn a return on
their investment; the return is necessary to ensure that funds are supplied to the financial markets.172

"The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the
securities[,]"173 namely: (1) the money market, which facilitates the flow of short-term funds (with maturities of one year
or less); and (2) the capital market, which facilitates the flow of long-term funds (with maturities of more than one year).174

Whether referring to money marketsecurities or capital market securities, transactions occur either in the primary market
or in the secondary market.175 "Primary markets facilitate the issuance of new securities. Secondary markets facilitate the
trading of existing securities, which allows for a change in the ownership of the securities."176 The transactions in primary
markets exist between issuers and investors, while secondary market transactions exist among investors.177

"Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial
transactions."178 Still, all systems perform one basic function: the quick mobilization of money from the lenders/investors
to the borrowers.179

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect finance.180

With direct financing, the "borrower and lender meet each other and exchange funds in returnfor financial assets"181(e.g.,
purchasing bonds directly from the company issuing them). This method provides certain limitations such as: (a) "both
borrower and lender must desire to exchange the same amount of funds at the same time"[;]182 and (b) "both lender and
borrower must frequently incur substantial information costs simply to find each other."183

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing information
costs.184 A Broker185 is "an individual or financial institution who provides information concerning possible purchases and
sales of securities. Either a buyer or a seller of securities may contact a broker, whose job is simply to bring buyers and
sellers together."186 A dealer187 "also serves as a middleman between buyers and sellers, but the dealer actually acquires
the sellers securities in the hope of selling them at a later time at a more favorable price."188 Frequently, "a dealer will
split up a large issue of primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow of
savings into investment."189 In semi direct financing, "[t]he ultimate lender still winds up holding the borrowers securities,
and therefore the lender must be willing to accept the risk, liquidity, and maturity characteristics of the borrowers [debt
security]. There still must be a fundamental coincidence of wants and needs between [lenders and borrowers] for
semidirect financial transactions to take place."190

"The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions,
carried out with the help of financial intermediaries"191 or financial institutions, like banks, investment banks, finance
companies, insurance companies, and mutual funds.192 Financial intermediaries accept funds from surplus units and
channel the funds to deficit units.193 "Depository institutions [such as banks] accept deposits from surplus units and
provide credit to deficit units through loans and purchase of [debt] securities."194 Nondepository institutions, like mutual
funds, issue securities of their own (usually in smaller and affordable denominations) to surplus units and at the same
time purchase debt securities of deficit units.195 "By pooling the resources of[small savers, a financial intermediary] can
service the credit needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities performed by market
participants that works to transfer the funds from the surplus units (or investors/lenders) to those who need them (deficit
units or borrowers).

Meaning of "at any one time"

Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining the "20 or
more lenders" would mean every transaction executed in the primary or secondary market in connection with the
purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning of "20 or more
lenders/investors" is made at any transaction in connection with the purchase or sale of the Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a
broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate lenders
in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or morelenders/investors,
there is deemed to be a public borrowing and the bonds at that point intime are deemed deposit substitutes.
Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest income from the
bonds.

For debt instruments that are

not deposit substitutes, regular
income tax applies

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997 National
Internal Revenue Code are subject to the regular income tax.

The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income, Section 32(A) of the
1997 National Internal Revenue Code discloses a legislative policy to include all income not expressly exempted as within
the class of taxable income under our laws.

"The definition of gross income isbroad enough to include all passive incomes subject to specific tax rates or final
taxes."197 Hence, interest income from deposit substitutes are necessarily part of taxable income. "However, since these
passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the
computation of gross income, which determines taxable income."198 "Stated otherwise . . . if there were no withholding
tax system in place in this country, this 20 percent portion of the passive income of [creditors/lenders] would actually be
paid to the [creditors/lenders] and then remitted by them to the government in payment of their income tax."199

This court, in Chamber of Real Estate and Builders Associations, Inc. v. Romulo,200 explained the rationale behind the
withholding tax system:

The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be
lost or substantially reduced through failure to file the corresponding returns[;] and third, to improve the governments
cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to
maximize and expedite the collection of income taxes by requiring its payment at the source."202

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller isrequired to
withhold the 20% final income tax on the imputed interest income from the bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the "gains" contemplated under Section 32(B)(7)(g)203 of
the 1997 National Internal Revenue Code, which exempts gains derived from trading, redemption, or retirement of long-
term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of
money. Gains from sale or exchange or retirement of bonds orother certificate of indebtedness fall within the general
category of "gainsderived from dealings in property" under Section 32(A)(3), while interest from bonds or other certificate
of indebtedness falls within the category of "interests" under Section 32(A)(4).204 The use of the term "gains from sale" in
Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under Sections 24, 25, 27, and 28 in the
exemption.205

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds before
their maturity date, which is the difference between the selling price of the bonds in the secondary market and the price
at which the bonds were purchased by the seller; and (2) gain realized by the last holder of the bonds when the bonds are
redeemed at maturity, which is the difference between the proceeds from the retirement of the bonds and the price
atwhich such last holder acquired the bonds. For discounted instruments,like the zero-coupon bonds, the trading gain
shall be the excess of the selling price over the book value or accreted value (original issue price plus accumulated discount
from the time of purchase up to the time of sale) of the instruments.206

The Bureau of Internal

Revenue rulings

The Bureau of Internal Revenues interpretation as expressed in the three 2001 BIR Rulings is not consistent with law.207 Its
interpretation of "at any one time" to mean at the point of origination alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that "all
treasury bonds . . . regardlessof the number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes."208 Being the subject of this petition, it is, thus, declared void because it completely disregarded the
20 or more lender rule added by Congress in the 1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations when there was none in the law.

Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions must be read
together, endeavoring to make every part effective, harmonious, and sensible.209 That construction which will leave every
word operative will be favored over one that leaves some word, clause, or sentence meaningless and insignificant.210

It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997
National Internal Revenue Code is an authoritative construction ofgreat weight, but the principle is not absolute and may
be overcome by strong reasons to the contrary. If through a misapprehension of law an officer has issued an erroneous
interpretation, the error must be corrected when the true construction is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the nullification of
Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because it was
contrary to the express provision of Section 230 of the 1977 National Internal Revenue Codeand, hence, "[cannot] be
given weight for to do so would, in effect, amend the statute."212 Thus:

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten
years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of
Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement.213(Citations omitted)

This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield
against judicial action [because] there are no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule
the same."214 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified Revenue
Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops.216 It
was held that "the [Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative rulings or
circulars not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant
or modify the law, but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend
the law."217

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court stated that the
Commissioner of Internal Revenue is not bound by the ruling of his predecessors,219 but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated
authority of the administrative agency; (ii) whether itis reasonable; and (iii) whether it was issued pursuant to proper
procedure. But the court is not free to substitute its judgment as to the desirability or wisdom of the rule for the legislative
body, by its delegation of administrative judgment, has committed those questions to administrative judgments and not
to judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the correctness or
propriety of the rule. As a matter of power a court, when confronted with an interpretative rule, is free to (i) give the force
of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree of
authoritative weight to the interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an
"agricultural food product" within the meaning of 103(b) of the NIRC. As the Solicitor General contends, "copra per se is
not food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for food." That previous
Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of
Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in
the interpretation of laws.220 (Emphasis supplied, citations omitted)

Tax treatment of income

derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2 billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to undisclosed
investors at 11.996 billion.

It may seem that there was only one lender RCBC on behalf of CODE-NGO to whom the PEACe Bonds were issued at
the time of origination. However, a reading of the underwriting agreement221 and RCBC term sheet222reveals that the
settlement dates for the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to
various undisclosed investors at a purchase price of approximately 11.996 would fall on the same day, October 18, 2001,
when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire 10.2 billion
borrowing received by the Bureau of Treasury in exchange for the 35 billion worth of PEACe Bonds was sourced directly
from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds all at the
time of origination or issuance. At this point, however, we do not know as to how many investors the PEACe Bonds were
sold to by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO
would have been obliged to pay the 20% final withholding tax on the interest or discount from the PEACe Bonds. Further,
the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be
required of any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received by
individuals from longterm deposits or investments with a holding period of not less than five (5) years is exempt from the
final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for
the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO, orany lender or investor if such
be the case, as the withholding agents.

The collection of tax is not

barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and collect
internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false returns with intent to evade tax;
and (3) failureto file a return, to be computed from the time of discovery of the falsity, fraud, or omission. Section 203
states:

SEC. 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: Provided,
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. (Emphasis supplied)

....

SEC. 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 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.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the Bureau
of Internal Revenue may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of
the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-intervenors.

Reiterative motion on the temporary restraining order

Respondents withholding of the
20% final withholding tax on
October 18, 2011 was justified

Under the Rules of Court, court orders are required to be "served upon the parties affected."224 Moreover, service may be
made personally or by mail.225 And, "[p]ersonal service is complete upon actual delivery [of the order.]"226This courts
temporary restraining order was received only on October 19, 2011, or a day after the PEACe Bonds had matured and the
20% final withholding tax on the interest income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of
service of pleadings, court orders, or processes. Moreover, the news reports227 cited by petitioners were posted minutes
before the close of office hours or late in the evening of October 18, 2011, and they did not givethe exact contents of the
temporary restraining order.

"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that suchinjunction
or order was served on him personally or that he had notice of the issuance or making of such injunction or order."228

At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax
due"229 and return the amount of the tax withheld should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in withholding the amount corresponding to the 20%
final withholding tax from the proceeds of the PEACe Bonds, as it received this courts temporary restraining order only
on October 19, 2011, or the day after this tax had been withheld.

Respondents retention of the

amounts withheld is a defiance
of the temporary restraining
order

Nonetheless, respondents continued failure to release to petitioners the amount corresponding to the 20% final
withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance of this courts
temporary restraining order.231

The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act to be
considered fait accompli, the act must have already been fully accomplished and consummated.232 It must be irreversible,
e.g., demolition of properties,233 service of the penalty of imprisonment,234 and hearings on cases.235When the act sought
to be enjoined has not yet been fully satisfied, and/or is still continuing in nature,236 the defense of fait accomplicannot
prosper.

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the
withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue. Even though the Bureau
of Treasury had already withheld the 20% final withholding tax237 when it received the temporary restraining order, it had
yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government agencies such
as the Bureau of Treasury the procedure for the remittance of all taxes it withheld to the Bureau of Internal Revenue, a
national agency shall file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by withholding
tax returns on or before the 10th day of the following month after the said taxes had been withheld. 240 The Bureau of
Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury,241which shall be the basis for
recording the remittance of the tax collection.242 The Bureau of Internal Revenue will then record the amount of taxes
reflected in the TRA as tax collection in the Journal ofTax Remittance by government agencies based on its copies of the
TRA.243 Respondents did not submit any withholding tax return or TRA to provethat the 20% final withholding tax was
indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasurys Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011 submitted to this
court shows:

Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00

Coupon T/Bonds

(Peace Bonds) 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59

Due to BIR 412-002 4,966,207,796.41

To record redemption of 10yr Zero

coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.

The foregoing journal entry, however, does not prove that the amount of 4,966,207,796.41, representing the 20% final
withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on October 18,
2011. The entries merely show that the monies corresponding to 20% final withholding tax was set aside for remittance
to the Bureau of Internal Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause why they failed to
comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."245 The 20% final withholding tax was effectively placed in custodia legiswhen
this court ordered the deposit of the amount in escrow. The Bureau of Treasury could still release the money withheld to
petitioners for the latter to place in escrow pursuant to this courts directive. There was no legal obstacle to the release
of the 20% final withholding tax to petitioners. Congressional appropriation is not required for the servicing of public debts
in view of the automatic appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government service
insurance, and other similar fixed expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated: provided, that no obligations shall be
incurred or payments made from funds thus automatically appropriated except as issued in the form of regular budgetary
allotments.

Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such
amounts as may be necessary to effect payments on foreign or domestic loans, or foreign or domestic loans whereon
creditors make a call on the direct and indirect guarantee of the Republic of the Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled corporations
and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions the proceeds of which were
relent to public or private institutions;

c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic of the
Philippines;

d. other public or private institutions and guaranteed by government owned or controlled corporations and/or
government financial institutions.

The amount of 35 billion that includes the monies corresponding to 20% final withholding tax is a lawfuland valid
obligation of the Republic under the Government Bonds. Since said obligation represents a public debt, the release of the
monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government Bonds may
be lawfully taken from the continuing appropriation out of any monies in the National Treasury and is not required to be
the subject of another appropriation legislation: SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys
in the National Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by law, any
interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of
any such money, or from any such sinking funds the principal amount of any obligations which have matured, or which
have been called for redemption or for which redemption has been demanded in accordance with terms prescribed by
him prior to date of issue. . . In the case of interest-bearing obligations, he shall pay not less than their face value; in the
case of obligations issued at a discount he shall pay the face value at maturity; or if redeemed prior to maturity, such
portion of the face value as is prescribed by the terms and conditions under which such obligations were originally issued.
There are hereby appropriated as a continuing appropriation out of any moneys in the National Treasury not otherwise
appropriated, such sums as may be necessary from time to time to carry out the provisions of this section. The Secretary
of Finance shall transmit to Congress during the first month of each regular session a detailed statement of all expenditures
made under this section during the calendar year immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be made
through the National Treasurys account with the Bangko Sentral ng Pilipinas, to wit:

Section 38. Demand Deposit Account. The Treasurer of the Philippines maintains a Demand Deposit Account with the
Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as amended,
shall be credited and all payments for redemption of Treasury Bills and Bonds shall be charged.1wphi1

Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court has
held:

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own judgment
and wisdom formulates an appropriation act precisely following the process established by the Constitution, which
specifies that no money may be paid from the Treasury except in accordance with an appropriation made by law.

Debt service is not included inthe General Appropriation Act, since authorization therefor already exists under RA Nos.
4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting authorization as embodied in said Republic
Acts and PD for debt service, Congress does not concern itself with details for implementation by the Executive, butlargely
with annual levels and approval thereof upon due deliberations as part of the whole obligation program for the year. Upon
such approval, Congress has spoken and cannot be said to havedelegated its wisdom to the Executive, on whose part lies
the implementation or execution of the legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which remained
in full force and effect, until set aside, vacated, or modified. Its conduct finds no justification and is reprehensible.247

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-
2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding
to the 20% final withholding tax despite this court's directive in the temporary restraining order and in the resolution
dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount
corresponding-to the 20% final withholding tax that it withheld on October 18, 2011.
G.R. No. 198756, August 16, 2016

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY,
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK, AND PLANTERS
DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE PHILIPPINES, COMMISSIONER

OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE
NATIONAL TREASURER, AND BUREAU OF TREASURY, Respondents.

RESOLUTION

LEONEN, J.:

This resolves separate motions for reconsideration and clarification filed by the Office of the Solicitor General1 and
petitioners-intervenors Rizal Commercial Banking Corporation and RCBC Capital Corporation2 of our Decision dated
January 13, 2015, which: (1) granted the Petition and Petitions-in-Intervention and nullified Bureau of Internal Revenue
(BIR) Ruling Nos. 370-2011 and DA 378-2011; and (2) reprimanded the Bureau of Treasury for its continued retention of
the amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011, and ordered it to
release the withheld amount to the bondholders.

In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering of Treasury Bonds3 (Public
Offering) dated October 9, 2001, the Bureau of Treasury announced that "P30.0 [billion] worth of 10-year Zero[-]Coupon
Bonds [would] be auctioned on October 16, 2001[.]"4 It stated that "the issue being limited to 19 lenders and while
taxable shall not be subject to the 20% final withholding [tax]."5chanrobleslaw

On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-Coupon Bond.6 The memo
stated in part that the formula, in determining the purchase price and settlement amount, "is only applicable to the
zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender limit."7chanrobleslaw

On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury issued the Auction Guidelines for the
10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001 (Auction Guidelines).8 The Auction Guidelines
reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding tax as the issue will be limited to a
maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001)."9chanrobleslaw

At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC) participated on behalf of Caucus
of Development NGO Networks (CODE-NGO) and won the bid.10 Accordingly, on October 18, 2001, the Bureau of
Treasury issued P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately P10.17
billion,11 resulting in a discount of approximately P24.83 billion.

Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement12 with CODE-NGO, where RCBC
Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds.13 RCBC Capital
agreed to underwrite14 on a firm basis the offering, distribution, and sale of the P35 billion Bonds at the price of
P11,995,513,716.51.15 In Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll income derived
from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all forms of
taxation as confirmed by [the] Bureau of Internal Revenue . . . letter rulings dated 31 May 2001 and 16 August 2001,
respectively."16chanrobleslaw

RCBC Capital sold and distributed the Government Bonds for an issue price of P11,995,513,716.51.17Banco de Oro, et al.
purchased the PEACe Bonds on different dates.18chanrobleslaw

On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the Commissioner of Internal Revenue
issued BIR Ruling No. 370-201119 declaring that the PEACe Bonds, being deposit substitutes, were subject to 20% final
withholding tax.20 Under this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax
from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.21chanrobleslaw

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue
issued BIR Ruling No. DA 378-201122 clarifying that the final withholding tax due on the discount or interest earned on
the PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO but also [on] 'all subsequent holders of
the Bonds.'"23chanrobleslaw

On October 17, 2011, petitioners filed before this Court a Petition for Certiorari, Prohibition, and/or Mandamus (with
urgent application for a temporary restraining order and/or writ of preliminary injunction).24chanrobleslaw

On October 18, 2011, this Court issued a temporary restraining order25cralawred "enjoining the implementation of BIR
Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income therefrom shall be withheld by the petitioner banks and placed in escrow pending resolution of [the]
petition."26chanrobleslaw

RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to intervene and to admit the
Petition-in-Intervention. The Motions were granted by this Court.27chanrobleslaw

Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TRO.28chanrobleslaw

On November 15, 2011, this Court directed respondents to: "(1) show cause why they failed to comply with the October
18, 2011 resolution; and (2) comply with the Court's resolution in order that petitioners may place the corresponding
funds in escrow pending resolution of the petition."29chanrobleslaw

On December 6, 2011, this Court noted respondents' compliance.30chanrobleslaw

On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion [To Direct Respondents to
Comply with the Temporary Restraining Order].31chanrobleslaw

On December 4, 2012, this Court noted petitioners' Manifestation with Urgent Reiterative Motion and required
respondents to comment.32chanrobleslaw

Respondents filed their Comment,33 to which petitioners filed the Reply.34chanrobleslaw

On January 13, 2015, this Court promulgated the Decision35 granting the Petition and the Petitions-in-Intervention.
Applying Section 22(Y) of the National Internal Revenue Code, we held that the number of lenders/investors at every
transaction is determinative of whether a debt instrument is a deposit substitute subject to 20% final withholding tax.
When at any transaction, funds are simultaneously obtained from 20 or more lenders/investors, there is deemed to be a
public borrowing and the bonds at that point in time are deemed deposit substitutes. Consequently, the seller is
required to withhold the 20% final withholding tax on the imputed interest income from the bonds. We further declared
void BIR Rulings Nos. 370-2011 and DA 378-2011 for having disregarded the 20-lender rule provided in Section 22(Y).
The Decision disposed as follows:ChanRoblesVirtualawlibrary
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-
2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding
to the 20% final withholding tax despite this court's directive in the temporary restraining order and in the resolution
dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount
corresponding to the 20% final withholding tax that it withheld on October 18, 2011.36chanroblesvirtuallawlibrary

On March 13, 2015, respondents filed by registered mail their Motion for Reconsideration and
Clarification.37chanrobleslaw

On March 16, 2015, petitioners-intervenors RCBC and RCBC Capital moved for clarification and/or partial
reconsideration.38chanrobleslaw

On July 6, 2015, petitioners Banco de Oro, et al. filed their Consolidated Comment39 on respondents' Motion for
Reconsideration and Clarification and petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for
Clarification and/or Partial Reconsideration.

On October 29, 2015, petitioners Banco de Oro, et al. filed their Urgent Reiterative Motion [to Direct Respondents to
Comply with the Temporary Restraining Order].40chanrobleslaw

The issues raised in the motions revolve around the following:

chanRoblesvirtualLawlibraryFirst, the proper interpretation and application of the 20-lender rule under Section 22(Y) of
the National Internal Revenue Code, particularly in relation to issuances of government debt instruments;

Second, whether the seller in the secondary market can be the proper withholding agent of the final withholding tax due
on the yield or interest income derived from government debt instruments considered as deposit substitutes;

Third, assuming the PEACe Bonds are considered "deposit substitutes," whether government or the Bureau of Internal
Revenue is estopped from imposing and/or collecting the 20% final withholding tax from the face value of these Bonds.
Further:

chanRoblesvirtualLawlibrary

(a) Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?

(b) Will it constitute a deprivation of property without due process of law?

Lastly, whether the respondent Bureau of Treasury is liable to pay 6% legal interest.

Before going into the substance of the motions for reconsideration, we find it necessary to clarify on the procedural
aspects of this case. This is with special emphasis on the jurisdiction of the Court of Tax Appeals in view of the previous
conflicting rulings of this Court.

Earlier, respondents questioned the propriety of petitioners' direct resort to this Court. They argued that petitioners
should have challenged first the 2011 Bureau of Internal Revenue rulings before the Secretary of Finance, consistent
with the doctrine on exhaustion of administrative remedies.

In the assailed Decision, we agreed that interpretative rulings of the Bureau of Internal Revenue are reviewable by the
Secretary of Finance under Section 441 of the National Internal Revenue Code. However, we held that because of the
special circumstances availing in this casenamely: the question involved is purely legal; the urgency of judicial
intervention given the impending maturity of the PEACe Bonds; and the futility of an appeal to the Secretary of Finance
as the latter appeared to have adopted the challenged Bureau of Internal Revenue rulingsthere was no need for
petitioners to exhaust all administrative remedies before seeking judicial relief.

We also stated that:ChanRoblesVirtualawlibrary

[T]he jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals.
The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of the
1997 National Internal Revenue Code on the taxability of the interest income from zero-coupon bonds issued by the
government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, such
rulings of the Commissioner of Internal Revenue are appealable to that court, thus:

chanRoblesvirtualLawlibrarySEC. 7. Jurisdiction. - The CTA shall exercise:ChanRoblesVirtualawlibrary

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in casesinvolving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National
Internal Revenue or other laws administered by the Bureau of Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or
inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary
of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial
Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the
expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National
Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein
provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the
provisions of this Act.

In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court emphasized the jurisdiction of the
Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:ChanRoblesVirtualawlibrary

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the
jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the
RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing
the Tax Code on the taxability of pawnshops.

...

....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which
states:ChanRoblesVirtualawlibrary

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. The Secretary of Finance, upon
recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement
of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax
under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of the
Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the provisions of
internal revenue laws, including ruling on the classification of articles of sales and similar purposes."

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:ChanRoblesVirtualawlibrary

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to
nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that, accordingly, this case is
not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and
license fees to adhere strictly to the interpretation given by the defendant to the statutory provisions abovementioned,
as set forth in the Circular. The same incorporates, therefore, a decision of the Collector of Internal Revenue (now
Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the administration of which is
entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125,
Section 7 of which provides that the Court of Tax Appeals 'shall exercise exclusive appellate jurisdiction to review by
appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code
or other law or part of the law administered by the Bureau of Internal Revenue.'"42chanroblesvirtuallawlibrary

In Commissioner of Internal Revenue v. Leal,43 the Commissioner issued Revenue Memorandum Order (RMO) No. 15-91
imposing 5% lending investors tax on pawnshops, and Revenue Memorandum Circular (RMC) No. 43-91 subjecting the
pawn ticket to documentary stamp tax.44 Leal, a pawnshop owner and operator, asked for reconsideration of the
revenue orders, but it was denied by the Commissioner in BIR Ruling No. 221-91.45 Thus, Leal filed before the Regional
Trial Court a petition for prohibition seeking to prohibit the Commissioner from implementing the revenue orders.46 This
Court held that Leal should have filed her petition for prohibition before the Court of Tax Appeals, not the Regional Trial
Court, because "the questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops."47 This Court held that such rulings in connection with the
implementation of internal revenue laws are appealable to the Court of Tax Appeals under Republic Act No. 1125, as
amended.48chanrobleslaw

Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno, Jr.,49 this Court upheld the jurisdiction of the Court of
Tax Appeals over the Regional Trial Courts, on the issue of the validity of revenue memorandum circulars.50 It explained
that "the assailed revenue regulations and revenue memorandum circulars [were] actually rulings or opinions of the
[Commissioner of Internal Revenue] on the tax treatment of motor vehicles sold at public auction within the [Subic
Special Economic Zone] to implement Section 12 of [Republic Act] No. 7227." This Court further held that the taxpayers'
invocation of this Court's intervention was premature for its failure to first ask the Commissioner of Internal Revenue for
reconsideration of the assailed revenue regulations and revenue memorandum circulars.

However, a few months after the promulgation of Asia International Auctioneers, British American Tobacco v.
Camacho51 pointed out that although Section 7 of Republic Act No. 1125, as amended, confers on the Court of Tax
Appeals jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality of a law or
rule is challenged. Thus:ChanRoblesVirtualawlibrary

The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by Republic Act No. 9282.
Section 7 thereof states, in pertinent part:

chanRoblesvirtualLawlibrary. . . .

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases
where the constitutionality of a law or rule is challenged. Where what is assailed is the validity or constitutionality of a
law, or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function, the
regular courts have jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules
issued by an administrative agency contravenes the law or the constitution is within the jurisdiction of the regular
courts. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts. This is within the scope of judicial power, which includes the authority of the courts to determine in
an appropriate action the validity of the acts of the political departments. Judicial power includes the duty of the courts
of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.

In Drilon v. Lim, it was held:ChanRoblesVirtualawlibrary

We stress at the outset that the lower court had jurisdiction to consider the constitutionality of Section 187, this
authority being embraced in the general definition of the judicial power to determine what are the valid and binding
laws by the criterion of their conformity to the fundamental law. Specifically, B.P. 129 vests in the regional trial courts
jurisdiction over all civil cases in which the subject of the litigation is incapable of pecuniary estimation, even as the
accused in a criminal action has the right to question in his defense the constitutionality of a law he is charged with
violating and of the proceedings taken against him, particularly as they contravene the Bill of Rights. Moreover, Article X,
Section 5(2), of the Constitution vests in the Supreme Court appellate jurisdiction over final judgments and orders of
lower courts in all cases in which the constitutionality or validity of any treaty, international or executive agreement,
law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.

The petition for injunction filed by petitioner before the RTC is a direct attack on the constitutionality of Section 145(C)
of the NIRC, as amended, and the validity of its implementing rules and regulations. In fact, the RTC limited the
resolution of the subject case to the issue of the constitutionality of the assailed provisions. The determination of
whether the assailed law and its implementing rules and regulations contravene the Constitution is within the
jurisdiction of regular courts. The Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts,
including the regional trial courts. Petitioner, therefore, properly filed the subject case before the RTC.52 (Citations
omitted)
British American Tobacco involved the validity of: (1) Section 145 of Republic Act No. 8424; (2) Republic Act No. 9334,
which further amended Section 145 of the National Internal Revenue Code on January 1, 2005; (3) Revenue Regulations
Nos. 1-97, 9-2003, and 22-2003; and (4) RMO No. 6-2003.53chanrobleslaw

A similar ruling was made in Commissioner of Customs v. Hypermix Feeds Corporation.54 Central to the case was Customs
Memorandum Order (CMO) No. 27-2003 issued by the Commissioner of Customs. This issuance provided for the
classification of wheat for tariff purposes. In anticipation of the implementation of the CMO, Hypermix filed a Petition
for Declaratory Relief before the Regional Trial Court. Hypermix claimed that said CMO was issued without observing the
provisions of the Revised Administrative Code; was confiscatory; and violated the equal protection clause of the 1987
Constitution.55 The Commissioner of Customs moved to dismiss on the ground of lack of jurisdiction.56On the issue
regarding declaratory relief, this Court ruled that the petition filed by Hypermix had complied with all the requisites for
an action of declaratory relief to prosper. Moreover:ChanRoblesVirtualawlibrary

Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts. This is within the scope of judicial power, which includes the authority of the courts to determine in
an appropriate action the validity of the acts of the political departments.57chanroblesvirtuallawlibrary

We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc. The Court of Tax Appeals has
exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations, and other
administrative issuances of the Commissioner of Internal Revenue.

Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial
power:ChanRoblesVirtualawlibrary

ARTICLE VIII
JUDICIAL DEPARTMENT

Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be established by
law.

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. (Emphasis supplied)

Based on this constitutional provision, this Court recognized, for the first time, in The City of Manila v. Hon. Grecia-
Cuerdo,58 the Court of Tax Appeals' jurisdiction over petitions for certiorari assailing interlocutory orders issued by the
Regional Trial Court in a local tax case. Thus:ChanRoblesVirtualawlibrary

[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987 Constitution
provides, nonetheless, that judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law and that judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA includes
that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the
tax court. It, thus, follows that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs
of certiorari in these cases.59 (Emphasis in the original)
This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is inherent in the exercise
of its appellate jurisdiction:ChanRoblesVirtualawlibrary

A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it effectively, to make
all orders that will preserve the subject of the action, and to give effect to the final determination of the appeal. It
carries with it the power to protect that jurisdiction and to make the decisions of the court thereunder effective. The
court, in aid of its appellate jurisdiction, has authority to control all auxiliary and incidental matters necessary to the
efficient and proper exercise of that jurisdiction. For this purpose, it may, when necessary, prohibit or restrain the
performance of any act which might interfere with the proper exercise of its rightful jurisdiction in cases pending before
it.

Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction should have powers
which are necessary to enable it to act effectively within such jurisdiction. These should be regarded as powers which
are inherent in its jurisdiction and the court must possess them in order to enforce its rules of practice and to suppress
any abuses of its process and to defeat any attempted thwarting of such process.

In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall possess all the
inherent powers of a court of justice.

Indeed, courts possess certain inherent powers which may be said to be implied from a general grant of jurisdiction, in
addition to those expressly conferred on them. These inherent powers are such powers as are necessary for the ordinary
and efficient exercise of jurisdiction; or are essential to the existence, dignity and functions of the courts, as well as to
the due administration of justice; or are directly appropriate, convenient and suitable to the execution of their granted
powers; and include the power to maintain the court's jurisdiction and render it effective in behalf of the litigants.

Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary to effectuate its
jurisdiction, a grant of jurisdiction, in the absence of prohibitive legislation, implies the necessary and usual incidental
powers essential to effectuate it, and, subject to existing laws and constitutional provisions, every regularly constituted
court has power to do all things that are reasonably necessary for the administration of justice within the scope of its
jurisdiction and for the enforcement of its judgments and mandates." Hence, demands, matters or questions ancillary or
incidental to, or growing out of, the main action, and coming within the above principles, may be taken cognizance of by
the court and determined, since such jurisdiction is in aid of its authority over the principal matter, even though the
court may thus be called on to consider and decide matters which, as original causes of action, would not be within its
cognizance.60 (Citations omitted)

Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a law or regulation in the
first instance.61 This is contemplated in the Constitution when it speaks of appellate review of final judgments of inferior
courts in cases where such constitutionality is in issue.62chanrobleslaw

On, June 16, 1954, Republic Act No. 1125 created the Court, of Tax Appeals not as another superior administrative
agency as was its predecessorthe former Board of Tax Appealsbut as a part of the judicial system63 with exclusive
jurisdiction to act on appeals from:ChanRoblesVirtualawlibrary

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the
National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue;
 (2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money
charges; seizure, detention or release of property affected fines, forfeitures or other penalties imposed in
relation thereto; or other matters arising under the Customs Law or other law or part of law administered by
the Bureau of Customs; and

(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the assessment and taxation of
real property or other matters arising under the Assessment Law, including rules and regulations relative
thereto.

Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters involving assessments that
were previously cognizable by the Regional Trial Courts (then courts of first instance).64chanrobleslaw

In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax Appeals and elevated its
rank to the level of a collegiate court with special jurisdiction. Section 1 specifically provides that the Court of Tax
Appeals is of the same level as the Court of Appeals and possesses "all the inherent powers of a Court of
Justice."65chanrobleslaw

Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all tax-related
issues:ChanRoblesVirtualawlibrary

Section 7. Jurisdiction - The CTA shall exercise:ChanRoblesVirtualawlibrary

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;

2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial;

3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved
by them in the exercise of their original or appellate jurisdiction;
 4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other
money charges, seizure, detention or release of property affected, fines, forfeitures or other penalties in
relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau
of Customs;

5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property originally decided by the provincial or city board of
assessment appeals;

6) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from
decisions of the Commissioner of Customs which are adverse to the Government under Section 2315 of the
Tariff and Customs Code;

7) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or
article, and the Secretary of Agriculture in the case of agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs
Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to
impose or not to impose said duties.

The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or
regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a refund. It is
only in the lawful exercise of its power to pass upon all maters brought before it, as sanctioned by Section 7 of Republic
Act No. 1125, as amended.

This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases directly challenging
the constitutionality or validity of a tax law or regulation or administrative issuance (revenue orders, revenue
memorandum circulars, rulings).

Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the decisions of
quasi-judicial agencies66 (Commissioner of Internal Revenue, Commissioner of Customs, Secretary of Finance, Central
Board of Assessment Appeals, Secretary of Trade and Industry) on tax-related problems must be brought exclusively to
the Court of Tax Appeals.

In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction to
resolve all tax problems. Petitions for writs of certiorari against the acts and omissions of the said quasi-judicial agencies
should, thus, be filed before the Court of Tax Appeals.67chanrobleslaw

Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 12968 provides an exception to the original
jurisdiction of the Regional Trial Courts over actions questioning the constitutionality or validity of tax laws or
regulations. Except for local tax cases, actions directly challenging the constitutionality or validity of a tax law or
regulation or administrative issuance may be filed directly before the Court of Tax Appeals.

Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum circulars, or rulings),
these are issued by the Commissioner under its power to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws. Tax rulings, on the other hand, are official positions of the
Bureau on inquiries of taxpayers who request clarification on certain provisions of the National Internal Revenue Code,
other tax laws, or their implementing regulations.69Hence, the determination of the validity of these issuances clearly
falls within the exclusive appellate jurisdiction of the Court of Tax Appeals under Section 7(1) of Republic Act No. 1125,
as amended, subject to prior review by the Secretary of Finance, as required under Republic Act No.
8424.70chanrobleslaw

We now proceed to the substantive aspects.

II

Respondents contend that the 20-lender rule should not strictly apply to issuances of government debt instruments,
which by nature, are borrowings from the public.71 Applying the rule otherwise leads to an absurd result.72 They point
out that in BIR Ruling No. 007-0473 dated July 16, 2004 (the precursor of BIR Ruling Nos. 370-2011 and DA 378-2011), the
Bureau of Treasury's admitted intent to make the government securities freely tradable to an unlimited number of
lenders/investors in the secondary market was considered in place of an actual head count of lenders/investors due to
the limitations brought about by the absolute confidentiality of investments in government bonds under Section 2 of
Republic Act No. 1405, otherwise known as the Bank Secrecy Law.74chanrobleslaw

Considering that the PEACe Bonds were intended to be freely tradable in the secondary market to 20 or more
lenders/investors, respondents contend- that they, like other similarly situated government securitiesawarded to 19
or less GSEDs in the primary market but freely tradable to 20 or more lenders/investors in the secondary market
should be treated as deposit substitutes subject to the 20% final withholding tax.75chanrobleslaw

Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that Section 22(Y) of the National Internal
Revenue Code applies to all types of securities, including those issued by government. They add that under this
provision, it is the actual number of lenders at any one time that is material in determining whether an issuance is to be
considered a deposit substitute and not the intended distribution plan of the issuer.

Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue that the real intent behind the issuance
of the PEACe Bonds, as reflected by the representations and assurances of government in various issuances and rulings,
was to limit the issuance to 19 lenders and below. Hence, they contend that government cannot now take an
inconsistent position.

We find respondents' proposition to consider the intended public distribution of government securitiesin this case,
the PEACe Bondsin place of an actual head count to be untenable.

The general rule of requiring adherence to the. letter in construing statutes applies with peculiar strictness to tax laws
and the provisions o taxing act are not to be extended by implication.76chanrobleslaw

The definition of deposit substitutes in Section 22(Y) specifically defined "public" to mean "twenty (20) or more
individual or corporate lenders at any one time."77 The qualifying phrase for public introduced78by the National Internal
Revenue Code shows that a change in the meaning of the provision was intended, and this Court should construe the
provision as to give effect to the amendment.79 Hence, in light of Section 22(Y), the reckoning of whether there are 20 or
more individuals or corporate lenders is crucial in determining the tax treatment of the yield from the debt instrument.
In other words, if there are 20 or more lenders, the debt instrument is considered a deposit substitute and subject to
20% final withholding tax.

II.A

The definition of deposit substitutes under the National Internal Revenue Code was lifted from Section 95 of Republic
Act No. 7653, otherwise known as the New Central Bank Act:ChanRoblesVirtualawlibrary

SEC. 95. Definition of Deposit Substitutes. The term "deposit substitutes" is defined as an alternative form of obtaining
funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or purchasing of receivables and other obligations.These
instruments may include, but need not be limited to, bankers' acceptances, promissory notes, participations, certificates
of assignment and similar instruments with recourse, and repurchase agreements. The Monetary Board shall determine
what specific instruments shall be considered as deposit substitutes for the purposes of Section 94 of this Act: Provided,
however, That deposit substitutes of commercial, industrial and other nonfinancial companies issued for the limited
purpose of financing their own needs or the needs of their agents or dealers shall not be covered by the provisions of
Section 94 of this Act. (Emphasis supplied)

Banks are entities engaged in the lending of funds obtained from the public in the form of deposits.80Deposits of money
in banks and similar institutions are considered simple loans.81 Hence, the relationship between a depositor and a bank
is that of creditor and debtor. The ownership of the amount deposited is transmitted to the bank upon the perfection of
the contract and it can make use of the amount deposited for its own transactions and other banking operations.
Although the bank has the obligation to return the amount deposited, it has no obligation to return or deliver the same
money that was deposited.82chanrobleslaw

The definition of deposit substitutes in the banking laws was brought about by an observation that banks and non-bank
financial intermediaries have increasingly resorted to issuing a variety of debt instruments, other than bank deposits, to
obtain funds from the public. The definition also laid down the groundwork for the supervision by the Central Bank of
quasi-banking functions.83chanrobleslaw

As defined in the banking sector, the term "public" refers to 20 or more lenders.84 "What controls is the actual number
of persons or entities to whom the products or instruments are issued. If there are at least twenty (20) lenders or
creditors, then the funds are considered obtained from the public."85chanrobleslaw

If a bank or non-bank financial intermediary sells debt instruments to 20 or more lenders/placers at any one time,
irrespective of outstanding amounts, for the purpose of relending or purchasing of receivables or obligations, it is
considered to be performing a quasi-banking function and consequently subject to the appropriate regulations of the
Bangko Sentral Pilipinas (BSP).

II.B

Under the National Internal Revenue Code, however, deposit substitutes include not only the issuances and sales of
banks and quasi-banks for relending or purchasing receivables and other similar obligations, but also debt instruments
issued by commercial, industrial, and other non-financial companies to finance their own needs or the needs of their
agents or dealers. This can be deduced from a reading together of Section 22(X) and(Y):ChanRoblesVirtualawlibrary

Section 22. Definitions - When used in this Title:

chanRoblesvirtualLawlibrary. . . .
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate lenders
at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits
for the borrower's own account, or through the issuance of certificates of assignment or similar instruments, with
recourse, or of repurchase agreements for purposes of relending or purchasing receivables and other similar obligations:
Provided, however, That commercial industrial and other non-financial companies, which borrow funds through any of
these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be
considered as performing quasi-banking functions.

(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining funds from the public (the term 'public'
means borrowing from twenty (20) or more individual or corporate lenders at any one time), other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose
of re-lending or purchasing of receivables and other obligations, or financing their own needs or the needs of their
agent or dealer. (Emphasis supplied)

For internal revenue tax purposes, therefore, even debt instruments issued and sold to 20 or more lenders/investors by
commercial or industrial companies to finance their own needs are considered deposit substitutes, taxable as such.

II.C

The interest income on bank deposits was subjected for the first time to the withholding tax system under Presidential
Decree No. 1156,86 which was promulgated in 1977. The whereas clauses spell the reasons for the
law:ChanRoblesVirtualawlibrary

[I]nterest on bank deposit is one of the items includible in gross income. . . . [M]any bank depositors fail to declare
interest income in their income tax returns. . . . [I]n order to maximize the collection of the income tax on interest on
bank deposits, it is necessary to apply the withholdings system on this type of fixed or determinable income.

In the same year, Presidential Decree No. 115487 was also promulgated. It imposed a 35% transaction tax (final tax) on
interest income from every commercial paper issued in the primary market, regardless of whether they are issued to the
public or not.88 Commercial paper was defined as "an instrument evidencing indebtedness of any person of entity,
including banks and non-banks performing quasi-banking functions, which is issued, endorsed, sold, transferred or in any
manner conveyed to another person or entity, either with or without recourse and irrespective of maturity." The
imposition of a final tax on commercial papers was "aimed primarily to improve the administrative provisions of the
National Internal Revenue Code to ensure the collection on the tax on interest on commercial papers used as principal
instruments issued in the primary market."89 It was reported that "the [Bureau of Internal Revenue had] no means of
enforcing strictly the taxation on interest income earned in the money market transactions."90chanrobleslaw

These presidential decrees, as well as other new internal revenue laws and various laws and decrees that have so far
amended the provisions of the 1939 National Internal Revenue Code were consolidated and codified into the 1977
National Internal Revenue Code.91chanrobleslaw

In 1980, Presidential Decree No. 173992 was promulgated, which further amended certain provisions of the 1977
National Internal Revenue Code and repealed Section 210 (the provision embodying the percentage tax on commercial
paper transactions). The Decree imposed a final tax of 20% on interests from yields on deposit substitutes issued to the
public.93 The tax was required to be withheld by banks and non-bank financial intermediaries and paid to the Bureau of
Internal Revenue in accordance with Section 54 of the 1977 National Internal Revenue Code. Presidential Decree No.
31739, as amended by Presidential Decree No. 1959 in 1984 (which added the definition of deposit substitutes) was
subsequently incorporated in the National Internal Revenue Code.
These developments in the National Internal Revenue Code reflect the rationale for the application of the withholding
system to yield from deposit substitutes, which is essentially to maximize and expedite the collection of income taxes by
requiring its payment at the source,94 as with the case of the interest on bank deposits. When banks sell deposit
substitutes to the public, the final withholding tax is imposed on the interest income because it would be difficult to
collect from the public. Thus, the incipient scheme in the final withholding tax is to achieve an effective administration in
capturing the interest-income windfall from deposit substitutes as a source of revenue.

It must be emphasized, however, that withholding tax is merely a method of collecting income tax in advance. The
perceived tax is collected at the source of income payment to ensure collection. Consequently, those subjected to the
final withholding tax are no longer subject to the regular income tax.

III

Respondents maintain that the phrase "at any one time" must be given its ordinary meaning, i.e. "at any given time" or
"during any particular point or moment in the day."95 They submit that the correct interpretation of Section 22(Y) does
not look at any specific transaction concerning the security; instead, it considers the existing number of
lenders/investors of such security at any moment in time, whether in the primary or secondary market.96 Hence, when
during the lifetime of the security, there was any one instance where twenty or more individual or corporate lenders
held the security, the borrowing becomes "public" in character and is ipso facto subject to 20% final withholding
tax.97chanrobleslaw

Respondents further submit that Section 10.1(k) of the Securities Regulation Code and its Implementing Rules and
Regulations may be applied by analogy, such that if at any time, (a) the lenders/investors number 20 or more; or (b)
should the issuer merely offer the securities publicly or to 20 or more lenders/investors, these securities should be
deemed deposit substitutes.98chanrobleslaw

On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the phrase "at any one time" only refers to
transactions made in the primary market. According to them, the PEACe Bonds are not deposit substitutes since CODE-
NGO, through petitioner-intervenor RCBC, is the sole lender in the primary market, and all subsequent transactions in
the secondary market merely pertain to a sale and/or assignment of credit and not borrowings from the
public.99chanrobleslaw

Similarly, petitioners contend that for a government security, such as the PEACe Bonds, to be considered as deposit
substitutes, it is an indispensable requirement that there is "borrowing" between the issuer and the lender/investor in
the primary market and between the transferee and the transferor in the secondary market. Petitioners submit that in
the secondary market, the transferee/buyer must have recourse to the selling investor as required by Section 22(Y) of
the National Internal Revenue Code so that a borrowing "for the borrower's (transferor's) own account" is created
between the buyer and the seller. Should the transferees in the secondary market who have recourse to the transferor
reach 20 or more, the transaction will be subjected to a final withholding tax.100chanrobleslaw

Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that respondents' proposed application of
Section 10.1(kl) of the Securities Regulation Code and its Implementing Rules is misplaced because: (1) the National
Internal Revenue Code clearly provides the conditions when a security issuance should qualify as a deposit substitute
subject to the 20% final withholding tax; and (2) the two laws govern different matters.

III.A

Generally, a corporation may obtain funds for capital expenditures by floating either shares of stock (equity) or bonds
(debt) in the capital market. Shares of stock or equity securities represent ownership, interest, or participation in the
issuer-corporation. On the other hand, bonds or debt securities are evidences of indebtedness of the issuer-corporation.

New securities are issued and sold to the investing public for the first time in the primary market. Transactions in the
primary market involve an actual transfer of funds from the investor to the issuer of the new security. The transfer of
funds is evidenced by a security, which becomes a financial asset in the hands of the buyer/investor.

New issues are usually sold through a registered underwriter, which may be an investment house or a bank registered as
an underwriter of securities.101 An underwriter helps the issuer find buyers for its securities. In some cases, the
underwriter buys the whole issue from the issuer and resells this to other security dealers and the public.102 When a
group of underwriters pool together their resources to underwrite an issue, they are called the "underwriting
syndicate."103chanrobleslaw

On the other hand, secondary markets refer to the trading of outstanding or already-issued securities. In any secondary
market trade, the cash proceeds normally go to the selling investor rather than to the issuer.

To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A bonds. The proceeds of the sale go
to A, the issuer. The sale between A and X is a primary market transaction.

Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's indebtedness. The cash paid for the bonds
no longer go to A, but remains with X, the selling investor/holder. The transfer of Abonds from X to Y is considered a
secondary market transaction. Any difference between the purchase price of the assets (A bonds) and the sale price is a
trading gain subject to a different tax treatment, as will be explained later.

When Y trades its A bonds to Z, the sale is still considered a secondary market transaction. In other words, the trades
from X to Y, Y to Z, and Z to subsequent holders/investors are considered secondary market transactions. If Z holds on to
the bonds and the bonds mature, Z will receive from A the face value of the bonds.

A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and the issuer pays interest
on the invested amount. However, unlike bank deposits, bonds are marketable securities. The market mechanism
provides quick mobility of money and securities.104 Thus, bondholders can sell their bonds before they mature to other
investors, in turn converting their financial assets to cash. In contrast, deposits, in the form of savings accounts for
instance, can only be redeemed by the issuing bank.

III.B

An investor in bonds may derive two (2) types of income:

chanRoblesvirtualLawlibraryFirst, the interest or the amount paid by the borrower to the lender/investor for the use of
the lender's money.105 For interest-bearing bonds, interest is normally earned at the coupon date. In zero-coupon bonds,
the discount is an interest amortized up to maturity.

Second, the gain, if any, that is earned when the bonds are traded before maturity date or when redeemed at maturity.

The 20% final withholding tax imposed on interest income or yield from deposit substitute does not apply to the gains
derived from trading, retirement, or redemption of the instrument.

It must be stressed that interest income, derived by individuals from long-term deposits or placements made with banks
in the form of deposit substitutes, is exempt from income tax. Consequently, it is likewise exempt from the final
withholding tax under Sections 24(B)(1) and 25(A)(2) of the National Internal Revenue Code. However, when it is
preterminated by the individual investor, graduated rates of 5%, 12%, or 20%, depending on the remaining maturity of
the instrument, will apply on the entire income, to be deducted and withheld by the depository bank.

With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of the National Internal Revenue
Code provides:ChanRoblesVirtualawlibrary

Sec. 32. Gross Income. -

....

(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from
taxation under this title:

chanRoblesvirtualLawlibrary. . . .

(7) Miscellaneous Items. -

....

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the sale or
exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5)
years.

Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a maturity of more than five
years) in the secondary market, are exempt from income tax. These "gains" refer to the difference between the selling
price of the bonds in the secondary market and the price at which the bonds were purchased by the seller. For
discounted instruments such as the zero-coupon bonds, the trading gain is the excess of the selling price over the book
value or accreted value (original issue price plus accumulated discount from the time of purchase up to the time of sale)
of the instruments.106chanrobleslaw

Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when the bonds are redeemed at
maturity, which is the difference between the proceeds from the retirement of the bonds and the price at which the last
holder acquired the bonds.

On the other hand, gains realized from the trading of short-term bonds (i.e., those with a maturity of less than five
years) in the secondary market are subject to regular income tax rates (ranging from 5% to 32% for individuals, and 30%
for corporations) under Section 32107 of the National Internal Revenue Code.

III.C

The Secretary of Finance, through the Bureau of Treasury,108 is authorized under Section 1 of Republic Act No. 245, as
amended, to issue evidences of indebtedness such as treasury bills and bonds to meet public expenditures or to provide
for the purchase, redemption, or refunding of any obligations.

These treasury bills and bonds are issued and sold by the Bureau of Treasury to lenders/investors through a network of
licensed dealers (called Government Securities Eligible Dealers or GSEDs).109GSEDs are classified into primary and
ordinary dealers.110 A primary dealer enjoys certain privileges such as eligibility to participate in the competitive bidding
of regular issues, eligibility to participate in the issuance of special issues such as zero-coupon treasury bonds, and
access to tap facility window.111On the other hand, ordinary dealers are only allowed to participate in the non-
competitive bidding.112Moreover, primary dealers are required to meet the following
obligations:ChanRoblesVirtualawlibrary

a. Must submit at least one competitive bid in each scheduled auction.

b. Must have total awards of at least 2% of the total amount of bills or bonds awarded within a particular quarter.
This requirement does not cover special issues.

c. Must be active in the trading of GS [government securities] in the secondary market.113

A primary dealer who fails to comply with its obligations will be dropped from the roster of primary dealers and
classified as an ordinary dealer.

The auction method is the main channel used for originating government securities.114 Under this method, the Bureau of
Treasury issues a public notice offering treasury bills and bonds for sale and inviting tenders.115 The GSEDs tender their
bids electronically;116 after the cut-off time, the Auction Committee deliberates on the bids and decide on the
award.117chanrobleslaw

The Auction Committee then downloads the awarded securities to the winning bidders' Principal Securities Account in
the Registry of Scripless Securities (RoSS). The RoSS, an electronic book-entry system established by the Bureau of
Treasury, is the official Registry of ownership of or interest in government securities.118 All government securities
floated/originated by the National Government under its scripless policy, as well as subsequent transfers of the same in
the secondary market, are recorded in the RoSS in the principal Securities Account of the GSED.119chanrobleslaw

A GSED is required to open and maintain Client Securities Accounts in the name of its respective clients for segregating
government securities acquired by such clients from the GSED's own securities holdings. A GSED may also lump all
government securities sold to clients in one account, provided that the GSED maintains complete records of
ownership/other titles of its clients in the GSED's own books.120chanrobleslaw

Thus, primary issues of treasury bills and bonds are supposed to be issued only to GSEDs. By participating in auctions,
the GSED acts as a channel between the Bureau of Treasury and investors in the primary market. The winning GSED
bidder acquires the privilege to on-sell government securities to other financial institutions or final investors who need
not be GSEDs.121 Further, nothing in the law or the rules of the Bureau of Treasury prevents the GSED from entering into
contract with another entity to further distribute government securities.

In effecting a sale or distribution of government securities, a GSED acts in a certain sense as the "agent" of the Bureau of
Treasury. In Doles v. Angeles,122 the basis of an agency is representation.123 The question of whether an agency has been
created may be established by direct or circumstantial evidence.124 For an agency to arise, it is not necessary that the
principal personally encounter the third person with whom the agent interacts.125 The law contemplates impersonal
dealings where the principal need not personally know or meet the third person with whom the agent transacts:
precisely, the purpose of agency is to extend the personality of the principal through the facility of the agent.126 It was
also stressed that the manner in which the parties designate the relationship is not controlling.127 If an act done by one
person on behalf of another is in its essential nature one of agency, the former is the agent of the latter,
notwithstanding he or she is not so called.128chanrobleslaw

Through the use of GSEDs, particularly primary dealers, government is able to ensure the absorption of newly issued
securities and promote activity in the government securities market. The primary dealer system allows government to
access potential investors in the market by taking advantage of the GSEDs' distribution capacity. The sale transactions
executed by the GSED are indirectly for the benefit of the issuer. An investor who purchases bonds from the GSED
becomes an indirect lender to government. The financial asset in the hand of the investor represents a claim to future
cash, which the borrower-government must pay at maturity date.129chanrobleslaw
Accordingly, the existence of 20 or more lenders should be reckoned at the time when the successful GSED-bidder
distributes (either by itself or through an underwriter) the government securities to final holders. When the GSED sells
the government securities to 20 or more investors, the government securities are deemed to be in the nature of a
deposit substitute, taxable as such.

On the other hand, trading of bonds between two (2) investors in the secondary market involves a purchase or sale
transaction. The transferee of the bonds becomes the new owner, who is entitled to recover the face value of the bonds
from the issuer at maturity date. Any profit realized from the purchase or sale transaction is in the nature of a trading
gain subject to a different tax treatment, as explained above.

Respondents contend that the literal application of the "20 or more lenders at any one time" to government securities
would lead to: (1) impossibility of tax enforcement due to limitations imposed by the Bank Secrecy Law; (2) possible
uncertainties130; and (3) loopholes.131chanrobleslaw

These concerns, however, are not sufficient justification for us to deviate from the text of the law.132Determining the
wisdom, policy or expediency of a statute is outside the realm of judicial power.133These are matters that should be
addressed to the legislature. Any other interpretation looking into the purported effects of the law would be
tantamount to judicial legislation.

IV

Section 57 prescribes the withholding tax on interest or yield on deposit substitutes, among others, and the person
obligated to withhold the same. Section 57 reads:ChanRoblesVirtualawlibrary

Section 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the Secretary of Finance may
promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by
certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c), 33 and 282 of the Code on specified
items of income shall be withheld by payor-corporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 58 of this Code.

Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National Internal Revenue Code relative to
the Withholding on Income subject to the Expanded Withholding Tax and Final Withholding Tax) states that the liability
for payment of the tax rests primarily on the payor as a withholding agent. Section 2.57
reads:ChanRoblesVirtualawlibrary

Sec. 2.57. WITHHOLDING OF TAX AT SOURCE.

(A) Final Withholding Tax Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from the payee of said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent[.] (Emphasis supplied)
From these provisions, it is the payor-borrower who primarily has the duty to withhold and remit the 20% final tax on
interest income or yield from deposit substitutes.

This does not mean, however, that only the payor-borrower can be constituted as withholding agent. Under Section 59
of the National Internal Revenue Code, any person who has control, receipt, custody, or disposal of the income may be
constituted as withholding agent:ChanRoblesVirtualawlibrary

SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under this Title upon gains, profits,
and income not falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise
provided by law shall be assessed by personal return under rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner. The intent and purpose of the Title is that all gains, profits and
income of a taxable class, as defined in this Title, shall be charged and assessed with the corresponding tax prescribed by
this Title, and said tax shall be paid by the owners of such gains, profits and income, or the proper person having the
receipt, custody, control or disposal of the same. For purposes of this Title, ownership of such gains, profits and income
or liability to pay the tax shall be determined as of the year for which a return is required to be rendered. (Emphasis
supplied)

The intent and purpose of the National Internal Revenue Code provisions on withholding taxes is also explicitly
stated, i.e., that all gains, profits, and income "are charged and assessed with the corresponding tax"134 and said tax paid
by "the owners of such gains, profits and income, or the proper person having the receipt, custody, control or disposal of
the same."135chanrobleslaw

The obligation to deduct and withhold tax at source arises at the time an income subject to withholding is paid or
payable, whichever comes first.136 In interest-bearing bonds, the interest is taxed at every instance that interest is paid
(and income is earned) on the bond. However, in a zero-coupon bond, it is expected that no periodic interest payments
will be made. Rather, the investor will be paid the principal and interest (discount) together when the bond reaches
maturity.

As explained by respondents, "the discount is the imputed interest earned on the security, and since payment is made at
maturity, there is an accreted interest that causes the price of a zero coupon instrument to accordingly increase with
time, all things being constant."137chanrobleslaw

In a 10-year zero-coupon bond, for instance, the discount (or inter is not earned in the first period, i.e., the value of the
instrument does not equal par at the end of the first period. The total discount is earned over the life of the instrument.
Nonetheless, the total discount is considered earned on the year of sale based on current value.138chanrobleslaw

In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary responsibility to
withhold the 20% final withholding tax on the interest valued at present value, when its sale and distribution of the
government securities constitutes a deposit substitute transaction. The 20% final tax is deducted by the buyer from the
discount of the bonds and included in the remittance of the purchase price.

The final tax withheld by the withholding agent is considered as a "full and final payment of the income tax due from the
payee on the said income [and the] payee is not required to file an income tax return for the particular
income."139 Section 10 of Department of Finance Department Order No. 020-10140 in relation to the National Internal
Revenue Code also provides that no other tax shall be collected on subsequent trading of the securities that have been
subjected to the final tax.

In this case, the PEACe Bonds were awarded to petitioners-intervenors RCBC/CODE-NGO as the winning bidder in the
primary auction. At the same time, CODE-NGO got RCBC Capital as underwriter, to distribute and sell the bonds to the
public.

The Underwriting Agreement141 and RCBC Term Sheet142 for the sale of the PEACe bonds show that the settlement dates
for the issuance by the Bureau of Treasury of the Bonds to petitioners-intervenors RCBC/CODE-NGO and the distribution
by petitioner-intervenor RCBC Capital of the PEACe Bonds to various investors fall on the same day, October 18, 2001.
This implies that petitioner-intervenor RCBC Capital was authorized to perform a book-building process,143 a customary
method of initial distribution of securities by underwriters, where it could collate orders for the securities ahead of the
auction or before the securities were actually issued. Through this activity, the underwriter obtains information about
market conditions and preferences ahead of the auction of the government securities.

The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-intervenor RCBC Capital sold
the PEACe bonds to investors. Should the number of investors to whom petitioner-intervenor RCBC Capital distributed
the PEACe bonds, therefore, be found to be 20 or more, the PEACe Bonds are considered deposit substitutes subject to
the 20% final withholding tax. Petitioner-intervenors RCBC/CODE-NGO and RCBC Capital, as well as the final
bondholders who have recourse to government upon maturity, are liable to pay the 20% final withholding tax.

We note that although the originally intended negotiated sale of the bonds by government to CODE-NGO did not
materialize, CODE-NGO, a private entitystill through the participation of petitioners-intervenors RCBC and RCBC
Capitalended up as the winning bidder for the government securities and was able to use for its projects the profit
earned from the sale of the government securities to final investors.

Giving unwarranted benefits, advantage, or preference to a party and causing undue injury to government expose the
perpetrators or responsible parties to liability under Section 3(e) of Republic Act No. 3019. Nonetheless, this is not the
proper venue to determine and settle any such liability.

VI

Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for the 20% final withholding tax
for two (2) reasons. First, at the time the required withholding should have been made, their obligation was not clear
since BIR Ruling Nos. 370-2011 and DA 378-2011 stated that the 20% final withholding tax does not apply to PEACe
Bonds.144 Second, to punish them under the circumstances (i.e., when they secured the PEACe Bonds from the Bureau of
Treasury and sold the Bonds to the lenders/investors, they had no obligation to remit the 20% final withholding tax)
would violate due process of law and the constitutional proscription on ex post facto law.145chanrobleslaw

Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for the 20% final withholding tax even as a
taxpayer because it never earned interest income from the PEACe Bonds, and any income earned is deemed in the
nature of an underwriting fee.146 Petitioners-intervenors RCBC and RCBC Capital instead argue that the liability falls on
the Bureau of Treasury and CODE-NGO, as withholding agent and taxpayer, respectively, considering their explicit
representation that the PEACe Bonds are exempt from the final withholding tax.147chanrobleslaw

Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal Revenue is barred from assessing and
collecting the 20% final withholding tax, assuming it was due, on the ground of prescription.148 They contend that the
three (3)-year prescriptive period under Section 203, rather than the 10-year assessment period under Section 222, is
applicable because they were compliant with the requirement of filing monthly returns that reflect the final withholding
taxes due or remitted for the relevant; period. No false or fraudulent return was made because they relied on the 2001
BIR Rulings and on the representations made by the Bureau of Treasury and CODE-NGO that the PEACe Bonds were not
subject to the 20% final withholding tax.149chanrobleslaw
Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's interpretation of the phrase "at any one
time" cannot be applied to the PEACe Bonds and should be given prospective application only because it would cause
prejudice to them, among others. They cite Section 246 of the National Internal Revenue Code on non-retroactivity of
rulings, as well as Commissioner of Internal Revenue v. San Roque Power Corporation,150 which held that taxpayers may
rely upon a rule or ruling issued by the Commissioner from the time it was issued up to its reversal by the Commissioner
or the court. According to them, the retroactive application of the court's decision would impair their vested rights,
violate the constitutional prohibition on non-impairment of contracts, and constitute a substantial breach of obligation
on the part of government.151 In addition, the imposition of the 20% final withholding tax on the PEACe Bonds would
allegedly have pernicious effects on the integrity of existing securities that is contrary to the state policies of stabilizing
the financial system and of developing the capital markets.152chanrobleslaw

CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings confirming that the PEACe
Bonds were not subject to the 20% final withholding tax.153 Therefore, it should not be prejudiced if the BIR Rulings are
found to be erroneous and reversed by the Commissioner or this court.154 CODE-NGO argues that this Court's Decision
construing the phrase "at any one time" to determine the phrase "20 or more lenders" to include both the primary and
secondary market should be applied prospectively.155chanrobleslaw

Assuming it is liable for the 20% final withholding tax, CODE-NGO argiles that the collection of the final tax was barred by
prescription.156 CODE-NGO points out that under Section 203 of the National Internal Revenue Code, internal revenue
taxes such as the final tax, should be assessed within three (3) years after the last day prescribed by law for the filing of
the return.157 It farther argues that Section 222(a) on exceptions to the prescribed period, for tax assessment and
collection does not apply.158 It claims that there is no fraud or intent to evade taxes as it relied in good faith on the
assurances of the Bureau of Internal Revenue and Bureau of Treasury the PEACe Bonds are not subject to the 20% final
withholding tax.159chanrobleslaw

We find merit on the claim of petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for prospective application of
our Decision.

The phrase "at any one time" is ambiguous in the context of the financial market. Hence, petitioner-intervenor RCBC and
the rest of the investors relied on the opinions of the Bureau of Internal Revenue in BIR Ruling Nos. 020-2001, 035-
2001160 dated August 16, 2001, and DA-175-01161 dated September 29, 2001 to vested their rights in the exemption from
the final withholding tax. In sum, these rulings pronounced that to determine whether the financial assets, i.e., debt
instruments and securities, are deposit substitutes, the "20 or more individual or corporate lenders" rule must apply.
Moreover, the determination of the phrase "at any one time" to determine the "20 or more lenders" is to be
determined at the time of the original issuance. This being the case, the PEACe Bonds were not to be treated as deposit
substitutes.

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,162 the Commissioner demanded from petitioner deficiency
withholding income tax on film rentals remitted to foreign corporations for the years 1965 to 1968. The assessment was
made under Revised Memo Circular No. 4-71 issued in 1971, which used gross income as tax basis for the required
withholding tax, instead of one-half of the film rentals as provided under General Circular No. V-334. In setting aside the
assessment, this Court ruled that in the interest of justice and fair play, rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive application where applying them would prove prejudicial to
taxpayers who relied in good faith on previous issuances of the Commissioner. This Court further held that Section 24(b)
of then National Internal Revenue Code sought to be implemented by General Circular No. V-334 was neither too plain
nor simple to understand and was capable of different interpretations. Thus:ChanRoblesVirtualawlibrary

The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha[d] been determined that the
tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic principle of
income taxation . . . and that a mere return of capital or investment is not income. . . ." "A part of the receipts of a non-
resident foreign film distributor derived from said film represents, therefore, a return of investment." The circular thus
fixed the return of capital at 50% to simplify the administrative chore of determining the portion of the rentals covering
the return of capital.

Were the "gross income" base clear from Sec. 24(b), perhaps, the ratiocination of the Tax Court could be upheld. It
should be noted, however, that said Section was not too plain and simple to understand. The fact that the issuance of
the General Circular in question was rendered necessary leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different interpretations.

In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was just
one in a series of enactments regarding Sec. 24(b) of the Tax Code. Republic Act No. 3825 came next on June 22, 1963
without changing the basis but merely adding a proviso (in bold letters).

(b) Tax on foreign corporation. (1) Non-resident corporations. There shall be levied, collected, and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign
corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits and income, a tax equal to thirty per centum of such amount: PROVIDED,
HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS. (double emphasis ours)

Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some words
(also in bold letters).

"(b) Tax on foreign corporations. (1) Nonresident corporations. There shall be levied, collected and paid for each
taxable year, in lieu of the tax imposed by the preceding paragraph, upon the amount received by every foreign
corporation not engaged in trade or business within the Philippines, from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal to thirty per
centum of such amount."

The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It
provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction." Note should be taken of the fact that this case involves not a mere opinion
of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all internal revenue officials"
by the then Commissioner of Internal Revenue.

It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum
Circular No. 4-71, that Sec. 24(b) was amended to refer specifically to 35% of the "gross income."163 (Emphasis supplied)

San Roque has held that the 120-day and the 30-day periods under Section 112 of the National Internal Revenue Code
are mandatory and jurisdictional. Nevertheless, San Roque provided an exception to the rule, such that judicial claims
filed by taxpayers who relied on BIR Ruling No. DA-489-03from its issuance on December 10, 2003 until its reversal by
this Court in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.164 on October 6, 2010are
shielded from the vice of prematurity. The BIR Ruling declared that the "taxpayer-claimant need not wait for the lapse of
the 120-day period before it could seek judicial relief with the C[ourt] [of] T[ax] A[ppeals] by way of Petition for Review."
The Court reasoned that:ChanRoblesVirtualawlibrary

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of the Atlas
doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply prospectively. .
..

....

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a
specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-
Agency Tax Credit and Drawback Center of the Department of Finance. This government agency is also the addressee, or
the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the
Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not
wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-
03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where
this Court held that the 120+30 day periods are mandatory and jurisdictional.165 (Emphasis supplied)

The previous interpretations given to an ambiguous law by the Commissioner of Internal Revenue, who is charged to
carry out its provisions, are entitled to great weight, and taxpayers who relied on the same should not be prejudiced in
their rights.166 Hence, this Court's construction should be prospective; otherwise, there will be a violation of due process
for failure to accord persons, especially the parties affected by it, fair notice of the special burdens imposed on them.

VII
Urgent Reiterative Motion [to Direct Respondents to Comply with the Temporary Restraining Order]

Petitioners Banco de Oro, et al. allege that the temporary restraining order issued by this Court on October 18, 2011
continues to be effective under Rule 58, Section 5 of the Rules of Court and the Decision dated January 13, 2015. Thus,
considering respondents' refusal to comply with their obligation under the temporary restraining order, petitioners ask
this Court to issue a resolution directing respondents, particularly the Bureau of Treasury, "to comply with its order by
immediately releasing to the petitioners during the pendency of the case the 20% final withholding tax" so that the
monies may be placed in escrow pending resolution of the case.167chanrobleslaw

We recall that in its previous pleadings, respondents remain firm in its stance that the October 18, 2011 temporary
restraining order could no longer be implemented because the acts sought to be enjoined were already fait
accompli.168 They allege that the amount withheld was already remitted by the Bureau of Treasury to the Bureau of
Internal Revenue. Hence, it became part of the General Fund, which required legislative appropriation before it could
validly be disbursed.169 Moreover, they argue that since the amount in question pertains to taxes alleged to be
erroneously withheld and collected by government, the proper recourse was for the taxpayers to file an application for
tax refund before the Commissioner of Internal Revenue under Section 204 of the National Internal Revenue
Code.170chanrobleslaw

In our January 13, 2015 Decision, we rejected respondents' defense of fait accompli. We held that the amount withheld
were yet to be remitted to the Bureau of Internal Revenue, and the evidence (journal entry voucher) submitted by
respondents was insufficient to prove the fact of remittance. Thus:ChanRoblesVirtualawlibrary
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both
the withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue. Even though the
Bureau of Treasury had already withheld the 20% final withholding tax when they received the temporary restraining
order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on
November 10, 2011. The act enjoined by the temporary restraining order had not yet been fully satisfied and was still
continuing.

Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which prescribes to national government agencies such
as the Bureau of Treasury the procedure for the remittance of all taxes they withheld to the Bureau of Internal Revenue,
a national agency shall file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by
withholding tax returns on or before the 10th day of the following month after the said taxes had been withheld. The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury, which shall be the basis
in recording the remittance of the tax collection. The Bureau of Internal Revenue will then record the amount of taxes
reflected in the TRA as tax collection in the Journal of Tax Remittance by government agencies based on its copies of the
TRA. Respondents did not submit any withholding tax return or TRA to prove that the 20% final withholding tax was
indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10-10395 dated October 18, 2011 submitted to this
court shows:ChanRoblesVirtualawlibrary

Account Debit Amount Credit

Code Amount

Bonds Payable-L/T, Dom-Zero 442- 35,000,000,000.00

360

Coupon T/Bonds

(Peace Bonds) - 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59

Due to BIR 412- 4,966,207,796.41

002

To record redemption of 10 yr Zero coupon (Peace Bond) net

of the 20% final withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per BTr letter
authority and BSP Bank Statements.

The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing the 20% final
withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on October 18,
2011. The entries merely show that the monies corresponding to 20% final withholding tax was set aside for remittance
to the Bureau of Internal Revenue.171

Respondents did not submit any withholding tax return or tax remittance advice to prove that the 20% final withholding
tax was, indeed, remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011, and
consequently became part of the general fund of the government. The corresponding journal entry in the books of both
the Bureau of Treasury and Bureau of Internal Revenue showing the transfer of the withheld funds to the Bureau of
Internal Revenue was likewise not submitted to this Court. The burden of proof lies on them to show their claim of
remittance. Until now, respondents have failed to submit sufficient supporting evidence to prove their claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation,172 this Court upheld the
right of a withholding agent to file a claim for refund of the withheld taxes of its foreign parent company. This Court,
citing Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue,173 ruled that inasmuch as it is an agent of
government for the withholding of the proper amount of tax, it is also an agent of its foreign parent company with
respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the
government. Thus:ChanRoblesVirtualawlibrary

The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made "personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms
"liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal
interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding
agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:ChanRoblesVirtualawlibrary

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as
well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return
and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty
bound to withhold; whereas the Commissioner and his deputies are not made liable by law.

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends
with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the
government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an
action for recovery of such claim. This implied authority is especially warranted where, as in the instant case, the
withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

....

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within
the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such
claim.174 (Emphasis supplied, citations omitted)

In Commissioner of Internal Revenue v. Smart Communication, Inc.:175

[W]hile the withholding agent has the right to recover the taxes erroneously or illegally collected, he nevertheless has
the obligation to remit the same to the principal taxpayer. As an agent of the taxpayer, it is his duty to return what he
has recovered; otherwise, he would be unjustly enriching himself at the expense of the principal taxpayer from whom
the taxes were withheld, and from whom he derives his legal right to file a claim for
refund.176chanroblesvirtuallawlibrary

Since respondents have not sufficiently shown the actual remittance of the 20% final withholding taxes withheld from
the proceeds of the PEACe bonds to the Bureau of Internal Revenue, there was no legal impediment for the Bureau of
Treasury (as agent of petitioners) to release the monies to petitioners to be placed in escrow, pending resolution of the
motions for reconsideration filed in this case by respondents and petitioners-inervenors RCBC and RCBC Capital.

Moreover, Sections 204 and 229 of the National Internal Revenue Code are not applicable since the Bureau of Treasury's
act of withholding the 20% final withholding tax was done after the Petition was filed.

Petitioners also urge177 us to hold respondents liable for 6% legal interest reckoned from October 19, 2011 until they
fully pay the amount corresponding to the 20% final withholding tax.

This Court has previously granted interest in cases where patent arbitrariness on the part of the revenue authorities has
been shown, or where the collection of tax was illegal.178chanrobleslaw

In Philex Mining Corp. v. Commissioner of Internal Revenue:179

[T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the collection of the tax was
attended by arbitrariness. An action is not arbitrary when exercised honestly and upon due consideration where there is
room for two opinions, however much it may be believed that an erroneous conclusion was reached. Arbitrariness
presupposes inexcusable or obstinate disregard of legal provisions.180 (Emphasis supplied, citations omitted)

Here, the Bureau of Treasury made no effort to release the amount of P4,966,207,796.41, corresponding to the 20%
final withholding tax, when it could have done so.

In the Court's temporary restraining order dated October 18, 2011,181 which respondent received on October 19, 2011,
we "enjoin[ed] the implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition
that the 20% final withholding tax on interest income therefrom shall be withheld by the petitioner banks and placed in
escrow pending resolution of [the] petition."182chanrobleslaw

Subsequently, in our November 15, 2011 Resolution, we directed respondents to "show cause why they failed to comply
with the [temporary restraining order]; and [to] comply with the [temporary restraining order] in order that petitioners
may place the corresponding funds in escrow pending resolution of the petition."183chanrobleslaw

Respondent did not heed our orders.

In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury for its continued retention of the
amount corresponding to the 20% final withholding tax, in wanton disregard of the orders of this Court.

We further ordered the Bureau of Treasury to immediately release and pay the bondholders the amount corresponding
to the 20% final withholding tax that it withheld on October 18, 2011.
However, respondent remained obstinate in its refusal to release the monies and exhibited utter disregard and defiance
of this Court.

As early as October 19, 2011, petitioners could have deposited the amount of P4,966,207,796.41 in escrow and earned
interest, had respondent Bureau of Treasury complied with the temporary restraining order and released the funds. It
was inequitable for the Bureau of Treasury to have withheld the potential earnings of the funds in escrow from
petitioners.

Due to the Bureau of Treasury's unjustified refusal to release the funds to be deposited in escrow, in utter disregard of
the orders of the Court, it is held liable to pay legal interest of 6% per annum184 on the amount of P4,966,207,796.41
representing the 20% final withholding tax on the PEACe Bonds.

WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and petitioners-intervenors RCBC
and RCBC Capital Corporation's Motion for Clarification and/or Partial Reconsideration is PARTLY GRANTED.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the bondholders the amount of
P4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, with legal interest of 6% per annum
from October 19, 2011 until full payment.

SO ORDERED.

FITNESS BY DESIGN, INC., G.R. No. 177982

Petitioner,
- versus - Promulgated:
COMMISSIONER ON INTERNAL REVENUE, October 17, 2008
Respondent.
x-------------------------------------------------x

DECISION

CARPIO MORALES, J.:

On March 17, 2004, the Commissioner on Internal Revenue (respondent) assessed Fitness by Design, Inc. (petitioner) for
deficiency income taxes for the tax year 1995 in the total amount of P10,647,529.69.[1] Petitioner protested the
assessment on the ground that it was issued beyond the three-year prescriptive period under Section 203 of the Tax
Code.[2] Additionally, petitioner claimed that since it was incorporated only on May 30, 1995, there was no basis to
assume that it had already earned income for the tax year 1995.[3]

On February 1, 2005, respondent issued a warrant of distraint and/or levy against petitioner,[4] drawing petitioner to file
on March 1, 2005 a Petition for Review (with Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests subject of this Petition)[5] before the Court of Tax Appeals (CTA)
before which it reiterated its defense of prescription. The petition was docketed as CTA Case No. 7160.

In his Answer,[6] respondent alleged:

The right of the respondent to assess petitioner for deficiency income tax, VAT and Documentary Stamp Tax for the year
1995 has not prescribed pursuant to Section 222(a) of the 1997 Tax Code. Petitioners 1995 Income Tax Return (ITR) filed
on April 11, 1996 was false and fraudulent for its deliberate failure to declare its true sales. Petitioner declared in its
1995 Income Tax Return that it was on its pre-operation stage and has not declared its income. Investigation by the
revenue officers of the respondent, however, disclosed that it has been operating/doing business and had sales
operations for the year 1995 in the total amount of P7,156,336.08 which it failed to report in its 1995 ITR. Thus, for the
year 1995, petitioner filed a fraudulent annual income return with intent to evade tax. Likewise, petitioner failed to file
Value-Added Tax (VAT) Return and reported the amount of P7,156,336.08 as its gross sales for the year 1995. Hence,
for failure to file a VAT return and for filing a fraudulent income tax return for the year 1995, the corresponding taxes
may be assessed at any time within ten (10) years after the discovery of such omission or fraud pursuant to Section
222(a) of the 1997 Tax Code.

The subject deficiency tax assessments have already become final, executory and demandable for failure of the
petitioner to file a protest within the reglementary period provided for by law. The alleged protest allegedly filed on
June 25, 2004 at the Legal Division, Revenue Region No. 8, Makati City is nowhere to be found in the BIR Records nor
reflected in the Record Book of the Legal Division as normally done by our receiving clerk when she receive[s] any
document. The respondent, therefore, has legal basis to collect the tax liability either by distraint and levy or civil
action.[7] (Emphasis and underscoring supplied)

The aforecited Section 222(a)[8] of the 1997 Tax Code provides:

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 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. (Underscoring supplied)

The Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a criminal complaint before the Department of
Justice against the officers and accountant of petitioner for violation of the provisions of The National Internal Revenue
Code of 1977, as amended,[9] covering the taxable year 1995. The criminal complaint was docketed as I.S. No. 2005-203.

On motion of petitioner in CTA Case No. 7160, a preliminary hearing on the issue of prescription[10] was conducted
during which petitioners former bookkeeper attested that a former colleague certified public accountant Leonardo
Sablan (Sablan) illegally took custody of petitioners accounting records, invoices, and official receipts and turned them
over to the BIR.[11]

On petitioners request, a subpoena ad testificandum was issued to Sablan for the hearing before the CTA scheduled
on September 4, 2006 but he failed to appear.[12]

Petitioner thus requested for the issuance of another subpoena ad testificandum to Sablan for the hearing scheduled
on October 23, 2006,[13] and of subpoena duces tecum to the chief of the National Investigation Division of the BIR for
the production of the Affidavit of the Informer bearing on the assessment in question.[14] Petitioners requests were
granted.[15]

During the scheduled hearing of the case on October 23, 2006, on respondents counsels manifestation that he was not
furnished a copy of petitioners motion for the issuance of subpoenaes, the CTA ordered petitioner to file a motion for
the issuance of subpoenas and to furnish respondents counsel a copy thereof.[16] Petitioner complied with the CTA
order.[17]
In a related move, petitioner submitted written interrogatories addressed to Sablan and to Henry Sarmiento and
Marinella German, revenue officers of the National Investigation Division of the BIR.[18]

By Resolution[19] of January 15, 2007, the CTA denied petitioners Motion for Issuance of Subpoenas and disallowed the
submission by petitioner of written interrogatories to Sablan, who is not a party to the case, and the revenue
officers,[20] it finding that the testimony, documents, and admissions sought are not relevant.[21] Besides, the CTA found
that to require Sablan to testify would violate Section 2 of Republic Act No. 2338, as implemented by Section 12 of
Finance Department Order No. 46-66, proscribing the revelation of identities of informers of violations of internal
revenue laws, except when the information is proven to be malicious or false.[22]

In any event, the CTA held that there was no need to issue a subpoena duces tecum to obtain the Affidavit of the
Informer as the same formed part of the BIR records of the case, the production of which had been ordered by it.[23]

Petitioners Motion for Reconsideration[24] of the CTA Resolution of January 15, 2007 was denied,[25] hence, the present
Petition for Certiorari[26] which imputes grave abuse of discretion to the CTA

I.
x x x in holding that the legality of the mode of acquiring the documents which are the bases of the above discussed
deficiency tax assessments, the subject matter of the Petition for Review now pending in the Honorable Second Division,
is not material and relevant to the issue of prescription.

II.
x x x in holding that Mr. Leonardo Sablans testimony, if allowed, would violate RA 2338 which prohibits the BIR to reveal
the identity of the informer since 1) the purpose of the subpoena is to elicit from him the whereabouts of the original
accounting records, documents and receipts owned by the Petitioner and not to discover if he is the informer since the
identity of the informer is not relevant to the issues raised; 2) RA 2338 cannot legally justify violation of the Petitioners
property rights by a person, whether he is an informer or not, since such RA cannot allow such invasion of property
rights otherwise RA 2338 would run counter to the constitutional mandate that no person shall be deprive[d] of life,
liberty or property without due process of law.

III.
x x x in holding that the issuance of subpoena ad testificandum would constitute a violation of the prohibition to reveal
the identity of the informer because compliance with such prohibition has been rendered moot and academic by the
voluntary admissions of the Respondent himself.

IV.
x x x in holding that the constitutional right of an accused to examine the witness against him does not exist in this
case. The Petitioners liability for tax deficiency assessment which is the main issue in the Petition for Review is currently
pending at the Honorable Second Division. Therefore, it is a prejudicial question raised in the criminal case filed by the
herein Respondent against the officers of the Petitioner with the Department of Justice.

V.
x x x in dismissing the request for subpoena ad testificandum because the Opposition thereto submitted by the
Respondent was not promptly filed as provided by the Rules of Court thus, it is respectfully submitted that, Respondent
has waived his right to object thereto.

VI.
x x x when the Honorable Court of Tax Appeals ruled that the purpose of the Petitioner in requesting for written
interrogatories is to annoy, embarrass, or oppress the witness because such ruling has no factual basis since Respondent
never alleged nor proved that the witnesses to whom the interrogatories are addressed will be annoyed, embarrassed
or oppressed; besides the only obvious purpose of the Petitioner is to know the whereabouts of accounting records and
documents which are in the possession of the witnesses to whom the interrogatories are directed and to ultimately get
possession thereof. Granting without admitting that there is annoyance, embarrassment or oppression; the same is not
unreasonable.

VII.
x x x when it failed to rule that the BIR officers and employees are not covered by the prohibition under RA 2338 and do
not have the authority to withhold from the taxpayer documents owned by such taxpayer.

VIII.
x x x when it required the clear and unequivocal proof of relevance of the documents as a condition precedent for the
issuance of subpoena duces tecum.

IX.
x x x when it quashed the subpoena duces tecum as the Honorable Court had issued an outstanding order to the
Respondent to certify and forward to the CTA all the records of the case because up to the date of this Petition the BIR
records have not been submitted yet to the CTA.[27]

Grave abuse of discretion implies such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction
or, in other words, when the power is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive duty or a virtual refusal of duty
enjoined or to act at all in contemplation of law.[28]

The Court finds that the issuance by the CTA of the questioned resolutions was not tainted by arbitrariness.

The fact that Sablan was not a party to the case aside, the testimonies, documents, and admissions sought by petitioner
are not indeed relevant to the issue before the CTA.For in requesting the issuance of the subpoenas and the submission
of written interrogatories, petitioner sought to establish that its accounting records and related documents, invoices,
and receipts which were the bases of the assessment against it were illegally obtained. The only issues, however, which
surfaced during the preliminary hearing before the CTA, were whether respondents issuance of assessment against
petitioner had prescribed and whether petitioners tax return was false or fraudulent.

Besides, as the CTA held, the subpoenas and answers to the written interrogatories would violate Section 2 of Republic
Act No. 2338 as implemented by Section 12 of Finance Department Order No. 46-66.
Petitioner claims, however, that it only intended to elicit information on the whereabouts of the documents it needs in
order to refute the assessment, and not to disclose the identity of the informer.[29] Petitioners position does not
persuade. The interrogatories addressed to Sablan and the revenue officers show that they were intended to confirm
petitioners belief that Sablan was the informer. Thus the questions for Sablan read:

1. Under what circumstances do you know petitioner corporation? Please state in what capacity, the date or
period you obtained said knowledge.
2. Do you know a Ms. Elnora Carpio, who from 1995 to the early part of 1996 was the book keeper of
petitioner? Please state how you came to know of Ms. Carpio.
3. At the time that Ms. Carpio was book keeper of petitioner did she consult you or show any accounting
documents and records of petitioner?
4. What documents, if any, did you obtain from petitioner?
5. Were these documents that you obtained from petitioner submitted to the Bureau of Internal Revenue
(BIR)? Please describe said documents and under what circumstances the same were submitted.
6. Was the consent of the petitioner, its officers or employees obtained when the documents that you
obtained were submitted to the BIR? Please state when and from whom the consent was obtained.
7. Did you execute an affidavit as an informer in the assessment which was issued by the BIR against petitioner
for the tax year 1995 and other years?[30] (Underscoring supplied)
while the questions for the revenue officers read:

1. Where did you obtain the documents, particularly the invoices and official receipts, which [were] used by your office
as evidence and as basis of the assessment for deficiency income tax and value added tax for the tax year 1995 issued
against petitioner?

2. Do you know Mr. Leonardo Sablan? Please state under what circumstance you came to know Mr.
Sablan?[31] (Underscoring supplied)

Petitioner impugns the manner in which the documents in question reached the BIR, Sablan having allegedly submitted
them to the BIR without its (petitioners) consent.Petitioners lack of consent does not, however, imply that the BIR
obtained them illegally or that the information received is false or malicious. Nor does the lack of consent preclude the
BIR from assessing deficiency taxes on petitioner based on the documents. Thus Section 5 of the Tax Code provides:

In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the
liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the
Commissioner is authorized:

(A) To examine any book, paper, record or other data which may be relevant or material to such query;
(B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is
subject to audit or investigation, or from any office or officer of the national and local governments, government
agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned and controlled
corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross
incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint
ventures or consortia and registered partnerships and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or employee of such person,
or any person having possession, custody, or care of the books of accounts and other accounting records containing
entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or
his duly authorized representatives at a time and place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry;
and
(E) To cause revenue officers and employees to make a canvass from time to time of any revenue district or
region and inquire after and concerning all persons therein who may be liable to pay any internal revenue tax, and all
persons owning or having the care, management or possession of any object with respect to which a tax is imposed.

x x x x (Emphasis and underscoring supplied)

The law thus allows the BIR access to all relevant or material records and data in the person of the taxpayer,[32] and the
BIR can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly
observed.[33] To require the consent of the taxpayer would defeat the intent of the law to help the BIR assess and collect
the correct amount of taxes.
Petitioners invocation of the rights of an accused in a criminal prosecution to cross examine the witness against him and
to have compulsory process issued to secure the attendance of witnesses and the production of other evidence in his
behalf does not lie. CTA Case No. 7160 is not a criminal prosecution, and even granting that it is related to I.S. No. 2005-
203, the respondents in the latter proceeding are the officers and accountant of petitioner-corporation, not
petitioner. From the complaint and supporting affidavits in I.S. No. 2005-203, Sablan does not even appear to be a
witness against the respondents therein.[34]

AT ALL EVENTS, issuance of subpoena duces tecum for the production of the documents requested by the petitioner
which documents petitioner claims to be crucial to its defense[35] is unnecessary in view of the CTA order for respondent
to certify and forward to it all the records of the case.[36] If the order has not been complied with, the CTA can enforce it
by citing respondent for indirect contempt.[37]

WHEREFORE, in light of the foregoing disquisition, the petition is DISMISSED.

Costs against petitioner.

SO ORDERED.
 COMMISSION OF INTERNAL REVENUE, G.R. No. 170389
Petitioner,
Present:

CARPIO, J., Chairperson,

- versus - LEONARDO-DE CASTRO,*
PERALTA,
MENDOZA, and
SERENO,** JJ.

AQUAFRESH SEAFOODS, INC., Promulgated:

Respondent.
October 20, 2010

x-----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.:

Before this Court is a petition for review on certiorari,[1] under Rule 45 of the Rules of Court, seeking to set aside the
November 9, 2005 Decision[2] of the Court of Tax Appeals (CTA) En Banc in CTA-E.B. No. 77. The CTA En Banc affirmed
the December 22, 2004 Decision of the CTA First Division.

The facts of the case are as follows:

On June 7, 1999, respondent Aquafresh Seafoods Inc. sold to Philips Seafoods, Inc. two parcels of land, including
improvements thereon, located at Barrio Banica, Roxas City, for the consideration of Three Million One Hundred
Thousand Pesos (Php 3,100, 000.00). Said properties were covered under Transfer Certificate of Titles Nos. T-21799 and
T-21804.

Respondent then filed a Capital Gains Tax Return/Application for Certification Authorizing Registration and paid the
amount of Php186,000.00, representing the Capital Gains Tax (CGT) and the amount of Php46,500.00, representing the
Documentary Stamp Tax (DST) due from the said sale. Subsequently, Revenue District Officer Gil G. Tabanda issued
Certificate Authorizing Registration No. 1071477.

The Bureau of Internal Revenue (BIR), however, received a report that the lots sold were undervalued for taxation
purposes. This prompted the Special Investigation Division (SID) of the BIR to conduct an occular inspection over the
properties. After the investigation, the SID concluded that the subject properties were commercial with a zonal value
of Php2,000.00 per square meter.

On September 15, 2000, Regional Director Leonardo Q. Sacamos (Director Sacamos) of the Revenue Region Iloilo City
sent two Assessment Notices apprising respondent of CGT and DST defencies in the sum of Php1,372,171.46 and
Php356,267.62, respectively. Director Sacamos relied on the findings of the SID that the subject properties were
commercial with a zonal valuation of Php2,000.00 per square meter.
On October 1, 2000, respondent sent a letter protesting the assessments made by Director Sacamos. On December 1,
2000, Director Sacamos denied respondent's protest for lack of legal basis. Respondent appealed, but the same was
denied with finality on February 13, 2002.

On March 19, 2002, respondent filed a petition for review[3] before the CTA seeking the reversal of the denial of its
protest. The main thrust of respondent's petition was that the subject properties were located in Barrio Banica, Roxas,
where the pre-defined zonal value was Php650.00 per square meter based on the Revised Zonal Values of Real
Properties in the City of Roxas under Revenue District Office No. 72 Roxas City (1995 Revised Zonal Values of Real
Properties). Respondent asserted that the subject properties were classified as RR or residential and not commercial.
Respondent argued that since there was already a pre-defined zonal value for properties located in Barrio Banica, the
BIR officials had no business re-classifying the subject properties to commercial.

On December 22, 2004, the CTA promulgated a Decision[4] ruling in favor of respondent, the dispositive portion of which
reads:

IN VIEW OF THE FOREGOING, respondent's assessments for deficiency capital against tax and documentary stamp taxes
are hereby CANCELLED and SET ASIDE. x x x

SO ORDERED.[5]

Ruling in favor of respondent, the CTA opined that that the existing Revised Zonal Values in the City of Roxas should
prevail for purposes of determining respondent's tax liabilities, thus:

While respondent is given the authority to determine the fair market value of the subject properties for the purpose of
computing internal revenue taxes, such authority is not without restriction or limitation. The first sentence of Section
6(E) sets the limitation or condition in the exercise of such power by requiring respondent to consult with competent
appraisers both from private and public sectors. As there was no re-evaluation and no revision of the zonal values of
the subject properties in Roxas City at the time of the sale, respondent cannot unilaterally determine the zonal values of
the subject properties by invoking his powers of obtaining information and making assessments under Sections 5 and 6
of the NIRC. The existing Revised Zonal Values of Real Properties in the City of Roxas shall prevail for the purpose of
determining the proper tax liabilities of petitioner.[6]

Petitioner Commissioner of Internal Revenue filed a Motion for Reconsideration, which was, however, denied by the
CTA in a Resolution[7] dated April 4, 2005.

Petitioner then appealed to the CTA En Banc.

In a Decision dated November 9, 2005, the CTA En Banc dismissed petitioner's appeal, the dispositive portion of which
reads:

WHEREFORE, premises considered, the Petition for Review is DISMISSED for lack of merit.
SO ORDERED.[8]

The CTA En Banc ruled that the 1995 Revised Zonal Values of Real Properties should prevail. Said court relied on Section
6 (E) of the National Internal Revenue Code (NIRC) which requires consultation from appraisers, from both the public
and private sectors, in fixing the zonal valuation of properties. The CTA En Banc held that petitioner failed to prove any
amendment effected on the 1995 Revised Zonal Values of Real Properties at the time of the sale of the subject
properties.

Hence, herein petition, with petitioner raising the following issues for this Court's resolution, to wit:

I.
WHETHER OR NOT THE REQUIREMENT OF CONSULTATION WITH COMPETENT APPRAISERS BOTH FROM THE PRIVATE
AND PUBLIC SECTORS IN DETERMINING THE FAIR MARKET VALUE OF THE SUBJECT LOTS IS APPLICABLE IN THE CASE AT
BAR.

II.
WHETHER OR NOT THE COURT OF TAX APPEALS EN BANC COMMITTED GRAVE ERROR IN APPLYING THE FAIR MARKET
VALUE BASED ON THE ZONAL VALUATION OF A RESIDENTIAL LAND AS TAX BASE IN THE COMPUTATION OF CAPITAL
GAINS TAX AND DOCUMENTARY STAMP TAX DEFICIENCIES OF RESPONDENT.[9]

The petition is not meritorious. The issues being interrelated, this Court shall discuss the same in seriatim.
Under Section 27(D)(5) of the NIRC of 1997, a CGT of six (6%) percent is imposed on the gains presumed to have been
realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a
corporation and which are treated as capital assets based on the gross selling price or fair market value as determined in
accordance with Section 6(E) of the NIRC, whichever is higher.

On the other hand, under Section 196 of the NIRC, DST is based on the consideration contracted to be paid or on its fair
market value determined in accordance with Section 6(E) of the NIRC, whichever is higher.

Thus, in determining the value of CGT and DST arising from the sale of a property, the power of the CIR to assess is
subject to Section 6(E) of the NIRC, which provides:

Section 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. -

xxxx

(E) Authority of the Commissioner to Prescribe Real Property Values The Commissioner is hereby authorized to divide
the Philippines into different zones or area and shall, upon consultation with competent appraisers both from the
private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes
of computing internal revenue tax, the value of the property shall be, whichever is higher of:

(1) the fair market value as determined by the Commissioner; or

(2) the fair market value as shown in the schedule of values of the Provincial and City Assessors.

While the CIR has the authority to prescribe real property values and divide the Philippines into zones, the law is clear
that the same has to be done upon consultation with competent appraisers both from the public and private sectors. It
is undisputed that at the time of the sale of the subject properties found in Barrio Banica, Roxas City, the same were
classified as RR, or residential, based on the 1995 Revised Zonal Value of Real Properties. Petitioner, thus, cannot
unilaterally change the zonal valuation of such properties to commercial without first conducting a re-evaluation of the
zonal values as mandated under Section 6(E) of the NIRC.

Petitioner argues, however, that the requirement of consultation with competent appraisers is mandatory only when it
is prescribing real property values that is when a formulation or change is made in the schedule of zonal
values. Petitioner also contends that what it did in the instant case was not to prescribe the zonal value, but merely
classify the same as commercial and apply the corresponding zonal value for such classification based on the existing
schedule of zonal values in Roxas City.[10]

We disagree.

To this Court's mind, petitioner's act of re-classifying the subject properties from residential to commercial cannot be
done without first complying with the procedures prescribed by law. It bears to stress that ALL the properties
in Barrio Banica were classified as residential, under the 1995 Revised Zonal Values of Real Properties. Thus, petitioner's
act of classifying the subject properties involves a re-classification and revision of the prescribed zonal values.

In addition, Revenue Memorandum No. 58-69 provides for the procedures on the establishment of the zonal values of
real properties, viz.:
(1) The submission or review by the Revenue District Offices Sub-Technical Committee of the schedule of recommended
zonal values to the TCRPV;
(2) The evaluation by TCRPV of the submitted schedule of recommended zonal values of real properties;
(3) Except in cases of correction or adjustment, the TCRPV finalizes the schedule and submits the same to the Executive
Committee on Real Property Valuation (ECRPV);
(3) Upon approval of the schedule of zonal values by the ECRPV, the same is embodied in a Department Order for
implementation and signed by the Secretary of Finance. Thereafter, the schedule takes effect (15) days after its
publication in the Official Gazette or in any newspaper of general circulation.

Petitioner failed to prove that it had complied with Revenue Memorandum No. 58-69 and that a revision of the 1995
Revised Zonal Values of Real Properties was made prior to the sale of the subject properties. Thus, notwithstanding
petitioner's disagreement to the classification of the subject properties, the same must be followed for purposes of
computing the CGT and DST. It bears stressing, and as observed by the CTA En Banc, that the 1995 Revised Zonal Values
of Real Properties was drafted by petitioner, BIR personnel, representatives from the Department of Finance, National
Tax Research Center, Institute of Philippine Real Estate Appraisers and Philippine Association of Realtors Board, which
duly satisfied the requirement of consultation with public and private appraisers.[11]
Petitioner contends, nevertheless, that its act of classifying the subject properties based on actual use was in accordance
with guidelines number 1-b and 2 as set forth in Certain Guidelines in the Implementation of Zonal Valuation of Real
Properties for RDO 72 Roxas City (Zonal Valuation Guidelines).[12]

Section 1 (b) of the Zonal Valuation Guidelines reads:

1. No zonal value has been prescribed for a particular classification of real property.

Where in the approved schedule of zonal values for a particular barangay -

xxxx

b) No zonal value has been prescribed for a particular classification of real property in one barangay, the zonal value
prescribed for the same classification of real property located in an adjacent barangay of similar conditions shall be
used.
Section 1 (b) does not apply to the case at bar for the simple reason that said proviso operates only when no zonal
valuation has been prescribed. The properties located in BarrioBanica, Roxas City were already subject to a zonal
valuation, a fact which even petitioner has admitted in its petition, thus:

It must be noted that under the schedule of zonal values, Barangay Banica, where the subject lots are situated, has a
single classification only that of a residential area. Accordingly, it has a prescribed zonal value of Php650.00 per square
meter.[13]

Petitioner, however, also relies on Section 2 (a) of the Zonal Valuation Guidelines, to justify its action. Said section
states:

2. Predominant Use of Property.

a) All real properties, regardless of actual use, located in a street/barangay zone, the use of which are predominantly
commercial shall be classified as Commercial for purposes of zonal valuation.

In BIR Ruling No. 041-2001, issued on September 18, 2001, the BIR tackled the application of a provision which is
identical to Section 2 (a) of the Zonal Valuation Guidelines. BIR Ruling No. 041-2001 involved a request by the Iglesia Ni
Cristo that the re-computation of CGT and DST based on the predominant use of the real properties located at
Mindanao Avenue, Quezon City, be set aside. In said case, the Iglesia ni Cristo paid the CGT and DST based on the zonal
value of residential lots in Quezon City. The Revenue District Officer, however, ordered a re-computation of the CGT and
DST based on the ground that the real property is located in a predominantly commercial area and must be classified as
commercial for purposes of zonal valuation. The BIR ruled in favor of Iglesia ni Cristo stating that Certain Guidelines in
the Implementation of Zonal Valuation of Real Properties for RDO No. 38, applying the predominant use of property as
the basis for the computation of the Capital Gains and Documentary Stamp Taxes, shall apply only when the real
property is located in an area or zone where the properties are not yet classified and their respective zonal valuation
are not yet determined. The pertinent portion of BIR Ruling No. 041-2001 reads:

In reply, please be informed that this Office finds your request meritorious. The number 2 guideline laid down in Certain
Guidelines in the implementation of Zonal valuation of Real Properties for RDO No. 38- North Quezon City xxx does not
apply to this case.

Number 2 of the CERTAIN GUIDELINES IN THE IMPLEMENTATION OF ZONAL VALUATION OF REAL PROPERTIES FOR RD
NO. 38 NORTH QUEZON CITY provides:

2. PREDOMINANT USE OF PROPERTY:

ALL REAL PROPERTIES REGARDLESS OF ACTUAL USE, LOCATED IN A STREET/BARANGAY ZONE, THE USE OF WHICH ARE
PREDOMINANTLY COMMERCIAL SHALL BE CLASSIFIED AS 'COMMERICIAL'FOR PURPOSES OF ZONAL VALUATION.
It is the considered opinion of this Office that the guideline applies when the real property is located in an area or
zone where the properties are not yet classified and their respective zonal valuation are not yet determined.
In the instant case, however, the classification and valuation of the properties located in Mindanao Avenue, Bagong
Bantay, have already been determined. Under Department of Finance Order No. 6-2000, the properties along
Mindanao Avenue had already been classified as residential and commercial. The zonal valuation thereof had already
been determined. x x x Therefore, the Revenue District Officer of RDO No. 38 has no discretion to determine the
classification or valuation of the properties located in the pertinent area. The computation of the capital gains and
documentary stamp taxes shall be based on the zonal of residential properties located at Mindanao Avenue, Bago
Bantay, Quezon City.[14]
Based on the foregoing, this Court need not belabour on the applicability of Section 2 (a), as the BIR itself has already
ruled that the same shall apply only when the real property is located in an area or zone where the properties are not
yet classified and their respective zonal valuation are not yet determined. As mentioned earlier, the subject properties
were already part of the 1995 Revised Zonal Value of Real Properties which classified the same as residential with a
zonal value of Php650.00 per square meter; thus, Section 2 (a) clearly has no application.
This Court agrees with the observation of the CTA that zonal valuation was established with the objective of having an
efficient tax administration by minimizing the use of discretion in the determination of the tax based on the part of the
administrator on one hand and the taxpayer on the other hand.[15] Zonal value is determined for the purpose of
establishing a more realistic basis for real property valuation. Since internal revenue taxes, such as CGT and DST, are
assessed on the basis of valuation, the zonal valuation existing at the time of the sale should be taken into account.[16]

If petitioner feels that the properties in Barrio Banica should also be classified as commercial, then petitioner should
work for its revision in accordance with Revenue Memorandum Order No. 58-69. The burden was on petitioner to prove
that the classification and zonal valuation in Barrio Banica have been revised in accordance with the prevailing
memorandum. In the absence of proof to the contrary, the 1995 Revised Zonal Values of Real Properties must be
followed.

Lastly, this Court takes note of the wording of Section 2 (b) of the Zonal Valuation Guidelines, to wit:

2. Predominant Use of Property.

b) The predominant use of other classification of properties located in a street/barangay zone, regardless of actual
use shall be considered for purposes of zonal valuation.

Based thereon, this Court rules that even assuming arguendo that the subject properties were used for commercial
purposes, the same remains to be residential for zonal value purposes. It appears that actual use is not considered for
zonal valuation, but the predominant use of other classification of properties located in the zone. Again, it is undisputed
that the entire Barrio Banica has been classified as residential.
WHEREFORE, premises considered, the petition is denied. The November 9, 2005 Decision of the Court of Tax
Appeals En Banc, in CTA-E.B. No. 77, is hereby AFFIRMED.

SO ORDERED.
[G.R. No. 136975. March 31, 2005]

COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING CO., INC., respondent.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision[1] of the Court of Appeals (CA) which reversed the Decision[2] of the Court
of Tax Appeals (CTA) in CTA Case No. 5126, upholding the deficiency income and sales tax assessments against respondent
Hantex Trading Co., Inc.

The Antecedents

The respondent is a corporation duly organized and existing under the laws of the Philippines. Being engaged in the sale
of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it
is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs
under Section 1301 of the Tariff and Customs Code.

Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence
and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin
amounting to P115,599,018.00 but only declared P45,538,694.57.[3] According to the informer, based on photocopies of
77 Consumption Entries furnished by another informer, the 1987 importations of the respondent were understated in its
accounting records.[4] Amoto submitted a report to the EIIB Commissioner recommending that an inventory audit of the
respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the EIIB.[5]

Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued Mission Order No. 398-89[6] dated
November 14, 1989 for the audit and investigation of the importations of Hantex for 1987. The IIPO issued subpoena duces
tecum and ad testificandum for the president and general manager of the respondent to appear in a hearing and bring
the following:

1. Books of Accounts for the year 1987;

2. Record of Importations of Synthetic Resin and Calcium Carbonate for the year 1987;

3. Income tax returns & attachments for 1987; and

4. Record of tax payments.[7]

However, the respondents president and general manager refused to comply with the subpoena, contending that its books
of accounts and records of importation of synthetic resin and calcium bicarbonate had been investigated repeatedly by
the Bureau of Internal Revenue (BIR) on prior occasions.[8] The IIPO explained that despite such previous investigations,
the EIIB was still authorized to conduct an investigation pursuant to Section 26-A of Executive Order No. 127. Still, the
respondent refused to comply with the subpoena issued by the IIPO. The latter forthwith secured certified copies of the
Profit and Loss Statements for 1987 filed by the respondent with the Securities and Exchange Commission
(SEC).[9] However, the IIPO failed to secure certified copies of the respondents 1987 Consumption Entries from the Bureau
of Customs since, according to the custodian thereof, the original copies had been eaten by termites.[10]

In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection Division, Manila International Container
Port, and the Acting Chief of the Collection Division, Port of Manila, to authenticate the machine copies of the import
entries supplied by the informer. However, Chief of the Collection Division Merlita D. Tomas could not do so because the
Collection Division did not have the original copies of the entries. Instead, she wrote the IIPO that, as gleaned from the
records, the following entries had been duly processed and released after the payment of duties and taxes:

IMPORTER HANTEX TRADING CO., INC. SERIES OF 1987

ENTRY NO. DATE RELEASED ENTRY NO. DATE RELEASED

03058-87 1-30-87 50265-87 12-09-87

09120-87 3-20-87 46427-87 11-27-87

18089-87 5-21-87 30764-87 8-21-87

19439-87 6-2-87 30833-87 8-20-87

19441-87 6-3-87 34690-87 9-16-87

11667-87 4-15-87 34722-87 9-11-87

23294-87 7-7-87 43234-87 11-2-87

45478-87 11-16-87 44850-87 11-16-87

45691-87 12-2-87 44851-87 11-16-87

25464-87 7-16-87 46461-87 11-19-87

26483-87 7-23-87 46467-87 11-18-87

29950-87 8-11-87 48091-87 11-27-87[11]

Acting Chief of the Collection Division of the Bureau of Customs Augusto S. Danganan could not authenticate the machine
copies of the import entries as well, since the original copies of the said entries filed with the Bureau of Customs had
apparently been eaten by termites. However, he issued a certification that the following enumerated entries were filed
by the respondent which were processed and released from the Port of Manila after payment of duties and taxes, to wit:

Hantex Trading Co., Inc.

Entry No. Date Released Entry No. Date Released

03903 1-29-87 22869 4-8-87

04414 1-20-87 19441 3-31-87

10683 2-17-87 24189 4-21-87

12611 2-24-87 26431 4-20-87

12989 2-26-87 45478 7-3-87

17050 3-13-87 26796 4-23-87

17169 3-13-87 28827 4-30-87

18089 3-16-87 31617 5-14-87

19439 4-1-87 39068 6-5-87

21189 4-3-87 42581 6-21-87

43451 6-29-87 42793 6-23-87

42795 6-23-87 45477 7-3-87

35582 not received 85830 11-13-87

45691 7-3-87 86650 not received

46187 7-8-87 87647 11-18-87

46427 7-3-87 88829 11-23-87

57669 8-12-87 92293 12-3-87

62471 8-28-87 93292 12-7-87

63187 9-2-87 96357 12-16-87

66859 9-15-87 96822 12-15-87

67890 9-17-87 98823 not received

68115 9-15-87 99428 12-28-87

69974 9-24-87 99429 12-28-87

72213 10-2-87 99441 12-28-87

77688 10-16-87 101406 1-5-87

84253 11-10-87 101407 1-8-87

85534 11-11-87 03118 1-19-87[12]

Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan
conducted an investigation. They relied on the certified copies of the respondents Profit and Loss Statement for 1987 and
1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer, as
well as excerpts from the entries certified by Tomas and Danganan.

Based on the documents/records on hand, inclusive of the machine copies of the Consumption Entries, the EIIB found that
for 1987, the respondent had importations totaling P105,716,527.00 (inclusive of advance sales tax). Compared with the
declared sales based on the Profit and Loss Statements filed with the SEC, the respondent had unreported sales in the
amount of P63,032,989.17, and its corresponding income tax liability was P41,916,937.78, inclusive of penalty charge and
interests.

EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR and recommended the collection of the
total tax assessment from the respondent.[13]
On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to the BIR Assistant Commissioner for
Special Operations Service, directing the latter to prepare a conference letter advising the respondent of its deficiency
taxes.[14]

Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers Saturnino D. Torres and Wilson Filamor
conducted an investigation on the 1987 importations of the respondent, in the light of the records elevated by the EIIB to
the BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain the respondents liability for
deficiency sales and income taxes for 1987, if any. Per Torres and Filamors Report dated March 6, 1991 which was based
on the report of the EIIB and the documents/records appended thereto, there was a prima facie case of fraud against the
respondent in filing its 1987 Consumption Entry reports with the Bureau of Customs. They found that the respondent had
unrecorded importation in the total amount of P70,661,694.00, and that the amount was not declared in its income tax
return for 1987. The District Revenue Officer and the Regional Director of the BIR concurred with the report.[15]

Based on the said report, the Acting Chief of the Special Investigation Branch wrote the respondent and invited its
representative to a conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency internal revenue taxes and to
present whatever documentary and other evidence to refute the same.[16] Appended to the letter was a computation of
the deficiency income and sales tax due from the respondent, inclusive of increments:

B. Computations:

1. Cost of Sales Ratio A2/A1 85.492923%

2. Undeclared Sales Imported A3/B1 110,079,491.61

3. Undeclared Gross Profit B2-A3 15,969,316.61

C. Deficiency Taxes Due:

1. Deficiency Income Tax B3 x 35% 5,589,261.00

50% Surcharge C1 x 50% 2,794,630.50

Interest to 2/28/91 C1 x 57.5% 3,213,825.08

Total 11,597,825.58

2. Deficiency Sales Tax

at 10% 7,290,082.72

at 20% 10,493,312.31

Total Due 17,783,395.03

Less: Advanced Sales Taxes Paid 11,636,352.00

Deficiency Sales Tax 6,147,043.03

50% Surcharge C2 x 50% 3,073,521.52

Interest to 2/28/91 5,532,338.73

Total 14,752,903.28[17]
===========

The invitation was reiterated in a Letter dated March 15, 1991. In his Reply dated March 15, 1991, Mariano O. Chua, the
President and General Manager of the respondent, requested that the report of Torres and Filamor be set aside on the
following claim:

[W]e had already been investigated by RDO No. 23 under Letters of Authority Nos. 0322988 RR dated Oct. 1, 1987,
0393561 RR dated Aug. 17, 1988 and 0347838 RR dated March 2, 1988, and re-investigated by the Special Investigation
Team on Aug. 17, 1988 under Letter of Authority No. 0357464 RR, and the Intelligence and Investigation Office on Sept.
27, 1988 under Letter of Authority No. 0020188 NA, all for income and business tax liabilities for 1987. The Economic
Intelligence and Investigation Bureau on Nov. 20, 1989, likewise, confronted us on the same information for the same
year.

In all of these investigations, save your request for an informal conference, we welcomed them and proved the contrary
of the allegation. Now, with your new inquiry, we think that there will be no end to the problem.

Madam, we had been subjected to so many investigations and re-investigations for 1987 and nothing came out except
the payment of deficiency taxes as a result of oversight. Tax evasion through underdeclaration of income had never been
proven.[18]

Invoking Section 235[19] of the 1977 National Internal Revenue Code (NIRC), as amended, Chua requested that the inquiry
be set aside.

The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner for Collection Jaime M. Maza, sent
a Letter dated April 15, 1991 to the respondent demanding payment of its deficiency income tax of P13,414,226.40 and
deficiency sales tax of P14,752,903.25, inclusive of surcharge and interest.[20] Appended thereto were the Assessment
Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655.[21]

On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR sent a letter to the respondent
demanding payment of its tax liability due for 1987 within ten (10) days from notice, on pain of the collection tax due via
a warrant of distraint and levy and/or judicial action.[22] The Warrant of Distraint and/or Levy[23] was actually served on the
respondent on January 21, 1992. On September 7, 1992, it wrote the Commissioner of Internal Revenue protesting the
assessment on the following grounds:

I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF OUR
RECORDS WAS EVER MADE BY THE EIIB WHICH RECOMMENDED ITS ISSUANCE.[24]

II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR 1987 AMOUNTED TO P105,716,527.00 AS
CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO CONSIDER
OUR REAL PURCHASES OF P45,538,694.57.[25]

III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS AND UNFOUNDED CONSIDERING THAT WE
HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR BUSINESS.[26]

In view of the impasse, administrative hearings were conducted on the respondents protest to the assessment. During
the hearing of August 20, 1993, the IIPO representative presented the photocopies of the Consumption and Import Entries
and the Certifications issued by Tomas and Danganan of the Bureau of Customs. The IIPO representative testified that the
Bureau of Customs failed to furnish the EIIB with certified copies of the Consumption and Import Entries; hence, the EIIB
relied on the machine copies from their informer.[27]
The respondent wrote the BIR Commissioner on July 12, 1993 questioning the assessment on the ground that the EIIB
representative failed to present the original, or authenticated, or duly certified copies of the Consumption and Import
Entry Accounts, or excerpts thereof if the original copies were not readily available; or, if the originals were in the official
custody of a public officer, certified copies thereof as provided for in Section 12, Chapter 3, Book VII, Administrative
Procedure, Administrative Order of 1987. It stated that the only copies of the Consumption Entries submitted to the
Hearing Officer were mere machine copies furnished by an informer of the EIIB. It asserted that the letters of Tomas and
Danganan were unreliable because of the following:

In the said letters, the two collection officers merely submitted a listing of alleged import entry numbers and dates
released of alleged importations by Hantex Trading Co., Inc. of merchandise in 1987, for which they certified that the
corresponding duties and taxes were paid after being processed in their offices. In said letters, no amounts of the landed
costs and advance sales tax and duties were stated, and no particulars of the duties and taxes paid per import entry
document was presented.

The contents of the two letters failed to indicate the particulars of the importations per entry number, and the said letters
do not constitute as evidence of the amounts of importations of Hantex Trading Co., Inc. in 1987.[28]

The respondent cited the following findings of the Hearing Officer:

[T]hat the import entry documents do not constitute evidence only indicate that the tax assessments in question have no
factual basis, and must, at this point in time, be withdrawn and cancelled. Any new findings by the IIPO representative
who attended the hearing could not be used as evidence in this hearing, because all the issues on the tax assessments in
question have already been raised by the herein taxpayer.[29]

The respondent requested anew that the income tax deficiency assessment and the sales tax deficiency assessment be
set aside for lack of factual and legal basis.

The BIR Commissioner[30] wrote the respondent on December 10, 1993, denying its letter-request for the dismissal of the
assessments.[31] The BIR Commissioner admitted, in the said letter, the possibility that the figures appearing in the
photocopies of the Consumption Entries had been tampered with. She averred, however, that she was not proscribed
from relying on other admissible evidence, namely, the Letters of Torres and Filamor dated August 7 and 22, 1990 on their
investigation of the respondents tax liability. The Commissioner emphasized that her decision was final.[32]

The respondent forthwith filed a petition for review in the CTA of the Commissioners Final Assessment Letter dated
December 10, 1993 on the following grounds:

First. The alleged 1987 deficiency income tax assessment (including increments) and the alleged 1987 deficiency sales tax
assessment (including increments) are void ab initio, since under Sections 16(a) and 49(b) of the Tax Code, the
Commissioner shall examine a return after it is filed and, thereafter, assess the correct amount of tax. The following facts
obtaining in this case, however, are indicative of the incorrectness of the tax assessments in question: the deficiency
interests imposed in the income and percentage tax deficiency assessment notices were computed in violation of the
provisions of Section 249(b) of the NIRC of 1977, as amended; the percentage tax deficiency was computed on an annual
basis for the year 1987 in accordance with the provision of Section 193, which should have been computed in accordance
with Section 162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly basis; and the BIR official who
signed the deficiency tax assessments was the Assistant Commissioner for Collection, who had no authority to sign the
same under the NIRC.

Second. Even granting arguendo that the deficiency taxes and increments for 1987 against the respondent were correctly
computed in accordance with the provisions of the Tax Code, the facts indicate that the above-stated assessments were
based on alleged documents which are inadmissible in either administrative or judicial proceedings. Moreover, the alleged
bases of the tax computations were anchored on mere presumptions and not on actual facts. The alleged undeclared
purchases for 1987 were based on mere photocopies of alleged import entry documents, not the original ones, and which
had never been duly certified by the public officer charged with the custody of such records in the Bureau of Customs.
According to the respondent, the alleged undeclared sales were computed based on mere presumptions as to the alleged
gross profit contained in its 1987 financial statement. Moreover, even the alleged financial statement of the respondent
was a mere machine copy and not an official copy of the 1987 income and business tax returns. Finally, the respondent
was following the accrual method of accounting in 1987, yet, the BIR investigator who computed the 1987 income tax
deficiency failed to allow as a deductible item the alleged sales tax deficiency for 1987 as provided for under Section 30(c)
of the NIRC of 1986.[33]

The Commissioner did not adduce in evidence the original or certified true copies of the 1987 Consumption Entries on file
with the Commission on Audit. Instead, she offered in evidence as proof of the contents thereof, the photocopies of the
Consumption Entries which the respondent objected to for being inadmissible in evidence.[34] She also failed to present
any witness to prove the correct amount of tax due from it. Nevertheless, the CTA provisionally admitted the said
documents in evidence, subject to its final evaluation of their relevancy and probative weight to the issues involved.[35]

On December 11, 1997, the CTA rendered a decision, the dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the herein petition. Petitioner is hereby
ORDERED TO PAY the respondent Commissioner of Internal Revenue its deficiency income and sales taxes for the year
1987 in the amounts of P11,182,350.26 and P12,660,382.46, respectively, plus 20% delinquency interest per annum on
both deficiency taxes from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of the 1987 Tax Code, with costs
against the petitioner.

SO ORDERED.[36]

The CTA ruled that the respondent was burdened to prove not only that the assessment was erroneous, but also to adduce
the correct taxes to be paid by it. The CTA declared that the respondent failed to prove the correct amount of taxes due
to the BIR. It also ruled that the respondent was burdened to adduce in evidence a certification from the Bureau of
Customs that the Consumption Entries in question did not belong to it.

On appeal, the CA granted the petition and reversed the decision of the CTA. The dispositive portion of the decision reads:

FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the December 11, 1997 decision of the CTA
in CTA Case No. 5162 affirming the 1987 deficiency income and sales tax assessments and the increments thereof, issued
by the BIR is hereby REVERSED. No costs.[37]

The Ruling of the Court of Appeals

The CA held that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless
since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly
authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR
investigators.[38] The CA also noted that the public officer charged with the custody of the import entries was never
presented in court to lend credence to the alleged loss of the originals.[39] The CA pointed out that an import entry is a
public document which falls within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible for
any legal purpose, Section 24, Rule 132 of the Rules of Court should apply.[40] Citing the ruling of this Court in Collector of
Internal Revenue v. Benipayo,[41] the CA ruled that the assessments were unlawful because they were based on hearsay
evidence. The CA also ruled that the respondent was deprived of its right to due process of law.

The CA added that the CTA should not have just brushed aside the legal requisites provided for under the pertinent
provisions of the Rules of Court in the matter of the admissibility of public documents, considering that substantive rules
of evidence should not be disregarded. It also ruled that the certifications made by the two Customs Collection Chiefs
under the guise of supporting the respondents alleged tax deficiency assessments invoking the best evidence obtainable
rule under the Tax Code should not be permitted to supplant the best evidence rule under Section 7, Rule 130 of the Rules
of Court.

Finally, the CA noted that the tax deficiency assessments were computed without the tax returns. The CA opined that the
use of the tax returns is indispensable in the computation of a tax deficiency; hence, this essential requirement must be
complied with in the preparation and issuance of valid tax deficiency assessments.[42]

The Present Petition

The Commissioner of Internal Revenue, the petitioner herein, filed the present petition for review under Rule 45 of the
Rules of Court for the reversal of the decision of the CA and for the reinstatement of the ruling of the CTA.

As gleaned from the pleadings of the parties, the threshold issues for resolution are the following: (a) whether the petition
at bench is proper and complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991
final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latters 1987
importation of resins and calcium bicarbonate is based on competent evidence and the law; and (c) the total amount of
deficiency taxes due from the respondent for 1987, if any.

On the first issue, the respondent points out that the petition raises both questions of facts and law which cannot be the
subject of an appeal by certiorari under Rule 45 of the Rules of Court. The respondent notes that the petition is defective
because the verification and the certification against forum shopping were not signed by the petitioner herself, but only
by the Regional Director of the BIR. The respondent submits that the petitioner should have filed a motion for
reconsideration with the CA before filing the instant petition for review.[43]

We find and so rule that the petition is sufficient in form. A verification and certification against forum shopping signed by
the Regional Director constitutes sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules of
Court. Under Section 10 of the NIRC of 1997,[44] the Regional Director has the power to administer and enforce internal
revenue laws, rules and regulations, including the assessment and collection of all internal revenue taxes, charges and
fees. Such power is broad enough to vest the Revenue Regional Director with the authority to sign the verification and
certification against forum shopping in behalf of the Commissioner of Internal Revenue. There is no other person in a
better position to know the collection cases filed under his jurisdiction than the Revenue Regional Director.

Moreover, under Revenue Administrative Order No. 5-83,[45] the Regional Director is authorized to sign all pleadings filed
in connection with cases referred to the Revenue Regions by the National Office which, otherwise, require the signature
of the petitioner.

We do not agree with the contention of the respondent that a motion for reconsideration ought to have been filed before
the filing of the instant petition. A motion for reconsideration of the decision of the CA is not a condition sine qua non for
the filing of a petition for review under Rule 45. As we held in Almora v. Court of Appeals:[46]

Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:

A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with the Supreme Court a petition for
certiorari within fifteen (15) days from notice of judgment, or of the denial of his motion for reconsideration filed in due
time. (Emphasis supplied)

The conjunctive or clearly indicates that the 15-day reglementary period for the filing of a petition for certiorari under
Rule 45 commences either from notice of the questioned judgment or from notice of denial of the appellants motion for
reconsideration. A prior motion for reconsideration is not indispensable for a petition for review on certiorari under Rule
45 to prosper. [47]
While Rule 45 of the Rules of Court provides that only questions of law may be raised by the petitioner and resolved by
the Court, under exceptional circumstances, the Court may take cognizance thereof and resolve questions of fact. In this
case, the findings and conclusion of the CA are inconsistent with those of the CTA, not to mention those of the
Commissioner of Internal Revenue. The issues raised in this case relate to the propriety and the correctness of the tax
assessments made by the petitioner against the respondent, as well as the propriety of the application of Section 16,
paragraph (b) of the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in
relation to Section 3, Rule 132 of the Rules of Evidence. There is also an imperative need for the Court to resolve the
threshold factual issues to give justice to the parties, and to determine whether the CA capriciously ignored,
misunderstood or misinterpreted cogent facts and circumstances which, if considered, would change the outcome of the
case.

On the second issue, the petitioner asserts that since the respondent refused to cooperate and show its 1987 books of
account and other accounting records, it was proper for her to resort to the best evidence obtainable the photocopies of
the import entries in the Bureau of Customs and the respondents financial statement filed with the SEC.[48] The petitioner
maintains that these import entries were admissible as secondary evidence under the best evidence obtainable rule, since
they were duly authenticated by the Bureau of Customs officials who processed the documents and released the cargoes
after payment of the duties and taxes due.[49] Further, the petitioner points out that under the best evidence obtainable
rule, the tax return is not important in computing the tax deficiency.[50]

The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977 NIRC, as amended, legally cannot
be equated to the best evidence rule under the Rules of Court; nor can the best evidence rule, being procedural law, be
made strictly operative in the interpretation of the best evidence obtainable rule which is substantive in character.[51] The
petitioner posits that the CTA is not strictly bound by technical rules of evidence, the reason being that the quantum of
evidence required in the said court is merely substantial evidence.[52]

Finally, the petitioner avers that the respondent has the burden of proof to show the correct assessments; otherwise, the
presumption in favor of the correctness of the assessments made by it stands.[53] Since the respondent was allowed to
explain its side, there was no violation of due process.[54]

The respondent, for its part, maintains that the resort to the best evidence obtainable method was illegal. In the first
place, the respondent argues, the EIIB agents are not duly authorized to undertake examination of the taxpayers
accounting records for internal revenue tax purposes. Hence, the respondents failure to accede to their demands to show
its books of accounts and other accounting records cannot justify resort to the use of the best evidence obtainable
method.[55] Secondly, when a taxpayer fails to submit its tax records upon demand by the BIR officer, the remedy is not to
assess him and resort to the best evidence obtainable rule, but to punish the taxpayer according to the provisions of the
Tax Code.[56]

In any case, the respondent argues that the photocopies of import entries cannot be used in making the assessment
because they were not properly authenticated, pursuant to the provisions of Sections 24[57] and 25[58] of Rule 132 of the
Rules of Court. It avers that while the CTA is not bound by the technical rules of evidence, it is bound by substantial
rules.[59]The respondent points out that the petitioner did not even secure a certification of the fact of loss of the original
documents from the custodian of the import entries. It simply relied on the report of the EIIB agents that the import entry
documents were no longer available because they were eaten by termites. The respondent posits that the two collectors
of the Bureau of Customs never authenticated the xerox copies of the import entries; instead, they only issued
certifications stating therein the import entry numbers which were processed by their office and the date the same were
released.[60]

The respondent argues that it was not necessary for it to show the correct assessment, considering that it is questioning
the assessments not only because they are erroneous, but because they were issued without factual basis and in patent
violation of the assessment procedures laid down in the NIRC of 1977, as amended.[61] It is also pointed out that the
petitioner failed to use the tax returns filed by the respondent in computing the deficiency taxes which is contrary to
law;[62] as such, the deficiency assessments constituted deprivation of property without due process of law.[63]

Central to the second issue is Section 16 of the NIRC of 1977, as amended,[64] which provides that the Commissioner of
Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration and
enforcement. Among such powers are those provided in paragraph (b) thereof, which we quote:

(b) Failure to submit required returns, statements, reports and other documents. When a report required by law as a basis
for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation
or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise
files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct
and sufficient for all legal purposes.[65]

This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of
assessing the proper tax against a taxpayer, to make a return in case of a taxpayers failure to file one, or to amend a return
already filed in the BIR.

The petitioner may avail herself of the best evidence or other information or testimony by exercising her power or
authority under paragraphs (1) to (4) of Section 7 of the NIRC:

(1) To examine any book, paper, record or other data which may be relevant or material to such inquiry;

(2) To obtain information from any office or officer of the national and local governments, government agencies or its
instrumentalities, including the Central Bank of the Philippines and government owned or controlled corporations;

(3) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any
person having possession, custody, or care of the books of accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such books, papers, records, or
other data, and to give testimony;

(4) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; [66]

The best evidence envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records
of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the
same line of business, including their gross profit and net profit sales.[67] Such evidence also includes data, record, paper,
document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or
from whom the subject taxpayer received any income; and record, data, document and information secured from
government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff
and Customs Commission.

The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit
or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose
of the law is to enable the BIR to get at the taxpayers records in whatever form they may be kept. Such records include
computer tapes of the said records prepared by the taxpayer in the course of business.[68] In this era of developing
information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping
capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of
the taxpayers return.

In Campbell, Jr. v. Guetersloh,[69] the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the
Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had taxable
income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the
return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may
examine and subpoena, if necessary, traders and brokers accounts and books and the taxpayers book accounts. The
Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any
practicable proof that is available in the circumstances of the particular situation. Citing its ruling in Kenney v.
Commissioner,[70] the U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and
incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during
the years in question.[71]

We agree with the contention of the petitioner that the best evidence obtainable may consist of hearsay evidence, such
as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer
subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts.[72] Moreover, the general
rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept
documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose
to give weight or disregard such evidence, depending on its trustworthiness.

However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere
photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a
taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the
Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such
copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against
a taxpayer. Indeed, in United States v. Davey,[73] the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a
taxpayers return is being checked, the government is entitled to use the original records rather than be forced to accept
purported copies which present the risk of error or tampering.[74]

In Collector of Internal Revenue v. Benipayo,[75] the Court ruled that the assessment must be based on actual facts. The
rule assumes more importance in this case since the xerox copies of the Consumption Entries furnished by the informer
of the EIIB were furnished by yet another informer. While the EIIB tried to secure certified copies of the said entries from
the Bureau of Customs, it was unable to do so because the said entries were allegedly eaten by termites. The Court can
only surmise why the EIIB or the BIR, for that matter, failed to secure certified copies of the said entries from the Tariff
and Customs Commission or from the National Statistics Office which also had copies thereof. It bears stressing that under
Section 1306 of the Tariff and Customs Code, the Consumption Entries shall be the required number of copies as
prescribed by regulations.[76] The Consumption Entry is accomplished in sextuplicate copies and quadruplicate copies in
other places. In Manila, the six copies are distributed to the Bureau of Customs, the Tariff and Customs Commission, the
Declarant (Importer), the Terminal Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner and the
BIR personnel ignored the copy of the Consumption Entries filed with the BIR and relied on the photocopies supplied by
the informer of the EIIB who secured the same from another informer. The BIR, in preparing and issuing its preliminary
and final assessments against the respondent, even ignored the records on the investigation made by the District Revenue
officers on the respondents importations for 1987.

The original copies of the Consumption Entries were of prime importance to the BIR. This is so because such entries are
under oath and are presumed to be true and correct under penalty of falsification or perjury. Admissions in the said entries
of the importers documents are admissions against interest and presumptively correct.[77]
In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of the
Consumption Entries in fixing the tax deficiency assessments against the respondent.

The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation.
The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the
calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an
invincible barrier to proof.[78] However, the rule does not apply where the estimation is arrived at arbitrarily and
capriciously.[79]

We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed
correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed,
however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence,
a prima facie case of liability on the part of the taxpayer is made.[80] If a taxpayer files a petition for review in the CTA and
assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in
preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on
several factors other than the normal evidentiary rule imposing proof obligation on the petitioner-taxpayer: the
presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information;
and the desirability of bolstering the record-keeping requirements of the NIRC.[81]

However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a naked assessment, i.e., without any
foundation character, the determination of the tax due is without rational basis.[82] In such a situation, the U.S. Court of
Appeals ruled[83] that the determination of the Commissioner contained in a deficiency notice disappears. Hence, the
determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in
credible evidence.

The issue that now comes to fore is whether the tax deficiency assessment against the respondent based on the certified
copies of the Profit and Loss Statement submitted by the respondent to the SEC in 1987 and 1988, as well as certifications
of Tomas and Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed to overcome the
prima facie correctness of the tax deficiency assessment issued by the petitioner, to wit:

The issue should be ruled in the affirmative as petitioner has failed to rebut the validity or correctness of the
aforementioned tax assessments. It is incongruous for petitioner to prove its cause by simply drawing an inference
unfavorable to the respondent by attacking the source documents (Consumption Entries) which were the bases of the
assessment and which were certified by the Chiefs of the Collection Division, Manila International Container Port and the
Port of Manila, as having been processed and released in the name of the petitioner after payment of duties and taxes
and the duly certified copies of Financial Statements secured from the Securities and Exchange Commission. Any such
inference cannot operate to relieve petitioner from bearing its burden of proof and this Court has no warrant of
absolution. The Court should have been persuaded to grant the reliefs sought by the petitioner should it have presented
any evidence of relevance and competence required, like that of a certification from the Bureau of Customs or from any
other agencies, attesting to the fact that those consumption entries did not really belong to them.

The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the
Commissioner of Internal Revenue is wrong but the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the
presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524). The burden of proving the
illegality of the assessment lies upon the petitioner alleging it to be so. In the case at bar, petitioner miserably failed to
discharge this duty.[84]

We are not in full accord with the findings and ratiocination of the CTA. Based on the letter of the petitioner to the
respondent dated December 10, 1993, the tax deficiency assessment in question was based on (a) the findings of the
agents of the EIIB which was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and Loss
Statements of the respondent for 1987 and 1988; and (c) the certifications of Tomas and Danganan dated August 7, 1990
and August 22, 1990:

In reply, please be informed that after a thorough evaluation of the attending facts, as well as the laws and jurisprudence
involved, this Office holds that you are liable to the assessed deficiency taxes. The conclusion was arrived at based on the
findings of agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own examiners who have
painstakingly examined the records furnished by the Bureau of Customs and the Securities & Exchange Commission (SEC).
The examination conducted disclosed that while your actual sales for 1987 amounted to P110,731,559.00, you declared
for taxation purposes, as shown in the Profit and Loss Statements, the sum of P47,698,569.83 only. The difference,
therefore, of P63,032,989.17 constitutes as undeclared or unrecorded sales which must be subjected to the income and
sales taxes.

You also argued that our assessment has no basis since the alleged amount of underdeclared importations were lifted
from uncertified or unauthenticated xerox copies of consumption entries which are not admissible in evidence. On this
issue, it must be considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the Collection
Division of the Manila International Container Port and Port of Manila, respectively, certified that the enumerated
consumption entries were filed, processed and released from the port after payment of duties and taxes. It is noted that
the certification does not touch on the genuineness, authenticity and correctness of the consumption entries which are
all xerox copies, wherein the figures therein appearing may have been tampered which may render said documents
inadmissible in evidence, but for tax purposes, it has been held that the Commissioner is not required to make his
determination (assessment) on the basis of evidence legally admissible in a formal proceeding in Court (Mertens, Vol. 9,
p. 214, citing Cohen v. Commissioner). A statutory notice may be based in whole or in part upon admissible evidence
(Llorente v. Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977); and Rosano v.
Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v. Commissioner (1977), the assessment was given due
course in the presence of admissible evidence as to how the Commissioner arrived at his determination, although there
was no admissible evidence with respect to the substantial issue of whether the taxpayer had unreported or undeclared
income from narcotics sale. [85]

Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents for the actual cost of importation of
the respondent are the machine copies of the Consumption Entries from the informer which the IIPO claimed to have
been certified by Tomas and Danganan:

The source documents for the total actual cost of importations, abovementioned, were the different copies of
Consumption Entries, Series of 1987, filed by subject with the Bureau of Customs, marked Annexes F-1 to F-68. The total
cost of importations is the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed entries. These
entries were duly authenticated as having been processed and released, after payment of the duties and taxes due
thereon, by the Chief, Collection Division, Manila International Container Port, dated August 7, 1990, Annex-G, and the
Port of Manila, dated August 22, 1990, Annex-H. So, it was established that subject-importations, mostly resins, really
belong to HANTEX TRADING CO., INC.[86]

It also appears on the worksheet of the IIPO, as culled from the photocopies of the Consumption Entries from its informer,
that the total cost of the respondents importation for 1987 was P105,761,527.00. Per the report of Torres and Filamor,
they also relied on the photocopies of the said Consumption Entries:

The importations made by taxpayer verified by us from the records of the Bureau of Customs and xerox copies of which
are hereto attached shows the big volume of importations made and not declared in the income tax return filed by
taxpayer.
Based on the above findings, it clearly shows that a prima facie case of fraud exists in the herein transaction of the
taxpayer, as a consequence of which, said transaction has not been possibly entered into the books of accounts of the
subject taxpayer.[87]

In fine, the petitioner based her finding that the 1987 importation of the respondent was underdeclared in the amount
of P105,761,527.00 on the worthless machine copies of the Consumption Entries. Aside from such copies, the petitioner
has no other evidence to prove that the respondent imported goods costing P105,761,527.00. The petitioner cannot find
solace on the certifications of Tomas and Danganan because they did not authenticate the machine copies of the
Consumption Entries, and merely indicated therein the entry numbers of Consumption Entries and the dates when the
Bureau of Customs released the same. The certifications of Tomas and Danganan do not even contain the landed costs
and the advance sales taxes paid by the importer, if any. Comparing the certifications of Tomas and Danganan and the
machine copies of the Consumption Entries, only 36 of the entry numbers of such copies are included in the said
certifications; the entry numbers of the rest of the machine copies of the Consumption Entries are not found therein.

Even if the Court would concede to the petitioners contention that the certification of Tomas and Danganan authenticated
the machine copies of the Consumption Entries referred to in the certification, it appears that the total cost of
importations inclusive of advance sales tax is only P64,324,953.00 far from the amount of P105,716,527.00 arrived at by
the EIIB and the BIR,[88] or even the amount of P110,079,491.61 arrived at by Deputy Commissioner Deoferio, Jr.[89] As
gleaned from the certifications of Tomas and Danganan, the goods covered by the Consumption Entries were released by
the Bureau of Customs, from which it can be presumed that the respondent must have paid the taxes due on the said
importation. The petitioner did not adduce any documentary evidence to prove otherwise.

Thus, the computations of the EIIB and the BIR on the quantity and costs of the importations of the respondent in the
amount of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary and capricious. The petitioner cannot rely on
the presumption that she and the other employees of the BIR had regularly performed their duties. As the Court held
in Collector of Internal Revenue v. Benipayo,[90] in order to stand judicial scrutiny, the assessment must be based on facts.
The presumption of the correctness of an assessment, being a mere presumption, cannot be made to rest on another
presumption.

Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly examined the 1987 books of
accounts of the respondent showing its importations, and found that the latter had minimal business tax liability. In this
case, the presumption that the District Revenue officers performed their duties in accordance with law shall apply. There
is no evidence on record that the said officers neglected to perform their duties as mandated by law; neither is there
evidence aliunde that the contents of the 1987 and 1988 Profit and Loss Statements submitted by the respondent with
the SEC are incorrect.

Admittedly, the respondent did not adduce evidence to prove its correct tax liability. However, considering that it has been established that the
petitioners assessment is barren of factual basis, arbitrary and illegal, such failure on the part of the respondent cannot serve as a basis for a finding
by the Court that it is liable for the amount contained in the said assessment; otherwise, the Court would thereby be committing a travesty.

On the disposition of the case, the Court has two options, namely, to deny the petition for lack of merit and affirm the decision of the CA, without
prejudice to the petitioners issuance of a new assessment against the respondent based on credible evidence; or, to remand the case to the CTA for
further proceedings, to enable the petitioner to adduce in evidence certified true copies or duplicate original copies of the Consumption Entries for
the respondents 1987 importations, if there be any, and the correct tax deficiency assessment thereon, without prejudice to the right of the
respondent to adduce controverting evidence, so that the matter may be resolved once and for all by the CTA. In the higher interest of justice to
both the parties, the Court has chosen the latter option. After all, as the Tax Court of the United States emphasized in Harbin v. Commissioner of
Internal Revenue,[91] taxation is not only practical; it is vital. The obligation of good faith and fair dealing in carrying out its provision is reciprocal and,
as the government should never be over-reaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment of
material facts.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is SET ASIDE. The records are REMANDED to the
Court of Tax Appeals for further proceedings, conformably with the decision of this Court. No costs. SO ORDERED.
G.R. No. 81446 August 18, 1988

BONIFACIA SY PO, petitioner,

vs.
HONORABLE COURT OF TAX APPEALS AND HONORABLE COMMISSIONER OF INTERNAL REVENUE, respondents.

Basilio E. Duaban for petitioner.

SARMIENTO, J.:

This is an appeal from the decision 1 of the respondent Court of Tax Appeals, dated September 30,1987, which affirmed
an earlier decision of the correspondent Commissioner of Internal Revenue in assessment letters dated August 16, 1972
and September 26, 1972, which ordered the payment by the petitioner of deficiency income tax for 1966 to 1970 in the
amount of P7,154,685.16 and deficiency specific tax for January 2, 1964 to January 19, 1972, in the amount of
P5,595,003.68.

We adopt the respondent court's finding of facts, to wit:

Petitioner is the widow of the late Mr. Po Bien Sing who died on September 7, 1980. In the taxable years 1964 to 1972,
the deceased Po Bien Sing was the sole proprietor of Silver Cup Wine Factory (Silver Cup for brevity), Talisay, Cebu. He
was engaged in the business of manufacture and sale of compounded liquors, using alcohol and other ingredients as raw
materials.

On the basis of a denunciation against Silver Cup allegedly "for tax evasion amounting to millions of pesos" the then
Secretary of Finance Cesar Virata directed the Finance-BIR--NBI team constituted under Finance Department Order No.
13-70 dated February 19, 1971 (Exh- 3, pp. 532-553, Folder II, BIR rec.) to conduct the corresponding investigation in a
memorandum dated April 2, 1971 (p. 528, Folder II, BIR rec.). Accordingly, a letter and a subpoena duces tecum dated
April 13,1971 and May 3,1971, respectively, were issued against Silver Cup requesting production of the accounting
records and other related documents for the examination of the team. (Exh. 11, pp. 525-526, Folder II, BIR rec.). Mr. Po
Bien Sing did not produce his books of accounts as requested (Affidavit dated December 24, 1971 of Mr. Generoso. Quinain
of the team, p. 525, Folder H, BIR rec.). This prompted the team with the assistance of the PC Company, Cebu City, to
enter the factory bodega of Silver Cup and seized different brands, consisting of 1,555 cases of alcohol products. (Exh. 22,
Memorandum Report of the Team dated June 5, 1971, pp. 491-492, Folder II, BIR rec.). The inventory lists of the seized
alcohol products are contained in Volumes I, II, III, IV and V (Exhibits 14, 15, 16, 17, and 18, respectively, BIR rec.). On the
basis of the team's report of investigation, the respondent Commissioner of Internal Revenue assessed Mr. Po Bien Sing
deficiency income tax for 1966 to 1970 in the amount of P7,154,685.16 (Exh. 6 pp. 17-19, Folder I, BIR rec.) and for
deficiency specific tax for January 2,1964 to January 19, 1972 in the amount of P5,595,003.68 (Exh. 8, p. 107, Folder I, BIR
rec.).

Petitioner protested the deficiency assessments through letters dated October 9 and October 30, 1972 (Exhs. 7 and 9, pp.
27-28; pp. 152-159, respectively, BIR rec.), which protests were referred for reinvestigation. The corresponding report
dated August 13, 1981 (Exh. 1 0, pp. 355, Folder I, BIR rec.) recommended the reiteration of the assessments in view of
the taxpayer's persistent failure to present the books of accounts for examination (Exh. 8, p. 107, Folder I, BIR rec.),
compelling respondent to issue warrants of distraint and levy on September 10, 1981 (Exh. 11, p. 361, Folder I, BIR rec.).

The warrants were admittedly received by petitioner on October 14, 1981 (Par. IX, Petition; admitted par. 2, Answer),
which petitioner deemed respondent's decision denying her protest on the subject assessments. Hence, petitioner's
appeal on October 29,1981. 2
The petitioner assigns the following errors:

RESPONDENT INTENTIONALLY ERRED IN HOLDING THAT PETITIONER HAS NOT PRESENTED ANY EVIDENCE OF RELEVANCE
AND COMPETENCE REQUIRED TO BASH THE TROUBLING DISCREPANCIES AND SQUARE THE ISSUE OF ILLEGALITY POSITED
ON THE SUBJECT ASSESSMENTS.

II

RESPONDENT COURT OF TAX APPEALS PALPABLY ERRED IN DECIDING THE CASE IN A WAY CONTRARY TO THE DOCTRINES
ALREADY LAID DOWN BY THIS COURT.

III

RESPONDENT COURT OF TAX APPEALS GRAVELY ERRED IN FINDING PO BEEN SING TO HAVE INCURRED THE ALLEGED
DEFICIENCY TAXES IN QUESTION. 3

We affirm.

Settled is the rule that the factual findings of the Court of Tax Appeals are binding upon this Honorable Court and can only
be disturbed on appeal if not supported by substantial evidence.4

The assignments of errors boils down to a single issue previously raised before the respondent Court, i.e., whether or not
the assessments have valid and legal bases.

The applicable legal provision is Section 16(b) of the National Internal Revenue Code of 1977 as amended. It reads:

Sec. 16. Power of the Commissioner of Internal Revenue to make assessments.

xxx xxx xxx

(b) Failure to submit required returns, statements, reports and other documents. - When a report required by law as a
basis for the assessment of an national internal revenue tax shall not be forthcoming within the time fixed by law or
regulation or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner
of Internal Revenue shall assess the proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise,
files a false or fraudulent return or other documents, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct
and sufficient for all legal purposes.

The law is specific and clear. The rule on the "best evidence obtainable" applies when a tax report required by law for the
purpose of assessment is not available or when the tax report is incomplete or fraudulent.

In the instant case, the persistent failure of the late Po Bien Sing and the herein petitioner to present their books of
accounts for examination for the taxable years involved left the Commissioner of Internal Revenue no other legal option
except to resort to the power conferred upon him under Section 16 of the Tax Code.

The tax figures arrived at by the Commissioner of Internal Revenue are by no means arbitrary. We reproduce the
respondent court's findings, to wit:
As thus shown, on the basis of the quantity of bottles of wines seized during the raid and the sworn statements of former
employees Messrs. Nelson S. Po and Alfonso Po taken on May 26, and 27,1971, respectively, by the investigating team in
Cebu City (Exhs. 4 and 5, pp. 514-517, pp. 511-513, Folder 11, BIR rec.), it was ascertained that the Silver Cup for the years
1964 to 1970, inclusive, utilized and consumed in the manufacture of compounded liquours and other products 20,105
drums of alcohol as raw materials 81,288,787 proof liters of alcohol. As determined, the total specific tax liability of the
taxpayer for 1964 to 1971 amounted to P5,593,003.68 (Exh. E, petition, p. 10, CTA rec.)

Likewise, the team found due from Silver Cup deficiency income taxes for the years 1966 to 1970 inclusive in the aggregate
sum of P7,154,685.16, as follows:

1966 P207,636.24

1967 645,335.04

1968 1,683,588.48

1969 1,589,622.48

1970 3,028,502.92

Total amount due.

and collectible P7,154,685.16

The 50% surcharge has been imposed, pursuant to Section 72 * of the Tax Code and tax 1/2% monthly interest has likewise
been imposed pursuant to the provision of Section 51(d) ** of the Tax Code (Exh. O, petition). 5

The petitioner assails these assessments as wrong.

In the case of Collector of Internal Revenue vs. Reyes, 6 we ruled:

Where the taxpayer is appealing to the tax court on the ground that the Collector's assessment is erroneous, it is
incumbent upon him to prove there what is the correct and just liability by a full and fair disclosure of all pertinent data
in his possession. Otherwise, if the taxpayer confines himself to proving that the tax assessment is wrong, the tax court
proceedings would settle nothing, and the way would be left open for subsequent assessments and appeals in
interminable succession.

Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove
otherwise. 7 In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a
Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. 8 All presumptions are
in favor of the correctness of tax assessments. 9

On the whole, we find that the fraudulent acts detailed in the decision under review had not been satisfactorily rebutted
by the petitioner. There are indeed clear indications on the part of the taxpayer to deprive the Government of the taxes
due. The Assistant Factory Superintendent of Silver Cup, Nelson Po gave the following testimony:

Annexes "A", "A-1 " to "A-17" show that from January to December 1970, Silver Cup had used in production 189 drums of
untaxed distilled alcohol and 3,722 drums of untaxed distilled alcohol. Can you tell us how could this be possible with the
presence of a revenue inspector in the premises of Silver Cup during working hours?
Actually, the revenue inspector or storekeeper comes around once a week on the average. Sometimes, when the
storekeeper is around in the morning and Po Bein Sing wants to operate with untaxed alcohol as raw materials, Po Bien
Sing tells the storekeeper to go home because the factory is not going to operate for the day. After the storekeeper leaves,
the illegal operation then begins. Untaxed alcohol is brought in from Cebu Alcohol Plant into the compound of Silver Cup
sometimes at about 6:00 A.M. or at 12:00 noon or in the evening or even at mid-night when the storekeeper is not around.
When the storekeeper comes, he sees nothing because untaxed alcohol is brought directly to, and stored at, a secret
tunnel within the bodega itself inside the compound of Silver Cup.

In the same vein, the factory personnel manager testified that false entries were entered in the official register book: thus,

A As factory personnel manager and all-around handy man of Po Bien Sing, owner of Silver Cup, these labels were
entrusted to me to make the false entries in the official register book of Silver Cup, which I did under the direction of Po
Bien Sing. (Sworn statement, p. 512, Folder II, BIR rec.) 10 (Emphasis ours)

The existence of fraud as found by the respondents can not be lightly set aside absent substantial evidence presented by
the petitioner to counteract such finding. The findings of fact of the respondent Court of Tax Appeals are entitled to the
highest respect.11 We do not find anything in the questioned decision that should disturb this long-established doctrine.

WHEREFORE, the Petition is DENIED. The Decision of the respondent Court of Tax Appeals is hereby AFFIRMED. Costs
against the petitioner.

SO ORDERED.
G.R. No. L-13656 January 31, 1962

COLLECTOR OF INTERNAL REVENUE, (now Commissioner), petitioner,

vs.
ALBERTO D. BENIPAYO, respondent.

Office of the Solicitor General for petitioner.

Carlos J. Antiporda for respondent.

DIZON, J.:

This is an appeal taken by the Collector of Internal Revenue from the decision of the Court of Tax Appeals dated January
23, 1948, reversing the one rendered by the former, thereby relieving respondent Alberto D. Benipayo from the payment
of the deficiency amusement tax assessed against him in the total amount of P12,093.45.

Respondent is the owner and operator of the Lucena Theater located in the municipality of Lucena, Quezon. On October
3, 1953 Internal Revenue Agent Romeo de Guia investigated respondent's amusement tax liability in connection with the
operation of said theater during the period from August, 1952 to September, 1953. On October 15, 1953 De Guia
submitted his report to the Provincial Revenue Agent to the effect that respondent had disproportionately issued tax-free
20-centavo children's tickets. His finding was that during the years 1949 to 1951 the average ratio of adults and children
patronizing the Lucena Theater was 3 to 1, i.e., for every three adults entering the theater, one child was also admitted,
while during the period in question, the proportion is reversed - three children to one adult. From this he concluded that
respondent must have fraudulently sold two tax-free 20-centavo tickets, in order to avoid payment of the amusement tax
prescribed in Section 260 of the National Internal Revenue Code. Based on the average ratio between adult and children
attendance in the past years, Examiner de Guia recommended a deficiency amusement tax assessment against respondent
in the sum of P11,193.45, inclusive of 25% surcharge, plus a suggested compromise penalty of P900.00 for violation of
section 260 of the National Internal Revenue Code, or a total sum of P12,093.45 covering the period from August, 1952
to September, 1953 inclusive. On July 14, 1954, petitioner issued a deficiency amusement tax assessment against
respondent, demanding from the latter the payment of the total sum of P12,152.93 within thirty days from receipt thereof.
On August 16, 1954, respondent filed the corresponding protest with the Conference Staff of the Bureau of Internal
Revenue. After due hearing, the Conference Staff submitted to petitioner Collector of Internal Revenue its finding to the
effect that the "meager reports of these fieldmen (Examiner de Guia and the Provincial Revenue Agent of Quezon) are
mere presumptions and conclusions, devoid of findings of the fact of the alleged fraudulent practices of the herein
taxpayer". In view thereof, and as recommended by the Conference Staff, petitioner referred the case back to the
Provincial Revenue Agent of Quezon for further investigation. The report submitted by Provincial Revenue Officer H.I.
Bernardo after this last investigation partly reads as follows:.

The returns from July 1 to July 11, showed that 31.43% of the entire audience of 12,754 consisted of adults, the remaining
68.57% of children. During this said period due, perhaps, to the absence of agents in the premises, subject taxpayer was
able to manipulate the issuance of tickets in the way and manner alleged in Asst. De Guia's indorsement report mentioned
above. But during the period from July 14 to July 24, 1955, when agents of this Office supervised in the sales of admission
tickets the sales for adults soared upwards to 76% while that for children dropped correspondingly to 24%.

It is opined without fear of contradiction that the ratio of three (3) adults to every one (1) child in the audience or a
proportion of 75:25 as reckoned in Asst. De Guia's indorsement report to this Office's new findings of a proportion of
76:24, represents and conveys the true picture of the situation under the law of averages, provided that the film being
shown is not a children's show. There is no hard and fast rule in this regard, but this findings would seem to admit no
contradiction.

Please note that the new findings of this Office is not a direct proof of what has transpired during the period investigated
by Asst. De Guia and now pending before the Conference Staff", . . (Exh. 3, BIR Record, p. 137-138).
After considering said report, the Conference Staff of the Bureau of Internal Revenue recommended to the Collector of
Internal Revenue the issuance of the deficiency amusement tax assessment in question.

The only issue in this appeal is whether or not there is sufficient evidence in the record showing that respondent, during
the period under review, sold and issued to his adult customers two tax-free 20-centavo children's tickets, instead of one
40-centavo ticket for each adult customer; to cheat or defraud the Government. On this question the Court of Tax Appeals
said the following in the appealed decision:.

To our mind, the appealed decision has no factual basis and must be reversed. An assessment fixes and determines the
tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the
amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how
reasonable or logical said presumptions may be. Assuming arguendothat the average ratio of adults and children
patronizing the Lucena Theater from 1949 to 1951 was 3 to 1, the same does not give rise to the inference that the same
conditions existed during the years in question (1952 and 1953). The fact that almost the same ratio existed during the
month of July, 1955 does not provide a sufficient inference on the conditions in 1952 and 1953. . .

In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of
correctness of assessment being a mere presumption cannot be made to rest on another presumption that the
circumstances in 1952 and 1953 are presumed to be the same as those existing in 1949 to 1951 and July 1955. In the case
under consideration there are no substantial facts to support the assessment in question. ...

A review of the records has not disclosed anything sufficient to justify a reversal of the above finding made by the Court
of Tax Appeals. It should be borne in mind that to sustain the deficiency tax assessed against respondent would amount,
in effect, to a finding that he had, for a considerable period of time, cheated and defrauded the government by selling to
each adult patron two children's tax-free tickets instead of one ticket subject to the amusement tax provided for in Section
260 of the National Internal Revenue Code. Fraud is a serious charge and, to be sustained, it must be supported by clear
and convincing proof which, in the present case, is lacking.

The claim that respondent admitted having resorted to the anomalous practice already mentioned is not entirely correct.
What respondent appears to have admitted was that during a certain limited period he had adopted a sort of rebate
system applicable to cases where adults and children came in groups and were al anomalous practice already mentioned
is not entirely correct. What respondent appears to have admitted was that during a certain limited period he had adopted
a sort of rebate ystem applicable to cases where adults and children came in group and were all charged 20 centavo
admission tickets. This practice was, however, discontinued when he was informed by the Bureau of Internal Revenue
that it was not in accordance with law.

WHEREFORE, the appealed judgment is hereby affirmed with costs.

G.R. No. L-36181 October 23, 1982

MERALCO SECURITIES CORPORATION (now FIRST PHILIPPINE HOLDINGS CORPORATION), petitioner,

vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.

G.R. No. L-36748 October 23, 1982

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.

G.R. No. L-36181

San Juan, Africa, Gonzales & San Agustin for petitioner.

Ramon A. Gonzales for respondents.

TEEHANKEE, J.:

These are original actions for certiorari to set aside and annul the writ of mandamus issued by Judge Victorino A. Savellano
of the Court of First Instance of Manila in Civil Case No. 80830 ordering petitioner Meralco Securities Corporation (now
First Philippine Holdings Corporation) to pay, and petitioner Commissioner of Internal Revenue to collect from the former,
the amount of P51,840,612.00, by way of alleged deficiency corporate income tax, plus interests and surcharges due
thereon and to pay private respondents 25% of the total amount collectible as informer's reward.

On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his wife and children) submitted to
petitioner Commissioner of Internal Revenue confidential denunciation against the Meralco Securities Corporation for tax
evasion for having paid income tax only on 25 % of the dividends it received from the Manila Electric Co. for the years
1962-1966, thereby allegedly shortchanging the government of income tax due from 75% of the said dividends.

Petitioner Commissioner of Internal Revenue caused the investigation of the denunciation after which he found and held
that no deficiency corporate income tax was due from the Meralco Securities Corporation on the dividends it received
from the Manila Electric Co., since under the law then prevailing (section 24[a] of the National Internal Revenue Code) "in
the case of dividends received by a domestic or foreign resident corporation liable to (corporate income) tax under this
Chapter . . . .only twenty-five per centum thereof shall be returnable for the purposes of the tax imposed under this
section." The Commissioner accordingly rejected Maniago's contention that the Meralco from whom the dividends were
received is "not a domestic corporation liable to tax under this Chapter." In a letter dated April 5, 1968, the Commissioner
informed Maniago of his findings and ruling and therefore denied Maniago's claim for informer's reward on a non-existent
deficiency. This action of the Commissioner was sustained by the Secretary of Finance in a 4th Indorsement dated May
11, 1971.

On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an amended petition for mandamus, in
the Court of First Instance of Manila, docketed therein as Civil Case No. 80830, against the Commissioner of Internal
Revenue and the Meralco Securities Corporation to compel the Commissioner to impose the alleged deficiency tax
assessment on the Meralco Securities Corporation and to award to him the corresponding informer's reward under the
provisions of R.A. 2338.
On October 28, 1978, the Commissioner filed a motion to dismiss, arguing that since in matters of issuance and non-
issuance of assessments, he is clothed under the National Internal Revenue Code and existing rules and regulations with
discretionary power in evaluating the facts of a case and since mandamus win not lie to compel the performance of a
discretionary power, he cannot be compelled to impose the alleged tax deficiency assessment against the Meralco
Securities Corporation. He further argued that mandamus may not lie against him for that would be tantamount to a
usurpation of executive powers, since the Office of the Commissioner of Internal Revenue is undeniably under the control
of the executive department.

On the other hand, the Meralco Securities Corporation filed its answer, dated January 15, 1971, interposing as special
and/or affirmative defenses that the petition states no cause of action, that the action is premature, that mandamus win
not lie to compel the Commissioner of Internal Revenue to make an assessment and/or effect the collection of taxes upon
a taxpayer, that since no taxes have actually been recovered and/or collected, Maniago has no right to recover the reward
prayed for, that the action of petitioner had already prescribed and that respondent court has no jurisdiction over the
subject matter as set forth in the petition, the same being cognizable only by the Court of Tax Appeals.

On January 10, 1973, the respondent judge rendered a decision granting the writ prayed for and ordering the
Commissioner of Internal Revenue to assess and collect from the Meralco Securities Corporation the sum of
P51,840,612.00 as deficiency corporate income tax for the period 1962 to 1969 plus interests and surcharges due thereon
and to pay 25% thereof to Maniago as informer's reward.

All parties filed motions for reconsideration of the decision but the same were denied by respondent judge in his order
dated April 6, 1973, with respondent judge denying respondents' claim for attorneys fees and for execution of the decision
pending appeal.

Hence, the Commissioner filed a separate petition with this Court, docketed as G.R. No. L-36748 praying that the decision
of respondent judge dated January 10, 1973 and his order dated April 6, 1973 be reconsidered for respondent judge has
no jurisdiction over the subject matter of the case and that the issuance or non-issuance of a deficiency assessment is a
prerogative of the Commissioner of Internal Revenue not reviewable by mandamus.

The Meralco Securities Corporation (now First Philippine Holdings Corporation) likewise appealed the same decision of
respondent judge in G.R. No. L-36181 and in the Court's resolution dated June 13, 1973, the two cases were ordered
consolidated.

We grant the petitions.

Respondent judge has no jurisdiction to take cognizance of the case because the subject matter thereof clearly falls within
the scope of cases now exclusively within the jurisdiction of the Court of Tax Appeals. Section 7 of Republic Act No. 1125,
enacted June 16, 1954, granted to the Court of Tax Appeals exclusive appellate jurisdiction to review by appeal, among
others, decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue. The law transferred
to the Court of Tax Appeals jurisdiction over all cases involving said assessments previously cognizable by courts of first
instance, and even those already pending in said courts. 1 The question of whether or not to impose a deficiency tax
assessment on Meralco Securities Corporation undoubtedly comes within the purview of the words "disputed
assessments" or of "other matters arising under the National Internal Revenue Code . . . .In the case of Blaquera vs.
Rodriguez, et al, 2 this Court ruled that "the determination of the correctness or incorrectness of a tax assessment to
which the taxpayer is not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of the Court of First
Instance, for under the provisions of Section 7 of Republic Act No. 1125, the Court of Tax Appeals has exclusive appellate
jurisdiction to review, on appeal, any decision of the Collector of Internal Revenue in cases involving disputed assessments
and other matters arising under the National Internal Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue."

Thus, even assuming arguendo that the right granted the taxpayers affected to question and appeal disputed assessments,
under section 7 of Republic Act No. 1125, may be availed of by strangers or informers like the late Maniago, the most that
he could have done was to appeal to the Court of Tax Appeals the ruling of petitioner Commissioner of Internal Revenue
within thirty (30) days from receipt thereof pursuant to section 11 of Republic Act No. 1125. 3 He failed to take such an
appeal to the tax court. The ruling is clearly final and no longer subject to review by the courts. 4

It is furthermore a well-recognized rule that mandamus only lies to enforce the performance of a ministerial act or
duty 5 and not to control the performance of a discretionary power. 6 Purely administrative and discretionary functions
may not be interfered with by the courts. 7 Discretion, as thus intended, means the power or right conferred upon the
office by law of acting officially under certain circumstances according to the dictates of his own judgment and conscience
and not controlled by the judgment or conscience of others. 8 mandamus may not be resorted to so as to interfere with
the manner in which the discretion shall be exercised or to influence or coerce a particular determination. 9

In an analogous case, where a petitioner sought to compel the Rehabilitation Finance Corporation to accept payment of
the balance of his indebtedness with his backpay certificates, the Court ruled that "mandamus does not compel the
Rehabilitation Finance Corporation to accept backpay certificates in payment of outstanding loans. Although there is no
provision expressly authorizing such acceptance, nor is there one prohibiting it, yet the duty imposed by the Backpay Law
upon said corporation as to the acceptance or discount of backpay certificates is neither clear nor ministerial, but
discretionary merely, and such special civil action does not issue to control the exercise of discretion of a public
officer." 10 Likewise, we have held that courts have no power to order the Commissioner of Customs to confiscate goods
imported in violation of the Import Control Law, R.A. 426, as said forfeiture is subject to the discretion of the said
official, 11 nor may courts control the determination of whether or not an applicant for a visa has a non-immigrant status
or whether his entry into this country would be contrary to public safety for it is not a simple ministerial function but an
exercise of discretion. 12

Moreover, since the office of the Commissioner of Internal Revenue is charged with the administration of revenue laws,
which is the primary responsibility of the executive branch of the government, mandamus may not he against the
Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that would be
tantamount to a usurpation of executive functions. As we held in the case of Commissioner of Immigration vs.
Arca 13 anent this principle, "the administration of immigration laws is the primary responsibility of the executive branch
of the government. Extensions of stay of aliens are discretionary on the part of immigration authorities, and neither a
petition for mandamus nor one for certiorari can compel the Commissioner of Immigration to extend the stay of an alien
whose period to stay has expired.

Such discretionary power vested in the proper executive official, in the absence of arbitrariness or grave abuse so as to go
beyond the statutory authority, is not subject to the contrary judgment or control of others. " "Discretion," when applied
to public functionaries, means a power or right conferred upon them by law of acting officially, under certain
circumstances, uncontrolled by the judgment or consciences of others. A purely ministerial act or duty in contradiction to
a discretional act is one which an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience
to the mandate of a legal authority, without regard to or the exercise of his own judgment upon the propriety or
impropriety of the act done. If the law imposes a duty upon a public officer and gives him the right to decide how or when
the duty shall be performed, such duty is discretionary and not ministerial. The duty is ministerial only when the discharge
of the same requires neither the exercise of official discretion or judgment." 14

Thus, after the Commissioner who is specifically charged by law with the task of enforcing and implementing the tax laws
and the collection of taxes had after a mature and thorough study rendered his decision or ruling that no tax is due or
collectible, and his decision is sustained by the Secretary, now Minister of Finance (whose act is that of the President
unless reprobated), such decision or ruling is a valid exercise of discretion in the performance of official duty and cannot
be controlled much less reversed by mandamus. A contrary view, whereby any stranger or informer would be allowed to
usurp and control the official functions of the Commissioner of Internal Revenue would create disorder and confusion, if
not chaos and total disruption of the operations of the government.

Considering then that respondent judge may not order by mandamus the Commissioner to issue the assessment against
Meralco Securities Corporation when no such assessment has been found to be due, no deficiency taxes may therefore
be assessed and collected against the said corporation. Since no taxes are to be collected, no informer's reward is due to
private respondents as the informer's heirs. Informer's reward is contingent upon the payment and collection of unpaid
or deficiency taxes. An informer is entitled by way of reward only to a percentage of the taxes actually assessed and
collected. Since no assessment, much less any collection, has been made in the instant case, respondent judge's writ for
the Commissioner to pay respondents 25% informer's reward is gross error and without factual nor legal basis.

WHEREFORE, the petitions are hereby granted and the questioned decision of respondent judge dated January 10, 1973
and order dated April 6, 1973 are hereby reversed and set aside. With costs against private respondents.
[G.R. No. 130430. December 13, 1999]

REPUBLIC OF THE PHILIPPINES, represented by the Commissioner of the Bureau of Internal Revenue (BIR), petitioner,
vs. SALUD V. HIZON, respondent.

DECISION

MENDOZA, J.:

This is a petition for review of the decision[1] of the Regional Trial Court, Branch 44, San Fernando, Pampanga, dismissing
the suit filed by the Bureau of Internal Revenue for collection of tax.

The facts are as follows:

On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68
covering the fiscal year 1981-1982. Respondent not having contested the assessment, petitioner, on January 12, 1989,
served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to
dispose of the attached properties.

More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax
deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case
with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint was signed
by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureaus Regional Director
in Pampanga.

Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR
Commissioner as required by 221[2] of the National Internal Revenue Code, and (2) that the action had already
prescribed. Over petitioners objection, the trial court, on August 28, 1997, granted the motion and dismissed the
complaint. Hence, this petition. Petitioner raises the following issues:[3]

I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL OF
THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE.

II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN BARRED
BY THE STATUTE OF LIMITATIONS.

First. In sustaining respondents contention that petitioners complaint was filed without the authority of the BIR
Commissioner, the trial court stated:[4]

There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in Court,
civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be secured. . . . [A]n action
will not prosper in the absence of the commissioners approval. Thus, in the instant case, the absence of the approval of
the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . .

The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner
Liwayway Chato.

Sec. 221 of the NIRC provides:

Form and mode of proceeding in actions arising under this Code. Civil and criminal actions and proceedings instituted in
behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall
be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city fiscal, or the
Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no
civil and criminal actions for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code
shall be begun without the approval of the Commissioner. (Emphasis supplied)

To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions:

The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal
Branches of Revenue Regions:

....

II. Civil Cases

1. Complaints for collection on cases falling within the jurisdiction of the Region . . . .

In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith
which, otherwise, requires the signature of the Commissioner.

....

Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division
of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in
this case was signed by the BIRs Chief of Legal Division for Region 4 and verified by the Regional Director, there was,
therefore, compliance with the law.

However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held:

[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public
corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take
judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the
official acts of the legislative, executive and judicial departments of the Philippines . . . .[5]

This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of
the law, they are valid and have the force of law.[6] The governing statutory provision in this case is 4(d) of the NIRC which
provides:

Specific provisions to be contained in regulations. - The regulations of the Bureau of Internal Revenue shall, among other
things, contain provisions specifying, prescribing, or defining:

....

(d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and
conduct of legal actions and proceedings.

RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate.

As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR
Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official
with the rank equivalent to a division chief or higher, except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate under 204(A) and (B) of this Code, any tax deficiency: Provided, however, that
assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00)
or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary
of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be
compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant
Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having
jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are
produced or kept.

None of the exceptions relates to the Commissioners power to approve the filing of tax collection cases.

Second. With regard to the issue that the case filed by petitioner for the collection of respondents tax deficiency is barred
by prescription, 223(c) of the NIRC provides:

Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by
distraint or levy or by a proceeding in court within three years[7]following the assessment of the tax.

The running of the three-year prescriptive period is suspended[8]-

for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or
a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by
the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which the
tax is being assessed or collected; provided, that, if the taxpayer informs the Commissioner of any change in address, the
running of the statute of limitations will not be suspended; when the warrant of distraint or levy is duly served upon the
taxpayer, his authorized representative or a member of his household with sufficient discretion, and no property could be
located; and when the taxpayer is out of the Philippines.

Petitioner argues that, in accordance with this provision, respondents request for reinvestigation of her tax deficiency
assessment on November 3, 1992 effectively suspended the running of the period of prescription such that the
government could still file a case for tax collection.[9]

The contention has no merit. Sec. 229[10] of the Code mandates that a request for reconsideration must be made within
30 days from the taxpayers receipt of the tax deficiency assessment, otherwise the assessment becomes final,
unappealable and, therefore, demandable.[11] The notice of assessment for respondents tax deficiency was issued by
petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on
November 3, 1992, without stating when she received the notice of tax assessment. She explained that she was
constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors.[12] In all likelihood, she must
have been referring to the distraint and levy of her properties by petitioners agents which took place on January 12,
1989. Even assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was
nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not
suspend the running of the prescriptive period provided under 223(c). Although the Commissioner acted on her request
by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment
had long become demandable.

Nonetheless, it is contended that the running of the prescriptive period under 223(c) was suspended when the BIR timely
served the warrants of distraint and levy on respondent on January 12, 1989.[13]Petitioner cites for this purpose our ruling
in Advertising Associates Inc. v. Court of Appeals.[14] Because of the suspension, it is argued that the BIR could still avail of
the other remedy under 223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January
1, 1997.

Petitioners reliance on the Courts ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court
stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue,[15] is that the timely
service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that
the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the
statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary
remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the Court. Thus,
in Advertising Associates, it was held:[16] It should be noted that the Commissioner did not institute any judicial proceeding
to collect the tax. He relied on the warrants of distraint and levy to interrupt the running of the statute of limitations.

Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of distraint
and levy were served on respondent on January 12, 1989 and then when respondent made her request for reinvestigation
of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have commenced running
again sometime after the service of the warrants of distraint and levy. Petitioner, however, does not state when or why
this took place and, indeed, there appears to be no reason for such. It is noteworthy that petitioner raised this point before
the lower court apparently as an alternative theory, which, however, is untenable.

For the foregoing reasons, we hold that petitioners contention that the action in this case had not prescribed when filed
has no merit. Our holding, however, is without prejudice to the disposition of the properties covered by the warrants of
distraint and levy which petitioner served on respondent, as such would be a mere continuation of the summary remedy
it had timely begun. Although considerable time has passed since then, as held in Advertising Associates Inc. v. Court of
Appeals[17] and Palanca v. Commissioner of Internal Revenue,[18] the enforcement of tax collection through summary
proceedings may be carried out beyond the statutory period considering that such remedy was seasonably availed of.

WHEREFORE, the petition is DENIED.

 COMMISSIONER OF INTERNAL REVENUE, G.R. No. 177279

Petitioner,

- versus -

HON. RAUL M. GONZALEZ, Secretary of Promulgated:

Justice, L. M. CAMUS ENGINEERING
CORPORATION (represented by LUIS M. October 13, 2010
CAMUS and LINO D. MENDOZA),

Respondents.

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision[1] dated October 31, 2006 and Resolution[2]dated March 6, 2007 of the Court of Appeals (CA) in CA-G.R. SP No.
93387 which affirmed the Resolution[3] dated December 13, 2005 of respondent Secretary of Justice in I.S. No. 2003-774
for violation of Sections 254 and 255 of the National Internal Revenue Code of 1997 (NIRC).

The facts as culled from the records:

Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then Commissioner of Internal Revenue
(petitioner) Dakila B. Fonacier, Revenue Officers Remedios C. Advincula, Jr., Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr.
and Aurelio Agustin T. Zamora supervised by Section Chief Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National Office,
conducted a fraud investigation for all internal revenue taxes to ascertain/determine the tax liabilities of respondent L. M.
Camus Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and 1999.[4] The audit and investigation against
LMCEC was precipitated by the information provided by an informer that LMCEC had substantial underdeclared income
for the said period. For failure to comply with the subpoena duces tecum issued in connection with the tax fraud
investigation, a criminal complaint was instituted by the Bureau of Internal Revenue (BIR) against LMCEC on January 19,
2001 for violation of Section 266 of the NIRC (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City).[5]

Based on data obtained from an informer and various clients of LMCEC,[6] it was discovered that LMCEC filed fraudulent
tax returns with substantial underdeclarations of taxable income for the years 1997, 1998 and 1999. Petitioner thus
assessed the company of total deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and value-
added tax [VAT] - P112,351,625.71) covering the said period. The Preliminary Assessment Notice (PAN) was received by
LMCEC on February 22, 2001.[7]
LMCECs alleged underdeclared income was summarized by petitioner as follows:

Year Income Income Undeclared Percentage of

Per ITR Per Investigation Income Underdeclaration

1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%

1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%

1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%[8]

In view of the above findings, assessment notices together with a formal letter of demand dated August 7, 2002 were sent
to LMCEC through personal service on October 1, 2002.[9] Since the company and its representatives refused to receive
the said notices and demand letter, the revenue officers resorted to constructive service[10] in accordance with Section 3,
Revenue Regulations (RR) No. 12-99[11].

On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to the Secretary of Justice for
preliminary investigation its complaint against LMCEC, Luis M. Camus and Lino D. Mendoza, the latter two were sued in
their capacities as President and Comptroller, respectively. The case was docketed as I.S. No. 2003-774. In the Joint
Affidavit executed by the revenue officers who conducted the tax fraud investigation, it was alleged that despite the
receipt of the final assessment notice and formal demand letter on October 1, 2002, LMCEC failed and refused to pay the
deficiency tax assessment in the total amount of P630,164,631.61, inclusive of increments, which had become final and
executory as a result of the said taxpayers failure to file a protest thereon within the thirty (30)-day reglementary
period.[12]

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable whatsoever for the
alleged tax deficiency which had become due and demandable. Considering that the complaint and its annexes all showed
that the suit is a simple civil action for collection and not a tax evasion case, the Department of Justice (DOJ) is not the
proper forum for BIRs complaint. They also assail as invalid the assessment notices which bear no serial numbers and
should be shown to have been validly served by an Affidavit of Constructive Service executed and sworn to by the revenue
officers who served the same. As stated in LMCECs letter-protest dated December 12, 2002addressed to Revenue District
Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the company had already undergone a series of routine
examinations for the years 1997, 1998 and 1999; under the NIRC, only one examination of the books of accounts is allowed
per taxable year.[13]
LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic Recovery Assistance Payment
[ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998 and 1999; for 1997, its tax liability was terminated
and closed under Letter of Termination[14] dated June 1, 1999 issued by petitioner and signed by the Chief of the
Assessment Division.[15] LMCEC claimed it made payments of income tax, VAT and expanded withholding tax (EWT), as
follows:

TAXABLE AMOUNT OF TAXES

YEAR PAID

1997 Termination Letter Under Letter of EWT - P 6,000.00

Authority No. 174600
Dated November 4, 1998 VAT - 540,605.02

IT - 3,000.00

1998 ERAP Program pursuant WC - 38,404.55

to RR #2-99 VAT - 61,635.40

1999 VAP Program pursuant IT - 878,495.28

to RR #8-2001 VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped from further taking any action against it and its corporate officers
concerning the taxable years 1997 to 1999. With the grant of immunity from audit from the companys availment of ERAP
and VAP, which have a feature of a tax amnesty, the element of fraud is negated the moment the Bureau accepts the offer
of compromise or payment of taxes by the taxpayer. The act of the revenue officers in finding justification under Section
6(B) of the NIRC (Best Evidence Obtainable) is misplaced and unavailing because they were not able to open the books of
the company for the second time, after the routine examination, issuance of termination letter and the availment of ERAP
and VAP. LMCEC thus maintained that unless there is a prior determination of fraud supported by documents not yet
incorporated in the docket of the case, petitioner cannot just issue LAs without first terminating those previously issued. It
emphasized the fact that the BIR officers who filed and signed the Affidavit-Complaint in this case were the same ones
who appeared as complainants in an earlier case filed against Camus for his alleged failure to obey summons in violation
of Section 5 punishable under Section 266 of the NIRC of 1997 (I.S. No. 00-956 of the Office of the City Prosecutor of
Quezon City). After preliminary investigation, said case was dismissed for lack of probable cause in a Resolution issued by
the Investigating Prosecutor on May 2, 2001.[17]

LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner for having no basis in fact
and law. However, until now the said protest remains unresolved. As to the alleged informant who purportedly supplied
the confidential information, LMCEC believes that such person is fictitious and his true identity and personality could not
be produced. Hence, this case is another form of harassment against the company as what had been found by the Office
of the City Prosecutor of Quezon City in I.S. No. 00-956. Said case and the present case both have something to do with
the audit/examination of LMCEC for taxable years 1997, 1998 and 1999 pursuant to LA No. 00009361.[18]

In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed with the contention of LMCEC
that the complaint filed is not criminal in nature, pointing out that LMCEC and its officers Camus and Mendoza were being
charged for the criminal offenses defined and penalized under Sections 254 (Attempt to Evade or Defeat Tax) and 255
(Willful Failure to Pay Tax) of the NIRC. This finds support in Section 205 of the same Code which provides for
administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action) remedies in order to enforce
collection of taxes. Both remedies may be pursued either independently or simultaneously.In this case, the BIR decided
to simultaneously pursue both remedies and thus aside from this criminal action, the Bureau also initiated administrative
proceedings against LMCEC.[19]

On the lack of control number in the assessment notice, petitioner explained that such is a mere office requirement in the
Assessment Service for the purpose of internal control and monitoring; hence, the unnumbered assessment notices should
not be interpreted as irregular or anomalous. Petitioner stressed that LMCEC already lost its right to file a protest letter
after the lapse of the thirty (30)-day reglementary period. LMCECs protest-letter dated December 12, 2002 to RDO
Clavelina S. Nacar, RD No. 40, Cubao, Quezon City was actually filed only on December 16, 2002, which was disregarded
by the petitioner for being filed out of time. Even assuming for the sake of argument that the assessment notices were
invalid, petitioner contended that such could not affect the present criminal action,[20] citing the ruling in the landmark
case of Ungab v. Cusi, Jr.[21]

As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division, Revenue Region No. 7, Quezon
City, petitioner pointed out that LMCEC failed to mention that the undated Certification issued by RDO Pablo C. Cabreros,
Jr. of RD No. 40, Cubao, Quezon City stated that the report of the 1997 Internal Revenue taxes of LMCEC had already been
submitted for review and approval of higher authorities. LMCEC also cannot claim as excuse from the reopening of its
books of accounts the previous investigations and examinations. Under Section 235 (a), an exception was provided in the
rule on once a year audit examination in case of fraud, irregularity or mistakes, as determined by the
Commissioner. Petitioner explained that the distinction between a Regular Audit Examination and Tax Fraud Audit
Examination lies in the fact that the former is conducted by the district offices of the Bureaus Regional Offices, the
authority emanating from the Regional Director, while the latter is conducted by the TFD of the National Office only when
instances of fraud had been determined by the petitioner.[22]

Petitioner further asserted that LMCECs claim that it was granted immunity from audit when it availed of the VAP and
ERAP programs is misleading. LMCEC failed to state that its availment of ERAP under RR No. 2-99 is not a grant of absolute
immunity from audit and investigation, aside from the fact that said program was only for income tax and did not cover
VAT and withholding tax for the taxable year 1998. As for LMCECS availment of VAP in 1999 under RR No. 8-2001 dated
August 1, 2001 as amended by RR No. 10-2001 dated September 3, 2001, the company failed to state that it covers only
income tax and VAT, and did not include withholding tax. However, LMCEC is not actually entitled to the benefits of VAP
under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle of estoppel invoked by LMCEC, estoppel clearly does
not lie against the BIR as this involved the exercise of an inherent power by the government to collect taxes.[23]

Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956 is misleading because said case
involves another violation and offense (Sections 5 and 266 of the NIRC). Said case was filed by petitioner due to the failure
of LMCEC to submit or present its books of accounts and other accounting records for examination despite the issuance
of subpoena duces tecum against Camus in his capacity as President of LMCEC. While indeed a Resolution was issued by
Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing the complaint, the same is still on appeal and pending
resolution by the DOJ. The determination of probable cause in said case is confined to the issue of whether there was
already a violation of the NIRC by Camus in not complying with the subpoena duces tecum issued by the BIR.[24]

Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by the Commissioner is
because the latter agreed with the findings of the investigating revenue officers that fraud exists in this case. In the
conduct of their investigation, the revenue officers observed the proper procedure under Revenue Memorandum Order
(RMO) No. 49-2000 wherein it is required that before the issuance of a Letter of Authority against a particular taxpayer, a
preliminary investigation should first be conducted to determine if a prima facie case for tax fraud exists. As to the
allegedly unresolved protest filed on April 20, 2001 by LMCEC over the PAN, this has been disregarded by the Bureau for
being pro forma and having been filed beyond the 15-day reglementary period. A subsequent letter dated April 20,
2001 was filed with the TFD and signed by a certain Juan Ventigan. However, this was disregarded and considered a mere
scrap of paper since the said signatory had not shown any prior authorization to represent LMCEC. Even assuming said
protest letter was validly filed on behalf of the company, the issuance of a Formal Demand Letter and Assessment Notice
through constructive service on October 1, 2002 is deemed an implied denial of the said protest. Lastly, the details
regarding the informer being confidential, such information is entitled to some degree of protection, including the identity
of the informant against LMCEC.[25]

In their Joint Rejoinder-Affidavit,[26] Camus and Mendoza reiterated their argument that the identity of the alleged
informant is crucial to determine if he/she is qualified under Section 282 of the NIRC. Moreover, there was no assessment
that has already become final, the validity of its issuance and service has been put in issue being anomalous, irregular and
oppressive. It is contended that for criminal prosecution to proceed before assessment, there must be a prima
facie showing of a willful attempt to evade taxes. As to LMCECs availment of the VAP and ERAP programs, the certificate
of immunity from audit issued to it by the BIR is plain and simple, but petitioner is now saying it has the right to renege
with impunity from its undertaking. Though petitioner deems LMCEC not qualified to avail of the benefits of VAP, it must
be noted that if it is true that at the time the petitioner filed I.S. No. 00-956 sometime in January 2001 it had already in its
custody that Confidential Information No. 29-2000 dated July 7, 2000, these revenue officers could have rightly filed the
instant case and would not resort to filing said criminal complaint for refusal to comply with a subpoena duces tecum.

On September 22, 2003, the Chief State Prosecutor issued a Resolution[27] finding no sufficient evidence to establish
probable cause against respondents LMCEC, Camus and Mendoza. It was held that since the payments were made by
LMCEC under ERAP and VAP pursuant to the provisions of RR Nos. 2-99 and 8-2001 which were offered to taxpayers by
the BIR itself, the latter is now in estoppel to insist on the criminal prosecution of the respondent taxpayer. The voluntary
payments made thereunder are in the nature of a tax amnesty. The unnumbered assessment notices were found highly
irregular and thus their validity is suspect; if the amounts indicated therein were collected, it is uncertain how these will
be accounted for and if it would go to the coffers of the government or elsewhere. On the required prior determination
of fraud, the Chief State Prosecutor declared that the Office of the City Prosecutor in I.S. No. 00-956 has already squarely
ruled that (1) there was no prior determination of fraud, (2) there was indiscriminate issuance of LAs, and (3) the complaint
was more of harassment. In view of such findings, any ensuing LA is thus defective and allowing the collection on the
assailed assessment notices would already be in the context of a fishing expedition or witch-hunting. Consequently, there
is nothing to speak of regarding the finality of assessment notices in the aggregate amount of P630,164,631.61.

Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor.[28]

Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review under Resolution
dated December 13, 2005.[29]

The Secretary of Justice found that petitioners claim that there is yet no finality as to LMCECs payment of its 1997 taxes
since the audit report was still pending review by higher authorities, is unsubstantiated and misplaced. It was noted that
the Termination Letter issued by the Commissioner on June 1, 1999 is explicit that the matter is considered closed. As for
taxable year 1998, respondent Secretary stated that the record shows that LMCEC paid VAT and withholding tax in the
amount of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the issuance of a certificate of immunity
from audit for 1998 by the Office of the Commissioner of Internal Revenue. For taxable year 1999, respondent Secretary
found that pursuant to earlier LA No. 38633 dated July 4, 2000, LMCECs 1999 tax liabilities were still pending investigation
for which reason LMCEC assailed the subsequent issuance of LA No. 00009361 dated August 25, 2000 calling for a similar
investigation of its alleged 1999 tax deficiencies when no final determination has yet been arrived on the earlier LA No.
38633.[30]

On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the existence of the following
circumstances indicating fraud in the settlement of LMCECs tax liabilities: (1) there must be intentional and substantial
understatement of tax liability by the taxpayer; (2) there must be intentional and substantial overstatement of deductions
or exemptions; and (3) recurrence of the foregoing circumstances. First, petitioner miserably failed to explain why the
assessment notices were unnumbered; second,the claim that the tax fraud investigation was precipitated by an alleged
informant has not been corroborated nor was it clearly established, hence there is no other conclusion but that the Bureau
engaged in a fishing expedition; and furthermore, petitioners course of action is contrary to Section 235 of the NIRC
allowing only once in a given taxable year such examination and inspection of the taxpayers books of accounts and other
accounting records. There was no convincing proof presented by petitioner to show that the case of LMCEC falls under
the exceptions provided in Section 235. Respondent Secretary duly considered the issuance of Certificate of Immunity
from Audit and Letter of Termination dated June 1, 1999 issued to LMCEC.[31]

Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice found petitioner to have
engaged in forum shopping in view of the fact that while there is still pending an appeal from the Resolution of the City
Prosecutor of Quezon City in said case, petitioner hurriedly filed the instant case, which not only involved the same parties
but also similar substantial issues (the joint complaint-affidavit also alleged the issuance of LA No. 00009361 dated August
25, 2000). Clearly, the evidence of litis pendentia is present. Finally, respondent Secretary noted that if indeed LMCEC
committed fraud in the settlement of its tax liabilities, then at the outset, it should have been discovered by the agents of
petitioner, and consequently petitioner should not have issued the Letter of Termination and the Certificate of Immunity
From Audit. Petitioner thus should have been more circumspect in the issuance of said documents.[32]

Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent Secretary via a certiorari
petition in the CA.

On October 31, 2006, the CA rendered the assailed decision[33] denying the petition and concurred with the findings and
conclusions of respondent Secretary. Petitioners motion for reconsideration was likewise denied by the appellate
court.[34] It appears that entry of judgment was issued by the CA stating that its October 31, 2006 Decision attained finality
on March 25, 2007.[35] However, the said entry of judgment was set aside upon manifestation by the petitioner that it has
filed a petition for review before this Court subsequent to its receipt of the Resolution dated March 6, 2007 denying
petitioners motion for reconsideration on March 20, 2007.[36]

The petition is anchored on the following grounds:

I.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who gravely abused his
discretion by dismissing the complaint based on grounds which are not even elements of the offenses charged.

II.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who gravely abused his
discretion by dismissing petitioners evidence, contrary to law.

III.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who gravely abused his
discretion by inquiring into the validity of a Final Assessment Notice which has become final, executory and demandable
pursuant to Section 228 of the Tax Code of 1997 for failure of private respondent to file a protest against the same.[37]

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for violation of Sections 254
(Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information and Pay Tax).

Petitioner filed the criminal complaint against the private respondents for violation of the following provisions of the NIRC,
as amended:
SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in any manner to evade or defeat any
tax imposed under this Code or the payment thereof shall, in addition to other penalties provided by law, upon conviction
thereof, be punished by a fine of not less than Thirty thousand pesos (P30,000) but not more than One hundred thousand
pesos (P100,000) and suffer imprisonment of not less than two (2) years but not more than four (4) years: Provided, That
the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the collection of
taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund
Excess Taxes Withheld on Compensation. Any person required under this Code or by rules and regulations promulgated
thereunder to pay any tax, make a return, keep any record, or supply any correct and accurate information, who willfully
fails to pay such tax, make such return, keep such record, or supply such correct and accurate information, or withhold
or remit taxes withheld, or refund excess taxes withheld on compensations at the time or times required by law or rules
and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not
less than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10)
years.

x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is insufficient evidence to establish
probable cause to charge private respondents under the above provisions, based on the following findings: (1) the tax
deficiencies of LMCEC for taxable years 1997, 1998 and 1999 have all been settled or terminated, as in fact LMCEC was
issued a Certificate of Immunity and Letter of Termination, and availed of the ERAP and VAP programs; (2) there was no
prior determination of the existence of fraud; (3) the assessment notices are unnumbered, hence irregular and suspect;
(4) the books of accounts and other accounting records may be subject to audit examination only once in a given taxable
year and there is no proof that the case falls under the exceptions provided in Section 235 of the NIRC; and (5) petitioner
committed forum shopping when it filed the instant case even as the earlier criminal complaint (I.S. No. 00-956) dismissed
by the City Prosecutor of Quezon City was still pending appeal.

Petitioner argues that with the finality of the assessment due to failure of the private respondents to challenge the same
in accordance with Section 228 of the NIRC, respondent Secretary has no jurisdiction and authority to inquire into its
validity. Respondent taxpayer is thereby allowed to do indirectly what it cannot do directly to raise a collateral attack on
the assessment when even a direct challenge of the same is legally barred. The rationale for dismissing the complaint on
the ground of lack of control number in the assessment notice likewise betrays a lack of awareness of tax laws and
jurisprudence, such circumstance not being an element of the offense. Worse, the final, conclusive and undisputable
evidence detailing a crime under our taxation laws is swept under the rug so easily on mere conspiracy theories imputed
on persons who are not even the subject of the complaint.

We grant the petition.

There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax fraud investigation
conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax returns for 1997, 1998 and
1999. Pursuant to RR No. 12-99,[38] a PAN was sent to and received by LMCEC on February 22, 2001 wherein it was notified
of the proposed assessment of deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and VAT
- P112,351,625.71) covering taxable years 1997, 1998 and 1999.[39] In response to said PAN, LMCEC sent a letter-protest
to the TFD, which denied the same on April 12, 2001 for lack of legal and factual basis and also for having been filed beyond
the 15-day reglementary period.[40]

As mentioned in the PAN, the revenue officers were not given the opportunity to examine LMCECs books of accounts and
other accounting records because its officers failed to comply with the subpoena duces tecum earlier issued, to verify its
alleged underdeclarations of income reported by the Bureaus informant under Section 282 of the NIRC. Hence, a criminal
complaint was filed by the Bureau against private respondents for violation of Section 266 which provides:

SEC. 266. Failure to Obey Summons. Any person who, being duly summoned to appear to testify, or to appear and produce
books of accounts, records, memoranda, or other papers, or to furnish information as required under the pertinent
provisions of this Code, neglects to appear or to produce such books of accounts, records, memoranda, or other papers,
or to furnish such information, shall, upon conviction, be punished by a fine of not less than Five thousand pesos (P5,000)
but not more than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than
two (2) years.

It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present considering that the
outcome of I.S. No. 00-956 is not determinative of the issue as to whether probable cause exists to charge the private
respondents with the crimes of attempt to evade or defeat tax and willful failure to supply correct and accurate
information and pay tax defined and penalized under Sections 254 and 255, respectively. For the crime of tax evasion in
particular, compliance by the taxpayer with such subpoena, if any had been issued, is irrelevant. As we held in Ungab v.
Cusi, Jr.,[41] [t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a] fraudulent [return] with
intent to evade and defeat x x x the tax. Thus, respondent Secretary erred in holding that petitioner committed forum
shopping when it filed the present criminal complaint during the pendency of its appeal from the City Prosecutors dismissal
of I.S. No. 00-956 involving the act of disobedience to the summons in the course of the preliminary investigation on
LMCECs correct tax liabilities for taxable years 1997, 1998 and 1999.

In the Details of Discrepancies attached as Annex B of the PAN,[42] private respondents were already notified that inasmuch
as the revenue officers were not given the opportunity to examine LMCECs books of accounts, accounting records and
other documents, said revenue officers gathered information from third parties. Such procedure is authorized under
Section 5 of the NIRC, which provides:

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons. In
ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability
of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the
Commissioner is authorized:

(A) To examine any book, paper, record or other data which may be relevant or material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to
audit or investigation, or from any office or officer of the national and local governments, government agencies and
instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers,
and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies,
regional operating headquarters of multinational companies, joint accounts, associations, joint ventures or consortia and
registered partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any
person having possession, custody, or care of the books of accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such books, papers, records, or
other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; x x x

x x x x (Emphasis supplied.)
Private respondents assertions regarding the qualifications of the informer of the Bureau deserve scant consideration. We
have held that the lack of consent of the taxpayer under investigation does not imply that the BIR obtained the information
from third parties illegally or that the information received is false or malicious. Nor does the lack of consent preclude the
BIR from assessing deficiency taxes on the taxpayer based on the documents.[43] In the same vein, herein private
respondents cannot be allowed to escape criminal prosecution under Sections 254 and 255 of the NIRC by mere
imputation of a fictitious or disqualified informant under Section 282 simply because other than disclosure of the official
registry number of the third party informer, the Bureau insisted on maintaining the confidentiality of the identity and
personal circumstances of said informer.

Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No. 12-99, assessment
notice and formal demand informing the said taxpayer of the law and the facts on which the assessment is made, as
required by Section 228 of the NIRC. Respondent Secretary, however, fully concurred with private respondents contention
that the assessment notices were invalid for being unnumbered and the tax liabilities therein stated have already been
settled and/or terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN) within the
prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall
inform the [t]axpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the
audit shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the fact, the law, rules
and regulations or jurisprudence on which the assessment is based, otherwise the formal letter of demand and the
notice of assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a requirement for its validity but rather the
contents thereof which should inform the taxpayer of the declaration of deficiency tax against said taxpayer. Both the
formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules and
regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under Section 228 of
the NIRC.

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on which the
assessment is made. Otherwise, the assessment is void. To implement the provisions of Section 228 of the NIRC, RR No.
12-99 was enacted. Section 3.1.4 of the revenue regulation reads:

3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued
by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayers
deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is
based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the
taxpayer only by registered mail or by personal delivery. x x x.[45](Emphasis supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCECs tax deficiencies
but also details of the specified discrepancies, explaining the legal and factual bases of the assessment. It also reiterated
that in the absence of accounting records and other documents necessary for the proper determination of the companys
internal revenue tax liabilities, the investigating revenue officers resorted to the Best Evidence Obtainable as provided in
Section 6(B) of the NIRC (third party information) and in accordance with the procedure laid down in RMC No. 23-2000
dated November 27, 2000. Annex A of the Formal Letter of Demand thus stated:
Thus, to verify the validity of the information previously provided by the informant, the assigned revenue officers resorted
to third party information. Pursuant to Section 5(B) of the NIRC of 1997, access letters requesting for information and the
submission of certain documents (i.e., Certificate of Income Tax Withheld at Source and/or Alphabetical List showing the
income payments made to L.M. Camus Engineering Corporation for the taxable years 1997 to 1999) were sent to the
various clients of the subject corporation, including but not limited to the following:

1. Ayala Land Inc.

2. Filinvest Alabang Inc.

3. D.M. Consunji, Inc.

4. SM Prime Holdings, Inc.

5. Alabang Commercial Corporation

6. Philam Properties Corporation

7. SM Investments, Inc.

8. Shoemart, Inc.

9. Philippine Securities Corporation

10. Makati Development Corporation

From the documents gathered and the data obtained therein, the substantial underdeclaration as defined under Section
248(B) of the NIRC of 1997 by your corporation of its income had been confirmed. x x x x[46] (Emphasis supplied.)

In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that the estimated tax
liabilities arising from LMCECs underdeclaration amounted to P186,773,600.84 in 1997, P150,069,323.81 in 1998
and P163,220,111.13 in 1999. These figures confirmed that the non-declaration by LMCEC for the taxable years 1997,
1998 and 1999 of an amount exceeding 30% income[47] declared in its return is considered a substantial underdeclaration
of income, which constituted prima facieevidence of false or fraudulent return under Section 248(B)[48] of the NIRC, as
amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent Secretary found the latters
claim as meritorious on the basis of the Certificate of Immunity From Audit issued on December 6, 1999 pursuant to RR
No. 2-99 and Letter of Termination dated June 1, 1999 issued by Revenue Region No. 7 Chief of Assessment Division Ruth
Vivian G. Gandia. Petitioner, however, clarified that the certificate of immunity from audit covered only income tax for
the year 1997 and does not include VAT and withholding taxes, while the Letter of Termination involved tax liabilities for
taxable year 1997 (EWT, VAT and income taxes) but which was submitted for review of higher authorities as per the
Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr.[50] For 1999, private respondents supposedly availed of the
VAP pursuant to RR No. 8-2001.

RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering the scarcity of financial and
human resources as well as the time constraints within which the Bureau has to clean the Bureaus backlog of unaudited
tax returns in order to keep updated and be focused with the most current accounts in preparation for the full
implementation of a computerized tax administration, the said revenue regulation was issued providing for last priority in
audit and investigation of tax returns to accomplish the said objective without, however, compromising the revenue
collection that would have been generated from audit and enforcement activities. The program named as Economic
Recovery Assistance Payment (ERAP) Program granted immunity from audit and investigation of income tax, VAT and
percentage tax returns for 1998. It expressly excluded withholding tax returns (whether for income, VAT, or percentage
tax purposes). Since such immunity from audit and investigation does not preclude the collection of revenues generated
from audit and enforcement activities, it follows that the Bureau is likewise not barred from collecting any tax deficiency
discovered as a result of tax fraud investigations. Respondent Secretarys opinion that RR No. 2-99 contains the feature of
a tax amnesty is thus misplaced.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to
collect uncollected tax from tax evaders without having to go through the tedious process of a tax case.[51] Even
assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax amnesty, it bears noting that a tax amnesty,
much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like
that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.[52]

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-2001, through
payment supposedly made in October 29, 2001 before the said program ended on October 31, 2001, did not amount to
settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from prosecution for filing fraudulent
return and attempt to evade or defeat tax. As correctly asserted by petitioner, from the express terms of the aforesaid
revenue regulations, LMCEC is not qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit
and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under certain conditions,
considering that first, it was issued a PAN on February 19, 2001, and second, it was the subject of investigation as a result
of verified information filed by a Tax Informer under Section 282 of the NIRC duly recorded in the BIR Official Registry as
Confidential Information (CI) No. 29-2000[53] even prior to the issuance of the PAN.

Section 1 of RR No. 8-2001 provides:

SECTION 1. COVERAGE. x x x

Any person, natural or juridical, including estates and trusts, liable to pay any of the above-cited internal revenue taxes
for the above specified period/s who, due to inadvertence or otherwise, erroneously paid his internal revenue tax liabilities
or failed to file tax return/pay taxes may avail of the Voluntary Assessment Program (VAP), except those falling under any
of the following instances:

1.1 Those covered by a Preliminary Assessment Notice (PAN), Final Assessment Notice (FAN), or Collection Letter issued
on or before July 31, 2001; or

1.2 Persons under investigation as a result of verified information filed by a Tax Informer under Section 282 of the Tax
Code of 1997, duly processed and recorded in the BIR Official Registry Book on or before July 31, 2001;

1.3 Tax fraud cases already filed and pending in courts for adjudication; and

x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any subsequent audit of its account
books and other accounting records in view of the strong finding of underdeclaration in LMCECs payment of correct
income tax liability by more than 30% as supported by the written report of the TFD detailing the facts and the law on
which such finding is based, pursuant to the tax fraud investigation authorized by petitioner under LA No. 00009361. This
conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001 provides:

SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A taxpayer who has availed of the VAP shall not be audited
except upon authorization and approval of the Commissioner of Internal Revenue when there is strong evidence or finding
of understatement in the payment of taxpayers correct tax liability by more than thirty percent (30%) as supported by a
written report of the appropriate office detailing the facts and the law on which such finding is based: Provided, however,
that any VAP payment should be allowed as tax credit against the deficiency tax due, if any, in case the concerned taxpayer
has been subjected to tax audit.

xxxx

Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-2001 and RR No. 10-2001,
we hold that respondent Secretary gravely erred in declaring that petitioner is now estopped from assessing any tax
deficiency against LMCEC after issuance of the aforementioned documents of immunity from audit/investigation and
settlement of tax liabilities. It is axiomatic that the State can never be in estoppel, and this is particularly true in matters
involving taxation. The errors of certain administrative officers should never be allowed to jeopardize the governments
financial position.[54]

Respondent Secretarys other ground for assailing the course of action taken by petitioner in proceeding with the audit
and investigation of LMCEC -- the alleged violation of the general rule in Section 235 of the NIRC allowing the examination
and inspection of taxpayers books of accounts and other accounting records only once in a taxable year -- is likewise
untenable. As correctly pointed out by petitioner, the discovery of substantial underdeclarations of income by LMCEC for
taxable years 1997, 1998 and 1999 upon verified information provided by an informer under Section 282 of the NIRC, as
well as the necessity of obtaining information from third parties to ascertain the correctness of the return filed or
evaluation of tax compliance in collecting taxes (as a result of the disobedience to the summons issued by the Bureau
against the private respondents), are circumstances warranting exception from the general rule in Section 235.[55]

As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997, 1998 and 1999 in amounts
equivalent to more than 30% (the computation in the final assessment notice showed underdeclarations of almost 200%)
constitutes prima facie evidence of fraudulent return under Section 248(B) of the NIRC. Prior to the issuance of the
preliminary and final notices of assessment, the revenue officers conducted a preliminary investigation on the information
and documents showing substantial understatement of LMCECs tax liabilities which were provided by the Informer,
following the procedure under RMO No. 15-95.[56] Based on the prima facie finding of the existence of fraud, petitioner
issued LA No. 00009361 for the TFD to conduct a formal fraud investigation of LMCEC.[57] Consequently, respondent
Secretarys ruling that the filing of criminal complaint for violation of Sections 254 and 255 of the NIRC cannot prosper
because of lack of prior determination of the existence of fraud, is bereft of factual basis and contradicted by the evidence
on record.

Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the
correctness of a tax assessment unless proven otherwise.[58] We have held that a taxpayers failure to file a petition for
review with the Court of Tax Appeals within the statutory period rendered the disputed assessment final, executory and
demandable, thereby precluding it from interposing the defenses of legality or validity of the assessment and prescription
of the Governments right to assess.[59]Indeed, any objection against the assessment should have been pursued following
the avenue paved in Section 229 (now Section 228) of the NIRC on protests on assessments of internal revenue taxes.[60]

Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002 were duly served on
LMCEC on October 1, 2002. Private respondents did not file a motion for reconsideration of the said assessment notice
and formal demand; neither did they appeal to the Court of Tax Appeals. Section 228 of the NIRC[61] provides the remedy
to dispute a tax assessment within a certain period of time. It states that an assessment may be protested by filing a
request for reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer. No such
administrative protest was filed by private respondents seeking reconsideration of the August 7, 2002 assessment notice
and formal letter of demand. Private respondents cannot belatedly assail the said assessment, which they allowed to lapse
into finality, by raising issues as to its validity and correctness during the preliminary investigation after the BIR has
referred the matter for prosecution under Sections 254 and 255 of the NIRC.

As we held in Marcos II v. Court of Appeals[62]:

It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon
the subject estate, but the Bureau of Internal Revenue, whose determinations and assessments are presumed correct and
made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the
performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima
facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof
is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the
assessment will justify the judicial affirmance of said assessment. x x x.

Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the
taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken
by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme
of a well-ordered society. The subject tax assessments having become final, executory and enforceable, the same can
no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost
appeal or remedy. This judicial policy becomes more pronounced in view of the absence of sufficient attack against the
actuations of government. (Emphasis supplied.)

The determination of probable cause is part of the discretion granted to the investigating prosecutor and ultimately, the
Secretary of Justice. However, this Court and the CA possess the power to review findings of prosecutors in preliminary
investigations. Although policy considerations call for the widest latitude of deference to the prosecutors findings, courts
should never shirk from exercising their power, when the circumstances warrant, to determine whether the prosecutors
findings are supported by the facts, or by the law. In so doing, courts do not act as prosecutors but as organs of the
judiciary, exercising their mandate under the Constitution, relevant statutes, and remedial rules to settle cases and
controversies.[63] Clearly, the power of the Secretary of Justice to review does not preclude this Court and the CA from
intervening and exercising our own powers of review with respect to the DOJs findings, such as in the exceptional case in
which grave abuse of discretion is committed, as when a clear sufficiency or insufficiency of evidence to support a finding
of probable cause is ignored.[64]

WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution dated March 6, 2007 of the
Court of Appeals in CA-G.R. SP No. 93387 are hereby REVERSED and SET ASIDE. The Secretary of Justice is
hereby DIRECTED to order the Chief State Prosecutor to file before the Regional Trial Court of Quezon City, National
Capital Judicial Region, the corresponding Information against L. M. Camus Engineering Corporation, represented by its
President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of Sections 254 and 255 of the National Internal
Revenue Code of 1997.

No costs.

SO ORDERED.
 COMMISSIONER OF INTERNAL REVENUE, G.R. No. 178697

Petitioner,

- versus - Promulgated:

SONY PHILIPPINES, INC., November 17, 2010

Respondent.

X ---------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5, 2007 Resolution of the
Court of Tax Appeals En Banc[1] (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First
Division[2] which, in turn, partially granted the petition for review of respondent Sony Philippines, Inc. (Sony). The CTA-
First Division decision cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency assessment for expanded withholding
tax (EWT) in the amount of P1,035,879.70 and the penalties for late remittance of internal revenue taxes in the amount
of P1,269, 593.90.[3]

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734) authorizing certain revenue officers
to examine Sonys books of accounts and other accounting records regarding revenue taxes for the period 1997 and
unverified prior years. On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties was issued
by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies.[4] Said details of the deficiency taxes and penalties for late remittance
of internal revenue taxes are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.65[5]

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000. Sony submitted
relevant documents in support of its protest on the 16th of that same month.[6]

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said supporting documents to the
CIR, Sony filed a petition for review before the CTA.[7]

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized advertising expense
paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-First
Division maintained the deficiency EWT assessment on Sonys motor vehicles and on professional fees paid to general
professional partnerships. It also assessed the amounts paid to sales agents as commissions with five percent (5%) EWT
pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT
assessment on rental expense since it found that the total rental deposit of P10,523,821.99 was incurred from January to
March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-First
Division also upheld the penalties for the late payment of VAT on royalties, for late remittance of final withholding tax on
royalty as of December 1997 and for the late remittance of EWT by some of Sonys branches. [8] In sum, the CTA-First
Division partly granted Sonys petition by cancelling the deficiency VAT assessment but upheld a modified deficiency EWT
assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to CANCEL and WITHDRAW
the deficiency assessment for value-added tax for 1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of internal revenue taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding tax in the amount
of P1,035,879.70 and the following penalties for late remittance of internal revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]

The CIR sought a reconsideration of the above decision and submitted the following grounds in support thereof:

A. The Honorable Court committed reversible error in holding that petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax assessment with respect to the
5% withholding tax on rental deposit in the amount of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on time.[10]
On April 28, 2005, the CTA-First Division denied the motion for reconsideration. Unfazed, the CIR filed a petition for review
with the CTA-EB raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount of P2,894,797.00 should be subjected to 10% withholding
tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on rental deposit in the amount
of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the period January to March 1998 was
filed outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed CIRs petition on May 17,
2007. CIRs motion for reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it raised before the CTA-First
Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF
PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE AMOUNT OF PHP2,894,797.00
SHOULD BE SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT TO THE 5% WITHHOLDING TAX ON
RENTAL DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD
JANUARY TO MARCH 1998 WAS FILED ON TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR subsequently filed a
manifestation informing the Court that it would no longer file a reply. Thus, on December 3, 2008, the Court resolved to
give due course to the petition and to decide the case on the basis of the pleadings filed.[13]
The Court finds no merit in the petition.
The CIR insists that LOA 19734, although it states the period 1997 and unverified prior years, should be understood to
mean the fiscal year ending in March 31, 1998.[14]The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the appropriate revenue officer
assigned to perform assessment functions. It empowers or enables said revenue officer to examine the books of account
and other accounting records of a taxpayer for the purpose of collecting the correct amount of tax. [15]The very provision
of the Tax Code that the CIR relies on is unequivocal with regard to its power to grant authority to examine and assess a
taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration
and Enforcement.

(A)Examination of Returns and Determination of tax Due. After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and
the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer. x x x [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally
important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered the period 1997 and unverified prior years. For said reason, the CIR acting through
its revenue officers went beyond the scope of their authority because the deficiency VAT assessment they arrived at was
based on records from January to March 1998 or using the fiscal year which ended in March 31, 1998. As pointed out by
the CTA-First Division in its April 28, 2005 Resolution, the CIR knew which period should be covered by the investigation.
Thus, if CIR wanted or intended the investigation to include the year 1998, it should have done so by including it in the
LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase and unverified prior years,
violated Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of which
reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The practice of issuing L/As
covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated in the L/A.[16] [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIRs argument,
that Sonys advertising expense could not be considered as an input VAT credit because the same was eventually
reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never incurred any advertising
expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising expense should
be for the account of SIS, and not Sony.[17]

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sonys deficiency
VAT assessment stemmed from the CIRs disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter.[18] It is evident under Section 110[19] of the 1997 Tax Code that an advertising expense
duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no less than CIRs own witness, Revenue
Officer Antonio Aluquin.[20] There is also no denying that Sony incurred advertising expense. Aluquin testified that
advertising companies issued invoices in the name of Sony and the latter paid for the same.[21] Indubitably, Sony incurred
and paid for advertising expense/ services. Where the money came from is another matter all together but will definitely
not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable. In
support of this, the CIR cited a portion of Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy equivalent to the
latters advertising expenses will not affect the validity of the input taxes from such expenses. Thus, at the most, this is an
additional income of our client subject to income tax. We submit further that our client is not subject to VAT on the subsidy
income as this was not derived from the sale of goods or services.[22]

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the Court
agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sonys advertising expense for
it was but an assistance or aid in view of Sonys dire or adverse economic conditions, and was only equivalent to the latters
(Sonys) advertising expenses.

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly, there was
no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for
goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to rule that services rendered for a fee even on
reimbursement-on-cost basis only and without realizing profit are also subject to VAT. The case, however, is not applicable
to the present case. In that case, COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred although without profit. This is
not true in the present case. Sony did not render any service to SIS at all. The services rendered by the advertising
companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount
equivalent to the latters advertising expense but never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR insists that said
deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five percent (5%) citing Revenue
Regulation No. 2-98 dated April 17, 1998.[24] The said revenue regulation provides that the 10% rate is applied when the
recipient of the commission income is a natural person. According to the CIR, Sonys schedule of Selling, General and
Administrative expenses shows the commission expense as commission/dealer salesman incentive, emphasizing the word
salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on Section 1(g) of
Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real estate and commercial
brokers and agents of professional entertainers five per centum (5%).[25]
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is subject to 5%
withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the commission expense in the schedule
of Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as commission/dealer
salesman incentive the same does not justify the automatic imposition of flat 10% rate. As itemized by petitioner, such
expense is composed of Commission Expense in the amount of P10,200.00 and Broker Dealer of P2,894,797.00. [26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the applicable rule is Revenue
Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which was the applicable rule during the subject
period of examination and assessment as specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only
adopted in April 1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on brokers and
agents was only increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.[27] Until
then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT assessment on the
rental deposit. According to their findings, Sony incurred the subject rental deposit in the amount of P10,523,821.99 only
from January to March 1998. As stated earlier, in the absence of the appropriate LOA specifying the coverage, the CIRs
deficiency EWT assessment from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties (i) as of December
1997; and (ii) for the period from January to March 1998. Again, the Court agrees with the CTA-First Division when it
upheld the CIR with respect to the royalties for December 1997 but cancelled that from January to March 1998.

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82 and Sections 2.57.4 and 2.58(A)(2)(a)[29] of
Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on royalties from January to March of 1998.
At the same time, it downplays the relevance of the Manufacturing License Agreement (MLA) between Sony and Sony-
Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the payment of final tax on
royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty payments when the royalty is
paid or is payable. After which, the corresponding return and remittance must be made within 10 days after the end of
each month. The question now is when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and December 31, the LICENSEE shall furnish
to the LICENSOR a statement, certified by an officer of the LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective semi-annual period and amount of royalty due pursuant
this ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.[30]

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period which ends in June 30
and December 31. However, the CTA-First Division found that there was accrual of royalty by the end of December 1997
as well as by the end of June 1998. Given this, the FWTs should have been paid or remitted by Sony to the CIR on January
10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from January to March 1998 was well
within the semi-annual period ending June 30, which meant that the royalty may be payable until August 1998 pursuant
to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual at the end of
June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.